As filed with the Securities and Exchange Commission on April 15, 2005.
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SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number: 1-9531
TELEFONICA, S.A.
(Exact name of registrant as specified in its charter)
KINGDOM OF SPAIN
(Jurisdiction of incorporation or organization)
Gran Via, 28, 28013 Madrid, Spain
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
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Ordinary Shares, nominal value
(euro)1.00 per share New York Stock Exchange
American Depositary Shares, each
representing three Ordinary Shares New York Stock Exchange
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the New York Stock
Exchange.
---------
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
---------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
---------
The number of issued shares of each class of stock of
Telefonica, S.A. at December 31, 2004 was:
Ordinary Shares, nominal value (euro)1.00 per share: 4,955,891,361
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17 [ ] Item 18 [X}
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TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.....................3
CERTAIN TERMS AND CONVENTIONS.................................................4
PRESENTATION OF CERTAIN FINANCIAL INFORMATION.................................4
PART I........................................................................5
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS................5
A. DIRECTORS AND SENIOR MANAGEMENT......................................5
B. ADVISORS.............................................................5
C. AUDITORS.............................................................5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................5
ITEM 3. KEY INFORMATION......................................................5
A. SELECTED FINANCIAL DATA..............................................5
B. CAPITALIZATION AND INDEBTEDNESS......................................8
C. REASONS FOR THE OFFER AND USE OF PROCEEDS............................8
D. RISK FACTORS.........................................................8
ITEM 4. INFORMATION ON THE COMPANY..........................................16
A. HISTORY AND DEVELOPMENT OF THE COMPANY..............................16
B. BUSINESS OVERVIEW...................................................23
C. ORGANIZATIONAL STRUCTURE............................................79
D. PROPERTY, PLANT AND EQUIPMENT.......................................79
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................84
A. OPERATING RESULTS...................................................84
B. LIQUIDITY AND CAPITAL RESOURCES....................................124
C. RESEARCH AND DEVELOPMENT...........................................127
D. TRENDS AND OUTLOOK.................................................129
E. OFF-BALANCE SHEET ARRANGEMENTS.....................................130
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS......................131
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................131
A. DIRECTORS AND SENIOR MANAGEMENT....................................131
B. COMPENSATION.......................................................139
C. BOARD PRACTICES....................................................141
D. EMPLOYEES..........................................................141
E. SHARE OWNERSHIP....................................................142
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................143
A. MAJOR SHAREHOLDERS.................................................143
B. RELATED PARTY TRANSACTIONS.........................................144
C. INTERESTS OF EXPERTS AND COUNSEL...................................145
ITEM 8. FINANCIAL INFORMATION..............................................146
ITEM 9. THE OFFERING AND LISTING...........................................152
A. OFFER AND LISTING DETAILS..........................................152
B. PLAN OF DISTRIBUTION...............................................157
C. MARKETS............................................................157
D. SELLING SHAREHOLDERS...............................................157
E. DILUTION...........................................................157
F. EXPENSES OF THE ISSUE..............................................157
ITEM 10. ADDITIONAL INFORMATION.............................................157
A. SHARE CAPITAL......................................................157
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.............................158
C. MATERIAL CONTRACTS.................................................161
D. EXCHANGE CONTROLS..................................................163
E. TAXATION...........................................................165
F. DIVIDENDS AND PAYING AGENTS........................................169
G. STATEMENTS BY EXPERTS..............................................169
i
H. DOCUMENTS ON DISPLAY...............................................169
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........170
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............178
PART II.....................................................................178
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................178
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS...........................................................178
ITEM 15. CONTROLS AND PROCEDURES............................................178
ITEM 16.....................................................................178
A. AUDIT COMMITTEE FINANCIAL EXPERT...................................178
B. CODE OF ETHICS.....................................................178
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................178
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.........179
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.........................................................179
PART III....................................................................179
ITEM 17. FINANCIAL STATEMENTS...............................................179
ITEM 18. FINANCIAL STATEMENTS...............................................179
ITEM 19. EXHIBITS...........................................................180
ii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements in this Annual Report can be identified, in some
instances, by the use of words such as "expects", "aim", "hope", "anticipates",
"intends", "believes" and similar language or the negative thereof or by the
forward-looking nature of discussions of strategy, plans or intentions. These
statements appear in a number of places in this Annual Report including,
without limitation, certain statements made in "Item 3--Key Information--Risk
Factors", "Item 4--Information on the Company" and "Item 5--Operating and
Financial Review and Prospects" and include statements regarding our intent,
belief or current expectations with respect to, among other things:
o the effect on our results of operations of competition in the Spanish
telecommunications market and our other principal markets;
o trends affecting our financial condition or results of operations;
o acquisitions or investments which we may make in the future;
o our capital expenditures plan;
o supervision and regulation of the Spanish telecommunications sector and in
other countries where we have significant operations;
o our strategic partnerships;
o the potential for growth and competition in current and anticipated areas
of our business; and
o the adoption of International Financial Reporting Standards in preparing
our Consolidated Financial Statements beginning January 1, 2005.
Such forward-looking statements are not guarantees of future performance
and involve numerous risks and uncertainties, and actual results may differ
materially from those anticipated in the forward-looking statements as a result
of various factors. The risks and uncertainties involved in our businesses that
could affect the matters referred to in such forward-looking statements include
but are not limited to:
o changes in general economic, business, or political conditions in the
domestic or international markets in which we operate or have material
investments that may affect demand for our services;
o changes in currency exchange rates and interest rates;
o the impact of current, pending or future legislation and regulation in
Spain, other countries where we operate and the European Union;
o new pronouncements from the International Accounting Standards Board
regarding International Financial Reporting Standards;
o the actions of existing and potential competitors in each of our markets;
o the outcome of pending litigation; and
o the potential effects of technological changes.
Some of these and other important factors that could cause such
differences are discussed in more detail under "Item 3--Key Information--Risk
Factors", "Item 4--Information on the Company", "Item 5--Operating and
Financial Review and Prospects" and "Item 11--Quantitative and Qualitative
Disclosures About Market Risk".
Readers are cautioned not to place undue reliance on those forward-looking
statements, which speak only as of the date of this Annual Report. We undertake
no obligation to release publicly the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date of this Annual
3
Report including, without limitation, changes in our business or acquisition
strategy or planned capital expenditures, or to reflect the occurrence of
unanticipated events.
CERTAIN TERMS AND CONVENTIONS
Our ordinary shares, nominal value one euro each, are currently listed on
each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges under the
symbol "TEF". They are also listed on various foreign exchanges such as the
London, Frankfurt, Paris, Buenos Aires, Lima, Sao Paulo and Tokyo stock
exchanges and are quoted through the Automated Quotation System of the Spanish
stock exchanges and through the SEAQ International System of the London Stock
Exchange. American Depositary Shares ("ADSs"), each representing the right to
receive three ordinary shares, are listed on the New York Stock Exchange under
the symbol "TEF" and on the Lima Stock Exchange. ADSs are evidenced by American
Depositary Receipts ("ADRs") issued under a Deposit Agreement with Citibank,
N.A., as Depositary. Brazilian Depositary Shares ("BDSs"), each representing
the right to receive one ordinary share, are listed on the Sao Paulo Stock
Exchange. BDSs are evidenced by Brazilian Depositary Receipts ("BDRs") issued
under a Deposit Agreement with Banco Bradesco, S.A., as Depositary.
As used herein:
o "Telefonica", "Telefonica Group" and terms such as "we", "us" and "our"
mean Telefonica, S.A. and its consolidated subsidiaries unless the context
otherwise requires;
o "Telefonica de Espana" means Telefonica de Espana, S.A., our subsidiary
that conducts our fixed line telecommunications services business in
Spain, and its consolidated subsidiaries;
o "Telefonica Moviles" means Telefonica Moviles, S.A., our subsidiary that
conducts our worldwide wireless communications services business, and its
consolidated subsidiaries;
o "Telefonica de Contenidos" (formerly "Admira") means Telefonica de
Contenidos, S.A., our subsidiary that conducts our worldwide audiovisual
content and media business, and its consolidated subsidiaries;
o "Telefonica Latinoamerica" means Telefonica Internacional, S.A., our
subsidiary that conducts our fixed line telecommunications business in
Latin America, and its consolidated subsidiaries;
o "Terra Networks" (formerly "Terra Lycos") and the "Terra Group" mean Terra
Networks, S.A., our subsidiary that conducts our worldwide
Internet-related business, and its consolidated subsidiaries.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
In this Annual Report, references to "dollars" or "$" are to United States
dollars and references to "euro" or "(euro)" are to the single currency of the
participating member states in the Third Stage of the European Economic and
Monetary Union pursuant to the treaty establishing the European Community, as
amended from time to time.
4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
A. DIRECTORS AND SENIOR MANAGEMENT
Not applicable.
B. ADVISORS
Not applicable.
C. AUDITORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of
Telefonica, S.A. You should read this table in conjunction with "Item
5--Operating and Financial Review and Prospects" and the Consolidated Financial
Statements included elsewhere in this Annual Report. The consolidated income
statement data for each of the three years in the period ended December 31,
2004 and the consolidated balance sheet data as of December 31, 2004 and 2003
set forth below are derived from, and are qualified in their entirety by
reference to, the Consolidated Financial Statements and notes thereto included
in this Annual Report. The consolidated income statement data for each of the
two years in the period ended December 31, 2001 and the consolidated balance
sheet data as of December 31, 2002, 2001 and 2000 set forth below are derived
from Telefonica, S.A.'s Consolidated Financial Statements, which are not
included herein. Our Consolidated Financial Statements have been prepared in
accordance with Spanish GAAP, which differ in certain respects from U.S. GAAP.
Please refer to note 25 to our Consolidated Financial Statements for a
discussion of these differences.
The basis of presentation and principles of consolidation are described in
detail in note 2 to our Consolidated Financial Statements.
At and for the year ended December 31,
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2000 2001 2002 2003 2004
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(in millions of euro, except per share and per ADS data)
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INCOME STATEMENT DATA
Amounts in accordance with Spanish GAAP:
Revenues from operations........................... 28,485.5 31,052.6 28,411.3 28,399.8 30,321.9
Other operating revenues(1)........................ 266.7 254.7 297.6 288.9 381.7
Internal expenditures capitalized.................. 899.1 730.4 496.7 530.3 474.3
Increase (decrease) in inventories (net)........... 112.3 (103.9) (18.1) (135.5) 32.9
Total revenues..................................... 29,763.6 31,933.8 29,187.5 29,083.5 31,210.8
Goods purchased.................................... (6,045.2) (7,111.9) (6,953.6) (6,276.6) (7,558.7)
External services and local taxes.................. (5,786.1) (5,534.3) (4,976.7) (5,082.7) (5,601.6)
Personnel expenses................................. (5,111.7) (5,390.3) (4,793.8) (4,641.3) (4,411.8)
Provision for depreciation and amortization........ (6,960.8) (7,374.0) (6,692.4) (6,274.2 (5,980.2)
Trade provisions................................... (761.1) (1,023.8) (645.6) (420.6) (336.2)
Other operating expenses........................... (140.7) (69.3) (93.7) (60.3) (87.2)
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Total operating costs before financial expenses
and goodwill amortization....................... (24,805.6) (26,503.6) (24,155.7) (22,755.7) (23,975.6)
5
At and for the year ended December 31,
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2000 2001 2002 2003 2004
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(in millions of euro, except per share and per ADS data)
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Operating profit................................... 4,958.0 5,430.2 5,031.8 6,327.9 7,235.3
Amortization of goodwill and reversal of negative
goodwill........................................ (500.6) (841.6) (665.4) (442.5) (432.6)
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Financial income (expense), net.................... (1,611.8) (1,608.4) (1,589.3) (1,555.9) (1,240.2)
Exchange gains (losses), net....................... (248.5) (782.7) (632.3) 495.8 56.41
Income (losses) from associated companies.......... (161.4) (376.5) (527.9) (212.6) (56.1)
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Profit from ordinary activities.................... 2,435.7 1,821.1 1,616.8 4,612.2 5,562.8
Extraordinary revenues............................. 4,302.3 1,167.1 474.6 1,167.2 409.0
Losses on fixed assets............................. (239.9) (233.0) (9,614.6) (55.3) (49.7)
Extraordinary expenses............................. (3,630.5) (721.3) (7,078.0) (2,361.6) (1,525.1)
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Income (loss) before tax and minority interest..... 2,867.6 2,033.9 (14,601.1) 3,362.5 4,397.0
Corporate income tax............................... (242.2) (198.1) 3,228.7 (913.4) (1,138.7)
Minority interest.................................. (120.6) 271.0 5,795.6 (245.5) (381.0)
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Net income......................................... 2,504.8 2,106.8 (5,576.8) 2,203.6 2,877.3
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Net income (loss) per share(2)..................... 0.59 0.43 (1.13) 0.45 0.60
Weighted average number of shares (thousands)...... 4,269,839 4,916,564 4,948,037 4,960,125 4,795,982
Net income (loss) per ADS(2)(3).................... 1.76 1.28 (3.38) 1.35 1.80
Weighted average number of ADSs (thousands)........ 1,423,280 1,638,855 1,649,346 1,653,375 1,598,631
Amounts in accordance with U.S. GAAP(4):
Total revenues..................................... 27,326.1 31,577.2 28,912.6 27,708.4 29,854.9
Income (loss) before tax........................... 1,549.7 (6,713.6) (8,693.5) 3,804.9 3,979.2
Corporate income tax............................... 295.0 (477.8) 3,387.5 (1,114.6) (1,401.2)
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Net income (loss).................................. 1,844.6 (7,191.3) (5,206.1) 2,690.3 2,578.0
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Net income (loss) per share(2)(5).................. 0.43 (1.46) (1.05) 0.54 0.55
Net income (loss) per ADS(2)(3)(5)................. 1.30 (4.39) (3.16) 1.63 1.64
BALANCE SHEET DATA
Amounts in accordance with Spanish GAAP:
Cash............................................... 765.6 621.9 517.5 336.4 855.0
Property plant and equipment....................... 38,721.9 36,606.1 27,099.7 24,315.8 23,348.1
Total assets....................................... 92,377.3 86,422.6 68,041.3 62,075.2 63,466.3
Total long term debt............................... 24,692.9 27,692.4 21,726.1 18,495.4 16,003.7
Total shareholders' equity......................... 25,930.5 25,861.6 16,996.0 16,756.6 16,225.1
Amounts in accordance with U.S. GAAP(4):
Cash............................................... 678.7 619.6 517.5 336.4 827.5
Property, plant and equipment...................... 38,277.9 35,563.2 25,282.7 27,718.4 21,823.2
Total assets....................................... 107,884.6 90,930.9 67,211.0 61,600.4 62,519.3
Total long term debt............................... 20,618.5 27,771.2 21,778.0 18,310.0 14,881.9
Total shareholders' equity......................... 44,225.3 31,659.6 16,973.7 17,224.0 16,314.6
CASH FLOW DATA
Amounts in accordance with Spanish GAAP:
Net cash provided by operating activities.......... 8,996.9 8,828.8 8,814.6 9,191.1 10,186.8
Net cash used in (provided by) investing activities (17,719.5) (9,895.4) (5,780.2) (5,171.7) (8,978.7)
Net cash used in (received from) financing
activities(6)................................... 14,320.9 (1,321.1) (2,101.1) (4,178.9) (1,961.2)
Amounts in accordance with U.S. GAAP:
Net cash provided by operating activities.......... 16,370.1 8,995.8 9,019.5 9,558.7 10,042.7
Net cash used in (provided by) investing activities (25,572.6) (9,528.5) (5,585.4) (5,462.8) (8,543.1)
Net cash used in (received from) financing
activities(6)................................... 14,689.4 (1,347.0) (2,082.0) (4,220.0) (2,264.6)
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(1) Includes internal capitalized expenditures on fixed assets and increase in
inventories (net).
(2) The per share and per ADS computations for all periods presented have been
adjusted to reflect the stock split and stock dividends which occurred
during the periods presented.
(3) Each ADS represents the right to receive three ordinary shares. Figures do
not include any charges of the Depositary.
(4) U.S. GAAP data for the years ended December 31, 2000, 2001, 2002, and 2003
have been restated retroactively to record our investment in Portugal
Telecom, SGPS under the equity method. See Note 25.7 to our Consolidated
Financial
6
Statements included elsewhere herein. The effect of the change on net
income in 2003, 2002, 2001 and 2000 was an increase or (decrease) of
(euro) 4.2 million,(euro) 8.4 million, ((euro)9.0) million and
((euro)11.4) million, respectively. The effect of the change on
Shareholders equity in 2003, 2002, 2001 and 2000 was a decrease of
(euro)67.3 million, (euro)15.6 million, (euro)110.2 million and
(euro)132.5 million, respectively.
(5) U.S. GAAP earnings per share and per ADS have been computed using the
weighted average number of shares outstanding for each period.
(6) Includes net cash outflow for capital expenditures and for investments in
affiliates.
Exchange Rate Information
Effective January 1, 1999, the following 11 European Union member states
adopted the euro as a common currency: Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. They
also established fixed conversion rates between their respective sovereign
currencies and the euro. On January 1, 2001, Greece joined the European
Economic and Monetary Union. The exchange rate at which the Spanish peseta has
been irrevocably fixed against the euro is Ptas 166.386 = (euro)1.00. On
January 1, 2002, the participating member states began issuing new
euro-denominated bills and coins for use in cash transactions. As of March 1,
2002, the participating member states have withdrawn the bills and coins
denominated in their respective currencies from circulation, and they are no
longer legal tender for any transactions. As used in this Annual Report, the
term "Noon Buying Rate" refers to the rate of exchange for euros, expressed in
U.S. dollars per euro, in the City of New York for cable transfers payable in
foreign currencies as certified by the Federal Reserve Bank of New York for
customs purposes. The Noon Buying Rate certified by the New York Federal
Reserve Bank for the euro on April 14, 2005 was $1.2819 = (euro)1.00.
The following tables describe, for the periods and dates indicated,
information concerning the Noon Buying Rate for the euro. Amounts are expressed
in U.S. dollars per (euro)1.00.
Noon Buying Rate
----------------------------------------
Period
Year ended December 31, end Average(1) High Low
-------------------------------------------------------------------------------------------------------------------
2000.................................................................. 0.9388 0.9207 1.0335 0.8270
2001.................................................................. 0.8901 0.8909 0.9535 0.8370
2002.................................................................. 1.0485 0.9495 1.0485 0.8594
2003.................................................................. 1.2597 1.1411 1.2597 1.0361
2004.................................................................. 1.3538 1.2478 1.3625 1.1801
Source: Federal Reserve Bank of New York.
------------------
(1) The average of the Noon Buying Rates for the euro on the last day of each
month during the relevant period.
Noon Buying Rate
------------------
Month ended High Low
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October 31, 2004........................................................................... 1.2783 1.2271
November 30, 2004.......................................................................... 1.3288 1.2703
December 31, 2004.......................................................................... 1.3625 1.3224
January 31, 2005........................................................................... 1.3476 1.2954
February 28, 2005.......................................................................... 1.3274 1.2773
March 31, 2005............................................................................. 1.3465 1.2877
April 30, 2005 (to April 14)............................................................... 1.2972 1.2838
Source: Federal Reserve Bank of New York.
Monetary policy within the member states of the euro zone is set by the
European Central Bank. The European Central Bank has set itself the objective
of containing inflation and will adjust interest rates in line with this policy
without taking account of other economic variables such as the rate of
unemployment. It has further declared that it will not set an exchange rate
target for the euro.
Our ordinary shares are quoted on the Spanish stock exchanges in euro.
Currency fluctuations may affect the dollar equivalent of the euro price of our
shares listed on the Spanish stock exchanges and, as a result, the market
7
price of our ADSs, which are listed on the New York Stock Exchange. Currency
fluctuations may also affect the dollar amounts received by holders of ADRs on
conversion by the Depositary of any cash dividends paid in euro on the
underlying shares.
Our consolidated results are affected by fluctuations between the euro and
the currencies in which the revenues and expenses of some of our consolidated
subsidiaries are denominated (principally the Brazilian real, the Argentine
peso, the Chilean peso, the Peruvian nuevo sol, the Mexican dollar and the U.S.
dollar). See "Item 11--Quantitative and Qualitative Disclosures About Market
Risk".
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
In addition to the other information contained in this Annual Report,
prospective investors should carefully consider the risks described below
before making any investment decisions. The risks described below are not the
only ones that we face. Additional risks not currently known to us or that we
currently deem immaterial may also impair our business and results of
operations. Our business, financial condition or results of operations could be
materially adversely affected by any of these risks, and investors could lose
all or part of their investment.
Risks Related to Our Business
We endeavor to implement our business plans successfully, but factors
beyond our control may prevent us from doing so, which could have a
material adverse effect on our business.
Our ability to increase our revenues and maintain our position as a
leading European and Latin American provider of advanced telecommunications and
Internet services will depend in large part on the successful, timely and
cost-effective implementation of our business plans, including our plan to
operate our various businesses along global business lines.
Factors beyond our control that could affect the implementation and
completion of our business plan include:
o difficulties in developing and introducing new technologies;
o declining prices for some of our services;
o the effect of adverse economic trends in our principal markets;
o the effect of foreign exchange fluctuations on our results of
operations;
o difficulties in obtaining applicable government, shareholder and
other approvals;
o difficulties in entering into key contracts with third parties;
o the effect of increased competition;
o our ability to establish and maintain strategic relationships;
o difficulties in integrating our acquired businesses;
o the effect of future acquisitions on our financial condition and
results of operations;
8
o difficulties in securing the timely performance of independent
contractors hired to engineer, design and construct portions of our
network;
o the potential lack of attractive investment targets;
o difficulties in attracting and retaining highly skilled and qualified
personnel; and
o the effect of unanticipated network interruptions.
A material portion of our foreign operations and investments is located in
Latin America, and we are therefore exposed to risks inherent in operating
and investing in Latin America.
At December 31, 2004, approximately 41.8% of our assets were located in
Latin America. In addition, approximately 37.1% of our revenue from operations
for 2004 was derived from our Latin American operations. Our foreign operations
and investments in Latin America are subject to various risks, including risks
related to the following:
o government regulations and administrative policies may change
quickly;
o currencies may be devalued or may depreciate or currency restrictions
and other restraints on transfer of funds may be imposed;
o governments may expropriate assets;
o governments may impose burdensome taxes or tariffs;
o political changes may lead to changes in the business environments in
which we operate;
o our operations are dependent on concessions and other agreements with
existing governments;
o economic downturns, political instability and civil disturbances may
negatively affect our operations; and
In addition, revenues from operations of our Latin American subsidiaries,
their market value and the dividends and management fees received from them are
exposed to material country risk as a result of adverse economic conditions in
the region that may adversely affect demand, consumption and exchange rates.
For example, our operations in Argentina were affected by the devaluation
of the Argentine peso, high inflation and other adverse macroeconomic
conditions in Argentina and related legislative measures adopted by the
Argentine Government in 2001 and 2002. During 2003 and 2004 the Argentine
economy has stabilized and experienced significant growth. However, the effects
of laws adopted during the economic crisis continue to affect the results of
operations and financial condition of our operations in Argentina. In addition,
the Argentine economic and social situation has quickly deteriorated in the
past and may quickly deteriorate in the future and we cannot assure you that
the Argentine economy will continue to experience sustained growth.
Furthermore, approximately 50% of the bonds issued by the Republic of Argentina
remain in default and this may influence measures taken by its government
affecting business development in the private sector.
Our fixed line business in Argentina derive a majority of their revenues
from regulated tariffs for telecommunication services. Prior to the enactment
of the Public Emergency Law on January 7, 2002 in response to the economic
crisis, those tariffs were linked to a rate per unit of usage expressed in U.S.
dollars, which could also be adjusted semiannually in accordance with
variations in the U.S. consumer price index. Under the Public Emergency Law,
however, any tariff index clauses or any other index mechanism incorporated in
the agreements executed by the Argentine government, including those agreements
with telecommunication service providers, are void and not applicable. Any
increase in inflation will thus result in a decrease in revenues from our fixed
line business in Argentina in real terms, as tariffs are not adjusted for
inflation, which could have a material adverse effect on our results of
operations and financial conditions. Our fixed line operator Telefonica de
Argentina is in the process of renegotiating the tariffs it charges customers
for fixed line telephone service with the Argentina
9
government. No assurance can be given that the outcome of these negotiations
will be favorable to Telefonica de Argentina.
The Public Emergency Law also mandated "pesification" by stating that
fixed line tariffs must be established in pesos using a Ps.1.00 per U.S.$1.00
exchange rate. Since our fixed line business in Argentina realizes
substantially all of its revenues in pesos, any depreciation in the peso
against the euro will negatively affect our results of operations since
Telefonica de Argentina has not been allowed to alter its tariffs in response
to such depreciation. Exchange rates were stable in 2004. However, any future
depreciation of the peso against the euro may have an adverse effect on our
results of operations.
If applied to telecommunication services as originally drafted, the
"Project of Law for Public Services" presently under discusion in the Argentine
parliament would create uncertainty regarding certain critical issued faced by
our subsidiaries in Argentina such as the status of licenses and concessions
granted to the declared public services. The project under discussion also
lacks provisions for tariff adjustments, conditions on investments, financial
policies of the operators and obligations of universal services. We cannot
predict whether this project will be enacted into law or become part of the
regulatory framework that governs our operations in Argentina. Similarly, since
the project is still under discussion we cannot predict what effects this
project, or any other regulations arising from the deliberations on the
project, could have on our business, financial condition or results of
operations.
The effects of inflation and currency depreciation may require certain of
our subsidiaries to undertake a mandatory recapitalization or commence
dissolution proceedings.
Under Argentine corporate law, if a corporation presents annual financial
statements that report negative shareholders' equity, the corporation is
required to commence dissolution proceedings unless its shareholders take
action (either by making a capital contribution or authorizing the issuance of
additional shares of the corporation) that increases capital stock. As of the
date of this Annual Report, certain of our subsidiaries have negative
shareholders' equity. Telefonica Holding Argentina and Telefonica
Comunicaciones Personales had a negative shareholders' equity of (euro)1,142.8
million at December 31, 2004. As a consequence, in the next annual
shareholders' meeting of each such subsidiary, the shareholders must resolve to
recapitalize the company to avoid dissolution proceedings. These subsidiaries
must recapitalize before December 31, 2005 or be subject to dissolution
proceedings instigated by Argentine authorities. If such dissolutions were to
occur, our subsidiary Telefonica Comunicaciones Personales could lose its
license to provide wireless telecommunications in Argentina.
Our financial condition and results of operations may be adversely
affected if we do not effectively manage our exposure to foreign currency
exchange and interest rate risk.
We are exposed to various types of market risk in the normal course of our
business, including the significant impact of changes in foreign currency
exchange rates, as well as the impact of changes in interest rates. We employ
risk management strategies to manage this exposure, in part through the use of
financial derivatives such as foreign currency forwards, currency swap
agreements and interest rate swap agreements. In particular, in order to limit
our exposure to Latin American currency exchange rate fluctuations, we use
financial derivatives and other instruments. If the financial derivatives
market is not sufficiently liquid for our risk management purposes, or if we
cannot enter into arrangements of the type and for the amounts necessary to
limit our exposure to Latin American currency exchange rate fluctuations, such
failure could adversely affect our financial condition and results of
operations. Also, our other risk management strategies may not be successful,
which could adversely affect our financial condition and results of operations.
For a more detailed description of our financial derivatives transactions, see
"Item 11--Quantitative and Quantitative Disclosures About Market Risk".
The development of our business could be hindered if we fail to maintain
satisfactory working relationships with our partners.
Some of our operations are conducted through joint ventures in which we
own a significant, but less than controlling, ownership interest. For example,
Brasilcel in Brazil, which is jointly controlled by Telefonica Moviles and
Portugal Telecom, is conducted through a joint venture. As a result of our less
than controlling interest in these joint ventures, our company does not have
absolute control over the operations of the venture.
10
In addition, in some cases where we own a majority of the venture, we may
be subject to provisions in shareholders' agreements restricting our ability to
control the venture. The relevant corporate governance provisions vary from
venture to venture and often depend upon the size of our investment relative to
that of the other investors, our experience as a telecommunications operator in
the relevant jurisdiction compared to that of the other investors and the
preference or requirement of foreign governments that local owners hold an
interest in licensed telecommunications operators. As a result, we must
generally obtain the cooperation of our partners in order to implement and
expand upon our business strategies and to finance and manage our operations.
The risk of disagreement or deadlock is inherent in jointly controlled
entities and there is the risk that decisions against our interests will be
made and that we may not realize the expected benefits from our joint ventures,
including economies of scale and opportunities to realize potential synergies
and cost savings. Our joint venture partners may choose not to continue their
partnerships with us.
The costs and difficulties of acquiring and integrating businesses could
impede our future growth and adversely affect our competitiveness.
We may enter into acquisition transactions in order to, among other
things, provide services in countries in which we do not currently have
operations or to enhance our product portfolio in a market where we currently
have operations, as we have done in recent years. These acquisitions may expose
us to certain risks, including the following:
o the difficulty of assimilating the operations and personnel of the
acquired entities;
o the potential disruption to our ongoing business caused by senior
management's focus on the acquisition;
o our failure to incorporate successfully licensed or acquired
technology into our network and product offerings;
o the failure to maintain uniform standards, controls, procedures and
policies; and
o the impairment of relationships with employees as a result of changes
in management and ownership.
We cannot assure you that we will be successful in overcoming these risks,
and our failure to overcome these risks could have a negative effect on our
business, financial condition and results of operations.
Telefonica Moviles' acquisition of BellSouth's wireless operations in
Latin America and of Telefonica Movil from CTC Chile may require us to
increase our capital resources and financing requirements.
On March 5, 2004, Telefonica Moviles entered into a stock purchase
agreement with BellSouth Corporation, or BellSouth, to acquire 100% of
BellSouth's interests in its wireless operations in Argentina, Chile, Peru,
Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and Panama. The
shares of these operators were effectively transferred in 2004 and in January
2005. The total acquisition cost for Telefonica Moviles, adjusted by the net
debt of all the companies, amounted to (euro)3,252.5 million (excluding the
acquisition cost of the companies acquired in 2005). Furthermore, on May 18,
2004 the Board of Compania de Telecomunicaciones de Chile, or CTC Chile,
accepted a binding offer from Telefonica Moviles S.A. for the acquisition of
100% of the shares of Telefonica Movil Chile, S.A., a subsidiary of CTC Chile.
The total amount paid by Telefonica Moviles for this acquisition was $1,058
million.
Telefonica Moviles has funded these acquisitions through cash generated by
its operations and from loans provided by us. In addition to the financing
required for these acquisitions, our capital resource requirements may increase
in order to upgrade and integrate the networks of these operators, involving in
some cases changes in technology. We may be required to further increase our
debt or use a portion our existing cash flow from operations to invest in same
of these new acquisitions, which could have a material adverse effect on our
revenues and overall results of operations.
11
We may be adversely affected by unanticipated network interruptions.
Unanticipated network interruptions as a result of system failures whether
accidental or otherwise, including due to network, hardware or software
failures, that affect the quality of, or cause an interruption in, our service
could result in customer dissatisfaction, reduced revenues and traffic, and
costly repairs and could harm our reputation. Although we carry business
interruption insurance, our insurance policy may not provide coverage in
amounts sufficient to compensate us for any losses we incur.
Risks Relating to Our Industry
We face intense competition in most of our markets, which could result in
decreases in current and potential customers, revenues and profitability.
We face significant competition in all of the markets in which we operate.
Governmental authorities in many of the countries in which we operate continue
to grant new licenses and concessions to new market entrants, which results in
increased competition in those countries and markets. In addition,
technological developments are increasing cross-competition in certain markets,
such as between wireless providers and fixed line telephony operators.
Regulatory policies applicable in many of the countries in which we
operate generally favor increased competition in most of our market segments,
especially in the fixed line and wireless services industries, including by
granting new licenses in existing licensed territories in order to permit the
entry of new competitors. These regulatory policies are likely to have the
effect, over time, of reducing our market share in the relevant markets in
which we operate. For example, Spanish telecommunications regulators have
attempted to promote competition in fixed line telecommunications services
through policies that favor other fixed line telecommunications operators.
Regulations introduced in recent years in Spain have allowed other operators to
locate their equipment in or adjacent to our exchanges (i.e., local loop
unbundling) and have made it easier for our customers to route some or all of
their calls over our competitors' networks (i.e., carrier pre-selection).
Additional regulatory changes resulting in increased competition could have a
further adverse effect on our business, results of operations, financial
condition and prospects.
In addition to this, because we hold leading market shares in many of the
countries in which we operate, we could face regulatory actions by national or,
in Europe, European Union antitrust or competition authorities if it is
determined that we have prevented, restricted or distorted competition. These
authorities could prohibit us from making further acquisitions or continuing to
engage in particular practices or impose fines or other penalties on us, which,
if significant, could harm our financial performance and future growth.
For a complete description of the regulatory proceedings we currently face
please see "Item 8--Financial Information--Legal Proceedings".
As a result of these policies, we may lose market share in Spain and in
other markets where we are the incumbent operator.
In addition, we are subject to the effects of actions by our competitors
in the markets where we have operations. Our competitors could:
o offer lower prices, more attractive discount plans or better services
and features;
o develop and deploy more rapidly new or improved technologies,
services and products;
o bundle offerings of one type of service with others;
o in the case of the wireless industry, subsidize handset procurement;
or
o expand and enhance more rapidly their networks.
12
Furthermore, some of our competitors in certain markets have, and some
potential competitors may enjoy, competitive advantages, including the
following:
o greater name recognition;
o greater financial, technical, marketing and other resources;
o larger customer bases; and
o well-established relationships with current and potential customers.
To compete effectively with our competitors, we will need to successfully
market our services and anticipate and respond to various competitive factors
affecting the relevant markets, such as the introduction of new products and
services by our competitors, pricing strategies adopted by our competitors,
changes in consumer preferences and general economic, political and social
conditions. If we are unable to compete effectively with our competitors, it
could result in price reductions, lower revenues, under-utilization of our
services, reduced operating margins and loss of market share.
We operate in a highly regulated industry and could become subject to more
burdensome regulation, which could adversely affect our businesses.
As a multinational telecommunications company, we are subject to different
laws and regulations in each of the jurisdictions in which we provide services.
Furthermore, the licensing, construction, operation and interconnection
arrangements of our communications systems are regulated to varying degrees by
national, state, regional, local and supranational authorities, such as the
European Union. These authorities could adopt regulations or take other actions
that could adversely affect us and our companies, including revocation of any
of our licenses or concessions to offer services in a particular market,
failure to renew a license or concession, modification of the terms of a
license or concession or the granting of new licenses or concessions to
competitors. Increased or significant changes in the regulation of the
activities of our operating companies, including the regulation of rates that
may be charged to customers for services, could have a material adverse effect
on our business, financial condition or results of operations.
We operate under license and concession contracts.
Most of our operating companies require licenses or concessions from the
governmental authorities of the countries in which they operate. These licenses
and concessions specify the types of services permitted to be offered by our
operating companies. The continued existence and terms of our licenses and
concessions are subject to review by regulatory authorities in each country and
to interpretation, modification or termination by these authorities. The terms
of these licenses granted to our operating companies and conditions of the
license renewal vary from country to country. Although license renewal is not
usually guaranteed, most licenses do address the renewal process and terms,
which we believe we will be able to satisfy. As licenses approach the end of
their terms it is our intention to pursue their renewal as provided by each of
the license agreements.
For example, Telefonica del Peru has requested a renewal of the existing
contract to provide fixed line telecommunication services, which expires in
2019, for an additional five-year period. In June 2004, the Peruvian government
notified Telefonica del Peru of its recommendation not to renew the concession
for such additional period. Telefonica del Peru may petition for the additional
five-year extension period in December 2008.
Many of these licenses and concessions are revocable for public interest
reasons. The rules of some of the regulatory authorities with jurisdiction over
our operating companies require us to meet specified network build-out
requirements and schedules. In particular, our existing licenses and
concessions typically require that we satisfy certain obligations, including
minimum specified quality, service and coverage conditions and capital
investment. Failure to comply with these obligations could result in the
imposition of fines or revocation or forfeiture of the license for the relevant
area. In addition, the need to meet scheduled deadlines may require our
companies to expend more resources than otherwise budgeted for a particular
network build-out.
13
Our operations in Latin America face different risks, including the
possibility of a material modification to the applicable regulatory framework,
political uncertainty, economic volatility or social unrest.
The industry in which we operate is subject to rapid technological changes
and if we are unable to adapt to such changes our ability to provide
competitive services could be materially adversely affected.
The telecommunications industry is in a period of rapid technological
change. Our future success depends, in part, on our ability to anticipate and
adapt in a timely manner to technological changes. We expect that new products
and technologies will emerge and that existing products and technologies will
further develop. These new products and technologies may reduce the prices for
our services or they may be superior to, and render obsolete, the products and
services we offer and the technologies we use, and may consequently reduce the
revenues generated by our products and services and require investment in new
technology. Our most significant competitors in the future may be new entrants
to our markets who are not burdened by an installed base of older equipment. As
a result, it may be very expensive for us to upgrade our products and
technology, in order to continue to compete effectively with new or existing
competitors. Such increased costs could adversely affect our business,
financial condition or results of operations.
Our business depends on the upgrading of our existing networks.
We must continue to upgrade our existing wireless and fixed line networks
in a timely and satisfactory manner in order to retain and expand our customer
base in each of our markets, to enhance our financial performance and to
satisfy regulatory requirements. Among other things, we could:
o upgrade the functionality of our networks to permit increased
customization of services;
o increase coverage in some of our markets;
o expand and maintain customer service, network management and
administrative systems; and
o upgrade older systems and networks to adapt them to new technologies.
Many of these tasks are not entirely under our control. If we fail to
successfully execute them, our services and products may be less attractive to
new customers and we may lose existing customers to our competitors, which
would adversely affect our results of operations.
Failure to generate sufficient cash flow and higher capital expenditure
requirements could make us more dependent on external financing. If we are
unable to obtain financing, our business may be adversely affected.
The operation, expansion and upgrading of our networks, as well as the
marketing and distribution of our services and products, require substantial
financing. Moreover, our liquidity and capital resource requirements may
increase if we participate in other fixed line or wireless license award
processes or make acquisitions. We also have major capital resource
requirements relating to, among other things, the development of distribution
channels in new countries of operations and the development and implementation
of new technologies.
If our ability to generate cash flow were to decrease, we might need to
incur a significant amount of debt to support our liquidity and capital
resources requirements for the ongoing development and expansion of our
business. Our ability to raise capital is also related to our stock price and
the liquidity of the equity markets. Adverse trends in these areas could
prevent us from raising capital. If we have insufficient internal cash flow or
we are unable to borrow the amounts we need at affordable rates or we cannot
raise equity, we may be unable to pursue our business plans, which could
adversely affect our financial condition and results of operations.
Our business could be adversely affected if our suppliers fail to provide
necessary equipment and services on a timely basis.
We depend upon a small number of major suppliers for essential products
and services, mainly network infrastructure. These suppliers may, among other
things, extend delivery times, raise prices and limit supply due to their own
shortages and business requirements. If these suppliers fail to deliver
products and services on a timely
14
basis, our business and results of operations could be negatively affected.
Similarly, interruptions in the supply of telecommunications equipment for our
networks could impede network development and expansion, which in some cases
could adversely affect our ability to satisfy our license requirements.
The wireless industry may be harmed by reports suggesting that radio
frequency emissions cause health problems and interfere with medical
devices.
Media and other reports have suggested that radio frequency emissions from
wireless handsets and base stations may cause health problems. If consumers
harbor health-related concerns, they may be discouraged from using wireless
handsets. These concerns could have an adverse effect on the wireless
communications industry and, possibly, expose wireless providers, including us,
to litigation. Even if the authorized health institutions confirm there is no
scientific evidence of adverse health effects, we cannot assure you that
further medical research and studies will refute a link between the radio
frequency emissions of wireless handsets and base stations and these health
concerns. Government authorities could increase regulation of wireless handsets
and base stations as a result of these health concerns or wireless companies,
including Telefonica Moviles, could be held liable for costs or damages
associated with these concerns, which could have an adverse effect on our
business. In Spain, for example, Telefonica Moviles was required by law to test
and certify the emissions of all its base stations in or close to populated
areas. For the year ended 2004, such tests have again confirmed lower emission
levels than those required by regulations. If in the future Telefonica Moviles
fails to comply fully with these standards, it could be subject to claims or
regulatory actions.
Other Risks
We face risks associated with litigation.
We are party to lawsuits and other legal proceedings in the ordinary
course of our business. An adverse outcome in, or any settlement of, these or
other lawsuits (including any that may be asserted in the future) could result
in significant costs to us. In addition, our senior management may be required
to devote substantial time to these lawsuits which they could otherwise devote
to our business. For a more detailed description of current lawsuits, see "Item
8--Financial Information--Legal Proceedings".
We must adopt new accounting standards in 2005 that will impact our
financial reporting.
In 2004 we prepared our financial statements in accordance with Spanish
GAAP, and prepared a reconciliation of certain items to U.S. GAAP as required
by SEC regulation. Under current European Union law, listed EU companies had to
apply from January 1, 2005 the International Financial Reporting Standards
(IFRS) adopted by the EU in preparing their consolidated financial statements.
Applying these standards to our Consolidated Financial Statements will
imply a change in the presentation of our financial information, since the
financial statements will include more components and additional disclosure
will be required. Additionally, there will be a change in the valuation of
certain items. Regarding the former, at this moment it is not possible to
determine the exact impact that this new regulation will entail compared to
Spanish GAAP, since new pronouncements from the International Accounting
Standards Board (IASB), or pronouncements that are not endorsed by the European
Union (EU) prior to the preparation of our December 31, 2005 Consolidated
Financial Statements, may have an impact on our financial statements. Regarding
the latter, we have performed a preliminary analysis of how the adoption of
IFRS will impact our financial condition and results of operations. Based on
this analysis, we estimate that the principal adjustments to our total
shareholders' equity at December 31, 2004 under IFRS would result in a decline
in our shareholders' equity of approximately (euro)3,729 million from
(euro)16,225.1 million at that date under Spanish GAAP. A decrease in our
shareholders' equity when measured under IFRS at December 31, 2005 could cause
certain of our loan covenants to become more restrictive, which could have a
material adverse effect on our business, financial condition and results of
operations.
For additional information concerning significant differences identified
between IFRS and Spanish GAAP, see "Item 5--Operating and Financial Review and
Prospects-- Preliminary Guidance on Differences Between IFRS and Spanish GAAP".
15
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Overview
Telefonica, S.A. is a corporation duly organized and existing under the
laws of the Kingdom of Spain, incorporated on April 19, 1924. We are:
o a diversified telecommunications group which provides a comprehensive
range of services mainly in Spain and Latin America through one of
the world's largest and most modern telecommunications networks;
o the leading provider of fixed line voice telephone services, wireless
communications services, Internet access services and data
transmission services in Spain;
o one of the largest telecommunications operators in Latin America,
with operations principally in Brazil, Argentina, Chile, Peru,
Mexico, Colombia, Ecuador, Nicaragua, Panama, Uruguay, Venezuela, El
Salvador and Guatemala; and
o a leading Spanish multinational corporation.
At December 31, 2004, we had approximately 43.2 million access lines in
service and 74.4 million wireless subscribers. In addition, we have 0.4 million
pay television subscribers. We had a total of approximately 118.1 million
customers at December 31, 2004, more than half of which are in Latin America.
Beginning in 2004, we retroactively changed our calculation of our
customer base to count as customers only those which we directly manage.
Accordingly, we do not consider the customers of subsidiaries in which we have
a financial interest but do not control to be part of our customer base.
Therefore, we have retroactively removed all customers of CANTV for 2002 and
2003.
The following table reflects the development of our customer base since
2002.
At December 31, % change
----------------------------- 2003 vs.
2002 2003(1) 2004 2004
-----------------------------------------
(in thousands)
-----------------------------------------
Lines in service (in thousands)(2)...................... 40,440.4 41,128.4 43,249.5 5.2
In Spain............................................. 18,705.6 19,100.4 19,835.3 3.8
In other countries................................... 21,734.8 22,028.0 23,414.3 6.3
-----------------------------------------
Mobile telephony customers (in thousands)(3)............ 41,376.1 51,848.6 74,442.5 43.6
In Spain............................................. 18,412.0 19,660.6 18,977.0 (3.5)
In other countries................................... 22,964.1 32,188.0 55,465.4 72.3
-----------------------------------------
Total(4)................................................ 82,156.5 93,351.3 118,100.3 26.5
------------------
(1) Beginning on January 1, 2003, we have retroactively introduced a
modification in our calculation formula for the lines in service. This
criteria will apply to the following equivalencies: PSTN (x1), basic ISDN
(x2), primary ISDN (x30), 2/6 digital access for switchboards and Ibercom
(x30), ADSL (x1) and unbundled loops (x1). PSTN, or Public Switched
Telephone Network, are lines that offer basic telephony services. ISDN, or
integrated service digital networks, are lines that allow the integration
of voice, data and video services through two 64kbits/s channels. ADSL, or
asymmetrical digital subscriber lines, are lines that allow for voice and
high speed data transmission. This new criteria introduces a difference in
the manner in which we account for ISDN primary access and of the 2/6
access for switchboards and Ibercom, which will be multiplied by the
number of access channels (30) instead of the extensions using it.
(2) Includes all the lines in service (traditional and ADSL) of Telefonica de
Espana, CTC Chile, Telefonica de Argentina, Telefonica del Peru, Telesp,
Telefonica Moviles El Salvador, Telefonica Moviles Guatemala and
Telefonica Deutschland.
16
(3) Includes all the customers of Telefonica Servicios Moviles Espana,
MediTelecom, Telefonica Movil Chile, TCP Argentina, Telefonica Moviles
Peru, Brasilcel, Telefonica Moviles Guatemala, Telefonica Moviles El
Salvador, Telefonica Moviles Mexico and, for 2004 only, the customers of
companies acquired from BellSouth in 2004 including those with operations
in Venezuela, Guatemala, Nicaragua, Panama, Ecuador, Colombia, Peru and
Uruguay but does not include the former BellSouth companies operating in
Chile and Argentina as the acquisitions of the BellSouth companies in
Chile and Argentina were not closed until 2005.
(4) Includes all pay television subscribers of Cable Magico in Peru,
Multiservicio in El Salvador and Imagenio in Spain. After the merger
between Via Digital and Sogecable, the TV-platform clients are not
included in 2002 (775,000).
During 2004, we implemented certain measures to simplify our business
lines by integrating the former Telefonica Empresas business line's operations
into the Spanish and Latin American fixed line businesses. Pursuant to this
reorganization, the operations of Telefonica Data Espana and Telefonica
Soluciones are now conducted by Telefonica de Espana and the operations of
Telefonica Data Latinoamerica and Telefonica International Wholesale Services
(TIWS) are now conducted by Telefonica Latinoamerica.
As a result of this reorganization, our operations are organized according
to five principal lines of business, each of which is headed by an operating
subsidiary that is under our direct control and two additional non-strategic
business lines. Our five principal lines of business are:
o Spanish fixed line business conducted through Telefonica de Espana;
o Mobile business conducted through Telefonica Moviles;
o Latin American fixed line business conducted through Telefonica
Latinoamerica;
o Internet portal business conducted through Terra Networks; and
o Content and media business conducted through Telefonica de
Contenidos.
Our other lines of business are:
o Directories business conducted through Telefonica Publicidad e
Informacion, S.A.; and
o Call center business in Europe (Spain), Latin America and Northern
Africa (Morocco) conducted through Atento N.V.
Our new organization allows us to shift from a product-oriented strategy
to a customer-oriented strategy by focusing on our key businesses, divesting
unprofitable operations and reorganizing the group in order to facilitate
services tailored to our customer's needs rather than offering different
products conducted by separate business lines. The final objective of this
process is to maximize the quality and breadth of the services we provide to
our corporate and professional clients through integrated management of our
service catalog, better organizational coordination and through cost and
investments synergies.
On February 23, 2005 our Board of Directors approved a merger plan for the
acquisition of Terra Networks by Telefonica. The Board of Directors of Terra
Networks also approved the merger plan. The merger is subject to approval by
our shareholders and the shareholders of Terra Networks. Upon completion of the
merger, we intend to integrate the Internet portal business currently conducted
through Terra Networks into our other existing business lines.
Telefonica, S.A., the parent company of the Telefonica Group, also
operates as a holding company with the following objectives:
o coordinate the group's activities;
o allocate resources efficiently among the group;
17
o provide managerial guidelines for the group;
o manage the portfolio of businesses;
o provide cohesion within the group; and
o foster synergies among the group's subsidiaries.
The following chart shows the organizational structure of the principal
subsidiaries of the Telefonica Group at December 31, 2004, including their
jurisdictions of incorporation and our ownership interest.
18
TELEFONICA S.A.
|
--------------------------------------------------------------------------------------------------------------------
| | | | | | |
| | | | | | |
Fixed-Line Worldwide wireless Fixed-Line Worldwide Worldwide Worldwide Worldwide
telecommunications communications telecommunications Internet audiovisual directory contact
services in Spain services services in --| related content content and centers
| | Latin America | services and media publishing |
| | | | | | |
| | | | | | |
TELEFONICA TELEFONICA MOVILES TELEFONICA --------| TERRA NETWORKS TELEFONICA DE TELEFONICA ATENTO N.V.
DE ESPANA (Spain) INTERNACIONAL | (Spain) CONTENIDOS PUBLICIDAD (The
(Spain) 92.46% (Spain) | 75.87% (Spain) E INFORMACION Netherlands)
100% | 100% | | 100% (Spain) 91.35%
| | | | | | 59.90% |
| | | | | | | |
|--Telefonica Telcel | Telefonica | Telefonica | | Terra | Atco | Telefonica | Atento
| Tele- (Venezuela)-|---Moviles |--de Argentina | | Networks |---(Argentina) |-- Publicidad e | Tele-
| comuni- 92.46% | Espana | (Argentina) | |--Espana | 100% | Informacion |--servicios
| caciones | (Spain) | 98.03% | | (Spain) | | Espana | Espana
| Publicas | 92.46% | | | 75.87% | | (Spain) | (Spain)
| (Spain) | | | | | | 59.90% | 91.35%
| 100% | | | | | | |
| TEM Colombia|---Brasilcel | Compania de | | Terra | Sogecable | Telefonica | Atento
| (Colombia) | Brasil |--Telecomuni- | | Networks |---(5) |-- Publicidad e | -Brasil
|--TELYCO 92.46% | (Brazil) | caciones | |--Brasil | (Spain) | Informacion | (Brazil)
| (Spain) | 46.23% | de Chile | | (Brazil) | 23.83% | Brasil | 91.35%
| 100% | | (Chile) | | 75.87% | | (Brazil) |
| | | 44,89% | | | | 59.90% |
| | | | | | | |
| Telefonica Comunicaciones--Telefonica | | | Terra | Endemol (2) | Impresora y | Atento
|--Empresas Moviles del | Moviles | Telefonica | | Networks |---(Netherlands)|-- Comercial |--Chile
| Espana Peru | Argentina |--de Peru | |--Mexico | 99.70% | Publiguias | (Chile)
| (Spain) (Peru) | (Argentina) | (Peru) | | (Mexico) | | (Chile) | 70.87%
| 100% 92.32% | 90.58% | 98.19% | | 75.86% | | 59.90% |
| | | | | | | |
| | | | | | | |
| Telefonica TEM Guatemala---Telefonica | | | Terra | Hispasat | Telefonica | Atento
|--Soluciones y Cia | Moviles | Telesp | | Networks |---(Spain) | Publicidad |--Peru
Sectoriales (Guatemala) | Peru | (Brasil)(1) | |--Argentina | 13.23% |---e Informacion| (Peru)
(Spain) 92.46% | (Peru) |--(Brazil) | | (Argentina) | Peru | 90,86%
100% | 90.58% 87.49% | | 75.87% | (Peru) |
| | | | 59.90% |
Otecel------|---Telefonica | | Terra Net- | Telefonica | Atento Maroc
(Ecuador) | Moviles Telefonica | |--works | Servicios |--(Morocco)
92.46% | Mexico |--International---| | Guatemala |---Audiovisuales | 91,35%
| (Mexico) | Wholesale | | (Guatemala) (Spain) |
TEM Panama--|---85.06% | Services | | 75.87% 100% |
(Panama) | | 100% | | | Atento de
92.06% | | | | |--Guatemala
| Telefonica | | | Terra Networks | (Guatemala)
Abiatar-----|---El Salvador | EMERGIA S.A. | |--Peru | 91.35%
(Uruguay) | (El Salvador) |--(Uruguay) (4) | | (Peru) |
92.46% | 84.83% 100% | | 75.86% |
| | | |
Telefonia | | | | Atento
Celular-----|---Telefonica | | Terra Networks |--El Salvador
Nicaragua Guatemala Telefonica | |--Chile | (El Salvador)
(Nicaragua) (Guatemala) |--Empresas ------| | (Chile) | 91.35%
92.46% 92.46% | America | 75.87% |
| 100% | |
| | |
Telefonica | | Terra Networks | Atento
Movil Chile | Telefonica |--Venezuela |--Argentina
(Chile) | Data (Venezuela) | (Argentina)
92.46% |--USA 75.87% | 91.35%
| (USA) |
| 100% |
| |
| | Atento
| Telefonica | Mexico
| Empresas |--(Mexico)
|--Brasil (3) 91.35%
| (Brazil)
| 93.98%
|
|
| Telefonica
| Data
|--Argentina
| (Argentina)
| 97.92%
|
|
| Telefonica
|--Empresas Peru
(Peru)
97.07%
(1) 84.34% representing voting interest
(2) Ownership in Endemol is held directly by Telefonica S.A.
(3) Ownership in Telefonica Data Brasil Holding is held 53.66% by Telefonica
DataCorp and 40.32% by Telefonica Internacional S.A.
(4) EMERGIA S.A. is held directly by Telefonica S.A.
(5) Ownership in Sogecable is held 1.60% by Telefonica S.A. and 22.23% by
Telefonica de Contenidos.
19
Our principal executive offices are located at Gran Via, 28, 28013 Madrid,
Spain and our telephone number is (34) 91-584-03-06.
Capital Expenditures and Divestitures
We have invested over (euro)11,400.1 million in capital expenditures
(consisting of additions to property, plant and equipment, which we refer to as
"tangible investments", and additions to intangible assets, which we refer to
as "intangible investments") since January 1, 2002. Of this amount,
(euro)3,768.1 million was invested in 2004, (euro)3,705.8 million was invested
in 2003 and (euro)3,926.2 million was invested in 2002. Losses on property,
plant and equipment, which we refer to as "tangible (property and equipment)
divestitures", and losses on intangible assets, which we refer to as
"intangible asset divestitures", in 2004 were not material. Tangible (property
and equipment) and intangible asset divestitures in 2002 were material,
principally due to our write-downs of the values of our UMTS licenses and other
intangible assets in Germany, Austria and Switzerland, which amounted to
(euro)9,526.2 million.
Year Ended December 31, 2004
In 2004, capital expenditures increased by 1.7% from 2003, principally due
to expenditures by Telefonica Moviles on network and technology for our mobile
businesses in Spain, Brazil, Argentina and Mexico and investments by Telefonica
Latinoamerica to further develop our broadband network for our Latin America
fixed line business. Our principal capital expenditures in 2004 included:
o intangible investments ((euro)594.1 million)
o tangible investments made by Telefonica Latinoamerica ((euro)680.6
million)
o tangible investments made by Telefonica de Espana
((euro)965.4million)
o tangible investments made by Telefonica Moviles ((euro)1,352.3
million)
o tangible investments made by Atento ((euro)19.9 million)
Year Ended December 31, 2003
In 2003, capital expenditures decreased by 5.6% from 2002, due to a more
controlled and conservative investment policy implemented in 2003. Each of our
principal business lines has maintained a policy of reduced capital expenditure
compared to the prior year, with the exception of our worldwide wireless
communications services as a result of the roll-out of GSM networks in Mexico
and Chile. Telefonica de Espana and Telefonica Latinoamerica have maintained
their policy of focusing on capital expenditures on the development of
broadband technology while maintaining the necessary capital expenditures for
their traditional business. Our principal investments in 2003 included:
o intangible investments ((euro)806.5 million)
o tangible investments made by Telefonica Latinoamerica ((euro)504.5
million)
o tangible investments made by Telefonica de Espana
((euro)1,084.4million)
o tangible investments made by Telefonica Moviles ((euro)996.9 million)
o tangible investments made by Telefonica Empresas ((euro)100.3
million)
o tangible investments made by Atento ((euro)10.4 million)
Year Ended December 31, 2002
Our principal capital expenditures in 2002 were investments made by
Telefonica de Espana in the development of its broadband services. Capital
expenditures in 2002 were substantially reduced due to the freeze of the
20
development of UMTS licenses in Europe and the reduction of investments in
Spain and Latin America. In 2002, capital expenditures decreased by 53.4% from
2001 and included:
o intangible investments ((euro)1,106.6 million)
o tangible investments made by Telefonica Latinoamerica ((euro)628.5
million)
o tangible investments made by Telefonica de Espana ((euro)1,262.9
million)
o tangible investments made by Telefonica Moviles ((euro)684.3 million)
o tangible investments made by Telefonica Data ((euro)146.5 million)
o tangible investments made by Atento ((euro)12.7 million)
Financial Investments and Divestitures
Our principal financial investments in 2004 were made by Telefonica
Moviles ((euro)3,997.9 million, which included (euro)3,252.5 million from the
acquisition of certain BellSouth companies) and Telefonica, S.A. ((euro)530.8
million, which included (euro)475.1 million from additional acquisitions of
Portugal Telecom shares. Our principal financial divestitures in 2004 were the
sale of Lycos, Inc. and Pearson Plc by Terra Networks S.A. and Telefonica
Contenidos, respectively.
Our principal financial investments in 2003 were made by Telefonica, S.A.
((euro)1,528.5 million, which included (euro)1,029.6 million from acceptances
to our tender offer for Terra Networks shares), Telefonica de Contenidos
((euro)708.6 million) and Telefonica Moviles ((euro)567.4 million). Our
principal financial divestitures were the overall divestiture of our interest
in Antena 3 TV and the sale of our interests in Sonda, 3G Telecommunications
and Inmarsat by Telefonica Internacional, Telefonica Moviles and Telefonica de
Espana, respectively.
Our principal financial investments in 2002 were made by Telefonica
Moviles ((euro)712.4 million), Telefonica de Contenidos ((euro)488.6 million)
and Telefonica, S.A. ((euro)264.0 million). Our principal financial
divestitures in 2002 were divestitures by Telefonica de Contenidos of 100% of
its holding in Grupo Uniprex Onda Cero, Cadena Voz de Radiodifusion and Azul
Television, and its sale of 4.11% of its interest in Hispasat, S.A. Additional
divestitures were made by Telefonica Datacorp, SAU, and Terra Networks of their
interests in European Telecom International, GmbH Lycos Korea and Sympatico
Lycos.
Public Takeover Offers
On May 28, 2003 we launched a tender offer for 100% of the outstanding
shares of Terra Networks that we did not own. The CNMV approved the prospectus
for the tender offer on June 19, 2003. The offer price was (euro)5.25 per
share, payable in cash. Following the tender offer we held 71.97% of the
outstanding shares of Terra Networks. In December 2003 the Board of Directors
of Terra Networks approved the acquisition of 4.41% of its shares owned by
Citibank N.A. as the agent bank for the stock option plans assumed by Terra
Networks following its merger with Lycos, Inc.
On February 23, 2005 the Boards of Directors of Telefonica and Terra
Networks approved a merger plan which provides for the merger of the two
companies, with the termination through dissolution without liquidation of
Terra Networks and the en bloc transmission of all of its assets to Telefonica,
which through universal succession will acquire the rights and obligations of
Terra Networks. The exchange ratio was set at two ordinary shares of Telefonica
for every nine ordinary Terra Networks shares.
On May 25, 2003 Telesp Celular Participaco?s S.A., or TCP, launched a
tender offer for the common shares of Centro Oeste Celular Participaco?s S.A.,
or TCO, not owned by it. The acceptance period finished on November 18, 2003.
As a result of the shares tendered, TCP acquired 72.2% of TCO's outstanding
common shares for R$16.73 per 1,000 common shares. The total purchase price for
the TCO shares acquired was R$538.8 million. At December 31, 2003 TCP held
86.6% of TCO's ordinary shares, representing a 28.29% interest in TCO. TCP also
announced the intention to launch an exchange offer for the remaining shares of
TCO through which TCP would have become
21
TCO's sole shareholder. This would have been followed by a merger of TCO into
TCP. After the launch of the exchange offer, the Commissao de Valores
Mobiliarios (Brazilian Securities Commission), raised questions as to the
exchange offer's compliance with Brazilian law. Although TCP and TCO believed
that the exchange offer complied with applicable law, TCP and TCO decided to
terminate the exchange offer in January 2004.
In August 2004, Brasilcel launched tender offers for part of the
outstanding shares of Tele Sudeste Celular Participaco?s S.A., or TSD, Tele
Leste Celular Participaco?s S.A., or TBE, Celular CRT Participaco?s S.A., or
CRT, and TCO directly and indirectly through its subsidiary TCP, which
concluded in October 2004. As a result of the shares it acquired, Brasilcel's
stakes in the mentioned companies' share capital have increased to: 90.9% in
TSD, 50.6% in TBE, 67.0% in CRT and TCP's stake in TCO increased to 50.6%. The
aggregate amount of consideration paid for such shares was approximately R$607
million for Brasilcel and approximately R$902 million for TCP.
For further information, see "Item 4--Business Overview--Telefonica
Moviles--Telefonica Moviles Operations--Brazil".
Recent Developments
The principal events since the close of our financial year are set forth
below.
o On March 29, 2005, Telefonica S.A. submitted a binding bid to
purchase 51.1% of the equity in the Czech telecommunications company
Cesky Telecom a.s., from the Czech government in an auction as part
of a privatization process. The bid price submitted by Telefonica
S.A. is 502 Czech korunas per share, representing a total value of
(euro)2,745.9 million for the state's 51.1% of the share capital of
Cesky Telecom a.s. The privatization commission formed by the Czech
government for the privatization process issued a non-binding
recommendation that the government of the Czech Republic accept the
bid of Telefonica S.A.. On April 6,2005 the government of the Czech
Republic declared officially that the bid of Telefonica, S.A. was the
winner of the auction through which the privatization is being
conducted. On April 12, 2005 we signed an agreement with the Czech
government to purchase its 51% stake in Cesky Telecom a.s. The
conclusion of this transaction is subject to several conditions and
regulatory approvals and will require Telefonica to launch a
mandatory bid to acquire the remaining 48.9% of the total share
capital of Czesky Telecom a.s.
o On February 23, 2005 the Boards of Directors of Telefonica and Terra
Networks approved a merger plan which provides for the merger of the
two companies. See "Item 4--History and Development of the
Company--Public Takeovers."
o On February 16, 2005, the Board of Directors of Telefonica Publicidad
e Informacion, S.A., or TPI, agreed to submit to its next general
shareholders' meeting a proposal to distribute a dividend of
(euro)0.30 per share, which amounts to a 20% increase from dividends
paid in 2003. The proposed dividend would result in a dividend payout
ratio of 97% for the TPI Group and 99% for TPI. The dividend will be
paid after the amortization of treasury stock held by the company
(7,212,147 shares, representing 1.96% of the share capital),
previously held in connection with hedging arrangements for its stock
options plan, which expired in November 2003.
o On January 26, 2005, Telefonica's Board of Directors approved the
payment of a dividend to its shareholders of (euro)0.5 per share
corresponding to fiscal year 2004 charged against both earnings and
reserves. The Board of Directors also announced that it is their
intention to maintain the same minimum dividend for fiscal year 2005.
The dividends, which must be approved at Telefonica's general
shareholders meeting, are to be distributed in two payments. The
first interim dividend from 2004 net income of (euro)0.23 per share
will be paid on May 13, 2005 and the second dividend from reserves of
(euro)0.27 per share will be paid on November 11, 2005.
o In January 2005, Telefonica Moviles, S.A. acquired 100% of
Comunicaciones Moviles de Chile, S.A., a wireless communications
provider in Chile, for U.S.$532 million and 100% of Compania de
Radiocomunicaciones Moviles S.A., a wireless communications provider
in Argentina, for U.S.$988 million, which completed the acquisition of
BellSouth's Latin American operations.
22
o In January 2005, a capital increase carried out by TCP was fully
subscribed for an amount of approximately R$2.1 billion. The proceeds
raised were used in part to finance TCP's increased stake in Tele
Centro Oeste (TCO) and the remainder was used to partially repay
short-term debt and improve the company's capital structure. As a
result of the capital increase, Brasilcel's stake in TCP's share
capital increased to 65.7%.
B. BUSINESS OVERVIEW
Spanish Fixed Line Business--Telefonica de Espana
Our Spanish fixed line business is managed by Telefonica de Espana. The
principal services offered by Telefonica de Espana are:
o Traditional fixed line telecommunication services, including:
o PSTN (public switched telephone network) lines;
o ISDN (integrated services digital network) access, which
provides high-speed transmission of voice and data through
existing fixed line infrastructure;
o Public telephone services including street phone booths and
other facilities in locations such as airports, train stations,
hotels and shops;
o Local service, domestic long distance, international long
distance and fixed-to-mobile communications services;
o Supplementary services and value added services, such as (i)
call waiting, (ii) call forwarding, (iii) three-party service,
(iv) voice and text messaging, (v) advanced voicemail services,
(vi) information services and (vii) conference-call facilities;
o Intelligent network services, such as (i) free-phone service,
(ii) televoting, (iii) premium rate services, (iv) universal
number and (v) virtual private networks;
o Ibercom: a wide range of advanced corporate communications
services, based on the customer's premises-located switches and
network facilities; and
o Leasing and sale of terminal equipments, ranging from basic
telephones to PABXs (private automatic branch exchanges).
o Internet and broadband multimedia services, including:
o Narrowband switched access to Internet, including a range of pay
per use and flat rate choices;
o Telefonica.net: ISP (Internet Service Provider) services;
o Retail and whole sale broadband access, through ADSL
(asymmetrical digital subscriber line) and satellite
technologies;
o Residential-oriented value added services, such as (i) instant
messaging, (ii) concerts and videoclips by streaming, (iii)
e-learning, (iv) parental control, (v) firewall and (vi)
anti-virus;
o Terminal equipment related to Internet and broadband and
multimedia services, including USB modems, wireless routers and
personal computers;
o Business-oriented value added services, such as (i) intranet,
(ii) web, (iii) e-commerce, (iv) e-business and e-administration
developing, (v) managing services and (vi) sector oriented
solutions (e.g. for lawyers or other professionals);
23
o Wireless access to broadband services, such as Wi-Fi hotspots
for business customers or for public access such as hotels and
convention centers; and
o Multimedia, under the trade name Imagenio, providing TV, video
on demand, Internet access and a wide range of leisure services.
o Data and business-solutions services, including:
o Leased lines;
o VPN (virtual private network) services, including X-25, Frame
Relay, ATM (Asynchronous transfer mode) and IP;
o Hosting and ASP (Application service provider) services,
including Web Hosting, Managed Hosting, Content Delivery and
application and security services;
o Outsourcing services including network management (CGP's ) and
desktop services; and
o System integration and professional services.
o Wholesale services for telecommunication operators, including:
o Domestic interconnection services;
o International wholesale services;
o Leased lines for other operators' network deployment;
o Co-location of operators infrastructures; and
o Local loop leasing, under the unbundled local loop regulation
framework.
Operations
The following table shows the development of Telefonica de Espana's
domestic telecommunications network and growth in usage of that network since
2002:
At December 31,
-----------------------------------
2002 2003(1) 2004
-----------------------------------
Lines in service (in thousands)(1)........................................ 18,705.6 19,100.4 19,835.3
Lines (RTB) (in thousands)................................................ 15,470.2 15,061.0 14,838.2
Equivalent ISDN basic accesses (in thousands)............................. 1,752.1 1,827.0 1,863.8
Equivalent ISDN primary accesses (in thousands)........................... 413.9 426.6 458.4
2/6 digital accesses for switchboards and Ibercom (in thousands).......... 112.3 109.0 106.3
Fully unbundled local loops (in thousands) 16.3 78.4
ADSL connections (in thousands)........................................... 957.2 1,660.5 2,490.1
Fixed-lines per each 100 inhabitants (total market)(2).................... 45.3 45.0 45.0
Average time for the provision of the PSTN service (days)................. 10.1 10.9 18.6
Lines in service per employee(3).......................................... 460.1 515.4 566.0
Average consumption per line (minutes/day)................................ 22.1 21.8 19.7
Average consumption growth per line (%)................................... 4.7 (1.4) (5.9)
Internet users (narrowband) (in thousands)................................ 3,045 2,938 2,444
Growth of outgoing international traffic (%).............................. (22.4) (1.4) 4.0
Growth of incoming international traffic (%).............................. (5.1) 3.4 3.3
Basic telephony lines set up (in thousands)............................... 16,347.3 15,974.7 15,689.5
Digitalization degree (%)................................................. 89.2 92.6 94.2
Coaxial cable (km)........................................................ 2,468 2,457 2,444
24
At December 31,
-----------------------------------
2002 2003(1) 2004
-----------------------------------
Lines in service (in thousands)(1)........................................ 18,705.6 19,100.4 19,835.3
Lines (RTB) (in thousands)................................................ 15,470.2 15,061.0 14,838.2
Equivalent ISDN basic accesses (in thousands)............................. 1,752.1 1,827.0 1,863.8
Optical fiber cable (km).................................................. 60,932 64,934 75,888
Copper cable in interurban links (km)..................................... 56,753 56,492 59,324
Copper cable in subscriber networks (4)................................... 69,148 69,854 70,361
------------------
(1) Beginning on January 1, 2003, we have retroactively introduced a
modification in our calculation formula for the lines in service. This
criteria will apply to the following equivalencies: PSTN (x1), basic ISDN
(x2), primary ISDN (x30), 2/6 digital access for switchboards and Ibercom
x30), ADSL (x1) and unbundled loops. PSTN, or Public Switched Telephone
Network, are lines that offer basic telephony services. ISDN, or
integrated service digital networks, are lines that allow the integration
of voice, data and video services through two 64kbits/s channels. ADSL, or
asymmetrical digital subscriber lines, are lines that allow for voice and
high speed data transmission. This new criteria introduces a difference in
the manner in which we account for ISDN primary access and of the 2/6
digital access for switchboards and Ibercom, which will be multiplied by
the number of access channels (30) instead of the extensions using it.
(2) Includes homogeneous lines in the total market. We have retroactively
changed the calculations for 2002 and 2003 to reflect new population data
published by the Spanish National Statistics Institute on August 19, 2004.
(3) For 2003 and 2004, this item includes employees per new perimeter and
equivalent lines with unbundled loops.
(4) Thousands of kilometers - par. (Transmission cables in the subscriber
networks contain a variable number of conducting filaments, which are
insulated from each other and grouped in pairs. Each such pair is called a
"par".)
In 2004, voice and Internet traffic decreased as a result of weak market
conditions in the Spanish telecommunications sector and loss of market share by
Telefonica de Espana due to increased competition. The number of minutes
consumed in 2004 decreased by 6.7% to 123,026 million from 131,897 million in
2003. The decrease in minutes consumed in 2004 was mainly due to a 5.9%
decrease in minutes per line per day from 19.7 in 2004 compared to 21.8 in 2003
and especially due to a decrease in the average minutes per day per line of
traditional and narrow band Internet access services.
Outgoing traffic, which includes voice and Internet calls, accounted for
55.9% of Telefonica de Espana's total traffic in 2004. Outgoing traffic
decreased by 14.9% to 68,787 million minutes in 2004 compared to 80,822 million
minutes in 2003. During 2004, fixed line to wireless calls decreased 1.3% to
5,777 million minutes in 2004 from 5,855 million minutes in 2003. Calls for
Internet access decreased by 22.5% to 21,453 million minutes in 2004 from
27,696 million minutes in 2003. Local calls decreased by 13.7% to 24,929
million minutes in 2004 from 28,882 million minutes in 2003. Provincial calls
decreased 10.9% to 6,053 million minutes in 2004 from 6,796 million minutes in
2003. Interprovincial calls decreased 9.5% to 6,242 million minutes in 2004
from 6,894 million minutes in 2003. International outgoing calls increased 4.0%
to 1,734 million minutes in 2004 from 1,667 million minutes in 2003. With
respect to value added services, the number of voice mails used increased by
3.1% to 11.9 million compared to 11.5 million in 2003. Subscribers to caller
identification increased by 10.0% to 7.5 million compared to 6.8 million in
2003. The number of text messages managed through fixed line telephones
increased 217% to more than 50 million, of which 33 million were sent from
fixed line telephones and the rest were sent from mobile telephones. Incoming
traffic, which also includes voice and Internet calls, accounted for 44.1% of
Telefonica de Espana's total traffic in 2004. Incoming traffic increased by
6.2% to 54,239 million minutes in 2004, compared to 51,075 million minutes in
2003.
During 2004, Telefonica de Espana continued offering different discount
plans targeted to different client profiles. At December 31, 2004 the total
number of subscribers for such discount plans was 3,329,797.
25
Digitalization
With respect to infrastructure, once the digitalization of 94.2% of the
local exchanges was achieved, the upgrading of all remaining telephone
exchanges was completed and as a result, Telefonica de Espana was able to
provide basic digital services, such as itemized billing, to 100% of its
customers. The digitalization of Telefonica de Espana's network also enables it
to provide a broad range of digital services to satisfy customer demands.
Telefonica de Espana's international switching exchanges and domestic and
international transmission links are 100% digitalized.
During 2004, Telefonica de Espana continued to make progress in the
Internet and broadband businesses. As a result of Telefonica de Espana's
commitment to ADSL technology, at December 31, 2004 clients of this service in
Spain numbered 2.5 million representing a 50% increase compared to 2003. Of the
total number of ADSL clients, 1.6 million were retail ADSL clients,
representing a 50.6% increase in retail ADSL clients compared to 2003.
Our variety of ADSL offerings has been well received by clients in 2004.
Throughout the year, value added services were in high demand, with 1.2 million
services sold. Total "ADSL solutions" amounted to 178,226 of which 169,145
refer to business services. Of these business services, 46,683 are Net LAN
(remote access), which allow customers to create their own private virtual
network. The ADSL security service has been successful with 347,198 customers
at December 31, 2004. In addition, campaigns in order to market other value
added services for wireless ADSL (Wi-Fi) are being intensified.
Regulation
Below is a description of the current Spanish telecommunications
regulatory framework. This description should be considered in light of certain
developments currently underway in the regulatory and competitive environment
that will have a material impact on Telefonica de Espana's business and
operations in future years.
Overview
Spain is a member state of the European Union. As such, it is required to
enact E.U. legislation in its domestic law and to take E.U. legislation into
account in applying its domestic law. European Union legislation can take a
number of forms. "Regulations" have general application, are binding in their
entirety and are directly applicable in all member states. "Directives" are
also binding, but national authorities may choose the form and method of
implementation. "Recommendations" are not binding, but Spanish courts are
obligated to take them into consideration.
In order to strengthen free competition throughout its member states, the
E.U. approved a new regulatory framework in 2002. This framework is composed of
a series of directives aimed at strengthening competition in the electronic
communications industry within the E.U., establishing mandatory minimum service
standards for all users (universal service) and users' rights, improving
licensing regimes and enhancing telecommunications data protection. These
directives required that member states' regulatory frameworks be modified
accordingly to comply with the E.U.'s telecommunications regulatory framework
within 15 months.
The General Telecommunications Law
In compliance with the obligation to enact this new European legal
framework, on November 23, 2003 the Spanish Parliament enacted Law 32/2003 (the
"General Telecommunications Law"). This law replaced any other provisions of
equal or inferior jurisdiction that were contrary to the provisions set forth
in the new law.
The purpose of the General Telecommunications Law is to advance the
liberalization of the provision of services and the installation and
exploitation of electronic communications networks, and in this regard satisfy
the principle of minimal government intervention. Accordingly, the provision of
these services and the ability to exploit such networks is granted as a matter
of law. In this regard, the law avoids "ex ante" control by regulators as a
fundamental principle, removing the current regime of authorizations and
licenses and substituting them with "ex post" controls, through market analyses
mechanisms necessary to determine the existence of effective competition.
Furthermore, in the absence of effective competition, a series of obligations
are imposed upon operators with
26
"significant market power". Within this regulatory framework, the national
regulatory authority has a leading role in the implementation of the "ex-post"
controls.
Under the General Telecommunications Law, the Spanish government issued
Royal Decree 2296/2004 on December 10, 2004 containing new regulations
governing the electronic communications and network access markets. The General
Telecommunications Law will continue to be implemented through a series of new
rules and regulations. Until such new rules and regulations are enacted,
existing provisions will remain in force, provided that they are not contrary
to the new General Telecommunications Law. It is expected that during 2005 the
Spanish government will approve new regulations governing installation of
telecommunications services, the use of electronics networks, universal service
obligations and other public service obligations.
The State Contract
Since 1991, we have provided telecommunications services through a
contract signed with the Spanish government on December 26, 1991. However,
under the new regulatory framework described above, all licenses and
authorizations for the exploitation of telecommunications networks or for the
provision of electronic communications services were extinguished once the new
General Telecommunications Law came into force. However, in accordance with the
first transitory disposition of the new General Telecommunications Law, the
rights and obligations applicable to the individual licenses and general
authorizations held by Telefonica de Espana will remain valid. Consequently,
Telefonica de Espana must comply with the obligations established before new
General Telecommunications Law came into force.
Fixed telephony
Telefonica de Espana is considered a market dominant operator in the
provision of fixed line telephony services and leasing of circuits. As a market
dominant operator, Telefonica de Espana has certain obligations regarding
interconnection and access to public networks and the supply of universal
service, as well as other obligations to provide public service.
Mobile telephony
Mobile telephony regulation concentrates on the management and control of
the use of the radio-electric public domain, which is exploited by operators
through the allocation of frequencies in the radio-electric public domain.
For the provision of mobile telephony services, Telefonica Moviles Espana
is considered a market operator and is subject to the fulfillment of certain
obligations in the interconnection services market.
Internet
Spanish law has attempted to remove legal uncertainties regarding the
Internet as a transmission vehicle for diffusion and exchange of various types
of information. Law 34/2002 established the concept of "information society
services" which incorporates, among other things, the purchase of goods and
services through electronic means and the supply of information through the
Internet. Providers of such information services must supply certain basic
information to their customers either on their website or through similar
means, cease transmission of information if required by government agencies and
retain certain information transmitted through their services for at least
twelve months.
Service quality
The service quality parameters are established through a ministerial
order, dated October 14, 1999, and through the universal service quality
ministerial order, dated December 21, 2001. This regulatory framework sets
forth the quality standards for telecommunications services, including fixed
telephony, mobile telephony and Internet access.
Regulatory authorities
In accordance with General Telecommunications Law 32/2003, the national
regulatory authorities in the telecommunications sector are:
27
o The Spanish Government;
o The senior and directive bodies of the Ministry of Economy on issues
of price regulations (Government Deputy Commission for Financial
Affairs);
o The Communications State Secretary for the Information Society, a
member of the Ministry of Industry, Tourism and Trade;
o The Telecommunications Market Commission; and
o The State radio-communications agency.
Fixed telephony regulation
Telefonica de Espana S.A.U. is a dominant operator in the fixed telephony
market and is subject to specific regulation in the different business areas
where it operates.
Licenses and Concessions
Under the new General Telecommunications Law, anyone involved in the use
of a telecommunications network or in the provision of electronic communication
services should notify the Telecommunications Market Commission prior to the
commencement of the activity. The Telecommunications Market Commission will
register the telecommunications operator in the operator registry.
All licenses and authorizations for the use of telecommunications networks
or for the provision of electronic communications services expired after the
new General Telecommunications Law came into force. Nevertheless, the right to
occupy public and private property should continue according to the relevant
regulation.
Interconnection
The General Telecommunications Law requires owners of public
telecommunications networks, which includes Telefonica de Espana, to allow
competitors to interconnect with their networks and services under
non-discriminatory terms and conditions. The General Law on Telecommunications
provides that the conditions for interconnection are to be freely agreed among
the parties in compliance with certain minimum conditions set by law for
interconnection agreements. Where the parties are unable to reach an agreement,
the Telecommunications Market Commission may impose the obligation to
interconnect upon the conditions it dictates.
Until the regulations governing the telecommunications markets in Spain
under the General Telecommunications Law are fully developed and an analysis is
completed by the Telecommunications Market Commission the reference
interconnection offer (RIO) applies. The RIO is an instrument created by
Spanish law under which Telefonica de Espana sets forth the terms the general,
technical and financial conditions through which Telefonica de Espana
interconnects with other operators. The applicable regulations state that
interconnection prices charged by Telefonica de Espana in its RIO must be based
on cost rather than profit.
Telefonica de Espana's current RIO was approved the Telecommunications
Market Commission on July 10, 2003 and is revised annually as permitted by law.
On March 31, 2004 the Telecommunications Market Commission approved a new
resolution modifying the RIO with respect to compensation to be paid to
Telefonica de Espana for toll-free calls placed from public pay-telephones.
Network access
The General Telecommunications Law sets forth that the Telecommunications
Market Commission can require an electronic communications public network
operator to allow other operators to access its network. The Telecommunications
Market Commission can establish the technical or operating requirements to
ensure normal performance of such network. In the same manner as
interconnection obligations, an operator may be declared to have significant
market power, which imposes obligations regarding information transparency,
non-discrimination, separation of accounts, access to specific network
resources and price controls.
28
Under Royal Decree 7/2000 and Royal Decree 3456/2000, the "unbundling of
the local loop" was established by setting forth the conditions under which the
dominant operators of fixed line public networks must provide shared access to
the local loop, with prices set by the Spanish government's Deputy Commission
for Financial Affairs.
The Telecommunications Market Commission amended Telefonica de Espana's
local loop offer for 2004 on March 31, 2004 by lowering the monthly rental fees
charged for access to the local loop, on July 22, 2004 by adapting the local
loop offer to new ADSL velocities at the retail level and on July 28, 2004 by
modifying the local loop offer for massive migrations between different
varieties for access to the local loop.
Selection of operator
Telefonica de Espana, as a designated dominant operator in the supply of
connection to public telephone networks from a fixed location, must allow
subscribers to place calls with any operator. Customers may pre-select any
operator or choose another operator by dialing a three-digit code.
Royal Decree 1651/1998, regulated matters concerning call-to-call operator
selection, pre-assignment of operator and safekeeping of numbers by
subscribers, irrespective of the operator that provides the service. Royal
Decree 7/2000 set forth a calendar for the implementation of pre-assignment in
metropolitan calls.
Customers may keep their telephone number when changing access operators
as long as they do not change their physical location.
Public service obligations
Universal service. The General Telecommunications Law provides that
operators shall be subject rules of public service and other general public
obligations in order to guarantee the existence and quality of electronic
communications services.
"Universal service" is defined as a set of communication services
guaranteed to all end users, irrespective of their geographic whereabouts, of a
determined quality and at an affordable price. Such services must guarantee
that all citizens can receive a connection to the fixed public network and
access to the fixed line telecommunications services available to the public, a
free telephone directory, a sufficient number of public telephones, equal
access to fixed-telephony services for disabled persons or those with special
social needs and functional Internet access.
In addition, Law 34/2002, governing e-commerce and information services
over the Internet, provides that all subscribers to the rural telephone
cellular access system (TRAC) that requested an Internet connection prior to
December 31, 2004 could progressively be provided with a connection that allows
them functional connection to the Internet.
The current obligation of Telefonica de Espana to provide universal
service is imposed until 2005.
To finance the universal service, the General Telecommunications Law
stipulates that the Telecommunications Market Commission must determine whether
the net cost to provide universal services implies an unfair burden for the
operators required to provide such service. The Telecommunications Market
Commission has issued several resolutions relating to Telefonica de Espana's
net costs for the provision of the universal service indicating that Telefonica
de Espana does not have a right to be compensated by other operators as there
is no competitive disadvantage or unfair burden. The Telecommunications Market
Commission has not yet created. On March 25, 2004, the Telecommunications
Market Commission recognized the existence of a net cost of (euro)110.0 million
for Telefonica de Espana as a result of providing universal service, but
provided no compensation since the amount was not considered an undue burden.
Competition
The following describes our current main competitors in the principal
market segments in which the Telefonica de Espana Group operates. Since 1997,
the supply of fixed line telephone services to the public has been open to all
29
possible competitors, subject to basic licensing requirements as provided for
in the General Telecommunications Law, as well as the attainment of legal
authorization for installment of such services.
In June 1997, Retevesion was granted a license to provide public fixed
line telephone services in Spain, becoming the second operator after Telefonica
de Espana to hold such a license. Retevision began operations in January 1998.
During 2002, as part of a reorganization process undertaken by the Auna Group,
Retevision merged with Aunacable (a cable operator for the Auna Group). The new
name of this fixed line telephone company is Auna Telecommunicaciones S.A. The
principal shareholders of the Auna Group are Endesa, Santander Central Hispano,
Union Fenosa and ING, together with several savings banks.
In May 1998, the Lince consortium, comprised of France Telecom and Editel,
S.A. (a consortium which includes Multitel Cable, S.A. and Ferrovial
Telecommunicaciones), received the third license for the provision of fixed
line telephone services in Spain. Lince commenced operations in December 1998
under the trade name Uni2. In July 2001, France Telecom reached an agreement
with its partners in the Lince consortium to acquire their interests in the
Lince group. As a result, France Telecom now owns 100% of Uni2, which, together
with Al-Pi Telecommunicaciones (a subsidiary of Uni2 that serves corporate
clients and professionals in Catalonia), comprises the Uni2 group.
Jazztel p.l.c., a company created in July 1998, received the fourth
license for the provision of fixed line telephone services in Spain. Jazztel,
p.l.c. is controlled by a consortium comprised of funds managed by Espirito
Santo Bank, ING, and Fidelity Investments.
Pricing rules
On October 15, 1999, the Spanish government issued Royal Decree 16/1999 in
order to address increasing inflation and promote a higher degree of
competition within the telecommunications operators. This Decree established a
price regulatory framework for fixed line telephony service and for lines to be
leased by Telefonica de Espana based on maximum prices per year.
On December 22, 2004 the Spanish government's Deputy Commission for
Financial Affairs (CDGAE) approved a new price regulatory framework for 2005.
This new regulatory framework provides greater flexibility for the
introduction of new services and allows different pricing alternatives, which
favors competition and innovation.
The most important aspects of the current price regulatory framework are
the following:
o Price-caps for the following basic telephony services: local,
provincial, interprovincial, international long distance and
fixed-to-mobile communications, monthly subscription fees for
individual telephone lines and circuits, monthly rental fees for
leased circuits and maritime mobile telecommunications service.
o Any increase for monthly rental fees for individual telephone lines
could not exceed 2% for 2005.
o Internet access calls, service packages, price plans, discount
programs and new services may be offered 21 days after giving notice
to the Ministry of Economy and Ministry of Industry, Trade and
Tourism, the Telecommunications Market Commission and the Consumer
and Users Council prior to initiation of sales.
o All tariffs must be identical throughout Spain.
o The tariff for a call from a fixed line to a mobile phone must be the
same regardless of which mobile network receives the fixed line call.
o All other tariffs associated with fixed-telephone service are
liberalized, except for the 11818 information services and the public
telephone call rates.
The following table displays the variation in prices from the previous
price regulatory framework.
30
Concept Variation
-------------------------------------------------------------------
Local...................................................... 0.0%
Provincial.................................................(36.4%)
Interprovincial............................................(45.6%)
International..............................................(35.8%)
Fixed-to-mobile............................................(32.3%)
Information service........................................ 29.4%
Monthly rental fee......................................... 42.1%
Subscription fee...........................................(53.4%)
Tariffs for main services
The tariffs for electronic telecommunication services for the three years
ended December 31, 2004 (excluding applicable taxes) are provided below. These
are the nominal tariffs set by Telefonica de Espana in accordance with the
applicable price regulatory framework.
At December 31,
----------------------------
2002 2003 2004
----------------------------
(in euro)
Subscription fee..................................
Individual lines and trunk lines.................. 59.50 59.50 59.50
Integrated Service Digital Network................
Primary access.................................... 3,606.07 3,606.07 3,606.07
Basic access...................................... 168.28 168.28 168.28
Monthly subscription fee..........................
Individual telephone line(1)...................... 11.67 12.61 13.17
Integrated Service Digital Network................
- Primary access.................................. 342.58 342.58 342.58
- Basic access(2)................................. 22.84 23.78 24.81
Digital circuit 64kbits/s of 4 km................. 236.24 236.24 236.24
------------------
(1) After January 22, 2005 the tariff shall be (euro)13.43.
(2) After January 22, 2005 the tariff shall be (euro)25.31.
The following table displays the applicable rates for local, provincial
and interprovincial traffic at December 31, 2004:
Exemption
Initial (seconds without Three minute call(1)(4)
connection additional cost; (euro cents)
charge only a flat rate ----------------------------
(euro cents) is charged) Peak(2) Off peak(3)
--------------------------------------------------------------------
Local................................... 6.85 160 7.65 7.18
Provincial.............................. 8.33 0 19.85 16.25
Interprovincial......................... 8.33 0 28.67 19.67
------------------
(1) Call establishment fee included.
(2) For local calls between 8 a.m. and 6 p.m. Monday to Friday. For provincial
and interprovincial between 8 a.m. and 8 p.m. Monday to Friday.
(3) Other times and public holidays.
(4) Billing is done per second.
The following table displays the applicable tariffs from fixed-line to
mobile calls at December 31, 2004. The first minute is billed in full, and
subsequent minutes are billed per second.
31
Initial
connection
charge Tariff A(1) Tariff B(2)
---------------------------------------
(euro cents) (euro cents per minute)
Vodafone.................................................................. 6.85 16.66 11.40
Initial
connection
charge Tariff C(3) Tariff D(4) Tariff E(5)
----------------------------------------------------
(euro cents) (euro cents per minute)
Telefonica Moviles Espana (Movistar)........................ 6.85 15.70 15.70 11.40
Amena....................................................... 6.85 19.14 19.14 11.40
------------------
(1) Tariff A: Monday to Friday from 8 a.m. to 8 p.m.
(2) Tariff B: Monday to Friday from midnight to 8 a.m. and from 8 p.m. to
midnight and at all times on weekends and public holidays.
(3) Tariff C: Monday to Friday from 8 a.m. to 8 p.m.
(4) Tariff D: Monday to Friday from 8 p.m. to 10 p.m.
(5) Tariff E: Monday to Friday from midnight to 8 a.m. and from 10 p.m. to
midnight. Weekends and public holidays during the entire day.
The following tables show the applicable tariffs for international
long-distance calls at December 31, 2004:
Fixed line to fixed line
Initial Flat rate
connection for a three
charge minute call
------------------------
(euro cents)
Western European Countries(1)............. 11.87 47.87
------------------
(1) Germany, Austria, Belgium, Denmark, Finland, France, Greece, Ireland,
Italy, Luxembourg, Holland, Portugal, United Kingdom, Sweden, Andorra,
Monaco, San Marino, Vatican, Switzerland and Liechtenstein.
Fixed-line to mobile calls:
Initial Flat rate
connection for a three
charge minute call
------------------------
(euro cents)
Western European Countries(1).............. 11.87 116.97
------------------
(1) Germany, Austria, Belgium, Denmark, Finland, France, Greece, Ireland,
Italy, Luxembourg, Holland, Portugal, United Kingdom, Sweden, Andorra,
Monaco, San Marino, Vatican, Switzerland and Liechtenstein.
Fixed-line to fixed-line or mobile calls:
Flat rate for a
Initial connection charge three minute call
--------------------------------------------------------
(euro cents)
Iceland and Norway............................. 11.87 86.87
Rest of Europe(1) and part of North Africa(2).. 11.87 104.87
Byelorussia, Macedonia and Tunisia............. 11.87 116.87
United States.................................. 11.87 47.87
Canada and part of the Caribbean............... 11.87 116.87
Bolivia, Colombia and Paraguay................. 11.87 134.87
Puerto Rico and Dominican Republic............. 11.87 71.87
32
Flat rate for a
Initial connection charge three minute call
--------------------------------------------------------
(euro cents)
Rest of Latin America(3)....................... 11.87 146.87
Rest of America................................ 11.87 176.87
Japan and Australia............................ 11.87 206.87
Rest of the World.............................. 11.87 from 176.87 to 371.87
------------------
(1) Czech Republic, Slovakia, Faeroe Isles, Hungary, Malta, Poland, Albania,
Bosnia, Bulgaria, Croatia, Cyprus, Slovenia, Estonia, Latvia, Lithuania,
Moldavia, Rumania, Russia, Turkey, Ukraine and Yugoslavia.
(2) Morocco, Libya, Algeria and Western Sahara.
(3) Argentina, Brazil, Costa Rica, Chile, Ecuador, El Salvador, Guatemala,
Honduras, Mexico, Nicaragua, Panama, Peru, Venezuela.
On July 10, 2003 the CDGAE agreement modified the maximum surcharge to be
applied to calls made from public telephones to 51.56%, compared to 35% under
the previous price regulating framework.
The following table shows the applicable tariffs for switched traffic at
December 31, 2004:
Peak(1) Off peak(2)
----------------------
(euro cents per second)
Local................................................... 0.71 0.42
Metropolitan............................................ 0.95 0.57
Single transit.......................................... 1.05 0.63
Double transit.......................................... 2.14 1.29
------------------
(1) Monday to Friday 8 a.m. to 8 p.m.
(2) Weekends and public holidays and Monday to Friday from 8 p.m. to 8 a.m.
The following table shows the applicable tariffs for transit services at
December 31, 2004:
Peak(1) Off peak(2)
(euro cents per second)
----------------------
Unicentral.............................................. 0.15 0.09
National................................................ 1.21 0.73
National with local ext................................. 1.60 0.96
Intranodal transit...................................... 0.44 0.26
------------------
(1) Monday to Friday 8 a.m. to 8 p.m.
(2) Weekends and public holidays and Monday to Friday from 8 p.m. to 8 a.m.
The following table shows the applicable tariffs for interconnection by
capacity mode at December 31, 2004:
Tariff per 64 Tariff per
Kbps circuit(1) Mbps link(2)
-------------------------------
(in euro per month)
Local........................................... 44.20 1,326.11
Metropolitan.................................... 62.32 1,869.63
Single transit.................................. 73.77 2,213.00
Double transit.................................. 106.20 3,186.00
------------------
(1) Kilobytes per second.
(2) Megabytes per second.
33
Prices of local loop
By a resolution dated March 31, 2004 the Telecommunications Market
Commission Resolution approved the modification of the tariffs charged by
Telefonica de Espana for access to the local loop. The tariffs are the
following:
Sign-up Monthly
Unbundled access fee fee
-------------------
(in euro)
Pair sign-up fee............................................................................ 22.37 11.35
Sign up fee for vacant pair terminated in a building with connection in accordance
with RDL 1/1998 (ICT) requiring a single bridge in the main registration................. 36.14 11.35
Sign up fee for vacant pair terminated in a building with connection in accordance
with RDL 1/1998 (ICT) requiring a second bridge at the distribution point................ 41.42 11.35
Shared access Sign-up Monthly
fee fee
-------------------
(in euro)
Pair sign-up with co-location................................................................ 30.13 3
Pair sign-up with remote co-location......................................................... 36.04 3
With
installation
of plain old With
Without telephone installation
splitter services of ISDN
Indirect access installation splitter splitter
--------------------------------------------
(in euro)
Indirect access sign-up.............................................. 41.83 82.21 132.25
Change from shared access to indirect access......................... 32.89 64.24 114.29
Change of operator in indirect access................................ 18.43 49.78 99.82
Simultaneous change of operator and dial-up connection speed in
indirect access................................................... 24.41 55.77 105.81
Disconnection in indirect access..................................... 26.66 26.66 26.66
Monthly rental fee according to modes
Subscription
Form fee
------------
(in euro)
O.......................................................... 22.32
B.......................................................... 25.90
J.......................................................... 44.18
C.......................................................... 74.85
N.......................................................... 84.88
L.......................................................... 122.64
M.......................................................... 188.20
P.......................................................... 249.18
Comparison to other European Operators
The following table displays the tariffs charged by Telefonica de Espana
at December 31, 2004 compared to other European operators. Applicable rates
during normal business hours have been used.
Telefonica Deustsche France Telecom
de Espana Telecom Telecom Italia BT (UK)
---------------------------------------------------------------
(in euro)
Residential monthly rental fee................ 13.17 13.50 10.87 12.14 12.67
Business monthly rental fee................... 13.17 13.50 13.10 17.00 19.47
34
During Business Hours
Telefonica Deustsche France Telecom
de Espana Telecom Telecom Italia BT (UK)
---------------------------------------------------------------
(in euro)
3 minute calls................................
Local......................................... 0.08 0.10 0.13 0.10 0.14
Long-distance national........................ 0.28 0.31 0.27 0.33 0.29
Source: Eurodata, Tarifica and operators.
Interconnection prices
Customer Service
One of our main priorities is to satisfy customer needs by improving the
quality of our customer service. We have continued our strategy of segmenting
our customers in order to tailor our services to best meet the specific needs
of each customer segment. In addition, in order to increase our ability to
distribute our products and services we have signed agreements with large
department stores to complement our traditional channels of distribution.
The corporate customer service model developed by Telefonica de Espana,
which is aimed at achieving the highest degree of efficiency in customer
service, features the following:
o A 24-hour personal customer service line for purchasing any type of
product and service and handling customer queries;
o The Tiendas Telefonica ("Telefonica stores") where customers can test
and buy products marketed by Telefonica;
o Telefonica's "virtual" store, accessible by Internet, which offers
the ability to order and purchase online the majority of services and
products offered by Telefonica; and
o A sophisticated customer service system for companies, ranging from a
telephone help line, which for small companies is based on client
portfolio criteria, to the creation of equipment for customer care
and multidisciplinary activity sectors sales or individual company
sales for larger clients.
In addition, we have continued to develop our product portfolio especially
in broadband services. For instance, customers now have the option to finance
the acquisition of desktop or portable computers from us as part of our ADSL
offerings. We also launched the Imagenio service in 2004. Imagenio is a leisure
and communication service, including pay-TV with a broad range of content, from
regular television channels to movies, documentary films and music concerts,
and featuring Videoclub, an advanced video on demand service. Imagenio includes
broadband Internet access, though there is a way for customers to access the
service through a digital television connection.
We have also continued to develop products previously introduced including
our "combinados" plans that combine access and traffic, allowing each client to
optimize its consumption according to calling destination and calling time
profile. We have also initiated new access offers including "holiday line" and
"young line" in order to better satisfy client needs.
Subsidiaries of Telefonica de Espana
Telefonica Data Espana
Telefonica Data Espana was acquired by Telefonica de Espana on June 30,
2004. Telefonica Data Espana is a company that provides large companies with
the following services:
o Internet and data services including connectivity services that lets
the client share information between different company locations
(RPVs with X-25 technology, Frame Relay, ATM, IP), Internet access
services including information access, applications and Internet
publishing and wholesale traffic services and communications
outsourcing; and
35
o Hosting and applications services based on "Telefonica Internet
Centers" including web hosting, managed hosting, content delivery,
security services and applications.
Telefonica Soluciones
Telefonica Soluciones was acquired by Telefonica de Espana on June 30,
2004. Telefonica Soluciones is responsible for developing our systems
integration, outsourcing and consultancy business inside the Telefonica Group.
Telefonica Telecomunicaciones Publicas ("TTP", formerly known as Cabinas
Telefonicas, S.A., "Cabitel")
TTP is a wholly owned subsidiary of Telefonica de Espana, S.A., which
focuses on the commercialization, installation, management and maintenance of
public telephony as well as the advertising use of any base, outlet or service
capable of supporting this activity.
Telefonica Cable
Telefonica Cable provides digital television services through ADSL lines
as part of the Imagenio project. Other multimedia services such as digital
audio and broadband Internet through both television and PC and video on demand
are also included in the Imagenio project but are provided by Telefonica de
Espana. In April 2004, Telefonica Cable initiated operations in Madrid,
Barcelona and Alicante.
Telyco Group
The Telyco group is comprised of the two following entities.
o Telyco S.A.U. is a wholly owned subsidiary of Telefonica de Espana,
S.A., which sells telecommunications equipment directly through its
stores and authorized dealers, as well as through wholesale
distribution. Telyco has a commercial network that covers Spain
through its direct channels (stores and direct sale) and indirect
channels (associated commercial group - Telyco stores and wholesale
channel).
o Telyco Maroc S.A. is a 54% owned subsidiary of Telyco S.A.U. located
in Morocco, which supplies mobile telephone products to Medi Telecom.
Telefonica Soluciones Sectoriales
The Telefonica Soluciones Sectoriales Group is comprised of the two
following entities:
o Telefonica Soluciones Sectoriales, a wholly owned subsidiary of
Telefonica de Espana, S.A., serves as an investment vehicle for
information technology and telecommunications projects through
shareholdings in related companies. Additionally, Telefonica
Soluciones Sectoriales participates on the boards of trustees of five
foundations.
o Interdomain, wholly owned subsidiary of Telefonica Soluciones
Sectoriales. Interdomain's main activity is related to registering
Internet domains at a national and international level.
Mobile Business--Telefonica Moviles
We conduct our worldwide mobile business through Telefonica Moviles, which
is a leading provider of wireless communications services in Spain and Latin
America in terms of managed customers. Telefonica Moviles estimates, based on
information made public by its competitors, local regulatory authorities and
data collected from interconnection fees charged and paid, that it is one of
the five largest global providers of wireless communication services based upon
managed customers at December 31, 2004. Telefonica Moviles offers a broad range
of wireless services, including voice services, enhanced calling features,
international roaming, wireless internet and data services, wireless intranets
and other corporate services.
At December 31, 2004, Telefonica Moviles provided wireless services
through its operating companies and joint ventures, to approximately 74.4
million managed customers in territories with a population of approximately
36
509 million. Managed customers include all customers from companies which we
directly control but excludes the customers of companies in which we have a
financial interest but do not control. Telefonica Moviles has operations in
Spain, Mexico, Peru, El Salvador, Guatemala, Venezuela, Colombia, Panama,
Nicaragua, Ecuador, Uruguay, Argentina and Chile and, through its joint
ventures with Portugal Telecom, it also provides wireless communication
services in Brazil and Morocco. Telefonica Moviles' strategy is to focus on
consolidating its market leadership position in Spain and Latin America and on
increasing its profitability and cash flow in the medium term by optimizing its
investments and operating efficiencies while assessing the potential for growth
in new markets reinforcing its market leadership position in Spain and Latin
America.
In March 2004, Telefonica Moviles signed an agreement with BellSouth
Corporation to acquire its Latin American operations. During October 2004,
Telefonica Moviles closed on the acquisition of 8 of the 10 operators
(Venezuela, Colombia, Ecuador, Peru, Guatemala, Nicaragua, Uruguay and Panama).
The acquisition of the remaining two operators (Argentina and Chile) closed in
January 2005.
Telefonica Moviles will continue to analyze the possibility of selective
acquisitions and strategic agreements that complement its business. Telefonica
Moviles believes that growth in its markets will be driven by (i) increased
customer usage of its wireless services, including both voice and data
services, (ii) the introduction of new wireless data and Internet services, and
(iii) increased penetration rates in its Latin American markets.
Telefonica Moviles also has licenses to provide UMTS services. (Universal
Mobile Telephone System, which allows wireless multimedia voice and data
transmission speeds of up to 384 kbits/s), in Switzerland through its wholly
owned subsidiaries, in Germany through its 57.2% interest in the Group 3G UMTS
Holding GmbH consortium, or Group 3G, and in Italy through its 45.59% interest
in the IPSE 2000 consortium. Telefonica Moviles has, however, restructured its
operations in these countries. See "Item 5 - Operating and Financial Review and
Prospects - Operating Results - Overview - Presentation of Financial
Information - Other Events Affecting the Comparison of our Results".
The following table provides a summary overview of our operating companies
and those companies in which we have non-controlling minority interests at
December 31, 2004.
Population in
Ownership service
Country Name of Company Interest (1) territory Total Customers
----------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
Spain Telefonica Moviles de Espana 92.5% 44.0 19.0
Morocco Medi Telecom 29.8% 31 2.7
Brazil Brasilcel(2) 46.2% 131.5 26.5
Argentina Telefonica Comunicaciones Personales 90.5% 38.7 3.4
Peru Telefonica Moviles Peru 90.6% 27.6 2.1
Peru Comunicaciones Moviles del Peru 92.3% 27.6 0.7
Mexico Telefonica Moviles Mexico(3) 85.1% 104.7 5.6
El Salvador Telefonica Moviles El Salvador 84.8% 6.7 0.4
Guatemala Telefonica Centroamerica Guatemala 92.5% 12.7 0.4
Guatemala Telefonica Moviles Guatemala y Compania 92.5% 12.7 0.4
Chile Telefonica Movil Chile(4) 92.5% 15.4 3.3
Panama Telefonica Moviles Panama 92.1% 3.2 0.6
Nicaragua Telefonica Celular Nicaragua 92.5% 5.6 0.3
Venezuela Telcel 92.5% 26.0 4.3
Colombia Telefonica Moviles Colombia 92.5% 45.3 3.3
Ecuador Otocel 92.5% 12.9 1.1
Uruguay Abiatar 92.5% 3.4 0.2
Total 508.7 74.4
------------------
(1) Represents the ownership interest of the Telefonica Group.
37
(2) Jointly controlled and managed by Telefonica Moviles and Portugal Telecom.
Through its 50% interest in Brasilcel at December 31, 2004, Telefonica
Moviles indirectly held 45.45% of Tele Sudeste, 26.42% of Celular CRT,
25.3% of Tele Leste Celular, 32.56% of Telesp Celular and 10.74% of Tele
Centro Oeste Celular.
(3) Telefonica Moviles Mexico, S.A. de C.V. holds interests in 100% of Baja
Celular Mexicano, 90.0% of Movitel del Noroeste, 100% of Telefonica
Celular del Norte, 100% of Celular de Telefonica, S.A. de C.V. and 100% of
Pegaso PCS. Through its 92.0% interest in Telefonica Moviles Mexico, S.A.
de C.V., as of December 31, 2004, Telefonica Moviles indirectly holds
92.0% of Baja Celular Mexicano, 82.8% of Movitel del Noroeste, 92.0% of
Telefonica Celular del Norte, 92.0% of Celular de Telefonica, S.A. de C.V.
and 92.0% of Pegaso PCS.
(4) The acquisition of 100% of the shares of Telefonica Movil Chile, the
mobile telephone operator in Chile, from CTC Chile closed on July 23,
2004.
Services and Products
Telefonica Moviles' operating companies offer a wide variety of wireless
and related services and products to consumer and business customers. Although
the services and products available vary from country to country, the following
are Telefonica Moviles' principal services and products:
o Wireless Voice Services. Telefonica Moviles' principal service in all
of its markets is wireless voice telephony, which has gained
increased usage as a result of Telefonica Moviles' increased customer
base and increased market penetration rates.
o Value Added Services. Customers in most of Telefonica Moviles'
markets have access to a range of enhanced calling features including
voice mail, call hold, call waiting, call forwarding and three-way
calling.
o Wireless Internet. As part of Telefonica Moviles' strategy to become
a leader in the wireless Internet sector, it offers Internet access
in an increasing number of areas, mainly through the e-mocion brand,
which allows its clients to access a wide range of mobile Internet
services through voice, WAP or GPRS CDMA 1XRTT or code division
multiple access (a broadband transmission system for wireless
networks allowing for speeds of up to 144 kbits/s), or UTMS. GPRS, or
general packet radio service, is an evolution of GSM or global
standard for mobile, towards 2.5G, allowing wireless voice and
higher-speed data transmission. WAP, or wireless application
protocol, is a standard protocol allowing for wireless Internet
access. Telefonica Moviles' operators in Brazil, Mexico, Argentina,
Peru, El Salvador, Guatemala and Morocco have launched
Movistar-emocion or services similar in content under other brands,
such as "Vivo ao Vivo" in Brazil. Through wireless Internet access,
Telefonica Moviles' customers are able to send and receive e-mail,
browse web pages, download games, purchase goods and services in
m-commerce transactions and use our other data services. Current data
services offered include short messaging services, or SMS, and
Multimedia Messaging Services, or MMS, which allows customers to send
messages with images, photographs, sounds and videoclips. Customers
may also receive selected information, such as news, sports scores
and stock quotes. Telefonica Moviles also provides wireless
connectivity for devices such as laptops and personal digital
assistants. Technological advances, which include the development of
GPRS and UMTS, facilitate the development of these services by
increasing the speed at which data is transmitted and making it
possible to expand the offer of services and reduce their cost.
Telefonica Moviles Espana launched its "Oficin@ Movistar
UMTS"GPRS/UMTS data card, the first third generation service offered
in Spain by a mobile operator offering high-speed data transmission
of up to 384 kbits/s, to its corporate customers in February 2004 and
in May 2004 extended the service to all residential and prepaid
customers in conjunction with launching the first UMTS videophone
services in the Spanish market.
o Corporate Services. Telefonica Moviles provides business solutions,
including wireless infrastructure in offices, private networking and
portals for corporate customers that provide flexible on-line
billing. Telefonica Moviles Espana offers corporate services through
Movistar Corporativo 2000, and other advanced solutions for data,
developed for specific sectors.
o Roaming. Telefonica Moviles has roaming agreements that allow its
customers to use their handsets when they are outside of their
service territories, including on an international basis. In 2002,
Telefonica Moviles extended international roaming services to
pre-paid customers. It has also implemented intelligent network
38
technology using the CAMEL standard for its customers in Spain. This
allows Telefonica Moviles' customers to use their mobile telephones
in European countries where a roaming agreement has been reached as
if they were in their home country, for example, by not having to
dial customary roaming prefixes. Through the FreeMove alliance with
T-Mobile International, Telecom Italia Mobile and Orange, Telefonica
Moviles Espana delivers an enhanced, seamless roaming service for
customers of the four companies when traveling abroad through its
"Virtual Home Environment" and new service propositions to
international customers. In Brazil, Mexico and Argentina, Telefonica
Moviles' roaming agreements allow its customers to make and receive
calls throughout the national territories of these countries.
o Trunking and Paging. In Spain and Guatemala, Telefonica Moviles
provides digital wireless services for closed-user groups of clients
and paging services.
o M-payment. Through its subsidiary Telefonica Moviles Espana,
Telefonica Moviles has an interest of 13.36% in MobiPay Espana, whose
other shareholders include Vodafone Espana, Amena and several
financial institutions and processing companies. MobiPay Espana is a
company incorporated to develop micro-payments. Telefonica Moviles
also has a 50.0% interest in MobiPay International, aimed at
expediting payments through mobile phones in an international
setting. In addition, on February 26, 2003 Telefonica Moviles
announced its participation in the new MPSA (Mobile Payment Services
Association). The association, which is comprised of Vodafone,
Orange, T-Mobile and Telefonica Moviles, will operate under the brand
name Simpay. For further information see "--Wireless Internet and
Data Initiatives--M-Payment".
o Other Services. Telefonica Moviles also has the technology available
to provide other value added wireless services such as location-based
services and telematics. Location-based services permit the precise
location of the handset to be determined by the wireless network,
which will permit users to receive and access information specific to
such location. Telefonica Moviles believes that this technology will
be widely used in fleet management, logistics and security
monitoring. Telematics applications permit the delivery of data to
machines, such as automobiles and vending machines.
Telefonica Moviles' Operations
Telefonica Moviles' operations currently are conducted in three distinct
geographic areas:
o Spain;
o Morocco; and
o Latin America.
The following is a description of the markets in which Telefonica Moviles
operates and includes information on its market share by geographic location.
Customer information on the wireless markets in which Telefonica Moviles
operates, including its market share, are estimates that Telefonica Moviles has
made based on information made public by its competitors or by local regulators
in the respective markets. With respect to its operations in Morocco, this
information is also based on data collected from interconnection fees charged
and paid.
Spain
Telefonica Moviles offers wireless services in Spain through Telefonica
Moviles Espana, the leading wireless operator in Spain in terms of total number
of customers at December 31, 2004. Telefonica Moviles Espana had approximately
19.0 million customers at December 31, 2004, representing an estimated 48.5%
market share.
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Telefonica Moviles' operations in Spain:
39
At December 31,
(in millions)
2002 2003 2004
---------------------------------------------
Total customers (1) 18.4 19.7 19.0
Pre-paid customers (1) 11.9 11.7 9.7
Population in service 42 43 44
territory
Source: Telefonica Moviles
------------------
(1) Telefonica Moviles Espana has determined that it will no longer include
1.3 million inactive prepaid SIM cards in its reported customer base. This
adjustment was made from April 1, 2004 and all operating metrics
corresponding to 2004 have been calculated taking this adjustment into
account.
Telefonica Moviles Espana has offered wireless services in Spain since
1982 with the launch of analog wireless services under the brand MoviLine.
Digital wireless services, using GSM 900 MHz technology, were launched in 1995
under the Movistar brand name, which has since become one of the most widely
recognized brands in Spain. In 1997, Telefonica Moviles Espana launched the
first pre-paid wireless service in Spain under the Movistar Activa brand name,
and, in January 1999, Telefonica Moviles Espana launched the GSM 1800 MHz
service. In March 2000, having achieved the highest rating in the award
process, Telefonica Moviles Espana was awarded a third generation wireless, or
UMTS, license covering the Spanish national territory for (euro)131 million.
Telefonica Moviles launched its UMTS service on a pre-commercial basis in
October 2003 and extended the service during 2004.
Market
With an estimated population of approximately 44 million people, Spain is
the fifth largest wireless market in Western Europe with approximately 39.2
million wireless customers at December 31, 2004. This customer base represents
a penetration rate of 89.1%. The Spanish market grew 4.4% in 2004.
The Spanish wireless market has shown increasing growth as a result of a
decline in wireless handset prices and per minute call rates, and the
introduction of pre-paid tariffs. At December 31, 2004, Telefonica Moviles
Espana had approximately 19.0 million customers including 0.6 million new
customers added during 2004 but excluding 1.3 million inactive prepaid SIM
cards after April 2004.
Network and Technology
Telefonica Moviles Espana's licenses and concessions in Spain permit it to
operate digital networks and analog networks. Since December 31, 2003
Telefonica Moviles Espana has not operated an analog network, having migrated
its analog Moviline subscribers to its digital GSM Movistar services.
Telefonica Moviles Espana also holds one of four nationwide licenses for UMTS
services in the country, having launched UMTS services commercially in 2004.
Telefonica Moviles Espana's digital network in Spain is based upon the GSM
standard, which is one of the most widely used standard systems for wireless
communication. The prevalence of the GSM standard, together with Telefonica
Moviles Espana's international roaming agreements, enables its Movistar
customers to make and receive calls throughout Western Europe and in almost 200
countries worldwide. Telefonica Moviles Espana's GSM-based network provides its
customers with access to many of the most advanced wireless handsets and a full
panoply of services and products.
Telefonica Moviles Espana's licenses entitle it to 40 MHz of spectrum in
the 900 MHz band and 2x24.8 MHz of spectrum in the DCS 1800 MHz band. Under the
terms of its UMTS license, Telefonica Moviles Espana is authorized to operate
using two paired, or two-way, 15 MHz channels plus one unpaired, or one-way, 5
MHz channel.
In 2002, 2003 and 2004, Telefonica Moviles Espana invested approximately
(euro)1,669 million in building out and enhancing its networks in Spain,
developing its technological platforms and information systems. At December 31,
2004, Telefonica Moviles Espana's GSM/GPRS digital network in Spain, which
consisted of 115 switching centers and more than 16,200 base stations, provided
coverage to approximately 99% of the population. The amounts invested in 2002,
2003 and 2004 have been used to enhance the quality of its coverage of
high-density areas, to permit more intensive use of its wireless services
within buildings in an urban environment, further enhancing the
40
appeal of wireless communications and to introduce new technologies. In
addition, Telefonica Moviles Espana has continued in 2004 to roll-out its UMTS
network, complying with its obligations under its UMTS license. At December 31,
2004 Telefonica Moviles Espana's UMTS coverage represented 40% of the
population, with 3,800 base stations in approximately one hundred cities.
The Spanish wireless market has been receptive to new wireless services,
such as SMS and wireless Internet. Telefonica Moviles Espana has offered GPRS
services, with increased speed and efficiencies versus existing GSM networks,
since 2001. Multi-media messaging services, or MMS, which allow customers to
send and receive messages combining color photographs and images with voice,
sound, animations or text, have been offered by Telefonica Moviles Espana since
2002, bringing customers closer to the potential of third generation, or 3G,
services while still utilizing existing technology such as GPRS. In all,
Telefonica Moviles Espana continues to demonstrate its commitment to be a
leader in technological innovation in Spain and to make the most innovative
services available to its customers, as can be seen with the development of the
following various new services and data applications in 2004:
o GPRS technology continued developing significantly in 2004.
Telefonica Moviles Espana estimates that close to 3.8 million of its
customers were web browser users with GPRS technology by December
2004, almost 2.4 million more than in December 2003. After the launch
of i-mode services in June 2003, in collaboration with NTT DoCoMo,
Telefonica Moviles Espana became the first operator in the Spanish
market to provide i-mode navigation services. At December 31, 2004
almost 700 thousand of Telefonica Moviles Espana's web browser users
used its i-mode service.
o The use of multimedia messaging services (MMS) increased
significantly in 2004, with almost 1.5 million users at December 31,
2004 compared to 0.5 million at December 31, 2003. Almost one half of
the handsets sold by Telefonica Moviles Espana in 2004 were equipped
with MMS technology.
o After the pre-commercial launch of UMTS services in October 2003, on
February 13, 2004, Telefonica Moviles Espana launched its "Oficin@
Movistar UMTS" GPRS/UMTS data card, the first third generation
service offered in Spain by a mobile operator with high-speed data
transmission up to 384 kbits/s, to its corporate customers. This
service was extended to all Telefonica Moviles Espana residential and
prepaid customers on May 24, 2004, initially in Madrid and Barcelona,
and gradually extended to the rest of Spain. On that same date,
Telefonica Moviles Espana also launched the first UMTS videophone
services in the Spanish market.
o Telefonica Moviles Espana began offering additional services and
products in 2004 targeted to the corporate and professional segments
such as Movistar desktop, Blackberry(R) Professional Mail, and the
TSM 520 handset including the Windows(R) Mobile Smartphone 2003
system.
In general, Telefonica Moviles Espana's strategy is to use a variety of
suppliers based on the quality and rates of their services and products. In
Spain, Ericsson, Motorola and Nokia have supplied the majority of Telefonica
Moviles Espana's GSM and GPRS network. Ericsson supplied the majority of the
infrastructures for the first phase of the roll-out of its UMTS Network, and
Ericsson and Siemens are supplying the infrastructure for the second phase of
the roll-out.
Sales and Marketing
Since Telefonica Moviles Espana began providing wireless services in
Spain, its sales and marketing strategy has been to generate increased brand
awareness, customer growth and increased revenues. As the Spanish market
continues to mature, Telefonica Moviles Espana's focus has been shifting from
customer acquisition to management of its customer relationships and
continuation of profitable growth through customer loyalty and new products and
services.
Telefonica Moviles Espana utilizes all types of marketing channels,
including television, radio, exterior signage, telemarketing, direct mail and
Internet advertising. Telefonica Moviles Espana also sponsors a leading
motorcycle grand prix racing team and cultural and sporting events in order to
increase its brand recognition. Its advertising emphasizes its image as the
market leader and characteristics such as quality, convenience and reliability,
with
41
specific campaigns based on price or new product offerings. For example,
campaigns for its pre-paid service, Movistar Activa, emphasize the simplicity
and mobility of the pre-paid service with a focus on the younger segment of the
market. For its contract customers, Telefonica Moviles Espana markets Movistar
Plus, which emphasizes exclusivity and value with specific offers of new
services, and a loyalty program based on points earned.
For purposes of sales and distribution, Telefonica Moviles Espana divides
the Spanish market into the consumer market and business market. At December
31, 2004, Telefonica Moviles Espana had approximately 8,500 points of sale for
the consumer market. In addition, Telefonica Moviles Espana uses approximately
100 points of sale that are owned by our Group.
In the wireless business sector, Telefonica Moviles Espana uses its
distributors to market to small and medium sized enterprises and uses its own
corporate sales force to target large business customers. Telefonica Moviles
Espana offers a variety of plans, ranging from volume discounts to specifically
tailored service contracts.
Telefonica Moviles Espana offers several different pricing options for
wireless services. At December 31, 2004, more than 49% of Telefonica Moviles
Espana's total customer base are contract customers, and 51% are pre-paid
(Movistar Activa).
During 2004, Telefonica Moviles Espana continued encouraging customer
migration from its pre-paid plans to its contract plans, in line with the
process that started in March 2002, when the contract plans of Telefonica
Moviles Espana changed such that they no longer contained a monthly fee, but
instead required a minimum usage commitment. At December 31, 2004, prepaid to
contract migrations stood at over one million, improving the proportion of
contract customers to total customers by 8.5% from December 31, 2003.
The competitive tariffs and quality of services provided by Telefonica
Moviles Espana, along with its success in encouraging migration to its contract
plans, have led to improvement in the usage and spending pattern of its
customers. Total traffic increased to 30.4 million minutes, a 12% increase
compared to 2003. In addition, data and content services are becoming
increasingly important methods by which wireless customers in Spain
communicate. All of this contributed to a significant increase in data revenues
which totaled almost (euro)1 billion in 2004 (an increase of 16.1% compared to
2003). The increase in average revenue per user from data services was
primarily due to a substantial growth of non-SMS data services, which gave rise
to an increase in non-SMS related revenues, out of total data revenues, of
4.5%.
In 2004, Telefonica Moviles Espana experienced growing commercial pressure
from competitors as a result of mobile phone number portability offers in the
residential market and aggressive pricing in the corporate market. As a result,
the amount spent by Telefonica Moviles Espana to acquire and retain customers
as a percentage of net sales was 8.6% in 2004, compared to 7.5% in 2003. These
cost increases were partially offset by certain cost reduction measures taken
by Telefonica Moviles Espana to take full advantage of its economies of scale.
Regulation
Licenses and concessions. Under the new General Telecommunications Law,
anyone interested in the exploitation of a telecommunications network or in the
provision of electronic communication services should notify the
Telecommunications Market Commission prior to the commencement of the activity.
The Telecommunications Market Commission will register the telecommunication
operator in the Operator Registry.
Under the new regulatory framework, all licenses and authorizations for
the exploitation of telecommunications networks or for the provision of
electronic communications services were extinguished once the new General
Telecommunications Law came into force. However, in accordance with the first
transitory disposition of the new General Telecommunications Law, the rights
and obligations applicable to the individual licenses and general
authorizations held by Telefonica Moviles Espana will remain valid.
Consequently, Telefonica Moviles Espana must comply with the obligations
established before new General Telecommunications Law came into force.
Telefonica Moviles Espana holds the following concessions for the use of
spectrum which terms and conditions are associated with the former licenses now
extinguished:
42
Concession Type (licenses) Concession Duration Ending Date Extension Period
------------------------------------------------------------------------------------------------------------------
GSM 900 15 years February 3, 2010 5 years
DCS--1800 25 years July 24, 2023 5 years
UMTS 20 years April 18, 2020 10 years
Paging 20 years September 24, 2012 10 years
(8) Analogic Trunking 20 years June, 2014 10 years
(4) Analogic Trunking 20 years November, 2016 10 years
Interconnection. Because Telefonica Moviles has been classified by the
Telecommunications Market Commission as a market dominant operator in the
wireless and interconnection markets, Telefonica Moviles Espana must provide
cost oriented interconnection rates on a non-discriminatory, transparent and
proportional basis based on objective criteria based on costs. The technical
and financial conditions under which Telefonica Moviles Espana provides
interconnection services to itself or to its subsidiaries must be offered under
the same conditions to other operators. This obligation principally relates to
the quality of services, delivery schedule and the terms and conditions for the
provision of interconnection services. Likewise, Telefonica Moviles Espana must
provide relevant information on the technical and functional specifications of
the interconnection points to any operator that requests interconnection.
Every year Telefonica Moviles Espana must file separate accounts with the
Telecommunications Market Commission for its interconnection related
activities. The accounts must include the interconnection services that
Telefonica Moviles Espana provided to itself and to its subsidiaries or
affiliates as well as the services provided to other operators. Telefonica
Moviles Espana must also file every year an externally audited statement of
interconnection costs with the Ministry of Economy, the Ministry of Industry,
Trade and Tourism and with the Telecommunications Market Commission.
The Telecommunications Market Commission initiated a procedure on
September 11, 2003 to determine Telefonica Moviles Espana's termination
interconnection prices. On October 7, 2004, the Telecommunications Market
Commission established the average maximum price for Telefonica Moviles
Espana's interconnection termination service at (euro)0.13 per minute,
beginning on October 31, 2004.
Number Safekeeping. Since November 2000, mobile telephony users are able
to keep their telephone number whenever they switch mobile operators.
Tariffs. The mobile operators that provide mobile telephone services may
generally set the tariffs they charge to their customers. However, the General
Telecommunications Law states grants the Government's Deputy Commission for
Financial Affairs the authority to set transitory maximum and minimum prices,
as well as fixed prices. As of the date of this Annual Report, the Deputy
Commission for Financial Affairs has not regulated rates of digital wireless
services.
Telefonica Moviles Espana can freely set the rates for the services
provided to its customers and must only communicate the rates to the regulatory
authorities and to the consumer and customer organizations.
Competition
Telefonica Moviles de Espana currently has two competitors in the Spanish
market for wireless communications service: Vodafone Espana, a subsidiary of
Vodafone PLC, and Retevision Movil S.A., which operates under the brand name
Amena.
In early 2000, the Spanish government awarded four third generation
wireless, or UMTS, licenses, which cover the entire country of Spain.
Telefonica Moviles Espana was awarded one of these licenses, while the others
were awarded to Retevision Movil, Vodafone and the Xfera consortium.
Morocco
Telefonica Moviles provides wireless services in Morocco through Medi
Telecom, S.A., in which it holds a 32.18% interest and shares management
responsibilities with Portugal Telecom, which also holds a 32.18% interest.
43
Medi Telecom also has local minority shareholders. Medi Telecom is the second
largest wireless operator in Morocco with over 2.7 million customers at
December 31, 2004. Medi Telecom commenced offering wireless services in Morocco
in March 2000, eight months after it was awarded a GSM license covering the
Moroccan national territory.
Telefonica Moviles has entered into a shareholders' agreement with other
shareholders of Medi Telecom under which it has the right to appoint the chief
executive officer of Medi Telecom. In addition, as of April 2003, the sale or
transfer of shares in Medi Telecom triggers a right of first refusal with a
priority for Telefonica Moviles and Portugal Telecom. The shareholders'
agreement also requires specified majority votes to approve most corporate
actions.
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Medi Telecom:
At December 31,
------------------------
2002 2003 2004
------------------------
Total wireless customers (in millions at period end)................... 1.6 2.1 2.7
Pre-paid customers (in millions at period end)......................... 1.5 1.9 2.6
Population in service territory (in millions at period end)............ 30 30 31
------------------
Source: Telefonica Moviles, except population
Population: Pyramid Research
Licenses
In July 1999, Medi Telecom was awarded a GSM license in the 900 MHz band.
This license allows Medi Telecom to provide wireless services in all of
Morocco. The license is valid for a period of 15 years from August 2, 1999 and
may be renewed for one five-year period, subject to the fulfillment by the
operator of certain terms and conditions. In March 2005, however, Medi Telecom
reached an agreement with Moroccan regulators to extend their GSM license for
an additional ten years (until August 2024). In order to qualify for this
additional ten year extension, Medi Telecom must pay to the government 1% of
all revenues obtained from providing GSM services beginning in August 2014. In
order for this agreement to become effective, an official decree must be
issued.
Network and Technology
Medi Telecom's network in Morocco is based upon the GSM standard. Its
license entitles it to 50 MHz spectrum in the 900 MHz band. In 2002, 2003 and
2004, Medi Telecom invested a total of approximately (euro)252 million in
building out and enhancing its digital network in Morocco. At December 31,
2004, Medi Telecom's digital network in Morocco consisted of 13 switching
centers and 1,689 base stations giving coverage to over 96% of the population.
Medi Telecom plans to make new investments to increase the coverage of its
network.
Competition
Medi Telecom currently competes with Maroc Telecom, the former state
monopoly provider of all telecommunications services in Morocco.
Brazil
Telefonica Moviles and Portugal Telecom are 50-50 shareholders in
Brasilcel, N.V., or Brasilcel, a joint venture which combines Telefonica
Moviles' and Portugal Telecom's wireless businesses in Brazil. This joint
venture is the leading wireless operator in Brazil in terms of total number of
customers at December 31, 2004. At December 31, 2004 Brasilcel had a total of
26.5 million customers, of which 5.2 million are contract customers. Brasilcel
had an estimated average share in its markets of operations of approximately
51% and of 41% in Brazil at December 31, 2004, based on information provided by
its competitors and regulatory authorities. All of the operating companies
participating in the joint venture have been operating under the brand name
"Vivo" since April 2003. The licensed
44
areas of Brasilcel include 19 states in Brazil and its federal capital, with a
population of approximately 131.5 million, and representing 85.5% of Brazil's
gross domestic product at December 31, 2004.
The following table shows the different states where service is provided
by Brasilcel's operators in 2004:
Company State
---------------------------------------------------------------------------------------------
Telesp Celular..................... Sao Paulo
Tele Sudeste....................... Rio de Janeiro and Espirito Santo
Global Telecom .................... Parana and Santa Catarina
CRT Celular........................ Rio Grande do Sul
Tele Centro Oeste.................. Acre, Goias, Mato Grosso, Mato Grosso do Sul, Rondonia,
Tocantins, Distrito Federal, Amazonas, Para, Amapa,
Roraima and Maranhao
Tele Leste......................... Bahia and Sergipe
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to the operations of Brasilcel:
At December 31,
----------------------
2002 2003 2004
----------------------
Total customers (in millions at period end)(1)..................... 13.7 20.7 26.5
Pre-paid customers (in millions at period end)(1).................. 10.1 15.8 21.4
Population in service territory (in millions at period end)........ 97 130 131.5
Source: Telefonica Moviles, except population data
Population: Pyramid Research
------------------
(1) Total customers and prepaid customers in 2004 reflect the customers of
Brasilcel. Total customers and pre-paid customers in 2003 reflect the
customers of Brasilcel, including TCO from May 2003. Total customers and
pre-paid customers for 2002 reflect the customers of Tele Leste Celular,
Tele Sudeste Celular, Telesp Celular and Celular CRT.
Regulation
The wireless telecommunications companies that operate pursuant to
licenses and concessions are subject to general obligations set forth by the
National Agency for Telecommunications, or Anatel, and to obligations pursuant
to each license concerning quality of services, network expansion and
modernization.
Licenses and Concessions. On December 4, 2002 ANATEL authorized the
contribution to Brasilcel of the wireless assets in Brazil of both Portugal
Telecom and Telefonica Moviles and allowed the migration of Brasilcel's
operators to a new licensing regime, Personal Mobile Service, or the SMP
regime. Accordingly, Brasilcel's operators replaced all their old licenses with
new SMP licenses. The old licenses were concessions granted under the Cellular
Mobile Service, or the SMC regime. The new SMP licenses include the right to
provide cellular services for an unlimited period of time but restrain the
right of using the spectrum according to the schedules listed in the old
licensing titles (Celular CRT until 2007, Telerj Celular until 2005, Telest
Celular until 2008, Telebahia Celular and Telergipe Celular until 2008, TCP
until 2008 or 2009 (for the cities of Ribeirao Preto and Guatapara), Global
Telecom until 2013, TCO until 2006 (for Brazil's Federal District), Teleacre
Celular, Teleron Celular, Telemat Celular and Telems Celular until 2009,
Telegoias Celular until 2008 and Norte Brasil Telecom until 2013).
The renewal of all these licenses must be solicited 30 months before its
expiration. The companies listed above with licenses expiring within 30 months
have already applied for the renewal of their licenses. For the renewal of
these licences, the operators will have to make a payment for the use of the
spectrum in the amount of 2% of gross revenues. This payment has to be made two
years after obtaining the license. This payment is already guaranteed, although
for the moment we do not pay for the use of the Spectro.
Interconnection. Resolution 40/98 approved the general interconnection
regulations. Interconnection is mandatory for all telecommunications operators.
Conflicts arising from the negotiations between operators are
45
resolved through the arbitration by Anatel. Existing regulations state that
operators that offer general public services (fixed line services, personal
mobile services and specialized mobile services such as trunking and cable TV)
must publish the terms and conditions for interconnection with their networks.
Rates. The rates that wireless service providers may charge their
customers are regulated by the SMP regime. The SMP regime allows operators to
freely negotiate their interconnection rates with other operators. In addition,
under the SMP rules, the retail rates charged to customers for fixed-to-mobile
calls cannot be less than the sum of the interconnection fees charged on the
fixed and mobile call terminations.
Network and Technology
The licenses granted to Brasilcel's operating companies allow operations
in CDMA, CDMA 1XRTT, CDMA EVDO and TDMA networks. Brasilcel offers both analog
and digital services in the 800 MHz band. TDMA, or time division multiple
access, is a digital mobile phone technology that allows several calls to share
a single channel without interfering with one another. CDMA 1XRTT or code
division multiple access, is a broadband transmission system for wireless
networks allowing for speeds of up to 144 kbits/s. Additionally, in 2004
Brasilcel also launched CDMA EVDO, a technology that increases data
capabilities allowing speeds of up to 2.4 mbits/s.. We believe Brasilcel has
differentiated itself in Brazil by offering more innovative and advanced
products and services, in part because of its new networks with the high
technological capacity of CDMA 1XRTT and EVDO, which provide a significant
competitive advantage for Brasilcel.
Brasilcel's operators that offered services in CDMA Networks (TCP,
TeleSudeste Celular, Global Telecom and TeleLeste Celular) have upgraded their
networks by the layout of CDMA-1XRTT and EVDO and the companies which offered
services based on TDMA Networks (Celular CRT and TCO) are selectively
introducing CDMA-1XRTT and EVDO. In 2004, there has been a significant increase
of CDMA 1XRTT coverage, reaching 3,700 base stations and covering over 800
municipalities in its areas of operation by year-end.
In 2004, the usage of data services increased, principally due to an
increase in SMS and data-enabled handsets. Brasilcel continued to develop its
data transmission services business in Brazil through the use of its CDMA 1XRTT
and EVDO network.
During the three years ended December 31, 2004 Brasilcel invested
approximately (euro)278 million in the development of the networks of its
companies in Brazil.
Sales and Marketing
The consolidation of the different brands of Brasilcel into the Vivo brand
in 2003 has helped Brasilcel to operate under a unified commercial strategy.
The Brazilian market expanded strongly in 2004, with high commercial
activity and increased competitive pressure from all operators. In this
context, Vivo has lead customer growth, maintaining its leadership position in
the market with a commercial strategy focused on increasing both the customer
base and revenues.
Loyalty programs that were established for both contract and prepaid
customers in 2003 experienced high growth during 2004. Under these programs,
contract customers accrue the right to a handset upgrade based on the revenues
that the customers generate, and prepaid customers have access to handsets at a
competitive price. Additionally, prepaid to contract migrations were actively
promoted in 2004.
Brasilcel is actively managing its distribution channels, which consisted
of 7,998 points of sale at the national level in 2004. Additionally,
Brasilcel's prepaid customers were provided access to a wide range of points
for "recharges". The recharges can also be made by electronic transfers through
the commercial banking network.
As of December 31 2004, approximately 20% of Brasilcel's customers were
contract clients and the remaining 80% were prepaid customers.
46
Competition
The growth of the Brazilian market has been considerable during the past
years and was accompanied by an increase in competition due to the introduction
of two new competitors (TIM and Oi) and the expansion of Claro's operations.
TIM, Oi and Claro, together with Brasilcel's companies operating under the Vivo
brand, represent the principal operators in Brazil.
Peru
Telefonica Moviles has been providing wireless services in Peru through
Telefonica Moviles, S.A.C., or Telefonica Moviles Peru, since 2001.
In March 2001, Telefonica, S.A. transferred an approximately 16.5%
interest in Telefonica del Peru S.A.A. to Telefonica Moviles in exchange for
65,939,564 ordinary shares of Telefonica Moviles. In accordance with the
resolution of the shareholders of Telefonica del Peru to divide the company
along business lines, Telefonica del Peru spun off its wireless operations in
June 2001 in the form of shares of Telefonica Moviles, S.A.C. and its data
operations. Telefonica Moviles agreed with other members of the Telefonica
Group who were shareholders of Telefonica del Peru to exchange, following such
spin-offs, the shares of such data operations that they received in the
spin-off, as well as the shares they held in Telefonica del Peru, for the
shares in Telefonica Moviles, S.A.C. that they received in the spin-off.
Following the spin-off, share exchanges and additional share purchases,
Telefonica Moviles held a 97.97% interest in Telefonica Moviles, S.A.C. and did
not hold any interest in such data operations or Telefonica del Peru.
With the acquisition of 99.85% of Comunicaciones Moviles del Peru from
BellSouth in October 2004, Telefonica Moviles consolidated its leadership in
the Peruvian market with an approximately 69% market share at December 31,
2004. At December 31, 2004 the Telefonica Moviles Peru's and Comunicaciones
Moviles del Peru's combined customer base totaled approximately 2.9 million
(Telefonica Moviles Peru: 2.1 million customers; Comunicaciones Moviles del
Peru: 0.7 million).
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Telefonica Moviles Peru.
At December 31,
-----------------------
2002 2003 2004(1)
-----------------------
Total customers (in millions at period end)........................... 1.2 1.5 2.9
Pre-paid customers (in millions at period end)........................ 1.0 1.2 2.3
Population in service territory (in millions at period end)........... 26 27 27.6
Source: Telefonica Moviles, except population
Population: Pyramid Research
------------------
(1) Customer data for 2004 includes the subscribers of Comunicaciones Moviles
del Peru, acquired from BellSouth by Telefonica Moviles in October 2004.
Regulation
The Telecommunications Act approved in 1993 (DS 13-93-TCC), and the
General Regulations approved in 1994 (DS 6-94-TCC 1994), are the legal
framework for the telecommunications sector in Peru.
In 1991, Telefonica del Peru's government-owned predecessor, Compania
Peruana de Telefonos S.A., was granted a license for the provision of wireless
services in Lima and Callao. Entel Peru S.A. was granted a license in 1992 for
the provision of wireless service nationwide. In 1995, Entel Peru was merged
into Compania Peruana de Telefonos and the surviving entity changed its name to
Telefonica del Peru. Each license is valid for a term of 20 years. They expire
on May 24, 2011 and February 1, 2012, respectively. Each license may be renewed
for twenty year periods by filing an application at least two years prior to
the expiration date. The renewal process requires the license holder to fulfill
certain terms and condition.
Telefonica Moviles S.A.C. holds the following licenses:
47
o Wireless. Licenses to provide wireless services through Sub bands
Band A of the 800 MHz band.
o Paging. License to provide paging services in the 450 MHz band
o Long distance. License to provide long distance, international and
domestic carrier services, granted in December 2001 for a twenty year
period.
After receiving regulatory approval, Telefonica Moviles acquired
Comunicaciones Moviles del Peru from BellSouth on October 28, 2004. On January
5, 2005 Telefonica Moviles Peru requested authorization from the Ministry of
Transport and Communications to transfer Telefonica Moviles Peru's licenses to
Comunicaciones Moviles del Peru and such authorization was granted in April
2005.
Comunicaciones Moviles del Peru holds the following licenses:
o Wireless. License to provide wireless services through Sub band B of
the 800 MHz band.
o Long Distance. Licenses to provide long distance international,
domestic and local carrier services. The licenses for local carrier
services expire between 2016 and 2022. The licenses for domestic and
international carrier services expire on February 5, 2019.
o Fixed Line. License to provide local fixed telephony services for
Lima and Callao. This license was granted on August 11, 1999 and may
be renewed for successive twenty year periods at the request of the
holder.
Comunicaciones Moviles del Peru was granted a license for the provision of
wireless services in Lima and Callao in 1991 and was granted a license to
provide such services in the provinces in 1998. Each license is valid for a
term of 20 years. They expire in 2011 and 2018, respectively. Each license may
be renewed for twenty year periods by filing an application at least two years
prior to the expiration date. The renewal process requires the license holder
to fulfill certain terms and condition, such as as compliance with public
service obligaions and expansion targets and compliance with antitrust law and
interconnection rules as well as OSIPTEL regulations.
Interconnection. Telefonica Moviles Peru is obliged to interconnect with
other concession holders who request access to the network. Interconnection
rates can be negotiated among wireless operators in Peru. Nevertheless, there
is a maximum rate fixed by the Organization for Supervision of Private
Investment in Telecommunications (OSPITEL) for termination rates of local
calls. This rate is calculated by OSIPTEL based on market information and
projections.
Rates. Rates charged by wireless providers to their customers have been
subject to a free tariff regime supervised by OSPITEL. Operators freely
establish their rates for telephone calls by fixed line users to wireless
service, and vice versa. Currently, the two tariffs in force are "the wireless
user pays" and "the calling party pays." In June 2004, however, OSPITEL issued
a resolution proposing a reduction of rates for calls by fixed line users to
wireless users of 60% by December 2005.
Interconnection rates can be negotiated among wireless operators in Peru.
Nevertheless, there is a maximum rate fixed by OSPITEL for termination rates of
local calls. This rate is calculated by OSPITEL based on market information and
projections.
Network and Technology
Telefonica Moviles Peru operates both analog and digital networks. Its
digital network is based upon the CDMA/CDMA 1xRTT standard. It has roaming
agreements enabling Telefonica Moviles Peru's contract customers to make and
receive calls in over 180 countries, including most of the Americas.
Telefonica Moviles Peru's licenses entitle it to 25 MHz of spectrum in the
800 MHz band.
Telefonica Moviles Peru invested approximately (euro)119 million in
building out and enhancing its network in 2002, 2003 and 2004. In 2004, the
amounts invested have been used to increase the switching capacity of the
network and to roll-out the CDMA1xRTT network.
48
At December 31, 2004, Telefonica Moviles Peru's network consisted of the
CDMA1xRTT network and the Motorola Analog-Digital Network. The CDMA1xRTT
network consisted of 4 switching centers and 273 base stations. The Motorola
Analog-Digital Network consisted of 6 dual capacity switching centers, 291
analog base stations and 334 digital base stations.
Telefonica Moviles Peru has been the first wireless operator in Peru to
launch CDMA1xRTT technology, which offers its clients a better quality in voice
transmission and a higher speed in data transmission. Moreover, this technology
permitted the launch of Movistar Multimedia, the platform of access to a wide
range of services like video downloads, single- and multi-user games, MMS,
chat, ringtones and location services, among others.
Competition
According to Telefonica Moviles' estimates, Telefonica Moviles Peru is the
leading operator in the Peruvian market. Telefonica Moviles Peru currently has
two competitors: Stet Mobile Holdings which obtained a GSM/PCS license in March
2000 and subsequently launched its services under the TIM brand, and Nextel
Peru.
Argentina
Telefonica Comunicaciones Personales S.A. is the third largest wireless
operator in Argentina with approximately 3.4 million customers at December 31,
2004, representing an approximately 26% market share.
In January 2001, Telefonica, S.A. transferred to Telefonica Moviles 15.1%
of the common stock of Telefonica de Argentina S.A. in exchange for 174,863,364
ordinary shares of Telefonica Moviles. In accordance with the resolution of the
shareholders of Telefonica de Argentina S.A. to divide the company along
business lines, in November 2001 Telefonica de Argentina S.A. spun-off its
wireless operations in the form of shares of Telefonica Comunicaciones
Personales S.A. and its data operations. Telefonica Moviles previously had
agreed with other members of the Telefonica Group who were shareholders of
Telefonica de Argentina S.A. to exchange, following such spin-offs, the shares
of such data operations that Telefonica Moviles received in its spin-off, as
well as the shares Telefonica Moviles holds in Telefonica de Argentina S.A.,
for the shares of Telefonica Comunicaciones Personales that they receive in the
spin-off. Following the spin-offs and share exchanges, Telefonica Moviles held
a 97.93% interest in Telefonica Comunicaciones Personales S.A. and did not hold
any interest in the data operations of Telefonica de Argentina S.A.
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Telefonica Comunicaciones Personales.
At December 31,
---------------------
2002 2003 2004
---------------------
Total customers (in millions at period end)........................ 1.6 1.8 3.4
Pre-paid customers (in millions at period end)..................... 1.1 1.2 2.1
Population in service territory (in millions at period end)........ 38 38.2 38.7
Source: Telefonica Moviles, except population
Population: Pyramid Research
Telefonica Comunicaciones Personales provides wireless services in each of
Argentina's three service regions: Greater Buenos Aires; Southern Argentina;
and Northern Argentina. In Greater Buenos Aires, the Telefonica Group commenced
offering analog wireless services in 1993 under the Miniphone brand name
through a company that it owned jointly with Telecom Argentina, an affiliate of
France Telecom and Telecom Italia. In 1994, Miniphone launched digital wireless
services in Greater Buenos Aires. In 1999 Telefonica Comunicaciones Personales
and Telecom Argentina divided Miniphone's assets, including customers, between
them and entered into an agreement which allows Telefonica Comunicaciones
Personales and Telecom Personal to continue to operate in Greater Buenos Aires
separately. The Telefonica Group launched pre-paid wireless services in Greater
Buenos Aires in October 1997.
49
In Southern Argentina, the Telefonica Group launched wireless services
through Telefonica Comunicaciones Personales in 1996 under the Unifon brand and
launched prepaid wireless services in Southern Argentina in May 1999.
In Northern Argentina, Telefonica Comunicaciones Personales began offering
wireless services in May 2000 following receipt of personal communication
service, or PCS, licenses covering all three service regions. After launching
its services in Northern Argentina, Telefonica Comunicaciones Personales became
a nationwide provider of wireless services.
On March 5, 2004 Telefonica Moviles agreed to acquire BellSouth's
operating companies in Latin America, including Compania de Radiocomunicaciones
Moviles, or CRM, in Argentina. The acquisition of CRM closed on January 7,
2005.
Regulation
The National Telecommunications Law No. 19798 of 1972 (Ley Nacional de
Telecomuicaciones) and the specific regulations for each service (including
Governmental Decree 264/98) liberalized the telecommunications market in
Argentina.
Licenses. Telefonica Comunicaciones Personales S.A.'s licenses for the
provision of wireless services include the following:
o PCS licenses and corresponding authorizations for use of spectrum for
Northern Argentina, Southern Argentina and Greater Buenos Aires;
o Licenses and corresponding authorizations for use of spectrum for
wireless telephone services for Greater Buenos Aires and Southern
Argentina; and
o Licenses for trunking, or closed user group, services for the greater
Buenos Aires area and other provinces.
In Argentina, regulatory authorities approved the acquisition of CRM
subject to the return of certain bandwidth such that the combined operations of
Telefonica Comunicaciones Personales and CRM would not hold bandwidth of more
than 50 MHz in any one service region.
CRM's licenses for the provision of telecommunication services include the
following:
o PCS licenses and corresponding authorizations for use of spectrum for
each of Northern Argentina, Southern Argentina and Greater Buenos
Aires;
o Licenses and corresponding authorizations for use of spectrum for
wireless telephone services for Greater Buenos Aires; and
o Licenses for trunking, or closed user group, services for the Buenos
Aires area.
o Fixed Telephony nationwide.
Licenses do not expire, but may be cancelled as the result of an
operator's failure to comply with the terms of its license.
An authorization from the Secretariat of Communications allowing for use
of spectrum is required before a telecommunications operator may provide
wireless services. No wireless service provider may hold a bandwidth of more
than 50 MHz in any one service region.
Telefonica Comunicaciones Personales' operating licenses require it to
comply with the coverage and service provision undertakings contained in those
licenses, but they in turn allow Telefonica Comunicaciones Personales to freely
set the tariffs to be charged to its customers, as long as tariffs are applied
on a non-discriminatory basis.
50
Licenses granted to mobile cellular radio-communications service, mobile
telephony service and PCS operators do not preclude them from offering any
other telecommunication services on a competitive basis although each of these
operations are subject to specific regulations.
Interconnection. Interconnection agreements are freely negotiated between
operators. If they fail to reach an agreement, each operator may call upon the
Secretariat of Communications to determine the terms and conditions of
interconnection between the relevant operators.
Operators with "significant market power" (defined as operators with more
than 25% of total gross revenues generated by wireless operations) and
market-dominant operators (operators with more than 75% of total gross
revenues) must provide cost-oriented interconnection prices. Market-dominant
operators must provide interconnections with other operators through a
"reference interconnection offer."
The "calling party pays" system is in the process of being slowly
introduced in Argentina. This system has not yet been introduced for
mobile-to-mobile calls or for payphone to mobile calls. Nevertheless, mobile
companies have signed private agreements beginning in 2003 that provide for
traffic termination fees from the second quarter of 2003. Resolution 623/2002
established the benchmark rate for fixed-to-mobile termination under the
calling party pays system. This benchmark takes into account the weighted
average revenues and average traffic for all mobile operators.
Rates. Rates charged to customers are not regulated in Argentina.
Network and Technology
Telefonica Comunicaciones Personales operates both analog and digital
networks. Its digital network is based upon the TDMA standard and GSM. It has
roaming agreements enabling its customers to make and receive calls in more
than 170 countries worldwide.
Telefonica Comunicaciones Personales' licenses entitle it to 12.5 MHz of
spectrum in the 800 MHz band and 30 MHz of spectrum in the 1900 MHz band in
Greater Buenos Aires, 25 MHz of spectrum in the 800 MHz band and 20 MHz of
spectrum in the 1900 MHz band in Southern Argentina and 40 MHz of spectrum in
the 1900 MHz band in Northern Argentina.
Telefonica Comunicaciones Personales invested a total of approximately
(euro)109,4 million in building out and enhancing its digital network in
Argentina in the three years ended December 31, 2004. The GSM network was
launched in 2004, and by year-end consisted of 1,109 base stations, reaching a
population coverage representing approximately 82% of national GDP and
providing roaming-in service for international travelers.
At December 31, 2004, Telefonica Comunicaciones Personales' digital
network in Argentina consisted of 47 switching centers and 2,099 base stations
(including both digital and analog networks) giving coverage over 90% of the
population. Telefonica Comunicaciones Personales' network has dual capacity so
that the analog network has the same number of switching centers and base
stations as the digital network.
Competition
Telefonica Comunicaciones Personales' currently has three competitors in
the Argentine market for wireless communications service, each of which
provides services on a nationwide basis: Telecom Personal, which is controlled
by Telecom Italia through Telecom Argentina, CTI Movil which is controlled by
America Movil, and Nextel, owned by NII Holdings Inc.
Mexico
Telefonica Moviles holds 92.0% of Telefonica Moviles Mexico, which is
Mexico's second largest wireless operator, with over 5.6 million customers at
December 31, 2004. Telefonica Moviles Mexico owns licenses covering all of
Mexico.
The companies making up Telefonica Moviles Mexico were acquired by
Telefonica Moviles in two steps:
51
(1) Acquisition of Northern Operators. Telefonica Moviles Mexico acquired
its four Northern wireless operators (Bajacel, Movitel, Norcel, and
Cedetel) from us in July 2001. We acquired such operators from
Motorola, Inc. in exchange for an aggregate of $1,835.5 million in
our shares and $10.5 million in cash and transferred them to
Telefonica Moviles in exchange for approximately 203 million of its
ordinary shares.
(2) Acquisition of Pegaso Telecomunicaciones, S.A. de C.V. and Formation
of Telefonica Moviles Mexico. On April 26, 2002, Telefonica Moviles
signed agreements to purchase 65.3% of Pegaso from Sprint, Leap
Wireless, Qualcomm and other financial investors. Pegaso owns
licenses to operate on a nationwide basis. In connection with this
agreement, Telefonica Moviles also agreed with the Burillo Group, who
held a 34.77% interest in Pegaso at the time of the acquisition, to
contribute Telefonica Moviles' interests in Pegaso and its other
Mexican operators and the Burillo Group's interest in Pegaso into a
new holding company, Telefonica Moviles Mexico.
On September 10, 2002, having obtained authorization from the relevant
Mexican authorities, Telefonica Moviles acquired a 65.23% holding in Pegaso for
$92.9 million. In accordance with Telefonica Moviles' agreement with the
Burillo Group, on September 10, 2002 Telefonica Moviles contributed its
interest in Pegaso and its other Mexican operators (Bajacel, Movitel, Norcel
and Cedetel) to Telefonica Moviles Mexico. On the same date the Burillo Group
contributed its wireless interests to Telefonica Moviles Mexico.
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Telefonica Moviles' Mexican operators.
At December 31
------------------------------
2002(1) 2003 2004
------------------------------
Total customers (in millions at period end)......................... 2.4 3.5 5.6
Pre-paid customers (in millions at period end)...................... 2.1 3.2 5.3
Population in service territory (in millions at period end)......... 102.0 103.3 104.7
Source: Telefonica Moviles, except population
Population: Pyramid Research
------------------
(1) The figures for 2002 include our four Northern Mexican operators and
Pegaso as from September 10, 2002.
Regulation
The provision of telecommunications services in Mexico is regulated by the
Telecommunications Federal Law ("LFT"), enacted in 1995 (D.O.F.7/6/95), as well
as specific regulations governing the different types of telecommunications
services.
Regulatory authorities. The following governmental agencies oversee the
telecommunications industry in Mexico::
o the Secretariat of Communications and Transportation (SCT), and
o the Federal Telecommunications Commission (COFETEL).
Licenses and concessions. In Mexico, authorization to provide mobile
telephony services is granted through a concession. Telefonica Moviles's
Mexican wireless operating companies have been granted the following
concessions to operate mobile telephony services on Band A:
o Baja Celular Mexicana, S.A. de C.V., or Bajacel, operates in Region
1, which consists of the states of Baja California, Baja California
Sur and the municipality of San Luis Rio Colorado in the state of
Sonora;
o Movitel del Noroeste, S.A. de C.V, or Movitel, operates in Region 2,
which consists of the states of Sinaloa and Sonora, except for the
municipality of San Luis Rio Colorado, which is included in Region 1;
52
o Telefonia Celular del Norte, S.A. de C.V, or Norcel, operates in
Region 3, which consists of the states of Chihuahua, Durango and the
municipalities of Torreon, Francisco I. Madero, Matamoros, San Pedro
and Viesca in the state of Coahuila; and
o Celular de Telefonia, S.A. de C.V, or Cedetel, operates in Region 4,
which consists of the states of Nuevo Leon, Tamaulipas and Coahuila,
excluding the municipalities of Torreon, Francisco I. Madero,
Matamoros, San Pedro and Viesca.
Currently, only one Band A and one Band B service provider may provide
mobile telephony services in each region. Each concession is granted for a
period of twenty years, and may be renewed for additional twenty year periods,
subject to the fulfilment by the operator of certain terms and conditions.
These conditions are the fulfilment of the current obligations, solicitation of
the renewal of the license before the expiration of the licensee, and accepting
the new conditions that will be established by the SCT. The concessions to
provide mobile telephony services awarded to the above operating companies each
expire in 2010.
In July 2001, Telefonica Moviles acquired, through Cedetel, a 49% interest
in Grupo de Telecomunicaciones Mexicanas, S.A. de C.V., or GTM, which holds a
concession to provide radio link in the 7 GHz band. This concession expires in
2018, and may be renewed for additional twenty year periods. On June 5, 2003
GTM was granted a license to provide, among others, national and international
long distance services for a 15 year period. This license may be renewed if GTM
complies with certain conditions under Mexican federal communications law. In
July 2004, GTM acquired a concession from Megacable to provide a point-to-point
link in the 23 GHz. band. This concession was granted in 1998 and expires in
2018.
On April 26, 2002, Telefonica Moviles signed definitive agreements to
purchase 65% of Pegaso. In 1998, Pegaso was awarded licenses to provide
personal communication services until 2018. This license may be extended for
additional twenty year periods, subject to the fulfillment by the operator of
certain terms and conditions.
The concessionaires are subject to general obligations set forth by SCT
and COFETEL, and to obligations pursuant to each concession concerning quality
of service, network expansion and modernization.
On July 12, 2004 COFETEL called for an auction to grant concessions to
provide fixed and mobile wireless access. The bidding process for certain
wireless frequencies available in each of nine PCS regions began on January 11,
2005. Nextel, Telcel, Iusacell and Telefonica Moviles were participating in the
bidding process. However, the auction was halted on February 9, 2005 due to a
court order mandating that COFETEL allow UNEFON to participate in the auction.
The bidding process was re-initiated on April 1, 2005.
Interconnection. Mexican legislation on telecommunications matters
requires all network license holders to undertake interconnection agreements
whenever another operator requests it. The terms of such agreements may be
freely negotiated between parties on a non-discriminatory basis. In the event
of any controversy, COFETEL must arbitrate between the parties. The
interconnection agreements must be registered in the telecommunications
register, and those that are signed with foreign networks require prior
authorization from the SCT.
Under Mexican law, COFETEL can establish specific obligations for the
concessionaires of public telecommunications networks who hold significant
market power regarding prices, quality of service and the provision of
information.
Since May 1, 1999, the Calling Party Pays system (CPP) has applied
exclusively to local service (services established between exchanges of the
same local area) although the user has the option of maintaining the Receiving
Party Pays system. COFETEL has stated that it is considering extending CPP to
national long-distance calls, which would require regulatory approval by the
Federal Commission for Regulatory Improvement.
Rates. Rates charged to customers are not regulated. They are fixed by
wireless operating companies and must be registered with COFETEL. Rates do not
enter into force until confirmed by COFETEL.
53
Network and Technology
Telefonica Moviles Mexico offers both analog and digital networks. Its
digital networks are based upon the CDMA and GSM standards. At December 31,
2004, Telefonica Moviles Mexico's digital network in Mexico consisted of 35
switching centers and 4,677 base stations, including both digital (GSM,
CDMA1900 and 850) and analog (AMPS) base stations giving coverage to more than
52.5% of the population. In each of the regions in which Telefonica Moviles
Mexico operates, it holds licenses of 20 MHz of spectrum on the 850 MHz band,
and 30 MHz and 10 MHz of spectrum on the 1900 MHz band.
The launch of Telefonica Moviles Mexico GSM network on a nationwide basis
started in 2003 and by the end of 2004 covered areas with a population
representing 77% of Mexico's national gross domestic product at December 31,
2004. Telefonica Moviles Mexico has invested during the three years ended
December 31, 2004 a total of (euro)970 million, principally during 2003 and
2004. on its GSM network.
Competition
Telefonica Moviles Mexico competes with various operators at a national
level, most of which are subsidiaries of larger international
telecommunications companies. The principal competitor of Telefonica Moviles
Mexico is Telcel. The other competitors of Telefonica Moviles Mexico are
Iusacell, Unefon, and Nextel.
Chile
Prior to 2004, Telefonica Moviles was party to a management agreement with
Telefonica Movil Chile, a mobile phone operator in Chile and a subsidiary of
Compania de Telecomunicaciones de Chile. On July 23, 2004, after the acceptance
of a binding offer by Compania de Telecomunicaciones de Chile's Board of
Directors, Telefonica Moviles acquired 100% of the shares of Telefonica Movil
Chile.
Telefonica Movil Chile had approximately 3.3 million customers at December
31, 2004, which, according to Telefonica Movil Chile's estimates based on
information provided by its competitors and regulatory authorities, accounted
for 34.7% of the overall mobile telephony market. Since the launch of its GSM
services in April 2003, Telefonica Movil Chile has approximately 1.5 million
GSM customers, approximately 44% of its total customers.
The following table presents, at the dates and for the period indicated,
selected statistical data relating to Telefonica Movil.
Year ended December 31,
----------------------
2002 2003 2004
----------------------
Total customers (in millions at period end)......................... 1.8 2.3 3.3
Pre-paid customers (in millions at period end)...................... 1.4 1.8 2.8
Population in service territory (in millions at period end)......... 15.2 15.4 15.4
Source: Telefonica Moviles, except population
Population: Pyramid Research
On March 5, 2004 Telefonica Moviles agreed to acquire BellSouth's wireless
companies in Latin America, including BellSouth Comunicaciones and BellSouth
Chile. The acquisitions of BellSouth Comunicaciones and BellSouth Chile closed
on January 7, 2005.
Regulation
The General Telecommunications Law (No. 18,168) of 1982, as amended,
established the legal framework for the provision of telecommunications
services in Chile. The law established the rules for granting concessions and
permits to provide telecommunications services and for the regulation of rates
and interconnection.
Regulatory Authorities. The main regulatory agency of the Chilean
telecommunication sector is the Ministry of Transportation and
Telecommunications, which acts primarily through the Undersecretary of
Telecommunications (SUBTEL).
54
Licenses and Concession. Telefonica Movil Chile holds the following
concessions:
o Concession for the provision of wireless telecommunications services
in the 800 MHz band:
o For the Metropolitan Region and Region V, the concession was
granted on November 11, 1998 for an unlimited period of time.
o For Regions I to IV and Regions VI to XII, the concession was
granted on August 3, 1989 for an unlimited period of time.
o Concession for the provision of wireless telecommunications services
in the 1900 MHz band. The concession was granted for a thirty year
period from November, 16, 2002, and may be renewed for successive
thirty year periods at the request of the holder.
Chilean regulatory authorities approved the acquisition of BellSouth
Comunicaciones and BellSouth Chile by Telefonica Moviles subject to certain
conditions, such as the sale by auction of 25MHz of bandwidth in the 800MHz
band by Telefonica Moviles within 18 months.
BellSouth Chile's concessions for the provision of telecommunication
services include the following:
o Concession for the provision of wireless telecommunications services
in the 800 MHz band:
o For the Metropolitan Region and Region V, the concession was
granted for a fifty- year period from January 27, 1982 and may
be renewed for successive fifty year periods at the request of
the holder.
o For Regions I to IV and Regions VI to X, the concession was
granted on February 6, 1990 for an unlimited period of time.
o For Regions XI and XII, the concession was granted July 26, 1993
for an unlimited period of time.
o Concession for the provision of wireless telecommunications services
in the 1900 MHz band:
o for the provision of wireless service nationwide with a
bandwidth of 10 MHz, the concession was granted for a thirty
year period from April 3, 2003 and may be renewed for successive
thirty year periods at the request of the holder.
o BellSouth Chile also holds a concession for fixed line long distance
services nationwide granted March 16, 1994 for an unlimited period of
time.
Interconnection. The Telecommunications Law requires that holders of
public telecommunications service licenses to interconnect their networks to
other networks providing the same type of service. This requirement is intended
to ensure that subscribers and users of telecommunications services are able to
communicate with each other, both inside Chile and abroad. The same requirement
applies to holders of intermediate service licenses, who are required to
interconnect their networks to the local telephone network. SUBTEL sets the
applicable tariffs for services provided through the interconnected networks,
in accordance with the procedures established in Section 25 of the
Telecommunications Law. The structure, level and indexing of these
interconnection rates are fixed by a tariff decree by the Chilean Ministries of
Economy and Transport and Telecommunications.
The tariffs are set every five years. Starting on February 13, 2004, the
new interconnection charges for the 2004-2009 period became effective for both
Telefonica Movil and BellSouth Chile. The new interconnection charges have
decreased by an average of 27.4% for the 2004-2009 from the average tariffs in
Chilean pesos as of December 31, 2002. The new tariff scheme stipulates three
time slots defined as "peak", "reduced" and "night".
Rates. Calling Party Pays was implemented on February 23, 1999. Under this
tariff structure, local telephone companies pay to mobile telephone companies
an access charge for calls placed from fixed networks to mobile networks. Local
telephone companies may pass this interconnection charge on to their customers.
Under this tariff structure, local telephone companies pay to mobile telephone
companies an access charge for calls placed from fixed
55
networks to mobile networks. Under the Calling Party Pays system, a fixed
network costumer calling a mobile telephone pays the local telephone company a
rate comprised of a local tariff that is part of the basic local telephone
service plus a fee for interconnecting from the fixed network to the mobile
network. Mobile telephone customers can choose not to have the Calling Party
Pays system apply to their mobile-telephone accounts and thus continue to pay
for incoming calls.
Network and Technology
Telefonica Movil Chile maintains a fully digitalized nationwide TDMA
mobile network of 25 MHz in the 800 MHz frequency. In 2002 Telefonica Movil
Chile also acquired through an auction two nationwide bands of 10 MHz each in
the 1900 MHz mobile frequency (PCS), which it is developing with GSM/GPRS
technology. In April 2003, Telefonica Movil Chile launched its GSM service,
which has the benefit of operating over the only GSM/GPRS network covering all
of Chile. In 2004, Telefonica Movil Chile continued to make improvements to its
GSM/GPRS network's quality and coverage of voice services nationwide.
In 2003, with the addition of the GSM/GPRS network, Telefonica Movil Chile
began to deploy new services such as multimedia messaging (Movil Image), game
downloads (Movil Game) and ring-tone downloads (Movil Music). In July 2003, a
new data transmission service, the GPRS mobile Internet, was launched. In
October 2003, the installation of the new "enhanced data rates for global
evolution", or EDGE, high-speed data network made Chile the fourth country
worldwide and the first country in Latin America that is able to provide its
citizens with third generation (3G) services.
In March 2004, Telefonica Movil became the first operator in Chile to
launch mobile TV services providing its customers with local TV programs on
their mobile phones. In April 2004, a new broadband mobile service was launched
offering customers a "always on" connection with a transfer speed of up to 474
kbits/s. In October 2004, Telefonica launched a photo log service that lets
customers create their own web pages to send images or SMS from their mobile
phones.
The GSM/GPRS network extended roaming services to more than 160 countries.
Since early 2004, Telefonica Movil Chile's contract clients can use the GPRS
roaming service in Spain, the U.S., Argentina and Mexico, allowing them access
to data services when they are abroad.
In the three years ended December 31, 2004, Telefonica Movil Chile
invested a total of approximately (euro)170 million in building out and
enhancing its network in Chile. At December 31, 2004 Telefonica Movil Chile's
digital wireless network consisted of 14 switching centers and 1,435 base
stations giving coverage to over 98% of the population.
Competition
Telefonica Movil Chile currently has two competitors in the Chilean market
for wireless communication service: Entel PCS and Smartcom.
Central America
Telefonica Moviles provides wireless services in El Salvador and Guatemala
through TES Holdings, S.A. and TCG Holding, S.A., respectively. These holding
companies own interests in Telefonica Moviles El Salvador, S.A. de C.V., and
Telefonica Centroamerica Guatemala, S.A. de C.V.
Telefonica Moviles manages Telefonica Moviles El Salvador and Telefonica
Centroamerica Guatemala in exchange for an annual fee of 9% of the operating
profits of each operating company.
In August 2001, Telefonica Moviles entered into an agreement with Mesotel
de Costa Rica, S.A., a subsidiary of Mesoamerica Telecom, to acquire its direct
and indirect interests in Telefonica Moviles El Salvador, Telefonica
Centroamerica Guatemala, Telca Gestion, S.A. and Telca Gestion Guatemala, S.A.,
and other companies in which Telefonica Moviles and Mesoamerica Telecom were
shareholders, in exchange for approximately 21.9 million of Telefonica Moviles'
ordinary shares. In January 2002, Telefonica Moviles amended this agreement and
acquired one-third of Mesotel de Costa Rica, S.A.'s interests in exchange for
7.3 million of Telefonica Moviles' ordinary
56
shares. The remaining two-thirds of Mesotel de Costa Rica, S.A.'s interests
were purchased by Telefonica Moviles in July 2002 for 14.6 million Telefonica
Moviles' ordinary shares. As a result of these transactions, Telefonica Moviles
held. a 91.75% interest in Telefonica Moviles El Salvador and a 100% interest
in Telefonica Centroamerica Guatemala at December 31, 2004.
On March 5, 2004 Telefonica Moviles agreed to acquire BellSouth's wireless
companies in Latin America, including Bellsouth y Cia, S.C.A. in Guatemala. The
acquisition of Bellsouth y Cia, S.C.A. closed in October 2004.
El Salvador
Telefonica Moviles provides wireless services in El Salvador through
Telefonica Moviles El Salvador, the third largest of four wireless operators in
El Salvador, with approximately 384,300 customers at December 31, 2004,
representing 23.7% of the market.
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Telefonica Moviles' operations in El
Salvador:
At December 31,
------------------------------
2002 2003 2004
------------------------------
Total customers...................................... 230,856 255,300 384,300
Pre-paid customers................................... 160,266 186,309 294,000
Population in service territory (in millions)........ 6.5 6.6 6.7
------------------
Source: Telefonica Moviles, except population
Population: Pyramid Research
(1) Includes both fixed wireless lines and wireless operations.
Telefonica Moviles El Salvador commenced offering digital wireless
services in El Salvador in December 1998 under the Movistar brand name. In
addition to wireless services, Telefonica Moviles El Salvador also provides
Internet, cable TV and telephone services through Telefonica Multiservicios, a
joint venture between Telefonica Moviles El Salvador and Amnet, an
international communications provider in El Salvador.
Regulation
Concessions for the provision of telecommunications services are granted
for a thirty year period. The concession may be renewed for successive thirty
year periods. Telefonica El Salvador holds a concession to provide public
telephone service, including wireless services, throughout El Salvador until
January 1, 2028.
Concessions for use of spectrum are granted for terms of twenty years and
may be renewed for successive twenty year periods. Telefonica Moviles El
Salvador holds the following concession for use of spectrum:
o concession to use 25 MHZ of spectrum in the 800 MHz B band; and
o concession to use the following frequencies for multi-channel
connections, including the delivery of wireless services: 5 GHZ, 11
GHz; and 23 GHz.
A concession may be revoked only when a concession holder does not supply
telecommunications services within two years after the concession has been
granted or if it commits three serious infractions described in the relevant
law within a period of three years. Concessions may be renewed by filing a new
application with the General Superintendency of Electricity and
Telecommunications. Concessions are renewed depending on the fulfillment of
certain terms and conditions by the holder of the concession. Applications for
renewal of the concession must be sought one year before its expiration or the
regulatory authority will hold an auction to sell the concession to other
operators.
57
Network and Technology
The digital network of Telefonica Moviles in El Salvador is based upon the
CDMA and GSM standard. During the three years ended December 31, 2004
Telefonica Moviles El Salvador invested a total of approximately (euro)38
million in building out and enhancing its networks in El Salvador. At December
31, 2004 the digital network of Telefonica Moviles in El Salvador consisted of
two switching centers shared by the fixed line and mobile networks and 252 base
stations giving coverage to over 50% of the population.
Competition
Telefonica Moviles El Salvador currently competes in the El Salvador
market for wireless communications service with Telemovil, CTE Telecom and
Digicel.
Guatemala
Telefonica Moviles provides wireless services in Guatemala indirectly
through its wholly owned subsidiary Telefonica Centroamerica Guatemala. We also
provide wireless services through TEM Guatemala y Cia after its acquisition
from BellSouth by Telefonica Moviles in October 2004. At December 31, 2004,
Telefonica Moviles' total customer base in Guatemala was approximately 751,000
(Telefonica Moviles Guatemala: 376,000 and TEM Guatemala y Cia.: 375,000).
The following table presents, at the dates and for the periods indicated,
selected statistical data relating to Telefonica Moviles' operations in
Guatemala:
At December 31,
------------------------------
2002 2003 2004(1)
------------------------------
Total customers.................................. 97,089 156,868 750,554
Pre-paid customers.............................. 48,865 113,551 562,051
Population in service territory (in millions).... 12.0 12.0 12.7
------------------
Source: Telefonica Moviles, except population
Population: Pyramid Research
(1) Customer data for 2004 includes TEM Guatemala y Cia.'s subscribers
acquired by Telefonica Moviles from BellSouth in October 2004.
Telefonica Centroamerica Guatemala commenced offering digital wireless
services in Guatemala in October 1999 under the Movistar brand name. Telefonica
Centroamerica Guatemala also provides fixed line public telephone service, data
and long distance services and paging services through its subsidiary Tele
Escucha with 7 thousand customers as of December 31, 2004.
Regulation
In Guatemala, a telecommunications services provider does not require a
governmental concession to provide such services, but does require an
authorization to use the spectrum. These authorizations are called "titles."
Telefonica Centroamerica Guatemala, S.A. holds titles, obtained in a public
auction in March 1999, to use two 15 MHz channels in the 1900 MHz band for the
provision of wireless services until 2014. Titles are granted for a
fifteen-year term and may be renewed for subsequent fifteen-year terms at the
request of the holder. The renewal process is based on the fulfillment by the
operator of certain terms and conditions.
Network and Technology
In Guatemala, Telefonica Centroamerica Guatemala operates a digital
network, which is based upon the CDMA and GSM standards. Telefonica
Centroamerica Guatemala's license entitles it to 30 MHz of spectrum in the 1900
MHz band. In the three years ended December 31, 2004 Telefonica Centroamerica
Guatemala invested a total of approximately (euro)34 million mostly in building
out and enhancing its network in Guatemala. At December 31, 2004, Telefonica
Centroamerica Guatemala's digital wireless network consisted of three switching
centers and 421 base stations giving coverage to over 81% of the population.
58
Competition
Telefonica Moviles currently has two competitors in the Guatemala wireless
market: Telgua and Comcel.
Other operations
Other Latin American companies acquired from BellSouth
At December 31, 2004, the customer base of the six other wireless
operators acquired from BellSouth in Latin American totaled 9.9 million
(Telefonica Moviles Colombia: 3.3 million; Otecel (Ecuador): 1.1 million;
Telefonia Celular de Nicaragua: 286,000; BellSouth Panama: 626,000; Abiatar
(Uruguay): 203,000 and Telcel (Venezuela): 4.3million). Commercial activity of
these newly acquired companies under the management of Telefonica Moviles in
the last two months included primarily Christmas campaigns aimed at acquiring
new prepaid customers.
Puerto Rico
NewComm Wireless Services Inc. was organized on January 29, 1999 to
operate a personal communication services (PCS) license in Puerto Rico as a
joint venture agreement between Telefonica and Clearcomm and commended
commercial operations in late September 1999.
Newcomm Wireless entered into a management contract with Telefonica
Moviles when it commenced operations. In September 2004, the management
contract was cancelled and Clearcomm took charge of the management of Newcomm
Wireless. Telefonica Moviles decided to write-off the value of certain
convertible notes issued by Newcomm Wireless to Telefonica Moviles, which are
convertible into an approximately 49% interest in Newcomm Wireless, as of
December 31, 2004 in light of the continued competitive environment in Puerto
Rico.
Since the cancellation of the management contract, Wireless Services
Inc.'s customer base is no longer included in our managed customer base.
Wireless Internet and Data Initiatives
Wireless Internet and Data
We believe that the convergence of data communications and voice
communications represents a new and important opportunity to create value in
the mobile communications sector in the near future. An important component of
our strategy is broadening uses of wireless communications, currently dominated
by voice services, to include more widespread use of wireless Internet and data
services. By diversifying our services, we are seeking to capture the value
created by these new services. Revenue from data transmission services
increased to almost (euro)1 billion in 2004 primarily due to the increased use
of other data services other than traditional SMS service.
We anticipate the demand for wireless Internet services will grow as
network transmission speeds increase through the roll-out of GPRS (general
packet radio service), CDMA 1XRTT, EDGE and UMTS services, allowing wireless
voice and higher-speed data transmission.
Telefonica Moviles offers GPRS services in Spain commercially with the
same coverage as its GSM network. Regarding UMTS, after the pre-commercial
launch of UMTS services in October 2003, on February 13, 2004 Telefonica
Moviles Espana launched its "Oficin@ Movistar UMTS"GPRS/UMTS data card, the
first third generation service offered in Spain by a mobile operator with
high-speed data transmission up to 384 kbits/s, to its corporate customers.
This service was extended to all Telefonica Moviles Espana residential and
prepaid customers on May 24, 2004, initially in Madrid and Barcelona, and
gradually extended to the rest of Spain. On that same date, Telefonica Moviles
Espana launched the first UMTS videophone services in the Spanish market. We
believe that any large-scale launch of UMTS technology will ultimately be
determined by the availability of UMTS compatible handsets that are small,
reasonably priced, and have adequate battery life.
In other markets such as Brazil and Peru, Telefonica Moviles has already
launched high speed data services based on technologies such as CDMA 1XRTT.
During 2004, Telefonica Moviles continued expanding the CDMA 1xRTT network in
Brazil, reaching 3,700 base stations and covering over 800 municipalities in
its areas of operation
59
at December 31, 2004. Additionally, in 2004 Brasilcel also launched CDMA EVDO,
a technology that increases data capabilities allowing speeds of up to 2.4
megabytes per second. In Peru, Telefonica Moviles commercially launched the
CDMA 2000 1xRTT network on November 27, 2003, and by December 2004, the
CDMA1xRTT network consisted of 273 base stations.
In addition, GSM/GPRS cellular services have been offered in Mexico and
Chile since 2003, and were launched in Argentina, Guatemala and El Salvador in
2004. In Mexico, GSM/GPRS coverage reached 247 cities by December 2004, a level
of population representing 77% of Mexican GDP; and EDGE technology was
rolled-out on its GSM network in July 2004, providing speeds of up to 240 Kb/s
and offering services such as video streaming, web browsing and high-speed data
transmission capabilities. In Argentina, one year after its launch, the GSM
network reached a population coverage of approximately 82% of national GDP.
In June 2000, Telefonica Moviles launched Movistar e-mocion, its wireless
Internet service provider in Spain. Most of Telefonica Moviles' operating
companies have launched Movistar e-mocion or similar services under different
brands, such as Vivo in Brazil.
Currently Movistar e-mocion has several content groups in Spain, including
mobile banking, media, news, portals, ticketing, m-commerce, travel,
entertainment, health and yellow pages, among others. Telefonica Moviles has
signed agreements with more than 250 content providers to provide links through
Movistar e-mocion for products and services in Spain, including: Terra Mobile,
Yahoo!, Telefonica Paginas Interactivas, Reuters, LaNetro, Banco Bilbao Vizcaya
Argentaria, La Caixa, Santander Central Hispano, Unicaja, Serviticket, AVIS,
Globalia Group, Antena 3, CNN, ABC, La Vanguardia and Infojobs. Customers can
also access Movistar proprietary services, such as e-mail and itemized call
information. Telefonica Moviles' wireless data services include SMS, MMS and
Internet access via personal computers and PDAs, as well as the ability to
receive information such as general news, sport scores and stock market
information. Telefonica Moviles is focusing on consolidating its position in
the corporate segment (where it has a strong position in terms of market share)
with a view to introducing and marketing new wireless data services and
applications.
In June 2003, Telefonica Moviles launched i-mode services in Spain,
integrated with its Movistar e-mocion mobile portal, which can be accessed
through a diverse range of terminals. In addition, in November 2001, Telefonica
Moviles Espana, together with Ericsson, Hewlett Packard and the regional
government of Cataluna created Tempos21, Innovacion en Aplicaciones Moviles,
S.A., or Tempos21, with the objective of conducting research and development on
wireless services and applications based on the GSM, GPRS and UMTS standards or
other technologies that may be developed. Tempos21, which began operations in
2002, is developing, implementing and managing wireless Internet related
products and other wireless services and applications for enterprises (B2B and
B2B2C). Tempos21 also provides consulting services and develops integrated
solutions for the aforementioned sectors. Telefonica Moviles Espana holds a
38.5% interest in Tempos21.
Telefonica Moviles' wireless Internet access services in Spain are
currently billed on the basis of connection time, at a discount to voice rates,
for WAP (wireless access protocol) CDS services, and on the basis of the volume
of data sent, for WAP GPRS services, and, in each case, depending on the
content. Telefonica Moviles also offers premium services, under which access to
premium content is available at an extra charge, which it shares with the
content providers. Telefonica Moviles receives 100% of the revenues derived
from wireless airtime induced by Movistar e-mocion. It also receives a
percentage of the m-commerce revenues of its partners.
M-Payment
Telefonica Moviles initially began developing this business in conjunction
with Banco Bilbao Vizcaya Argentaria as a 50-50 joint venture. At the same
time, Banco Santander Central Hispano, a major Spanish bank, and Vodafone were
jointly developing a separate mobile payment system. On May 30, 2001,
Telefonica Moviles, Banco Bilbao Vizcaya Argentaria, Banco Santander Central
Hispano and Vodafone agreed to integrate their respective mobile payment
systems to form a single mobile payment standard. The new payment system is an
open system, which other financial institutions, wireless operators (such as
Amena) and payment processing companies in Spain have joined. This system is
being developed in Spain through MobiPay Espana, S.A. and outside of Spain
through MobiPay International S.A.
60
The MobiPay initiative became more widely accepted in 2004. At December
31, 2004 there were approximately 2,600 on-line stores, including FNAC, Halcon
Viajes, MundoHogar, Seguros Winterthur and Air Europa, which had included
MobiPay as a method of payment. In February 2004, an agreement was reached with
Kilowatt to implement the mobile payment standard in services offered by
Kilowatt such as vending machines.
In addition, on February 26, 2003, Telefonica Moviles, Orange, T-Mobile
and Vodafone signed an agreement for the creation of the Mobile Payment
Services Association which will operate under the brand name Simpay. The
objective of the association is to promote an open solution under one common
brand for payments through mobile phones that would be compatible with the
networks of the different operators. This system would be available in several
countries and would complement other systems that already exist in the
telecommunications sector.
In February 2004, Simpay presented its first product based on payments in
amounts less than (euro)10. The product will be commercially available in 2005.
Now that the design of the product and of the infrastructure has been
completed, Simpay and the founding companies will invite other mobile operators
to join the partnership. European mobile telephony operators such as 3,
Debitel, KPN Mobile, Elisa (previously Radiolinja), Mobilkom, Optimus, O2, SFR,
TeliaSonera and TMN have expressed interest in joining Simpay.
In February 26, 2003, Telefonica Moviles entered into an alliance with
three other European mobile operators, T-Mobile International, Telecom Italia
Mobile, or TIM, and Orange. This alliance adopted the brand name FreeMove in
March 2004 to represent its joint offering. This alliance is using its
collective scale, strength and expertise to deliver an enhanced, seamless
service for customers of the four partners when traveling abroad through its
"Virtual Home Environment" as well as new service offerings to international
customers. This alliance has also resulted in economic benefits to the
operators from joint handset procurement as well as preferred supplier
agreements with Siemens and Motorola.
Latin American Fixed Line Business--Telefonica Latinoamerica
Our Latin American fixed line business is conducted through Telefonica
Latinoamerica. The following tables set forth information with respect to the
fixed line telecommunications services provided by the principal
telecommunications operators that are members of the Telefonica Latinoamerica
group. Information is given as of December 31, 2004, unless otherwise
specified.
Population
at December Principal Fixed-Line
Company Country 31, 2004(1) Services Provided Competition
------------------------------------------------------------------------------------------------------------------------
Telecomunicacoes de Sao Paulo-Telesp Brazil 39.0 Basic telephony, All existing telephone
domestic and services in Brazil are
international long open to free
distance, public competition
telephony, Internet
access, value added
services
Compania de Telecomunicaciones de Chile 15.4 Basic telephony, All existing telephone
Chile domestic and services in Chile are
international long open to free
distance, public competition
telephony, Internet
access, value added
services
Telefonica de Argentina Argentina 38.7 Basic telephony, All existing telephone
domestic and services in Argentina
international long are open to free
distance public competition
telephony, Internet
access, value added
services
61
Telefonica del Peru Peru 27.6 Basic telephony, All existing telephone
domestic and services in Peru are
international long open to free
distance public competition, except
telephony, Internet for new PCS licenses
access, value added which have been
services, Cable TV awarded on an
exclusive basis for a
three-year period
Telefonica Larga Distancia de Puerto Puerto Rico 4.0 Long-distance services Open to free
Rico competition
------------------
Source: Pyramid Research.
(1) Population in millions of coverage area.
The following table sets forth ownership and management information as of
December 31, 2004 regarding the principal telecommunications operators that are
members of the Telefonica Latinoamerica group.
Year
Company Acquired Interest Management
---------------------------------------------------------------------------------------------------------------------------
Telecomunicacoes de Sao Paulo-Telesp 1998 87.5% Telefonica Latinoamerica manages
Telesp pursuant to a management
contract
Compania de Telecomunicaciones de Chile 1990 44.9% Telefonica Latinoamerica appoints a
majority of the members of the Board
of Directors
Telefonica de Argentina 1990 98.0% Telefonica Latinoamerica controls
Telefonica de Argentina through its
stake in COINTEL. In addition,
Telefonica Latinoamerica manages
Telefonica de Argentina pursuant to a
management contract
Telefonica del Peru 1994 98.2% Telefonica Latinoamerica appoints a
majority of the members of the Board
of Directors and manages Telefonica
del Peru pursuant to a management
contract
Telefonica Larga Distancia de Puerto Rico 1992 98.0% Telefonica Latinoamerica appoints a
majority of the members of the Board
of Directors
Brazil
Telecomunicacoes de Sao Paulo--Telesp
Telesp provides fixed line and other telecommunications services in the
Brazilian state of Sao Paulo under concessions and licenses from Brazil's
federal government. We acquired our initial interest in Telesp in 1998 as part
of a consortium that acquired a majority interest in Telesp in connection with
the restructuring of Telebras, the former Brazilian state-owned
telecommunications monopoly. In mid-2000, we completed an exchange offer for
the Telesp shares and ADSs held by minority investors. In July 2000, we agreed
to exchange our interest in Portelcom Participacoes S.A., the holding company
which controls Telesp Celular, for Portugal Telecom's minority interest in SP
Telecomunicacoes S.A., the holding company through which we control Telesp and
paid an aggregate of approximately U.S.$60 million to Portugal Telecom pursuant
to the terms of the agreement. In December 2001, we acquired an additional 3.5%
of SP Telecomunicacoes S.A. from Iberdrola.
62
At December 31, 2004, Telesp managed approximately 13.3 million access
lines in service, representing an increase of 4% from 12.8 million in 2003 due
to a 1.3% increase in the number of traditional telephone lines and a 70.6%
increase in broadband services. In 2004, the digitalization of Telesp's network
increased to 98.67% and its productivity ratio increased to 1,865 lines in
service per employee at December 31, 2004 from 1,792 lines in service per
employee at December 31, 2003, principally due to an increase in lines in
service (Traditional and ADSL lines). At December 31, 2004, Telesp had 826,000
ADSL lines, a 70.6% increase from the 484,000 lines in 2003, and 85.6% of
Telesp's network had ADSL coverage.
Under a management contract between Telefonica Latinoamerica and Telesp,
Telefonica Latinoamerica provides Telesp with management and technical support
in exchange for management fees equivalent to 0.2% of Telesp's revenues, as
defined in the management contract. The management contract expires in December
2005. Telesp and Telefonica Latinoamerica intend to renew the contract.
The following table provides information with respect to Telesp's fixed
line telecommunications network at and for the periods indicated.
Increase/
At December 31 (Decrease)
2002 2003 2004 2003-2004
--------------------------------------------------
Lines installed (in thousands)................. 14,356 14,249 14,231 (0.1)%
Lines in service (in thousands)(1)............. 12,839 12,781 13,289 4.0%
Traditional lines in service................... 12,506 12,297 12,463 1.3%
ADSL lines..................................... 333 484 826 70.6%
Penetration rate in Sao Paulo.................. 32.9% 31.6% 31.7% 0.1%
Lines in service per employee.................. 1,349 1,792 1,865 4.1%
------------------
(1) Beginning on January 1, 2003, we have retroactively introduced a
modification in our calculation formula for the lines in service. This
criteria will apply to the following equivalencies: PSTN (x1), basic ISDN
(x2), primary ISDN (x30), 2/6 digital access for switchboards and Ibercom
x30) and ADSL (x1). PSTN, or Public Switched Telephone Network, are lines
that offer basic telephony services. ISDN, or integrated service digital
networks, are lines that allow the integration of voice, data and video
services through two 64kbits/s channels. ADSL, or asymmetrical digital
subscriber lines, are lines that allow for voice and high speed data
transmission. This new criteria introduces a difference in the manner in
which we account for ISDN primary access and of the 2/6 access for
switchboards and Ibercom, which will be multiplied by the number of access
channels (30) instead of the extensions using it.
Regulation
In 1997, the Telecommunications General Law was passed in Brazil (Law
9472/97) creating a National Agency for Telecommunications, or Anatel.
Concessions and Authorizations. Concessions and licenses to provide
telecommunications services are granted under the public regime, while
authorizations are granted under the private regime. Companies that provide
services under the public regime, or public regime companies, are subject to
certain obligations as to quality of service, continuity of service,
universality of service, network expansion and modernization. Companies that
provide services under the private regime, or private regime companies, are
generally not subject to the same requirements regarding continuity or
universality of service. However, they are subject to certain network expansion
and quality of service obligations set forth in their authorizations. Public
regime companies, including Telesp, can also offer certain telecommunications
services in the private regime, including data transmission services.
Fixed-line Services--Public Regime. Telesp's current concession agreement
expires December 31, 2005, and, subject to satisfactory completion of certain
network expansion, modernization and service quality obligations, contemplates
a full renewal for an additional 20 years or revocation. Telesp formally
notified Anatel of its intention to renew its concession agreement on June 30,
2003. Subject to its satisfaction of the network expansion, modernization and
service quality obligations set forth in the current concession agreement
through December 2005, Telesp's renewed concession agreement will become
effective on January 1, 2006. While the basic form of the
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renewed concession agreement has been finalized by Anatel and subject to
extensive public comment, certain regulatory terms and conditions that will, or
may be incorporated, into the renewed concession agreement remain pending. In
order for the concession agreement renewal to take place Telesp must fulfill
certain quality and universalization targets set forth in the current concession
agreement that expires December 31, 2005. The universalization targets refer to
deadlines for networks expansion and modernization for individual and collective
access service availability. The quality targets refer to measured quality
service on the services rendered to customers.
Act No. 25.120, enacted on April 25, 2002, allowed Telesp to provide local
and interregional services in Regions I and II and Sector 33 of Region III, and
international long distance services in Regions I, II and III.
Fixed-line Services--Private Regime. The Brazilian telecommunications
regulations provide for the introduction of competition in telecommunications
services by requiring Anatel to authorize private regime companies to provide
local and intrarregional long-distance service in each of the three fixed-line
regions and to provide intrarregional, interregional and international
long-distance services throughout Brazil. Anatel has already granted
authorizations to private regime operators to operate in Region III, Telesp's
concession region.
Interconnection. Under the General Telecommunications Law, all fixed line
telecommunications service providers must provide interconnection upon the
request of any other fixed line or mobile telecommunications service provider.
Telesp has interconnection agreements with other telephone service providers,
including Embratel, Intelig and Telesp Celular. The interconnection agreements
are freely negotiated among the service providers, subject to a price cap in
compliance with regulations established by Anatel. If a service provider offers
to any party an interconnection tariff below the price cap, it must offer the
same tariff to any other requesting party on a nondiscriminatory basis. If the
parties cannot reach an agreement on the terms of interconnection, including
the interconnection tariff, Anatel can establish the terms of the
interconnection.
Rates. For local network usage (TURL) and the interurban network (TU-RIU),
rates are regulated by Anatel and an inflation index formula is included in the
concession contract. Concession agreements also establish a price cap for
annual rate adjustments, depending upon the type of service provided. Rates for
international services are not required to follow the price cap.
In June 2003, Anatel prescribed new rates for Telesp's concession area.
However, based on an injunction issued by a federal court, Telesp charged lower
rates than those prescribed by Anatel. After the final decision regarding the
legal injunction with the reincorporation of the IGP-DI as the index, the
approved increases were applied in addition to the approved tariffs in June
2003. The increase was divided in two installments, the first one effective
after September 1, 2004 and the second installment effective after November 1,
2004.
On June 29, 2004 Anatel approved new rates for Telesp's concession areas
starting in July 2004. The approved increases were applied in addition to the
tariffs determined by the legal injunction.
Competition
In addition to evolving regulatory considerations, Telesp's business is
affected by competition from other telecommunications providers. Telesp began
to face competition in its region in July 1999 and anticipates that competition
will contribute to declining prices for fixed-line telecommunications services
and increasing pressure on operating margins. Telesp's future growth and
results of operations will depend significantly on a variety of factors,
including:
o Brazil's economic growth and its impact on the greater demand for
services;
o the costs and availability of financing; and
o the exchange rate between the real and other currencies.
Telesp is subject to competition for local telephone services from a
"mirror" license holder, who was granted rights similar to those granted to
Telesp as part of the privatization of Telebras. It is subject to competition
for
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interprovincial long distance services from a "mirror" license holder, Embratel
and Embratel's "mirror" license holder.
Network and Technology
In 2003, Telesp began to offer international and interregional long
distance telecommunication services known as "Super 15.". Since 1999, Telesp
has made significant investments to develop its broadband access business
through ADSL technology under the brand "Speedy." Telesp also offers wireless
broadband connectivity to their clients through Wi-Fi.
Chile
CTC Chile
Compania de Telecomunicaciones de Chile, or CTC Chile, a company in which
we held a 44.89% stake at December 31, 2004, is the leading telecommunications
operator in Chile based on number of customers, according to information
provided by its competitors and regulatory authorities. As of December 31,
2004, CTC Chile owned approximately 73% of all telephone lines in Chile,
according to its estimates. CTC Chile provides a broad range of
telecommunications and other services throughout Chile, including local
telephone service, domestic and international long distance service, broadband
access and services, dedicated lines, public telephone service, interconnection
services, Internet access for corporate customers and security systems
services. These services are complemented by the sale and rental of telephone
equipment and a broad range of value added services that enhance the
communications experience of its customers, such as voice mail, call-waiting,
call-forwarding, caller-ID, outbound traffic control, CiberRing (call-waiting
notice for Internet users) and access to information and entertainment
services.
On July 23, 2004, CTC Chile sold to Telefonica Moviles a 100% interest in
shares of Telefonica Movil Chile, a mobile telephone operator in Chile. The
total amount paid for the acquisition was approximately (euro)1.1 billion.
CTC Chile managed approximately 2.63 million lines in service at December
31, 2004 and the access line penetration rate for the market in Chile was
approximately 22.0% at that same date. CTC Chile's productivity ratio increased
to 856 lines per employee in 2004 from 794 lines per employee in 2003,
principally as a result of an increase in lines in services and workforce
reductions. At December 31, 2004, CTC Chile had 200,700 ADSL connections in
service compared to 125,200 in 2003. In 2004, the degree of digitalization of
CTC Chile's network reached 100% and 87.8% of its network had ADSL
coverage.
Regulation
The regulatory framework of Chile, defined in the General
Telecommunications Law (Ley General de Telecommunications), was enacted in
1982. This law introduced competition in the telecommunications services sector
in Chile (Law 18168/82 amended by Decree 1/87, Laws 19091/91 and 19302/94) and
dictated provisions on licenses and permits for operating telecommunications
services, rate regulation and network interconnection. Those provisions were
later amended or replaced by subsequent modifications.
Regulatory authorities. The following regulatory authorities exist in
Chile:
o the Under-Secretary of Telecommunications (SUBTEL);
o the Ministry of Economy, Infrastructure and Reconstruction;
o the Ministry of Transport and Telecommunications; and
o the Antitrust Commission.
Licenses and Concessions. Under Law No. 18,168, companies must obtain
licenses in order to provide telecommunications services. Licenses granted for
public and intermediate services generally have 30-year terms
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and may be renewed indefinitely for 30-year periods at the request of the
operator (although certain licenses held by CTC Chile have longer terms).
A license may be terminated, after notice of noncompliance with the
applicable technical regulations, by executive decree of the Ministry of
Transport and Telecommunications, if the operator is in violation of the law or
does not comply with the terms and conditions to which the license is subject.
If a license is terminated, the holder is barred from applying for any license
for a period of five years.
CTC Chile holds the following licenses:
o Local Telephony Public Service. CTC Chile holds licenses for local
telephone service in all regions of Chile for a 50-year period
beginning as of December 1982.
o Multicarrier Long Distance Licenses. CTC Chile, through Telefonica
Mundo and Globus, respectively, holds 30-year licenses granted in
April 1993 and licenses for an indefinite term to provide domestic and
international long distance services through central switches and
cable and fiber-optic networks nationwide.
o Data Transmission. CTC Chile, through Telefonica Empresas, holds, as
of March 1987, nationwide public service data transmission licenses
for an indefinite term.
Telecommunications services in Chile are provided on a competitive basis,
although access rates (for network use), must be set by the Ministry of
Transport and Telecommunications and the Ministry of Economy, according to
article 25 of the General Telecommunications Law.
Interconnection. Interconnection is obligatory for all license holders of
public telecommunications services and intermediate services that provide long
distance services. The Exempt Resolution No. 1007/95 sets the procedures and
deadlines to establish and accept interconnections between networks of public
telephone service and intermediate services.
Rates. Under the General Telecommunications Law, maximum tariffs for
telephony services are set every five years by the Ministry of Transport and
Telecommunications and the Ministry of Economy. The Antitrust Commission may
subject any telephony service to price regulation, except for mobile telephone
services to the public that are expressly exempted under the General
Telecommunications Law.
Each maximum tariff takes into account the relevant cost components
associated with providing the regulated service, and is adjusted monthly in
accordance with a tariff index. A distinct tariff index exists for each
individual regulated service that reflects the different theoretical cost
components associated with each such service.
On October 13, 2003 the Antitrust Commission issued Resolution No. 709,
approving CTC Chile's request for local telephony services tariff flexibility
and the ability to offer alternative plans within a framework of conditions
specified by the regulator. On February 26, 2004 a framework regarding how CTC
Chile may offer the mentioned alternative tariff plans was published. One
relevant aspect is that no previous authorization is required to offer such
plans. Plans are not subject to maximum levels or predetermined structures and
may include joint offers with other telecommunication and non-telecommunication
services.
On May 4, 2004 a new tariff decree was proposed by the Ministry of
Transport and Telecommunications. CTC Chile and other operators filed appeals
to the tariff decree and subsequently the Ministry resubmitted the decree to
the Chilean General Controller in September 2004, and again in December 2004
with slight modifications to the document submitted in May 2004. On February
11, 2005, Tariff Decree No. 169 was published in the Official Gazette. CTC
Chile will apply the new tariffs to its customers retroactively as of May 6,
2004.
Argentina
Telefonica de Argentina
Telefonica de Argentina is a leading provider of fixed line public
telecommunications services and basic telephone services in Argentina based on
number of customers, according to information provided by its competitors
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and regulatory authorities. Telefonica de Argentina is licensed to provide local
and domestic long distance and international services and domestic and
international telex services throughout Argentina. Telefonica de Argentina's
licenses do not expire but may be cancelled as a result of a failure to comply
with the terms of the license. During 2000, we increased our stake in Telefonica
de Argentina through a public exchange offer for Telefonica de Argentina shares
and ADSs held by minority investors and our acquisition of a 50% interest in
Compania de Inversiones en Telecomunicaciones (COINTEL), which held a 52.9%
stake in Telefonica de Argentina. At December 31, 2004, we held a 98.03%
interest in Telefonica de Argentina.
At December 31, 2004, Telefonica de Argentina's telecommunications network
had approximately 4.52 million lines in service, including ADSL lines, an
increase of 6.6% from approximately 4.24 million at December 31, 2003, and the
access line penetration rate for the market in Argentina was 23.6%. At that
date, Telefonica de Argentina's estimated market share for local telephony was
51.4%, its estimated market share for domestic long distance was 35.9% and its
estimated market share for international long distance was 42.4%. Telefonica de
Argentina's broadband operations expanded in 2004, reaching 189,000 ADSL users
at December 31, 2004 while also developing the usage of wireless broadband
technology (WIFI).
As of December 31, 2004, approximately 51% of Telefonica de Argentina's
lines in service were in the Greater Buenos Aires metropolitan area, including
21% of Telefonica de Argentina's lines in service that were located within the
City of Buenos Aires. Approximately 86% of Telefonica de Argentina's lines in
service as of December 31, 2004, were residential, with the remainder being
professional, commercial and governmental customers.
Telefonica Latinoamerica has a management contract with Telefonica de
Argentina under which it has agreed to manage Telefonica de Argentina's
business and provide services and expertise regarding Telefonica de Argentina's
entire range of activities in return for a percentage of Telefonica de
Argentina's operating revenues equivalent to 4% of its gross revenue prior to
amortization and interest expense. This contract was renegotiated during 2003
and was extended through 2008 with a 5 percentage point reduction of our
management fee. Under the management contract, Telefonica Latinoamerica manages
Telefonica de Argentina's day-to-day operations.
Regulation
The basic legal framework is set forth in the National Telecommunications
Law (No. 19,798) from 1972, and in the specific regulations governing each
service. Through Decree 264/98 the telecommunications market in Argentina was
deregulated.
On September 3, 2000, the Argentine government issued Decree No. 764/00,
which approved rules for licenses for telecommunications services,
interconnection, universal service and for the administration, management and
control of the radio electric Sspectrum.
In January 2002, the Public Emergency Law introduced significant changes
to the agreements executed by the Argentine government, including those
regarding utilities, such as Telefonica de Argentina's tariff agreements. This
law mandated the conversion of prices and tariffs in such agreements into pesos
at a rate of one peso per one U.S. dollar without the possibility of adjusting
such conversion rate or indexation of any kind. It also authorizes the
Argentine government to renegotiate the above-mentioned contracts.
As an investor in Argentina through Telefonica Argentina, we commenced
arbitration proceedings against the Republic of Argentina before the CIADI,
(Centro Internacional de Arreglo de Diferencias relativas a Inversiones) based
on the Reciprocal Protection of Investments Treaty between Spain and Argentina,
for damages suffered by us because of the measures adopted by the Argentine
Government. We submitted pleadings to the arbitration tribunal on December 6,
2004 and the Republic of Argentina submitted its answer in February 2005.
On October 21, 2003, Law No. 25.790 became effective, extending the term
for the renegotiation of the concession or licensing agreements with public
utilities until December 31, 2004. This law also established that the decisions
made by the Argentine government during the renegotiation process shall not be
limited by, or subject to, the stipulations contained in the regulatory
frameworks currently governing the concession or licensing agreements for the
respective public utilities. Renegotiated agreements may cover some aspects of
concession or licensing agreements and may contain formulas to adjust such
agreements or temporarily amend them. The law includes the
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possibility of agreeing upon periodic reviews, as well as the establishment of
conditions regarding the quality parameters applied to services. Law No. 25.972
extended the emergency renegotiation period until December 31, 2005.
Regulatory authorities. The provision of telecommunications services is
regulated by the Secretary of Communications and supervised by the National
Communications Commission, subject to the participation in certain cases of the
Under Secretary of Competition, Deregulation and Consumer's Defense (the Sub
Secretaria de la Competencia, la Desregulacion y la Defensa del Consumidor).
Licenses. The licenses, all granted for an unlimited period of time and
held by Telefonica de Argentina S.A., and the regulations that govern them are:
o Decreto 2344/90: Licence to provide fixed line telecommunication
services.
o Decreto 2346/90: License to provide international telecommunications
services, including telex and data transmission.
o Decreto 90/99: License to provide local, long distance, international
and data transmission telecommunication services in the northern
region.
o Res 1995/95: License to provide international telex services.
o Resolucion SC 16/01: License to provide Internet access and
international data transmission services.
o Res SC 59/01: License to provide data transmission.
o Res SC 225/03: License to provide transmission of television signals.
Interconnection. Decree No. 764/00 approved new rules for national
interconnection and established interconnection standards and conditions to
which telephone service providers must comply without affecting pre-existing
agreements.
The rules for national interconnection set forth the basic principles to
be taken into account regarding interconnection among operators such as who
will be able to agree on tariffs and service terms and conditions on a
non-discrimination basis, provided that they comply with certain minimum
obligations.
The regulations also establish the obligation for dominant and significant
power operators to unbundle their local loops (physical link and its capacity
between the carrier's capacity and the clients' facilities) and to allow
competitors the use them on the basis of technical reasonability. As of the
date of this Annual Report, the working group in charge of setting reference
rates for this service has not been created.
Rates. Decree No. 764/00 established that providers of telephone services
may freely set rates and/or prices for their services, which shall be applied
on a non-discriminatory basis. However, until the Secretary of Communications
determines that there is effective competition for telecommunications services,
the "dominant" providers in such areas, which include Telefonica de Argentina,
must respect the maximum tariffs established in the general rate structure.
Below the values established in such tariff structure, such providers may
freely set their rates by areas, routes, long distance legs and/or customer
groups.
The guidelines set forth in article 26 of Decree 1185/90 are still
applicable for operators with significant market power. These established the
information obligations that operators have with regard to the tariffs, both to
clients as well as to the regulation authority. This decree also establishes
the powers that said authority has to revise and oppose said tariffs.
The Public Emergency Law converted these tariffs into pesos at a rate of
one peso per one U.S. dollar and provided that the Argentine government would
renegotiate the tariff regime.
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Competition
Telecom Argentina, Compania de Telefonos del Interior S.A., an affiliate
of Telmex, and Compania de Telefonos del Plata S.A., an affiliate of Bell
South, were awarded licenses to provide the same basic telephone services
throughout Argentina as of October 10, 1999. Since November 2000, other
principal competitors, including Impsat Corp. and AT&T, have also entered the
market, as well as smaller regional competitors.
Peru
Telefonica del Peru
At December 31, 2004, Telefonica del Peru was the leading global
telecommunications operator in Peru based on number of customers, according to
information provided by its competitors and regulatory authorities. Telefonica
del Peru offers fixed local and domestic and international long distance
services throughout Peru as well as a wide range of other telecommunications
services including public telephone, cable television and data communications.
On December 17, 2003, Telefonica del Peru's Board of Directors approved a
resolution to apply for the delisting of Telefonica del Peru's ADSs from the
NYSE. On March 1, 2004 Telefonica del Peru's delisting application was approved
and the ADSs ceased trading on the NYSE. Following the delisting, holders of
ADSs were given an opportunity to exchange their ADSs for the underlying
ordinary shares at a ratio of ten ordinary shares for each Telefonica del Peru
ADS. The Class B Shares trade on the Lima Stock Exchange.
In 2000, we completed an exchange offer for the Telefonica del Peru shares
and ADSs held by minority investors. Following our acquisition in September
2001 of an additional 10% interest in Telefonica del Peru Holding from Wiese
Telefonica S.A. and IGM Telefonos, S.A. for a total of (euro)227.3 million, we
held an approximately 97.07% interest in Telefonica del Peru at December 31,
2004.
At December 31, 2004, Telefonica del Peru had approximately 96.4% of the
local telephone lines in Peru, according to information provided by its
competitors and regulatory authorities, or 2.4 million lines including
broadband lines and public telephone lines operated by Telefonica del Peru.
Additionally, Telefonica del Peru had 389,174 pay television subscribers.
Telefonica del Peru had 205,400 ADSL and cable modem subscribers at
December 31, 2004, a 126.5% increase compared to 90,700 subscribers at December
31, 2003. The ADSL penetration rate for the market in Peru was 7.8% at December
31, 2004.
At December 31, 2004 the degree of digitalization of Telefonica del Peru's
network reached 96.5%.
Under a management contract between Telefonica Latinoamerica and
Telefonica del Peru, Telefonica Latinoamerica provides Telefonica del Peru with
management and technical support in exchange for management fees equivalent to
1% of Telefonica del Peru's total revenues. This contract expires in 2014.
On April 15, 2003, OSIPTEL introduced the multicarrier dial-up service for
the long distance market. This system allows callers to freely select the
operator they want to use for each call. Each operator has a predetermined
number that the caller dials as a prefix to the call. This service favored the
entrance of new operators with lower long distance tariffs. In the domestic and
international long distance market, in 2004 Telefonica del Peru had 72% and 58%
estimated market shares, respectively, with AT&T and Americatel as its main
competitors. Within the Lima metropolitan area, Telefonica del Peru had
approximately 99% market share, according to its estimates, with AT&T its only
competitor. Telefonica del Peru is the leading provider of public telephone
service with AT&T and Bellsouth as its main competitors. In addition,
Telefonica del Peru provides cable television in the Lima metropolitan area and
seven other cities through its wholly owned subsidiary, Telefonica Multimedia
S.A.C.
Regulation
The Telecommunications Act (Texto Unico Ordenado de la Ley de
Telecomunicaciones) approved in 1993 (DS 13-93-TCC) and the General Regulations
implementing the statute, approved in 1994 (DS 6-94-TCC 1994) are the legal
framework for the telecommunications sector in Peru.
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Licenses and Concessions. Telefonica del Peru provides telecommunications
services based on concessions granted by the Ministry of Transport and
Telecommunications. The concession term is for twenty years, which may be
renewed totally or partially at Telefonica del Peru's request. Total renewal is
for a further twenty year period. Partial renewal is for periods of up to five
additional years. Once a regulated operator chooses either a partial or total
renewal modality, they cannot switch. Telefonica del Peru selected a partial
renewal modality, which will allow Telefonica del Peru to renew its term every
five-years from the effective date, up to a maximum of 20 years. Under the
terms of Telefonica del Peru's concession contracts, The Ministry of Transport
and Telecommunications may choose not to renew or extend Telefonica del Peru's
contracts if it has repeatedly not complied with the terms of its concessions
contracts as determined by the Peruvian government. A partial renewal of five
years was approved by Ministry Resolution No 272-92 dated June 21, 1999,
extending the concession term until 2019.
In December 2003, Telefonica del Peru petitioned the government for a
five-year extension of its concession contracts from 2019 to 2024. On June
2004, the Ministry of Transport and Telecommunications notified Telefonica del
Peru of its recommendation not to renew the concession contracts for an
additional five-year period. As of the date of this Annual Report a final
decision has not been issued. If the request for extension is denied, then
Telefonica del Peru may again petition for the additional five-year extension
period from 2019 to 2024 in December 2008.
Rates. The tariffs of the services regulated following the period of
limited concurrence must be approved by OSIPTEL in accordance with a price cap
formula based on a productivity factor.
On July 19, 2004 OSIPTEL set the value of the productivity factor for the
2004 to 2007 period at an annual rate of 10.1% and 7.8% for local and
international calls, respectively. The productivity factor set is applicable
until August 31, 2007. A review process shall be put in place every three
years.
Interconnection prices. The interconnection charges have displayed a
decreasing trend. Except for charges for call termination in local fixed
network, which are set on the basis of costs, charges were established using
the international comparison method. However, OSIPTEL has initiated several
administrative procedures to set new interconnection charges for several
services.
Telefonica Larga Distancia de Puerto Rico
At December 31, 2004, we held a 98.0% interest in Telefonica Larga
Distancia de Puerto Rico, Inc., or TLD, which provides long distance telephone
services in Puerto Rico.
In 2004, TLD's customers consumed 180 million minutes from TLD network, a
14.6% decrease compared to 211 million minutes in 2003.
Other Investments
Infonet Services Corporation
At December 31, 2004 we held a 14.4% economic interest and a 17.1% voting
interest in Infonet Services Corporation, a data telecommunications firm that
uses telecommunications tools to electronically link offices within a
multinational company and to speed the transfer of information between them.
On November 18, 2004 Infonet agreed to merge with British
Telecommunications plc. Pursuant to the merger, we sold all our interests in
Infonet for U.S.$138.8 million on February 25, 2005.
Atrium Telecomunicacoes Ltda.
On December 24, 2004 Telesp agreed to acquire 100% of the shares of Santa
Genovese Participacoes Ltd. Holding, which owns 100% of the shares of Atrium
Telecomunicacoes Ltda. for R$113.4 million (approximately (euro)31 million).
Atrium is a provider of integral telecommunications services for businesses in
the city of Sao Paulo.
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Telefonica Empresas America
During 2004, we implemented certain measures to simplify our business
lines by integrating the former Telefonica Empresas business line's operations
into the Spanish and Latin American fixed line businesses. Pursuant to this
reorganization, the operations of Telefonica Empresas America, or TEA, and
Telefonica International Wholesale Services, or TIWS, are now conducted by
Telefonica Latinoamerica. See "--History and Development of the
Company--Overview".
TEA is a holding company for operations in Latin America focused on
corporate communication services, including voice services, private virtual
networks, Internet connectivity, International data services, hosting and other
company solutions.
After the spin off in 2001 of the data transmission operations of the
integrated telecommunications operators in Brazil, Argentina and Peru into TEA
and together with its other operations in Colombia, Mexico and the United
States, Telefonica Empresas America offers a unique network platform for the
provision of corporate data transmission services to multinational clients in
Latin America.
TEA's strategy in each country depends on the status of development of its
network and its market share. In those countries in which our Group holds a
leading position, TEA concentrates on offering "one-stop shopping" services and
customized communications solutions to corporate customers, with particular
emphasis on value added services, such as hosting, content delivery and
e-solutions. We refer to these markets as TEA's "incumbent markets". In those
countries where TEA is a new entrant, TEA offers a complete portfolio of IP
services and packaged solutions to the most attractive market segments, such as
small and medium-sized enterprises, Internet service providers and other
Telefonica Group companies. We refer to these markets as TEA's "expansion
markets".
Incumbent Markets
TEA's incumbent markets include Brazil, Argentina, Chile and Peru. TEA
manages operations focused on significant clients of the Telefonica Group. At
December 31, 2004 TEA had 40,429 end user connections in Brazil, and
approximately 13,931 in Argentina, 5,330 in Peru and 54,020 end user
connections in Chile.
Expansion Markets
TEA's future markets where it may seek to enter include Colombia, Mexico,
Puerto Rico and the United States. At December 31, 2004, TEA had 5,826 end user
connections in these expansion markets. Despite the commencement of operations
at TEA data center in Miami in September 2001, which has enabled TEA to begin
providing hosting services in the United States (principally in Florida), TEA's
results of operations in these expansion markets were adversely affected by the
decline of new technology companies and the economic recession in the United
States.
Certain Agreements
In May 2003, TEA signed an agreement with Amadeus Data Processing to
become their telecommunication partner supplier in the Latin American region.
This agreement is based on a technological association principle by means both
companies will benefits from sharing and developing business opportunities.]
In February 2003, Telefonica Data Brasil signed a 60-month agreement with
Banco Santander to outsource its telecommunications services for voice, data
and PABX for Banco Santander's 2,000 branches in the Brazilian territory.
Telefonica International Wholesale Services
In 2002, Telefonica Data's international network included the
international data transmission services and the international services
integrated in Telefonica DataCorp. During 2003, Telefonica DataCorp transferred
its international network to Telefonica International Wholesale Services
(TIWS), a new business line of the Telefonica Group. TIWS was created to become
a global wholesale operator of data, voice and capacity.
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Since 2003, TIWS is the business unit responsible for other
telecommunications operators and for managing the Group's international
services and the network which supports these services.
Internet Portal Business--Terra Networks
Our worldwide Internet portal business is led by the Terra Networks Group.
The Terra Networks Group provides a leading Internet portal to Spanish and
Portuguese-speaking markets throughout the world.
We created Terra Networks in December 1998 to operate the Spanish
residential and small office/home office Internet access business carried on by
the Telefonica Group since December 1995. In November 1999, Terra Networks,
S.A. completed an initial public offering of approximately 30% of its ordinary
shares. In 2000, Terra Networks, S.A. acquired 100% of Lycos, Inc. in a
stock-for-stock exchange. On May 28, 2003, we launched a tender offer for 100%
of the outstanding shares of Terra Networks, S.A. that we did not own. As a
result of the tender offer, closed in July 2003, we owned 71.97% of the total
capital stock of Terra Networks. In December 2003 the Board of Directors of
Terra Networks, S.A., approved the acquisition of 4.41% of the capital stock
owned by Citibank, N.A., as the agent bank for the stock option plans assumed
by the company as part of the integration of the Lycos, Inc. As a result, in
December 2003, we held 75.29% of the total capital stock in Terra Networks.
During 2004, we purchased 3,321,048 shares of Terra Networks in the open
market. As of February 23, 2005 we directly held 75.87% of Terra Networks'
outstanding share capital.
On February 23, 2005, Terra Networks S.A.'s Board of Directors approved
our merger proposal which is now subject to approval by shareholders at the
annual general shareholders' meeting of both companies. At the same meeting
Terra Networks' Board of Directors also approved the proposal to pay a dividend
in the amount of (euro)0.60 per Terra Networks share, subject to the approval
by Terra Networks'shareholders at the annual general shareholders' meeting.
Payment is expected to be made during the days following the annual general
meeting and, in any event, before the merger of Telefonica and Terra is
consummated.
Terra Networks offers a suite of Internet services in a variety of
languages that provides its users throughout its core markets in Europe, Latin
America and North America with:
o access to the Internet (in Spain and certain countries in Latin
America);
o portal and network services that incorporate a wide variety of
individually tailored content for each market and featuring enhanced
functionality;
o a range of online advertising, marketing and e-commerce opportunities;
o multiple solutions for customers' Internet needs, such as web design
and hosting and communication; and
o consulting services such as web audit, web rationalization and web
maintenance.
Through its portals and network of websites and joint venture
partnerships, the Terra Networks Group has one of the largest global footprints
of any Internet portal or network, with portals in 27 countries. The Terra
Networks Group currently holds a leading position in the following markets:
Spain, Latin America and the U.S. Hispanic market. Through its joint ventures
and other interests, the Terra Networks Group also holds an important position
in Europe (Lycos Europe) on a pan-regional basis. The Terra Networks Group is
also a leading interactive services provider in Spain and Latin America,
offering Internet access and local language interactive content and services to
more than six million pay customers in Spain, Brazil, Mexico, Peru, Chile, the
United States and Central America. In 2004, the Terra Networks Group was one of
the leading broadband services and content providers in Spain and Brazil. Terra
Networks ended 2004 with a total of 1.8 million pay access subscribers,
including 1.1 million ADSL subscribers, 66% more than the previous year.
In the first half of 2004, Terra Networks restructured its operation to
provide for increased operational flexibility and enhance its ability to focus
on its customers. As part of this restructuring, Terra Networks reduced its
operations in countries in which Telefonica does not conduct significant
operations, particularly the United States and Mexico. In connection with the
restructuring, personnel expenses have been significantly reduced and headcount
has been reduced from 2,255 at year-end 2003 to 1,606 at year-end 2004.
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The Terra Networks Group's business model has changed over the years to
suit prevailing market conditions in general and the Internet industry in
particular. An example is its access business, which in 2001 abandoned its
strategy of offering free access and began offering pay access. In 2002 and
2003, Terra Networks focused on ADSL and broadband access, particularly in
Spain and Latin America.
In June 2004, Terra Networks approved the payment of a cash dividend of
(euro)2.0 per Terra Networks share. The payment of (euro)1.1 billion was made
on July 30, 2004.
In October 2004, Terra Networks, S.A. sold its interest in Lycos to the
Korean group Daum Communications Corp. Prior to the sale, Lycos transferred to
Terra Networks, among other assets, the shares it held in Terra Networks USA,
LLP (a subsidiary concerned with operating the portal for Spanish speaking
people in the United States) and its stake in Lycos Europe, N.V. The sale price
of the Lycos assets sold to Daum Communications was U.S.$108 million.
Strategic Alliance with Terra Networks
On February 12, 2003 we and Terra Networks entered into a Strategic
Alliance Framework Agreement to replace the strategic agreement dated May 16,
2000 to which Bertelsmann AG was also a party. Under this agreement, we
guaranteed Terra Networks at least (euro)78.5 million per year through the
purchase of advertising by members of the Telefonica group. In 2003 and 2004 we
generated the minimum value per year under the agreement.
Affiliated Companies of Terra Networks
Banking--Uno-e (BBVA)
The BBVA Group and the Terra Networks Group hold interests in Uno-e Bank,
S.A.'s share capital of 67% and 33%, respectively. See "--Other Lines of
Business--International Strategic Partnerships--Our Strategic Alliance with
Banco Bilbao Vizcaya Argentaria--Uno-e Bank".
Travel-Rumbo/One Travel (Amadeus)
In July 1999, Terra Networks agreed to create a 50-50 joint venture with
Amadeus Global Travel Distribution, S.A., a global leader in the travel
industry that operates travel reservation and distribution systems. The purpose
of the joint venture is to develop a website for travel and tourism related
services targeted at the Spanish and Portuguese speaking markets. In September
2000, Terra Networks launched Rumbo in Spain through this joint venture. In
2001, the Terra Networks Group launched Rumbo in Argentina, Brazil and Mexico,
and in 2002, Terra Networks launched Rumbo in Chile, Colombia, Venezuela,
Uruguay and Peru. In March 2003, Rumbo signed an agreement with Despegar.es,
another Spanish travel website, to manage its website. At December 31, 2004
Terra Networks had investments of (euro)7.5 million in Rumbo and had provided
financing in the form of loans in the amount of (euro)3.8 million. In February
2005, Terra Networks agreed to sell its entire 54.1% interest in One
Travel.com, Inc., for U.S.$25.5 million, payable in specified installments over
a one-year period.
Location services-Maptel Networks
In January 2001, Terra Networks acquired Maptel Networks, a leading
provider of location and cartographic content in Spain. Maptel Networks
develops web and wireless location-based solutions and provides consultancy
services in different areas: Geomarketing, Geographical Information Systems
(GIS), Fleet Management, and Customer Relationship Management (CRM). These
services are based on Maptel's own cartography and technology, and are being
used for a broad range of customers in different sectors of activity. At
December 31, 2004 Terra Networks had invested a total of (euro)2.4 million and
had provided financing in the form of loans in the amount of (euro)3.3 million
to Maptel Networks.
E-learning-Educaterra
Educaterra, a wholly owned subsidiary of the Terra Networks Group, is the
exclusive e-learning services provider of the Telefonica Group, providing
solutions for the residential market and the corporate market. During 2002,
Educaterra.com was launched as the Terra Networks Group's exclusive e-learning
vertical channel.
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Educaterra.com currently operates in Spain, Brazil, Mexico, Argentina and
Uruguay, and Terra Networks plans to make it available in several other Latin
American countries. The portal provides a wide range of e-learning content in
languages, IT, tutoring support, "edutainment", parent school and officeware,
and other areas, with more than 25,000 hours of content in Spanish. At December
31, 2004 Terra Networks had invested a total of (euro)6.3 and provided financing
in the form of loans in the amount of (euro)0.5 million to Educaterra.
Recent Developments
In January 2005 Alestra (ATT) and Terra Networks reached an agreement
pursuant to which Alestra would manage the Internet access service provided by
Terra Networks in the Mexican market, while Terra Networks would continue to
manage and market the portal www.terra.com.mx, and to provide e-mail and value
added services to its Mexican access clients.
Content and Media Business--Telefonica de Contenidos (Formerly Admira)
Telefonica de Contenidos (formerly Admira) conducts our worldwide
audiovisual content and media business. Telefonica de Contenidos develops and
distributes audiovisual content through traditional media and new technology
platforms.
During 2004, Telefonica de Contenidos continued divesting its
non-strategic assets by selling its interests in Lolafilms, a Spanish motion
picture production company, Rodven, a Venezuelan record company, Mediapark, a
Spanish television channel production company, Radio Continental, an Argentine
radio company owned by Atlantida de Comunicaciones, Radio Continental and is in
the process of selling its interest in the company that holds the broadcasting
rights for the Argentine national soccer league. On September 23, 2004
Telefonica de Contenidos sold its 5% stake in Pearson, p.l.c. for (euro)345
million.
Endemol Entertainment
In July 2000, we acquired 99.2% of Endemol Entertainment Holding N.V., or
Endemol, one of Europe's leading television producers. Endemol develops and
produces audiovisual programming for free-to-air television, pay television and
the Internet. Endemol has produced reality television shows such as Big
Brother, Fear Factor and "Operacion Triunfo".
Endemol has a very strong international network built by a combination of
start-ups, acquisitions and joint ventures, with operations in 23 countries
around the world.
With the further development of the Internet and increased capabilities of
mobile telephony to provide new platforms suitable for delivering entertainment
content that attract younger audiences (which are more appealing to
advertisers) away from traditional television production, Endemol has refined
its interactive strategy by focusing on brand development, bringing content to
other channels by using Endemol TV brands and developing new content for other
channels and platforms.
Endemol continues to develop its strategy of geographic diversification.
During 2004, Endemol started operations in Russia and Chile and Endemol plans
to expand into Asia.
Pay Television
On May 8, 2002, Telefonica de Contenidos entered into an agreement with
Sogecable to integrate Via Digital with Sogecable.
On November 29, 2002, the Spanish government approved the merger of Via
Digital with Sogecable, subject to the fulfillment of 24 general conditions and
14 conditions related to the exploitation of television broadcast soccer
rights.
On January 29, 2003, Sogecable, Telefonica de Contenidos and we reaffirmed
our commitment to the merger and signed a complementary agreement that adapts
the May 2002 agreement to the conditions established by the Spanish government.
Pursuant to this agreement, the conditions imposed by the government were
accepted, although
74
in parallel the parties filed an appeal against five of the conditions. A plan
implementing such conditions was agreed by the parties and was submitted to the
Spanish government, who approved it on April 3, 2003.
Under the May 2002 and January 2003 agreements, the merger of Via Digital
and Sogecable was structured as follows:
o A share capital increase of 23% in Sogecable has been offered to Via
Digital's shareholders, which are principally Telefonica de
Contenidos, Grupo Prisa and Groupe Canal + in exchange for 100% of
their intests in Via Digital shares.
o After the share exchange, Telefonica de Contenidos held a higher stake
than Grupo Prisa and Groupe Canal+ (16.4%). Telefonica de Contenidos
agreed to suspend its voting rights for its shares exceeding 16.4% of
Sogecable's shared capital. As a consequence, the corporate governance
rights of the three reference shareholders in Sogecable will be equal.
o Telefonica de Contenidos has agreed not to dispose of its 16.4% stake
in Sogecable also during the three year period following the share
exchange.
o Telefonica de Contenidos, Grupo Prisa and Groupe Canal+ will have
equal representation on the Board of Directors of Sogecable with the
same number of members. Grupo Prisa proposed that the chairman of the
board would be one of the board members appointed by Telefonica de
Contenidos.
o Groupe Canal+ and Grupo Prisa agreed to maintain their existing
shareholder agreement with respect to Sogecable, to which Telefonica
de Contenidos will not be a party.
o Grupo Prisa, Groupe Canal+ and Telefonica de Contenidos, each
underwrote and funded (euro)50 million of participative loans, for a
total amount of (euro)150 million. These loans have a 10-year maturity
and an 11% annual interest rate.
o Subordinated debt in an amount of (euro)175 million was offered to all
of the Sogecable shareholders and we purchased (euro)172 million of
such debt. This debt has a maturity of 9 years and the applicable
interest rate is 10.3% per annum plus attached warrants equivalent to
1% of Sogecable's shares.
Following the merger on July 21, 2003, Sogecable, now integrated with Via
Digital, launched its commercial offer under the brand "Digital+". At December
31, 2004, Sogecable had 2.1 million subscribers of which 0.4 were Canal+ analog
subscribers.
Telefonica Servicios Audiovisuales and Hispasat
Through Telefonica Servicios Audiovisuales, we offer audiovisual
transmission services, production services and systems integration services to
the television industry. Telefonica de Contenidos also holds a 13.2% interest
in Hispasat, a Spanish satellite communications system.
Antena 3
At our annual general meeting of shareholders held on April 11, 2003, our
shareholders approved the distribution of up to 50,000,400 shares of Antena 3
held directly by us, representing 30% of the outstanding share capital of
Antena 3. On April 30, 2003, our Board of Directors decided, as approved by the
general meeting of shareholders held on April 11, 2003, to accept an offer made
by Grupo Planeta for 25.1% of the Antena 3 shares for (euro)364.0 million. In
November 2003 we sold our remaining 4.17% holdings in Antena 3 through a block
trade for (euro)95.7 million. The Onda Cero Radio Network was also sold along
with the sale of Antena 3.
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Other Lines of Business
Directories Business--Telefonica Publicidad e Informacion (TPI)
Telefonica Publicidad e Informacion publishes, develops and sells
advertising in telephone directories. In addition to printed directories, it
offers directories online and in telephone-based format. Telefonica Publicidad
e Informacion has operations in Spain, Brazil, Chile and Peru. In addition,
Telinver is the Group's telephone directory subsidiary in Argentina. At
December 31, 2004, we held a 59.9% interest in TPI. On April 7, 2005 TPI
engaged in a capital reduction under which we increased our ownership interest
in TPI to 61.1%.
Spain
Telefonica Publicidad e Informacion estimates its market share in the
directory printing sector in Spain is 89%. Its core products are:
o Paginas Amarillas ("Yellow Pages"), an annual advertising directory
containing certain information on companies, businesses and
professionals in a particular geographical area, classified by sector,
location and alphabetical order. The directory contained approximately
1.2 million listings and 295,600 paid advertisers at December 31,
2004. In 2004, 16 million copies were printed.
o In 2001, Telefonica Publicidad e Informacion introduced a new product
known as Paginas Amarillas de Bolsillo ("Pocket Yellow Pages"), which
has become TPI's most modern and manageable annual advertising
directory. In 2004, a total of fifteen different pocket directories
were published. This product is designed for use outside the home and
permits the user to conveniently carry the directory.
o Paginas Blancas ("White Pages"), which includes residential,
professional and business telephone numbers in a particular geographic
area, classified by location and alphabetical order. The directory has
been redesigned and new content and information has been added,
offering information of general interest to users. During 2004, 60
different White Pages directories were published and 17 million copies
printed. The number of advertisers in the White Pages reached 265,400
in 2004.
o Paginas Amarillas Online (PAOL) ("Yellow Pages Online") is one of the
largest and most complete online databases of Spanish businesses in
terms of number of listings. The number of advertisers in Paginas
Amarillas Online reached 268,500 and the number of registered visits
increased to 55.5 million in 2004. Paginas Amarillas Online also
offers supplementary information, including job listings,
international directory listings (with access to yellow page listings
in other countries) and street guides to more than 400 Spanish cities.
o Servicio de informacion telefonica 11888 (operator-assisted directory
assistance) is a directory assistance service launched in February
2003 that offers 24-hour operator-assisted information over the
telephone for all companies, businesses, professionals, products and
services located in the Yellow Pages. 11888 also include value added
services, such as call completion and the ability to send information
by fax or e-mail. In 2004, the company responded to 36.1 million calls
compared to 22.3 million calls in 2003, an increase of 61.4% .
Advertising revenues increased 14.7% to (euro)4.5 million. The
services reached 259,000 advertisers.
o Business-to-Business Directories: In September 2004 a new vertical
directory called Guia de la Hosteleria, was published specializing in
listing Hotels & Catering businesses. In addition, the second edition
of Guia de la Construccion, specializing in listing construction
businesses, was published in December 2004.
o Europages, available in paper, CD-Rom and over the Internet, is the
most comprehensive trans-European directory containing information on
major European export companies, classified by activity and grouped by
country of origin. The Europages are edited annually by Euredit.
Telefonica Publicidad e Informacion is responsible for managing the
advertising business and the distribution of the directory in Spain.
In May 1999, Telefonica Publicidad e Informacion entered into an agreement
with Telefonica de Espana to publish, distribute, market and sell advertising
in Paginas Blancas. Under this agreement, Telefonica Publicidad e
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Informacion pays Telefonica de Espana a commission based on the revenues
generated from advertising and is reimbursed for the costs associated with the
Guias Basicas de Referencia ("Basic Guides").
Latin America
Brazil
Telefonica Publicidad e Informacion commenced its operations in Brazil in
1999. Telefonica Publicidad e Informacion published its first edition of yellow
pages directories in 2001 under the name "GuiaMais" for the Brazilian cities of
Sao Paulo, Guarulhos, Ribeirao Preto and Curitiba (Parana State), and, in 2002,
it began publishing "GuiaMais" in Osasco-Barueri and the ABC region. In 2003,
Curitiba's directories were not published because of short-term profitability
concerns. In 2004, the first pocket directory in Sao Paulo city was launched.
Telefonica Publicidad e Informacion also offers its directories online and in
telephone-based format. According to our estimates, the website of GuiaMais is
the most visited directory website in Brazil with 11.6 million registered
visits in 2004, which is an 86.1% increase from 2003.
Telefonica Publicidad e Informacion also publishes a white pages directory
in Sao Paulo. In July 2001, Anatel, the Brazilian telecommunications regulator,
temporarily suspended Telesp's obligation to distribute printed copies of white
pages directories to its customers as long as it offers an alternative service
and its customers do not request a printed copy. In 2004, Telefonica Publicidad
e Informacion Brazil published a reduced white pages edition for the state of
Sao Paulo, which did not include the listings for the city of Sao Paulo because
Telesp did not publish such listings in 2004.
Chile
In early 2004, Telefonica Publicidad e Informacion acquired the 49% of
Impresora y Comercial Publiguias, S.A., or Publiguias, for U.S.$80.4 million.
Publiguias is the leader of the Chilean directories market, with a market
share of 96%. Publiguias publishes 10 yellow pages and white pages directories,
with more than 51,800 advertising clients and 7.1 million copies printed.
Additionally, in 2004 Publiguias published its first business to business
directory. Santiago is the most important directory with more than 23,800
advertisers. Internet revenues have increased strongly due mainly to the
commercial strategy implemented in the last years. The number of registered
visits to Publiguias' Internet directory increased 14.8% to 5.5 million in
2004.
In 2001, CTC and Publiguias renegotiated their contractual framework and
entered into an agreement to publish, distribute, market and sell advertising
in the white pages directories. Under this agreement, Publiguias pays a fee of
total advertising sold in the white pages and receives from CTC the costs
associated with listing the telephone numbers. Under this contract, CTC will
provide billing and collection services for its sales of advertising and will
receive a percentage of the revenues generated by Publiguias as a result of
such sales. In addition, Publiguias will pay CTC a variable fee based on the
number of individual updates to the to telephones numbers listings.
In early 2001, the Chilean regulatory authority modified the requirement
to publish and distribute annually white pages directories to customers. As a
result, white pages directories are only required to be published every two
years with a supplement being distributed in the year of non-publication.
Publiguias and CTC agreed that this new regulation applied only with respect to
the distribution of residential white pages directories in Santiago, Chile. In
2003, Publiguias published an addendum to the Santiago residential white pages
directories, and in 2004, it published a complete directory.
Peru
Telefonica Publicidad e Informacion purchased the directory publishing
business of Telefonica del Peru in February 2002 for U.S.$36.3 million.
Telefonica Publicidad e Informacion is the only publisher of directories in
Peru due to the acquisition of Comunicaciones Moviles del Peru from BellSouth
in October 2004. TPI Peru publishes white pages and yellow pages directories in
Lima, and in central, northern and southern Peru. The twelve different
directories published have over 34,400 advertisers with more than 20,800 in
Lima's directory. Peru also
77
has an online version of its directories, the number of visits in 2004 increased
80,5% to 4.8 million. TPI Peru reached an agreement in 2002 with Telefonica del
Peru to publish, distribute, market and sell advertising in the white pages
directories. Under this agreement, TPI Peru pays a commission based on the
revenues generated from advertising and receives the amount of the costs
associated with the basic guides plus a margin for their management.
Argentina
Telinver edits, publishes, distributes and sells advertising in telephone
directories (22 different directories of white and yellow pages) in every local
area served by Telefonica de Argentina. The company also publishes an
industrial yellow pages directory and 4 neighbourhood directories with shopping
listings. Since 1997 has offered its directories on CD-ROM.
In addition, Telinver offers white and yellow directories and e-commerce
services through the online portal of "Paginas Doradas," which received 9
million visits in 2004.
In August 2004 Telinver launched *2424, a live-operator directory service
for mobile clients.
Call Centers--Atento
We formed Atento in 1999 to develop our call center business. Atento
offers integrated telephone assistance services as well as sophisticated
"customer relationship management" services such as the development and
implementation of customer loyalty programs, telemarketing services and market
research. In addition, Atento rents contact centers, and provides staff for
such centers, to third parties. At December 31, 2004, Atento operated more than
40 contact centers and had 30,566 contact center personnel in 12 countries on
three continents, including Europe (Spain), Latin America and Northern Africa
(Morocco).
In December 2001, Banco Bilbao Vizcaya Argentaria agreed to transfer its
domestic and international contact center business to Atento. In May 2002 we
created Atento N.V. a new holding company for our contact center operations. We
contributed to Atento N.V., our entire contact center business in Spain and
overseas.
In October 2003 the Sociedad General de Participaciones Empresariales
("GPE"), a subsidiary of Banco Bilbao Vizcaya Argentaria, we and Atento N.V.,
reached an agreement to allow BBVA to participate in Atento N.V.'s share
capital. Also, in October 2003 specific agreements were reached to provide
services to the BBVA in Spain and Portugal. Following this agreement, in
November 2003, Atento N.V. carried out a capital increase fully subscribed in
cash by us and GPE, representing 8.65% of Atento N.V.'s share capital. Also in
October 2003, BBVA and Atento N.V. signed a framework agreement for Atento to
provide services for a four year period to BBVA.
International Strategic Partnerships
Portugal Telecom
On January 23, 2001, Telefonica Moviles, S.A., Portugal Telecom and its
subsidiary PT Moveis agreed to create a joint venture to consolidate Telefonica
Moviles' wireless businesses in Brazil with those of Portugal Telecom. On
October 17, 2002, Telefonica Moviles, Portugal Telecom and PT Moveis entered
into a Stockholders' Agreement and a Subscription Agreement that implemented
the joint venture agreement signed in January 2001. Under this joint venture
framework agreement, each of the Telefonica Group and the Portugal Telecom
Group agreed to contribute to a 50-50 joint venture (Brasilcel) certain of its
respective wireless businesses in Brazil, including interests in operating
companies and holding companies.
During 2004 Telefonica, S.A. acquired an additional 52,820,862 shares of
Portugal Telecom. Additionally, on December 29, 2004, Portugal Telecom reduced
its capital by retiring 87,799,950 shares of treasury stock, representing 7% of
its capital stock. As a result of these transactions, Telefonica increased its
interest in Portugal to 9.58% at December 31, 2004.
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Mobipay
Telefonica Moviles is jointly developing with other telecommunications
companies a new, simple, fast, low cost and secure mobile payment system, under
the Mobipay brand, to process automated transactions including vending
machines, personal money transfers, micropayments and electronic invoicing. For
a description of Mobipay and other m-pay initiatives, see "--Worldwide Wireless
Communication Services--Telefonica Moviles--Services and products--M-payment".
Our Strategic Alliance with Banco Bilbao Vizcaya Argentaria
Uno-e Bank
In February 2000, we and Banco Bilbao Vizcaya Argentaria, S.A. entered
into a strategic alliance agreement, which provided that the online bank,
Uno-e, would be 49%-owned by Terra Lycos and 51%-owned by Banco Bilbao Vizcaya
Argentaria, S.A. On May 15, 2002, Terra Networks, S.A. and Banco Bilbao Vizcaya
Argentaria, S.A. agreed to merge Uno-e Bank, S.A. with Finanzia Banco de
Credito, S.A. a wholly owned subsidiary of Banco Bilbao Vizcaya Argentaria,
S.A. On January 10, 2003, Terra Networks, S.A. signed a liquidity contract that
replaced a previous agreement. The liquidity contract grants Terra Networks a
put option to sell its interest in the merged entity to Banco Bilbao Vizcaya
Argentaria, S.A. between April 1, 2005 and September 30, 2007. The sale price
will be the greater of (i) the value determined by an investment bank; or (ii)
the value calculated by multiplying Uno-e's last year earnings by BBVA's
price-to-earnings ratio (PER). Additionally, the contract provides that if
Uno-e does not obtain the planned ordinary revenue and earnings before taxes,
the aggregate market value of the shares Terra Networks, S.A. owns cannot be
evaluated at less than (euro)148.5 million.
In an extraordinary general shareholders' meeting of Uno-e Bank S.A. held
on April 23, 2003, Terra Networks, S.A. and BBVA unanimously approved (subject
to the required approval by Banco de Espana) a capital increase in Uno-e Bank
S.A. to be wholly subscribed by Finanzia Banco de Credito, S.A. (a wholly owned
subsidiary of BBVA) through the contribution of its private consumer finance
business. Finanzia Banco de Credito, S.A. also held an extraordinary general
shareholders' meeting on the same date, which approved the contribution and
subscription for shares in the capital increase. As a result of the capital
increase in June 2003, the consumer finance business has been integrated into
the shareholding structure of Uno-e Bank, and the respective stakes of the BBVA
group and Terra Networks after the capital increase were 67% and 33%,
respectively.
Seasonality
Our main business is not significantly affected by seasonal trends.
Patents
Our business is not materially dependent upon the ownership of patents,
commercial or financial contracts or new manufacturing processes.
C. ORGANIZATIONAL STRUCTURE
Please see "--History and Development of the Company--Overview".
D. PROPERTY, PLANT AND EQUIPMENT
Spain
Fixed lines
In order to provide residential and other telecommunication services in
Spain, we operate a full telecommunication services network. We benefit from an
intensive capital investment plan carried out over the last decade, which
focused on network expansion as well as network upgrading. As a result, we now
have:
o A network consisting of fiber optical cable to the curb in every
Spanish city with a population of more than 50,000 inhabitants.
79
o Switching including synchronous digital hierarchy.
o An asynchronous transfer mode rollout (ATM).
o System 7 signaling throughout (used for commutation circuits
networks).
Our infrastructure development objective is to achieve a fully digital
system which allows simultaneous voice, data, text, and image transmission, and
which permits cost-efficient network management and maintenance. Consistent
with this aim, we are moving towards a simplified two-level hierarchical
network through the use of remote units, and we are presently increasing
operational efficiencies through centralization of our network supervision and
management functions. The local digitalization rate in our network has
increased from 56.7% in 1995 to 94.2% as of December 31, 2004, and our long
distance lines are now 100% digitalized.
In carrying out our infrastructure development program, we have increased
the use of fiber optical cable in our network.
The following table shows the total length of the four basic types of
cable used in our network:
At December 31,
------------------------------------
2004 2003 2002 2001
------------------------------------
Coaxial cable (Km.).............................................. 2,444 2,457 2,468 4,756
Optical fiber cable (Km.)........................................ 75,888 64,934 60,932 58,156
Copper cable in interurban links (Km. aerial cable).............. 59,324 56,492 56,753 57,095
Copper cable in subscriber networks (Km. per urban zone)(1)...... 70,361 69,854 69,148 68,563
------------------
(1) Transmission cables in the subscriber networks contain a variable number
of conducting filaments, which are isolated from each other and grouped in
pairs. Each such pair is called a "par".
The deployment of broadband infrastructure at December 31, 2004 is as
follows:
At December 31, 2004
--------------------
ADSL connections (in thousands):................... 2,490.11
ADSL lines over BTN:............................... 2,360.17
ADSL lines over ISDN:.............................. 129.9
6.5 (regular switchboards)
Switchboards with ADSL over BTN:................... and 9.8 (remote equipment)
Switchboards with ADSL over ISDN:.................. 1.2
Degree of DSLAM equipment occupation (%):.......... 92%
Avarage time of retail ADSL service
provision in PSTN and ISDN 11.87:................ 11.87
ADSL lines subscribed per 100 inhabitants:......... 5.8%
Our number of ADSL lines subscribed per 100 BTN and/or ISDN access lines
at December 31, 2004 were as follows:
Lines ADSL Coverage
----------------------------
BTN (thousands)................................................ 148.38 236.01 15.9%
ISDN........................................................... 931.90 129.94 13.9%
Total.......................................................... 157.70 249.01 15.8%
----------------------------
The Spanish demography and topography presents significant challenges
regarding the provision of basic telephony services throughout the country,
especially to rural areas. Our continuous plan of rural expansion has been
partly fostered by the Spanish local authorities. We are capable of using
alternative technologies in order to extend the provision of services to remote
and underpopulated areas according to our universal service obligations.
Wireless access services were established in areas in which wireless service
could be provided at a lower cost per customer that fixed line telephony
services.
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Wireless Networks
Telefonica Moviles Espana's digital network in Spain is based on the GSM
standard, which has been adopted by more than 130 countries worldwide,
including all member countries of the European Union. The wide acceptance of
the GSM standard, together with its international roaming agreements, enables
Telefonica Moviles Espana's customers to make and receive calls throughout
Western Europe and in more than 200 countries worldwide. Telefonica Moviles
Espana's GSM-based network provides its customers with access to many of the
most advanced wireless services and a full portfolio of services and products.
In addition, in 2001 Telefonica Moviles Espana launched a general packet radio
services, or GPRS, which permits faster-based technology for the transmission
of data and improved networks utilization.
In addition to continue increasing the GSM network's capacity in order to
improve the network coverage quality in highly populated areas and allow for a
more intensive use of its network inside offices in urban areas, Telefonica
Moviles Espana has continued during 2003 rolling-out its UMTS network complying
with its obligations under its UMTS license. In October 2003 Telefonica Moviles
was the first mobile operator in Spain to launch a pre-commercial service based
on UMTS technology.
Argentina
Telefonica de Argentina's properties consist of transmission plants and
exchange equipment. Most of Telefonica de Argentina's properties are located in
and around the Buenos Aires region.
As of December 31, 2004, the telephony service has approximately 4.3
million lines in service with approximately 25.1 million lines in service per
each 100 inhabitants in the southern region.
Telefonica de Argentina's long distance service was provided mainly
through a microwave network using analog lines and switchboards. As of December
2004, Telefonica de Argentina has built approximately 5,305 kilometers of
optical fiber network, out of which 17,187 kilometers are located in the
northern region and are dedicated to the provision of national long-distance
services between the main cities, and another optical fiber network for the
transmission of long-distance services between switchboards.
Brazil
Network and Facilities
Telesp's network includes installed lines and switches, an access lines
network connecting customers to switches and trunk lines connecting switches
and long-distance transmission equipment. As of December 31, 2004, our regional
telephone network included approximately 14.2 million installed access lines,
including public telephone lines, of which 12.5 million access lines were in
service. At that time, of the access lines in service, approximately 74.8% were
residential, 20.1% were commercial, 2.6% were public telephone lines and 2.4%
were for our own use and for testing. intraregional long-distance transmission
is provided by a microwave network and by fiber optic cable. Telesp's network
strategy is to develop a broadband integrated network that is compatible with
several types of telecommunications services and multimedia applications.
The following table sets forth selected information about our network in
aggregate, at the dates and for the years indicated.
At and for year ended December 31,
-----------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------
Installed access lines (in millions)............................... 14.2 14.2 14.4 14.3 12.5
Access lines in service (in millions)(1)........................... 12.5 12.3 12.5 12.6 10.6
Average access lines in service (in millions)...................... 12.3 12.4 12.6 11.9 9.3
Access lines in service per 100 inhabitants........................ 31.7 31.6 32.9 33.8 30.4
Percentage of installed access lines connected to digital switches. 98.7 96.9 96.1 95.7 93.8
Number of public telephones (in thousands)......................... 331.2 331.1 330.9 342.8 246.8
81
------------------
(1) Data includes public telephone lines.
Technology
We are currently implementing the necessary infrastructure for the
offering of "Wi-Fi", which is a wireless Internet access connection that offers
mobility to our Internet clients.
As of December 31, 2004, Telesp'snetwork was approximately 98.7% digital.
Peru
In order to provide telecommunication services in Peru, Telefonica del
Peru operates a telecommunications multiservice network. Over the last decade,
a number of significant capital investments were made in order to enlarge the
telecommunication's infrastructure and to provide the telecommunications
network with the latest generation technologies. As a result, we currently
have:
o A solid optical fiber and coaxial cable network.
o A communications network interconnected through signaling protocol
number 7.
o An ATM network.
o A transmission network including SDH technology (synchronous digital
hierarchy).
The objective while developing Telefonica del Peru's infrastructure is to
achieve a completely digital system that allows for simultaneous voice, video,
data and text transmission, and therefore obtains network management and
maintenance efficiencies. According to this, our network is simplified to a two
level hierarchy network through the use of remote units. We are also increasing
our operating efficiencies through effective management of network
centralization.
Telefonica del Peru's network is 96.5% digititalized, long-distance
transmission is 100% digital in Lima and Callao and Telefonica del Peru's
provincial network is 91.3% digititalized.
Plant digitalization:............................................ 96.5%
Number of fixed lines in service(1):............................. 2,155,648
Number of fixed lines set-up:.................................... 2,307,247
------------------
(1) Includes public phones but excludes cellular public telephones.
Telefonica del Peru has increased the number of ISDN lines. As of December
31, 2004, Telefonica del Peru had approximately 54,634 ISDN lines.
Telefonica del. Peru's infrastructure development plan has increased the
use of optical fiber into its network:
At December 31,
-----------------------------------------
Description 2000 2001 2002 2003 2004
-----------------------------------------
Coaxial cable (Km.).................................................. 5,585 5,697 5,738 5,797 5,870
Optical fiber cable (Km.)............................................ 6,508 6,728 6,761 6,993 7,090
Subscriber network (thousand Km.-pair)............................... 5,196 5,270 5,316 5,517 5,757
Chile
The principal plant and equipment of CTC Chile consists of outside plant
and switching equipment and operating units that are located throughout the
country. The Company's land and buildings principally consist of its telephone
exchanges and other technical, administrative and commercial properties. At
December 31, 2004, the Company's telephone plants and equipment represented
86.6% of its gross fixed assets (including depreciation);
82
construction in progress represented 1.8 %, land and buildings represented 6.0%,
and furniture, office equipment and other assets represented 5.4 %.
Substantially all of CTC Chile's telephone exchanges are situated within
buildings owned by CTC Chile. CTC Chile also owns its corporate headquarters
located at Avenida Providencia 111 in Santiago. This building, which houses CTC
Chile's principal offices, was completed in October of 1996 and currently
provides office space for the majority of the administrative and technical
staff of CTC Chile and its subsidiaries. The assets of CTC Chile and its
subsidiaries are insured, subject to standard deductibles and other terms and
conditions, for all events of physical damage and loss of revenue resulting
from service outages.
Wireless Networks
Telefonica Movile Chile owns, or controls through long-term leases or
licenses, property consisting of plant and equipment used to provide wireless
communication services.
Plant and equipment used to provide wireless communication consist of:
o Switching, transmission and receiving equipment;
o Connecting line (cables, wires, poles and other support structures,
conduits and similar items);
o Land and buildings;
o Easements; and
o Other miscellaneous properties (work equipment, furniture and plants
under construction).
Satellite Communications
At present we have interests in two international satellite communications
organizations or companies, including:
o A 0.7% interest in Intelsat, the global satellite consortium; and
o A 13.2% interest in Hispasat, the communications satellite company
which carries the Digital + direct-to-home (DTH) satellite television
service and operates a new satellite system in Brazil and Latin
America (Amazonas).
We sold our 2.1% interest in Eutelsat, the European regional satellite
company, in March 2004 to Nebozzo Sarl for (euro)44,833,236.
We sold our 0.7% interest in New Skies Satellites, the communications
satellite company that was formerly part of Intelsat, in January 2005 to Zeus
Holdings Limited for $7,839,088.
We have implemented a satellite IP-access platform, which has been in
operation since February 2003. Telefonica currently provides broadband Internet
and Intranet access with similar speed and performance as with the ADSL
technology. This satellite platform is also providing VoIP services, which have
been in operation since the second half of 2004.
Submarine Cable
We are also one of the world's largest submarine cable operators. We
currently participate in 44 international underwater cable systems (13 of which
are moored in Spain) and own 11 domestic fiber optic cables.
83
ITEM 5...OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
Overview
We are involved in five principal lines of business:
o Spanish fixed line business conducted through Telefonica de Espana;
o Mobile business conducted through Telefonica Moviles;
o Latin American fixed line business conducted through Telefonica
Latinoamerica;
o Internet portal business conducted through Terra Networks; and
o Content and media business conducted through Telefonica de Contenidos.
Our two other lines of business are:
o Directories business conducted through Telefonica Publicidad e
Informacion, S.A.; and
o Call center business in Europe (Spain), Latin America and Northern
Africa (Morocco) conducted through Atento N.V.
In 2004, we improved many of our operating and non-operating line items,
our customer base and net income increased and we achieved wider margins in
most of our business lines. Our net income was (euro)2,877.3 million in 2004,
(euro)2,203.6 million in 2003 and a net loss of (euro)5,576.8 million in 2002.
Revenues from operations increased 6.8% to (euro)30,321.9 million in 2004
compared to (euro)28,399.8 in 2003 and (euro)28,411.3 in 2002. Operating profit
in 2004 increased 14.3% from 2003, which had increased 25.8% from 2002.
Operating profit before depreciation and amortization increased 4.9% from 2003,
which had increased 7.5% from 2002. For further information on operating profit
before depreciation and amortization, please see "Presentation of Financial
Information--Non-GAAP Financial Information."
Our total managed client base increased 26.5% to 118.1 million in 2004
from 93.4 million in 2003, which was a 13.6% increase from 82.2 million in
2002. After the acquisition of Bellsouth's Latin American operators, our
wireless operations had approximately 74.4 million managed customers at
December 31, 2004, a 43.6% increase compared to 52 million managed customers in
2003. In addition, in 2004 our ADSL connections increased by 61% to 4.4
million, of which approximately 3 million are in Europe and the rest in Latin
America. In 2003 our ADSL connections had increased by 81.8% to nearly 2.7
million.
Our results for the year ended December 31, 2002 were affected by the loss
in value of the Argentine peso and of the Brazilian real, given the strong
weight of both countries in our business. Notwithstanding the economic recovery
in Argentina in 2003 and 2004, our business is exposed to risks inherent in
operating and investing in Latin America. Our results for the year ended
December 31, 2002 were also affected by the commencement of the restructuring
of our non-profitable businesses, principally Terra Networks' acquisition of
Lycos, Inc. and Telefonica Moviles' UMTS operations in Europe.
We believe that our improved results for the year ended December 31, 2004
were due to substantial commercial efforts made in each of our business lines.
Our client oriented management has allowed us to grow organically in our
operations and to strengthen our position in key markets, although competitive
pressures continued to affect our operations in 2004.
Presentation of Financial Information
The information in this section should be read in conjunction with our
Consolidated Financial Statements, and the notes thereto, included elsewhere in
this Annual Report. Our Consolidated Financial Statements have been
84
prepared in accordance with Spanish GAAP, which differ in certain respects from
U.S. GAAP. Please refer to note 25 to our Consolidated Financial Statements for
a discussion of these differences.
Non-GAAP Financial Information
Operating profit before depreciation and amortization is calculated by
excluding depreciation and amortization expenses from our operating profit in
order to eliminate the impact of generally long-term capital investments that
cannot be significantly influenced by our management in the short-term. Our
management believes that operating profit before depreciation and amortization
is meaningful for investors because it provides an analysis of our operating
results and our segment profitability using the same measure used by our
management. Operating profit before depreciation and amortization also allows
us to compare our results with those of other companies in the
telecommunications sector without considering their asset structure. We use
operating profit before depreciation and amortization to track our business
evolution and establish operational and strategic targets. Operating profit
before depreciation and amortization is also a measure commonly reported and
widely used by analysts, investors and other interested parties in the
telecommunications industry. Operating profit before depreciation and
amortization is not a measure of financial performance under Spanish GAAP or
U.S. GAAP and may not be comparable to other similarly titled measures for
other companies.Operating profit before depreciation and amortization should
not be considered an alternative to operating profit as an indicator of our
operating performance, or an alternative to cash flows from operating
activities as a measure of our liquidity.
The following table provides a reconciliation of operating profit before
depreciation and amortization to operating profit for the Telefonica Group for
the periods indicated.
Year ended December 31,
---------------------------------
2002 2003 2004
---------------------------------
(in millions of euro)
Operating profit before depreciation and amortization.......................... 11,724.16 12,602.12 13,215.40
Depreciation and amortization expense.......................................... 6,692.42 6,274.22 5,980.15
Consolidated Operating Profit.................................................. 5,031.75 6,327.90 7,235.25
Significant transactions that affect the comparability of our results of
operations in the periods under review
During 2002, 2003 and 2004 various changes occurred in the composition of
the Telefonica Group that affect the comparability of our historical operating
results. Please see note 2 to our Consolidated Financial Statements for a
discussion of the principles of consolidation and a detailed description of the
principal changes in the composition of the group affecting our financial
statements during the periods under review covered by the Consolidated
Financial Statements. The most significant changes are summarized below.
Year ended December 31, 2004
Portugal Telecom
During 2004 Telefonica, S.A. acquired 52,820,862 shares of Portugal
Telecom, S.G.P.S., S.A. for (euro)475.1 million, giving rise to consolidation
goodwill of (euro)344.5 million. Additionally, on December 29, 2004, Portugal
Telecom reduced its capital by retiring 87,799,950 shares of treasury stock,
representing 7% of its capital stock. Following these transactions, our
interest in Portugal Telecom was 8.55%. The ownership interest of the
Telefonica Group was 9.58% at December 31, 2004. This company continues to be
accounted for by the equity method.
Tele Sudeste, Tele Leste, CRT and TCO
In October 2004, Brasilcel N.V. and Telesp Celular Participacoes, S.A.
(TCP) completed friendly tender offers for Tele Sudeste Celular Participacoes,
S.A., Tele Leste Celular Participacoes, S.A., Celular CRT Participacoes, S.A and
Tele Centro Oeste Celular Participacoes, S.A (TCO)which required a cash payment
of approximately R$607 million for Basilcel, N.V. and of R$902 million for TCP.
85
At June 30, 2004 Brasilcel N.V. acquired from NTT DoCoMo, Inc. and Itochu
Corporation their ownership interests in Sudestecel Participacoes, S.A., a
holding company with a 10.5% interest in Tele Sudeste Celular Participacoes,
S.A. for (euro)20.8 million. As a result of this transaction, Brasilcel, N.V.
increased its controlling interest in Sudestecel Participacoes., S.A. to 100%.
Tele Sudeste Celular Participacoes, S.A. continues to be fully consolidated in
the financial statements of the Brasilcel Group , and which in turn is
proportionally consolidated in our Consolidated Financial Statements.
Telefonica Movil de Chile
On July 23, 2004, 100% Telefonica Movil de Chile, S.A. was acquired by
Telefonica Moviles from the Chilean Compania de Telecomunicaciones de Chile,
S.A., a subsidiary of Telefonica Internacional, S.A. The total amount paid for
this acquisition was $1,058 million. As a result of this transaction, the
Telefonica Group increased its effective ownership interest in the capital
stock of Telefonica Movil de Chile, S.A. from 44.89% to 92.46%. This company
continues to be fully consolidated in our Consolidated Financial Statements.
Acquisition of BellSouth's Operations in Latin America
On March 5, 2004, Telefonica Moviles, S.A. reached an agreement to acquire
the BellSouth Corporation's interests in its wirelessoperators in Argentina,
Chile, Peru, Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and
Panama.
BellSouth's interests in the operators located in Ecuador, Guatemala and
Panama were transferred on October 14, 2004 and its interests in the operators
located in Colombia, Nicaragua, Peru, Uruguay and Venezuela were transferred on
October 28, 2004. BellSouth's interests in the operator in Chile were
transferred on January 7, 2005, and BellSouth's interets in the Argentine
operator were transferred on January 11, 2005.
Under the transaction agreement, the operators were valued at $5,850
million. The total acquisition cost for Telefonica Moviles, adjusted for the
acquired companies debt assumed by Telefonica Moviles, amounted to
(euro)3,252.5 million in 2004 (excluding Chile and Argentina, which were
acquired in 2005).
Following the closing of the acquisitions and pursuant to the terms of the
transaction agreements, Telefonica Moviles launched public tender offers to
acquire the minority shareholdings that remained outstanding. The price offered
in these transactions was equal to the paid under the BellSouth trasaction
agreements.
Sale of Pearson Plc
In 2004, Telefonica, S.A. sold 38,853,403 Pearson Plc shares representing
4.84% of its capital stock for approximately (euro)350 million, giving rise to
a loss of (euro)33.23 million
Additional Acquisition of Impresora y Comercial Publiguias, S.A.
In 2004, Telefonica Publicidad e Informacion, S.A., acquired the remaining
49% of the shares of its Chilean subsidiary Impresora y Comercial Publiguias,
S.A. for (euro)65.6 million, thereby increasing its ownership interest to 100%.
A 9% holding was acquired from the Chilean company Compania de
Telecomunicaciones de Chile, S.A., a Telefonica Group subsidiary.
Sale of Lycos Inc
On October 5, 2004, Terra Networks, S.A. and Daum Communications, Corp.
reached an agreement for the sale of Lycos, Inc for $108 million, giving rise to
a gain of (euro)26.2 million. Prior to the Lycos sale, as part of the agreement
for this transaction, Lycos, Inc. transferred assets with a book value of
(euro)332.9 million to Terra Networks, S.A.
86
Year ended December 31, 2003
Sale of Antena 3
On January 7, 2003, we and our subsidiary Telefonica de Contenidos
exercised our call option rights to acquire 19,532,625 shares of Antena 3 de
Television, S.A. from Banco Santander Central Hispano, S.A., representing
11.72% of its share capital. After this transaction, we held a 59.24% interest
in the share capital of Antena 3 de Television.
Subsequently, we began a process of divesting our interests in Antena 3.
On April 30, 2003, we sold 25.1% of the total share capital of Antena 3 to to
the Planeta Group for (euro)364 million. On April 11, 2003, our shareholders
approved a distribution of shares representing 30% Antena 3 de Television's
share capital as a dividend in kind. In October and November of 2003, we sold
all our remaining interests Antena 3 de Television on the market for
(euro)95.72 million, resulting in a complete divestiture of our stake in Antena
3 de Television, S.A. These transactions have resulted in a recorded profit of
(euro)392.29 million.
Tender Offer for Terra Networks
In July 2003, we concluded a tender offer for Terra Networks, S.A. by
acquiring 202,092,043 of its shares for (euro)5.25 per share. Subsequently,
Terra Networks acquired 4.41% of its capital stock owned by Citibank, N.A., as
the agent bank for the stock option plans assumed by Terra Networks as part of
its merger with Lycos, Inc. After these transactions we held 75.29% of the
total capital stock in Terra Networks. During 2004, Terra Networks was fully
consolidated in the Telefonica Group.
Acquisition of TCO
On April 25, 2003, Telesp Celular Participacoes, S.A. (TCP), which is
65.12%-owned by Brasilcel, N.V., acquired from the Brazilian company Fixcel
61.10% of the common voting stock of Tele Centro Oeste Celular Participacoes,
S.A. (TCO), representing 20.37% of the TCO's total capital stock, for R$1,505.5
million. As a result of a subsequent tender offer TCP held 86.58% of the
ordinary shares of TCO at December 31, 2003. In 2003, TCO was included in the
consolidated financial statements of Brasilcel that, in turn, was included in
the Telefonica Group using the proportional integration method.
Sogecable and Via Digital
In connection with the merger of Via Digital and Sogecable, S.A. in the
first half of 2003, Telefonica de Contenidos, S.A. acquired interests
representing 12.63% of the capital share of Via Digital for (euro)165.6 million.
On July 2, 2003, Telefonica de Contenidos, S.A. subscribed to a capital increase
of Sogecable, S.A., contributing the shares it owned in Via Digital and thereby
acquired 22.23% interest in Sogecable. Via Digital, which was consolidated
during financial year 2002 using the equity method, is no longer consolidated in
our financial statements. In additionIn October of 2003, Telefonica, S.A.
acquired 2,020,000 shares in Sogecable, S.A. for (euro)41.91 million, which
increased our interest to 23.83%. These transactions resulted in a charge of
(euro)607.23 million in amortization of goodwill. Sogecable, S.A. was
consolidated in 2003 using the equity method.
Uno-e Bank
In 2003, our interest in Uno-e Bank decreased from 49% to 33% as a result
of a capital increase by Uno-e Bank, which was fully subscribed by BBVA, Uno-e
Bank's other shareholder. As a result of our decreased interest, Uno-e Bank was
excluded from consolidation of the Telefonica Group in 2003.
Year ended December 31, 2002
Acquisition of Iberdrola
In March 2002, we completed our purchase of Iberdrola's interests in our
Brazilian wireless operators, which we then subsequently contributed to
Telefonica Moviles. The Brazilian wireless operators were fully consolidated in
87
our financial statements until they were contributed to Brasilcel, our joint
venture with Portugal Telecom, after which they were consolidated under the
proportional integration method
Sale of Prime Argentina
In June 2002, Telefonica de Contenidos sold its interest in Prime
Argentina, which owned Azul Television, for U.S.$12 million, which resulted in
extraordinary losses of (euro)162.8 million.
Acquisition of Pegaso
In September 2002, Telefonica Moviles acquired 65.23% of Pegaso PCS
(Mexico) for (euro)92.9 million from the Burillo Group. Subsequently, Pegaso
carried out a capital increase to which Telefonica Moviles subscribed for
(euro)211.5 million, representing its proportionate 65.23% interest. Pursuant
to the Pegaso acquisition, Telefonica Moviles agreed to combine its Mexican
wireless operations with those owned the Burillo Group. Under the agreement,
each of Telefonica Moviles and Burillo would combine their interests under a
new holding company, Telefonica Moviles Mexico, with Telefonica Moviles holding
92% of the share capital and the remainder held by Burillo.
Sale of Uniprex and Cadena Voz
In September 2002, Telefonica de Contenidos, S.A. sold its interests in
both Group Uniprex Onda Cero and Cadena Voz de Radiodifusion, S.A. Admira Group
sold this equity to Antena 3 de Television Group, which gave rise to capital
gains totaling (euro)35.8 million.
Incorporation of Brasilcel Joint Venture
On December 27, 2002, Telefonica Moviles and PT Moveis Servicos de
Telecomunicacoes, SGPS, S.A. (PT Moveis), Portugal Telecom's affiliate, entered
into a joint venture agreement under which each of Telefonica Moviles and
Portugal Telecom contributed their Brazilian wireles operators to a newly
formed company, Brasilcel. Under the joint venture agreement, Telefonica
Moviles and Portugal Telecom agreed to purse their Brazilian wireless
operations exclusively through Brazil incorporated Brasilcel, the 50/50 Joint
Venture, by contributing 100% of their respective direct and indirect interests
in the mobile communications companies in Brazil.
Other Events Affecting the Comparison of Our Results
Acquisition of UMTS licenses
In 2000 Telefonica Moviles, directly or through consortiums, with other
international and local partners bid on and was awarded UMTS licenses in Spain,
Germany, Italy, Austria and Switzerland. Most of these licenses were awarded in
the second half of the year 2000. At the end of 2001 and in the beginning of
2002, although UMTS technology had not yet been developed to allow for
commercialization of UTMS services, the prevailing conditions in these markets
and the specific business plans for the development of these businesses allowed
Telefonica Moviles to anticipate the recoverability of its investments already
made and those planned for the future. Therefore, during the preparation of the
year-ended 2001 financial statements, Telefonica Moviles compared the book
value of the licenses to the financial projections included in the business
plan and considered that it could recover the investments made up to that time.
However, Telefonica Moviles' business plans were based on assumptions that
could not be realized in the future or would require adjustment. As a result of
significant changes in the telecommunications market in 2002, Telefonica
Moviles undertook to review its European strategy and to commission independent
experts to assess its business plans of its UMTS operations in Germany, Italy,
Austria and Switzerland.
Under US GAAP, according to SFAS 144, a long-lived asset (asset group)
shall be tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. In the case of
Telefonica Moviles' investments in Germany, Austria and Switzerland, which it
fully consolidates under Spanish and US GAAP, an impairment loss was recognized
in 2002 based on the comparison between the carrying amount of each of the
licenses and their respective fair values. Under US GAAP, the investments in
these licenses were also
88
considered not recoverable according to SFAS 144, their carrying value exceeded
the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the licenses. These assessments were based on the
carrying amount of the licenses at the date that they were tested for
recoverability. The impairment loss was measured as the amount by which the
carrying amount of each of the licenses exceeded its respective fair values.
With respect to Italy, Telefonica Moviles accounts for this investment
under the equity method under Spanish GAAP and US GAAP.
General UMTS market conditions
During the first half of 2002 there were significant changes in the
telecommunications market from a competitive, technological, financial and
regulatory perspective. These changes caused Telefonica Moviles to review its
European strategy and to commission independent experts to assess the business
plans of its UMTS operations in Germany, Italy, Austria and Switzerland. The
following is a summary of these changes:
o In a publication released in June 2002 from the European Commission on
3G technology, it became apparent that it was highly unlikely that
there would be significant regulatory changes providing the conditions
necessary to develop commercial applications for the UMTS licenses.
o As a result of the lack of commercial applications for the UMTS
licenses, there was little incentive to build our the networks
necessary to take advantage of 3G technology.
o The delay in commercial viability was also due to a delay in the
availability of UMTS handsets. The availability of UMTS handsets was
limited to a small number of prototype models with technical problems
that made commercial distribution difficult. Problems with network
equipment hardware and software also limited the viability of network
coverage.
o Demand for 3G services was revised downwards as a result of a general
decrease in demand for data services and ongoing delays in the
availability of attractive applications using UMTS technology.
As the delay in commercially viable UMTS technology increased it also
became apparent that incumbent operators's with strong established positions in
the countries in which we had obtained UMTS licenseswould make it difficult for
new market entrants, such as Telefonica Moviles, to attract customers and
obtain market share.
Notwithstanding the foregoing, we believe that there are commercially
feasible uses for UMTS technology, in makrets characterized by a reduced number
of operators where we can obtain a minum market share in order to absorb the
costs associated with the roll-out of 3G technology. Particularly as we have
reduced our estimates of revenue per units served.
Telefonica Moviles' UMTS operations
Telefonica Moviles developed and implemented various initiatives directed
at improving its business plans in the countries in which it was awarded UMTS
licenses. These included, for example, roaming and network sharing agreements,
non-recourse vendor financing and various commercial agreements. Telefonica
also analyzed other strategic alternatives such as consolidation with other
operators. Ultimately, it concluded that none of these alternatives were
viable. As a result, Telefonica Moviles adopted the most appropriate decisions
for each country as a function of the prevailing conditions in each market.
Germany. On the basis of the roaming and infrastructure sharing agreements
with another German operator, Group 3G, our joint venture with Sonera, started
operations as a GSM/GPRS virtual mobile operator, or VMO, at the end of 2001.
GPRS, or general packet radio service, is the natural evolution of GSM towards
2.5G, allowing wireless voice and higher-speed data transmission. A VMO is a
mobile operator that does not own a network and instead buys mobile minutes
wholesale from existing network operators and sells them to its clients.
Subsequently, and once the actual operational and financial results for two
quarters of commercial operations as a 2/2.5G VMO in Germany became available,
Telefonica Moviles realized that the results of Group 3G since the launch of
commercial activity up to July 2002 were significantly lower than forecast. In
addition, it was becoming apparent that the German wireless market was not
growing as expected; the number of subscribers was forecasted to grow at less
than
89
one percent in the first half of 2002. As a consequence, and after an in depth
assessment of the expected evolution of these parameters with an independent
third party report, it was concluded that continuing Telefonica Moviles'
operations in Germany would not generate value for Group 3G's shareholders.
Therefore, Telefonica Moviles and Sonera decided to halt all commercial
operations in Germany.
Italy. After taking into consideration market conditions and given the
differences in the regulatory environment in Italy, both with regard to
compliance with coverage requirements included in the license and flexibility
shown by the regulators, and the shareholder structure of IPSE 2000, in 2002
the shareholders of IPSE 2000 decided to postpone the launch of commercial
operations and restructure the company.
Austria and Switzerland. In Austria and Switzerland, no relevant
commercial agreements had been signed as of June 2002, including 2G roaming
agreements, network sharing agreements and vendor financing; consequently, the
activities of Telefonica Moviles' operations were substantially reduced in
light of these circumstances, together with Telefonica Moviles' experience in
Germany. Telefonica Moviles updated its business plans for both of these
countries.
Based on the assessments obtained from independent experts, and taking
into account that in Germany, Austria and Switzerland network coverage
requirements included in the UMTS licenses would likely come into effect
earlier than in Italy, and to ensure that its investments were correctly valued
at all times, Telefonica Moviles decided to write down the entire amount of the
book value of its investments in Germany, Austria and Switzerland.
The impact on our balance sheet as a result of the above-mentioned
write-down was as follows:
Telefonica Attributed to:
Balance Sheet Group Germany Austria Switzerland
------------------------------------------------------------------------------------------------------------
(thousands of euros)
Book value before write-downs:
Intangible assets (mainly licenses)..... 9,445,386 9,278,565 128,963 37,858
Property, plant and equipment........... 87,559 60,943 6,428 20,188
Impairments:
Intangible assets (mainly licenses)..... (9,445,386) (9,278,565) (128,963) (37,858)
Property, plant and equipment........... (84,296) (57,843) (6,364) (20,089)
Book value after write-downs:
Intangible assets (mainly licenses)..... 0 0 0 0
Property, plant and equipment........... 3,263 3,100 64 99
With respect to Telefonica Moviles' investment in Italy, the UTMS
license's terms and conditions made it possible to implement a business plan
with lower investment than in the other countries and it was determined that
the assignment of the right to use the 3Gspectrum was foreseeable.
Consequently, Telefonica Moviles' did not fully write down its investment in
IPSE 2000. Telefonica Moviles estimated the value of the UMTS license of IPSE
2000, S.p.A. to be (euro)300 million in 2002, (euro)136 million of which
represented Telefonica Moviles' investment in IPSE 2000. As of December 31,
2004 Telefonica Moviles' investment in IPSE 2000 was valued at the same level.
Accordingly, at December 31, 2002 a net loss of (euro)5,049.8 million was
recorded in Telefonica Moviles' combined financial statements associated with
the write-down of assets and the restructuring of operations in these four
countries. In our Consolidated Financial Statements this net loss was
(euro)4,958.2 million.
Telefonica Moviles de Espana. Currently, Telefonica Moviles provides UMTS
services in Spain through Telefonica Moviles Espana. On February 13, 2004,
Telefonica Moviles Espana began offering to its corporate customers "Oficin@
Movistar UMTS". This service was extended to all Telefonica Moviles Espana
customers in Madrid and Barcelona on May 24, 2004, and gradually extended to
the rest of Spain. In addition, on May 24, 2004, Telefonica Moviles Espana
launched the first UMTS video services in the Spanish market. We believe that
to make large-scale launch of UMTS technology, UMTS compatible handsets that
are small, reasonably priced, and have adequate battery life must become
available.
90
The value of the UMTS assets on Telefonica Moviles Espana's balance sheet
is not significant. It was awarded a license to provide UMTS services for
(euro)131 million. The time required for Telefonica Moviles Espana to recover
the value of its investments is significantly shorter than in other countries
and the impact of the delay in the introduction of a commercially viable UMTS
technology on Telefonica Moviles Espana's revenue forecasts is much lower than
in other European countries.
Other markets. Considering the low level of maturity of the wireless
industry in Latin America and Morocco and the adequacy of current technologies
for servicing the communication needs of customers in the countries of these
regions, we have not acquired UMTS licenses nor do we expect to introduce UMTS
services in these other markets in the short term.
Economic situation in Argentina
Telefonica, like other telecommunications companies operating in
Argentina, has been affected by the economic situation in Argentina. As of
December 31, 2004, our total investment in Argentina amounted to (euro)989.2
million, including goodwill, intercompany financing and the assets assignable
to our Argentine investments (includign losses attributable to our Argentine
operations before the related tax effect).
As a result of the economic volatility in Argentina, our Consolidated
Financial Statements for the year ended December 31, 2002 reflected an adverse
impact on revenues from operations and on the "Stockholders'
Equity--Translation Differences in Consolidation" caption of (euro)354.7
million and (euro)1,147.1 million, respectively, in 2002. No such adverse
impact was recorded for the years ended December 31, 2003 and 2004.
Our operations in Argentina were affected by the devaluation of the
Argentine peso, high inflation and other adverse macroeconomic conditions in
Argentina and related legislative measures adopted by the Argentine Government
in 2001 and 2002 to address the crisis, such as the Public Emergency Law
enacted on January 7, 2002. During 2003 and 2004 the Argentine economy has
stabilized and experienced signficant growth. Argentina's estimated GDP growth
in 2004 was 8.8%, matching the growth rate in 2003. However, the effects of
laws adopted during the economic crisis continue to affect the results of
operations and financial condition of Telefonica de Argentina and Telefonica
Comunicaciones Personales.
Our fixed line business in Argentina derives a majority of its revenues
from regulated tariffs for telecommunication services. Prior to the enactment
of the Public Emergency Law, those tariffs were linked to a rate per unit of
usage expressed in U.S. dollars and could also be adjusted semiannually in
accordance with variations in the U.S. consumer price index. However, the
Public Emergency Law states that any tariff index clauses or any other index
mechanism incorporated in the agreements executed by the Argentine government,
including those agreements with telecommunication service providers, are void
and not applicable. Any increase in inflation will thus result in a decrease in
revenues from our fixed line business in Argentina in real terms, as tariffs
are not adjusted for inflation. The consumer inflation rate increased by
approximately 6.1%, below the target range of 7% to 11% established by
Argentina's central bank, while wholesale prices rose by approximately 7.9% in
2004.
The Public Emergency Law also mandated "pesification" by stating that
fixed line tariffs must be established in pesos using a Ps.1.00 per U.S.$1.00
exchange rate. Since our fixed line business in Argentina realizes
substantially all of its revenues in pesos, any depreciation in the peso
against the euro will negatively affect our results of operations since
Telefonica de Argentina has not been allowed to alter its tarriffs in response
to such depreciation. Exchange rates were stable in 2004. However, any future
depreciation of the peso against the euro may have an adverse effect on our
results of operations.
Telefonica Empresas
During 2004, we integrated the former Telefonica Empresas business line's
operations into the Spain and Latin America fixed business lines. The
operations of Telefonica Data Espana and Telefonica Soluciones are now
conducted by Telefonica de Espana and the operations of Telefonica Data
Latinoamerica and Telefonica International Wholesale Services (TIWS)are now
conducted by Telefonica Latinoamerica. See "Item 4-- History and Development of
the Company--Overview".
91
In order to facilitate comparison we have recalculated the analysis of
certain results of our operations in 2003 and 2002 to account for the
reorganization of our structure. The analysis and discussion of our results of
operations for 2004 compared to 2003 uses the new structure and the analysis
and discussion for 2003 compared to 2002 continue using the previous structure.
Significant Accounting Changes
In 2004 and 2003, there were no significant changes in the Group's
accounting policies.
In 2002, under Spanish GAAP, pursuant to an ICAC resolution dated March
15, 2002, we recorded tax assets relating to tax relief and tax credits not yet
taken for tax purposes but regarding which there is no doubt that they can be
deducted in the future in accordance with generally accepted accounting
principles. An asset of (euro)343.0 million was recorded as of December 31,
2002, pursuant to this resolution.
Critical Accounting Policies
Accounting for long-lived assets, including goodwill
Property, plant and equipment and intangible assets, other than goodwill
(like licenses), are recorded at acquisition cost. If such assets are acquired
in a business combination, the purchase price is the estimated fair value of
the acquired property, plant and equipment or intangible assets. Property,
plant and equipment are depreciated on a straight-line basis over their
estimated useful lives, and licenses and other intangible assets are amortized
based on the intangible asset's estimated capacity to generate revenues during
the concession period.
Accounting for long-lived assets and intangible assets involves the use of
estimates for determining: (a) the fair value at the acquisition date in the
case of such assets acquired in a business combination, and (b) the useful
lives of the assets over which they are to be depreciated or amortized.
When an impairment in the value of an asset occurs, nonscheduled
write-downs are made. We assess the impairment of identifiable intangible and
long-lived assets whenever there is reason to believe that the carrying value
may exceed the fair value and where a permanent impairment in value is
anticipated. The determination of whether the impairment of long-lived and
intangible assets is necessary involves the use of estimates that includes but
are not limited to the analysis of the cause of potential impairment in value,
the timing of such potential impairment and an estimate of the amount of the
impairment. We also consider technological obsolescence, discontinuance of
services and other changes in circumstances that indicate the need to perform
an impairment test. A significant change in the facts and circumstances that we
relied upon in making our estimates may trigger the requirement of recording an
impairment and may have a material adverse impact on our operating results and
financial condition.
Goodwill in consolidation, which arises when the consideration paid for a
subsidiary exceeds the subsidiary's underlying book value at the purchase date
and such excess consideration is not directly allocable to the companies'
assets, is amortized on a straight-line basis during the period in which such
goodwill contributes to the obtainment of revenues by the company for which the
goodwill was recorded.
Nonscheduled write-downs of goodwill are made when an impairment in the
value of goodwill occurs. We review, on a regular basis, the performance of our
subsidiaries. When there is reason to believe that the goodwill arising from
the acquisition of that subsidiary is impaired and that the impairment is of a
permanent nature, we compare the carrying amount of that subsidiary to its fair
value. The determination of the fair value of a subsidiary involves extensive
use of estimates and significant management judgment is involved. Methods
commonly used by us for valuations include discounted cash flow methods.
A significant reduction in our estimate of the value of a subsidiary may
result in the need to write down goodwill in consolidation which could have a
material adverse affect on our operating results and financial condition.
We believe that the estimates we make to determine an asset's useful life
are "critical accounting estimates" because: (1) they require our management to
make estimates about technological evolution and competitive uses of
92
assets, and (2) the impact of changes in these estimates could be material to
our financial position and results of operations. Management's estimates about
technology and its future development require significant judgment because the
timing and nature of technological advances are difficult to predict.
Deferred taxes
Management assesses the recoverability of deferred tax assets on the basis
of estimates of our future taxable income. The recoverability of deferred tax
assets ultimately depends on our ability to generate sufficient taxable income
during the periods in which the deferred taxes are deductible. In making its
assessment, our management considers the scheduled reversal of deferred tax
liabilities, projected taxable income and tax planning strategies.
This assessment is carried out on the basis of internal projections which
are updated to reflect our most recent operating trends. In accordance with
applicable accounting standards, a deferred tax asset must be recognized when
its future deductibility is more likely than not. Our current and deferred
income taxes, and associated valuation allowances, are impacted by events and
transactions arising in the normal course of business as well as in connection
with special and non-recurring items. Assessment of the appropriate amount and
classification of income taxes is dependent on several factors, including
estimates of the timing and realization of deferred income tax assets and the
timing of income tax payments. Actual collections and payments may materially
differ from these estimates as a result of changes in tax laws as well as
unanticipated future transactions impacting our income tax balances.
Preliminary Guidance on Differences Between IFRS and Spanish GAAP
We are required to prepare consolidated financial statements in accordance
with IFRS from January 1, 2005. The opening IFRS consolidated balance sheet
will be prepared for the period beginning January 1, 2004. The Committee of
European Securities Regulators has recommended that selected IFRS financial
information be disclosed in advance of publication of such IFRS financial
statements. In line with this recommendation, we are providing a summary of
certain of the expected differences in the preparation of our consolidated
financial statements on the basis of IFRS. The following summary is not an
exhaustive description of the effects of preparing our Consolidated Financial
Statements under International Financial Reporting Standards, or IFRS compared
to Spanish GAAP. Additional significant effects on our Consolidated Financial
Statements may occur when they are prepared under IFRS due to new
pronouncements from the International Accounting Standards Board (IASB) or
pronouncements that are not endorsed by the EU prior to the preparation of our
December 31, 2005 consolidated financial statements. The actual effects on our
Consolidated Financial Statements from the adoption of IFRS may be different
from those shown below for these or other reasons.
The information included in this Annual Report regarding the potential
effects on our Consolidated Financial Statements from the adoption of IFRS are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and readers are cautioned not to place undue
reliance on such information.
Total Shareholders' Equity
At December 31, 2004 our total shareholders' equity was (euro)16,225.1
million under Spanish GAAP. We have performed a preliminary analysis of how the
adoption of IFRS will impact our total shareholders' equity. Based on this
analysis, we estimate that the principal adjustments to our total shareholders'
equity at December 31, 2004 under IFRS would result in a decline in our
shareholders' equity of approximately (euro)3,729 million from (euro)16,225.1
million at that date under Spanish GAAP. This decrease would be principally due
the adoption of accounting policies under IFRS that would require us to change
how we measure the value of certain assets and liabilities and to change the
timing of when certain revenues and expenses are recognized.
Principal Adjustments Affecting Our Shareholders' Equity Under IFRS
The principal adjustments that would affect our total shareholders' equity
under IFRS as estimated are the following:
93
Goodwill and fair value adjustments in business combinations
Telefonica will adopt the exemption granted by IFRS 1 "First-Time Adoption
of IFRS" to apply IFRS 3 "Business combinations" prospectively from the
transition date and thus not to restate business combinations prior to January
1, 2005.
Under Spanish GAAP, goodwill and fair value adjustments are reported at
historical exchange rates. Under IFRS these items are translated at the
exchange rates prevailing at each balance sheet date.
IFRS permits certain intangible assets to be classified as having an
"indefinite useful life," which is not permitted under Spanish GAAP. Under
IFRS, goodwill and intangible assets with indefinite useful lives are not
amortized, but are instead subject to an impairment test at least once a year.
Under Spanish GAAP, goodwill and all intangible assets must be amortized over
their useful lives.
Under IFRS, the cost of telecommunications licenses is amortized on a
straight-line basis over their economic useful lives. Under Spanish GAAP,
Telefonica's policy is to amortize its telecommunications licenses
systematically over their useful lives, using patterns based on revenues
generated or the average number of clients during such measuring period.
Based on our preliminary analysis, we estimate that these changes to our
accounting policies would have reduced our total shareholders' equity at
December 31, 2004 by approximately (euro)3,398 million.
Treasury shares and equity instruments
Under Spanish GAAP, treasury shares are classified as assets (except if
held exclusively for subsequent cancellation pursuant to resolution approved at
a general shareholders' meeting) and are measured at the lower of cost or
market value. For IFRS purposes, treasury shares are deducted from total
shareholders' equity and any related transactions are also deducted from
shareholders' equity, rather than through our consolidated income statement.
For IFRS purposes, certain instruments issued to cover employee stock
option plans are classified as shareholders' equity, since the agreements
provide for the exchange of a fixed number of treasury shares for a fixed
amount of cash. In addition, however, a liability is also recognized in the
balance sheet under IFRS because the issuer is obligated to repurchase its own
equity instruments.
Based on our preliminary analysis, we estimate that these changes would
have reduced our total shareholders' equity at December 31, 2004 by
approximately (euro)847 million.
Revenue recognition
Under Spanish GAAP, fees charged when customers connect to our network are
recognized upfront, together with the related costs. Also, handset sales are
recognized separately upon delivery.
For IFRS purposes, connection revenues are recorded together with the
related revenues from handsets or other equipment to the extent that the
aggregate of such equipment and connection revenues do not exceed the fair
value of the equipment delivered to the customer. Any connection revenues not
recognized together with the related equipment revenues are recognized over the
period in which services are expected to be provided to the customer. Under
IFRS equipment sales are recognized upon delivery to end customers.
Based on our preliminary analysis, we estimate that these changes to our
accounting policies would have reduced our total shareholders' equity at
December 31, 2004 by approximately (euro)347 million.
Income taxes
The accounting treatment for income taxes under Spanish GAAP requires the
use of the income statement liability method, which focuses on timing
differences between taxable profit and accounting profit. IFRS require the
recognition of deferred taxes using the balance sheet liability method, which
focuses on temporary differences between the tax base of an asset or liability
and its carrying value on the balance sheet.
94
Based on our preliminary analysis, we estimate that these changes to our
accounting policies would have reduced our total shareholders' equity at
December 31, 2004 by approximately (euro)282 million.
Post-employment and termination benefits
Although provisions are required to be recognized for pension obligations
under both Spanish GAAP and IFRS, differences in the measurement of the
obligation exist between IFRS and Spanish GAAP. Under Spanish GAAP, part of the
actuarial losses relating to these plans are deferred, provided certain
circumstances are met, whereas under IFRS all actuarial gains and losses are
recognized in the consolidated income statement in the year they are
identified.
Based on our preliminary analysis, we estimate that these changes to our
accounting policies would have reduced our total shareholders' equity at
December 31, 2004 by approximately (euro)238 million.
Capitalized costs
Under Spanish GAAP, start-up costs are deferred and amortized over five
years. Under IFRS, expenditures that do not meet the criteria for recognition
as an asset are expensed as incurred.
Under Spanish GAAP, costs related to the issuance of equity instruments
are also capitalized and amortized over five years. Under IFRS, capital
increase expenses are charged against the gross proceeds of the new capital.
Under Spanish GAAP, research and development expenses are capitalized and
amortized over three years from the date of completion of the internal project.
Under IFRS research costs are expensed as incurred.
Based on our preliminary analysis, we estimate that these changes to our
accounting policies would have reduced our total shareholders' equity at
December 31, 2004 by approximately (euro)220 million.
Minority Interests
Under Spanish GAAP, minority interests are classified as a separate
liability on the balance sheet but excluded from total shareholders' equity.
Under IFRS, minority interests are considered as part of total shareholders'
equity.
Additionally, under IFRS the preference shares issued by Telefonica's
subsidiary Telefonica Finance would be reclassified from minority interests to
liabilities as explained below.
Based on our preliminary analysis, we estimate that these changes to our
accounting policies would have increased our total shareholders' equity at
December 31, 2004 by approximately (euro)1,603 million.
Other Adjustments Affecting Our Shareholders' Equity Under IFRS
Financial reporting in hyperinflationary economies
Under Spanish GAAP, the restatement of financial statements for
hyperinflation is required when it is required under local GAAP.
Under IFRS, a number of qualitative and quantitative indicators are
analyzed to determine whether hyperinflation exists, and therefore whether
financial statements should be restated in terms of the measuring unit current
at each balance sheet date. Under IFRS, of the countries in which we operate
only Venezuela is considered to be a hyperinflationary economy.
Definition of associate: significant influence
For Spanish GAAP purposes, significant influence is presumed to exist when
an investor holds 3% or more of the voting rights in a listed company (20% or
more in the case of unlisted companies). Under IFRS, provided that an investor
holds 20% or more of the voting power of the investee, it is presumed that the
investor has significant influence. Under IFRS, certain investments, classified
as associated companies under Spanish GAAP, shall be
95
accounted for as available for sale and marked to market at each balance sheet
date, with the resulting unrealized gains or losses being recognized directly in
shareholders' equity.
Financial instruments
Spanish GAAP requires that financial assets, including derivatives, be
measured at the lower of cost or market value, whereas financial liabilities
are measured at their redemption amount. Financial assets are derecognized when
expired, transferred or sold.
Under IFRS, financial assets and liabilities are classified into
categories that determine their measurement at fair value or at amortized cost.
Certain gains and losses on financial instruments are required to be recognized
directly in shareholders' equity until derecognition, or in the event of an
impairment. Also, IFRS sets out very strict requirements for the derecognition
of financial assets, based on an assessment of the risks and rewards related to
the asset.
In addition to this, IFRS requires compliance with very specific criteria
in order to apply hedge accounting. As a consequence, certain hedging
relationships that would qualify for hedge accounting under Spanish GAAP would
not qualify for hedge accounting under IFRS.
Foreign exchange differences
Spanish GAAP requires unrealized foreign currency exchange gains in excess
of recorded foreign currency exchange losses to be capitalized and deferred.
Under IFRS, foreign currency exchange gains or losses are recognized or
expensed through the income statement.
Under Spanish GAAP, the exchange differences arising in intra-group loans
(mainly in U.S. dollars) are eliminated in the consolidation process against
cumulative translation differences. Under IFRS, exchange differences arising in
intra-group loans are recognized in the income statement unless the loan is
considered to be part of the entity's net investment in a foreign operation.
Net Financial Debt and Commitments
At December 31, 2004 our net financial debt and commitments was
(euro)24,614 million under Spanish GAAP. We have performed a preliminary
analysis of how the adoption of IFRS will impact our net financial debt. Based
on our analysis, we estimate that our net financial debt at December 31, 2004
would have been approximately (euro)27,041 million under IFRS. This increase
would be principally due to the reclassification of preferred stock issued by
one of our subsidiaries. Under IFRS, the preference shares issued by
Telefonica's subsidiary Telefonica Finance would be reclassified from
non-equity minority interests to liabilities because we are obliged to pay
dividends if there is distributable profit and we do not have the unconditional
right to avoid delivering cash, which is required under IFRS in order for the
preferred shares to avoid treatment as a liability.
Net Income
Our net income was (euro)2,877.3 million for the year ended December 31,
2004 under Spanish GAAP. We have performed a preliminary analysis of how the
adoption of IFRS will impact our net income. Based on our analysis, we estimate
that our net income for the year ended December 31, 2004 would have been
approximately (euro)3,100 million under IFRS. This increase would be
principally due to the changes in how goodwill and fair value adjustments in
business combinations and financial instruments are measured under IFRS as
described above.
Operating Environment
Operating Environment by Country
Spain
Our results of operations are dependent to a large extent on the level of
demand for our services in Spain. As of December 31, 2004, revenues from our
operations in Spain represented 60% of our consolidated revenues. Demand
96
for our services in Spain is related to the performance of the Spanish economy.
Spain's real gross domestic product (GDP) expanded by approximately 2.7% in
2004, reflecting relatively stronger domestic demand. Inflation was 3.2% in
2004. The current-account deficit was estimated at 4.5% of GDP in 2004. The
unemployment rate was 10.4% at December 31, 2004.
Brazil
The Brazilian economy experienced robust growth in 2004. Brazil's GDP rose
an estimated 5.3% in 2004, a much faster pace than the 0.5% growth registered
in 2003. Consumer prices increased 7.6% in 2004 compared to 9.3% in 2003. In
order to curb inflation and achieve target inflation rates, the Central Bank of
Brazil began raising interest rates in 2004. As of March 5, 2005, the Brazilian
central bank's benchmark lending rate stood at 18.75% compared to 16% in
September 2004. Brazil finished 2004 with a trade balance surplus of U.S.$33.7
billion, compared to U.S.$24.8 billion in 2003. Exports went up by 32% to
U.S.$96.5 billion, while imports increased by 30% to U.S.$62.8 billion.
Argentina
Argentina's estimated GDP growth in 2004 was 8.8%, which matched the
growth rate in 2003 and concluded the second year of growth after 4 years of
recession ending with the deep economic and political crisis of 2001-2002. The
peso depreciated 1.7% closing at 2.98 peso/U.S.$1. The consumer inflation rate
increased by approximately 6.1%, below the target range of 7% to 11%
established by Argentina's central bank, while wholesale prices rose by
approximately 7.9% in 2004. The unemployment rate decreased to approximately
13.2% in September 2004 from 14.5% in December 2003 due to continued economic
growth and the implementation of the "Plan Jefes y Jefas de Hogar," the federal
government's main social assistance program.
Chile
Chile's GDP grew approximately 5.9% in 2004 compared to 3.2% growth in
2003. In 2004, inflation stood at approximately 1.1%, compared to an inflation
rate of approximately 2.8% in 2003. The Chilean peso, which floats freely,
appreciated approximately 13.4% in nominal terms (11.4% in real terms) against
the U.S. dollar in 2004. Chile's unemployment rate rose to 8.8% in 2004
compared to 8.5% in 2004. In 2004, Chile had its largest budget surplus in
eight years after a surge in copper prices boosted revenue. The surplus,
following a 2003 deficit equivalent to 0.4% of GDP, was 2.2% of GDP.
Peru
Peru's GDP grew by 5.1%, the highest rate in seven years. This growth was
mainly explained by an exceptional improvement in terms of trade, which
increased 8.1% (the highest increase since 1979). In 2004, exports rose 15.2%
last year and private investment rose 9.4%. Exports are expected to continue
growing, albeit at a more modest rate, while domestic demand is expected to
grow in line with GDP. During 2004, Standard & Poor's and Fitch raised the
Peruvian government's credit rating to BB (stable), two levels below investment
grade. In 2002, Peru's central bank adopted an explicit medium-term annual
inflation target at 2.5% within a range that could vary +/- 1%. Inflation for
2004 was 3.5% compared to 2.5% in 2003.
Mexico
Mexico's estimated GDP growth in 2004 was 4.5%, compared to 1.2% in 2003.
Monetary policy has been kept tight by the Mexican government in order to limit
inflation and to bolster the currency, which appreciated by approximately 0.3%
relative to the U.S. dollar during the course of 2004.
Exchange Rate Fluctuations
We publish our Consolidated Financial Statements in euro. Because a
substantial portion of our assets, liabilities, sales and earnings are
denominated in currencies other than the euro, we are exposed to fluctuations
in the values of these currencies against the euro. These currency fluctuations
have had and may continue to have a material impact on our financial condition
and results of operations.
97
In 2004, variations in currencies increased our consolidated cash flows by
approximately (euro)30.7 million and decreased our consolidated revenues from
operations by approximately 2.5%. Currency fluctuations can also have a
significant impact on our balance sheet, particularly stockholders' equity,
when translating the financial statements of subsidiaries located outside the
euro zone into euro. For example, in 2004 stockholders' equity was increased by
(euro)244 million due to the translation of the financial statements of our
foreign subsidiaries, principally due to the decline of the U.S. dollar and key
Latin American currencies relative to the euro.
The table below sets forth the average exchange rates against the euro of
the U.S. dollar and the key Latin American currencies that impacted our
consolidated results for the periods indicated.
2003(1) 2004(1) % change
Average Average Average
---------------------------------------
U.S. Dollar........................ 1.13 1.24 10.0%
Argentine Peso..................... 3.32 3.65 9.8%
Brazilian Real..................... 3.45 3.63 5.2%
Chilean Peso....................... 670.17 757.58 12.9%
Mexican Peso....................... 12.68 12.02 10.5%
Peruvian Nuevos Soles.............. 3.91 4.24 8.5%
Source: Central Treasury Bank of the respective countries
------------------
(1) These exchange rates are used to convert the income statements of our
Latin American subsidiaries from local currency to euro Income statements
for subsidiaries that use inflation adjusted accounting criteria (Mexico,
Chile, Peru, Colombia and Venezuela), are first converted to US dollars at
the closing exchange rate, and then the conversion into euros is made
according to the average exchange rate during the period.
In the comparison below of our results of operations for the year ended
December 31, 2004 compared to the year ended December 31, 2003 and for the year
ended December 31, 2003 compared to the year ended December 31, 2002, we have
provided certain comparisons at constant exchange rates in order to present an
analysis of the development of our results of operations from year to year
without the effects of currency fluctuation. To make such comparisons, we have
converted certain financial items using the prior year's exchange rate.
We describe certain risks relating to exchange rate fluctuations in "Item
3--Key Information--Risk Factors" and describe our policy with respect to
limiting our exposure to short-term fluctuations in exchange rates under "Item
11--Quantitative and Qualitative Disclosure about Market Risk".
Regulation
We are subject to regulation in the different markets where we operate,
which has a significant effect on our profitability. In Spain, we are regulated
by the Telecommunications Market Commission, which applies "price caps" to the
fees we can charge our customers for interconnection and subscription. In
addition, as a dominant operator, Telefonica de Espana is obligated to grant
other operators access to its network. Interconnection prices must remain
within the Interconnection Offer Framework as determined by the
Telecommunications Market Commission.
Telefonica Moviles is also regulated in Spain by the Telecommunications
Market Commission, which has declared Telefonica Moviles to be an operator with
"significant market power". Telefonica Moviles is obligated to allow other
mobile operators to access its network, and the Telecommunications Market
Commission sets the rates that Telefonica Moviles can charge other mobile
operators for such access. Telefonica Moviles must pay a yearly fee to reserve
the public domain radioelectric spectrum in respect of the allocated
frequencies.
We are also subject to regulation in the Latin American markets where we
have operations. These regulations include the application of, among other
things, "price caps", governmental regulation of rates and fees, and the
obligation to allow other operators to access our networks at competitive or
regulated rates.
For a more detailed description of how regulation affects us, please see
"Item 4--Information on the Company--Business Overview".
98
Results of Operations
A summary of our results of operations during 2002, 2003 and 2004 are
shown below.
Year ended December 31,
------------------------------------------------
2002 2003 2004
------------------------------------------------
(in millions of euro, except share and per share
data)
Revenues from operations.......................... 28,411.3 28,399.8 30,321.9
Operating profit.................................. 5,031.8 6,327.9 7,235.3
Income (loss) before tax and minority interest.... (14,601.1) 3,362.5 4,397.0
Net income (loss)................................. (5,576.8) 2,203.6 2,877.3
Net income (loss) per share(1).................... (1.13) 0.45 0.60
Weighted average number of shares (millions)...... 4,948.04 4,960.13 4,955.98
------------------
(1) The per share computations for all periods presented have been adjusted to
reflect the stock split and stock dividends which occurred during the
periods presented and after the close of the period but before the
issuance of the financial statements.
The table below sets forth certain consolidated revenue and expense items
as a percentage of consolidated revenue from operations for the periods
indicated.
Year ended December 31,
-------------------------------------------
2002 2003 2004
-------------------------------------------
(in millions of euro)
Revenues from operations.......................... 28,411.3 28,399.8 30,321.9
Other operating revenue........................... 1.0% 1.0% 1.3%
Internal expenditures capitalized................. 1.7% 1.9% 1.6%
Increase (decrease) in inventories, net........... (0.1%) (0.5%) 0.1%
Goods purchased................................... (24.5%) (22.1%) (24.9%)
External services and local taxes................. (17.5%) (17.9%) (18.5%)
Personnel expenses................................ (16.9%) (16.3%) (14.5%)
Provision for depreciation and amortization....... (23.6%) (22.1%) (19.7%)
Trade provisions.................................. (2.3%) (1.5%) (1.1%)
Other operating expenses.......................... (0.3%) (0.2%) (0.3%)
Total operating costs before financial e
xpenses and goodwill amortization............... (85.0%) (80.1%) (79.1%)
Operating profit.................................. 17.7% 22.3% 23.9%
Amortization of goodwill and reversal to
negative goodwill............................... (2.3%) (1.6%) (1.4%)
Financial income (expense)........................ (5.6%) (5.5%) (4.1%)
Exchange gains (losses), net...................... (2.2%) 1.8% 0.2%
Income (loss) from associated companies........... (1.9%) (0.8%) (0.2%)
Profit from ordinary activities................... 5.7% 16.2% 18.3%
Extraordinary revenues............................ 1.7% 4.1% 1.3%
Losses on fixed assets............................ (33.8%) (0.2%) (0.2%)
Extraordinary expenses............................ (24.9%) (8.3%) (5%)
Income (loss) before tax and minority interest.... (51.4%) 11.8% 14.5%
Corporate income tax.............................. 11.4% (3.2%) (3.8%)
Minority interests................................ 20.4% (0.9%) (1.3%)
Net Income........................................ (19.6%) 8% 9.5%
The table below sets forth the percentage of our consolidated net sales by
geographic region for the periods indicated.
99
Year ended December 31,
---------------------------------------
2002 2003 2004
---------------------------------------
Spain............................................. 58% 62% 60%
Latin America..................................... 35% 33% 35%
Rest of World..................................... 7% 5% 5%
Total............................................. 100% 100% 100%
The table below sets forth the contribution to our results of operations
by each of our principal business segments for 2002, 2003 and 2004 after
elimination of sales to other members of the Telefonica Group. During 2004, we
integrated the former Telefonica Empresas business line's operations into the
Spanish and Latin American fixed business lines. See "Item 4-- History and
Development of the Company--Overview". In light of the integration of the
Telefonica Empresas business line into the Spain and Latin America fixed line
businesses, to provide a comparable year-to-year discussion of our results of
operations for the two years ended December 31, 2004, we have presented the
results of operations for the year ended December 31, 2003 as if the Telefonica
Empresas business line had been integrated into the Spain and Latin America
fixed line businesses during such period. In the discussion of our results of
operations for the two years ended December 31, 2003, however, the discussion
of our results of operations does not reflect the integration of the Telefonica
Empresas business line into the Spain and Latin America fixed line businesses.
In order to provide information regarding our results of operations for all
three periods on a comparable basis, we have set forth below the results of
operations of our business lines, reflecting the integration of the Telefonica
Empresas business line into the Spain and Latin America fixed line businesses,
for the three years ended December 31, 2004.
Year ended December 31,
------------------------------------------
2002 2003 2004
------------------------------------------
in millions of euro
Revenues from Operations
Telefonica de Espana.............................. 9,929.0 10,028.3 10,295.1
Telefonica Latinoamerica.......................... 7,138.0 6,456.8 6,549.2
Telefonica Moviles................................ 7,993.0 8,905.1 10,577.3
Telefonica de Contenidos.......................... 1,068.1 1,374.5 1,200.2
Terra Networks.................................... 546.3 414.5 399.9
Other companies(1)................................ 1,736.88 1,220.7 1,300.2
Operating Expenses
Telefonica de Espana.............................. 6,050.1 6,048.7 6,019.0
Telefonica Latinoamerica.......................... 3,880.9 3,548.5 3,646.6
Telefonica Moviles................................ 5,600.3 5,881.3 7,381.9
Telefonica de Contenidos.......................... 964.4 1,179.7 1,027.9
Terra Networks.................................... 741.5 577.79 510.4
Other companies(1)................................ 5,574.6 2,139.3 2,331.2
Eliminations (6,038.5) (3,328.4) (3,377.7)
Operating profit before amortization
Telefonica de Espana.............................. 4,695.4 4,762.4 5,054.5
Telefonica Latinoamerica.......................... 3,295.0 3,101.3 3,141.0
Telefonica Moviles................................ 3,830.0 4,581.9 4,755.0
Telefonica de Contenidos.......................... 114.5 210.3 182.6
Terra Networks.................................... (141.7) (39.5) 20.9
Other companies(1)................................ 2.4 72.8 133.3
Eliminations (71.5) (87.1) (71.8)
Amortizations
Telefonica de Espana.............................. (2,765.8) (2,638.8) (2,374.0)
Telefonica Latinoamerica.......................... (2,163.4) (1,805.7) (1,697.8)
Telefonica Moviles................................ (1,391.9) (1,516.4) (1,673.4)
Telefonica de Contenidos.......................... (49.6) (49.9) (30.5)
Terra Networks.................................... (142.7) (78.7) (79.5)
100
Year ended December 31,
------------------------------------------
2002 2003 2004
------------------------------------------
in millions of euro
Other companies(1)................................ (254.3) (227.2) (188.8)
Eliminations 75.3 42.1 63.9
Operating Profit
Telefonica de Espana.............................. 1,929.6 2,123.6 2,680.5
Telefonica Latinoamerica.......................... 1,131.7 1,295.6 1,443.2
Telefonica Moviles................................ 2,438.1 3,065.9 3,081.6
Telefonica de Contenidos.......................... 64.9 160.4 152.1
Terra Networks.................................... (284.4) (118.2) (58.7)
Other companies(1)................................ (251.9) (154.4) (55.5)
Eliminations 3.8 (44.9) (8.0)
-----------------
(1) TPI, Atento, Telefonica, S.A., Grupo T. Gestiona and other subsidiaries.
We present the results of operations of each consolidated operating
subsidiary under the line of business to which it relates, regardless of
whether the legal entity has been transferred to the holding company that heads
such line of business. The results shown for our different lines of business
may therefore differ from those reported by our subsidiaries such as Telefonica
Moviles and Terra Lycos, which are reporting companies in the United States.
They will also differ from the results of operations reported by those
companies because they are not wholly owned by us and because certain
transactions they enter into with other members of the Telefonica Group are
eliminated in consolidation. We use this presentation because it more
accurately reflects the way in which we evaluate the performance of our
different lines of business.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The table below sets forth an analysis of consolidated revenues from
operations for each of our principal business segments for 2003 and 2004 after
elimination of sales to other members of the Telefonica Group. Financial data
related to our business segments is also included in Note 25 to our
Consolidated Financial Statements.
Year ended December 31,
-----------------------
2003 2004
-----------------------
(in millions of euro)
Telefonica de Espana.............................. 10,028.3 10,295.1
Telefonica Latinoamerica.......................... 6,456.8 6,549.2
Telefonia Moviles................................. 8,905.1 10,577.3
Telefonica de Contenidos.......................... 1,374.5 1,200.2
Terra Networks.................................... 414.5 399.9
Other companies(1)................................ 1,220.7 1,300.2
-----------------------
Total Revenues from Operations 28,399.8 30,321.9
------------------
(1) Includes revenues from operations from TPI, Atento, Telefonica, S.A.,
Grupo T. Gestiona and other subsidiaries.
The table below shows the contribution to our total revenue from
operations of each of our principal lines of business for 2003 and 2004 after
adjustments for sales to other members of the Telefonica Group.
Year ended December 31,
------------------------
2003 2004
------------------------
Telefonica de Espana.............................. 35.3% 34.0%
Telefonica Latinoamerica.......................... 22.7% 21.6%
Telefonica Moviles................................ 31.4% 34.9%
Telefonica de Contenidos.......................... 4.8% 4.0%
Terra Networks.................................... 1.5% 1.3%
101
Year ended December 31,
------------------------
2003 2004
------------------------
Other companies(1)................................ 4.3% 4.3%
Total Revenues from operations.................... 100.0% 100.0%
------------------
(1) Includes revenues from operations from Telefonica, S.A., Grupo T. Gestiona
and other subsidiaries.
The table below shows the contribution to our consolidated net income of
each of our principal business lines in 2003 and 2004.
Year ended December 31,
------------------------
2003 2004
------------------------
(in millions of euro)
Telefonica de Espana............................... 280.20 1,112.07
Telefonica Latinoamerica........................... 558.50 806.61
Telefonica Moviles................................. 1,594.30 1,620.41
Telefonica de Contenidos........................... 119.7 (65.46)
Terra Networks..................................... (172.71) 163.97
Other companies and Eliminations(1)................ (176.4) (760.31)
Total Net Income................................... 2,203.59 2,877.29
------------------
(1) Includes net income from TPI, Atento, Telefonica, S.A., Grupo T. Gestiona
and other subsidiaries.
Revenues from operations (sales to external clients)
Our revenues from operations, which accounted for 97.3% and 97.2% of our
consolidated total revenues for 2004 and 2003, respectively, increased to
(euro)30,321.9 million in 2004 compared to (euro)28,399.8 million in 2003. The
increase in revenue from Telefonica de Espana, Telefonica Moviles, Telefonica
Latinoamerica, Telefonica Publicidad e Informacion, or TPI and Atento was
offset by the negative exchange rate impact suffered in 2004. Exchange rate
fluctuations had a negative impact of approximately 1.50% on our revenues from
operations in 2004.
Whereas we calculate revenues from operations both before and after
adjustments for sales to other members of the Telefonica Group, our analysis of
revenue from operations is strictly limited to revenues from operations after
adjustments for sales to other members of the Telefonica Group. In the
aggregate, we believe that sales to other members of the Telefonica Group did
not have a significant impact on the percentage fluctuations during the periods
discussed.
Telefonica de Espana Group. Since 2004, the results of Telefonica Data
Espana and Telefonica Soluciones are included in the results of Telefonica de
Espana due to the integration of the former Telefonica Empresas business line's
operations into the Spain and Latin America fixed business lines. As discussed
above, in order to facilitate comparison we have recalculated the analysis of
certain results of our operations in 2003 to account for the reorganization of
our structure.
Telefonica de Espana Group's revenues from operations increased to
(euro)10,295.1 million in 2004 from (euro)10,028.3 million in 2003. The
positive evolution in revenues compared to 2003 was principally due to the
increase in revenues from broad band services and services provided to other
operators, which offset the decline in outgoing traffic and commercialization
of handsets.
o Revenues from connection access fees include all revenues from our
clients for rental of and connection to PSTN lines (for basic
telephony service), ISDN lines (for integration of voice, data and
video services), Corporate Services and TUP (for public telephony
service) and additional charges and publicity in telephone booths.
Revenues for connection access fees increased by 0.9% to 2,821.3
million in 2004 compared to 2,795.8 million in 2003. The increase in
revenue was due to a 4.35% increase in the PSTN monthly rental fee
((euro)0.55) and the increase of the surcharge on calls made from
public cabins to free toll numbers partially offset the by the 1.5%
decrease in the number of PSTN lines in service. This increase in the
monthly rental fee was excluded from the price-cap on tariffs imposed
by Spanish regulation.
102
o Revenues from leased circuits include revenues received from leasing
our circuits, both domestic and international, to customers and other
telecommunication operators. Revenue from leased circuits decreased by
10.0% to (euro)173.2 million in 2004 compared to (euro)192.4 million
in 2003. The decrease in revenue in 2004 was due to a diminution in
the number of leased circuits as a result of customer migration to
higher speeds, ADSL, and to the carrier capacity of wholesalers.
o Revenues from the commercialization of handsets include all revenues
from the sale, leasing, maintenance and installation of handsets.
Revenues from the commercialization of handsets decreased by 16.9% to
(euro)586.0 million in 2004 from (euro)705.5 million in 2003 as the
result of a reduction in maintenance revenues due to price reductions,
changes made to comprehensive maintenance service price and generally
to a policy to offer increased discounts and bonuses to certain client
segments.
o Broadband services revenues, principally composed of revenues
generated by TdE IP network, increased by 55.6% to (euro)1,068.2
million in 2004 from (euro)686.7 million in 2003. This increase was
principally due to a 50.0% increase in the number total of connections
in 2004. Retail ADSL connections increased to (euro)1,611.9 million in
2004 compared to (euro)1,070.3 million in 2003. This situation led to
a twofold increase in the revenues obtained from ADSL services in 2004
as compared to 2003. The increase in ADSL connections was primarily
due to the increased popularity of broadband in Spain and increased
marketing efforts.
o Revenues from operator services include all revenues from operator
services, national and international. International operator services
include automatic access, transit, leasing capacity and manual
international access. National operator services include national
interconnection, rented subscriber loop and commercial wholesale
services (access, transit, traffic and support). Revenues from
operator services increased by 8.8% to (euro)717.3 million in 2004
from (euro)659.6 million in 2003, due to an increase in the use of our
rented subscriber loop and increases in commercial wholesale services.
o Revenues from outgoing traffic, which include all revenues from net
effective consumption and other consumption (including phone cards,
messages, manual traffic and RPV), decreased 3.2% to (euro)3,521.0
million in 2004 from (euro)3,639.1 million in 2003. This decrease was
due to a market recession and increased competition leading to a loss
of market share and a 2% price reduction in 2004 as a result of a
price-cap on tariffs imposed by Spanish regulation. See "Item
4--Information on the Company--Business Overview--Fixed-Line
Telecommunications Services in Spain--Telefonica de
Espana--Spain--Regulation".
o Revenues from data services, including revenues from retail access,
the installation and operation of virtual private networks and the
solutions business increased 3.7% to (euro)742 million in 2004 from
(euro)715.5 in 2003.
Telefonica Moviles. Telefonica Moviles' revenue from operations increased
18.8% to (euro)10,577.3 million in 2004 from (euro)8,905.1 million in 2003.
Exchange rate fluctuations had a negative impact of approximately 3.2% on
Telefonica Moviles revenues from operations. Revenues from Telefonica Moviles'
Spanish operations increased 11.7% to (euro)7,114.3 million in 2004 from
(euro)6,372.2 million in 2003. This resulted primarily from a 12% increase of
traffic.
Revenues from Telefonica Moviles' Latin American wireless operations
increased 36.9% as measured in euro to (euro)3,461.8 million in 2004 from
(euro)2,529.5 million in 2003, due principally to the incorporation of
BellSouth's Latin American operations acquired by Telefonica Moviles in 2004.
Excluding the impact of exchange rate fluctuations and the incorporation of
Bellsouth operators, revenues from operations would have increased primarily
due to the increase in the number of customers in Mexico and Argentina.
Telefonica Latinoamerica. Beginning in 2004, the results of Telefonica
Empresas America and Telefonica International Wholesale Services (TIWS) have
been included in the Telefonica Latinoamerica business line due to the
integration of the former Telefonica Empresas business line's operations into
the Spanish and Latin American fixed line businesses as discussed above. In
order to facilitate comparison we have recalculated the analysis of certain
results of our operations in 2003 to account for the reorganization of our
structure.
Telefonica Latinoamerica's operating revenues increased by 1.4% to
(euro)6,549.2 million in 2004 from (euro)6,456.8 million in 2003. Exchange rate
fluctuations had a negative impact of approximately 5.4%. Excluding the impact
of
103
exchange rate fluctuations, revenues from operations would have increased by
6.8%. In local currency, revenues from Telesp's operations increased
principally due to the expansion of broadband, new business, such as long
distance originated out of Sao Paulo or Personal Mobile System (SMP), and the
increase in the tariffs, in addition to an increase in fixed to mobile traffic.
Telefonica de Argentina's revenues from operations increased due to the
continuation of the improved economic conditions started in year 2003 in
Argentina as reflected by high customer demand, increased network traffic and
increases in fixed-line as well as ADSL users. Telefonica del Peru and CTC's
operating revenues decreased in 2004 compared to 2003 mainly due to lower
average tariffs and the effects of increased mobile competition.
o Revenues from operations generated by Telesp increased 8.8% (excluding
exchange rate fluctuations, revenues from operations would have
increased 14.4%) to (euro)3,603.0 million in 2004 from (euro)3,311.3
million in 2003 reflecting the growth of lines in service, especially
those associated with products targeted to certain population sectors,
broadband revenues and an increase in long distance market share. In
addition to those effects, Telesp's results from operations also
improved because of a tariff increment since July 2004 (6.89% average
increase as measured in local currency), as well as an additional
increase according to the tariff increase not applied during 2003 as a
result of a legal decision.
o Revenues from operations generated by Telefonica de Argentina
decreased 0.9% (excluding exchange rate fluctuations, revenues from
operations would have increased 8.9%) to (euro)741.2 million in 2004
from (euro)747.8 million in 2003. The increase in revenues from
operations, excluding exchange rate fluctuations, was mainly due to a
higher demand for fixed lines and ADSL and a 9.9% significant increase
in total traffic, mainly as a result of prepaid traffic growth.
o Revenues from operations generated by Compania de Telecomunicaciones
de Chile decreased 10.8% (excluding exchange rate fluctuations,
revenues from operations would have decreased 7.7%) to (euro)859.6
million in 2004 from (euro)963.5 million in 2003, due to the fall in
local and long distance traffic, influenced by customers increasingly
substituting fixed line services with mobile telephony services, and
the reduction in local fixed to mobile traffic tariffs since January
2004. These effects were partially offset by an increase in broadband
revenues as a consequence of a 60.3% increase in broadband lines to
200,700 lines.
o Revenues from operations generated by Telefonica del Peru decreased
approximately 8.0% (excluding exchange rate fluctuations, revenues
from operations would have decreased 4.1%) to (euro)957.9 million in
2004 from (euro)1,041.6 million in 2003, principally due to the
decrease of 10% in local traffic tariffs and the fall in traffic as a
result of increased competition from the mobile business and the long
distance competitors. These effects were partially offset by the
increase in broadband revenues resulting from an increase in broadband
lines of 126.5% to 205,400 lines.
o Telefonica Empresas America's revenues from operations increased 2.2%
to (euro)319.8 million in 2004 from (euro)312.9 million in 2003.
(excluding exchange rate fluctuations, revenues from operations would
have increased 7.6%), principally due to an increase in revenues from
Internet, data and solution services.
Terra Networks. Terra Networks' revenues from operations decreased 3.5% to
(euro)399.9 million in 2004 from (euro)414.5 million in 2003. This decrease is
principally due to the Lycos sale in October 2004. The decrease in revenues
from operations was partially offset by an increase in number of subscribers
for Internet access and communication and portal services due to the success of
the OBP (Open, Basic, Premium) model initiated in 2001. Exchange rate
fluctuations had a positive impact of approximately 1.1%.
Telefonica de Contenidos Group (formerly Admira). Telefonica de Contenidos
Group's revenues from operations decreased 12.7% to (euro)1,200.2 million in
2004 from (euro)1,374.5 million in 2003, mainly due to the sale of Antena 3,
which was consolidated using the full integration method during the first six
months of 2003. Antena 3 contributed (euro)303.8 million to 2003 revenues from
operations. This decrease in revenues was partially offset by increases in
revenues from Endemol and ATCO. The Endemol Group generated revenues of
(euro)1,033.7 million in 2004, a 13.1% from 2003 due primarily to a strong
results from its operations in the United Kingdom and the U.S.. The performance
of ATCO is mainly explained by a recovery in the advertising business in
Argentina.
104
Others. Revenues from operations from our other businesses decreased 6.3%
to (euro)1,220.6 million in 2004 from (euro)1,297.8 million in 2003. Revenue
from operations from Atento increased 24.1% to (euro)611.7 million in 2004 from
(euro)493 million in 2003, despite the negative impact of foreign exchange
fluctuations of 4.3% primarily due to the strong increase in revenues from its
operations in Spain, Brazil and Mexico and minor increases in other countries,
with the exception of Morocco. Telefonica Publicidad e Informacion's revenues
from operations increased 3.9% to (euro)546.4 million in 2004 from (euro)525.8
million in 2003 due to the growth in revenues of all subsidiaries as measured
in local currencies, which more than offset the depreciation of Latin American
currencies against the euro.
Total expenses (operating expenses and other operating expenses)
Operating expenses, which consist of inventories (net), goods purchased,
external services and local taxes and personnel costs increased 8.7% to
(euro)17,539.2 million in 2004 from (euro)16,136.9 million in 2003, principally
due to the incorporation of Bellsouth's Latin American operators and to the
commercial effort made to add new customers and to maintain existing ones.
Other operating expenses and trade provisions decreased 12.0% to (euro)423.4
million in 2004 from (euro)480.9 million in 2003, due to a decrease in trade
provisions at Telefonica Latinoamerica, Telefonica de Espana and Telefonica
Moviles.
Telefonica de Espana. For the business line headed by Telefonica de
Espana, operating expenses decreased 0.5% to (euro)6,019.0 million compared to
(euro)6,048.7 million in 2003. This decrease was due to a decrease in personnel
expenses recorded during the year as a result of the continuation of the labor
reduction program for 2003-2007 at Telefonica de Espana, which began in July
2003.
Goods purchased increased 1.7% to (euro)2,571.3 million in 2004 from
(euro)2,528.7 million in 2003. This increase was due to an increase in the
expenses at Telyco linked to the handset sale business and to an increase in
the expenses for the acquisition of equipment related to the development of
ADSL services. The decrease of the interconnection expenses after the reduction
of the fixed to mobile interconnection tariffs that came into effect in
November 2003 and October 2004 partially offset these increased expenses.
Personnel expenses decreased 9.3% to (euro)2,083.6 million in 2004 from
(euro)2,298.3 million in 2003 due to the labor reduction program for years
2003-2007 approved in July 2003, which reduced headcount by 2,417 employees
during 2004. At December 31, 2004, Telefonica de Espana Group had 36,425
employees, a 5.2% decrease compared to 2003.
External services increased 13.5% to (euro)1,179.9 million in 2004 from
(euro)1,039.2 million in 2003. This increase is mainly due to stronger
marketing efforts resulting from growing competitive pressure and to higher
operational activity related to the growth of our ADSL services.
Other operating expenses decreased 39.6% primarily due to a decrease in
the amount of account receivables paid in 2004 which led to a 37.3% decrease in
our provisions for bad debt.
Telefonica Moviles. Operating expenses at Telefonica Moviles increased
25.5% to (euro)7,381.9 million in 2004 from (euro)5,881.3 million in 2003,
principally due to a 36.3% increase in the cost of goods purchased to
(euro)3,743.9 million in 2004 from (euro)2,747.0 million in 2003, and a 17.4%
increase in external services costs and taxes to (euro)3,082.8 million in 2004
from (euro)2,625.7 million in 2003.
Goods purchased (including interconnection costs) at Telefonica Moviles'
Spanish operations increased 13.6% to (euro)2,044.0 million in 2004 from
(euro)1,799.0 million in 2003, mainly due to the increase in commercial
activity and in outgoing traffic to other networks, generating an increase in
interconnection expenses. External services at Telefonica Moviles' Spanish
operations increased 13.0% to (euro)1,759.0 million in 2004 from (euro)1,557.0
million in 2003, principally due to greater commercial activity. Personnel
expenses at Telefonica Moviles' Spanish operations increased 8.2% to
(euro)257.6 million in 2004 from (euro)238 million in 2003 due to a 1.3%
increase in headcount for the period.
Goods purchased (including interconnection costs) at Telefonica Moviles'
Latin American operations increased 84.5% to (euro)1,715.9 million in 2004 from
(euro)929.9 million in 2003 due principally to the incorporation of BellSouth's
Latin American operators. Excluding the impact of exchange rate fluctuations
and the incorporation of Bellsouth's
105
operators, good purchases would have increased primarily as a result of an
increase in commercial activity in Brazil, Mexico and Argentina. External
services at Telefonica Moviles' Latin American operations increased 18.5% to
(euro)1,283.3 million in 2004 from (euro)1,082.7 million in 2003, due
principally to the incorporation of BellSouth's Latin American operators.
Excluding the impact of exchange rate fluctuations and the incorporation of the
Bellsouth operators, external services would have increased due to the same
reasons as the increases in goods purchased. Personnel expenses at Telefonica
Moviles' Latin American operations increased 34.7% to (euro)293.3 million in
2004 from (euro)217.7 million in 2003 mainly due to the high turnover in
Mexico's salesforce during 2004.
Telefonica Latinoamerica. Telefonica Latinoamerica's operating expenses
increased 2.8% to (euro)3,646.7 million in 2004 compared to (euro)3,548.50
million in 2003. Excluding the impact of exchange rate fluctuations, operating
expenses would have increased approximately 8.0% due to an increase in
interconnection expenses in Brazil as a result of an increase in traffic to
mobile networks and the introduction of SMP system in August of 2003 for long
distance mobile to mobile calls. Likewise, there was an increase in external
services costs in Brazil and Argentina because of commercial efforts made
during 2004.
Other operating expenses decreased 5.6% to (euro)204.2 million in 2004
from (euro)216.2 million in 2003. Excluding the impact of exchange rate
fluctuations, other operating expenses would have decreased 1.3% as a
consequence of the reduction in bad debt provisions from amounts billed to
customers in Brazil and Argentina.
o Telesp's operating expenses increased 14.7% in 2004 (excluding
exchange rate fluctuations, operating expenses would have increased
20.6%) mainly due to more traffic volume directed to mobile networks
and the SMP expansion, with higher interconnection expenses
associated, and to the price increase of certain contracts indexed to
inflation. Other operating expenses decreased 5.4% (excluding exchange
rate fluctuations, other operating expenses would have decreased
0.5%), due to a reduction in uncollectible accounts receivable.
o Telefonica de Argentina's operating expenses increased 0.4% in 2004
(excluding exchange rate fluctuations, operating expenses would have
increased 10.3%), principally due to an increase in personnel
expenses, in part related to an increase in salaries indexed to
inflation, goods purchased and an increase in external services
reflecting the increase of commercial activity. These cost increases
were partially offset by a decrease in other operating expenses, which
gave rise to a gain of (euro)11.5 million in 2004 as compared to gain
of (euro)3.5 million in 2003. The positive result with respect to
other operating expenses was primarily due to the effective management
of bad debt, the increased use of prepaid and consumption control
products which help maximize debt recovery and ensuring that
profitable customers are maintained.
o Compania de Telecomunicaciones de Chile's operating expenses decreased
10.8% to (euro)482.51 in 2004 (excluding exchange rate fluctuations,
operating expenses would have decreased 7.75%), mainly due to the
reduction in goods purchased as a result of the fall in mobile
interconnection rates. This decrease was partially offset by an
increase in external services expenses and personnel costs measured in
local currency.
o Telefonica del Peru's operating expenses decreased 9.3% to
(euro)605.19 million in 2004 (excluding exchange rate fluctuations,
operating expenses would have decreased 5.45%), principally as a
result of a reduction in external services expenses. In 2004
Telefonica Latinoamerica renegotiated its management fee contract such
that management fees charged to Telefonica del Peru are 1% of its
revenues instead of a payment of a 9% of its quarterly operating
profits before depreciation and amortization. In addition, until 2003
Telefonica de Peru paid a technology transfer fee to Telefonica
Latinoamerica of 1% of its revenues. Promotion and plant maintenance
expenses also declined. There was also a reduction in goods purchased
as a result of a decline in fixed line to mobile traffic.
o Telefonica Empresas America's operating expenses increased by 2.1% to
(euro)425.89 million in 2004 from (euro)417.02 million in 2003
(excluding exchange rate fluctuations, operating expenses would have
increased 7.8%), mainly due to an increase in goods purchased and
personnel expenses.
Terra Networks. operating expenses decreased 11.7% to (euro)510.4 million
in 2004 from (euro)577.8 million in 2003, principally due to improvements in
efficiency, personnel reduction and less sales and marketing expenses.
106
o Goods purchased decreased 3.6% to (euro)256.3 million in 2004 from
(euro)265.8 million in 2003, principally due to the reductions
observed in practically all items and particularly in communications
costs. Personnel expenses decreased 19.9% to (euro)95.8 million in
2004 from (euro)119.7 million in 2003, principally due to workforce
reductions.
o External services decreased 18.7% to (euro)148.3 million in 2004 from
(euro)182.4 million in 2003 as a result of successful cost control
with respect to all expenses, particularly those relating to marketing
and professional services.
Telefonica de Contenidos (formerly Admira). Telefonica de Contenidos Group
(formerly Admira). Telefonica de Contenidos Group's revenues from operations
decreased 12.7% to (euro)1,200.2 million in 2004 from (euro)1,374.5 million in
2003, mainly due to the sale of Antena 3, which was consolidated using the full
integration method during the first six months of 2003. Antena 3 contributed
(euro)303.8 million to 2003 revenues from operations. This decrease in revenues
was partially offset by increases in revenues from Endemol and ATCO. The
Endemol Group generated revenues of (euro)1,033.7 million in 2004, a 13.1% from
2003 due primarily to strong results from its operations in the United Kingdom
and the U.S. The performance of ATCO is mainly explained by a recovery in the
advertising business in Argentina.
Others and eliminations. Operating expenses of our other businesses
increased 9.4% to (euro)1,980.5 million in 2004 from (euro)1,795.0 million in
2003. Atento's operating expenses increased 22.2% in 2004 due to the increase
of personnel expenses related to an increase of activity. Operating expenses
for Telefonica Publicidad e Informacion increased by 1.3% due mainly to the
increase of external services, including expenses for a full year of operating
the telephone directory service 11888 in Spain.
Operating profit before depreciation and amortization
Our management believes that operating profit before depreciation and
amortization is meaningful for investors because it provides an analysis of our
operating results profitability of our business lines using the same measure
used by our chief decision makers. See "Item 5. Operating and Financial Review
and Prospects -- Presentation of Financial Information -- Non-GAAP Financial
Information". The following table provides a reconciliation of operating profit
before depreciation and amortization to operating profit for the Telefonica
Group and each of our business lines for the periods indicated.
Year ended December 31, 2004
--------------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Terra Telefonica
de Espana Moviles Latinoamerica Contenidos Network Holding(1) Other Elimination Total
--------------------------------------------------------------------------------------------------------------
(in millions of euro)
Operating profit
before
depreciation and
amortization
expenses......... 5,054.5 4,755.0 3,141.0 182.6 20.9 (220.1) 353.4 (71.82) 13,215.4
Depreciation and
amortization
expenses......... 2,374.0 1,673.4 1,697.8 30.5 79.5 49.9 139.0 (63.86) 5,980.2
Operating profit.... 2,680.5 3,081.6 1,443.2 152.1 (58.7) (270.1) 214.45 (7.95) 7,235.3
Year ended December 31, 2003
--------------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Terra Telefonica
de Espana Moviles Latinoamerica Contenidos Network Holding(1) Other Elimination Total
--------------------------------------------------------------------------------------------------------------
(in millions of euro)
Operating profit
before
depreciation
and
amortization
expenses....... 4,762.40 4,581.90 3,101.3 210.33 (39.49) (223.75) 296.51 (87.09) 12,602.12
Depreciation and
amortization
expenses....... 2,638.8 1,516.04 1,805.70 49.93 78.74 47.91 179.24 (42.14) 6,274.22
107
Year ended December 31, 2004
--------------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Terra Telefonica
de Espana Moviles Latinoamerica Contenidos Network Holding(1) Other Elimination Total
--------------------------------------------------------------------------------------------------------------
(in millions of euro)
Operating Profit.. 2,123.59 3,065.86 1,295.60 160.40 (118.22) (271.66) 117.27 (44.94) 6,327.90
------------------
(1) Group parent company
Our operating profit before depreciation and amortization increased 4.9%
to (euro)13,215.4 million in 2004 from (euro)12,602.1 million in 2003, due to
increases in operating profit before depreciation and amortization at
Telefonica Moviles, Telefonica de Espana, Telefonica Latinoamerica, Telefonica
Publicidad e Informacion and Atento. Operating profit before depreciation and
amortization also increased at Terra Networks, which recorded positive
operating profit before depreciation and amortization. Exchange rate
fluctuations had a negative impact of approximately 1.7%.
Telefonica de Espana. Telefonica de Espana's operating profit before
depreciation and amortization increased 6.1% to (euro)5,054.5 million in 2004
from (euro)4,762.4 million in 2003. This increase was mainly due to the
positive evolution of broadband revenues and to cost reductions principally due
to a 9.3% reduction in personnel expenses.
Telefonica Latinoamerica. Telefonica Latinoamerica's operating profit
before depreciation and amortization increased slightly to (euro)3,141.0
million in 2004 from (euro)3,101.3 million in 2003, as a result of depreciation
of almost all Latin American currencies against the euro. Excluding the impact
of exchange rate fluctuation, Telefonica Latinoamerica's operating profit
before depreciation and amortization increased 6.8% mainly due to increases of
operating profit before depreciation and amortization in local currencies of
Telesp (6.9%) Telefonica de Argentina (12.8%), and Telefonica del Peru (9.7%),
which offset decreases of operating profit before depreciation and amortization
in local currencies of Compania de Telecomunicaciones de Chile (-3.6%).
o Telesp's operating profit before depreciation and amortization
increased 1.7% (excluding exchange rate fluctuations, operating profit
before depreciation and amortization would have increased 6.9%) in
2004 to (euro)1,699.9 million from (euro)1,672.1 million in 2003. The
increase in local currency was principally due to growth in Telesp's
ADSL, traditional lines based in a low income markets and SMP and rhe
average increase in tariffs of 16%. This increase offsets an increase
in expenses following the increase in commercial activity and higher
interconnection costs associated to the SMP development.
o Telefonica de Argentina's operating profit before depreciation and
amortization increased 2.7% (excluding exchange rate fluctuations,
operating profit before depreciation and amortization would have
increased 12.8%) in 2004 to (euro)466.1 million from (euro)453.9
million in 2003. The increase was principally due to the improvement
of the main operational indicators (especially lines and traffic), to
a reduction of bad debt and to the collection of amounts owed for
which provisions had been taken in prior years.
o Compania de Telecomunicaciones de Chile's operating profit before
depreciation and amortization decreased 6.9% (excluding exchange rate
fluctuations, operating profit before depreciation and amortization
would have decreased 3.7%) in 2004 to (euro)417.8 million from
(euro)448.7 in 2003. This reduction was principally due to a decrease
in revenues, which could not be offset by strict cost controls.
Revenues decreased due to a reduction in the long distance market and
decreases in network traffic, influenced by customers increasingly
substituting fixed line services for mobile telephony services.
o Telefonica del Peru's operating profit before depreciation and
amortization increased 5.2% (excluding exchange rate fluctuations,
operating profit before depreciation and amortization would have
increased 9.7%) in 2004 to (euro)426.4 million from (euro)405.3
million in 2003. The decrease in revenues from operations was
primarily due to a decrease in local traffic tariffs and a decrease in
traffic as a result of increased competition. These decreases was
offset by a reduction in operating expenses.
o Telefonica Empresas America's operating profit before depreciation and
amortization increased 71.5% (an increase of 79.0% in local
currencies) in 2004 to (euro)54.3 million from (euro)31.7 million in
2003. The increase in revenues from operations is mainly due to
significant increases in revenues from internet, data and solution
services, which were partially offset by an increase in operating
expenses.
108
Telefonica Moviles. Telefonica Moviles' operating profit before
depreciation and amortization increased 3.8% to (euro)4,755.0 million in 2004
from (euro)4,581.9 million in 2003 due principally to a significant increase in
operating profit before depreciation and amortization for Telefonica Moviles'
Spanish operations due to increased marketing efforts. Exchange rate
fluctuations had a negative impact of approximately 0.8%.
Terra Networks. Terra Networks had positive operating profit before
depreciation and amortization of (euro)20.9 million in 2004 compared to
negative operating profit before depreciation and amortization of (euro)39.5
million in 2003 due to a reduction in personnel costs from a headcount
reduction carried out in 2004.
Telefonica de Contenidos (former Admira). Telefonica de Contenidos'
operating profit before depreciation and amortization decreased 13.2% to
(euro)182.6 million from (euro)210.3 million in 2003. The principal reason for
this decrease was a change in accounting relating to the Antena 3 Group.
However, the effect of cost-cutting measures implemented by Telefonica de
Contenidos partially offset this decrease.
Others. Operating expenses of our other businesses increased 9.4% to
(euro)1,980.5 million in 2004 from (euro)1,795.0 million in 2003. Atento's
operating expenses increased 22.2% in 2004 due to the increase of personnel
expenses related to an increase of activity. Operating expenses for Telefonica
Publicidad e Informacion increased by 1.3% due mainly to the increase of
external services, including expenses for a full year of operating the
telephone directory service 11888 in Spain.
Depreciation and amortization
Consolidated depreciation and amortization decreased 4.7% to 5,980.2
million in 2004 from 6,274.2 million in 2003. This decrease was due in large
part to our commitment to a conservative investment policy. This policy seeks
to control capital expenditures by eliminating expenditures that are
unnecessary or that cannot be recovered in a reasonable amount of time.
Telefonica de Espana Group. Depreciation and amortization of Telefonica de
Espana Group decreased 10.0% to (euro)2,374.0 million in 2004 from
(euro)2,638.8 million in 2003, due to a more controlled and conservative
investment policy
Telefonica Latinoamerica. Depreciation and amortization of Telefonica
Latinoamerica decreased 6.0% to (euro)1,697.8 million in 2004 from
(euro)1,805.7 million in 2003. Excluding the impact of exchange rate
fluctuations, depreciation and amortization would have decreased 1.4% when
compared with the previous year. This decrease was primarily due to a more
controlled and conservative investment policy.
Telefonica Moviles Depreciation and amortization of Telefonica Moviles
increased 10.4% to (euro)1,673.4 million in 2004 from (euro)1,516.0 million in
2003 (excluding the impact of exchange rate fluctuations, depreciation and
amortization would have increased by 4.3%) mainly due to a increase of the
amortization in Mexico due to investment in developing the GSM network.
Terra Networks. Depreciation and amortization of Terra Networks increased
1.0% to (euro)79.5 million in 2004 from (euro)78.7 million in 2003.
Telefonica de Contenidos. Depreciation and amortization of Telefonica de
Contenidos (formerly Admira) decreased to (euro)30.5 million in 2004 compared
to (euro)49.9 million in 2003.
Others. Depreciation and amortization of our other businesses decreased to
(euro)138.9 million in 2004 from (euro)179.2 million in 2003. Atento's
depreciation and amortization decreased 30.3% to (euro)36.4 million in 2004
from (euro)52.2 million in 2003. Telefonica Publicidad e Informacion's
depreciation and amortization decreased 18.3% to (euro)25.1 million in 2004
compared to (euro)30.8 million 2003.
Operating profit
Operating profit increased 14.3% to (euro)7,235.25 million in 2004 from
(euro)6,327.9 million in 2003. This increase compared to last year is the
result of the increase in revenues and a 4.7% decrease in amortization expense.
109
Telefonica de Espana. Operating profit of Telefonica de Espana Group
increased 26.2% to (euro)2,680.5 million in 2004 from (euro)2,123.6 million in
2003, mainly due to the positive evolution of Internet and broadband services
and a 10.0% decrease in amortization compared to 2003.
Telefonica Latinoamerica. Operating profit at Telefonica Latinoamerica
increased by 11.4% to (euro)1,443.2 million in 2004 from (euro)1,295.6 million
in 2003 as a result of a 1.4% increase in revenue and a 6.0% decrease in
amortization. Excluding the impact of exchange rate fluctuations, operating
profit would have increased by 18.1%.
Telefonica Moviles. Operating profit of Telefonica Moviles increased 0.5%
to (euro)3,081.6 million in 2004 from (euro)3,065.9 million in 2003, mainly due
to a 3.8% increase in operating profit before depreciation and amortization,
offset in part by a 10.4% increase in depreciation expense.
Terra Networks. Terra Networks' operating loss in 2004 was (euro)58.6
million compared to an operating loss of (euro)118.2 million during 2003. The
strong performance in operating profit before depreciation and amortization of
Terra Networks was more than offset by (euro)79.5 million of depreciation and
amortization expenses.
Telefonica de Contenidos. Operating profit of Telefonica de Contenidos was
(euro)152.1 million in 2004 compared to an operating profit of (euro)160.4
million in 2003.
Others. Operating profit of our other businesses increased to (euro)206.5
million in 2004 from (euro)72.3 million in 2003 due to a 34.4% increase in
operating profit before depreciation and amortization and to a 45.2% decrease
in depreciation and amortization expenses. Atento's operating profits grow
281.5% to (euro)54.4 million in 2004 from (euro)14.3 million in 2003. This
improvement was due to the increase in revenues together with a reduction of
amortizations in 30.3% due to a decrease in capital expenditures. Telefonica
Publicidad e Informacion's operating profit in 2004 was (euro)190.1 million, a
24.0% increase compared to 2003 mainly due to a 16.9% increase in operating
profit before depreciation and amortization and a 18.3% decrease in
depreciation and amortization.
Profit from ordinary activities
Profit from ordinary activities increased 20.6% to (euro)5,562.8 million
in 2004 compared to (euro)4,612.2 million in 2003. This increase was
principally due to a 14.3% increase in operating profit and:
o the losses from associated companies decreased in 2004 by 73.6% to
(euro)56.1 million from (euro)212.6 million in 2003 as a result of the
deconsolidation of Via Digital, the sale of certain subsidiaries
(Antena 3 TV and Atlanet in 2003 and Audiovisual Sport in 2004),
smaller losses related to IPSE-2000, Medi Telecom and the Lycos Group,
and the positive impact of the results of Portugal Telecom due to both
its improved results and our increased participation compared to 2003.
o Goodwill amortization totaled (euro)432.6 million euros in 2004, a
2.2% decrease compared to 2003. This performance was principally due
to a reduction of goodwill amortization in the cellular business
resulting from the reclassification of certain licenses as intangible
assets rather than goodwill and as a result of sale of Lycos Inc. in
2004 and Antena 3 in 2003. This decrease was partially offset by an
increase in goodwill resulting from the incorporation of goodwill
amortization from Bellsouth's Latin American operators for the last
two months of 2004 and from Sogecable since July 2003.
o Net financial expenses decreased 19.8% to (euro)1,173.2 million in
2004 (excluding an expense of (euro)10.6 million resulting from the
depreciation of the Argentine peso against the euro) compared to
(euro)1,462.6 million in 2003 (excluding a (euro)134.4 million profit
generated by the appreciation of the Argentine peso and a (euro)267.5
million profit from the cancellation of U.S. dollar-denominated debt).
This decrease in net financial expenses was due to a decrease in
average net debt as well as a reduction of costs as a result of the
decrease in average interest rates in Europe and Brazil in 2004.
Income (loss) before tax and minority interest
Income (loss) before tax and minority interest was (euro)4,397.0 million
in 2004 compared to (euro)3,362.5 million in 2003.
110
Extraordinary revenues decreased to (euro)409.0 million in 2004 from
(euro)1,167.2 million in the previous year, due principally to the capital gain
for the sale of Antena3 TV for (euro)392.3 million recorded in 2003 and capital
gains related to real estate disposals of (euro)39.3 million in 2004 compared
to (euro)203.0 million in 2003.
Extraordinary expenses decreased to (euro)1,574.8 million in 2004 from
(euro)2,416.8 in 2003. Extraordinary expenses for 2004 primarily related to a
(euro)674.7 million provision related to the acceptance of early retirement
benefits by employees of Telefonica de Espana under its labor reduction
program, a (euro)273.5 million provision from the headcount reduction of Terra
Networks and other personnel reorganizations within the Telefonica Group, and
the anticipated writedown of (euro)101.5 million of goodwill in Telefonica UK.
Corporate income tax
The tax provision in 2004 was (euro)1,138.7 million compared to
(euro)913.4 million 2003. The increase was primarily due to an increase in
revenues from operations.
Minority interests
Profit attributable to minority interests was (euro)381.0 million in 2004
compared to (euro)245.5 million in 2003. The 55.2% increase was principally due
to net income recorded by Terra Networks, compared with a loss of (euro)2,203.6
in 2003.
Net income
Consolidated net income amounted to (euro)2,887.3 million in 2004 compared
to net income of (euro)2,203.6 million in 2003.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
The table below sets forth an analysis of consolidated revenue from
operations for each of our principal business segments for 2002 and 2003 after
elimination of sales to other members of the Telefonica Group. Financial data
related to our business segments is included in Note 25 to our Consolidated
Financial Statements.
Year ended December 31,
------------------------
After adjustments for
intra-group sales
------------------------
2002 2003
------------------------
(in millions of euro)
Telefonica de Espana.............................. 9,337.7 9,319.0
Telefonica Latinoamerica.......................... 6,822.8 6,150.3
Telefonia Moviles................................. 7,993.0 8,905.1
Telefonica Empresas............................... 1,445.3 1,425.6
Telefonica de Contenidos.......................... 1,068.1 1,374.5
Terra Lycos....................................... 546.3 414.5
Telefonica Publicidad e Informacion............... 503.5 525.8
Atento............................................ 216.4 191.7
Other companies(1)................................ 478.1 93.4
------------------------
Total Revenue from operations..................... 28,411.3 28,399.8
------------------------
------------------
(1) Includes revenue from operations from Telefonica, S.A., Grupo T. Gestiona
and other subsidiaries.
The table below shows the contribution to our total revenues from
operations of each of our principal lines of business for 2002 and 2003 after
adjustments for sales to other members of the Telefonica Group.
111
Year ended December 31,
------------------------
After adjustments for
intra-group sales
------------------------
2002 2003
------------------------
Telefonica de Espana.............................. 32.9% 32.8%
Telefonica Latinoamerica.......................... 24.0% 21.7%
Telefonica Moviles................................ 28.1% 31.3%
Telefonica Empresas............................... 5.1% 5.0%
Telefonica de Contenidos.......................... 3.8% 4.8%
Terra Lycos....................................... 1.9% 1.5%
Telefonica Publicidad e Informacion............... 1.8% 1.9%
Atento............................................ 0.8% 0.7%
Other companies................................... 1.7% 0.3%
------------------------
Total revenues from operations.................... 100.0% 100.0%
------------------------
------------------
(1) Includes revenue from operations from Telefonica, S.A., Grupo T. Gestiona
and other subsidiaries.
The table below shows the contribution to our consolidated net income of
each of our principal business lines in 2002 and 2003.
Year ended December 31,
-------------------------
2002 2003
-------------------------
(in millions of euro)
Telefonica de Espana.............................. 807.93 178.08
Telefonica Latinoamerica.......................... (182.54) 677.22
Telefonica Moviles................................ (3,744.47) 1,594.30
Telefonica Empresas............................... (728.25) (74.66)
Telefonica de Contemdos........................... (669.15) 119.7
Terra Lycos....................................... (2,008.87) (172.71)
Telefonica Publicidad e Informacion............... 71.57 88.80
Atento............................................ (99.09) (16.25)
Other companies(1)................................ 976.07 (190.89)
-------------------------
Total net income (loss)........................... (5,576.80) 2,203.59
-------------------------
------------------
(1) Includes net income from Telefonica, S.A. Grupo T. Gestiona and other
subsidiaries.
Revenues from operations (sales to external clients)
Our revenue from operations, which accounted for 97.2% and 97.1% of our
consolidated total revenues for 2003 and 2002, respectively, remained stable in
2003 at (euro)28,399.8 million compared to (euro)28,411.3 in 2002. The increase
in revenue from Telefonica Moviles, Telefonica Latinoamerica, Telefonica
Publicidad e Informacion, or TPI, Atento and Telefonica Empresas was offset by
the negative exchange rate impact suffered in 2003. Exchange rate fluctuations
had a negative impact of approximately 6.5% on our revenues from operations in
2003.
Whereas we calculate revenues from operations both before and after
adjustments for sales to other members of the Telefonica Group, our analysis of
revenue from operations is strictly limited to revenues from operations after
adjustments for sales to other members of the Telefonica Group. In the
aggregate, we believe that sales to other members of the Telefonica Group did
not have a significant impact on the percentage fluctuations during the periods
discussed.
Telefonica de Espana. Telefonica de Espana's revenues from operations
decreased 0.2% to (euro)9,319.0 million in 2003 from (euro)9,337.7 in 2002. The
stability in revenues compared to 2002 was principally due to the increase in
revenues from IP Services and services provided to other operators.
112
o Revenues from connection access fees include all revenues from our
clients for rental and connection of PSTN lines (for basic telephony
service), ISDN lines (for integration of voice, data and video
services), Corporate Services and TUP (for public telephony service)
and additional charges and publicity in telephone booths. Revenues for
connection access fees decreased by 2% to (euro)2,795.2 million in
2003 compared to (euro)2,852.2 million in 2002. The decrease in
revenue was due to a 2.0% decrease in the number of PSTN lines in
service that was not offset by the 8% increase ((euro)0.94) in the
PSTN monthly rental fee. This increase in the monthly rental fee was
excluded from the price-cap on tariffs imposed by Spanish regulation.
o Revenues from leased circuits include revenues received from leasing
our circuits, both domestic and international, to customers and other
telecommunication operators. Revenue from leased circuits decreased by
23.6% to (euro)195.0 million in 2003 compared to (euro)255.2 million
in 2002. The decrease in revenue in 2003 was due to a decrease in the
number of leased circuits as a result of customer migration to higher
speeds, ADSL, and to the carrier capacity of wholesalers.
o Revenues from the commercialization of handsets include all revenues
from the sale, leasing, maintenance and installation of handsets.
Revenues from the commercialization of handsets decreased by 3.1% to
(euro)705.5 million in 2003 from (euro)728.3 million in 2002 as the
result of a reduction in maintenance revenues due to a decreased
number of users requiring maintenance for the period.
o IP services revenues include all revenue from Telefonica de Espana's
IP networks, and are principally composed of revenues from ADSL
subscribers. Revenue from IP services increased by 119.2% to
(euro)557.2 million in 2003 from (euro)254.2 million in 2002. This
increase was principally due to a 76.5% increase in the number of ADSL
retail subscriber connections in 2003 as compared to 2002, which led
to a twofold increase in the revenues obtained from ADSL services in
2003 as compared to 2002. At the year-end 2003 we had 1,070.3 thousand
ADSL retail subscribers compared to 606.4 thousand at the year-end
2002.
o Revenues from operator services include all revenues from operator
services, national and international. International operator services
include automatic access, transit, leasing capacity and manual
international access. National operator services include national
interconnection, rented subscriber loop and wholesale ADSL and
commercial wholesale services (access, transit, traffic and support).
Revenues from operator services increased by 4.7% to (euro)708.7
million from (euro)676.6 million in 2002, due to increases in the use
of our rented subscriber loop and increases in wholesale ADSL
services.
o Revenues from outgoing traffic, which include all revenues from net
effective consumption and other consumption (including RPV, phone
cards, messages, manual traffic), decreased 7.5% to (euro)3,639.3
million in 2003 from (euro)3,935.0 million in 2002. This decrease was
due to the market recession, increased competition leading to a loss
of market share and a 2% price reduction in 2003 as a result of a
price-cap on tariffs imposed by Spanish regulation. See "Item
4--Information on the Company--Business Overview--Fixed-Line
Telecommunications Services in Spain--Telefonica de
Espana--Spain--Regulation".
Telefonica Moviles. Telefonica Moviles' revenue from operations increased
11.4% to (euro)8,905.1 million in 2003 from (euro)7,993.0 million in 2002.
Exchange rate fluctuations had a negative impact of approximately 6.8%.
Revenues from Telefonica Moviles' Spanish operations increased 15.3% to
(euro)6,372.2 million in 2003 from (euro)5,528.7 million in 2002. This resulted
primarily from a 6.8% increase in our customer base to 19.7 million at December
31, 2003 from 18.4 million at December 31, 2002, as well as increased customer
usage.
Revenues from Telefonica Moviles' Latin American wireless operations
increased 5.9% as measured in euro to (euro)2,529.5 million in 2003 from
(euro)2,388.9 million in 2002, due principally to the negative impact of
exchange rate fluctuations. Excluding the impact of exchange rate fluctuations,
revenues from operations increased primarily due to the increase in the number
of customers in Brazil and Mexico, full consolidation of twelve months of
operations in Pegaso in 2003 compared to three months of operations in 2002,
and consolidation of the Brazilian Joint Venture in 2003 compared to our
participations in TeleSudeste, Teleleste and CRT in 2002.
Telefonica Latinoamerica. Telefonica Latinoamerica's operating revenues
decreased by 9.9% to (euro)6,150.3 million in 2003 from (euro)6,822.8 million
in 2002 principally as a result of the decline in value of local currencies,
with
113
the exception of the Chilean peso. Exchange rate fluctuations had a negative
impact of approximately 16.6%. Excluding the impact of exchange rate
fluctuations, revenues from operations increased by 6.7%. In local currency,
revenues from Telesp's operations increased principally due to the increase in
the tariffs and the expansion of broadband and long distance services.
Telefonica de Argentina's revenues from operations increased due to improved
economic conditions in Argentina, increases in network traffic and increases in
tariffs due to the application of the CER index (wholesaler inflation
indexation) to wholesale contracts. Telefonica del Peru and CTC's operating
revenues decreased in 2003 compared to 2002. Operating revenues of Telefonica
del Peru decreased due to the launch of new tariff plans with lower average
tariffs. Operating revenues of CTC decreased due to decreases in network
traffic, influenced by customers increasingly substituting fixed line services
by mobile telephony services.
o Revenues from operations generated by Telesp denominated in euro
decreased 8.1% (an increase of 15.4% as measured in Brazilian reais)
to (euro)3,343.2 million in 2003 from (euro)3,638.0 million in 2002.
This was principally due to the depreciation of the Brazilian real
against the euro. The value of the Brazilian real declined 20.3%
compared to the euro, based on average exchange rates for 2003 and
2002. The increase in revenues from operations, as measured in
Brazilian reais, was mainly due to an increase in tariffs (17% average
increase in tariffs for local calls (as measured in local currency))
effective from July 2003, as well as an increase in broadband revenues
and an increase in the long distance market share.
o Revenues from operations generated by Telefonica de Argentina
denominated in euro increased 2.5% (an increase of 14.3% as measured
in Argentine pesos) to (euro)747.8 million in 2003 from (euro)729.5
million in 2002. The increase in revenues from operations, as measured
in Argentine pesos, was mainly due to the improvement of general
economic conditions, the application of the CER Index and a 10.2%
increase in total traffic per line per day.
o Revenues from operations generated by Compania de Telecomunicaciones
de Chile denominated in euro decreased 14.6% (a decline of 15.2% as
measured in Chilean pesos) to (euro)963.5 million in 2003 from
(euro)1,128.3 million in 2002. This change was in part influenced by
the change in the scope of consolidation following the sale of 25% of
Sonda in September 2002. Sonda was previously fully consolidated in
our financial statements. Excluding the in our scope of consolidation,
the decrease in Chilean pesos would have been 7.0%, due to the fall in
the long distance market and decreases in network traffic, influenced
by customers increasingly substituting fixed line services by mobile
telephony services.
o Revenues from operations generated by Telefonica del Peru denominated
in euro decreased approximately 16.6% (a decline of 1.5% as measured
in Peruvian nuevos soles) to (euro)1,041.6 million in 2003 from
(euro)1,248.7 million in 2002, principally due to the launch of the
new tariff plans starting in March, following the Peruvian
Government's proposal to eliminate monthly rental fees, and as a
result of increased competition from the mobile business.
Telefonica Empresas. Telefonica Empresas' revenue from operations
decreased 1.4% to (euro)1,425.6 million in 2003 from (euro)1,445.3 million in
2002, principally due to change in the scope of consolidation after the
accounting of Atlanet by the equity method from July 2002. In October 2003,
Atlanet was sold to Fiat Gestione Participacione S.p.A.
Terra Lycos. Terra Lycos' revenues from operations decreased 24% to
(euro)414.5 million in 2003 from (euro)546.3 million in 2002. This decrease is
principally due to the global economic slowdown in advertising, the end of the
agreement with Bertelsmann at the end of 2002 and the depreciation of certain
currencies against the euro from which Terra Lycos obtains its revenues outside
Spain. The decrease in revenues from operations was partially offset by an
increase in number of subscribers for Internet access and communication and
portal services due to the success of the OBP (Open, Basic, Premium) model
initiated in 2001. Exchange rate fluctuations had a negative impact of
approximately 11%.
Telefonica de Contenidos Group (formerly Admira). Telefonica de Contenidos
Group's revenues from operations increased 28.7% to (euro)1,374.5 million in
2003 from (euro)1,068.1 million in 2002, principally due to changes in the
scope of consolidation as participation in Antena 3 Group was not consolidated
through the global method in 2002. During the first semester of 2003 Antena 3
was fully consolidated. Impact of the change in consolidation
114
methods of Antena 3 Group explains a (euro)303.8 million increase in revenues.
The increase was also due to the recuperation of the Argentine peso and
advertising in the Argentine market, which have enabled Atco to increase its
revenues to (euro)72.0 million in 2003 from (euro)54.6 million in 2002.
Others. Revenues from operations from our other businesses decreased 32.3%
to (euro)810.9 million in 2003 from (euro)1,198 million in 2002. Revenue from
operations from Atento decreased 11.4% to (euro)191.7 million in 2003 from
(euro)216.4 million in 2002 principally due to exchange rate fluctuations,
which had a negative impact of approximately 16.6%. Excluding the impact of
exchange rate fluctuation, revenues increased 5.1% due mainly to an increase in
revenues in most of Atento's markets, which offset decreases in revenue in
Morocco and decreases in revenue due to the sale of Atento's operations in
Japan. Telefonica Publicidad e Informacion's revenues from operations increased
4.4% to (euro)525.8 million in 2003 from (euro)503.5 million in 2002 due to the
growth in revenues of all subsidiaries as measured in local currencies.
Total expenses (operating expenses and other operating expenses)
Operating expenses, which consist of increase in inventories (net), goods
purchased, external services and local taxes and personnel costs decreased 3.8%
to (euro)16,136.9 million in 2003 from (euro)16,773.3 million in 2002,
principally due to decreased operating expenses at Telefonica Latinoamerica,
Telefonica de Espana, Telefonica Empresas, Terra Lycos, and Atento, offset in
part by an increase in operating expenses at Telefonica Moviles, Telefonica
Publicidad e Informacion and Telefonica de Contenidos. Other operating expenses
and trade provisions decreased 35% to (euro)480.9 million in 2003 from
(euro)739.3 million in 2002, due to a decrease in trade provisions at
Telefonica Latinoamerica, Telefonica de Espana and Telefonica Moviles.
Telefonica de Espana. For the business line headed by Telefonica de
Espana, operating expenses decreased by 1.2% to (euro)5,795.6 million compared
to (euro)5,868.6 million in 2002. This decrease was due to a decrease in goods
purchased together with the decrease in personnel expenses recorded during the
last quarter as a result of the approval of a labor reduction program in July
2003 (Plan Social de Expediente de Regulacion de Empleo) for 2003-2007 at
Telefonica de Espana.
Goods purchased by the business line headed by Telefonica de Espana in
Spain decreased 6.5% to (euro)2,490.3 million in 2003 from (euro)2,662.1
million in 2002. This decrease was due to a reduction in fixed-mobile
interconnection tariffs with Telefonica de Espana's mobile operators and to a
decrease in the expenses for the acquisition of equipment.
Personnel expenses increased 0.9% to (euro)2,174.9 million in 2003 from
(euro)2,156.5 million in 2002. The operating company, Telefonica de Espana
S.A., accounts for 97.8% of all personnel expenses, a 1% increase compared to
last year due to an increase in salaries, partially offset in the last quarter
of 2003 by the launch of the Telefonica de Espana labor reduction program.
Personnel expenses in 2003 includes the impact related to 5,489 employees
leaving under the labor reduction program approved in July 2003. At year-end
2003, Telefonica de Espana had 35,216 employees, a 13.4% decrease when compared
to 2002.
External services increased 7.9% to (euro)956.6 million in 2003 from
(euro)886.3 million in 2002. This increase is mainly due to commercial efforts
carried out to develop ADSL services and to launch the "combinados", which is a
consumer plan that combines access and traffic, allowing each client to
optimize its consumption according to volume of use, destination and calling
time profile.
Other operating expenses decreased by 55.4% primarily due to an increase
in the amount of account receivables paid in 2003 which led to a 42.7% decrease
in our provisions for bad debt.
Telefonica Moviles. Operating expenses at Telefonica Moviles increased 5%
to (euro)5,881.3 million in 2003 from (euro)5,600.3 million in 2002,
principally due to a 6.9% increase in the cost of goods purchased to
(euro)2,747.0 million in 2003 from (euro)2,571.1 million in 2002, and a 6.6%
increase in external services costs and taxes to (euro)2,625.7 million in 2003
from (euro)2,462.5 million in 2002.
Goods purchased (including interconnection costs) at Telefonica Moviles'
Spanish operations increased 9.7% to (euro)1,799.0 million in 2003 from
(euro)1,640.0 million in 2002, mainly due to the increase in the commercial
activity and in
115
outgoing traffic to other networks, generating an increase in the
interconnection expenses. External services at Telefonica Moviles' Spanish
operations increased 6.3% to (euro)1,557.0 million in 2003 from (euro)1,465.0
million in 2002, principally due to the greater commercial activity. Personnel
expenses at Telefonica Moviles' Spanish operations increased 4.8% to (euro)238
million in 2003 from (euro)227 million in 2002 due to a 1.6% increase in
headcount for the period.
Goods purchased (including interconnection costs) at Telefonica Moviles'
Latin American operations increased 12.3% to (euro)929.9 million in 2003 from
(euro)828.1 million in 2002 primarily as a result of the increase in commercial
activity in Brazil, Mexico and Argentina, and of changes in the scope of
consolidation of the operations in Brazil and Mexico mentioned above. External
services at Telefonica Moviles' Latin American operations increased 29.2% to
(euro)1082.7 million in 2003 from (euro)838.0 million in 2002, principally due
to the same reasons as the increases in goods purchased. Personnel expenses at
Telefonica Moviles' Latin American operations increased 2.5% to (euro)217.7
million in 2003 from (euro)212.5 million in 2002. The increase in personnel
expenses is low despite the changes in the consolidation of Brazil and Mexico
operations in 2003 compared to 2002.
Telefonica Latinoamerica. Telefonica Latinoamerica's operating expenses
decreased 5.7% to (euro)3,215.0 million in 2003 compared with (euro)3,407.5
million in 2002, principally as a result of the depreciation of Latin American
currencies during 2003. Excluding the impact of exchange rate fluctuation,
operating expenses increased approximately 11.3%, due to an increase in the
long distance and ADSL activity in Brazil and to the new tariff plans and ADSL
in Peru that offset the strict cost reduction policy in Argentina and the
decrease in activity and cost reduction policy in Chile.
Other operating expenses decreased 23.9% to (euro)234.3 million in 2003
from (euro)307.9 million in 2002.
o Telesp's operating expenses increased 0.9% in 2003 (an increase of
26.6% as measured in Brazilian reais, mainly due to the expansion of
the new long distance business, to the acceleration of the broadband
deploy and to the price increase of the contracts indexed to
inflation). Other operating expenses, which in euro decreased 7.1%,
increased 16.6% in local currency, due principally to provisions for
bad debt linked to an increase in the amounts billed to customers.
o Telefonica de Argentina's operating expenses decreased 3.3% in 2003
(an increase of 7.8% as measured in Argentine pesos, principally due
to the increase in the personnel expenses, in part related to an
increase in salaries indexed to inflation, goods purchased as a result
of increased commercial activity, and a small increase in external
services). Other operating expenses were (euro)3.4 million in 2003 as
compared to negative (euro)55.0 million in 2002. The positive result
with respect to other operating expenses was primarily due to the
effective management of bad debt, as a result of the launch of
specific products in the market to maximize debt recovery and ensuring
that profitable customers are maintained.
o Compania de Telecomunicaciones de Chile's operating expenses decreased
15.8% to (euro)541.2 in 2003 (a decrease of 16.4% as measured in
Chilean pesos), mainly due to the change in the scope of consolidation
following the sale of 25% of Sonda in September 2002. Personnel
expenses decreased as the result of reductions in headcount and the
reduction of interconnection costs due to the decrease in traffic.
o Telefonica del Peru's operating expenses decreased 9.4% to (euro)667.5
million in 2003 (an increase of 7% as measured in Peruvian nuevos
soles), principally as a result of the expenses related to the new
commercial plans and to the expansion of the broadband business.
Telefonica Empresas. Telefonica Empresas' operating expenses decreased by
8.6% to (euro)1,486.9 million in 2003 from (euro)1,626.4 million in 2002,
mainly due to the change to equity method accounting of Atlanet from July 2002
and to the cost control measures.
Terra Lycos. Terra Lycos' operating expenses decreased 22% to (euro)577.8
million in 2003 from (euro)741.5 million in 2002, principally due to effective
management, improvements in efficiency, personnel reduction and less sales and
marketing expenses.
116
o Goods purchased decreased 9.5% to (euro)265.8 million in 2003 from
(euro)293.6 million in 2002, principally due to the reductions
observed in practically all items and particularly in communication
costs. Personnel expenses decreased 28% to (euro)119.7 million in 2003
from (euro)165.4 million in 2002, principally due to workforce
reductions. Personnel expenses from Lycos accounted for 35% of Terra
Lycos' total personnel expenses.
o External services decreased 33% to (euro)182.4 million in 2003 from
(euro)273.7 million in 2002 as a result of successful cost control
with respect to all expenses, particularly those relating to marketing
and professional services.
Telefonica de Contenidos (formerly Admira). Telefonica de Contenidos'
operating expenses increased approximately 22.3% to (euro)1,179.7 million in
2003 from (euro)964.4 million in 2002, due principally to changes in the scope
of consolidation as our participation in the Antena 3 Group was not
consolidated through the global method in 2002. During the first semester of
2003 Antena 3 was fully consolidated.
Others. Operating expenses of our other businesses decreased 70.7% to
(euro)1,256.1 million in 2003 from (euro)4,280.3 million in 2002. Atento's
operating expenses decreased 16.5% in 2003 due to the negative impact of
exchange rate fluctuations of the Latin American currencies, and to the cost
control, both operating and structural. Operating expenses for Telefonica
Publicidad e Informacion increased by 4.0% due mainly to the increase of
external services, including the expenses for telephone platform 11888.
Operating profit before depreciation and amortization
Our management believes that operating profit before depreciation and
amortization is meaningful for investors because it provides an analysis of our
operating results and our segment profitability using the same measure used by
our chief operating decision makers. See "Item 5. Operating and Financial
Review and Prospects -- Presentation of Financial Information -- Non-GAAP
Financial Information". The following table provides a reconciliation of
operating profit before depreciation and amortization to operating profit for
the Telefonica Group for the periods indicated on a segment basis.
Year ended December 31, 2003
-----------------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Terra Telefonica Telefonica
de Espana Moviles Latinoamerica Contenidos Lycos Empresas Holding Other Elimination Total
-----------------------------------------------------------------------------------------------------------------
(in millions of euro)
Operating profit
before
depreciation
and
amortization
expenses....... 4,534.16 4,581.90 3,065.28 210.33 (39.49) 304.38 (223.75) 268.01 (98.70) 12,602.12
Depreciation and 8
amortization
expenses....... 2,567.98 1,516.04 1,718.79 49.93 78.74 245.65 47.91 108.23 (59.05) 6,274.22
Operating profit.. 1,966.18 3,065.87 1,346.48 160.40 (118.23) 58.73 (271.65) 159.79 (39.66) 6,327.90
Year ended December 31, 2002
-----------------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Terra Telefonica Telefonica
de Espana Moviles Latinoamerica Contenidos Lycos Empresas Holding Other Elimination Total
-----------------------------------------------------------------------------------------------------------------
(in millions of euro)
Operating profit 4,517.24 3,830.00 3,346.74 114.50 (141.69) 128.58 (231.49) 231.84 (71.53) 11,724.16
before
depreciation
and
amortization
expenses.......
Depreciation and 2,701.82 1,391.88 1,999.41 49.58 142.72 292.10 57.09 133.11 (75.29) 6,692.42
amortization
expenses.......
Operating Profit.. 1,815.42 2,438.12 1,347.34 64.92 (284.41) (163.52) (288.58) 98.73 3.76 5,031.75
Our operating profit before depreciation and amortization increased 7.5%
to (euro)12,602.1 million in 2003 from (euro)11,724.2 million in 2002, due to
the increases of operating profit before depreciation and amortization at
117
Telefonica Moviles, Telefonica de Espana, Telefonica de Empresas, Telefonica
Publicidad e Informacion, Telefonica de Contenidos and Atento. Operating profit
before depreciation and amortization also increased at Terra Lycos, which
recorded negative operating profit before depreciation and amortization. This
offsets the decrease in Telefonica Latinoamerica due to the exchange rate
fluctuations in Latin America. Exchange rate fluctuations had a negative impact
of approximately 6%.
Telefonica de Espana. Telefonica de Espana Group's operating profit before
depreciation and amortization increased 0.4% to (euro)4,534.2 million in 2003
from (euro)4,517.2 million in 2002. This increase was mainly due to cost
reduction savings principally due to a 42.7% decrease in bad debt provisions.
Telefonica Latinoamerica. Telefonica Latinoamerica's operating profit
before depreciation and amortization decreased 8.4% to (euro)3,065.3 million in
2003 from (euro)3,346.7 million in 2002, as a result of the decrease in euro
demonstrated by all companies, except Argentina. Excluding the impact of
exchange rate fluctuation, Telefonica Latinoamerica's operating profit before
depreciation and amortization increased 8.6% mainly due to increases of
operating profit before depreciation and amortization in local currencies of
Telesp (10.3%) and, Telefonica de Argentina (39.9%), which offset decreases of
operating profit before depreciation and amortization in local currencies of
Compania de Telecommunicaciones de Chile (5.8%) and Telefonica del Peru (8.1%).
o Telesp's operating profit before depreciation and amortization
decreased 12.2% (an increase of 10.3% as measured in Brazilian reais)
in 2003 to (euro)1,672.1 million from (euro)1,903.7 million in 2002.
The increase in local currency was principally due to a 17% average
increase in tariffs for local calls (as measured in local currency)
effected in July 2003, and the good performance of Telesp's ADSL and
long distance business. This increase offset an increase in expenses
following the increase in commercial activity and in the provisions
for bad debt.
o Telefonica de Argentina's operating profit before depreciation and
amortization increased 25.5% (an increase of 39.9% as measured in
Argentine pesos) in 2003 to (euro)453.9 million from (euro)361.7
million in 2002. The increase was principally due to the improvement
of the main operational indicators (especially plant and traffic), and
to the reduction of bad debt due to the timely customer payment during
the year and to the collection of payments provisioned over the last
years.
o Compania de Telecomunicaciones de Chile's operating profit before
depreciation and amortization decreased 5.2% (a decrease of 5.8% as
measured in Chilean pesos) in 2003 to (euro)448.7 million from
(euro)473.1 in 2002. This reduction was principally due to the change
in the scope of consolidation following the sale of 25% of Sonda in
September 2002 and a decrease in revenues, which could not be offset
by cost containment measures. Revenues decreased due to the reduction
in the long distance market and decreases in network traffic,
influenced by customers increasingly substituting fixed line services
by mobile telephony services.
o Telefonica del Peru's operating profit before depreciation and
amortization decreased 22.2% (a decrease of 8.1% in Peruvian nuevos
soles) in 2003 to (euro)405.3 million from (euro)521.0 million in
2002. The small increase on revenues from operations (due to the
launching of new tariff plans and influenced by the decrease revenues
from public telephony and the increasing competition in long distance)
could not offset the increase in expenses relating to the new
commercial plans, the ADSL expansion and the increase in
fixed-to-mobile traffic.
Telefonica Moviles. Telefonica Moviles' operating profit before
depreciation and amortization increased 19.6% to (euro)4,581.9 million in 2003
from (euro)3,830.0 million in 2002 due principally to a significant increase in
operating profit before depreciation and amortization for Telefonica Moviles'
Spanish operations. Exchange rate fluctuations had a negative impact of
approximately 3.4%.
Telefonica Empresas. Telefonica Empresas' operating profit before
depreciation and amortization increased 136.7% to (euro)304.4 million in 2003
from (euro)128.6 million in 2002, due principally to significant cost
containment efforts in a macroeconomic environment unfavorable to the
generation of new revenues.
118
Terra Lycos. Terra Lycos had negative operating profit before depreciation
and amortization of (euro)39.5 million in 2003 compared to negative operating
profit before depreciation and amortization of (euro)141.7 million in 2002 due
to successful cost containment measures.
Telefonica de Contenidos (former Admira). Telefonica de Contenidos'
operating profit before depreciation and amortization increased 83.3% to
(euro)210.3 million from (euro)114.5 million in 2002. The principal reasons for
this increase was the change in accounting relating to the Antena 3 Group. Also
affecting the increase was the increasing margins in Endemol and the effect of
the cost cutting measures in the holding Telefonica de Contenidos.
Others. Operating profit before depreciation and amortization of our other
businesses increased 15.6% to (euro)268.0 million in 2003 from (euro)231.8
million in 2002. Atento's operating profit before depreciation and amortization
increased 22.4% to (euro)66.5 million in 2003 from (euro)54.3 million in 2002.
Exchange rate fluctuations had a negative impact of approximately 23.3%. Growth
for Atento was due principally to the increase of the profit margins in Brazil,
Venezuela, Colombia, Mexico and Central America, and the control exercised over
operating and fixed costs during the year. Telefonica Publicidad e
Informacion's operating profit before depreciation and amortization increased
22.0% due mainly to the growth in Spain and to the improvement of the negative
operating profit before depreciation and amortization in Brazil due to the
operating cost containment measures.
Depreciation and amortization
Consolidated depreciation and amortization decreased 6.2% to 6,274.2
million in 2003 from 6,692.4 million in 2002. This increase was due in large
part to a controlled and conservative investment policy implemented over the
last years. Exchange rate fluctuations had a positive impact of approximately
7.5%.
Telefonica de Espana. Depreciation and amortization of Telefonica de
Espana Group decreased 5.0% to (euro)2,568.0 million in 2003 from (euro)2,701.8
million in 2002, due to a more controlled and conservative investment policy
implemented over the last years and the increase of totally amortized elements.
Telefonica Latinoamerica. Depreciation and amortization of Telefonica
Latinoamerica decreased 14.0% to (euro)1,718.8 million in 2003 from
(euro)1,999.4 million in 2002. Excluding the impact of exchange rate
fluctuations, depreciation and amortization remained stable when compared with
the previous year, due to a more controlled and conservative investment policy
implemented in 2003.
Telefonica Moviles. Depreciation and amortization of Telefonica Moviles
increased 8.9% to (euro)1,516.0 million in 2003 from (euro)1,391.9 million in
2002. Excluding the impact of exchange rate fluctuations, depreciation and
amortization increase by 21.26%. This increase was principally due to the
increase of the amortization expense due to the changes in the scope of
consolidation of the Telefonica Moviles' operations in Brazil and Mexico
mentioned above.
Telefonica Empresas. Depreciation and amortization of Telefonica Empresas
decreased 15.9% to (euro)245.7 million in 2003 from (euro)292.1 million in
2002.
Terra Lycos. Depreciation and amortization of Terra Lycos decreased 44.8%
to (euro)78.7 million in 2003 from (euro)142.7 million in 2002 due to the
write-off of start-up and intangible assets recorded in 2002.
Telefonica de Contenidos. Depreciation and amortization of Telefonica de
Contenidos (formerly Admira) remained stable when compared with the previous
year amounting to (euro)49.9 million in 2003.
Others. Depreciation and amortization of our other businesses decreased to
(euro)108.2 million in 2003 from (euro)133.11 million in 2002. Atento's
depreciation and amortization decreased 30.7% to (euro)52.2 million in 2003
from (euro)75.4 million in 2002. Telefonica Publicidad e Informacion's
depreciation and amortization in 2003 amounted to (euro)30.8 million, a 1.3%
decrease when compared to 2002.
119
Operating profit
Operating profit increased 25.8% to (euro)6,327.9 million in 2003 from
(euro)5,031.7 million in 2002. This increase compared to last year is the
result of the increase in operating profit before depreciation and amortization
and of the 6.2% decrease in amortization.
Telefonica de Espana. Operating profit of Telefonica de Espana Group
increased 8.3% to (euro)1,966.2 million in 2003 from (euro)1,815.4 million in
2002, mainly due to a 5.0% decrease in the amortization of fixed assets during
the period, compared to 2002.
Telefonica Latinoamerica. Operating profit at Telefonica Latinoamerica
decreased by 0.1% to (euro)1,346.5 million in 2003 from (euro)1,347.3 million
in 2002, mainly due to a 8.4% decrease in operating profit before depreciation
and amortization which was offset in part by a 14% decrease in amortization.
Excluding the impact of exchange rate fluctuations, operating profit increased
by 21.6%.
Telefonica Moviles. Operating profit of Telefonica Moviles increased 25.8%
to (euro)3,065.9 million in 2003 from (euro)2,438.1 million in 2002, mainly due
to a 19.6% increase in operating profit before depreciation and amortization,
offset in part by a 8.9% increase in depreciation expense.
Telefonica Empresas. Operating profit of Telefonica Empresas in 2003 was
approximately (euro)58.7 million compared to an operating loss of (euro)163.5
million during 2002, mainly due to the fact that operating profit before
depreciation and amortization increased by 136.7% and amortization expense
decreased by 15.9%.
Terra Lycos. Terra Lycos' operating loss in 2003 was (euro)118.2 million
compared to an operating loss of (euro)284.4 million during 2002, mainly due to
the decrease in negative operating profit before depreciation and to a 44%
decrease in the depreciation and amortization expense during 2003.
Telefonica de Contenidos. Operating profit of Telefonica de Contenidos'
(formerly Admira) was (euro)160.4 million in 2003 compared to (euro)64.9
million in 2002.
Others. Operating profit of our other businesses increased to (euro)159.8
million in 2003 from (euro)98.7 million in 2002 due to a 15.6% increase in
operating profit before depreciation and amortization and to a 18.7% decrease
in depreciation and amortization. Atento's operating profits were (euro)14.3
million in 2003 compared to an operating loss of (euro)21.1 million in 2002.
This improvement is due to the increase in operating profit before depreciation
and amortization together with a 30.8% decrease of amortization. Telefonica
Publicidad e Informacion's operating profit in 2003 was (euro)153.3 million, a
28.1% increase when compared to 2002 mainly due to a 22.0% increase in
operating profit before depreciation and amortization, offset in part by a 1.3%
increase in depreciation and amortization.
Profit from ordinary activities
Profit from ordinary activities, which consists of operating profit,
amortization of goodwill, financial income (expense), exchange gains (losses)
and income (loss) from associated companies, increased 185.3%, to (euro)4,612.2
million in 2003 from (euro)1,616.8 million in 2002. In addition to the 25.8%
increase in the operating profit, the growth rate is mainly due to:
o the negative results for associates were reduced over 2003 by 59.7% to
(euro)212.6 million from (euro)527.9 million in 2002 as a result of
both the sale of certain subsidiaries (ETI Austria, Data Uruguay, Azul
TV in 2002, and Antena3 TV and Atlanet in 2003) and the smaller losses
related to IPSE-2000, Medi Telecom, Pearson and Via Digital (Sogecable
was included in the consolidated accounts in July 2003).
o the improvement in the goodwill amortization which decreased 33.5%
compared to 2002 to (euro)442.5 million, following write-offs at Terra
Lycos, Telefonica Deutschland, lobox and Pearson carried out in 2003.
Goodwill of our mobile businesses increased by 14.6% as compared to
last year, principally due to the acquisitions of Pegaso in September
2002 and TCO in May 2003; and
o a 52.3% decrease in net financial expense to (euro)1,060.7 million in
2003 from (euro)2,221.6 in 2002, including a positive impact from the
appreciation of the Argentinean peso of (euro)134.4 million. Excluding
the impact of exchange rate fluctuations, the financial result rose to
(euro)1,195.1 million, which meant a drop of 29.4% compared to the
comparable financial results for 2002 ((euro)1,692.8 million). Out of
that percentage, 15.8
120
percentage points were due to the positive result of (euro)267.5
million coming from the cancellation of US dollars denominated debt.
Excluding also this positive result, 2003 financial results would have
totaled (euro)1,462.6 million, falling 13.6% versus the
above-mentioned comparable figure of 2002. Net financial debt of
Telefonica Group reached (euro)19,235.3 million as of December 2003,
decreasing (euro)3,297.8 million from 2002.
Income (loss) before tax and minority interest
Income (loss) before tax and minority interest consists of profit (loss)
from ordinary activities, extraordinary income, losses on sales of fixed assets
and extraordinary expenses. Income before tax and minority interest was
(euro)3,362.5 million in 2003 compared to a loss of (euro)14,601.1 million in
2002.
This principal cause for the increase was due to extraordinary losses in
2002 ((euro)16,217.9 million) related to the assets and restructuring costs of
UMTS and those of Terra Lycos, Telefonica Deutschland and Pearson that were
accounted for last year.
Extraordinary revenues increased to (euro)1,167.2 million in 2003 from
(euro)474.6 million in the previous year, due principally to the capital gain
for the sale of Antena3 TV for (euro)392.3 million and the net capital gain
related to real estate disposals amounting to (euro)180.9 million.
Extraordinary expenses decreased to (euro)2,416.8 million in 2003 from
(euro)16,692.5 in 2002. Extraordinary expenses for 2003 primarily related to
the provision relating to the 5,489 employees that participated in the
"Streamlining Social Plan" 2003-2007 ((euro)1,372.3 million) and the costs
associated to the different contingencies and compensation for workforce
reduction at Telesp and Telefonica del Peru.
Corporate income tax
The provision for corporate income tax expense at the consolidated level
was (euro)913.4 million compared to the fiscal credit that arose in 2002 due to
the depreciation in value (provision for investment valuation allowances,
deductible) of European subsidiaries that were awarded UMTS licenses.
Minority interests
Profit attributable to minority interests was (euro)245.5 million in 2003
compared to a loss attributable of (euro)5,795.6 million in 2002, primarily due
to (euro)4,600 million losses by the Telefonica Moviles group relating to the
write-off of UMTS assets in Europe and (euro)900 million of extraordinary
expenses incurred by Terra Lycos in 2002. The improved performance in 2003 was
mainly due to the smaller losses in Terra Lycos and higher net income in the
companies operated by Telefonica Latinoamerica.
Net income
Consolidated net income amounted to (euro)2,203.6 million in 2003 compared
to a loss of (euro)5,576.8 million in 2002.
Material Differences Between U.S. GAAP and Spanish GAAP
The principal differences between U.S. GAAP and Spanish GAAP relevant to
us are discussed below. See also note 25 to the Consolidated Financial
Statements included elsewhere herein.
o We have performed in 2003 and prior years some business combinations
accounted for under Spanish GAAP using the pooling of interest method.
Under U.S. GAAP, these acquisitions were recorded using the purchase
accounting method. In the case where a capital increase in a
subsidiary is carried out to effect a business combination that is
part of a broader corporate reorganization and which is accounted for
using the purchase accounting method, under U.S. GAAP Telefonica
recognizes the increase in its investment as a result of the capital
increase by crediting shareholders' equity.
o Prior to 1988, Spanish GAAP permitted the revaluation of fixed assets.
As a result of such revaluation, in years prior to 1988, we stated our
property, plant and equipment at the then current replacement cost
less
121
accumulated depreciation, and credited the revaluations to the surplus
account shown on the balance sheet under "other reserves".
Depreciation was calculated each year based on the then current gross
replacement cost using estimated remaining useful lives. Between 1988
and 1995, Spanish GAAP did not permit such revaluations, and we used
historical cost basis accounting. In 1996, new legislation permitted
us to write up the value of certain of our assets. This write-up was
reversed in the reconciliation to U.S. GAAP of shareholders' equity.
o In accordance with Spanish GAAP, interest incurred during periods
exceeding 12 months in which assets are under construction may be
capitalized. However, interest incurred during periods in which
qualifying assets are under construction are capitalized and amortized
over such qualifying asset's expected life under U.S. GAAP.
o Start-up costs are capitalized under Spanish GAAP, but expensed under
U.S. GAAP.
o Spanish GAAP requires that research and development expenses and
capital increase expenses be capitalized and amortized over a period
not exceeding five years. Such expenses are expensed in current
periods and reduced from capital proceeds, respectively, under U.S.
GAAP.
o Under Spanish GAAP, provisions are recorded for early retirement
expenses in the period during which management announces the early
retirement programs. Under U.S. GAAP, early retirement provisions are
recorded in the period during which an agreement is reached with the
employee.
o Under Spanish GAAP exchange gains may be deferred. Under U.S. GAAP,
exchange gains are included in income on a current basis.
o Under Spanish GAAP, revenues and expenses are recognized on accrual
basis, i.e., when the goods and services are actually provided,
regardless of when the resulting monetary or financial flow occurs.
Under U.S. GAAP, according to SAB 104, some revenues must be deferred.
o SFAS No. 115 requires certain investments in financial assets to be
classified on the basis of the purpose for which they were acquired
(held-to-maturity securities, trading securities or available-for-sale
securities). The treatment of the unrealized gains and losses differs
depending on the classification:
o unrealized gains and losses (other than permanent diminutions in
value) on securities that we consider held-to-maturity are not
recorded.
o unrealized gains and losses on securities considered
available-for-sale are not recorded in the income statement but
included as a separate equity caption.
o unrealized gains or losses on trading securities are recorded in the
income statement.
These criteria differ from Spanish GAAP.
o Under Spanish GAAP, derivatives not assigned as hedge are accounted
for at the lower of their cost or market value and those assigned as
hedge generally are considered a change in hedge item characteristics.
Under U.S. GAAP all derivatives are accounted at fair value through
earnings and all derivatives assigned as hedge instruments may have a
different accounting or require its hedge item also to be accounted at
fair value. Additionally, measuring hedge ineffectiveness differs
between Spanish and U.S. GAAP.
o Under Spanish GAAP, goodwill is amortized on a straight-line basis
over the expected life of asset. Under U.S. GAAP, in accordance with
SFAS No. 142, goodwill and intangible assets deemed to have indefinite
lives should no longer be amortized but instead are subject to
periodic impairment testing under a fair value approach. SFAS No. 142
requires the testing of all goodwill and intangibles deemed to have
indefinite lives for impairment as of January 1, 2002.
o Under Spanish GAAP, companies in which significant influence is
maintained over the management are carried by the equity method and
investments in companies in which a company owns less than 50% but
122
has the majority of the common voting stock or are controlled by a
company must be consolidated. In addition, a holder of at least 20% or
3%, for listed investments, presumes a significant influence. In
general, under U.S. GAAP, only companies in which a holding of between
20% and 50% is owned are carried by the equity method, unless there is
evidence that significant influence is exercised over their
management. Investee companies in which a participation above 50% and
control rights exist are consolidated.
Under U.S. GAAP, shareholders' equity was (euro)16,314.6 million at
December 31, 2004, compared with (euro)16,225.1 million under Spanish GAAP.
Under U.S. GAAP, shareholders' equity was (euro)17,291.4 million at December
31, 2003, compared with (euro)16,756.6 million under Spanish GAAP. Under U.S.
GAAP, shareholders' equity was (euro)16,989.3 million at December 31, 2002,
compared with (euro)16,996.0 million under Spanish GAAP.
Under U.S. GAAP, net income was (euro)2,578.0 million for the year ended
December 31, 2004 compared to (euro)2,877.3 million under Spanish GAAP. Under
U.S. GAAP, net income was (euro)2,686.1 million for the year ended December 31,
2003 compared with (euro)2,203.6 million under Spanish GAAP. Under U.S. GAAP,
net income was negative (euro)5,214.5 million for the year ended December 31,
2002 compared with negative (euro)5,576.8 million under Spanish GAAP.
For additional information concerning significant differences between U.S.
GAAP and Spanish GAAP, as well as a reconciliation of net income and
shareholders' equity to U.S. GAAP, please see note 25 to the Consolidated
Financial Statements included elsewhere herein.
New U.S. Accounting Pronouncements
Statements of Financial Accounting Standards No. 123 (Revised 2004):
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared
Based Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock
compensation awards issued to employees. Rather, SFAS 123R requires companies
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost
will be recognized over the period during which an employee is required to
provide services in exchange for the award--the requisite service period
(usually the vesting period). SFAS 123R applies to all awards granted after the
required effective date, December 15, 2005, and to awards modified,
repurchased, or cancelled after that date. SFAS 123R will be effective for our
fiscal year ending December 31, 2005. The Company does not anticipate that
adoption of this Standard will have a material effect on its financial
position, results of operations, or cash flows.
Statements of Financial Accounting Standards No. 151: Inventory Costs - An
Amendment of ARB No. 43, Chapter 4
On November 24, 2004, the FASB issued SFAS No. 151, "Inventory Cost, a
revision of ARB No. 43, Chapter 4". The amendments to SFAS No. 151 aim to
improve financial information, stating that the expenses of inactive
facilities, transportation costs, manipulation costs and scrap material costs
should be recorded in the statement of operation as expenses of the period. The
application of fixed cost to inventories should be based on the normal capacity
of the production facilities.
SFAS No. 151 will be applicable to valuation of Inventories by the end of
the first reporting period ending after June 15, 2005. The Company does not
anticipate that the adoption of SFAS No. 151 will have a material impact on its
financial position, cash flows or results of operations.
Statements of Financial Accounting Standards No. 153: Exchanges of
Non-monetary Assets - An Amendment of APB Opinion No. 29
On December 16, 2004, the FASB issued SFAS N0.153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29", which amends
Accounting Principles Board Opinion No. 29 "Accounting for Nonmonetary
Transactions". This amendment is based on the idea that exchange transactions
should be valued in accordance with the value of the exchanged assets. The
exception made for similar non-monetary productive assets is eliminated and
substituted by a more extensive exception related to non-monetary assets with a
non-commercial consideration. APB No. 29 stated that the exchange transaction
of a productive asset for a similar one should be recorded at the book value of
the exchanged asset.
SAS No. 153 will be applicable for non-monetary asset exchange
transactions occurring in fiscal periods beginning after June 15, 2005. The
Company does not anticipate that the adoption of SFAS No. 153 will have a
material impact on its financial position, cash flows or results of operations.
SAB No. 107: Shared Based Payment
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB)
relating to the FASB accounting standard for stock options and other
share-based payments. The interpretations in SAB No. 107, "Share-Based
Payment," (SAB 107) express views of the SEC Staff regarding the application of
SFAS No. 123 (revised 2004), "Share-Based Payment "(Statement 123R). Among
other things, SAB 107 provides interpretive guidance related to the interaction
between Statement 123R and certain SEC rules and regulations, as well as
provides the Staff's views regarding the valuation of share-based payment
arrangements for public companies. The Company does not anticipate that
adoption of SAB 107 will have any effect on its financial position, results of
operations or cash flows.
FIN No. 46 - Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51
In January 2003, the Financial Accounting Standards Board ("FASB")
released Interpretation No. 46 Consolidation of Variable Interest Entities
("FIN 46") which requires that all primary beneficiaries of Variable Interest
Entities (VIE) consolidate that entity. FIN 46 is effective immediately for
VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains
an interest after that date. It applies in the first fiscal year or interim
period beginning after June 15, 2003 to VIEs in which an enterprise holds a
variable interest it acquired before February 1, 2003. In December 2003, the
FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the
provisions of the interpretation and to defer the effective date of
implementation for certain entities. Under the guidance of FIN 46R, entities
that do not have interests in structures that are commonly referred to as
special purpose entities are required to apply the provisions of the
interpretation in financials statements for periods ending after March 14,
2004. As indicated in note 25.20.4 the only impact on the application of FIN 46
R was the desconsolidation of Telefonica Finance our trust preferred shares
vehicle.
123
SAB No. 104 - Revenue Recognition and EITF 00-21
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is currently following the
guidance of SAB 104. SAB 104 also revises or rescinds certain interpretive
guidance regarding SAB 101 that was in conflict with the provisions of EITF
00-21.
In 2004, The Company adopted EITF 00-21, 'Revenue Recognition' (SAB 104),
which revises or rescinds certain interpretive guidance regarding SAB 101 that
was in conflict with the provisions of EITF 00-21. The effects of this
implementation are explained in Note 25.4.
EITF 04-1: Accounting for Preexisting Relationships between the Parties to
a Business Combination
This Issue addresses the accounting for preexisting relationships between
the parties to a business combination. The consensuses in this Issue should be
applied to business combinations consummated and goodwill impairment tests
performed in reporting periods beginning after October 13, 2004. The
application of this new accounting literature by Telefonica had no impact on
its financial position, cash flows or results of operations.
EITF Issue No. 01-08 - Determining Whether an Arrangement Contains a Lease
In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to clarify
the requirements of identifying whether an arrangement should be accounted for
as a lease at its inception. The guidance in the consensus is designed to
mandate reporting revenue as rental or leasing income that otherwise would be
reported as part of product sales or service revenue. EITF Issue No. 01-08
requires both parties to an arrangement to determine whether a service contract
or similar arrangement is, or includes, a lease within the scope of SFAS No.
13, "Accounting for Leases." The application of this EITF has not had any
effect on The Company's financial position, cash flows or results of
operations.
EITF Issue No. 03-11 - Reporting Realized Gains and Losses on Derivative
Instruments That Are Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for Trading
Purposes
In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that
determined whether realized gains and losses on derivative contracts not held
for trading purposes should be reported on a net or gross basis is a matter of
judgment that depends on the relevant facts and circumstances and the economic
substance of the transaction. In analyzing the facts and circumstances, EITF
Issue No. 99-19, and Opinion No. 29, "Accounting for Nonmonetary Transactions,"
should be considered. EITF Issue No. 03-11 is effective for transactions or
arrangements entered into after September 30, 2003. The application of this
EITF has not had any effect on The Company's financial position, cash flows or
results of operations.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
The table below sets forth our consolidated cash flows for the periods
indicated. Positive figures refer to cash inflows and negative figures or those
in brackets refer to cash outflows.
Year ended December 31,
---------------------------------------
2002 2003 2004
---------------------------------------
(in millions of euro)
Net cash provided by operating activities........ 8,814.6 9,191.1 10,186.8
Net cash used in investing activities............ (5,780.2) (5,171.7) (8,978.7)
Net cash used in financing activities............ (2,101.1) (4,178.9) (1,961.2)
A more detailed consolidated cash flow table is included in note 25 to the
Consolidated Financial Statements for the year ended December 31, 2004.
Net Cash Provided by Operating Activities
Net cash provided by operating activities amounted to (euro)10,186.8
million in 2004, (euro)9,191.1 million in 2003 and (euro)8,814.6 million in
2002. Net cash provided by operating activities increased 10.8% in 2004
compared to 2003. This growth in 2004 was mainly due to the strong performance
of cash received from customers. Net cash inflow from operating activities
(which is a subtotal of cash received from customers minus cash paid to
suppliers and employees and minus income taxes paid) increased 6.1% in 2004 to
(euro)11,338.98 million from (euro)10,687.91 million in 2003. This variation
was primarily due to cash received from customers, which totaled
(euro)36,339.08 million at the end of 2004, an increase of 8.8% compared to
2003. This significant growth was provided by almost all business lines through
commercial efforts and the increase in our client base and, in case of
Telefonica Moviles, the integration of the new operators acquired from
Bellsouth in Latin America in 2004. Net cash inflow from operating activities
increased 2.9% in 2003 to (euro)10,687.91 million from (euro)10,384.3 million
in 2002, due principally to to increases in cash provided by Telefonica
Moviles.
In 2004, cash paid to suppliers and employees totaled (euro)24,674.10
million, 10.0% more than in 2003. These higher outflows were also mainly
explained by larger payments of commercial and advertising expenses and handset
purchases from the commercial efforts made by the Telefonica group during 2004
and, in the case of Telefonica Moviles Group, the incorporation of Bellsouth's
Latin American operations in 2004. Payments to employees, however, decreased
compared to 2003, mainly supported by the savings obtained through the
2003-2007 headcount reduction program at Telefonica de Espana.
Net cash outflow for interest paid less dividends and interest charged
(which is a subtotal of dividends from associated companies plus net interest
paid) decreased 23.0% to (euro)1,152.2 million in 2004 from (euro)1,496.9
million in
124
2003. This decrease was principally due to a decrease in net interest paid,
which is the principal compenent of net cash outflow to (euro)1,223.4 million in
2004 from (euro)1,559.5 million in 2003. The principal reasons for the decrease
in net interest paid were continued low interest rates combined with a average
net financial debt reduction of approximately 7.1% at a consolidated level in
2004. Net cash outflow for interest paid less dividends and interest charged
decreased 4.6% in 2003 to (euro)1,496.85 million from (euro)1,569.7 million in
2002, principally due to the decrease in net interest paid to (euro)1,559.5
million in 2003 from (euro)1,610.9 million in 2002.
Net Cash Used in Investing Activities
Net cash used in investing activities increased to (euro)8,978.7 million
in 2004 from (euro)5,171.7 million in 2003, which was a decline from
(euro)5,780.2 million in 2002. The principal components of net cash used in
investing activities are:
o net cash outflow for capital expenditures (which is a subtotal of net
payments for tangible and intangible assets and deferred charges and
proceeds from sale of property, plant and equipment);
o and net cash outflow for investments in affiliates (which is a
subtotal of proceeds from investments in affiliates, proceeds from
capital grants, and purchase of new investments, net of cash
acquired).
Net cash outflow for capital expenditures increased slightly to
(euro)3,488.2 million in 2004 from (euro)3,483.8 million in 2003 compared to
(euro)4,311.8 million in 2002. Our principal capital expenditures in 2004
amounted to (euro)1,305.8 million from Telefonica de Espana, (euro)1,385.7
million from our Telefonica Moviles and (euro)771.9 million from our Telefonica
Latinoamerica. Other payments amounted to (euro)24.7 million, which relates to
payments from our other business lines. The stability of net cash outflow for
capital expenditures was due principally to a more controlled and conservative
investment policy implemented in 2002 and 2003. During 2004 Telefonica de
Espana continued to implement a policy of shifting its focus toward broadband
by stepping up the deployment of ADSL technology and devoting greater resources
to the growing Internet and multimedia businesses without neglecting the needs
of its traditional business. Despite increasing its investment in broadband,
the reduction of unit costs and the rationalization of investments (re-use of
vacant infrastructure, process redesign, etc.) enabled Telefonica de Espana to
significantly reduce its capital expenditures compared to 2003. The principal
capital expenditures made by our mobile business in 2004 were investments in
wireless telephony networks and technology. For example, our mobile business in
Brazil invested to develop an enhanced version of its CDMA network and to
increase its capacity and coverage. Our mobile business in Spain invested in
its UMTS network and our mobile businesses in Argentina and Mexico invested to
deploy the GSM network. Capital expenditures by our Latin American fixed line
business rose in 2004, principally from increased investments in broadband
technology made by our fixed line businesses in Argentina and Peru.
Net cash outflow for investments in affiliates increased 120.0% to
(euro)6,380.9 million in 2004 from (euro)2,112.2 million in 2003. Our main
investments in affiliates in 2004 were (euro)208.7 million related to tender
offers to increase our interests in the Brasilcel subsidiaries, (euro)3,179.4
million for the acquisition of the Bellsouth's operators in Latin America and
(euro)483.7 million for the acquisition of additional Portugal Telecom shares.
Our main investments in affiliates in 2003 were (euro)1,030 million for the
take-over bid of Terra Networks and (euro)461 million for the acquisition of
Via Digital shares and its subsequent integration with Sogecable. Net cash
outflow for investments in affiliates increased 35.7% to (euro)2,112.2 million
in 2003 from (euro)1,556.5 million in 2002.
Net Cash Used by Financing Activities
Net cash used by financing activities decreased to (euro)1,961.2 million
in 2004 from (euro)4,178.9 million in 2003. This was due principally to the
proceeds, net of repayments, from other loans, credit facilities and notes
payable, which amounted to (euro)2,113.4 million in 2004 compared to a negative
figure of (euro)3,927.5 in 2003. Debentures and bonds redeemed, net of
proceeds, amounted to (euro)1,217.6 million in 2004 compared to a negative
figure of (euro)1,223.1 in 2003). Finally, dividends paid, net of proceeds from
the issuance of stock, amounted to (euro)2,857.0 million in 2004 compared to
(euro)1,474.5 million in 2003. In 2003, the principal component of net cash
used by financing activities was the repayments of other loans, credit
facilities, notes payable and short term loans, net of proceeds, which amounted
to (euro)3,927.5 million. Net cash used by financing activities doubled
approximately in 2003 to (euro)4,178.9 million from (euro)2,101.1 million in
2002.
125
Anticipated Uses of Funds
Our principal liquidity and capital resource requirements consist of the
following:
o capital expenditures for existing and new operations;
o acquisitions of new licenses, or other operators or companies engaged
in complementary or related businesses such as Telefonica
Moviles'acquisition of BellSouth's wireless operations in Latin
America and Telefonica Movil Chile, the acquisition of Cesky Telecom
and other potential acquisitions;
o debt service requirements relating to our existing and future debt;
o costs and expenses relating to the operation of our business; and
o dividend and early retirement payments.
We expect to spend approximately 48% of our capital expenditures budget for
2005 on our fixed line telephony and Telefonica Empresas' businesses (including
broadband services, which are expected to account for approximately 50% of our
fixed line telephony and Telefonica Empresas business expenditures in 2005
compared to approximately 39% in 2004), approximately 40% on our wireless
services business and approximately 12% on our other lines of business. Our
principal capital expenditures are described in "Item 4--Information on the
Company". Our anticipated amounts of capital expenditures and investments in
affiliates and the underlying assumptions are subject to risks and
uncertainties, and actual capital expenditures and investments in affiliates may
be less than or exceed these amounts. See "Cautionary Statement Regarding
Forward-Looking Statements".
Anticipated Sources of Liquidity
Cash flows from operations are our primary source of cash funding for
existing operations, capital expenditures, debt interest and principal payments.
We also rely on external borrowings, including a variety of short- and
medium-term financial instruments, principally bonds and debentures, and
borrowings from financial institutions. Cash and equivalents are mainly held in
euro and euro-denominated instruments. Our gross financial debt was
(euro)24,183.2 at December 31, 2004, which includes cash ((euro)855 million) and
short and long-term financial investments ((euro)2,724.1), but excludes other
payables ((euro)373.55 million) and uncalled capital payments payable
((euro)4.50 million). These items are taken into consideration to calculate our
net financial debt, which was (euro)20,982.2 million at December 31, 2004. As
described below, approximately 3.5% of our consolidated gross financial debt at
December 31, 2004 represented zero-coupon obligations.We believe that, in
addition to internal generation of funds, our medium-term note program, our euro
commercial paper program, our corporate domestic promissory note program and
available lines of credit will provide us with substantial flexibility for our
future capital requirements as existing debt is retired. As of the date of this
Annual Report, our management believes that our working capital is sufficient to
meet our present requirements.
The following table describes our consolidated gross financial debt, as
stated in euro using the December 31, 2004 exchange rate. We may have exchange
rate financial derivatives instruments assigned to the underlying debt
instruments. In 2004, the average interest rate on our consolidated gross
financial debt was 6.7%. The debt profile below shows the notional amount at the
date at which we entered into the related derivatives.
Amortization schedule
audited amounts
(in millions of euros) 2005 2006 2007 2008 2009 Subsequent Total
------------------------------------------------------------------------------------------------------------------------------------
Non convertible euro and foreign
currency debentures, bonds and
other marketable debt securities... 3,350.95 1,570.63 675.99 1,015.05 825.00 5,134.53 12,572.15
Promissory notes and commercial paper. 1,892.65 6.56 6.37 11.51 5.91 67.92 1,990.92
Corporate promissory notes............ 4.70 -- -- -- -- -- 4.70
Loans and credits..................... 2,629.13 756.49 245.51 134.90 528.35 1,091.11 5,385.49
Foreign currency loans................ 1,535.97 474.30 315.13 749.42 811.04 344.12 4,229.98
126
audited amounts
(in millions of euros) 2005 2006 2007 2008 2009 Subsequent Total
------------------------------------------------------------------------------------------------------------------------------------
TOTAL................................. 9,413.40 2,807.98 1,243.00 1,910.88 2,170.30 6,637.68 24,183.24
At December 31, 2004, we had unused committed credit lines in an amount of
(euro) 5,271 million, and all of them bear interest at a floating rate based on
market indices, principally the Euro Interbank Offered Rate (EURIBOR) and the
London Interbank Offered Rate (LIBOR). At the same date, additionally we had
(euro)1,942 million available of the (euro)3 billion syndicated revolving credit
facility we entered into on July 6, 2004. See "Item 7 - Major Shareholders and
Related Party Transactions--Related Party Transactions".
Our borrowing requirements are not significantly affected by seasonal
trends.
The table below sets forth the ratings of our short and long term debt as
of the date of this Annual Report. A credit rating is not a recommendation to
buy, sell or hold securities, may be subject to revision at any time and should
be evaluated independently of any other rating.
Long-Term Short-Term
Rating Agency Issuer (1) Debt Debt Outlook Last Update
---------------------------------------------------------------------------------------------------------------
Standard & Poor's Telefonica, S.A. A A-1 CreditWatch-Negative March 31, 2005
Moody's Telefonica, S.A. A3 P-2 Stable December 2, 2002
Fitch Telefonica, S.A. A F-1 Rating Watch-Negative April 1, 2005
On March 31 and April, 2005, Standard and Poor's and Fitch placed our
corporate credit ratings on "CreditWatch" and "Rating Watch", respectively, with
negative implications. These placements followed the announcement by the Czech
Republic's privatization commission that our (euro)2.7 billion bid to acquire a
51.1% state in Cesky Telecom a.s. is the preferred bid in the auction process.
Our ability to use external sources of financing will depend in large part
on our credit ratings. We believe that we are well-positioned to raise capital
in the public debt markets. However, a downgrade of any of the ratings of our
debt by any of Moody's, Standard & Poor's and/or Fitch may increase the cost of
our future borrowing or may make it more difficult to access the public debt
markets. In connection with the credit rating agencies' review of our debt
ratings, the rating agencies may give considerable weight to the general
macroeconomic and political conditions in Latin America given our high degree of
exposure in such region, the performance of our businesses in the Spanish
market, our ability to turn around our non-profitable businesses, our financial
and dividend policy and our acquisition policy.
Intragroup Loans
We lend funds to our operating subsidiaries, directly or through holding
companies that head our different lines of business. These funds are derived
from retained cash flows, loans, bonds and other sources (such as asset
disposals). Some of the subsidiaries receiving funds are located in Latin
American countries.
C. RESEARCH AND DEVELOPMENT
We continue to be firmly committed to technological innovation as a key
tool to achieve a sustainable competitive edge, such as preempting market trends
and differentiating our products, through the introduction of new technologies,
with the development of both new products and business processes with a view to
becoming a more effective, efficient and customer oriented Group.
In 2004, Telefonica has established a new model in technological innovation
management to align, even more, our technological innovation with the strategy
of the Telefonica Group. Also it promotes the collaboration with other agents,
who will become "technological partners" (clients, Public Administrations,
suppliers, content providers, other enterprises, etc.).
As regards the means of obtaining innovative solutions, Telefonica also
considers that achieving the differentiation of its products with respect to its
competitors and a better market positioning cannot be based solely
127
on acquired technology. It is necessary to foster research and development
activities to guarantee this differentiation and to drive forward other
innovation activities. Our research and development (R&D) policy is aimed
at:
o developing new products and services in order to gain market share;
o fostering customer loyalty;
o increasing revenues;
o improving management;
o improving business practices;
o increasing the quality of our infrastructure and services to improve
customer service and reducing costs.
In 2004 the Telefonica Group undertook technological innovation projects
focusing on profitable innovation, process efficiency, the creation of new
sources of revenues, customer satisfaction, the consolidation of the new markets
and technological leadership. The technological innovation activities have been
especially integrated in Telefonica's strategy to create value through broadband
and IP network communications and services.
Also, projects to promote the Information Society were performed, new
services that will use o3G mobile technologies capacities and new wireless
handsets were prepared, and work was performed with a view to identifying as
soon as possible the emerging technologies that might have a relevant impact on
the businesses, testing them with trials relating to new services, applications
and platform prototypes.
In 2004 new systems were developed and the existing systems were
substantially improved, the detail being as follows:
o Commercial and operating management systems, aimed at providing
innovative solutions for business processes, in order to provide
intelligence thereto and to increase the profitability and
effectiveness of the procurement, customer service, billings and
infrastructure management processes.
o Network and service management systems, aimed at strengthening
infrastructures and their quality, using innovative solutions.
Most of the R&D activities are undertaken by Telefonica Investigacion y
Desarrollo S.A.U. (Telefonica I&D). a wholly-owned investee of Telefonica, which
works principally for the Group's lines of business. In performing its
functions, it receives the assistance of other companies and universities,
Telefonica I&D's mission focuses on improving the Telefonica Group's
competitiveness through technological innovation and product development.
Telefonica I&D conducts experimental and applied research and product
development to increase the range of our services and reduce operating costs. It
also provides technical assistance to our Latin American operations. Telefonica
I&D's activities include the following:
o the development of new products and fixed telephone services,
particularly the development of such value added services as broadband, wireless
communications and Internet services for the public, corporate, wireless and
multimedia sectors, and the automation of customer services while integrating
new opportunities of the GPRS and UMTS systems;
o the development of interactive services, focusing on the development
of information services and new infrastructure to provide such
services, primarily in the Internet Protocol environment;
o the development of management systems designed to strengthen
infrastructure and its quality and to develop innovative solutions for
the management of our networks and services;
o the development of business support systems intended to provide
innovative solutions for business processes; and
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o innovation in business services intended to reinforce technological
skills in the areas of networks, software and information
technologies.
In 2004 Telefonica I&D opened a new R&D center in Mexico DF (Telefonica I&D
Mexico). This subsidiary was created, as Telefonica Pesquisa e Desenvolvimento,
located in Sao Paulo, to address the Latin American market.
In 2004, approximately 55% of Telefonica I&D's research and development was
for the benefit of Telefonica de Espana, 24% for the benefit of Telefonica
Moviles, 11% for Telefonica Latinoamerica, 4% for Telefonica Empresas and 6% for
our other subsidiaries, such as Atento, Terra and Telefonica Contenidos.
At December 31, 2004, Telefonica I&D had 1271 employees, who also
collaborate with Telefonica R&D qualified professionals from more than 32
companies and 14 universities. In 2004, 1660 projects were undertaken and
incorporated into our strategy for value creation via broadband communications
and services, and IP networks. New projects were started to develop profitable
innovations providing an increase in efficiency to the different
telecommunications processes, while maintaining our technological leadership.
Our total research and development expenses were (euro)513 million,
(euro)444 million and (euro)461 million in 2002, 2003 and 2004.. These expenses
represented 1.8%, 1.6% and 1.5% of our consolidated revenues in each of those
years, respectively. These figures have been calculated using the guidelines set
out in the OECD Manual. These guidelines include expenses for research and
development that, because of timing of projects or accounting classifications,
we do not include in their entirety in our consolidated balance sheet.
As a result, the methodology used in calculating our total research
expenses for 2004 is not the same as the methodology used for the research and
development expenses reported in 2002 and 2003 ((euro)94.4 million and (euro)
73,3 million, respectively) in our Annual Report on Form 20-F for those years.
Lastly, it should be noted in connection with technological innovation, and
in particular with R&D, that in 2003 the Telefonica Group, through Telefonica
I+D, implemented measures aimed more at the medium and long term in order to
detect, understand, develop and apply, using strategic studies, technological
monitoring and experimental development methods, issues, singular matters,
opportunities and particularly technologies that will have an effect on the
performance of the Group's various lines of business. This includes
participation in projects financed mainly by Spanish Administration or Regional
Administrations where Telefonica I&D centers are located (Aragon, Castilla y
Leon, Cataluna y Madrid). Also this includes extensive participation in European
projects promoted and financed mainly by the EU.
D. TRENDS AND OUTLOOK
Our strategy going forward will enable us to continue enhancing cash
returns through growth and transformation. We have a clear strategy to grow cash
flows and improve our return on capital. The customer is our strategy's starting
point, and the focus of our future development.
Management for revenue growth will focus on managing and developing the
broadband market opportunities, while maximizing growth in the wireless sector
and accomplishing continuous growth in the Latin American fixed-line market.
o In broadband we will continue to develop the opportunities offered by
the market, innovating to make broadband truly "mass-market".
o In the wireless sector, we stand to capture further growth, both in
Spain and in Latin America, given the important potential for market
growth.
In Spain:
o In the short-term, our aim will be to further grow our voice business
(increased penetration, tariff and service innovation,
prepaid-to-contract migrations and loyalty schemes)
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o In the medium term, the aim will be to further grow data services
(offer customized data services oriented to all customers by segment,
enhance customer experience with new content and applications, and
guarantee access to affordable and enhanced handsets)
o UMTS deployment will simultaneously support voice growth and guarantee
the future contribution of data services.
In Latin America:
o Our main goal is to keep growing our costumer base in Telefonica
Moviles' current Latin American markets. Our growth strategy is based
on strengthened local branding, leveraged scale in handset policies,
improved channel reach and productivity and transferred best practices
from Telefonica Moviles Espana across our Latin American operations
(channels, branding, loyalty programs).
o Latin American fixed-line business will keep growing organically. The
aim will be to retain and grow our customer base while stimulating
usage and annual revenue per user while achieving continuous organic
revenue growth.
o Retain and grow customer base maximizing penetration by income level,
accelerating internet mass penetration, retaining customers through
bundling and further segmentation and anticipating and minimizing
churn from high-value, high risk customers.
o Stimulating usage and annual revenue per user, with traffic bundling
and flat rates, increasing weight of fixed fees, introducing new value
added services and developing new businesses (telemergency, handsets,
etc.) leveraging customer base.
At the same time, the Telefonica Group is transforming itself in order to
grow its cash flow and improve return on capital. This transformation is
centered around its customers and focused on two key aspects aiming to reach an
integrated telecom group serving all customers' needs in each segment:
o Becoming a commercially oriented company, developing commercial
excellence across our business lines in order to stimulate growth. To
do this, the aim is to shift the Telefonica Group's operations towards
commercial activities.
More efficient business model: We are quickly evolving the Telefonica
Group's economic model towards a more agile model. We are optimizing capital
expenditures while redirecting our capital expenditures towards broadband and
new services and becoming a much less capital intensive business.
This section contains forward-looking statements that are based upon
certain assumptions. Such forward-looking statements are not guarantees of
future performance and involve numerous risks and uncertainties, and actual
results may differ materially from those anticipated. For a discussion of the
important factors that could cause such differences please see "Item 3--Key risk
factors", "Item 4--Information on the Company", "Item 5--Operating and Financial
Review and prospects" and "Item 11--Quantitative and Qualitative Disclosures
about Market Risk".
E. OFF-BALANCE SHEET ARRANGEMENTS
We have commitments that could require us to make material payments in the
future. These commitments are not included in our consolidated balance sheet at
December 31, 2004. Our principal commitments as of the date of this Annual
Report are detailed in the Consolidated Financial Statements as is described
below. These commitments are primarily contingent obligations in the form of
guarantees for our subsidiaries and put and call rights with respect to some of
our joint ventures. These arrangements allow us to provide the necessary credit
support for some our subsidiaries to develop their operations and allow us to
enter into joint ventures on market terms. As of the date of this Annual
Report, we are not aware of any events that would result in the material
reduction to us of any of these off-balance sheet arrangements. For a
discussion of our off-balance sheet commitments please refer to note 22(b) of
our Consolidated Financial Statements.
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F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table describes our contractual obligations and commitments
with definitive payment terms which may require significant cash outlays in the
future. The amounts payable are as of December 31, 2004.
Payments Due by Period
---------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------
(millions of euro)
Contractual Obligations .....................
Long-Term Debt Obligations(1)................ 24,183.24 9,413.40 4,050.98 4,081.18 6,637.68
Operating Lease Obligations(2)............... 1,524.28 279.18 542.71 265.84 436.55
Purchase Obligations(3)...................... 1,201.50 804.85 273.78 108.02 14.85
Other long term obligations(4)............... 6,019.64 864.57 2,242.31 1,095.31 1,817.45
---------------------------------------------------------------------
Total........................................ 32,928.66 11,362.00 7,109.78 5,550.35 8,906.53
---------------------------------------------------------------------
---------------------
(1) Pursuant to Spanish GAAP, Capital (Finance) Lease Obligations are not
calculated separately and are instead included as part of our Debt
Obligations.
(2) Our operating lease obligations have in most cases extension options
conditioned on the applicable law of each country. Accordingly, we have
included only those amounts that represent the initial contract period.
(3) Material Purchase Obligations include network equipment and audiovisual
content obligations, and payment obligations under existing licenses.
(4) Other Long Term Obligations include long term debt obligations that require
us to make cash payments, excluding financial debt obligations included in
the table above.
For details of the composition of, and changes in, our debt, see notes 14,
15 and 16 to our Consolidated Financial Statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
We are managed by our Board of Directors, which consists of a minimum of
five and a maximum of 20 members. All members of the Board of Directors are
elected to five-year terms by our shareholders during a general meeting of
shareholders. The Board of Directors, which meets monthly, elects from among its
own members the chairman and the vice chairmen. Our Board of Directors is the
supervisory and controlling body and determines our strategy and coordination
with the other members of the Telefonica Group. Our Board of Directors has
expressly delegated all of its authority and power to the Standing Committee
except as prohibited by Spanish corporate law or under our Articles of
Association. Our Board of Directors is informed at each of its meetings of all
resolutions adopted by our Standing Committee and a summary of the minutes of
the sessions of our Standing Committee is distributed to all members of our
Board of Directors, who then vote whether or not to ratify the aforementioned
resolutions. The Standing Committee meets bi weekly and is composed of seven
members and the secretary of the Standing Committee. Our Board of Directors has
also instituted an audit and control committee, a nominating, compensation and
corporate governance committee, a human resources and corporate reputation
committee, a regulation committee, a service quality and customer service
committee, and an international affairs committee, each of which is composed of
between a minimum of three directors and a maximum of five directors, most of
whom are directors who do not hold executive functions.
Board of Directors
During 2004, the Board of Directors met 11 times. At April 15, 2005, the
Board of Directors had met four times during 2005. At April 15, 2005, the
directors of Telefonica, S.A., their respective positions on the Board of
Directors and the year they were appointed to such positions were as follows:
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First Current Term
Name Age Appointed Ends
-------------------------------------------------------------------------------------------
Cesar Alierta Izuel(1) 60 1997 2007
Isidro Faine Casas(1)(2) 62 1994 2006
Jose Antonio Fernandez Rivero(3)(4)(8) 54 2002 2007
Jesus Maria Cadenato Matia(1)(3) 49 2003 2008
Maximino Carpio Garcia(1)(4)(5) 59 1997 2007
Carlos Colomer Casellas(1)(7) 61 2001 2006
Alfonso Ferrari Herrero(6)(5)(9) 63 2001 2006
Jose Fernando de Almansa Moreno-Barreda(6) 55 2003 2008
Gonzalo Hinojosa Fernandez de Angulo(4)(7) 59 2002 2007
Miguel Horta e Costa 56 1998 2008
Pablo Isla Alvarez de Tejera(5)(9) 41 2002 2007
Luis Lada Diaz(6)(7) 55 2000 2006
Jose Fonollosa Garcia(3) 55 2003 2008
Antonio Massanell Lavilla(2)(4)(7)(9) 50 1995 2006
Enrique Used Aznar(6)(8)(9) 63 2002 2007
Mario Eduardo Vazquez 69 2000 2006
Antonio Viana-Baptista(1) 47 2000 2005
Gregorio Villalabeitia Galarraga(1)(3)(5)(6)(8) 54 2002 2007
Antonio Jesus Alonso Ureba(1)(8) 47 2001 2006
Ramiro Sanchez de Lerin Garcia-Ovies(10) 50 2003 --
---------------------
(1) Member of the Standing Committee of the Board of Directors.
(2) Nominated by Caja de Ahorros y Pensiones de Barcelona.
(3) Nominated by Banco Bilbao Vizcaya Argentaria, S.A.
(4) Member of the Audit and Control Committee of the Board of Directors.
(5) Member of the Nominating, Compensation and Corporate Governance Committee
of the Board of Directors.
(6) Member of the International Affairs Committee.
(7) Member of the Service Quality and Customer Service Committee.
(8) Member of the Regulation Committee.
(9) Member of the Human Resources and Corporate Reputation Committee.
(10) Mr. Sanchez de Lerin was appointed vice-secretary of the Board of Directors
on October 29, 2003 and is not a director.
A significant majority (14) of our current directors are non-executive
directors. In accordance with the regulations of our Board of Directors,
minorities of these directors (6) are appointed by our significant shareholders.
Our Board of Directors has expressly delegated all of its authority and
power to the Standing Committee except as prohibited by Spanish corporate law or
under our Articles of Association. This committee is made up of fewer Directors
and meets more frequently than our Board. The members of the Standing Committee
are Mr. Cesar Alierta Izuel, Mr. Isidro Faine Casas, Mr. Maximino Carpio Garcia,
Mr. Carlos Colomer Casellas, Mr. Jesus Maria Cadenato Matia, Mr. Antonio
Viana-Baptista, Gregorio Villalabeitia Galarraga and Mr. Alonso Ureba, who is
the secretary of the standing committee.
The Audit and Control Committee functions are regulated by our bylaws and
the Board of Directors regulations. The Audit and Control Committee has the
primary objective of providing support to our Board of Directors in its
supervisory oversight functions, specifically having the following
responsibilities:
o To report, through its Chairman, to our General Meeting of
Shareholders on matters raised at the General Meeting by the
shareholders relating to the functions and matters of competence of
the Committee;
132
o To propose to our Board of Directors, to submit to our General Meeting
of Shareholders, the appointment of our Auditors referred to in
Article 204 of the Stock Company Act, as well as, when appropriate,
the terms of their engagement, scope of professional assignment and
revocation or renewal of their appointment;
o To supervise the internal audit services;
o To examine the financial information process and the internal control
systems; and
o To maintain the necessary relations with the Auditors to receive
information on all matters that may put its independence at risk, and
any others related to the process of auditing our accounts, as well as
to receive information and maintain the communication with the Auditor
as required by law relating to the audit process and with respect to
the technical regulations on auditing.
The Audit and Control Committee meets at least once per quarter and as many
times as considered necessary. During 2004 the Audit and Control Committee met
11 times and, as of the date of this Annual Report, had met five times in 2005.
The members of the Audit and Control Committee are Mr. Antonio Massanell Lavilla
(chairman), Mr. Maximino Carpio Garcia, Mr. Jose Antonio Fernandez Rivero and
Mr. Gonzalo Hinojosa Fernandez de Angulo.
The Nominating, Compensation and Corporate Governance Committee is
responsible for reporting to the Board of Directors of the proposals for the
appointment of directors, members of the Standing Committee, and the other
committees of our Board of Directors, and top members of our management and our
subsidiaries. In addition, the Nominating, Compensation and Corporate Governance
Committee is responsible for the compensation packages for our Chairman and our
Chief Executive Officer, determining Directors' compensation and reviewing the
adequacy of the compensation packages and informing the Board of Directors and
top members of management's compensation. The Nominating, Compensation and
Corporate Governance Committee is responsible for preparing our Corporate
Governance Annual Report. The members of the Nominating, Compensation and
Corporate Governance Committee are Mr. Alfonso Ferrari Herrero (chairman), Mr.
Maximino Carpio Garcia, Mr. Pablo Isla Alvarez de Tejera and Mr. Gregorio
Villalabeitia Galarraga. During 2004 the Nominating, Compensation and Corporate
Governance Committee met ten times, and as of the date of this Annual Report,
had met three times.
The Human Resources and Corporate Reputation Committee is responsible for
reviewing our personnel policy and making proposals to our Board of Directors
regarding our personnel policy, and corporate reputation and promoting our
values within the Group. The Human Resources and Corporate Regulation Committee
met six times during 2004 and as of the date of this Annual Report had met two
times. The members of the Human Resources and Corporate Reputation Committee are
Mr. Pablo Isla Alvarez de Tejera (chairman), Mr. Alfonso Ferrari Herrero, Mr.
Antonio Massanell Lavilla and Mr. Enrique Used Aznar.
The Regulation Committee's main objective is to monitor the main regulatory
matters which affect the Telefonica Group. Another responsibility of the
Committee is to act as a communication and information channel between our
management team and our Board of Directors concerning regulatory matters. The
members of the Regulation Committee are Mr. Enrique Used Aznar (chairman), Mr.
Gregorio Villalabeitia Galarraga, Mr. Antonio Jesus Alonso Ureba and Mr. Jose
Antonio Fernandez Rivero. During 2004, the Regulation Committee met ten times,
and as of the date of this Annual Report, had met six times.
The Service Quality and Customer Service Committee is responsible for
monitoring and reviewing the standards of quality of the main services provided
by the Telefonica Group. The Service Quality and Customer Service Committee acts
as an information channel between our senior management team and our Board of
Directors. The members of the Service Quality and Customer Service Committee are
Mr. Gonzalo Hinojosa Fernandez de Angulo (president), Mr. Carlos Colomer
Casellas and Mr. Antonio Massanell Lavilla and Mr. Luis Lada Diaz. During 2004
the Service Quality and Customer Service Committee met four times, and as of the
date of this Annual Report, had met once.
The International Affairs Committee is responsible for analyzing the
international events and matters that affect the Telefonica Group and reporting
these events and possible consequences to our Board of Directors. The
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committee pays close attention to events taking place in countries where the
Telefonica Group has operations and which may affect our competitive position,
corporate image and financial results. The committee also oversees our
non-profit foundations in such countries. The members of the International
Affairs Committee are Mr. Jose Fernando de Almansa Moreno-Barreda (chairman),
Mr. Alfonso Ferrari Herrero, Mr. Enrique Used Aznar, Mr. Gregorio Villalabeitia
Galarraga and Mr. Luis Lada Diaz. The International Affairs Committee is
responsible for informing the Board of Directors of the international events
affecting the Telefonica Group's performance. During 2004, the International
Affairs Committee met on six occasions and as of the date of this Annual Report
had met once.
Biographies of Directors
Mr. Cesar Alierta Izuel serves as our Executive Chairman and Chairman of
our Board of Directors. Mr. Alierta began his career in 1970 as general manager
of the Capital Markets division at Banco Urquijo in Madrid until 1985. From June
1996 until his appointment as our Chairman, he was the Chairman of Tabacalera,
S.A. which after the merger with the French tobacco company, Seita, became
Altadis. Previously, he was the Chairman and founder of Beta Capital, which he
combined with his post as Chairman of the Spanish Financial Analysts'
Association as from 1991. He has also been a member of the Board of Directors
and Standing Committee of the Madrid Stock Exchange. In January 1997, Mr.
Alierta was appointed to our Board of Directors, and has also been appointed as
director of Telefonica Internacional (TISA), Plus Ultra, Terra and Iberia.
During his years as Chairman of Tabacalera, Mr. Alierta was also the Chairman of
the Board of Directors of Logista, a subsidiary of the Altadis group. Mr.
Alierta is currently a member of the Altadis Board of Directors and Standing
Committee. On 26 July 2000, Mr. Alierta was appointed as our Chairman and Chief
Executive Officer. Mr. Alierta holds a law degree from the University of
Zaragoza and an MBA from Columbia University (New York).
Mr. Isidro Faine Casas serves as our Vice-Chairman of the Board of
Directors. Mr. Faine is currently the General Manager of La Caja de Ahorros y
Pensiones de Barcelona ("la Caixa"). Mr. Faine has developed his professional
career working for several companies in different sectors of the economy, as
well as financial institutions, for over 20 years. Mr. Faine holds a doctorate
degree in Economics, a Diploma in Alta Direccion from IESE and a ISMP in
Business Administration from Harvard University. He is a financial analyst and
an academic at the "Real Academia de Ciencias Economicas y Financieras".
Mr. Jose Antonio Fernandez Rivero serves as Vice-Chairman of our Board of
Directors. Mr. Fernandez Rivero is currently also a member of the Board of
Directors of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), Iberdrola, S.A., and
Chairman of Adquira, S.A. Mr. Fernandez began his career in Arthur Andersen
(Systems) in Madrid in 1976. In 1977, he joined the International Division of
Banco de Vizcaya, S.A., were he served as the Manager of Administration and
Control from 1982 to 1985. In 1986, he was appointed Chairman of the Standing
Committee of Banque de Gestion Financiere, S.A. (Belgium), a subsidiary of Banco
de Vizcaya, S.A. Later in 1988 he worked for Banco Bilbao Vizcaya as Deputy
General Manager (Control and Planning Department of Retail Banking), and in 1989
he worked as Regional Manager of such Division. In 1990, he joined Banco
Exterior de Espana, S.A. as General Controller. In 1991, he was appointed as
General Controller for Corporacion Bancaria de Espana, S.A. (Argentaria). In
1994, he was named General Manager and in 1997, he was appointed General Manager
of Organization, Systems, Operations, Human Resources, Purchases and Real Estate
for Argentaria. Since 1999 until his early retirement in January 2003 as General
Manager, Mr. Fernandez Rivero was responsible for the Systems and Operations
Division for the BBVA Group. He holds a degree in economics and a master's
degree from The College of Europe, Bruges (Belgium).
Mr. Jesus Maria Cadenato Matia serves as a director. Mr. Cadenato began his
career as a professor at the Basque Country University from 1977 to 1984 and
joined Banco Bilbao in 1977, where he held several key management positions in
the head office and within the retail branch network. He currently represents
BBVA on the boards of directors of Iberia Cards and Uno-e Bank. Mr. Cadenato has
a bachelor's degree in business administration from the Basque Country
University, specializing in business finance, and a master's degree from IESE
Business School (Executive Management Business Administration).
Mr. Maximino Carpio Garcia serves as a director. Since 1984, he has been
Professor of Applied Economics of the Universidad Autonoma de Madrid. From 1983
to 1984, he was Chief of the Studies Services of the Confederacion Espanola de
Organizaciones Empresariales. From 1984 to 1992, he worked as head of the
134
Department of Economic and Public Finance of the Universidad Autonoma. From 1992
to 1995, he was dean of the Economics and Business Faculty of the Universidad
Autonoma. From 1995 to 1998, he served as head of the department of Public
Economy of the Universidad Autonoma. He also serves as a member of the Economic
and Social Council, a Spanish government advisory entity, and the Advisory
Committee of Abengoa. Mr. Carpio is a member of the Board of Directors of
Telefonica Moviles, S.A. Mr. Carpio also received his doctorate degree from the
Universidad Autonoma de Madrid.
Mr. Carlos Colomer Casellas serves as a director. Mr. Colomer is Chairman
of the Colomer Group and a director of Altadis, S.A. Mr. Colomer began his
career in 1970 as Marketing Vice-Chairman of Henry Colomer, S.A. In 1980, he was
appointed as Chairman and General Manager of Henry Colomer, S.A and Haugron
Cientifical, S.A. In 1986, he was also appointed President of Revlon for Europe.
In 1989, he became the President of Revlon International and in 1990, he was
appointed Executive Vice-President and Chief Operating Officer of Revlon Inc. In
2000, he was appointed Chairman and Chief Executive Officer of the Colomer
Group. Currently Mr. Colomer is also the Chief Operating Officer of INDO an
import-export company, Director of Cataluna for Banco Santander Central Hispano,
Director of Hospital General de Cataluna and member of the Advisory Committee of
CVC Capital Partners. Mr. Colomer has an economics degree from the University of
Barcelona and a degree in business administration from the IESE (Barcelona).
Mr. Alfonso Ferrari Herrero serves as a director. He also serves as a
director of CTC Chile S.A. and Telefonica del Peru. From 1995 to 2000, he was
Executive Chairman of Beta Capital, S.A. and prior to that he served on several
Boards of Directors representing the Banco Urquijo where he was a partner from
1985. He has a doctorate in Industrial Engineering from the Industrial Engineers
Technical School of the Polytechnic University of Madrid and he holds a master's
degree in business administration from Harvard University.
Mr. Jose Fernando de Almansa y Moreno-Barreda is Member of the Board and
President of the International Affairs Committee of this Board at Telefonica
S.A. He is also Member of the Board at Telefonica Moviles S.A., Telefonica de
Argentina S.A., Telefonica del Peru S.A, Telecomunicacoes de Sao Paulo S.A., and
BBVA Bancomer Mexico. He holds a degree in law from the University of Deusto
(Bilbao, Spain). He joined the Spanish Diplomatic Corps, and served from 1976 to
1992, as Secretary of the Spanish Embassy in Brussels, Cultural Counsellor of
the Spanish Representation to Mexico, Chief Director for Eastern European
Affairs and Atlantic Affairs Director in the Spanish Foreign Affairs Ministry,
Counsellor to the Spanish Permanent Representation to NATO, in Brussels,
Minister-Counsellor of the Spanish Embassy in the Soviet Union, General Director
of the National Commission for the 5th Centennial of the Discovery of the
Americas, and Deputy General Director for Eastern Europe Affairs in the Spanish
Foreign Affairs Ministry. From 1993 to 2002, Fernando de Almansa was appointed
Chief of the Royal Household by His Majesty King Juan Carlos I, and is currently
Personal Adviser to His Majesty the King.
Mr. Gonzalo Hinojosa Fernandez de Angulo serves as a director. Mr. Hinojosa
currently serves as Chairman and Chief Executive Officer of Cortefiel, S.A. He
began his professional career with Cortefiel in 1976, and has served in various
management positions since then. From 1991 through 2002, he served as a director
of Banco Central Hispano Americano and a director of Portland Valderribas. He
currently serves as a director of Altadis. Mr. Hinojosa has a degree in
industrial engineering.
Mr. Miguel Horta e Costa serves as a director. Mr. Costa is Chairman of
Portugal Telecom, SGPS, S.A. He is also President of PT Comunicacoes, S.A., PT
Multimedia-Servicos de Telecomunicacoes e Multimedia, SGPS, S.A., PT
Moveis-Servicos de Telecomunicacoes, SGPS, S.A., TMN-Telecomunicacoes Moveis
Nacionais, S.A., PT Ventures, SGPS, S.A., PT Sistemas de Informacao, S.A., PT
Compras-Servicos de Consultoria e Negociacao, S.A., PT Corporate-Solucoes
Empresariais de Telecomunicacoes e Sistemas, S.A., Portugal Telecom Brasil, S.A.
and of the Fundacao Portugal Telecom. In 1987, he was appointed State Secretary
of Foreign Commerce. He currently serves as a director of Portugalia Airlines.
Mr. Costa holds a graduate degree in economics from the Universidad Tecnica de
Lisboa.
Mr. Pablo Isla Alvarez de Tejera serves as a director. Mr. Isla is Chairman
of the Board of Directors of Altadis, S.A. and Logista, S.A. Mr. Isla began his
career in 1988 as Attorney General with the Spanish Ministry of Transports,
Tourism and Communications and in 1991 served as the official delegate in Spain
for the United Nations Commission in the Spanish General Direction of Legal
Services. From 1992 through 1996, Mr. Isla served
135
as General Manager of the Legal Services Department of Banco Popular. In 1996,
he was appointed General Manager of the National Heritage department of the
Treasury Ministry. He served as General Secretary of Banco Popular Espanol from
1998 through 2000. In July 2000, Mr. Isla was appointed Chairman of the Board of
Grupo Altadis and Co-Chairman of the company. Mr. Isla also serves as director
of Iberia Lineas Aereas de Espana, S.A and Mutua Madrilena. Mr. Isla has a law
degree from the University Complutense of Madrid.
Mr. Luis Lada Diaz serves as a director. He is currently a board member and
our General Manager for Development, Planning and Regulatory Affairs. In 1989,
Mr. Lada was Deputy General Manager for Technology, Planning and International
Services when he left the Telefonica Group to join Amper Group, a
telecommunications systems and equipment manufacturer, as General Manager for
Planning and Control. Mr. Lada returned to the Telefonica Group in 1993 as
Controller of the Subsidiaries and Participated Companies. In 1994, he was
appointed as Chief Executive Officer of Telefonica Moviles de Espana S.A., and
was promoted to Chairman and President of Telefonica Moviles, S.A. in August
2000. He served as President until July 2002, after which he accepted his
present position. He also serves on the boards of directors of Telefonica
Moviles, S.A., Telefonica Internacional S.A. and Sogecable S.A. He holds a
degree in telecommunications engineering and joined the Telefonica Group in 1973
in the Research and Development Department, rising through the ranks to hold
various managerial and executive positions and currently is a member of A.P.D.
Supervisory Board and a member of the Advisory Board of the UOC University.
Mr. Jose Fonollosa Garcia serves as a director. Mr. Fonollosa currently
represents BBVA on the Board of Directors of BBVA BHIF (Chile), Provida
(Chile), BBVA Banco Provincial (Venezuela) and Bradesco (Brasil). In his long
career at BBVA he has served as C.I.O, C.F.O, head of the Latin American retail
banking division among other responsibilities. He holds a graduate degree in
economics.
Mr. Antonio Massanell Lavilla serves as a director. Mr. Massanell is Senior
Executive Vice President of Caja de Ahorros y Pensiones de Barcelona and a
member of the Boards of Directors of Port Aventura, S.A. and Baqueira Beret,
S.A. He is also President of Servihabitat, e-laCaixa, S.A. and Internet Global
Congress (IGC). As a representative of Caja de Ahorros y Pensiones de Barcelona,
he has worked with the Telefonica Group in the deployment of Caja de Ahorros y
Pensiones de Barcelona's corporate telecoms network. Mr. Massanell received his
degree in economics from the University of Barcelona.
Mr. Enrique Used Aznar serves as a director. Mr. Used is the Chairman of
AMPER, S.A. and AmperProgramas and the Deputy Chairman of Medidata (Brazil).
Previously, he held the position of Chairman of Telefonica Latinoamerica, S.A.,
Telefonica Moviles, S.A., Estratel and Telefonica Investigacion y Desarrollo,
S.A. He has also served as Deputy Chairman and Chief Executive Officer of
Telefonica Publicidad e Informacion and Compania Telecomunicaciones de Chile. He
has also served as a member of the Board of Directors of Telefonica de
Argentina, ATT Network System International and Ericsson (Spain).
Mr. Mario Eduardo Vazquez serves as a director. Mr. Vazquez is the
President of Telefonica de Argentina, Telefonica Moviles Argentina, S.A.,
Telefonica Comunicaciones Personales, S.A., Atento Argentina, S.A. Adquira
Argentina, S.A. and serves as Chairman of the Board of Directors of Rio Compania
de Seguros, S.A. He also serves as a director of Banco Rio de la Plata, S.A.,
Riobank International, Corporacion Metropolitana de Finanzas, S.A., Heller
Financial Argentina, S.A., Heller-Sud Servicios Financieros, S.A., Motorcare
Argentina, S.A., Acsa Loss Control, S.A. and Central Puerto, S.A, Indra SI S.A.
Mr. Antonio Viana-Baptista serves as a director. Mr. Viana-Baptista has
served as Chairman and Chief Executive Officer of Telefonica Moviles S.A., since
August 2002. He also serves on the Board of Directors of Telefonica
Internacional, S.A., Telefonica de Argentina, S.A, Brasilcel, N.V, Tele Sudeste
Celular Participacoes, S.A., Telesp Celular Participacoes, S.A., and Portugal
Telecom SGPS, S.A. He was a principal partner of McKinsey & Co. at the McKinsey
offices in Madrid and Lisbon from 1985 to 1991 and served as Executive Advisor
of the Banco Portugues de Investimento (BPI) from 1991 to 1996. From 1996
through July 2002, Mr. Viana-Baptista was President of Telefonica Internacional
and Executive President of Telefonica Latinoamerica. Mr. Viana-Baptista holds a
bachelor's degree from the Catholic University of Lisbon, a graduate degree in
European Economics from the Portuguese Catholic University and a master's degree
in business administration from INSEAD.
136
Mr. Gregorio Villalabeitia Galarraga serves as a director. Mr.
Villalabeitia is currently a member of the Board of Directors of Gas Natural,
S.A., Iberia Lineas Aereas de Espana, S.A. and Repsol YPF, S.A. He has been
General Manager of Caja de Ahorros Vizcaina and Chief Executive of Banco
Cooperativo Espanol. He was appointed Chief Operating Officer of Banco de
Credito Local and was Chief Executive Officer of Caja Postal in January 1995.
Following the merger of the various entities of Argentaria, he was named
Wholesale Banking General Manager in 1998. In October 1999, following the merger
of Argentaria and Banco Bilbao Vizcaya (BBV), he was named General Manager of
Global Investment Banking of Banco Bilbao Vizcaya Argentaria (BBVA), and after
the restructuring in December 2001 he was appointed General Manager of the Real
Estate and Industrial Group of the Bank. Mr. Villalabeitia has a degree in law
and economics from the University of Deusto.
Mr. Antonio J. Alonso Ureba serves as our General Secretary and Secretary
to our Board of Directors and serves as a director. Mr. Alonso Ureba has worked
on the technical staff of the Madrid Town Council central administration, in the
Public Defender's Office and as director of Legal Services and Secretary to the
Board of the Spanish Stock Exchange Commission (Comision Nacional del Mercado de
Valores). During his professional career, Mr. Alonso has authored a number of
publications and has been a speaker at a number of conferences. Mr. Alonso Ureba
holds a law degree from the Complutense University of Madrid and a master's
degree in financial management and investment analysis.
Mr. Ramiro Sanchez de Lerin Garcia-Ovies serves as our General Vice
Secretary and Vice Secretary to our Board of Directors in October 29, 2003. He
began his career in Arthur Andersen, first working for its audit department and
later for its tax department. In 1982, he became an "Abogado del Estado" and
started working for the Treasury Internal Revenue in Madrid (Delegacion de
Hacienda de Madrid). Afterwards he was assigned to the State Secretariat for the
European Communities and later to the Foreign Affairs Ministry. He has been
General Secretary and Secretary of the Board of Elosua, S.A., Tabacalera, S.A.,
Altadis, S.A. and Xfera Moviles, S.A. He has also been teaching in ICADE,
Instituto de Empresa and Escuela de Hacienda Publica, Executive
Officers/Management Team.
Executive Officers/Management Team
At April 15, 2005, the members of our executive management team at an
executive level was composed of our chief executive officer and seven general
managers and the years of their appointments to their respective positions were
as follows:
Name Position Appointed Age
-------------------------------------------------------------------------------------------------
Cesar Alierta Izuel Chairman of the Board of Directors and 2000 60
Chief Executive Officer
Luis Lada Diaz General Manager of Development, Planning 2000 55
and Regulation, Member of the Board
Antonio J. Alonso Ureba General Secretary and Secretary to the 2001 47
Board. Member of the Board
Santiago Fernandez Valbuena Chief Financial Officer of Telefonica, S.A. 2002 46
Luis Abril Perez General Manager of Corporate Communication 2002 57
Calixto Rios Perez General Manager of Auditing and Management 2000 60
Resources
Guillermo Fernandez Vidal General Manager of Commercial Development 1998 58
and Subsidiaries
Javier Nadal Arino General Manager of Institutional Relations 2005 55
and the Telefonica Foundation
The chief executive officers of our principal business units are:
137
Name Position Appointed Age
-------------------------------------------------------------------------------------------------
Julio Linares Lopez Telefonica de Espana 2000 59
Jose Maria Alvarez-Pallete
Lopez Telefonica Latinoamerica 2002 41
Antonio Viana-Baptista Telefonica Moviles 2002 47
Biographies of the Executive Officers and Senior Management
Mr. Santiago Fernandez Valbuena serves as General Manager of Finance and
Shared Resources since December 2003. He has served as our Chief Financial
Officer since July 2002. He joined Telefonica in 1997 as Chief Executive Officer
of Fonditel, Telefonica's Pension Assets Manager. Previously, he was Managing
Director of Societe Generale Equities and Head of Equities & Research at Beta
Capital in Madrid. He holds an M.S. and a PhD degree in Economics and Finance
from Northeastern University. Mr. Fernandez Valbuena served as President of the
Research Commission at the Spanish Institute of Financial Analysts. He has held
senior teaching positions at Manchester Business School and Instituto de
Empresa's MBA programs.
Mr. Luis Abril Perez serves as our General Manager for Corporate
Communication. Mr. Abril started his professional career as a Microeconomics
Professor in the Universidad Comercial de Deusto, where he then went on to head
the Finance Department. In 1978, he moved to the Banco de Vizcaya as Treasury
Director and then worked as head of the President's Technical Department, under
Pedro Toledo. During his work with the BBV Group (1988-1991) he acted as General
Director for the Asset Management division. During the 1994-99 period Mr. Abril
acted as General Director for Banesto and as General Director for Communications
for BSCH (1999-2001). Mr. Abril holds a degree in Economics and a degree in Law
from the Universidad Comercial de Deusto (1971), and a graduate degree in
Business Administration from the North European Management Institute, Oslo,
Norway (1973).
Mr. Calixto Rios Perez serves as our General Manager of Auditing and
Management Resources. In 1973, Mr. Rios joined Banco Exterior de Espaffa as the
General Manager of Extebank in New York City. Subsequently he was appointed
Chief Executive Officer and Chief Operating Officer of Extebandes, in Venezuela.
Later, Mr. Rios returned to Madrid as the General Manager of Filiales Bancarias
Internacionales of Banco Exterior de Espafla. In 1990, he was appointed Chief
Operating Officer responsible for overseeing the construction, management and
marketing of the Olympic Village for the Olympic games and a year later was
named Chief Financial Officer of Tabacalera, S.A. After the merger of Tabacalera
and Seita, he was appointed Advisor to the Chairmen and Head of Strategy and
Planning. After joining Telefonica as Corporate General Manager for
Institutional Relations, in July 2002 he was appointed General Manager for
Internal Auditing and Communications. He holds a degree in Economics from the
Complutense University of Madrid.
Mr. Guillermo Fernandez-Vidal serves as our Subsidiaries General Manager
since December 2003, and he has served as our Corporate General Manager and
Assistant to our Chief Executive Officer. He began his career in 1970 as a
systems technician at NCR's Computer Testing Center. From 1972 to 1987, he
worked for ENTEL, S.A., where he escalated to General Manager. In 1987, he
joined Telefonica as Deputy General Manager for large clients. Subsequently he
was appointed Assistant Head of Business Communications, Head of Business
Communications and General Manager of Businesses and General Public and Chief
Operating Officer of Telefonica Data, S.A. Mr. Fernandez-Vidal holds an
industrial engineer degree in Computer Science.
Javier Nadal Arino Javier Nadal Arino serves as our General Manager of
Institutional Relations and as the CEO of the Telefonica Foundation since
December 2004. He joined the Telefonica Group in 1985. From 2003 to 2004, Mr.
Nadal served as the Chairman of Telefonica de Peru and from 1995 to 1997,as the
Chairman of Telefonica de Argentina. He served for ten years as General Manager
of Communications in the Spanish government while also serving as Telefonica de
Espana's representative to the government. From 1989 to 1994, he was the
President of Retevision. He holds an engineering degree from the Universidad
Politecnica de Madrid.
Biographies of the Chief Executive Officers of our Principal Business Units
Mr. Julio Linares Lopez serves as Chief Executive Officer of Telefonica de
Espana. He joined Telefonica in May of 1970 in the research and development
center, where he held several positions until he was appointed Head of
Telefonica's Technology and Technical Regulations Department. In April 1990, he
was appointed General
138
Manager of Telefonica Investigacion y Desarrollo (Telefonica I&D). In December
1994, he became Deputy General Manager of Marketing and Development of
Telefonica Services in the commercial area and subsequently Assistant Managing
Director of Business Marketing. In July 1997, he was appointed Chief Operating
Officer of Telefonica Multimedia and Chairman of Telefonica Cable and
Producciones Multitematicas. From May 1998 to January 2000, he served as General
Manager of Strategy and Technology at the Telefonica, S.A. Corporate Centre, and
as a director of Telefonica Sistemas, Telefonica Investigacion y Desarrollo and
Via Digital. In January 2000, he was appointed Chairman of Telefonica de Espana.
Mr. Linares holds a degree as a Telecommunications Engineer.
Mr. Jose Maria Alvarez-Pallete Lopez serves as Chief Executive Officer of
Telefonica Latinoamerica. He began his career at Arthur Young Auditors in 1987.
In 1988, he joined Benito & Monjardin/Kidder, Peabody & Co., where he held
various positions in the research and corporate finance departments. In 1995, he
joined Valenciana de Cementos Portland (Cemex) as head of the Investor Relations
and Studies department. In 1996, he was promoted to Controller for the company
in Spain, and in 1998 to General Manager of Administration and Financial Affairs
for Cemex Group's interests in Indonesia, headquartered in Jakarta. Mr.
Alvarez-Pallete holds a graduate degree in Economics from the Complutense
University of Madrid. He also studied Economics at the Universite Libre de
Belgique.
B. COMPENSATION
The total amount of payments made to our directors during 2004 was
(euro)10.6 million ((euro)3.7 million as a fixed allowance, including
compensation made to our directors for serving as directors of our subsidiaries;
(euro)167 thousand for expenses of attending our Board's sub-committees
meetings; (euro)6.6 million for salaries and variable compensation to our
directors with executive functions; (euro)129 thousand for in kind compensation
to our executive directors, including life insurance premiums; and (euro)44.5
thousand for our contributions to directors' pensions schemes).
The following table shows the individual breakdown of the fixed payments
paid to directors (in their capacity as directors) in 2004:
Position 2004
--------------------------------------------------------------------------------
(in euro)
Chairman.......................................................... 127,614
Deputy Chairmen................................................... 162,690
Directors(1):
Executive directors......................................... 97,614
Nominee directors........................................... 97,614
Independent directors....................................... 97,614
---------------------
(1) One of the members of our Board of Directors, who is not resident in Spain,
receives an additional annual assignment of (euro)52,639.14, due to the
special interest we have in him being part of our Board of Directors due to
his experience and dedication in relation to Latin America.
The following table shows the individual breakdown of the fixed payments
made to our directors (in their capacity as members of our Standing Committee)
during 2004:
Position 2004
--------------------------------------------------------------------------------
(in euro)
Chairman.......................................................... 65,076
Deputy Chairman................................................... 65,076
Directors......................................................... 65,076
--------------------------------------------------------------------------------
The compensation of our directors consists of a monthly fixed allowance and
of certain per diems for attending Board of Directors' sub-committees meetings.
Our meeting of shareholders held on April 11, 2003 set the annual maximum gross
compensation for any director at (euro)6 million for fixed allowances and for
expenses of attending our Board's sub-committee meetings. In addition, directors
with executive functions receive additional payments for carrying out their
executive functions. Directors do not receive any compensation for expenses for
attending our Board of Directors' or Standing Committee meetings.
139
The following table shows the total amount of compensation paid during 2004
to our executive officers Mr. Cesar Alierta, Mr. Luis Lada, Mr. Mario Eduardo
Vazquez, Mr. Antonio Viana-Baptista and Mr. Antonio Jesus Alonso Ureba, each of
whom are also members of our Board of Directors.
Items 2004
--------------------------------------------------------------------------------
(in euro)
Salaries....................................................... 3,337,527
Variable Compensation.......................................... 3,220,739
Compensation in kind........................................... 129,412
Contribution to pension plans.................................. 44,500
Total.......................................................... 6,732,178
Additionally, the following table shows the compensation paid to our
executive officers (excluding those who are also members of our Board of
Directors) in 2004:
Items 2004
--------------------------------------------------------------------------------
(in euro)
Salaries....................................................... 3,859,367
Variable Compensation.......................................... 2,745,943
Fees and allowances............................................ 98,374
Compensation in kind........................................... 117,520
Total.......................................................... 6,821,205
Employment contracts for executive officers belonging to the Standing
Committee have an indemnity clause, which provides for an indemnity in the event
we decide to terminate the employment agreement. The indemnification to be paid
in such event is equal to three years of salary plus an additional one-year
salary depending on the length of service provided to us. The concept of annual
salary includes the last fixed remuneration plus the arithmetic average of the
sum of the last two variable annual salaries received in accordance with the
employment contract.
We provide pension, retirement or similar benefits to our directors with
executive functions and to our executive officers. During 2004 we set aside or
accrued approximately (euro)44,500 for our directors with executive functions
and (euro)91,327 for our other executive officers. Non-executive directors do
not receive any compensation in the form of pension plans or life insurance
policies and do not participate in any stock option plan linked to our market
share price.
We did not provide any advances or loans to our directors or members of our
management team and do not provide our directors or senior management team with
any benefits upon termination of their terms of employment.
Incentive Plans
Our TIES Program, which was tied which tied to the market value of our
shares, ended on February 15, 2005. At the commencement of the TIES plan,
eligible employees were able to subscribe for shares at the discounted price of
(euro)5 per share. The number of shares an eligible employee was able to
subscribe for in the initial allocation was based on such employee's wage level.
As part of the initial allocation, we offered 1,197,880 shares, of which
1,123,072 were subscribed. These shares became freely transferrable when the
TIES plan expired on February 15, 2005.
Our subsidiaries, Telefonica Moviles, S.A. and Terra Networks, S.A. have
also established their own compensation plans tied to the market price of their
shares.
EN-SOP
In order to satisfy certain obligations in connection with our acquisition
in 2000 of Endemol Entertainment Holdings, N.V., in April 2001 our Board of
Directors approved the establishment of a new stock option plan, which we refer
to as the "EN-SOP program", that is open to all permanent employees of Endemol
Entertainment N.V. and
140
its affiliated companies at January 1, 2001 who do not participate in a similar
compensation plan. As part of the EN-SOP program, we will deliver to each
eligible employee who is employed on January 1 of 2001, 2002, 2003 and 2004 a
variable number of options to purchase shares of Telefonica, S.A. based on such
employee's level and salary.
The options expire four years from their respective date of grant and may
be exercised in equal amounts beginning in the third and fourth years from such
date of grant. The total number of options granted each year pursuant to the
plan will be determined by dividing (euro)27.5 million by the exercise price,
which price shall be equal to the weighted average of the price per ordinary
share of Telefonica, S.A. on the automated quotation system of the Spanish stock
exchanges during the five trading days prior to the meeting of the Board of
Directors which convenes the annual shareholders' meeting.
The EN-SOP program is subject to anti-dilution and other provisions
customary for stock option plans of this type and to the condition that the
participant not terminates his or her employment voluntarily and unilaterally
prior to the exercise date.
On December 22, 2004, our Board of Directors decided that the EN-SOP plan
would be covered with Telefonica shares acquired in the open market. In
accordance with the conditions of the EN-SOP plan, 2,246,732 options to purchase
shares of Telefonica, S.A. were granted to Endemol Group employees in 2004 with
an exercise price of (euro)12.24 per share. The total number of participants
under the EN-SOP plan as of December 31, 2004 was 947.
C. BOARD PRACTICES
Please see "--Directors and Senior Management" above.
D. EMPLOYEES
Employees and Labor Relations
The table below sets forth the number of employees at the dates indicated
for the parent company of the Telefonica Group, each of the consolidated
companies of the groups which comprise our different lines of business and other
consolidated subsidiaries. Temporary employees represented 13% of our total
employees at December 31, 2004, compared to 10.8% in 2003 due to an increase in
the number of temporary employees of Atento. On average during 2004 we had
approximately 20,755 temporary employees in 2004 compared to 15,950 in 2003.
Year Ended December 31,
----------------------------------------
Line of Business 2002 2003 2004
-------------------------------------------------------------------------------------------
Telefonica, S.A.................................. 799 767 622
Telefonica de Espana(1).......................... 43,952 38,464 36,425
Telefonica Moviles............................... 13,694 13,093 19,797
Telefonica Latinoamerica......................... 28,019 25,762 25,905
Telefonica Contenidos............................ 5,574 4,638 5,860
Terra Networks................................... 2,455 2,229 1,584
Atento........................................... 49,432 54,394 74,829
Telefonica Publicidad e Informacion.............. 2,752 2,787 2,876
Other............................................ 6,168 6,154 5,656
Total Employees.................................. 152,845 148,288 173,554
---------------------
(1) In 2003, Katalyx and Emergia became part of Telefonica Empresas Group, and
in 2004, Telefonica Empresas became part of Telefonica de Espana and
Telefonica Latinoamerica. As a consequence of this reorganization and in
order to have comparable figures for prior years , we have re-classified
certain employees to Telefonica de Espana with (1,779 in 2002, 1,878 in
2003, and 2,091 in 2004) and to Telefonica Latinoamerica (2,346 in 2002,
2,621 in 2003 and 2,571 employees in 2004).
Management believes that labor relations are generally good. On July 23,
2003, Telefonica de Espana entered into a collective bargaining agreement that
provided for increases in wage levels in accordance with anticipated
141
increases in the Indices de Precios de Consumo (IPC), the Spanish consumer price
index, and an additional productivity bonus per employee. In accordance with
this agreement in 2004 wage levels increased 3.2% and employees received an
additional productivity bonus of approximately (euro)387.54 per active employee.
On July 13, 2004, Telefonica Data Espana entered into a collective
bargaining agreement. Telefonica Moviles Espana published its collective
bargaining agreement on September 30, 2004, which provided for increases in wage
levels in accordance with anticipated increases in the Spanish consumer price
index and established an additional productivity bonus for each employee.
Our retired employees are provided with certain pension benefits. While
Telefonica de Espana contributes the required amounts to fund these benefits
over time, there remains an unfunded past service liability, which is estimated
to be approximately (euro)320.3 million. We have agreed to fund this obligation
over a period ending in 2007.
In order to adapt to the new competitive environment, we have, among other
things, implemented voluntary pre-retirement and early retirement plans in
recent years.
On July 29, 2003, Telefonica de Espana's labor reduction program (Plan
Social de Expediente de Regulacion de Empleo) was approved by the Spanish Labor
Ministry. The program called for voluntary redundancies of up to a maximum
15,000 employees of the company over the next four years. This plan allows
Telefonica de Espana to reduce its workforce while maintaining its
competitiveness. The plan is non-discriminatory, voluntary and applies to all of
our employees. The aggregate number of employees that have requested to be
included in the labor reduction program at December 31, 2004 was 7,906
employees.
In connection with our voluntary retirement programs, we recorded
provisions of (euro)1,363.7 million in 2003 and (euro)698.2 million in 2004,
which were charged to results of operations in each respective year. The
provision for pre-retirements and early retirements recorded at December 31,
2004 covers all the obligations assumed at that date in connection with our
voluntary pre-retirement and early retirement plans.
On June 22, 2004 Terra Networks' labor reduction program was approved by
the Spanish Labor Ministry. This program allows Terra Networks to reduce its
workforce up to 130 employees by voluntary redundancies and redeployment. The
Labor Ministry has also approved Terra Networks Latin America program to reduce
its workforce by 29 employees through similar mechanisms.
E. SHARE OWNERSHIP
At April 15, 2005, the following members of our Board of Directors
beneficially owned an aggregate of 898,378 shares, representing approximately
0.018% of our capital stock.
No. of Shares
Beneficially
Name Owned
Cesar Alierta Izuel............................... 632,012
Isidro Faine Casas................................ 7,164
Jesus Maria Cadenato Matia........................ 9,906
Antonio Jesus Alonso Ureba........................ 8,438
Maximino Carpio Garcia............................ 5,836
Carlos Colomer Casellas........................... 543
Jose Antonio Fernandez Rivero..................... 115
Alfonso Ferrari Herrero........................... 101,311
Jose Fernando de Almansa Moreno-Barreda........... 2,112
Gonzalo Hinojosa Fernandez de Angulo.............. 37,958
Miguel Horta e Costa.............................. 354
Pablo Isla Alvarez de Tejera...................... 386
Luiz Lada Diaz.................................... 30,000
Antonio Massanell Lavilla......................... 2,748
Enrique Used Aznar................................ 37,438
Mario Eduardo Vazquez............................. 10
142
No. of Shares
Beneficially
Name Owned
Antonio Viana-Baptista............................ 21,994
Gregorio Villalabeitia Galarraga.................. 53
At April 15, 2005, members of our executive management team (excluding
members of our Board of Directors listed above) beneficially owned an aggregate
of 272,789 shares, representing approximately 0.0055% of our capital stock.
None of our Directors or executive officers beneficially owned shares
representing one percent or more of our share capital at that date.
None of our Directors and executive officers held options in respect of
shares representing one percent or more of our share capital at that date.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
General
At April 15, 2005, we had 4,955,891,361 shares outstanding, each having a
nominal value of (euro)1 per share. All outstanding shares have the same rights.
At April 15, 2005, according to information publicly available to
Telefonica, S.A., beneficial owners of 5% or more of our voting stock were as
follows:
Name of Beneficial Owner Number of Shares Percent
--------------------------------------------------------------------------------
Banco Bilbao Vizcaya Argentaria, S.A.(1)........... 284,024,849 5.73%
Caja de Ahorros y Pensiones de Barcelona,
"La Caixa"(2).................................... 266,476,222 5.38%
Chase Nominees LTD.(3)............................. 491,120,327 9.91%
State Street Bank & Trust Co (4). 377,436,725 7.61%
---------------------
(1) According to information provided to us by the BBVA for our 2004 Corporate
Governance Report filed with the CNMV on March 30, 2005.
(2) According to information provided to us by la Caixa for our 2004 Corporate
Governance Report filed with the CNMV on March 30, 2005.
(3) Held by Chase Nominees LTD. on behalf of beneficial owners. Based on
information obtained from a communication made to the CNMV on May 13, 2004.
(4) Held State Street Bank & Trust Co. on behalf of beneficial owners. Based on
information obtained from a communication made to the CNMV on February 2,
2005.
We do not keep a shareholder registry and our ownership structure cannot be
known precisely. Based on the information available to us there is no individual
or corporation that directly or indirectly through one or more intermediaries
may exercise any type of control over us. Nevertheless we have certain
shareholders whose holdings are considered material.
Preliminary administrative authorization of certain transactions (Golden
Share)
On May 13, 2003, the European Court of Justice ("ECJ") ruled (in the case
C-463/00, European Communities Commission vs. The Kingdom of Spain), that the
preliminary authorization rules (golden share) set forth in Law 5/1995, enacted
on March 23, 1995 governing the necessary legal requirements regime for the
transfer of the Spanish government holdings' in certain public companies
requiring prior governmental approval with respect to a limited number of
fundamental corporate and control transactions affecting us, were no longer
valid. In order to adapt Law 5/1995 to the ECJ's May 13, 2003 ruling, Law 5/1995
was modified by virtue of the twenty-fifth
143
additional provision of Law 62/2003, dated December 31, 2003, governing certain
tax, administrative and social matters. This regulation establishes a new
post-closing notification model, which, for the purposes of the Telefonica
Group, is applicable until February 2007.
The post-closing notification requirements described in Law 5/1995 apply to
us, Telefonica Moviles S.A., Telefonica de Espana S.A.U., and Telefonica Moviles
Espana S.A.U., and must be observed in the following transactions:
o Transfer or encumbrance of strategic assets located in Spain by
Telefonica de Espana and Telefonica Moviles Espana. Transactions
affecting these assets carried out between Telefonica Group companies
are exempt and need only be reported through a written communication
to the competent regulatory body;
o Transfer or encumbrance of shares or any other securities of
Telefonica de Espana by Telefonica S.A., Telefonica Moviles S.A. by
Telefonica S.A. and Telefonica Moviles Espana by Telefonica Moviles
S.A., when such transactions results in a change of control, or the
sale of holdings representing 50% or more;
o Substitution of Telefonica Moviles Espana SAU.'s business purpose;
o Direct or indirect acquisition of our or Telefonica Moviles S.A.'s
shares representing 10% or more of each company's share capital.
Financial transactions, which do not result in a change of control or
in a change of management, are exempt from the requirements of Law
5/1995.
o Voluntary winding-up, spin-off or merger need only be reported through
a simple written communication, except where these operations affect
strategic assets specified in Law 5/1995, which will require the
post-closing notification. Transactions between members of the
Telefonica Group affecting strategic assets are exempt from the
post-closing notification.
Ownership Limitations
The new General Telecommunications Law ("GTL") enacted on November 3, 2003,
eliminated the existing ownership limitations, which prohibited non-European
national from owning directly or indirectly more than 25% of our assets or share
capital, except under certain circumstances. Article 6 of the new GTL provides
for the application of the reciprocity principle under existing international
treaties or agreements, signed and ratified by Spain. The Spanish government,
upon request, may authorize exceptions to the reciprocity principle contained in
the new GTL.
B. RELATED PARTY TRANSACTIONS
During 2004 and as of the date of this Annual Report in 2005, none of our
Directors and no member of our management team has been involved in any related
party transactions with us.
Our Articles of Association grant our Board the exclusive power to
authorize any transactions with major shareholders or our directors and any
proposed transaction affecting a company where one of our Board members is an
executive or a shareholder. Previous to authorizing any such transaction our
Board will receive an opinion from the Nominating, Compensation and Corporate
Governance Committee addressing the fairness of the transaction to our
shareholders and us. Any of our Directors that may have an interest in the
proposed transaction must abstain from voting on the proposed transaction.
Two of our major shareholders are financial institutions. We have entered
into related party transactions with both companies within our ordinary course
of business, and always on arm's length terms. During 2004, the executed
transactions were usually loans or capital markets transactions provided to us
by these financial institutions and agreements for us to provide
telecommunications and broadband services to such institutions.
Related Party Transactions with Significant Shareholders
During 2004 and during the first quarter of 2005, the Board of Directors or
its Standing Committee have authorized the following transaction with
significant shareholders:
144
Credit Agreement with BBVA and La Caixa as underwriters, joint bookrunners
and mandated lead arrangers.
On July 6, 2004, with the favorable opinion from the Nominating,
Compensation and Corporate Governance Committee, we entered into a syndicated
multicurrency revolving facility amounting to (euro)3 billion with a group of
Spanish and international financial institutions. This facility will mature on
July 6, 2009, and carries an interest rate equal to Euribor/Libor plus a margin
grade dependent on our credit rating. La Caixa and BBVA acted together with four
other banks as underwriters, bookrunners and mandated lead arrangers for the
facility.
Agreements with Subsidiaries
On February 23, 2005, the Board of Directors of Telefonica and Terra
Networks each agreed to merge their respective companies with the termination
through dissolution without liquidation of Terra Networks and the transmission
of all of its assets to Telefonica, which through universal succession will
acquire the rights and obligations of Terra Networks. The exchange ratio, which
was determined on the basis of the real value of the corporate assets and
liabilities of both companies, will be two ordinary shares of Telefonica for
every nine ordinary Terra Networks shares. The Board of Directors of Terra
Networks also proposed the distribution to Terra Networks' shareholders a cash
dividend of (euro)0.60 per ordinary Terra Netoworks share. The merger is subject
to the approval of the shareholders of both Telefonica and Terra Networks at
their respective general shareholders meetings.
Intra-Group Loans
We are the parent company of the Telefonica Group and develop our business
purpose through our subsidiaries and affiliated companies. We coordinate group
policies, including financial policy and, in some cases actual financial
management is conducted by us. Most of the operations we perform with other
members of the Telefonica Group correspond to financing transactions, which are
necessary to cover their needs for funds and which provide interest rate
coverage and exchange rate risks.
During 2004, as recorded in our non-consolidated company accounts, we
loaned a total of (euro)26,716 million to companies in the Telefonica Group
while companies of the Telefonica Group and their associates loaned us a total
of (euro)27,249 million. (euro)11,269.7 million was loaned to us by Telefonica
Europe, our company devoted to fundraising in the capital markets and
(euro)7,332.80 was loaned to us by Telefonica Finanzas, our company in charge of
financial support for Telefonica Group companies.
As to the balances with associated companies, the headings "Other credits"
long term and "Credits to associated companies" short term on the Consolidated
Balance Sheet at December 31, 2004, include an amount of (euro)230.48 and
(euro)24.46 million, respectively, in connection with the financing provided to
Sogecable, S.A. according to the commitments acquired in the agreements signed
in relation to integration of its satellite platforms. Moreover, there is a long
term balance of (euro)66.64 million with Medi Telecom and a long term balance of
(euro)314.27 million with Ipse 2000.
Likewise, the "Debtor associated companies" and "Debts to associated
companies" amounts to (euro)52.07 million and (euro)15.89 million, respectively,
for the companies in the Brasilcel group. In relation to Medi Telecom, these
sums amounted to (euro)10.55 and (euro)0.44 million in each heading. The Debts
to associated companies also includes (euro)11.71 million balance with Amper.
On the other hand, the amount of sales and services rendered that are
recorded in the Profit and Loss Account for the financial year ended on December
31, 2004 are for sales to companies in the Group, mainly the management contract
with Telefonica de Argentina renegotiated in 2004 and in force until 2008, which
regulates the advisory services provided by Telefonica and the price of such
services. The revenue received for that item during financial year 2004 amounted
to (euro)20.85 million.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
Consolidated Financial Statements
Please see Item 18.
Legal Proceedings
We and members of the Telefonica Group are party to several lawsuits which
are currently in progress in the law courts and the arbitration courts of the
different countries in which the Telefonica Group has operations.
Based on the reports of counsel engaged to act in the lawsuits we are party
to, it is reasonable to consider that the adverse outcome of any of these, as
yet, unresolved lawsuits will not materially affect the Telefonica Group's
economic and financial position or solvency. The following lawsuits are those
which we consider most significant because of their subject matter or because of
the amounts disputed:
A proceeding contesting the resolutions adopted by our special
stockholders' meeting held on February 4, 2000.
The stockholder Javier Sotos Garcia, then owner of 300 shares of our
shares, filed a complaint contesting the resolutions adopted by the Special
Stockholders' Meeting held on February 4, 2000, based, among other reasons, on
the purported contravention of the rules regulating the holding of the mentioned
meeting and on the purported contravention of the rules for exclusion of
preemptive subscription rights in stock capital increases.
On May 8, 2003, the Court of First Instance no. 33 of Madrid handed down a
judgment wholly dismissing the complaint filed by the plaintiff stockholder,
holding that there were no basis to declare the voidness or voidability of the
resolutions adopted by our Special Stockholders' Meeting held on February 4,
2000, and awarding the costs of the proceeding against the plaintiff. On July
26, 2003, an appeal was filed by the latter before the Provincial Court of
Madrid.. On December 11, 2003, we filed a reply brief contesting the appeal. The
hearing related to the appeal was held before the Provincial Court of Madrid on
January 18, 2005.
On February 9, 2005, Telefonica was notified about the resolution of the
Provincial Court of Madrid in which the Court dismissed the appeal. Javier Sotos
Garcia announced his decision to file an appeal in the High Court against this
resolution. On March 3, 2005, the Provincial Court decide to dismiss this
announcement to file appeal in the High Court. Javier Sotos has filed an appeal
against the resolution in which the Provincial Court dismissed his announcement
to file an appeal in the High Court and Telefonica has filed its answer
contesting this appeal.
It should be noted that the complaint filed against the aforementioned
resolutions adopted by our stockholders' meeting held on February 4, 2000, did
not in any way affect the implementation of those resolutions.
A proceeding contesting certain resolutions adopted by our annual
Stockholders' Meeting held on June 15, 2001.
The aforementioned stockholder, Javier Sotos Garcia, also filed a complaint
contesting some of the resolutions adopted by our annual Stockholders' Meeting
held on June 15, 2001.
The aforementioned complaint is based, among other allegations, on the
purported infringement of the contesting stockholder's right to information and
on the purported contravention of the legal rules for disapplication of
preemptive rights of subscription in capital increases.
On January 23, 2004, we were notified that the proceeding had been stayed
until such time as either any of the parties apply for its resumption or the
instance lapses.
It should be noted that the complaint filed against the aforementioned
resolutions adopted by our stockholders' meeting held on June 15, 2001, did not
in any way affect the implementation of those resolutions.
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Complaint filed by IDT against us, Terra Networks, S.A. and Lycos, Inc.
International Discount Telecommunications Corporation (IDT) filed a
complaint in the U.S. District Court for the District of New Jersey against us,
Terra Networks, S.A., Terra Networks U.S.A., Inc., and Lycos, Inc.
This complaint is based on the alleged breach of the joint venture
agreement entered into between IDT and Terra Networks, S.A. in October 1999, on
the alleged nonperformance of the obligations under the agreement to terminate
the joint venture agreement and on the provision prohibiting fraud in connection
with the purchase or sale of securities under the U.S. Securities Exchange Act.
IDT has also asserted state law claims alleging fraudulent misrepresentation and
concealment in addition to its claim under the Securities Exchange Act.
The lawsuit is currently for an unspecified amount, without prejudice to
the possibility of the claim being specified and quantified in the course of the
proceeding by the plaintiff for damages.
In May 2002, the U.S. District Court decided to dismiss the part of the
complaint relating to certain alleged breaches of the joint venture agreement,
which also resulted in the exclusion of Terra Networks, U.S.A., Inc. from the
proceeding.
Subsequently, IDT added a new claim to the complaint alleging that we were
liable, as a control person, for the fraud alleged against Terra Networks in its
negotiations with IDT that led to the termination agreement. We filed objections
against this claim.
The defendants have filed an answer and, in turn, Terra Networks S.A. has
filed a counterclaim.
On July 2, 2003, in light of the evidence presented, Terra Networks, S.A.,
Lycos, Inc. and us, filed pleadings seeking summary dismissal of the claims . In
turn, IDT has requested to have the counterclaim filed by Terra Networks, S.A.
dismissed.
On September 1, 2004, the District Court upheld the Magistrate's September
2002 ruling granting IDT permission to assert the Section 20(a) claim against
Telefonica in a Third Amended Complaint. Terra Networks and Telefonica then
filed answers denying the allegations of the Third Amended Complaint. In its
answer, Terra Networks also has reasserted its counterclaims against IDT.
On September 27, 2004, Telefonica filed a motion asking that the Third
Amended Complaint be dismissed based on lack of personal jurisdiction. The
District Court has not yet ruled on that motion.
On September 30, 2004, the Court issued decisions resolving two of the
summary judgment motions filed by the defendants in July 2003. Specifically, the
Court granted Lycos's motion and dismissed Lycos from the action. The Court
denied Terra Networks' motion for summary judgment, which argued that IDT waived
any claim for fraud. The Court did not rule that there was no waiver; rather, it
held that it was up to the jury to decide if there has been a waiver.
Plaintiff's Third Amended Complaint does not specify the damages allegedly
suffered by IDT, but IDT will attempt to prove its damages at trial through the
introduction of expert testimony.
On March 3, 2005 we were notified that the District Court granted our
motion to dismiss Telefonica for lack of specific jurisdiction. On March 11,
2005 we were notified that the District Court denied Terra Networks' summary
judgment motion and granted IDT's motion to dismiss Terra Networks'
counterclaims.
Sistemas e Instalaciones de Telecomunicacion, S.A.U. (Sintel)
As a result of the voluntary bankruptcy proceeding being conducted at
Madrid Court of First Instance no. 42, case number 417/2001, which is the
continuation of the petition for Chapter 11-type insolvency filed by the
director of Sintel on June 8, 2000, two criminal proceedings have commenced
which affect us.
Under the bankruptcy order, inter alia, the effects of the bankruptcy were
backdated to June 8, 1998. As a result of the backdated effects of the
bankruptcy pursuant to the order we receive a payment demand for (euro)22.9
million,
147
which represents the total amount paid for Sintel from January 1999 to April
2000. The relevant parties, consider null and void as a matter of law the
participation of Sintel in the contract dated December 30, 1998, in which a debt
of (euro)21.4 million was recognized due to the sale of the shares of Sintel by
us to Mastec Internacional, S.A. as well as the amounts paid by Sintel, which
acted as a joint and several guarantor to the payments owed by Mastec
International to us.
We filed an ancillary complaint in which we solicit that the effects of the
bankruptcy be backdated to a date closer to that of the bankruptcy order, so
that the contract dated December 30, 1998, is not affected. The representatives
of the employees filed another complaint to the contrary, proposing that the
effects of the bankruptcy be backdated to the date of the sale of the shares of
Sintel (April 1996).
The arrangement proposed by the bankrupt company and approved by the court
was the subject of an appeal to a superior court.
On June 14, 2004 the Madrid Provincial Appellate Court denied all
complaints regarding to the request of the effects of the bankruptcy be
backdated to a date closer to December 30, 1998, in consequence, the arrangement
proposed by the bankrupt company and the date in which the effects of the
bankruptcy will be effective are firm.
Nevertheless this resolution could not be appealed, the ex-employees of
Sintel prepared an appeal in the High Court which was denied by a resolution of
July 7, 2004. This resolution was appeal in different instances by the
ex-employees and was finally resolved by an order of the High Court confirming
the dismissal of the appeal notify to the parties on February 4, 2005.
The two criminal proceedings are as follows:
"Abbreviated" proceeding no. 273/2001, in relation to which, on September
24, 2002, we and Telefonica de Espana, S.A. appeared before Central Examining
Court no. 1 filing a criminal suit against the directors of Sintel and of Mastec
Internacional, S.A., as parties suffering damages. Leave was given for them to
appear as parties to the proceeding.
Preliminary proceeding no. 362/2002, which was commenced on October 23,
2002, by Central Examining Court no. 1 for a possible extortion offense. This
proceeding arises from the previous one, concerns the possible commission of an
extortion offense in the assumption by Sintel of joint and several liability
with Mastec for the obligation to pay the related sale price.
This preliminary proceeding has been joined to proceeding no. 273/200. On
April 22, 2004, we were notified of a decision denying the filing of proceedings
we requested on June 6, 2003 and allowing the judicial proceedings to continue.
On June 29, 2004, we were notified of an enlargement of this criminal suit
by an alleged crime of bankruptcy punishable filed by the ex-employees of
Sintel. On July 4, 2004 and August 5, 2004, Telefonica requested its rejection.
At present the Judge has not resolved about the enlargement of this criminal
suit.
Collective lawsuits filed by stockholders of Terra in the U.S., in
connection with the tender offer by us for Terra Networks, S.A.
On May 29, 2003, two class actions were filed with the Supreme Court of New
York State by stockholders of Terra Networks, S.A. against us, Terra Networks,
S.A. and certain former and current directors of Terra Networks, S.A.
These actions are based on the claim that the price offered by us to the
stockholders of Terra Networks, S.A. was not in keeping with the intrinsic value
of the shares of that company, and seek to have the tender offer revoked or, in
the alternative, to have damages awarded to them.
It should be noted that since the filing of the complaints, the related
proceedings have remained inactive.
148
Lawsuit filed by ADICAE.
On June 21, 2003, a consumer association (ADICAE) filed a lawsuit against
Terra Networks, S.A., Telefonica, S.A. and against certain of our directors and
directors of Terra Networks, S.A. On April 13, 2004, the Central Instruction
Court superseded this lawsuit and directed the complainants to provide a
(euro)100,000 deposit (bond) as a prerequisite to file an appeal. On April 16,
2004, ADICAE opposed the decision that provided for such deposit and on April
28, 2004, Terra Networks, S.A. filed a counterclaim requesting the confirmation
of such decision. On May 20, 2004, the Central Instruction Court rejected the
opposition filed by ADICAE. This resolution was appealed by ADICAE and we
opposed to the appeal. The court has not yet ruled on the appeal.
Appeal for judicial review no. 6461/03 filed at the National Appellate
Court by the World Association of Stockholders of Terra Networks, S.A.
(ACCTER) against the administrative decision made by the Spanish National
Securities Market Commission to authorize the tender offer by us for Terra
Networks, S.A. shares.
ACCTER filed an appeal for judicial review against the decision of the
Spanish National Securities Market Commission to authorize the tender offer made
to Terra Networks stockholders on June 19, 2003.
We have filed an application, admitted for consideration, to appear in the
proceeding as an intervening nonparty to defend the lawfulness of the decision
by the Spanish National Securities Market Commission.
In turn, the National Appellate Court has rejected the appellant's request
for an ex parte or inter parties injunctive stay of the aforementioned decision.
A brief was filed on December 19, 2003 by the Government Legal Service. We
also replied on February 12, 2004 to the application filed by ACCTER for
judicial review.
At present the process is pending to set a date to pass judgement on this
claim.
Class action lawsuit filed by a stockholder of Terra Networks in the U.S.
in connection with the merger between Telefonica, S.A. Terra Networks, S.A.
On February 22, 2005, a class action was filed with the Supreme Court of
the State of New York County of Westchester by an owner of ADSs of Terra
Networks, S.A. against Telefonica, S.A., Terra Networks, S.A. and certain former
and current directors of Terra Networks, S.A.
This action is based, among other things, on the claim that the price
offered by us to the stockholders of Terra Networks, S.A. did not reflect the
intrinsic value of the shares of Terra Networks.
Regulatory Sanctions
In 2001 and 2002, the Telecommunications Market Commission and the Spanish
Competition Court initiated sanctioning proceedings against Telefonica de Espana
for its actions as dominant operator.
The following resolutions have been imposed by the Telecommunications
Market Commission and the Spanish Competition Court, which have been appealed
before the competent authorities:
Spanish Competition Court's resolution dated March 8, 2000
On March 8, 2000, the Spanish Competition Court imposed on Telefonica de
Espana a fine amounting to (euro)8,414,169.46 for violating Article 6 of the
Spanish competition Law 16/89 (Ley 16/89 de Defensa de la Competencia) and of
Article 82 of the EC Treaty, finding to have been practices in abuse of dominant
position by Telefonica de Espana in the launching of the advertising campaign
"Planes Claros".
On September 22, 2003, Telefonica de Espana filed a
contentious-administrative appeal before the Spanish Court "Audiencia Nacional"
against such resolution. This appeal was partially admitted on the grounds that
the Spanish Competition Court's resolution was contrary to the law regarding the
proportionality of the sanction imposed, and reduced it to (euro) 901,518.16.
149
Telefonica de Espana, the State lawyer, and the co-plaintiff, Retevision,
filed a final appeal before the Spanish Supreme Court ("Recurso de Casacion")
against this judgment. Retevision later withdrew its appeal.
Telecommunications Market Commission's resolution dated July 23, 2002
On July 23, 2002, the Telecommunication Market Commission imposed on a fine
amounting to (euro)18 million Telefonica de Espana for infringement of the
"Closed User Group" regulation as interpreted by the Telecommunications Market
Commission.
On July 31, 2002, Telefonica de Espana filed a contentious-administrative
appeal to the Spanish Court "Audiencia Nacional" against this sanction.
On July 8, 2004, the Appeals Court notified Telefonica de Espana that it
had dismissed its appeal. On October 18, 2004 Telefonica de Espana filed a final
appeal (Recurso de Casacion) against the Court's decision before the Spanish
Supreme Court.
Telecommunications Market Commission's resolution dated October 24, 2002
On October 24, 2002, the Telecommunication Market Commission imposed a fine
amounting to (euro)13.5 million on Telefonica de Espana for breach of its
obligations relating to voice capacity and data interconnection.
On February 10, 2003, Telefonica de Espana filed a
contentious-administrative appeal to the Spanish Court "Audiencia Nacional"
against this sanction. The administrative appeal is pending a court resolution.
Telecommunications Market Commission's resolution dated July 10, 2003
On July 10, 2003 the Telecommunication Market Commission imposed a fine
amounting to (euro)8 million on Telefonica de Espana for infringement of
Telecommunications Market Commission's resolution relating to the prices applied
by Telefonica de Espana to Vic Telehome, S.A.
On September 10, 2003, Telefonica de Espana lodged a
contentious-administrative appeal to the Spanish Court "Audiencia Nacional"
against this sanction.
Spanish Competition Court's resolution dated April 1, 2004
On April 1, 2004, the Spanish Competition Court imposed a fine amounting to
(euro)57 million on Telefonica de Espana for infringement of Article 6 of the
Spanish competition Law 16/89 (Ley 16/89 de Defensa de la Competencia) and of
Article 82 of the EC Treaty, finding that we had abused our dominant position by
making conditional the provision of certain supplementary services to customers
to the inexistence of carrier pre-selection and by launching unfair advertising
campaigns that misled customers and denigrated competitors.
On April 16, 2004, Telefonica de Espana filed a contentious-administrative
appeal to the Spanish Court "Audiencia Nacional" against this sanction.
The Appeals Court has resolved to partially accept the suspension of the
decision rendered by the Spanish Competition Court on April 1, 2004, the Appeals
Court has specifically resolved to suspend our payment of the fine imposed on us
by the Spanish Competition Court, amounting to (euro)57 million until a final
judgment is rendered.
Proceedings and Convictions
During the last five years, neither we nor, to the best of our knowledge,
any person listed in Item 6 above:
o has been convicted in a criminal proceeding, excluding traffic
violations or similar misdemeanors; or
o has been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was
or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to,
United States federal or state laws or finding any violation with
respect to such laws.
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Dividend Information
At the extraordinary general meeting of shareholders held in June 1998, we
announced our previous dividend policy of capital increases charged to freely
disposable reserves that would be distributed to our shareholders free of
charge. The ratio for each of the share dividends was one new share for every 50
then outstanding. This policy allowed our shareholders to obtain liquidity by
trading their shares.
The table below sets forth these capital increases carried out during
those years:
Date of Shareholders' Meeting Approving Number of Date Capital Increase
Capital Increase Shares Issued was Carried Out
-----------------------------------------------------------------------------------------
June 24, 1998................................. 61,492,674 January 1999
June 24, 1998................................. 62,722,527 April-May 1999
March 26, 1999................................ 63,976,992 November 1999
April 7, 2000................................. 86,814,214 January 2001
April 7, 2000................................. 89,203,045 March 2001
June 15, 2001................................. 93,438,317 January-February 2002
June 15, 2001................................. 95,307,084 March-April 2002
April 12, 2002................................ 97,213,225 January-February 2003
April 12, 2002................................ 99,157,490 March 2003
Following increased cash flow generation, we considered cash dividend
payments to be appropriate. Accordingly, at the Annual General Shareholders'
Meeting held on April 11, 2003, the shareholders approved the distribution of a
dividend of (euro) 0.25 per share payable in cash, marking the end of the
alternative dividend policy. The first payment was made effective on July 3,
2003, consisting of (euro)0.13 per share and the second payment of (euro)0.12
per share was made effective on October 15, 2003. In both cases, the dividends
were charged against the item "Additional paid-in capital".
At the Annual General Meeting of shareholders held on April 30, 2004, the
shareholders approved the distribution of a dividend of (euro)0.20 per share
payable in cash and a distribution of a share premium of (euro)0.20 per share
payable in cash. The first payment of (euro)0.20 per share payable from 2003 net
income was made on May 14, 2004 and the second payment of (euro)0.20 per share
from additional paid in capital reserve will be made on November 12, 2004.
For fiscal year 2004, and according to the current shareholder remuneration
policy approved by the Board of Directors of the Company at its meeting held on
July 23, 2003, Telefonica's Board of Directors has approved the following:
o the distribution of an interim dividend of (euro)0.23 per share
payable in cash from 2004 net income. This payment will be made on May
13, 2005;
o to propose to the next annual general meeting of shareholders the
distribution of a share premium of (euro) 0.27 per share from
additional paid in capital reserves. Subject to shareholder approval,
this payment will be made on November 11, 2005;
o to submit to next annual general meeting of shareholders a proposal to
distribute Telefonica treasury stock among its shareholders in the
proportion on one share (1) for every twenty five shares (25). The
distribution, subject to shareholder approval, will be charged against
paid in capital reserves.
The table below sets forth the annual cash dividends per share paid by us
from net income for each of the periods listed during the past five years.
Fiscal Year ended December 31, Cash Dividends per Share
--------------------------------------------------------------------------------
(euro)
2004.............................................. 0.23
2003.............................................. 0.20
2002.............................................. --
151
Fiscal Year ended December 31, Cash Dividends per Share
----------------------------------------------------------------------
(euro)
2001....................................... --
2000...................................... --
Distribution of Antena 3 shares to shareholders
At our annual General Shareholders' Meeting of shareholders held on April
11, 2003, our shareholders approved the distribution of 50,000,400 shares of
Antena 3 representing 30% of the outstanding share capital of the company. The
number of shares to be distributed to each of our shareholders would be the
result of dividing the number of Antena 3 shares to be distributed by the number
of our shares who had a right to such distribution. Subsequent to the resolution
adopted at the General Shareholders' Meeting of Antena 3, S.A. on August 29,
2003, the nominal value of its shares was modified from one euro to three euro.
The distribution represented 30% of the share capital of Antena 3, totaling
16,666,800 shares. The exchange ratio was set at one share of Antena 3 for every
295.60802997576 of our shares and our shareholders who were entitled to a
fraction of an Antena 3 share as a result of applying the above described
exchange ratio received a cash payment for such fractions. For this purpose, the
Antena 3 shares were assigned a value of (euro)25.20. This distribution was
subject to us commencing an initial public offering of the Antena 3 shares in
the Madrid, Barcelona, Bilbao and Valencia stock exchanges, before November 20,
2003.
Antena 3 prepared a full prospectus relating to the listing of all of its
shares on the Madrid, Barcelona, Valencia and Bilbao stock exchanges, and their
inclusion in the Spanish Automated Quotation System ("sistema de interconexion
bursatil"), according to the requirements laid down in Spanish securities
exchange laws. The prospectus was verified and was registered by the Spanish
Securities Markets Commission on October 17, 2003 thereby fulfilling the
condition precedent for the resolution adopted by our shareholders on our annual
general meeting held on April 11, 2003, regarding the extraordinary in-kind
distribution to our shareholders of part of the Additional Paid-in Capital
Reserve by means of allocation of shares representing 30% of the share capital
of Antena 3.
The Antena 3 shares received by Citibank N.A. as ADR depositary were sold
in the Spanish market and the proceeds, $0.3227182 per ADR, distributed to ADR
holders as of the ADR record date on November 6, 2003.
ITEM 9. THE OFFERING AND LISTING
A. OFFER AND LISTING DETAILS
General
Our ordinary shares, nominal value one euro each, are currently listed on
each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges under the
symbol "TEF". They are also listed on various foreign exchanges such as the
London, Frankfurt, Paris, Buenos Aires and Tokyo stock exchanges and are quoted
through the Automated Quotation System of the Spanish stock exchanges and
through the SEAQ International System of the London Stock Exchange. Our shares
are eligible for deposit in the Euroclear system. Our BDSs are listed on the Sao
Paulo Stock Exchange. Our ADSs are listed on the New York Stock Exchange and the
Lima Stock Exchange.
The table below sets forth, for the periods indicated, the reported high
and low quoted closing prices, as adjusted for all stock splits, for the shares
on the Madrid Stock Exchange, which is the principal Spanish market for our
shares.
Per Share
----------------
High Low
----------------
(euro)
----------------
Year ended December 29, 2000............................. 32.60 17.50
Year ended December 28, 2001............................. 21.10 10.11
Year ended December 30, 2002............................. 15.75 7.45
Year ended December 30, 2003............................. 11.78 7.82
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Per Share
----------------
High Low
----------------
(euro)
----------------
Year ended December 30, 2004............................. 13.96 11.20
Quarter ended March 31, 2003............................. 10.18 7.82
Quarter ended June 30, 2003.............................. 10.40 8.70
Quarter ended September 30, 2003......................... 11.11 9.83
Quarter ended December 30, 2003.......................... 11.78 10.23
Quarter ended March 31, 2004............................. 13.44 11.98
Quarter ended June 30, 2004.............................. 13.06 11.33
Quarter ended September 30, 2004......................... 12.25 11.20
Quarter ended December 30, 2004.......................... 13.96 12.59
Quarter ended March 31, 2005............................. 14.56 13.44
Quarter ended June 30, 2005 (through April 14)........... 13.49 13.25
Month ended December 30, 2004............................ 13.96 13.49
Month ended January 30, 2005............................. 14.03 13.44
Month ended February 28, 2005............................ 14.56 13.90
Month ended March 31, 2005............................... 14.12 13.44
Month ended April 30, 2005 (through April 14)............ 13.49 13.25
---------------------------------------
Source: Madrid Stock Exchange Information.
On April 14, 2005, the closing price of our shares on the Automated
Quotation System of the Spanish stock exchanges was (euro)13.47 per share,
equal to $17.27 at the Noon Buying Rate for cable transfers in euro as
certified for customs purposes by the Federal Reserve Bank of New York on that
date.
Our ADSs are listed on the New York Stock Exchange under the symbol "TEF"
and are quoted through SEAQ International. Citibank, N.A. is the Depositary
issuing ADRs evidencing the ADSs pursuant to the Deposit Agreement dated as of
November 13, 1996, as amended as of December 3, 1999 and as of June 23, 2000,
among Telefonica, the Depositary and the holders from time to time of ADRs. Each
ADS represents the right to receive three shares.
The table below sets forth, for the periods indicated, the reported high
and low quoted closing prices sales prices, as adjusted for all stock splits, of
our ADSs on the New York Stock Exchange:
Per ADS
High Low
(dollars)
Year ended December 29, 2000........................ 83.19 41.46
Year ended December 31, 2001........................ 54.46 27.35
Year ended December 31, 2002........................ 39.43 21.47
Year ended December 31, 2003........................ 44.38 26.08
Year ended December 31, 2004........................ 56.70 40.59
Quarter ended March 31, 2003........................ 31.39 26.08
Quarter ended June 30, 2003......................... 36.61 28.54
Quarter ended September 30, 2003.................... 37.26 33.32
Quarter ended December 31, 2003..................... 44.38 35.84
Quarter ended March 31, 2004........................ 51.67 43.70
Quarter ended June 30, 2004......................... 46.95 40.59
Quarter ended September 30, 2004.................... 45.25 41.13
Quarter ended December 31, 2004..................... 56.70 46.12
Quarter ended March 31, 2005........................ 56.89 51.86
Quarter ended June 30, 2005 (through April 14)...... 52.32 51.30
Month ended December 31, 2004....................... 56.70 54.20
Month ended January 30, 2005........................ 56.22 52.26
Month ended February 27, 2005....................... 56.63 54.27
Month ended March 31, 2005.......................... 56.01 51.97
Month ended April 30, 2005 (through April 14)....... 52.32 51.30
---------------------------------------
Source: Bloomberg.
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At December 31, 2004, approximately 220,898,472 of our shares were held in
the form of ADSs by 1,035 holders of record, including Cede & Co., the nominee
of The Depository Trust Company. The number of ADSs outstanding was 87,854,712
at December 31, 2004.
Spanish Securities Market Legislation
The Spanish Securities Act which became effective in 1989, restructured the
organization and supervision of the Spanish securities markets. This legislation
and the regulations implementing it:
o established an independent regulatory authority, the CNMV, to
supervise the securities markets;
o established a framework to regulate trading practices, public
offerings, tender offers and insider trading;
o required stock exchange members to be corporate entities;
o required companies listed on a Spanish stock exchange to file annual
audited financial statements and to make public quarterly financial
information;
o established the legal framework for the Automated Quotation System;
o exempted the sale of securities from transfer and value added taxes;
o deregulated brokerage commissions; and
o provided for transfer of shares by book-entry or by delivery of
evidence of title.
Effective in November 1998, Law 24/1988 was amended by Law 37/1998, of
November 16, 1998. The amendment introduced the following changes:
o The concept of the "investment services company" was created. Brokers,
dealers and portfolio managing companies are considered to be
investment services companies. These companies are entitled to render
investment services and complementary activities. Banks are not
considered to be investment services companies, although they may
render investment services upon becoming members of the Spanish stock
exchanges.
o An investment services company must be authorized by the Ministry of
Treasury in order to render investment services and complementary
activities. Once authorization is obtained, the founders of the
investment services company must incorporate the company as a sociedad
anonima or a sociedad de responsabilidad limitada, both limited
liability corporations and, once incorporated, the company must be
registered with the Commercial Registry (Registro Mercantil) and the
CNMV. This registration must be published in the State Official
Gazette.
o The European principle of "single passport" or "single license" was
introduced within the Spanish legal system. Under this principle, an
investment services company may render investment services and
complementary activities within European Union member countries,
either through a branch or directly. Any necessary authorizations and
licenses must be obtained from the authorities of the country of
domicile (the "home country principle"), but the applicable market
conduct rules are those set forth in the legislation of the country in
which the investment services company renders its services (the "host
country principle").
154
o Spanish investment services companies wishing to render their services
overseas must be authorized to do so. However, in the event that they
wish to provide services within the European Union, they need only
give prior notice to the CNMV.
o An investment guarantee fund was created to protect investors from the
insolvency of any investment services company. This fund has the same
purpose as the deposit guarantee fund, which is currently in charge of
refunding deposits made in insolvent Spanish financial entities.
Spanish investment services companies are obligated to maintain a
stake in the investment guarantee fund through participation in the
share capital of the managing company of the fund.
On July 8, 2003, in order to increase the transparency of the Spanish
financial markets, the Spanish parliament passed the so-called "Transparency
Act" ("Ley de Transparencia"), also known as "Ley Aldama". The Act regulates the
corporate governance structure of listed companies, setting out new reporting
obligations and defining the duties of directors and their legal liabilities.
The Transparency Act amends the Securities Market Act of 1988 (24/1988) and the
Public Companies Act approved by Legislative Royal Decree 1564/1989.
Securities Trading in Spain
The Spanish securities market for equity securities consists of four stock
exchanges located in Madrid, Bilbao, Barcelona and Valencia and the Automated
Quotation System, or Mercado Continuo. During 2004, the Automated Quotation
System accounted for the majority of the total trading volume of equity
securities on the Spanish stock exchanges.
Automated Quotation System
The Automated Quotation System links the four Spanish stock exchanges,
providing those securities listed on it with a uniform continuous market that
eliminates certain of the differences among the local exchanges. The principal
features of the system are the computerized matching of buy and sell orders at
the time of entry of the order. Each order is executed as soon as a matching
order is entered, but can be modified or canceled until executed. The activity
of the market can be continuously monitored by investors and brokers. The
Automated Quotation System is operated and regulated by Sociedad de Bolsas,
S.A., a corporation owned by the four companies that manage each of the stock
exchanges. All trades on the Automated Quotation System must be placed through a
brokerage firm, an official stock broker or a dealer firm that is a member of a
Spanish stock exchange. Beginning January 1, 2000, Spanish banks were able to
become members of a Spanish stock exchange and are therefore able to place
trades on the Automated Quotation System.
In a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day,
an opening price is established for each security traded on the Automated
Quotation System based on a real-time auction in which orders can be entered,
modified or cancelled but are not executed. During this pre-opening session, the
system continuously displays the price at which orders would be executed if
trading were to begin. Market participants only receive information relating to
the auction price (if applicable) and trading volume permitted at the current
bid and offer price. If an auction price does not exist, the best bid and offer
price and associated volumes are shown. The auction terminates with a random
period of 30 seconds in which share allocation takes place. Until the allocation
process has finished, orders cannot be entered, modified or cancelled. In
exceptional circumstances (including the inclusion of new securities on the
Automated Quotation System) and after giving notice to the CNMV, Sociedad de
Bolsas S.A. may establish an opening price without regard to the reference price
(the previous trading day's closing price), alter the price range for permitted
orders with respect to the reference price and modify the reference price.
The computerized trading hours are from 9:00 a.m. to 5:30 p.m. During the
trading session, the trading price of a security is permitted to vary up to a
maximum so-called "static" range of the reference price, provided that the
trading price for each trade of such security is not permitted to vary in excess
of a maximum so-called "dynamic" range with respect to the trading price of the
immediately preceding trade of the same security. If, during the trading
session, there exist matching bid and ask orders over a security within the
computerized system which exceed any of the above "static" and "dynamic" ranges,
trading on the security is automatically suspended and a new auction is held
where a new reference price is set, and the "static" and "dynamic" ranges will
apply over such reference price.
155
The "static" and "dynamic" ranges applicable to each particular security are set
up and reviewed periodically by Sociedad de Bolsas, S.A.
Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized
matching system without prior authorization from Sociedad de Bolsas S.A., at a
price within the range of 5% above the higher of the average price and closing
price for the day and 5% below the lower of the average price and closing price
for the day if there are no outstanding bids or offers, respectively, on the
system matching or bettering the terms of the proposed off-system transaction
and, if, among other things, the trade involves more than (euro)300,000 and more
than 20% of the average daily trading volume of the stock during the preceding
three months. These trades must also relate to individual orders from the same
person or entity and be reported to the Sociedad de Bolsas S.A., before 8:00
p.m. At any time trades may take place (with the prior authorization of the
Sociedad de Bolsas S.A.) at any price if:
o the trade involves more than (euro)1.5 million and more than 40% of
the average daily volume of the stock during the preceding three
months;
o the transaction derives from a merger or spin-off process, or from the
reorganization of a group of companies;
o the transaction is executed for the purposes of settling a litigation
or completing a complex group of contracts; or
o Sociedad de Bolsas finds other justifiable cause.
Information with respect to the computerized trades between 9:00 a.m. and
5:30 p.m. is made public immediately, and information with respect to trades
outside the computerized matching system is reported to the Sociedad de Bolsas
by the end of the trading day and published in the Boletin de Cotizacion and in
the computer system by the beginning of the next trading day.
Clearance and Settlement System
A new financial act (Ley 44/2002 de Medidas de Reforma del Sistema
Financiero) was enacted on November 22, 2002, to increase the efficiency of the
Spanish financial markets. The new law introduced a new article, 44-bis to the
Ley del Mercado de Valores (the "Spanish Securities Act") under which Sociedad
de Sistemas is created.
The Sociedad the Sistemas de Gestion de los Sistemas de Registro,
Compensacion y Liquidacion de Valores S.A., or Sociedad de Sistemas, is
regulated by the Spanish Securities Act and where appropriate by Royal Decree
505/1987 of April 3, 1987, Royal Decree 166/1992 of February 14, 1992, and by
any other related regulation. This company, which is a wholly owned subsidiary
of Bolsas y Mercados Espanoles, Sociedad Holding de Mercados y Sistemas
Financieros, S.A. (the "Sociedad Holding"), has the following functions:
o Bookkeeping of securities represented by means of book entries
admitted to trading in the Stock Markets or in the Public Debt Book
Entry Market.
o Managing the clearance and settlement system for the brokerage
transactions in the stock markets and at the Public Debt Book Entry
Market.
o Providing technical and operational services directly linked to the
registry, clearance and settlement of securities, or any other service
required by the Sociedad de Sistemas to be integrated with any other
registry, clearance, and settlement systems.
The Sociedad de Sistemas will provide the CNMV, the "Banco de Espana", and
the "Ministro de Economia", with the information that these entities may request
regarding the registry, clearance, and settlements performed within the systems
managed by the Sociedad de Sistemas.
Transactions carried out on the Spanish stock exchanges are cleared and
settled through the Sociedad de Sistemas.
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Only members of the system are entitled to use it, and membership is
restricted to authorized broker members of the Spanish stock exchanges, the Bank
of Spain (when an agreement, approved by the Spanish Ministry of Economy and
Finance, is reached with the Sociedad de Sistemas) and, with the approval of the
CNMV, other brokers not members of the Spanish stock exchanges, banks, savings
banks and foreign settlement and clearing systems. The clearance and settlement
system and its members are responsible for maintaining records of purchases and
sales under the book-entry system. Shares of listed Spanish companies are held
in book-entry form. The Sociedad de Sistemas, which manages the clearance and
settlement system, maintains a registry reflecting the number of shares held by
each of its member entities (each, an entidad adherida) as well as the amount of
such shares held on behalf of beneficial owners. Each member entity, in turn,
maintains a registry of the owners of such shares. Spanish law considers the
legal owner of the shares to be:
o the member entity appearing in the records of the Sociedad de Sistemas
as holding the relevant shares in its own name; or the investor
appearing in the records of the member entity as holding the shares.
The settlement of any transactions must be made three business days
following the date on which the transaction was carried out.
Obtaining legal title to shares of a company listed on a Spanish stock
exchange requires the participation of a Spanish official stockbroker,
broker-dealer or other entity authorized under Spanish law to record the
transfer of shares. To evidence title to shares, at the owner's request the
relevant member entity must issue a certificate of ownership. In the event the
owner is a member entity, the Sociedad de Sistemas is in charge of the issuance
of the certificate with respect to the shares held in the member entity's name.
Brokerage commissions are not regulated. Brokers' fees, to the extent
charged, will apply upon transfer of title of shares from the Depositary to a
holder of ADRs in exchange for such ADSs, and upon any later sale of such shares
by such holder. Transfers of ADSs do not require the participation of an
official stockbroker. The Deposit Agreement provides that holders depositing
shares with the Depositary in exchange for ADSs or withdrawing shares in
exchange for ADSs will pay the fees of the official stockbroker or other person
or entity authorized under Spanish law applicable both to such holder and to the
Depositary.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Please see "--Offer and Listing Details".
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10..ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
157
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following summary describes certain material considerations concerning
our capital stock and briefly describes certain provisions of our bylaws
(estatutos) and Spanish law.
Corporate Objects
Section 4 of Part I of our bylaws sets forth our corporate objects:
o delivery and exploitation of any and all kinds of public and private
telecommunication services and, to such end, to design, install,
preserve, repair, improve, acquire, dispose of, connect, administer,
manage and perform whatever other activities other than those
mentioned above with respect to any types of networks, lines,
satellites, items of equipment, systems and items of technical
infrastructure, both existing or to be created in the future,
including the property upon which any and all of the above items are
set up;
o delivery and exploitation of any and all types of ancillary or
supplementary services, as well as of any services that may stem from
communication activities;
o research and development, promotion and application of any and all
component principles, items of equipment and systems which are
directly or indirectly used in telecommunications;
o manufacturing, production and, generally, any and all forms of
industrial activities related to telecommunications; and
o acquisition, disposal and, generally, any and all forms of trade
activities related to telecommunications.
Director Qualification
In order to be elected as a director, a person must have held a number of
our shares representing a par value of no less than (euro)3,000 for at least
three years prior to his or her election. These shares may not be transferred so
long as such person remains a director. This requirement does not apply to any
person who, at the time of his or her appointment, has either a labor or
professional relationship with the company or is expressly exempted from such
requirement by a vote of at least 85% of the Board of Directors.
Interested Transactions
When a director has an interest in a transaction, such transaction must be
presented to the Nominating, Compensation and Corporate Governance Committee.
The Committee delivers an opinion to the Board of Directors about the fairness
of the transaction to our shareholders and to us. The interested director may
not attend the board meeting at which the related transaction is discussed and
noted on.
We do not provide any loans or salary advances to our directors, management
or employees.
A director must retire upon reaching the age of 70. Such retirement shall
take effect at the first board meeting following the general shareholders'
meeting that approves the financial statements for the year in which such
director turned 70.
Significant Differences
Corporate Governance Guidelines. In Spain, companies with securities listed
on a Spanish Stock Exchange are expected to follow the Olivencia Code of Good
Governance and the Aldama Report, which include recommendations for corporate
governance guidelines and shareholder disclosure. Additionally, listed companies
are now required by law to publish an Annual Report on Corporate Governance and
also to publish corporate governance information on their websites. We base our
corporate governance procedures on the recommendations of the Olivencia Code and
the Aldama Report and also follow the recommendations of the Aldama Report. As
part of our corporate governance procedures, we have adopted regulations for our
Board of Directors that govern, among other things, director qualification
standards, responsibilities, compensation, access to management information, the
158
Board of Directors purpose and each of our Board Sub-committees purpose and
responsibilities. Moreover we have a Regulation of the General Shareholders
Meeting that aims to reinforce its transparency providing shareholders with a
framework guaranteeing and facilitating exercise of their rights. The Annual
Report on corporate governance published by us provides a detailed explanation
of our corporate governance procedures and explains the role and duties of our
Board of Directors and Board Sub-committees.
Our Annual Report on corporate governance is available at our registered
office and on our website at www.telefonica.com. None of the information
contained on our website is incorporated in this Annual Report.
Committees. We have an Audit and Control Committee since 1997, composed of
two non-executive directors and two directors deemed independent by our Board of
Directors. These committees' functions and duties are similar to those required
by the NYSE.
U.S. companies listed on the NYSE must also have an audit committee meeting
certain specified requirements. Listed foreign private issuers, such as us, must
comply with this NYSE rule by July 31, 2005. As of the date of this Annual
Report report, our Audit and Control Committee was composed of two non-executive
directors and two directors deemed independent by our Board of Directors of
Telefonica S.A. This committee's functions and duties are similar to those
required by the NYSE.
We have a Nominating, Compensation and Corporate Governance Committee,
which is composed of four non-executive directors. The functions, composition
and competencies are regulated by the company and are very similar to those
required by the NYSE.
Independence of the Board. As of the date of this Annual Report, we had 19
directors, out of which eight have been deemed independent by our Board of
Directors. A significant majority of our current directors (14) are
non-executive directors. The NYSE rules include detailed criteria for
determining director independence. We, in accordance with Spanish
recommendations, assess the independence of our directors by evaluating, among
other things, (i) the contractual, employment and commercial relations between
directors and us, (ii) other Board of Directors positions held by directors, and
(iii) the directors familial relationships. The Nominating, Compensation and
Corporate Governance Committee evaluates these criteria and notifies the Board
of Directors of its decision. Our Board of Directors in turn is responsible for
assessing whether a director is deemed independent as reported in our Annual
Report on Corporate Governance.
Internal audit function. We have a General Internal Audit Department
responsible for internal audit matters and for ensuring the efficiency of the
internal audit control process of our different units. This General Internal
Audit Department reports directly to the Audit and Control Committee, thus
guaranteeing the adequate performance of all its functions.
Non-executive director meetings. Pursuant to the NYSE listing standards,
non-executive directors of U.S. listed companies must meet on a regular basis
without management present and the company must disclose a method for any
interested parties to communicate directly with the non-executive directors. As
a group, our non-executive directors do not meet formally without management
present. Our Audit and Control Committee, which is composed of two independent
and two non-executive directors, has unanimously approved procedures that allow
any employee to anonymously and confidentially report instances of fraud,
alterations of financial information or specific risks to the company and its
subsidiaries. We expect these procedures to be in place within the coming
months.
Code of ethics. The NYSE listing standards require U.S. companies to adopt
a code of business conduct and ethics for directors, officers and employees, and
promptly disclose any waivers of the code for directors or executive officers.
We have adopted, as required by the Sarbanes Oxley Act, a code of ethics that
applies to our principal executive officer, principal financial officer and to
our senior financial officers. We also have an Internal Code of Conduct for
securities markets issues to prevent insider trading misconducts and to control
possible conflicts of interest. In addition, the Regulations of the Board of
Directors set out in detail our directors main obligations relating to conflict
of interest concerning business opportunities, misappropriation of our assets
confidentiality and non-competition.
159
Description of Telefonica Capital Stock
Description of Share Capital
At April 15, 2005, our issued share capital consisted of 4,955,891,361
ordinary registered shares with a nominal value of (euro)1.00 each. Our
shareholders have delegated to the Board of Directors the authority to issue up
to 2,274,667,655 new shares. The Board's authorization to issue new shares
expires on June 15, 2006.
Meetings and Voting Rights
We hold our ordinary general shareholders' meeting during the first six
months of each fiscal year on a date fixed by the Board of Directors.
Extraordinary general shareholders' meetings may be called, from time to time,
at the discretion of our Board of Directors or upon the request of shareholders
representing 5% of our paid-in share capital. We publish notices of all ordinary
and extraordinary general shareholders' meetings in the Official Gazette of the
Commercial Registry and in at least one newspaper in Madrid at least fifteen
days before the relevant meeting.
Each share of Telefonica entitles the holder to one vote. However, only
registered holders of shares representing a par value of at least (euro)300,
which currently equals at least 300 shares because our shares have a par value
of (euro)l each, are entitled to attend a general shareholders' meeting. Holders
of shares representing a par value of less than (euro)300, meaning less than 300
shares, may aggregate their shares by proxy and select a representative that is
a shareholder to attend a general shareholders' meeting or delegate his or her
voting rights by proxy to a shareholder who has the right to attend the
shareholders' meeting. However, under our bylaws, no shareholder may vote a
number of shares exceeding 10% of the total outstanding voting capital.
Any share may be voted by proxy. Proxies must be in writing and are valid
only for a single meeting.
Only holders of record five days prior to the day on which a general
meeting of shareholders is scheduled to be held may attend and vote at the
meeting. Under the deposit agreement for the ADSs, our depositary accepts voting
instructions from holders of ADSs. The depositary executes such instructions to
the extent permitted by law and by the terms governing the shares. The
depositary or its nominee, whichever is applicable, will be entitled to vote by
proxy the shares represented by the ADSs.
Shareholders representing, in person or by proxy, at least 25% of our
subscribed voting capital constitute a quorum for a general meeting. If a quorum
is not present at the first meeting, then the meeting can be held on second
call. Regardless of the number of shareholders present at the second meeting,
they are deemed to constitute a quorum.
Shareholders representing, in person or by proxy, at least 50% of our
subscribed voting capital constitute a quorum on a first call for shareholders'
meetings at which shareholders will be voting on any of the following actions:
o issuance of bonds;
o increase or reduction of share capital;
o amendment of corporate purpose;
o any other amendment of our bylaws; or
o merger, split or spin-off of Telefonica.
When a quorum is present on the first call, these special resolutions must
be adopted by the affirmative vote of shareholders representing a majority of
our present subscribed voting capital.
If a quorum for the meeting is not present after the first call, upon a
second call for the meeting, 25% of our subscribed voting capital will
constitute a quorum. When shareholders representing less than 50% of the
subscribed
160
voting capital are in attendance, these special resolutions must be
adopted by a vote of two-thirds of those shareholders present.
A shareholder who owns shares on the record date will not be entitled to
vote his/her shares in a general meeting of shareholders if the shareholder,
individually or as part of a group, has not complied with the notification
requirements relating to the acquisition of additional shares beyond certain
threshold amounts.
Dividends
Shareholders vote on final dividend distributions at the shareholders'
meeting. Distributable profits are equal to:
o net profits for the year; plus
o profits carried forward from previous years; plus
o distributable reserves; minus
o losses carried forward from previous years; minus
o amounts allocated to reserves as required by law or by our bylaws.
The Board of Directors can make interim dividend payments without a prior
shareholder vote on the issue. However, under those circumstances, the dividend
is limited to distributable net profits of the current year and is subject to
certain legal requirements.
Unclaimed dividends revert to Telefonica five years from their date of
payment.
Registration and Transfers
Our shares are in registered book-entry form. Transfers executed through
stock exchange systems are implemented pursuant to the stock exchange clearing
and settlement procedures carried out by the Spanish clearing institution.
Transfers executed outside of stock exchange systems, that is, over the counter,
are implemented pursuant to the general legal regime for book-entry transfer,
including registration by the Spanish clearing institution.
There are no restrictions with respect to the transfer of our shares.
Liquidation Rights
Under Spanish law, upon our liquidation, the shareholders would be entitled
to receive, on a pro rata basis, any assets remaining after the payment of our
debts and taxes and liquidation expenses.
C. MATERIAL CONTRACTS
Material Contracts
Agreement with Bellsouth
On March 5, 2004 Telefonica Moviles entered into a stock purchase agreement
with BellSouth to acquire 100% of BellSouth's interests in its wireless
operations in Argentina, Chile, Peru, Venezuela, Colombia, Ecuador, Uruguay,
Guatemala, Nicaragua and Panama.
The effective transfer of the shares of these companies was conditional,
among other things, upon the attainment of the required regulatory
authorizations in each country and on the approvals, if any, required, from the
minority stockholders of the various operators. All the holdings of BellSouth in
the operators located in Ecuador, Guatemala and Panama were transferred on
October 14, 2004. All holdings in the operators located in Colombia, Nicaragua,
Peru, Uruguay and Venezuela were transferred on October 28, 2004. All holdings
in the operator in
161
Chile were transferred on January 7, 2005, and the holdings in the Argentinian
operator were transferred on January 11, 2005.
Under this agreement the aforementioned operators were valued at $5,850
million and their net debt was assumed. The total acquisition cost for
Telefonica Moviles, adjusted by the net debt of all the companies, amounted to
(euro)3,252.5 million in 2004 (excluding Chile and Argentina, which were
acquired in 2005).
In addition to acquiring BellSouth's wireless operators in Latin America,
in compliance with the commitments assumed under the share purchase agreement,
Telefonica Moviles launched an offer for the acquisition of the minority
interests in these companies, the purchase price in each case being equal to the
price agreed with BellSouth.
Other Important Agreements
Agreement with Sogecable
In May 2002, Admira entered into an agreement with Sogecable to integrate
Via Digital and Canal Satelite Digital, which is the pay television and
satellite broadcast platform of Sogecable. The integration was subject to the
satisfaction of certain conditions, including the approval of 100% of the
shareholders of Via Digital to subscribe a capital increase through a share
exchange and the receipt of several administrative authorizations. Under the
agreement, Sogecable issued 28,981,121 new shares in exchange for the total
issued and outstanding shares of Via Digital at the date of the exchange. To
date, we together with Telefonica de Contenidos own 23.83% of the resulting
company. See "Item 4--Information on the Company--Business Overview--Worldwide
Audiovisual Content and Media--Telefonica de Contenidos (Formerly Admira)".
Also, on August 7, 2003, Telefonica de Contenidos acquired a commitment, up
to a maximum of (euro)80 million, to guarantee compliance with the payment
obligations arising for Sogecable under the aforementioned syndicated loan and
credit facility, or to indemnify the syndicate of banks and savings banks up to
the same amount against the damage and loss that the syndicate may suffer if any
of Sogecable's obligations in relation to the contract were to be rendered null,
void or ineffective for Sogecable.
See "Item 4--Information on the Company--Business Overview--Worldwide
Audiovisual Content and Media--Telefonica de Contenidos (Formerly Admira)".
Uno-e Bank
On January 10, 2003, Terra Networks, S.A. and BBVA entered into an
agreement for the integration of the consumer finance line of business of
Finanzia Banco de Credito, S.A. and Uno-e Bank, S.A., in terms more suited to
their respective interests than those established in the memorandum of
understanding of May 15, 2002, which was then rendered void. The definitive
agreement was subject to the related internal and administrative authorizations,
which had to be granted before June 30, 2003, as a condition for the
formalization and execution of the integration transaction. After the
integration had taken place, Terra Networks, S.A.'s ownership interest in Uno-e
Bank, S.A. was 33% and that of the BBVA Group was 67%.
Atento
On October 24, 2003, BBVA, Telefonica, S.A. and Atento N.V. entered into an
Agreement establishing the terms and conditions under which BBVA, through
General de Participaciones Empresariales, S.L. (GPE) became a stockholder of
Atento N.V. by contributing all the shares of Procesos Operativos, S.A. As a
result of the performance of this agreement, Telefonica, S.A. currently owns
shares representing 91.35% of the capital stock of Atento N.V., and GPE owns the
remaining 8.65%.
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D. EXCHANGE CONTROLS
Exchange Controls and Other Limitations Affecting Security Holders
Preliminary administrative authorization of certain transactions (Golden
Share)
On May 13, 2003, the European Court of Justice ("ECJ") ruled (in the case
C-463/00, European Communities Commission vs. The Kingdom of Spain), that the
preliminary authorization rules (golden share) set forth in Law 5/1995,
requiring prior governmental approval with respect to a limited number of
fundamental corporate and control transactions affecting us, were no longer
valid. In order to adapt Law 5/1995 to the ECJ's May 13, 2003 ruling, Law 5/1995
was modified by virtue of the twenty-fifth additional provision of Law 62/2003,
dated December 31, 2003, governing certain tax, administrative and social
matters. This regulation establishes a new post-closing notification model,
which, for the purposes of the Telefonica Group, is applicable until February
2007.
The post-closing notification requirements described in Law 5/1995 apply to
us, Telefonica Moviles S.A., Telefonica de Espana S.A.U., and Telefonica Moviles
Espana S.A.U., and must be observed in the following transactions:
o transfer or encumbrance of strategic assets located in Spain by
Telefonica de Espana and Telefonica Moviles Espana. Transactions
affecting these assets carried out between Telefonica Group companies
are exempt and need only be reported through a written communication
to the competent regulatory body;
o transfer or encumbrance of shares or any other securities of
Telefonica de Espana by Telefonica S.A., Telefonica Moviles S.A. by
Telefonica S.A. and Telefonica Moviles Espana by Telefonica Moviles
S.A., when such transactions result in a change of control, or the
sale of holdings representing 50% or more;
o substitution of Telefonica Moviles Espana S.A.U.'s business purpose;
o direct or indirect acquisition of our or Telefonica Moviles S.A.'s
shares representing 10% or more of each company's share capital.
Financial transactions which do not result in a change of control or
in a change of management are exempt from the requirements of Law
5/1995; and
o voluntary winding-up, spin-off or merger need only be reported through
a simple written communication, except where these operations affect
strategic assets specified in Law 5/1995, which will require the
post-closing notification. The above-mentioned transaction between
members of the Telefonica Group affecting strategic assets are exempt
from the post-closing notification.
Ownership Limitations
The new General Telecommunications Law ("GTL") enacted on November 3, 2003
eliminated existing ownership limitations, which prohibited non-European
nationals from owning directly or indirectly more than 25% of our assets or
share capital, except under certain circumstances. Article 6 of the new GTL
provides for the application of the reciprocity principle under existing
international treaties or agreements signed and ratified by Spain. The Spanish
government, upon request, may authorize exceptions to the reciprocity principle
contained in the new GTL.
Trading by Telefonica in its own Shares or Shares of Companies under its
Control
At December 31, 2004, we held 207,245,179 shares of treasury stock,
representing 4.18% of our capital stock. At March 31, 2005, we held 247,704,407
shares of treasury stock, representing 5% of our capital stock. We have
announced our commitment to dedicate a minimum of (euro)4 billion to the
acquisition of our treasury stock over the 2003-2006 period.
The Spanish Corporations Law prohibits the purchase by us and our
subsidiaries of shares in the secondary market except in the following limited
circumstances:
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o the purchase of shares must be authorized by a general meeting of
shareholders of Telefonica and, in the case of a purchase of shares by
a subsidiary, also by a general meeting of shareholders of the
subsidiary;
o the shares so purchased have no economic or voting rights while held
by Telefonica and have no voting rights while held by its
subsidiaries;
o the purchaser must create reserves equal to the purchase price of any
shares that are purchased and, if a subsidiary is the acquirer, the
reserve must also be recorded by the parent company; and
o the total number of shares held by Telefonica and its subsidiaries may
not exceed 5% of the total capital of Telefonica.
Any acquisition of shares of Telefonica exceeding, or that causes
Telefonica's and its subsidiaries' holdings to exceed, 1% of Telefonica's share
capital must be reported to the CNMV.
At a general meeting of shareholders held in April 2003, Telefonica's
shareholders authorized the Board of Directors to acquire shares of Telefonica
for a period of 18 months from the date of authorization. The new authorization
also applies to companies under our control. Pursuant to the new authorization,
the aggregate nominal value of the shares held by us or any of our subsidiaries
cannot exceed 5% of our shareholders' equity. Consistent with applicable Spanish
laws and regulations and the authorization of our shareholders, from time to
time we or our affiliates engage in transactions involving securities of members
of the Telefonica Group. These transactions may include purchases of shares of
group members, forward contracts with respect to these shares and other similar
transactions. At the general meeting of shareholders held in April 2004, this
authorization was extended for an additional 18 months from the date of the
meeting.
Other Restrictions on Acquisitions of Shares
A person or group of persons that directly or indirectly exercises
beneficial ownership or control of 5% or more of the outstanding shares, or
which increases or decreases the number of shares which it owns or controls to
an amount which equals or exceeds any multiple of 5% of such outstanding shares,
must inform the following entities of such ownership:
o Telefonica;
o the Stock Exchange Management Companies of the Spanish stock exchanges
on which the shares are listed;
o the CNMV; and
o in the case of a foreign person or group of persons, the General
Directorate of Commercial Policy and Foreign Investments.
A person or group that is a member of our Board of Directors must report
any acquisition or transfer, regardless of size, of our capital stock. A person
or group of persons that fails to inform any of the above entities after
reaching any of the indicated thresholds may incur fines and penalties.
Additionally, if a company fails to inform us after reaching ownership or
control of 10% of the outstanding shares or increases the shares it controls to
equal or exceed any successive multiple of 5%, the rights corresponding to those
shares will be suspended until a proper notification to us is made. For
reporting requirements concerning acquisitions by us or our affiliates of our
shares, see "--Trading by Telefonica in its own Shares or Shares of Companies
under its Control" above.
Dividend and Liquidation Rights
At the general meeting of shareholders held on April 11, 2003, we announced
a new dividend policy aimed at providing cash dividend payments. The meeting
approved a (euro) 0.25 dividend payment per share for 2003. The first payment of
(euro) 0.13 per share was made effective on July 3, 2003, and the second payment
of (euro) 0.12 per share was made effective on October 15, 2003. At the annual
general meeting of shareholders held on April 30, 2004, the shareholders
approved the distribution of a dividend of (euro)0.20 per share payable in cash
and a distribution of (euro)0.20 as
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share premium per share payable in cash. The first payment of (euro)0.20 per
share payable from 2003 net income was effective on May 14, 2004 and the second
payment of (euro)0.20 per share from Additional Paid- in capital reserve will be
made on November 12, 2004.
According to Spanish law and our bylaws, dividends may only be paid out of
profits or distributable reserves if the value of our net worth is not, and as a
result of such distribution would not be, less than its capital stock. Pursuant
to Spanish law, we are required to reserve 10% of our fiscal year net income
until the amount in its legal reserve reaches 20% of our capital. Our legal
reserve is currently at 20%.
Dividends payable by us to non-residents of Spain ordinarily are subject to
a Spanish withholding tax. For the tax implications of dividends, see
"--Taxation".
Upon our liquidation, our shareholders would be entitled to receive pro
rata any assets remaining after the payment of our debts and taxes and expenses
of the liquidation. Any change in the rights of shareholders to receive
dividends and payment upon liquidation would require an amendment to our bylaws
by resolution adopted by a general meeting of shareholders. If there were more
than one class of shares, such amendment would also require the approval of each
class of shareholders affected by the amendment.
Preemptive Rights and Increases of Share Capital
Pursuant to the Spanish Corporations Law, shareholders and holders of
convertible bonds have preemptive rights to subscribe for any new shares and for
bonds convertible into shares. Such rights may not be available under special
circumstances if precluded by a resolution passed at a general meeting of
shareholders in accordance with Article 159 of the Spanish Corporations Law, or
the Board of Directors, if authorized. Further, such rights, in any event, will
not be available in the event of an increase in capital to meet the requirements
of a convertible bond issue or a merger in which shares are issued as
consideration. Such rights:
o are transferable;
o may be traded on the Automated Quotation System; and
o may be of value to existing shareholders because new shares may be
offered for subscription at prices lower than prevailing market
prices.
Shares issuable upon exercise of rights must be registered under the
Securities Act of 1933 in order to be offered to holders of ADRs. If we decided
not to register the shares, the rights would not be distributed to holders of
ADRs. Pursuant to the Deposit Agreement, however, holders of ADRs are entitled
to receive their proportionate share of the proceeds, if any, from sale by the
Depositary of any rights accruing to holders of ADRs.
E. TAXATION
The following is a general summary of material Spanish and U.S. federal
income tax consequences to U.S. Holders (as defined below) of the ownership and
disposition of shares or ADSs. This summary is based upon U.S. tax laws,
including the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
final, temporary and proposed Treasury regulations, rulings, judicial
decisions, administrative pronouncements, Spanish tax law, and the Convention
Between the United States of America and the Kingdom of Spain for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes
on Income, signed February 22, 1990, together with related protocol (the
"Treaty"), all as currently in effect and all of which are subject to change or
changes in interpretation, possibly with retroactive effect. In addition, the
summary is based in part on the representations of the Depositary and assumes
that each obligation provided for in or otherwise contemplated by the Deposit
Agreement or any other related agreements will be performed in accordance with
its terms.
As used herein, the term "U.S. Holder" means a beneficial owner of one or
more shares or ADSs:
(a) who is, for U.S. federal income tax purposes, one of the following:
i. a citizen or resident of the United States,
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ii. a corporation (or other entity taxable as a corporation) created
or organized in or under the laws of the United States or any
political subdivision thereof, or
iii. an estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source;
(b) who is entitled to the benefits of the Treaty under the Limitation on
Benefits provisions contained in the Treaty;
(c) who holds the shares or ADSs as capital assets for U.S. federal income
tax purposes;
(d) who owns, directly, indirectly or by attribution, less than 10% of the
share capital or voting stock of Telefonica; and
(e) whose holding is not effectively connected with a permanent
establishment in Spain.
This summary does not address tax considerations that may apply to holders
that are subject to special tax rules, such as U.S. expatriates, insurance
companies, tax-exempt organizations, certain financial institutions, persons
subject to the alternative minimum tax, dealers and certain traders in
securities or foreign currencies, persons holding the shares or ADSs as part of
a straddle, hedging, conversion or other integrated transaction, persons who
acquired their shares or ADSs pursuant to the exercise of employee stock options
or otherwise as compensation, partnerships or other entities classified as
partnerships for U.S. federal income tax purposes or persons whose functional
currency is not the U.S. dollar. Such holders may be subject to U.S. federal
income tax consequences different from those set forth below.
If a partnership holds shares or ADSs, the tax treatment of a partner
generally will depend upon the status of the partner and the activities of the
partnership. A partner in a partnership that holds shares or ADSs is urged to
consult its own tax advisor regarding the specific tax consequences of owning
and disposing of the shares or ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are
pre-released may be taking actions that are inconsistent with the claiming of
foreign tax credits by U.S. Holders of ADSs. Such actions would also be
inconsistent with the claiming of the reduced rate of tax applicable to
dividends received by certain non-corporate U.S. Holders. Accordingly, the
availability of foreign tax credits to U.S. Holders of ADSs and the reduced tax
rate for dividends received by certain non-corporate U.S. Holders, both as
described below, could be affected by actions that may be taken by parties to
whom ADSs are pre-released. For purposes of the Treaty and U.S. federal income
tax, U.S. Holders of American Depositary Receipts will generally be treated as
owners of the ADSs evidenced thereby and the shares represented by such ADSs.
This discussion assumes that Telefonica is not, and will not become, a
passive foreign investment company ("PFIC"), as discussed below under "United
States Federal Income Tax Considerations - Passive Foreign Investment Company
Rules."
U.S. Holders of shares or ADSs should consult their own tax advisors
concerning the specific Spanish and U.S. federal, state and local tax
consequences of the ownership and disposition of shares or ADSs in light of
their particular situations as well as any consequences arising under the laws
of any other taxing jurisdiction. In particular, U.S. Holders are urged to
consult their own tax advisors concerning whether they are eligible for benefits
under the Treaty.
Spanish Tax Considerations
Taxation of Dividends
Under Spanish law, dividends paid by a Spanish resident company to a U.S.
Holder of shares or ADSs are subject to an income tax withheld at source on the
gross amount of dividends, currently at a 15% tax rate.
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Taxation of Extraordinary Distributions
On November 12, 2004 we made a special distribution of euro 0.20 per share
consisting of a distribution of paid-in surplus. Under Spanish law, this
distribution is subject to special tax treatment. In general, the amount of this
distribution received in cash is not taxable under Spanish income tax law but
instead reduces the acquisition cost of the shares or ADSs for Spanish tax
purposes (i.e., in the event of a subsequent sale or disposition of the shares
or ADSs, the amount of gain realized will be higher). If the amount of the
distribution exceeds the adjusted acquisition cost of a U.S. Holder for the
shares or ADSs, that U.S. Holder will be subject to tax on the excess at a rate
of 15% and be required to file a Spanish Form 210 along with payment of the tax
within one month of the distribution. No amount will be withheld by us in
respect of Spanish taxes on this distribution.
Taxation of Capital Gains
Spanish income tax is generally levied at a 35% tax rate on capital gains
of non-residents of Spain who are not entitled to the benefit of any applicable
treaty for the avoidance of double taxation and who do not operate through a
fixed base or a permanent establishment in Spain.
Under the Treaty, capital gains realized by U.S. Holders arising from the
disposition of shares or ADSs will not be taxed in Spain provided that the
seller has not maintained a direct or indirect holding of 25% or more in our
capital during the twelve months preceding the disposition of the shares or
ADSs. U.S. Holders will be required to establish that they are entitled to the
exemption from tax under the Treaty by providing to the relevant Spanish tax
authorities Spanish Form 210 and a certificate of residence on IRS Form 6166
from the IRS stating that to the best knowledge of the IRS, such U.S. Holder is
a U.S. resident within the meaning of the Treaty. Spanish law requires that both
of these forms be filed within one month from the date the capital gain is
realized. Beginning July 5, 2004, U.S. Holders were required to request the IRS
Form 6166 certificate of residence by filing IRS Form 8802 with the IRS. The
U.S. Holder must attach to IRS Form 8802 a statement by the U.S. Holder
declaring that it was or will be a resident of the United States for the period
for which the Treaty benefit is claimed.
Spanish Wealth Tax
Individual U.S. Holders who hold shares or ADSs located in Spain are
subject to the Spanish Wealth Tax (Impuesto sobre el Patrimonio) (Spanish Law
19/1991), which imposes tax on property located in Spain on the last day of any
year. Shares or ADSs located outside of Spain are not subject to the Spanish
Wealth Tax. However, the Spanish tax authorities may argue that all shares of
Spanish corporations and all ADSs representing such shares are located in Spain
for Spanish tax purposes. If such a view were to prevail, U.S. Holders who held
shares or ADSs located in Spain or deemed to be located in Spain on the last day
of any year would be subject to the Spanish Wealth Tax for such year at marginal
rates varying between 0.2% and 2.5% of the average market value of such shares
or ADSs during the last quarter of such year, as published by the Spanish
Ministry of Economic Affairs. U.S. Holders should consult their tax advisors
with respect to the Spanish Wealth Tax.
Spanish Inheritance and Gift Taxes
Transfers of shares or ADSs on death and by gift to individuals are subject
to Spanish inheritance and gift taxes (Impuesto sobre Sucesiones y Donaciones),
respectively, if the transferee is a resident of Spain for tax purposes, or if
the shares or ADSs are located in Spain at the time of death, regardless of the
residence of the heir or beneficiary. The applicable tax rate, after applying
all relevant factors, ranges from between 7.65% and 81.6% for individuals. Gifts
of shares granted to corporate U.S. Holders are subject to corporate tax which
is generally levied at the rate of 35%.
Expenses of Transfer
Transfers of shares or ADSs will be exempt from any transfer tax (Impuesto
sobre Transmisiones Patrimoniales) or value added tax. Additionally, no stamp
tax will be levied on such transfers.
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United States Federal Income Tax Considerations
Taxation of Dividends
Distributions received by a U.S. Holder on shares or ADSs, including the
amount of any Spanish taxes withheld, other than certain pro rata distributions
of shares to all shareholders (including ADS holders), will constitute foreign
source dividend income to the extent paid out of Telefonica's current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes). The amount of the dividend a U.S. Holder will be required to include
in income will equal the U.S. dollar value of the euro, calculated by reference
to the exchange rate in effect on the date the payment is received by the
Depositary (in the case of ADSs) or by the U.S. Holder (in the case of shares),
regardless of whether the payment is converted into U.S. dollars on the date of
receipt. If a U.S. Holder realizes gain or loss on a sale or other disposition
of euro, it will be U.S. source ordinary income or loss. Corporate U.S. Holders
will not be entitled to claim the dividends-received deduction with respect to
dividends paid by Telefonica. Subject to applicable limitations and the
discussion above regarding concerns expressed by the U.S. Treasury, dividends
received by certain non-corporate U.S. Holders in taxable years beginning before
January 1, 2009 will be taxable at a maximum rate of 15%. Non-corporate U.S.
Holders should consult their own tax advisors to determine whether they are
subject to any special rules that limit their ability to be taxed at this
favorable rate.
Spanish taxes withheld from dividends on shares or ADSs at a rate not
exceeding the rate provided in the Treaty will be creditable against a U.S.
Holder's U.S. federal income tax liability, subject to applicable restrictions
and limitations that may vary depending upon the U.S. Holder's circumstances and
the discussion above regarding concerns expressed by the U.S. Treasury. Instead
of claiming a credit, a U.S. Holder may elect to deduct such Spanish taxes in
computing its taxable income, subject to generally applicable limitations. The
limitation of foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. The rules governing foreign tax credits
are complex. Therefore, U.S. Holders should consult their own tax advisors
regarding the availability of foreign tax credits in their particular
circumstances.
Taxation Upon Sale or Other Disposition of Shares or ADSs
A U.S. Holder will generally recognize capital gain or loss on the sale or
other disposition of shares or ADSs, which will be long-term capital gain or
loss if the U.S. Holder has held such shares or ADSs for more than one year. The
amount of the U.S. Holder's gain or loss will be equal to the difference between
such U.S. Holder's tax basis in the shares or ADSs sold or otherwise disposed of
and the amount realized on the sale or other disposition. Any gain or loss will
generally be U.S. source gain or loss for foreign tax credit purposes.
As discussed under "Spanish Tax Considerations--Taxation of Capital Gains"
above, gain realized by a U.S. Holder on the sale or other disposition of shares
or ADSs may be subject to Spanish tax unless the U.S. Holder provides the
relevant Spanish tax authorities with both a certificate of U.S. tax residence
on IRS Form 6166 and Spanish Form 210. Spanish law requires that both of these
forms be filed within one month from the date on which the capital gain is
realized. U.S. Holders are advised to submit IRS Form 8802 and the accompanying
declaration to the IRS well in advance of the date on which the IRS Form 6166
that will be issued by the IRS may be required by the Spanish tax authorities,
as there may be delays in obtaining the necessary forms. U.S. Holders should
consult their own tax advisors regarding the potential Spanish tax consequences
of a sale or other disposition of shares or ADSs and the procedures available
for an exemption from such tax.
Passive Foreign Investment Company Rules
Telefonica believes that it was not a PFIC for U.S. federal income tax
purposes for its 2004 taxable year. However, since PFIC status depends upon the
composition of a company's income and assets and the market value of its assets
(including, among others, less than 25% owned equity investments) from time to
time, there can be no assurance that Telefonica will not be considered a PFIC
for any taxable year. If Telefonica were treated as a PFIC for any taxable year
during which a U.S. Holder held a share or ADS, certain adverse tax consequences
could apply to the U.S. Holder.
If Telefonica is treated as a PFIC for any taxable year, gain recognized by
a U.S. Holder on a sale or other disposition of a share or
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ADS would be allocated ratably over the U.S. Holder's holding period for the
share or ADS. The amounts allocated to the taxable year of the sale or other
disposition and to any year before Telefonica became a PFIC would be taxed as
ordinary income. The amount allocated to each other taxable year would be
subject to tax at the highest rate in effect for individuals or corporations, as
appropriate, and an interest charge would be imposed on the amount allocated to
such taxable year. Further, any distribution in respect of shares or ADSs in
excess of 125% of the average of the annual distributions on shares or ADSs
received by the U.S. Holder during the preceding three years or the U.S.
Holder's holding period, whichever is shorter, would be subject to taxation as
described above. Certain elections may be available (including a mark-to-market
election) to U.S. Holders that may mitigate the adverse tax consequences
resulting from PFIC status.
In addition, if Telefonica were to be treated as a PFIC in a taxable year
in which it pays a dividend or the prior taxable year, the 15% dividend rate
discussed above with respect to dividends paid to certain non-corporate U.S.
Holders would not apply.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless the U.S.
Holder is a corporation or other exempt recipient or, in the case of backup
withholding, the U.S. Holder provides a correct taxpayer identification number
and certifies that no loss of exemption from backup withholding has occurred.
The amount of any backup withholding from a payment to a U.S. Holder will be
allowed as a credit against the U.S. Holder's U.S. federal income tax liability
and may entitle such U.S. Holder to a refund, provided that the required
information is furnished to the IRS.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable.
G. STATEMENTS BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
Where You Can Find More Information
We file Annual Reports on Form 20-F and furnish periodic reports on Form
6-K to the SEC. You may read and copy any of these reports at the SEC's public
reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services. Some SEC
filings of ours are also available at the website maintained by the SEC at
"http://www.sec.gov".
Our ADSs are listed on the New York Stock Exchange under the symbol "TEF".
You may inspect any periodic reports and other information filed with the SEC by
us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
As a foreign private issuer, we are exempt from the rules under the
Exchange Act which prescribe the furnishing and content of proxy statements, and
our officers, directors and principal shareholders are exempt from the reporting
and "short-swing" profit recovery provisions contained in Section 16 of the
Exchange Act.
We are subject to the informational requirements of the Spanish securities
commission and the Spanish stock exchanges, and we file reports and other
information relating to our business, financial condition and other matters with
the Spanish securities commission and the Spanish stock exchanges. You may read
such reports, statements and other information, including the annual and
biannual financial statements, at the public reference facilities maintained in
Madrid and Barcelona. Some of our Spanish securities commission filings are also
available at the website maintained by the Spanish securities commission at
http://www.cnmv.es.
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We have appointed Citibank, N.A. to act as depositary for the Telefonica
ADSs. Citibank will, as provided in the deposit agreement, arrange for the
mailing of summaries in English of such reports and communications to all record
holders of the ADSs of Telefonica. Any record holder of Telefonica ADSs may read
such reports, notices or summaries thereof, and communications at Citibank's
office located at 111 Wall Street, New York, New York 10043.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to diverse financial market risks due to (i) our business
activities, (ii) the debt acquired to finance our business, (iii) our
shareholdings in various companies, and (iv) other related financial
instruments that we have entered into.
The main market risks that affect the companies in the Telefonica Group
are:
o Exchange rate risk. This risk arises mainly due to (i) our
international presence and resulting investments in Latin America,
and (ii) debt denominated in currencies other than the euro or
denominated in the currencies of countries where our businesses are
located.
o Interest rate risk. This risk arises mainly due to fluctuations in
the interest rates affecting (i) the financial costs associated with
variable interest rate debt (or debt with short term maturity and
foreseeable renewal), and (ii) the value of our long-term liabilities
with fixed interest rates (the market value of this debt rises when
interest rates drop).
o Share price risk. This risk arises mainly due to (i) the variation in
value of our shareholdings in other companies that are not globally
or proportionally consolidated, (ii) derivatives affecting our
shareholdings, (iii) our own shares held in our portfolio (treasury
shares) and (iv) derivatives affecting our own shares or the shares
of companies in which we hold or may hold an interest.
We also face liquidity risk and "country risk". Liquidity risk arises due
to the possible imbalances between our capital needs (due to operating and
financial expenses, investment, debts that have matured, dividends committed)
and our sources of funds (revenue, divestments, financing commitments with
financial institutions, operations on capital markets).
"Country risk", which is directly related to market and liquidity risks,
consists of the possibility of either, loss of value of the assets or decrease
of cash flows generated by such assets and transferred to us. This risk is a
direct consequence of political, economic and social instability in the
countries in which the Telefonica Group operates, especially Latin America.
The Telefonica Group actively manages the above mentioned risks, in order
to:
o stabilize cash flows to facilitate financial planning in order to
meet our capital requirements;
o facilitate the understanding and the prediction of our future results
by investors;
o protect the value of our equity and the value of the investment made.
In the event any of these objectives conflict with each other, our
management evaluates the policy to be followed in each particular situation. In
our risk management we use derivative financial instruments, mainly related to
exchange rates, interest rates and share prices.
Exchange Rate Risk
Our objective in exchange rate risk management is that, in the event of
depreciation of local Latin American currencies, potential losses in the value
of the assets related to our business are offset by savings from the reduction
in the euro value of our debt denominated in Latin American currencies.
Our exchange rate rate risk management endeavors to ensure that, in the
event of depreciation Latin American currencies, the decrease in the euro value
of our debt denominated in non-euro currencies covers the decrease in expected
cash flows for a two-year period. However, our ability to accomplish this
objective is limited due to the the limited availability of appropriate debt
instruments denominated in certain currencies, such as the Venezuelan bolivar,
or due to high transaction costs associated with entering into debt instruments
denominated in Latin currencies compared to the expected depreciation of such
currencies. Our estimates show that the depreciation of Latin American
currencies versus the euro throughout 2003 and 2004 has resulted in a decrease
of (euro)236 million of cash outflow generated by us over the last two years.
This esimate is calculated by comparing real figures in euro for our cash flows
in 2003 and 2004 with the value in euro that cash flows would have been in 2003
and 2004 if the Latin American exchange rates had remained at year 2002 rates.
However, depreciation of Latin American currencies and the U.S. dollar versus
the euro in 2003 and 2004 has reduced the cost of our debt resulting in savings
of approximately (euro)1.08 billion when translating our debt denominated in
local currency to euro. Thus, the accumulated cash flow loss over the last two
years has been offset by the debt savings. For the year ended December 31, 2004
we estimate that the depreciation of Latin American currencies and the U.S.
dollar versus the euro resulted in a loss of cash flows of (euro)18 million,
which was offset by savings of (euro)223 million resulting from the reduction
of the cost of our debt denominated in such currencies when measured in euros.
The protection against future depreciation of Latin American currencies in
relation to the euro is based on incurring in debt denominated in Latin
American currencies. Excluding Mexico (which is a net receiver of cash flow),
at December 31, 2004, our debt denominated in Latin American currencies (other
than the Mexican peso) amounted to (euro)3.38 billion and was equivalent to 2.1
times the cash flow generated by our Latin American operations (excluding
Mexico). However, our debt denominated in Latin American currencies is not
uniformly distributed in proportion to the cash flows generated by our Latin
American operations in such currencies. Consequently, our future ability to
generate savings from our debt denominated in Latin American currencies will
depend on where and to what extent depreciation of such currencies versus the
euro takes place. For example, at December 31, 2004 we had more assets in
Venezuela denominated in the local currency then debt denominated in the local
currency. These assets would lose value if the Venezuelan bolivar were to
depreciate against the euro and such losses would not be fully offset by
savings from the reduction of the cost of our debt denominated in the
Venezuelan bolivar measured in euros.
Also, we protect against the loss of value of our Latin American assets
due to depreciation versus the euro by incurring U.S. dollar denominated debt.
At December 31, 2004 our net debt (gross debt minus short-term financial
assets) denominated in U.S. dollars was equivalent to (euro)2.4 billion,
excluding certain U.S. dollar denominated instruments entered into to finance
the acquisition of BellSouth's Latin American wireless operations.
Another essential element of our exchange rate management policy is to
minimize negative financial results due to exchange rate variations while still
maintaining open currency positions (under strict risk supervision).
Difficulties in minimizing this risk have arisen due to the difficulty in
hedging external U.S. dollar denominated debt incurred by our subsidiaries in
Argentina through derivative contracts. The external U.S. dollar denominated
debt of our Argentine subsidiaries was (euro)652 million at December 31, 2004.
Tabular description of market rate sensitive instruments
At December 31, 2004 we did not maintain any financial instruments for
trading purposes, although certain instruments could be classified as held for
trading purposes if the relationship between us and the counterparty was not
explicitly documented or if both parties considered the instrument to be held
for trading. The tables below describe the financial instruments bearing market
risk (interest rate risk and foreign exchange risk) for the companies
consolidated in the Telefonica Group. Financial instruments reflected in this
table comprise debt, temporary financial investments, cash, bank balances and
associated derivatives without an optionality feature (mainly interest rate
swaps, cross currency swaps and currency forwards). This information has been
prepared as follows:
o The debt obligations are divided according to their final
characteristics after taking into account the effect of the
associated derivative instruments. They are classified according to
the currency in which they are denominated, within the following
categories:
o Euro
o America: U.S. dollar and Latin American currencies
o Asian currencies
o African currencies
o The table below also shows the total foreign currency exchange rate
exposure for each currency. Each such currency category is further
divided into interest rate features:
o Floating rate interest
o Fixed rate interest
o Interest rate bounded with options
In addition, a calendar describing the maturity dates is given for each
combination of currency and interest rate feature. Each column shows the
notional amount of each debt obligation taking into account associative
derivatives maturing in the year indicated at the top of the column through a
five-year period. The notional amount outstanding after such five-year period
is shown as an aggregate amount in the next column. The column "Total"
aggregates all of the notional amounts. Notional amounts do not include accrued
interest, except for zero coupon bonds, which include accrued interest from
inception to the date of each table. The fair value columns show the value for
(i) the underlying debt,(ii) the derivatives linked to the underlying debt, and
(iii) the total (the sum of the two previous values).
170
SENSITIVITY TO INTEREST RATES AND EXCHANGE RATES OF DEBT OBLIGATIONS
AT DECEMBER 31, 2004
(in millions of euro, except percentages)
MATURITY
DATES FAIR VALUE (in millions of euro)
-----------------------------------------------------------------------------------------------------------
Underlying Associated Book
2005 2006 2007 2008 2009 Subsequent TOTAL Debt Derivatives TOTAL Value
-----------------------------------------------------------------------------------------------------------
EURO ................... 5,755 2,125 534 774 1,286 4,960 15,434 12,152 4,432 16,584 15,434
-----------------------------------------------------------------------------------------------------------
Floating Rate .......... (3) 6 (286) (47) (2) 137 (195) 2,606 (2,777) (171) (195)
Spread-Ref Euribor (776.70)% 34.24% (0.05)% 5.36% (72.67)% 3.12% (12.95)% -- -- -- --
Fixed Rate ............. 5,309 2,111 812 814 788 4,599 14,433 8,808 6,736 15,544 14,433
Interest Rate .... 4.58% 3.97% 5.27% 4.16% 4.24% 6.07% 4.96% -- -- -- --
Bounded Rate ........... 448 8 8 8 500 224 1,195 738 473 1,211 1,195
-----------------------------------------------------------------------------------------------------------
AMERICA ................ 200 739 740 1,054 907 1,635 5,275 8,492 (2,761) 5,730 5,275
-----------------------------------------------------------------------------------------------------------
Instruments in USD ..... (1,776) 23 316 235 629 1,600 1,026 7,707 (6,232) 1,474 1,026
Floating Rate .......... (699) (155) 45 73 -- (5) (742) 2,548 (3,239) (690) (742)
Spread ........... (0.33)% (0.66)% 3.81% 1.20% -- (10.38)% (0.87)% -- -- -- --
Fixed Rate ............. (428) 179 271 152 61 1,387 1,621 5,158 (3,155) 2,004 1,621
Interest Rate .... 7.34% 9.77% 9.43% 7.24% 5.02% 7.89% 8.33% -- -- -- --
Instruments in ARS ..... 133 59 54 -- -- -- 246 89 127 217 246
Floating Rate .......... 66 16 1 -- -- -- 82 18 64 82 82
Spread ........... -- 2.40% -- -- -- -- 0.47% -- -- -- --
Fixed Rate ............. 68 43 54 -- -- -- 164 71 63 135 164
Interest Rate .... 8.83% 8.64% 9.27% -- -- 10.38% 8.92% -- -- -- --
Instruments in BRL ..... 493 307 117 544 49 9 1,518 307 1,243 1,550 1,518
Floating Rate .......... 15 260 117 544 49 9 993 307 671 977 993
Spread ........... (7.68)% (0.95)% (2.06)% (0.50)% (5.59) -- (1.16)% -- -- -- --
Fixed Rate ............. 478 48 -- -- -- -- 525 -- 573 573 525
Interest Rate .... 15.68% -- -- -- -- -- 14.26% -- -- -- --
Instruments in CLP ..... 241 11 80 173 63 -- 567 (137) 697 560 567
Floating Rate .......... 368 -- -- 16 14 -- 398 -- 396 396 398
Spread ........... -- -- -- (0.28)% (0.33)% -- (0.02)% -- -- -- --
Fixed Rate ............. (127) 11 80 157 49 -- 169 (137) 697 560 567
Interest Rate .... 3.42% 3.30% 4.45% 4.80% 5.07% -- 5.66% -- -- -- --
Instruments in UFC ..... 390 27 2 83 151 12 666 230 458 689 666
Floating Rate .......... 300 25 -- 81 -- -- 406 97 306 403 406
Spread ........... 0.03% 0.33% -- 0.95% -- -- 0.23% -- -- -- --
Fixed Rate ............. 91 2 2 2 151 12 260 133 152 285 260
Interest Rate .... 6.74% 6.49% 6.49% 6.49% 3.50% 6.17% 4.83% -- -- -- --
Instruments in PEN ..... 393 119 75 14 10 12 623 210 415 626 623
Floating Rate .......... 137 2 -- -- -- -- 138 -- 136 136 138
Spread ........... -- -- -- -- -- -- -- -- -- -- --
Fixed Rate ............. 256 117 75 14 10 12 484 210 279 490 484
Interest Rate .... 5.08% 6.06% 6.33% 7.94% 7.00% 5.00% 5.63% -- -- -- --
Instruments in COP ..... 132 101 30 -- -- -- 264 38 213 251 264
Fixed Rate ............. 129 5 -- -- -- -- 134 28 94 122 134
Interest Rate .... 0.35% 4.00% -- -- -- -- 0.50% -- -- -- --
Instruments in MXN ..... 192 92 66 5 5 3 364 46 316 363 364
Floating Rate .......... 88 3 11 3 3 1 108 -- 107 107 108
Spread ........... (0.37)% (0.52)% (0.66)% (0.52)% (0.52)% (0.52)% (0.41)% -- -- -- --
Fixed Rate ............. 104 89 55 3 3 1 256 46 209 255 256
Interest Rate .... 8.09% 7.75% 7.93% 8.83% 8.83% 8.83% 7.96% -- -- -- --
Instruments in GTQ ..... 1 -- -- -- -- -- 1 1 -- 1 1
Fixed Rate ............. 1 -- -- -- -- -- 1 1 -- 1 1
Interest Rate .... 10.50% -- -- -- -- -- 10.50% -- -- -- --
-----------------------------------------------------------------------------------------------------------
ASIA ................... (1) -- 1 -- -- -- (0) 327 (326) 1 (0)
-----------------------------------------------------------------------------------------------------------
Instruments in JPY ..... (1) -- 1 -- -- -- (0) 327 (326) 1 (0)
Floating Rate .......... 0 0 1 -- -- -- 1 231 (229) 1 1
Spread ........... 3.79% 3.79% 3.79% 3.79% -- -- 3.79% -- -- -- --
171
MATURITY
DATES FAIR VALUE (in millions of euro)
-----------------------------------------------------------------------------------------------------------
Underlying Associated Book
2005 2006 2007 2008 2009 Subsequent TOTAL Debt Derivatives TOTAL Value
-----------------------------------------------------------------------------------------------------------
Fixed Rate ............. (2) -- -- -- -- -- (2) 142 (142) (0) (2)
Interest Rate .... -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------
AFRICA ................. 31 -- -- -- -- -- 31 -- 31 31 31
-----------------------------------------------------------------------------------------------------------
Instruments in MAD ..... 31 -- -- -- -- -- 31 -- 31 31 31
Fixed Rate ............. -- -- -- -- -- -- 31 -- 32 32 31
Interest Rate .... 4.23% -- -- -- -- -- 4.23% -- -- -- --
-----------------------------------------------------------------------------------------------------------
TOTAL .................. 5,984 2,864 1,274 1,828 2,193 6,595 20,739 20,971 1,376 22,347 20,739
-----------------------------------------------------------------------------------------------------------
Total Floating Rate .... 400 162 (113) 669 63 142 1,323 5,789 (4,425) 1,364 1,323
Total Fixed Rate ....... 5,786 2,695 1,379 1,141 1,062 6,011 18,074 14,444 5,166 19,611 18,074
Total Bounded Rate ..... (202) 8 8 18 1,068 442 1,342 738 634 1,372 1,342
-----------------------------------------------------------------------------------------------------------
EXCHANGE RATE OPTIONS .. (25) -- -- -- -- -- (25) -- (25) (25) (25)
-----------------------------------------------------------------------------------------------------------
OTHER LIABILITIES ...... 268
-----------------------------------------------------------------------------------------------------------
NET DEBT ............... 20,982
-----------------------------------------------------------------------------------------------------------
172
The table below is an extract of the previous table that shows the
sensitivity to interest rates originated by our position on interest rate swaps.
SENSITIVITY TO INTEREST RATES AT DECEMBER 31, 2004
DETAIL FOR INTEREST RATE SWAPS
(in millions of euro, except percentages)
MATURITY DATES
------------------------------------------------------------------------
Book
2005 2006 2007 2008 2009 Subsequent TOTAL Fair Value Value
-----------------------------------------------------------------------------------------------
EURO ...................... -- -- (0) (0) -- -- -- (123) --
-----------------------------------------------------------------------------------------------
Fixed to floating ......... -- -- -- (0) -- -- (0) (233) (0)
-----------------------------------------------------------------------------------------------
Receiving leg ............. (1,085) (34) (241) (640) 3 (135) (2,132) (2,360) (2,132)
Average Interest Rate 2.23% 5.77% 5.72% 4.94% 6.37% 6.74% 3.77% -- --
Paying leg ................ 1,085 34 241 640 (3) 135 2,132 2,126 2,132
Average Spread (0.01)% (0.51)% 0.05% (0.71)% 0.11% (0.04)% (0.21)% -- --
-----------------------------------------------------------------------------------------------
Floating to fixed ......... -- -- (0) -- -- -- (0) 131 (0)
-----------------------------------------------------------------------------------------------
Receiving leg ............. (1,905) (1,130) (615) (1,199) (326) (1,550) (6,725) (6,736) (6,725)
Average Spread 0.00% -- 0.08% (0.18)% -- -- (0.03)% -- --
Paying leg ................ 1,905 1,130 615 1,199 326 1,550 6,725 6,867 6,725
Average Interest Rate 0.65% 2.94% 4.81% 4.22% 3.55% 3.90% 2.94% -- --
-----------------------------------------------------------------------------------------------
Floating to floating ...... -- -- (0) -- -- -- (0) (21) (0)
-----------------------------------------------------------------------------------------------
Receiving leg ............. (290) (28) (57) -- (300) (92) (767) (794) (767)
Average Spread 0.34% -- 0.26% -- 0.63% 0.20% 0.42% -- --
Paying leg ................ 290 28 57 -- 300 92 768 773 768
Average Spread 0.29% 0.15% 0.33% -- 0.11% 0.10% 0.20% -- --
USD ....................... -- -- -- -- -- -- -- (43) --
-----------------------------------------------------------------------------------------------
Fixed to floating ......... -- -- -- -- -- -- -- (60) --
-----------------------------------------------------------------------------------------------
Receiving leg ............. (758) -- -- -- -- (477) (1,235) (1,296) (1,235)
Average Interest Rate 7.31% -- -- -- -- 4.71% 6.30% -- --
Paying leg ................ 758 -- -- -- -- 477 1,235 1,236 1,235
Average Spread 0.53% -- -- -- -- -- 0.33% -- --
-----------------------------------------------------------------------------------------------
Floating to fixed ......... -- -- -- -- -- -- -- 17 --
-----------------------------------------------------------------------------------------------
Receiving leg ............. (132) (44) (44) (49) (27) (519) (816) (813) (816)
Average Spread 0.01% 0.08% 0.08% 0.08% -- -- 0.01% -- --
Paying leg ................ 132 44 44 49 27 519 816 830 816
Average Interest Rate 2.62% 6.63% 6.63% 5.37% 4.34% 4.17% 4.27% -- --
-----------------------------------------------------------------------------------------------
BRL ....................... -- -- -- -- -- -- -- (0) --
-----------------------------------------------------------------------------------------------
Floating to fixed ......... -- -- -- -- -- -- -- (0) --
-----------------------------------------------------------------------------------------------
Receiving leg ............. (398) -- -- -- -- -- (398) (456) (398)
Average Spread -- -- -- -- -- -- -- -- --
Paying leg ................ 398 -- -- -- -- -- 398 455 398
Average Interest Rate 15.55% -- -- -- -- -- 15.55% -- --
-----------------------------------------------------------------------------------------------
MXN ....................... -- -- -- -- -- -- -- (0) --
-----------------------------------------------------------------------------------------------
Floating to fixed ......... -- -- -- -- -- -- -- (0) --
-----------------------------------------------------------------------------------------------
Receiving leg ............. (47) (88) (49) (1) (1) (1) (187) (186) (187)
Average Spread (0.06)% (0.63)% (0.83)% (0.54)% (0.54)% (0.54)% (0.54)% -- --
Paying leg ................ 47 88 49 1 1 1 187 186 187
Average Interest Rate 9.43% 7.73% 7.94% 8.43% 8.43% 8.43% 8.22% -- --
-----------------------------------------------------------------------------------------------
The tables below describe all interest rates, foreign exchange options and
interest rate options to which we were a party at December 31, 2004. Options are
identified by notional amount and average strike price, and are classified by
both type and maturity.
173
INTEREST RATE OPTIONS
------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 2010+
------------------------------------------------------------------------------------
Collars
Notional bought..................... 3,385,015,018 -- -- 60,101,210 2,134,160,487 1,591,770,061
Strike Cap.......................... 2.483 -- -- 5.520 3.694 6.675
Strike Floor........................ 2.259 -- -- 5.415 2.740 4.416
Caps
Notional sold....................... 3,385,015,018 -- -- 60,101,210 2,434,160,487 91,770,061
Strike.............................. 2.941 -- -- 7.000 4.628 5.750
Floors
Notional sold....................... 1,400,000,000 -- -- -- -- 1,071,097,628
Strike.............................. 2.400 -- -- -- -- 2.914
Notional bought..................... 400,000,000 -- -- -- -- --
Strike.............................. 2.125 -- -- -- -- --
FOREIGN EXCHANGE OPTIONS
------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 2010+
------------------------------------------------------------------------------------
Call USD / Put ARS
Notional bought options................ 199,397,988 -- -- -- -- --
Strike................................. 3.0726 -- -- -- -- --
Notional sold options.................. 176,973,309 -- -- -- -- --
Strike................................. 3.5036 -- -- -- -- --
Put USD / Call ARS
Notional bought options................ -- -- -- -- -- --
Strike................................. -- -- -- -- -- --
Notional sold options.................. 209,102,840 -- -- -- -- --
Strike................................. 2.8914 -- -- -- -- --
Call USD / Put EUR
Notional bought options................ 181,337,640 -- -- -- -- --
Strike................................. 1.3315 -- -- -- -- --
Notional sold options.................. 40,378,827 -- -- -- -- --
Strike................................. 1.3354 -- -- -- -- --
Put USD / Call EUR
Notional bought options................ 1,054,254,460 -- -- -- -- --
Strik.................................. 1.3255 -- -- -- -- --
Notional sold options.................. 671,756,846 -- -- -- -- --
Strike................................. 1.3588 -- -- -- -- --
SENSITIVITY TO INTEREST RATES AND EXCHANGE RATES OF DEBT OBLIGATIONS
AT DECEMBER 31, 2003
(in millions of euro, except percentages}
MATURITY
DATES FAIR VALUE
-----------------------------------------------------------------------------------------------------------
Underlying Associated Book
2004 2005 2006 2007 2008 Subsequent TOTAL Debt Derivatives TOTAL Value
-----------------------------------------------------------------------------------------------------------
EURO .................... 547 4.039 2.133 628 949 5.125 13.421 10,323 3,971 14.294 13.421
Floating Rate ........ (364) 2,139 1,077 (36) 479 748 4,043 3,092 996 4,088 4,043
Spread-Ref Euribor. (3.39)% 0.90% 0.17% (0.41)% (0.53)% 0.61% 0.88%
Fixed Rate ........... 836 1,900 1,056 664 470 4,377 9,303 7,156 2,975 10,131 9,303
Interest Rate ..... (2.89)% 8.74% 5.18% 5.70% 4.83% 5.92% 5.55%
Bounded Rate ......... 75 -- -- -- -- -- 75 75 -- 75 75
Other European Currencies 284 -- -- -- -- -- 284 -- 291 291 284
Instruments in GBP ...... 284 -- -- -- -- -- 284 -- 291 291 284
Floating Rate ........ 170 -- -- -- -- -- 170 -- 173 173 170
Spread ............ -- -- -- -- -- -- --
Fixed Rate ........... 114 -- -- -- -- -- 114 -- 118 118 114
Interest Rate ..... 6.25 -- 6.25%
AMERICA ................. 906 785 652 638 304 2,080 5,365 8,841 (2,942) 5,898 5,365
Instruments in USD ...... (1,254) 123 330 484 215 1,918 1,816 8,575 (6,248) 2,327 1,816
174
MATURITY
DATES FAIR VALUE
-----------------------------------------------------------------------------------------------------------
Underlying Associated Book
2004 2005 2006 2007 2008 Subsequent TOTAL Debt Derivatives TOTAL Value
-----------------------------------------------------------------------------------------------------------
Floating Rate ........ (876) 71 (13) 167 78 158 (415) 1,774 (2,123) (348) (415)
Spread ............ (0.57)% 4.14% (7.87)% 1.03% 1.05% (0.00)% (2.77)%
Fixed Rate ........... (378) 52 343 317 137 1,760 2,231 6,800 (4,125) 2,676 2,231
Interest Rate ..... (21.87)% (4.39)% 8.84% 9.37% 7.81% 8.26% 13.29%
Instruments in ARS ...... 60 2 2 7 -- 0 70 29 40 70 70
Floating Rate ........ 41 -- -- -- -- -- 41 -- 40 40 41
Spread ............ -- -- -- -- -- -- --
Fixed Rate ........... 19 2 2 7 -- 0 29 29 -- 29 29
Interest Rate ..... 21.11% 6.00% 6.00% 5.72% -- 10.38% 15.65%
Instruments in BRL ...... 911 295 107 65 61 49 1,489 (206) 1,707 1,500 1,489
Floating Rate ........ 846 21 60 65 61 49 1,103 (206) 1,334 1,128 1,103
Spread ............ (0.36)% (9.25)% (4.06)% (3.86)% (4.42)% (5.50)% (1.39)%
Fixed Rate ........... 65 274 47 -- -- -- 386 -- 372 372 386
Interest Rate ..... 28.83% 15.75% -- -- -- -- 16.04%
Instruments in CLP ...... 60 3 -- -- -- -- 63 (21) 82 62 63
Floating Rate ........ 80 3 -- -- -- -- 84 -- 82 82 84
Spread ............ -- -- -- -- -- -- --
Fixed Rate ........... (21) -- -- -- -- -- (21) (21) -- (21) (21)
Interest Rate ..... 0.84% -- -- -- -- -- 0.84%
Instruments in UFC ...... 820 112 32 7 7 81 1,060 235 822 1,058 1,060
Floating Rate ........ 811 105 25 -- -- -- 940 101 822 924 940
Spread ............ 0.08% 0.08% 0.33% -- -- -- 0.09%
Fixed Rate ........... 10 7 7 7 7 81 120 134 -- 134 120
Interest Rate ..... 6.36% 6.58% 6.58% 6.58% 6.58% 6.70% 6.64%
Instruments in PEN ...... 292 116 76 3 14 22 523 210 318 528 523
Floating Rate ........ 113 38 -- -- -- -- 151 -- 147 147 151
Spread ............ -- -- -- -- -- -- --
Fixed Rate ........... 179 78 76 3 14 22 372 210 171 381 372
Interest Rate ..... 4.93% 5.60% 6.18% 6.25% 7.94% 5.97% 5.52%
Instruments in COP ...... 1 -- 6 -- -- -- 6 7 -- 7 6
Fixed Rate ........... 1 -- 6 -- -- -- 6 7 -- 7 6
Interest Rate ..... 54.75% -- 15.00% -- -- -- 18.60%
Instruments in MXN ...... 17 135 100 71 6 9 337 11 336 347 337
Floating Rate ........ 3 72 3 11 3 4 97 -- 96 96 97
Spread ............ (0.52)% (0.49)% (0.5)2 (0.66)% (0.52)% (0.52)% (0.52)%
Fixed Rate ........... 14 63 97 60 3 4 241 11 240 251 241
Interest Rate ..... 7.03% 9.46% 7.75% 7.93% 8.83% 8.83% 8.23
Instruments in GTQ ...... (1) -- -- -- -- -- (1) (1) -- (1) (1)
Fixed Rate ........... (1) -- -- -- -- -- (1) (1) -- (1) (1)
Interest Rate ..... -- -- -- -- -- -- --
ASIA .................... (1) 0 0 0 -- -- (0) 428 (427) 1 (0)
Instruments in JPY ...... (1) 0 0 0 -- -- (0) 428 (427) 1 (0)
Floating Rate ........ 0 0 0 0 -- -- 1 231 (229) 1 1
Spread ............ 3.79% 3.79% 3.79% 3.79% -- -- 3.79%
Fixed Rate ........... (2) -- -- -- -- -- (2) 197 (197) (0) (2)
Interest Rate ..... 3.44% -- -- -- -- -- 3.44%
AFRICA .................. 31 -- -- -- -- -- 31 -- 32 32 31
Instruments in MAD ...... 31 -- -- -- -- -- 31 -- 32 32 31
Fixed Rate ........... 31 -- -- -- -- -- 31 -- 32 32 31
Interest Rate ..... 8.90% -- -- -- -- -- 8.90%
TOTAL ................... 1,767 4,825 2,785 1,267 1,253 7,205 19,101 19,592 925 20,517 19,101
Total Floating Rate ..... 825 2,450 1,152 208 621 960 6,215 4,992 1,339 6,332 6,215
Total Fixed Rate ........ 868 2,375 1,633 1,059 632 6,245 12,811 14,525 (414) 14,110 12,811
Total Bounded Rate ...... 75 -- -- -- -- -- 75 75 -- 75 75
EXCHANGE RATE OPTIONS ... (102) -- -- -- -- -- (102) -- (102) (102) (102)
OTHER LIABILITIES ....... 237
NET DEBT ................ 19,235
175
The table below is an extract of the previous table that shows the
sensitivity to interest rates originated by our position on interest rate swaps.
SENSITIVITY TO INTEREST RATES AT DECEMBER 31, 2003
DETAIL FOR INTEREST RATE SWAPS
(Millions of (euro), except percentages)
MATURITY DATES
------------------------------------------------------------------------ Fair Book
2004 2005 2006 2007 2008 Subsequent TOTAL Value Value
-----------------------------------------------------------------------------------------------
EURO ...................... -- -- -- -- -- -- -- 1 --
Fixed to floating ......... -- -- -- -- -- -- -- (114) --
Receiving leg .......... (290) (85) (34) (241) (640) (52) (1,343) (1,448) (1,343)
Average Interest Rate 4.44% 2.52% 5.77% 5.72% 4.94% 6.37% 4.90%
Paying leg ............. 290 85 34 241 640 52 1,343 1,334 1,343
Average Spread ...... (0.09)% (0.10)% (0.51)% 0.05% (0.71)% 0.03% (0.36)%
Floating to fixed ......... -- -- -- -- -- -- -- 116 --
Receiving leg .......... (2,060) (130) (75) (282) (681) (26) (3,253) (3,255) (3,253)
Average Spread ...... 0.00% 0.02% -- 0.17% -0.32% -- (0.05)%
Paying leg ............. 2,060 130 75 282 681 26 3,253 3,370 3,253
Average Interest Rate 3.30% 4.95% 5.44% 5.67% 4.86% 4.98% 3.96%
Floating to floating ...... 0 0 0 0 -- -- 0 (17) 0
Receiving leg .......... (215) (290) (28) (57) -- (350) (940) (966) (940)
Average Spread ...... 0.23% 0.34% -- 0.26% -- 0.54% 0.37%
Paying leg ............. 215 290 28 57 -- 350 940 949 940
Average Spread ...... 0.23% 0.29% 0.15% 0.33% -- 0.13% 0.22%
USD ....................... -- -- -- -- -- -- -- (111) --
Fixed to floating ......... -- -- -- -- -- -- -- (132) --
Receiving leg .......... (1.653) (817) -- -- -- (515) (2,984) (3,126) (2,984)
Average Interest Rate 2.51% 7.31% -- -- -- 4.71% 4.20%
Paying leg ............. 1,653 817 -- -- -- 515 2,984 2,994 2,984
Average Spread ...... -- 0.53% -- -- -- -- 0.15%
Floating to fixed ......... -- -- -- -- -- -- -- 21 --
Receiving leg .......... -- (143) (48) (48) (24) (356) (618) (618) (618)
Average Spread ...... -- 0.01% 0.08% 0.08) 0.08% -- 0.02%
Paying leg ............. -- 143 48 48 24 356 618 639 618
Average Interest Rate -- 2.62% 6.63% 6.63% 6.63% 4.08% 4.23%
GBP ....................... -- -- -- -- -- -- -- 4 --
Floating to fixed ......... -- -- -- -- -- -- -- 4 --
Receiving leg .......... (114) -- -- -- -- -- (114) (114) (114)
Average Spread ...... -- -- -- -- -- -- --
Paying leg ............. 114 -- -- -- -- -- 114 118 114
Average Interest Rate 6.25% -- -- -- -- -- 6.25%
BRL ....................... -- -- -- -- -- -- -- (1) --
Floating to fixed ......... -- -- -- -- -- -- -- (1) --
Receiving leg .......... (30) (274) -- -- -- -- (304) (309) (304)
Average Spread ...... -- -- -- -- -- -- --
Paying leg ............. 30 274 -- -- -- -- 304 308 304
Average Interest Rate 15.70% 15.75% -- -- -- -- 15.75%
MXN ....................... -- -- -- -- -- -- -- 11 --
Floating to fixed ......... -- -- -- -- -- -- -- 11 --
Receiving leg .......... (1) (51) (95) (53) (1) (2) (204) (201) (204)
Average Spread ...... (0.54)% (0.06)% (0.63)% (0.83)% (0.54)% (0.54)% (0.54%
Paying leg ............. 1 51 95 53 1 2 204 212 204
Average Interest Rate 8.43% 9.43% 7.73% 7.94% 8.43% 8.43% 8.22%
The tables below describe all interest rates, foreign exchange options and
interest rate options to which we were a party at December 31, 2003. Options are
identified by notional amount and average strike price, and are classified by
both type and maturity.
176
INTEREST RATE OPTIONS
------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009+
------------------------------------------------------------------------------------
Collars
Notional bought.......... 74,819,685 60,101,210 1,500,000,000
Strike Cap............... 7.125 5.520 6.823
Strike Floor............. 4.125 5.415 4.184
Caps
Notional sold............ 60,101,210
Strike................... 7.000
Floors
Notional sold............ 1,082,618,658
Strike................... 2.705
Notional bought.......... 400,000,000
Strike................... 2.125
FOREIGN EXCHANGE OPTIONS
------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009+
------------------------------------------------------------------------------------
Call BRL / Put EUR
Notional bought options......... 17,300,000
Strike.......................... 3.769
Notional sold options...........
Strike..........................
Call MXN / Put EUR.................
Notional bought options......... 243,018,713
Strike.......................... 13.846
Notional sold options...........
Strike..........................
Call USD / Put ARS.................
Notional bought options......... 11,979,813
Strike.......................... 2.974
Notional sold options........... 18,146,296
Strike.......................... 3.272
Put USD / Call ARS.................
Notional bought options.........
Strike..........................
Notional sold options........... 13,841,424
Strike.......................... 2.574
Put USD / Call BRL.................
Notional bought options......... 3,721,298
Strike.......................... 3.292
Notional sold options...........
Strike..........................
Call USD / Put BRL.................
Notional bought options.........
Strike..........................
Notional sold options........... 237,529,691
Strike.......................... 2.250
Put USD / Call EUR.................
Notional bought options......... 2,628,368,963
Strike.......................... 1.1901
Notional sold options........... 1,946,472,684
Strike.......................... 1.2607
Call USD / Put EUR.................
Notional bought options......... 591,448,931
Strike........................ 1.2293
Notional sold options........... 232,779,097
Strike.......................... 1.2096
Interest Rate Risk
We actively manage our interest rate risk exposure. We pursue several
derivative strategies, including swaps or options in order to hedge either our
debt's fair value or cash flows for interest expenses. In some cases, when we
determine to swap debt from fixed rates into floating rate (or vice versa) at
certain target levels, we sell to financial institutions the right to enter
into the swap at some future date. The sale of such option is classified as
held for trading purposes.
Our interest rate risk exposure is mainly reflected in our consolidated
income statement, as accrued financial expenses would increase in a scenario of
rising interest rates. This increase would come from floating rate debt and
short term debt, which would typically be refinanced at maturity.
Accordingly, our financial costs are mainly sensitive to fluctuations in
interest rates indices (mainly the Euribor, the Brazilian SELIC rate, the
Chilean UF, and the U.S. dollar LIBOR). At December 31, 2004, 59.2% of our
total debt (or 83.3% of the long term debt), had its interest rate fixed for a
period exceeding one year, which was a slightly higher proportion to that at
December 31, 2003 (representing 53% of our total debt and 68.9% of the long
term debt).
Our financial expenses in 2004 amounted to (euro)1,183.8 million, a 12%
increase compared to 2003 (excluding the positive exchange rates results in
2003 of (euro)402 million from the appreciation of the Argentine peso and the
conversion of certain U.S. dollar denominated debt into euros (one-off),
financial expenses in 2004 compared with 2003 excluding these positive items
would have been 20% less). Financial expenses in 2004 amounted to an average
cost of 6.1% on the average net debt of the year. The strong decrease in the
Brazilian SELIC rate (with an average rate of 16.25% in 2004, as compared to
23.53% in 2003) helped reduce the global cost.
At December 31, 2004 almost all of our debt with variable interest rates
was denominated in Brazilian reais. In 2004 we reduced our variable interest
rate debt denominated in euros to take advantage of the decrease and relative
stability in interest rates in the EU in 2004. However, our U.S. dollar
denominated debt (excluding U.S. dollar debt converted into other currencies by
exchange rate derivatives) was maintained primarily at fixed rates in 2004.
Consequently, the U.S. dollar LIBOR index only materially influenced our
financial expenses through cross currency swaps under which dollars were
purchased only against sale of Latin American currencies, as the price of these
hedges depends on both the U.S. dollar LIBOR and the Latin American currency's
main interest rate index (e.g. the Brazilian SELIC rate). These type of hedges
are especially relevant in the case of Chile and Peru.
As previously mentioned, we actively manage our exposure to interest rates
through derivatives. We expected interests rates to rise in 2004 and so we
performed several swap operations to fix interest rates on debt denominated in
euros and U.S. dollars at floating rates. As a result of these we did swap
operations in order to fix payments of approximately (euro)4 billion euro
denominated debt at floating interest rates maturing after 2004. We also
entered into swap operations to fix interest rates on debt denominated in U.S.
dollars at floating rates to reduce the risk of an increase in interest rates
in the U.S. We also sold options on swaps amounting to a notional amount of
approximately (euro)400 million, which (if exercised by the counterpart) would
have fixed the interest rates paid by us (paying lower intrest rates compared
to rates available at the time of sale of the option). At December 31, 2004 all
the options on swaps taken in 2004 had expired. A notional amount of (euro)200
of such options were exercise in 2004, resulting in fixing the underlying debt
at an interest rate 0.20% lower that the than the rate available at the time of
the sale of the option.
Share price risk
We are exposed to equity risks due to movements in the price of our own
shares, as a result of our share buy-back program, which was announced in
October 2003. This share buy-back program allows us to purchase approximately
(euro)4 billion of our shares until and during 2006. The final amount of shares
bought pursuant to this program will depend on cash flow generation and the
evolution of our share price. At December 31, 2004 the value of our interest in
our own shares was approximately (euro)207 million. Under U.S. GAAP, this
amount of our own shares held would reduce shareholders' equity and variations
in the price of our shares would not affect our consolidated income statement.
We are also exposed to loss in the event of a drop in price of the shares
we own as part of our portfolio. At December 31, 2004 we held 8 million call
options to purchase our own shares at a preset price. The majority of such
options expire in 2005. These options reduce the risk increases in our share
price. However, if our share price increases we would be able to purchase fewer
of our own shares pursuant to our buy-back program because there is a pre-set
maximum amount that we can spend. The maximum loss that may be experienced in
this case is the premium paid for the options, if at maturity the share price
is below the exercise price. However, in such case, we would be able to
purchase our shares on the open market at a lower price.
We have also entered into operations for a lesser amount consisting of (i)
sales of put options (that would obligate us to purchase our own shares if the
price of our shares were to significantly decrease) and (ii) structures with
call options bought and call options sold at different exercise prices. At
December 31, 2004 due to small movements in the price of our shares, the value
of these structures would result in an amount equal to directly owning 4.7
million shares.
We are exposed to the fluctuations in the prices of our subsidiaries'
shares, especially to the extent that these are not integrated in our core
business or may be sold, which can make it necessary to valuate them at market
prices. For example, the divestment of Pearson plc in 2004 gave rise to a loss
of (euro)33 million.
Liquidity Risk
We aim to adapt the maturity profile of our debt to our cash flow
generation capacity to pay our debt obligations, maintaining a certain margin.
In practice, that has led to monitoring of two criteria:
1. The average maturity of the Telefonica Group's debt must exceed the
time required to pay the debt (assuming fulfillment of the internal
projections, and all the flows generated being assigned to payment of
the debt, and not to dividends or acquisitions).
2. The Telefonica Group must be able to pay off all of its commitments
in the coming 12 months, without having to incur in additional debt
(but maintaining the credit lines already firmly committed by
financing institutions), assuming budgetary fulfillment.
At December 31, 2004, the average maturity of our net financial debt
((euro)20,982 million) was 4.9 years. At the Investor Conference in October
2003, the Telefonica Group announced that it expects to generate more than
(euro)27 billion during a four year period, assuming exchange rates are
maintained at 2002 levels. In spite of the weakness of the Latin American
currencies in relation to the euro (mostly due to the weakness of the U.S.
dollar), existing margin allows us to believe that the first criteria was being
fulfilled on at December 31, 2004.
Fulfillment of the second criteria was proven by comparing the gross
amount of debt maturing in 2005 ((euro)9,413.4 million) with the sum of (i)
liquid assets at December 31, 2004 (temporary financial investments in the
amount of (euro)3,579.1 million and cash and bank balances in the amount of
(euro)855.0 million) (ii) annual cash generation from operations ((euro)6,742.6
million in 2004), (iii) available credit lines committed by financial
institutions with maturity exceeding one year, or extendable on our option
((euro)7,213 million at December 31, 2004). The resulting margin allowed us to
make a dividend payment of (euro)50 cents per share (about (euro)2.4 billion)
and to complete the acquisition of BellSouth's Latin American wireless
operations in October 2004 and January 2005.
In spite of measures put into place to guarantee our liquidity, we
consider it important for our business development plans and strategy and for
the management of our liabilities to have an easy access to capital markets.
Any legal or tax restrictions on such access could have a negative effect on
our liquidity. Likewise, in order to maintain access to funding on good
conditions in price and terms, we closely monitor the balance between the risk
of our business and our financial structure, as well as material credit ratios.
Country risk
Sovereign risk perception in the majority of the Latin American countries
where we operate decreased significantly in 2004 reflecting macroeconomic
stability and a favorable outlook and reaching the lowest debt credit spreads
(measured as the difference between interest rates payable on debt issued by a
foreign over equivalent US Treasuries) since 1999, excluding Argentina. At the
end of 2004, sovereign risk (measured by a country's debt credit spread) for
Brazil was 3.83%, 1.67% for Mexico, 2.20% for Peru, 4.12% for Venezuela, 6.90%
in Ecuador and 3.32% for Colombia (each as measured by the EMBI index of JP
Morgan). Each of the countries at some point in the last five years experienced
spreads of 9%. Argentina's economy experienced strong growth in 2004. However,
since Argentina was still in default on its sovereign debt, its risk perception
remains high.
Despite these improvements in sovereign risk perception and the positive
outlook for the future, we continued to monitor closely any unexpected loss in
value of our Latin America assets due to social, economic or political
instability. To monitor our country risk we continued to follow two basic
guidelines:
1. To partially match our Latin American assets with liabilities in our
Latin American companies that we do not guarantee so that any loss in
such assets would be partially offset by a reduction in liabilities,
and
2. To reinvest funds generated by our Latin American operations in
business opportunities in Latin America, when it is not expected that
these funds would generate profits in the near future.
As to repatriation of funds, (euro)2,016 million were received from Latin
America in 2004, mostly from dividends payments or capital reductions
((euro)887.6 million) and the rest as interest and principal payments from
loans to our Latin American subsidiaries and management fees. Cash flows were
reinvested in Mexico, where Telefonica Moviles made investments amounting to
(euro)377 million to develop the GSM network.
Derivative policy
At December 31, 2004 our notional amount of derivatives exposure was
(euro)38,659 million. The notional amount of exposure is high because
derivatives may be applied several times on the same underlying debt for an
amount equal to such debt's face value. For example, derivative instruments can
be used to fix the interest payable on an underlying floating rate debt
instrument at each interest payment date. Our policy on the use of derivatives
has placed emphasis on the following points:
i. Existence of a clearly identified underlying in the Telefonica Group on
which the derivative is applied, and if possible eligible for hedging
accounting.
Among the acceptable underlyings are expected cash flows in currencies
other than the euro, when reasonably secure or foreseeable even if these
do not adapt to the criteria required by the accounting regulations to be
treated as a hedge. The hedges with economic sense in the Telefonica
Group's opinion do not always fulfill criteria established by the
different accounting regulations in order to be treated as hedges in
financial statements. In these cases, the decision to maintain hedges
makes the change in value of these derivatives to be directly reflected in
the income statement.
ii. Matching the main features (notional, maturity, interest payment dates) of
the underlying and one side of the derivative, with the greatest possible
precision.
That matching is especially sought for the foreign currency debt and
derivatives hedging payments in foreign currency. However, even when a
perfect hedge of the flows is sought, the lack of depth of the Latin
American derivative markets has led historically to imbalances between the
characteristics of the hedges and the underlying debts. We intend to
reduce those imbalances, as long as this does not involve disproportionate
transaction costs. In other occasions, the hedges have been built in
holding companies (Telefonica S.A., Telefonica Moviles S.A. and Telefonica
Internacional) while the debt was maintained at a subsidiary level. As a
consequence these operations have not fulfilled the coverage criteria
required by the accounting regulations and the results have been recorded
in the profit and loss accounts. The main reasons for the separation
between the hedge and the underlying value have been the possibility of
differences in the legal validity of the local hedges against the
international ones (due to unforeseen local legal changes affecting local
hedges) and the different credit quality of the counterparts (of the
companies in the Telefonica Group involved as well as the banking
institutions).On the other hand, interest rate derivatives may also suffer
imbalances with their underlyings, especially when these have shorter
terms, as happens when we enter into long-term swaps, caps, or collars to
protect against rises in interest rates that may raise the financial costs
generated by the promissory notes and commercial paper issued by us, in a
few months, but with probable rollover.
iii. Capacity to revaluate the derivatives at market prices, using systems
available in the Telefonica Group.
The fundamental tool for derivative valuation and risk management and debt
is the Kondor+ system, licensed by Reuters, widely used among diverse
financial entities.
iv. Sale of options only when there is an underlying exposure recorded on our
balance sheet with an external highly probable flow that counters the
potential loss of exercising the option.
In 2004, we sold short term options on euro interest rate swaps, that gave
a counterparty the right to enter into a swap agreement receiving a
specific fixed interest rate, lower than the prevailing level at the time
of selling the option. Thus, if the rates dropped, we would transfer part
of our debt at variable rate to fixed rate, at lower levels to the initial
ones, having collected a premium.
The guidelines for risk management are issued by the General Management of
Corporate Finance of the Telefonica Group and implemented by the financial
managers of the companies (ensuring they are in keeping between the
individual interests of the companies and those of the Telefonica Group).
The General Management of Corporate Finance may authorize exceptions to
this policy due to justified reasons, including the narrowness of the
markets or on clearly limited and reduced risks. Likewise, the entry of
companies into the Telefonica Group as a result of acquisitions or
mergers, requires time to adapt them to our risk management policy.
177
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Our Chief Executive Officer and our
Chief Financial Officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in US Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this Form 20-F, have concluded that, as of such
date, our disclosure controls and procedures were effective.
(b) Internal Control Over Financial Reporting. There were no changes in our
internal control over financial reporting that occurred during the year ended
December 31, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 16.
A. AUDIT COMMITTEE FINANCIAL EXPERT.
Our Board of Directors has determined that Mr. Antonio Massanell, the
chairman of our Audit and Control Committee, meets the requirements of an "audit
committee financial expert" as defined by the SEC.
B. CODE OF ETHICS
We have adopted a code of ethics (Normas de Conducta Para Financieros Grupo
Telefonica), applicable to our Chief Executive Officer, Chief Financial Officer,
principal accounting officer, controller and persons performing similar
functions within the Telefonica Group A copy of our code of ethics is filed as
an Exhibit to this Annual Report.
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The fees accrued for the fiscal years 2004 and 2003 from the various member
firms of the Deloitte Touche Tohmatsu international organization, to which our
auditors Deloitte, S.L. belong, amounted to (euro)13.3 million and (euro)15.5
million, respectively. These fees include the total amounts of the Spanish and
foreign companies in which the Telefonica Group has effective control or joint
control with third parties.
For the year
December 31,
---------------------
2004 2003
---------------------
(in millions of euro)
Audit Fees.................................. 11.00 9.94
Audit-Related Fees(1)....................... 1.16 1.03
Tax Fees(2)................................. 0.23 0.22
All Other Fees(3)........................... 0.87 4.33
Total Fees.................................. 13.26 15.52
178
------------------------
(1) Audit-Related Fees: The services included under this caption are basically
due diligence services related to business combinations, advice on
International Financial Reporting Standards (IFRS) applicable to the
Telefonica Group, accounting consultations in connection with acquisitions,
review of the annual and quarterly information required by the different
Spanish regulatory authorities relating to costs and quality parameters and
attest services related to financial reporting that are not required by
statute or regulation.
(2) Tax Fees: The services included under this caption are, among others,
consultancy and fiscal advising, review tax returns, studies of
transference prices, tax reviews and issues of opinions of fiscal nature
demanded by local regulations.
(3) All Other Fees: The services included under this caption are coordination
in the operational procedures for preparing telephone directories
worldwide, cost analysis, advising in the internal spreading of IFRS,
assistance in relation to the Sarbanes-Oxley Act, improvement and
consolidation of Internet portals, consultancy in projects of Internet
programs, advice in the implantation of specific software, etc.
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
(c) Total Number of Shares (or Units)
(a) Total Number of (b) Average Price Paid Purchases as Part of Publicly Announced
Period of Fiscal Year Shares Purchased per Share (euros) Plans or Programs(1)
------------------------------------------------------------------------------------------------------------------------------------
January 1 to January 31.............. 5,200,000 12.3295 5,200,000
February 1 to February 29............ 4,825,661 12.9416 4,825,661
March 1 to March 31.................. 14,247,968 12.3622 14,247,968
April 1 to April 30.................. 13,368,822 12.7412 13,368,822
May 1 to May 31...................... 28,850,000 11.8673 28,850,000
June 1 to June 30.................... 24,050,000 11.9679 24,050,000
July 1 to July 31.................... 19,925,000 11.8761 19,925,000
August 1 to August 31................ 18,072,559 11.7136 18,072,559
September 1 to September 30.......... 4,375,000 11.8401 4,375,000
October 1 to October 31.............. 20,000,000 12.3244 20,000,000
November 1 to November 30............ 10,247,300 12.9372 10,247,300
December 1 to December 31............ 3,550,000 13.6985 3,550,000
Total................................ 166,712,310 12.1830 166,712,310
(1) All purchases listed are related to our commitment announced in October
2003 to dedicate a minimum of (euro)4 billion to the acquisition of
treasury stock over the 2003-2006 period subject to free cash flow
generation and share price. At December 31, 2004 the total cost of treasury
stock purchases linked to this program amounted to (euro)2,478 million
((euro)2,031 million in 2004 and the balance in 2003), representing a 62%
of the total (euro)4 billion buyback.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Please see pages F-1 through F-o.
179
ITEM 19. EXHIBITS
Exhibit Description
Number
1.1 Amended and Restated Articles of Association (English translation)**
4.1 Merger Plan of Telefonica, S.A. and Terra Networks, S.A. dated
as of February 23, 3005*
4.2 Stock purchase agreement dated as of March 5, 2004 by and among
Telefonica Moviles, S.A., each of the entities listed on Schedule
1 thereto, and Bell South Corporation**
4.3 Strategic Alliance Framework Agreement dated as of February 12, 2003
between Telefonica, S.A. and Terra Networks S.A.+***
4.4 Shareholders Agreement dated as of October 17, 2002 among Telefonica
Moviles, S.A., Portugal Telecom, SGPS, S.A., PT Moveis, SGPS, S.A.
and Brasilcel B.V.+***
4.5 Subscription Agreement dated as of October 17, 2002 among Telefonica
Moviles, S.A., Portugal Telecom, SGPS, S.A., PT Moveis, SGPS, S.A.
and Brasilcel B.V.+***
8.1 Subsidiaries of Telefonica, S.A. (see Note 1 to the Consolidated
Financial Statements and Exhibit I thereto)
11.1 Code of Conduct for Financial Officers**
12.1 Certification of Cesar Alierta Izuel, Chief Executive Officer of
Telefonica, S.A., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
12.2 Certification of Santiago Fernandez Valbuena, Chief Financial
Officer of Telefonica, S.A., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
13.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
------------------------
* Included as Annex A-1 to the joint information statement/prospectus
contained in the registration statement on Form F-4 of Telefonica, S.A.
and Terra Networks, S.A.
** Incorporated by reference to Telefonica, S.A.'s Annual Report on Form 20-F
for the fiscal year ended December 31, 2003.
*** Incorporated by reference to Telefonica, S.A.'s Annual Report on Form 20-F
for the fiscal year ended December 31, 2002.
+ Confidential material appearing in this document has been omitted and filed
separately with the Securities and Exchange Commission in accordance with
the Securities Exchange Act of 1934, as amended, and Rule 24b-2 promulgated
thereunder. Omitted information has been marked with a star (*).
180
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
TELEFONICA S.A.
By: /s/ Cesar Alierta Izuel
-------------------------------------
Name: Cesar Alierta Izuel
Title: Chief Executive Officer
TELEFONICA S.A.
By: /s/ Santiago Fernandez Valbuena
-------------------------------------
Name: Santiago Fernandez Valbuena
Title: Chief Financial Officer
Date: April 15, 2005
181
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Telefonica, S.A.
Page
----
Independent Auditors' Report for the years ended
December 31, 2004, 2003 and 2002 F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004 F-3
Consolidated Statements of Income for the three years
ended December 31, 2004 F-5
Notes to the Consolidated Financial Statements for 2003 and 2004 F-6
Exhibits to the Consolidated Financial Statements for 2003 and 2004 E-1
Ipse 2000 S.p.A.
Page
----
Financial Statements A-1
Independent Auditors' Report for the year ended December 31, 2002 A-2
Notes to the Financial Statements as of December 31, 2002 A-7
Summary of Principle GAAP Differences A-31
Subsequent events occurred between July 8, 2003 and April 10, 2005 A-35
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Telefonica, S.A.:
We have audited the accompanying consolidated balance sheets of Telefonica, S.A.
and of the companies comprising the Telefonica Group (see Note 1) as of December
31, 2004 and 2003, and the related consolidated statements of operations for
each of the three years in the period ended December 31, 2004. These
consolidated financial statements are the responsibility of the controlling
Company's Directors. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatements. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telefonica, S.A. and
of the companies composing Telefonica Group as of December 31, 2004 and 2003,
and the results of their operations and the funds obtained and applied by them
for each of the three years ended December 31, 2004, in conformity with
accounting principles generally accepted in Spain.
Accounting principles generally accepted in Spain vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
consolidated net income (loss) for each of the three years in the period ended
December 31, 2004, and the determination of consolidated shareholders' equity
and financial position as of December 31, 2004 and 2003, to the extent
summarized in Note 25.
s/DELOITTE, S.L.
Madrid, Spain
March 4, 2005, except for Note 25, as to which the date is April 15, 2005
F-2
Telefonica
--------------------------------------------------------------------------------
TELEFONICA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
--------------------------------------------------------------------------------
Amounts in millions of Euros
----------------------------
Assets 2003 2004
--------------------------------------------------------------------------------
Property, plant and equipment (net) (Note 7) 24,315.78 23,348.14
Land and structures 6,071.16 6,626.27
Technical installations and machinery 2,385.42 2,089.89
Telephone installations 55,885.32 59,094.46
Furniture, equipment and other 2,831.18 3,067.04
Construction in progress 1,074.00 1,242.40
Advance payments for fixed assets 7.21 9.05
Installation materials 185.66 264.91
Accumulated depreciation (44,124.17) (49,045.88)
Capital increase expenses 543.59 409.18
Intangible assets (net) (Note 6) 7,673.16 8,430.02
Research and development expenses 1,189.92 1,256.97
Rights on leased assets 92.77 55.51
Administrative concessions 6,603.09 7,872.63
Other intangible assets 4,306.95 5,184.70
Accumulated amortization (4,519.57) (5,939.79)
Goodwill (Note 5) 6,053.87 7,409.36
Subscribed shares not paid-in (uncalled payments) 0.00 0.00
Financial assets 13,006.44 12,227.02
Long term financial investments (Note 8) 3,441.92 3,227.62
Deferred expenses (Note 9) 535.04 432.23
Longterm prepaid taxes (Notes 18) 9,029.48 8,567.17
Current assets 10,482.36 11,642.62
Inventories 400.97 669.62
Accounts receivable 6,218.26 6,935.79
Credits and other investments 3,199.64 2,288.35
Prepayments 193.61 203.66
Short-term treasurystock (Note 11) 133.46 690.18
Cash 336.42 855.02
--------------------------------------------------------------------------------
Total assets 62,075.20 63,466.34
The accompanying notes 1 to 25 and exhibits I to VI
are an integral part of these consolidated financial statements
F-3
Telefonica
--------------------------------------------------------------------------------
TELEFONICA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
--------------------------------------------------------------------------------
Amounts in millions of Euros
----------------------------
Liabilities and shareholders' equity 2003 2004
--------------------------------------------------------------------------------
Shareholders' equity (Note 11) 16,756.56 16,225.12
Capital stock 4,955.89 4,955.89
Paid-in surplus 7,987.14 5,287.68
Revaluation reserve 1,357.86 1,357.86
Other reserves 252.09 1,746.40
Net income for the year 2,203.58 2,877.29
Minority interests (Note 12) 4,426.22 3,775.58
Stockholders ownership 21,182.78 20,000.70
Provisions for contingencies and expenses (Note 14) 7,688.23 7,574.21
Negative goodwill 11.42 4.97
Deferred revenues (Note 13) 657.97 328.97
Long term liabilities 18,495.42 16,003.71
Long term creditors 17,693.79 15,147.89
Deferred taxes (Note 18) 801.63 855.82
Current liabilities 13,848.86 19,344.92
Trade creditors 5,308.60 5,665.41
Non trade creditors 8,122.09 13,134.95
Accruals 418.17 544.56
Provisions for contingencies and expenses short term 190.52 208.86
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity 62,075.20 63,466.34
The accompanying notes 1 to 25 and exhibits I to VI
are an integral part of these consolidated financial statements
F-4
Telefonica
--------------------------------------------------------------------------------
TELEFONICA GROUP
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
Amounts in millions of Euros
--------------------------------------------------------------------------------
2002 2003 2004
--------------------------------------------------------------------------------
Revenues from operations (Note 20) 28,411.30 28,399.84 30,321.90
Other operating revenues 297.57 288.94 381.71
Internal expenditures capitalized 496.71 530.32 474.31
Increase in inventories (net) (18.10) (135.49) 32.97
Total revenues 29,187.48 29,083.61 31,210.89
Goods purchased 6,953.59 6,276.61 7,558.69
External services and local taxes 4,976.71 5,082.68 5,601.63
Personnel expenses (Note 20) 4,793.77 4,641.32 4,411.81
Provision for depreciation and
amortization 6,692.42 6,274.22 5,980.15
Trade provisions 645.58 420.60 336.16
Other operating expenses 93.66 60.28 87.20
Total operating costs before financial
expenses and goodwill amortization 24,155.73 22,755.71 23,975.64
Operating profit 5,031.75 6,327.90 7,235.25
Amortization of goodwill (Note 5) (667.49) (444.11) (433.53)
Reversal of negative goodwill 2.06 1.65 0.94
Financial income (expense) (1,589.30) (1,555.87) (1,240.21)
Exchange (losses) gains (632.32) 495.17 56.41
Income (losses) from associated companies (527.88) (212.58) (56.11)
Profit from ordinary activities 1,616.82 4,612.16 5,562.75
Extraordinary revenues (Note 20) 474.63 1,167.16 409.02
Losses on fixed assets (Note 20) (9,614.55) (55.27) (49.71)
Extraordinary expenses (Note 20) (7,077.96) (2,361.55) (1,525.05)
Income before tax and minority
interests (14,601.06) 3,362.50 4,397.01
Corporate income tax (Note 18) 3,228.65 (913.43) (1,138.71)
Minority interests (Note 12) 5,795.61 (245.49) (381.01)
Net income (5,576.80) 2,203.58 2,877.29
Net income per share (Euros) (1.13) 0.44 0.60
--------------------------------------------------------------------------------
The accompanying notes 1 to 25 and exhibits I to VI
are an integral part of these consolidated financial statements
F-5
Telefonica
--------------------------------------------------------------------------------
TELEFONICA, S.A. AND SUBSIDIARIES
COMPOSING THE TELEFONICA GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2004
------------------------------------
(1) INTRODUCTION AND GENERAL INFORMATION
Telefonica Group companies
Telefonica, S.A. and its subsidiaries and investees make up an integrated
group of companies ("the Telefonica Group") operating mainly in the
telecommunications, media and entertainment industries.
The Parent Company of this Group is Telefonica, S.A. ("Telefonica"), a
corporation that was incorporated for an indefinite period of time on April
19, 1924. Its registered office is at calle Gran Via 28, Madrid (Spain).
Exhibit I hereto lists the subsidiaries, associated companies and investees
in which the Telefonica Group has direct or indirect holdings, their lines
of business, their registered offices, their net worth and results at
year-end, their gross book value, their contribution to the reserves of the
Consolidated Group and the consolidation method used.
Corporate structure of the Group
Telefonica's basic corporate purpose, per Article 4 of its bylaws, is the
provision of all manner of public and private telecommunications services,
and all manner of ancillary or supplementary telecommunications services or
the services derived therefrom. All the business activities that constitute
the corporate purpose may be performed either in Spain or abroad and may be
carried on either wholly or partially by the Company, or through
stockholdings or other equity interests in other companies or legal
entities with an identical or a similar corporate purpose.
The main groups of subsidiaries through which Telefonica carries on its
corporate purpose and manages its business areas or basic lines of business
are as follows:
- The wireline telephony business and the related supplementary services
provided in Spain, centered at the Telefonica de Espana Group.
- The cellular telephony business is centralized in Spain and abroad at
the Telefonica Moviles Group.
- The main business activity of the Telefonica Internacional Group is to
make and manage investments in the wireline telephony industry in the
Americas.
- Other businesses in the Telefonica Group are those headed up by
Telefonica Publicidad e Informacion-TPI (the directories business),
Terra Networks, S.A. (provider of services,
F-6
Telefonica
--------------------------------------------------------------------------------
content and portals for Internet access), Atento, N.V. (call center
services) and Telefonica de Contenidos, S.A. (media, entertainment and
content).
The business activities carried on by most of the Telefonica Group
companies are regulated by various pieces of legislation, under which
authorizations, concessions or licenses must be obtained in certain
circumstances in order to be able to provide the various services.
Also, certain wireline and wireless telephony services are provided under
regulated rate and price systems.
(2) BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
a) True and fair view
The accompanying consolidated financial statements of the Telefonica Group
were prepared from the accounting records of Telefonica, S.A. and of each
of the companies composing the Telefonica Group. The respective individual
financial statements were prepared in accordance with the accounting
principles and standards regulated in Spain by the Commercial Code as
implemented by the Spanish National Chart of Accounts and in the applicable
regulations in the various countries in which the companies composing the
Consolidated Group are located. The accompanying consolidated financial
statements are presented in accordance with Royal Decree 1815/1991,
approving the rules for the preparation of consolidated financial
statements and, accordingly, they give a true and fair view of the net
worth, financial position, results of operations and funds obtained and
applied in 2004.
b) Accounting policies
The consolidation methods applied were as follows:
- The companies over which effective control is exercised or in relation
to which the Company has entered into agreements with the other
stockholders were fully consolidated.
- The companies which are managed jointly with third parties were
proportionally consolidated.
- The companies in which there is significant influence but not
ownership of a majority of the voting rights in their governing bodies
or joint management with third parties are accounted for by the equity
method.
- The investees which are either not included in the foregoing points or
which, although included, do not have a material impact on the
consolidated financial statements are carried at the lower of cost or
market.
In certain circumstances, at some of the Group's investees a qualified
majority of the voting rights may be required to adopt certain resolutions,
and this was taken into account, together with other factors, when
selecting the consolidation method.
All material accounts and transactions between the consolidated companies
were eliminated in consolidation. The margins included in transactions
involving capitalizable goods or services by subsidiaries with other
Telefonica Group companies were eliminated in consolidation.
F-7
Telefonica
--------------------------------------------------------------------------------
In the case of Group companies whose accounting and valuation methods
differed from those of Telefonica, adjustments were made in consolidation
in order to present the consolidated financial statements on a uniform
basis with the financial statements of the Parent Company.
The consolidated statement of income includes the revenues and expenses of
the companies that are no longer in the Group up to the date on which the
related holding was sold or the company was liquidated, and those of the
new companies included in the Group from the date on which the holding was
acquired or the company was formed through year-end.
The equity of minority interests in the net worth and results of the fully
consolidated subsidiaries is recorded under the "Minority Interests" and
"Income/Loss Attributed to Minority Interests" captions, respectively (see
Note 12).
In accordance with standard practice in Spain, the accompanying
consolidated financial statements do not include the tax effect, if any, of
transferring the reserves of the consolidated subsidiaries and of the
companies accounted for by the equity method to the Parent Company's
accounts, since it is considered that such reserves will be used to finance
these companies' operations and that those that may be distributed would
not give rise to a material additional tax cost.
c) Comparative information and changes in the scope of consolidation
Comparative information
The figures in these consolidated financial statements and in the
consolidated management report are expressed in millions of euros unless
indicated otherwise.
There were no changes in the structure of the consolidated balance sheet
and consolidated statement of income with respect to those presented in the
previous year. Also, there were no changes in accounting principles with
respect to 2003 with a significant effect.
Changes in the scope of consolidation
The main variations in the scope of consolidation in 2004 were as follows
(the full detail of all the variations in 2004 and 2003 is included in
Exhibit II):
Telefonica
Telefonica, S.A. acquired 52,820,862 shares of Portugal Telecom, S.G.P.S.,
S.A. for (euro)475.14 million, giving rise to consolidation goodwill of
(euro)344.52 million. Additionally, on December 29, 2004, Portugal Telecom
reduced capital by retiring 87,799,950 shares of treasury stock,
representing 7% of capital stock. Following these transactions, Telefonica
increased its direct holding in this company to 8.55%. The direct and
indirect ownership interest of the Telefonica Group is 9.58%. This company
continues to be accounted for by the equity method in the consolidated
financial statements of the Telefonica Group.
Telefonica Moviles Group
In August 2004, Brasilcel N.V. and Telesp Celular Participacoes, S.A. (TCP)
announced their intention to launch friendly tender offers for Tele Sudeste
Celular Participacoes, S.A., Tele Leste Celular Participacoes, S.A.,
Celular CRT Participacoes, S.A and Tele Centro
F-8
Telefonica
--------------------------------------------------------------------------------
Oeste Celular Participacoes, S.A (TCO). These tender offers were
effectively implemented in October.
The following tables show the percentages of ownership held by Brasilcel
N.V. and TCP in these subsidiaries before the friendly tender offers and
the resulting percentages of ownership after settlement of the shares
purchased as a result of the offer:
----------------------------------- -----------------------------
Brasilcel Percentage Percentage TCP Percentage Percentage
of of of of
Ownership Ownership Ownership Ownership
before after before after
tender tender tender tender
offers offers offers offers
------------------------------------ -----------------------------
Tele Sudeste 86.7% 90.9%
-----------------------------------
Tele Leste 27.9% 50.6% TCO 28.9% 50.6%
-----------------------------------
CRT 51.5% 67.0%
----------------------------------- -----------------------------
These tender offers gave rise to a cash payment of approximately 607
million reais for Brasilcel, N.V. and of 902 million reais for TCP.
At the end of June 2004, Brasilcel N.V. effectively acquired from NTT
DoCoMo, Inc. and Itochu Corporation their ownership interests in Sudestecel
Participacoes, S.A., a holding company controlling a bloc of shares in the
operator Tele Sudeste Celular Participacoes, S.A. representing 10.5% of its
capital stock, for (euro)20.84 million. As a result of this transaction,
Brasilcel, N.V. increased its controlling interest in Sudestecel
Participacoes., S.A. to 100%. This company continues to be fully
consolidated in the financial statements of the Brasilcel Group and this
group, in turn, is proportionally consolidated in the consolidated
financial statements of the Telefonica Group, in accordance with the
agreements with Portugal Telecom as detailed in Note 22-d.
On July 23, 2004, a 100% holding in the Chilean company Telefonica Movil de
Chile, S.A. was acquired from the Chilean company Compania de
Telecomunicaciones de Chile, S.A., a subsidiary of Telefonica
Internacional, S.A. The total amount paid for this acquisition was $1,058
million. As a result of this transaction, the Telefonica Group increased
its effective ownership interest in the capital stock of this company from
44.89% to 92.46%. This company continues to be fully consolidated in the
consolidated financial statements of the Telefonica Group.
On March 5, 2004, Telefonica Moviles, S.A. reached an agreement with
BellSouth Corporation ("BellSouth") for the acquisition of all the holdings
owned by latter in the former's operators in Argentina, Chile, Peru,
Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and Panama.
The effective transfer of the shares of these companies was conditional,
inter alia, upon the obtainment of the required regulatory authorizations
in each country and on the approvals, if any, required, from the minority
stockholders. The shares of these operators were effectively transferred in
2004 and in January 2005: all the holdings of BellSouth in the operators
located in Ecuador, Guatemala and Panama were transferred on October 14,
2004; those in the operators located in Colombia, Nicaragua, Peru, Uruguay
and Venezuela were transferred on October 28, 2004, that in the operator in
Chile was transferred on January 7, 2005, and the holding in the
Argentinian operator was transferred on January 11, 2005.
F-9
Telefonica
--------------------------------------------------------------------------------
Under this agreement the aforementioned operators were valued at $5,850
million and their net debt was taken over. The total acquisition cost for
Telefonica Moviles, adjusted by the net debt of all the companies, amounted
to (euro)3,252.54 million (excluding Chile and Argentina).
In addition to acquiring the holdings owned by the BellSouth Group in the
wireless operators in Latin America, in compliance with the commitments
assumed under the share purchase agreement, Telefonica Moviles launched an
offer for the acquisition of the minority interests in these companies, the
purchase price in each case being equal to the price agreed with BellSouth.
Following are the values assigned to each transaction and the acquisition
cost for Telefonica Moviles:
- Acquisition of a 100% holding in the operator Otecel, S.A. (Ecuador)
for a total company value of $833 million. The acquisition cost for
Telefonica Moviles, adjusted for the company's net debt, was
(euro)663.43 million.
- Acquisition of a 100% holding in BellSouth Guatemala, S.A. for a total
company value of $175 million. The acquisition cost for Telefonica
Moviles, adjusted for the company's net debt, was (euro)92.54 million.
- Acquisition of a 99.57% holding in BellSouth Panama, S.A. for a total
company value of $657 million. The acquisition cost for Telefonica
Moviles, adjusted for the company's net debt, was (euro)549.28
million.
- Acquisition of a 100% holding in Telcel, S.A. (Venezuela) for a total
company value of $1,195 million. The acquisition cost for Telefonica
Moviles, adjusted for the company's net debt, was (euro)1,223.98
million.
- Acquisition of a 100% holding in Telefonica Moviles Colombia, S.A. for
a total company value of $1,050 million. The acquisition cost for
Telefonica Moviles, adjusted for the company's net debt, was
(euro)517.46 million.
- Acquisition of a 99.85% holding in Comunicaciones Moviles del Peru,
S.A. for a total company value of $210 million. The acquisition cost
for Telefonica Moviles, adjusted for the company's net debt, was
(euro)7.70 million.
- Acquisition of a 100% holding in Telefonia Celular de Nicaragua, S.A.
for a total company value of $150 million. The acquisition cost for
Telefonica Moviles, adjusted for the company's net debt, was
(euro)148.74 million.
- Acquisition of a 100% holding in Abiatar, S.A. for a total company
value of $60 million. The acquisition cost for Telefonica Moviles,
adjusted for the company's net debt, was (euro)49.42 million.
Telefonica de Contenidos Group
Telefonica, S.A. sold on the London Stock Exchange 38,853,403 Pearson Plc
shares representing 4.84% of its capital stock for approximately (euro)350
million, giving rise to a loss of (euro)33.23 million in the consolidated
financial statements of the Telefonica Group.
F-10
Telefonica
--------------------------------------------------------------------------------
T.P.I. Group
In 2004 Telefonica Publicidad e Informacion, S.A., the parent company of
the group, acquired the remaining 49% holding in its Chilean subsidiary
Impresora y Comercial Publiguias, S.A. for (euro)65.6 million, thereby
increasing its ownership interest to 100%. A 9% holding was acquired from
the Chilean company Compania de Telecomunicaciones de Chile, S.A., a
Telefonica Group subsidiary. This company continues to be fully
consolidated in the Telefonica Group.
Terra Group
On October 5, 2004, Terra Networks, S.A. and Daum Communications, Corp.
reached an agreement for the sale of Lycos, Inc. after obtaining the
required administrative authorizations and approval from the Antitrust
Authorities in the United States. The sale price was set at $108 million,
giving rise to a gain of (euro)26.17 million. On September 30, 2004, i.e
before the sale of Lycos, Inc., and as part of the agreement for this
transaction, Lycos, Inc. transferred assets amounting to (euro)332.9
million to Terra Networks, S.A.
Telefonica Internacional Group
On July 8, 2004, Telefonica Internacional Chile S.A. acquired 3 million
ADRs of Compania de Telecomunicaciones de Chile S.A. (CTC), representing 12
million series A shares, equal to a 1.25% holding in this company, thereby
increasing the Telefonica Group's total ownership interest to 44.89%. The
price paid was US$ 37.07 million. The company continues to be fully
consolidated in the Telefonica Group.
Under a share repurchase program, the subsidiary Telefonica del Peru,
S.A.A. acquired own shares in the market for 21.90 million new soles
(approximately (euro)5.3 million), thereby increasing the Telefonica
Group's effective percentage of ownership from 97.21% to 98.19%. The
company continues to be fully consolidated in the Telefonica Group.
In December the Brazilian company Telecomunicacoes de Sao Paulo, S.A.
(TELESP) entered into an agreement for the purchase of all the shares
(cuotas) of Santa Genovense Participacoes Ltd., a holding company owning
all the cuotas of Atrium Telecomunicacoes, for 113.44 million Brazilian
reais (approximately (euro)31 million), giving rise to goodwill of
(euro)33.14 million. The company was fully consolidated in the consolidated
financial statements of the Telefonica Group.
(3) PROPOSED DISTRIBUTION OF INCOME OF THE PARENT COMPANY
Telefonica, S.A. obtained income of (euro)1,301.40 million in 2004.
The proposed distribution of 2004 income that the Company's Board of
Directors will submit for approval by the Stockholders' Meeting is as
follows: a) to appropriate 10% of income for the year ((euro)130.14
million) to the legal reserve; b) to pay a fixed dividend of (euro)0.23
gross per share for the Company's outstanding shares carrying dividend
rights; and c) to appropriate the remainder to voluntary reserves.
F-11
Telefonica
--------------------------------------------------------------------------------
---------------------------------------------------------------
Millions of euros
---------------------------------------------------------------
Distributable income 1,301.40
Distribution to:
Legal reserve 130.14
Dividend (maximum distributable
amount of (euro)0.23/share for all the
shares into which the Company's 1,139.86
capital stock is divided
(4,955,891,361 shares).
Voluntary reserve (minimum)31.40
---------------------------------------------------------------
Total 1,301.40
---------------------------------------------------------------
It is hereby stated that on February 23, 2005, the Company's Board of
Directors resolved (see Note 23) to distribute a fixed interim dividend out
of 2004 income of (euro)0.23 gross for the Company's outstanding shares
carrying dividend rights, up to a total amount of (euro)1,139.86 million.
This interim dividend will be paid on May 13, 2005. Consequently, the
proposed dividend to be paid out of 2004 income will be fully settled
through payment of the aforementioned interim dividend.
(4) VALUATION STANDARDS
The main valuation methods used in preparing the 2004 consolidated
financial statements were as follows:
a) Consolidation goodwill
The accompanying consolidated balance sheets include consolidation
goodwill, net of amortization, arising from the positive difference in
consolidation between the amounts paid to acquire the shares of the
subsidiaries consolidated or accounted for by the equity method and
their underlying book values plus the unrealized gains allocable to
these companies' assets at the acquisition date.
The amortization periods are those for which the projected income
attributable to the Group of the companies at which goodwill exists is
at least equal to the unamortized amount of the goodwill relating to
these companies. Generally speaking, this goodwill is amortized by the
straight-line method over 20 years (see Exhibit III).
Positive consolidation differences allocable to the assets of the
acquired company give rise to an increase in the value of the related
assets up to the limit of their market value, once the related
appraisal has been performed.
b) Translation methods (year-end exchange rate method)
The financial statements of the Group companies abroad were translated
to euros at the exchange rates ruling at year-end, except for:
1. Capital stock and reserves, which were translated at historical
exchange rates.
2. Income statements, which were translated at the average exchange
rates for the year.
F-12
Telefonica
--------------------------------------------------------------------------------
The exchange difference arising from application of this method is
included under the "Stockholders' Equity - Translation Differences in
Consolidation" caption in the accompanying consolidated balance
sheets, net of the portion of said difference relating to minority
interests, which is recorded under the "Minority Interests" caption on
the liability side of the accompanying consolidated balance sheets.
In accordance with the accounting standards in force in their
respective countries, certain Group companies use accounting methods
that include inflation adjustments, which consist of valuing monetary
assets and liabilities at face value and adjusting the historical cost
of nonmonetary assets and liabilities for the inflation from the date
of inclusion of the asset or liability in the company's balance sheet
to year-end. Therefore, the effect of the inflation for the year on
the monetary assets and liabilities is included in the statement of
income for the year under the "Exchange Losses" or "Exchange Gains"
captions. The amounts thus adjusted are translated to U.S. dollars at
the year-end exchange rates and the subsequent translation to euros is
made by the year-end exchange rate method described in the preceding
paragraphs.
The consolidation of Group companies located in Argentina constitutes
a special case. In accordance with the requirements of the Spanish
Accounting and Audit Institute (ICAC), the assets of these companies
do not include the effect of the adjustment for inflation which,
temporarily, was considered under local accounting regulations in
Argentina in 2002 and in the first quarter of 2003.
c) Start-up expenses
Start-up expenses comprise mainly incorporation, capital increase and
preopening expenses and expenses relating to initial public offerings.
Preopening expenses include most notably direct costs incurred in the
launch of various GSM digital telephony services and expenses incurred
in connection with UMTS third-generation wireless services in Spain
until these services start to be marketed (first quarter of 2004).
These expenses are recorded at cost and are amortized on a
straight-line basis over five years from the inception of activity.
d) Intangible assets
This caption in the accompanying consolidated balance sheets relates
mainly to the following items:
Research and development expenses
These relate to the costs incurred in developing new products to be
marketed or used for the Group's own network, which are generally
amortized by the straight-line method over three years from the date
of completion. Costs incurred in projects which are not viable for the
future are charged to the consolidated statement of income for the
year in which this circumstance becomes known.
F-13
Telefonica
--------------------------------------------------------------------------------
Administrative concessions
This caption relates to the acquisition cost of the licenses for the
provision of telephony services granted to the Group by various public
authorities, and to the value assigned to the licenses held by certain
companies at the time they were included in the Telefonica Group.
Amortization starts to be taken when commercial operation of these
licenses commences and continues to be taken over the term thereof
based in most cases on the estimated capacity to generate revenues in
each period.
Rights on leased assets
The rights under financial lease contracts are recorded at the cost of
the related assets, and the total debt for lease payments plus the
amount of the purchase option is recorded as a liability. The
difference between the two amounts, which represents the interest
expenses on the transaction, is recorded as a deferred expense and is
allocated to income each year by the interest method. The rights under
the existing contracts, which relate mainly to computer hardware, are
amortized on a straight-line basis generally over five years, which
coincides with the years of useful life of the hardware.
Software licenses and developments
These items are recorded at cost and are amortized on a straight-line
basis over three years.
Other intangible assets
This caption includes, among other items, the costs incurred in
acquiring capacity and rights to use other operators' cables, mainly
underwater cables. These rights are amortized over the duration of the
rights acquired.
e) Property, plant and equipment
Property, plant and equipment are carried at cost revalued pursuant to
the applicable enabling legislation (see Note 7). If the regulations
applicable in a particular country so require, the property, plant and
equipment are valued at cost adjusted for inflation (see Note 4-b).
Cost includes external costs plus internal costs comprising warehouse
materials used, direct labor used in installation work and the
allocable portion of the indirect costs required for the related
investment. The latter two items are recorded as revenues under the
"Capitalized Expenses of Group Work on Fixed Assets" caption.
The interest and other financial expenses incurred during the
construction of fixed assets which lead to the start-up of a new
activity, when the construction period exceeds one year, and the
exchange differences arising over this period on long-term loans to
finance these assets, are generally not capitalized. However, because
of their specific nature, the interest expenses incurred in the
construction of the Group's future office center (Distrito C),
amounting to (euro)1.7 million, were capitalized.
The costs of expansion, modernization or improvements leading to
increased productivity, capacity or efficiency or to a lengthening of
the useful lives of the assets are capitalized.
Upkeep and maintenance expenses are expensed currently.
F-14
Telefonica
--------------------------------------------------------------------------------
The Group records the necessary value adjustments to reduce the cost
of each item of property, plant and equipment to its market value at
each year-end, provided that the book value of the asset is not
recoverable through the generation of sufficient revenues to cover all
the costs and expenses, including depreciation.
An allowance is be recorded for lasting decline in value that is
deemed to be reversible. This allowance is deducted in the valuation
of the asset in question; in this case the lower value is not
maintained if the causes which prompted the value adjustment cease to
exist.
If the decline in value of the assets is irreversible and differs from
the result of systematic depreciation, the loss and the decline in
value of the related asset are recorded directly.
The companies depreciate their property, plant and equipment by the
straight-line method at annual rates based on the years of estimated
useful life of the assets, calculated in accordance with technical
studies which are revised periodically based on technological advances
and the rate of dismantling, as follows:
---------------------------------------------------
Years of
Estimated
Useful Life
---------------------------------------------------
Buildings and structures 25 - 50
Plant and machinery 10 - 15
Telephone installations, networks
and subscriber equipment 5 - 25
Furniture, office equipment and other 2 - 10
---------------------------------------------------
The increases in value resulting from revaluations are depreciated
over the years of remaining useful life of the revalued assets.
f) Long- and short-term investments
Shareholdings which were not consolidated are recorded in the
consolidated balance sheet at the lower of cost or market.
The market value was determined as follows:
1. Listed securities:
The market value was taken to be the lower of average market
price in the last quarter or market price at year-end.
2. Unlisted securities and investments in companies accounted for by
the equity method:
The market value was taken to be the underlying book value at
year-end plus the unrealized gains disclosed at the time of the
acquisition and still existing at year-end.
Unrealized losses (cost higher than market value at year-end) are
recorded under the "Allowances" caption.
g) Deferred charges
This caption in the accompanying consolidated balance sheets includes
mainly the following items:
Supplementary pension payments to retired employees (shortfall)
F-15
Telefonica
--------------------------------------------------------------------------------
These relate to the shortfall in the provisions recorded for the
commitments assumed by Telefonica de Espana to retired employees as of
June 30, 1992. Since then, the shortfall has been allocated to income
over 15 years by the straight-line method, in accordance with the
communication of March 1, 1993, received from the Spanish Accounting
and Audit Institute (ICAC). On November 1, 1997, coverage of these
commitments was externalized and on November 1, 2002, they were
adapted to Private Insurance Law 30/1995, Law 50/1998 on Tax,
Administrative, Labor and Social Security Measures, Royal Decree
1588/1999 approving the regulations on the instrumentation of
employers' pension commitments to employees and beneficiaries (see
Note 9), and Additional Provision Twenty-Five of Law 14/2000 on Tax,
Administrative, Labor and Social Security Measures.
Debt arrangement expenses
These relate to long-term debt arrangement expenses and issuance
premiums corresponding to debentures and bonds and preferred
securities and are amortized by the interest method on the basis of
the principal amounts outstanding.
Interest on long-term promissory notes
This relates to the difference between the face value and the
effective value of the promissory notes issued at over one year. This
interest is charged to income by the interest method.
Interest on financial lease contracts
This relates to the interest expenses on financial lease contracts,
which are charged to income by the interest method (see Note 4-d).
Externalization of pension commitments
As a result of Telefonica de Espana's externalization of its pension
commitments pursuant to Private Insurance Law 30/1995, Law 50/1998 on
Tax, Administrative, Labor and Social Security Measures, Royal Decree
1588/1999 approving the regulations on the instrumentation of
employers' pension commitments to employees and beneficiaries, and
Additional Provision Twenty-Five of Law 14/2000 on Tax,
Administrative, Labor and Social Security Measures for 2001, the
differences arising due to the change in the actuarial assumptions
needed to externalize the aforementioned commitments were recorded
under the "Deferred Charges" caption (see Note 9). (euro)12.60 million
and (euro)11.76 million were recorded in this connection in 2003 and
2004, respectively, under the "Extraordinary Expenses and Losses"
caption in the consolidated statement of income (see Note 20).
h) Inventories
Warehouse materials for installation in investment projects and
consumables and replacement parts are valued at the lower of weighted
average cost, adjusted for the effect of inflation in the countries
whose local legislation so requires (see Note 4-b), or market.
Obsolete, defective or slow-moving inventories have been reduced to
realizable value. The allowance for decline in value of inventories is
recorded on the basis of inventory age and turnover.
i) Treasury stock
Treasury stock is valued at the lower of cost, comprising the total
amount paid for acquisition, or market. Since these shares were
acquired without any prior resolution having
F-16
Telefonica
--------------------------------------------------------------------------------
been adopted by the Stockholders' Meeting to use them to reduce
capital stock, it is assumed that they are intended for subsequent
sale or, alternatively, for a possible capital reduction, and,
accordingly, the market value is taken to be the lowest of average
official market price in the last quarter of the year, year-end market
price, or the related underlying book value. Where appropriate,
provisions were recorded with a charge to the consolidated statement
of income for the difference between the acquisition cost and the
lower of the year-end market price or the average market price in the
last quarter, and with a charge to reserves for the difference between
the aforementioned value and the related underlying book value.
j) Capital subsidies
Capital subsidies are valued at the amount granted and are allocated
to income on a straight-line basis over a maximum period of ten years,
which does not differ materially from the estimated useful life of the
subsidized assets.
Most of the aforementioned subsidies were granted to Telefonica de
Espana and the conditions under which the subsidies were granted are
being met (see Note 13).
k) Foreign currency transactions
Fixed-income securities and receivables and payables denominated in
foreign currencies are translated to euros at the exchange rates
ruling at the transaction date, and are adjusted at year-end to the
exchange rates then prevailing.
Exchange differences arising on adjustment of foreign currency
fixed-income securities and receivables and payables to year-end
exchange rates are classified by currency and due date, and for this
purpose currencies which, although different, are officially
convertible are grouped together.
The positive net differences in each group of currencies are recorded
under the "Deferred Revenues" caption on the liability side of the
consolidated balance sheet, unless exchange losses in a given group
have been charged to income in prior years, in which case the positive
net differences are credited to period income up to the limit of the
negative net differences charged to income in prior years.
The positive differences deferred in prior years are credited to
income in the year in which the related accounts receivable and
payable fall due or are repaid early, or as negative exchange
differences for the same or a higher amount are recognized in each
homogeneous group.
Exchange gains or losses arising from specific-purpose financing of
foreign currency investments in investees to hedge the exchange risk
to which these investments are exposed are recorded under the
"Translation Differences in Consolidation" caption in the consolidated
balance sheet.
These transactions are deemed to be hedging transactions when they
meet certain requirements, most notably that the foreign currency in
which the financing is denominated is the same as, or largely matches,
the functional currency of the investment and of the flows generated
by it, and that the timing of recognition of the anticipated revenues
from dividends and management fees matches the loan repayment
schedule.
F-17
Telefonica
--------------------------------------------------------------------------------
l) Pension and other commitments to employees
At year-end the Group records in the consolidated balance sheet the
provisions required to cover the accrued liability for the existing
commitments that have not been externalized, based on actuarial
calculations using an appropriate discount rate. The liabilities
recorded under "Preretirements, Social Security Costs and Voluntary
Severances" were calculated individually and are discounted to present
value at a rate of 4%.
The Group's main commitments in this connection are detailed in Note
14.
m) Technical reserves
This caption relates mainly to the net level premium reserves, which
represent the amount by which the present value of life insurance,
pension and reinsurance commitments exceeds the net premiums to be
paid by the policyholders to the subsidiaries Seguros de Vida y
Pensiones Antares, S.A. and Casiopea Reaseguradora, S.A. These
reserves are credited when the commitments covered are paid.
n) Accounts payable
Accounts payable are recorded at repayment value, except for
zero-coupon debenture and bond issues, which are recorded in the
consolidated balance sheet at issue value plus the related accrued
interest (see Note 15).
o) Derivatives
Transactions whose purpose and effect is to eliminate or significantly
reduce exchange, interest rate or market risk on asset and liability
positions or on other transactions are treated as hedging
transactions. The gains or losses arising during the life of these
derivatives are taken to the consolidated statement of income using
the same timing of recognition method as that used to recognize the
gains or losses on the underlying hedged asset or transaction (see
Note 17).
Transactions which, exceptionally, were not assigned to hedge risks,
are not treated as hedging transactions. In transactions of this kind,
the differences in market price are recorded for accounting purposes
when the transactions are canceled or finally settled. However, if
potential losses are anticipated at year-end, the related provision is
recorded with a charge to the consolidated statement of income.
Similarly, transactions aimed at reducing the exchange risk relating
to the income contributed by Latin American subsidiaries are not
treated as hedging transactions.
p) Corporate income tax and other taxes
These captions in the accompanying consolidated statements of income
include all the debits and credits arising from the corporate income
tax levied on the Spanish Group companies and similar taxes applicable
to the Group companies abroad.
The expense for corporate income tax of each year is calculated on the
basis of book income before taxes, increased or decreased, as
appropriate, by the permanent differences from taxable income, defined
as those arising between taxable income and the book income before
taxes that do not reverse in subsequent periods. The difference
between the accrued tax expense and the tax paid is due to the
above-mentioned deferral, to tax assets for tax credits not yet taken
and to revenue and expense recognition timing differences giving rise
F-18
to deferred tax assets and liabilities, provided that they have a
certain reversal period (see Note 18).
Pursuant to an ICAC resolution of March 15, 2002, the Telefonica Group
recorded the tax assets relating to the tax relief and tax credits not
yet taken for tax purposes regarding which there is no doubt, in
accordance with the accounting principle of prudence in valuation,
that they can be deducted in the future (see Note 18). Tax credits for
investment in fixed assets are deferred from when they are recognized
over the average years of useful life of the assets for which the
credits were earned.
q) Recognition of revenues and expenses
Revenues and expenses are recognized on an accrual basis, i.e. when
the actual flow of the related goods and services occurs, regardless
of when the resulting monetary or financial flow arises.
The revenues from wireline telephony and other services are recognized
on an accrual basis. These services are generally billed bimonthly.
Unbilled revenues from the beginning of the billing cycle to the end
of each month are estimated or recorded as soon as they are known. The
differences between the estimated revenues and those subsequently
billed are not material and are recognized in the following period as
an addition to net sales.
In the wireless telephony business there are advertising campaigns
based on customers obtaining points for the telephone traffic they
generate. These points can be exchanged for discounts on the purchase
of handsets, traffic or other types of services based on the number of
points earned and the type of contract involved. The accompanying
consolidated balance sheets include the related provision based on an
estimate of the value of the points accumulated at year-end.
The "Accrual Accounts" caption on the liability side of the
consolidated balance sheet includes the amount relating to purchases
made by customers of the prepaid service for recharging or acquiring
cards that at year-end had still not been earned and recorded as a
revenue since the customers had not consumed the total amount of
traffic relating to their cards.
As for the business activities performed by Group subsidiaries
operating in the on-line travel agency industry, which bill the end
customer for the total amount of the ticket, including taxes, and
assume the credit risk or risk of nonpayment by the end customer,
maintaining a minimum purchase commitment to the principal supplier or
reserving the right to set the definitive price to be charged to the
end customer, the full amount billed is recorded under the "Net Sales
and Services" caption. In connection with these sales, the "Cost of
Materials Used and Other External Expenses" caption includes all the
cost of the products sold. If these conditions are not met, the
commission earned by the Company is recognized under the "Net Sales
and Services" caption. The sales thus recorded in 2004 and 2003
amounted to (euro)25.66 million and (euro)31.19 million, respectively.
In the directories line of business, advertising revenues and the
associated costs are recognized when the advertisement is published,
regardless of when the related monetary or financial flow arises. The
revenues related to billings for advertising in unpublished guides are
recorded under the liability "Accrual Accounts" caption, whereas the
associated costs are recorded as "Inventories" until the guides are
published.
F-19
Telefonica
--------------------------------------------------------------------------------
In accordance with the accounting principle of prudence, only realized
income is recorded at year-end, whereas foreseeable contingencies and
losses, including possible losses, are recorded as soon as they become
known.
(5) CONSOLIDATION GOODWILL
The variations in the "Consolidation Goodwill" caption and in the related
accumulated amortization in 2004 and 2003 were as follows:
--------------------------------------------
Millions
of Euros
--------------------------------------------
Balance at 12/31/02 6,364.02
--------------------------------------------
Additions 1,135.82
Amortization (444.11)
Write-offs (Note 20) (6.48)
Net retirements (312.01)
Net transfers (606.73)
Translation differences (76.64)
--------------------------------------------
Balance at 12/31/03 6,053.87
--------------------------------------------
Additions 2,231.55
Amortization (433.53)
Write-offs (Note 20) (111.09)
Net retirements (85.75)
Net transfers (242.85)
Translation differences (2.84)
--------------------------------------------
Balance at 12/31/04 7,409.36
--------------------------------------------
The goodwill arising on the acquisition of companies abroad is translated
to euros at the exchange rates prevailing at the time the goodwill arises,
except for goodwill arising on the acquisition of companies by foreign
companies, which is recorded in local currency and is affected by exchange
rate fluctuations. The resulting differences are recorded under the
"Translation Differences in Consolidation" caption.
The detail of the balances of the goodwill and of the related accumulated
amortization relating to each company and of the variations therein is
shown in Exhibit III.
Per the estimates and projections available to the directors, the projected
income attributable to the Group that will be earned by the companies at
which goodwill had arisen at year-end is at least equal to the unamortized
balance of the related goodwill in the related periods.
Based on these estimates and projections, in 2004 the existing estimates
and projections were reviewed, and (euro)111.09 million of goodwill was
written off in accordance with the accounting principle of prudence in
valuation, based on the analyses made of the projected cash flows for the
following years (see Note 20). The goodwill written off in 2004 included
most notably (euro)101.51 million relating to the investment in Telefonica
UK.
There were no material writeoffs in 2003.
F-20
Telefonica
--------------------------------------------------------------------------------
2004
The main additions to consolidation goodwill in 2004 related to the
following companies:
--------------------------------------------------
Millions
of Euros
--------------------------------------------------
Olympic, Ltda. 501.85
Otecel, S.A. 397.44
Telcel, C.A. 376.24
Portugal Telecom S.G.P.S., S.A. 344.52
Telefonica Moviles Panama 252.18
Brasilcel Group 111.68
Other companies 247.64
--------------------------------------------------
Total 2,231.55
--------------------------------------------------
The net retirements of goodwill in 2004 included most notably that relating
to the divestment of Lycos, Inc. amounting to (euro)48.66 million and of
Pearson Plc. amounting to (euro)189.49 million (see Note 2-c).
2003
The main additions to consolidation goodwill in 2003 related to the
following companies:
--------------------------------------------------
Millions
of Euros
--------------------------------------------------
Sogecable, S.A. 607.23
Tele Centro Oeste Celular
Participacoes, S.A. (TCO) 227.67
Endemol France 112.10
Antena 3 de Television, S.A. 63.91
Terra Networks, S.A. 58.57
Other companies 66.34
--------------------------------------------------
Total 1,135.82
--------------------------------------------------
The net retirements of goodwill in 2003 included most notably that relating
to the divestment of Antena 3 de Television, S.A. amounting to (euro)217.59
million (see Exhibit II). The most significant transfer arose from the
exclusion of the holding in Uno-e Bank, S.A. from consolidation, amounting
to (euro)110.95 million (see Exhibit II).
In 2003 (euro)504.65 million of goodwill were allocated as an addition to
the net value of the licenses to operate wireless communication services
nationally in Mexico. This amount was allocated after the related valuation
had been completed, which is when the related amount was transferred to the
"Administrative Concessions" account (see Note 6).
As indicated in Notes 6 and 7, the positive consolidation differences
allocable to the assets of the companies acquired from BellSouth were
allocated in 2004, on the basis of preliminary conclusions drawn from the
valuation performed by independent appraisers. Once the allocation of price
to all the assets and liabilities of the acquired companies is completed in
2005, the amounts of the recorded goodwill might be modified as a result of
certain reclassifications to other captions in the consolidated balance
sheet, even though it is considered that the amount of these
reclassifications would not be material.
F-21
Telefonica
--------------------------------------------------------------------------------
(6) INTANGIBLE ASSETS
The detail of the balances of the intangible asset accounts and of the
variations therein in 2004 and 2003 is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------------
Balance Inclusion Exclusion Balance
at of of Translation at
12/31/03 Additions Retirements Companies Companies Differences Transfers 12/31/04
-----------------------------------------------------------------------------------------------------------------------------------
Cost:
Research and development
expenses 1,189.92 67.27 (1.96) - - 0.06 1.68 1,256.97
Administrative concessions 6,603.09 9.93 (2.81) 1,244.69 - (53.51) 71.24 7,872.63
Rights on leased assets 92.77 1.31 (1.91) - (14.27) 0.90 (23.29) 55.51
Software licenses
and developments 3,492.73 322.06 (52.74) 151.10 (9.72) 17.95 235.49 4,156.87
Other intangible assets 814.22 193.48 (47.11) 370.06 (158.45) 4.46 (148.83) 1,027.83
-----------------------------------------------------------------------------------------------------------------------------------
Total intangible assets, gross 12,192.73 594.05 (106.53) 1,765.85 (182.44) (30.14) 136.29 14,369,81
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated amortization:
Research and
development expenses 1,090.50 88.64 - - - 0.07 - 1,179.21
Administrative concessions 1,103.29 252.63 (2.81) 269.85 - (10.76) (11.91) 1,600.29
Rights on leased
assets 33.37 14.93 (0.65) - (12.53) (0.17) (18.65) 16.30
Software licenses
and developments 1,883.57 782.76 (46.57) 86.16 (6.96) 3.88 120.23 2,823.07
Other intangible assets 380.69 48.08 (34.52) 96.97 (100.53) 1.71 (79.86) 312.54
-----------------------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 4,491.42 1,187.04 (84.55) 452.98 (120.02) (5.27) 9.81 5,931.41
-----------------------------------------------------------------------------------------------------------------------------------
Allowances for decline in value 28.15 0.52 (3.11) - (8.45) 0.33 (9.06) 8.38
-----------------------------------------------------------------------------------------------------------------------------------
Intangible assets, net 7,673.16 (593.51) (18.87) 1,312.87 (53.97) (25.20) 135.54 8,430.02
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------------
Balance Inclusion Exclusion Balance
at of of Translation at
12/31/02 Additions Retirements Companies Companies Differences Transfers 12/31/03
-----------------------------------------------------------------------------------------------------------------------------------
Cost:
Research and development
expenses 1,179.15 73.32 (57.33) - - (1.93) (3.29) 1,189.92
Administrative concessions 6,350.20 0.12 (15.33) 8.30 - (110.59) 370.39 6,603.09
Rights on leased assets 84.40 21.63 (4.55) - (9.27) (4.24) 4.80 92.77
Software licenses
and developments 3,131.15 533.05 (699.08) 16.90 (2.20) (11.08) 523.95 3,492.73
Other intangible assets 1,190.64 181.76 (254.44) 16.46 (18.38) (14.37) (287.45) 814.22
-----------------------------------------------------------------------------------------------------------------------------------
Total intangible assets, gross 11,935.58 809.88 (1,030.73) 41.66 (29.85) (142.21) 608.40 12,192.73
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated amortization:
Research and development
expenses 1,005.95 141.00 (56.69) - - (0.51) 0.75 1,090.50
Administrative concessions 993.97 244.99 (4.06) 1.62 - (37.98) (95.25) 1,103.29
Rights on leased assets 29.92 16.33 (2.93) - (3.65) (3.04) (3.26) 33.37
Software licenses
and developments 1,767.14 725.21 (685.12) 5.84 (1.12) (25.49) 97.11 1,883.57
Other intangible assets 468.70 77.88 (148.96) 0.03 (0.46) (25.57) 9.07 380.69
-----------------------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 4,265.68 1,205.41 (897.76) 7.49 (5.23) (92.59) 8.42 4,491.42
-----------------------------------------------------------------------------------------------------------------------------------
Allowances for decline in value 40.33 0.80 (4.89) - (0.08) (3.02) (4.99) 28.15
-----------------------------------------------------------------------------------------------------------------------------------
Intangible assets, net 7,629.57 (396.33) (128.08) 34.17 (24.54) (46.60) 604.97 7,673.16
-----------------------------------------------------------------------------------------------------------------------------------
The "Inclusion of Companies" column in 2004 includes most notably the
addition of the assets relating to the companies acquired by Telefonica
Moviles from BellSouth, which gave rise to an increase in gross cost and in
accumulated amortization of (euro)1,588.63 million and (euro)451.52
million, respectively. The amount relating to the gross cost includes
(euro)1,006.73 million of addition to the value basically of licenses and
customer portfolio, as a result of the allocation of the consolidation
differences arising from the purchase in accordance with valuations
performed by independent appraisers.
The most significant item in "Exclusion of Companies" in 2004 related to
the deconsolidation of Lola Films, with a cost and accumulated amortization
of (euro)140.55 million and (euro)83.20 million, respectively.
F-22
Telefonica
--------------------------------------------------------------------------------
The additions in 2003 included most notably (euro)316.69 million relating
to Telefonica de Espana, basically due to the update of the software of
exchanges. The additions at the Telefonica Moviles Group amounted to
(euro)149.33 million and related to investments in information and billing
systems and in the development of new i-mode services.
The "Administrative Concessions" caption includes mainly the following
items:
- A concession granted by the Peruvian State to Telefonica del Peru,
S.A.A. when this company was acquired in April 1994 by Telefonica
Internacional. This concession expires in 2019.
- Licenses to operate wireline and wireless communications services of
the companies awarded in the privatization in July 1998 of the
Telebras in Brazil. A portion of the price paid for these companies
was allocated as an addition to the value of these assets when they
were acquired. (euro)76.06 million were recorded in 2004 as an
addition to the net value of the licenses of Tele Centro Oeste Celular
Participacoes, S.A. The term of these licenses is 27 years.
- DCS 1800 MHz license in Spain recorded at the amount paid to the
Spanish Government plus the amount set aside to defray the costs
relating to the radio spectrum cleaning process required for the
implementation and development of these licenses.
- The amount attributable to the licenses to operate wireless
communication services nationally in Mexico. This amount was allocated
after the related valuation had been completed, which is when it was
reclassified from the "Consolidation Goodwill" caption. The
reclassified net balance of these licenses as of December 31, 2003,
amounted to (euro)504.65 million, and this amount is being amortized
over the term of the licenses based on the estimated capacity of the
licenses to generate revenues in each period (see Note 5).
- Licenses for the provision of UMTS services in Spain, Germany and
Switzerland. In Spain, since the technology is not available and in
accordance with the revenue and expense matching principle, these
licenses will begin to be amortized on commencement of the operation
of the related licenses and will be amortized over the license term.
For the other countries, the initial acquisition cost was written down
in 2002 and the carrying value reflects the current estimate of the
realizable value of these businesses.
- Licenses to operate telecommunications services in countries where the
companies acquired from BellSouth Corporation and in Chile through
Telefonica Movil Chile operate.
The terms of the licenses detailed above in connection with the wireless
business range from 15 to 30 years.
The projections of the directors regarding business performance and the
income to be generated by these licenses are at least equal to the
unamortized balance of the licenses.
F-23
Telefonica
--------------------------------------------------------------------------------
(7) PROPERTY, PLANT AND EQUIPMENT
The detail of the balances of property, plant and equipment accounts, of
the related accumulated depreciation and of the variations therein in 2004
and 2003 is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------------
Balance Inclusion Exclusion Balance
at of of Translation at
12/31/03 Additions Retirements Companies Companies Differences Transfers 12/31/04
-----------------------------------------------------------------------------------------------------------------------------------
Cost:
Land and structures 6,071.16 192.71 (138.86) 234.44 (5.50) (19.17) 291.49 6,626.27
Plant and machinery 2,385.42 52.05 (60.01) 121.01 (6.34) (45.14) (357.10) 2,089.89
Telephone installations 55,885.32 1,121.57 (1,163.00) 1,978.35 (1.01) (87.56) 1,360.79 59,094.46
Furniture, tools and
other items 2,831.18 178.31 (180.80) 186.12 (13.50) (23.33) 89.06 3,067.04
---------------------------------------------------------------------------------------------------
Total property,plant and
equipment in service 67,173.08 1,544.64 (1,542.67) 2,519.92 (26.35) (175.20) 1,384.24 70,877.66
Construction in progress 1,074.00 1,334.08 (5.88) 70.38 - (24.97) (1,205.21) 1,242.40
Advances on property,
plant and equipment 7.21 0.91 (0.04) 1.17 - (0.41) 0.21 9.05
Installation
materials 185.66 294.43 (4.68) 10.95 - (2.54) (218.91) 264.91
---------------------------------------------------------------------------------------------------
Property, plant and
equipment, gross 68,439.95 3,174.06 (1,553.27) 2,602.42 (26.35) (203.12) (39.67) 72,394.02
---------------------------------------------------------------------------------------------------
Accumulated depreciation:
Structures 2,167.33 225.45 (49.20) 121.81 (1.18) (9.72) 13.05 2,467.54
Plant and machinery 1,585.52 211.53 (29.61) 99.84 (6.30) (46.78) (185.35) 1,628.85
Telephone installations 38,360.03 3,837.87 (1,115.46) 1,520.22 (0.37) (120.98) 173.72 42,655.03
Furniture, tools and
other items 1,927.85 355.07 (170.14) 145.57 (8.34) (15.75) (35.80) 2,198.46
-----------------------------------------------------------------------------------------------------------------------------------
Total accumulated
depreciation 44,040.73 4,629.92 (1,364.41) 1,887.44 (16.19) (193.23) (34.38) 8,949.88
-----------------------------------------------------------------------------------------------------------------------------------
Allowances for
decline in value 83.44 19.89 (25.78) 8.56 - (1.20) 11.09 96.00
-----------------------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net 24,315.78 (1,475.75) (163.08) 706.42 (10.16) (8.69) (16.38) 23,348.14
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------------
Balance Inclusion Exclusion Balance
at of of Translation at
12/31/02 Additions Retirements Companies Companies Differences Transfers 12/31/03
-----------------------------------------------------------------------------------------------------------------------------------
Cost:
Land and structures 6,159.15 22.93 (264.71) 15.38 (4.32) (67.50) 210.23 6,071.16
Plant and machinery 3,739.81 55.43 (33.83) 16.32 (7.25) (162.45) (1,222.61) 2,385.42
Telephone installations 53,758.90 280.18 (722.61) 170.47 (0.34) (766.85) 3,165.57 55,885.32
Furniture, tools and 3,132.06 132.27 (492.56) 23.95 (10.91) (89.97) 136.34 2,831.18
other items
----------------------------------------------------------------------------------------------------
Total property, plant and
equipment in service 66,789.92 490.81 (1,513.71) 226.12 (22.82) (1,086.77) 2,289.53 67,173.08
Construction in progress 986.15 2,342.47 (18.79) 9.22 (0.21) (36.15) (2,208.69) 1,074.00
Advances on property, plant
and equipment 66.15 1.07 (0.19) 0.16 - (5.08) (54.90) 7.21
Installation
materials 162.63 122.08 (8.94) - - 4.79 (94.90) 185.66
----------------------------------------------------------------------------------------------------
Property, plant and
equipment, gross 68,004.85 2,956.43 (1,541.63) 235.50 (23.03) (1,123.21) (68.96) 68,439.95
----------------------------------------------------------------------------------------------------
Accumulated depreciation:
Structures 2,120.13 218.61 (88.99) 2.41 (2.18) (17.35) (65.30) 2,167.33
Plant and machinery 1,540.87 287.61 (26.47) 4.06 (5.53) (194.35) (20.67) 1,585.52
Telephone installations 35,217.52 4,016.14 (641.69) 76.32 (0.22) (326.33) 18.29 38,360.03
Furniture, tools and
other items 1,941.31 419.61 (424.53) 13.96 (5.45) (72.15) 55.10 1,927.85
-----------------------------------------------------------------------------------------------------------------------------------
Total accumulated
depreciation 40,819.83 4,941.97 (1,181.68) 6.75 (13.38) (610.18) (12.58) 4,040.73
-----------------------------------------------------------------------------------------------------------------------------------
Allowances for
decline in value 85.37 19.84 (10.36) - - (10.34) (1.07) 83.44
-----------------------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net 27,099.65 (2,005.38) (349.59) 138.75 (9.65) (502.69) (55.31) 24,315.78
-----------------------------------------------------------------------------------------------------------------------------------
F-24
Telefonica
--------------------------------------------------------------------------------
The "Inclusion of Companies" column in 2004 includes most notably the
addition of the assets relating to the companies acquired by Telefonica
Moviles from BellSouth, which led to increases in gross cost, accumulated
depreciation and allowances of (euro)2,586.91 million, (euro)1,880.59
million and (euro)8.56 million, respectively. As in the case of intangible
assets, Telefonica Moviles is performing a valuation of the tangible fixed
assets acquired as part of the purchase of the BellSouth operators in order
to allocate to these assets the corresponding portion of the purchase
price, up to the limit of their market value. This valuation has disclosed
asset overstatements amounting to (euro)117 million, which are recorded as
a reduction of the value of the assets acquired. Although this valuation
had not been completed at the date of these consolidated financial
statements, no significant differences are expected to arise with respect
to the net book value of the recorded tangible and intangible assets.
The investments in 2003 and 2004 included most notably in the case of
Telefonica de Espana additions of (euro)1,084.26 million and (euro)327.09
million, respectively, focused mainly on the deployment of the RIMA network
(high performance IP network) and the launch of ADSL, in which a cumulative
investment of (euro)1,988.61 million has been made since the beginning in
August 2001.
The additions at the Telefonica Moviles Group in 2003 amounted to
(euro)996.84 million and related mainly to the increase in and deployment
of the capacities of the GSM and GPRS networks and the increase in the
investment in the UMTS network. The additions at the Telefonica
Internacional Group for investments in the year amounted to (euro)504.48
million and related to both traditional and broadband (ADSL) investments.
The "Retirements" column of the various captions includes basically the
dismantling of telephony plant of Telefonica de Espana (see Note 20) with a
gross cost of (euro)1,177.29 million in 2004 ((euro)1,134.64 million in
2003).
The "Translation Differences" column includes both the effect of the
variation in exchange rates on the beginning balances and the monetary
adjustment applied by certain companies to their balances to adjust for
inflation, in accordance with the accounting practices in their respective
countries. The effect of exchange rates on the period variations is
included in the appropriate column for each variation.
As of December 31, 2004 and 2003, the following items had been fully
depreciated:
--------------------------------------------------------
Millions of Euros
---------------------
12/31/04 12/31/03
--------------------------------------------------------
Buildings and structures 365.11 251.94
Plant, machinery and tools 2,135.56 991.97
Telephone installations 21,847.68 19,068.16
Other tangible fixed assets 1,409.54 989.75
--------------------------------------------------------
Total 25,757.89 21,301.82
--------------------------------------------------------
Telefonica de Espana's fixed assets used to provide services currently
regulated by the related license cannot be mortgaged without prior
administrative authorization.
F-25
Telefonica
--------------------------------------------------------------------------------
The Telefonica Group companies have taken out insurance policies to
reasonably cover the possible risks to which their property, plant and
equipment used in operations are subject with suitable limits and coverage.
These policies include certain franchises for local and domestic
long-distance networks and subscriber equipment.
On December 31, 1996, Telefonica de Espana revalued its property, plant and
equipment pursuant to Royal Decree-Law 7/1996. The Company had previously
revalued its assets pursuant to the enabling legislation specifically
applicable to Telefonica de Espana. The net increase in value resulting
from these revaluations is being depreciated over the years of remaining
useful life of the revalued assets. The percentage of total assets
represented by the revalued assets and the effect on the depreciation
expense for the year in the accompanying consolidated balance sheet and
statement of income are not material.
The detail, as of December 31, 2004, of the property, plant and equipment
owned by consolidated Group companies located abroad is as follows:
-----------------------------------------------------------
Millions of Euros
-----------------------------------------------------------
Cost 30,688.56
Accumulated depreciation (18,170.64)
-----------------------------------------------------------
Total 12,517.92
-----------------------------------------------------------
(8) LONG-TERM INVESTMENTS
The detail of the balances of the long-term investments and of the related
investment valuation allowances as of December 31, 2004 and 2003, and of
the variations therein in the years then ended, is as follows:
------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------------------------------------------------------
Investments Tax
in Associated Other Deposits and Receivables
Companies Investments Other Loans Guarantees (Note 18) Allowances Total
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/02 2,081.19 932.03 2,225.26 160.77 9,679.42 (295.54) 14,783.13
------------------------------------------------------------------------------------------------------------------------------
Additions 419.43 21.57 1,005.17 533.22 874.01 (93.50) 2,759.90
Retirements (47.38) (528.68) (607.54) (118.29) (1,627.84) 46.77 (2,882.96)
Inclusion of companies - - 8.15 0.48 3.94 - 12.57
Exclusion of companies (17.68) - - (2.53) (0.42) (5.47) (26.10)
Translation differences (108.04) (25.79) (6.21) 5.12 (25.32) 12.69 (147.55)
Losses (212.58) - - - - - (212.58)
Dividends (31.62) - - - - - (31.62)
Transfers (575.92) 93.24 (1,412.30) 3.62 125.69 (17.72) (1,783.39)
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/03 1,507.40 492.37 1,212.53 582.39 9,029.48 (352.77) 12,471.40
------------------------------------------------------------------------------------------------------------------------------
Additions 138.77 18.72 323.51 41.34 958.65 (65.96) 1,415.03
Retirements (185.13) (113.38) (105.12) (64.44) (1,342.14) 17.31 (1,792.90)
Inclusion of companies - 0.05 0.57 1.80 54.21 - 56.63
Exclusion of companies - - (3.54) - - 16.25 12.71
Translation differences 8.30 1.82 (24.38) 6.30 (0.74) (1.47) (10.17)
Losses (56.11) - - - - - (56.11)
Dividends (29.98) - - - - - (29.98)
Transfers (224.17) 118.94 (72.00) (8.54) (132.29) 46.24 (271.82)
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/04 1,159.08 518.52 1,331.57 558.85 8,567.17 (340.40) 11,794.79
------------------------------------------------------------------------------------------------------------------------------
F-26
Telefonica
--------------------------------------------------------------------------------
The additions to and retirements from the "Investments in Associated
Companies" and "Other Investments" accounts reflect the amount of the
investments detailed in the variations in the consolidated Group as of
December 31, 2004 and 2003, described in Exhibit II.
The "Other Loans" caption includes mainly the investment of the net level
premium reserves of the Group's insurance companies, mainly in fixed-income
securities and long-term deposits amounting to (euro)702.65 million and
(euro)676.93 million as of December 31, 2004 and 2003, respectively, which
earned average returns in 2004 of between 3.68% and 5.17%. The "Short-Term
Investments - Short-Term Investment Securities" caption in the consolidated
balance sheet as of December 31, 2004, includes (euro)576.28 million
((euro)559.10 million in 2003) which also relate to short-term investments
made by the Group's insurance companies to cover commitments, which are
accounted for as "Technical Reserves" (see Note 14). The maturity schedule
for these financial assets is established on the basis of the projections
of payments to be made for the commitments acquired.
Noteworthy in connection with the balances receivable from associated
companies as of December 31, 2004 and 2003, is the financing granted to
Sogecable, S.A. in accordance with the commitments assumed in relation to
the integration of the satellite platforms, as indicated in Note 22-b.
Thus, the "Long-term Investments - Other Loans" and "Short-term Investments
- Loans to Associated Companies" captions include (euro)230.38 million and
(euro)24.46 million, respectively, of loans to this company ((euro)222.49
million and (euro)9.27 million as of December 31, 2003). These were also
long-term balances of (euro)66.64 million receivable from Medi Telecom and
of (euro)314.27 million receivable from Ipse 2000 at 2004 years end.
In connection with the investment in Ipse 2000, the net exposure as of
December 31, 2004, including financing granted, amounted to (euro)136
million. Although this company has an imbalanced financial position, it is
considered that no additional allowance is required because of the business
opportunities allowed by the regulatory framework in Italy (assignment or
sale of radio spectrum) and of the opportunity for optimizing and using the
accumulated tax losses.
The "Receivable from Associated Companies" and "Payable to Associated
Companies" captions include most notably (euro)52.07 million and
(euro)15.89 million, respectively, relating to Brasilcel Group companies.
(euro)10.55 million of the "Receivable from Associated Companies" caption
and (euro)0.44 million of the "Payable to Associated Companies" relate to
Medi Telecom. The latter caption also includes a balance of (euro)11.71
million payable to Amper.
The "Deposits and Guarantees" account includes mainly (euro)467.68 million
to cover guarantees. These deposits will decrease as the respective
obligations they are guaranteeing are reduced.
The "Tax Receivables" caption includes the long-term deferred tax assets
and other tax assets, which are grouped together under the "Long-Term
Investments" caption on the asset side of the consolidated balance sheet in
accordance with an ICAC Resolution on Valuation Standard 16 of the Spanish
National Chart of Accounts, and the tax credits recognized in the year (see
Note 18).
In 2004 the Telefonica Group sold the following investments in various
companies with the results detailed below:
F-27
Telefonica
--------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Percentage of Millions of euros
Capital Stock -------------------
Sold Gain (Loss)
-------------------------------------------------------------------------------
Subsidiaries and associated companies:
Lycos, Inc 100% 26.17
Telefonica Movil de Chile, S.A. 7.54% 14.33
Tecnologia y S.V.A., S.A. 100% 10.77
Radio Movil Digital 99.99% 10.23
Pearson Plc. 4.84% (33.23)
Other 3.89
-------------------------------------------------------------------------------
Net gain 32.16
-------------------------------------------------------------------------------
The Group and associated companies listed on stock markets are as follows:
- Telefonica, S.A.
- Telefonica Moviles, S.A.
- Telefonica Publicidad e Informacion, S.A.
- Terra Networks, S.A.
- Sogecable, S.A.
- Amper, S.A.
- Lycos Europe, N.V.
- Compania de Telecomunicaciones de Chile, S.A. (CTC Chile)
- Telefonica de Argentina, S.A.
- Telefonica de Peru, S.A.A.
- Compania Anonima Nacional de Telefonos de Venezuela, C.A. (CANTV)
- Portugal Telecom, S.A.
- Telecomunicacoes de Sao Paulo, S.A. (Telesp)
- Tele Sudeste Celular Participacoes, S.A.
- Telesp Celular Participacoes, S.A.
- Tele Centro Oeste Celular Participacoes, S.A. (TCO)
- Tele Leste Celular Participacoes, S.A.
- Celular CRT Participacoes, S.A.
- Infonet Services Corporation
- Telefonica Moviles El Salvador, S.A. de C.V.
- Telefonica Data Brasil Holding, S.A.
- Telefonica Mundo, S.A. (188 Telefonica Mundo)
F-28
Telefonica
--------------------------------------------------------------------------------
- Telefonica Moviles Argentina, S.A.
- Telefonica Holding de Argentina, S.A.
- Telefonica Data Argentina, S.A.
- Telefonica Empresas Peru, S.A.A.
- Telefonica Moviles Peru Holding, S.A.A.
- Comunicaciones Moviles de Peru, S.A.A.
- Multiholding Corporation, S.A.
Short-term investments
This caption in the accompanying consolidated balance sheet as of December
31, 2004, includes basically the following items:
- The investment in short-term assets of Telefonica's cash surpluses,
which amounted to (euro)184.61 million ((euro)1.287,03 million in
2003), and the investments made with the net level premium reserves of
the Group's insurance companies, which amounted to (euro)576.28
million, as indicated above ((euro)559.10 million in 2003).
- The investments relating to the Telefonica Moviles Group recorded
under the "Other Loans" caption, which amounted to (euro)528.68
million ((euro)300.34 million in 2003).
(9) DEFERRED CHARGES
The breakdown of the balance of this caption and the amortization schedule
are as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------------------------------------------------
Maturity
-----------------------------------------------------------
Subsequent Balance at Balance at
2005 2006 2007 2008 2009 Years 12/31/04 12/31/03
-------------------------------------------------------------------------------------
Supplementary pension payments
to retired employees (shortfall) (Note 4-g) 61.58 61.59 30.80 - - - 153.97 263.07
Debt arrangement expenses 16.99 12.92 7.48 5.35 4.25 7.21 54.20 64.69
Interest on long-term promissory notes 7.00 7.05 7.13 7.27 7.42 8.61 44.48 51.60
Interest on financial lease contracts 0.73 0.60 0.51 0.45 0.47 3.44 6.20 6.41
Externalization of commitments 10.44 8.91 7.47 5.96 4.73 7.95 45.46 57.22
(Note 4-g)
Other deferred charges 40.81 25.59 13.06 12.34 11.35 24.77 127.92 92.05
-----------------------------------------------------------------------------------------------------------------------------------
Total 137.55 116.66 66.45 31.37 28.22 51.98 432.23 535.04
-----------------------------------------------------------------------------------------------------------------------------------
F-29
Telefonica
--------------------------------------------------------------------------------
(10) TRADE RECEIVABLES
The detail of the balances of this caption as of December 31, 2004 and
2003, is as follows:
--------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------
Balance at Balance at
12/31/04 12/31/03
--------------------------------------------------------------------------------
Trade receivables billed 4,364.05 4,547.42
Other receivables 136.19 65.63
-------------------------------------------
Services billed 4,500.24 4,613.05
Unbilled services 1,883.06 1,653.12
-------------------------------------------
Trade receivables 6,383.30 6,266.17
-------------------------------------------
Allowance for bad debts (1,546.68) (1,685.75)
--------------------------------------------------------------------------------
Net balance 4,836.62 4,580.42
--------------------------------------------------------------------------------
The "Unbilled Services" account includes the connection, monthly and meter
service charges not yet billed by the Group operators. This amount arises
because these companies' subscriber billing schedules do not coincide with
December 31 (see Note 4-q).
The balance of the public-sector trade receivables in the countries in
which the Group operates amounted to (euro)483.58 million as of December
31, 2004 ((euro)387.85 million as of December 31, 2003).
In 2004 the provisions to the allowance for bad debts amounted to
(euro)318.98 million ((euro)380.82 million in 2003).
(11) STOCKHOLDERS' EQUITY
The detail of the balances of equity accounts and of the variations therein
in 2004 and 2003 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------------------
Distribution Distribution Variations Distribution
Balance at of 2002 Other of in Capital Balance at of 2003
12/31/02 Income Variations Dividends Stock 12/31/03 Income
------------------------------------------------------------------------------------------------------------------------------------
Capital stock 4,860.66 - - - 95.23 4,955.89 -
Additional paid-in capital 11,670.02 (1,516.22) (247.74) (1,653.15) (265.77) 7,987.14 -
Revaluation reserves 2,870.90 (1,316.67) - - (196.37) 1,357.86 -
Unrestricted reserves 4,816.37 2,621.05 975.84 - - 8,413.26 (136.13)
Reserve for treasury stock 334.56 - (201.10) - - 133.46 -
Other restricted reserves 57.97 - - - - 657.97 137.37
Consolidation reserves 3,870.14 (5,364.96) (1,061.79) - - (2,556.61) 2,202.34
Translation differences in
consolidation (6,507.82) - 111.83 - - (6,395.99) -
Income (Loss) for the year (5,576.80) 5,576.80 2,203.58 - - 2,203.58 (2,203.58)
------------------------------------------------------------------------------------------------------------------------------------
Total 16,996.00 - 1,780.62 (1,653.15) (366.91) 16,756.56 - (
------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------
Distribution Balance
of Other at
Dividends Variations 12/31/04
--------------------------------------------------------------------------------
Capital stock - - 4,955.89
Additional paid-in capital (951.64) (1,747.82) 5,287.68
Revaluation reserves - - 1,357.86
Unrestricted reserves (972.53) 536.02 7,840.62
Reserve for treasury stock - 556.72 690.18
Other restricted reserves - - 795.34
Consolidation reserves - (1,073.50)
Translation differences in
consolidation - 244.02 (6,151.97)
Income (Loss) for the year - 2,877.29 2,877.29
--------------------------------------------------------------------------------
Total (1,924.17) 1,392.73 16,225.12
--------------------------------------------------------------------------------
The "Other Variations" column relating to the "Unrestricted Reserves" and
"Consolidation Reserves" accounts relates mainly to the dividends paid to
the Parent Company by its subsidiaries.
F-30
Telefonica
--------------------------------------------------------------------------------
Also, in 2004 and 2003 it includes in the "Additional Paid-in Capital"
account the provision recorded to reduce the carrying value of the shares
of treasury stock to their underlying book value. Lastly, the
"Consolidation Reserves" account included in 2003 (euro)80.45 million
arising as a result of the capital reduction carried out by Terra Networks,
S.A. in order to reduce the value of its treasury stock to its underlying
book value.
a) Capital stock
As of December 31, 2004, Telefonica, S.A.'s capital stock amounted to
(euro)4,955,891,361, and consisted of 4,955,891,361 fully paid common
shares of a single series and of (euro)1 par value each, all recorded
by the book-entry system and traded on the Spanish computerized
trading system ("Continuous Market") (in the selective "Ibex 35"
Index), on the four Spanish Stock Exchanges (Madrid, Barcelona,
Valencia and Bilbao) and on the New York, London, Paris, Frankfurt,
Tokyo, Buenos Aires, Sao Paulo and Lima Stock Exchanges.
On June 15, 2001, the Stockholders' Meeting of Telefonica, S.A.
resolved to authorize the Board of Directors to increase the Company's
capital, at one or several times within a maximum period of five years
from that date, under the terms provided by Article 153.1 b) of the
Spanish Corporations Law (authorized capital) up to a maximum of
(euro)2,274.68 million, by issuing for this purpose the related new
common shares, be they redeemable or of any other type permitted by
the Law, with a fixed or variable premium, with or without preemptive
subscription right and, in all cases, with disbursements for the new
shares issued in the form of monetary contributions. As of December
31, 2004, the Board of Directors had not made use of this
authorization.
Furthermore, on April 12, 2002, the Stockholders' Meeting resolved to
approve two successive capital increases at the Company with a charge
to unrestricted reserves, each for an amount equal to 2% of the
subscribed and paid-in capital stock, through two successive issues of
new shares that would be assigned totally free of charge to the
Company's stockholders at a ratio of one new share for every 50 shares
held by them, and empowered the Board of Directors accordingly to
execute the resolution in question within one year from the date on
which it was adopted. These capital increases were carried out during
the first few months of 2003, as indicated below.
Also, on April 11, 2003, the Stockholders' Meeting empowered the Board
of Directors to issue fixed income securities at one or several times
within a maximum period of five years from that date. The fixed-income
securities issued can be debentures, bonds, promissory notes or any
other kind of fixed-income security, both simple and, in the case of
debentures and bonds, exchangeable for shares of the Company or of any
of the Group companies and/or convertible into shares of the Company.
As of December 31, 2004, the Board of Directors had not exercised
these powers, except in relation to the approval of two programs to
issue corporate promissory notes for 2004 and 2005.
Also, on April 30, 2004, the Stockholders' Meeting resolved to
authorize the Board of Directors to derivatively acquire treasury
stock, for a consideration, up to the limits and pursuant to the terms
and conditions established by the Stockholders' Meeting, within a
maximum period of 18 months from that date. However, it established
that in no case could the par value of the shares acquired, added to
that of the treasury stock already held by Telefonica, S.A. and any of
its controlled subsidiaries, exceed 5% of the capital stock of
Telefonica.
F-31
Telefonica
--------------------------------------------------------------------------------
As of December 31, 2004 and 2003, the Telefonica Group companies held
the following shares of the Parent Company, Telefonica, S.A.:
-----------------------------------------------------------------------------------------------------------------------
Euros per Share (*)
-------------------------------
Number of Shares Acquisition Market Price Market Value %
-----------------------------------------------------------------------------------------------------------------------
Treasury stock at 12/31/04 207,245,179 11.83 13.228 2,741.44 4.18179%
-----------------------------------------------------------------------------------------------------------------------
Treasury stock at 12/31/03 40,532,869 10.39 10.847 439.66 0.81787%
-----------------------------------------------------------------------------------------------------------------------
(*) As indicated in Note 4-i, a drop in the market value of the shares to below
acquisition cost would lead to the recording of additional provisions with
a charge to consolidated income, but would not affect the total amount of
consolidated equity.
In 2004 the Company acquired for a consideration 166,712,310 shares of
treasury stock for (euro)2,031.05 million.
The consolidated balance sheets as of December 31, 2004 and 2003,
include the acquisition cost of the shares of treasury stock
((euro)2,452.31 million and (euro)421.26 million, respectively) net of
allowances of (euro)1,762.13 million and (euro)287.80 million,
respectively, the provisions to which were recorded, in accordance
with current accounting regulations (see Note 4-i), with a cumulative
charge to unrestricted reserves in respect of the amount by which cost
exceeds the underlying book value. The allowance released with a
credit to 2003 consolidated income amounted to (euro)159.95 million,
as a result of the positive performance of the share price in the
period, which enabled the Group to release the provisions recorded in
prior years in which the market price of the share was lower than cost
(see Note 20).
The Company has recorded the related restricted reserve for the amount
of these shares of treasury stock. Also, in 2004 and 2003 it recorded
provisions of (euro)1,474.33 million and (euro)448.84 million,
respectively, with a charge to the "Unrestricted Reserves" caption to
reflect the shares of treasury stock at their underlying book value
(see Note 4-i).
Variations in capital stock and additional paid-in capital in 2004
------------------------------------------------------------------
The variations in 2004 in the "Capital Stock" and "Additional Paid-in
Capital" captions were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------
Additional Paid-in
Date Number of Shares Capital Stock Capital
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/03 4,955,891,361 4,955.89 7,987.14
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividend 04/30/04 - - (951.64)
Restricted reserve for treasury stock - - (556.72)
Valuation of treasury stock - - (1,191.10)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/04 4,955,891,361 4,955.89 5,287.68
-----------------------------------------------------------------------------------------------------------------------------------
In 2004 the Company did not perform any capital increase or reduction
transaction.
On April 30, 2004, the Stockholders' Meeting resolved to pay a cash
dividend out of 2003 income consisting of the payment of (euro)0.20
for each Company share outstanding. This dividend was paid on May 14,
2004, and the total amount paid was (euro)972.53 million.
F-32
Telefonica
--------------------------------------------------------------------------------
Also on April 30, 2004, the Stockholders' Meeting approved the
distribution of a portion of the additional paid in capital recorded
in the Company's balance sheet, through the payment of (euro)0.20 for
each Company share outstanding, with a charge to the "Additional
Paid-in Capital" caption. This amount was paid on November 12, 2004,
and the total amount paid was (euro)951.64 million.
Variations in capital stock and additional paid-in capital in 2003
------------------------------------------------------------------
The variations in 2003 in the "Capital Stock" and "Additional Paid-in
Capital" captions were as follows:
----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------------------
Number Additional Paid-in
Date of Shares Capital Stock Capital
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 4,860,661,286 4,860.66 11,670.02
----------------------------------------------------------------------------------------------------------------------------------
Capital increase at no cost to stockholders 02/12/03 97,213,225 97.21 -
Capital increase at no cost to stockholders 04/11/03 99,157,490 99.16 -
Retirement of treasury stock 06/05/03 (101,140,640) (101.14) (265.77)
Cash dividend Jul.-Oct. 2003 - - (1,233.15)
Dividend in kind - - (420.00)
Restricted reserve for treasury stock - - (247.74)
Allocation of 2002 loss - - (1,516.22)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 4,955,891,361 4,955.89 7,987.14
----------------------------------------------------------------------------------------------------------------------------------
The capital increases and reductions formalized in 2003 were as follows:
- On February 12, 2003, the notarial deed of formalization and execution
of a capital increase at Telefonica S.A. was executed. This capital
increase, for a par value of (euro)97,213,225 was carried out with a
charge to unrestricted reserves through the issuance of an equal
number of new common shares of the Company, of (euro)1 par value each,
which were assigned to the Company's stockholders free of charge at a
ratio of one new share for every 50 shares held by them. Following
registration of the aforementioned public deed at the Mercantile
Registry, the new shares were admitted to listing on official markets
from February 27, 2003.
- On April 11 2003, the notarial deed of formalization and execution of
a capital increase at Telefonica S.A. was executed. This capital
increase, for a par value of (euro)99,157,490, was carried out with a
charge to unrestricted reserves through the issuance of an equal
number of new common shares of the Company, of (euro)1 par value each,
which were assigned to the Company's stockholders free of charge at a
ratio of one new share for every 50 shares held by them. Following
registration of the aforementioned public deed at the Mercantile
Registry, the new shares were admitted to listing on official markets
from May 2, 2003.
- On June 5, 2003, the deed of capital reduction formalizing the
implementation by the Company's Board of Directors of the resolution
adopted by the Stockholders' Meeting on April 11, 2003, was executed.
Capital was reduced through the retirement of treasury stock
previously acquired by the Company pursuant to the authorization of
the Stockholders' Meeting. As a result, 101,140,640 shares of treasury
stock of Telefonica S.A. were retired and the Company's capital stock
was reduced by a par value of (euro)101,140,640. Article 5 of the
bylaws in relation to the capital stock figure,
F-33
Telefonica
--------------------------------------------------------------------------------
which from that date was set at (euro)4,955,891,361, was reworded
accordingly. At the same time, pursuant to Article 167.3 of the
Spanish Corporations Law, and in order to render null and void the
right of opposition provided for in Article 166 of the Corporations
Law, it was decided to record a reserve for retired capital stock for
an amount equal to the par value of the retired shares, which can only
be used if the same requirements as those applicable to the reduction
of capital stock are met. The retired shares were excluded from
official listing on June 18, 2003.
In addition, on April 11, 2003, the Stockholders Meeting resolved to
distribute a portion of the additional paid-in capital recorded in the
Company's balance sheets, through the payment of (euro)0.25 per share for
each of the Company's outstanding shares. The related charge was made to
the "Additional Paid-in Capital" account. This amount was paid in two
installments, the first of (euro)0.13 per share on July 3, 2003, and the
second of (euro)0.12 per share on October 15, 2003. The total amount paid
amounted to (euro)1,233.17 million.
Also, on April 11, 2003, the Stockholders' Meeting approved the
distribution in kind of a portion of the additional paid in capital, for a
total amount of up to (euro)420,003,360, through the distribution to the
stockholders of Telefonica S.A. of shares representing up to 30% of the
capital stock of Antena 3 de Television S.A. This distribution, which was
carried out in November 2003, was subject to the condition precedent,
already fulfilled in the year, that the Spanish National Securities Market
Commission (CNMV) approved the admission to listing of the shares of the
aforementioned company (see Exhibit II).
b) Legal reserve
Under the revised Corporations Law, 10% of income for each year must
be transferred to the legal reserve until the balance of this reserve
reaches at least 20% of capital stock. The legal reserve can be used
to increase capital provided that the remaining reserve balance does
not fall below 10% of the increased capital stock amount. Otherwise,
until the legal reserve exceeds 20% of capital stock, it can only be
used to offset losses, provided that sufficient other reserves are not
available for this purpose.
c) Revaluation reserves
The balance of the "Revaluation Reserves" caption arose as a result of
revaluations made from 1946 to 1987 and of the revaluation made
pursuant to Royal Decree-Law 7/1996.
F-34
Telefonica
--------------------------------------------------------------------------------
The detail as of December 31, 2004 and 2003, of the balance of the
revaluation reserves, which amounted to (euro)1,357.86 million, and of
the variations therein in 2004 and 2003 is as follows:
--------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------------------------------------------
Revaluations made from 1946 to 1987 4,478.76
Revaluation made pursuant to Royal Decree-Law 7/1996 1,357.40
Amounts used:
Capital increases from 1977 to 1986 (447.68)
Transfer to provisions in 1982 (113.16)
Single tax on revaluation, Royal Decree-Law 7/1996 (40.72)
Other variations from 1981 to 1986 (15.45)
Amount used in 1998 (1,795.07)
1999 capital increase (188.42)
Capital increase on January 25, 2001 (86.82)
Capital increase on April 3, 2001 (89.20)
--------------------------------------------------------------------------------
Balance at 12/31/01 3,059.64
--------------------------------------------------------------------------------
Capital increase on February 13, 2002 (93.44)
Capital increase on April 12, 2002 (95.30)
--------------------------------------------------------------------------------
Balance at 12/31/02 2,870.90
--------------------------------------------------------------------------------
Capital increase on February 12, 2003 (97.21)
Capital increase on April 11, 2003 (99.16)
Amounts used to offset 2002 losses (1,316.67)
--------------------------------------------------------------------------------
Balance at 12/31/03 and 12/31/04 1,357.86
--------------------------------------------------------------------------------
d) Consolidation reserves
The detail of the consolidation reserves as of December 31, 2004, and
of the variations therein in 2004 is as follows:
F-35
Telefonica
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------------
Balance at Balance at
12/31/03 Increase Decrease 12/31/04
-----------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies (1,956.68) 2,843.44 (1,478.64) (591.88)
Companies accounted for by the equity method (599.93) 34.40 (270.36) (835.89)
-----------------------------------------------------------------------------------------------------------------------------------
Total (2,556.61) 2,877.84 (1,749.00) (1,427.77)
-----------------------------------------------------------------------------------------------------------------------------------
The detail of the consolidation reserves as of December 31, 2003, and of
the variations therein in 2003 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------------
Balance at Balance at
12/31/02 Increase Decrease 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies 4,402.65 799.10 (7,158.43) (1,956.68)
Companies accounted for by the equity method (532.51) 9.00 (76.42) (599.93)
------------------------------------------------------------------------------------------------------------------------------------
Total 3,870.14 808.10 (7,234.85) (2,556.61)
------------------------------------------------------------------------------------------------------------------------------------
e) Translation differences in consolidation
The translation differences relate mainly to the effect of exchange
rate fluctuations on the net assets of the companies located abroad
after elimination of intercompany balances and transactions (see Note
4-b). This caption also includes the exchange differences resulting
from specific-purpose foreign-currency financing transactions relating
to investments in investees and which hedge the exchange risk on these
investments.
Following the exclusion of an investee from consolidation, the
translation differences contributed by this investee through the date
of sale are transferred to the "Consolidation Reserves" caption.
The detail of the contribution made by the Group companies to the
translation differences in consolidation is shown in Exhibit I.
f) Legislation regulating the sale of holdings
Law 62/2003 on Tax, Administrative, Labor and Social Security
Measures, based on the judgment of the European Court of Justice of
May 13, 2003, amended the administrative authorization system
contained in Law 5/1995 on the legal regime applicable to the disposal
of public shareholdings in certain companies, to which certain of the
corporate transactions and agreements of Telefonica S.A., Telefonica
Moviles S.A., Telefonica Moviles Espana, S.A.U. and Telefonica de
Espana, S.A.U. are subject pursuant to Royal Decree 8/1997.
The reform introduces a new model for administrative involvement,
replacing the system of prior authorization with that of subsequent
notification. The cases that must be notified were also reduced.
Specifically, the sale or encumbrance of shares without notification
is permitted, provided that there is no change in control, in relation
to shares representing up to 50% of the capital
F-36
Telefonica
--------------------------------------------------------------------------------
stock of (i) Telefonica de Espana, S.A.U. owned by Telefonica, S.A.;
(ii) Telefonica Moviles, S.A. owned by Telefonica, S.A.; and (iii)
Telefonica Moviles Espana, S.A.U. owned by Telefonica Moviles, S.A.
Additionally, the notification system still applies to the direct,
indirect or triggered acquisition, even through third-party trusts or
interposed third parties, of shares of Telefonica S.A. or of
Telefonica Moviles S.A. when they result in the disposal of at least
10% of the capital stock. However, cases constituting mere financial
transactions that do not have as their objective the obtainment of the
control and/or management of these companies are excluded.
Also, the disposal or encumbrance of certain strategic assets located
in Spain by Telefonica de Espana and Telefonica Moviles Espana
continue to be subject to the aforementioned notification system,
except when these transactions are carried out between Group
companies.
(12) MINORITY INTERESTS
This caption relates to the equity of minority stockholders in the net
worth and results for the year of the fully consolidated Group companies.
The variations in 2004 and 2003 in the balances of this caption in the
consolidated balance sheets were as follows:
------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------
Balance at 12/31/02 5,612.93
------------------------------------------------------------------------------
Capital contributions and inclusion of companies 396.06
Income for the year 245.49
Variation in translation differences (60.87)
Acquisitions and exclusion of companies (1,452.21)
Dividend paid (309.66)
Other variations (5.52)
------------------------------------------------------------------------------
Balance at 12/31/03 4,426.22
------------------------------------------------------------------------------
Capital contributions and inclusion of companies 25.47
Income for the year 381.01
Variation in translation differences 3.62
Acquisitions and exclusion of companies (10.00)
Dividend paid (1,082.97)
Other variations 32.23
------------------------------------------------------------------------------
Balance at 12/31/04 3,775.58
------------------------------------------------------------------------------
The detail of the balances of this caption and of the variations relating
to the main Group companies is shown in Exhibit IV.
2004
The most significant variations in minority interests in 2004 were those
relating to the distribution of dividends by Telefonica Empresas CTC Chile,
S.A., Terra Networks, S.A. and Telesp Participacoes, S.A.
F-37
Telefonica
--------------------------------------------------------------------------------
2003
Noteworthy in 2003 was the effect of the tender offer for Terra Networks,
S.A. shares that led to a reduction of (euro)1,207.42 million in the
balance of "Minority Interests", and this amount is included in the
"Acquisitions" account in the accompanying table (see Exhibit II). Also
worthy of mention in relation to "Capital Contributions and Inclusion of
Companies" are the (euro)142.06 million relating to the inclusion in the
consolidated financial statements of Tele Centro Oeste Celular
Participacoes, S.A. and (euro)240.38 million relating to the inclusion of
Antena 3 de Television, S.A. (see Exhibit II). As indicated in Exhibit II,
the latter investment was subsequently excluded from consolidation, giving
rise to a reduction of (euro)244.39 million in the balance of the "Minority
Interests" caption.
(13) DEFERRED REVENUES
The detail of the balances of this caption in the accompanying consolidated
balance sheets and of the variations therein in 2004 and 2003 is as
follows:
---------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------------------------------
Accrual of
Capital Exchange Investment Tax
Subsidies Gains Credit (Note 18) Other Total
---------------------------------------------------------------------------------------------------------------------
Balance at 12/31/02 238.07 3.46 157.06 481.87 880.46
---------------------------------------------------------------------------------------------------------------------
Additions 1.81 42.15 33.99 116.50 194.45
Transfers and other variations 0.34 (5.35) (3.56) (34.32) (42.89)
Allocation to income (53.78) (38.16) (47.38) (234.73) (374.05)
---------------------------------------------------------------------------------------------------------------------
Balance at 12/31/03 186.44 2.10 140.11 329.32 657.97
---------------------------------------------------------------------------------------------------------------------
Additions 10.08 26.28 32.92 19.27 88.55
Transfers and other variations 0.55 3.92 0.02 (22.54) (18.05)
Allocation to income (94.90) (23.33) (74.84) (206.43) (399.50)
---------------------------------------------------------------------------------------------------------------------
Balance at 12/31/04 102.17 8.97 98.21 119.62 328.97
---------------------------------------------------------------------------------------------------------------------
The "Other" caption included (euro)64.70 million as of December 31, 2003,
relating to the revenue to be collected in the five years following 1999
for the future deduction at Telesp of amortization of goodwill, which is
tax deductible at that company and was written off at 2004 year-end.
In 2000, as a result of various changes in the conditions of the
liabilities for pensions and other welfare benefits to Telesp employees,
the liability recorded in this connection was reassessed. This reassessment
disclosed an overprovision in 2000 which was reflected in this caption and
the impact of which on the statement of income was deferred over future
years. The prevailing conditions are analyzed periodically until the
company is able to assess the final resolution of certain matters. In line
with the trend in prior years, in 2004 this company's commitments to its
retired employees decreased sharply and the plans for medical assistance to
this group of employees were modified to provide benefits adapted to these
retirees' requirements, which entailed a much lower cost for the company
than the former plan in force. Because of these matters, which were
disclosed in independent experts' reports, the outstanding balance of this
liability was eliminated since the reasons which gave rise to its recording
in 2000 ceased to exist in the last few years. The balance outstanding of
(euro)48.50 million was recorded as an extraordinary revenue in the
accompanying statement of income (see Note 20).
This caption also includes (euro)101.31 million and (euro)103.20 million as
of December 31, 2004 and 2003, respectively, relating to the amounts
collected by Telefonica de Espana and Emergia from other operators for the
use of underwater cable systems.
F-38
Telefonica
--------------------------------------------------------------------------------
Capital subsidies
The detail of the capital subsidies not yet allocated to income is as
follows:
--------------------------------
Millions of Euros
--------------------------------------------------------------------------------
Grantor 12/31/04 12/31/03
--------------------------------------------------------------------------------
Official agencies, autonomous
community governments,
provincial and municipal
governments, etc. 13.78 33.99
EU-
STAR Programme - 1.99
ERDF Programme 0.80 3.58
ERDF 94/95 Operating Programme 84.18 141.48
Other 3.41 5.40
--------------------------------------------------------------------------------
Total 102.17 186.44
--------------------------------------------------------------------------------
(14) PROVISIONS FOR CONTINGENCIES AND EXPENSES
The detail of the balances of the provisions for contingencies and expenses
and of the variations therein in 2004 and 2003 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------
Balance at Period Amounts Inclusion of Transfers Balance at Period
12/31/02 Provisions Used Companies and Other 12/31/03 Provisions
------------------------------------------------------------------------------------------------------------------------------------
Group insurance 9.04 0.73 (0.85) - 2.50 11.42 1.83
Provisions for preretirements,
social security costs and
voluntary severance 1,134.02 1.436.78 (300.72) - 24.96 2,295.04 720.58
Technical reserves (Note 4.m) 3,287.25 13.30 (449.94) (0.16) - 2,850.45 122.05
Provision for pension
funds of other companies 122.10 43.37 (96.90) - 1.35 69.92 32.09
UMTS provision 2,298.97 8.84 (101.89) - (968.81) 1,237.11 14.57
Other provisions 1,163.53 497.07 (429.38) 18.43 (25.36) 1,224.29 202.36
------------------------------------------------------------------------------------------------------------------------------------
Total 8,014.91 2,000.09 (1,379.68) 18.27 (965.36) 7,688.23 1,093.48
------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------
Amounts Inclusion of Transfers Balance at
Used Companies and Other 12/31/04
-------------------------------------------------------------------------------------------
Group insurance (1.24) - - 12.01
Provisions for preretirements,
social security costs and
voluntary severance (370.97) - 9.71 2,654.36
Technical reserves (Note 4.m) (553.68) - - 2,418.82
Provision for pension
funds of other companies (33.09) 36.45 (19.40) 85.97
UMTS provision (4.47) - (95.10) 1,152.11
Other provisions (216.14) (3.37) 43.80 1,250.94
-------------------------------------------------------------------------------------------
Total (1,179.59) 33.08 (60.99) 7,574.21
-------------------------------------------------------------------------------------------
The main provisions and commitments to employees recorded under this
caption in the accompanying consolidated balance sheets are as follows.
Group life insurance (internal allowance for survivorship benefits)
Serving employees who did not join the pension plan continue to be entitled
to receive survivorship benefits at the age of 65. Telefonica de Espana has
recorded a provision to cover these commitments, based on the actuarial
calculations made under the following assumptions: GRM/F-95 mortality table
and an assumed interest rate of 4%. Most of these commitments were
externalized in 2002.
Provisions for preretirements, early retirements, social security costs and
voluntary severance of Telefonica de Espana employees
In order to adapt to the competitive environment, in prior years Telefonica
implemented preretirement, early retirement and technology renewal plans in
order to adapt its cost structure to the new environment and took certain
strategic decisions relating to its sizing and organization policy.
F-39
Telefonica
--------------------------------------------------------------------------------
The provisions under this caption as of December 31, 2004 and 2003, include
the commitments arising from the Special Agreement with the Social Security
System, amounting to (euro)377.98 million and (euro)537.25 million, and the
income commitments to employees who have taken voluntary severance,
amounting to (euro)337.62 million and (euro)388.91 million, respectively.
Also, on July 29, 2003, the Ministry of Labor and Social Affairs approved a
labor force reduction plan for Telefonica de Espana that envisages the
termination of up to 15,000 employment contracts in the period from 2003 to
2007, through voluntary, universal and non-discriminatory programs. The
approval of the labor force reduction plan was announced on July 30, 2003.
Within the framework regulated by the labor force reduction plan, in 2004
and 2003 the Company approved a total of 2,417 and 5,489 requests for
voluntary severance, for which provisions amounting to (euro)674.70 million
and (euro)1,372.29 million, respectively, were recorded with a charge to
the "Extraordinary Expenses and Losses" caption in the consolidated
statement of income, of a total recorded at consolidated level by the
various Group companies of (euro)908,03 million and (euro)1,593.41 million,
respectively (see Note 20). The outstanding balances as of December 31,
2004 and 2003, were (euro)1,869.69 million and (euro)1,334.45 million,
respectively.
Technical reserves
This caption includes the reserves recorded by the Group's insurance
companies. As indicated in various sections of these notes to consolidated
financial statements, in November 2002, pursuant to the legislation in
force, several of Telefonica de Espana's commitments to its employees were
externalized to the Group company Seguros de Vida y Pensiones Antares, S.A.
As of December 31, 2004 and 2003, the main items and amounts included under
the "Technical Reserves" caption were as follows:
---------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------
12/31/04 12/31/03
---------------------------------------------------------------------------------------------------
Supplementary pension payments for retired personnel (a) 515.77 547.98
Group life insurance (b) 135.58 125.43
Preretirements and early retirements (c) 1,552.09 1,966.01
Other technical reserves 215.38 211.03
---------------------------------------------------------------------------------------------------
Total 2,418.82 2,850.45
---------------------------------------------------------------------------------------------------
(a) On July 8, 1992, Telefonica de Espana reached an agreement with its
employees whereby it recognized supplementary pension payments for
employees who had retired as of June 30, 1992, equal to the difference
between the pension payable by the social security system and that
which would be paid to them by ITP (Institucion Telefonica de
Prevision). Once the aforementioned supplementary pension payments had
been quantified, they became fixed, lifelong and non-updateable. 60%
of the payments are transferable to the surviving spouse recognized as
such as of June 30, 1992, and to underage children. The resulting
underprovision on that date was recorded under the "Deferred Charges"
caption and is being charged to income from that date by the
straight-line method over 15 years, the estimated average remaining
life of the retired employees (1992-2007) (see Note 9)
(b) See section above on "Group Life Insurance".
F-40
Telefonica
--------------------------------------------------------------------------------
(c) Reserves relating to the insurance policies taken out to cover the
retirement and preretirement of employees who availed themselves of
the labor force reduction plans implemented by Telefonica de Espana in
the past and which were externalized.
The companies that still have these commitments calculated the amounts to
be provisioned at 2004 year-end using actuarial assumptions pursuant to
current legislation, including most notably the ERM/F-2000 mortality tables
and a floating interest rate of between 2.80% and 4% for the most
significant amounts, based on the related hire dates.
Provision for the pension funds of other companies
--------------------------------------------------
The subsidiary Telecomunicacoes de Sao Paulo, S.A. (Telesp) had various
pension plan, medical insurance and life insurance commitments to its
employees. In 2000, this company and other companies which were formerly
included in the Telebras telecommunications system in Brazil entered into
negotiations with their employees. The negotiations ended in October 2000
with the conversion of the former defined-benefit pension plan into a new
defined-contribution pension plan and the elimination of the life insurance
plan. Substantially all the serving employees of these companies availed
themselves of the new plan. As indicated in Note 13, in 2004, due mainly to
the significant decrease in the medical benefit commitments to the retired
employees of Telesp, the future payment obligations recorded at 2003
year-end in this connection were reduced significantly. Consequently, the
liability recorded as of December 31, 2004, for this item, which amounted
to (euro)12.3 million, relates to the accrued commitments to be covered
through future payments, net of the value of the assets covering them
((euro)22.58 million in 2003).
Also worthy of note in this connection as of December 31, 2004, are the
commitments acquired by Telefonica de Argentina and CTC Chile amounting to
(euro)10.10 million and (euro)22.00 million, respectively ((euro)17.52
million and (euro)22.64 million, respectively, in 2003).
The variations in the "Other" column in 2004 and 2003 relate mainly to
translation differences.
UMTS provisions
---------------
In relation to the value adjustments to UMTS licenses in 2002, this caption
includes most notably a provision of (euro)2,371.46 million recorded in
2002. The balance of this caption, net of the amounts used in 2002, 2003
and 2004, was (euro)1,237.11 million at 2003 year-end and (euro)1,152.12
million at 2004 year-end.
The transfers related to the reduction of the equity-method amount
corresponding to the investment in Ipse 2000, after the company had
recorded these effects in its net worth.
Other provisions
----------------
The balance of this caption as of December 31, 2004, includes various
provisions recorded by the Telefonica Group companies, including most
notably (euro)47.6 million at the Telefonica Internacional subgroup
relating to provisions for severance costs for the employees' years of
service at the respective companies, in accordance with the legislation
applicable in each country or with the contractual agreements entered into
((euro)65.00 million as of December 31, 2003), and (euro)150.61 million at
Telefonica de Espana relating to the accrued amount of long-service bonuses
paid to personnel after 25 years of service ((euro)158.12 million in 2003).
F-41
Telefonica
--------------------------------------------------------------------------------
Also, certain Group companies, mainly those in the Endemol Group, when
investing in other companies make payment of part of the pacted price,
conditional upon compliance by the acquired company with some related
future goal, in most cases increased revenues, the obtainment of income,
etc. Since a part of the acquisition price is therefore not fixed, each
year the necessary estimates are made, considering the variables which
might be pending ratification with the sellers, to evaluate the possible
liabilities inherent to these transactions and the related goodwill. As of
December 31, 2004, the amounts provisioned in this connection, (euro)319.22
million and (euro)15.60 million, were recorded under the long-term
"Provisions for Contingencies and Expenses" and "Short-Term Provisions for
Contingencies and Expenses" captions, respectively ((euro)282.45 million
and (euro)70.44 million, respectively, as of December 31, 2003).
As of December 31, 2004 and 2003 this caption included (euro)382.44 million
relating to the debit balance with the minority stockholder of Group 3G
UMTS Holding GmbH.
Lastly, the "Other Provisions" caption in 2004 and 2003 includes, inter
alia, the provisions recorded (or used) by the Group companies to cover the
risks inherent to the realization of certain assets, the contingencies
derived from their respective business activities and the risks arising
from commitments acquired in other transactions.
(15) DEBENTURES, BONDS AND OTHER MARKETABLE DEBT SECURITIES
The variations in the years ended December 31, 2004 and 2003, in the
balances relating to debentures, bonds and other marketable debt securities
were as follows:
------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------
Non-Convertible Non-Convertible Promissory Notes and Total
Euro Foreign Currency Commercial Paper
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/02 6,161.50 7,246.20 1,898.20 15,305.90
------------------------------------------------------------------------------------------------------------------------------
New issues 2,650.00 354.52 3,383.88 6,388.40
Redemptions, conversions and exchanges (277.77) (865.07) (3,772.39) (4,915.23)
Adjustments and other variations 68.46 (1,276.62) (234.30) (1,442.46)
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/03 8,602.19 5,459.03 1,275.39 15,336.61
------------------------------------------------------------------------------------------------------------------------------
New issues - 567.86 3,793.55 4,361.41
Redemptions, conversions and exchanges (1,318.78) (499.15) (3,077.76) (4,895.69)
Adjustments and other variations 96.77 (335.77) (0.26) (239.26)
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/04 7,380.18 5,191.97 1,990.92 14,563.07
------------------------------------------------------------------------------------------------------------------------------
Maturity:
Long term 5,124.62 4,096.58 98.27 9,319.47
Short term 2,255.56 1,095.39 1,892.65 5,243.60
Unmatured accrued interest 296.07 296.07
------------------------------------------------------------------------------------------------------------------------------
Debentures and bonds
The main issues in 2004 were as follows:
Issues of Telefonica de Argentina, S.A.:
F-42
Telefonica
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
-----------------------------------------------------------------------------------------------------------------------
Marketable debentures 05/05/04 163.26 ARP 05/06/05 8.05%
Marketable debentures 10/28/04 134.85 ARP 10/28/05 8.25%
Marketable debentures 10/28/04 65.15 ARP 05/02/06 Floating BADLAR+2.4% (*)
-----------------------------------------------------------------------------------------------------------------------
(*) Maximum rate of 15% and minimum rate of 7%
Issues of Telesp Celular Participacoes, S.A.:
-----------------------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
-----------------------------------------------------------------------------------------------------------------------
Marketable debentures 09/01/04 1500,00 BRL 09/01/07 103.5% CDI (*)
-----------------------------------------------------------------------------------------------------------------------
(*) Reference market interest rate in Brazil.
Issues of Telefonica de Peru, S.A.A. under the bond programs:
-----------------------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
-----------------------------------------------------------------------------------------------------------------------
3rd Bond Program T. Peru
(2nd-Series A) 04/20/04 30.00 New soles 04/20/07 5.3125%
3rd Bond Program T. Peru
(3rd) 06/30/04 30.00 New soles 12/30/07 8.1250%
-----------------------------------------------------------------------------------------------------------------------
The main issues in 2003 were as follows:
Under the EMTN program of Telefonica Europe, B.V.:
--------------------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
-------------------------------------------------------------------------------------------------------------------
EMTN Issue 02/03/03 100.00 Euros 02/03/05 Floating EONIA + 0.47%
EMTN Issue 02/14/03 1,500.00 Euros 02/14/13 5.125%
EMTN Issue 02/14/03 500.00 Euros 02/14/33 5.875%
EMTN Issue 10/06/03 100.00 Euros 10/17/05 Floating EONIA + 0.23%
EMTN Issue 10/27/03 100.00 Euros 10/27/05 Floating EURIBOR + 0.14%
EMTN Issue 11/05/03 50.00 Euros 05/05/05 Floating EONIA + 0.17%
EMTN Issue 11/27/03 100.00 Euros 11/27/06 Floating EURIBOR + 0.18%
EMTN Issue 12/11/03 200.00 Euros 12/11/06 Floating EURIBOR + 0.18%
-------------------------------------------------------------------------------------------------------------------
Issues of Telefonica de Argentina, S.A.:
-------------------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
-------------------------------------------------------------------------------------------------------------------
Marketable debentures 08/07/03 189.70 USD 11/01/07 11.875%
Marketable debentures 08/07/03 220.00 USD 11/07/10 9.125%
Marketable debentures 08/07/03 148.14 USD 08/01/11 8.85%
-------------------------------------------------------------------------------------------------------------------
These issues of Telefonica Argentina, S.A. relate to offers to exchange
marketable debentures which were restructured during 2003 and which
represented net additions of (euro)147.49 million.
F-43
Telefonica
--------------------------------------------------------------------------------
Issues of Telesp Celular Participacoes, S.A.:
----------------------------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
----------------------------------------------------------------------------------------------------------------------------
Marketable debentures 06/24/03 75 USD 12/22/04 6.75%
Marketable debentures 08/11/03 250 BRL 08/01/08 104.6% CDI
----------------------------------------------------------------------------------------------------------------------------
Issues of Telefonica de Peru, S.A.A. under the bond programs:
----------------------------------------------------------------------------------------------------------------------------
Face Value
Date (millions) Currency Maturity Interest Rate
----------------------------------------------------------------------------------------------------------------------------
2nd Bond Program T. Peru (8th) 03/14/03 75.00 New soles 03/14/05 6.5%
2nd Bond Program T. Peru (8th-Series B) 04/22/03 15.00 New soles 04/22/05 6.1875%
2nd Bond Program T. Peru (9th) 04/14/03 21.00 USD 01/14/05 2.4375%
3rd Bond Program T. Peru (1st) 11/24/03 50.00 New soles 11/24/10 VAC + 5% (a)
6th Bond Issue T. Peru 06/18/03 70.00 New soles 06/18/05 5.1875%
7th Bond Issue T. Peru 08/20/03 63.19 New soles 08/20/08 7.9375%
8th Bond Issue T. Peru 08/20/03 16.84 USD 02/20/09 3.8125%
9th Bond Issue T. Peru 07/07/03 20.00 USD 07/07/07 3.125%
----------------------------------------------------------------------------------------------------------------------------
(a) VAC: Inflation (adjustment factor).
The detail of the debentures and bonds is shown in Exhibit V.
Corporate promissory notes
The features of the main corporate promissory note issue program as of
December 31, 2004, were as follows:
--------------------------------------------------------------------------------------------------------------------
Millions of Euros Euros
----------------------------- ----------
Limit
Outstanding Addressed to Face Value Method of Sale
--------------------------------------------------------------------------------------------------------------------
2,000 Participating entities 1,000 Monthly auctions
-----------------------------------------------
100,000 Specific transactions
--------------------------------------------------------------------------------------------------------------------
The average interest rate on the outstanding position as of December 31,
2004, was 2.24%.
Commercial paper
The features of Telefonica Europe, BV's commercial paper issue program are
as follows:
--------------------------------------------------------------------------------------------------------------------
Millions of Euros Euros
-------------------------- -----------------
Limit
Outstanding Addressed to: Face Value Method of Sale
--------------------------------------------------------------------------------------------------------------------
2,000 Investors US$ 500,000 Specific transactions
-----------------------------------------------------
(euro)500,000 Specific transactions
-----------------------------------------------------
(yen)100,000,000 Specific transactions
-----------------------------------------------------
(pound)100,000 Specific transactions
--------------------------------------------------------------------------------------------------------------------
The average interest rate on the outstanding position as of December 31,
2004, was 2.24%.
F-44
Telefonica
--------------------------------------------------------------------------------
Also, as of December 31, 2004, Telefonica del Peru, S.A.A. had a commercial
paper issue program with a maximum outstanding limit of US$ 180 million or
its equivalent in local currency. As of that date US$ 151.8 million had not
been used, and the remaining US$ 28.2 million, or its equivalent in local
currency, had been drawn down through specific transactions at an interest
rate as of December 31, 2004, of 4.55%.
Telesp has a local bond program, with a maximum limit outstanding of 3,000
million reais, which provided for the issue, up to this amount, of
commercial paper and local bonds, at any maturity date, with interest in
reais at fixed rates, floating rates (CDI) or tied to other indices, for
example inflation (GPI - M or CPI - A). A first tranche of 1,500 million
reais had been used at the end of 2004 and 1,500 million reais are still
available for use.
(16) PAYABLE TO CREDIT INSTITUTIONs
The detail of the accounts payable to credit institutions is as follows:
-----------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------------------------
Balance at 12/31/04 Balance at 12/31/03
-----------------------------------------------------------------------------------------------
Short Long Short Long
Term Term Total Term Term Total
-----------------------------------------------------------------------------------------------------------------------------
Corporate promissory notes 4.70 - 4.70 6.92 99.65 106.57
Loans and credits 2,629.13 2,756.36 5,385.49 988.76 2,815.97 3,804.73
Foreign currency loans 1,535.97 2,694.01 4,229.98 1,663.52 2,016.94 3,680.46
-----------------------------------------------------------------------------------------------------------------------------
Total 4,169.80 5,450.37 9,620.17 2,659.20 4,932.56 7,591.76
-----------------------------------------------------------------------------------------------------------------------------
As of December 31, 2004, the average interest rates on the corporate
promissory notes, loans and credits and foreign currency loans were 13.52%,
3.05% and 3.89%, respectively. These percentages do not include the effect
of the hedging arranged by the Group.
The most significant financial transactions in 2004 and 2003 were as
follows:
------------------------------------------------------------------------------------------------------------------
Amount
(Millions) Currency Date Maturity
------------------------------------------------------------------------------------------------------------------
ABN Amro Bank N.V. 377.08 USD 11/26/04 11/15/10
Drawdown against Citibank syndicated loan 500.00 Euro 07/06/04 07/06/09
Drawdown against Citibank syndicated loan 760.00 USD 07/06/04 07/06/09
Santander Overseas Bank 273.93 USD 10/28/04 10/28/05
JBIC (Telesp) loan 29,762.50 Yen 01/23/03 07/23/09
------------------------------------------------------------------------------------------------------------------
On July 6, 2004, Telefonica arranged a syndicated loan of (euro)3,000
million with several Spanish and foreign banks. This syndicated loan
matures in five years (July 6, 2009) and bears interest of EURIBOR/LIBOR
plus a spread that will be based on the Company's credit rating. The
commitments and obligations of the parties are those ordinarily assumed in
syndicated financing transactions. Banco Bilbao Vizcaya Argentaria, S.A.
and Caja de Ahorros y Pensiones de Barcelona ("La Caixa") acted, together
with other institutions, as underwriters and lead managers.
F-45
Telefonica
--------------------------------------------------------------------------------
On November 26, 2004, Telefonica, S.A. and several branches of ABN Amro
Bank N.V. entered into a credit facility agreement amounting to US$ 377.08
million, secured by the export credit agencies of Finland ("Finnvera") and
Sweden ("EKN"), bearing fixed interest of 3.26% and with final maturity on
November 15, 2010. This financing will cover up to 85% of the purchases of
network equipment to be made by Telefonica Moviles Group companies from
Ericsson and Nokia.
Santander Overseas Bank granted financing for US$273.93 million to
Telefonica Moviles's subsidiary in Colombia to refinance this company's
debt at a floating interest rate tied to three-month Libor plus a spread of
0.125%. This financing was secured by Telefonica, S.A.
In December 2004, CTC Chile renegotiated a US$ 200 million syndicated loan
from several international banks which matured in February and August 2005.
The company extended the maturity date to December 21, 2009, and reduced
the applicable interest rate from Libor plus a spread of 112.5 basis points
to Libor plus a spread of 40 basis points, thus adapting it to current
market conditions.
On April 9, 2003, Compania de Telecomunicaciones de Chile (CTC) completed
the renegotiation of the US$ 225 million syndicated loan granted on
February 7, 1996, of which US$ 168 million were outstanding at 2003
year-end. The renegotiation will mainly enable the maturity to be extended
to April 2008. The repayments will be made in three installments: US$ 60
million on April 9, 2006, US$ 75 million on April 9, 2007 and US$ 33
million on April 9, 2008, and the interest rate will be Libor plus a spread
based on the current risk classification.
The main repayments made in 2004 and 2003 were as follows:
-----------------------------------------------------------------------------------------------------------
Amount (Millions) Currency Date
-----------------------------------------------------------------------------------------------------------
Early repayment of BSCH syndicated loan (Tranche A) 120.00 Euro 01/30/04
Repayment of BSCH syndicated loan (Tranche A) 254.25 Euro 02/19/04
Early repayment of BSCH syndicated loan (Tranche B)(1) 1,500.00 Euro 02/27/03
BBK loan 100.00 Euro 10/28/03
Alcatel loan(2) 166.78 USD 12/15/03
Qualcomm loan(2) 363.19 USD Several
BSCH loan 200.00 Euro 12/30/03
-----------------------------------------------------------------------------------------------------------
(1) (euro)1,145 million were repaid on that date by Telefonica S.A. and
the remaining (euro)355 million were repaid by Telefonica Europe B.V.
(2) These are the main repayments of accounts payable to the suppliers of
Telefonica Moviles Mejico. The amount of the Qualcomm loan is the
overall figure for the year, which is broken down into three payments,
the largest of which amounted to the US$ 281.27 million and was repaid
on June 13, 2003.
In 2003 Telefonica, S.A. made two early repayments of the syndicated loan,
totaling (euro)1,200 million, that was arranged in 1999 with several
financial institutions: the first, amounting to (euro)70 million, was made
on October 30 and the second, amounting to (euro)200 million, was made on
December 30. Both repayments were made to Banco Santander Central Hispano
(BSCH). In 2004 the two repayments detailed in the foregoing table were
made, both to BSCH.
F-46
Telefonica
--------------------------------------------------------------------------------
In 2003 Compania de Telecomunicaciones de Chile (CTC) made an early
repayment of the syndicated loan, amounting to US$ 120 million, that was
arranged on April 17, 2001, with JP Morgan Chase. The repayment was made in
two installments: the first on April 23, amounting to US$ 90 million, and
the second on June 27, amounting to US$ 30 million.
The claimability of certain financing arranged by various Telefonica Group
companies is subject to compliance with certain financial covenants. All
the covenants were being complied with at the date of preparation of these
consolidated financial statements.
The scheduled maturities for repayment of the debt as of December 31, 2004,
were as follows:
--------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Subsequent Years Total
--------------------------------------------------------------------------------------------------------------------------------
Corporate promissory notes 4.70 - - - - - 4.70
Loans and credits 2,629.13 756.49 245.51 134.90 528.35 1,091.11 5,385.49
Foreign currency loans 1,535.97 474.30 315.13 749.42 811.04 344.12 4,229.98
--------------------------------------------------------------------------------------------------------------------------------
Total 4,169.80 1,230.79 560.64 884.32 1,339.39 1,435.23 9.620.17
--------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2004, the Telefonica Group had financing sources of
various types exceeding (euro)7,500 million and the possibility of
negotiating the maturity dates of various of the existing financing
commitments and, accordingly, any need of the Group arising from its
short-term commitments is adequately covered.
Foreign currency loans
The detail of the foreign currency loans as of December 31, 2004 and 2003,
is as follows:
--------------------------------------------------------------------------------
Outstanding Balance (in Millions)
-----------------------------------------------------------
Foreign Currency Euros
-----------------------------------------------------------
Currency 12/31/04 12/31/03 12/31/04 12/31/03
--------------------------------------------------------------------------------
US dollars 4,540 3,711 3,305.50 2,806.09
Brazilian reais 877 1,061 242.52 290.86
Argentine pesos 191 52 47.06 14.21
Colombian pesos 90,172 - 27.77 -
Yen 45,488 47,083 351.55 348.63
Chilean pesos 125,363 84,266 165.48 112.36
New soles 363 219 81.21 50.19
Pounds sterling - 20 0.06 29.46
Mexican pesos 109 269 7.13 18.96
Other currencies 1.70 9.70
--------------------------------------------------------------------------------
Total for the Group 4,229.98 3,680.46
--------------------------------------------------------------------------------
(17) DERIVATIVES
In 2004 the Group continued to use derivatives both to limit interest rate
and exchange risks on unhedged positions and to adapt its debt structure to
market conditions.
As of December 31, 2004, the total outstanding balance of derivatives
transactions was (euro)38,659.70 million ((euro)30,915.29 million as of
December 31, 2003), of which (euro)24,428.19 million related to interest
rate risk and (euro)13,996.04 million to exchange risk ((euro)13,342.11
million and (euro)16,535.60 million as of December 31, 2003, respectively)
(see Exhibit VI).
F-47
Telefonica
--------------------------------------------------------------------------------
Most of the derivatives transactions are assigned directly to individual
asset or liability positions in the consolidated balance sheet. Also, there
is a transaction portfolio hedging other financial risks of the Group. The
net financial gain obtained in 2004 in relation to these latter
transactions amounted to (euro)70.00 million (net revenue of (euro)322.18
million in 2003).
(18) TAX MATTERS
Pursuant to a Ministerial Order dated December 27, 1989, since 1990
Telefonica, S.A. has filed consolidated tax returns with certain Group
companies. 54 companies formed the consolidated tax Group in 2004.
Deferred tax assets and liabilities
The detail as of December 31, 2004 and 2003, of the Telefonica Group's
deferred tax assets and liabilities, and of the variations therein in 2004
and 2003, is as follows:
---------------------------------------------------------------------------------------------------------------------------
Millions of euros
-------------------------------------------------------------------------------
Deferred and Other Tax Assets Deferred Tax Liabilities
-------------------------------------------------------------------------------
Short Long Short Long Intercompany
Term Term Term Term Long Term
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 310.10 9,336.43 131.56 1,584.07 45.39
-------------------------------------------------------------------------------
Reversal (209.54) (1,118.82) (11.02) (484.32) (6.08)
Arising in the year 356.33 608.55 11.58 87.70 2.84
Net international variations 26.10 (30.74) - (496.85) -
Inclusion/Exclusion of companies and other 35.52 29.68 30.55 (21.11) 6.33
-------------------------------------------------------------------------------
Balance at December 31, 2003 518.51 8,825.10 162.67 669.49 48.48
Reversal (333.29) (1,394.04) (52.27) (71.26) (4.42)
Arising in the year 241.97 748.56 18.38 119.64 18.64
Net international variations 29.83 0.24 - 7.81 -
Inclusion/Exclusion of companies and other (9.72) 41.44 (0.26) (10.95) 6.40
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 447.30 8,221.30 128.52 714.73 69.10
---------------------------------------------------------------------------------------------------------------------------
The balance of the "Long-Term Investments - Tax Receivables" caption, which
amounts to (euro)8,567.17 million (see Note 8), includes, in addition to
the deferred and other tax assets shown in the foregoing table, an amount
of (euro)345.87 million ((euro)204.38 million as of December 31, 2003)
relating to tax credits recorded as indicated below.
The "Long-Term Debt - Taxes Payable" caption amounting to (euro)855.82
million includes the deferred tax liabilities shown in the foregoing table,
together with (euro)71.99 million relating to long-term obligations to
public authorities.
The deferred intercompany taxes relate to the differences arising from the
elimination of unrealized gains on intercompany transactions, plus the
cumulative differences between the net tax payable reported in the
Telefonica Group's consolidated corporate income tax return and the sum of
the net tax charges per the individual corporate income tax returns of the
Telefonica Group companies.
F-48
Telefonica
--------------------------------------------------------------------------------
Taxes payable and tax receivables
The detail of the "Other Nontrade Payables - Taxes Payable" and "Accounts
Receivable - Tax Receivables" captions as of December 31, 2004 and 2003, is
as follows:
--------------------------------------------------------------------
Millions of Euros
---------------------------------
Balance at Balance at
12/31/04 12/31/03
--------------------------------------------------------------------
Taxes payable:
Tax withholdings 115.54 101.95
Indirect taxes payable 828.18 485.37
Corporate income tax 398.15 109.43
Accrued social security taxes 172.95 172.13
Deferred tax liabilities 128.51 162.67
Other 216.07 149.54
--------------------------------------------------------------------
Total 1,859.40 1,181.09
--------------------------------------------------------------------
--------------------------------------------------------------------------------
Millions of euros
-------------------------
Balance at Balance at
12/31/04 12/31/03
--------------------------------------------------------------------------------
Tax receivables:
Tax withholdings and installment payments 224.35 198.40
Income tax refunds receivable 97.96 10.48
Taxes, surcharges and other payments recoverable 2.68 15.63
Deferred tax assets and other short-term tax credits 447.30 518.51
Indirect taxes refundable 644.47 370.01
Other 7.47 9.81
--------------------------------------------------------------------------------
Total 1,424.23 1,122.84
--------------------------------------------------------------------------------
Reconciliation of the income per books to the taxable income for corporate
income tax purposes and determination of the tax expense
The reconciliation of the income per books to the taxable income for
corporate income tax purposes as of December 31, 2004 and 2003, and the
determination of the corporate income tax expense and the net tax payable
for the two years are as follows.
F-49
Telefonica
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Millions of Euros
------------------------
2004 2003
--------------------------------------------------------------------------------
Income per books 4,397.01 3,362.50
Permanent differences (722.36) (422.15)
Timing differences 400.52 (634.03)
Offset of tax losses (338.65) (358.74)
--------------------------------------------------------------------------------
Taxable income 3,736.52 1,947.58
--------------------------------------------------------------------------------
Gross tax payable 1,209.74 465.68
Tax credits and tax relief (76.09) (457.29)
Unrecorded prior years' tax assets 15.91 222.62
--------------------------------------------------------------------------------
Corporate income tax payable (receivable) 1,149.56 231.01
--------------------------------------------------------------------------------
Tax effect of timing differences and deferred revenues (29.67) 112.20
Other items 18.82 570.22
--------------------------------------------------------------------------------
Accrued corporate income tax 1,138.71 913.43
--------------------------------------------------------------------------------
The permanent differences arose mainly as a result of the amortization of
consolidation goodwill (see Note 5) and the results assignable to
associated companies, and of events that gave rise to tax bases that are
not included in the consolidated statement of income, such as translation
differences, etc.
The main timing differences arose as a result of the investment valuation
provisions recorded by individual companies for the amounts yet to be
allocated to income in connection with their equity investments, and of the
effect of retirement and early retirement plans, which are tax deductible
based on the payment schedule rather than when the related provisions are
recorded.
The Telefonica tax Group has (euro)519.81 million ((euro)449.27 million in
2003) of unused tax credits relating to 1999 through 2004. This amount
includes (euro)345.87 million recorded under the "Long-Term Investments -
Tax Receivables" caption relating to tax credits recognized for accounting
purposes in accordance with an ICAC resolution dated March 15, 2002 (see
Note 4-p), mainly in connection with reinvestment of extraordinary income
and research and development expenses ((euro)161.22 million as of December
31, 2004). The tax credits not recognized in the consolidated balance sheet
relate mainly to those arising from export activities.
The tax losses available for carryforward in Spain at the main Group
companies total (euro)18,140.23 million, of which (euro)15,848.57 million,
(euro)1,128.38 million and (euro)633.42 million were incurred in 2002, 2001
and 2000, respectively, and can be offset within 15 years. (euro)12,780.97
million of these tax losses were capitalized, giving rise to a tax asset of
(euro)4,473.34 million, which was recorded under the "Long-Term Investments
- Tax Receivables" caption and includes the projected offset of tax losses
against the taxable income generated in 2004 which is detaled in the table
above.
In the 2002 corporate income tax return a negative adjustment of
(euro)2,137.24 million was made in relation to Telefonica Moviles, S.A. as
a result of the transfer of certain holdings acquired in prior years whose
market value differed from the book value at which they were recorded
(underlying book value) because Telefonica Moviles, S.A. applied the
provisions of Article 159 of the Corporations Law. No accounting effect for
this adjustment was recorded, since the stance adopted by the authorities
differs from that of the company. Also, as of December 31, 2004, the Terra
Networks Group had unrecognized tax losses amounting to (euro)2,911.54
million.
F-50
Telefonica
--------------------------------------------------------------------------------
The Telefonica Group companies not domiciled in Spain reported tax assets
of (euro)156.81 million relating to tax losses recorded for accounting
purposes. They also had (euro)1,172.16 million of tax credits relating to
tax losses which were not recorded in the consolidated balance sheet.
In connection with the sale of the holding in Lycos Inc. (see Note 2-c),
Terra Networks, S.A. recognized a tax asset amounting to (euro)272 million
in 2004 which was included in the total tax asset of (euro)306 million
recognized in 2004. This tax asset arose from the difference between the
sale price of Lycos Inc. shares for (euro)89 million and the value at which
the capital increase for the acquisition of this company was recorded, net
of the adjustments (mainly provisions to the investment valuation
allowance) which had already been tax deductible prior to the sale.
Additionally, the company is considering the possibility of reporting a
higher tax loss for 2004, for an amount of up to (euro)7,418 million, as a
result of using as the acquisition value for tax purposes that which would
result from taking the market value of the Lycos Inc. shares received,
rather than the book value at which they were recorded, in conformity with
Article 159 of the Spanish Corporations Law. However, in view of the
opposite stance upheld by the tax authorities in their replies to the
requests for tax rulings on similar cases and of the uncertainties
prevailing about the final decision that may be adopted, no effect for
accounting purposes was recognized in this connection in the consolidated
financial statements.
On September 25, 2002, tax audits commenced at several of the companies
included in tax Group 24/90 of which Telefonica, S.A. is the parent
company. The taxes subject to review are corporate income tax (for the
years from 1998 to 2000) and VAT and tax withholdings and prepayments
relating to personal income tax, tax on income from movable capital,
property tax and nonresident income tax (1998 to 2001). Although the tax
audits have not yet been completed, the final outcome of the tax
assessments signed under protest for approximately (euro)135 million is not
expected to disclose the need to record significant liabilities in the
consolidated financial statements of the Telefonica Group.
The years open for review by the tax inspection authorities for the main
applicable taxes vary from one consolidated company to another, based on
each country's tax legislation, taking into account their respective
statute-of-limitations periods. In Spain, as a result of the tax audit
currently in progress, the tax Group has the following years open for
review: the years since 2002 for tax withholdings and prepayments relating
to personal income tax, tax on income from movable capital, property tax,
nonresident income tax and VAT; and the years since 2001 for corporate
income tax (since 2001 and 2000, respectively, for the other Spanish
companies).
In the other countries in which the Telefonica Group has a significant
presence, the years open for review by the relevant authorities are
generally as follows:
- The last five years in Argentina, Brazil, Mexico, Colombia, Uruguay
and the Netherlands.
- The last four years in Peru, Guatemala and Venezuela.
- The last three years in Chile, El Salvador and the U.S.
The tax audit of the open years is not expected to give rise to additional
material liabilities for the Group.
F-51
Telefonica
--------------------------------------------------------------------------------
(19) CURRENT LIABILITIES - OTHER NONTRADE PAYABLES
The detail of the balances of the "Current Liabilities - Other Nontrade
Payables" caption in the consolidated balance sheets as of December 31, 2004 and
2003, is as follows:
--------------------------------------------------------------------------------
Millions of Euros
--------------------------------
Balance at Balance at
12/31/04 12/31/03
--------------------------------------------------------------------------------
Group company dividends payable 141.63 137.54
Short-term payables to fixed asset suppliers 390.48 66.80
Guarantees and deposits 45.66 66.78
Compensation payable 443.13 330.70
Other nonfinancial nontrade payables 434.25 334.11
--------------------------------------------------------------------------------
Total 1,455.15 935.93
--------------------------------------------------------------------------------
(20) REVENUES AND EXPENSES
Sales and services
The detail, by business line, of net sales and services is as follows:
-------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------
12/31/04 12/31/03 12/31/02
-------------------------------------------------------------------------------------------------------
Wireline telephony business in Spain 10,955.77 10,695.42 10,640.14
Moviles business 12,054.14 10,428.28 9,449.34
Wireline telephony business in Latin America 6,883.44 6,744.93 7,366.24
Telefonica Contenidos business 1,219.13 1,378.48 1,076.16
Directorios business 628.13 589.30 550.46
Terra Networks business 539.16 545.09 599.95
Atento business 611.73 492.96 571.09
Instrumentality companies and other 803.66 788.82 1,006.92
-------------------------------------------------------------------------------------------------------
Group revenues before the elimination of
intercompany sales 33,695.16 31,663.28 31,260.30
-------------------------------------------------------------------------------------------------------
Intercompany sales (3,373.26) (3,263.44) (2,849.00)
-------------------------------------------------------------------------------------------------------
Total revenues from Group operations 30,321.90 28,399.84 28,411.30
-------------------------------------------------------------------------------------------------------
Personnel expenses
The detail of the personnel expenses is as follows:
-----------------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------------
12/31/04 12/31/03 12/31/02
-----------------------------------------------------------------------------------------------------------
Compensation 3,203.37 3,368.59 3,561.57
Provisions to the pension allowance and other
commitments to employees 106.23 115.45 121.26
Accrual for the cost of the loyalty-building programs
tied to share market price 1.20 14.63 16.97
Employee welfare expenses and other 1,101.01 1,142.65 1,093.97
-----------------------------------------------------------------------------------------------------------
Total 4,411.81 4,641.32 4,793.77
-----------------------------------------------------------------------------------------------------------
F-52
Telefonica
--------------------------------------------------------------------------------
Inclusion in the general social security system
-----------------------------------------------
Since January 1, 1992, Telefonica de Espana and its employees, who were
formerly covered by a company employee welfare system, have been
contributing to the general social security system. As a result of the
inclusion of serving employees in the social security system, Telefonica de
Espana must make additional contributions to the social security system
until the year 2016, based on the serving employees' effective contribution
bases applicable at any time in that period. These contributions consist of
the payment of 2.2% of the base salary, and the related amount is recorded
under the "Personnel Expenses - Employee Welfare Expenses and Other"
caption. (euro)24.17 million were recorded in this connection in 2004
((euro)27.16 million in 2003).
Supplementary pension plan for employees
----------------------------------------
Various Telefonica Group companies have arranged a defined-contribution
pension plan pursuant to Legislative Royal Decree 1/2002 approving the
revised Pension Plans and Funds Law. Under this plan, contributions of
between 6.87% and 4.50% of the participating employees' regulatory base
salary (based on each employee's respective hire date and the company in
question) are made to the plan. The obligatory contribution of the
participant is generally a minimum of 2.2% of the employee's regulatory
base salary. The system used is an individual and financial capitalization
system.
As of December 31, 2004, 42,446 Group employees were covered by the pension
plans managed by the subsidiary Fonditel Entidad Gestora de Fondos de
Pensiones, S.A. The contributions made by the various companies in 2004
amounted to (euro)93.55 million ((euro)105.72 million in 2003).
Number of employees
-------------------
Following is a detail of the Telefonica Group's average number of employees
in 2004 and 2003, together with the headcount as of December 31 of those
years. The employees shown for each subgroup include the Telefonica Group
companies with similar activities in order to present the employees by
business.
--------------------------------------------------------------------------------
12/31/04 12/31/03
-----------------------------------------------
Average Year-end Average Year-end
--------------------------------------------------------------------------------
Telefonica, S.A. 668 622 791 767
Telefonica de Espana Group 37,281 36,425 42,537 38,464
Telefonica Moviles Group 14,071 19,797 13,240 13,093
Telefonica Internacional Group 25,951 25,905 27,079 25,762
Directorios Group 2,898 2,876 2,778 2,787
Telefonica de Contenidos Group 5,520 5,860 6,487 4,638
Atento Group 62,429 74,829 48,171 54,394
Terra Networks Group 1,997 1,584 2,273 2,229
Other 6,004 5,656 6,108 6,154
--------------------------------------------------------------------------------
Total 156,819 173,554 149,465 148,288
--------------------------------------------------------------------------------
The figures in the foregoing table relate to the consolidated companies.
F-53
Telefonica
--------------------------------------------------------------------------------
Also, the Group company Telefonica de Espana has filed various appeals for
judicial review against the Government in connection with the monetary
claim relating to healthcare services provided in the years from 1999 to
2003 (inclusive). The company has recorded an account receivable of
(euro)90.47 million in this connection. Also, proceedings have been
instigated by or against the regulator, some of which are being conducted
in the administrative jurisdiction and others before the courts.
Compensation systems tied to share market price
At 2004 year-end Telefonica only had one compensation system tied to the
market price of its shares: the TIES Program is aimed at all the serving
personnel of Telefonica and of most of its Spanish and foreign
subsidiaries.
The other compensation system tied to the market price of Telefonica shares
ended in September 2003. The so-called TOP Plan was aimed exclusively at
executive personnel of Telefonica, S.A. and of several Group companies
including the executive directors of Telefonica, S.A. This Plan was
implemented by Telefonica on June 28, 1999, and was approved by the
Company's Stockholders' Meeting on April 7, 2000.
In view of the fact that when the aforementioned TOP Plan expired after the
last opportunity for beneficiaries (participants) to exercise the
Telefonica, S.A. stock options held by them the exercise prices were
substantially higher than the market price of the shares at that time, the
option-holders did not exercise the options which, accordingly, expired.
The subsidiaries Telefonica Moviles S.A. and Terra Networks, S.A. have also
established their own compensation systems tied to the market price of
their respective shares.
In November 2003 the stock option plan of the subsidiary Telefonica
Publicidad e Informacion, S.A. (TPI) expired. This plan, which was aimed at
the company's executives (including the Executive Director) and employees,
was implemented in 1999 and was approved by the aforementioned company's
Stockholders' Meeting on April 17, 2000. In view of the fact that when the
aforementioned plan expired with the last opportunity for the beneficiaries
to exercise the TPI stock options held by them the exercise prices were
higher than the market price of the shares at that time, the option-holders
did not exercise the options which, accordingly, expired.
In October 2003 TPI extended to 2008 year-end the irrevocable call option
right on 7,212,147 TPI shares that the company had arranged with Caja de
Ahorros y Pensiones de Barcelona (La Caixa).
On June 28, 2004, the Board of Directors of TPI, following the issuance of
a favorable report by the Appointments and Compensation and Best Practice
Corporate Governance Committee, resolved to notify La Caixa of its
intention to exercise the call option right on all the above-mentioned
shares (7,212,147 shares), and to treat the shares so acquired under the
system applicable to treasury stock; i.e. the shares shall be either (i)
specifically assigned to the implementation of a new Stock Option Plan, if
any, which shall be approved by the next Stockholders' Meeting of the
Company, or, (ii) in the absence of this plan, retired at the time of the
aforementioned Meeting. These shares were acquired on July 9, 2004.
Lastly, there is a program of options on Telefonica, S.A. shares targeted
at the employees of Endemol (the EN-SOP Program).
Following is a detailed account of the main features of each of the
aforementioned compensation systems currently in force:
F-54
Telefonica
--------------------------------------------------------------------------------
a) Telefonica, S.A. stock option plan targeted at all the employees of
certain Telefonica Group companies ("TIES Program")
On February 23, 2000, the Board of Directors of Telefonica, S.A.
approved the establishment of a new compensation system tied to the
market price of the Company's shares, with the grant of options on
Company shares, known as the TIES Program. This Program is aimed at
all the employees of Telefonica, S.A. and its Spanish and foreign
subsidiaries who meet the requirements established in the rules
governing the Program and who are not participating in any other
similar employee stock or stock option plan.
In order to achieve the purposes of the Program, on April 7, 2000, the
Stockholders' Meeting of Telefonica, S.A. approved two capital
increases with disapplication of preemptive subscription rights, for a
par value of (euro)1,197,880 and (euro)31,504,244, respectively,
through the issuance of 1,197,880 and 31,504,244 new common shares,
respectively, of (euro)1 par value each, with additional paid-in
capital of 400% of the par value.
Telefonica, S.A. duly registered separate prospectuses for the
aforementioned capital increases, which were verified by the CNMV on
November 16, 2000, and February 16, 2001, respectively. It was clearly
explained therein which options could be exercised in each tranche,
and the procedures for exercising and settling these options.
The main features of the TIES Program are as follows:
1. Number of shares offered for initial acquisition by the
beneficiaries: 1,197,880.
2. Issue price: (euro)5.
3. Maximum number of shares under option assigned to
beneficiaries: 31,504,244. This figure, which is the maximum
amount necessary to cover the total rights carried by the
shares initially assigned, also includes a reserve for new
beneficiaries of the Program equal to 4.5% of the initial
beneficiaries.
4. Method of assignment of shares under option: depends on the
appreciation of Telefonica, S.A. shares with respect to an
initial reference value to be set by the Board of Directors
and on the number of shares of Telefonica, S.A. initially
acquired. The initial reference value was set at (euro)20.5
per share.
5. Exercise price: (euro)5.
At its meeting on June 28, 2000, the Board of Directors of Telefonica,
S.A. resolved to commence implementation of the TIES Program (the
features and general terms of which had been established on February
23, 2000, by the Board of Directors' meeting that approved the
creation of the Program), and established the requirements to be met
by the employees of the subsidiaries of Telefonica, S.A. in order to
become beneficiaries of the TIES Program.
Subsequently, on November 29, 2000, the Board of Directors of
Telefonica, S.A. adapted to the date on which the Program was
ultimately launched the conditions and requirements to be met by the
employees of the companies participating in the Program in order to
become beneficiaries of the Program and the reference value initially
set.
On February 14, 2001, the notarial deed of formalization and execution
of the first capital increase at Telefonica indicated above was
executed. The par value of the capital was increased by
(euro)1,123,072, through the issuance of an equal number of common
shares with
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additional paid-in capital of (euro)4 per share. The new shares were
fully subscribed and paid, through a monetary contribution, by the
beneficiaries of the TIES Program.
On February 20, 2001, the notarial deed of formalization and execution
of the second capital increase to cater for the TIES Program was
executed. The par value of the capital was increased by
(euro)31,504,244, through the issuance of an equal number of common
shares with additional paid-in capital of (euro)4 per share. The new
shares were fully subscribed and paid, through a monetary
contribution, by BBVA (50%) and La Caixa (50%).
On December 31, 2004, 72,298 persons were participating in the TIES
program, holding a total of 29,792,427 purchase options on Telefonica,
S.A. shares.
February 15, 2005 was the third and the last Exercise Date under the
Program but there were no exercisable options at that date since the
initial reference value was higher than the market value of the
Company shares. Consequently, all the unexercised options expired and
were cancelled for all purposes and the TIES Program was thus
terminated and the shares which were acquired in the past as the
initial assignment to participate in the Program ceased to be covered
by it.
Lastly, in February 2005, in accordance with a report issued by the
Board of Directors on the resolutions adopted by the Stockholders'
Meeting on April 7, 2000, in connection with item IX on the agenda
(relating to the establishment of the TIES Program), Telefonica, S.A.
acquired 34,760,964 shares classified as treasury stock. A proposal
will foreseeably be submitted for approval by the next Stockholders'
Meeting of the Company to reduce capital with the consequent
retirement of these shares.
b) Telefonica Moviles, S.A. stock option plan ("MOS Program")
On October 26, 2000, the Special Stockholders' Meeting of Telefonica
Moviles, S.A. authorized the establishment of a corporate stock option
plan for the executives and employees of Telefonica Moviles, S.A. and
its subsidiaries and, in order to facilitate coverage of the Company's
obligations to the beneficiaries of the plan, resolved to increase the
capital stock of Telefonica Moviles, S.A. by (euro)11,400,000 through
the issuance of 22,800,000 shares of (euro)0.50 par value each.
Subsequently, on June 1, 2001, the Stockholders' Meeting of Telefonica
Moviles, S.A. introduced certain modifications and clarifications of
the stock option plan with a view to making it more attractive and a
more efficient mechanism for the motivation and loyalty-building of
its beneficiaries.
Lastly, on September 21, 2001, the Board of Directors of Telefonica
Moviles S.A. resolved to develop and establish, in conformity with the
aforementioned resolutions of the Stockholders' Meetings on October
26, 2000 and June 1, 2001, the terms and conditions of the stock
option plan. The main features of this plan are as follows:
1. The plan is open to all the executive directors, executives
(including general managers or similar) and employees who on
December 1, 2001, were working for companies in which Telefonica
Moviles, S.A. directly or indirectly, during the term of the plan
(i) has a holding with voting rights of over 50%, or (ii) has the
right to appoint over 50% of the members of the Board of
Directors.
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Without prejudice to the above, the MOS Program envisaged the
possibility of awarding new options at dates subsequent to its
initial implementation. In order to carry this out, following the
issuance of a report by the Appointments and Compensation
Committee, the Board of Directors resolved to assign options to
both the employees of the new companies which, when joining the
Telefonica Moviles Group, met the aforementioned requirements and
the employees hired by companies already participating in the MOS
Program. Similarly, the Board resolved that employees could join
the plan until December 31, 2003. Consequently, new beneficiaries
joined the plan in 2002 and 2003. In 2003 certain companies were
excluded from the MOS Program because they ceased to comply with
the requirements to remain in it.
2. There are three types of option:
o Type-A options, with an exercise price of (euro)11.
o Type-B options, with an exercise price of (euro)16.5.
o Type-C options, with an exercise price of (euro)7.235.
Each beneficiary of the Program will receive an equal number of
type-A and type-B options and a number of type-C options equal to
the sum of the type-A and type-B options received.
3. The executive directors and executives who are beneficiaries of
the MOS Program must place a deposit on one share of Telefonica
Moviles, S.A. for every 20 options assigned to them.
4. Each option, regardless of type, will entitle its holder to
receive one share of Telefonica Moviles, S.A.
5. The options may be exercised at a rate of one-third each year
from the day after the day on which two, three and four years
have elapsed from the option grant date (January 2, 2002). The
first exercise period commenced on January 2, 2004. The second
period commenced on January 3, 2005.
6. At the exercise date, the options may be settled, at the
beneficiary's request, either (i) through delivery of shares of
Telefonica Moviles, S.A., once the beneficiary has paid the
option exercise price, or (ii) cashless for cash.
The first phase of the Program commenced on January 2, 2002. The
second phase of the plan, which included the companies and new
employees who fulfilled the requirements envisaged in the plan,
commenced on June 1, 2002, and finished on December 31, 2003. The
total number of beneficiaries of the MOS Program was 7,575 as of
December 31, 2004. Of these beneficiaries, one is an executive
director of Telefonica Moviles, S.A. and ten are general managers or
similar executives. 11,137,144 options had been assigned as of
December 31, 2004.
In 2004, in the second exercise period, 778 employees exercised a
total of 79,823 options. Of these employees, two beneficiaries opted
for the cashless system and the remainder for the cashless for cash
system. The amount received by these beneficiaries upon the exercise
of their options was (euro)109 thousand. Additionally, 859 employees,
owning a total of 1,681,928 options, left the program as a result of
early settlement or voluntary withdrawal. (euro)844 thousand were paid
in this connection in 2004.
In order to provide coverage for the MOS Program, on September 21,
2001, the Board of Directors resolved to carry out the capital
increase approved by the Special Stockholders'
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Meeting on October 26, 2000. Since not all the shares comprising the
capital increase were subscribed, the company issued 21,445,962 shares
of (euro)0.50 par value each, which were subsequently subscribed and
paid by BBVA (50%) and La Caixa (50%).
On September 27, 2001, Telefonica Moviles, S.A., on the one hand, and
BBVA and La Caixa, on the other, entered into the related share
subscription and call option contracts under which the two
aforementioned financial institutions granted Telefonica Moviles, S.A.
a call option on each of the shares subscribed in order to enable
Telefonica Moviles, S.A. to meet its commitments to the beneficiaries
of the MOS Program, as described earlier.
The implementation of the MOS Program and the capital increase to
provide coverage for the Program were notified to the CNMV and
published in the Abridged Prospectus, which was verified and
registered in the CNMV's Official Register on November 2, 2001.
c) Terra Networks, S.A. stock option Plan
The Terra Networks, S.A. stock option Plan was approved by the
Stockholders' Meeting on October 1, 1999, and implemented by Board of
Directors' resolutions adopted on October 18, 1999, and December 1,
1999.
The Plan provides, through the exercise of the stock options by their
holders, for the ownership by the employees and executives of the
Terra-Lycos Group companies of a portion of the capital of Terra
Networks, S.A. up to a maximum of 14,000,000 shares.
In order to cover the stock option plan as approved, on October 5,
1999, Banco Zaragozano, S.A., Caja de Ahorros y Pensiones de Barcelona
and Terra Networks, S.A. entered into a contract under which these
entities granted to Terra Networks, S.A. an irrevocable call option on
14,000,000 issued shares, which could be exercised at any time prior
to April 30, 2004.
The approval and implementation of this compensation system were
notified to the CNMV and were made public through the complete
information memorandum verified and registered in the CNMV Official
Register on October 29, 1999, and in the Prospectus presented to the
Securities and Exchange Commission (SEC) in the U.S.
On December 1, 1999 and June 8, 2000, the Board of Directors, pursuant
to the powers granted to it by the Stockholders' Meeting, implemented
the first phase of the plan by granting options to employees of the
Terra Group. The main features of these options are as follows:
1. Each of the stock options under the Plan entitles the holder
(employee or executive) to acquire one share of Terra Networks,
S.A. at an exercise price of (euro)11.81 per share.
2. Duration of four years and three months (therefore, it ended on
February 28, 2004), and the options could be exercised at a rate
of one-third of those granted each year from the second year
onwards.
3. The exercise of the options is conditional upon the beneficiary
remaining a Terra-Lycos Group employee.
In 2001 the Board of Directors implemented the second phase of the
Terra Networks, S.A. stock option plan, which was approved by the
Stockholders' Meeting on June 8, 2000, and launched pursuant to a
resolution adopted by the Board of Directors on December 22, 2000,
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at the recommendation of the Appointments and Compensation Committee
based on a proposal of its Chairman, through the assignment of options
to executives and employees who were already beneficiaries of the
stock option plan, in addition to the assignment of options to new
employees who had joined the Terra-Lycos Group at that date.
The main features established by the Board of Directors for this
assignment were as follows:
1. Each of the stock options under the Plan entitles the holder to
acquire one share of Terra Networks, S.A. at an exercise price of
(euro)19.78 per share.
2. The duration of the Plan was modified by a resolution adopted by
the Stockholders' Meeting on June 8, 2000, and was set at six
years with a two-year grace period. The options can be exercised
at a rate of one-quarter of those granted each year from the
third year through the sixth year.
3. The exercise of the options is conditional upon the beneficiary
remaining a Terra Group employee.
4. Options were granted to one executive director and four general
managers and persons of a similar category, and this was duly
notified to the CNMV on December 29, 2000.
On February 21, 2001, the Board of Directors resolved to modify the
resolution adopted on December 22, 2000, in respect of the duration
and method of accrual of the stock options. Accordingly, the period
for the exercise of the options assigned was set at five years, and
the options may be exercised at a rate of one-quarter each year from
the end of the first year.
In 2001, at the recommendation of the Appointments and Compensation
Committee, the Board of Directors approved, each quarter (specifically
at its meetings on May 10, July 25 and November 6), the assignment of
options to new company employees, and set the exercise price at the
market price of the shares during the related quarter and with the
same terms and conditions as regards exercise period and duration as
those envisaged for the second phase of the Plan.
On June 7, 2001, the Stockholders' Meeting of Terra Networks, S.A.
resolved to partially modify the resolution relating to the stock
option plan which was ratified and approved by the Stockholders'
Meeting on June 8, 2000, as regards the extension of the stock option
Plan to executives and directors, and extended the option exercise
period to ten years from that in which they were granted, stipulating
that the options could be partially exercised each year during this
period. At the date of preparation of these consolidated financial
statements, the Board of Directors had not yet extended the option
exercise period.
Also, in 2002, at the recommendation of the Appointments and
Compensation Committee, the Board of Directors approved at its
meetings on January 30, July 25 and September 26 the assignment of
options to new company employees, and set the exercise price at the
market price of the shares during the related quarter and with the
same terms and conditions as regards exercise period and duration as
those envisaged for the second phase of the Plan. In addition, on
February 25, 2002, the assignment of further options was approved by
the Board of Directors.
In June 2002 it was decided to confine assignments of options to new
hires recruited from that date onwards for professional categories 1
and 2.
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As of December 31, 2003, options on 6,438,696 shares had been assigned
to Terra-Lycos Group employees, executives and directors, of which
1,555,554 relate to the first phase of the Plan and the remainder to
the second phase. The weighted average stock option exercise price is
(euro)14.70.
As of December 31, 2003, the Terra-Lycos Group's executives and
directors held 1,185,252 stock options under the Terra Networks, S.A.
stock option Plan, the weighted average exercise price of which is
(euro)19.03.
On April 28 and 29, 2004, Terra Networks, S.A. entered into respective
contracts with La Caixa and Barclays Bank (which took over Banco
Zaragozano and succeeded it on all its rights and obligations),
respectively, to extend the contracts executed on October 5, 1999; the
term of the contract with La Caixa was extended through April 30,
2006, and that of the contract with Barclays Bank through July 15,
2004.
On June 22, 2004, the Stockholders' Meeting of Terra Networks, S.A.
resolved, in connection with item IV on the agenda relating to the
"Reduction of capital stock through the retirement of shares of
treasury stock, with disapplication of the creditors' right to
contest, and delegation of power in connection with the funding of
Option Plans", to delegate powers on the Board of Directors of Terra
Networks, S.A., in connection with the funding of the Option Plans of
Terra Networks, S.A., so that it may decide, if necessary or
appropriate in view of the performance of the share market price, to
eliminate such funding or to keep the unfunded status or, as
appropriate, to establish any other funding system to cater for the
obligations arising from the Option Plans, thus extending the power
conferred under the resolution adopted by the Stockholders' Meeting on
October 1, 1999, in relation to item two on the agenda.
On July 15, 2004, in compliance with the aforementioned contract dated
October 5, 1999, and with the extension dated April 29, 2004, Terra
Networks, S.A. purchased from Barclays Bank, as an over-the-counter
transaction, the 7,000,000 shares owned by the latter in the capital
stock of Terra Networks, S.A. These shares were classified as treasury
stock and will be retired, if so decided at the Stockholders' Meeting.
On July 22, 2004, the Board of Directors of Terra Networks, S.A.,
after obtaining a favorable report from the Audit and Control
Committee, resolved to reduce by (euro)2 the exercise price of the
Terra Networks, S.A. stock options granted to the beneficiaries of the
Terra Group's Stock Option Plans, on or after the date of dividend
payment with a charge to additional paid-in capital approved by the
Stockholders' Meeting of Terra Networks, S.A., i.e. July 30, 2004.
As of December 31, 2004, options on 3,118,870 shares had been assigned
to Terra Group employees and executives, all of which relate to the
second phase of the Option Plan since the rights relating to the first
phase expired in April. The weighted average stock option exercise
price is (euro)14.21.
As of December 31, 2004, the Terra Group's executives held 650,000
stock options under the Terra Networks, S.A. stock option Plan, the
weighted average exercise price of which is (euro)16.37.
As of December 31, 2004, there were no directors of Terra Networks,
S.A. owning stock options.
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d) Terra Networks, S.A. stock option Plan resulting from the acquisition
of the stock option plans of Lycos, Inc.
Under the agreements entered into for the acquisition of Lycos, Inc.,
it was agreed to exchange options on the shares of Lycos, Inc. for
options on the shares of Terra Networks, S.A.
On June 8, 2000, the Stockholders' Meeting of Terra Networks, S.A.
resolved to acquire the stock option Plans of Lycos, Inc., provided
that the two companies merged.
On October 25, 2000, the Board of Directors of Terra Networks, S.A.
approved (i) the exchange of options on Lycos, Inc. shares existing
prior to the conclusion of the transaction for options on Terra
Networks, S.A. shares; (ii) the transfer to Citibank NA (Agent Bank)
of all the options on Lycos, Inc. shares for their early exercise; and
(iii) the entering into of a contract between Terra Networks, S.A. and
the Agent Bank in connection with the new Terra Networks, S.A. stock
option Plan.
As a result of the exchange of Lycos, Inc. stock options for Terra
Networks, S.A. stock options, the employees, executives and directors
of Lycos, Inc. received call options on 65,540,249 shares of Terra
Networks, S.A. owned by the Agent Bank.
On June 7, 2001, the Stockholders' Meeting of Terra Networks, S.A.
resolved to partially modify the resolution relating to the stock
option Plan, which was ratified and approved by the Stockholders'
Meeting on June 8, 2000, as regards the obligations arising from the
assumption of the Lycos, Inc. stock options by Terra Networks, S.A.,
following the exchange of shares between the latter and Lycos, Inc.,
which may be covered with Terra Networks, S.A. shares held by
Citibank, NA, as a result of the exchange of Lycos, Inc. shares held
by Citibank, NA to cover the stock options of the employees and
executives of Lycos, Inc.
On December 16, 2003, the Board of Directors of Terra Networks, S.A.,
pursuant to the powers granted to it by the Stockholders' Meetings on
June 8, 2000 and April 2, 2003, approved the acquisition by Terra
Networks, S.A. of 26,525,732 shares of Terra Networks, S.A. owned by
Citibank, N.A. as Agent Bank of the option Plans assumed by the
Company at the time of the integration of Lycos, Inc. These shares
still covered the stock options of the employees of Lycos, Inc.
outstanding as of that date
As of December 31, 2003, the employees, executives and directors of
Lycos had exercised 16,216,587 options, and 19,272,198 options
remained outstanding, at a weighted average price of US$ 20.77.
As of December 31, 2003, the directors and executives held stock
option rights on 9,090,776 options, derived from the Lycos, Inc. stock
option Plans set up prior to the acquisition of Lycos, Inc. by Terra
Networks, S.A. The weighted average exercise price of the stock
options is US$ 23.05.
Also, as of December 31, 2003, the Board members who hold or have held
executive posts in the Terra-Lycos Group held 8,717,026 options on
Terra Networks, S.A. shares derived from the Terra Networks, S.A. and
Lycos, Inc. stock option Plans at a weighted average exercise price of
(euro)18.40.
On June 22, 2004, the Stockholders' Meeting of Terra Networks, S.A.
resolved, inter alia, to reduce capital stock by (euro)53,052,804 for
the purpose of retiring 26,526,402 shares of treasury stock. The
resolution expressly stated that 26,507,482 of the shares to be
retired had been acquired by Terra Networks, S.A. from Citibank N.A.
and were classified as
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treasury stock to fund the obligations arising from Lycos Inc. stock
option plans taken over by Terra Networks, S.A. under section D) of
the resolution adopted by the Stockholders' Meeting on June 8, 2000,
in connection with item five on the agenda (in the revised version
approved by the Stockholders' Meeting on June 7, 2001).
Also, under the aforementioned capital reduction resolution the Board
of Directors of Terra Networks, S.A. was expressly empowered to
decide, if necessary or appropriate in view of the performance of the
share market value, to eliminate such funding or to keep the unfunded
status or, as appropriate, to establish any other funding system to
cater for the obligations arising from the Option Plans of Lycos, Inc.
On July 22, 2004, the Board of Directors of Terra Networks, S.A.,
after obtaining a favorable report from the Audit and Control
Committee, resolved to reduce by (euro)2 the exercise price of the
Terra Networks, S.A. stock options granted to the beneficiaries of the
Terra Group's Stock Option Plans, on or after the date of dividend
payment with a charge to additional paid-in capital approved by the
Stockholders' Meeting of Terra Networks, S.A., i.e. July 30, 2004.
On July 31, 2004, Terra Networks, S.A. and the Korean company Daum
Communications executed the contract for the sale of all the Lycos,
Inc. shares. The transaction was finally implemented on October 5,
2004, after obtaining the required administrative authorizations and,
specifically, approval from the U.S. Antitrust Authorities.
Under the sale contract, Terra Networks, S.A. undertook to continue to
assume the obligations arising from the stock option Plans of Terra
Networks, S.A. vis-a-vis the beneficiaries of Lycos, Inc., although
Lycos, Inc. would be authorized to perform, for the account and at the
expense of Terra Networks, S.A., any action which might be necessary
or appropriate in connection with the exercise of the options by the
beneficiaries.
As of December 31, 2004, Lycos' employees, executives and directors
had exercised a total of 1,089,238 options at a weighted average
exercise price of US$ 20.39, and 10,863,239 options remained
outstanding.
e) Telefonica, S.A. stock option plan aimed at employees of Endemol
("EN-SOP Program")
In order to fulfill the commitments assumed by Telefonica, S.A. in the
acquisition of the Dutch company Endemol (in mid-2000), and in order
to establish a competitive compensation system similar to that in
place at other companies in the industry in which Endemol operates, on
April 25, 2001, the Standing Committee of the Board of Directors of
Telefonica, S.A. approved the establishment of a Telefonica, S.A.
stock option plan targeted at the employees of Endemol Entertainment
N.V. (Endemol) and its subsidiaries (Endemol Group), known as the
EN-SOP Program.
This Program consists of the grant to the beneficiaries (all the
Endemol Group's permanent employees on January 1, 2001, who are not
participating in another similar stock or stock option plan),
effective January 1, 2001, 2002, 2004 and 2004, of a variable number
(based on the various wage and functional categories) of purchase
options on Telefonica, S.A. shares. The duration of the options will
be four years from the grant date, and the options may be exercised at
a rate of one-half each year three and four years after the related
grant date.
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The total number of options to be delivered each year will be
determined by dividing (euro)27,500,000 by the annual reference value
of the Telefonica, S.A. shares, which will be taken to be the
arithmetic mean of the closing prices of the Telefonica, S.A. shares
on the Spanish Continuous Market for the last five trading days prior
to that on which the Board of Directors of Telefonica, S.A. holds the
meeting calling the Annual Stockholders' Meeting.
The option exercise price will be the related annual reference value,
and the exercise terms will be the customary terms in programs of this
nature. The beneficiaries must remain uninterruptedly permanent
employees of Endemol until the options are exercised, without
prejudice to the regulation of cases of early settlement of the
options in certain cases in which the employment relationship is
interrupted prior to the exercise of the options.
The options may be settled through the acquisition by the beneficiary
of the underlying shares or, alternatively, by the cashless or
cashless for cash system.
In order to cover each annual grant of options, it was provided that
Telefonica: (i) would increase capital by the amount necessary to
cater for the delivery of the shares derived from the exercise of the
options by the beneficiaries or, alternatively, (ii) would acquire on
the market the related purchase options on Telefonica, S.A. shares.
Accordingly, in order to cover the annual grant of options in 2001, on
June 15, 2001, the Stockholders' Meeting of Telefonica, S.A. approved
a capital increase at Telefonica, S.A. of (euro)1,425,624, through the
issuance of an equal number of common shares with additional paid-in
capital of (euro)18.2898 per share, and granted the necessary powers
to the Board of Directors to carry out the capital increase, with
express powers, where appropriate, to not carry it out.
As a result of the significant change in stock market conditions in
the second half of 2001, on September 26, 2001, the Board of Directors
decided not to implement the aforementioned capital increase approved
by the Stockholders' Meeting, and decided that, instead of the capital
increase, the annual grant of options for 2001 under the EN-SOP
Program would be covered through the acquisition on the market of
purchase options on Telefonica, S.A. shares.
Under the EN-SOP Program, in 2001 1,281,040 purchase options on
Telefonica, S.A. shares were delivered to the employees of the Endemol
Group (with the distribution agreed on by the Appointments and
Compensation Committee of the Board of Directors of Telefonica, S.A.,
the governing body responsible for this as established when the
resolution to set up this Program was adopted), at an exercise price
of (euro)19.2898 per share (annual reference value). In 2001, 972
persons were participating in the Program.
With respect to the application of the EN-SOP Program in 2002, in
order to cover the annual grant of options in 2002, on April 12, 2002,
the Stockholders' Meeting of Telefonica, S.A. resolved to increase
capital at Telefonica, S.A. by (euro)2,180,809 euros, through the
issuance of an equal number of new common shares with additional
paid-in capital of (euro)11.61 per share, and granted the necessary
powers to the Board of Directors to carry out the capital increase,
with express powers, where appropriate, to not carry it out.
As in 2001, on December 18, 2002, the Board of Directors of
Telefonica, S.A. decided not to implement the aforementioned capital
increase approved by the Stockholders' Meeting, and decided that,
instead of the capital increase, the annual grant of options for 2002
under the EN-SOP Program would be covered, where necessary, with
Telefonica, S.A. shares previously acquired in the securities market.
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Under the EN-SOP Program, in 2002 1,933,504 purchase options on
Telefonica, S.A. shares were delivered to the employees of the Endemol
Group at an exercise price of (euro)12.61 per share (annual reference
value). In 2002 977 persons were participating in the Program.
With respect to the application of the EN-SOP Program in 2003, which
the Standing Committee of the Board of Directors of Telefonica, S.A.
decided on December 17, 2003, will be covered with Telefonica, S.A.
shares previously acquired in the securities market, 2,767,084
purchase options on Telefonica, S.A. shares were delivered to the
employees of the Endemol Group at an exercise price of (euro)9.03 per
share (annual reference value). 1,048 persons were participating in
the Program in 2003.
Lastly, with respect to the application of the EN-SOP Program in 2004,
which the Standing Committee of the Board of Directors of Telefonica,
S.A. decided on December 22, 2004, will be covered with Telefonica,
S.A. shares previously acquired in the securities market, 2,246,732
purchase options on Telefonica, S.A. shares were delivered to the
employees of the Endemol Group at an exercise price of (euro)12.24 per
share (annual reference value). 947 persons were participating in the
Program in 2004.
Interest on accounts payable and similar expenses and revenues from other
equity investments and loans
The detail of the "Interest on Accounts Payable and Similar Expenses" and
"Revenues from Other Equity Investments and Loans" captions is as follows:
--------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------
12/31/04 12/31/03 12/31/02
--------------------------------------------------------------------------------
Debentures, bonds and other
marketable debt securities 946.34 946.95 1,060.64
Loans and credits 382.84 907.67 659.66
Other 289.92 91.88 63.84
--------------------------------------------------------------------------------
Total financial expenses 1,619.10 1,946.50 1,784.14
--------------------------------------------------------------------------------
Associated companies 49.52 33.00 31.07
Other companies 340.33 336.77 289.30
--------------------------------------------------------------------------------
Total other financial revenues 389.85 369.77 320.37
--------------------------------------------------------------------------------
Exchange differences
The detail of the exchange gains and losses allocated to the consolidated
statements of income is as follows:
--------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------
12/31/04 12/31/03 12/31/02
--------------------------------------------------------------------------------
Exchange losses (111.98) (339.74) (2,245.17)
Exchange gains 168.39 834.91 1,612.85
--------------------------------------------------------------------------------
Exchange differences 56.41 495.17 (632.32)
--------------------------------------------------------------------------------
Of these total exchange differences, the most significant amount relates to
the revaluation of the debt denominated in foreign currency at the
Argentine companies, as a result of the depreciation or appreciation of the
Argentine peso. Accordingly, exchange differences were recorded which
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had a net positive impact of (euro)134.36 million in 2003 and a net
negative impact of (euro)10.58 million in 2004.
In view of the different evolution of the exchange rates of the U.S. dollar
and the Brazilian real against the euro, in 2003 U.S. dollar-denominated
debt obtained initially to specifically finance investments denominated in
foreign currencies was cancelled. This had a positive impact of
(euro)267.51 million on the "Exchange Differences" caption.
Extraordinary revenues
The detail of the extraordinary revenues is as follows:
---------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------
12/31/04 12/31/03 12/31/02
---------------------------------------------------------------------------------------------------------------------
Priors years revenues - - 15.66
Indemnity payments for breach of contract 11.54 27.45 31.76
Adjustment of pension commitments - 70.34 -
Insurance settlement consortium - 2.83 0.87
Corporate restructuring of the wireless business in Brazil 14.36 14.68 49.10
Sale of treasury stock - 7.12 -
Provisions for treasury stock - 159.95 -
Allocation of deferred revenues to income (Note 13) 48.50 74.34 -
Other extraordinary revenues earned in the year 92.83 124.49 158.57
Gains on fixed assets disposals 81.50 224.22 55.56
Gains on disposals of investiments in consolidated companies (Note 8) 65.39 407.96 99.32
Capital subsidiaries transferred to income for the year (note 13) 94.90 53.78 63.79
---------------------------------------------
409.02 1,167.16 474.63
---------------------------------------------------------------------------------------------------------------------
The "Other Extraordinary Revenues Earned in the Year" account includes the
extraordinary revenues earned by all the Group companies, the amounts of
which taken individually were not material.
Extraordinary expenses and losses
---------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------
12/31/04 12/31/03 12/31/02
---------------------------------------------------------------------------------------------------------------------
Provision for contingencies 85.16 79.83 31.29
Extraordinary provisions for preretirements (Note 14) 908.03 1,593.41 395.01
Write-off of goodwill (Note 5) 111.09 6.48 2.259,81
Provisions for treasury stock (Note 11) - - 288,09
Court claims 117.37 45.93 4.51
Fines, penalties and litigation 98.59 103.31 107.01
Write-off of start up expenses - - 56.62
UMTS License value adjustments (note 14) - - 2.753,90
Externalization of commitments (Note 4-g) 11.76 12.60 2.12
Other extraordinary expenses 127.11 380.04 836.68
Variation in fixed asset and investment valuation
allowance (Notes 7 and 8) 32,71 100,29 136.48
Losses on disposal of investments in consolidated companies (Note 8) 33,23 39,66 206.44
---------------------------------------------------------------------------------------------------------------------
1,525.05 2,361.55 7,077.96
---------------------------------------------------------------------------------------------------------------------
Bidland Systems Inc. and TI Capital Management, LLC reached a final
agreement with Katalyx, Inc. and Telefonica, S.A. to resolve in court the
two claims filed by the former alleging
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noncompliance with certain contractual obligations for the creation of a
joint venture. Under this agreement, the damages initially sought were
reduced to $38 million and each party undertook to bear its respective
lawyers' fees. This amount, equal to (euro)30.62 million, was recorded
under the "Court Claims" caption.
With respect to the arbitral award in connection with the complaint
submitted by the Radio Blanca Group to Uniprex (an Antena 3 de Television,
S.A. Group company), on May 21, 2003, Telefonica, S.A. and Kort Geding,
S.L. entered into an agreement whereby the former sold to the latter a
25.1% holding in the capital stock of Antena 3 de Television, S.A. This
agreement contains a covenant whereby the seller undertakes to reduce the
sale price by an amount equal to 25.1% of the possible adverse economic
impact arising from the content of the award relating to the arbitration
between Uniprex and Radio Blanca. Uniprex filed an appeal with the
Provincial Appelate Court against the arbitral award rendered on March 15,
2004. No decision has yet been handed down in this connection. The
accompanying consolidated financial statements include an extraordinary
expense of (euro)31.44 million, which is recorded under the "Court Claims"
caption, and the use of provisions amounting to (euro)15 million.
The "Other Extraordinary Expenses" caption includes extraordinary expenses
of a very diverse nature incurred by numerous Telefonica Group companies.
Gains and losses on fixed assets
The "Gains on Fixed Asset Disposals" caption includes (euro)39.27 million
relating to the gain obtained from the disposal of real estate, performed
mainly by Telefonica de Espana and Inmobiliaria Telefonica ((euro)202.95
million in 2003).
This caption also includes negative net amounts of (euro)15.38 million and
(euro)19.15 million as of December 31, 2004 and 2003, respectively,
recorded as a result of the dismantling of Telefonica de Espana's plant for
network digitalization (see Note 7).
(21) DIRECTORS' COMPENSATION AND OTHER BENEFITS AND OTHER DISCLOSURES
a) Directors' compensation and other benefits
The compensation of Telefonica, S.A.'s directors is governed by Article 28
of the bylaws, which states that the amount of the compensation to be paid
by the Company to its directors shall be that determined by the
Stockholders' Meeting for this purpose and this amount shall remain in
force until the Stockholders' Meeting resolves to change it. The Board of
Directors is responsible for setting the exact amount to be paid within the
stipulated limits and distributing it among the directors. In this
connection, on April 11, 2003, the Stockholders' Meeting set the maximum
gross annual amount to be paid to the Board of Directors at (euro)6
million, which includes a fixed payment and attendance fees for attending
the Board of Directors advisory committee or control committee meetings. In
2004, the Appointments and Compensation and Best Practice Corporate
Governance Committee reviewed, in accordance with Article 25.b.5 of the
Rules of the Board of Directors, the compensation system for the Company's
directors, which had not been revised since March 1997. As a result, the
Committee submitted a proposal to the Board of Directors to change the
compensation system in view of the long period of time elapsed since it had
been set up (1997). On September 29, 2004, the Board of Directors resolved
to revise the fixed annual amount to be paid as compensation to the members
of the Board of Directors and of its Standing Committee and the amount of
the attendance fees for attending the
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meetings of the other Board Committees, and to establish a fixed annual
amount to be paid as compensation to the members of these Board Committees,
all within the maximum limit set by the Stockholders' Meeting on April 11,
2003.
Therefore, the compensation of Telefonica's directors in their capacity as
members of the Board of Directors and/or of the Standing Committee and the
advisory and control committees consists of a fixed amount payable monthly
and attendance fees for attending the meetings of the Board's advisory or
control committees. Additionally, executive directors receive the
appropriate amounts for discharging their executive duties as stipulated in
their respective contracts.
In 2004 the members of the Board of Directors of Telefonica, S.A. earned
the following total compensation for discharging their duties as such:
(euro)3,707,904.71 of fixed monthly payments (including the compensation
earned as members of the Boards of Directors or of the advisory or control
committees of other Telefonica Group companies) and (euro)166,828.32 of
attendance fees for attending the Board of Directors advisory committee
meetings (including the attendance fees for attending Board of Directors
advisory committee meetings of other Telefonica Group companies).
In their capacity as Company executives the executive directors Cesar
Alierta Izuel, Antonio J. Alonso Ureba, Luis Lada Diaz, Mario E. Vazquez
and Antonio Viana-Baptista, earned the following compensation:
(euro)6,558,265.38 of salaries and variable compensation; (euro)129,412.46
of compensation in kind, which include life insurance premiums; and
(euro)44,500.00 of contributions paid by the Company, as sponsor, to
pension plans.
The breakdown of the compensation and benefits received by Telefonica's
directors in 2004 is as follows:
Board of Directors: annual amount of the fixed payment received by
each director (in euros):
-----------------------------------------------------
Position 2004
-----------------------------------------------------
Chairman 127,613.94
-----------------------------------------------------
Deputy Chairmen 162,689.82
-----------------------------------------------------
Directors (1):
Executive directors 97,613.94
Nominee directors 97,613.94
Independent directors 97,613.94
-----------------------------------------------------
(1) Additionally, one director, who is not resident in Spain,
receives an additional annual payment of (euro)52,639.14
because his experience and work in relation to Latin
America are of special interest to the Company
Standing Committee: amount of the fixed payment received by each
director who is a member of the Standing Committee (in euros):
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Telefonica
--------------------------------------------------------------------------------
--------------------------------------------------
Position 2004
--------------------------------------------------
Chairman 65,075.88
Deputy chairman 65,075.88
Directors 65,075.88
--------------------------------------------------
The directors do not receive any attendance fees for attending meetings of
the Board of Directors or of the Standing Committee.
Other committees of the Board of Directors.
A) Fixed amount received by each director who is a member of any of the
Board committees, based on the position held, for October, November
and December 2004 (in euros):
--------------------------------------------------
Position 2004
--------------------------------------------------
Chairman 5,000.00
Directors 2,500.00
--------------------------------------------------
B) Total annual amounts paid in 2004 for attending meetings of the
advisory and control committees of the Board of Directors, received by
the directors who are members thereof taken as a whole (in euros):
-----------------------------------------------------------------------------------------------
Committees 2004
-----------------------------------------------------------------------------------------------
Audit and Control Attendance fee per meeting (through 09/30/04): 858.61
Attendance fee per meeting (from 10/01/04): 1,250.00
Number of meetings paid: 11
Total received: 38,258.30
-----------------------------------------------------------------------------------------------
Appointments and Compensation and Attendance fee per meeting (through 09/30/04): 858.61
Best Practice Corporate Governance Attendance fee per meeting (from 10/01/04): 1,250.00
Number of meetings paid: 9
Total received: 33,889.42
-----------------------------------------------------------------------------------------------
Human Resources and Corporate Attendance fee per meeting (through 09/30/04): 858.61
Reputation Attendance fee per meeting (from 10/01/04): 1,250.00
Number of meetings paid: 5
Total received: 16,161.93
-----------------------------------------------------------------------------------------------
Regulation Attendance fee per meeting (through 09/30/04): 858.61
Attendance fee per meeting (from 10/01/04): 1,250.00
Number of meetings paid: 10
Total received: 30,922.20
-----------------------------------------------------------------------------------------------
Service Quality and Commercial Service Attendance fee per meeting (through 09/30/04): 858.61
Attendance fee per meeting (from 10/01/04): 1,250.00
Number of meetings paid: 5
Total received: 12,727.49
-----------------------------------------------------------------------------------------------
International Matters Attendance fee per meeting (through 09/30/04): 858.61
Attendance fee per meeting (from 10/01/04): 1,250.00
Number of meetings paid: 2
Total received: 7,727.49
-----------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
Executive directors: total amounts received by the executive directors
Cesar Alierta Izuel, Antonio J. Alonso Ureba, Luis Lada Diaz, Mario E.
Vazquez and Antonio Viana-Baptista taken as a whole for the items
indicated below (in euros):
---------------------------------------------------
2004
---------------------------------------------------
Salaries 3,337,526.82
Variable compensation 3,220,738.56
Compensation in kind 129,412.46
Contributions to pension plans 44,500.00
---------------------------------------------------
Additionally, it should be noted that the nonexecutive directors do
not receive and did not receive in 2004 any compensation in the form
of pensions or life insurance, and they do not participate in the
compensation plans linked to share market price.
The Company does not grant and did not grant in 2004 any advances,
loans or credits to the directors, or to its top executives, thus
complying with the requirements of the Sarbanes-Oxley Act passed in
the U.S. which is applicable to Telefonica as a listed company in that
market.
Lastly, the five Company directors who are members of the Catalonia
and Andalusia advisory committees (set up in April and October 2004,
respectively) received a total amount of (euro)48,750.00 in 2004.
b) Detail of the equity interests in companies engaging in an activity
that is identical, similar or complementary to that of the Company and
the performance of similar activities by the directors for their own
account or for the account of others
Pursuant to Article 127 ter. 4 of the Spanish Corporations Law,
introduced by Law 26/2003, which amends Securities Market Law 24/1988,
and the revised Spanish Corporations Law, in order to reinforce the
transparency of listed corporations, following is a detail of the
companies engaging in an activity that is identical, similar or
complementary to the activity that constitutes the corporate purpose
of Telefonica, S.A., in which the members of the Board of Directors
own equity interests, and of the functions, if any, that they
discharge thereat:
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Telefonica
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------------------------------------------------------------------------------------------------------------------------------------
Owner Investee Activity % of Ownership Function
------------------------------------------------------------------------------------------------------------------------------------
Isidro Faine Casas Terra Networks, S.A. Telecommunications < 0.01% -
------------------------------------------------------------------------------------------------------------------------------------
Jose Fernando de Almansa Lucent Telecommunications < 0.01% -
Moreno - Barreda Technologies, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Maximino Carpio Garcia Telefonica Moviles, S.A. Telecommunications < 0.01% Director
------------------------------------------------------------------------------------------------------------------------------------
Miguel Horta e Costa Portugal Telecom, SGPS, S.A. Telecommunications < 0.01% Executive Chairman
------------------------------------------------------------------------------------------------------------------------------------
Luis Lada Diaz Telefonica Moviles S.A. Telecommunications < 0.01% Director
------------------------------------------------------------------------------------------------------------------------------------
Sogecable S.A. Television,
telecommunications < 0.01% Director
and audiovisual
production services
------------------------------------------------------------------------------------------------------------------------------------
Antonio Massanell Lavilla Telefonica Moviles S.A. Telecommunications < 0.01% Director
------------------------------------------------------------------------------------------------------------------------------------
Enrique Used Aznar Amper, S.A. Telecommunications
equipment supplier 0.39% Chairman
------------------------------------------------------------------------------------------------------------------------------------
Antonio Viana Baptista Portugal Telecom, SGPS, S.A. Telecommunications < 0.01% Director
------------------------------------------------------------------------------------------------------------------------------------
PT Multimedia-Servicos de
Telecomunicacoes e
Multimedia, SGPS, S.A. Internet < 0.01% -
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Moviles, S.A. Telecommunications < 0.01% Executive Chairman
------------------------------------------------------------------------------------------------------------------------------------
(1) If the holding is less than 0.01% of the capital stock, "< 0.01%" is shown.
Also, pursuant to the aforementioned Law, set forth below are the
activities carried on, for their own account or for the account of
others, by the various members of the Board of Directors that are
identical, or similar or complementary to the activity that constitutes
the corporate purpose of Telefonica, S.A.:
------------------------------------------------------------------------------------------------------------------------------------
Type of Arrangement Positions Held
under which the Company through or Functions
Name Activity is which the Activity Performed at
Activity Carried On Carried on (2) is Carried on the Company
------------------------------------------------------------------------------------------------------------------------------------
Jose Antonio Fernandez Rivero Internet and e-commerce For account of
others Adquira Espana, S.A. Chairman
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Moviles, S.A. Director
others
----------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica del Peru, S.A.A. Director
Jose Fernando de Almansa others
Moreno-Barreda ----------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica de Argentina, S.A . Director
others
----------------------------------------------------------------------------------------------------
Telecommunications For account of Telecomunicaciones de Sao Director
others Paulo, S.A.
------------------------------------------------------------------------------------------------------------------------------------
F-70
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Type of Arrangement Positions Held
under which the Company through or Functions
Name Activity is which the Activity Performed at
Activity Carried On Carried on (2) is Carried on the Company
------------------------------------------------------------------------------------------------------------------------------------
Jose Fernando de Almansa Telecommunications For account of Telefonica International, S.A. Director
Moreno-Barreda others
------------------------------------------------------------------------------------------------------------------------------------
Maximino Carpio Garcia Telecommunications For account of Abengoa, S.A. Member of
equipment supplier others Advisory
Committee
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Moviles, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
Alfonso Ferrari Herrero Telecommunications For account of Compania de Director
others Telecomunicaciones de
Chile, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica de Peru, S.A.A. Director
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica International, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
Miguel Horta e Costa Telecommunications For account of Portugal Telecom, SGPS S.A. Executive
others Chairman
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Comunicacoes, S.A. Executive
others Chairman
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Multimedia-Servicos Chairman
others de Telecomunicacoes e
Multimedia, SGPS, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Moveis-Servicoes de Chairman
others Telecomunicacoes,
SGPS, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of TMN-Telecomunicacoes Chairman
others Moveis Nacionais, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Sistemas de Informacao, S.A. Chairman
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Corporate-Solucoes Chairman
others Empresariais de
Telecomunicacoes e
Sistemas, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Compras - Servicos de Chairman
others Consultoria e
Negociacao, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of PT Investimentos Chairman
others Internacionais - Consultoria
Internacional, S.A.
------------------------------------------------------------------------------------------------------------------------------------
Gregorio Villalabeitia Gallarraga Telecommunications For account of Telefonica International, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Moviles, S.A. Director
others
--------------------------------------------------------------------------------------------------
Television, For account of Sogecable, S.A. Director
Luis Lada Diaz telecommunications and others
audiovisual production
services
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica International, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
Antonio Massanell Lavilla Telecommunications For account of Telefonica Moviles, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
Enrique Used Aznar Telecommunications For account of Amper, S.A. Chairman
equipment provider others
------------------------------------------------------------------------------------------------------------------------------------
F-71
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Type of Arrangement Positions Held
under which the Company through or Functions
Name Activity is which the Activity Performed at
Activity Carried On Carried on (2) is Carried on the Company
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications For account of Telecomunicaciones Director
others de Sao Paulo, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica de Director
others Peru, S.A.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Terra Networks, S.A. Director
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Internacional, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
Mario Eduardo Vazquez Telecommunications For account of Telefonica de Argentina, S.A. Chairman
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Holding de ViceChairman
others Argentina, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Compania Internacional ViceChairman
others de Telecomunicaciones,
S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Moviles Chairman
others Argentina, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Comunicaciones Chairman
others Personales, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Radio Movil Digital Chairman
others Argentina, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Radio Servicios S.A. Chairman
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telinver, S.A. Chairman
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Katalyx Argentina, S.A. Chairman
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Katalyx Food Service Manager
others Argentina, S.R.L.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Katalyx Cataloguing Manager
others Argentina, S.R.L.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Katalyx Construction Manager
others Argentina, S.R.L.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Katalyx Transportation Manager
others Argentina, S.R.L.
--------------------------------------------------------------------------------------------------
Internet and e-commerce For account of Adquira Argentina, S.A. Chairman
others
--------------------------------------------------------------------------------------------------
Internet and e-commerce For account of Terra Networks ViceChairman
others Argentina, S.A.
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Data Chairman
others Argentina, S.A.
------------------------------------------------------------------------------------------------------------------------------------
Antonio Viana Baptista Telecommunications For account of Telefonica Moviles, S.A. Executive
others Chairman
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Internacional, S.A. Director
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica Moviles Espana, S.A. Director
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica de Argentina, S.A. Director
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Brasilcel, N.V. Director
others
--------------------------------------------------------------------------------------------------
Telecommunications For account of Portugal Telecom, SGPS, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
F-72
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Type of Arrangement Positions Held
under which the Company through or Functions
Name Activity is which the Activity Performed at
Activity Carried On Carried on (2) is Carried on the Company
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications For account of Telefonica de Espana, S.A. Director
others
------------------------------------------------------------------------------------------------------------------------------------
(2) Only shown if the activity is carried on as an employee and, therefore, is
carried on through a company.
Pursuant to Article 114.2 of the Spanish Corporations Law, also
introduced by Law 26/2003, it is hereby stated that in the fiscal year
to which these consolidated financial statements refer, the directors,
or persons acting on their behalf, did not perform any transactions
with Telefonica or any other company in the Telefonica Group other
than in the course of the Company's ordinary operations or in
conditions other than normal market conditions.
(22) Other information
a) Litigation
Telefonica, S.A. and its Group companies are party to several lawsuits
which are currently in progress in the law courts and the arbitration
courts of the various countries in which the Telefonica Group is
present.
Based on the reports of counsel engaged to act in the lawsuits of
Telefonica, S.A., it is reasonable to consider that the adverse
outcome of any of these as yet unresolved lawsuits will not materially
affect the Telefonica Group's economic and financial position or
solvency. These lawsuits include most notably the following:
1) A proceeding contesting the resolutions adopted by the Special
Stockholders' Meeting of Telefonica, S.A. on February 4, 2000.
The stockholder Javier Sotos Garcia, who owns 300 shares of the
Company, filed a complaint contesting the resolutions adopted by
the Special Stockholders' Meeting on February 4, 2000, based on
the purported contravention of the rules regulating the holding
of the Meeting and on the purported contravention of the rules
for disapplication of preemptive rights of subscription in
capital increases.
On May 8, 2003, Court of First Instance no. 33 handed down a
judgment wholly dismissing the complaint filed by the plaintiff
stockholder, holding that it was inappropriate to rule on the
voidness or voidability of the resolutions adopted by the Special
Stockholders' Meeting of Telefonica, S.A. on February 4, 2000,
and awarding the costs of the proceeding against the plaintiff.
On July 26, 2003, an appeal was filed by the latter at the Madrid
Provincial Appellate Court. On December 11, 2003, Telefonica, S.A
filed a reply brief contesting the appeal. On January 18, 2005,
the appeal hearing was held. On February 9, notice was given of
the judgment by the Provincial Appellate Court dismissing the
appeal filed by Javier Sotos and awarding costs against the
appellant. On February 18, notice was given of the filing of a
pleading by Javier Sotos Garcia preparing
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--------------------------------------------------------------------------------
an extraordinary appeal against procedural infringements and a
cassation appeal against the judgment of the Madrid Provincial
Appellate Court on January 24, 2005.
2) A proceeding contesting certain resolutions adopted by the Annual
Stockholders' Meeting of Telefonica, S.A. on June 15, 2001.
The aforementioned stockholder, Javier Sotos Garcia, also filed a
complaint contesting some of the resolutions adopted by the
Company's Annual Stockholders' Meeting on June 15, 2001.
The aforementioned complaint is based on the purported
infringement of the contesting stockholder's right to information
and on the purported contravention of the legal rules for
disapplication of preemptive rights of subscription in capital
increases.
On January 23, 2004, the Company was notified that the proceeding
had been stayed until such time as either the parties apply for
its resumption or the instance lapses.
Based on the opinion of its legal counsel, the Company is
convinced that the outcome of the aforementioned court proceeding
will be wholly satisfactory for the Company.
3) Complaint filed by IDT against Telefonica, S.A., Terra Networks,
S.A. and Lycos, Inc.
International Discount Telecommunications Corporation (IDT) filed
a complaint at the New Jersey State Courts in the U.S. against
Telefonica, S.A., Terra Networks, S.A., Terra Networks U.S.A.,
Inc., and Lycos, Inc.
This complaint is based on the purported breach of the joint
venture agreement entered into between IDT and Terra Networks,
S.A. in October 1999, on the purported nonperformance of the
obligations under the agreement to terminate the joint venture
agreement, on purported fraud and contravention of the
legislation governing the purchase and sale of securities
(Federal Securities Exchange Act) and, lastly, on purported
fraudulent concealment of information.
The lawsuit is currently for an unspecified amount, without
prejudice to the possibility of the claim by the plaintiff for
damages being specified and quantified in the course of the
proceeding.
Subsequently, IDT added a new claim to the complaint alleging
that Telefonica was liable, as a control person, for the fraud
alleged against Terra in its negotiations with IDT that led to
the termination agreement. Telefonica has filed objections
against this claim.
The defendants have filed an answer and, in turn, Terra Networks
S.A. has filed a counterclaim.
In October 2002 the New Jersey State Court decided to dismiss the
part of the complaint relating to certain purported breaches of
the joint venture agreement, which also resulted in the exclusion
of Terra Networks, U.S.A., Inc. from the proceeding.
On July 2, 2003, in light of the evidence taken, Terra Networks,
S.A., Lycos, Inc. and Telefonica, S.A. filed pleadings seeking
summary trial to determine the claims and have
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--------------------------------------------------------------------------------
others dismissed. In turn, IDT has petitioned to have the
counterclaim filed by Terra Networks, S.A. dismissed.
On September 1, 2004, the Court confirmed the decision in
September 2002 granting IDT leave to file a third complaint
against Telefonica, S.A.
Terra Networks, S.A. and Telefonica, S.A. have filed answers
refuting the allegations of IDT in the third complaint.
On September 27, 2004, Telefonica, S.A. filed a motion to have
the third complaint declared inadmissible for want of personal
jurisdiction. The Court has not yet ruled on the motion.
On September 30, 2004, the Court ruled on two of the motions
filed by the defendants in July 2003. In particular, the Court
accepted the motion to have the complaint against Lycos declared
inadmissible, but refused the request by Terra for summary trial.
The Court has not ruled on the other motions filed by Terra.
Based on the opinion of its legal counsel, the Company considers
that it has a sound defense against the claims filed against it
and, accordingly, Telefonica is confident that the outcome for
Telefonica of the litigation arising from IDT's complaint should
not be adverse but, if it were, considers that the economic and
financial impact on the Telefonica Group should not be material.
4) Sistemas e Instalaciones de Telecomunicacion, S.A.U. (Sintel)
As a result of the voluntary bankruptcy proceeding being
conducted at Madrid Court of First Instance no. 42, case number
417/2001, which is the continuation of the petition for Chapter
11-type insolvency filed by the director of Sintel on June 8,
2000, two criminal proceedings have commenced which affect
Telefonica, S.A.
Under the bankruptcy order, inter alia, the effects of the
bankruptcy were backdated to June 8, 1998. As a result of the
backdated effects of the bankruptcy pursuant to the order, the
bodies in the bankruptcy sent Telefonica a payment demand for
(euro)22.87 million, which represented the total amount paid by
Sintel, since they considered null and void as a matter of law
the involvement of Sintel in the contract dated December 30,
1998, in which a debt of (euro)21.35 million was recognized by
reason of the sale of the shares of Sintel to Mastec
Internacional, S.A. and the amounts paid by Sintel, which in the
aforementioned contract appeared as a joint and several guarantor
for the fulfillment of these payment obligations.
Telefonica filed an ancillary complaint in which it proposes that
the effects of the bankruptcy be backdated to a date closer to
that of the bankruptcy order, so that the contract dated December
30, 1998, is not affected. The representatives of the employees
filed another complaint to the contrary, proposing that the
effects of the bankruptcy be backdated to the date of the sale of
the shares of Sintel (April 1996).
The arrangement proposed by the bankrupt company and approved by
the Court was the subject of an appeal to a superior court.
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On June 14, 2004, an order was made dismissing all of the appeals
filed and confirming the order approving the bankruptcy
arrangement. An appeal was filed against this order and has been
dismissed by the Supreme Court, thus making the bankruptcy
arrangement final.
The two criminal proceedings are as follows:
"Abbreviated" proceeding no. 273/2001, in relation to which, on
September 24, 2002, Telefonica, S.A. and Telefonica de Espana,
S.A. appeared before Central Examining Court no. 1 filing a civil
suit as parties suffering loss against the directors of Sintel
and of Mastec Internacional, S.A. Leave was given for them to
appear as parties to the proceeding.
Preliminary proceeding no. 362/2002, which was commenced on
October 23, 2002, by Central Examining Court no. 1 for a possible
offense of extortion. This proceeding arises from the preceding
one, concerns the possible commission of an offense of extortion
in the assumption by Sintel of joint and several liability with
Mastec for the obligation to pay the related sale price. This
preliminary proceeding has been joined to proceeding no.
273/2001. In April 2004, the motion filed by counsel for
Telefonica, S.A. to have the case dismissed on the ground that
the investigation should have continued was rejected. However, it
must be stressed that no charges have been pressed to date, and
the claim in the expanded criminal complaint that led to this
proceeding has been expressly dismissed.
On June 29, 2004, notice was given of a pleading filed by counsel
for the former employees of Sintel seeking to further expand the
criminal complaint to include, this time, the existence of an
offense of criminal insolvency purportedly committed in the sale
of Sintel to Mastec Internacional, Inc. in April 1996. On July 4
and August 5, 2004, Telefonica, S.A. filed submissions seeking to
have the aforementioned pleading declared inadmissible, although
the judge has not yet granted leave to expand the criminal
complaint.
5) Collective lawsuits filed by stockholders of Terra in the U.S.,
in connection with the tender offer by Telefonica, S.A. for Terra
Networks, S.A.
On May 29, 2003, two class actions were filed at the Supreme
Court of New York State by stockholders of Terra Networks, S.A.
against Telefonica, S.A., Terra Networks, S.A. and certain former
and current directors of Terra Networks, S.A.
These actions are founded mainly on the claim that the price
offered to the stockholders of Terra Networks, S.A. was not in
keeping with the intrinsic value of the shares of that company,
and seek to not have the tender offer approved or, alternatively,
to have damages awarded to them.
It should be noted that since the filing of the complaints, the
related proceedings have remained inactive.
Based on the opinion of its legal counsel, the Company considers
that it has a sound defense against both the form and the
substance of the claims filed against it and, accordingly, is
confident that the outcome of the litigation should not be
adverse for Telefonica.
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6) Appeal for judicial review no. 6/461/03 filed at the National
Appellate Court by the World Association of Stockholders of Terra
Networks, S.A. (ACCTER) against the administrative decision made
by the Spanish National Securities Market Commission (CNMV) to
authorize the tender offer by Telefonica, S.A. for Terra
Networks, S.A.
ACCTER filed an appeal for judicial review against the decision
of the CNMV to authorize the tender offer made to Terra Networks,
S.A. stockholders on June 19, 2003.
Telefonica, S.A. has filed an application, admitted for
consideration, to appear in the proceeding as an intervening
nonparty to defend the lawfulness of the decision by the CNMV.
In turn, the National Appellate Court has rejected the
appellant's request for an ex parte or inter partes injunctive
stay of the aforementioned decision.
ACCTER filed a complaint for judicial review, and Telefonica,
S.A. and the Government Legal Service filed their answers.
At present, the proceeding is ready for the rendering of
judgment.
Based on the opinion of its legal counsel, the Company is
convinced that the outcome of the aforementioned proceeding will
be satisfactory for the Company.
7) Claim at the ICSID
As a result of the enactment by the Argentine Government of
Public Emergency and Exchange Rules Reform Law 25561, of January
6, 2002, Telefonica considered that the terms and conditions of
the Share Transfer Agreement approved by Decree 2332/90 and the
Pricing Agreement ratified by Decree 2585/91, both of which were
executed by the Company with the Argentine Government, were
affected appreciably, since the Law renders ineffective any
dollar or other foreign currency adjustment clauses, or
indexation clauses based on price indexes of other countries, or
any other indexation mechanism in contracts with the public
authorities. The Law also provides that prices and rates
resulting from such clauses are denominated in pesos at an
exchange rate of one peso ($ 1) to one U.S. dollar (US$ 1).
Accordingly, since negotiations with the Argentine Government
were unsuccessful, on May 14, 2003, Telefonica filed a request
for arbitration with the International Center for Settlement of
Investment Disputes (ICSID) pursuant to the Agreement for the
Promotion and Reciprocal Protection of Investments between the
Argentine Republic and the Kingdom of Spain. On July 6, 2004, the
first hearing at the ICSID took place in Washington and a 90-day
stay was ordered in an attempt to reach a settlement. Following
the expiration of the stay without any such settlement having
been achieved, on December 6, 2004, Telefonica filed the
"memorial" or claim with the ICSID together with the initial
supporting testimonies.
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b) Commitments
Strategic alliance between Telefonica and Terra
On February 12, 2003, Telefonica and Terra Networks, S.A. entered
into a Framework Strategic Alliance Agreement to replace the
Strategic Agreement dated May 16, 2000, to which Bertelsmann AG
was also a party (whereby, in the framework of the acquisition of
Lycos Inc. by Terra Networks, S.A., Telefonica, S.A. undertook to
commission from Terra the portion of the advertising services
committed by Bertelsmann AG that the latter did not commission
from Terra Networks, S.A., up to a maximum amount of US$ 675
million).
Additionally, on February 12, 2003, Telefonica, S.A., Terra
Networks, S.A., Lycos Inc. and Bertelsmann AG entered into a
preferential interest agreement which will enable them to
continue to explore opportunities for the mutual provision of
communications, development and content services in the on-line
market.
The term of the Framework Strategic Alliance Agreement is six
years, ending on December 31, 2008. The agreement is
automatically renewable for one-year periods unless it is
expressly terminated by the parties.
The main features of this Framework Strategic Alliance Agreement
are summarized as follows:
1. Strengthening of the Terra Lycos Group as:
The exclusive provider of essential portal elements,
including brand image, and aggregator of the broad and
narrow band Internet content and services targeted at the
residential, SOHO and, when so agreed, SME market segments,
for the Telefonica Group companies' connectivity and ISP
services.
Preferential provider of consulting, management and
maintenance services for the country portals of the
Telefonica Group companies.
Exclusive provider of Telefonica Group employee on-line
training services.
Preferential provider of on-line integral marketing services
with the Telefonica Group companies.
2. Guaranteed minimum volume of acquisitions of Terra Group
on-line advertising space by Telefonica Group companies.
3. Exclusive acquisition of connectivity and wholesale Internet
access services by Terra Group companies from Telefonica
Group companies under the legally permitted
most-favored-customer conditions.
4. Outsourcing by Terra Group companies to Telefonica Group
companies of all or part of the services and/or operation of
the Internet access elements for the provision of ISP
services to its residential, SOHO and, when so agreed, SME
customers under the legally permitted most-favored-customer
conditions.
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5. Exclusive acquisition by Terra Group companies from
Telefonica Group companies of the advanced broad and narrow
band network and platform services required to construct the
range of services to be offered to residential, SOHO and,
when so agreed, SME customers under the legally permitted
most-favored-customer conditions.
The Framework Strategic Alliance Agreement guarantees the
generation for the Terra Group of a minimum annual amount
throughout the term of the Agreement of (euro)78.5 million. This
amount is the difference between the revenues arising from the
services provided under the aforementioned Framework Strategic
Alliance Agreement and the costs and investments directly
associated therewith. In compliance with the terms of the
aforementioned Framework Agreement, the minimum annual amount was
generated for the Terra Group in 2003 and 2004.
Agreements with Portugal Telecom (Brazil)
On January 23, 2001, Telefonica, S.A. and its subsidiary Telefonica
Moviles, S.A., on the one hand, and Portugal Telecom SGPS, S.A. and
its subsidiary PT Moveis, SGPS, S.A., on the other, entered into an
agreement in order to group together all their wireless telephony
businesses in Brazil and, accordingly, they undertook to contribute
all their wireless telephony assets in Brazil to a joint venture,
which, subject to the obtainment of the necessary regulatory
authorizations, would be a subsidiary of the two groups, and in which
they would each have a 50% ownership interest. Also, under the terms
of this agreement, the two parties expressed their interest in
increasing their reciprocal ownership interests, subject to compliance
with the applicable regulatory and bylaw conditions.
On October 17, 2002, Telefonica Moviles, S.A., on the one hand, and
Portugal Telecom SGPS, S.A. and its subsidiary PT Moveis SGPS, S.A.,
on the other, entered into the definitive agreements (Stockholders'
Agreement and Subscription Agreement) that implement the
aforementioned agreement signed in January 2001. On December 27, 2002
(after having obtained the necessary authorizations), the two Groups'
holdings in their respective Brazilian wireless telephony operators
were contributed to a Dutch joint venture, Brasilcel N.V., in
accordance with the provisions of the aforementioned Subscription
Agreement.
In accordance with the aforementioned definitive agreements,
Telefonica Moviles, S.A. and the Portugal Telecom Group will have the
same voting rights at Brasilcel, N.V. This equality in voting rights
will cease to exist if, as a result of capital increases at Brasilcel,
N.V., the percentage of ownership of either of the parties falls below
40% during an uninterrupted period of six months. In this event, if
the Group with the reduced interest were the Portugal Telecom Group,
it would be entitled to sell to Telefonica Moviles, S.A., which would
be obliged to buy (directly or through another company), all the
Portugal Telecom Group's ownership interest in Brasilcel N.V. This
right expires on December 31, 2007. The price for the acquisition of
the Portugal Telecom Group's holding in Brasilcel, N.V. would be
calculated on the basis of an independent appraisal (in the terms
provided for in the definitive agreements) performed by investment
banks, selected using the procedure established in these agreements.
Subject to certain conditions, the payment could be made, at
Telefonica Moviles' choice, in (i) cash, (ii) Telefonica Moviles S.A.
shares and/or Telefonica, S.A. shares, or (iii) a combination of the
two. This put option would be exercisable in the 12 months subsequent
to the end of the aforementioned six-month period,
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provided that the Portugal Telecom Group had not increased its
ownership interest to 50% of the total capital stock of Brasilcel N.V.
Also, in accordance with the definitive agreements, the Portugal
Telecom Group will be entitled to sell to Telefonica Moviles, S.A.,
which will be obliged to buy, its holding in Brasilcel, N.V. should
there be a change in control at Telefonica, S.A., at Telefonica
Moviles, S.A. or at any other subsidiary of the latter that held a
direct or indirect ownership interest in Brasilcel N.V. Similarly,
Telefonica Moviles, S.A. will be entitled to sell to the Portugal
Telecom Group, which will be obliged to buy, its holding in Brasicel,
N.V. if there is a change of control at Portugal Telecom SGPS, S.A.,
at PT Moveis SGPS, S.A or at any other subsidiary of either company
that held a direct or indirect ownership interest in Brasilcel N.V.
The price will be determined on the basis of an independent appraisal
(in the terms provided for in the definitive agreements) performed by
investment banks, selected using the procedure established in these
agreements. The related payment could be made, at the choice of the
group exercising the put option, in cash or in shares of the wireless
telephony operators contributed by the related party, making up the
difference, if any, in cash.
Agreements for the acquisition of Pegaso (Mexico)
In accordance with the agreements entered into by Telefonica Moviles,
S.A. on April 26, 2002, with Sprint, Leap Wireless, Qualcomm and other
financial investors, the acquisition by Telefonica Moviles, S.A. of
65% of the capital stock of the Mexican company Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso) was definitively concluded
on September 10, 2002.
Also, in compliance with the agreements adopted on that date,
Telefonica Moviles, S.A. and the Burillo group, which owned 35% of the
remaining capital stock of Pegaso, all the shares of Pegaso were
contributed to a company formed for this purpose called Telefonica
Moviles Mexico, S.A. de C.V. Telefonica Moviles, S.A. also contributed
to this new company the companies which it owned in northern Mexico.
After these contributions, Telefonica Moviles, S.A. had a 92% holding
in the new company.
Under the agreements entered into, the Burillo group has certain
mechanisms with which it can cease to be a stockholder, instrumented
through an option to sell its holding in Telefonica Moviles Mexico,
S.A. de C.V. The Burillo group can exercise its put option in 2007 or
2008, or, if its holding in the company falls below 50% of its
original ownership interest, on the date on which such decrease
occurs. If the Burillo group did not exercise its put option,
Telefonica Moviles could exercise its purchase option on the shares of
the company owned by the Burillo group. In this case, the purchase
price for the shares will be determined on the basis of a valuation of
the company on the date on which the rights were exercised. The
agreements entered into envisage that a portion of the purchase price
will be paid in cash, the amount of which will depend upon the Burillo
group's original investment in the company, to which interest will be
added and from which any cash distribution received by the Burillo
group will be deducted. The remaining portion of the purchase price,
if any, will be paid, at Telefonica Moviles' choice, in cash, in
shares of Telefonica Moviles or a combination of the two.
Also, under the stockholders' agreement entered into the Burillo group
has certain rights to veto agreements on the conversion of shares from
one class to another, declarations of
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bankruptcy or Chapter 11-type insolvency proceedings, dissolution or
liquidation, bylaw amendments which adversely affect the rights of the
Burillo group and mergers or corporate reorganizations which do not
afford the Burillo group the opportunity to maintain a given
percentage of ownership.
Newcomm Wireless Services, Inc. (Puerto Rico).
On September 29, 2003, Telefonica Moviles, S.A. arranged a
counterguarantee for Telefonica Internacional, S.A. for the obligation
of Telefonica Moviles Puerto Rico (a subsidiary of Telefonica Moviles)
regarding a loan of US$ 11 million granted by Banco Santander de
Puerto Rico. On January 11, 2005, Telefonica Moviles Puerto Rico
repaid the principal and paid the interest outstanding on the
aforementioned loan, and the guarantee provided by Telefonica
Internacional, S.A. and, consequently, the counterguarantee of
Telefonica Moviles, were released from that date.
On December 23, 2003, Telefonica Moviles, S.A. arranged a
counterguarantee for Telefonica, S.A. for the obligation of Newcomm
Wireless Services, Inc. de Puerto Rico, regarding a bridge loan of US$
61 million granted by ABN AMRO which matures on June 30, 2005. These
guarantees are deemed to be recoverable on the basis of the company's
business plan and of their seniority for credit ranking purposes with
respect to capital stock.
Medi Telecom (Morocco)
Telefonica Moviles Espana S.A. (Sole-Stockholder Company), as a
stockholder of Medi Telecom, signed a "Stockholders' Support
Agreement" together with Portugal Telecom and the BMCE Group. This
commitment requires the signatories to jointly and severally provide
up to (euro)210 million of financial assistance to Medi Telecom in the
event of noncompliance with financial clauses or a shortfall in funds
at Medi Telecom that would prevent it from meeting its debt servicing
obligations. If Medi Telecom obtains a specific level of operating
income before depreciation and amortization during a certain period of
time and if it fulfills all its obligations under the loan agreement,
this financial commitment will automatically be cancelled.
As a result of the most recent loans and capital increases subscribed
by, inter alia, Telefonica Moviles Espana, S.A. (sole-Stockholder
Company), the aforementioned commitment between the latter, Portugal
Telecom and the BMCE Group was reduced to (euro)118.3 million as of
December 31, 2004.
Guarantees provided for Ipse 2000 (Italy)
The Telefonica Group has provided for the Italian company Ipse 2000
S.p.A. (the awardee of an UMTS license in Italy, in which it owns an
indirect holding through Telefonica Moviles, S.A. and Telefonica
DataCorp, S.A.U.), guarantees securing financial transactions, mainly
its financing commitments relating to the amounts payable to the
Italian State in connection with the grant of the license amounting to
(euro)483.93 million.
On December 27, 2002, Telefonica Moviles, S.A. arranged a
counterguarantee for Telefonica, S.A., which in turn was
counterguaranteed by Telefonica Moviles Espana, S.A.U., whereby, under
certain terms and conditions, Telefonica Moviles, S.A. undertakes
vis-a-vis Telefonica, S.A. to pay for 91.79% of the amounts to be
legally, contractually or judicially paid by the latter in connection
with the guarantee that Telefonica, S.A. (jointly
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with other strategic partners of Ipse 2000, S.p.A.) provided to
certain banks, which in turn provided a bank guarantee for the Italian
authorities as security for the deferred payment of the UMTS license.
Payment of the deferred amount for the base license ((euro)16.01
million) was completed as of November 31, 2004. In order to avoid
execution of the guarantee by the Italian Government and subject to
the resolution of the litigation in progress, in addition to and
together with the payment of the base license price, IPSE 2000, S.p.A.
paid (euro)104.32 million as part of the installment outstanding in
connection with the deferred payment of the additional 5 MHz spectrum
which was granted to ISPE 2000, S.p.A. by the Italian Government for a
total amount of (euro)826.33 million. This additional 5MHz spectrum
was returned by IPSE 2000, S.p.A. There is currently a dispute between
this company and the Italian Government in connection with the
validity of this return.
On October 25, 2000, Ipse 2000, S.p.A. signed an agreement with
Ferrovie dello Stato, S.p.A., an Italian railroad company, whereby
Ipse 2000, S.p.A. was granted certain access and use rights on certain
specific sites owned by the railroad company. Telefonica, S.A.
provided a guarantee of up to (euro)48.2 million to secure the amounts
owed under this agreement. On November 28, 2003, Ipse 2000, S.p.A.
notified its decision to terminate the agreement with Ferrovie dello
Stato, S.p.A. on the grounds that the agreement was a lease agreement
subject to unilateral termination in the event of exceptional
circumstances. Since Ferrovie dello Stato, S.p.A. rejected these
grounds, arbitration proceedings have been initiated to resolve the
dispute as stipulated in the agreement.
Atento
Within the framework of the strategic agreement entered into on
February 11, 2000, by Banco Bilbao Vizcaya Argentaria S.A. (BBVA) and
Telefonica, on December 4, 2001, the two entities signed an agreement
establishing the procedure and conditions for the integration in
Atento, a Telefonica Group subsidiary, of the BBVA Group's Spanish and
international contact center business.
The transaction agreed on consisted of the initial contribution by
Telefonica S.A. of all its contact center business to a newly-formed
subsidiary (Atento N.V.) and the subsequent inclusion of the BBVA
Group in the stockholder structure of Atento N.V. through the
contribution of the Spanish companies Procesos Operativos, S.A. and
Leader Line, S.A., which entailed the transfer to Atento of the BBVA
Group's Spanish and international contact center business.
The transaction also envisaged the signing of various specific
agreements for the provision to the BBVA Group by Atento of contact
center services in Spain and Portugal and in several Latin American
countries.
Atento N.V. was incorporated on May 13, 2002. All Telefonica, S.A.'s
contact center business was contributed to it on that date. The
contributions by the BBVA Group under the terms of the agreement
discussed in this section have not yet been made.
On October 24, 2003, BBVA, Telefonica, S.A. and Atento N.V. entered
into an Agreement establishing the terms and conditions under which
BBVA, through General de Participaciones Empresariales, S.L. (GPE)
became a stockholder of Atento N.V. by contributing all the shares of
Procesos Operativos, S.A. As a result of the performance of
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this Agreement, Telefonica, S.A. currently owns shares representing
91.35% of the capital stock of Atento N.V., and GPE (a BBVA Group
company) owns the remaining 8.65%.
Subsequently, on December 1, 2003, the Atento Group company Atento
Teleservicios Espana, S.A. acquired all the shares of Leader Line,
S.A.
On November 27, 2003, BBVA and Atento N.V. entered into a framework
contract for services, with a term of four years, establishing the
terms under which Atento N.V. and its subsidiaries will provide
contact center activities and services to the BBVA Group.
At the same time as the aforementioned acquisition of Leader Line,
S.A., Telefonica and GPE entered into a put option contract whereby
GPE has the right to sell to Telefonica, which will be obliged to buy,
all the shares of Atento N.V. that GPE owns at the time the option is
exercised.
Commitments in relation to Sogecable
As a result of the agreements dated May 8, 2002 and January 29, 2003,
between Telefonica, S.A., Telefonica de Contenidos, S.A.U. and
Sogecable, S.A., relating to the merger of Via Digital into Sogecable,
on August 7, 2003, Telefonica de Contenidos acquired a commitment to
contribute funds up to a maximum of (euro)45.28 million to offset
Sogecable's cash deficit if it is unable to repay any amount owed
under a syndicated loan and credit facility granted to Sogecable on
August 7, 2003, by several financial institutions. This guarantee to
contribute funds to cover possible cash deficits at Sogecable expires
on June 30, 2005, the date on which it is estimated that the
restructuring process brought about by the merger of the digital
platforms will have been completed.
Also, on August 7, 2003, Telefonica de Contenidos, S.A.U. acquired a
commitment, up to a maximum of (euro)80 million, to guarantee
compliance with the payment obligations arising for Sogecable under
the aforementioned syndicated loan and credit facility, or to
indemnify the syndicate of banks and savings banks up to the same
amount against the damage and loss that the syndicate may suffer if
any of Sogecable's obligations in relation to the contract were to be
rendered null, void or ineffective for Sogecable.
In any case, the maximum amount guaranteed by Telefonica de
Contenidos, S.A.U. in relation to the aforementioned syndicated loan
and credit facility granted to Sogecable may not exceed (euro)80
million, and the guarantee will be reduced in proportion to the
voluntary or mandatory early repayments that take place during the
term of the related agreement, which ends on December 31, 2010.
Telefonica, S.A. and Telefonica de Contenidos, S.A.U. have stated that
they currently plan not to dispose of this holding for at least three
years from the exchange date.
Commitments relating to audiovisual content (Telefonica de Contenidos)
As of December 31, 2004, Telefonica de Contenidos had the following
commitments relating to sports rights:
1. In December 2004, Canal Satelite Digital, S.A. gave its approval
to allow Telefonica de Contenidos to broadcast on a non-exclusive
basis under the pay-per-view (PPV) system the signal for the
soccer games of the First and Second Divisions of the
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Spanish National Soccer League and of the Spanish Knock-out Cup
(Copa de S.M. El Rey) (except for the final) produced by
Audiovisual Sport, from January 1, 2005, at current market prices
for this type of content and for a period that will depend on the
soccer seasons for which the content provider will be able to
renew the current agreements with the soccer clubs.
2. Also in December 2004, an agreement was entered into with
Audiovisual Sport for the latter to provide the broadcast signal
to Telefonica de Contenidos and/or the Telefonica Group companies
to which Telefonica de Contenidos assigns the signal, for the
soccer games specified in the agreement with Canal Satelite
Digital, at current market prices for this type of content for
each soccer game, with guaranteed minimum payments per season to
Audiovisual Sport from January 1, 2005, and for a period that
will depend on the soccer seasons for which the content provider
will be able to renew the current agreements with the soccer
clubs.
Terra Networks, S.A. - BBVA (Uno-e Bank, S.A.)
By virtue of the agreements entered into in February 2000 by
Telefonica, S.A. and Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), in
August 2001 Terra Networks, S.A. acquired a 49% holding in Uno-e Bank,
S.A. for (euro)160.43 million.
On May 15, 2002, Terra Networks, S.A. and BBVA entered into a
memorandum of understanding to integrate the consumer finance lines of
business of Finanzia Banco de Credito, S.A. (a wholly-owned subsidiary
of BBVA) and Uno-e Bank, S.A. The agreement relating to this
integration was subject to a legal, financial and business review, and
to the obtainment of the relevant internal and administrative
authorizations. After the integration had taken place, Terra Networks,
S.A.'s ownership interest in Uno-e Bank, S.A. was 33% and that of the
BBVA Group was 67%.
On that same date (May 15, 2002), BBVA and Terra Networks, S.A.
entered into a liquidity agreement in which they established certain
liquidity mechanisms (call and put options) relating to the Uno-e
Bank, S.A. shares owned by Terra Networks, S.A., which would be
modified if a definitive agreement were reached regarding the
aforementioned integration of the consumer finance lines of business
of Finanzia Banco de Credito, S.A. and Uno-e Bank, S.A., to the effect
that BBVA would lose its call option and Terra Networks, S.A. would
retain its put option, but only at the market value as determined by
an investment bank.
On January 10, 2003, Terra Networks, S.A. and BBVA entered into an
agreement for the integration of the consumer finance line of business
of Finanzia Banco de Credito, S.A. and Uno-e Bank, S.A., in terms more
suited to their respective interests than those established in the
memorandum of understanding of May 15, 2002, which was then rendered
void. The definitive agreement was subject to the related internal and
administrative authorizations, which had to be granted before June 30,
2003, as a condition for the formalization and execution of the
integration transaction. After the integration had taken place, Terra
Networks, S.A.'s ownership interest in Uno-e Bank, S.A. was 33% and
that of the BBVA Group was 67%.
On that same date (January 10, 2003), BBVA and Terra Networks, S.A.
entered into a liquidity agreement that replaced that dated May 15,
2002, when the aforementioned integration took place. This agreement
establishes the following liquidity mechanism (put options) relating
to the Uno-e Bank, S.A. shares owned by Terra Networks, S.A.: Terra
Networks, S.A. has the right to sell to BBVA, and BBVA is obliged to
acquire, Terra Networks, S.A.'s holding in Uno-e Bank, S.A. between
April 1, 2005 and September 30,
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2007, at market value, established as the higher of the two following
values: (i) that determined by an investment bank; and (ii) that
obtained by multiplying the income after taxes of Uno-e Bank, S.A. by
the P/E ratio of BBVA, multiplied by the percentage of ownership held
by Terra Networks, S.A. that it is intended to sell as of that date.
Also, the exercise price of the aforementioned option may not be lower
than (euro)148.5 million if Uno-e Bank, S.A. does not achieve the net
ordinary revenue and pre-tax income targets set for 2005 and 2006 in
the above-mentioned liquidity agreement.
In accordance with the terms of the aforementioned agreement dated
January 10, 2003, once the relevant authorizations had been obtained,
on April 23, 2003, the Special Stockholders' Meeting of Uno-e Bank,
S.A. approved a capital increase at Uno-e Bank, S.A. to be subscribed
in full by Finanzia Banco de Credito, S.A., through the nonmonetary
contribution of the consumer finance business line of the latter,
whose Special Stockholders' Meeting held on the same date approved the
contribution and the subscription in full of the capital increase.
This capital increase led to the integration of the consumer finance
business line of Finanzia Banco de Credito, S.A. into Uno-e Bank,
S.A., following which the holdings of the BBVA Group and Terra
Networks, S.A. in Uno-eBank, S.A. are 67% and 33%, respectively.
Other commitments in the form of performance bonds for concessions or
licenses
1. Telefonica Moviles Espana, S.A.U., a subsidiary of Telefonica
Moviles, S.A., which is in turn a subsidiary of Telefonica, S.A.,
provided certain financial guarantees to the Spanish State
amounting to (euro)1,100 million, in relation to the grant to
Telefonica Moviles Espana, S.A.U. of a UMTS license in Spain.
These guarantees ensure fulfillment of the commitments assumed by
the company awarded the license in relation to network
deployment, job creation, investments, etc.
Telefonica Moviles Espana, S.A.U. initiated negotiations with the
Ministry of Science and Technology with a view to changing the
existing system of guarantees. This process was completed through
an Official Notice issued by the Secretary of State for
Telecommunications and for the Information Society on July 28,
2003, as a result of which the 71 guarantees in force at that
date amounting to (euro)630.9 million that were securing the
commitments assumed under the UMTS license were returned to
Telefonica Moviles Espana, S.A.U., after the latter had arranged,
in the same month, a guarantee of (euro)167.5 million with the
Government Depositary, to secure compliance with the UMTS service
commitments prior to launch of the UMTS and the commitments of
the first year from the date of commercial launch, in accordance
with the new system of guarantees. In September 2003, Telefonica
Moviles Espana, S.A.U. cancelled the returned guarantees at the
respective banks.
On June 23, 2004, the Ministry of Industry, Tourism and Commerce
issued an order authorizing the change in the commitments assumed
by Telefonica Moviles Espana, S.A.U. in connection with the
operation of the third-generation wireless telecommunications
(UMTS) service. Under this Order the requests filed by Telefonica
Moviles Espana, S.A.U. in this respect were upheld, compliance
with certain commitments was reinterpreted and other commitments
were eliminated for the benefit of public interest.
F-85
Telefonica
--------------------------------------------------------------------------------
As a result of this change, the amount to be guaranteed by
Telefonica Moviles Espana, S.A.U. as a performance bond for the
commitments assumed prior to the launch of the UMTS service and
in the first year of service was reduced to (euro)157.5 million.
The guarantee therefore amounted to (euro)157.5 million as of
December 31, 2004.
2. Telefonica Moviles, S.A. is backing the commitments assumed by
Grupo de Telecomunicaciones Mexicanos, S.A. de C.V. (GTM) to the
regulator, COFETEL for the long-distance national license it has
obtained. The maximum amount of this support is MXP 124.15
million. As of the date of preparation of these consolidated
financial statements no disbursements had been made in this
connection.
3. In 1999 Telefonica de Argentina, S.A. provided guarantees for the
promissory notes amounting to US$ 22.5 million provided by
Telefonica Comunicaciones Personales, S.A. to the Argentine
Government to guarantee the fulfillment of the obligations
assumed in the obtainment of the PCS licenses for areas I and
III. Also, Telefonica de Argentina, S.A. jointly and severally
guaranteed, with Telecom Argentina Stet-France Telecom, S.A., the
promissory notes amounting to ARP 45 million provided jointly by
Telefonica Comunicaciones Personales, S.A. and Telecom Personal,
S.A. to the Argentine Government to guarantee the fulfillment of
the obligations assumed in the obtainment of the PCS licenses for
area II. These guarantees are still in force, pending
verification by the Regulatory Authority of the fulfillment of
the PCS network coverage obligations secured by these guarantees.
In 2003 the Regulatory Authority verified substantially all the
coverage obligations in areas I and III, leaving only the cities
of La Rioja, Cordoba and Catamarca. The Regulatory Authority
completed the verification of the PCS network coverage
obligations in the aforementioned cities and in area II in 2004.
The Regulatory Authority must now decide the return of the
guarantees.
Telefonica, S.A. and those of its subsidiaries which head subgroups
perform, as holding companies, various equity investment purchase and
sale transactions in the course of their business activities, in which
it is standard practice to receive or provide guarantees regarding the
nonexistence of liabilities, contingencies, etc. in the investments
forming the subject matter of the related transactions.
The contingencies arising from the commitments described above were
evaluated when the consolidated financial statements as of December
31, 2004, were prepared, and the provisions recorded with respect to
the commitments taken as a whole are not representative.
c) Regulatory matters
On April 1, 2004, the Spanish Antitrust Agency ("the TDC") rendered a
decision finding that Telefonica de Espana had engaged in conduct
restricting competition and abused its dominant position.
On April 16, 2004, the Company filed an appeal for judicial review
contesting the decision of the TDC which, inter alia, had imposed a
(euro)57 million fine on Telefonica de Espana.
The appeal is being heard by Panel 6 of the Judicial Review Chamber of
the National Appellate Court (appeal no. 162/2004). The appeal, which
was filed on April 16,
F-86
Telefonica
--------------------------------------------------------------------------------
2004, included a motion to stay the execution of certain sections of
the decision of April 1, 2004, including the section relating to the
imposition of the fine.
In an Order of June 29, 2004, the Chamber granted an injunctive stay
of execution of the fine, subject to the posting of a bond in the same
amount. Accordingly, execution of the fine is currently stayed.
Based on the opinion expressed by its external advisers, the Company
considers that there are strong factual and legal arguments that could
lead to the appeal being upheld in whole or in part.
d) Environmental matters
The Telefonica Group, through its investees, and in line with its
environmental policy, has been undertaking various activities and
projects relating to environmental matters. In 2004 it incurred
expenses and made investments for scantly material amounts which were
recorded in the consolidated statement of income and the consolidated
balance sheet, respectively.
As regards the current systems implemented by the Group to reduce the
environmental impact of its facilities, several projects were
initiated the cost of which was included in the cost of the facilities
in which they are located.
As regards possible environmental contingencies, there are sufficient
internal control mechanisms, which are periodically supervised, either
in-house or by prestigious outside firms. No significant contingencies
have been disclosed in this connection.
e) Fees paid to auditors
The fees paid to the various member firms of the Deloitte Touche
Tohmatsu international organization, to which Deloitte, S.L. (the
auditors of the Telefonica Group) belongs, amounted to (euro)12.53
million in 2004 and (euro)14.82 million in 2003.
The detail of the foregoing amounts is as follows:
--------------------
Millions of Euros
--------------------
2004 2003
-------------------------------------------------------------
Audit of financial statements 8.56 7.48
Other audit services 2.95 2.90
Non-attest work 1.02 4.44
-------------------------------------------------------------
TOTAL 12.53 14.82
-------------------------------------------------------------
The fees paid to other auditors in 2004 and 2003 amounted to
(euro)11.20 million and (euro)7.78 million, respectively, the detail
being as follows:
F-87
Telefonica
--------------------------------------------------------------------------------
---------------------
Millions of Euros
---------------------
2004 2003
--------------------------------------------------------------
Audit of financial statements 2.55 2.10
Other audit services 0.23 2.05
Non-attest work 8.42 3.63
--------------------------------------------------------------
TOTAL 11.20 7.78
--------------------------------------------------------------
These fees include the amounts paid in connection with the fully and
proportionally consolidated Spanish and foreign Telefonica Group
companies. In this connection, they include (euro)0.61 million in 2004
and (euro)0.95 million in 2003 relating to 50% of the fees for the
proportionally consolidated companies (Deloitte Touche Tohmatsu,
(euro)0.61 million in 2004 and (euro)0.70 million in 2003; other
auditors, (euro)0.25 million in 2003).
f) Adoption of International Financial Reporting Standards - IFRS
Under Regulation (EC) no. 1606/2002 of the European Parliament and of
the Council of July 19, 2002, all companies governed by the law of an
EU Member State and whose securities are admitted to trading on a
regulated market of any Member State must prepare their consolidated
financial statements for the years beginning on or after January 1,
2005, in conformity with the International Financial Reporting
Standards (IFRS) previously adopted by the European Union. In
conformity with this Regulation, the Group will have to present its
consolidated financial statements for 2005 in accordance with the IFRS
adopted by the European Union.
Under IFRS 1, First-Time Adoption of International Financial Reporting
Standards, although the first consolidated financial statements
prepared in accordance with IFRS will, in the case of the Group, be
those for the year ending December 31, 2005, it will be necessary to
include, for comparison purposes, the figures for the preceding year
(2004) prepared on a basis consistent with that used to calculate the
figures for 2005. Accordingly, an opening balance sheet will have to
be prepared as of the date of transition to IFRS accounting methods
(January 1, 2004, in the case of the Group), also in accordance with
the IFRS in force as of December 31, 2005.
In order to meet the obligation imposed by Regulation (EC) no.
1606/2002, the Group has established a plan for the transition to IFRS
that includes, inter alia, the following steps:
1. Analysis of the differences between the methods provided for in
the National Chart of Accounts in force in Spain and related
implementing rules, and in IFRS.
2. Selection of the methods to be used in cases or areas in which
IFRS permit alternative accounting treatments to be applied.
3. Assessment and determination of the appropriate changes to or
adaptations of the operating procedures and systems used for
compiling and providing the information required in order to
prepare the consolidated financial statements.
4. Preparation of the opening consolidated financial statements, as
of the transition date, in accordance with IFRS.
F-88
Telefonica
--------------------------------------------------------------------------------
The Group commenced to implement the plan for the transition to IFRS
in 2003 and the stage of completion is currently as planned for the
adaptation to be completed in 2005.
(23) SUBSEQUENT EVENTS
In the period from December 31, 2004, through the date of preparation of
these consolidated financial statements the following events worthy of
mention took place at the Telefonica Group:
BellSouth
The acquisition of all the shares owned by BellSouth in the Chilean and
Argentine operators was performed on January 7 and January 11, 2005, thus
completing the purchase of the Latin American operators from BellSouth.
The acquisition of BellSouth's Chilean operators was formalized on January
7, 2005. The corporate value of these companies under the share purchase
agreement dated March 5, 2004, amounted to $531.89 million. As a result of
the company's net debt at the time of acquisition, the final purchase price
was $405.50 million.
The acquisition of the Argentine companies which belonged to the BellSouth
group was formalized on January 11, 2005. The agreed-upon corporate value
of these companies amounted to $988.36 million and the price finally paid,
after deducting the company's net debt, was $673.54 million.
The agreement entered into with BellSouth stipulates that, after the
acquisition of these companies, Telefonica Moviles will perform various
procedures to validate their cash and debt. If as a result of these
procedures the debt and cash figures used in the calculation of the final
share price at the closing date were found to be inaccurate, the purchase
price could be increased or reduced in order to reflect the difference
disclosed. Accordingly, the acquisition price might be adjusted slightly
upwards or downwards as a result of the cash and debt audit currently under
way.
Restructuring of Telefonica Holding de Argentina, S.A.'s debt
Telefonica Holding de Argentina S.A. has a debt to its majority
stockholder, Telefonica Internacional, S.A., amounting to $616 million of
principal and interest. Telefonica Internacional, S.A. has stated its
intention to partially convert this loan into equity through a capital
increase for an amount equal to the principal and related interest accrued
through the date of the Stockholders' Meeting, translated to Argentine
pesos at the closing buying exchange rate of Banco de la Nacion Argentina
on the business day immediately preceding the date of the aforementioned
Stockholders' Meeting (i.e. an amount of up to ARP 2,046 million), and
through the issuance at par of common registered class B shares of ARP 1
par value each, carrying one voting right each, for the same amount as the
amount to be converted into equity. These shares will have the same
dividend rights as the other shares outstanding at the issue date.
Accordingly, the Board of Directors of Telefonica Holding de Argentina,
S.A. resolved to hold a Special Stockholders' Meeting on February 15, 2005,
to adopt a resolution on the aforementioned capital increase, which was
approved at that Meeting.
Capital increase at Telesp Celular Participacoes (TCP).
F-89
On October 8, 2004, TCP resolved to increase capital by approximately 2.05
million reais. Following this capital increase, which was completed on
January 4, 2005, and was fully subscribed, Brasilcel increased its
ownership interest from 65.12% to 65.70%.
Assignment of debt owed by Telinver S.A.
On January 3, 2005, Telinver S.A. entered into an assignment agreement with
Telefonica Internacional S.A. and Telefonica de Argentina S.A. whereby
Telinver, S.A. assigned its debt payable to Telefonica Internacional S.A.U.
to Telefonica de Argentina S.A., which now has a claim on Telinver, S.A. as
a consideration for the assigned debt. Telefonica de Argentina, S.A. has
stated its intention to convert a portion of this claim into equity for the
purpose of balancing the net worth position of Telinver, S.A.
MTN Program for the issuance of debt instruments (Telefonica Emisiones,
S.A.U.)
Telefonica Emisiones, S.A.U., a subsidiary of Telefonica, S.A., has
launched a program for the issuance of debt instruments ("the Program") for
up to a total of (euro)15,000 million. The related Prospectus was filed
with the UK Listing Authority for which purpose the Dealership Agreement,
the Issue and Paying Agency Agreement, the Deed of Covenant, the Deed of
Guarantee and the Master Global Notes were formalized on February 4, 2005.
Under the Deed of Guarantee, the issues of debt instruments to be made by
Telefonica Emisiones, S.A.U. under the aforementioned Program shall be
irrevocably and unconditionally guaranteed by Telefonica, S.A.; all in
conformity with the resolutions adopted by Telefonica, S.A.'s Standing
Committee at its meeting on December 22, 2004.
Merger by absorption of Terra Networks, S.A. into Telefonica, S.A.
On February 9, 2005, Telefonica, S.A.'s Standing Committee resolved to
propose to Terra Networks, S.A. the commencement of negotiations for the
eventual merger of the two companies.
The Boards of Directors of Telefonica, S.A. and Terra Networks, S.A.
resolved at their respective meetings held on February 23, 2005, to approve
a plan for the merger by absorption of Terra Networks, S.A. into
Telefonica, S.A. through the dissolution of the former and the transfer en
bloc of all its assets and liabilities to the latter, which will acquire,
by way of universal succession, all the rights and obligations of Terra
Networks, S.A. The exchange ratio for the shares of the companies to be
merged was determined on the basis of the actual net asset value of
Telefonica, S.A. and Terra Networks, S.A. and will be as follows: 2 shares
of Telefonica, S.A. of (euro)1 par value each, for 9 shares of Terra
Networks, S.A. of (euro)2 par value each. The merger plan will be submitted
for approval by the respective Stockholders' Meetings.
Interim dividend out of 2004 income
In accordance with the shareholder return policy approved by the Company's
Board of Directors, and in conformity with the resolution adopted by the
Board on January 26, 2005, on February 23, 2005, the Board of Directors of
Telefonica, S.A., on the basis of the financial information furnished to
it, resolved, pursuant to Article 216 of the Spanish Corporations Law
currently in force, to distribute a fixed interim dividend out of 2004
income of (euro)0.23 gross per share for the Company's outstanding shares
carrying dividend rights, up to a maximum total amount of (euro)1,139.86
million. This interim dividend will be paid on May 13, 2005.
F-90
Telefonica
--------------------------------------------------------------------------------
ACCOUNTING STATEMENT SUPPORTING THE DISTRIBUTION OF THE INTERIM DIVIDEND:
------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------
Income from January 1, 2004, through 1,301.40
December 31, 2004
Mandatory appropriations to reserves (130.14)
Distributable income 1,171.26
Proposed interim dividend (maximum amount) 1,139.86
------------------------------------------------------------------------------
CASH POSITION:
As shown in the financial statements for 2004, prepared by the Board of
Directors on February 23, 2005, on December 31, 2004, there was sufficient
liquidity for the distribution of dividends. This liquidity also existed as of
January 31, 2005, as evidenced by the following statement of liquidity:
------------------------------------------------------------------------------
Funds available for distribution Millions of Euros
------------------------------------------------------------------------------
Cash 31.04
Unused credit facilities 6,836.06
Proposed interim dividend (maximum amount) (1,139.86)
Difference 5,727.24
------------------------------------------------------------------------------
Dividend with a charge to additional paid-in capital
Also, in conformity with the resolution adopted by the Board of Directors on
January 26, 2005, the Company's Board resolved to propose to the next
Stockholders' Meeting that a fixed cash dividend of (euro)0.27 per share be
distributed with a charge to additional paid-in capital. This dividend will be
paid, subject to approval by the aforementioned Stockholders' Meeting and as
announced by the Company, on November 11, 2005.
F-91
Telefonica
--------------------------------------------------------------------------------
(24) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
------------------------------------------------------------------------------------------------------------------------------------
APPLICATION OF FUNDS 12/31/04 12/31/03 SOURCE OF FUNDS 12/31/04 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
Funds applied in operations - Funds obtained from operations 11,633.24 10,635.10
Start-up and debt arrangement
expenses 58.59 144.99
Fixed asset additions Stockholder contributions
a) Intangible assets 594.09 809.88 a) Capital increase - -
b) Property, plant and equipment 3,172.33 2,973.30 b) Additional paid-in capital - -
c) Long-term investments 3,948.60 4,322.56 c) Minority interests 5.60 301.99
Deferred tax assets 716.01 - Deferred tax assets - 818.90
Deferred revenues 88.55 1.81
Dividends 3,268.05 2,070.18
Long-term deferred tax liabilities -
Long-term debt 2,697.17 3,783.76
Repayment or transfer to short term Fixed asset disposals
of long-term debt 5,792.81 5,166.77 a) Intangible assets 15.00 108.86
b) Property, plant and equipment 158.08 535.50
Provisions 1,119.59 1,897.95 c) Long-term investments 767.40 1,944.42
Other funds applied 15.45 213.48
Transfer to short term of long-term loans 80.54 1,783.38
Decrease in working capital due to Increase in working capital due to
disposal of equity investments 25.19 - disposal of equity investments - 100.39
Decrease in working capital due Increase in working capital due to
to inclusion of subsidiaries 464.60 - inclusion of subsidiaries - 46.10
Variation in working capital due Variation in working capital due to
to translation differences 581.25 translation differences 224.31 -
------------------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDS APPLIED 18,549.27 18,806.40 TOTAL FUNDS OBTAINED 15,69.89 20,060.21
------------------------------------------------------------------------------------------------------------------------------------
FUNDS OBTAINED IN EXCESS OF FUNDS FUNDS APPLIED IN EXCESS OF FUNDS OBTAINED
APPLIED (INCREASE IN WORKING CAPITAL) - 1,253.81 (DECREASE IN WORKING CAPITAL) 2,879.38 -
------------------------------------------------------------------------------------------------------------------------------------
18,549.27 20,060.21 18,549.27 20,060.21
---------------------- ----------------------
VARIACIONES DEL CAPITAL CIRCULANTE
------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN WORKING CAPITAL 12/31/04 12/31/03 DECREASE IN WORKING CAPITAL 31-12-04 31-12-03
------------------------------------------------------------------------------------------------------------------------------------
Due from stockholders for
capital calls - - Due from stockholders for capital calls - -
Inventories 268.64 - Inventories - 48.86
Accounts receivable 717.53 189.12 Accounts receivable - -
Accounts payable - 693.06 Accounts payable 5,391.85 -
Short-term investments 1,119.77 622.67 Short-term investments - -
Cash 518.60 - Cash - 207.49
Accrual accounts 10.05 5.31 Accrual accounts 122.12 -
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,634.59 1,510.16 TOTAL 5,513.97 256.35
------------------------------------------------------------------------------------------------------------------------------------
VARIATION IN WORKING CAPITAL 2,879.38 - VARIATION IN WORKING CAPITAL 1,253.81
------------------------------------------------------------------------------------------------------------------------------------
5,513.97 1,510.16 5,513.97 1,510.16
--------------------- ---------------------
F-92
Telefonica
--------------------------------------------------------------------------------
The reconciliation of the balances of the consolidated statements of income to
the funds obtained from operations is as follows:
---------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------
12/31/04 12/31/03
---------------------------------------------------------------------------------------------------------------------------
Income 2,877.29 2,203.58
Income attributable to minority interests 384.05 245.49
Income of associated companies 56.11 212.58
--------------------------------------------------------------------------------------------------------------------------
3,317.45 2,661.65
--------------------------------------------------------------------------------------------------------------------------
Add:
Dividends of companies accounted for by the equity method 71.24 -
Depreciation and amortization expense 5,968.17 6,283.70
Provisions for property, plant and equipment 27.29 35.69
Amortization of debt arrangement expenses 39.71 41.70
Amortization of consolidation goodwill 432.59 442.46
Amortization of other deferred charges 64.34 140.45
Write-down of consolidation goodwill 111.09 6.48
Investment valuation provisions 5.81 -
Undepreciated plant dismantled 28.98 38.68
Provisions for inventory adjustment 0.04 1.81
Period provisions 1,032.00 1,986.78
Provisions to technical reserves of insurance companies 122.05 13.30
Deferred interest 8.90 26.55
Deferred tax liabilities and other 1,063.85 787.05
Property, plant and equipment and intangible assets 20.60 16.52
Financial provision and supplementary pension payments to retired employees 61.63 5.17
Losses on disposal of consolidated companies 33.34 39.74
Less:
Gain on disposal of property, plant and equipment and intangible assets 47.63 221.83
Capital subsidies 94.90 12.93
Exchange differences 250.36 882.97
Long-term deferred tax assets and liabilities - -
Gain on disposal of consolidated companies 65.39 407.96
Fixed asset allowances used - 0.07
Other allowances used 283.68 356.53
Results on financial investments 33.88 10.34
--------------------------------------------------------------------------------------------------------------------------
Funds obtained from operations 11,633.24 10,635.10
--------------------------------------------------------------------------------------------------------------------------
F-93
(25) DIFFERENCES BETWEEN SPANISH AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND OTHER REQUIRED DISCLOSURES
The consolidated financial statements of Telefonica, S.A. (the Group) are
prepared in accordance with accounting principles generally accepted in
Spain ("Spanish GAAP"), which differ in certain significant respects from
accounting principles generally accepted in the United States of America
("U.S. GAAP"). A reconciliation of net income and shareholders' equity from
Spanish GAAP to U.S. GAAP is provided below.
Reconciliation of Net Income and Shareholders' Equity from Spanish GAAP to
U.S. GAAP.
The following table ("Reconciliation Table") sets forth the most
significant adjustments to consolidated net income (loss) and shareholders'
equity that would have been required had U.S. GAAP been applied instead of
Spanish GAAP:
Millions of Euros
----------------------------
2003 2004
(as restated*)
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity under Spanish GAAP 16,756.56 16,225.12
Additions (deductions) for U.S. GAAP purposes:
Reversal of net effect of revaluation of fixed assets and related accumulated depreciation (Note 25.1) (581.93) (517.89)
Research and development expenses (Note 25.2) (99.13) (77.76)
Capital increase expenses (Note 25.3.a) (105.21) (48.19)
Start-up costs (Note 25.3.b) (283.57) (248.39)
Capitalized interest (Note 25.3.c) 324.29 281.92
Foreign currency exchange gains (Note 25.3.e) 2.10 8.97
Reflagging expenses (Note 25.3.f) (5.21) (2.83)
Revenue recognition (Note 25.4) (836.07) (508.57)
Adjustment of valuation account under SFAS No. 109 due to current period events (Note 25.6) 361.84 133.87
Consolidation differences and unrealized gains (losses) on marketable securities (Note 25.7) (209.39) (24.94)
Present Value of certain assets and liabilities (Note 25.8) - (13.34)
Business Combination, Goodwill and intangible assets (Note 25.9) 1,675.94 2,130.68
Pension Plan of the Brazilian investees (Note 25.10) 96.17 3.10
Treasury stock (Note 25.11) (133.46) (690.18)
Derivatives instruments and hedging activities - SFAS 133 (Note 25.12) 31.87 (90.80)
Stock options plans (Note 25.13) (157.52) (157.52)
Provisions for Restructuring and others (Note 25.14) - 64.44
Adjustments related to U.S. GAAP equity investees (Note 25.15) 10.37 (28.49)
Effective interest rate (Note 25.16) (3.38) (2.89)
Temporary impairments (Note 25.17) (485.86) (398.34)
Sale and leaseback involving real estate (Note 25.18) (22.59) (12.88)
Accounting for Asset Retirement Obligations - SFAS 143 - effect in period (Note 25.19) (2.94) (15.55)
Other U.S. GAAP adjustments (Note 25.20) (0.39) (0.22)
Deferred taxes related to U.S. GAAP adjustments (Note 25.6) 899.96 344.14
------------------------------------------------------------------------------------------------------------------------------------
Total additions (deductions), before cumulative effect of a change in accounting principle 475.89 128.34
Cumulative effect of a change in accounting principle:
Revenue recognition. EITF 00-21, as of January 1, 2004 (Note 25.4) - (38.87)
Accounting for Asset Retirement Obligations - SFAS 143, as of January 1, 2003 (Note 25.19) (8.47) -
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity under U.S. GAAP 17,223.98 16,314.59
------------------------------------------------------------------------------------------------------------------------------------
(*) Figures for December 31, 2002 and 2003 have been restated to
retrospectively record our investment in Portugal Telecom, SGPS by the
equity method - see Note 25.7.
F-94
Millions of Euros
------------------------------------------
2002 2003 2004
(as restated*) (as restated*)
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) under Spanish GAAP (5,576.80) 2,203.58 2,877.29
Additions (deductions) for U.S. GAAP purposes:
Reversal of depreciation on revalued portion of fixed assets (Note 25.1) 90.33 96.60 64.05
Research and development expenses (Note 25.2) 12.52 72.10 21.65
Capital increase expenses (Note 25.3.a.) 138.75 65.77 57.24
Start-up costs (Note 25.3.b) (15.33) (0.48) 35.63
Capitalized interest, net of amortization (Note 25.3.c) (83.85) (27.55) (64.72)
Income recognized from PRIDES (Note 25.3.d) 4.82 - -
Foreign currency exchange gains (Note 25.3.e) 1.91 (1.36) 6.87
Reflagging expenses (Note 25.3.f) 6.34 3.45 2.38
Revenue recognition (Note 25.4) 241.84 132.67 246.65
Distribution of Subsidiary's shares to Shareholders' (Note 25.5) - (161.08) -
Adjustment of valuation account under SFAS No. 109 (Note 25.6) (263.58) 8.18 (227.98)
Consolidation differences and unrealized gains (losses) on marketable
securities (Note 25.7) 24.47 52.94 (103.04)
Present Value of certain assets and liabilities (Note 25.8) - - (14.06)
Business Combination, Goodwill and intangible assets (Note 25.9):
- Reversal (amortization) of Goodwill and translation adjustments 398.06 151.46 222.32
- Impairment of goodwill and intangible assets (107.12) - -
- Cumulative currency translation adjustment of disposed investees - - (492.78)
Pension Plan of the Brazilian investees (Note 25.10) (14.82) (49.70) (96.01)
Treasury stock (Note 25.11) 289.88 (167.07) -
Derivative instruments and hedging activities - SFAS 133 (Note 25.12) (610.20) 403.83 (19.86)
Provisions for Restructuring and others (Note 25.14) 8.89 (11.07) 64.33
Adjustments related to U.S. GAAP equity investees (Note 25.15) 81.00 118.67 40.01
Effective interest rate (Note 25.16) - (3.76) 0.21
Temporary impairments (Note 25.17) 75.48 107.07 87.52
Sale and leaseback involving real estate (Note 25.18) (3.61) (18.98) 9.70
Accounting for Asset Retirement Obligations - SFAS 143 -
effect in period (Note 25.19) - (2.94) (0.38)
Other U.S. GAAP adjustments (Note 25.20) 3.05 (1.38) (2.94)
Deferred taxes related to U.S. GAAP adjustments (Note 25.6) 91.89 (272.17) (97.20)
--------------------------------------------------------------------------------------------------------------------------------
Income (loss), under U.S. GAAP, before cumulative effect of a change in
accounting principle (5,206.06) 2,698.78 2,616.88
Cumulative effect of a change in accounting principle:
Revenue recognition. EITF 00-21, as of January 1, 2004 (Note 25.4) - - (38.87)
Accounting for Asset Retirement Obligations - SFAS 143, as of
January 1, 2003 (Note 25.19) - (8.47) -
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) under U.S. GAAP (5,206.06) 2,690.31 2,578.01
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) under U.S. GAAP consists of:
Net income (loss) from continuing operations (4,572.38) 2,770.79 2,924.33
Net income (loss) from discontinued operations (633.68) (80.48) (346.32)
Net income (loss) under U.S. GAAP (5,206.06) 2, 690.31 2,578.01
--------------------------------------------------------------------------------------------------------------------------------
(*) Figures for December 31, 2002 and 2003 have been restated to
retrospectively record our investment in Portugal Telecom, SGPS by the
equity method - see Note 25.7.
F-95
Euros per Share
(except per share data)
----------------------------------------
2002 2003 2004
----------------------------------------------------------------------------------------------------
Income (loss) per share, under U.S. GAAP, before (1.05) 0.54 0.55
cumulative effect of changes in accounting principles
----------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting principles - - (0.01)
----------------------------------------------------------------------------------------------------
Basic net income (loss) per share under U.S. GAAP (1.05) 0.54 0.54
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Income (loss) per share, under U.S. GAAP, before (1.05) 0.54 0.55
cumulative effect of changes in accounting principles
assuming Dilution
----------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting principles - - (0.01)
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per share, under U.S. GAAP (1.05) 0.54 0.54
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Basic net income (loss) per share from
Continuing operations, under US GAAP (0.92) 0.56 0.61
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per share from (0.92) 0.55 0.61
Continuing operations, under US GAAP
----------------------------------------------------------------------------------------------------
Basic net income (loss) per share from (0.13) (0.02) (0.07)
Discontinued operations, under US GAAP
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per share from (0.13) (0.02) (0.07)
Discontinued operations, under US GAAP
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Basic income (loss) per ADS (*), under U.S. GAAP, before (3.16) 1.63 1.64
cumulative effect of changes in accounting principles.
----------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting principles - (0.01) (0.02)
----------------------------------------------------------------------------------------------------
Basic net income per ADS (*), under U.S. GAAP (3.16) 1.62 1.52
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per ADS (*), under U.S. GAAP,
before cumulative effect of changes in accounting
principles. (3.16) 1.62 1.63
----------------------------------------------------------------------------------------------------
Cumulative effect of changes in accounting principles - (0.01) (0.02)
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per ADS (*), under U.S. GAAP (3.16) 1.61 1.61
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Basic net income (loss) per ADS (*) from (2.77) 1.68 1.83
Continuing operations, under US GAAP
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per ADS (*) (2.75) 1.66 1.82
from Continuing operations, under US GAAP
----------------------------------------------------------------------------------------------------
Basic net income (loss) per ADS (*) from (0.38) (0.05) (0.22)
Discontinued operations, under US GAAP
----------------------------------------------------------------------------------------------------
Diluted net income (loss) per ADS (*) (0.38) (0.05) (0.22)
from Discontinued operations, under US
GAAP
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Weighted average number of basic shares (thousands) 4,948,037 4,960,125 4,795,892
----------------------------------------------------------------------------------------------------
Weighted average number of diluted shares (thousands) 4,982,821 4,994,908 4,830,675
----------------------------------------------------------------------------------------------------
(*) Each ADS represents three ordinary shares of Telefonica, S.A.
Basic net income (loss) per share was calculated based upon net income
(loss) in each year divided by the weighted average number of shares
outstanding for the relevant period.
Diluted net income (loss) per share was calculated based upon net income
(loss) in each year divided by the weighted average number of shares
outstanding for the relevant period considering the future or current
events that may change the number of shares, unless those potential common
shares result in an anti-dilutive per-share effect.
F-96
The statement of changes in shareholders' equity under U.S. GAAP at December 31,
2004 and 2003, is as follows:
------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------
2003 2004
(as restated*)
-------------------------------------------------------------------------------------------------------------------
Shareholders' equity under U.S.GAAP at January 1 16,973.70 17,223.98
Variations:
Net income, under U.S. GAAP, for the year 2,690.31 2,578.01
Dividends (1,653.15) (1,924.17)
Non-monetary dividends, net of tax (Note 25.5) 134.18 -
Treasury stock (Note 25.11) (447.00) (2,031.05)
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on marketable securities, net of tax (Note 25.7) 22.36 77.84
Derivatives instruments and hedging activities, net of tax (Note 25.12) 4.58 (66.82)
Currency translation adjustments
Under Spanish GAAP 111.83 244.02
Cumulative currency translation adjustment of disposed investees - 492.78
Under U.S. GAAP (612.83) (280.00)
-------------------------------------------------------------------------------------------------------------------
Shareholders' equity under U.S.GAAP at December 31 17,223.98 16,314.59
-------------------------------------------------------------------------------------------------------------------
(*) Figures for December 31, 2003 have been restated to retrospectively record
our investment in Portugal Telecom, SGPS by the equity method - see Note
25.7.
Shareholders' rights and all dividend distributions are based on the
financial statements as reported for local Spanish statutory purposes
by Telefonica S.A.
The differences included in the Reconciliation Tables above are explained in the
following paragraphs:
1. Restatement of tangible assets.
As described in Note 7, some assets related to property, plant and
equipment were restated as of December 31, 1996. Such restatements are not
permitted under U.S. GAAP. The adjustments shown in the reconciliation
tables above include a reduction in shareholders' equity to eliminate these
restatements and an increase in income for the year resulting from the
recalculation of the period depreciation on a historical cost basis.
2. Research and development expenses.
In accordance with Spanish GAAP, research and development expenses are
capitalized and amortized by the straight-line method over three years from
the date of completion. Under U.S. GAAP, research and development expenses
are expensed as incurred.
3. Accruals and deferrals.
Different criteria are applied under Spanish GAAP and U.S. GAAP to accrue
certain items and, accordingly, the related adjustments have to be made in
the reconciliations of shareholders' equity and net income:
F-97
a. Capital increase expenses
In accordance with Spanish GAAP, expenses associated with the issuance
of equity securities are capitalized and amortized over five years.
Under U.S. GAAP, capital increase expenses must be deducted from the
proceeds of the new capital.
b. Start-Up costs
In accordance with Spanish GAAP, period costs incurred during the
start-up of a business that will contribute to the obtainment of
future revenues may be capitalized and are amortized over five years.
Under U.S. GAAP, all costs incurred during the start-up period should
be expensed in accordance with SOP 98-5, Reporting on the Costs of
Start-Up Activities, except for those costs that are directly related
to and specifically identifiable with the system construction or those
that are clearly related to asset acquisitions. Start-up costs
expensed include pre-operating costs such as organizational costs,
advertising and promotion, market research and administrative costs.
c. Capitalized interest
In accordance with Spanish GAAP, interest incurred during periods
exceeding 12 months in which assets were under construction may be
capitalized. As described in Note 4.e, the company generally doesn't
capitalize the financial expenses.
Under U.S. GAAP, interest incurred during periods in which qualifying
assets, as defined by SFAS No. 34, Capitalization of Interest Costs,
are under construction, are capitalized and amortized over the
expected life of the assets.
d. Income recognized from PRIDES
Under Spanish GAAP the Company recognized in 1994 the profit from the
PRIDES (Provisionally Redeemable Income Debt Exchangeable for Stock)
issue carried out by Cointel. That profit represents the difference
between the cash received from the debt holders and the carrying
amount of the Class B shares of Telefonica de Argentina S.A. (TASA),
which is the consideration to pay at the maturity of the PRIDES.
That profit would be recognized, under U.S. GAAP, only at the maturity
of the PRIDES, which has taken place during 2002.
e. Foreign currency exchange gains
Spanish GAAP requires unrealized foreign currency exchange gains in
excess of recorded foreign currency exchange loss to be deferred.
Under U.S. GAAP, foreign currency exchange gains are included in
income, in accordance with SFAS No. 52, Foreign Currency Translation.
f. Reflagging expenses
As a result of increasing competition in wireless communications,
Telefonica has invested certain amounts in costs in connection with
the signing of exclusive distribution agreements with distributors, in
order to increase distributor loyalty and to
F-98
assure that they continue to market Telefonica's wireless products
exclusively and correspond to refurbishing and improvement of such
distributors.
Under Spanish GAAP, such expenses have been deferred for a period of
three years, which is the term of the exclusive distribution agreement
for Telefonica products entered into with these distributors. Under
U.S. GAAP, reflagging expenses are recognized as incurred.
4. Revenue recognition
Under Spanish GAAP, revenues and expenses are recognized on an accrual
basis, i.e., when the goods and services are actually provided, regardless
of when the resulting monetary or financial flow occurs. Connection fees
and monthly fees are recorded up-front since they are non-refundable fees
for which services have been already provided.
Under U.S. GAAP, the Company adopted on January 1, 2000 Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101),
updated by SAB No 104. From December 2004 the Company adopted the
provisions of Emerging Issues Task Force Issue 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") for
multiple element arrangements. The revenue recognition policies by each
major segment and principal differences between Spanish GAAP and U.S. GAAP
are set forth below:
Telefonica Moviles
------------------
The Group enters into contracts with customers to provide a variety of
wireless communication services. The minimum contractual period is
generally one year for substantially all of the Group's wireless contracts.
Under these contracts, the customer generally is charged the following
fees:
a) A nominal fee for the initial connection of the wireless service and a
nominal charge for the handset. This charge is often less than the
cost of the handset itself.
b) A monthly fee for use of the Group's wireless networks.
c) Service fees consisting of an initial fee for establishing the call
plus fees based on airtime used by the caller, destination of the call
and service.
d) On occasion, an additional monthly fee or fee based on usage of
airtime for added value services, such as short messages services and
data services.
The Group recognizes revenues related to the monthly network fees in the
month that the wireless service is provided to the customer. The Group
recognizes interconnection fees arising from wireless to fixed calls and
fees from other services utilized by the customers in the period in which
the related calls are completed. The Group charges roaming per-minute fees
to other wireless companies for the use of its network by their customers.
Under Spanish GAAP, the Group recognizes initial connection fees, revenues
and related costs from sales of handsets, and commissions paid to agents
related to new subscriptions
F-99
upon signing of the contract with customers since they are non-refundable
since it is considered that goods and services have been provided.
Revenues and expenses under U.S. GAAP until December 31, 2003-
Under US GAAP, the Company has deferred revenues from obtaining new
customers over the expected period that the customer will use the services.
Under US GAAP the Company also deferred and amortized, until December 31,
2003, the related cost associated with obtaining new customers over the
same period as the related revenues were being recognized. Where the costs
incurred exceeded the deferred revenues, the excess costs were deferred and
amortized over the minimum enforceable contract period. The Company has
concluded, that the revenues less any direct costs, or net margin, from the
total telecommunications services arrangement during the minimum contract
term exceeded the costs deferred.
The minimum contract period is the period in which the customer must use
the wireless communications services provided by the Company. This period
is generally for a period lasting one year in duration. If the customer
decides to terminate its agreement during this minimum contractual period,
the customer will be obligated to immediately remit any remaining amounts
due under the contract to us. Moreover, any amounts paid by customers in
advance for services to be provided would not be refunded to customers.
The Company has determined the expected life of the subscriber relationship
based on its past statistical history as an operator providing wireless
services, looking in particular to metrics such as churn rate. The Company
has also considered factors such as the future projected churn rate of
subscribers when determining its estimates of average subscriber life.
Revenues and expenses under US GAAP after December 31, 2003-
The Group has adopted the provisions of the Emerging Issues Task Force
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21") for multiple-element revenue arrangements for
all outstanding transactions at January 1, 2004.
EITF 00-21 requires that arrangements involving the delivery of bundled
products or services be separated into individual component deliverables,
each with its own separate earnings process. Revenue relating to the
bundled contract is allocated among the different deliverables, based on
their relative fair values (the relative fair value of each of the
component deliverables to the aggregated relative fair value of the bundled
deliverables).
Handsets are sold many times in a bundled package to the customers, as the
handsets and the air-time are price-sensitive and, thus, volatile in a
competitive marketplace, the determination of fair values in the mobile
phone sector business is quite complex.
Because we enter in thousands of revenue arrangements every period, an
analysis has been made of the products and services provided by the Group
in order to conclude when those products and services are sold in a bundled
package and if they fall under scope of EITF 00-21. For Telefonica Moviles
Group the main activities affected by this new literature are the prepaid
and postpaid contract businesses.
F-100
For the mentioned activities, upon customer activation, arrangement
consideration received is allocated to each unit of accounting based on
their relative fair values. As nonrefundable, up-front connection fees
charged do not meet the criteria of a separate unit of accounting, the
additional arrangement consideration received from connection fees or
up-front fees is allocated to the other delivered item(s) to the extent
that the aggregate handsets and connection fee or up-front fee proceeds do
not exceed the allocated fair value of the handsets. Any connection fee or
up-front fees proceeds not allocated to the delivered handsets is deferred
upon connection and recognized as service revenue over the expected
customer relationship period. The amount allocable to a delivered item
(the handset) is always limited to the amount that is not contingent upon
the delivery of additional service (the airtime) or meeting other
specified performance conditions (the non contingent amount).
Some arrangements entered into the Group include offers to customers for
free or discounted products or services that will be delivered at a future
date if the customer completes a specified cumulative level of revenue
transactions. These arrangements are considered by the Group in the same
way under both Spanish and US GAAP, and are subject to the appropriate
provisions when entered into. These offers have not had any impact upon
adoption of EITF 00-21 because they are specifically excluded from the
scope of Issue 00-21.
The Task Force agreed not to provide guidance in EITF 00-21 on accounting for
direct costs and expenses related to an arrangement with multiple deliverables
due to the broad, general nature of the issue.
Upon application of EITF 00-21 the accounting for deferred customer acquisition
costs would create a mixed model, that is, in some circumstances the entire
amount of costs will be eligible for deferral and, in other circumstances, EITF
00-21 will limit the amount eligible for deferral to a very insignificant amount
or nil. By adopting an accounting policy whereby these costs are expensed when
incurred, all customer acquisitions costs will be accounted for consistently and
the mixed model will be eliminated.
For the reasons described below, we believe this accounting change is
preferable:
1 We understand that a change from one generally accepted method of
accounting (as it was the SAB 101 revenue and cost deferral accounting
policy until December 2003) to another generally accepted method of
accounting preferable when such change eliminates this type of a "mixed
model" of accounting.
2 Additionally, when we originally adopted our accounting policy with respect
to customer acquisition costs, a significant portion of the Company's sales
were contract sales with contractually enforceable minimum contract
periods. Thus, a significant portion of customer acquisition costs met the
criteria for deferral. The SAB 101 adjustment only considered those
contracts that met the criteria for deferral. Over the past few years the
Company's mix of business has changed due to growth in Latin America
regions and an increase in competition. Sales of prepaid phone cards now
comprise a significant portion of the Company's sales and the total number
of contracts that the Company sells with a contractually enforceable
minimum contract periods has declined. The Company expects these trends to
continue into the foreseeable future. As a result of this change in
business, the amount of deferred customer acquisition costs has decreased
over the last years and the amount is now considered to be immaterial.
3 Under IFRS adoption which has not taken place yet, the Company's accounting
policy will be to expense customer acquisition costs when incurred. As
such, changing the Company's accounting to a similar method under US GAAP
will eliminate one of the reconciling items between IFRS and US GAAP.
4 Lastly, the effect of deferring customer acquisition costs eligible for
capitalization in 2003 was approximately an increase of $1 million euros in
net income. Therefore, we believe that the effect of this accounting change
is not significant for the results of operations and the financial position
of the Company.
The closing balances of 2003 and 2002 of the SAB 101 adjustment in the US GAAP
reconciliation have not been restated and represent deferred revenues and costs
under SAB 101.
On a pro forma basis, assuming EITF 00-21 had been adopted at the beginning of
each period that is presented, the effect in Telefonica Group's Statements of
Income for 2003 and 2002 would not have have been significant.
Telefonica de Espana and Latinoamerica
--------------------------------------
Revenue for all wireline services is recognized when the service is
provided. Revenue from wireline services consists of line rental charges,
service charges based on the length of each type of calls, network
services, including interconnection and leasing high capacity lines,
maintenance charges and charges for other customer services. Revenues from
public telephone tokens and prepaid cards sales are recorded upon the usage
of minutes, as well as the related costs. Charges to customers for domestic
and long-distance calls are based on time, distance and use of services.
Billings are made monthly; unbilled revenues from the billing date to the
month end are estimated and recognized as revenue during the month in which
the service was provided. Provisions are made for trade accounts receivable
for which recoverability is considered improbable.
Revenue from wireline services also includes initial connection fees, which
under Spanish GAAP, are recognized upon signing of the contract with
customers, and direct inherent costs related to extension of the network
are deferred for 5 years, while other costs such as commercial and
administrative are expensed in year.
As mentioned above, the Group adopted the provisions of Emerging Issues
Task Force Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21") for multiple element arrangements outstanding
in January 1, 2004. Where the conditions requiring separate revenue
recognition existed, revenue was allocated among the different deliverables
based on their fair values, with revenue for each component deliverable
recognized when the revenue is realized and earned.
F-101
For sales of certain equipment bundled with telecommunication services,
mainly related to our internet and data services including connectivity
services, sales value consideration is allocated to each unit of
accounting based on their relative fair values. As initial connection fees
charged do not meet the criteria of a separate unit of accounting, any
additional arrangement consideration received from connection fees is
allocated to the other delivered item(s) or services to the extent that
the amounts of cash received or receivable do not exceed the allocated
fair value of the equipment and services. Any initial connection fee not
allocated to the delivered equipment and services is deferred upon
connection and recognized as service revenue over the average length of
the subscription.
Under U.S. GAAP, those transactions that are comprised of only one unit of
accounting and include a nonrefundable fee, are deferred in the average
length of the subscription, which depending on the services rendered (STB,
RDSI and ADSL) may vary between 7 to 1 years. Until December 31, 2003, all
costs related to activation were deferred up to the connection fees
revenues over the same time, and any excess over the revenues were directly
expensed.
Upon application of EITF 00-21, the Group has decided to change its
accounting treatment for those costs related to the activation, which in
U.S. GAAP were eligible for deferral, by adopting an accounting policy
whereby these costs are expensed when incurred. Such change has had a
deminimis impact in our consolidated financial position or results of
operations under U.S. GAAP.
Terra Lycos
-----------
The revenues from the sale of advertising are obtained through short-term
contracts and payments, which business partners make for long-term
prominent placing and advertising space on the Company subsidiaries'
websites. Under these contracts, these subsidiaries guarantee for a fixed
or a variable price a certain number of page impressions (accesses to
Internet pages which show advertising) or user referrals to other Internet
sites. Revenues on advertising contracts are recognized, under both Spanish
and U.S. GAAP, as services are performed over the period in which the
advertisement is displayed, provided that no significant Company
obligations remain at the end of a period in which the collection of the
resulting receivables is probable. Company obligations typically include
guarantees of minimum number of "impressions" or times that an
advertisement appears in pages viewed by users of the Company subsidiaries'
online properties.
Revenues from providing interconnect consist of the portion of the
interconnection fees due to the Company. The revenues from providing
Internet access are recorded, under both Spanish and U.S. GAAP, at their
gross amount when the Company acts as principal in the transaction and
carries the risk of loss for the collection. Only a commission is recorded
as revenue from providing Internet access when the criteria as described
above are not met. The revenues are recognized when the services are
performed.
The revenues from electronic commerce are derived principally from slotting
fees paid for selective positioning and promotion within the Company
subsidiaries' suite of products as well as from royalties from the sale of
goods and services from the Company subsidiaries' websites. Electronic
commerce revenues are generally recognized, under both Spanish and U.S.
GAAP, upon delivery provided that there are no substantial commitments on
the part of the Company remaining and the collection of the resulting
receivable is probable. In cases where there are significant remaining
obligations, the Company defers such revenue until those obligations are
satisfied. Electronic commerce revenues are recognized gross
F-102
when the Company acts as principal in the transaction, whereas they are
recorded net when it acts as an agent in the transaction.
The adoption of the provisions of Emerging Issues Task Force Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF
00-21") for multiple element arrangements outstanding in January 1, 2004
did not have any material impact in our revenue recognition criteria under
U.S. GAAP.
5. Distribution of Subsidiary's shares to Shareholders.
On January 7, 2003, Telefonica, S.A. and its subsidiary Telefonica de
Contenidos exercised call options on 19,532,625 shares of Antena 3 de
Television, S.A., representing 11.719% of its capital stock for (euro)
117.65 million. All unassigned portion of purchase price over acquired
assets and liability was recorded as goodwill. Following this acquisition,
the Telefonica Group owned 59.24% of the capital stock of Antena 3 de
Television.
Subsequently, Telefonica Group began a process of disposing its investment
in Antena 3 de Television, S.A. which commenced on April 30, 2003, with the
acceptance of the bid of (euro)364 million made by the Planeta Group for
25.1% of its capital stock.
Also, on April 11, 2003, the Stockholders' Meeting of Telefonica, S.A.
approved a prorata distribution to shareholders of shares representing 30%
of the capital stock of Antena 3 de Television, S.A. which took place in
October after this company had been admitted to listing on the Madrid Stock
Exchange.
In accordance with Spanish GAAP, the distribution of the shares in the
capital stock of Antena 3 de Television, S.A. was accounted for at fair
value giving rise to a gain recognized in income for the difference between
fair value and carrying amount of distributed assets of (euro)161.08
million.
Under U.S. GAAP, and according to APB 29, this prorata distribution of
shares of Antena 3 de Television, S.A. was recorded as a spin-off based on
the carrying value of the subsidiary.
6. Corporate income tax.
Under Spanish GAAP, deferred income taxes are recorded for timing
differences between book and taxable income.
For U.S. GAAP purposes, the Company utilizes the liability method as set
forth in SFAS No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on differences between
financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. Valuation allowances are provided for deferred tax assets when it
is determined that it is more likely than not that such assets are not
expected to be realized.
The Spanish accounting principles for recording income taxes differ from
those applicable under U.S. GAAP as regards to the period in which certain
deferred taxes assets and liabilities must be recorded and with respect to
the required disclosures. In this connection, the differences affecting the
Telefonica Group are as follows:
F-103
a) Under Spanish GAAP, deferred tax assets arising from tax loss
carryforwards as well as tax credits for export activities are
recognized only when their future realization is assured "beyond any
reasonable doubt", as opposed to the criteria of "more likely than
not" under U.S. GAAP.
b) Under Spanish GAAP, deductible temporary differences that are expected
to reverse in more than ten years from the balance sheet date are not
recorded as deferred tax assets. U.S. GAAP requires deferred taxes to
be provided for all temporary differences between financial reporting
and tax bases of assets and liabilities.
c) Under Spanish GAAP, for certain investment tax credits generated
subsequent to January 1, 1996, the reduction in income tax payments
for financial reporting purposes is reflected over the life of certain
fixed asset and thus a deferred revenue is created. The amortization
begins in the year the investment tax credit is used. Under U.S. GAAP,
to the extent such credits are non-refundable, the Company records
investment tax credits in the year they are generated.
d) Some taxable temporary differences that arise from the initial
recognition of an asset or liability in a transaction are not
recognized under Spanish GAAP, since are considered as a permanent
difference. Under U.S. GAAP all basis differences are considered
temporary differences and deferred tax assets and liabilities are
recognized.
e) Tax effects are computed on the differences arising from taxable
adjustments to U.S. GAAP, since they are considered to be temporary
differences to be accounted for under SFAS No. 109.
Under Spanish GAAP, until December 31, 2001, tax credits were not
recognized until they were utilized. Under U.S. GAAP, they are recorded
when generated and provisioned, if not expected to be recovered, through a
valuation allowance as indicated above. As explained in Note 4.p, as from
January 1, 2002, under Spanish GAAP, those deductible temporary differences
began being recorded when their future realization is assured "beyond any
reasonable doubt" as indicated in (a) above.
According to Spanish accounting policies, the Company has not provided tax
liabilities in their accounts for reserves pending distribution either by
the subsidiaries or by the equity method investees. For the purpose of U.S.
GAAP, the Company has not recorded a deferred tax liability for such
potential tax obligation where such reserves are the subject of
distribution, as for investments in subsidiaries are considered to be
permanent and for equity method investees, in most cases, it will be
entitled to a double tax deduction for the dividends it receives (or the
part of the capital gain obtained in the sale in respect of reserves
accumulated during the period of ownership of the shareholdings), so that
the Company believes that any future tax it may bear on reserves pending
distribution would not be in a significant amount.
The Group included (euro)2,137.24 million in its corporate income tax
return for 2002, arising from the difference between the market value and
the book value. This tax deduction will be applied in future years and was
not recorded under Spanish GAAP following a conservative criteria because
there are different interpretations of this issue. The tax credit
resulting from this matter amounting to (euro)748.03 million has been
recorded under U.S. GAAP in Telefonica Group.
This tax credit is fully provisioned for under US GAAP as the Company
considers that is more likely than not that this tax credit will not be
recovered in the future.
F-104
The amount of income tax under Spanish GAAP of the Telefonica Group is the
following:
--------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------
2002 2003 2004
--------------------------------------------------------------------------------
Domestic Income Tax (3,340.59) (2.07) 653.03
Foreign Income Tax 111.94 915.50 485.68
--------------------------------------------------------------------------------
Total Income Tax (3,228.65) 913.43 1,138.71
--------------------------------------------------------------------------------
A reconciliation setting forth the difference between the effective income
tax rate of the Telefonica Group and the Spanish domestic statutory income
tax rate under Spanish GAAP is as follows:
--------------------------------------------------------------------------------
Millions of Euros
------------------------------------------
2002 2003 2004
--------------------------------------------------------------------------------
Tax as enacted rate (35%) (5,110.37) 1,176.88 1,538.95
Permanent differences 1,459.52 (147.75) (252.83)
Tax credits (1,115.11) (227.40) (126.59)
Foreign additional taxes 1,537.31 111.70 (20.83)
--------------------------------------------------------------------------------
Total Income Tax (3,228.65) 913.43 1,138.71
--------------------------------------------------------------------------------
An analysis of the investment tax credits generated and the amounts
recognized in income in 2004 and 2003 under U.S. GAAP are presented below:
------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------
Tax Net
Tax Valuation Liabilities Income
Asset Increase Allowance (Increase) Impact
(Decrease) (Increase) Decrease (Increase)
(note a and b) Decrease (note c and d) Decrease
------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 256.79 (60.19) 157.06 263.58
------------------------------------------------------------------------------------------------------------
Adjustment to beginning balance due to 1.46 - (3.56) 2.10
additional credits
Credits arising in 2003 968.34 (967.05) 33.99 (35.28)
Credits taken in 2003 (7.82) 30.20 (47.38) 25.00
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,218.77 (997.04) 140.11 (8.18)
------------------------------------------------------------------------------------------------------------
Adjustment to beginning balance due to - - 0.12 (0.12)
additional credits
Credits arising in 2004 (*) 290.67 (420.56) 32.92 96.97
Credits taken in 2004 (73.00) 23.08 (81.21) 131.13
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,436.44 (1,394.52) 91.94 227.98
------------------------------------------------------------------------------------------------------------
(*) In July 15, 2004 there has been a European Court Decision that indicated
that Spanish tax credits for export activities could be viewed as an
illegal state government aid, which could restrict its future utilization.
In addition, the European Community has asked Spain for additional
information regarding such credits in order to reach a definitive
conclusion of its usage. Therefore, given such evidence and indications,
the Company has decided to record a valuation allowance in December 31,
2004 for such tax credits since it considered that it is more likely than
not that some portion or all of such credits would not be realized.
F-105
Deferred tax assets and liabilities as required under SFAS No. 109 include
the following (in millions of Euros):
================================================================================
Tax Credits
--------------
Prior year losses 1,224.00
Export activities deduction 170.52
Other 41.92
--------------
Total 1,436.44
================================================================================
================================================================================
Valuation
Allowance
--------------
Prior year losses 1,224.00
Export activities deduction 170.52
--------------
Total 1,394.52
================================================================================
================================================================================
Deferred
Liabilities
--------------
Tax Credits for investment in new fixed assets taken and not
recorded as income 78.72
Difference of accounting and tax value of assets 13.22
--------------
Total 91.94
================================================================================
7. Consolidation differences and unrealized gains (losses) on marketable
securities
Under Spanish GAAP, investments in which the Group exercises significant
influence are carried by the equity method and investments in which the
Company owns less than 50% but has the majority of the common voting stock
or are controlled by the Company through the Board of Directors must be
consolidated. In addition, under Spanish GAAP, a holder of at least 20% or
3%, for listed investments, presumes significant influence. In general,
under U.S. GAAP, only companies in which a holding of between 20% and 50%
is owned are carried by the equity method, unless there is evidence that
significant influence is exercised. Except for those circumstances required
by FIN 46(R), investee companies in which a participation above 50% and
control rights exist are consolidated.
In addition, SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, requires certain investments in certain financial assets
to be classified on the basis of the purpose for which they were acquired
(held-to-maturity securities, trading securities or available-for-sale
securities). The treatment of the unrealized gains and losses differs
depending on the classification: unrealized gains and losses (other than
permanent diminutions in value) on securities that the Company considers
held-to-maturity are not recorded; unrealized gains and losses on
securities considered available-for-sale are not recorded in the income
statement but included as a component of accumulated other comprehensive
income until they are realized or recorded into earnings due to other than
temporary decline of value; and unrealized gains or losses on trading
securities are recorded in the income statement. These criteria differ from
Spanish GAAP.
During 2002, due to market conditions, the company recorded an other than
temporary impairment of (euro)255 million. Of this amount, (euro)215
million are also recorded under Spanish GAAP.
F-106
Following Spanish GAAP, Infonet Services Corporation, Inc, Amper, S.A.,
Cia. Anonima N. de Telefonos de Venezuela, C.A and Banco Bilbao Vizcaya
Argentaria, S.A. were accounted for under the equity method because they
are listed companies and Telefonica owns 14.53%, 6.10%, 6.92% and 1.07%
respectively, of their capital stock. However, since there is no additional
evidence indicating the ability to exercise significant influence over
these investees (ie: a participation over 20%), these investments were
accounted for as available for sale equity securities at their market
value, if available, under U.S. GAAP. Nonetheless no decision has been
taken about the possible sale of these investees. Telefonica has reached
some agreements with Banco Bilbao Vizcaya Argentaria, S.A. to consolidate
the Company by the equity method under Spanish Gaap. Under U.S. GAAP this
investee must be consolidated by market value.
During 2004, the Company bought an additional 4.88% interest in Portugal
Telecom, SGPS, thereby increasing its holdings to 9.58%. As a result, and
following APB No. 18 requirements, management considered that Telefonica
could exercise significant influence over Portugal Telecom, SGPS' operating
and financial activities, therefore the Company has changed in this year
its method of accounting for this investment from an available-for-sale
securities to the equity method investee. Securities classified as an
available-for-sale are recorded at fair value and unrealized gains and
losses for such securities are reported in other comprehensive income,
except for any other then temporary impairments. Under the equity method,
the Company records its proportionate share of the earnings or losses for
the equity investee. The effect of the change for this investment was to
restate prior years reconciliation in order to eliminate unrealized gains
and losses for available-for-sale securities reported in other
comprehensive income for each of the years presented and to retroactively
record such investment by the equity method. The effect of the change was
an increase 2002 and 2003 net income by (euro)8.43 million and (euro)4.23
million, respectively. Shareholders equity as of the beginning of 2002 has
been decreased by (euro)110.20 for the effect of retroactive application of
the new method.
As of December 31, 2004 and 2003, the classification of these investments
under U.S. GAAP was as follows:
--------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------
Unrealized
Carrying Fair Net Gain
Amount Value (Loss)
--------------------------------------------------------------------------------
December 31, 2003:
Held-to-maturity - - -
Available-for-sale-securities 2,414.08 2,132.34 (281.74)
Trading securities 134.15 122.90 (11.25)
December 31, 2004:
Held-to-maturity - - -
Available-for-sale-securities 1,918.30 1,911.39 (6.91)
Trading securities 146.11 149.87 3.76
--------------------------------------------------------------------------------
8. Present Value of certain assets and liabilities
Under Spanish GAAP, some liabilities for contingencies as well as certain
assets/liabilities without fixed date have been recorded at the present
value of the disbursements that the Company expects to incur and or receive
from such assets and liabilities. Under U.S. GAAP, only fixed or
determinable receivables and payables should be discounted. The adjustment
provided in the reconciliation between consolidated shareholders equity and
net
F-107
income under Spanish GAAP and U.S. GAAP, represents the difference between
net present value and nominal value of such assets and liabilities.
9. Business Combinations, Goodwill and intangible assets.
Acquisitions
------------
Under Spanish GAAP, business combinations that are realized through the
issuance of shares are normally accounted for under the pooling of
interests method. Under U.S. GAAP, when equity securities (including any
warrants, rights or options) are issued as consideration in business
combinations, their fair value should be based on current market prices in
order to determine the purchase price. Up to December 31, 2000, the Group
performed the exchange of minority shareholders' shares of various
entities. These transactions were recorded under Spanish GAAP at the same
price of the issue of Telefonica's capital stocks, which is very close to
the net equity of the acquired companies and were accounted for under the
pooling of interest method for Spanish GAAP purposes. Under U.S. GAAP,
these acquisitions were recorded in accordance with the purchase accounting
method. By this method, the purchase prices were calculated considering the
market value of issued shares of each acquisition. The excess of the cost
under US GAAP over the net amounts of acquired assets and liabilities was
recognized as goodwill, which was being amortized over a period of 20 years
up to December 31, 2001, but which ceased to be amortized on January 1,
2002 in accordance with SFAS 142, Goodwill and Other Intangible Assets.
2002
----
- On July 22, 2002, Telefonica Moviles, S.A. carried out a capital increase,
for a total amount (par value plus additional paid-in capital) of
(euro)27.66 million. Mesotel subscribed and paid the 14,557,046 new shares,
in full through the contribution of the shares of the following companies:
TES Holding, S.A. de C.V., Telca Gestion, S.A. de C.V., TCG Holdings, S.A.,
Telca Gestion Guatemala, S.A., Paging de Centroamerica, S.A. and Telefonica
de Centroamerica, S.L. Under Spanish GAAP, goodwill of (euro)14.18 million
was recorded based on the difference between the stated value of the shares
issued and the fair value of the net assets acquired. However, for U.S.
GAAP purposes, purchase price should be based on the fair value of the
shares issued. This additional consideration resulted in additional
goodwill of (euro)70.31 million as of December 31, 2002.
- On April 26, 2002, Telefonica Moviles, signed agreements to purchase a
65.23% of Pegaso from Sprint, Leap Wireless, Qualcomm and other financial
investors. Pegaso operates in 14 cities throughout Mexico (Tijuana,
Guadalajara, Mexico D.F., Monterrey, Ensenada, Nuevo Laredo, Reynosa,
Toluca, Chapala, Mexicali, Saltillo, Cuernavaca, Puebla and Leon) and owns
licenses to operate on a nationwide basis. In connection with this
agreement, Telefonica Moviles, also agreed with the Burillo Group, who held
a 34.77% interest in Pegaso at the time of our acquisition, to contribute
our interests in Pegaso and our other Mexican operators with the Burillo
Group's interest in Pegaso into a new company, Telefonica Moviles Mexico.
On September 10, 2002, having obtained authorization from the related
Mexican authorities, Telefonica Moviles acquired a 65.23% holding in Pegaso
Telecomunicaciones, S.A. de C.V. (Mexico) for (euro)92.87 million.
Subsequently, in order to strengthen its net worth position, Pegaso
Telecomunicaciones, S.A. de C.V. carried out a capital increase in
F-108
which Telefonica Moviles, S.A. paid (euro)211.45 million corresponding to
its 65.23% holding. The agreements entered into with the Pegaso Group
envisaged the integration of the holdings in the northern Mexican companies
and in Pegaso Telecomunicaciones, S.A. de C.V. into a single company of
which the two groups would be stockholders. This transaction was
implemented through the sale of the holdings to Telefonica Moviles Mexico,
followed by the conversion of the debt into equity by the creditors, giving
Telefonica Moviles a nationwide presence in Mexico. We hold a 92% interest
in Telefonica Moviles Mexico and the Burillo Group owns the remaining 8%.
The Company adopted SFAS No. 141 to account for this acquisition. As this
business combination was made in the last quarter of 2002, there was an
amount of goodwill from the acquisition of Pegaso that was pending to be
allocated to any potential intangibles that could exist. Considering that
the intangibles that could result, if any, would have a long useful life,
the effect of the amortization of those intangibles in year 2002 (three
month period from acquisition) was not considered to be significant. The
amount of goodwill at the time of acquisition was the same under Spanish
and U.S. GAAP.
In order to account for the acquisition of Pegaso Telecomunicaciones, S.A.
de C.V. and the integration of the holding in the northern Mexican
companies in Telefonica Moviles Mexico, EITF 90.13 literature was
considered. In determining the values assigned to Pegaso (Target) and to
the Mexican northern companies contributed (Subsidiary), assets and
liabilities and the minority interest for purposes of Telefonica S.A.
consolidated financial statements, Telefonica, S.A. steped up Pegaso's
assets and liabilities to the extent acquired by Telefonica and should step
up the Mexican northern companies assets and liabilities to the extent sold
to Burillo. The result obtained in the sale of the 8% of the norther
Mexican companies to Burillo which were contributed to Telefonica Moviles
Mexico was not significant and therefore was not considered in the
reconciliation to U.S. GAAP. In September, 2002, the new cost basis in
Telefonica Moviles Mexico amounts to (euro)1,885.87 million, which equals
to the 92% of the fair value of Telefonica Moviles Mexico and the historic
cost of the net assets contributed to Telefonica Moviles Mexico amounts to
(euro)1,362.9 million ((euro)1,452.8 million from the northern Mexican
companies and (euro)(89.9) million from Pegaso). In 2003, after the
allocation process required by SFAS No. 141, (euro)504.65 million, were
allocated as a net additional value of the licenses obtained to operate
nationwide wireless communications services in Mexico; this allocation has
also been considered for Spanish GAAP purposes. This amount was
reclassified, once the respective valuations were completed, to the
"Intangible Assets - Concessions, Patents, Licenses and Other" caption
(Notes 4.d and 5.b). These licenses are being amortized over the concession
period based on the estimated capacity to generate revenues in each period.
Under U.S. GAAP, the allocation performed in 2003 from this purchase was as
follows:
September 30, 2002
(Millions of Euros)
Euros)
Current assets 290.9
Property, plant and equipment 572.9
Intangible assets 764.1
Goodwill 18.2
Total assets acquired 1,646.0
Current liabilities 643.5
Long-term debt and other 569.6
Total liabilities assumed 1,213.1
Total net assets assumed 432.9
F-109
In Note 22 certain agreements relating to the acquisition of the remaining
8% of Telefonica Moviles Mexico are explained. The options included in
these agreements have a minimum value at December 31, 2003 and 2004 as the
minimum value to be paid to Burillo is lower than fair value of the 8% of
Telefonica Moviles Mexico as of December 31, 2003 and 2004
Pegaso Telecomunicaciones, S.A. de C.V. did not have any Research and
Development assets.
As determined by SFAS No. 142 and SFAS No. 109, due to the fact the
valuation allowance is recognized for Pegaso tax credit carryforwards at
the acquisition date, Telefonica did not recognized any deferred taxes
asset related to such concept. At the acquisition date the total amount of
tax credit carryforwards for Pegaso amounted to (euro)808.4 million, which
could give raise to a future tax benefit of (euro)274.9 million. Under U.S.
GAAP, for future periods, upon the elimination of the valuation allowance
related to such deferred tax asset, all tax benefit, if any, will be
applied first to reduce to zero any goodwill related to this acquisition,
second to reduce to zero any other noncurrent intangible assets related to
the acquisition, and third to reduce our income tax expense.
2003
----
- On July 2003, Telefonica, S.A. concluded the tender offer for Terra
Networks, S.A. shares by acquiring 202,092,043 of this company's shares for
(euro)5.25 per share, which represented 33.6% of its total capital stock.
Following this transaction, Telefonica's direct holding in Terra was 71.97%
(38,58% as of December 31, 2002). In addition, on December 2003, Terra
Networks, S.A. acquired 26,525,732 shares owned by Citibank N.A., as the
agent bank for the company's stock option plan assumed as a result of the
acquisition of Lycos, Inc. Terra Networks, S.A. continues to guarantee the
coverage of the employee stock option plan with the shares now held as
treasury stock. As a result of this transaction, the Telefonica Group
increased its effective percentage of ownership from 71.97% to 75.29% as of
December 31, 2003. For U.S. GAAP, until the completion of the tender offer,
since the Company did not have either majority of voting rights or an
agreement that guaranteed the control rights for a minimum period of 10
years, this investment was accounted for by the equity method until July
31, 2003, and for December 31, 2002 and 2001.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition.
July 31, 2003
(Millions of Euros)
Euros)
Current assets 598.68
Property, plant and equipment 13.97
Intangible assets 22.73
Other long-lived assets 279.48
Goodwill 207.79
Total assets acquired 1,122.65
Current liabilities 70.74
Long-term debt and other 22.31
Total liabilities assumed 93.05
Total net assets acquired(*) 1,029.60
F-110
(*) The effective price of the business acquisition is
(euro)1,029.60 million which is presented net of
intragroup operations.
As determined by SFAS No. 142 and SFAS No. 109, due to the fact the a
valuation allowance is recognized for Terra Networks tax credit
carryforwards at the acquisition date, Telefonica did not recognized any
deferred tax asset related to such concept. At the acquisition date the
total amount of tax credit carryforwards for Terra Networks amounted to
(euro)3,200.8 million, which could give raise to a future tax benefit of
(euro)1,120.3 million. Under US GAAP, for future periods, upon the
elimination of the valuation allowance related to such deferred tax asset,
all tax benefit, if any, will be applied first to reduce to zero any
goodwill related to this acquisition, second to reduce to zero any other
noncurrent intangible assets related to the acquisition, and third to
reduce our income tax expense.
2004
----
On March 5, 2004, Telefonica Moviles, S.A. reached an agreement with
BellSouth Corporation ("BellSouth") for the acquisition of all the holdings
owned by latter in Argentina, Chile, Peru, Venezuela, Colombia, Ecuador,
Uruguay, Guatemala, Nicaragua and Panama, making it the only cellular
operator in all the key Latin American markets (population over 421
million) and leaving it an excellent position to capture the region's
strong growth potential.
The effective transfer of the shares of these companies was conditional
upon the obtainment of the required regulatory authorizations in each
country and on the acceptance of the offers by the minority stockholders.
The shares were effective transferred in the last quarter of 2004.
BellSouth's holdings in Ecuador, Guatemala and Panama were transferred on
October 14, 2004, and the holdings in Colombia, Nicaragua, Peru, Uruguay
and Venezuela were transferred on October 28, 2004. Lastly, the holdings in
Chile and Argentina were transferred on January 7 and 11, 2005.
As indicated in Note 2-c of the financial statements, the consolidated
statements of income include the revenues and expenses of the companies
from the date on which the related holding was acquired or the company was
formed through year-end. Therefore, the revenues relating to the companies
acquired from BellSouth on October, 2004 relate to two months of
operations.
There are no Research and Development assets acquired in these companies.
There are no contingent considerations in connection with the mentioned
acquisitions.
In addition to the acquisition of the BellSouth Group's ownership interests
in the wireless telephony operators in Latin America, in compliance with
the commitments assumed under share purchase agreements, Telefonica Moviles
offered to acquire the ownership interest held by the minority stockholders
of these companies, and in all cases the acquisition price was equal to
that agreed on with BellSouth.
Under this agreement, the total assets of the aforementioned operators were
valued based on external valuations at US$ 4,330 million (US$ 5,850 million
including the investments in Argentina and Chile acquired in January 2005).
The total acquisition cost for Telefonica Moviles under Spanish GAAP,
adjusted by the net debt of the companies at the transfer date, amounted to
(euro)3,252,539 thousand (excluding Chile and Argentina). The acquisition
cost considered under US GAAP amounts to (euro)3,211,596 thosusand. The
difference in the
F-111
acquisition cost between Spanish and US GAAP of (euro)40,943 thousand is
due to specific derivative transactions that were entered into in order to
hedge the forecasted business combinations. The expense incurred as a
consequence of the mentioned transactions do not qualify for hedge
accounting under US GAAP, according to SFAS 133 and can not be considered
as additional goodwlll and therefore have been considered as expenses under
US GAAP.
The values assigned to each transaction and the acquisition cost for
Telefonica Moviles under Spanish GAAP are described in Note 2 c.
Pursuant to the agreement with BellSouth, certain procedures were performed
to validate the cash and debt of the companies acquired, the end results of
which are currently being negotiated by Telefonica Moviles and Bellsouth
Corporation. As a result of these negotiations, the debt and cash amounts
taken into account for the purpose of calculating the ultimate price of the
shares could be subject to slight changes, which in no case would be
material with respect to the transaction taken as a whole.
The allocation was made on the basis of the preliminary conclusions drawn
from the related valuation performed by independent appraisers. However,
once the process of allocating the acquisition price to all the assets and
liabilities of the companies acquired has been completed at the end of
2005, the amounts of the goodwill recorded could be modified in the form of
reclassifications to other balance sheet captions, although it is
considered that such reclassifications would not be material.
Under US GAAP, the allocation performed in 2004 from this purchase was as
follows:
---------------------------------------------------------------
Millions of
Euros
-----------------
---------------------------------------------------------------
Current assets 926.3
Property, plant and equipment 696.9
Intangible assets 1,116.1
Other long-lived assets 32.3
Goodwill 1,862.2
Total assets acquired 4.633.8
Current liabilities 732.7
Deferred tax liability 299.4
Long-term debt and other 390.1
Total liabilities assumed 1,422.2
---------------------------------------------------------------
Total net assets acquired 3,211.6
---------------------------------------------------------------
The following unaudited proforma information presents a summary of the
effect in the Company's consolidated results of operations as if the
acquisitions described above had occurred on January 1, 2004 and 2003.
--------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------------------------------------------
Year ended December Year ended December
31, 2003 31, 2004
--------------------------------------------------------------------------------
Revenues 12,184 14,212
--------------------------------------------------------------------------------
Net income 1,790 1,583
--------------------------------------------------------------------------------
Basic EPS (Euros) 0.35 0.33
--------------------------------------------------------------------------------
F-112
These unaudited proforma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of
operations that actually would have resulted had these operations occurred
at January 1, 2004 and 2003, or future results of operations of the
consolidated entities.
Goodwill and Impairments
Spanish GAAP allow some temporary provisions to be accounted for as
impairment of goodwill. Additionally, under Spanish GAAP, the impairment of
goodwill is always measured by the comparison of fair value of each
subsidiary or investee and recorded amounts.
Under US GAAP, until January 1, 2002, any additional goodwill arising in a
business combination was tested for recoverability at the reporting unit
level according to APB 17, by a comparison with its estimated fair value up
to December 31, 2001. Any amounts that exceeded its fair value was
immediately written off. Provisions under Spanish GAAP considered temporary
or which did not qualify as goodwill impairment under U.S. GAAP were
reverted and any other impairment according to U.S. GAAP requirements were
recorded. The Company estimates the fair value of each reporting unit
through discounted cash flows approach.
SFAS No. 142 requires to test all goodwill and indefinite-lived intangible
assets for impairment as of January 1, 2002. The fair value of the
reporting units and the related implied fair value of their respective
goodwill was established using a discounted cash flows approach. As
appropriate, comparative market multiples were used to corroborate the
results of the value derived from the discounted cash flows. The results of
the transitional impairment test did not indicate any impairment as of
January 1, 2002. In the fourth quarter of 2002, additional impairment tests
were performed. The results of this testing indicated that the carrying
value of some reporting units and its assigned goodwill exceeded their
estimated fair value. As a result, as of December 31, 2002, the Company
recorded a noncash impairment charge of (euro)2,259.81 million both, under
Spanish and U.S. GAAP, which is reported for Spanish GAAP purposes in the
accompanying statement of operations as "extraordinary expenses".
In 2003 and 2004, additional impairment tests were performed. The results
of this testing did not indicate that the carrying value of the reporting
units and its assigned goodwill exceeded their estimated fair value. As a
result, as of December 31, 2003 and 2004, the Company did not record
additional non-cash impairment charges, under U.S. GAAP.
Under U.S. GAAP, in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and certain intangible assets deemed to have
indefinite lives should no longer be amortized, but instead be subject to
periodic, impairment testing under a fair value approach. All other
recognized intangible assets will continue to be amortized over their
estimated useful lives. The Group does not have material intangible assets
with indefinite useful lives. In addition, the Group has classified, under
U.S. GAAP, upon application of SFAS 142 on January 1, 2002, (euro)185
million as intangible assets which were previously included as goodwill.
Such intangible asset, which consists of a contract to perform narrowband
access, port, and DSL Backhaul services, arose in the purchase of
Telefonica Deutschland (former Mediaways) and Telefonica UK. During the
first half of 2002 the terms of this contract were renegotiated resulting
in lower margins for the company. Consequently an impairment analysis was
performed as of December 31,2002, in accordance with SFAS 144 which
revealed the need to write off this intangible asset by (euro)107 million
(See additional SFAS 144 disclosures in the "Additional Disclosures
Required under U. S. GAAP" Section of this Note). Intangible asset for
Telefonica UK have been impaired in December 31, 2004
F-113
for an amount of (euro)101.5 million since the Company has completely
ceased such operations (see Note 20).
The variations in 2003 and 2004 goodwill, under U.S. GAAP, in fully
consolidated companies were as follows:
---------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------
Goodwill U.S.GAAP Balance at Additions Retirements / Translation Balance at
12/31/02 Transfers(*) differences 12/31/03
---------------------------------------------------------------------------------------------------------
Telefonica Moviles 2,367.51 3.20 (538.96) (277.98) 1,553.77
Telefonica Latinoamerica 4,512.98 - (11.93) (141.58) 4,359.47
Telefonica Contenidos 1,196.93 91.17 (62.56) 2.07 1,227.61
Other business lines 641.01 71.53 136.65 (26.63) 822.56
---------------------------------------------------------------------------------------------------------
Total 8,718.43 165.90 (476.80) (444.12) 7,963.41
---------------------------------------------------------------------------------------------------------
(*) This amount basically refers to assignation of goodwill to intangible
assets after business combinations.
--------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------
Goodwill U.S.GAAP Balance at Additions Retirements / Translation Balance at
12/31/03 Transfers differences 12/31/04
--------------------------------------------------------------------------------------------------------
Telefonica Moviles 1,553.77 2,164.77 8.33 (370.73) 3,356.12
Telefonica Latinoamerica 4,359.47 14.37 10.63 (119.30) 4,265.17
Telefonica Contenidos 1,227.61 - (0.17) (27.35) 1,200.09
Other business lines 822.56 30.06 (88.83) 28.74 792.54
--------------------------------------------------------------------------------------------------------
Total 7,963.41 2,209.20 (70.04) (488.64) 9,613.92
--------------------------------------------------------------------------------------------------------
Goodwill arising on investments carried by the equity method under US GAAP
is recorded in the "Other-long term investment" caption in Item 7 of this
Note.
Translation Adjustment Related to Goodwill
------------------------------------------
Under Spanish GAAP, the translation of financial statements from the
functional currency to the reporting currency involves multiplying all
assets and liabilities, except for goodwill in certain cases, by the
current exchange rate on the balance sheet date. Goodwill is translated
using the historical exchange rate on the date the acquisition was
consummated and recorded in Euros. Under U.S. GAAP, the amount allocated at
the date of acquisition to the assets acquired and the liabilities assumed
(including goodwill or an excess of acquired net assets over cost as those
terms are used in SFAS No. 141, Goodwill and Other Intangible Assets)
should be translated at the current exchange rate as of the balance sheet
date, in conformity with the requirements of SFAS No. 52, Foreign Currency
Translation.
F-114
U.S. GAAP adjustments relating to earn-outs
-------------------------------------------
Under Spanish GAAP, contingent consideration based on maintaining or
achieving specified earnings levels in future periods is recorded at the
acquisition date as a liability (either as long term or short term). All
future changes related to the achieved levels adjust the respective
liability and goodwill.
Under U.S. GAAP, EITF 95-8 requires that earn-out arrangements, as entered
into by Endemol, should be accounted for as additional compensation and not
additional goodwill when they refer to expected future services. In order
to adjust accordingly, an additional compensation expense of (euro)76.62
million was recorded for the period ended December 31, 2004 ((euro)101.1
million in 2003).
Reclassification of Cumulative Currency Translation Adjustment of
-----------------------------------------------------------------
Disposed Investees
------------------
During 2004, the Group sold its foreign investments in the subsidiary
Lycos, Inc. Under Spanish GAAP, the cumulative balance of currency
translation adjustment related to this investment has been reclassified to
retained earnings for a total of (euro)492.78 million as of December 31,
2004. Under U.S. GAAP these corresponding balances must be recorded in
results of operations as part of the investment cost.
In addition, under U.S. GAAP, Lycos Inc. is considered to be a "component
of an entity", as defined in SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS 144), which will be eliminated from
the ongoing operations of the Group as a result of the sale transaction. In
addition, Terra Networks does not have any continuing involvement in the
operations of Lycos Inc. after its sale. SFAS 144 states that in a period
in which a component of an entity either has been disposed of or is
classified as held for sale, the income statement of the business
enterprise for current and prior periods shall report the results of
operations of the component, including any gain or loss recognized, in
discontinued operations, reported as a separate component of income before
extraordinary items and the cumulative effect of accounting changes.
10. Pension Plan of the Brazilian Investees
The subsidiary Telecomunicacoes de Sao Paulo, S.A., and the associated
companies Telerj Celular, S.A. and Telest Celular, S.A.(which were
subsidiaries up to December 27, 2002 when they were contributed to
Brasilcel), Telebahia Celular, S.A. and Telergipe Celular, S.A. had various
commitments with its employees as pension plans and medical and life
insurance. In 2000, these companies, like the other companies composing the
former Brazilian telecommunications system, Telebras, carried out a process
of negotiation with their employees, which culminated in October 2000, to
the transformation of the former pension plan into a new
defined-contribution pension plan, and the cancellation of the life
insurance plan. Substantially all the employees availed themselves in the
new plan. As a result of this change, the provision recorded in prior years
to cover the actuarial liabilities, under Spanish GAAP was overstated as of
December 31, 2000. Management of the Group calculated the new liability to
be recorded for the benefits payable to its employees and reclassified the
resulting over-provision to the "Deferred Revenues" caption. As explained
in Note 13, the Group has made a revaluation of terms in connection with
this matter and decided to allocate some of this deferred revenue to
income. Under U.S. GAAP, and according to SFAS 88, Employers' Accounting
and Settlements and Curtailments of Defined
F-115
Benefit Pension Plans and for the Termination Benefits, this over-provision
should be recognized as income in the period in which it was generated.
11. Treasury Stock
Under Spanish GAAP, treasury stock acquired without special purpose of
redemption should be recorded as a current asset at the lower of the
acquisition cost, market value or equity value.
Under U.S. GAAP, treasury stock has to be shown as a reduction of equity at
its acquisition cost, and any transactions involving treasury stock do not
affect net income. Any profit or loss accounted for under Spanish GAAP,
including any allowances, have to be eliminated under U.S. GAAP and
recorded to additional paid in capital.
12. Derivative Instruments and Hedging Activities
Under U.S. GAAP the Company has, effective January 1, 2001, adopted SFAS
No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (embedded derivatives) and for hedging activities. SFAS
No. 133 requires that all derivatives, whether designated in hedging
relationships or not, be recorded on the balance sheet at fair value. The
accounting for changes in fair value of a derivative instrument depends on
its intended use and the resulting designation.
If the derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and of the hedged item attributable to the
risk being hedged are recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in other comprehensive income
("OCI") and are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings. The gain or loss on a hedging
derivative instrument that is designated as, and is effective as, an
economic hedge of the net investment in a foreign operation shall be
reported in the same manner as a translation adjustment to the extent it is
effective as a hedge. The ineffective portion of net investment hedges
shall be reported in earnings.
Fair Value Hedges
As part of its overall risk management strategy, the Company uses
derivatives to convert its non-prepayable fixed-rate notes into
variable-rate debt. These derivatives are typically designated as fair
value hedges.
Under Spanish GAAP the accounting treatment of those derivatives designated
as hedges is symmetrical with the accounting treatment applied to the
hedged item. In this sense, we apply the concept of symmetry to the
following concepts:
Simultaneity when attributing products and/or costs of the hedged item
and the hedging instrument to the profit and loss account.
Identical headings and concepts of the profit and loss account in
which these returns are recorded.
F-116
Those hedging relationships designated as fair value hedges under U.S. GAAP
have their respective hedge items recorded at fair value attributable to
the risk being hedged and all hedging ineffectiveness is included in
earnings.
At December 31, 2004, 2003 and 2002, the Company has recorded a loss of
(euro)37.2 million, (euro)111.6 million and profit of (euro)71.3 million,
respectively, that related to the recognition of the risk being hedged for
each respective hedged item at fair value. This adjustment offsets the
respective recognition at fair value of those derivatives designated as
fair value hedges. The Company had no material ineffectiveness recorded in
earnings during 2004, 2003 and 2002.
Net Investment Hedges
The Company's policy is to attempt to finance its activities in the same
currencies as those of its foreign investments in order to hedge foreign
currency exposure of net investments in foreign operations. This policy is
implemented either by financing in the related currency or using
derivatives, such as currency swaps, which provide a synthetic effect of a
foreign currency loan, thereby reducing the exchange risk.
For the years ended December 31, 2004, 2003 and 2002, the Company recorded
under Spanish GAAP approximately (euro)0.00 million, (euro)180.46 million
and (euro)1,148.00 million of net gains respectively, related to
non-derivative instruments and derivative instruments used as net
investment hedges included as a cumulative translation adjustment in
equity. Under Spanish GAAP, the requirements to qualify a net investment
differ from those of U.S. GAAP. The main differences relate to the
measurement of the hedge ineffectiveness.
Those economic hedge instruments under Spanish GAAP that are not assigned
as a net investment hedge under U.S. GAAP are recorded at fair value
through earnings. On August 2002 the Company has decided to remove the
designation under U.S. GAAP of the Net Investment Hedge on Brazilian
subsidiaries. Additionally, all differences relating to net investment
hedges under Spanish GAAP and U.S. GAAP (economic hedges not assigned and
ineffectiveness) were recorded in earnings for the year ended December 31,
2004, 2003 and 2002. The Company has calculated the ineffectiveness of its
remaining net investment hedges by comparing an appropriate "hypothetical"
derivative and non-derivative contracts with the actual instruments being
used. The impacts of those matters on earnings in 2004, 2003 and 2002
represented a profit of (euro)47.8 million (euro)49.3 million a loss of
(euro)376.2 million, respectively, gross of tax and minority interests.
Cash Flow Hedges
As part of its overall risk management strategy, the Company uses
derivatives to convert its variable-rate notes into fixed-rate debt. Most
of these derivatives, considered effective according to SFAS No. 133, are
designated as cash flow hedges to manage the cash flow exposure due to
interest rate fluctuations.
Under Spanish GAAP the accounting treatment of those derivatives designated
as hedges is symmetrical with the accounting treatment applied to the
hedged item. In this sense, we apply the concept of symmetry to the
following concepts:
Simultaneity when attributing products and/or costs of the hedged item
and the hedging instrument to the profit and loss account.
F-117
Identical headings and concepts of the profit and loss account in
which these returns are recorded.
Under U.S. GAAP, all derivatives, whether designated in hedging
relationships or not, are recorded on the balance sheet at fair value.
Additionally, those hedging relationships which are designated as cash flow
hedges under U.S. GAAP have their respective effective portion of the gain
or loss recorded in other comprehensive income until it is necessary to be
adjusted against net income in order to offset the respective change in
cash flows on the hedged transaction. All of the ineffective portion and
excluded component of the derivative instruments is included in earnings.
As of December 31, 2004, 2003 and 2002 a total loss of (euro)40.6 million
(euro)38.4 million and (euro)74.6 million, respectively, is expected to
be reclassified into earnings during the next twelve months. The events
that are expected to occur in the next twelve months that will trigger the
reclassification of these components into earnings includes the termination
of the hedging relationships. The average time over which the Company is
hedging exposure to variability of cash flow is 24 months, 31 months and 46
months in December 31, 2002, 2003 and 2004, respectively.
Other Derivative Contracts
The Company holds various interest rate and foreign exchange derivative
instruments, which were not formally designated under SFAS No. 133 for the
application of hedge accounting. The purpose of entering into these
derivative contracts is to provide the Company with economic hedges of
exposed risks.
Under Spanish GAAP these derivatives are recorded at the lower of cost or
market value. Under U.S. GAAP, all derivatives are recorded on the balance
sheet at fair value with all changes in fair value being recorded as a
component of income from continuing operations during the period that such
contracts remain outstanding.
Derivative instruments are reported on a net-by-counterparty basis on the
consolidated balance sheet where management believes a legal right of
setoff exists under an enforceable netting agreement. Under U.S. GAAP, the
approximate impact to record these derivatives at fair value for the year
ended December 31, 2004, 2003 and 2002 represented a loss of approximately
(euro)35.2 million, a profit of (euro)391.5 million, and a loss of
(euro)167 million, respectively, before tax and minority interests.
13. Stock Option Plans
TIES Program
------------
On February 23, 2000, the Board of Directors approved the establishment of
a new compensation plan tied to the market price of the Company's
share, with the grant of options on Company shares, known as the TIES
Program (Note 20.a). In order to achieve the purposes of the program, two
capital increases were approved. The method of assignment of shares under
the option plan depends on the appreciation of Telefonica, S.A.'s
shares with respect to an initial reference value to be set by the Board of
Directors and on the number of shares of Telefonica S.A. initially acquired
by each employee.
F-118
On February 14, 2001, the first capital increase indicated above was
executed. The par value of the capital was increased by (euro)1,123,072,
through the issuance of an equal number of common shares with additional
paid in capital of (euro)4 per share. The new shares were fully subscribed
and paid, through a monetary contribution, by the beneficiaries of the TIES
program. On February 20, 2001, the second capital increase was executed.
The par value of the capital was increased by (euro)31,504,244, through the
issuance of an equal number of common shares with additional paid in
capital of (euro)4 per share. The new shares were fully subscribed and
paid, through a monetary contribution, by BBVA (50%) and La Caixa (50%).
Under US GAAP, the first capital increase under the TIES Plan would qualify
as a compensatory fixed plan, in accordance with APB 25, which would
require a fixed compensation charge based on the intrinsic value (fair
value less stock price to employee) to be recorded against income and
credited to additional paid in capital. The total compensation cost of
(euro)14.89 million has been expensed in full in 2001 under U.S. GAAP,
since there is not a requirement for a vesting period or the performance of
future services.
The grant of options on Company shares represents a compensatory variable
plan under APB 25, since the number of shares to be granted are not known
until the performance period has been completed. As of December 31, 2004,
2003 and 2002, the Company has not recorded any compensation on this part
of the Plan, as compensation for shares payable upon achieving a target
stock price generally should be recorded in total when the target is
achieved, and the target had not been achieved at such date.
The capital subscribed by BBVA and La Caixa amounted to (euro)157.52
million was treated as a finance transaction under U.S. GAAP, and thus
reclassified as a liability, since the Banks do not have the right to
pledge or exchange the shares and the Company maintains control over the
shares through the agreement that entitles and obligates it to repurchase
them. This adjustment has been considered in the computation of basic and
diluted weighted average number of shares.
14. Provisions for Restructuring and others.
a) Restructuring
Under Spanish GAAP, expenses related to restructuring have been considered
probable, and therefore have been provisioned. Under US GAAP, in accordance
with SFAS 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which the Company has decided to early adopt, if employees are
not required to render service until they are terminated in order to
receive the termination benefits or will not be retained to render service
beyond the minimum retention period, a liability for the termination
benefits shall be recognized and measured at its fair value at the
communication date. Therefore, the related restructuring charges were
eliminated under U.S. GAAP.
b) Other provisions
These differences refers to those provisions recorded under Spanish GAAP
following the "prudence principle" for possible loss contingencies. Under
U.S. GAAP only those provisions considered probable ("events that are
likely to occur") and that the amount of loss can be reasonable estimated
can be recorded. Therefore, those provisions that did not meet that
definition were reversed in the reconciliation note to U.S. GAAP.
F-119
15. Adjustments related to US GAAP equity investees
This adjustment reflects the U.S. GAAP adjustments made in the companies
consolidated by the equity method under U.S. GAAP, mainly corresponds to
the effects related to Brasilcel N.V., MediTelecom, S.A., Portugal Telecom,
SGPS and Sogecable, S.A. in 2004 and 2003 and to the effects related to
Terra Networks, Brasilcel N.V and Portugal Telecom, SGPS. in 2002.
The detail of the main adjustments is as follows and refer basically to
some concepts of our reconciliation items expressed previously:
----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------
2003 2004
(as restated*)
----------------------------------------------------------------------------------------------------------------------------------
Adjustments to Shareholders' equity
Start-up costs (5.38) 0.46
Business Combination, Goodwill arising from acquisitions, net of amortization
and translation adjustment 12.63 (31.86)
Consolidation differences and unrealized gains (losses) on marketable securities (28.13) (29.18)
Derivative instruments and hedging activities - SFAS No. 133 65.18 68.00
Other adjustments (33.73) (25.11)
----------------------------------------------------------------------------------------------------------------------------------
Total Adjustments related to US GAAP equity investees 10.37 (28.49)
----------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------
2002 2003 2004
---------------------------------------------------------------------------------------------------------------------------------
Adjustments to Net income
Start-up costs 31.58 9.90 5.85
Business Combination, Goodwill arising from acquisitions, net of amortization and
translation adjustment 34.92 41.38 55.87
Derivative instruments and hedging activities - SFAS No. 133 - 85.42 2.78
Other adjustments 14.50 (18.03) (24.49)
---------------------------------------------------------------------------------------------------------------------------------
Total Adjustments related to US GAAP equity investees 81.00 118.67 40.01
---------------------------------------------------------------------------------------------------------------------------------
Non-monetary Exchange for an Equity Investee
On May 8, 2002 Telefonica de Contenidos, S.A.U. (Telefonica de Contenidos,
a Telefonica's 100% subsidiary) entered into an agreement with Sogecable,
S.A. (a listed Company in Madrid Stock Exchange - Sogecable) to merge its
equity investee DTS Distribuidora de Television Digital, S.A (Via Digital)
with Sogecable, subject to the Spanish Government's approval. The
conditions under this agreement stated that a share capital increase of 23%
in Sogecable has been offered to Telefonica de Contenidos in exchange for
the 100% in Via Digital. In order to fulfill such conditions, as indicated
in note 2(c), in the first half of 2003 Telefonica de Contenidos increased
its participation in
F-120
Via Digital through a capital increase and conversion of debentures from a
48.6% to a 96.6% ownership. On July 2, 2003 Telefonica concluded this
non-monetary exchange in which Telefonica de Contenidos transferred its
ownership of Via Digital to Sogecable, S.A. in exchange for a
non-controlling ownership interest of 23,83% in such Company (Sogecable,
S.A.).
Under Spanish GAAP, non-monetary transactions related to exchange of
investments are accounted for at the lower of cost or fair value, therefore
no effect was recognized since the carrying amount under Spanish GAAP was
lower than the fair value at the time of this transactions. Under US GAAP,
this transaction was accounted for based on the fair values of the assets
exchanged in accordance with EITF 01-2 - Interpretations of APB Opinion No.
29 - Accounting for Non-monetary Transactions. Therefore a gain was
recognized for the difference between the fair value and carrying value
less the respective portion related to economic interest retained.
In addition, in accordance with APB Opinion No. 18 - The Equity Method of
Accounting for Investments in Common Stock and SFAS No. 141 - Goodwill and
Other Intangible Assets, Telefonica accounted for the difference between
its cost and the underlying equity in net assets of Sogecable as if the
Sogecable were a consolidated subsidiary. Therefore, Telefonica has
completed the purchase price allocation in order to properly identify the
part of such difference that correspond to an unrecorded intangible assets
and residual equity method goodwill. Under Spanish GAAP and US GAAP the
Group concluded that an amount of (euro)607 million of equity method
goodwill arose from this transaction. Under Spanish GAAP, equity method
goodwill is being amortized over a period of twenty years, while, under
U.S. GAAP, according to SFAS No. 142, goodwill is not being amortized.
16. Effective interest rate
Several contracts in Telefonica Comunicaciones Personales, S.A. accrue
increasing interest rates. This practice is allowed under Spanish GAAP.
However, for US GAAP purposes according to APB 21, it is necessary to
calculate an effective interest rate (an Investment Return Rate equivalent)
for the period in which the contract is effective.
17. Temporary Impairments
In 1999, the Group has analyzed the impact at Telefonica de Espana of the
new measures on the recoverability of the value of some of its property,
plant and equipment. As a result, in 1999 the Company recorded a provision
of (euro)1,322.56 million with a charge to extraordinary expenses. This
analysis considered the discounted cash-flow approach. In subsequent years,
due to new conditions, the related allowance was revalued and reversed
Accordingly, under Spanish GAAP, this allowance was considered as a
temporary impairment, and it was reversed in 2002 and 2001. Under US GAAP
this impairment was not reversed since according to an US GAAP analysis,
this impairment was considered permanent.
18. Sale and leaseback involving real estate
During 2003 Telefonica Group sold and leased back certain administrative
buildings to a third party, which is not an Special Purposes Entity (SPE).
Under Spanish GAAP, the building was removed from the balance sheet and a
gain immediately recognized in statement of income.
Under U.S. GAAP, such transaction involving real estate, including real
estate with equipment, must qualify as a sale under the provisions of FASB
Statement No. 66
F-121
"Accounting for Sales of Real Estate" before it is appropriate for the
seller-lessee to account for the transaction as a sale-leaseback under SFAS
No. 98 "Accounting for Leases - Sale-Leaseback Transaction Involving Real
State, Definition of the Lease Term, and Initial Direct Costs of Direct
Financing Leases".
Considering the appropriate guidance under US GAAP only the gain on the
sale in excess of the present value of the minimum lease payments is
recognized at the date of the sale. The remaining gain is deferred and
amortized in equal monthly amounts over the lease term because the
leaseback is classified as an operating lease.
19. Accounting for Asset Retirement Obligations
Under Spanish GAAP there are no specific requirements to record such
obligation, but provisions must be recorded when considered probable and
reasonably estimated, based upon the principle of prudence.
Effective January 1, 2003, the Group adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." An asset retirement
obligation represents a legal obligation associated with the retirement of
a tangible long-lived asset that is incurred upon the acquisition,
construction, development or normal operation of that long-lived asset.
This standard requires the Group to recognize asset retirement obligations
in the period in which they are incurred, if a reasonable estimate of fair
value can be made. The asset retirement obligations are accreted to their
present value at the end of each reporting period. The associated estimated
asset retirement costs are capitalized as part of the carrying amount of
the long-lived asset and depreciated over its useful life.
Telefonica evaluated it's leased and owned assets utilized in its
operations in Spain and overseas. During this evaluation, it was determined
that for certain assets an asset retirement obligation in acordance with
SFAS N(0) 143 was necessary.
20. Other U.S. GAAP Adjustments
This adjustment refers to other non material U.S. GAAP adjustments from
subsidiaries.
Additional Disclosures Required Under U.S. GAAP
1. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with Spanish GAAP, as
well as the additional note on differences between Spanish GAAP and U.S.
GAAP and other required disclosures (Note 25), requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
such estimates.
2. Net Income (Loss) per Share
Spanish GAAP does not require the net income (loss) per share to be
disclosed in the financial statements.
F-122
Net income (loss) per share for U.S. GAAP purposes was computed using the
weighted average number of shares outstanding for all periods. SFAS No.128,
Earnings per Share, requires the computation of diluted EPS considering the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued, unless inclusion of these
shares results in an anti-dilutive effect on per - share amounts.
Additionally, the number of shares outstanding has increased as a result of
stock dividends during the periods presented so the computation of basic
and diluted EPS has been adjusted retroactively for all years presented.
3. Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, defines Comprehensive Income
as a measure of all changes in equity of an enterprise during a period that
result from transactions and other economic events of the period other than
transactions with owners. Under Spanish GAAP, comprehensive income
components are recorded as separate items in shareholders' equity, since a
Comprehensive Income caption does not exists.
The following is a Statement of Comprehensive Income (Loss) prepared using
U.S. GAAP amounts:
-----------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------
Statement of Comprehensive Income (loss)
---------------------------------------------
2002 2003 2004
-----------------------------------------------------------------------------------------------------
Net Income (Loss) under U.S. GAAP (5,206.06) 2,690.31 2,578.01
Other Comprehensive Income (Loss):
Foreign currency translation adjustments (9,198.13) (502.94) (35.98)
Translation differences related to disposals(*) - - 492.78
Unrealized gain (loss) on securities available for
sale, net of tax (125.97) 22.36 77.84
Derivatives instruments and hedging activities, net
of tax 188.96 4.58 (66.82)
-----------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) (14,341.20) 2,214.31 3,045.83
-----------------------------------------------------------------------------------------------------
(*) There is no tax effect on this adjustment
F-123
The table below displays changes in Accumulated Other Comprehensive Income
(Loss):
--------------------------------------------------------------------------------------------------
Millions of Euros
Accumulated Other Comprehensive Income (Loss) -------------------------------------------
2002 2003 2004
--------------------------------------------------------------------------------------------------
Beginning balance, January 1, (7,381.32) (16,516.46) (16,992.47)
Foreign currency translation adjustments (9,198.13) (502.94) (35.98)
Translation differences related to disposals(*) - - 492.78
Unrealized gain (loss) on securities available
for sale, net of tax (125.97) 22.36 77.84
Derivatives and hedging activities:
Deferred gain on SFAS 133 hedges, net of tax 188.96 4.58 (66.82)
--------------------------------------------------------------------------------------------------
Ending balance, December 31 (16,516.46) (16,992.47) (16,524.65)
--------------------------------------------------------------------------------------------------
(*) There is no tax effect on this adjustment
The table below displays the Components of accumulated other comprehensive
Income (Loss):
--------------------------------------------------------------------------------------------------------
Components of accumulated Millions of Euros
other comprehensive Income (Loss) ---------------------------------------------
2002 2003 2004
--------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments (16,195.11) (16,698.05) (16,241.25)
Unrealized loss on securities available for sale, net of (242.11) (219.75) (141.92)
tax
Derivatives and hedging activities - SFAS 133, net of tax (79.24) (74.66) (141.48)
--------------------------------------------------------------------------------------------------------
Ending balance, December 31 (16,516.46) (16,992.47) (16,524.65)
--------------------------------------------------------------------------------------------------------
4. Other consolidation differences
The Company has consolidated under Spanish GAAP certain companies of which
it owns less than 50% of the common voting stock, which, in accordance with
U.S. GAAP, should be carried by the equity method. The following summarizes
the effect under U.S. GAAP for consolidation purposes:
- Terra Networks, for which the Company reduced its participation in the
year 2000 from 70.47% to under 50%, is being consolidated under
Spanish GAAP, since the Company has its control rights by having the
majority of the votes in the Board of Directors. In addition, in July
2003, Telefonica, S.A. concluded the tender offer for Terra Networks,
S.A. shares by acquiring 202,092,043 of this company's shares for
(euro)5.25 per share, which represented 33.6% of its total capital
stock. Following this transaction, Telefonica's direct holding in
Terra was 71.97%. In December 2003, Terra Networks, S.A. acquired
26,525,732 shares owned by Citibank N.A., as the agent bank for the
company's stock option plan assumed as a result of the acquisition of
Lycos, Inc. Terra Networks, S.A. continues to guarantee the coverage
of the employee stock option plan with the shares now held as treasury
stock. As a result of this transaction, the Telefonica Group increased
its effective percentage of ownership from 71.97% to
F-124
75.29% as of December 31, 2003. For U.S. GAAP, until the completion of
the tender offer, since the Company did not have either the majority
of voting rights or an agreement that guaranteed the control rights
for a minimum period of 10 years, this investment was accounted for by
the equity method.
- Since June 2002, the investment in Atlanet, S.p.a has been carried by
the equity method under Spanish GAAP, which was previously
consolidated. Therefore the difference in consolidation between
Spanish and U.S. GAAP related to this affiliate is reflected only
through June 30, 2002.
- On December 27, 2002, after complying with Brazilian regulatory
requirements, Telefonica Moviles, S.A. and Portugal Telecom Moveis
Servicios de Telecomunicacoes, SGPS, S.A. (PT Moveis) incorporated
Brasilcel, a 50/50 Joint Venture, by contributing 100% of their
respective direct and indirect interest in the following mobile
communications companies in Brazil:
--------------------------------------------------------------------------------
Companies % Affiliates
---------------------------------------
Telefonica PT Moveis Total
Moviles
--------------------------------------------------------------------------------
Celular CRT Participacoes, S.A. 40.90% 7.58% 48.80%
TeleLeste Celular Participacoes, S.A. 27.70% - 27.70%
TeleSudeste Celular Participacoes, S.A. 83.56% - 83.56%
Telesp Celular Participacoes, S.A. 14.68% 50.44% 65.12%
--------------------------------------------------------------------------------
Under Spanish GAAP, Brasilcel's balance sheet as of December 31, 2003
and 2002 is integrated in the consolidated annual accounts by the
proportional integration method, while the results of the Brazilian
entities contributed by Telefonica Moviles, S.A. have been included in
the consolidate statements of operations for the full year 2002 since
the contribution and formation of Brasilcel took place in December 27,
2002 and integrated by the proportional integration method in 2003.
For U.S. GAAP purposes Brasilcel's balance sheet is accounted for the
equity method as of December 31, 2003 and 2002.
The fair value of the contribution to Brasilcel, N.V. of the wireless
assets owned by Telefonica Moviles, S.A. was (euro)1,898 million.
According to EITF Issue 01-02, Interpretation of APB Opinion N(0) 29,
the exchange of a consolidated business for an interest in a joint
venture would not result in a gain recognition, absent the receipt of
cash or near cash consideration; as a consequence, Brasilcel, N.V. has
been considered in the consolidation for U.S. GAAP and Spanish GAAP at
historical cost of the consolidated business in Brazil prior to the
transaction.
In January 2003, the Financial Accounting Standards Board ("FASB")
released Interpretation No. 46 Consolidation of Variable Interest
Entities ("FIN 46") and amended FIN 46R in December 2003. FIN 46R
requires that all primary beneficiaries of Variable Interest Entities
(VIE) consolidate that entity. FIN 46 is effective immediately for
VIEs created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003 to VIEs in which
an enterprise holds a variable interest it acquired before February 1,
2003. In December 2003, the FASB published a revision to FIN 46 ("FIN
46R") to clarify some of the provisions of the interpretation and to
defer the effective date of implementation for certain entities. Under
the guidance of FIN 46R, entities that do not have interests in
structures that are
F-125
commonly referred to as special purpose entities are required to apply
the provisions of the interpretation in financials statements for
periods ending after March 14, 2004. We have reviewed all applicable
arrangements in order to determine whether an entity is a VIE and if
so, if we are the primary beneficiary. We also reviewed our investment
portfolio, including associated companies, as well as other
arrangements to determine whether we are the primary beneficiary of
any VIEs. Accordingly to such analysis, except for the deconsolidation
of Telefonica Finance (our trust preferred shares vehicle), since we
are not the primary beneficiary, the impact of the adoption of FIN 46R
did not identify any other VIE that should have changed the
consolidation method applied under Spanish GAAP and no other
significant interest in a VIE that would require any additional
disclosures.
The difference in these accounting consolidation procedures did not have an
impact in shareholders' equity or net income for the periods presented.
However, the balance sheet, statements of income and cash flow captions for
the respective periods are different under Spanish GAAP and U.S. GAAP. The
tables below demonstrate the effects of these differences in consolidations
in the Spanish GAAP financial statements:
Million of Euros(a)
12/31/02 12/31/03 12/31/04
---------------------------------------------
Abridged balance sheets
Due from stockholders (291.86) - -
Tangible fixed assets (888.43) (853.92) (890.67)
Intangible assets and start-up expenses (1,281.76) (1,221.05) (1,277.65)
Holdings in associated companies 2,949.21 1,831.34 2,065.10
Other financial investments (750.70) (93.17) (100.23)
Goodwill (1,089.09) (688.46) (679.03)
Deferred expenses (13.54) (2.25) (2.60)
Current assets (796.54) (757.34) (985.23)
---------------------------------------------
TOTAL ASSETS (2,162.71) (1,784.85) (1,870.31)
=============================================
Minority Interests (2,234.46) (387.99) (308.02)
Deferred income (0.49) - -
Provisions for contingencies and expenses (32.50) (26.36) (41.31)
Long term debt (484.65) (342.92) (342.20)
Current liabilities 589.39 (1,027.58) (1,178.78)
---------------------------------------------
TOTAL LIABILITIES (2,162.71) (1,784.85) (1,870.31)
=============================================
(a) Figures included in the year 2004 and 2003, mainly corresponds to the
effects related to Brasilcel N.V. Figures included in the year 2002 mainly
corresponds to the effects related to Terra Networks and Brasilcel N.V.
F-126
Millions of Euros (a)
12/31/02 12/31/03 12/31/04
==============================================
Abridged income statements
Net revenues from operations (511.23) (1,643.41) (1,569.62)
Operating Expenses (653.05) (1,125.09) (1,013.69)
Personnel expenses (180.49) (157.48) (90.31)
External services and good purchased (472.56) (967.61) (923.38)
Period depreciation and amortization (414.31) (431.60) (317.83)
Other expenses (21.52) (30.51) (52.84)
----------------------------------------------
Operating income 577.65 (56.21) (185.26)
Financial income (expense) (57.14) 118.74 150.49
Extraordinary expenses 1,049.53 152.95 (5.69)
----------------------------------------------
Income (loss) before tax 1,570.04 215.48 (40.46)
Corporate income tax 342.63 65.12 58.54
Minority interest (1,171.83) (139.54) 36.26
Income (loss) from associated companies (740.84) (141.06) (54.34)
Net income for the year - - -
==============================================
(a) Figures included in the year 2004, mainly corresponds to the effects
related to Brasilcel N.V. for the period ended December 31, 2004.Figures
included in the year 2003, mainly corresponds to the effects related to
Brasilcel N.V. for the period ended December 31, 2003 and Terra Networks
until July 31, 2003. Figures included in the year 2002 present the effects
of Atlanet S.p.a up to June 2002, and Terra Networks for the full year.
Millions of Euros(a)
12/31/02 12/31/03 12/31/04
=============================================
Abridged statements of cash flow
Net Cash provided by operating activities 204.85 (241.78) (144.05)
Net Cash used in investing activities 194.79 416.10 435.65
Net Cash used in financing activities 19.04 (32.36) (303.38)
Effects of exchange rate changes on cash 79.40 27.84 -
---------------------------------------------
Net change in cash and cash equivalents 498.08 169.80 (11.79)
Cash and cash equivalents at beginning of year (683.63) (185.55) (15.75)
---------------------------------------------
Cash and cash equivalents at year-end (185.55) (15.75) (27.54)
=============================================
(a) Figures included in the year 2004, mainly corresponds to the effects
related to Brasilcel N.V. for the period ended December 31, 2004.Figures
included in the year 2003, mainly corresponds to the effects related to
Brasilcel N.V. for the period ended December 31, 2003 and Terra Networks
until July 31, 2003. Figures included in the year 2002 present the effects
of Atlanet S.p.a up to June 2002, and Brasilcel N.V. and Terra Networks for
the full year.
F-127
5. Disclosure about fair value of financial instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires that the Company disclose the estimated fair value of its
financial instruments as of December 31, 2004 and 2003. The following
methods and assumptions were used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate such fair
value:
a. Cash and cash equivalents
Short-term securities portfolio. The fair value of these investments
is estimated based on listed market prices for those or similar
investments.
Cash and other short-term investments carrying value approximate fair
value because of the short maturity of those instruments.
b. Current assets and short-term creditors
The carrying value for most of the current assets approximates fair
value because of the relatively short period of time between the
origination of the instruments and their expected realization.
c. Long-term financial investments
The fair value of certain investments is estimated based on listed
market prices for those or similar investments. For investments for
which there are no market prices, a reasonable estimate of fair value
could not be made without incurring excessive costs. In view of the
limited volume of these investments considered individually, the cost
of their valuation based on an estimate of future cash flows
discounted at market interest rates for investments of this type
would be disproportionate with respect to the additional information
to be gained, and the Company's management considers that the
difference between the book value and the fair value is not material.
d. Debentures and bonds
Debentures and bonds are estimated based on market prices for those or
similar financial instruments.
e. Debts with financial institutions
The fair value of these debts was estimated based on the discounted
value of future cash flows expected to be paid, using discount rates
that reflect the relative risks involved.
f. Off-balance sheet risks and derivatives
The differential to be paid or received is accrued as an interest rate
change and is recognized over the life of the agreements.
The fair value of these agreements is estimated as follows:
a) Swap agreements: the fair value is the estimated amount that the
Company would receive or pay to terminate the swap agreements at
the reporting date.
F-128
The Company is exposed to credit losses in the event of
nonperformance by the other parties to the interest rate swap
agreements. However, the Company does not anticipate
nonperformance by the counterparts.
b) Foreign currency contracts: the fair value has been estimated by
obtaining quotes from brokers.
c) Options: the fair value is calculated as the amount that the
Company would receive or pay to terminate such contracts.
The estimated fair values and carrying values under Spanish GAAP, as
of December 31, 2004 and 2003 of the financial instruments are as
follows:
----------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------------
Balance at 12/31/03 Balance at 12/31/04
--------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents:
Short term financial investments 3,200.10 3,187.46 2,288.35 2,288.35
Cash 336.42 336.42 855.02 855.02
Long-term financial investments for which it is:
Practicable to estimate fair value 3,611.93 3,428.46 2,918.95 2,909.96
Not practicable 597.38 597.38 566.47 566.47
Current assets 6,812.84 6,812.84 7,809.06 7,809.06
Liabilities:
Short-term payables 13,848.85 11,980.87 19,344.93 16,647.98
Bonds and debentures 12,408.71 13,805.94 9,319.47 10,734.23
Payable to credit entities:
Loans and credits 4,932.56 6,035.50 5,450.37 6,864.00
Derivative financial instruments (*):
Foreign currency swaps N/A (934.32) N/A (1,418.00)
Interest rate swaps N/A 113.68 N/A 165.00
Forwards N/A (104.48) N/A (101.00)
Foreign currency options N/A 102.37 N/A 25.00
Interest rate options N/A (75.15) N/A (105.00)
Shares options N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------
(*) The carrying value of assets and liabilities include the carrying value of
the derivative financial instruments.
6. Stock option plans
Accounting Policy
Under Spanish GAAP, the Company has accounted for stock-based awards to
employees as described in Note 20.
Under U.S. GAAP, the Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with APB 25, Accounting for
Stock Issued to Employees. Compensation cost for stock options granted to
employees is measured as the excess of the quoted market price of the
Company's stock on the measurement date over the amount an employee must
pay to acquire the stock (the "intrinsic value"), and is recognized over
the vesting period.
F-129
Stock Compensation Plans
The Company has issued three stock option plans to its employees, the TOP
Plan, TIES Program and the EN-SOP Program based on Telefonica's stock,
which are fully described in Note 20. The Company's subsidiaries TPI,
Telefonica Moviles and Terra Networks have established their own stock
option plan to its employees. A full description of the characteristics of
each of these plans is given in Note 20 to the financial statements. The
additional U.S. GAAP disclosures relating to each applicable stock option
plan are presented below.
TOP Plan
According to the accounting policies described above, the Company did not
record any compensation expense relating to the Plan TOP for the year ended
December 31, 2002 and 2003, since Plan TOP is a fixed plan with no
intrinsic value at the grant date.
Had compensation expense for options granted under Plan TOP been determined
based on fair value at the grant dates in accordance with SFAS No. 123,
Accounting for Stock Based Compensation, the Company's charge for the years
ended December 31, 2002 and 2003 would not have been material in net income
or basic earnings per share. As of December 31, 2003 this plan expired.
TIES Program
According to the accounting policies described above, the Company did not
record any compensation expense relating to the TIES Program for the years
ended December 31, 2003 and 2004, since this Plan contains a floating
conversion ratio based upon the Company's stock price, and it was not
feasible to estimate at December 31, 2002, 2003 and 2004 the quantities of
shares that could probably vest in the future. In 2004, no new options have
been granted.
Had compensation expense for options granted under the TIES Program been
determined based on fair value at the grant dates in accordance with SFAS
No. 123, the Company would not have recorded any compensation expense for
the same factors indicated above.
EN-SOP Program
According to the accounting policies described above, the Company did not
record any compensation expense relating to the EN-SOP Program for the
years ended December 31, 2003 and 2004, since this plan did not have an
intrinsic value at the grant date.
Had compensation expense for options granted under the EN-SOP Program been
determined based on fair value at the grant dates in accordance with SFAS
No. 123, the Company's charge for the years ended December 31, 2003 and
2004 would not have been material in net income or basic earnings per
share. The fair value of each option granted was estimated using the
Black-Scholes option pricing model, for each option with the same vesting
period, using the following average assumptions: risk-free interest rate of
4.55%; expected life of 3.5 years; expected dividend yield of zero percent;
and assumed volatility of 46%.
The weighted average fair value of options granted during the year ended
December 31, 2004 was approximately Euros 2.96 per share.
F-130
TPI Plan
According to the accounting policies described above, the Company did not
record any compensation expense relating to the TPI Plan since for the year
ended December 31, 2002 and 2003, this plan did not have an intrinsic value
at the measurement date.
Had compensation expense for options granted under TPI Plan been determined
based on fair value at the grant dates in accordance with SFAS No. 123,
Accounting for Stock Based Compensation , the Company's charge for the
years ended December 31, 2002 and 2003 would not have been material in net
income or basic earnings per share. As of December 31, 2003 this plan was
expired.
Telefonica Moviles Plan (MOS)
As this stock option plan permits at the option of the holder either
exercise for cash or in shares, according to US GAAP, a presumption exists
that an employee will elect the cashless exercise and the option should be
accounted for as a variable plan. According to the accounting policies
described above, the Company did not record any compensation expense
relating to the MOS Plan for the year ended December 31, 2003 and 2004,
since this plan did not have an intrinsic value at the year end.
Had compensation expense for options granted under MOS Program been
determined based on fair value at the grant dates in accordance with SFAS
No. 123, the Company's charge for the years ended December 31, 2003 and
2004 would not have been material in net income or basic earnings per
share. The fair value of each option granted was estimated using the
Black-Scholes option pricing model, for each option with the same vesting
period, using the following average assumptions: risk-free interest rate of
2.27 %; expected life of 2.7 years; expected dividend yield of 2.63
percent; and assumed volatility of 29.17 %.
Terra Networks Plan
According to the accounting policies described above, the Company did not
record any compensation expense for the year ended December 31, 2003 and
2004, since the exercise price of the options was equivalent to the fair
value Terra Networks' ordinary shares on the measurement date.
The weighted average contractual life of outstanding options was 4 years.
In 2004, no new options have been granted and at December 31, 2003, the
fair value of options granted during 2003 pursuant to the second phase of
the Stock Option Plan was approximately Euros 1.55 per share. The fair
value of each option granted was estimated using the Black-Scholes option
pricing model, for each option with the same vesting period, using the
following average assumptions: risk-free interest rate of 3.52%; expected
life of 5 years; expected dividend yield of zero percent; and assumed
volatility of 39.59%.
Had compensation cost for these grants been determined consistent with
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation," the Group's net loss would have been increased
by approximately Euros 11,1 million for 2004, and the Group's basic and
diluted loss per share under US GAAP would have increased by Euros 0.02 per
share for the year ended December 31, 2004.
F-131
The status of the Company's stock option plans is summarized below as of
December 31, 2003 and 2004:
------------------------------------------------------------------------------------------------------------------------
En-Sop
Top Plan Ties Plan Program TPI Plan Mos Plan Terra Plan
------------------------------------------------------------------------------------------------------------------------
Outstarding at December 2002 13,066,516 29,956,042 3,227,944 4,697,400 16,392,164 8,900,502
------------------------------------------------------------------------------------------------------------------------
Granted - 1,210,224 2,559,084 - 606,895 70,000
------------------------------------------------------------------------------------------------------------------------
Forfeited/Expired (13,066,516) (1,052,727) (640,300) (4,697,400) (4,179,987) (2,531,806)
------------------------------------------------------------------------------------------------------------------------
Outstarding at December 2003 - 30,113,539 5,146,728 - 12,819,072 6,438,696
------------------------------------------------------------------------------------------------------------------------
Granted - - 2,246,732 - - -
------------------------------------------------------------------------------------------------------------------------
Forfeited/Expired - (321,112) (710,661) - (1,681,928) (4,054,876)
------------------------------------------------------------------------------------------------------------------------
Outstarding at December 2004 - 29,792,427 6,682,799 - 11,137,144 2,383,820
------------------------------------------------------------------------------------------------------------------------
7. Pension and post-retirement benefits
As described in Note 14, Telefonica de Espana has an agreement with some
employees whereby it recognized supplementary pension payments for
employees who had retired as of June 30, 1992, equal to the difference
between the pension payable by the social security system and that which
would be paid to them by ITP (Institucion Telefonica de Prevision).
In addition, the Group has a life insurance (internal allowance for
survivorship benefits) whereby serving employees who did not join the
pension plan continue to be entitled to receive survivorship benefits at
the age of 65. Telefonica de Espana has recorded a provision to cover these
commitments, based on the actuarial calculations made under the following
assumptions: GRM/F-95 mortality table and an assumed interest rate of 4%.
Telefonica accounting policy for Pensions and Other Post retirements
benefits has been compliant with SFAS 87 Employers Accounting for Pensions
and SFAS 106 Employers Accounting for Post-retirement Benefits other than
Pensions.
F-132
The following is a reconciliation of beginning and ending balances of the
benefit obligation for the two Plans mentioned above.
----------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------
2002 2003 2004
----------------------------------------------------------------------------------------------------
Change in benefit obligation
Projected Benefit obligation at the beginning of the year 748.74 719.72 687.53
Service Cost 5.61 5.50 5.70
Interest Cost 42.68 40.83 38.75
Actuarial gain/loss (6.30) (9.04) (2.09)
Benefits paid (71.01) (69.48) (66.83)
Benefit obligation at the end of the year 719.72 687.53 663.06
----------------------------------------------------------------------------------------------------
The detail of the funded status of the plans and the amounts recognized and
not recognized in the consolidated balance are as follow:
----------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------
2002 2003 2004
----------------------------------------------------------------------------------------------------
Funded status (719.72) (687.53) (663.06)
Unrecognized prior service cost 282.23 221.76 160.17
Prepaid (accrued) benefit cost (437.49) (465.77) (502.89)
----------------------------------------------------------------------------------------------------
The components of net periodic benefits costs for the years ended December
31, 2002, 2003 and 2004 are as follow:
--------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------
2002 2003 2004
--------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service Cost 5.61 5.50 5.70
Interest cost 42.68 40.83 38.75
Amortization of actuarial gain/loss (6.30) (9.04) (2.09)
Amortization of prior service cost 61.59 61.60 61.59
Net periodic benefit cost 103.58 98.89 103.95
--------------------------------------------------------------------------------------------------
F-133
The Accumulated Benefit Obligation for the years ended December 31, 2002,
2003 and 2004 are as follow:
----------------------------------------------------------------------
Millions of Euros
-----------------------------------
2002 2003 2004
----------------------------------------------------------------------
Accumulated Benefit Obligation 690.28 664.09 639.41
----------------------------------------------------------------------
The following actuarial assumptions were used in 2002, 2003 and 2004
----------------------------------------------------------------------
2002 2003 2004
----------------------------------------------------------------------
Weighted-averaged assumptions to
determine Benefits Obligation at
December, 31.
Discount rate 5.983% 5.961% 5.936%
Rate of compensation increase 2.500% 2.500% 2.500%
----------------------------------------------------------------------
The following benefits payments for the above mentioned plans are expected
to be paid:
-------------------------------------
Millions of
Euros
-------------------------------------
2005 66.15
2006 63.79
2007 60.99
2008 59.70
2009 59.40
2010 - 2014 267.61
-------------------------------------
8. Financial Statement Classifications
Capitalized expenses of in-house work on fixed assets consist of the
internal direct labor and allocable portion of the indirect costs. Under
Spanish GAAP internal expenditures capitalized are recorded as revenue. For
U.S. GAAP purposes, costs capitalized should be netted against the related
cost.
Increase in inventories, net, represents the net change in inventories
during the period. This includes beginning inventory plus purchases less
sales and final inventory. Under Spanish GAAP, the net change in
inventories is included in revenue. Under U.S. GAAP the net change in
inventories is included in expenses.
For U.S. GAAP purposes, up to December 31, 2001, the amortization of
goodwill must be shown as a deduction from operating income. In the Spanish
GAAP financial statements, this amount is shown separately below operating
income.
For U.S. GAAP, all goodwill related to investments accounted for under the
equity method would be included within the carrying amount of the
investment in the equity method
F-134
investee rather than being shown as part of the separate goodwill balance
on the balance sheet as is done under Spanish GAAP. Exhibit III shows
those effects in detail.
Spanish GAAP requires certain revenues/expenses which are not ordinary
revenues/expenses to be classified as extraordinary in the statement of
income. Under U.S. GAAP, a transaction must be both unusual in nature and
infrequent in occurrence in order to be classified as extraordinary.
Accordingly, no revenue or expenses included as extraordinary revenues and
expenses in Spanish GAAP would be considered extraordinary under U.S. GAAP.
As of December 31, 2002, (euro)1,892 million relating to the provision
recorded for the value of the investment in Ipse 2000, S.p.A. are recorded
under the caption "Provisions for contingencies and expenses". Under
U.S.GAAP, this amount would be reflected decreasing the investment and the
accounts receivable. In 2003 and 2004, Telefonica reclassified (euro)969
million and (euro)95 million, respectively, of these provisions to reflect
a lower balance of the equity investment, since Ipse 2000 recorded the
impairment of its assets in separate accounts.
The provision recorded is broken down as follows:
-----------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------------------------------------
12/31/02 12/31/03 12/31/04
-----------------------------------------------------------------------------------------------------------
IPSE 2000, S.p.A impairment 884 - -
Allowance for loan losses in accounts receivable from 815 736 656
IPSE 2000 and provision for contingencies
-----------------------------------------------------------------------------------------------------------
Total Telefonica Moviles 1,699 736 656
-----------------------------------------------------------------------------------------------------------
Additional impacts at Telefonica due to additional
ownership in IPSE 2000 (Telefonica Data) 192 4 -
-----------------------------------------------------------------------------------------------------------
Total Telefonica 1,892 740 656
-----------------------------------------------------------------------------------------------------------
a) IPSE 2000, S.p.A. impairment
During the first half of 2002 there were significant changes in the
marketplace, from a competitive, technological, financial and
regulatory perspective which caused Telefonica to revaluate and
update the assumptions of the business plans of its affiliate in
Italy and to reconsider its overall short and medium term strategy in
this country.
Based on the assessments obtained in 2002, and to ensure that the
investments were correctly valued, Telefonica decided in 2002 to
reduce the risk exposure in its books relating to this equity
investment in Italy, both under US and Spanish GAAP. According to APB
18, as the fair value for this investment obtained from independent
appraisals was significantly lower than the carrying value, it
clearly indicated a loss in the value of the investment; that was
other than a temporary decline. Therefore, an impairment loss was
recognized in the value of the investment.
Under Spanish GAAP, this correction in the value of the investment
was registered as a provision. Under US GAAP, it should be registered
as a reduction of the cost of that investment. Under Spanish GAAP,
equity value of Ipse 2000, S.p.A. accounted for as "Investment in
associated companies"
F-135
amounted to (euro)1,108 million, (euro)80 million and (euro)33
million as of December 31, 2002, 2003 and 2004, respectively. Under
US GAAP, this equity investment would have been (euro)129 million ,
(euro)80 million and (euro)33 million in 2002, 2003 and 2004
respectively. The difference between Spanish GAAP and US GAAP in the
amount shown in the caption of "Investment in associated
companies-Ipse" in 2002 is only due to different classification of
assets and liabilities related to this investment and, consequently
there is no difference in net income or shareholder's equity in 2002.
b) Allowance for loan losses in accounts receivable from IPSE 2000 and
provision for contingencies
In accordance with SFAS 114, the account receivable that Telefonica
had with Ipse 2000, S.p.A. as of December 31, 2002, 2003 and 2004
amounting to (euro)235 million, (euro)284 million and (euro)314
million have been provided based on the calculation performed on the
possible recoverability of this account receivable.
Paragraph 19 of APB 18 states that an investor should not provide for
additional losses unless the investor has guaranteed obligations of
the investee or is otherwise committed to provide further financial
support for the investee. Additionally, according to SFAS 5, any
estimated loss from a contingency should be accrued by a charge to
income if the conditions required under paragraph 8 are met. Based on
the available facts, the management considered that these conditions
were met, and therefore a provision was recorded under Spanish GAAP as
of December 31, 2002, 2003 and 2004 relating to guarantees given by
Telefonica to certain banks, which provided a bank guarantee to the
Italian authorities as security for the deferred payments for the
UMTS licenses. Also, a provision was recorded as of December 31,
2002, 2003 and 2004 for a further guarantee to Ferrovie dello Stato,
S.p.A., an Italian railway company, as Ipse 2000 entered into an
agreement with this company pursuant to which Ipse 2000 has been
granted certain access rights to and rights of use of a specified
portfolio of such railway company's sites.
9. Impairment of long-lived assets.
The Group evaluates the recoverability of the carrying amount of its
long-lived assets, including its administrative concessions, when events
or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable.
In performing the review for recoverability of long-lived assets under
Spanish GAAP and U.S. GAAP, the Group estimates the future cash flows
expected to result from each respective long-lived asset. If the sum of
the expected future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the long-lived assets, an impairment
loss is recognized under U.S. GAAP. Measurement of an impairment loss is
based on the fair value of the long-lived assets under both GAAP
(discounted cash flows). Since both discounted and undiscounted cash flows
have been higher than the carrying amount of long-lived assets, no
difference has arisen in 2004, 2003 and 2002 between Spanish and U.S.
GAAP, except for the impairment charge recorded on the Telefonica
Deutschland (Former Mediaways) contract and Telefonica UK described in
Note 25.9.
The estimates for the demand of 3G services have been revised downwards as
result of the actual data services demand and the ongoing delay in the
availability of a stable and competitive UMTS technology. The demand for
data services has been hampered by the impossibility to coordinate the
"value chain" and by the conflicts between suppliers and software and
application developers which have hindered the adoption of interoperable
devices. On the other hand, the delay in the introduction of a
commercially viable UMTS
F-136
technology has allowed incumbent operators to make a much smoother
"migration" to the new technology, thus hampering the successful
introduction of new entrants. In addition, the delay has caused the major
European markets to approach saturation, reducing the potential market for
new entrants to capturing low value marginal clients or those clients that
have not been retained by existing operators. At the same time, there has
been an increased perception of the difficulty of success of new entrants,
even using proven technologies such as GSM. The international "footprint"
issue, so important a couple of years ago, is no longer a critical factor
and is more important to have sufficient scale in a particular market to
obtain reasonable returns.
Taking into account these circumstances and considering SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Group
compared the value obtained from undiscounted cash flows with the carrying
value of the licenses and considering that this carrying value was higher,
decided, using a discounted cash flow approach, to estimate the fair value
of the UMTS licenses, resulting a write down of these long-lived assets.
The discount rate used in this discounted cash flow was calculated
considering the interest rate in Europe and the risk of this business. A
sensitivity analysis would not show significant differences, due to the
fair value obtained in the cash flow approach. Based on the assessments
obtained the Company has recognized an impairment for such licenses in
Germany, Austria and Switzerland, basically.
10. Fixed and Other Non-Current Assets
Since several U.S. GAAP differences affect fixed and other noncurrent
assets, shown below a detail of this caption under U.S. GAAP:
-------------------------------------------------------------------
Millions of Euros
-------------------------
2003 2004
-------------------------------------------------------------------
Property, Plant and Equipment 22,718.36 21,823.17
Intangible Assets 4,484.93 4,808.01
Other Long-term Investments 18,584.33 14,881.90
Goodwill 7,963.41 9,613.92
-------------------------------------------------------------------
Total fixed and other noncurrent assets 53,751.03 51,127.00
-------------------------------------------------------------------
11. Statements of cash flows
Spanish GAAP do not require presentation of a statement of cash flows.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments (or investments) purchased to be cash
equivalents, i.e., "cash and banks" and "short-term investments".
The following are consolidated statements of cash flows considering the
guidance provided by IAS 7 Cash Flow Statements, based on the financial
statement amounts reported under Spanish GAAP:
F-137
-----------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------
2002 2003 2004
-----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers 29,162.45 33,386.78 36,339.08
Dividends from associated companies 41,19 62,68 71.24
Cash paid to suppliers and employees (net of
amount capitalized) (18,551.56) (22,421.21) (24,674.10)
Net interest paid (1,610.89) (1,559.53) (1,223.43)
Payment for income taxes (226.58) (277.66) (326.00)
-----------------------------------------
Net cash provided by operating activities 8,814.61 9,191.06 10,186.79
Cash flow from investing activities:
Proceeds from investments in affiliates 457.26 752.30 563.62
Proceeds from sale of property, plant and
equipment 88.12 424.24 241.27
Proceeds from capital grants 7.56 2.85 13.51
Purchase of new investments, net of cash acquired (2,021.31) (2,867.30) (6,308.97)
Net payments for intangible assets and deferred charges (4,311.82) (3,483.77) (3,488.15)
-----------------------------------------
Net cash used in investing activities (5,780.19) (5,171.67) (8,978.72)
Cash flow from financing activities:
Proceeds from issuance of stock 2,006.56 12.12 92.49
Proceeds from debentures and bonds 285.83 2,860.25 572.99
Proceeds from other loans, credit facilities and notes
payable 8,229.00 6,529.74 18,659.57
Debentures and bonds redeemed (1,067.24) (1,637.14) (1,790.57)
Repayments of other loans, credit facilities
notes payable and short term loans (11,503.24) (10,457.27) (16,546.22)
Dividends paid (52.00) (1,486.65) (2,949.49)
-----------------------------------------
Net cash provided by financing activities (2,101.10) (4,178.93) (1,961.23)
Others non cash effects (546.85) 120.01 476.24
Net change in cash and cash equivalents 386.47 (39.53) (276.92)
Cash and cash equivalents at beginning of year (*) 3,189.11 3,575.59 3,536.03
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 3,575.58 3,536.06 3,259.11
-----------------------------------------------------------------------------------------------------
(*) Cash and cash equivalents have not included treasury stocks in 2002,
since the Company had decided to cancel part of those shares during 2003.
12. Business Segment Data
During 2004, the Group implemented certain measures to further simplify the
business lines. The measures taken in 2004 include most notably the
approval of the inclusion of the Telefonica Empresas business line, which
was organized to include Telefonica Data, Telefonica Soluciones and
Telefonica International Wholesale Services, in the Spain and Latin America
fixed line business lines
The group is organized according to six principal operating segments, each
of which is headed by an operating subsidiary that is under the Telefonica
Holding control. These five principal operating segments are:
F-138
o Telefonica de Espana: fixed-line telecommunications services in Spain
o Telefonica Moviles: worldwide wireless communications services.
o Telefonica Latinoamerica: fixed-line telecommunications services in
Latin America.
o Telefonica Contenidos: worldwide audiovisual content and media.
o Terra: worldwide Internet-related services.
In addition, the company has several other lines of business, including:
o Publishing, development and sale of advertising in telephone
directories conducted through Telefonica Publicidad e Informacion,
S.A.
o Operation of contact centers in Europe (Spain), Latin America,
Northern Africa (Morocco) conducted through Atento Holding
Telecomunicaciones, S.A.
The main figures by segment under Spanish GAAP in 2004 and 2003 were as
follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Telefonica
-------------------------- De Espana Moviles Latinoamerica Contenidos Terra Holding Other Eliminations Total
December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Sales to external
clients 10,295.09 10,577.34 6,549.15 1,200.16 399.92 2.41 1,297.82 - 30,321.90
Sale of services to
other segments of
the company 660.68 1,476.80 334.29 18.97 139.24 26.04 844.72 (3,500.75) -
Capitalized expenses
on Group work on
fixed assets 144.25 94.77 44.30 0.23 0.73 1.72 0.33 187.99 474.31
Other operating revenues 32.25 89.76 56.45 0.55 0.59 95.21 240.17 (133.26) 381.71
Operating expenses (6,019.00) (7,381.88) (3,646.57) (1,027.88) (510.36) (350.69) (1,980.48) 3377.70 (17,539.15)
Other operating expenses (58.74) (101.83) (196.64) (9.43) (9.25) 5.23 (49.20) (3.51) (423.38)
Operating Profit before
depreciation and
amort. expenses 5,054.53 4,754.97 3,140.98 182.60 20.87 (220.08) 353.36 (71.82) 13,215.40
Depreciation and
amortization expenses (2,374.03) (1,673.40) (1,697.81) (30.46) (79.51) (49.90) (138.91) 63.87 (5,980.15)
Operating Profit 2,680.49 3,081.57 1,443.17 152.14 (58.65) (269.98) 214.45 (7.95) 7,235.25
Gain or losses of
Associated Companies (0.97) (39.60) (0.42) (20.86) (14.56) - (0.64) 20.95 (56.11)
Financial income (expense) (374.05) (369.29) (315.31) (104.08) 18.28 726.46 147.16 (912.98) (1,183.80)
Amortization of goodwill (3.25) (103.04) (83.13) (121.12) (64.85) - (12.60) (44.61) (432.59)
Extraordinary Gains or
Losses (718.11) (92.72) 363.08 (32.75) (25.77) 708.84 (204.56) (1,163.76) (1,165.74)
Income tax expenses (471.88) (893.70) (263.96) 66.28 306.46 136.08 (8.39) (9.59) (1,138.71)
Minority interests (0.18) 37.20 (336.82) (5.07) 3.07 - (3.74) (75.46) (381.02)
Profit or loss of the
segment 1,112.07 1,620.41 806.61 (65.46) 163.98 1,301.40 131.70 (2,193.42) 2,877.29
Total Assets 18,580.01 22,643.78 21,542.90 4,003.68 1,852.21 49,856.38 25,834.65 (80,847.27) 63,466.34
Capital expenditures 1,207.50 1,669.00 753.30 24.30 25.40 88.90 82.20 (78.70) 3,771.90
------------------------------------------------------------------------------------------------------------------------------------
F-139
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------------
Telefonica Telefonica Telefonica Telefonica Telefonica
-------------------------- De Espana Moviles Latinoamerica Contenidos Terra Holding Other Eliminations Total
December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
Sales to external
clients 10,028.28 8,905.06 6,456.81 1,374.50 414.48 0.10 1,220.61 - 28,399.84
Sale of services to
other segments of
the company 667.10 1,523.22 228.12 3.98 130.62 32.82 796.92 (3,442.78) -
Capitalized expenses
on Group work on
fixed assets 174.62 90.14 47.37 0.12 0.91 - 2.83 215.12 531.11
Other operating revenues 38.40 76.98 73.69 4.82 0.63 72.82 121.53 (99.92) 288.95
Operating expenses (6,048.70) (5,881,33) (3,548.49 (1,179.68) (577.79) (344.22) (1,795.04) 3,238.36 (16,136.89)
Other operating expenses (97.31) (132.17) (216.20) 6.59 (8.33) 14.74 (50.34) (2.14) (480.88)
Operating Profit before
depreciation and
amort. expenses 4,762.39 4,581.90 3,101.30 210.33 (39.48) (223.75) 296.51 (87.08) 12,602.12
Depreciation and
amortization expenses (2,638.80) (1,516.04) (1,805.70) (49.93) (78.74) (47.91) (179.24) 42.14 (6,274.22)
Operating Profit 2,123.59 3,065.86 1,295.60 160.40 (118.22) (271.,66) 117.27 (44.94) 6,327.90
Gain or losses of
Associated Companies (0.90) (80.66) 2.50 (95.23) (34.73) - (1.15) (2.41) (212.58)
Financial income (expense) (447.50) (416.61) (228.60) (61.52) 57.74 400.68 177.89 (542.78) (1,060.70)
Amortization of goodwill (2.80) (116.40) (91.10) (102.52) (82.30) - (9.34) (38.00) (442.46)
Extraordinary Gains or
Losses (1,374.10 (7.53) (128.10) 327.89 4.53 1,089.45 (66.96) (1,094.84) (1,249.66)
Income tax expenses (18.10) (888.97) (169.70) (105.08) (0.27) 338.23 (57.57) (11.97) (913.43)
Minority interests - 38.61 (122.10) (4.24) 0.54 - (6.66) (151.64) (245.49)
Profit or loss of the
segment 280.19 1,594.30 558.50 119.70 (172.71) 1,556.70 153.48 (1,886.58) 2,203.58
Total Assets 18,593.23 16,419.95 22,157.97 4,497.53 2,987.21 49,422.15 27,542.29 (79,545.15) 62,075.19
Capital expenditures 1,480.50 1,317.66 654.10 138.99 80.40 30.52 163.88 (160.23) 3,705.82
------------------------------------------------------------------------------------------------------------------------------------
Measurement of Segments:
We include in the disclosure of segment data those measures of profit or
loss which are reviewed by the operating management to asses the
performance of each segment, basically operating revenues (sales to
external clients and to other segments), operating expenses, capital
expenditures and operating Profit before depreciation and amortization
expenses.
The budgets and strategic plans of the segments include the above mentioned
measures, and our chief operating decision maker reviews them on a monthly
basis in order to assess the performance of the segments and make decisions
to improve it and also to evaluate the accomplishment of the management of
each segment.
The rest of the measures disclosed are also considered for purposes of
making decisions about allocating resources to each segment. Management
uses more than one measure of a segment's profit or loss, however, the
reported measures are those that management believes are determined in
accordance with the measurement principles most consistent with Spanish
GAAP.
Accounting principles:
All transactions between segments are made at market prices or at prices
which have been approved and published by the regulatory authority.
The accounting principles used in the accounting for the segments is the
same as that used in the elaboration of the consolidated financial
statement.
F-140
13. External services
The Company advertises its branded services and products through national
and regional media in the countries in which it operates. These advertising
costs are expensed as incurred, and are charged against "external
services". Advertising expenses for 2002, 2003 and 2004 amounted to (euro)
781.58 millions, (euro)899.83 million and (euro)1,196.86 million
respectively. Accounting for such costs is consistent with US GAAP.
14. New accounting standards
Statements of Financial Accounting Standards No. 123 (Revised 2004):
--------------------------------------------------------------------
Share-Based Payment
-------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" to stock
compensation awards issued to employees. Rather, SFAS 123R requires
companies to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award--the
requisite service period (usually the vesting period). SFAS 123R applies to
all awards granted after the required effective date, December 15, 2005,
and to awards modified, repurchased, or cancelled after that date. SFAS
123R will be effective for our fiscal year ending December 31, 2005. The
Company does not anticipate that adoption of this Standard will have a
material effect on its financial position, results of operations, or cash
flows.
Statements of Financial Accounting Standards No. 151: Inventory Costs - An
--------------------------------------------------------------------------
Amendment of ARB No. 43, Chapter 4
----------------------------------
On November 24, 2004, the FASB issued SFAS No. 151, "Inventory Cost, a
revision of ARB No. 43, Chapter 4". The amendments to SFAS No. 151 aim to
improve financial information, stating that the expenses of inactive
facilities, transportation costs, manipulation costs and scrap material
costs should be recorded in the statement of operation as expenses of the
period. The application of fixed cost to inventories should be based on the
normal capacity of the production facilities.
SFAS No. 151 will be applicable to valuation of Inventories by the end of
the first reporting period ending after June 15, 2005. The Company does not
anticipate that the adoption of SFAS No. 151 will have a material impact on
its financial position, cash flows or results of operations.
Statements of Financial Accounting Standards No. 153: Exchanges of Non-monetary
-------------------------------------------------------------------------------
Assets - An Amendment of APB Opinion No. 29
-------------------------------------------
On December 16, 2004, the FASB issued SFAS N0.153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29", which amends
Accounting Principles
F-141
Board Opinion No. 29 "Accounting for Nonmonetary Transactions". This
amendment is based on the idea that exchange transactions should be valued
in accordance with the value of the exchanged assets. The exception made
for similar non-monetary productive assets is eliminated and substituted
by a more extensive exception related to non-monetary assets with a
non-commercial consideration. APB No. 29 stated that the exchange
transaction of a productive asset for a similar one should be recorded at
the book value of the exchanged asset.
SAS No. 153 will be applicable for non-monetary asset exchange transactions
occurring in fiscal periods beginning after June 15, 2005. The Company does
not anticipate that the adoption of SFAS No. 153 will have a material
impact on its financial position, cash flows or results of operations.
SAB No. 107: Shared Based Payment
---------------------------------
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB)
relating to the FASB accounting standard for stock options and other
share-based payments. The interpretations in SAB No. 107, "Share-Based
Payment," (SAB 107) express views of the SEC Staff regarding the
application of SFAS No. 123 (revised 2004), "Share-Based Payment
"(Statement 123R). Among other things, SAB 107 provides interpretive
guidance related to the interaction between Statement 123R and certain SEC
rules and regulations, as well as provides the Staff's views regarding the
valuation of share-based payment arrangements for public companies. The
Company does not anticipate that adoption of SAB 107 will have any effect
on its financial position, results of operations or cash flows.
FIN No. 46 - Consolidation of Variable Interest Entities - an interpretation of
-------------------------------------------------------------------------------
ARB No. 51
----------
In January 2003, the Financial Accounting Standards Board ("FASB")
released Interpretation No. 46 Consolidation of Variable Interest Entities
("FIN 46") which requires that all primary beneficiaries of Variable
Interest Entities (VIE) consolidate that entity. FIN 46 is effective
immediately for VIEs created after January 31, 2003 and to VIEs in which
an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003 to VIEs in
which an enterprise holds a variable interest it acquired before February
1, 2003. In December 2003, the FASB published a revision to FIN 46 ("FIN
46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the
guidance of FIN 46R, entities that do not have interests in structures
that are commonly referred to as special purpose entities are required to
apply the provisions of the interpretation in financials statements for
periods ending after March 14, 2004. As indicated in note 25.20.4 the only
impact on the application of FIN 46 R was the desconsolidation of
Telefonica Finance our trust preferred shares vehicle.
F-142
SAB No. 104 - Revenue Recognition and EITF 00-21
------------------------------------------------
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104
updates portions of the interpretive guidance included in Topic 13 of the
codification of Staff Accounting Bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The company believes it
is currently following the guidance of SAB 104. SAB 104 also revises or
rescinds certain interpretive guidance regarding SAB 101 that was in
conflict with the provisions of EITF 00-21.
In 2004, The Company adopted EITF 00-21, 'Revenue Recognition' (SAB 104),
which revises or rescinds certain interpretive guidance regarding SAB 101
that was in conflict with the provisions of EITF 00-21. The effects of this
implementation are explained in Note 25.4.
EITF 04-1: Accounting for Preexisting Relationships between the Parties to a
----------------------------------------------------------------------------
Business Combination
--------------------
This Issue addresses the accounting for preexisting relationships between
the parties to a business combination. The consensuses in this Issue
should be applied to business combinations consummated and goodwill
impairment tests performed in reporting periods beginning after October
13, 2004. The application of this new accounting literature by Telefonica
had no impact on its financial position, cash flows or results of
operations.
EITF Issue No. 01-08 - Determining Whether an Arrangement Contains a Lease
--------------------------------------------------------------------------
In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to clarify
the requirements of identifying whether an arrangement should be accounted
for as a lease at its inception. The guidance in the consensus is designed
to mandate reporting revenue as rental or leasing income that otherwise
would be reported as part of product sales or service revenue. EITF Issue
No. 01-08 requires both parties to an arrangement to determine whether a
service contract or similar arrangement is, or includes, a lease within the
scope of SFAS No. 13, "Accounting for Leases." The application of this EITF
has not had any effect on The Company's financial position, cash flows or
results of operations.
EITF Issue No. 03-11 - Reporting Realized Gains and Losses on Derivative
------------------------------------------------------------------------
Instruments That Are Subject to FASB Statement No. 133, Accounting for
----------------------------------------------------------------------
Derivative Instruments and Hedging Activities, and Not Held for Trading
-----------------------------------------------------------------------
Purposes
--------
In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that
determined whether realized gains and losses on derivative contracts not
held for trading purposes should be
F-143
reported on a net or gross basis is a matter of judgment that depends on the
relevant facts and circumstances and the economic substance of the transaction.
In analyzing the facts and circumstances, EITF Issue No. 99-19, and Opinion No.
29, "Accounting for Nonmonetary Transactions," should be considered. EITF Issue
No. 03-11 is effective for transactions or arrangements entered into after
September 30, 2003. The application of this EITF has not had any effect on The
Company's financial position, cash flows or results of operations.
****************
F-144
Telefonica
--------------------------------------------------------------------------------
EXHIBIT I.
Contribution of the Group companies to reserves and translation differences
The contribution of the Group companies to consolidated reserves and translation
differences as of December 31, 2004 and 2003, was as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of euros
---------------------------------------------------------------------------------
12/31/04 12/31/03
---------------------------------------------------------------------------------
To To Translation To To Translation
Companies Reserves Differences Reserves Differences
------------------------------------------------------------------------------------------------------------------------------------
Fonditel 6.63 - (0.94) -
Atento Group (279.23) (30.79) (263.76) (36.17)
Casiopea Group 64.73 - 48.79 -
Comet Group (6.45) (6.41) -
Telefonica de Espana Group 160.00 1.84 276.41 (0.03)
Telefonica Internacional Group 1,420.82 (4,568.35) 362.72 (4,010.81)
Telefonica Contenidos Group (1,935.22) (89.47) (1,966.32) (162.82)
Telefonica Publicidad e Informacion Group 138.42 (35.96) 126.39 (1.69)
Telefonica Moviles Group 896.93 (1,137.77) 159.22 (1,100.36)
Terra Networks Group (1,636.91) (52.60) (1,408.77) (167.59)
Inmobiliaria Telefonica - - 9.22 -
Taetel 11.10 - 10.40 -
Telefonica Europe B.V. 5.92 - 4.74 -
Telfisa 0.32 - (1.85) -
Tidsa 55.16 - 48.90 -
Telefonica, S.A. and instrumentality companies 15.707.16 (238.87) 18,640.51 (916.52)
------------------------------------------------------------------------------------------------------------------------------------
Total Telefonica Group 14,609.38 (6,151.97) 16,039.25 (6,395.99)
------------------------------------------------------------------------------------------------------------------------------------
Intercompany fixed asset transactions (65.47) - (46.17) -
------------------------------------------------------------------------------------------------------------------------------------
Total contribution 14,543.91 (6,151.97) 15,993.08 (6,395.99)
------------------------------------------------------------------------------------------------------------------------------------
E-1
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
DETAIL OF SUBSIDIARIES, ASSOCIATED COMPANIES AND INVESTEES AS OF DECEMBER 31, 2004 (amounts in millions of euros)
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica de Contenidos, S.A.U
(SPAIN)(*)(**)(1)(6) 100.00% 100.00% 2,163.60 (1,865.97) - (82.84) 2,241.88 FC -
Organization and operation of
activities and businesses
relating to multimedia services
Paseo de la Castellana,
141-28046 Madrid
Telefonica Media Argentina, S.A.
(ARGENTINA)(1) 100.00% 100.00% 471.63 (395.89) - - 899.16 FC -
Holdings in businesses in
areas related to the media
Tucuman, 1 Pta.17(0) - Buenos Aires
Atlantida Comunicaciones, S.A.
(ARGENTINA)(1)(6) 100.00% 100.00% 474.58 (531.99) - (33.32) - FC -
Free-to-air television and radio
Tucuman, 1 Pta.20 - Buenos Aires
Other holdings N/A N/A N/A N/A N/A N/A N/D EM 0.06
Telefonica Servicios Audiovisuales,
S.A.(SPAIN)(*)(**)(1) 100.00% 100.00% 6.01 18.11 - (4.16) 8.37 FC -
Provision of all manner of
audiovisual telecommunications
services
Virgilio, 2 - Edificio 2 -
Ciudad de la Imagen (*)
- 28223 Madrid
Andalucia Digital Multimedia,
S.A. (SPAIN) 24.00% 24.00% 2.69 (0.85) - (0.38) 0.43 EM 0.35
Development of the audiovisual
industry in Andalucia
Edificio Azul, Parque Tecnologico
de Andalucia - Malaga
Telefonica Sport, S.A. (SPAIN) (*) (**) 100.00% 100.00% 1.00 (1.35) - (0.62) 2.33 FC -
Management and exploitation of
audiovisual rights in any medium
Paseo de la Castellana, 141
- 28046 Madrid
Hispasat, S.A. (SPAIN) (2) 13.23% 13.23% 121.95 152.32 - 7.99 17.59 EM 37.35
Operation of a satellite
telecommunications system
Gobelas, 41 - 28023 Madrid
Telefonica Servicios de Musica S.A.U.
(SPAIN)(*)(**)(4) 100.00% 100.00% 1.26 3.51 - (4.42) 1.79 FC -
Provision of services in the
teledistribution industry
Luchana, 23, 1(0) - 28010 Madrid
Sogecable, S.A. (SPAIN) (1) (6) 1.60% 22.23% 23.83% 252.01 167.32 - (156.23) 1,065.49 EM 62.70
Indirect management of
public T.V. service
Gran Via, 32 - 3(a) Pta.
- 28013 Madrid
Patagonik Film Group, S.A.(ARGENTINA)(2) 30.00% 30.00% 2.42 (0.48) - 0.06 8.58 EM 0.54
Production of audiovisual content
Godoy Curz, 1540 - 1414 Buenos Aires
Other holdings (1) N/A N/A N/A N/A N/A N/A 11.21 C 11.22
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-2
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Endemol Holding, N.V.
(NETHERLANDS) (3) (6) 99.70% 99.70% 0.69 152.44 - 64.59 842.13 FC -
Holding company
Bergweg 70, 1217 SC Hilversum
Endemol International B.V.
(NETHERLANDS) (3) 100.00% 99.70% 0.02 (7.43) - 11.16 N/D FC -
Production of audiovisual content
Bergweg 70, 1217 SC Hilversum
Endemol, B.V. (3) 100.00% 99.70% 0.67 229.66 - (16.33) N/D FC -
Holding company. Financing and
exploitation of royalties
Bergweg 70, 1217 SC Hilversum
Endemol Holding France (3) 100.00% 99.70% 100.04 (111.97) - 36.64 N/D FC -
Holding and service company
Endemol France (Holding)
SAS (FRANCE) (3) 100.00% 99.70% 0.04 (9.27) - (24.05) N/D FC -
Holding and service company
8-10 rue Torricelli,
75017 Paris, France
Endemol Nederland Holding,
B.V. (NETHERLANDS) (3) 100.00% 99.70% 0.02 (5.27) - (1.50) N/D FC -
Holding and finance company
Bergweg 70, 1217 SC Hilversum
Endemol Nederland, B.V.
(NETHERLANDS) (3) 100.00% 99.70% 0.30 0.58 - 2.66 N/D FC -
Production and presentation of
radio and television broadcasts
Van Cleeffkade 15, 1431 BA Aalsmeer
Endemol International Distribution
(NETHERLANDS) (3) 100.00% 99.70% 0.02 (3.83) - 0.33 N/D FC -
Distribution and exploitation
of audiovisual rights
Bergweg 70, 1217 SC Hilversum
Endemol Finance B.V. (NETHERLANDS) (3) 100.00% 99.70% 9.08 182.35 - (15.55) N/D FC -
Finance company
Bergweg 70, 1217 SC Hilversum
Endemol Argentina S.A. (ARGENTINA) (3) 65.00% 64.80% - 0.22 - 0.57 N/D FC -
Presentation and shooting
by any audiovisual medium
Dr. E. Ravignani 1470,
C1414 CPJ - Buenos Aires
Endemol USA, Inc. (USA) (3) 100.00% 99.70% - 7.83 - 14.21 N/D FC -
All the activities permitted by
California law, except for certain
activities such as banking
9255 Sunset Blvd, Suite 1100 -
Los Angeles - 90069 California
True Entertainment LLC (USA) (3) 51.00% 50.85% - (0.11) - 0.79 N/D FC -
All the activities
permitted by Delaware law
435 West 19th Street
NY1011 New York
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-3
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Endemol Mexico S.A. de CV
(MEXICO) (3) 50.00% 49.85% - 0.80 - 0.52 N/D PC -
Development and production of
TV programs and serials
Vasco de Quiroga 2000, Colonia
Santa Fe, Delegacion Guajimalpa,
Mexico D.F. 01210
Endemol Globo, S.A. (BRAZIL) (3) 50.00% 49.85% 0.09 (0.20) - 0.33 N/D PC -
Development, exploitation and
distribution of audiovisual
formats and programs
Av. das Americas 700,
B2 Sala 301, Rio de Janeiro
Endemol Belgium, N.V. (BELGIUM) (3) 100.00% 99.70% 1.56 (0.97) - 2.08 N/D FC -
Television, theater, video,
film and other productions
Schalienhoevedreef 20E,
B-2800 Mechelen
Endemol-Neovision S.p.z.o.o.
(POLAND) (3) 50.00% 49.85% 0.01 0.06 - 0.08 N/D PC -
Radio- and television-related
activities
Ul. Dominikanska 25A, 02-738
- Warsaw
Endemol Producoes Televisivas
Portugal, Lda. (PORTUGAL) (3) 100.00% 99.70% 0.02 1.40 - 1.66 N/D FC -
Production, exchange and
distribution of TV productions
Rua Tierno Galvan, Torre 3,
8' Piso, sala 801, 1070 Lisbon
Endemol South Africa (SOUTH AFRICA) (3) 67.00% 66.80% 0.09 0.05 - 0.17 N/D FC -
TV program production
5 Concourse Crescent,
Lonehill, 2021 - Johanesburg
Endemol Deutschland, GmbH (GERMANY) (3) 100.00% 99.70% 0.03 (27.31) - 30.57 N/D FC -
Cinema, television and
theater production
Am Coloneum 3-7, D-50798
Cologne, Germany
Endemol Italia (Holding), S.P.A.
(ITALY) (3) 100.00% 99.70% 0.11 42.65 - 11.00 N/D FC -
Production and exploitation of
cinema films and TV films and serials
Via Monte Zebio 32, 00195 - Rome
Palomar, S.p.A. (ITALY) (3) 69.00% 68.79% 0.40 1.15 - 0.57 N/D FC -
Production and exploitation of
cinema films and TV films and serials
Via Silvio Pellico 24, 00195 - Rome
Endemol UK Holding, Ltd. (U.K.) (3) 100.00% 99.70% 20.97 (9.92) - 2.09 N/D FC -
Holding company
Shepherds Building Central,
Charecroft Way, Shepherds Bush,
W14 OEE - London
B&B Endemol (SWITZERLAND) (3) 50.00% 49.85% 0.03 0.04 - 1.04 N/D PC -
TV program and film production
Carmenstrasse 12, CH 8032 - Zurich
Endemol Espana Holding, S.L.
(SPAIN) (3) 100.00% 99.70% 0.47 12.92 - (4.32) N/D FC -
Holding company
Latorre & Asociados, Velasquez
21, 3o O, 28001 - Madrid
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-4
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Gestmusic Endemol, S.A. (SPAIN) (3) 100.00% 99.70% 0.06 17.98 - 4.15 N/A FC -
TV program production and
related activities
Sta. Elionor 3, 08024 -
Barcelona
Zeppelin Televison, S.A. (SPAIN) (3) 100.00% 99.70% 0.07 5.28 - 8.77 N/A FC -
Development and production
of audiovisual media
Avda de Manoteras 18-6a
Planta, 28050 - Madrid
Other holdings (3) N/A N/A N/A N/A N/A N/A N/A EM 7.96
Telefonica Datacorp, S.A.U.
(SPAIN) (*) (**) (1) 100.00% 100.00% 1,226.76 (423.33) - (77.08) 1,335.81 FC -
Provision and exploitation of
telecommunications services
Gran Via, 28 - 28013 Madrid
Telefonica International Wholesale
Services, S.L. (SPAIN)(*) (**) (1) 100.00% 100.00% 17.21 5.86 - 21.62 17.21 FC -
Provision of international services
Gran Via, 28 - 28013 Madrid
Telefonica Empresas Mexico,
S.A. de C.V. (MEXICO) (1) 49.00%
Telefonica Data Mexico Holding
(MEXICO) (1) 100.00% 100.00% 39.70 (31.53) - (5.79) 40.45 FC -
Global telecommunications services
Mexico
Telefonica Empresas Mexico,
S.A. de C.V. (MEXICO) (1) 51.00% 100.00% 70.26 (53.99) - (10.59) 39.19 FC -
Global telecommunications services
Sierra Santa Rosa, 61 -
Lomas de Chapultepec -
11.650 Mexico City
Katalyx Mexico, S.A. de C.V.
(MEXICO) (1) 100.00% 100.00% 14.04 (9.14) - (5.38) N/D FC -
Administrative management services
Boulevard Avila Camacho, 24 -
Mexico D.F.
Telefonica Data Colombia, S.A.
(COLOMBIA) (1) 65.00% 65.00% 5.78 0.75 - (2.66) 23.60 FC -
Global telecommunications services
Santa Fe de Bogota
Other holdings N/A N/A N/D N/D N/D N/D 0.03 C -
Telefonica Data do Brasil, Ltda.
(BRAZIL) (1) 100.00% 100.00% 249.87 (130.86) - (4.82) 249.62 FC -
Telecommunications services
Rua da Consolacao, 247 - 6 -
Sao Paulo
Telefonica Data Brasil Holding
(BRAZIL) (1) 93.98% 93.98% 345.67 (193.03) - (9.19) N/A FC -
Ownership of companies providing
network and telecommunications
services
Avda. Brig. Faria Lima, 1188 plta.
7(a) andar-parte - Sao Paulo
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-5
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Empresas (BRAZIL) (1) 93.98% 93.98% N/D N/D N/D N/D N/D FC -
Provision and operation of
telecommunications services
Avda. Tambore, 341/371 -
Barueri - Sao Paulo
Telefonica Datos de Venezuela, S.A.
(VENEZUELA) 100.00% 100.00% 0.02 0.18 - 0.03 0.02 FC -
Telecommunications services
Avda. Las Palmas, 3(0) -
1050 Caracas
Telefonica Data Canada, Inc.
(CANADA) 100.00% 100.00% N/D N/D N/D N/D 0.02 C 0.02
Telecommunications services
44 Chipman Hill, 10th Floor -
P.O. Box 7289 New Brunswick
ESL 4S6
Telefonica Data Caribe (SPAIN) 10.00%
Telefonica Data USA Inc.
(USA) (1) 100.00% 100.00% 0.00 48.34 - (18.44) 107.81 FC -
Telecommunications services
1221 Brickell Avenue -
33131 Miami - Florida
Telefonica Data Caribe (*) (**)
(SPAIN) (1) 90.00% 100.00% 0.06 (2.06) - (0.02) 0.06 FC -
Global telecommunications
services
Beatriz de Bobadilla, 14 - 28040 Madrid
Telefonica Data Cuba (CUBA) 50.00% 50.00% N/D N/D - N/D 7.63 C 7.63
Provision and operation of
telecommunications services
Ave, 47 s/n entre 18(a) y 20
- Miramar Playa - La Habana
Ipse - 2000 (ITALY) (1) 4.08%
Exploitation of a UMTS license
Piazza dei Caprettari,
70 - 00186 Roma
Telefonica Empresas Peru, S.A.A.
(PERU) (1) 97.07% 97.07% 29.00 (2.23) (3.39) 1.92 18.16 FC -
Provision and operation of
telecommunications services
Jorge Basadre, 592 7(0) -
San Isidro - Lima
Telefonica Data Argentina, S.A.
(ARGENTINA) (1) 97.92% 97.92% 108.79 (82.87) - 4.44 97.49 FC -
Provision and operation of
telecommunications services
Tucuman, 1 plta.18(0) -
1049 Buenos Aires
Intelsat, Ltd. (U.K.) 0.09% 0.09% N/D N/D N/D N/D 1.58 C 1.42
Global communications
service provider
Bermuda
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-6
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Soluciones de
Informatica y Comunicaciones,
S.L. (SPAIN) (*) (**) 100.00% 100.00% 16.60 (34.19) - (0.67) 16.60 FC -
Granting of loans, guarantees
and financial assistance to
the Telefonica Group
Alcalde Mandillo Tejero, 8 -
Edificio Simon Bolivar -
Santa Cruz de Tenerife
Telefonica Deutschland,
GMBH (GERMANY) (1) 100.00% 100.00% 2.60 502.76 - (165.06) 638.54 FC -
Internet and telecommunications
services
Landshuter Allee, 8 - 80637 Munich
Telefonica Data Atlas, S.A.
(MOROCCO) (8) 59.86% 59.86% 300m.DH N/D N/D N/D 0.02 C -
Provision and operation of
telecommunications services
Tour Bmce, Rond Point
Hassan II - Casablanca
Katalyx, Inc. (USA) (1) 100.00% 100.00% 143.43 (157.89) - 19.93 5.18 FC -
Administrative management
services
1221 Brickell Avenue -
Miami, Florida
Katalyx Brasil, Ltd. (BRAZIL) (1) 100.00% 100.00% 0.44 (1.55) - (0.01) N/D FC -
Administrative management
services
Rua Joaquim Floriano, 1052 -
Sao Paulo
Adquira Mexico, Ltd. (MEXICO) (1) 50.00% 50.00% 9.84 (7.30) - (1.14) N/D EM 0.70
E-commerce
Boulevard Avila Camacho,
24 - Mexico City
Adquira Brasil, Ltd. (BRAZIL) (1) 100.00% 100.00% 2.64 (2.99) - (0.19) N/D FC -
E-commerce
Rua Joaquim Floriano, 1052 -
Sao Paulo
Katalyx Transportation Brasil, Ltd.
(BRAZIL) (1) 100.00% 100.00% - (1.41) - (0.04) - FC -
E-commerce
Rua Joaquim Floriano, 1052 -
Sao Paulo
Katalyx Cataloguing Brasil, Ltd.
(BRAZIL) (1) 100.00% 100.00% - (0.24) - (0.01) - FC -
E-commerce and cataloging
Rua Joaquim Floriano, 1052 -
Sao Paulo
Mercador, S.A. (BRAZIL) (1) 54.00% 54.00% 21.81 (19.60) - (0.75) N/D EM 0.79
E-commerce
Rua Joaquim Floriano, 1052 -
Sao Paulo
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-7
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica de Espana, S.A.U.
(SPAIN) (*) (**) (1) (6) 100.00% 100.00% 1,023.68 2,241.85 - 1,112.07 3,033.86 FC -
Provision of telecommunications
services in Spain
Gran Via, 28 - 28013 Madrid
Telefonica S. de Informatica y
Comunicaciones de Espana,
S.A.U. (SPAIN) (*) (**) (3) 100.00% 100.00% 6.06 17.54 - (6.12) 20.49 FC -
Telecommunications systems,
network and infrastructure
engineering
Sor Angela de la Cruz, 3 -
Pl. 9(a) - 28020 Madrid
Telefonica Mobile Solutions Chile,
S.A.C. (CHILE) (1) N/D N/D 0.19 (1.36) - 0.11 0.19 FC -
Equipment and systems
engineering activities
Avda. Seminario, 15 - Providencea
- Santiago de Chile
Telefonica Mobile Solutions Peru,
S.A.C. (PERU) (1) 99.90% 99.90% 0.31 (0.17) - (0.12) - FC -
Communications services
and/or advisory
Avda. Camino Real, 155 4(0) -
San Isidro - Lima
Telefonica Mobile Solutions Brasil,
Ltda. (BRAZIL) (1) 99.90% 99.90% 0.01 (0.85) - 0.10 0.01 FC -
Equipment and systems
engineering activities
Na de Botafogo, 501 2(0) andar,
sales 202 y 203 - Rio de Janeiro
Telefonica Mobile Solutions
Argentina, S.A. (ARGENTINA) (1) N/D N/D 0.22 (0.18) - - 0.23 FC -
Equipment and systems
engineering activities
Carlos Pellegrini, 1149 10(0)
- Buenos Aires
Telefonica Sistemas Ingenieria de
Productos Guatemala, S.A.
(GUATEMALA) (8) 98.00% 98.00% - (0.21) - 0.02 - FC -
Telecommunications equipment
and systems engineering
Guatemala
Telefonica Sistemas El Salvador,
S.A. de C.V. (EL SALVADOR) (8) 99.50% 99.50% 0.04 (0.25) - 0.22 0.03 FC -
Engineering and systems services
San Salvador
Telefonica Soluciones de Outsourcing,
S.A. (SPAIN) (*) (**) (3) 100.00% 100.00% 1.00 (0.29) - 0.09 0.56 FC -
Network management and marketing
Goya, 4 - 28001 Madrid
Soluciones Tecnologicas para la
Alimentacion,S.L. (SPAIN) 45.00% 45.00% 6.51 0.65 - - 3.09 EM 3.38
E-commerce
C/Rosello,515.08025-Barcelona
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-8
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Soluciones Sectoriales,
S.A. (SPAIN) (*) (**) (4) 100.00% 100.00% 13.73 (3.57) - 0.43 10.72 FC -
Consulting services for companies
in the communications and IT
industries
Av. Burgos, 17-10.(0)-28036 Madrid
Interdomain, S.A. (SPAIN)(*)(**) (4) 100.00% 100.00% 0.30 0.52 - 0.04 0.78 FC -
Operation of Internet resources
Fernando El Santo, 15 -
28010 Madrid
SODETEL, Comercial de Servicios
de Telecomunicaciones, S.A. (SPAIN) 50.00% 50.00% 0.12 - - - 0.07 EM 0.06
Provision of consulting services,
installation and
telecommunications services
Parque industrial y de servicios
de Mairena del Aljarafe - Sevilla
Portel Servicios Telematicos,
S.A. (SPAIN) (1) 49.00% 49.00% 3.01 0.16 - - 1.35 EM 1.55
Systems engineering and
telecommunications in port areas
Avda. de Partenon, 10 Campo de
las Naciones - 28042 Madrid.
Instituto Canario de
Telecomunicaciones (IT 7) (SPAIN) 40.00% 40.00% 0.10 (0.06) - - 0.03 EM 0.01
Provider of multimedia services
Cebrian, 3 - 35003
Las Palmas de Gran Canaria
Bitel Baleares Innovacion
Telematica, S.A. (SPAIN) 39.00% 39.00% 1.51 0.07 - - 0.69 EM 0.62
Provision of services and
systems engineering in the
IT and communications fields
Paseo Maritimo, 38 A - 07005
Palma de Mallorca
Tecnologia e Ingenieria de Sist.
y Servicios Avanzados de Telec.,
S.A. (TISSAT) (SPAIN) (2) 30.77% 30.77% 0.78 2.33 - - 0.17 EM 0.96
Systems engineering and marketing
of advanced services
Correos, 1 - 46002 Valencia
SEMCA (SPAIN) 16.00% 16.00% 0.75 (0.11) - - 0.12 C 0.12
Emergency telephone service in the
Autonomous Community of Cantabria
Casimiro Sainz, 4 - Santander
Barcelona Emprend, S.A. (SPAIN) 6.92% 6.92% 6.50 (0.57) - (0.08) 0.45 C 0.45
Promotion of non-financial companies
C/ Llacuna, 162 - Barcelona
Foment Ciutat Vella, S.A. (SPAIN) 5.00% 5.00% 6.01 0.80 - - 0.30 C 0.30
Performance of urban projects
C/ Pintor Fortuny, 17-19 -
Barcelona
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-9
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Teleinformatica y Comunicaciones,
S.A. (TELYCO) (SPAIN) (*) (**) (3) 100.00% 100.00% 2.77 11.40 - (0.34) 12.47 FC -
Promotion, marketing and
distribution of telephone and
telematic equipment and services
Plaza del Descubridor Diego
de Ordas, 3 - 28003 Madrid
Telyco Marruecos, S.A. (MOROCCO) (3) 54.00% 54.00% 0.60 0.06 - 0.38 0.32 FC -
Promotion, marketing and
distribution of telephone services
Boulevard Abdelmoumen, 88 - Casablanca
Telefonica Telecomunicaciones
Publicas, S.A. (SPAIN)(*) (**) (1) 100.00% 100.00% 1.20 78.66 - 7.09 64.12 FC -
Installation of public telephones
Plaza de Carlos Trias Bertran,
7 - 28020 Madrid
Adquira Spain, S.A. (SPAIN) (2) 20.00% 20.00% 1.56 11.35 - (4.78) 7.64 EM 0.68
Development of e-commerce platform
Pl. Pablo Ruiz Picaso, s/n.
Edif. Torre Picaso - Madrid
Other holdings N/A N/A N/A N/A N/A N/A 0.22 C 0.22
Telefonica Data Espana, S.A.U.
(SPAIN) (*) (**) (1) 100.00% 100.00% 39.27 25.72 - 90.64 157.25 FC -
Data transmission
Beatriz de Bobadilla, 18 -
28040 Madrid
Agencia de Certificacion
Electronica, S.A.
(SPAIN) (*) (**) (2) 100.00% 100.00% 0.94 (4.28) - (0.42) 0.00 FC -
Operation of "electronic notary's
office" using SET technology
Sor Angela de la Cruz, 3 - 28020 Madrid
Segurvirtual MVS, S.A. (SPAIN) (3) 49.00% 49.00% 3.49 (6.87) - - 1.59 EM -
Research on insurance
virtual market
Plaza de la Lealtad, 4
- 28014 Madrid
Euroinfomarket, S.A. (SPAIN)(1) 5.00% 5.00% 2.05 (0.80) - (0.49) 0.27 C 0.27
Servicios On Line Para
Usuarios Multiples, S.A. (SPAIN) 33.33% 33.33% 0.60 1.33 - 0.34 0.70 EM 0.76
Telefonica Cable, S.A.
(SPAIN) (*) (**) (7) 100.00% 100.00% 3.05 (5.10) - (11.98) 29.58 FC -
Cable telecommunications services
Virgilio, 2 - Edificio 2
- Ciudad de la Imagen (*)
- 28223 Madrid
Telefonica Cable Menorca, S.A.
(SPAIN)(*) (**) 100.00% 100.00% 0.60 (0.13) - - 0.56 FC -
Cable television systems
and value-added services
Santiago Ramon y Cajal, 13
- Mahon - Menorca
Telefonica Cable Galicia,
S.A. (SPAIN) (**) (7) 85.00% 85.00% 0.60 0.10 - 0.01 0.53 FC -
Cable television systems
and value-added services
Ronda de Outerio, 1-3 - A Coruna
Sociedad General de Cablevision
Canarias, S.A. (SPAIN) (*)(**) (7) 100.00% 100.00% 1.23 (1.16) - - 1.17 FC -
Cable television systems and
value-added services
Alcalde Mandillo Tejera,
8 - 38007 Santa Cruz de Tenerife
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-10
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Taetel, S.L. (SPAIN) (*) (**) (1) 100.00% 100.00% 28.25 5.65 - 0.53 28.25 FC -
Acquisition, holding and disposal
of shares and ownership
interests in other companies
Beatriz de Bobadilla, 3 -
28040 Madrid
Lotca Servicios Integrales, S.L.
(SPAIN) (*) (**) (4) 100.00% 100.00% 16.93 - - - 16.93 FC -
Holding and operation of aircraft
and the lease thereof
Gran Via, 28 - 28013 Madrid
Telefonica Ingenieria de Seguridad,
S.A. (SPAIN) (*) (**) (2) 100.00% 100.00% 0.90 (2.63) - (0.76) 3.58 FC -
Security services and systems
Condesa de Venadito, 1 -
28027 Madrid
Telefonica Engenharia de
Seguranca (BRAZIL) (2) 99.99% 99.99% 3.25 (0.41) - (1.45) 3.07 FC -
Security services and systems
Rua Haddock Lobo, 337 2(0)
andar, conjunto 21 -
01414-001 - Sao Paulo
Telefonica Ingenieria de Seguridad
Mexico, S.A. de C.V. (MEXICO) (2) 65.00% 65.00% 0.52 (0.74) - (0.05) 0.34 FC -
Security services and systems
Ciudad de Mexico, Distrito Federal
Telefonica Capital, S.A.
(SPAIN) (*) (**) (3) 100.00% 100.00% 7.00 39.88 - 1.72 18.12 FC -
Financial institution
Gran Via, 28 - 28013 Madrid
Fonditel Pensiones Entidad
Gestora de Fondos de Pensiones,
S.A. (SPAIN) (3) 70.00% 70.00% 15.70 18.86 - 8.01 22.45 FC -
Administration of pension funds
Pedro Teixeira n(0) 8 - 3(a) P.
- 28020 Madrid
Fonditel Gestion, Sociedad Gestora
de Instituciones de Inversion
Colectiva, S.A. (SPAIN)(*) (**) 100.00% 100.00% 1.50 0.21 - 2.06 1.50 FC -
Administration and
representation of collective
investment institutions
Pedro Teixeira n(0) 8 - 3(a) P.
- 28020 Madrid
Fonditel Valores, Agencia de Valores,
S.A. (SPAIN) (*) (**)(3) 100.00% 100.00% 3.00 (0.07) - (0.03) 3.00 FC -
Investment services
Pedro Teixeira n(0) 8
- 3(a) P. - 28020 Madrid
Telepizza, S.A. (SPAIN) 4.89% 4.89% N/D N/D N/D N/D 102.02 C 102.02
Catalana D'Iniciatives, C.R.,
S.A. (SPAIN) 5.99% 5.99% 30.86 31.24 - 1.85 3.77 C 3.77
Promotion of non-finance
companies
Passeig de Gracia, 2 - 2(0)B
- 08007 Barcelona.
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-11
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Ateseco Comunicacion, S.A.
(SPAIN) (*) (**) (1) 100.00% 100.00% 6.12 39.47 - 2.23 107.58 FC -
Holding company
C/ Gran Via, 28 - 28013 Madrid
Atento N.V. (NETHERLANDS) (1) (6) 91.35% 91.35% 0.12 (10.98) - 18.21 302.71 FC -
Provision of telecommunications
services
Locatellikade, 1 - 1076 AZ Amsterdam
Procesos Operativos, S.A. (SPAIN)(1) 100.00% 91.35% 0.06 1.10 - 0.95 0.76 FC -
Provision of telematic services
(telemarketing, help line and,
in general, call-center activities)
Isla Sicilia, 3 - 28034 Madrid
Atento Teleservicios Espana, S.A.
(SPAIN) (4) 100.00% 91.35% 1.38 36.59 (20.00) 7.91 23.93 FC -
Provision of promotion, marketing
and market research services
relating to direct marketing
Santiago de Compostela, 94 -
7(a) - 28035 Madrid
Tempotel, Empresa de Trabajo
Temporal, S.A. (SPAIN) (4) 100.00% 91.35% 0.06 1.29 - (0.05) 0.06 FC -
Temporary employment agency
Principe de Vergara, 28 Madrid
Atento Servicios Tecnicos y
Consultoria, S.L. (SPAIN) (4) 100.00% 91.35% 0.01 0.15 - 0.34 0.01 FC -
Study, development and
performance of projects
and system-related services
Santiago de Compostela, 94 -
7(a) - 28035 Madrid
Servicios Integrales de Asistencia
y Atencion, S.L. (SPAIN) (4) 100.00% 91.35% 0.01 (0.01) - 0.26 0.01 FC -
Management of specialized
employment centers for
disabled workers
Santiago de Compostela,
94 - 7(a) - 28035 Madrid
Atento Brasil, S.A. (BRAZIL) (1) 100.00% 91.35% 249.75 (183.36) - 4.09 195.88 FC -
Provision of call-center services
Av. Maria Coelho de Aguiar,
215 - Bloco B, 8 -
05804-900 Sao Paulo
Atento Puerto Rico, Inc.
(PUERTO RICO) (1) 100.00% 91.35% 7.12 (5.95) - 3.42 8.22 FC -
Provision of call-center services
Valencia Park calle 2 edificio
17 suite 600, Guaynabo -
Puerto Rico 00968
Atento Colombia, S.A. (COLOMBIA) (1) 100.00% 91.35% 1.55 3.32 - 0.65 7.63 FC -
Provision of call-center services
Santa Fe de Bogota
Atento Maroc, S.A. (MOROCCO) (1) 100.00% 99.95% 4.16 (1.22) - (1.79) 3.56 FC -
Provision of call-center
services
Bd Abdelmoumen, Angle rue
Errazi et Charles
Lebrun - Casablanca
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-12
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Atento Venezuela, S.A.
(VENEZUELA) (1) 100.00% 91.35% 11.19 (9.92) - 2.31 8.78 FC -
Provision of call-center services
Caracas
Atento Centroamerica,
S.A. (GUATEMALA) (1) 100.00% 91.35% 15.95 (6.84) - (4.17) 12.23 FC -
Provision of call-center services
14 Calle 3-51 Zona 10 Edificio
Murano Center 18 Nivel -
Departamento de Guatemala
Atento El Salvador, S.A.
de C.V. (EL SALVADOR) (1) 7.41% 91.35% 4.40 (3.23) - 0.38 0.23 FC -
Provision of call-center services
San Salvador
Atento de Guatemala,
S.A. (GUATEMALA) (1) 100.00% 91.35% 14.76 (9.93) - 0.69 10.53 FC -
Provision of call-center
services
Guatemala City
Atento El Salvador, S.A. de C.V.
(EL SALVADOR) (1) 92.59%
Atento Holding Chile, S.A.
(CHILE) (1) 100.00% 91.35% 38.85 (9.78) - (0.04) 30.13 FC -
Holding company
Ciudad y Comuna de Santiago
Atento Argentina, S.A. (ARGENTINA) (1) 100.00% 91.35% 18.05 (21.64) - 0.20 0.22 FC -
Provision of call-center
services
Avda. de Mayo, 645 P.1(0) -
Buenos Aires
Atento Chile, S.A. (CHILE) (1) 70.00% 77.58% 21.72 (8.15) - 3.19 15.19 FC -
Provision of call-center
services
Diagonal Paraguay, 386 -
Santiago de Chile
Nexcom (CHILE) (1) 100.00% 77.58% 1.73 (0.99) - (0.15) 0.85 FC -
Provision of call-center services
Santiago de Chile
Atento Educacion, Ltda. (CHILE) (1) 100.00% 77.58% 0.01 0.05 - 0.05 0.01 FC -
Provision of call-center services
Santiago de Chile
Atento Recursos, Ltda. (CHILE) (1) 100.00% 77.58% 0.01 (0.25) - 0.01 0.01 FC -
Provision of call-center services
Santiago de Chile
Atento Peru, S.A.C. (PERU) (1) 70.00% 93.40% 8.90 (5.20) - 2.30 14.06 FC -
Provision of call-center services
C/ Jiron Camana, 654 - 01 Lima
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-13
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Atento Italia, S.R.L. (ITALY) (8) 100.00% 91.35% 0.01 (2.23) - (0.10) 6.08 FC -
Provision of call-center services
Via Lamaro, edif. D/2 - Roma
Atento Mexicana, S.A. de C.V.
(MEXICO) 100.00% 91.35% 5.36 (3.32) - 4.19 4.10 FC -
Provision of call-center services
Mexico City
Atento Atencion y Servicios,
S.A. De C.V. (MEXICO) 100.00% 91.35% 0.01 (0.01) - 0.06 0.01 FC -
Provision and receipt of all
manner of administrative,
professional and consultative
services
Ciudad de Mexico
Atento Servicios, S.A. de C.V.
(MEXICO) 100.00% 91.35% 0.02 (0.05) - 0.46 0.01 FC -
Provision of call-center services
Mexico City
Telefonica Investigacion y
Desarrollo, S.A. (TIDSA)
(SPAIN) (*) (**) (3) 100.00% 100.00% 6.01 55.16 - 4.43 6.01 FC -
Telecommunications research
activities and projects
Emilio Vargas, 6 - 28043 Madrid
Telefonica Investigacion y
Desarrollo de Mexico,
S.A. de C.V. (MEXICO) 100.00% 100.00% 0.01 (0.04) - 0.06 0.01 FC -
Telefonica Pesquisa e
Desenvolvimento (BRAZIL) 99.99% 99.99% 0.17 0.08 - 0.28 0.21 FC -
Telecommunications research
activities and projects Sao Paulo
Communicapital Inversiones,
S.A.U. (SPAIN) (1) 100.00% 100.00% 6.00 (73.72) - 2.40 6.00 C 6.00
Global telecommunications fund
Gran Via, 28 - 28013 Madrid
Compania Espanola de Tecnologia,
S.A. (SPAIN) (*) (**) (3) 100.00% 100.00% 3.99 (0.35) - (0.04) 10.11 FC -
Promotion of business initiatives
and holding of marketable securities
Villanueva, 2 duplicado planta
1(a) Oficina 23 - 28001 Madrid
Cleon, S.A. (SPAIN) (3) 50.00% 50.00% 8.23 (0.72) - (0.06) 4.12 EM 3.73
Property development
Villanueva, 2 duplicado planta
1(a) Oficina 23 - 28001 Madrid
Casiopea Reaseguradora, S.A.
(LUXEMBOURG) (3) 100.00% 100.00% 3.60 64.74 - 1.46 2.99 FC -
Reinsurance
6D, route de Treves, L-2633
Senningerberg, Luxembourg
Pleyade Peninsular, Correduria de
Seguros y Reaseguros del Grupo
Telefonica, S.A. (SPAIN) (3) 16.67% 83.33% 100.00% 0.36 1.28 - 1.51 0.38 FC -
Distribution, promotion or
preparation of insurance
contracts, operating as a broker
Avda. General Peron, 38 Master II
- 17(a) P.- 28020 Madrid
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-14
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Pleyade Peru Corredores de
Seguros, S.A.C. (PERU) (1) 99.93% 100.00% 0.01 0.02 - 0.01 0.01 FC -
Insurance broker
Lima
Pleyade Argentina, S.A.
(ARGENTINA) (1) 99.80% 99.80% 0.01 0.12 - 0.07 0.01 FC -
Insurance broker
Buenos Aires
TGP Brasil Corretora de
Seguros e Resseguros,
Ltda. (BRAZIL) (1) 99.90% 99.90% 0.01 0.04 (0.02) - 0.01 FC -
Insurance broker
Rua do Livramento, 66 -
Bloco A, 1(0) andar -
04008-030 - Sao Paulo
Pleyade Mexico, Agente de Seguros
y de Fianzas, S.A. de C.V., Ltda.
(MEXICO) (1) 99.50% 99.50% 0.02 (0.01) - 0.04 0.02 FC -
Insurance broker
San Pedro Garza Garcia -
Nuevo Leon
Other holdings N/D N/D N/D N/D N/D N/D 0.02 C 0.02
Altair Assurances, S.A.
(LUXEMBURGO) 100.00% 100.00% 6.00 - - - 6.00 C 6.00
Performance of direct
insurance transations
6DRoute de Treves L-2633
- Senningerberg
Seguros de Vida y Pensiones
Antares, S.A. (SPAIN)(*) (**) (3) 94.67% 5.33% 100.00% 204.33 4.95 - 8.39 215.50 FC -
Life insurance, pensions
and health insurance
Avda. General Peron, 38 Master
II - 17(a) P. - 28020 Madrid
Other holdings N/A N/A N/A N/A N/A N/A N/A 9.04 C 9.04
Telefonica Finanzas, S.A. (TELFISA)
(SPAIN) (*) (**) (3) 100.00% 100.00% 3.01 9.93 - 0.96 12.61 FC -
Integrated cash management,
counseling and financial support
for Group companies
Gran Via, 30 - 4(a) Plta. -
28013 Madrid
Telefonica Finanzas Peru, S.A.C.
(PERU) 100.00% 100.00% 2.75 - - 2.75 C 2.75
Integrated cash management,
counseling and financial
support for Group companies
Ciudad de Lima
Fisatel Mexico, S.A.
de C.V. (MEXICO) (1) 100.00% 100.00% 0.42 (0.29) - 0.15 0.43 FC -
Integrated cash management,
counseling and financial
support for Group companies
Boulevard Manuel Avila
Camacho, 24 - 16(a) Plta.
Lomas de Chapultepec -
11000 Mexico City
Venturini Espana, S.A.
(SPAIN) (*) (**) (2) 100.00% 100.00% 3.01 (0.13) - 0.36 3.60 FC -
Printing, graphic arts and
direct marketing
Avda. de la Industria,
17 Tres Cantos - 28760 Madrid
Venturini, S.A. (SPAIN)(*)(**)(2) 100.00% 100.00% 0.18 0.03 - 0.02 0.21 FC -
Direct marketing
Via Augusta, 117, 2(0)
1(a) - 08006 Barcelona
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-15
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Communicapital Gestion, S.A.U.
(SPAIN) (*) (**) (1) 100.00% 100.00% 0.06 0.02 - - 0.06 FC -
Global telecommunications fund
Gran Via, 28 - 28013 Madrid
Telefonica Participaciones,
S.A. (SPAIN) (**) 100.00% 100.00% 0.06 - - - 0.06 FC -
Issuance of preferred securities
and/or other debt financial
instruments
Gran Via, 28 - 28013 Madrid
Telefonica Emisiones, S.A.
(SPAIN) (**) (1) 100.00% 100.00% 0.06 - - - 0.06 FC -
Issuance of preferred securities
and/or other debt financial
instruments
Gran Via, 28 - 28013 Madrid
Telefonica Europe, B.V.
(NETHERLANDS) (1) 100.00% 100.00% 0.05 6.08 (1.35) 1.92 0.05 FC -
Fund raising in capital markets
Strawinskylaan 1259 , tower D,
12th floor 1077 XX - Amsterdam
Telefonica Finance USA,
L.L.C. (U.S.A.) 0.01% 0.01% 2,000.00 0.01 (83.68) 83.69 0.01 FC -
Financial intermediation
Corporation Trust Center,
1209 Orange street -
Wilmington/New Castle
County - Delaware
Telefonica Internacional
USA Inc. (U.S.A.) (1) 100.00% 100.00% - 0.37 - 0.04 - FC -
1221 Brickell Avenue suite
600 - 33131 Miami - Florida
Telefonica B2B Licencing, Inc.
(U.S.A.) (1) 100.00% 100.00% - (8.05) - (1.80) - FC -
Telefonica Gestion de
Servicios Compartidos, S.A.
(*) (**) (SPAIN) (1) (6) 100.00% 100.00% 7.57 11.82 - (1.10) 20.08 FC -
Provision of management and
administration services
Gran Via, 28 - 28013 Madrid
Sociedad de Cobros de Brasil
(BRASIL) 99.33% 99.33% 0.01 0.00 - 0.02 0.01 FC -
Telefonica Procesos y Tecnologia
de la Informacion, S.A.
(SPAIN) (*) (**) (3) 100.00% 100.00% 3.00 5.53 - 0.68 8.71 FC -
Provision of IT-related services
Jose Abascal, 4 - 28003 Madrid
Zeleris Espana, S.A.
(SPAIN) (*) (**) (3) 100.00% 100.00% 2.38 1.17 - 1.48 0.82 FC -
Provision of mail, directory
and package distribution services
C/ Gran Via, 28 - 28.013 Madrid
Telefonica Gestion de Servicios
Compartidos Mexico, S.A. de C.V.
(MEXICO) (1) (6) 99.99% 0.01% 100.00% 6.75 (3.73) - (0.21) 6.76 FC -
Provision of management and
administration services
Blvd. Diaz Ordaz Pte N 123 2(0), Col.
Santamaria - 6465 Monterrey
Telefonica Gestion de Servicios
Compartidos El Salvador, S.A.
(EL SALVADOR) (1) 100.00% 100.00% 0.02 0.01 - 0.06 0.01 FC -
Provision of management and
administration services
63 Avda. Sur y Alameda
Roosevelt-Ctro F Gigante
Torre B n 10, San Salvador
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-16
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Gestion de Servicios
Compartidos Guatemala, S.A.
de C.V. (GUATEMALA) (1) 100.00% 100.00% 0.01 0.03 - (0.05) 0.01 FC -
Provision of management and
administration services
18 Calle 5-56, Zona 10, Edif,
Unicentro Nivel 10, Guatemala
Telefonica Gestao de Servicos
Compartilhados do Brasil, Ltda.
(BRAZIL) (1) 99.99% 99.99% 8.45 (5.00) - (0.56) 5.00 FC -
Provision of management and
administration services and
advisory and consulting services
Rua Do Livramento, 66 Bolco
Ibirapuera - Sao Paulo -
Telefonica Gestion de Servicios
Compartidos, S.A.C. (PERU) (1) (6) 99.99% 0.01% 100.00% 3.91 1.48 - 0.23 3.91 FC -
Provision of management and
administration services
Shell, 310 - Miraflores Lima
Telefonica Centro de Cobros
Peru, S.A.C. (PERU) (1) 100.00% 100.00% 0.01 0.53 - 0.65 1.24 FC -
Provision of collection services
for the account of third parties
Shell, 310 -Miraflores -Lima
Telefonica Gestion de Servicios
Compartidos, S.A. (ARGENTINA) (1) 99.99% 99.99% 0.01 (0.53) - 0.45 0.01 FC -
Provision of management and
administration services
Tucuman 1, Piso 18 Ciudad
de Buenos Aires
Telefonica International Wholesale
Services America,
S.A. (URUGUAY) (1) (6) 100.00% 100.00% 370.41 (109.88) - (45.68) 499.05 FC -
Provision of high bandwidth
communications services
Luis A. de Herrera, 1248 Piso 4
- Montevideo
Emergia Argentina, S.A.
(ARGENTINA) (1) 99.99% 99.99% 11.82 (0.94) - (6.14) 7.41 FC -
Provision of high bandwidth
communications services
Paraguay, 1345 Piso 6 -
Buenos Aires
Emergia Participacoes,
Ltd. (BRAZIL) (1) 99.99% 99.99% 45.87 (17.40) - (7.09) N/A FC -
Provision of high bandwidth
communications services
Rua Martiniano de Carvalho,
n(degree)851, 16(degree) andar,
Bela Vista
Emergia Brasil, Ltd. (BRAZIL) (1) 99.99% 99.99% - - - - 33.70 FC -
Provision of high bandwidth
communications services
Av. Brigadeiro Faria Lima,
1188 Piso 8(0) - Sao Pablo
Telefonica International Wholesale
Services Chile, S.A. (CHILE) (1) 99.99% 99.99% 24.79 (9.29) - (2.61) 15.69 FC -
Provision of high bandwidth
communications services
Ricardo Lyon, 222 Piso 14 -
Santiago de Chile
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-17
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica International Wholesale
Services Peru, S.A.C. (PERU) (1) 99.99% 99.99% 14.62 (3.80) - (4.17) 11.62 FC -
Provision of high bandwidth
communications services
Av. de la Floresta,
497 Piso 5 - San Borga
Telefonica International Wholesale
Services USA, Inc. (U.S.A.) (1) 100.00% 100.00% 21.98 (16.18) - (2.99) 6.15 FC -
Provision of high bandwidth
communications services
1221 Brickell Avenue, Piso 6 -
33131 Miami (Florida)
Telefonica International Wholesale
Services Guatemala, S.A.
(GUATEMALA) (1) 99.99% 99.99% 11.70 0.28 - (3.18) 13.00 FC -
Provision of high bandwidth
communications services
Blvd. Los Proceres, 5-56 Piso 11,
zona 10 - Guatemala City
Telefonica International Wholesale
Services Puerto Rico, Inc.
(PUERTO RICO) (1) 100.00% 100.00% 17.39 (3.18) - (1.27) 0.46 FC -
Provision of high bandwidth
communications services
Metro Office Park Edificio 17,
Calle 2, Suite 600 - Guaynabo
Telefonica Internacional, S.A.
(SPAIN) (*) (**) (1) (6) 99.88% 0.12% 100.00% 2,842.12 3,627.02 - 1,216.79 8,141.40 FC -
Investment in the
telecommunications industry abroad
C/ Gran Via, 28 - 28013 Madrid
Sao Paulo Telecomunicacoes Holding,
Ltda. (BRAZIL) (1) 100.00% 100.00% 1,262.77 11.51 (71.96) 86.28 2,882.52 FC -
Holding company
Sao Paulo
Telecomunicacoes de Sao Paulo, S.A.
- TELESP (BRAZIL) (1) 87.49% 87.49% 1,653.42 1,755.59 (856.93) 600.56 4,535.10 FC -
Wireline telephony operator
in Sao Paulo
Sao Paulo
Telefonica Finance Limited
(ISLE OF MAN) (1) 100.00% 100.00% N/A N/A N/A N/A N/A FC -
Finance
Telefonica del Peru Holding,
S.A. (PERU) (1) (5) 100.00% 100.00% 1,292.10 (200.31) - (64.93) N/D FC -
Holding company
Telefonica del Peru, S.A.A.
(PERU) (1) 0.14% 98.05% 98.19% 526.81 70.79 - 12.49 750.89 FC -
Operator of local, long
distance and international
telephony services in Peru
Avda. Arequipa, 1155
Santa Beatriz - Lima
Atento Peru, S.A.C. (PERU) 30.00%
Telefonica International Holding,
B.V. (NETHERLANDS) (1) 100.00% 100.00% 402.61 202.46 - 73.04 N/D FC -
Holding company
Telefonica Chile Holding, B.V.
(NETHERLANDS) (1) 100.00% 100.00% 0.03 28.57 - (0.01) N/D FC -
Holding company
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-18
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Internacional de
Chile, S.A. (CHILE) (1) 100.00% 100.00% 11.58 693.48 - 202.64 N/A FC -
Holding company
Compania de Telecomunicaciones
de Chile, S.A. (C.T.C.),
(CHILE) (1) 44.89% 44.89% 1,090.58 94.22 (333.95) 448.60 N/A FC -
Operator of telecommunications
services in Chile
Avenida Providencia, 111 piso
29 Santiago de Chile
Telefonica Gestion de Servicios
Compartidos Chile, S.A. (CHILE) 99.90% 44.85% N/A N/A N/A N/A N/A FC -
Provision of management and
administration services
Avenida Providencia, 111 piso
29 Santiago de Chile
Atento Chile, S.A. (CHILE) (1) (6) 30.00%
Compania Internacional de
Telecomunicaciones, S.A.
(ARGENTINA) (1) 99.98% 99.98% 239.18 (700.85) - 57.71 372.57 FC -
Holding company
Av. Ingeniero Huergo, 723,
PB - Buenos Aires
Telefonica Holding de Argentina,
S.A. (ARGENTINA) (1) 99.96% 99.96% 102.33 (700.99) - (22.24) 998.90 FC -
Holding company
Tucuman, 1 P-17 Buenos Aires
Telefonica de Argentina, S.A.
(ARGENTINA) (1) 98.03% 98.03% 435.34 (715.87) - 158.17 866.22 FC -
Provision of telecommunications
services
Av. Ingeniero Huergo, 723,
PB - Buenos Aires
Telefonica Venezuela Holding, B.V.
(NETHERLANDS) (1) 100.00% 100.00% 0.0 (70.39) - (8.00) - FC -
Holding company
Compania Anonima Nacional
Telefonos de Venezuela
(CANTV) (VENEZUELA) (1) 6.92% 6.92% N/A N/A N/A N/A N/A C 118.28
Provision of telecommunications
services
Avenida Libertador, Centro
Nacional de
Telecomunicaciones,
Piso 1 - 1226 Caracas
Telefonica Larga Distancia de
Puerto Rico, INC.
(PUERTO RICO) (1) 98.00% 98.00% 82.10 (38.58) - 1.85 N/A FC -
Telecommunications operator
Calle 1, Edificio n(0) 8.
Metro Office Park.
Sector de Buchanan. Guaynabo
Puerto Rico
Infonet Services Corporation
(U.S.A.) (1) 14.41% 14.41% 1272,44 (473,09) - (34,59) N/A EM 90.63
Telecommunications operator
2100 East. Crand Avenue.
El Segundo, California 90245
- 1022 USA
Telefonica Moviles, S.A.
(*) (**) (1)(SPAIN) 21.43%
Communication Technology, Inc.
(U.S.A.) (4) 100.00% 100.00% 6.20 (7.73) - (5.17) 18.66 FC -
Provider of long distance
telecommunications services
Delaware
Other holdings N/A N/A N/A N/A N/A N/A N/A EM (0.05)
Other holdings N/A N/A N/A N/A N/A N/A N/A C 16.03
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-19
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Moviles, S.A.
(SPAIN)(*)(**)(1)(6)(9) 71.03% 21.43% 92.46% 2,165.28 920.71 - 1,633.91 3,051.92 FC -
Holding company
Goya, 24 - 28001 Madrid
Brasilcel, N.V. (NETHERLANDS)(1) 50.00% 46.23% 0.10 4,454.24 - 5,63 2,179.38 PC -
Joint Venture
Strawinskylaan 3105 - 1077ZX -
Amsterdam
VIVO Brasil Comunic.(BRAZIL)(1) 50.00% 46.23% - - - - - PC -
Holding company
Rua da Consolacao, 247 - 6(0)
andar / sala 57-F Sao Paulo - SP
Tagilo Participacoes, S.A. (BRAZIL)(1) 50.00% 46.23% 97.42 8.66 (0.57) 0.77 - PC -
Ownership of intellectual property
Rua Martiniano de Carvalho, 851,
20 andar, Parte, Bela Vista, Sao
Paulo.
Sudestecel Participacoes, S.A.
(BRAZIL)(1) 50.00% 46.23% 533.61 3.28 (1.33) 2.01 - PC -
Holding company
Rua Martiniano de Carvalho,
851, 20 andar, Parte, Bela Vista,
Sao Paulo.
Avista Part. S.L. (BRAZIL)(1) 50.00% 46.23% 170.37 - - (3.76) - PC -
Holding company
Rua da Consolacao, 247 - 6(0)
andar / sala 57-F Sao Paulo - SP
Tele Sudeste Celular Participacoes,
S.A. (BRAZIL)(1) 45.44% 42.02% 246.56 279.87 (7.06) 25.57 - PC -
Holding company
Prai de Botafogo 501,20 andar,
parte bela Vista, Sao Paulo
Telerj Celular, S.A. (BRAZIL)(1) 45.44% 42.02% 297.22 142.77 (2.18) 9.12 - PC -
Provision of wireless
communications services
Praia de Botafogo, 501-5(0)
a 8(0) Andares, Botafogo - Rio
de Janeiro
Telest Celular, S.A. (BRAZIL)(1) 45.44% 42.02% 44.33 28.32 (6.36) 16.91 - PC -
Provision of wireless
communications services
Avda. Nossa Senhora da Penha,
275 - Praia de Santa Elena,
Vitoria - Espiritu Santo
Portelcom Fixa, S.A. (BRAZIL)(1) 50.00% 46.23% - - - - - PC -
Holding company
Av Brigadeiro Faria Lima, 2277,
15(a) andar, Conj1503, Jardin
Paulistano, Sao Paulo
Telefonica Brasil Sul Celular
Participacoes, S.A. (BRAZIL)(1) 49.25% 45.54% 161.85 11.78 (3.54) 9.64 0.53 PC -
Holding company
Avda. Martiniano de Carvalho,
851, 20 andar, parte Sao Paulo,
Sao Paulo
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-20
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Celular CRT Participacoes, S.A.
(BRAZIL)(1) 33.28% 30.77% 71.16 192.94 (20.83) 50.11 - PC -
Holding company
Rua Jose Bonifacio, 245, Bon Fim,
Porto Alegre - Rio Grande Do Sul
Celular CRT, S.A. (BRAZIL)(1) 33.28% 30.77% 148.57 89.47 (0.02) 52.49 - PC -
Provision of wireless communications
services
Rua Jose Bonifacio, 245, Bon Fim,
Porto Alegre - Rio Grande Do Sul
Tele Leste Celular Participacoes, S.A.
(BRAZIL)(1) 25.29% 23.38% 84,74 27,22 - (8,34) - PC -
Holding company
Rua Silveria Martins, n 1036,
Cabula, Salvador- Bahia
Telebahia Celular, S.A. (BRAZIL)(1) 25.29% 23.38% 98.97 0.95 - (12.58) - PC -
Provision of wireless
communications services
Rua Silveria Martins, n 1036,
Cabula, Salvador- Bahia
Telergipe Celular, S.A. (BRAZIL)(1) 25.29% 23.38% 9.85 0.96 (0.24) 3.46 - PC -
Provision of wireless
communications services
Avda. Francisco Porto, 686,
13 de julho - Aracaju, Sergipe
Ptelecom Brasil, S.A. (BRAZIL)(1) 49.99% 46.22% 726.95 (410.74) - (9.16) - PC -
Holding company
Rua Cubatao, 320, 4 andar,
Sao Paulo, Sao Paulo
Portelcom Participacoes, S.A. (BRAZIL)(1) 49.99% 46.22% 979.40 (165.20) - (34.42) - PC -
Holding company
Av Brigadeiro Faria Lima, 2277,
15(a) andar, Conj1503, Jardin
Paulistano, Sao Paulo
Telesp Celular Participacoes, S.A.
(BRAZIL)(1) 32.56% 30.10% 1,209.67 (269.98) - 134.96) - PC -
Holding company
Av. Roque Petroni Junior,
n(0) 1464, 6 andar-parte, bloco B,
Morumbi, Sao Paulo, Sao Paulo
Telesp Celular, S.A. (BRAZIL)(1) 32.56% 30.10% 519.92 172.87 - 127.12 - PC -
Holding company
Av. Roque Petroni Junior,
n(0) 1464, 6 andar-parte, bloco B,
Morumbi, Sao Paulo, Sao Paulo
Global Telcom Telecom, S.A. (BRAZIL)(1) 32.56% 30.10% 1,119.42 (708.73) - (49.66) - PC -
Wireless operator
Av. Higienopolis, n(0) 1635,
Curitiba, Parana
Tele Centro Oeste Celular
Participacoes, S.A. (BRAZIL)(1) 16.49% 15.25% 219.32 352.31 (11.18) 140.05 - PC -
Holding company and
telecommunications services
Sector Comercial Sul, Quadra 2,
Bloco C, n(0) 226, Edif
Telebrasilia Celular, 7 andar,
Brasilia DF
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-21
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telegoias Celular, S.A. (BRAZIL) 16.49% 15.25% 68.54 87.64 - 50.22 - PC -
Wireless operator
Rua 136-C, Quadra F-44, n(0)
150, Setor Sul Goiania, Goias
Telemat Celular, S.A. (BRAZIL) 16.49% 15.25% 39.72 54.41 - 30.57 - PC -
Wireless operator
Av. Getulio Vargas, n(0) 1,300,
Centro, Cuiba, Matogrosso
Telems Celular, S.A. (BRAZIL) 16.49% 15.25% 31.33 38.35 - 21.09 - PC -
Wireless operator
Av. Alfonso Pena, n(0) 2,386,
Ed Dolor de Andrade, Campo
Grrande, Matogrosso Do Sul
Teleron Celular, S.A. (BRAZIL) 16.49% 15.25% 9.67 14.83 - 4.19 - PC -
Wireless operator
Av. Getulio Vargas, 1941,
Porto Velho, Rondonia
Teacre Celular, S.A. (BRAZIL) 16.49% 15.25% 5.20 7.16 - 2.66 - PC -
Wireless operator
Rua Minas Gerais, n(0) 64,
Ivete Vargas, Rio Branco-Acre
Norte Brasil Telecom, S.A. (BRAZIL) 16.49% 15.25% 49.78 2.22 - 9.79 - PC -
Wireless operator
Travessa Padre Eutiquio, n(0) 1,226,
Barrio Batista Campos, Belem, Para
Tele Centro Oeste IP, S.A. (BRAZIL) 16.49% 15.25% 0.28 (1.50) - (1.39) - PC -
Wireless operator
AC/ Sul Quadra 02, Bloco C,
n(0) 256, 3(0) Pavimento,
Ed Toufic, Plano Piloto, Brasilia
Telefonica Moviles El Salvador
Holding, S.A. de C.V. (EL SALVADOR)(3) 100.00% 92.46% 130.91 (4.49) - (1.19) 153.93 FC -
Holding company
Alameda Roosvelt y Avenida Sur.
Torre Telefonica nivel 10 - San
Salvador
AC/ Sul Quadra 02, Bloco C,
n(0) 256, 3(0) Pavimento,
Ed Toufic, Plano Piloto, Brasilia, DF
Telefonica Moviles El Salvador, S.A.
de C.V. (EL SALVADOR)(3) 91.75% 84.83% 102.79 (67.79) - (18.05) - FC -
Provision of wireless and
international long distance
communications services
Alameda Roosvelt y Avenida Sur.
Torre Telefonica nivel 10 - San
Salvador
Telefonica Multiservicios, S.A.
de C.V.(1) 71.11% 65.74% 6.52 (0.68) - (0.76) - FC -
Cable modem system operator
Alameda Roosvelt y Avenida Sur.
Torre Telefonica nivel 10 - San
Salvador
Telefonica Moviles Centroamerica,
S.A. de C.V.(1) 91.75% 84.83% 1.05 (0.08) - 0.03 - FC -
Operative company
Alameda Roosvelt y Avenida
Sur. Torre Telefonica nivel 10 -
San Salvador
Telefonica El Salvador, S.A. de
C.V.(1) 91.75% 84.83% 0.02 (0.02) - (0.01) - FC -
Operative company
Alameda Roosvelt y Avenida
Sur. Torre Telefonica nivel 10 -
San Salvador
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-22
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
TCG Holdings, S.A. (GUATEMALA)(1) 100.00% 92.46% 198.31 (1.22) - (0.39) 238.54 FC -
Holding company
Bulevar Los Proceres 5-56 Zona 10,
Unicentro nivel 11 - Guatemala City
Telefonica Moviles Guatemala, S.A.
(GUATEMALA)(1) 100.00% 92.46% 193.20 (106.61) - (15.53) 193.20 FC -
Provision of wireless, wireline
and radio paging communications
services
Bulevar Los Proceres 5-56 Zona 10,
Unicentro nivel 11 - Guatemala City
Telescucha, S.A. (GUATEMALA)(1) 100.00% 92.46% 2.39 (1.58) - (0.40) - FC -
Provision of telecommunications
and paging services
Bulevar Los Proceres 5-56 Zona 10,
Unicentro nivel 11 - Guatemala City
Infraestructura Internacional, S.A.
(GUATEMALA) 70.00% 64.72% 0.41 (0.14) - (0.01) - FC -
Provision of telecommunications
and paging services
Bulevar Los Proceres 5-56 Zona 10,
Unicentro nivel 11 - Guatemala City
PageMart de Centroamerica 30.00% 27.74% - - - - - FC -
Operative company
Bulevar Los Proceres 5-56 Zona 10 -
Univentro Nivel 11, Ciudad de Guatemala
Telefonica Moviles Espana, S.A.U.
(SPAIN)(*)(**)(1) 100.00% 92.46% 423.34 (1,011.70) - 2,143.16 933.21 FC -
Provision of wireless communications
services
Plaza de la Independencia, 6 -
Pta. 5 - 28001 Madrid
Spiral Investment, B.V. (NETHERLANDS)(1) 100.00% 92.46% 38.54 (133.51) - (2.53) - FC -
Holding company
Strawinskylaan 3105 - 1077ZX -
Amsterdam
3G Mobile AG (SWITZERLAND) 100.00% 92.46% 35.71 (78.70) - 0.57 - FC -
Wireless telephony operator
Bahnhofplatz 4, 8001 Zurich
MobiPay Espana, S.A. (SPAIN) 13.36% 12.35% 16.05 (3.00) - (5.09) - EM 1.06
Provision of payment services through
wireless telephony
Avda. Europa, 20 - Alcobendas - Madrid
Solivella Investment, B.V. (NETHERLANDS)(1) 100.00% 92.46% 880.70 (1,553.16) - (50,98) - FC -
Sociedad holding
Strawinskylaan 3105 - 1077ZX -
Amsterdam
Ipse 2000, S.p.A. (ITALY) 45.59% 46.23% 150.50 177.06 - (254.77) - EM 31.76
Installation and operation of third-
generation wireless communication systems
Piazza dei Capprettari, 70 - Rome
Group 3G UMTS Holding, GmbH (GERMANY)(1) 57.20% 52.89% 250.03 (10,195.88) - (0.02) - FC -
Network development and provision of
third-generation telecommunications
services
Alois-Wolfmuller-Str. 8 80939 Munich
Quam, GmbH (GERMANY)(1) 57.20% 52.89% 250.03 (250.02) - (37.66) - FC -
Provision of UMTS services
Alois-Wolfmuller-Str. 8 80939 Munich
Opco Mobile Services GmbH (GERMANY)(1) 57.20% 52.89% 0.05 - - (1.12) - FC -
Provision of UMTS services
Alois-Wolfmuller-Str. 8 80939 Munich
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-23
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Medi Telecom, S.A. (MOROCCO) 32.18% 29.75% 786.83 (666.78) - (42.93) - EM 5.04
Provision of wireless
communications services
Twin Center, Tour A. Angle Bd
Zertouni et El Massira El Kadra
Casablanca
Telefonica Moviles Interacciona,
S.A. (**) (SPAIN)(1) 100.00% 92.46% 4.00 (79.40) - (6.64) - FC -
Engineering consultancy services
in wireless environments.
Gran Via, 28 - 28013 Madrid
Terra Mobile Brasil, Ltd. (BRAZIL)(1) 100.00% 92.46% 5.65 (5.63) - - - FC -
No activity
22(0) ANDAR 17 - Bairro ou Distrito
FLAMENGO, Rio de Janeiro
Gruppo 3G, SRL (ITALY) 100.00% 92.46% 0.07 - - - - C 0.10
Holding company
Via Lepetit, 4 - Milan
Tempos 21 Innovacion en
Aplicaciones Moviles, S.A. (SPAIN) 38.50% 35.60% 13.22 (6.32) - (4.26) - C 5.09
Research, development and
commercial operation of
wireless services and applications
Avda. Diagonal, 640 - Barcelona
Simpay, Ltd. (U.K.) 25.00% 23.12% - - - - - C -
Wireless means of payment
62-65 Chandos Place, London
WC2N 4LP
Omicron Ceti, S.L. (SPAIN)(8) 100.00% 92.46% - - - - - C -
Holding company
Jose Abascal - Madrid
Telefonica Moviles Puerto
Rico, Inc. (PUERTO RICO) 100.00% 92.46% 0.03 0.98 - (45.91) 1.21 FC -
Ownership of wireless operators
in Puerto Rico
Metro Office Park Calle Edificio
#17, Suite 600 - 00968 Guaynabo
Telefonica Moviles USA, Inc.
(U.S.A.) 100.00% 92.46% - (0.85) - (0.08) 0.75 FC -
Telecommunications consultancy
services
1221 Brickell Avenue - Miami -
Florida
TELCA Gestion Guatemala, S.A. 100.00% 92.46% 0.02 - - - 0.02 C 0.02
Management of and counseling
on telecommunications services
Guatemala
MobiPay Internacional, S.A. (SPAIN) 50.00% 46.23% 11.82 (0.08) - (3.50) 5.21 PC -
Avda Europa 20, Alcobendas, Madrid
Provision of payment services
through wireless telephony
Telefonica Moviles Peru Holding,
S.A.A. (PERU)(1) 97.97% 90.58% 174.95 34.16 - 1.03 254.46 FC -
Holding company
Avda. Arequipa, 1155 Lima, 01
Telefonica Moviles, S.A.C. (PERU)(1) 97.97% 90.58% 201.47 7.95 - 1.08 - FC -
Provision of wireless
communications services
Avda. Arequipa, 1155 Lima, 01
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-24
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Moviles Argentina, S.A.
(ARGENTINA)(1) 97.93% 90.55% 128.73 (566.58) - (84.58) 495.79 FC -
Holding company
Ing Huergo 723, piso 17 -
Buenos Aires
Telefonica Comunicaciones Personales,
S.A. (ARGENTINA)(1) 97.93% 90.55% 131.86 (569.33) - (84,45) - FC -
Provision of wireless
communications services
Ing Huergo 723, piso 17 -
Buenos Aires
Radio Servicios, S.A. (ARGENTINA)(7) 97.93% 90.55% 0.24 (0.29) - (0.02) - EM (0.05)
Inactive company
Ing Huergo 723, piso 17 -
Buenos Aires
Telefonica de Centroamerica, S.L.
(SPAIN)(1)(7) 100.00% 92.46% 0.50 0.01 - (0.13) 1.33 C 1.33
Inactive company
Gran Via, n(0) 28, Madrid
Telefonica Moviles Holding Uruguay,
S.A. (URUGUAY)(7) 100.00% 92.46% 24.01 - - 0.05 25.80 FC -
Inactive company
Plza de la Independencia 8,
planta baja, Montevideo
Telefonica Moviles Uruguay,
S.A. (URUGUAY)(7) 100.00% 92.46% 24.01 - - 0.06 - FC -
Inactive company
Plza de la Independencia 8,
planta baja, Montevideo
Wireless Network Ventures 100.00% 92.46% - - - - - FC -
Holding Company
Palm Grove House, PO Box 438,
tortola, BVI
Paging de Centroamerica, S.A.
(GUATEMALA) 100.00% 92.46% - - - - - C -
Provision of telecommunications
and paging services
Bulevar Los Proceres 5-56 Zona 10,
Unicentro nivel 11 - Guatemala City
Telefonica Soporte y Tecnologia,
S.A. (GUATEMALA) 100.00% 92.46% - - - - - C -
Provision of telecommunications and
paging services
Bulevar Los Proceres 5-56 Zona 10,
Unicentro nivel 11 - Guatemala City
Telefonica Moviles Mexico, S.A. de
C.V. (MEXICO)(1) 92.00% 85.06% 1,443.01 (594.68) - (658.73) 998.99 FC -
Holding company
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Telefonica Finanzas Mexico, S.A. de
C.V. (MEXICO)(1) 92.00% 85.06% - 0.46 - 0.53 - FC -
Promotion, formation, organization,
exploitation, operation and ownership
of companies' capital stock.
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Baja Celular Mexicana, S.A. de C.V.
(MEXICO)(1) 92.00% 85.06% 97.05 (14.04) - (33.99) - FC -
Provision of wireless local loop
services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-25
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Movitel de Noroeste, S.A. de C.V.
(MEXICO)(1) 82.80% 76.56% 14.06 0.11 - (17.75) - FC -
Provision of wireless local
loop services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Moviservicios, S.A. de C.V.
(MEXICO)(1) 91.99% 85.05% 1.59 0.67 - 0.18 - FC -
Technical, administrative,
consultancy, advisory and
supervision services.
Paseo de los Tamarindos No.
400-A, piso 4, Col. Bosques de
las Lomas, Mexico City 05120
Corporativo Integral Comunicacion,
S.A. de C.V. (MEXICO)(1) 92.00% 85.06% 6.51 (13.30) - (1.43) - FC -
Holding company
Paseo de los Tamarindos
No. 400-A, piso 4, Col. Bosques
de las Lomas, Mexico City 05120
Telefonia Celular del Norte, S.A.
de C.V. (MEXICO)(1) 92.00% 85.06% 23.71 (57.13) - (26.65) - FC -
Provision of wireless local
loop services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Grupo Corporativo del Norte, S.A.
de C.V. (MEXICO)(1) 92.00% 85.06% 4.36 (18.90) - (2.99) - FC -
Acquisition, disposal and
custodianship of securities
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Celular de Telefonia, S.A. de C.V.
(MEXICO)(1) 92.00% 85.06% 23.03 (68.55) - (50.60) - FC -
Provision of wireless local loop
services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Enlaces del Norte, S.A. de C.V.
(MEXICO)(1) 87.31% 80.72% 0.03 2.39 - (12.08) - FC -
Acquisition, disposal and
custodianship of securities
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Grupo de Telecomunicaciones
Mexicanas, S.A. de C.V. (MEXICO)(1) 89.61% 82.85% 0.01 13.40 - (22.17) - FC -
Provision of wireless local loop
services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Pegaso Telecomunicaciones, S.A. de
C.V. (MEXICO)(1) 92.00% 85.06% 723.49 (1,152.08) - (454.61) - FC -
Installation, maintenance and
operation of public or private
telecommunications networks
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Pegaso Comunicaciones y Sistemas,
S.A. de C.V. (MEXICO)(1) 92.00% 85.06% 573.36 (984.32) - (153.48) - FC -
Provision of wireless local loop
services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
Pegaso PCS, S.A. de C.V. (MEXICO)(1) 92.00% 85.06% 10.28 (54.01) - (285.90) - FC -
Provision of wireless local loop
services
Paseo de los Tamarindos No. 400-A,
piso 4, Col. Bosques de las Lomas,
Mexico City 05120
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-26
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Pegaso Recursos Humanos, S.A.
de C.V. (MEXICO)(1) 92.00% 85.06% 2.27 (1.23) - 2.20 - FC -
Technical professional services
for the development of public
telecommunications networks
Paseo de los Tamarindos No.
400-A, piso 4, Col. Bosques de
las Lomas, Mexico City 05120
Pegaso Finanzas, S.A. de C.V.
(MEXICO)(1) 92.00% 85.06% - - - - - FC -
Obtaining financing and loans
and granting loans to commercial
partners.
Paseo de los Tamarindos No.
400-A, piso 4, Col. Bosques de
las Lomas, Mexico City 05120
Pegaso Finco I, S.A. de C.V.
(MEXICO)(1) 92.00% 85.06% - - - - - FC -
Operation of public
telecommunications networks
and bands of frequencies
Paseo de los Tamarindos No.
400-A, piso 4, Col. Bosques de
las Lomas, Mexico City 05120
Activos Para Telecomunicacion, S.A.
de C.V. (MEXICO)(1) 92.00% 85.06% - (47.67) - (17.24) - FC -
Provision of handsfree wireless
telecommunications services
Paseo de los Tamarindos No.
400-A, piso 4, Col. Bosques de
las Lomas, Mexico City 05120
Telecomunicaciones Punto a Punto
Mexico, S.A. de C.V. (MEXICO)(1) 92.00% 85.06% - (31.78) - 0.22 - FC -
Provision of handsfree wireless
telecommunications services
Paseo de los Tamarindos No.
400-A, piso 4, Col. Bosques de
las Lomas, Mexico City 05120
Telefonica Telecomunicaciones Mexico
(MEXICO) 94.90% 87.74% - - - - - FC -
Holding Company
Rio Duero 31, Mexico DF 06500
Telefonica Moviles Soluciones y
Aplicaciones, S.A. (CHILE)(1) 100.00% 92.46% 9.14 (0.36) - (4.78) 9.50 FC -
Provision of computer and
communications services
Avenida del Condor N(0)720,
piso 4, comuna de Huechuraba,
de la Ciudad de Santiago de Chile
Inversiones Telefonica Moviles
Holding Limitada (CHILE) 100.00% 92.46% 428.23 - - (22.15) 423.89 FC -
Holding company
Miraflores 130, piso 12,
Santiago e Chile
TEM Inversiones Chile Limitada (CHILE) 100.00% 92.46% 885.36 10.62 - (23.86) - FC -
Holding company
Miraflores 130, piso 12,
Santiago e Chile
Telefonica Movil de Chile, S.A.
(CHILE) 100.00% 92.46% 273.29 0.83 - (3.86) - FC -
Wireless operator
Miraflores 130, piso 12,
Santiago e Chile
Telefonica Moviles Soluciones,
S.A.(CHILE) 100.00% 92.46% 0.01 - - - - FC -
Services company
Miraflores 130 piso 12 Santiago
de Chile
Telefonica Moviles eServices
Latin America, Inc. (U.S.A.) 100.00% 92.46% - - - - - FC -
Provision of computer services
Mellon Financial Center 1111
Brickell ave. Suite 1000,
Miami, florida 33131
Ecuador Cellular Holdings, B.V.
(NETHERLANDS) 100.00% 92.46% 219.71 - - 6.82 663.43 FC -
Holding company
Strawinskylaan 3105, Atium 7th,
Amsterdam
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-27
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
BS Ecuador Holdings, Ltd. (ISLAS
VIRGENES BRITANICAS) 100.00% 92.46% - - - - - FC -
Holding company
Palm Grove House, PO Box 438,
tortola, BVI
Otecel, S.A. (ECUADOR) 100.00% 92.46% 61.15 26.56 - 5.19 - FC
Provision of wireless
communications services
Avda. de la Republica y la
Pradera esq. Casilla, Quito
Cellular Holdings (Central America),
Inc. (ISLAS VIRGENES BRITANICAS) 100.00% 92.46% - - - - 37.93 FC -
Holding company
Palm Grove House, PO Box 438,
tortola, BVI
Guatemala Cellular Holdings, B.V.
(NETHERLANDS) 100.00% 92.46% 4.28 - - 0.82 29.39 FC
Holding company
Strawinskylaan 3105, Atium 7th,
Amsterdam
TMG (BVI) Holdings, Ltd. (ISLAS
VIRGENES BRITANICAS) 100.00% 92.46% - - - - - FC -
Holding company
Palm Grove House, PO Box 438,
tortola, BVI
Centram Communications, LP (ISLAS
VIRGENES BRITANICAS) 100.00% 92.46% - - - - - FC -
Holding company
Palm Grove House, PO Box 438,
tortola, BVI
TEM Guatemala Ltd. (ISLAS VIRGENES
BRITANICAS) 100.00% 92.46% - - - - - FC -
Holding company
Palm Grove House, PO Box 438,
tortola, BVI
Telefonica Moviles Guatemala y Cia,
S.C.A. (GUATEMALA) 100.00% 92.46% 100.82 (46.00) - 2.08 - FC
Wireless operator
Blvd Los Proceres Torre
Telefonica 10, Guatemala
Central America Servies Holding, Ltd.
(ISLAS VIRGENES BRITANICAS) 100.00% 92.46% - - - - - FC -
No activity
Palm Grove House, PO Box 438,
tortola, BVI
Multi Holding Corporation (PANAMA) 99.23% 91.75% - - - - 298.72 FC -
Holding Company
Edificio HSBC, Piso 11, Avd Samuel
Lewis,Panama, Republica de Panama
Panama Cellular Holdings, B.V.
(NETHERLANDS) 100.00% 92.46% - 40.14 - 2.29 238.17 FC
Holding company
Strawinskylaan 3105, Atium 7th,
Amsterdam
BellSouth Panama, Ltd. (ISLAS
CAIMAN) 100.00% 92.46% - - - - - FC -
Holding company
Islas Cayman
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-28
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Panama Cellular Holdings, LLC (USA) 100.00% 92.46% - - - - - FC -
Holding company
Delaware
BSC de Panama Holdings, SRL (PANAMA) 100.00% 92.46% - 60.84 - 2.41 - FC -
Holding company
Avda Samuel Lewis y Calle 54,
Edificio Afra, Panama
BSC Cayman (ISLAS CAIMAN) 99.62% 92.10% - - - - - FC -
General Partnership
Islas Cayman
Telefonica Moviles Panama, S.A.
(PANAMA) 99.57% 92.06% 41.09 37.43 - 4.50 - FC
Wireless telephony services
Edificio Magna Corp. Calle 51
Este y Avda Manuel Maria Icaza,
Ciudad de Panama
Panama Cellular Investments, LLC (USA) 99.57% 92.06% - - - - - FC -
Services company
Delaware
Latin American Cellular Holdings,
B.V. (NETHERLANDS) 100.00% 92.46% 0.56 284.59 - 6.96 1,377.72 FC -
Holding company
Strawinskylaan 3105, Atium 7th,
Amsterdam
Ablitur, S.A. (URUGUAY)(2) 100.00% 92.46% 35.50 (8.59) - 0.18 - FC -
Holding company
Constituyente 1467 Piso 23,
Montevideo 11200
Redamil, S.A. (URUGUAY)(2) 100.00% 92.46% 4.70 10.46 - 0.18 - FC -
Holding company
Constituyente 1467 Piso 23,
Montevideo 11200
Abiatar, S.A. (URUGUAY)(2) 100.00% 92.46% 5.45 19.57 - 0.23 - FC -
Wireless operator and services
Constituyente 1467 Piso 23,
Montevideo 11200
Comunicaciones Moviles de Peru, S.A.
(PERU)(2) 99.85% 92.32% 23.09 (30.04) - (1.32) 0.17 FC -
Wireless operator
Av. Republica e Panama n(0)3055,
San Isidro, Lima
BellSouth Nicaragua, S.A. (NICARAGUA) 100.00% 92.46% - - - - - FC -
Holding Company
Managua
Pisani Resources y Cia, Ltd.
(NICARAGUA) 100.00% 92.46% - - - - - FC -
Holding Company
Managua
Doric Holding y Cia, Ltd. (NICARAGUA) 100.00% 92.46% - - - - - FC -
Holding Company
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-29
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Managua
Kalamai Holdings, Ltd. (ISLAS
VIRGENES BRITANICAS) 100.00% 92.46% - - - - - FC -
Holding Company
Palm Grove House, PO Box 438,
tortola, BVI
Kalamai Hold. Y Cia, Ltd.
(NICARAGUA) 100.00% 92.46% - - - - - FC -
Holding Company
Managua
Telefonia Celular de Nicaragua, S.A.
(NICARAGUA)(2) 100.00% 92.46% 11.21 31.41 - 1.14 - FC -
Wireless telephony services
Carretera Mazalla, Managua,
Nicaragua
Telecomunicaciones BBS, S.R.L.
(VENEZUELA)(2) 100.00% 92.46% - 486.84 - 16.86 - FC -
Wireless telephony-related
services
Torre Edicampo, Avda Francisco
de Miranda, Caracas 1010,
Venezuela
Comtel Comunicaciones Telefonicas,
S.A. (VENEZUELA)(2) 100.00% 92.46% 23.23 127.25 (27.56) 5.56 0.15 FC -
Holding company
Torre Edicampo, Avda Francisco
de Miranda, Caracas 1010,
Venezuela
Telcel, C.A. (VENEZUELA)(2) 100.00% 92.46% 104.37 365.12 (86.13) 17.48 240.47 FC -
Wireless operators
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060,
Venezuela
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-30
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Sistemas Timetrak, C.A. (VENEZUELA) 75.00% 69.35% 1.59 0.29 6.94 0.39 NA FC -
Fleet localitation services
Calle Pantin, Edificio Grupo
Secusat. Piso 3. Caracas, Venezuela
Servicios Telcel, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
Telcel International, Ltd.
(ISLAS CAIMAN) 100.00% 92.46% - - - - - FC -
Holding Company
Islas Cayman
Corporacion 271191, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Buy-sell buildings
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
Promociones 4222. C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Buy-sell buildings
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Merida, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Ciudad Ojeda, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. San Cristobal (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-31
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
S.T. Maracaibo, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Punto Fijo, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Valera, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Valencia, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
SyRed, T.E.I., C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
Servicios Telcel Acarigua, C.A.
(VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
Servicios Telcel Barquisimeto,
C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
Serv. Telcel Charallave (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Cumana, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Guarenas, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Los Teques, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Maracay, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-32
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
S.T. Margarita, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Maturin, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
S.T. Puerto Ordaz, C.A. (VENEZUELA) 100.00% 92.46% - - - - - FC -
Telecomunication services and
public atention
Av. Francisco de Miranda, Edif
Parque Cristal, Caracas 1060
Olympic, Ltd. (COLOMBIA)(2) 100.00% 92.46% 0.03 583.50 - 9.22 - FC
Holding company
Av. 82 N(0) 10-62, piso 6
Telefonica Moviles Colombia, S.A.
(COLOMBIA) 100.00% 92.46% 0.29 143.57 - 13.82 115.60 FC
Bautzen, Inc. (PANAMA) 100.00% 92.46% 0.21 (0.20) - - - FC
Financial management
Ciudad de Panama
Comoviles, S.A. (COLOMBIA) 99.97% 92.43% - 0.17 - - - FC
Telecommunications services
Calle 100 N(0) 7-33, piso 17,
Bogota
Comunicaciones Trunking, S.A.
(COLOMBIA) 99.95% 92.42% 0.02 0.07 - - - FC
Provision of trunking services
Calle 100 N(0) 7-33, piso 16,
Bogota
Paracomunicar, S.A. (COLOMBIA) 99.31% 91.82% - - - - - FC
Telecommunications services
Calle 100 N(0) 7-33, piso 17,
Bogota
Kobrocom Electronica, Ltd. (COLOMBIA) 99.95% 92.41% 0.04 (0.02) - - - FC
Telecommunications services
Calle 100 N(0) 7-33, piso 15,
Bogota
Other holdings N/A N/A - - - - - PE -
Other holdings N/A N/A - - - - 3.88 C 4.42
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-33
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Terra Networks, S.A. (SPAIN)(1)(6)(**) 75.87% 0.93% 76.80% 1,149.88 320.88 - 163.97 2,897.99 FC -
Provision and operation of
telecommunications services
Nicaragua, 54 - 08029 Barcelona
Terra Business Travel, S.A.
(SPAIN)(**) 100.00% 76.80% 0.56 (0.01) - - 0.56 FC -
Travel agent
Via Dos Castillas, 33.
Pozuelo de Alarcon - Madrid
Terra Lycos Holding, B.V.
(NETHERLANDS) 100.00% 76.80% 0.02 - - - 0.02 C 0.02
Marketing of software licenses
Koningslaan, 34. 1075 AD
Amsterdam, Holanda
Terra Lycos Intangibles, S.A.
(SPAIN)(1)(**) 100.00% 76.80% 0.66 13.29 - (0.07) 19.29 FC -
Internet services provider
Paseo de la Castellana, 92 -
28046 Madrid
Terra Networks USA, Inc. and
subsidiaries (U.S.A.) (6) 100.00% 76.80% - 4.66 - (6.41) 7.76 FC -
Portfolio company
1201 Brickell Avenue, Suite 700,
Miami - Florida 33131
Deremate.com, Inc. (USA) 18.00% 13.82% - - - - 3.69 C 3.69
Internet content and e-commerce
1018 Centre Road, Wilmington -
Delaware
Lycos Europe, N.V.(3) 32.10% 24.65% 3.12 143.14 - 46.60 47.88 EM 46.56
Internet portal
Richard Holkade 30-34, Haarlem,
Holanda
Centro de Investigacion y
Experimentacion de la Realidad
Virtual, S.L. (SPAIN) 100.00% 76.80% 0.01 N/D - N/D 10.08 C -
Design of communications
products
Via de Dos Castillas, 33 - Comp.
Atica Ed. 1, 1(a) Plta. Pozuelo
de Alarcon - 28224 Madrid
Corporation Real Time Team, S.L.
(SPAIN) 100.00% 76.80% 0.02 N/D - N/D 12.40 C -
Design, advertising and consulting
on the Internet
Claudio Coello, 32, 1(0) ext. -
Madrid
UNO-E Bank, S.A. (SPAIN) 33.00% 25.35% 80.32 31.15 - N/D 189.83 C 189.83
On-line banking
Julian Camarillo, 4 Edificio C,
28037 - Madrid
Terra Networks Asociadas, S.L.
(SPAIN) 100.00% 76.80% 6.11 (8.44) - (15.35) 61.12 FC -
Portfolio company
Paseo de la Castellana, 92 -
28046 Madrid
Maptel Networks, S.A.U. (SPAIN)(1) 100.00% 76.80% 2.54 (1.49) - (0.63) 2.41 FC -
Design of digital cartography
Plaza Santa Maria Soledad Torres
Acosta, 1 5(0) - 28004 Madrid
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-34
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Ifigenia Plus, S.L. (SPAIN)(1)(8)(**) 100.00% 76.80% 0.14 (1.52) - (1.36) 10.11 FC -
Vertical education and cultural
content development portal
Plaza Alonso Martinez, 3 -28004
Madrid
Educaterra, S.L. (SPAIN)(1)(**) 100.00% 76.80% 0.69 2.13 - (0.95) 6.30 FC -
Vertical education Internet portal
Via de Dos Castillas, 33 - Comp.
Atica Ed. 1, 1(a) Plta. Pozuelo
de Alarcon - 28224 Madrid
One Travel.com, Inc. (USA)(1)(6) 54.15% 41.59% 0.01 6.36 - (3.06) 29.64 FC -
Travel booking portal
258 Main Street, 3rd floor -
East Greenville, EEUU
11th Hour Vacations, Inc. (USA) 100.00% 41.59% N/D N/D - N/D - FC -
Travel booking portal
15 Century Drive, Greenville -
South Carolina, EEUU
Azeler Automocion, S.A. (SPAIN)(6) 50.00% 38.40% 1.80 (0.62) - (0.04) 5.22 EM 0.57
Motoring portal
Via de Dos Castillas, 33 -
Comp. Atica Ed. 1, 1(a) Plta.
Pozuelo de Alarcon - 28224 Madrid
Red Universal de Marketing y Bookings
Online, S.A. (SPAIN) (6) 50.00% 38.40% 0.90 (7.28) - 0.57 7.50 EM -
Travel booking portal
Procion 1 y 3 La Florida - 28023
Madrid
Inversis Networks, S.A. (SPAIN) 10.68% 8.20% 44.03 4.67 - (18.43) 11.69 C 11.69
Telematic and computer systems
and applications
C/ Arrastacia, 13 . Poligono de
las Mercedes - Madrid
Iniciativas Residenciales en
Internet, S.A. (ATREA) (SPAIN) 50.00% 38.40% 1.42 0.36 - (1.21) 3.85 EM 0.29
Real esate portal
Paseo Castellana, 92 - 28046
Madrid
Terra Networks Espana, S.A.
(SPAIN)(4)(**) 100.00% 76.80% 9.87 (393.78) - 9.83 93.97 FC -
ISP and portal
Via Dos Castillas, 33 - Comp.
Atica Ed. 1, 1(a) Plta.
Pozuelo de Alarcon - 28224\
Madrid
Terra Networks LATAM E.T.V.E.,
S.L. (SPAIN)(1)(**) 100.00% 76.80% 57.45 56.55 - (23.44) 540.69 FC -
Foreign securities holding and
management
Paseo de la Castellana, 92 -
28046 Madrid
Terra Networks Venezuela, S.A.
(VENEZUELA)(1) 100.00% 76.80% 1.37 (2.22) - (0.84) 20.88 FC -
ISP and portal
Avda. Francisco de Miranda,
Centro Plaza, Torre A, Piso 11,
Los Palos Grandes - Caracas
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-35
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Terra Networks Peru, S.A. (PERU)(1) 99.99% 76.80% 2.54 1.26 - (2.49) 52.80 FC -
ISP and portal
Los Sauces, 374 - Torre Roja -
San Isidro - Lima
Terra Networks Mexico Holding,
S.A. de C.V. (MEXICO)(1)(6) 100.00% 76.80% 91.32 (107.31) - (12.81) 356.66 FC -
Portfolio company
Antonio L. Rodriguez 1884,
Monterrey - Nuevo Leon, Mexico
Terra Networks Mexico, S.A. de
C.V. (MEXICO)(1)(6) 99.99% 76.80% 3.07 6.86 - (23.02) (10.39) FC -
ISP and portal
Col. Santa Maria Monterrey,
Ciudad de Monterrey - Nuevo Leon
Telefonica Interactiva Brasil,
Ltda. (BRAZIL)(1)(6) 99.99% 76.80% 534.51 (435.10) - (17.82) 359.66 FC -
Portfolio company
Rua de Consolacao, 247, 6(0)
- Sao Paulo - Brasil
Terra Networks Brasil, S.A. and
subsidiaries (BRAZIL)(1)(6) 100.00% 76.80% 248.66 (222.30) - (18.96) 262.53 FC -
ISP and portal
Rua General Joao Manoel, 90 -
Porto Alegre - Rio Grande do Sul
- Brasil
Terra Networks Chile Holding
Limitada (CHILE)(1)(6) 99.99% 76.80% 95.18 (64.10) - (6.93) 95.18 FC -
Portfolio company
Avda. Vitacura, 2736 - Santiago
de Santiago
Terra Networks Chile, S.A. (CHILE)(1) 100.00% 76.80% 38.79 (36.50) - (3.53) 71.11 FC -
ISP and portal
Avda. Vitacura, 2736 - Santiago
de Santiago
Terra Networks Guatemala, S.A.
(GUATEMALA)(6) 100.00% 76.80% 13.08 (12.59) - (1.93) 17.22 FC -
ISP and portal
Diagonal, 6 Edificio Las
Margaritas II - Guatemala City
Terra Networks El Salvador, S.A.
de C.V. (EL SALVADOR)(1) 99.99% 76.80% 2.00 (2.00) - - N/A FC -
Internet portal
63 Ave. Sur y Alameda Roosvelt,
Centro Fin. Gigante Torre de
San Salvador
Terra Networks Honduras, S.A.
(HONDURAS) 99.99% 76.80% 0.01 - - - N/A FC -
Internet portal
14 Av. Circunvalacion N.O.
San Pedro Sula-Cortez, Honduras
Terra Networks Costa Rica, S.A.
(COSTA RICA)(3) 99.99% 76.80% 0.01 - - - N/A FC -
Internet portal
Escurridabat, Edificio Domus
Plaza, 2(a) Planta Oficina 2 -
San Jose
Terra Networks Nicaragua, S.A.
(NICARAGUA) 99.99% 76.80% 0.01 - - - N/A FC -
Internet portal
Nicaragua
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated
corporate income tax return in 2004.
E-36
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Terra Networks Panama, S.A. (PANAMA) 99.99% 76.80% 0.01 - - - N/A FC -
Internet portal
Harry Eno y Piloto, Posada
Edificio El Educador - Coopeduc -
Bethania
Terra Networks Caribe, S.A.
(DOMINICAN REPUBLIC)(4) 99.98% 76.79% 0.01 - - - - FC -
Internet portal
Avda. Winston Churchill, Pza.
Fernandez II, Local 18 B -Nivel
Ensanche Paraiso - Santo Domingo
Terra Networks Argentina, S.A.
(ARGENTINA)(1) 99.99% 76.80% 1.25 (0.28) - (1.14) 0.92 FC -
ISP and portal
Avda. Leandro N. Alem.,
712 Piso 11 - Buenos Aires
Terra Networks Maroc, S.A.R.L.
(MOROCCO)(7) 100.00% 76.80% 0.03 N/D - N/D 0.03 C 0.03
Inactive company
332 Boulevard Brahim Roudani -
Casablanca
Terra Networks Colombia Holding,
S.A. (COLOMBIA) (1) (6) 100.00% 76.80% 0.25 (3.09) - (0.06) 47.01 FC -
Portfolio company
Avda. 100 n(0) 7-33 Torre 11
Of.301 - Santa Fe de Bogota
Terra Networks Colombia , S.A.
(La Ciudad.com) (COLOMBIA) (1) 99.99% 76.80% 0.00 2.17 - (1.86) 15.16 FC -
Internet portal
Avda. 100 n(0) 7-33 Torre 11
Of.301, Santa Fe de Bogota
Terra Networks Servicos de Acceso a
Internet e Trading, Ltd.
(PORTUGAL)(7) 100.00% 76.80% 0.01 N/A - N/A 0.01 C 0.01
Inactive company
Avda. Arriaga, 73-2(0) andar,
sala 212 - Freguesia de Se,
Concelho do Funchal (Madeira)
Telefonica Factoring Do Brasil, Ltd.
(BRASIL)(1) 40.00% 10.00% 50.00% 2.41 (0.96) (0.14) 0.72 1.45 EM 0.87
Factoring
Avda. Paulista, 1106
Telefonica Factoring Establecimiento
Financiero de Credito, S.A. (SPAIN)(1) 50.00% 50.00% 5.11 1.74 - 2.44 2.64 EM 4.80
Loans and credits (consumer and
mortgage loans and commercial
transactions)
Pedro Teixeira, 8 - 28020 Madrid
Alianca Atlantica Holding B.V.
(NETHERLANDS) 50.00% 43.76% 93.76% 40.00 0.80 - 1.03 29.12 EM -
Holder of 5,225,000 Portugal
Telecom, S.A. shares
Strawinskylaan 1725, 1077 XX
Amsterdam
Torre de Collcerola, S.A.
(SPAIN)(2) 30.40% 30.40% 12.02 0.56 - - 3.66 EM 3.83
Operation of a telecommunications
mast and technical assistance and
consulting services
Ctra. Vallvidrera-Tibidabo,
s/n(0) - 08017 Barcelona
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-37
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Publicidad e Informacion,
S.A. (SPAIN)(2)(6) 59.90% 59.90% 18.41 100.84 - 111.86 4.06 FC -
Publishing of directories and
advertising in all types of media
Avda. de Manoteras, 12 - 28050
MADRID
Telefonica Publicidad e Informacion
Direct, S.L. (SPAIN) (2) 100.00% 59.90% 0.06 - - - 0.64 FC -
Direct marketing related
activities
Avda. de Manoteras, 12 - 28050
MADRID
Telefonica Publicidad e Informacion
Edita, S.A.U. (SPAIN)(2) 100.00% 59.90% 0.66 8.77 - (2.46) 11.02 FC -
Publishing of technical and
professional directories in
various industries
Fuerteventura, 21- San Sebastian
de los Reyes. Madrid
Edinet Europa, S.A.U. (SPAIN)(2) 100.00% 59.90% 0.06 (0.01) - - 0.35 FC -
Publishing
Avda. de Manoteras, 12 - 28050
MADRID
Adquira Spain, S.A. (SPAIN)(2) 20.00% 11.98% 1.56 11.35 - (4.78) 3.17 EM 1.63
E-commerce
Goya, 4, 4(a) planta - Madrid
Telefonica Publicidad e Informacion
Internacional, S.A.U. (SPAIN)(2) 100.00% 59.90% 49.34 (0.50) - 4.90 49.34 FC -
Holding company
Avda. de Manoteras, 12 - 28050
MADRID
Directories Holding, B.V.
(NETHERLANDS) 100.00% 59.90% 0.02 13.12 (4.60) 4.58 47.58 FC -
Holding company
Drentestraat 24 BG 1083 HK -
Amsterdam
Publiguias Holding, S.A. (CHILE)(2) 100.00% 59.90% 13.73 (2.97) (6.36) 6.57 13.20 FC -
Holding company
Avda. Santa Maria 0792 -
Providencia - Santiago de Chile
Urge Chile, S.A. (CHILE)(2) 100.00% 59.90% 0.38 (0.35) - (0.24) 0.34 FC -
Construction and upkeep of
buildings. Refurbishment work in
general
Moneda 970, piso 12 - Santiago
de Chile
Impresora y Comercial Publiguias,
S.A. (CHILE)(2) 100.00% 59.90% 4.93 35.51 (12.50) 13.51 73.14 FC -
Telephone directory and related
products and telephone files
business
Avda. Santa Maria 0792 -
Providencia - Santiago de Chile
Other holdings N/A N/A N/A N/A - N/A 0.18 C 0.18
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate income tax return in 2003.
(**) Companies included in the consolidated corporate income tax return in 2004.
E-38
Telefonica
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND THEIR HOLDINGS % of Ownership VALUE IN
---------------------------- GROSS CONSOLI- CONSOLI-
TELEFONICA INTERIM INCOME BOOK DATION DATION
DIRECT INDIRECT GROUP CAPITAL RESERVES DIVIDEND (LOSS) VALUE METHOD (10)
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Publicidad e Informacion
Peru, S.A.C. (PERU)(2) 100.00% 59.90% 0.25 (0.33) (3.61) 4.47 18.25 FC -
Publishing of Peruvian market
directories
Paseo Republica, 3755 San Isidro,
Lima
Telefonica Publicidade e Informacao,
Ltda. (BRAZIL)(2) 100.00% 59.90% 63.17 (79.10) - (6.90) 72.65 FC -
Publishing of directories and
advertising in the states of Sao
Paulo and Rio Grande do Sul Rua
Gomes de Carvalho, 1507 Vila
Olimpia, Sao Paulo - Brasil
11888 Servicio Consulta Telefonica,
S.A. (SPAIN)(2) 100.00% 59.90% 0.06 0.01 (5.68) 6.78 0.06 FC -
Provision of wireline public
telephone and directory enquiry
service Avda. de Manoteras, 12 -
28050 MADRID
Guia Local Network, S.A. (BRAZIL) 20.00% 11.98% 3.70 - - (2.93) 1.57 C 1.57
City guide Internet portal
Avda. Das Americas, 500 Bl. 6A -
Rio de Janeiro
Euredit, S.A. (FRANCE) 5.00% 2.99% 2.80 2.08 - 2.64 0.23 C 0.23
Publication of European yearbooks
Avda. Friedland, 9 - 75008 Paris(*)
Sistemas Tecnicos de Loterias del
Estado, S.A. (SPAIN)(2) 31.75% 31.75% 12.02 54.32 - 4.74 3.82 EM 22.57
Operation of a gaming terminal
system for the Spanish State
Gaming Organization
Manuel Tovar, 9 - 28034 Madrid
Amper, S.A. (SPAIN)(1)(6) 6.10% 6.10% 27.91 20.18 - 2.51 11.83 EM 3.09
Development, manufacture and
repair of telecommunications
systems and equipment and related
components
Torrelaguna, 75 - 28027 Madrid
Portugal Telecom, S.G.P.S., S.A.
(PORTUGAL)(1) 8.55% 1.03% 9.58% 1,166.49 1,388.28 - 417.34 877.19 EM 283.24
Holding company
Avda. Fontes Pereira de Melo, 40 -
1089 Lisbon
Banco Bilbao Vizcaya Argentaria, S.A.
(SPAIN)(1)(6) 1.07% 1.07% 1,662.00 (12,107.3)(1,017.30) 2,802.00 555.63 EM 521.04
Banking
Plaza de San Nicolas, 4 - 48013
Bilbao (Vizcaya)
I-CO Global Communications (HOLDINGS)
Limited (U.K.) N/D N/D N/D N/D N/D 6.03 C 6.03
------------------------------------------------------------------------------------------------------------------------------------
Other holdings N/A N/A N/A N/A N/A N/A 8.72 C 8.72
------------------------------------------------------------------------------------------------------------------------------------
(*) Companies included in the consolidated corporate TOTAL VALUE IN CONSOLIDATION, ASSOCIATED COMPANIES (Note 8) 1,159.08
income tax return in 2003.
(**) Companies included in the consolidated corporate TOTAL VALUE IN CONSOLIDATION, INVESTEES (Note 8) 518.52
income tax return in 2004.
(1) Company audited by Deloitte & Touche. In Spain Deloitte & Touche Spain, S.L.
(2) Company audited by PriceWaterhouseCoopers.
(3) Company audited by K.P.M.G. Peat Marwick.
(4) Company audited by B.D.O. Audiberia.
(5) Company audited by Hugo Bottino.
(6) Consolidated figures.
(7) Inactive company.
(8) Company in liquidation.
(9) Company audited by Treureva.
(10) This value relates to the contribution to the Telefonica Group and not to the subgroups to which the contributing
companies belong.
FC Fully consolidated companies.
PC Proportionally consolidated companies.
EM Companies accounted for by the equity method.
I Investees
N/D No data.
N/A Not available
Financial information obtained from the financial statements, if any, prepared by the company.
E-39
Telefonica
--------------------------------------------------------------------------------
EXHIBIT II.
-----------
The variations in the scope of consolidation in the years ended December 31,
2004 and 2003, were as follows:
2004
The variations in the scope of consolidation in the year ended December 31,
2004, were as follows:
Telefonica
In 2004 Telefonica acquired 71,693 shares of the Dutch company Endemol
Entertainment Holding, N.V. (Endemol) for (euro)1.79 million. Following this
transaction, the Telefonica Group's holding in Endemol, which continues to be
fully consolidated in the Telefonica Group, increased to 99.70%.
Telefonica, S.A. acquired 52,820,862 shares of Portugal Telecom, S.G.P.S., S.A.
for (euro)475.14 million, giving rise to consolidation goodwill of (euro)344.52
million. Additionally, on December 29, 2004, Portugal Telecom reduced capital by
retiring 87,799,950 shares of treasury stock, representing 7% of capital stock.
Following these transactions, Telefonica increased its direct holding in this
company to 8.55%. The direct and indirect effective ownership interest by the
Telefonica Group was 9.58%. This company continues to be accounted for by the
equity method in the consolidated financial statements of the Telefonica Group.
The Spanish subsidiary Inmobiliaria Telefonica, S.L.U. was dissolved without
liquidation through the overall transfer of its assets and liabilities to its
sole stockholder, Telefonica, S.A. and the subsequent extinction of the company.
This company, which had been fully consolidated in the consolidated financial
statements of the Telefonica Group, was excluded from the scope of
consolidation.
The U.S. companies Telefonica B2B, Inc. and Telefonica USA, Inc., which were
fully consolidated in the consolidated financial statements of the Telefonica
Group, were excluded from the scope of consolidation following their liquidation
and dissolution and the transfer of their assets and liabilities to their sole
stockholder, Telefonica, S.A.
Zeleris Soluciones Integrales, S.L.U. was merged into Telefonica Gestion de
Servicios Compartidos Espana, S.A. (a wholly-owned subsidiary of Telefonica,
S.A.), which increased capital stock by (euro)5.47 million and received as a
consideration all the shares composing the capital stock of the former. As a
result of the merger, Zeleris Espana, S.A.U., a wholly-owned subsidiary of
Zeleris Soluciones Integrales, S.A., became a wholly-owned subsidiary of
Telefonica Gestion de Servicios Compartidos Espana, S.A. The company continues
to be fully consolidated in the consolidated financial statements of the
Telefonica Group.
In October Telefonica Gestion de Servicios Compartidos Espana, S.A., acquired a
99.33% holding in the Brazilian company Cobros Servicos de Gestao, S.A.,
currently S.L. As a result of the acquisition, the Brazilian company was fully
consolidated in the Telefonica Group.
In 2004 the Spanish company Telefonica Investigacion y Desarrollo, S.A.
incorporated the Mexican company Telefonica Investigacion y Desarrollo Mexico,
S.A. and subscribed and paid
E-40
Telefonica
--------------------------------------------------------------------------------
all its capital stock, consisting of 50,000 shares of MXP 1 par value each. This
company was fully consolidated in the Telefonica Group.
Telefonica, S.A. sold 464 shares of the associated company Torre de Collerola,
S.A. for (euro)1.47 million. As a result of this transaction, Telefonica, S.A.
reduced its ownership interest in this company to 30.4%. This company continues
to be accounted for by the equity method in the consolidation of the Telefonica
Group.
The Spanish companies Telefonica Participaciones, S.A.U. and Telefonica
Emisiones, S.A.U. were incorporated in November with a capital stock consisting
of 62,000 shares of (euro)1 par value each, which was fully subscribed and paid
by their sole stockholder Telefonica, S.A.
The Luxembourg company Altair Assurances, S.A. was incorporated in December with
an initial capital stock of (euro)6 million, which was subscribed and paid 95%
by the Luxembourg company Casiopea Reaseguradora, S.A. and 5% by the Spanish
company Seguros de Vida y Pensiones Antares, S.A., both wholly-owned
subsidiaries of the Telefonica Group.
The Peruvian company Telfisa Peru, S.A.C. was incorporated in December with an
initial capital of 12 million new soles, which was fully subscribed and paid by
the Telefonica Group.
The Spanish company Cleon, S.A. a 50%-owned subsidiary of Compania Espanola de
Tecnologia, S.A., which in turn is wholly owned by Telefonica, S.A., was carried
by the equity method in the consolidated financial statements of the Telefonica
Group for 2004 on the basis of management criteria, whereas in 2003 it was fully
consolidated.
T.P.I. Group
In 2004 Telefonica Publicidad e Informacion, S.A., the parent company of the
group, acquired the remaining 49% holding in its Chilean subsidiary Impresora y
Comercial Publiguias, S.A. for (euro)65.6 million, thereby increasing its
ownership interest to 100%. A 9% holding was acquired from the Chilean company
Compania de Telecomunicaciones de Chile, S.A., a Telefonica Group subsidiary.
This company continues to be fully consolidated in the Telefonica Group.
On August 13, 2004, the Chilean company Edinet America, S.A. (formerly Urge
Chile, S.A.) increased capital by 218.81 Chilean pesos ((euro)0.29 million).
This capital increase was fully subscribed and paid by Publiguias Holding, S.A.
As a result of this transaction, the TPI group increased its holding in Edinet
America, S.A. from 99.90% to 99.978%. In November the Chilean company Impresora
y Comercial Publiguias, S.A. acquired a 0.022% holding in the capital stock of
Edinet America, S.A. Following this transaction, the Telefonica Publicidad e
Informacion Group increased its holding in the Chilean company to 100%. This
company continues to be fully consolidated in the Telefonica Group.
Telefonica de Espana Group
Telefonica Cable, S.A., a wholly-owned subsidiary of Telefonica de Espana, S.A.,
continued its corporate group restructuring process and the following local
operators were merged into it: Telefonica Cable Asturias, S.A., Telefonica Cable
Valencia, S.A., Telefonica Cable Extremadura, S.A. and Telefonica Cable Balears,
S.A. All these companies, which had been fully consolidated in the Telefonica
Group in 2003, were excluded from the scope of consolidation in 2004.
E-41
Telefonica
--------------------------------------------------------------------------------
Telefonica de Espana, S.A.'s 2.13% holding in the French company Eutelsat, S.A.
was sold for (euro)44.83 million, giving rise to net gains of (euro)21.43
million. Additionally, Telefonica de Espana S.A. sold its 0.75% holding in the
Dutch company New Skies Satellites, B.V. for (euro)6.02 million, at a gain of
(euro)5.95 million. Both companies were recorded under the "Other Investments"
caption in the consolidated balance sheet of the Telefonica Group.
Telefonica Mobile Solutions, S.A.U. was taken over by its parent company
Telefonica Soluciones de Informatica y Comunicaciones de Espana, S.A.U. This
company, which had been fully consolidated in the consolidated financial
statements of the Telefonica Group in 2003, was excluded from consolidation in
2004.
Terra Group
Emplaza, S.A., a company 20% owned by the Terra Lycos Group which had not been
included in consolidation since June 2003 because it was inactive, was dissolved
and liquidated in January 2004.
Lycos, Inc. sold its holdings in Wit Capital and GSI Global Sports in March
2004, giving rise to a gain of (euro)0.15 million. These companies were included
under the "Other Investments" caption.
In 2004 Lycos, Inc. sold all its minority interests in Amazon, Interland, Cross
Media, Easy Link, Fast, Autobytel and Total Sports, and recorded a loss on these
sales of (euro)5.32 million. All these companies were included under the "Other
Investments" caption.
All the shares of the Mexican company Tecnologia y S.V.A., S.A. de C.V. were
sold in June 2004 giving rise to a gain of (euro)10.77 million. This company,
which had been fully consolidated in the Telefonica Group, was excluded from
consolidation in 2004.
In 2004 Terra Networks Asociadas, S.L. increased capital at Inversis Networks,
S.A. by (euro)1.60 million, thus increasing its ownership interest in this
company to 10.68%. This investee is recorded under the "Other Investments"
caption in the consolidated balance sheet of the Telefonica Group.
On September 2, 2004, Terra Networks Asociadas, S.L. sold its holding in A Tu
Hora, S.L., an inactive company, to Telepizza, which until then owned a 50%
ownership interest in this company. This investee, which had been carried by the
equity method in the consolidation of the Telefonica Group, was excluded from
the scope of consolidation in 2004.
On October 5, 2004, Terra Networks, S.A. and Daum Communications, Corp. reached
an agreement for the sale of Lycos, Inc. after obtaining the required
administrative authorizations and approval from the Antitrust Authorities in the
United States. The sale price was set at $108 million, giving rise to a gain of
(euro)26.17 million. On September 30, 2004, before the sale of Lycos, Inc., and
as part of the agreement for this transaction, Lycos, Inc. transferred assets
amounting to (euro)332.9 million to Terra Networks, S.A.
In November 2004, a capital increase of (euro)0.3 million was carried out at the
subsidiary Terra Networks Colombia, S.A. for the purpose of offsetting losses.
The local partners did not subscribe this capital increase. Following this
transaction, the ownership interest of minorities decreased from 32% to 5%. This
company continues to the fully consolidated in the financial statements of the
Telefonica Group.
E-42
Telefonica
--------------------------------------------------------------------------------
The merger of the wholly-owned subsidiary Ordenamiento de Links Especializados,
S.L. (OLE) into Terra Networks Espana, S.A. was completed in December 2004. OLE,
which had been fully consolidated in the Telefonica Group in 2003, was excluded
from the scope of consolidation in 2004.
Atento Group
All the shares of Atento Guatemala Comercial, S.A. were sold in March 2004. This
company, which had been fully consolidated in the Telefonica Group in 2003, was
excluded from the scope of consolidation in 2004.
Atento USA, Inc. was dissolved and all its assets and liabilities were
transferred to its parent company Atento Holding Inc. effective January 1, 2004.
This company, which had been fully consolidated in the consolidated financial
statements of the Telefonica Group for 2003, was excluded from the scope of
consolidation in 2004.
The U.S. company Atento Holding Inc. was dissolved on April 30, 2004, and all
its assets and liabilities were transferred to the Dutch parent company Atento
N.V. The company, which had been fully consolidated in the consolidated
financial statements of the Telefonica Group through that date, was subsequently
excluded from the scope of consolidation.
Leader Line, S.A., a wholly-owned subsidiary of Atento Teleservicios Espana,
S.A., was merged into the latter on July 16, 2004. The company, which had been
fully consolidated in the consolidated financial statements of the Telefonica
Group through that date, was subsequently excluded from the scope of
consolidation.
The Mexican company Atento Atencion y Servicios, S.A. de CV. was incorporated on
September 1, 2004. Of its initial capital stock, MXP 49.999 were fully
subscribed and paid by Atento Mexicana, S.A. de C.V. and MXP 1 by the Mexican
company Atento Servicios, S.A. de C.V. The company was fully consolidated in the
Telefonica Group in 2004.
Atento Uruguay, S.A. was dissolved and liquidated on September 30, 2004, and all
its assets and liabilities were transferred to its parent company Atento
Argentina, S.A. The company, which had been fully consolidated in the
consolidated financial statements of the Telefonica Group through that date, was
subsequently excluded from the scope of consolidation.
Telefonica Moviles Group
Mobipay Espana, S.A. increased its capital stock by (euro)3.78 million in 2004.
Telefonica Moviles Espana, S.A. subscribed the capital increase and acquired the
shares required to increase its ownership interest in the company from 13.33% to
13.36%. This investee continues to be accounted for by the equity method in the
consolidation of the Telefonica Group.
In August 2004, Brasilcel N.V. and Telesp Celular Participacoes, S.A. (TCP)
announced their intention to launch friendly tender offers for Tele Sudeste
Celular Participacoes, S.A., Tele Leste Celular Participacoes, S.A., Celular CRT
Participacoes, S.A and Tele Centro Oeste Celular Participacoes, S.A (TCO). These
tender offers were effectively implemented in October.
The following tables show the percentages of ownership held by Brasilcel N.V.
and TCP in these subsidiaries before the friendly tender offers and the
resulting percentages of ownership after settlement of the shares purchased as a
result of the offer:
E-43
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------ ----------------------------------------------
Percentage of Percentage of Percentage of Percentage of
Brasilcel Ownership before Ownership TCP Ownership before Ownership
the Offers after the Offers the Offers after the Offers
------------------------------------------------------ ----------------------------------------------
Tele Sudeste 86.7% 90.9%
------------------------------------------------------
Tele Leste 27.9% 50.6% TCO 28.9% 50.6%
------------------------------------------------------
CRT 51.5% 67.0%
------------------------------------------------------ ----------------------------------------------
These tender offers gave rise to a cash payment of approximately 607 million
reais for Brasilcel, N.V. and of 902 million reais for TCP.
A further 13.95% holding was acquired in the capital stock of the Spanish
company Mobipay Internacional, S.A., thereby increasing the total ownership
interest to 50%. This company, which had been accounted for by the equity method
in the consolidated financial statements of the Telefonica Group, is now
proportionally consolidated.
At the end of June 2004, Brasilcel N.V. effectively acquired from NTT DoCoMo,
Inc. and Itochu Corporation their ownership interests in Sudestecel
Participacoes, S.A., a holding company controlling a bloc of shares of the
operator Tele Sudeste Celular Participacoes, S.A. representing 10.5% of its
capital stock, for (euro)20.84 million. As a result of this transaction,
Brasilcel, N.V. increased its controlling interest in Sudestecel Participacoes,
S.A. to 100%. This company continues to be fully consolidated in the financial
statements of the Brasilcel Group and this group, in turn, is proportionally
consolidated in the consolidated financial statements of the Telefonica Group..
On July 23, 2004, a 100% holding in the Chilean company Telefonica Movil de
Chile, S.A. was acquired from the Chilean company Compania de Telecomunicaciones
de Chile, S.A., a subsidiary of Telefonica Internacional, S.A. The total amount
paid by Telefonica Moviles for this acquisition was $1,058 million. As a result
of this transaction, the Telefonica Group increased its effective ownership
interest in the capital stock of this company from 44.89% to 92.46%. This
company continues to be fully consolidated in the consolidated financial
statements of the Telefonica Group.
The mergers of the following Mexican companies were effective on September 24,
2004: Movicelular, S.A. de C.V. was merged into Movitel del Noroeste, S.A. de
C.V. and Tamcel, S.A. de C.V. was merged into Baja Celular Mexicana, S.A. de
C.V. The two subsidiaries continue to be fully consolidated in the Telefonica
Group.
On October 8, 2004, Telesp Celular Participacoes, S.A. resolved to increase
capital by approximately 2,054 reais. This capital increase was completed on
January 4, 2005, and was fully subscribed. Following this transaction,
Brasalcel, N.V. increased its holding from 65.12% to 65.70%.
On March 5, 2004, Telefonica Moviles, S.A. reached an agreement with BellSouth
Corporation ("BellSouth") for the acquisition of all the holdings owned by
latter in the former's operators in Argentina, Chile, Peru, Venezuela, Colombia,
Ecuador, Uruguay, Guatemala, Nicaragua and Panama.
The effective transfer of the shares of these companies was conditional, inter
alia, upon the obtainment of the required regulatory authorizations in each
country and on the approvals required, if appropriate, of the minority
stockholders. The effective transfer of the shares of
E-44
Telefonica
--------------------------------------------------------------------------------
these operators was made in 2004 and in January 2005: all the holdings owned by
BellSouth in the operators located in Ecuador, Guatemala and Panama were
transferred on October 14, 2004; those owned in the operators located in
Colombia, Nicaragua, Peru, Uruguay and Venezuela were transferred on October 28,
2004, that owned in the operator in Chile was transferred on January 7, 2005,
and the holding in the Argentine operator was transferred on January 11, 2005.
Under this agreement the aforementioned operators were valued at $5,850 million
and their net debt was taken over. The total acquisition cost for Telefonica
Moviles, adjusted by the net debt of all the companies, amounted to
(euro)3,252.54 million (excluding Chile and Argentina).
Following are the values assigned to each transaction and the acquisition cost
for Telefonica Moviles:
- Acquisition of a 100% holding in Otecel, S.A. (Ecuador) for a total company
value of $833 million. The acquisition cost for Telefonica Moviles,
adjusted by the company's net debt, was (euro)663.43 million.
- Acquisition of a 100% holding in BellSouth Guatemala, S.A. for a total
company value of $175 million. The acquisition cost for Telefonica Moviles,
adjusted by the company's net debt, was (euro)92.54 million.
- Acquisition of a 99.57% holding in BellSouth Panama, S.A. for a total
company value of $657 million. The acquisition cost for Telefonica Moviles,
adjusted by the company's net debt, was (euro)549.28 million.
- Acquisition of a 100% holding in Telcel, S.A. (Venezuela) for a total
company value of $1,195 million. The acquisition cost for Telefonica
Moviles, adjusted by the company's net debt, was (euro)1,223.98 million.
- Acquisition of a 100% holding in Telefonica Moviles Colombia, S.A. for a
total company value of $1,050 million. The acquisition cost for Telefonica
Moviles, adjusted by the company's net debt, was (euro)517.46 million.
- Acquisition of a 99.85% holding in Comunicaciones Moviles del Peru, S.A.
for a total company value of $210 million. The acquisition cost for
Telefonica Moviles, adjusted by the company's net debt, was (euro)7.70
million.
- Acquisition of a 100% holding in Telefonia Celular de Nicaragua, S.A. for a
total company value of $150 million. The acquisition cost for Telefonica
Moviles, adjusted by the company's net debt, was (euro)148.74 million.
- Acquisition of a 100% holding in Abiatar, S.A. for a total company value of
$60 million. The acquisition cost for Telefonica Moviles, adjusted by the
company's net debt, was (euro)49.42 million.
Telefonica Internacional Group
The Brazilian company Aix Participacoes, which in 2003 was accounted for by the
equity method in the consolidated financial statements of the Telefonica Group,
was proportionally consolidated in 2004.
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The U.S. company Katalyx, Inc. took over the U.S. companies Adquira, Inc. and
Katalyx Transportation, Llc. These two companies, which had been fully
consolidated in the consolidated financial statements of the Telefonica Group in
2003, were excluded from the scope of consolidation in 2004.
The Peruvian company Telefonica Empresas Peru, S.A.A. took over the Peruvian
company Telefonica Servicios Financieros, S.A.C. This company, which had been
fully consolidated in the consolidated financial statements of the Telefonica
Group in 2003, was excluded from the scope of consolidation in 2004.
On July 8, 2004, Telefonica Internacional Chile S.A. acquired 3 million ADRs of
Compania de Telecomunicaciones de Chile S.A. (CTC), representing 12 million
series A shares, equal to a 1.25% holding in this company, thereby increasing
the Telefonica Group's total ownership interest to 44.89%. The price paid was
US$ 37.07 million. The company continues to be fully consolidated in the
Telefonica Group.
As discussed above, on April 26, 2004, CTC sold to Telefonica Publicidad e
Informacion, S.A. its 9% holding in the Chilean company Impresora y Comercial
Publiguias S.A.
Following approval by the Board of Directors of the Chilean company CTC on May
18, and subsequent ratification by the Stockholders' Meeting on July 15, 2004,
the aforementioned sale of a 100% holding in the subsidiary Telefonica Moviles
Chile, S.A. to Telefonica Moviles, S.A. was formalized.
Under a share repurchase program, the subsidiary Telefonica del Peru, S.A.A.
acquired own shares in the market for 21.90 new soles (approximately (euro)5.3
million), thereby increasing the Telefonica Group's effective percentage of
ownership from 97.21% to 98.19%. The company continues to be fully consolidated
in the Telefonica Group.
In November Telefonica del Peru S.A.A. acquired a 99.99% holding in Antena 3
Producciones S.A. for US$ 3.85 million (approximately (euro)2.9 million). This
company was fully consolidated in the consolidated financial statements of the
Telefonica Group.
Telefonica del Peru, S.A.A. sold all the shares it owned in the Dutch company
New Skies Satellites, B.V., representing approximately 0.83% of this company's
capital stock, for US$ 7.84 million (approximately (euro)5.9 million). The
company was recorded under the "Other Investments" caption in the consolidated
balance sheet of the Telefonica Group.
With respect to the Katalyx Group, the Mexican subsidiaries Katalyx Construction
Mexico, S.R.L., Katalyx Health Mexico, S.R.L., Katalyx Cataloguing Mexico,
S.R.L. de C.V., Katalyx Food Service Mexico, S.R.L. de C.V. and Katalyx
Transportation Mexico, Llc. and the Argentine companies Katalyx Transportation
Argentina, S.R.L., Katalyx Construction Argentina, Katalyx Food Service
Argentina, S.R.L., Katalyx Cataloguing Argentina, S.R.L. and Katalyx Argentina,
S.A. were dissolved or are in the process of liquidation. All of them, which had
been fully consolidated in the consolidated financial statements of the
Telefonica Group for 2003, were excluded from the scope of consolidation in
2004.
The Argentine company Adquira Argentina, S.L. was took over by Telefonica Data
Argentina, S.A. The investee, which had been fully consolidated in the
consolidated financial statements of the Telefonica Group for 2003, was excluded
from the scope of consolidation in 2004.
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The Venezuelan company Compania Anonima Nacional de Telefonos de Venezuela, C.A.
(CANTV), which is 6.91% owned by the Telefonica Group and which in 2003 was
accounted for by the equity method in the consolidated financial statements of
the Telefonica Group, was excluded from the scope of consolidation in 2004. This
change was due to the removal from the Board of Directors of CANTV of Telefonica
Internacional's sole representative, in accordance with the resolution adopted
by the Stockholders' Meeting of CANTV on March 31, 2004.
In December the Brazilian company Telecomunicacoes de Sao Paulo, S.A. (TELESP)
entered into an agreement for the purchase of all the shares (cuotas) of Santa
Genovense Participacoes Ltd., a holding company owning all the cuotas of Atrium
Telecomunicacoes Ltda., for 113.44 million Brazilian reais (approximately
(euro)31 million), giving rise to goodwill of (euro)33.14 million. The company
was fully consolidated in the consolidated financial statements of the
Telefonica Group.
Telefonica de Contenidos Group
A 70% holding in the Spanish company Lola Films, S.A. was sold in July 2004 to
its minority stockholder.
Telefonica, S.A. sold on the London Stock Exchange 38,853,403 Pearson Plc shares
representing 4.84% of its capital stock for approximately (euro)350 million,
giving rise to a loss of (euro)33.23 million in the consolidated financial
statements of the Telefonica Group.
These companies, which in 2003 had been fully consolidated and accounted for by
the equity method, respectively, in the Telefonica Group, were excluded from the
scope of consolidation in 2004.
The group parent company took over its Spanish subsidiaries Telefonica Medios de
Comunicacion, S.A., Telefonica Media Internacional y de Contenidos, S.A.,
Producciones Multitematicas, S.A. and Gestora de Medios Audiovisuales de Futbol,
S.L. The Spanish company Corporacion Admira Media, S.A. was dissolved and
liquidated in June 2004. All these companies had been fully consolidated in the
Telefonica Group in 2003 but were excluded from the scope of consolidation in
2004.
In October 2004, Telefonica de Contenidos, S.A. sold its holdings in Lideres
Entertainment Group, Inc and Fieldy BV. These companies, which had been
accounted for by the equity method in the consolidated financial statements of
the Telefonica Group in 2003, were excluded from the scope of consolidation in
2004.
Telefonica de Contenidos's 20% holding in the Argentine company Torneos y
Competencias, S.A. was classified in the consolidated financial statements of
the Telefonica Group as a short-term investment on the basis of management
criteria.
2003
The variations in the scope of consolidation in the year ended December 31,
2003, were as follows:
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Telefonica
In July 2003, Telefonica, S.A. concluded the tender offer for Terra Networks,
S.A. shares by acquiring 202,092,043 of this company's shares for (euro)5.25 per
share, which represented 33.6% of its total capital stock. Following this
transaction, Telefonica's direct holding in Terra was 71.97%. In December 2003,
the Telefonica Group's effective holding in the Terra Group was increased to
75.29%, as described below. The company continued to be fully consolidated in
the Telefonica Group.
In February 2003, Telefonica, S.A. acquired 9,669 shares of the Dutch subsidiary
Endemol Entertainment Holding, N.V. for (euro)0.34 million. Following this
transaction, the Telefonica Group's holding in this Dutch company, which
continued to be fully consolidated in the Telefonica Group, increased to 99.49%.
On January 7, 2003, Telefonica, S.A. and its subsidiary Telefonica de Contenidos
exercised vis-a-vis Banco Santander Central Hispano, S.A. call options on
19,532,625 shares of Antena 3 de Television, S.A., representing 11.719% of its
capital stock, which were acquired by the Group company Corporacion Admira
Media. Following this acquisition, the Telefonica Group owned 59.24% of the
capital stock of Antena 3 de Television.
Subsequently, in 2003 the Telefonica Group began a process of divesting its
holding in this investee, which commenced on April 30, 2003, with the acceptance
of the bid of (euro)364 million made by the Planeta Group for 25.1% of the
capital stock of Antena 3 de Television. This sale was subject to the condition
subsequent, already fulfilled in that year, that the shares of Antena 3 de
Television were admitted to listing on the Spanish Stock Exchange.
Also, as indicated in Note 11, on April 11, 2003, the Stockholders' Meeting of
Telefonica, S.A. approved the distribution of shares representing 30% of the
capital stock of Antena 3 de Television as a dividend in kind for its
stockholders, which took place in October after this company had been admitted
to listing on the Stock Exchange, as mentioned above. Lastly, in October and
November Telefonica, S.A. sold on the stock market all the remaining shares of
the above-mentioned company owned by it (2,928,893 shares) for (euro)95.72
million.
These transactions carried out in 2003, which entailed the divestment of the
Telefonica Group's holding in Antena 3 de Television, S.A., gave rise to a gain
of (euro)392.29 million (see Note 8). The company, which was fully consolidated
in the first six months of 2003, was subsequently excluded from the scope of
consolidation.
In January 2003, the Mexican company Fisatel Mexico, S.A. de C.V. was formed
with an initial capital stock of MXP 5 million, consisting of 500 shares of MXP
100 each. Subsequently, this company increased its capital stock by MXP 4.95
million. The Telefonica Group subscribed all the shares of the new company,
which was fully consolidated in the Telefonica Group.
Telefonica Capital, S.A., a wholly-owned subsidiary of Telefonica, S.A., formed
Fonditel Gestion, Sociedad Gestora de Instituciones de Inversion Colectiva, S.A.
in April and Fonditel Valores, Agencia de Valores, S.A. in May and subscribed
all their shares for (euro)1.5 million and (euro)3 million, respectively. Both
companies were fully consolidated in the Telefonica Group.
In January 2003, Telefonica, S.A. acquired 376,000 shares of the subsidiary
Telefonica Moviles, S.A. for (euro)2.43 million. Following this acquisition, the
Telefonica Group's new ownership interest was 92.44%. This subsidiary continues
to be fully consolidated in the Telefonica Group.
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Telefonica, S.A. sold all the shares of its wholly-owned investee Playa de
Madrid, S.A. This company, which had been fully consolidated in the Telefonica
Group's consolidated financial statements in 2002, was excluded from the scope
of consolidation in 2003.
The following companies were fully consolidated in the Telefonica Group's
consolidated financial statements: Pleyade Argentina, S.A., Pleyade Peru
Corredores de Seguros, S.A.C., TGP Brasil Corretora de Seguros e Resseguros,
Ltda. and Pleyade Mexico, Agente de Seguros y de Fianzas, S.A. de C.V. These
companies are all subsidiaries of Pleyade Peninsular, Correduria de Seguros y
Reaseguros del Grupo Telefonica, S.A.
Telefonica Ingenieria de Seguridad, S.A., a wholly-owned subsidiary of the
Telefonica Group, participated in the incorporation of Telefonica Ingenieria de
Seguridad Mexico, S.A. de C.V. by paying (euro)0.34 million to subscribe 65% of
the new company's capital stock. This company was fully consolidated in the
Telefonica Group's consolidated financial statements.
Pursuant to the Strategic Alliance Framework Agreement entered into on February
11, 2000, by Telefonica and Banco Bilbao Vizcaya, S.A. (BBVA), the Telefonica
Group subsidiary located in the Netherlands, Atento N.V., increased capital
several times in November 2003 in order to include the BBVA Group in its
stockholder structure through the BBVA Group subsidiary General de
Participaciones Empresariales, S.L. As a result of these transactions, the
capital stock and additional paid-in capital of Atento N.V. increased by
(euro)20.76 million. Telefonica, S.A. subscribed and paid in cash (euro)20
million of this amount. The BBVA Group subscribed and paid in cash (euro)4
thousand and delivered the remaining (euro)0.76 million through a nonmonetary
contribution of all the shares of Procesos Operativos, S.A. The inclusion of the
BBVA Group in the stockholder structure of Atento N.V. reduced Telefonica,
S.A.'s holding in the latter from 100% to 91.35%. Atento N.V. continued to be
fully consolidated in the Telefonica Group and Procesos Operativos, S.A. was
fully consolidated in the Telefonica Group for the first time.
In December 2003, the wholly-owned subsidiary Telefonica Consultora y Servicios,
S.A. was absorbed by its parent company Telefonica Consultora de Proyectos, S.A.
Subsequently, also in December, Telefonica Consultora de Proyectos, S.A., a
wholly-owned subsidiary of Telefonica, S.A., was dissolved and liquidated.
Consequently, both companies, which had been fully consolidated in the
Telefonica Group, were excluded from consolidation.
Also, in December 2003, the following wholly-owned subsidiaries of the
Telefonica Group were dissolved and liquidated: Urbana Iberica, S.A., the U.S.
company Telefonica North America, Inc. and the Dutch company Emergia Holding,
N.V. All these companies, which had been fully consolidated in the Telefonica
Group, were excluded from the scope of consolidation.
Telefonica Moviles Group
On April 25, 2003, Telesp Celular Participacoes, S.A. (TCP), which was
65.12%-owned by Brasilcel, N.V., acquired from the Brazilian company Fixcel
(controlled by the Splice Group) 61.10% of the common voting stock of the
Brazilian company Tele Centro Oeste Celular Participacoes, S.A. (TCO),
representing 20.37% of the latter's total capital stock, for 1,505.5 million
reais.
In October 2003, pursuant to Brazilian legislation, TCP launched a tender offer
for TCO's remaining common voting stock held by minority stockholders. The
acceptance period of the tender offer ended on November 18, 2003, and resulted
in the acquisition by TCP of 74.23% of the shares at which the offer was
targeted, which meant that together with the shares it already
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owned, TCP's holding in TCO amounted to 86.58% of the common shares (90.73%
excluding the treasury stock owned by TCO) which represented 28.87% of its total
capital stock (29.31% excluding the treasury stock). TCP paid 538.8 million
reais for this additional ownership interest. TCP was consolidated in the
consolidated financial statements of Brasilcel, which, in turn, were
proportionally consolidated in the Telefonica Group.
Although TCP had announced its intention to perform an exchange of TCO's shares
whereby it would become its sole stockholder, the exchange was cancelled on
January 12, 2004, as a result of the opinion issued by the Brazilian Securities
Market Commission (CVM) which, for the Board of Directors of TCP and TCO, made
it advisable to cancel the process.
Telefonica Moviles, S.A. acquired a 20% holding in the Spanish company
Telefonica Moviles Interacciona, S.A. (formerly Terra Mobile, S.A.) from Terra
Networks, S.A.; following this transaction, it was this company's sole
stockholder. The Telefonica Group's effective holding in this company increased
from 81.66% to 92.44% and it continued to be fully consolidated in the
Telefonica Group. Subsequently, on June 24, 2003, Termespa, S.A. was merged by
absorption into Telefonica Moviles Interacciona, S.A.
On July 29, 2003, Medi Telecom, S.A. increased capital. The Telefonica Moviles
Group increased its percentage of ownership in this company, which continued to
be accounted for by the equity method in the Telefonica Group's consolidated
financial statements, from 31.34% to it current 32.18% by disbursing (euro)21.23
million.
In September 2003, Telefonica Moviles, S.A. incorporated Telefonica Moviles
Puerto Rico, Inc. with an initial capital stock of (euro)40 thousand. This
company was fully consolidated in the Telefonica Group.
On December 23, 2003, Telefonica Moviles Espana, S.A. and Mobilkom Austria
Aktiengesellschaft & Co KG (Mobilkom) reached an agreement whereby the latter
acquired all the shares of 3G Mobile Telecommunications GmbH, the Austrian
subsidiary of Telefonica Moviles Espana which holds a UMTS license. The selling
price of the company amounted to (euro)13.65 million. The company, which had
been fully consolidated in the Telefonica Group's consolidated financial
statements in 2002, was excluded from consolidation.
Telefonica de Contenidos Group
Telefonica de Contenidos, S.A. sold all of the shares of the Spanish company
Famosos, Artistas, Musicos y Actores, S.A.U. (FAMA), giving rise to a loss of
(euro)1.06 million for the Telefonica Group. This company, which had been fully
consolidated in the Telefonica Group's consolidated financial statements in
2002, was excluded from the scope of consolidation.
The Dutch company Fieldy, B.V. and the U.S. company Lideres Entertainment Group,
Inc. which were owned 51% and 49%, respectively, by Telefonica de Contenidos,
were accounted for by the equity method in the Telefonica Group's consolidated
financial statements on the basis of management criteria.
As part of the merger of DTS Distribuidora de Television Digital, S.A. (Via
Digital) and Sogecable, S.A., in the first half of 2003 Telefonica de
Contenidos, S.A. acquired shares representing 12.63% of the capital stock of
Distribuidora de Television Digital, S.A. (Via Digital) for (euro)165.6 million.
Also, debentures amounting to (euro)164.3 million were converted into shares and
capital was subsequently increased by (euro)949.84 million. As a result of these
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Telefonica
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transactions, the holding of Telefonica de Contenidos in Via Digital prior to
its merger with Sogecable, S.A. was 96.64%.
On July 2, 2003, Telefonica de Contenidos, S.A. subscribed to the capital
increase performed by Sogecable, S.A., by contributing the shares of Via Digital
owned by it. As a result of this transaction, the Telefonica Group acquired
28,008,149 shares in the capital increase, which represent a 22.228% holding in
the capital stock of Sogecable. Via Digital, which had been accounted for by the
equity method in 2002, was excluded from consolidation. In October 2003,
Telefonica, S.A. acquired 2,020,000 shares of Sogecable, S.A. for (euro)41.91
million and, as a result, the Telefonica Group's holding amounted to 23.83% of
the capital stock. These transactions gave rise to consolidation goodwill of
(euro)607.23 million. Sogecable, S.A. was accounted for by the equity method in
the Telefonica Group.
Also, as a result of the financing granted to Sogecable, S.A. in 2003 in the
form of a subordinated loan (see Note 8), Telefonica de Contenidos was assigned
1,241,990 warrants on Sogecable shares for its participation in this loan. The
"Other Investments" caption included the value of these warrants, amounting to
(euro)11.22 million.
On July 16, as part of the process to integrate the digital platforms, Gestora
de Medios Audiovisuales Futbol, S.L. sold its holding in 40% of the capital
stock of Audiovisual Sport, S.L. to Gestion de Derechos Audiovisuales y
Deportivos, S.A., a Sogecable Group company. The company, which had been
accounted for by the equity method in the Telefonica Group, was excluded from
the Group's consolidated financial statements.
On July 21 Telefonica de Contenidos, S.A. sold its 47.5% holding in Tick, Tack,
Ticket, S.A. The holding was transferred in the same transaction as another
holding of the same amount owned by Banco Bilbao Vizcaya Argentaria, S.A. The
sale gave rise to a book loss of (euro)0.13 million for the Telefonica Group.
On November 13, 2003, Telefonica de Contenidos, S.A. sold its holding in
Euroleague Marketing, S.L. to Sogecable, S.A.
On December 22, 2003, the liquidation of Interocio Games, S.A., a 50%-owned
investee of Telefonica de Contenidos, was formalized. This company, which in
2002 had been accounted for by the equity method in the Telefonica Group's
consolidated financial statements, was excluded from the scope of consolidation.
T.P.I. Group
In January 2003, the TPI Group incorporated the Spanish company 11888 Servicio
Consulta Telefonica, S.A. with an initial capital stock of (euro)60.20 thousand.
The company was fully consolidated in the Telefonica Group's consolidated
financial statements.
In July 2003, the Brazilian company Telefonica Publicidade e Informacao, Ltda.,
an investee of Telefonica Publicidad e Informacion, S.A. and Telefonica
Internacional, S.A., simultaneously reduced and increased capital. Telefonica
Publicidad e Informacion, S.A. subscribed and paid for all the securities in the
capital increase and became the company's sole stockholder. The Telefonica Group
diluted its effective holding in the company from 79.55% to 59.90%. The company
continued to be fully consolidated in the Telefonica Group.
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In September 2003, Buildnet, S.A. simultaneously reduced and increased capital,
giving it a capital stock of (euro)61 thousand, which was fully subscribed and
paid by the subsidiary of Telefonica Publicidad e Informacion, S.A., Goodman
Business Press, S.A. Through this transaction, the Telefonica Group's holding in
this company increased from 58.46% to 59.90%. This company continued to be fully
consolidated in the Telefonica Group.
Telefonica DataCorp Group
In October 2003, Telefonica DataCorp, S.A. acquired all the shares comprising
Telefonica, S.A.'s 99.9% holding in the U.S. company Katalyx, Inc. This company
continued to be fully consolidated in the Telefonica Group.
Also, in October Telefonica DataCorp, S.A. sold its 34% holding in Atlanet for
(euro)24.79 million, giving rise to a loss of (euro)25.78 million. The company,
which had been accounted for by the equity method in 2002, was excluded from the
scope of consolidation.
The U.S. companies Katalyx Food Service, Llc., Katalyx Sip, Llc, Katalyx
Cataloguing, Inc. and Katalyx Construction, Inc., which were all wholly-owned
subsidiaries of Katalyx, Inc., were liquidated. These companies, which had been
fully consolidated in the Telefonica Group in 2002, were excluded from the scope
of consolidation.
Telefonica Data Colombia, S.A. increased its capital stock in May 2003 so as to
include a new stockholder in its stockholder structure. Consequently, the
Telefonica Group's holding in this company, which continued to be fully
consolidated, decreased from 100% to 65%.
In June 2003, Telefonica Soluciones de Informatica y Comunicaciones de Espana,
S.A. (formerly Telefonica Sistemas, S.A.), a wholly-owned subsidiary of
Telefonica Datacorp, S.A., acquired all the shares of the Spanish company
Telefonica Mobile Solutions, S.A. from Telefonica Moviles, S.A. for (euro)1.13
million. As a result of this transaction, the Telefonica Group's effective
holding in this company, which continued to be fully consolidated in the
Telefonica Group, increased from 92.43% to 100%.
In June Telefonica Data Argentina, S.A., a 97.92%-owned subsidiary of Telefonica
Datacorp, S.A., acquired the 20% holding in the Argentine company Tyssa,
Telecomunicaciones y Sistemas, S.A. owned by the Telefonica Internacional Group,
as a result of which Telefonica Data Argentina gained control over all of
Tyssa's shares. Following this transaction, the Telefonica Group's effective
holding in this company decreased from 98.34% to 97.92%. Subsequently, in
September 2003 Tyssa was absorbed by its parent company.
Terra Group
In December 2003, Terra Networks, S.A. acquired 26,525,732 shares owned by
Citibank N.A., as the agent bank for the company's stock option plan assumed as
a result of the acquisition of Lycos, Inc. Terra Networks, S.A. continued to
guarantee the coverage of the employee stock option plan with the shares they
held as treasury stock. As a result of this transaction, the Telefonica Group
increased its effective percentage of ownership from 71.97% to 75.29% as of
December 31, 2003. The company continued to be fully consolidated in the
Telefonica Group.
The subsidiaries Terra Networks Uruguay, S.A. (wholly-owned by the Terra Group),
Terra Global Management, Inc. (wholly-owned), Bumeran Participaciones, S.L.
(84.2%-owned) and Emplaza, S.A. (80%-owned), which had been fully consolidated
in the Telefonica Group in
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2002, were excluded from the scope of consolidation. These companies were being
liquidated or dissolved.
The Terra Group increased its holding in the capital stock of the U.S. company
One Travel.com, Inc. by 15.08% to 54.15%, for which it disbursed (euro)3.3
million. The company, which had been accounted for by the equity method in the
Telefonica Group's consolidated financial statements in 2002, was fully
consolidated from April 2003.
In January 2003, an agreement was entered into with BBVA to integrate Uno-e
Bank, S.A. in the consumer finance line of business of Finanzia, Banco de
Credito, S.A. Subsequently, at the Special Stockholders' Meeting of Uno-e Bank,
S.A. on April 23, 2003, Terra Networks, S.A. and BBVA approved a capital
increase at Uno-e Bank, S.A., which was fully subscribed by Finanzia Banco de
Credito, S.A. (a wholly-owned investee of BBVA) through the nonmonetary
contribution of its consumer finance line of business. As a result of the
above-mentioned transaction, the holding of Terra Networks, S.A. in Uno-e Bank,
S.A. decreased from 49% at 2002 year-end to 33%, and the bank was excluded from
the scope of consolidation of the Telefonica Group.
Atento Group
On May 23, 2003, Atento Teleservicios Espana, S.A. subscribed and paid all the
shares of the new company Atento Servicios Tecnicos y Consultoria, S.L.,
comprising 3,006 shares of (euro)1 par value each. This company was fully
consolidated in the Telefonica Group.
On July 3, 2003, Atento Teleservicios Espana, S.A. subscribed and paid all the
shares of the new company Servicios Integrales de Asistencia y Atencion, S.L.,
comprising 3,006 shares of (euro)1 par value each. This company was fully
consolidated in the Telefonica Group.
Atento North America, Inc., a wholly-owned subsidiary of Atento Holding, Inc.,
was excluded from the Telefonica Group's scope of consolidation because it was
liquidated on January 1, 2003.
On April 14, 2003, Atento Teleservicios Espana, S.A. absorbed its wholly-owned
subsidiary Gestion de Servicios de Emergencia y Atencion al Ciudadano, S.A.,
which was excluded from the scope of consolidation.
In June 2003, the Atento Group sold 70% of the shares of Atento Pasona, Inc.
owned by it. This company, which had been fully consolidated in the Telefonica
Group in 2002, was excluded from the scope of consolidation.
Atento Asia Pacific, Inc., which had been fully consolidated in the Telefonica
Group in 2002, was excluded from the scope of consolidation because it was
liquidated on October 21, 2003.
On December 1, 2003, Atento Teleservicios Espana, S.A. acquired all the shares
of Leader Line, S.A., which was fully consolidated in the Telefonica Group.
Telefonica Espana Group
Continuing with the restructuring of its corporate group, Telefonica Cable,
S.A., a wholly-owned subsidiary of Telefonica de Espana, S.A., absorbed the
following local operators: Telefonica Cable Madrid, S.A., Telefonica Cable
Ceuta, S.A., Telefonica Cable Melilla, S.A.,
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Telefonica Cable Aragon, S.A., Telefonica Cable Catalunya, S.A., Telefonica
Cable Castilla y Leon, S.A., Telefonica Cable Euskadi, S.A., Telefonica Cable
Cantabria, S.A., Telefonica Cable Murcia, S.A., Telefonica Cable Andalucia,
S.A., Telefonica Cable La Rioja, S.A. and Telefonica Cable Navarra, S.A. All of
these companies, which had been fully consolidated in the Telefonica Group, were
excluded from the scope of consolidation in 2003.
With the acquisition of 17% of the capital stock of Telefonica Cable
Extremadura, S.A. for (euro)0.10 million, the Telefonica Group became the sole
stockholder of this company, which continued to be fully consolidated in the
Telefonica Group.
1.18% of the capital stock of Inmarsat Venture, plc., relating to an investment
which had been recorded under the "Other Investments" caption, was sold for
(euro)14.12 million.
Telefonica Internacional Group
As a result of the retirement of treasury stock by the U.S. company Infonet
Services Corporation in 2003, the Telefonica Internacional Group increased its
holding in this company from 14.32% to 14.53%. This company continued to be
accounted for by the equity method in the Telefonica Group's consolidated
financial statements.
On September 1, 2003, Compania de Telecomunicaciones de Chile S.A., a
43.64%-owned subsidiary of Telefonica Internacional, S.A., sold all the shares
of Compania de Telecomunicaciones de Chile S.A - Isapre, S.A. owned by it,
giving rise to a loss of (euro)0.29 million for the Telefonica Group. This
company, which had been fully consolidated in the Telefonica Group's
consolidated financial statements, was excluded from the scope of consolidation.
On July 29, 2003, Telefonica Empresas CTC Chile, S.A. was notified of the
decision of Inversiones Santa Isabel Limitada to bring forward and exercise its
purchase option on the remaining 35% of the capital stock of Sonda, S.A. This
transaction gave rise to a loss of (euro)11.14 million for the Telefonica Group.
The company, which had been accounted for by the equity method in the Telefonica
Group's consolidated financial statements, was excluded from the scope of
consolidation.
E-54
Telefonica
--------------------------------------------------------------------------------
EXHIBIT III
CONSOLIDATION GOODWILL
The detail of the balance of the consolidation goodwill and of the related
accumulated amortization as of December 31, 2004 and 2003, and of the variations
therein in 2004 and 2003 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------------
Consolidation Goodwill Balance at Translation Balance at
12/31/03 Additions Retirements Transfers Differences 12/31/04
------------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) 68.99 9.13 (1.40) 0.40 (0.33) 76.79
T. Peru Holding (Peru) 50.41 - - - - 50.41
Telefonica del Peru (Peru) 281.26 - - - - 281.26
Telefonica Multimedia, S.A.C (Peru) 7.88 - - - 0.22 8.10
Telefonica Movil de Chile, S.A (Chile) 264.59 - - (35.58) - 229.01
Telesp Participacoes (Brazil) 106.52 33.14 - (4.79) (0.04) 134.83
T. Holding de Argentina y filiales (Argentina) 576.60 - - - - 576.60
Cointel (Argentina) 484.29 - - - - 484.29
TPI Edita (Spain) 8.29 - - - - 8.29
Impresora y Comercial Publiguias, S.A. (Chile) - 42.22 - - - 42.22
Telefonica Internacional (Spain) 281.66 - - - - 281.66
Telefonica Moviles (Spain) 128.02 6 .10 - - - 134.12
T. Data Espana (Spain) 154.96 - - - - 154.96
T. Data Brasil (Brazil) 132.93 - - (2.75) 1.14 131.32
T. Deutchland Gmbh and subsidiaries (Germany) 699.93 - (101.51) - - 598.42
Fieldy Group (Netherlands) 1.46 - - - - 1.46
Endemol (Netherlands) 842.19 11.40 - - - 853.59
Endemol Group (Netherlands) 511.69 45.13 - (1.75) 0.59 555.66
Atco Group (Argentina) 375.00 - - - (4.28) 370.72
Telefonica Media Argentina (Argentina) 26.70 - - - - 26.70
Atento Peru (Peru) 4.13 - - - (0.58) 3.55
Atento Brasil (Brazil) 110.37 - - - (7.93) 102.44
Terra Brasil Holding (Brazil) 231.41 - - - 0.01 231.42
Terra Chile Holding (Chile) 25.05 - - - - 25.05
Ifigenia Plus (Spain) 4.72 - - - - 4.72
Lycos (USA) 307.27 - (220.27) (87.00) - -
Sociedades Lycos (USA) 65.73 - (67.31) - 1.58 -
One Travel.com, Inc. (USA) 21.20 - (8.89) - (0.05) 12.26
Terra Networks, S.A. (Spain) 75.77 1.81 - - - 77.58
Emergia Holding, N.V (Netherlands) 2.30 - - - - 2.30
T.Centroamerica Guatemala (Guatemala) 50.23 - - - (0.11) 50.12
Telefonica El Salvador (El Salvador) 66.76 - - - (3.10) 63.66
Brasilcel and subsidiaries (Brazil) 760.73 111.68 - (81.60) 4.25 795.06
Moviles Mexico and subsidiaries (Mexico) 412.24 - - (1.83) (4.82) 405.59
Telefonia Celular de Nicaragua - 54.82 - - (2.83) 51.99
Telcel (Venezuela) - 376.24 - - (11.47) 364.77
Otecel, S.A. (Ecuador) - 397.44 - - - 397.44
Olympic, Ltda. (Colombia) - 501.85 - - 20.59 522.44
Telefonica Moviles Panama (Panama) - 252.18 - - - 252.18
Comunicaciones Moviles de Peru, S.A. (Peru) - 4.46 - - (0.24) 4.22
BellSouth Guatemala y Cia. - 12.79 - - - 12.79
T. Moviles Uruguay S.A. (Uruguay) - 3.91 - - (0.18) 3.73
Other companies 8.43 - (0.92) (0.07) - 7.44
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 7,149.71 1,864.30 (400.30) (214.97) (7.58) 8,391.16
------------------------------------------------------------------------------------------------------------------------------------
E-55
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------------
Consolidation Goodwill Balance at Translation Balance at
12/31/03 Additions Retirements Transfers Differences 12/31/04
------------------------------------------------------------------------------------------------------------------------------------
Companies accounted for by the equity method:
Venworld (Venezuela) 134.21 - - (134.21) - -
Mercador (Brazil) 4.62 - - - - 4.62
Portugal Telecom (Portugal) 232.35 344.52 - - - 576.87
Amper (Spain) 5.59 - - - - 5.59
Pearson (U.K.) 293.52 - (293.52) - - -
Patagonik (Argentina) 7.31 - - - - 7.31
Sogecable, S.A. (Spain) 607.23 22.73 - - - 629.96
Medi Telecom., S.A. (Morocco) 10.56 - - - - 10.56
Other companies - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total 1,295.39 367.25 (293.52) (134.21) - 1,234.91
------------------------------------------------------------------------------------------------------------------------------------
Total consolidation goodwill 8,445.10 2,231.55 (693.82) (349.18) (7.58) 9,626.07
------------------------------------------------------------------------------------------------------------------------------------
E-56
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------
Amortization of Consolidation Goodwill Balance at Translation Balance at
12/31/03 Additions Retirements Transfers Differences 12/31/04
------------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) 38.24 3.25 - 0.40 (0.05) 41.84
T. Peru Holding (Peru) 7.10 2.50 - - - 9.60
Telefonica del Peru (Peru) 55.90 14.23 - - - 70.13
Telefonica Multimedia, S.A.C (Peru) 4.13 0.89 - - 0.17 5.19
Telefonica Movil de Chile, S.A (Chile) 81.41 14.22 - (89.74) - 5.89
Telesp Participacoes (Brazil) 20.32 5.43 - - - 25.75
T. Holding de Argentina y filiales (Argentina) 86.45 28.83 - - - 115.28
Cointel (Argentina) 210.47 21.66 - - - 232.13
TPI Edita (Spain) 1.48 2.18 - - - 3.66
Impresora y Comercial Publiguias, S.A. (Chile) - 1.64 - - - 1.64
Telefonica Internacional (Spain) 86.48 14.03 - - - 100.51
Telefonica Moviles (Spain) 16.40 6.45 - - - 22.85
T. Data Espana (Spain) 113.21 2.98 - - - 116.19
T. Data Brasil (Brazil) 18.83 6.54 - (3.03) 0.37 22.71
T. Deutchland Gmbh y filiales (Germany) 160.41 39.20 - - - 199.61
Fieldy Group (Netherlands) 1.46 - - - - 1.46
Endemol (Netherlands) 143.61 42.80 - - - 186.41
Endemol Group (Netherlands) 61.11 29.14 - (0.65) 0.03 89.63
Atco Group (Argentina) 321.84 3.99 - - - 325.83
Telefonica Media Argentina (Argentina) 5.04 1.33 - - - 6.37
Atento Peru (Peru) 0.88 0.21 - - (0.16) 0.93
Atento Brasil (Brazil) 21.22 5.61 - - (2.01) 24.82
Terra Brasil Holding (Brazil) 139.09 17.90 - - - 156.99
Terra Chile Holding (Chile) 15.77 2.19 - - - 17.96
Ifigenia Plus (Spain) 4.72 - - - - 4.72
Lycos (USA) 252.61 6.00 (352.42) 93.81 - -
Sociedades Lycos (USA) 42.45 3.60 (45.94) - (0.11) -
One Travel.com, Inc. (USA) 5.62 2.14 - - - 7.76
Terra Networks, S.A. (Spain) 15.21 6.62 - - - 21.83
Emergia Holding, N.V (Netherlands) 0.30 0.11 - - - 0.41
T.Centroamerica Guatemala (Guatemala) 6.11 2.78 - - (0.08) 8.81
Telefonica El Salvador (El Salvador) 12.37 3.40 - - (0.90) 14.87
Brasilcel and subsidiaries (Brazil) 72.25 43.36 - - 0.43 116.04
Moviles Mexico and subsidiaries (Mexico) 78.77 20.98 - (1.84) (2.43) 95.48
Telefonia Celular de Nicaragua - 0.46 - - - 0.46
Telcel (Venezuela) - 3.14 - - - 3.14
Otecel, S.A. (Ecuador) - 3.31 - - - 3.31
Olympic, Ltda. (Colombia) - 4.18 - - - 4.18
Telefonica Moviles Panama (Panama) - 2.10 - - - 2.10
Comunicaciones Moviles de Peru, S.A. (Peru) - 0.04 - - - 0.04
BellSouth Guatemala y Cia. - 0.10 - - - 0.10
T. Moviles Uruguay S.A. (Uruguay) - 0.02 - - - 0.02
Other companies 3.18 0.45 (0.07) - - 3.56
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,104.44 369.99 (398.43) (1.05) (4.74) 2,070.21
------------------------------------------------------------------------------------------------------------------------------------
E-57
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------------
Amortization of Consolidation Goodwill Balance at Translation Balance at
12/31/03 Additions Retirements Transfers Differences 12/31/04
------------------------------------------------------------------------------------------------------------------------------------
Venworld (Venezuela) 105.30 - - (105.30) - -
Mercador (Brazil) 4.51 0.10 - - 0.01 4.62
Portugal Telecom. (Portugal) 64.26 21.32 - - - 85.58
Amper (Spain) 1.50 0.28 - - - 1.78
Pearson (U.K.) 94.65 9.38 (104.03) - - -
Patagonik (Argentina) 1.47 0.36 5.48 - - 7.31
Sogecable, S.A. (Spain) 14.76 31.56 - - - 46.32
Medi Telecom., S.A. (Morocco) 0.37 0.53 - - - 0.90
Other companies (0.03) 0.01 - 0.02 (0.01) (0.01)
-----------------------------------------------------------------------------------
Total 286.79 63.54 (98.55) (105.28) - 146.50
------------------------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 2,391.23 433.53 (496.98) (106.33) (4.74) 2,216.71
------------------------------------------------------------------------------------------------------------------------------------
Unamortized consolidation goodwill 6,053.87 1,798.02 (196.84) (242.85) (2.84) 7,409.36
------------------------------------------------------------------------------------------------------------------------------------
F-58
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------------------------------------------------------
Consolidation goodwill Balance at Translation Balance at
12/31/02 Additions Retirements Transfers Differences 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) 97.07 - (27.82) 0.54 (0.80) 68.99
T. de Argentina y filiales (Argentina) 581.51 - - (4.69) (0.22) 576.60
T. Peru Holding (Peru) 50.41 - - - - 50.41
Telefonica del Peru (Peru) 281.26 - - - - 281.26
Telefonica Multimedia, S.A.C (Peru) 9.17 - - - (1.29) 7.88
Telefonica Moviles Chile, S.A (Chile) 267.45 - - (6.57) 3.71 264.59
Telesp Participacoes (Brazil) 106.52 - - - - 106.52
Cointel (Argentina) 484.29 - - - - 484.29
Goodman (Spain) 8.29 - - - - 8.29
Telefonica Internacional (Spain) 281.66 - - - - 281.66
Telefonica Moviles (Spain) 125.84 2.18 - - - 128.02
T. Data Espana (Spain) 154.96 - - - - 154.96
T. Data Brasil (Brazil) 127.78 9.23 - - (4.08) 132.93
Mediaways (Germany) 689.11 - - - - 689.11
Telefonica Deutchland Gmbh (Germany) 10.82 - - - - 10.82
Fieldy Group(Netherlands) 8.09 - (6.63) - - 1.46
Endemol (Netherlands) 833.04 9.15 - - - 842.19
Endemol Group (Netherlands) 379.12 128.54 9.42 - (5.39) 511.69
Atco Group (Argentina) 377.24 - - - (2.24) 375.00
Telefonica Media Argentina (Argentina) 26.70 - - - - 26.70
Atento Peru (Peru) 5.76 - - - (1.63) 4.13
Atento Brasil (Brazil) 132.66 - - - (22.29) 110.37
Terra Brasil Holding (Brazil) 232.50 - - (1.32) 0.23 231.41
Terra Chile Holding (Chile) 25.05 - - - - 25.05
Ifigenia Plus (Spain) 11.17 - (6.45) - - 4.72
Lycos (USA) 309.49 - (2.22) - - 307.27
Sociedades Lycos (USA) 286.55 - - (207.39) (13.43) 65.73
One Travel.com, Inc. (USA) - 3.73 - 17.37 0.10 21.20
Terra Networks, S.A. (Spain) 17.20 58.57 - - - 75.77
Emergia Holding, N.V (Netherlands) 2.30 - - - - 2.30
T.Centroamerica Guatemala (Guatemala) 50.89 - - - (0.66) 50.23
Telefonica El Salvador (El Salvador) 75.46 - - - (8.70) 66.76
Brasilcel and subsidiaries (Brazil) 512.34 246.50 - - 1.89 760.73
Moviles Mexico and subsidiaries (Mexico) 1,037.16 - (18.98) (552.54) (53.40) 412.24
Other companies 8.92 0.79 (0.26) (1.02) - 8.43
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 7,607.78 458.69 (52.94) (755.62) (108.20) 7,149.71
------------------------------------------------------------------------------------------------------------------------------------
E-59
Telefonica
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------------------
Consolidation goodwill Balance at Translation Balance at
12/31/02 Additions Retirements Transfers Differences 12/31/03
----------------------------------------------------------------------------------------------------------------------------------
Companies accounted for by
the equity method:
Venworld (Venezuela) 134.21 - - - - 134.21
Mercador (Brazil) 4.62 - - - - 4.62
Portugal Telecom (Portugal) 218.87 - - 13.48 - 232.35
Amper (Spain) 5.59 - - - - 5.59
Dts D(a) Tv Digital (Spain) 88.11 - (88.11) - - -
Antena 3 (Spain) 209.48 63.91 (273.39) - - -
SociedadesDependientes
de Antena 3 T.V., S.A - - - - - -
Pearson (U.K.) 292.99 0.53 - - - 293.52
Patagonik (Argentina) 7.31 - - - - 7.31
Sogecable, S.A. (Spain) - 607.23 - - - 607.23
Uno-e Bank (Spain) 130.25 - - (130.25) - -
One Travel (USA) 17.37 - - (17.37) - -
Meditel (Morocco) 5.10 5.46 - - - 10.56
Other companies 6.01 - - (6.01) - -
----------------------------------------------------------------------------------------
Total 1,119.91 677.13 (361.50) (140.15) - 1.295.39
----------------------------------------------------------------------------------------------------------------------------------
Total consolidation goodwill 8,727.69 1,135.82 (414.44) (895.77) (108.20) 8.445.10
----------------------------------------------------------------------------------------------------------------------------------
E-60
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------------------------------------------------------
Amortization of consolidation goodwill Balance at Translation Balance at
12/31/02 Additions Retirements Transfers Differences 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) 48.70 5.75 (16.55) 0.54 (0.20) 38.24
T. de Argentina y filiales (Argentina) 61.25 28.83 - (3.46) (0.17) 86.45
T. Peru Holding (Peru) 4.61 2.49 - - - 7.10
Telefonica del Peru (Peru) 41.67 14.23 - - - 55.90
Telefonica Multimedia, S.A.C (Peru) 3.92 0.85 - - (0.64) 4.13
Telefonica Moviles Chile, S.A (Chile) 73.10 14.70 - (5.71) (0.68) 81.41
Telesp Participacoes (Brazil) 14.89 5.43 - - - 20.32
Cointel (Argentina) 188.80 21.67 - - - 210.47
Goodman (Spain) 1.06 0.42 - - - 1.48
Telefonica Internacional (Spain) 72.46 14.02 - - - 86.48
Telefonica Moviles (Spain) 10.00 6.40 - - - 16.40
T. Data Espana (Spain) 110.23 2.98 - - - 113.21
T. Data Brasil (Brazil) 13.82 7.10 - - (2.09) 18.83
Mediaways (Germany) 120.71 38.66 - - - 159.37
Telefonica Deutchland Gmbh (Germany) 0.50 0.54 - - - 1.04
Fieldy Group(Netherlands) 2.01 - (0.55) - - 1.46
Endemol (Netherlands) 100.43 43.18 - - - 143.61
Endemol Group (Netherlands) 36.95 24.78 (0.62) - - 61.11
Atco Group (Argentina) 317.46 4.38 - - - 321.84
Telefonica Media Argentina (Argentina) 3.71 1.33 - - - 5.04
Atento Peru (Peru) 0.94 0.25 - - (0.31) 0.88
Atento Brasil (Brazil) 18.86 6.17 - - (3.81) 21.22
Terra Brasil Holding (Brazil) 120.97 18.36 - (0.24) - 139.09
Terra Chile Holding (Chile) 13.57 2.20 - - - 15.77
Ifigenia Plus (Spain) 3.73 0.99 - - - 4.72
Lycos (USA) 244.47 8.12 - - 0.02 252.61
Sociedades Lycos (USA) 252.91 5.21 - (207.39) (8.28) 42.45
One Travel.com, Inc. (USA) - 2.04 - 3.58 - 5.62
Terra Networks, S.A. (Spain) 12.05 3.16 - - - 15.21
Emergia Holding, N.V (Netherlands) 0.18 0.12 - - - 0.30
T.Centroamerica Guatemala (Guatemala) 3.57 2.81 - - (0.27) 6.11
Telefonica El Salvador (El Salvador) 10.56 3.61 - - (1.80) 12.37
Brasilcel and subsidiaries (Brazil) 28.95 43.62 - - (0.32) 72.25
Moviles Mexico and subsidiaries (Mexico) 88.94 50.39 - (47.49) (13.07) 78.77
Other companies 2.63 0.55 0.01 - (0.01) 3.18
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,028.61 385.34 (17.71) (260.17) (31.63) 2,104.44
------------------------------------------------------------------------------------------------------------------------------------
E-61
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------------------------------------------------------
Amortization of consolidation goodwill Balance at Translation Balance at
12/31/02 Additions Retirements Transfers Differences 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
Companies accounted for by
the equity method:
Venworld (Venezuela) 101.17 4.13 - - - 105.30
Mercador (Brazil) 3.56 0.88 - - 0.07 4.51
Portugal Telecom (Portugal) 52.89 11.37 - - - 64.26
Amper (Spain) 1.22 0.28 - - - 1.50
Dts D(a) Tv Digital (Spain) 16.64 2.20 (18.84) - - -
Antena 3 (Spain) 49.84 5.96 (55.80) - - -
Sociedades Dependientes
de Antena 3 T.V, S.A - 3.60 (3.60 - - -
Pearson (U.K.) 81.72 12.93 - - - 94.65
Patagonik (Argentina) 1.10 0.37 - - - 1.47
Sogecable, S.A. (Spain) - 14.76 - - - 14.76
Uno-e Bank (Spain) 17.37 1.93 - (19.30) - -
One Travel (USA) 3.58 - - (3.58) - -
Meditel (Morocco) - 0.37 - - - 0.37
Other companies 5.97 (0.01) - (5.99) - (0.03)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 335.06 58.77 (78.24) (28.87) 0.07 286.79
------------------------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 2,363.67 444.11 (95.95) (289.04) (31.56) 2,391.23
------------------------------------------------------------------------------------------------------------------------------------
Unamortized consolidation goodwill 6,364.02 691.71 (318.49) (606.73) (76.64) 6,053.87
------------------------------------------------------------------------------------------------------------------------------------
E-62
Telefonica
--------------------------------------------------------------------------------
EXHIBIT IV
MINORITY INTERESTS
This caption relates to the equity of minority stockholders in the net worth and
results for the year of the fully consolidated Group companies.
As of December 31, 2004, the balance of this caption comprised the holdings of
minority stockholders in the following companies:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------
% of Net Worth Translation Income Variation in Balance
Company Ownership Differences (Loss) Ownership at
Interest 12/31/04
------------------------------------------------------------------------------------------------------------------------------------
Terra Networks, S.A. 23.20% 357.04 (15.95) 38.03 - 379.12
C.T.C. , S.A. 55.11% 284.55 71.90 39.77 193.29 589.51
Fonditel Entidad Gestora de Fondos de Pensiones, S.A. 30.00% 10.37 - 2.40 - 12.77
Telefonica Argentina S.A. 1.97% (3.59) 0.20 3.39 - -
Telefonica del Peru, S.A. 1.81% 12.11 (0.05) 0.56 - 12.62
Telefonica Larga Distancia, Inc 2.00% 1.29 - 0.04 - 1.33
Telefonica Publicidad e Informacion, S.A. 40.10% 49.38 (1.56) 44.86 - 92.68
Telesp Participacoes, S.A. 12.51% 306.70 0.83 87.65 - 395.18
Telefonica Moviles, S.A. 7.54% 334.66 (101.37) 108.91 - 342.20
Group 3G UMTS Holding, GmbH (Note 14) 42.80% (382.44) - - - (382.44)
Telefonica Moviles Argentina, S.A. 2.07% (9.72) 1.01 (1.49) - (10.20)
Telefonica Finance USA 100.00% 1,916.31 - 83.69 - 2,000.00
Brasilcel (Holdings) 50.00% 373.82 4.78 36.26 (106.84) 308.02
Telefonica Moviles Mexico, S.A. 8.00% 71.93 0.65 (52.77) - 19.81
Other companies 14.73 3.63 (10.29) 6.91 14.98
------------------------------------------------------- -----------------------------------------------------------------
Total 3,337.14 (35.93) 381.01 93.36 3,775.58
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, the balance of this caption comprised the holdings of
minority stockholders in the following companies:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------
% of Net Worth Translation Income Variation in Balance
Company Ownership Differences (Loss) Ownership at
Interest 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
Terra Networks, S.A. 24.71% 782.50 (98.83) (85.37) 42.75 641.05
C.T.C. , S.A. 56.36% 754.67 54.28 30.87 - 839.82
Fonditel Entidad Gestora de
Fondos de Pensiones, S.A. 30.00% 9.24 - 2.27 - 11.51
Lola Films, S.A. 30.00% 9.11 - (1.51) - 7.60
Impresora y Comercial Publiguias, S.A. 49.00% 17.72 (4.19) 6.54 - 20.07
Telefonica Argentina S.A. 1.97% 0.06 (2.44) (2.79) - (5.17)
Telefonica del Peru, S.A. 2.79% 22.43 (0.03) 0.18 - 22.58
Telefonica Larga Distancia, Inc 2.00% 1.52 0.02 (0.14) - 1.40
Telefonica Publicidad e Informacion, S.A. 40.10% 49.47 (1.12) 36.02 - 84.37
Telesp Participacoes, S.A. 12.51% 338.06 (2.87) 75.87 - 411.06
Telefonica Moviles, S.A. 7.56% 274.27 (90.36) 121.55 - 305.46
Group 3G UMTS Holding, GmbH (Note 14) 42.80% (382.44) - - - (382.44)
Telefonica Moviles Argentina, S.A. 2.07% (11.71) 0.35 1.65 - (9.71)
Telefonica Finance USA 100.00% 1,916.31 - 83.69 - 2,000.00
Brasilcel (Holdings) 50.00% 383.81 2.63 21.88 (20.34) 387.98
Telefonica Moviles Mexico, S.A. 8.00% 133.27 (20.59) (42.40) - 70.28
Other companies - 41.59 (11.98) (2.82) (6.43) 20.36
----------------------------------------------- ----------------------------------------------------------------
Total 4,339.88 (175.13) 245.49 15.98 4,426.22
------------------------------------------------------------------------------------------------------------------------------------
E-63
Telefonica
--------------------------------------------------------------------------------
Variations in minority interests
The variations in minority interests in 2004 were as follows:
------------------------------------------------------------------------------------------------------------------------------------
Capital Income Acquisitions
Company Balance Contributions (Loss) Variation in and Balance
at and Inclusion for Translation Other Exclusion of Dividends at
12/31/03 of Companies the Year Differences Variations Companies Paid 12/31/04
------------------------------------------------------------------------------------------------------------------------------------
C.T.C., S.A. 839.82 192.81 39.77 13.01 21.48 - (517.38) 589.51
Terra Networks, S.A. 641.05 (41.15) 38.03 0.67 0.81 - (260.29) 379.12
Fonditel. 11.05 - 2.40 - (1.14) - - 12.77
Lola Films, S.A. 7.60 - (0.59) - (0.65) (6.36) - -
Impresora y Comercial
Publiguias, S.A. 20.07 (19.67) (0.52) 0.12 - - - -
Telefonica de Argentina, S.A. (5.17) - 3.39 (0.42) 2.20 - - -
Telefonica del Peru, S.A. 22.58 - 0.56 (7.28) - (3.24) - 12.62
Telefonica del Salvador, S.A. 2.43 0.05 (1.42) (0.06) - - - 1.00
Telefonica Larga
Distancia Inc. 1.40 - 0.04 (0.11) - - - 1.33
Telefonica Publicidad e
Informacion, S.A. 84.37 - 44.86 (0.43) 0.80 - (36.92) 92.68
Telesp Participacoes, S.A. 411.06 - 87.65 1.63 - - (105.16) 395.18
Telefonica Moviles, S.A. 305.46 - 108.91 (11.57) (0.56) - (60.04) 342.20
Group 3G UMTS Holding,
GmbH(Note 1) (382.44) - - - - - - (382.44)
Endemol Entertainment
Holding, N.V. 6.28 1.31 5.65 - (0.51) (0.40) (6.51) 5.82
Telefonica Moviles
Argentina, S.A. (9.71) - (1.49) 1.00 - - - (10.20)
Telefonica Centroamerica
Guatemala, S.A. 0.09 - - - - - - 0.09
Movitel del Noroeste, S.A. 1.64 - (2.13) 0.13 - - - (0.36)
Telefonica Finance USA 2,000.00 - 83.69 - - - (83.69) 2,000.00
Telefonica Moviles
Mexico, S.A. 70.28 - (52.77) 2.30 - - - 19.81
Brasilcel (Holdings) 387.98 (108.23) 36.26 4.79 - - (12.78) 308.02
Other companies 9.92 0.34 (11.28) (0.42) 10.07 - (0.20) 8.43
------------------------------------------------------------------------------------------------------------------------------------
Total 4,426.22 25.46 381.01 3.36 32.50 (10.00) (1,082.97) 3,775.58
------------------------------------------------------------------------------------------------------------------------------------
The variations in minority interests in 2003 were as follows:
------------------------------------------------------------------------------------------------------------------------------------
Capital Income Acquisitions
Company Balance Contributions (Loss) Variation in and Balance
at and Inclusion for Translation Other Exclusion of Dividends at
12/31/02 of Companies the Year Differences Variations Companies Paid 12/31/03
------------------------------------------------------------------------------------------------------------------------------------
C.T.C., S.A. 798.19 - 30.87 6.73 15.84 - (11.81) 839.82
Terra Networks, S.A. 1,954.21 - (85.37) (16.15) (4.22) (1.207.42) - 641.05
Fonditel. 10.24 - 2.27 - (1.00) - - 11.05
Lola Films, S.A. 3.24 6.00 (1.51) - (0.13) - - 7.60
Impresora y Comercial
Publiguias, S.A. 16.29 - 6.54 (0.32) 0.01 - (2.45) 20.07
Telefonica de
Argentina, S.A. (1.85) - (2.79) (0.53) - - - (5.17)
Telefonica del Peru, S.A. 18.49 - 0.18 (3.86) 8.88 - (1.11) 22.58
Telefonica del
Salvador, S.A. 4.24 - (1.06) (0.61) - - (0.14) 2.43
Telefonica Larga
Distancia Inc. 1.83 - (0.14) (0.29) - - - 1.40
Telefonica Publicidad
e Informacion, S.A. 70.25 - 36.02 (6.98) 1.14 - (16.06) 84.37
Telesp Participacoes, S.A. 481.12 - 75.87 (16.66) 1.73 - (131.00) 411.06
Telefonica Moviles, S.A. 238.93 - 121.55 (4.33) 6.60 - (57.29) 305.46
Group 3G UMTS Holding,
GmbH(Note 1) (382.44) - - - - - - (382.44)
Endemol Entertainment
Holding, N.V. 1.97 4.12 1.74 (0.05) (0.52) - (0.98) 6.28
Telefonica Moviles
Argentina, S.A. (11.72) - 1.65 0.35 0.01 - - (9.71)
Telefonica Centroamerica
Guatemala, S.A. 0.12 - (0.01) (0.02) - - - 0.09
Movitel del Noroeste, S.A. (0.30) - (1.47) (0.64) 4.05 - - 1.64
Telefonica Finance USA 2,000.00 - 83.69 - 0.46 - (84.15) 2,000.00
Telefonica Moviles
Mexico, S.A. 133.25 - (42.40) (20.59) 0.02 - - 70.28
Brasilcel (Participaciones) 252.05 142.06 21.88 2.63 (25.97) - (4.67) 387.98
Antena 3 Television, S.A. - 240.38 4.01 - - (244.39) - -
Other companies 24.82 3.50 (6.03) 0.45 12.42) (0.40) - 9.92
------------------------------------------------------------------------------------------------------------------------------------
Total 5,612.93 396.06 245.49 (60.87) (5.52) (1,452.21) (309.66) 4,426.22
------------------------------------------------------------------------------------------------------------------------------------
E-64
Telefonica
--------------------------------------------------------------------------------
EXHIBIT V
---------
Debentures and bonds
The detail of the debentures and bonds outstanding as of December 31, 2004, and
of the main features thereof is as follows (in millions of euros):
------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity
----------------------------------------------------------------
Telefonica and instrumentality Subsequent
companies Currency Rate (%) 2005 2006 2007 2008 2009 Years Total
------------------------------------------------------------------------------------------------------------------------------------
Debentures and bonds:
FEBRUARY 1990 SERIES B EUR 12.60 8.22 - - - - - 8.22
FEBRUARY 1990 SERIES C EUR 12.60 - - - - - 3.76 3.76
FEBRUARY 1990 SERIES E EUR 12.85 75.39 - - - - - 75.39
FEBRUARY 1990 SERIES F EUR 12.58 - - - - - 8.15 8.15
DECEMBER 1990 EUR 13.58 715.45 - - - - - 715.45
APRIL 1999 EUR 4.50 - - - - 500.00 - 500.00
JUNE 1999 EUR 3.02 - - - - 300.00 - 300.00
JULY 1999 zero-coupon EUR 6.37 - - - - - 42.00 42.00
MARCH 2000 EUR 5.19(*) - - - - - 50.00 50.00
APRIL 2000 EUR 5.63 - - 500.00 - - - 500.00
------------------------------------------------------------------------------------------------------------------------------------
Debentures subtotal: 799.06 - 500.00 - 800.00 103.91 2,202.97
------------------------------------------------------------------------------------------------------------------------------------
MARCH 1998 EUR 4.84 - - - 420.71 - - 420.71
GLOBAL BOND USD 7.35 917.70 - - - - - 917.70
GLOBAL BOND USD 7.75 - - - - - 1,835.40 1,835.40
GLOBAL BOND USD 8.25 - - - - - 917.70 917.70
GLOBAL BOND EUR 6.13 1,000.00 - - - - - 1,000.00
EMTN ISSUE EUR 5.13 - 1,000.00 - - - - 1,000.00
EMTN ISSUE EUR 0.15 50.00 - - - - - 50.00
EMTN ISSUE EUR Eonia+0.47 100.00 - - - - - 100.00
EMTN ISSUE (Tranche A) EUR 5.13 - - - - - 1,500.00 1,500.00
EMTN ISSUE (Tranche B) EUR 5.88 - - - - - 500.00 500.00
EMTN ISSUE EUR BNPEONIA01+0.23 100.00 - - - - - 100.00
EMTN ISSUE EUR 3-m Euribor + 0.14 100.00 - - - - - 100.00
EMTN ISSUE EUR Eonia OIS+ 0.17 50.00 - - - - - 50.00
EMTN ISSUE EUR 3-m Euribor + 0.18 - 100.00 - - - - 100.00
EMTN ISSUE EUR 3-m Euribor + 0.18 - 200.00 - - - - 200.00
------------------------------------------------------------------------------------------------------------------------------------
Bond subtotal 2,317.70 1,300.00 - 420.71 - 4,753.10 8,791.51
------------------------------------------------------------------------------------------------------------------------------------
Total issues: 3,116.76 1,300.00 500.00 420.71 800.00 4,857.01 10,994.48
------------------------------------------------------------------------------------------------------------------------------------
(*) The interest rate used (which is floating and set annually) is that of a
10-year pound sterling interest rate swap multiplied by 1.0225.
E-65
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Foreign operators Interest Maturity
-----------------------------------------------------------------------------------------------------------------
Subsequent
Debentures and Bonds Currency Rate (%) 2005 2006 2007 2008 2009 Years Total
------------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds USD 7.63 - 36.42 - - - 36.42
Yankee Bonds USD 8.38 - 114.84 - - - 114.84
Series F UF 6.00 1.63 1.63 1.63 1.63 1.63 10.96 19.11
Series K 1998 UF 6.75 91.26 - - - - - 91.26
----------------------------------------- -------------------------------------------------------------------
CTC CHILE: 92.89 152.89 1.63 1.63 1.63 10.96 261.63
----------------------------------------- -------------------------------------------------------------------
Bonds 1st Program T. Peru (1) N.Sol VAC+6.94 - 25.29 - - - - 25.29
Bonds 1st Program T. Peru (2) N.Sol VAC+7.00 - - - - 11.00 - 11.00
Bonds 2nd Program T. Peru (3) N.Sol VAC+6.19 - 23.99 - - - - 23.99
Bonds 2nd Program T. Peru (5) N.Sol VAC+6.25 - - 2.92 - - 2.92
Bonds 2nd Program T. Peru (7 -Series A) USD 4.38 28.64 - - - - - 28.64
Bonds 2nd Program T. Peru (7 -Series B) USD 4.00 8.03 - - - - - 8.03
Bonos 2o. Programa T. Peru (8-Series A) N.Sol 6.50 16.78 - - - - - 16.78
Bonds 2nd Program T. Peru (8 -Series B) N.Sol 6.19 3.36 - - - - - 3.36
Bonds 2nd Program T. Peru (9) USD 2.44 16.67 - - - - - 16.67
Bonds 3rd Program T. Peru (1) N.Sol VAC+5.00 - - - - - 11.66 11.66
Bonds 3rd Program T. Peru (2 - Series A) N.Sol 5.31 - - 6.71 - - - 6.71
Bonds 3rd Program T. Peru (3) N.Sol 8.13 - - 6.71 - - - 6.71
6th Issue T. Peru Bonds N.Sol 5.19 15.66 - - - - - 15.66
7th Issue T. Peru Bonds N.Sol 7.94 - - - 14.14 - 14.14
8th Issue T. Peru Bonds USD 3.81 - - - - 12.37 - 12.37
9th Issue T. Peru Bonds USD 3.13 - - 15.52 - - - 15.52
-------------------------------------------------------------------
Telefonica del Peru: 89.14 49.28 31.86 14.14 23.37 219.45
------------------------------------------------------------------------------------------------------------------------------------
Marketable debentures USD 9.13 - - - 92.24 - - 92.24
Marketable debentures USD 9.88 - 52.40 - - - - 52.40
Marketable debentures USD 11.88 - - 136.96 2.32 - - 139.28
Marketable debentures USD 9.13 - - - - - 156.03 156.03
Marketable debentures ARS 10.38 - - - - - 0.02 0.02
Marketable debentures USD 8.85 - - - - - 98.85 98.85
Marketable debentures ARS 8.05 38.60 - - - - - 38.60
Marketable debentures ARS 8.25 31.88 - - - - - 31.88
Marketable debentures ARS BADLAR+2.4 (*) - 16.06 - - - - 16.06
----------------------------------------- -------------------------------------------------------------------
TASA 70.48 68.46 136.96 94.56 - 254.90 625.36
----------------------------------------- -------------------------------------------------------------------
Marketable debentures USD 9.75 - - 5.54 - - - 5.54
-------------------------------------------------------------------
Telefonica Holding Argentina - - 5.54 - - - 5.54
----------------------------------------- -------------------------------------------------------------------
Non-convertible bonds BRL 103.5% CDI - - - 414.87 - - 414.87
-------------------------------------------------------------------
TELESP - - - 414.87 - 414.87
----------------------------------------- -------------------------------------------------------------------
Non-convertible bonds BRL 104.4% CDI - - - 69.14 - 69.14
-------------------------------------------------------------------
Brasilcel - - - 69.14 - - 69.14
----------------------------------------- -------------------------------------------------------------------
Total issues: 252.51 270.63 175.99 594.34 25.00 277.52 1,595.99
----------------------------------------- -------------------------------------------------------------------
Consolidation adjustments (18.32) - - - - (18.32)
----------------------------------------- -------------------------------------------------------------------
Total Group issues 3,350.95 1,570.63 675.99 1,015.05 825.00 5,134.53 12,572.15
------------------------------------------------------------------------------------------------------------------------------------
The detail of the maturities and redemption values of the zero-coupon bonds and
debentures as of December 31, 2004, is as follows (in millions of euros):
-----------------------------------------------------------------------------------------------------------------------
Zero-coupon Bonds and Debentures
(Issue value + Accrued Interest at
12/31/04) Redemption Date Redemption Book Value Redemption
-----------------------------------------------------------------------------------------------------------------------
DEBENTURES
FEBRUARY 1990 SERIES E 02/26/05 613.214% 75.39 76.79
FEBRUARY 1990 SERIES F 02/26/10 1,071.719% 8.15 15.04
DECEMBER 1990 12/28/05 675.000% 715.45 811.37
JULY 1999 07/21/29 637.634% 42.00 191.29
-----------------------------------------------------------------------------------------------------------------------
Total issues 840.99 1,049.49
-----------------------------------------------------------------------------------------------------------------------
E-66
Telefonica
--------------------------------------------------------------------------------
EXHIBIT VI
----------
The detail, by type of derivative, of the notional values of the derivatives
arranged by the Group as of December 31, 2004, is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions
----------------------------------------------------------------------------------------------------
Type of Risk Group Receives Group Pays
-------------------------------------------------------------------------------
Equivalent
Euro Value Value Currency Value Currency
------------------------------------------------------------------------------------------------------------------------------------
Euro interest rate swaps 13,788.03
-from fixed to floating 2,184.34 2,184.34 EUR 2,184.34 EUR
-from floating to fixed 10,276.17 10,276.17 EUR 10,276.17 EUR
-from floating to floating 1,327.52 1,327.52 EUR 1,327.52 EUR
Cross-currency swaps 2,639.35
-from fixed to floating 1,234.86
USD/USD 1,234.86 1,682.00 USD 1,682.00 USD
-from floating to fixed 1,404.49
USD/USD 815.53 1,110.84 USD 1,110.84 USD
BRL/BRL 398.14 2,240.00 BRL 1,439.50 BRL
MXN/MXN 190.82 2,927.89 MXN 2,927.89 MXN
Currency swaps 8,414.03
-from fixed to fixed 2,944.23
EUR/CLP 265.86 267.27 EUR 201,848.65 CLP
EUR/USD 96.12 125.13 EUR 130.92 USD
JPY/USD 47.48 6,741.65 JPY 64.67 USD
USD/EUR 2,519.25 2,334.85 USD 2,519.26 EUR
USD/PEN 15.52 20.00 USD 69.39 PEN
-from fixed to floating 1,289.47
EUR/USD 27.17 30.60 EUR 37.01 USD
EUR/BRL 16.86 16.56 EUR 60.95 BRL
EUR/CLP 16.09 16.49 EUR 12,217.00 CLP
JPY/BRL 94.04 12,573.05 JPY 340.00 BRL
USD/EUR 531.40 543.83 USD 531.40 EUR
USD/BRL 603.91 764.83 USD 2,183.51 BRL
-from floating to fixed 864.53
EUR/BRL 79.70 96.99 EUR 288.17 BRL
EUR/MAD 31.09 33.76 EUR 349.09 MAD
USD/ARS 89.57 125.00 USD 363.45 ARS
USD/BRL 47.63 140.00 USD 172.20 BRL
USD/CLP 64.20 80.36 USD 48,745.31 CLP
USD/COP 120.47 156.26 USD 392,123.65 COP
USD/PEN 260.26 336.00 USD 1,163.45 PEN
USD/MXN 22.71 34.29 USD 348.46 MXN
USD/UFC 148.90 200.00 USD 6.53 UFC
-from floating to floating 3,315.80
EUR/USD 812.69 994.77 EUR 1,106.96 USD
EUR/CLP 14.02 14.39 EUR 10,645.55 CLP
JPY/BRL 203.77 24,802.08 JPY 736.76 BRL
USD/EUR 2,011.58 2,024.63 USD 2,011.58 EUR
USD/MXN 273.74 416.00 USD 4,200.17 MXN
Forwards 3,548.68
USD/ARS 90.76 120.00 USD 368.26 ARS
ARS/USD 25.26 107.31 ARS 34.41 USD
USD/BRL 86.79 111.07 USD 313.78 BRL
USD/CLP 462.55 574.19 USD 351,184.61 CLP
CLP/USD 90.30 71,768.51 CLP 123.00 USD
USD/COP 158.57 195.00 USD 516,145.00 COP
USD/EUR 1,431.07 1,862.95 USD 1,431.08 EUR
EUR/USD 534.53 560.93 EUR 728.08 USD
USD/MXN 21.03 28.40 USD 322.68 MXN
USD/PEN 138.43 176.98 USD 618.85 PEN
USD/UFC 411.16 500.10 USD 18.02 UFC
UFC/USD 98.23 UFC 133.80 USD
---------------------- --------------- ---------------------- ------------------
Subtotal 28,390.09
----------------------------------------------
E-67
Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Notional amounts of structured products with options Euros Notional Value
------------------------------------------------------------------------------------------------------
Interest rate options 8,000.81
-Caps & Floors 7,842.14
US DOLLAR 972.77 1,325.00 USD
EURO CURRENCY 6,869.38 6,869.38 EUR
-Swaptions 79.33
EURO CURRENCY 79.33 - EUR
-Interest rate options 79.33 - EUR
Currency options 2,033.33
USD/EUR 1,833.93 2,498.00 USD
USD/ARS 199.40 271.60 USD
------------------------------------------------------------------------------------------------------
Equity options 235.47
------------------------------------------------------------------
Subtotal 10,269.61
------------------------------------------------------------------
Total 38,659.70
------------------------------------------------------------------
Note: The equity option position basically includes call spread positions on 3
million shares of treasury stock with average exercise prices of (euro)12.62 and
(euro)13.82 and call options bought on 5 million shares of treasury stock with
an exercise price of (euro)13.52.
The detail, by type of derivative, of the notional values of the derivatives
arranged by the Group as of December 31, 2003, is as follows:
---------------------------------------------------------------------------------------------------------------------------
Millions
----------------------------------------------------------------------------------------
Type of Risk Group Receives Group Pays
-----------------------------------------------------------------------
Equivalent
Euro Value Value Currency Value Currency
---------------------------------------------------------------------------------------------------------------------------
Euro interest rate swaps 6,479.85
-from fixed to floating 1,422.22 1,422.22 EUR 1,422.22 EUR
-from floating to fixed 4,075.18 4,075.18 EUR 4,075.18 EUR
-from floating to floating EUR EUR
Cross-currency swaps 4,460.87
-from fixed to floating 2,984.39
USD/USD 2,984.39 3,769.29 USD 3,769.29 USD
-from floating to fixed 1,476.48
USD/USD 855.11 1,080.00 USD 1,080.00 USD
BRL/BRL 304.19 1,110.00 BRL 1,110.00 BRL
GBP/GBP 113.51 80.00 GBP GBP
MXN/MXN 203.67 2,890.25 MXN 2,890.25 MXN
Currency swaps 11,319.65
-from fixed to fixed 2,163.92
EUR/USD 104.67 126.41 EUR USD
JPY/USD 59.08 7,778.82 JPY USD
USD/EUR 2,000.17 1,847.46 USD 2,000.17 EUR
-from fixed to floating 1,741.87
EUR/USD 86.05 - EUR USD
-
EUR/BRL 24.92 - EUR BRL
JPY/EUR 56.95 6,200.00 JPY 56.95 EUR
JPY/BRL 84.20 11,890.82 JPY BRL
USD/EUR 531.40 - USD EUR
USD/BRL 958.35 1,247.28 USD 3,497.07 BRL
-from floating to fixed 1,274.97
EUR/BRL 78.97 - EUR BRL
EUR/MAD 31.49 - EUR MAD
USD/EUR 874.97 - USD EUR
827.73
USD/BRL 95.72 - USD BRL
290.00
USD/PEN 167.64 - USD PEN
USD/MXN 26.18 - USD MXN
-from floating to floating 6,138.89
EUR/USD 1,027.35 1,191,84 EUR 1,297.54 USD
EUR/GBP 283.77 - EUR GBP
EUR/BRL 138.21 - EUR BRL
208.02
JPY/BRL 242.29 29,762.50 JPY 884.11 BRL
USD/EUR 4,147.02 4,015.89 USD 4,147.02 EUR
USD/MXN 300.25 421.63 USD 4,260.89 MXN
Forwards 1,378.52
---------------------------------------------------------------------------------------------------------------------------
E-68
Telefonica
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Millions
---------------------------------------------------------------------------------------------------------------------------
Type of Risk Equivalent Euro Group Receives Group Pays
Value
---------------------------------------------------------------------------------------------------------------------------
Value Currency Value Currency
---------------------------------------------------------------------------------------------------------------------------
USD/EUR 215.07 265.21 USD 215.07 EUR
EUR/USD 31.73 40.28 EUR 40.08 USD
USD/ARS 41.24 50.18 USD 152.62 ARS
USD/CLP 83.69 91.00 USD 62,760.91 CLP
USD/UFC 839.60 928.48 USD 37.21 UFC
PEN/USD 7.92 34.91 PEN 10.00 USD
USD/PEN 159.27 193.50 USD 696.80 PEN
---------------------------------------------------------------------------------------------------------------------------
Equity swaps 323.95
---------------------------------------------------
Subtotal 23,962.84
---------------------------------------------------
-------------------------------------------------------------------------------------------------------
Notional amounts of structured products with options Euros Notional Amount
-------------------------------------------------------------------------------------------------------
Interest rate options 2,401.39
-Caps & Floors 2,242.72
US DOLLAR 158.35 200.00 USD
EURO CURRENCY 2,084.37 2,084.37 EUR
-Swaptions 79.33
EURO CURRENCY 79.33 79.33 EUR
-Interest rate options 79.33 79.33 EUR
Currency options 3,837.43
USD/ARS 59.38 75.00 USD
EUR/USD 1,150.00 1,150.00 EUR
USD/EUR 2,126.48 2,685.75 USD
EUR/MXN 243.02 243.02 EUR
USD/BRL 241.25 304.70 USD
EUR/BRL 17.30 17.30 BRL
------------------------------------------------------------------------------------------------------
Equity options 713.63
------------------------------------------------------------------
Subtotal 6,952.45
------------------------------------------------------------------
Total 30,915.29
------------------------------------------------------------------
Note The equity option position basically relates to call options bought on 33
million shares of treasury stock with an average exercise price of (euro)11.43.
Also, there are combinations of call options bought at (euro)11.02, call options
sold at (euro)12.07 and put options sold at (euro)10.56 with a total positive
delta of 4.7 million shares.
E-69
Telefonica
--------------------------------------------------------------------------------
The detail, by maturity, of the hedging transactions arranged as of December 31,
2004, is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------------------------------------------------------
Up to From 1 to From 3 to 5 Over
Amount 1 Year 3 Years Years 5 Years
----------------------------------------------------------------------------------------------------------------------------------
With underlying instruments
----------------------------------------------------------------------------------------------------------------------------------
Loans 21,994.44 10,174.36 3,286.41 5,931.31 2,602.36
In national currency 17,129.34 8,680.72 2,036.06 4,368.77 2,043.79
In foreign currencies 4,865.10 1,493.64 1,250.35 1,562.54 558.57
MTN debentures and bonds 10,847.78 3,490.80 600.00 1,794.15 4,962.83
In national currency 5,032.34 1,400.00 600.00 1,441.49 1,590.85
In foreign currencies 5,815.44 2,090.80 - 352.66 3,371.98
Preferred shares 5,582.01 5,561.91 20.10 - -
Currency options 2,033.33 2,033.33 - - -
Forward 3,548.68 3,528.58 20.10 - -
Shares 235.47 235.47 - - -
----------------------------------------------------------------------------------------------------------------------------------
Total 38,659.70 19,462.53 3,906.52 7,725.46 7,565.18
----------------------------------------------------------------------------------------------------------------------------------
Note: The equity option position basically includes call spread positions on 3
million shares of treasury stock with average exercise prices of (euro)12.62 and
(euro)13.82 and call options bought on 5 million shares of treasury stock with
an exercise price of (euro)13.52.
The detail, by maturity, of the hedging transactions arranged as of December 31,
2003, is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of euros
------------------------------------------------------------------------------------------------
Up to From 1 to From 3 to 5 Over
Amount 1 Year 3 Years Years 5 Years
------------------------------------------------------------------------------------------------------------------------------------
With underlying instruments
------------------------------------------------------------------------------------------------------------------------------------
Loans 19,447.86 8,653.82 4,022.45 3,660.52 3,111.07
In national currency 8,206.08 3,819.97 817.86 2,832.91 735.34
In foreign currencies 11,241.78 4,833.85 3,204.59 827.61 2,375.73
MTN debentures and bonds 4,603.66 1,892.29 935.86 142.52 1,632.99
In national currency 605.82 2.12 - - 603.70
In foreign currencies 3,997.84 1,890.17 935.86 142.52 1,029.29
Preferred shares 1,500.00 - - - 1,500.00
In national currency 1,500.00 - - - 1,500.00
Other assets and liabilities 4,326.18 4,266.57 31.81 27.80 -
Swaps 467.64 408.03 31.81 27.80 -
Currency options 3,837.43 3,837.43 - - -
Forward 21.11 21.11 - - -
Subtotal 29,877.70 14,812.68 4,990.12 3,830.84 6,244.06
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Shares 1,037.58 1,037.58 - - -
Swaps 323.95 323.95 - - -
Equity options 713.63 713.63 - - -
------------------------------------------------------------------------------------------------------------------------------------
Total 30,915.28 15,850.26 4,990.26 3,830.84 6,244.06
------------------------------------------------------------------------------------------------------------------------------------
Note: The equity option position basically relates to call options bought on 33
million shares of treasury stock with an average exercise price of (euro)11.43.
Also, there are combinations of call options bought at (euro)11.02, call
options sold at (euro)12.07 and put options sold at (euro)10.56 with a total
positive delta of 4.7 million shares.
E-70
Telefonica
--------------------------------------------------------------------------------
CONSOLIDATED MANAGEMENT REPORT OF THE TELEFONICA GROUP
2004
Initial summary
The Telefonica Group's earnings increased in 2004 as a result of the significant
commercial drive in all lines of business, making it possible to successfully
face up to stiffer competition and to strengthen its position in the strategic
markets where it has a presence.
In this regard, operating revenues grew by 6.8% with respect to the previous
year, or 8.3% in adjusted terms1. The increase in expenses was a reflection of
the Group's major commercial drive to extend and consolidate its customer base,
both in the wireless telephony business and in the broadband market in Spain and
Latin America. EBITDA2 rose by 4.9% in the year (adjusted growth of 6.0%),
which, combined with the lower depreciation and amortization expense due to the
containment of investments in recent years, gave rise to a 14.3% increase in
operating income. The rise in operating income and the positive trend in
non-operating results enabled the Group to report net income of (euro)2,877.3
million, as compared with (euro)2,203.6 million in 2003, representing
year-on-year growth of 30.6%.
The process of rationalizing and optimizing investments in property, plant and
equipment and in intangible assets continued in 2004. Period additions of assets
of this nature amounted to (euro)3,768.1 million, up 1.7% on the figure for
2003. This growth was due basically to the investments made in the wireless
telephony business to improve the capacity and coverage of the networks in Latin
America and to develop UMTS technology in Spain, and to the capital expenditure
for the roll-out of ADSL, both in Spain and Latin America. However, at Group
level the ratio of investments in property, plant and equipment and intangible
assets to operating revenues fell from 13% in 2003 to 12.4% at 2004 year-end.
The Telefonica Group had to manage its businesses against a difficult backdrop
characterized by the slowdown in the growth of the traditional services, the
poor economic situation in certain of the countries in which it operates, the
stiffer competition and certain unfavorable decisions taken by the regulator. In
order to address this situation, Telefonica focused its management priorities on
its customers, making them the central linchpin of the Company's strategy. The
implementation of a more commercial, customer-oriented corporate model entailed
a process of transformation at the Telefonica Group towards a more flexible
means of managing the businesses, which enabled the Group to achieve greater
operating efficiency and to make more efficient use of resources.
This strategy enabled Telefonica to maintain a prominent position in the
industry, where it leads the Spanish- and Portuguese-speaking wireline and
wireless telephony markets, with more than 118 million customers, to enjoy a
solid financial position with a significant level of cash flow generation and to
earn a place among the leading European operators in terms of stock market
capitalization.
---------
1 Adjusted variation: eliminates the impact of exchange rate fluctuations and
variations in the scope of consolidation.
2 EBITDA: operating income before depreciation and amortization.
E-71
Telefonica
--------------------------------------------------------------------------------
Also, the success of this strategy made it possible for Telefonica to strengthen
its commitment to its stockholder remuneration policy, improving the returns on
the Company's shares. In this regard, the dividend approved by the Stockholders'
Meeting for 2003 was (euro)0.40 per share (as compared with the (euro)0.25 paid
the previous year), and for 2004, the Board of Directors, at its meeting on
January 26, 2005, resolved to propose to the Stockholders' Meeting that a
dividend of (euro)0.50 per share be paid, which represents a 25% increase with
respect to the 2003 dividend. As part of this strategy, on November 24, 2004,
the Board of Directors resolved to propose to the Stockholders' Meeting that
shares of treasury stock of Telefonica S.A. be distributed among the
stockholders, in the proportion of one share for every 25 shares owned by them,
with a charge to additional paid-in capital.
The Telefonica Group's main objective for the future is to become the best and
biggest integrated telecommunications group in the world, for which purpose it
will embark on a transformation process based on three main pillars: customers,
innovation and operating excellence. As regards the first of these three
pillars, Telefonica will attempt to amplify its customer base by building up
customer loyalty and increasing the share of the disposable income of its
customers received by it. Also, Telefonica aims to extend innovation to the
various processes in the value chain, including the commercial area. Lastly, the
Group's efforts in relation to operating excellence will focus on maintaining
its position of leadership by implementing a policy targeted at maximizing
efficiency and quality.
Organization by business line
The new organizational model, the implementation of which commenced in 2003, was
fully in place in 2004. The new model has simplified the lines of business in
order to achieve an organization that places greater emphasis on the key
businesses and has a more flexible asset and cost structure.
In this regard, in 2004 the integration of the Telefonica Empresas business
(Data, TIWS and Soluciones) into the wireline telephony businesses in both Spain
and Latin America was fully operational. Telefonica de Espana assumed the
business of Telefonica Empresas Espana and Telefonica Soluciones, and Telefonica
Latinoamerica included under its management the Telefonica Empresas business in
Latin America and the TIWS business.
The management comments included in this report are presented and refer to the
financial trend of the Telefonica Group based on its organizational structure by
line of business in place in 2004.
It should be noted that the assumptions used in preparing these comments on the
organization by line of business do not in any way alter the total results
obtained by the Telefonica Group.
Customers
At 2004 year-end the Telefonica Group had 118.1 million managed customers, an
increase of 26.4% with respect to the previous year.
Telefonica Moviles, which had 74.4 million managed customers, as compared with
52 million at 2003 year-end, consolidated its position as one of the industry's
leading operators. This figure includes the customer base contributed by the
eight BellSouth operators acquired in October 2004 (11 million customers). The
total customer base, including the BellSouth operators acquired in Argentina and
Chile, the purchase of which was clinched in 2005, would be 78.2 million
customers.
In Spain, Telefonica Moviles retained its market leadership with a total of 18.9
million customers, following a significant customer base clean-up operation in
April 2004, which affected 1.3 million inactive prepaid SIM cards. The most
notable development in Latin
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America was the substantial growth of the Brazilian market in which VIVO
maintained its positioning through a good performance in the attraction of new
customers, finishing the year with 26.5 million customers. Telefonica Moviles
Mexico confirmed its position as the second-largest operator in the market, with
5.6 million customers, as compared with 3.5 million in December 2003.
As regards the wireline telephony business, at 2004 year-end Telefonica de
Espana was managing 17.3 million traditional lines and Telefonica Latinoamerica
was managing 21.4 million, representing year-on-year growth of 2.5%, prompted
mainly by the upward trend of the number of lines at TASA and Telefonica del
Peru.
In the ADSL broadband market, the Group had more than 3.9 million connections,
as compared with 2.5 million in 2003; this growth was due mainly to the net gain
of 830,000 in Spain in 2004 to 2.5 million connections, and to Brazil, which
ended the year with 826,000 lines. This market is expanding basically as a
result of Telefonica's firm commitment to this business, to which it is devoting
a considerable commercial effort and a sizeable portion of its investments, and
for which specific services and content are being developed.
The broadband market in Spain experienced dynamic growth in the last quarter of
the year, boosted by the innovative and revolutionary commercial measures
adopted by Telefonica de Espana, which led to an increase in the quality of the
services provided and to a customized product offering adapted to the needs of
each customer. These measures included most notably the doubling of the access
speed of all Telefonica de Espana's ADSL connections, at no additional cost for
users, the new "ADSL to suit you" proposal including a rate system adapted to
the needs of each customer, and the combined offer of personal computers and
Internet connection at special prices.
In addition, in an attempt to maintain its position at the forefront of the ADSL
industry, the Group launched the Imagenio Project which, harnessing the roll-out
of ADSL and with a view to encouraging the use of broadband services, enables
customers to select, a la carte, their own personal product offering. With this
technological support customers can simultaneously receive high-definition
television, a la carte video and music, high-speed Internet access, and
telephone, fax messenger and video conference services.
Noteworthy with regard to the broadband market were the retail resale
connections relating to T.Deutschland, which totaled nearly half a million users
at 2004 year-end.
To conclude, it should be noted that the Group also has over 400,000
pay-per-view television customers, relating mostly to Cable Magico in Peru.
International expansion
In 2004 the Telefonica Group consolidated its position as a long-term investor
in Latin America, thereby contributing to the economic and social development of
the region. The most notable event in 2004 was the acquisition of BellSouth's
wireless operators by Telefonica Moviles as part of this Group company's
profitable growth policy.
The agreement for the purchase of BellSouth's ten wireless telephony operators
was entered into in March 2004. In October 2004 Telefonica Moviles completed the
acquisition of all the shares of the wireless telephony operators in Ecuador,
Guatemala, Panama, Venezuela, Colombia, Peru, Nicaragua and Uruguay. Subsequent
to year-end, in January 2005, the acquisition of the Chilean and Argentine
operators was concluded.
As a result of this transaction, Telefonica consolidated its leading position in
the region, strengthening its presence in certain key countries in which it
already operated (Argentina, Chile and Peru), where it expects to achieve
significant synergies, and, at the same time, it secured a
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significant position in high-growth markets in which it was not previously
present (Venezuela, Colombia, Ecuador and Uruguay) and attained a substantial
critical mass in Central America (Guatemala, El Salvador, Panama and Nicaragua).
Other relevant matters
In 2004 Terra Networks modified its corporate structure and made a series of
divestments, most notably the sale of the ownership interest held by it in
Lycos, Inc., its aim being to become a nimbler, more flexible organization
oriented toward the obtainment of maximum customer satisfaction. To this end, on
October 5, 2004, Terra Networks, S.A. executed the agreement entered into by it
on July 31, 2004, with the Korean company Daum Communications, Corp., whereby
Terra sold to the latter all its shares of Lycos, Inc.
Prior to this sale, Lycos, Inc. transferred a series of assets to Terra
Networks, S.A., including the holdings in Lycos Europe, Terra Networks USA and
LLP (a company engaging in the exploitation of the portal for Spanish-speaking
people in the United States) and other financial assets. The book value of the
transferred assets was (euro)332.9 million.
The sale price of Lycos, Inc., following the transfer of the aforementioned
assets, was set at US$ 108 million, and the transaction gave rise to a gain of
(euro)26 million.
Also worthy of mention, as part of the Group's firm commitment to Brazil, was
the acquisition in December 2004 of the Brazilian operator Atrium Telecom by
Telesp for (euro)31 million. Atrium Telecom engages in the provision of
corporate telecommunications services, in particular in buildings used for
commercial activities and by the financial services industry, through the
installation in such buildings of internal telecommunications infrastructures,
which it subsequently links up to the operators' networks.
With a view to strengthening its strategic alliance with Portugal Telecom,
Telefonica increased its direct ownership interest in this company's capital
stock to 8.55%. The Telefonica Group now has an effective direct and indirect
holding in Portugal Telecom of 9.58%.
Lastly, work continued in 2004 on the construction of Telefonica's Ciudad de las
Telecomunicaciones, the Group's new headquarters in Madrid (District C), a
project which entails the implementation of a new work philosophy based on
horizontality and open spaces. District C, whose design is the result of the
quest for maximum respect for the environment and for savings in energy and
maintenance costs, will be the springboard for the Group's change to a new
teamwork culture.
Regulatory environment
In 2004 the European Commission continued to develop the regulatory framework
for the telecommunications market and approved, inter alia, the Document on
Application of Remedies (obligations) and the X Report of the European
Commission on the implementation of the Regulatory Framework.
In Spain, following the change of government, the General Telecommunications Law
(LGT) was implemented and approval was given to the regulations governing
benchmark markets for networks and services, the obligations applicable to
operators with significant influence in the market, network access and
numbering.
Wireline telephony rates continued to evolve as envisaged under the price-cap
system currently in place: a 4.35% rise was applied to the monthly line rental
charge and a 2% reduction to all services.
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Telefonica de Espana modified the terms of its Local Loop Offer, establishing a
7.9% reduction in the monthly loop rental charge, a 14% reduction in the shared
access charge, and an increase in the connection charges for these services.
2004 witnessed heightened activity in broadband services and Telefonica de
Espana submitted to the regulator various offers and commercial packages for
ADSL and Imagenio. Several of these packages were authorized by the Spanish
Telecommunications Market Commission (CMT), provided they can be replicated by
competitors, whereas others are under analysis or are being modified by
Telefonica.
With regard to the Universal Service provided by Telefonica de Espana, the CMT
considered that although the provision of this service had represented a net
cost of (euro)110.1 million in 2002, it was not necessary to record a Universal
Service Financing Fund. All current TRAC customers have been given the option of
functional Internet access, and Telefonica de Espana has thus complied with the
provisions of the Law on Information Society Services and Electronic Commerce.
In the wireless telephony business, the CMT, in keeping with developments in
other countries, promoted further reductions in the prices for the termination
of calls in the wireless networks, and the Ministry of Industry approved the
modification of the operators' UMTS commitments to bring them into line with the
current situation.
Noteworthy in Latin America as a whole were the authorizations received from the
various regulatory bodies, which made it possible for Telefonica Moviles to
complete its acquisition of the BellSouth operators, a transaction which in
certain countries was conditional upon the post-merger company disposing of a
portion of the radio spectrum.
In Argentina, in May 2004 Telefonica and the Argentine government signed a
memorandum of understanding which established the freezing of basic telephony
rates through December 31, 2004, and the implementation of social plans, and
ratified the stability of the contracts for tax purposes. The Public Emergency
Law was extended to cover the period through December 2005, as a result of which
the Executive's exceptional powers were maintained, and the period in which the
government can renegotiate its contracts was extended through that same date.
2004 brought a rate readjustment in wireline telephony in Brazil, which gave
rise to an average increase of 15.99%. Also, the Brazilian regulatory and
antitrust authorities approved the joint venture of Telefonica Moviles and
Portugal Telecom.
In Chile, the new wireline telephony ratemaking framework for 2004-2009, which
will be applied retroactively from May 5, 2004, is currently pending completion,
whereas the new wireless telephony ratemaking framework for the same period came
into force in 2004. In February 2004 the regulations governing rate flexibility
were approved, thus permitting the launch of specific plans for various customer
segments. No decision has yet been handed down on the appeal filed by the Group
against the Chilean Ministry of Economy and Finance in connection with the
1999-2004 Rate Decree.
In Peru, a new productivity factor applicable to the wireline telephony rate
review mechanism was approved. This mechanism will remain in force through
August 2007. On June 9, 2004, the Ministry officially notified Telefonica of its
decision not to renew the Concession Contract for an additional five-year
period, thus limiting to 2019 the term of Telefonica de Peru's operating
license.
Share performance
For the second consecutive year, the international stock markets recorded rises,
with overall appreciation of over or close to 10%, underpinned by solid economic
growth and two-digit
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increases in corporate earnings. Against this backdrop, the
Telefonica share price rose by 19.1% in 2004, nearly double the gain recorded by
the European telecommunications industry (11.9%).
This sound Telefonica share performance was due to several factors, including
most notably the successful combination of growth and profitability, the steady
progress made in operations, the attractive stockholder remuneration policy, the
improved trend in 2004 in the Latin-American economy, the Group's robust
financial position and the favorable opinion of the main investment banks. At
2004 year-end, the stock-market capitalization of the Telefonica Group amounted
to (euro)68,689 million (US$ 93,097 million), placing it in fourth place in the
world ranking of telecommunications operators, superseded only by Vodafone
((euro)131,059 million), Verizon ((euro)82,761 million) and Deutsche Telekom
((euro)69,893 million).
INFORMATION ON THE LINES OF BUSINESS
Wireline telephony in Spain
In 2004 the results of the Telefonica de Espana Group were obtained within the
framework of a new corporate structure, following the inclusion of the
management and earnings of Telefonica Data Espana and Telefonica Soluciones in
the Parent Company, Telefonica de Espana.
The operating revenues of the Telefonica de Espana Group amounted to
(euro)10,955.8 million in 2004, representing growth of 2.4% with respect to the
previous year. The revenues of the Parent Company Telefonica de Espana
(Telefonica de Espana, Telefonica Data Espana, Telefonica Soluciones and
Telefonica Soluciones Sectoriales) totaled (euro)10,491.2 million, up 2.1% on
2003. This growth was due to the increased contribution of the Internet and
broadband business to total revenues, with year-on-year growth of 34.2%, which,
combined with the good performance of the wholesale and data and solutions
services, counterbalanced the decrease in the traditional services associated
with the voice business, the revenues of which fell by 2.5% with respect to the
figure for 2003.
The operating expenses of the Telefonica de Espana Group amounted to
(euro)6,019.0 million, a fall of 0.5% in year-on-year terms. This net decrease
arose chiefly as a result of the 9.3% reduction of personnel expenses due to
voluntary severances under the labor force reduction plan (ERE 2003-2007) and,
with an opposite effect, the increase in expenses relating to procurements and
outside work, supplies and services, which was a direct result of the Group's
commercial drive in 2004 and the substantial development of broadband services.
2,417 Telefonica de Espana employees left in 2004 under the 2004 labor force
reduction plan. By contrast, job creation focused on the commercial divisions
and on the strengthening of the Solutions business, resulting in a headcount of
35,045 people at the Parent Company Telefonica de Espana, 2,014 fewer than in
2003. The productivity ratio was 566.0 equivalent lines per employee (50.6 lines
per employee more than the previous year).
As of December 31, 2004, the Telefonica de Espana Group's EBITDA stood at
(euro)5,054.5 million, a year-on-year increase of 6.1%, giving rise to an EBITDA
margin of 46.1%, up 1.6 percentage points on the figure for 2003. At 2004
year-end, net income amounted to (euro)1,112.1 million.
Investments in property, plant and equipment and in intangible assets totaled
(euro)1,207.5 million, 18.4% less than in the previous year, evidencing the
Group's major drive to rationalize investments based on profitability and
optimization criteria.
In operating terms, the equivalent lines in service numbered to 19.8 million at
2004 year-end (year-on-year growth of 3.8%), due chiefly to the sound
performance of ADSL, which grew by 50%. Also, the loss of traditional lines (BTS
and ISDN Basic Access) slowed again in 2004 thanks to the drive to secure new
connections and to contain the number of disconnections.
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Preassigned lines totaled 2.4 million, virtually the same figure as that
recorded for the previous year.
At 2004 year-end, the number of loops leased by Telefonica de Espana's
competitors comprised over 78,000 fully unbundled lines and 37,700 shared lines,
the highest growth being shown by the latter option.
The volume of traffic through the network totaled 123,000 million minutes in
2004, down by 6.7% from 2003. Outgoing voice traffic fell by 10.9% and there was
a sharp reduction in the number of minutes used for Internet access due to
cannibalization by the ADSL broadband services. By contrast, incoming traffic
increased with respect to 2003.
In 2004 the Group launched a major commercial drive aimed at slowing the fall in
voice services. Particularly successful in this connection were the free
connection campaigns (238,000 connection requests) and the so-called combined
plans (planes combinados) - an offer integrating the monthly line rental charge
with flat- and semi-flat rates for voice consumption - which, since their launch
at the end of 2003, have resulted in the subscription of 1.1 million plans.
The Internet and broadband services, spearheaded by the commercial roll-out of
ADSL and backed by the campaign launched in October and November to double
access speed, contributed highly substantial results to the Group. The good
performance of the ADSL services is reflected by the 2.5 million connections
achieved by Telefonica de Espana at 2004 year-end, of which 1.6 million relate
to retail ADSL. In addition, in order to facilitate the expansion of this
service, new "ADSL a tu medida (ADSL to suit you)" access formats were launched,
which make it possible to respond to customers' needs in a more flexible manner.
The services providing added value to the retail ADSL offering are experiencing
strong growth, with nearly 1.2 million services marketed to date.
A milestone in the Group's efforts to foster the development of broadband
services was the launch at the end of 2004 of Imagenio, a service which enables
users to simultaneously receive high-definition television, a la carte video and
music, high-speed Internet access, and telephone, fax messenger and video
conference facilities.
Lastly, notable developments in 2004 in the Data and Solutions business were the
migrations from traditional technologies to IP-ADSL, the ramp-up of systems
outsourcing services and the growth in management and solutions services.
Telefonica Latinoamerica
Management of the Telefonica Latinoamerica Group was conditioned in 2004 by the
10.1% fall of the U.S. dollar with respect to the euro, which triggered the
depreciation of all Latin-American currencies against the euro.
The Group's operating revenues amounted to (euro)6,883.4 million at 2004
year-end, representing 2.1% growth with respect to the previous year.
Disregarding the exchange rate effect, the year-on-year growth would be 7.5%,
attributable mainly to Telesp and TASA. By contrast, the Chilean wireline
operator reported a drop in revenues at year-end due to the strong competition
from wireless telephony, and Telefonica del Peru's revenues fell as a result of
the rate reduction.
At 2004 year-end, EBITDA amounted to (euro)3,141.0 million, up 1.3% on 2003
(6.8% disregarding the exchange rate effect). Net income rose by 44.4% from
(euro)558.5 million in 2003 to (euro)806.6 million.
The investments in property, plant and equipment and in intangible assets, which
totaled (euro)769.2 million, included most significantly the investments made in
broadband technology.
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At 2004 year-end, Telefonica Latinoamerica was managing a total of 21.4 million
wireline telephony lines, 2.5% more than in 2003, due mainly to the increase in
the number of lines managed at TASA and Telefonica del Peru. The growth recorded
at the Argentine subsidiary hit an all-time high in 2004, influenced by the
clean-up of lines at the end of 2003 and burgeoning demand in 2004. At
Telefonica del Peru there was a 9.5% increase in the number of lines due to the
positive impact of the new rate plans.
As regards the broadband market, Telefonica Latinoamerica maintained its
aggressive policy aimed at expanding its business through ADSL technology and
surpassed the figure of 1.4 million users, an increase of 84.7% with respect to
2003.
In 2004 Telefonica Latinoamerica continued to adapt its operators to the new
competitive environment by outsourcing activities. Noteworthy in this connection
was the year-end headcount of 25,905 employees, including most notably the 4.7%
reduction at Telefonica del Peru following the severance plan implemented in the
course of the year.
The most salient matters relating to each operator are as follows:
In 2004 Telesp continued to implement its ADSL expansion plan and at year-end
had 826,400 users, signifying year-on-year growth of 70.6%. The number of
traditional lines in service totaled 12.5 million, up 1.3% on the figure for
December 2003, due to the launch of new products targeting lower-consumption
segments. Once again in 2004, Telesp improved its long-distance market shares,
achieving 88.5% in the Intrastate Domestic Long-Distance market, 58.4% in the
Interstate market and 51% in the International Long-Distance market.
Keeping the focus of its management efforts on achieving increased productivity,
Telesp recorded a lines/employee ratio of 1,865, 4.1% higher than in 2003.
Following the labor force restructuring process carried out last year, the
number of employees remained stable in 2004.
The operator reported a 14.9% increase in operating revenues in 2004, due to the
growth of its ADSL customer portfolio, the rate increase and the sound
performance of the new businesses (SMP, long-distance from Sao Paulo and
wireline-wireless traffic). However, expenses also rose as a result of a higher
volume of business and the increase in contract prices, which are largely
indexed to inflation. The good performance of revenues was reflected in Telesp's
EBITDA, which grew by 7.4% with respect to 2003.
TASA, in the wake of the severe crisis that beset Argentina in 2002,
consolidated in 2004 the recovery that had commenced in 2003. This recovery is
reflected in the good performance of line demand which, together with the
decrease in disconnections following the clean-up of the existing lines in 2003,
enabled TASA to increase the number of lines in service by 3.8% to 4.3 million.
The significant increase (9.9%) in total traffic was due to a large extent to
the rise in prepaid traffic. TASA also continued with the major expansion of its
ADSL business, which grew exponentially in 2004 to reach nearly 190,000 lines,
thus bolstering its position as market leader.
The upward trend in the main operating parameters enabled TASA to achieve a
10.6% year-on-year increase in total revenues, despite the fact that rates had
been frozen since January 2002. In addition, the operator continued to implement
the cost rationalization and control policy adopted following the 2002 crisis,
as a result of which it reported 11.2% EBITDA growth. A notable development in
2004 was the effective management of bad debts, achieved mainly through the
launch of prepaid and consumption control products. Lastly, TASA increased
productivity, its lines/employee ratio rising by 5.5% in the year to 558 lines.
CTC's earnings were hit (revenues fell by 6.2%) by the substantial growth of the
wireless market, which resulted in a severe cannibalization of the wireline
telephony business, and by lower wireline-wireless rates. Although traffic
figures fell considerably, the number of lines in
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service grew by 0.4% to 2.4 million, boosted by the launch of the "minutes
plans" following the approval of rate flexibility. In the prepaid business, CTC
continued to launch new products and services that are better adapted to the
needs and profiles of its customers. The cost containment policies, which proved
to be the order of the day in 2004, made it possible to keep the fall in EBITDA
in check (-3,6%). Broadband users, one of the main sources of business, numbered
over 200,000 in 2004, enabling CTC to retain its position as market leader.
Telefonica del Peru continued to market the rate plans launched by it in March
2003 in response to the draft bill for the elimination of the basic monthly
subscription charge (this bill was subsequently adjudged to be
unconstitutional). It ended the year with 639,770 migrations and 576,146 new
connections; consequently, at 2004 year-end the number of lines under plans
accounted for 50.4% of total lines, as compared with 36.6% in 2003. Once more in
2004, the long-distance business was hit by aggressive competition, which led to
a significant reduction of the average rate, and by the requirement established
by the regulatory body to provide customer information to the other
long-distance operators. Broadband performed well throughout the year, doubling
the number of users to more than 205,000 lines. Although operating revenues fell
by 1.1%, EBITDA grew by 0.9% as a result of the cost containment policy.
Telefonica Empresas America (TEA), which focuses its activities on the corporate
segment, is present in Brazil, Argentina, Chile, Peru, Colombia, Mexico and the
United States. In 2004 it consolidated its improved efficiency, which was
accompanied by solid growth. Operating revenues amounted to (euro)467.7 million,
up 5.4% on 2003 (11.2% disregarding the exchange rate effect). EBITDA grew by
71.5% (79% before the exchange rate effect) to (euro)54.3 million.
In 2004 TIWS made further progress toward achieving profitability and growth,
ending the year with EBITDA of (euro)50.1 million, as compared with (euro)17.8
million in 2003. This improvement was underpinned by increased revenues, which
totaled (euro)158.0 million (representing 21.2% growth in constant currency
terms), accompanied by an optimization of resources, which led to a decrease of
2.4% in operating expenses.
Cellular telephony
As mentioned earlier in the "International Expansion" section, the most notable
development in 2004 was the acquisition of BellSouth's ten wireless telephony
operators in Latin America (the related agreement was entered into in March
2004, and the acquisitions were completed in October 2004 and January 2005). As
a result, Telefonica Moviles consolidated its leading position in the region,
strengthening its presence in certain key countries in which it already operated
(Argentina, Chile and Peru), and, at the same time, secured a significant
position in high-growth markets in which it was not previously present
(Venezuela, Colombia, Ecuador and Uruguay) and attained a substantial critical
mass in Central America (Guatemala, El Salvador, Panama and Nicaragua).
The operating revenues of the wireless telephony business amounted to
(euro)12,054.1 million, up 15.6% on 2003. The adjusted year-on-year variation,
assuming constant exchange rates and excluding changes in the scope of
consolidation, would be an increase of 12.8%, due mainly to the growth of the
customer base.
By geographical area, the operating revenues of Telefonica Moviles in Spain rose
by 9.3%, boosted by 12% growth in traffic. Data ARPU (average monthly revenue
per user) was (euro)4.3, featuring an increased contribution from GPRS services
(mainly connectivity with Internet and Intranet access, content, downloading of
games and applications). Operating revenues in Latin America showed year-on-year
growth of 33.4% (22.8% in adjusted terms), due mainly to the sharp increase in
the number of lines in Mexico and Argentina.
Operating expenses amounted to (euro)7,381.9 million, up 25.5% on 2003. In
Spain, Telefonica Moviles incurred higher expenses for procurements (more
commercial measures and increased
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expenses for interconnection with other wireless operators) and outside services
(advertising and terminal support expenses). Similarly, in Latin America there
was a rise in procurements and outside services expenses due to the increased
commercial activity in Mexico, Argentina and Brazil.
EBITDA rose by 3.8% from (euro)4,581.9 million in 2003 to (euro)4,755.0 million
in 2004. Adjusted EBITDA growth would be 2.0%. Operations in Spain accounted for
88.4% of the EBITDA of the wireless telephony business, 6.6% more than in 2003.
Adjusted EBITDA from operations in Latin America would be down 2.8% on the
figure for 2003, due to higher losses in Mexico and the lower EBITDA in
Argentina resulting from the increase in commercial activity.
At 2004 year-end, net income amounted to (euro)1,620.4 million, up 1.6% on 2003.
Investments in property, plant and equipment and in intangible assets in the
wireless business totaled (euro)1,665.2 million, up 26.4% on 2003. This rise in
expenditure was due mainly to increased investment, both in Brazil (to deploy an
enhanced version of the CDMA network and to increase its capacity and coverage),
in Argentina (to develop the GSM network) and in Spain (investment in the UMTS
network).
In operational terms, the number of customers managed increased by over 22.4
million, representing year-on-year growth of over 43%, due mainly to the
acquisition of the BellSouth operators. The Group ended 2004 with more than 74
million customers managed, as compared with the 52 million at 2003 year-end.
Telefonica Moviles Espana has 18.9 million customers and a 48.5% market share.
In view of the increasing trend in the Spanish market for second lines and
shared lines to ultimately become inactive, and in order to more accurately
monitor the basic ratios of the business and the actual contribution of
customers to the generation of revenues, Telefonica Moviles Espana decided,
effective from April 1, 2004, to exclude 1.3 million inactive prepaid SIM cards
from the calculation of its declared number of lines.
As of December 31, 2004, Vivo had 26.5 million customers in Brazil, 28.5% more
than in December 2003, with an estimated average market share in its areas of
operations of 50.9%. Telefonica Moviles Mexico clearly strengthened its
competitive position, increasing its number of clients from 3.5 million in 2003
to 5.6 million in 2004, and attaining a market share of 14.5%, as compared with
11.2 % in December 2003.
The eight BellSouth operators whose acquisition was completed in October totaled
11 million customers at 2004 year-end. The number of customers of the BellSouth
operators in Argentina and Chile, the acquisition of which was completed in
January 2005, was 3.8 million.
The Spanish market was characterized by increasing maturity and a significant
change in the competitive environment, featuring strong commercial pressure from
the other two operators, in particular in the area of portability, which
prompted Telefonica Moviles Espana (TME) to step up its commercial drive in
terms of both customer attraction and loyalty-building. TME focused its efforts
on higher-value and high-growth potential segments, thus enabling it to maintain
its leading position in the Spanish market.
In May 2004 Telefonica Moviles Espana commenced marketing of the first UMTS
videotelephony services to appear in the Spanish market. At the same time, it
opened up the possibilities of its wireless connectivity service "Oficin@
MoviStar UMTS/GPRS" (launched in November 2003) to the residential market. At
the end of 2004, TME, with 3,800 base stations, was spearheading the deployment
of UMTS technology in Spain.
The behavior of the main Latin-American markets was highly dynamic in 2004, the
result of increasing competitive pressure and the stability of the region's
macroeconomic environment,
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which led to a significant rise in business activity and to solid year-on-year
growth in the number of customers.
Particularly noteworthy in this connection is the substantial expansion of the
Brazilian market, in which Vivo still ranks as market leader despite the growing
commercial aggressiveness of its competitors. Also worthy of mention is the
investment made by Vivo to increase the capacity of its networks in response to
the greater demand resulting from growth in its customer base and to enable it
to evolve toward an enhanced version of its current CDMA network.
In Mexico, Telefonica Moviles made significant progress in both the enhancement
of the capillarity and efficiency of its distribution channel and the deployment
of its GSM network, whose coverage as of December 2004 reached a population
representing 77% of the country's GDP. Also, in the second half of the year
Telefonica Moviles Mexico announced the implementation of EDGE technology in its
GSM network, as a result of which it can offer the most advanced broadband
wireless service in the Mexican market, thus confirming its position as Mexico's
second operator.
The marked dynamism witnessed in other markets such as Argentina and Chile was
triggered by heightened commercial activity by all the operators and the
deployment of GSM networks. Thus, as of December 2004, Telefonica Moviles had
3.4 million customers in Argentina and 3.3 million in Chile.
Internet
In 2004 the Terra Networks Group's operating revenues amounted to (euro)539
million: 44% related to access subscriptions, 23% to communications, portal and
content services, 22% to advertising and e-commerce and the remaining 11% to
other revenues. Revenues, which were affected by the change in the scope of
consolidation following the sale of the shares of Lycos, Inc. in early October
2004, fell by 1.1% with respect to 2003. Disregarding this effect and the impact
of exchange rate fluctuations, the growth of the Group's revenues would have
been 8%.
Noteworthy as regards access was the extension and improvement of the broadband
services, in particular the doubling of the access speed of the ADSL service in
both Spain and the Latin-American countries. In Spain, the Group's commercial
drive focused on the sale of the 14-hour "ADSL Home" and the 24-hour "ADSL Plus"
products. The ADSL business also experienced significant growth in Brazil, where
the Group continues to head the market with a market share of over 50%.
The cost containment drive, which led to a steady improvement in earnings, made
it possible to record positive EBITDA in all four quarters, and the Group
finished the year with EBIDTA of (euro)21 million.
As of December 31, 2004, the Terra Networks Group had 6.3 million pay
subscribers (including both access and value-added services), an increase of 25%
with respect to the previous year. Total pay access subscribers numbered 1.8
million, 9% more than the figure for 2003 year-end. Worthy of mention is the 66%
increase in broadband (mainly ADSL) customers to 1.1 million, of which 68%
relate to Brazil, 18% to Spain and 12% to Chile. Value-added service customers
grew by 33% to 4.5 million, 3.2 million of which are customers obtained from the
alliance with Telefonica.
The Group reported net income of (euro)164 million in 2004, as compared with a
net loss of (euro)173 million in 2003.
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Directories
At 2004 year-end, the earnings of the directories line of business set up by the
TPI Group and Telinver (the Group's subsidiary in the directories business in
Argentina) showed a substantial improvement on those for the previous year.
Operating revenues amounted to (euro)628.1 million, representing growth of 6.6%
(7.7% excluding the exchange rate effect). This increase was obtained mainly in
Spain, where both the traditional directories business and the telephone
information business performed well. This, combined with the containment of
costs, made it possible to report EBITDA of (euro)215.2 million, up 16.9% on
2003 (17.8% disregarding the exchange rate effect). Net income amounted to
(euro)112.6 million, 26.9% higher than in 2003.
The advertising business contributes 86% of TPI's total revenues. Although
relatively speaking the most significant business is publishing, other lines are
steadily gaining in importance, above all the Internet, which already accounts
for 6.0% of advertising revenues. A notable feature of 2004 was the good
performance of the telephone business, which consolidated its position following
the launch in Spain in 2003 of the 11888 service, achieving growth of 94.8% in
telephone traffic revenues.
TPI's strategy is based on three main concepts:
* Endeavor to achieve innovation in both new businesses and the launch of new
products. Examples of this in Spain are the consolidation in the telephone
information market, the launch of the first Hospitality Guide and the
publication of six new pocket guides (which are already published in 15
different locations). Furthermore, once the viability of the initiatives
developed in Spain has been analyzed, they are exported to Latin America.
As regards process innovation, work is currently under way on the implementation
of a CRM (Customer Relationship Management) system in the commercial area. This
system will enable TPI to gain a better knowledge of its advertisers and to
adapt its product offering to suit their needs. In addition, a project is being
carried out to optimize the Group's production systems by combining production
of the publishing product in two centers, one in Spain and another in Latin
America.
* Eminently commercial organization focusing on building customer royalty and
attracting new advertisers: over 70% of the labor force perform duties of a
commercial nature. Spain has an extensive sales force devoted to the traditional
businesses and other teams of employees specializing in the sale of new products
and services. In Latin America, a similar commercial organization and similar
work procedures have gradually been implemented, without overlooking the
idiosyncrasies of each country.
* Achievement of excellence in its activities with a view to obtaining increased
returns on the traditional lines and consolidating the new businesses.
Call centers
In 2004 the Atento Group's operating revenues amounted to (euro)611.7 million,
an increase of 24.1% with respect to 2003 (28.4% disregarding the exchange rate
effect), due to the burgeoning growth of business, mainly in Spain, Brazil and
Mexico, and to the sound trend of the transactions with BBVA following its entry
into Atento's stockholder structure. Spain and Brazil continue to account for
the highest proportion of the Atento Group's revenues, contributing 39% and 32%,
respectively. It should also be noted that the percentage contribution of
non-Telefonica Group customers to Atento's total revenues continued to increase
(44% in 2004 compared with 39% in 2003).
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Atento continues to focus on the search for higher value-added services to
enable it to differentiate its offering from those of its competitors, featuring
recognized quality processes that will lead it to obtained improved margins.
The Atento Group's operating expenses rose by 22.2% due mainly to the increase
in operations. However, the ratio of operating expenses to revenues fell by 1.2
percentage points to 85.2% as of December 31, 2004. This behavior was the result
of the cost control drive launched in 2003, mainly with respect to overheads,
which led to an increase in the ratio of tele-operator personnel to general line
personnel from 32.5% in 2003 to 34.5% at 2004 year-end. This, combined with the
good progress of operations, gave rise to EBITDA of (euro)90.8 million, up 36.6%
on the figure for 2003 (44.3% disregarding the exchange rate effect).
This consolidation of its operations enabled the Atento Group, for the first
time since its formation, to report net income of (euro)18.2 million in 2004.
At 2004 year-end Atento had a network of over 40 call centers, with 30,566
customer service stations and a total headcount of 74,829 employees, signifying
the creation of 20,500 jobs in 2004.
The salient events in 2004 included the consolidation of transactions with BBVA
following its entry into Atento's stockholder structure, the increase in
operating income despite the highly aggressive price scenario, and the provision
of services to customers on a supranational scale.
Media and Content
In 2004 this line of business continued with the policy of divestment of
non-strategic assets first implemented in 2003. In this connection, Telefonica
de Contenidos sold the ownership interests held by it in the movie producer
Lolafilms, the Venezuelan record company Rodven, the UK Pearson Group and the
thematic channel producer Mediapark. It also entered into agreements for the
sale of the Argentine radio networks Radio Continental and Radio Estereo, which
are conditional upon approval by the Federal Radio and Television Commission.
At 2004 year-end, the consolidated operating revenues of the media and content
business units totaled (euro)1,219.1 million, a fall of 11.6% compared with the
(euro)1,378.5 million recorded at 2003 year-end. EBITDA amounted to (euro)182.6
million, down 13.2% on the figure for 2003. This decrease was due chiefly to the
change in the scope of consolidation, since the ownership interest held by the
Group in Antena 3 was fully consolidated for the first six months of 2003 (until
the sale to the Planeta Group of a 25% holding). The contribution of Antena 3 to
2003 consolidated revenues and EBITDA was (euro)309.8 million and (euro)51
million, respectively. The effect of this reduction in the consolidated Group
was partially offset by the good earnings performance of Endemol and ATCO.
The Endemol Group reported revenues of (euro)1,033.7 million in 2004,
representing growth of 13.1%. EBITDA amounted to (euro)180.9 million, up 9.9% on
2003. This sound performance was achieved solely through organic growth, mainly
in the more competitive markets such as the U.S. and the U.K., where Endemol
increased its billings significantly.
The Endemol Group is continuing to implement its revenue diversification policy,
both geographically and in terms of formats. Accordingly, it commenced
operations in new markets such as Chile, where in 2004 it operated for the first
time through one of its subsidiaries, and it increased its ownership interests
in Palomar (Italy) and Southern Star (Australia). In addition, it is continuing
to invest a portion of its funds in the development of various formats that can
be exploited in on different platforms (such as development of Java-format
games, merchandising, telephone calls, SMS messages and the marketing of content
on the Internet).
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ATCO also displayed a significantly improved earnings performance with respect
to the previous year. Revenues totaled (euro)90.5 million, representing growth
of 38%, disregarding the exchange rate effect, and EBITDA amounted to (euro)14.8
million, as compared with the (euro)4.9 million recorded at 2003-year end.
Earnings
Consolidated income
When analyzing the year-on-year variations, it should be noted that they are
affected by the changes in the scope of consolidation, the most significant of
which were as follows: in 2003, the exclusions of Antena 3 (effective from July
2003), Atento Japan (June 2003) and Euroleague (November 2003) and the
inclusions of TCO (from May 2003), POSA (November 2003) and One Travel (April
2003); and, in 2004, the exclusions of Lycos (October 2004) and Lola Films
(August 2004) and the inclusion of eight of the BellSouth operators, effective
November 1.
The operating revenues of the Telefonica Group amounted to (euro)30,321.9
million, representing a year-on-year increase of 6.8%. This growth is a
reflection of the solid operating performance and the sustained expansion of the
customer base resulting from the commercial drive, which was stepped up in 2004
in all lines of business. This upward trend in revenues offset the increased
operating expenses associated with the commercial drive, giving rise to EBITDA
of (euro)13,215.4 million, up 4.9% on 2003.
Operating income grew by 14.3% as a result of the aforementioned rise in EBITDA
and of the 4.7% reduction in the depreciation and amortization expense, affected
by the containment of investments in recent years as part of the Group's policy
of reducing the volume of assets in order to simplify the Group's production
structure and increase the profitability of its businesses.
The net share in the losses of associated companies, which amounted to
(euro)56.1 million, was due mainly to the exclusion from consolidation in 2003
of the holdings in Via Digital and Audio Visual Sport, and to the reduction in
the loss incurred by Medi Telecom.
The net financial loss for the year amounted to (euro)1,183.8 million. As
indicated below, if this financial result is considered net of the effect of the
appreciation of the Argentine peso and of the repayment in 2003 of the debt
denominated in U.S. dollars, the period expense in this connection is reduced by
19.8%.
The goodwill amortization expense in 2004 was similar in overall terms to that
recorded in the previous year ((euro)433.5 million in 2004 compared with
(euro)444.1 million in 2003). The increases in the goodwill amortization balance
in 2004 relate most notably to the increase in 2004 in the holding in Portugal
Telecom, to the acquisition of the Bellsouth operators and to the investment in
Sogecable acquired in 2003 that was held throughout 2004. The most noteworthy
decreases in goodwill amortization in 2004 with respect to 2003 relate to the
effect of the sale of the holding in Lycos in 2004 and of that in Antena 3 de
Television in 2003, and to the allocation to intangible assets at 2003 year-end
of the goodwill that arose on the ownership interest in Telefonica Moviles
Mexico.
The net extraordinary loss in 2004, which amounted to (euro)1,165.7 million
(6.7% less than in 2003), included most notably the effect of the early
amortization of goodwill ((euro)111.1 million) and the period preretirement and
retirement provisions recorded at the Group as a whole ((euro)908.0 million).
The positive trend in operating and nonoperating earnings enabled the Group to
report net income of (euro)2,877.3 million, representing year-on-year growth of
30.6%.
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Revenues
Operating revenues amounted to (euro)31,177.9 million, up 6.7% on 2003.
By item, net sales and services, which accounted for more than 97% of total
operating revenues, amounted to (euro)30,321.9 million, with year-on-year growth
of 6.8%, or 8.3% in adjusted terms3. The greatest contributions to consolidated
operating revenues were made by the Wireless Business (35%), the Telefonica de
Espana Group (34%) and Telefonica Latinoamerica (22%).
The operating revenues of the Wireless Business amounted to (euro)12,054.1
million, up 15.6% on 2003 (12.8% in adjusted terms), due to increased handset
sales resulting from the growth in the customer base and to higher service
revenues. Spain accounted for 68% of revenues and Latin America for the
remaining 32%.
The operating revenues of the Telefonica de Espana Group totaled (euro)10,955.8
million, 2.4% higher than in 2003, due to the sound performance of wholesale and
retail broadband services, which offset the fall in voice traffic revenues.
Operating revenues at Telefonica Latinoamerica amounted to (euro)6,883.4
million, up 2.1% on 2003 (7.5% at constant exchange rates). This growth is
mainly attributable, at Telesp, to the development of the broadband services and
the rate increase and, at TASA, to the pick-up in demand and improved operating
variables. Telefonica Empresas America, which strengthened and consolidated its
market position in 2004, also contributed to revenue growth.
Expenses
Operating expenses amounted to (euro)17,962.5 million, with year-on-year growth
of 8.1% (adjusted growth of 9.8%), due mainly to the performance of the Wireless
Business, in which commercial activity was intense in 2004.
Procurement expenses grew by 17.4% with respect to 2003 year-end to reach
(euro)7,525.7 million. This increase was chiefly attributable to the rise in
wireless handset purchases resulting from heightened commercial activity, to
higher interconnection expenses at Spanish and Latin-American wireline telephony
operators, and to the increase in purchases of equipment for the deployment of
ADSL services.
Outside services expenses totaled (euro)5,082.5 million, 11.5% higher than in
2003. 2004 was characterized by the intense commercial activity of all the
Telefonica Group's lines of business, most notably the Wireless Business, whose
expenses rose sharply due to the funds invested by it in attracting new
customers and in building the loyalty of its existing customer portfolio. With
regard to the wireline operators, the rise in outside services expenses related
mainly to increased commercial deployment and to higher line maintenance costs
resulting from the expansion of the ADSL service.
The Group's personnel expenses totaled (euro)4,411.8 million, a decrease of 4.9%
with respect to 2003, influenced by the Telefonica de Espana labor force
reduction plan for 2004, which affected 2,417 employees. As of December 31,
2004, the Telefonica Group's headcount was 173,554 employees, 17% higher than
that of the preceding year, due mainly to the increase in operations at Atento,
which led to the creation of 20,500 jobs, and to the inclusion in December 2004
of the personnel of the BellSouth cellular operators, which had a headcount of
7,000 employees.
Noteworthy in connection with the other operating expenses was the significant
decrease in the
---------
3 Adjusted variation: eliminates the impact of exchange rate fluctuations and
variations in the scope of consolidation.
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period provision for bad debts in 2004 as a result of the greater control
exercised over delinquency in Spain and Latin America.
EBITDA and Operating income
As a result of the aforementioned variations in revenues and expenses, EBITDA
amounted to (euro)13,215.4 million at 2004 year-end, a 4.9% increase with
respect to 2003, representing adjusted growth of 6.0%.
Consolidated operating income stood at (euro)7,235.2 million, up 14.3% on the
figure for 2003 (15.5% adjusted growth). This substantial year-on-year increase
arose as a result of the growth in Ebitda and the good performance of the
depreciation and amortization expense, which fell by 4.7%, due mainly to
investment rationalization.
Investment activity
In 2004 the Telefonica Group recorded intangible asset and property, plant and
equipment additions of (euro)3,768.1 million, 1.7% more than in 2003. This
growth was due basically to the increased investment drive in the Wireless
Business and Telefonica Latinoamerica. The largest increase in expenditure was
that of the wireless telephony business, which had to make greater investments
both in Brazil, to evolve toward an enhanced version of the CDMA network and to
increase its capacity and coverage; in Spain, to invest in the UMTS network; and
in Argentina and Mexico, to deploy the GSM network.
Investments at Telefonica Latinoamerica rose in 2004, principally at TASA and
Telefonica del Peru, mainly as a result of the increased expenditure required to
deploy the broadband services.
In 2004 Telefonica de Espana continued to implement the policy of shifting the
Company's focus toward broadband by stepping up the deployment of ADSL
technology and devoting greater resources to the growing Internet and multimedia
businesses, without neglecting the needs of its traditional business. Despite
the investment drive in broadband, the reduction of unit costs and the
rationalization of investments (re-use of vacant infrastructure, process
redesign, etc.) enabled Telefonica de Espana to significantly reduce its
investments with respect to 2003.
The investment rationalization and optimization drive launched in recent years
at the Group's other lines of business continued in 2004.
Investments in property, plant and equipment totaled (euro)3,174.1 million,
representing an increase of 9.5%, whereas those in intangible assets amounted to
(euro)594.1 million, a fall of 26.3% with respect to 2003.
Long-term investments, which amounted to (euro)157.5 million, included most
notably the increase in the holding in Portugal Telecom.
Innovation and R&D
The Telefonica Group regards innovation as one of the pillars on which its
future transformation will be based. This strategy underlines the role of
innovation as a key tool with which the Group can attain a sustainable
competitive edge, such as the ability to preempt market trends and to
differentiate its products, by introducing new technologies in the new products
and services it develops and by including Communication and Information
Technologies (CITs) in its business processes. The ultimate aim pursued is to
become a more effective, efficient, flexible and customer-oriented enterprise.
To this end, Telefonica has established a New Technological Innovation Model,
which, implemented through Telefonica I+D, lays the foundations for the closer
alignment of technological innovation with the Group's strategy. The New Model
also promotes cooperation
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with other Group stakeholders, which will become its "technological allies"
(customers, public authorities, suppliers, business allies, etc.).
In 2004 Telefonica invested (euro)2,398 million in technological innovation.
Within the framework of its investment rationalization process, Telefonica
continues to increase each year the percentage of investments targeted at new
businesses.
As regards the means of obtaining innovative solutions, Telefonica continues to
consider that achieving the differentiation of its products with respect to its
competitors and a better market positioning cannot be based solely on acquired
technology. It is necessary to foster in-house research and development
activities to guarantee this differentiation and to drive forward other
innovation activities. In 2004 the Telefonica Group's investments in R&D
activities amounted to (euro)461 million (1.5% of its revenues).
Most of the R&D activities are undertaken by Telefonica Investigacion y
Desarrollo, a wholly-owned investee of Telefonica, which works principally for
the Group's lines of business. In performing its functions, it receives the
assistance of other companies and universities. The driving force behind the
Group's innovation, Telefonica I+D has the two-fold task of developing the
solutions that Telefonica requires and identifying the emerging technological
options that could have a significant impact on its businesses.
In 2004 Telefonica I+D formed a new company in Mexico to share, together with
Telefonica Pesquisa e Desenvolvimento, a Telefonica I+D subsidiary based in Sao
Paulo, the mission of supporting the technological innovation of the Group
companies operating in Latin America. In addition, Telefonica has embarked upon
the creation of a new R&D center in Andalusia, which will supplement the
activities currently being performed at the centers in Barcelona, Huesca, Madrid
and Valladolid.
The R&D projects undertaken in 2004 by the Telefonica Group targeted profitable
innovation, process efficiency, the creation of new sources of revenues,
customer satisfaction, the consolidation of the new markets and technological
leadership. These projects have played a central role in Telefonica's strategy
to create value - through broadband communications and services and wireless
data and multimedia services that harness the emerging potential of both UMTS
and the latest wireless handsets- and to develop and enhance commercial
management systems and networks and services.
Also, in 2004 the Group conducted applied R&D activities, aimed more at the
medium and long term, in order to detect, understand, develop and apply - using
advisory services, strategic studies, technological monitoring activities and
experimental development projects- any issues, particular features,
opportunities and above all technologies that will have an effect on the future
performance of the Group's various lines of business. These applied R&D
activities, which involve extensive participation in European R&D projects
promoted and financed in part by the EU, constitute the main reason why
Telefonica is the foremost Spanish company in terms of participation in projects
of this kind.
Financial earnings
Net financial expenses totaled (euro)1,183.8 million in 2004, including a loss
of (euro)10.6 million due to the depreciation of the Argentine peso.
Disregarding this effect, the financial loss for 2004 amounted to (euro)1,173.2
million, down 19.8% on the comparable figure for 2003 ((euro)1,462.6 million),
which does not include the gains of (euro)134.4 million and (euro)267.5 million,
respectively, resulting from the appreciation of the Argentine peso and from the
repayment of the debt denominated in U.S. dollars, events which occurred in
2003.
The free cash flow generated by the Telefonica Group in 2004 amounted to
(euro)6,507.0 million, of which (euro)1,924.2 million were used for the payment
of dividends by Telefonica S.A., (euro)5,534.5
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million were earmarked for financial investments (net of real estate
divestments) and (euro)697.2 million were used to settle commitments acquired by
the Group, derived mainly from the labor force reduction plans. Consequently,
the free cash flow after dividends, which to a large extent explains the
increase in the net financial debt, amounted to (euro)1,648.9 million.
Financing
The Telefonica Group's net debt rose by (euro)1,746.9 million from
(euro)19,235.3 million at 2003 year-end to (euro)20,982.2 million as of December
31, 2004. This increase was largely attributable to the free cash flow after
dividends of (euro)1,648.8 million. Also, the net debt increased by (euro)321.4
million due to variations in the scope of consolidation and other effects on
financial accounts; however, this rise was largely offset by a reduction of
(euro)223.4 million due to the impact of exchange rate fluctuations on the debt
not denominated in euros.
The main financing transactions in 2004 were as follows:
On July 6, 2004, Telefonica arranged a syndicated loan of (euro)3,000 million
with several Spanish and foreign banks. This syndicated loan matures in five
years (on July 6, 2009) and bears interest of EURIBOR/LIBOR plus a spread that
will be based on the Company's credit rating. The commitments and obligations of
the parties are those ordinarily assumed in syndicated financing transactions.
Banco Bilbao Vizcaya Argentaria, S.A. and Caja de Ahorros y Pensiones de
Barcelona ("La Caixa") acted, together with other institutions, as underwriters
and lead managers.
Also in July 2004, Telefonica Europe B.V. revalued the EMTN programme
(registered on the London Stock Exchange with a limit of (euro)10,000 million).
On October 15, Telesp formalized a local bond program with a limit of 3,000
million Brazilian reais. This program, which is valid for a period of two years
from that date, provides for the issue, up to the aforementioned amount, of
commercial paper and local bonds, maturing at any date, with interest in reais
at fixed rates, floating rates (CDI) or rates tied to other indices, for example
inflation (GPI - M or CPI - A). On October 28, a first tranche of 1,500 million
reais was used which, bearing interest at a floating rate (103.5% CDI), matures
on September 1, 2010.
On November 26, 2004, Telefonica, S.A. and several branches of ABN Amro Bank
N.V. entered into a credit facility agreement amounting to US$ 377.08 million,
secured by the export credit agencies of Finland ("Finnvera") and Sweden
("EKN"), bearing fixed interest of 3.26% and with final maturity on November 15,
2010. This financing will cover up to 85% of the purchases of network equipment
to be made by Telefonica Moviles Group companies from Ericsson and Nokia.
At the beginning of December, CTC Chile completed a public offering for the
repurchase of its two series of Yankee bonds, for a final amount of US$ 182
million, thereby not only reducing its level of indebtedness by this amount but
also decreasing its financial expenses in view of the high interest rate offered
on these bonds with respect to current market conditions in Chile.
Similarly, CTC Chile renegotiated a US$ 200 million syndicated loan from several
international banks, extending the maturity date to December 21, 2009, and
reducing the applicable interest rate from Libor plus a spread of 1.125% to
Libor plus a spread of 0.40%.
In 2004 Telefonica Europe continued to issue commercial paper under the ECP
(Euro Commercial Paper) program secured by Telefonica, S.A. It launched
short-term issues with maturities ranging from one week to 364 days. As of
December 31, 2004, the ending balance of the outstanding issues under this
program amounted to (euro)857.92 million (valued at issue price).
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Rating agencies
The credit ratings assigned to Telefonica's long-term debt by the main rating
agencies, which underwent no changes in 2004, are as follows: A3 with a stable
outlook from Moody's, a rating the Group has held since December 2, 2002; A
with a stable outlook, since February 5, 2002, from Standard and Poor's;
and, lastly, A with a stable outlook, since August 9, 2002, from Fitch Ibca. The
latest rating reviews performed by these agencies on March 8, 2004, July 9,
2004, and September 23, 2004, respectively, did not result in any changes to the
ratings.
Subsequent to year-end, on January 27, 2005, Standard and Poor's ratified
Telefonica's credit rating, albeit lowering the outlook classification from
stable to negative.
Agreements entered into subsequent to December 31, 2004
In the period from December 31, 2004, through the date of preparation of these
consolidated financial statements, the following events took place at the
Telefonica Group:
BellSouth
The acquisition of all the shares owned by BellSouth in the Chilean and
Argentine operators was performed on January 7 and January 11, 2005, thus
completing the purchase of the Latin American operators from BellSouth.
The acquisition of BellSouth's Chilean operators was formalized on January 7,
2005. The corporate value of these companies under the share purchase agreement
dated March 5, 2004, amounted to US$ 531.89 million. As a result of the
company's net debt at the time of acquisition, the final purchase price was US$
405.50 million.
The acquisition of the Argentine companies which belonged to the BellSouth group
was formalized on January 11, 2005. The agreed-upon corporate value of these
companies amounted to US$ 988.36 million and the price finally paid, after
deducting the company's net debt, was US$ 673.54 million.
The agreement entered into with BellSouth stipulates that, after the acquisition
of these companies, Telefonica Moviles will perform various procedures to
validate their cash and debt. If as a result of these procedures the debt and
cash figures used in the calculation of the final share price at the closing
date were found to be inaccurate, the purchase price could be increased or
reduced in order to reflect the difference disclosed. Accordingly, the
acquisition price might be adjusted slightly upwards or downwards as a result of
the cash and debt audit currently under way.
Restructuring of Telefonica Holding de Argentina, S.A.'s debt
Telefonica Holding de Argentina S.A. has a debt to its majority stockholder,
Telefonica Internacional, S.A., amounting to US$ 616 million of principal plus
interest. Telefonica Internacional, S.A. has stated its intention to partially
convert this loan into equity through a capital increase for an amount equal to
the principal and related interest accrued through the date of the Stockholders'
Meeting, translated to Argentine pesos at the closing buying exchange rate of
Banco de la Nacion Argentina on the business day immediately preceding the date
of the aforementioned Stockholders' Meeting (i.e. an amount of up to ARP 2,046
million), and through the issue at par of common registered class B shares of
ARP 1 par value each, carrying one voting right each, for the same amount as the
amount to be converted into equity. These shares will have the same dividend
rights as the other shares outstanding at the issue date. Accordingly, the Board
of Directors of Telefonica Holding de Argentina, S.A. resolved to hold a Special
Stockholders' Meeting on February 15, 2005, to adopt a resolution on the
aforementioned capital increase, which was approved at that Meeting.
E-89
Telefonica
--------------------------------------------------------------------------------
Capital increase at Telesp Celular Participacoes (TCP).
On October 8, 2004, TCP resolved to increase capital by approximately 2.05
million reais. Through this capital increase, which was completed on January 4,
2005, and was fully subscribed, Brasilcel increased its ownership interest from
65.12% to 65.70%.
Assignment of debt owed by Telinver S.A.
On January 3, 2005, Telinver S.A. entered into an assignment agreement with
Telefonica Internacional S.A. and Telefonica de Argentina S.A. whereby Telinver,
S.A. assigned its debt payable to Telefonica Internacional S.A. to Telefonica de
Argentina S.A., which now has a claim on Telinver, S.A. as a consideration for
the assigned debt. Telefonica de Argentina, S.A. has stated its intention to
convert a portion of this claim into equity for the purpose of balancing the net
worth position of Telinver, S.A.
MTN Program for the issuance of debt instruments (Telefonica Emisiones, S.A.U.)
Telefonica Emisiones, S.A.U., a subsidiary of Telefonica, S.A., has launched a
program for the issuance of debt instruments ("the Program") for up to a total
of (euro)15,000 million, the Prospectus for which was filed with the UK Listing
Authority and for which purpose the Dealership Agreement, the Issue and Paying
Agency Agreement, the Deed of Covenant, the Deed of Guarantee and the Master
Global Notes were formalized on February 4, 2005.
Under the Deed of Guarantee, the issues of debt instruments to be made by
Telefonica Emisiones, S.A.U. under the aforementioned Program shall be
irrevocably and unconditionally guaranteed by Telefonica, S.A.; all in
conformity with the resolutions adopted by Telefonica, S.A.'s Standing Committee
at its meeting on December 22, 2004
Merger by absorption of Terra Networks, S.A. into Telefonica, S.A.
On February 9, 2005, Telefonica, S.A.'s Standing Committee resolved to propose
to Terra Networks, S.A. the commencement of negotiations for the eventual merger
of the two companies.
The Boards of Directors of Telefonica, S.A. and Terra Networks, S.A. resolved at
their respective meetings held on February 23, 2005, to approve a plan for the
merger by absorption of Terra Networks, S.A. into Telefonica, S.A., through the
dissolution of the former and the transfer en bloc of all its assets and
liabilities to the latter, which will acquire, by way of universal succession,
all the rights and obligations of Terra Networks, S.A. The exchange ratio for
the shares of the companies to be merged was determined on the basis of the
actual net asset value of Telefonica, S.A. and Terra Networks, S.A. and as
follows: 2 shares of Telefonica, S.A. of (euro)1 par value each, for 9 shares of
Terra Networks, S.A. of (euro)2 par value each. The merger plan will be
submitted for approval by the respective Stockholders' Meetings.
Interim dividend out of 2004 income.
In accordance with the stockholder remuneration policy approved by the Company's
Board of Directors, and in conformity with the resolution adopted by the Board
on January 26, 2005, on February 23, 2005, the Board of Directors of Telefonica,
S.A., on the basis of the financial information furnished to it, resolved,
pursuant to Article 216 of the Spanish Corporations Law currently in force, to
distribute a fixed interim dividend out of 2004 income of (euro)0.23 gross per
share for the Company's outstanding shares carrying dividend rights, for a
maximum total amount of (euro)1,139.86. This interim dividend will be paid on
May 13, 2005.
E-90
Telefonica
--------------------------------------------------------------------------------
ACCOUNTING STATEMENT SUPPORTING THE DISTRIBUTION OF THE INTERIM DIVIDEND:
Millions
of Euros
---------------------------------------------------------------------
Income obtained in the period from January 1, 2004 1,301.40
to December 31, 2004
Mandatory appropriations to reserves (130.14)
Distributable income 1,171.26
Proposed interim dividend (maximum amount) 1,139.86
CASH POSITION:
As shown in the 2004 financial statements, which were prepared by the Board of
Directors on February 23, 2005, as of December 31, 2004, there was sufficient
liquidity for the distribution of the dividend. This liquidity also existed as
of January 31, 2005, as evidenced by the following statement of liquidity:
Funds available for distribution Millions
of Euros
---------------------------------------------------------------------
Cash 31.04
Unused credit 6,836.06
Proposed interim dividend (maximum amount) (1,139.86)
Difference 5,727.24
Dividend with a charge to additional paid-in capital
Also, in conformity with the resolution adopted by the Board of Directors on
January 26, 2005, the Company's Board resolved to propose to the next
Stockholders' Meeting that a fixed cash dividend of (euro)0.27 per share be
distributed with a charge to additional paid-in capital. This dividend will be
paid, subject to approval by the aforementioned Stockholders' Meeting and as
announced by the Company, on November 11, 2005.
Treasury stock
At the beginning of 2004 Telefonica held treasury stock representing 0.81787% of
capital stock, i.e. 40,532,869 shares with a book value of (euro)10.39 each,
giving a total of (euro)421.26 million and a par value of (euro)40.53 million.
In 2004 the Company acquired for consideration 166,712,310 shares of treasury
stock (representing 3.3639% of capital stock and with a par value of
(euro)166.71 million) at an average price of (euro)12.98 per share.
As a result, 207,245,179 shares (representing 4.18179% of capital stock) of
treasury stock were held at 2004 year-end, acquired at an average price of
(euro)11.83 per share, giving a total of (euro)2,542.31 million and a par value
of (euro)207.25 million. As indicated in Note 4-i, pursuant to current
accounting legislation, these shares of treasury stock were valued at their
underlying book value and, consequently, an allowance of (euro)1,762.13 million
was recorded.
E-91
IPSE 2000 S.p.A.
Financial Statements
A-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Ipse 2000 S.p.A.:
We have audited the accompanying balance sheet of Ipse 2000 S.p.A. (the
"Company" or "Ipse") as of December 31, 2002, and the related statements of
income and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America (US GAAS). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis for
our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2002, and the
results of its operations and cash flows for the year then ended in conformity
with the Italian regulations governing financial statements.
As discussed in the notes to the financial statements, the Company and Rete
Ferroviaria Italiana (RFI) have reached a settlement on March 2005, which is to
be formalized and executed no later than the first week of May 2005, regarding
the dispute that both parties had since November 27, 2003, when Ipse exercised
its withdrawal rights according to the agreement previously signed between them.
The effect of the settlement will be recorded as a loss of approximately 40
million Euros in Ipse's 2004 financial statements.
As discussed in the notes to the financial statements, on October 29, 2002, Ipse
notified the Ministry of Communications of its intention to relinquish its right
to be allocated and hold additional 2x5MHz spectrum. The Company, supported by
expert legal advice, did not consider that any formal acceptance by the Ministry
of Communications or the Telecommunications Authority was necessary. However,
the Italian authorities challenged this decision. As of the date of this
auditors' report this issue remains unsolved.
As discussed in the notes to the financial statements, in 2003 and 2004 the
Company decided to revise its strategy and prepared new business plans for which
the main assumptions are detailed in the notes to the financial statements. The
reasons for this change were the continuing slowdown in the main industrial
economies, changes in the financial markets and specific delays in the UMTS
market and the provisions of a set of EU directives enacted in 2003, which allow
so-called "spectrum trading" activities.
The main consequences of these changes, as discussed in the notes to the
financial statements, were the intention to become an operator subject to a
definitive transference of the Company's spectrum and the impairment of the UMTS
license by approximately EUR 2,073 million, as reflected by the financial
statement for fiscal year 2002.
A-2
Additionally as at June 30, 2004, the Company did not comply with the coverage
obligation set forth by article 8 of the terms and conditions of the UMTS
license. The Company is of the opinion that it is not required to fulfill the
original coverage obligation provided for by the UMTS license. However, as
indicated in the notes to the financial statements, the Italian authorities
disagreed with this opinion and have asked Ipse for the fulfillment of the
coverage obligation indicating that failure to comply with coverage obligations
may result in sanctions, up to and including the revocation of the License.
In September 2004, Ipse received expressions of interest for the acquisition of
a block of frequencies. At the same time, negotiations were initiated between
some of the Company's shareholders and third parties to sell 100% of Ipse's
equity. None of these potential transactions have occurred as of the date of
this auditors' report.
On June 30, 2004, we issued our auditors' report in accordance with auditing
standards generally accepted in Italy, as recommended by the Italian Regulatory
Commission for Companies and the Stock Exchange (Italian GAAS), on the financial
statements of Ipse for the year ended December 31, 2003, which were prepared in
conformity with the Italian regulations governing financial statements. Our
auditors' report under Italian GAAS for 2003 included matters similar to those
included in this auditors' report under US GAAS. Due to the possible effects of
the matters mentioned in those paragraphs, we disclaimed our opinion in
accordance with the requirements of Italian GAAS.
/s/ Deloitte & Touche S.p.A.
DELOITTE & TOUCHE S.p.A.
Roma, Italy
July 8, 2003 (April 10, 2005, as to Notes of "Subsequent events occurred between
July 8th 2003 and April 10, 2005" and "Summary of Principle GAAP Differences")
A-3
The Financial Statements have been extracted and translated into the English
language, from the Official Financial Statements filed with Italian
Authorities, and updated in order to consider subsequent events occurred
between July 8th 2002 and April 10, 2005.
No adjustments have been reported to the figures included in the financial
statements filed with the Italian Authorities
-------------------------------------------------------------------------------------------------
BALANCE SHEET - ASSETS 31.12.2003 31.12.2002 31.12.2001
----------------------------------------------------------
Unaudited(*) Unaudited (*)
-------------------------------------------------------------------------------------------------
(Euro)
A) UNPAID CALLED-UP SHARE CAPITAL - - -
B) FIXED ASSETS
I- Intangible fixed assets
1) start-up and expansion costs 25,141 50,282 75,423
2) research, development and
advertising expenses - - 1,642,523
3) industrial patents and intellectual
property rights 90,204 339,131 3,226,692
4) permits, licenses, trademarks and
similar rights 450,430,431 450,430,431 3,557,969,954
6) intangible fixed assets in
process and advances - - 39,051,270
7) other - 4,196,864 22,607,777
------------------------------------------
450,545,777 455,016,709 3,624,573,639
II- Tangible fixed assets
2) plant and machinery 496 319,488 16,908,660
3) industrial and commercial
equipment 7,528 283,062 345,446
4) other 273,690 3,137,107 10,192,279
5) tangible fixed assets under
construction and advances - - 399,702
------------------------------------------
281,714 3,739,657 27,846,087
III- Fixed asset investments
5)long Term Deposit 10,053,369 9,852,137 9,612,001
------------------------------------------
10,053,369 9,852,137 9,612,001
Total fixed assets (B) 460,880,859 468,608,503 3,662,031,727
C) CURRENT ASSETS
I- Inventories
4) finished goods and goods for resale - - 1,211,717
------------------------------------------
- - 1,211,717
II- Receivables
1) due from customers 616,589 2,801,452 10,729,541
5) due from others 128,021,973 107,494,071 73,776,919
128,638,562 110,295,522 84,506,460
III- Short-term investments
7) Short term deposits 14,500,000
------------------------------------------
- - 14,500,000
IV- Cash on hand and in banks
1) bank and post office deposits 1,744,644 12,054,931 3,667,149
3)cash and notes on hand 3,206 60 351
------------------------------------------
1,747,850 12,054,990 3,667,500
Total current assets (C) 130,386,412 122,350,512 103,885,677
D) ACCRUED INCOME AND PREPAID EXPENSES 264,244,992 287,766,952 121,249,667
------------------------------------------
TOTAL ASSETS 855,512,263 878,725,968 3,887,167,071
------------------------------------------
-------------------------------------------------------------------------------------------------
(*) Unaudited under US GAAS, although these Financial Statements were audited under Italian GAAS.
A-4
------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET - SHAREHOLDERS' EQUITY AND LIBILITIES 31.12.2003 31.12.2002 31.12.2001
-------------------------------------------------------------------------------
Unaudited(*) Unaudited(*)
------------------------------------------------------------------------------------------------------------------------------------
(Euro)
A) SHAREHOLDERS' EQUITY
I- Share capital 2,150,000,000 2,150,000,000 2,150,000,000
IV- Legal reserve 359,347 359,347 359,347
VII- Other reserves 518,040,678 357,832,444 185,355,527
VIII- Retained earnings (accumulated deficit) (2,415,508,615) (79,535,356) -
IX- Loss for the period (105,131,170) (2,335,973,260) (79,535,356)
-------------------------------------------------------------------------------
Total shareholders' equity (A) 147,760,241 92,683,175 2,256,179,518
B) ALLOWANCES FOR RISKS AND CHARGES 2,155,000 - -
-------------------------------------------------------------------------------
C) EMPLOYEE TERMINATION
INDEMNITIES 246,587 959,805 788,519
D) PAYABLES
3) payables to banks 0 419,103 189
4) due to other financial institutions
(shareholders loan) 315,594,413 253,266,034 24,508,048
6) due to suppliers (**) 330,240,000 370,962,552 (**)351,360,000 384,368,761 (**)367,200,000 484,775,802
11) taxes due 359,003 1,267,994 789,597
12) due to social security institutions 231,330 647,529 2,305,460
13) other payables
a) due to other related parties 90,657 1,296,721 26,610,331
b) due to others 17,305,024 (**)16,010,000 142,885,109 (*)962,676,000 1,087,975,526
Total payables (D) 704,542,979 784,151,250 1,626,964,953
E) ACCRUED EXPENSES AND DEFERRED INCOME 807,457 931,738 3,234,081
-------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 855,512,263 878,725,968 3,887,167,071
-------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
MEMORANDUM ACCOUNTS 31.12.2003 31.12.2002 31.12.2001
------------------------------------------------------------------------------------------------------------------------------------
A) Garantees received
1) guarantees received by banks 970,452,619 1,105,536,709 1,237,067,320
-------------------------------------------------------------------------------
MEMORANDUM ACCOUNTS 970,452,619 1,105,536,709 1,237,067,320
-------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
(*) Unaudited under US GAAS, although these Financial Statements were audited under Italian GAAS.
(**) due beyond next commercial year
------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT 2003 2002 2001
Unaudited (*) Unaudited (*)
------------------------------------------------------------------------------------------------------------------------------------
(Euro)
A) VALUE OF PRODUCTION
1) revenues from sales 0 491,165 14,827,578
4) capitalised costs and expenses - - 22,805,034
5) other income and revenues 66,134 231,756 90,237
-----------------------------------------------------------------
Total value of production (A) 66,134 722,921 37,722,849
B) OPERATING COSTS
6) raw, ancillary and consumable materials and
goods for resale 4,767 71,723 20,203,342
7) services 10,080,363 11,073,636 36,299,027
8) leases and rentals 22,119,774 25,615,451 3,512,110
9) personnel:
a)wages and salaries 4,870,561 17,551,615 21,432,976
b)social security contributions 1,648,723 5,084,897 5,869,652
c)termination indemnities 392,945 1,184,077 861,187
e)other - - 7,515
10) amortisation, depreciation and write-downs
a)amortization of intangible fixed assets 1,114,817 1,187,415 6,452,511
b)amortization of tangible fixed assets 312,067 959,285 2,735,873
d)svalutazioni dei crediti compresi nell'attivo
circolante e delle disponibilita liquide 27,628,637 64,807,928 -
11) changes in inventories of raw, ancillary and
consumable materials and goods for resale - 1,211,717 (1,211,717)
12) Risks allocations 2,155,000 -
14) other operating costs 386,341 501,889 584,119
-----------------------------------------------------------------
Total operating costs (B) 70,713,994 129,249,634 96,746,595
OPERATING INCOME (70,647,860) (128,526,713) (59,023,746)
C) FINANCIAL INCOME AND EXPENSE
16) other financial income
a)income from investment 279,997 240,136 246,616
d)other
2) from others 84,069 447,294 1,709,923
17) interest expense and other financial charge
b)to others (24,923,206) (12,561,187) (391,291)
-----------------------------------------------------------------
Total financial income (expense), net (C) (24,559,139) (11,873,757) 1,565,248
E) EXTRAORDINARY INCOME AND EXPENSE
20) revenues
a)others 1,452,461 8,977,857 -
21) expenses
a)others 11,376,631 131,563,647 22,076,858
b)write-downs 0 2,072,987,000 -
-----------------------------------------------------------------
Total extraordinary income and expense (E) (9,924,170) (2,195,572,790) (22,076,858)
INCOME BEFORE INCOME TAXES (A-B+-C+-D+-E) (105,131,170) (2,335,973,260) (79,535,356)
22) income taxes for the period - - -
-----------------------------------------------------------------
23) LOSS FOR THE PERIOD (105,131,170) (2,335,973,260) (79,535,356)
-----------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
(*) Unaudited under US GAAS, although these Financial Statements were audited under Italian GAAS.
A-5
------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS 31.12.2003 31.12.2002 31.12.2001
Unaudited (*) Unaudited (*)
------------------------------------------------------------------------------------------------------------------------------------
(Euro)
-----------------------------------------------------------------
A) CASH AND CASH EQUIVALENTS - OPENING BALANCE 11,635,887 3,667,500 67,659,405
----------------------------------------------------------------
B) CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
. Loss for the period before income taxes (105,131,170) (2,335,973,260) (79,535,356
. Current taxes - - -
. Depreciation and amortisation of tangible
and intangible fixed assets 1,426,884 2,146,700 9,188,384
. Net change in funds for risks and charges 2,155,000
. Net change in employee termination indemnities (713,218) 171,286 788,519
-----------------------------------------------------------------
Total (102,262,504) (2,333,655,274) (69,558,453)
. Change in net working capital:
. Change in inventories 0 1,211,717 (1,211,717)
. Change in receivables (18,343,040) (25,789,062) (83,563,443)
. Change in payables (79,189,168) (843,232,805) 410,263,001
. Change in accrued income and prepaid expenses 23,397,680 (168,819,629) (113,361,695)
-----------------------------------------------------------------
TOTAL B) (176,397,032) (3,370,285,053) 142,567,693
-----------------------------------------------------------------
C) CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
. Disinvestment in tangible fixed assets 3,145,877 23,147,145 (29,056,508)
. Disinvestment in intangible fixed assets 3,356,116 3,168,369,515 (338,746,616)
. Investment in fixed asset investments (201,232) (240,136) (9,612,001)
-----------------------------------------------------------------
TOTAL C) 6,300,761 3,191,276,524 (377,415,125)
-----------------------------------------------------------------
D) CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
. Payments from shareholders 160,208,234 172,476,917 185,355,527
. Change in short-term investments 0 14,500,000 (14,500,000)
-----------------------------------------------------------------
TOTAL D) 160,208,234 186,976,917 170,855,527
-----------------------------------------------------------------
-----------------------------------------------------------------
E) CASH AND CASH EQUIVALENTS - CLOSING BALANCE (A+B+C+D) 1,747,850 11,635,887 3,667,500
-----------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
A-6
Notes to the Financial Statements as of December 31, 2002
FORM AND CONTENT OF THE FINANCIAL STATEMENTS
The Financial Statements as of and for the year ended December 31, 2002 have
been prepared in accordance with the provisions of the Italian Civil Code and
consist of the Balance Sheet, the Profit and Loss Account and the following
Notes.
The Notes provide the information required by article 2427 of the Italian Civil
Code, in addition to other information considered necessary to give a true and
fair view of the Company's financial position, cash flows and operating
results, even where not required by specific provisions of the law.
No exceptional circumstances arose during the year necessitating recourse to
the departures permitted by article 2423, paragraph 4(degree) of the Italian
Civil Code.
The Balance Sheet and Profit and Loss Account are based on the
formats established by articles 2424 and 2425 of the Italian Civil Code.
However, the accounting items preceded by Arabic numbers having nil balances
for both the current and prior year have been eliminated.
All amounts reported in the Notes are expressed in thousands of euros, unless
otherwise indicated.
THE COMPANY AS A GOING CONCERN AND RECOVERABILITY OF THE BOOK VALUE OF ASSETS
As explained in detail in the Report on Operations, the slowdown in the major
industrialised economies, changes in the financial markets and specific delays
related to the UMTS market have led to a high degree of uncertainty with regard
to business models. This has considerably prolonged the time necessary to yield
a return on investment.
Consequently, taking into account the provisions of a set of EU directives
adopted in March 2002 (to be incorporated within the new Telecommunications
Code and due for introduction by July 2003), which will also enable
implementation of spectrum trading, the Company decided to focus its strategy
on the opportunities that will be granted by such frequency trading, which has
already been approved by a Cabinet Meeting held on May 23, 2003. However, it
should be pointed out that this decision does not preclude the possibility, if
the right conditions should occur, of defining a new strategy that would enable
the Company to take advantage of any opportunities that may arise.
In particular, the Company has developed a new business plan scenario, which
provides for launching spectrum-trading activities during the first quarter of
2004, which was approved at the Board of Directors' Meeting held on May 29,
2003. On the basis of this plan, the Company has determined the return of
investment that should be obtained from developing this activity, and therefore
the resulting value of the UMTS licence. This value was fixed, and the related
write-down posted to the Financial Statements, as indicated in the section on
"Permits, licences, trademarks and similar rights". Such valuation was carried
out with the assistance and on the advice of expert consultants.
The book value of other assets was deemed to be recoverable through measures
that will be implemented subsequent to approval of the Financial Statements.
The Company drew up its strategy and formulated the new business plan on the
basis of the following overall assumptions:
o introduction of the new Telecommunications Code will enable the
transfer of UMTS frequencies to the holders of third generation
mobile telecommunications licences alone;
o compliance with nationwide coverage obligations to come into effect
by June 30, 2004 will be transferred to the new operator using the
frequencies;
o developments in the UMTS market and the resulting migration of
captive customers and current market operators from the GSM/GPRS to
the UMTS platform, will generate demand for additional frequencies
among operators;
o the Company's structure, and especially the size of the workforce,
will be adapted to make it compatible with the new strategy.
The majority of strategic shareholders have pledged their financial support to
implementing the spectrum
A-7
trading strategy envisaged in the new business plan.
The related calculations and assumptions were made on the basis of the best
available information and on the basis of estimates that are subject to
uncertainty. We cannot, therefore, exclude the possibility that such
calculations and assumptions may be subject to review in order to reflect
future developments.
ACCOUNTING POLICIES
The valuation of items in the Financial Statements has been carried out in
compliance with the going concern and prudence principles.
The accounting policies adopted in the preparation of the Financial Statements
comply with the provisions of article 2426 of the Italian Civil Code, and are
consistent with those adopted in the prior year's Financial Statements.
All costs and revenues accrued during the year have been recorded, regardless
of the date of collection or payment.
Pursuant to the final paragraph of art. 2423-bis, the accounting policies
regarding the rental fees due on the contract signed with Ferrovie dello Stato
S.p.A. (renamed on July 1, 2001 as R.F.I. Rete Ferroviaria Italiana S.p.A.,
hereafter R.F.I.) were modified. This was done following the reclassification
carried out in response to legal opinion, which redefined the nature of the
contract as a long-term lease.
Intangible fixed assets
Intangible fixed assets are stated at purchase or production cost, plus any
incidental costs and costs directly chargeable to the assets.
Should there be other than a temporary impairment in the above value of such
intangible fixed assets, the relevant asset is written down accordingly. The
appropriate value of the asset is reinstated in future years if the reasons for
any write-down cease to apply.
Such assets are systematically amortised in accordance with the rates shown
below, which are representative of their residual useful economic lives.
"Start-up and expansion costs" represent the cost of the Company's
incorporation and are amortised over a period of five years. Start-up and
expansion and research, development and advertising costs are recorded under
assets in the Balance Sheet on the basis of the policies discussed and agreed
with the Board of Statutory Auditors.
"Industrial patents and intellectual property rights" include the purchase cost
of software licenses, which is amortised over a period of five years.
"Permits, licences, trademarks and similar rights" include the costs incurred
in order to obtain a public UMTS licence for the operation of third-generation
mobile telecommunications. This item also includes the cost of acquiring the
right of usufruct and possession from R.F.I., for 1,500 sites to be used for
the installation and maintenance of transmission equipment. Such costs were
reclassified among accrued income and prepaid expenses as they are considered
as prepaid invoiced lease rentals.
For further details on the write-down of the UMTS licence and reclassification
of the R.F.I. contract, see the notes below.
Intangibles in process and advances primarily include:
- start-up costs providing long-term benefits. Such costs derive from the
activities of specific departments within the Company during the start-up
phase;
- the costs incurred for the development and purchase of software
applications in the process of completion at year end;
- the costs incurred for the design and development of the network and the
implementation and development of information systems in the process of
completion at year end.
Such costs were fully written down during 2002 following the Company's decision
to focus its strategy on opportunities arising from the new Telecommunications
Code regarding spectrum trading.
Other intangible fixed assets include the costs relating to leasehold
improvements, which are amortised over the shorter of the residual useful life
of the improvement and the residual duration of the related
A-8
property lease.
Costs relating to design and development of the network and implementation and
development of information systems, were also fully written down in the light of
the above-mentioned events.
Tangible fixed assets
Tangible fixed assets are stated at purchase or production cost, plus any
incidental costs and costs directly chargeable to the assets.
The value of such assets is systematically depreciated applying the economic
and technical rates of depreciation shown below, which are held to reflect the
residual useful lives of the assets. Tangible fixed assets purchased during the
year are depreciated at 50% of the above ordinary rates to reflect the reduced
usage of the related asset.
Should there be other than a temporary impairment in value, such tangible fixed
assets are written down accordingly. The appropriate value of the relevant
asset is reinstated in future years if the reasons for any write-downs cease to
apply.
Routine maintenance costs are expensed as incurred.
Fixed asset investments
Fixed asset investments consist of a current account deposit pledged to Banca
di Roma as a back-to-back guarantee for the surety issued by the bank to R.F.I.
Debtors and creditors
Debtors are recorded at their estimated realisable value.
Creditors are recorded at their nominal value.
Current asset investments
This item, posted in the financial statements for 2001, referred solely to
short-term deposits. The amount recorded in the accounts represented the value
of the investment. The relevant accrued interest was posted to "Accrued
income".
Accruals and deferrals
Such items regard revenues and expenses referring to two or more accounting
periods recorded on an accruals basis.
Provision for employee termination indemnities
The provision for employee termination indemnities represents the entire
accrued liability to employees in compliance with established legislation and
labour contracts.
Revenues and costs
Revenues and costs are recorded on an accruals basis.
Income taxes
Current income taxes are calculated on the basis of estimated taxable income,
determined in accordance with established regulations and tax rates.
In the event of timing differences between the values recorded in the tax
accounts and the published accounts, deferred tax liabilities or assets are
recorded solely if there is reasonable certainty that such liabilities or
assets will be payable or recoverable in future years.
Memorandum accounts
The accounting policies and content of the memorandum accounts comply with
Italian Accounting Profession Principle No. 22. Such items regard guarantees,
risks and commitments to which the Company is subject.
A-9
NOTES TO THE BALANCE SHEET - ASSETS
FIXED ASSETS
As established by art. 2427 of the Italian Civil Code, movements in intangible
and tangible fixed assets are reported in schedules that specify, for each
item, the historical cost, prior year provisions for amortisation and
depreciation, movements during the year and the closing balance. As described
in more detail in the following notes, during this and the previous year the
Company wrote down intangible and tangible fixed assets with no residual useful
lives. This followed the Company's decision to delay its market launch, thereby
abandoning the original plan to introduce services using GSM/GPRS technology
and refocus its strategy on spectrum trading activities.
Intangible fixed assets
Intangible fixed assets decreased by 3,169,558 thousand euros, as shown in the
following schedule:
(euro)000
-----------------------------------------------------------------------------------------------------------------------------------
Start-up and Research, Industrial Permits, licences, Intangibles in Other Total
expansion development patents and trademarks and progress and
costs and intellectual similar rights advances
advertising property
costs rights
-----------------------------------------------------------------------------------------------------------------------------------
A)Opening balance
1. Historical cost 126 2.053 4.033 3.557.970 39.051 27.818 3.631.051
2. Allowances for amortisation (50) (411) (807) - - (5.210) (6.478)
-----------------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 2001 75 1.643 3.227 3.557.970 39.051 22.608 3.624.574
-----------------------------------------------------------------------------------------------------------------------------------
B)Movements during the year
3. Purchases - - 2 66.433 68 1.231 67.735
4. Disposals - - (0) - (794) (794)
5. Extraordinary items - (207) (33) - (1.587) (1.827)
6. Other decreases (826.331) (826.331)
7. Increased assessments 2001 (4.319) (4.319)
8. Decrease in allowances for
amortisation 130 130
9. Amortisation (25) - (113) - - (1.049) (1.187)
10. Reduction of interest (64.808)
11. Write-downs - (1.436) (2.744) (2.072.987) (34.529) (16.613) (2.128.309)
12. Transfers and reclassifi-
cations - - - (209.847) (271) 271 -209.847
-----------------------------------------------------------------------------------------------------------------------------------
Total (25) (1.643) (2.888) (3.107.540) (39.051) (18.410) (3.169.558)
-----------------------------------------------------------------------------------------------------------------------------------
C)Closing balance (A+B)
13. Historical cost 126 2.053 4.035 450.430 0 28.526 485.170
14. Allowances for amortisation (75) (410) (920) - - (6.129) (7.534)
15. Write-downs and extra-
ordinary items (1.643) (2.777) - - (18.200) (22.620)
-----------------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 2002 50 0 339 450.430 0 4.197 455.017
-----------------------------------------------------------------------------------------------------------------------------------
Start-up and expansion costs
"Start-up and expansion costs" represent the costs incurred at the time of the
Company's incorporation in 2001, providing long-term benefits.
Research, development and advertising costs
The costs incurred during 2001 for the production of a corporate advertising
campaign, designed to develop awareness of the Company's brand name and prepare
for the market launch, were fully written down during the year.
Industrial patents and intellectual property rights
"Industrial patents and intellectual property rights" refer solely to software
applications purchased outright and on the basis of long-term licences, and in
service as of December 31, 2002.
Permits, licences, trademarks and similar rights
This item underwent the following movements during the year:
euro000
--------------------------------------------------------------------------------------------------------
Net value Increases Decreases Other decreases Write-downs Net value
31.12.01 31.12.02
--------------------------------------------------------------------------------------------------------
UMTS licences 3.360.456 54.100 (826.331) (64.808) (2.072.987) 450.430
--------------------------------------------------------------------------------------------------------
Other similar rights
(Rete Ferroviaria
Italiana S.p.A.) 197.514 (197.514) - 0
--------------------------------------------------------------------------------------------------------
Total 3.557.970 54.100 (1.023.845) (64.808) (2.072.987) 450.430
--------------------------------------------------------------------------------------------------------
"Permits, licences, trademarks and similar rights" regard the cost of obtaining
a public UMTS licence for the operation of third-generation mobile
telecommunications, issued on January 10, 2001 with resolution no. 3/01/CONS,
and having a duration of 20 years from January 1, 2002.
After careful consideration, the costs relating to usufruct and possession of
1,500 sites owned by R.F.I., for the installation and maintenance of
transmission equipment, were reclassified among "accrued income
A-10
and prepaid expenses" as they were deemed to be prepaid invoiced lease rentals.
For further information on the accounting details of the contract, see the
above-mentioned item.
The following schedule provides details of such costs and the nature of the
incidental costs capitalised.
euro000
-------------------------------------------------------------------------------------------------------------------------------
Licences and capitalised incidental costs Net value Increase Decreases Write-down Net value
31.12.01 31.12.02
-------------------------------------------------------------------------------------------------------------------------------
a) Licences 3.360.456 54.100 (891.139) (2.072.987) 450.430
Award of UMTS licence (main spectrum) 2.442.841 (2.006.794) 436.047
Award of 2 X 5 MHz licence (additional
spectrum) 826.331 (826.331) 0
Interest expense on deferred payment of
residual licence fee 61.090 34.059 (64.808) (24.925) 5.416
Contributions paid to appraisers (UMTS auction) 1.549 (1.273) 277
Charges for surety granted by Mediocredito 25.562 19.815 (37.277) 8.100
Other surety charges 774 (636) 138
Cost of government advisors and technical
consultants for UMTS auction 2.033 (1.670) 363
Consultants and other 275 226 (412) 89
-------------------------------------------------------------------------------------------------------------------------------
b) Similar rights 197.514 - (197.514) - 0
Discounted cost of the right of
usufruct for Rete Ferroviaria Italiana
S.p.A. sites 190.839 (190.839) 0
Implicit interest on the right of usufruct
for Rete Ferroviaria Italiana S.p.A. sites 5.544 (5.544) 0
One-off cost of BdR surety for R.F.I.
sites (flat fee) 500 (500) 0
Accrued commissions on BdR suretyfor the
right of usufruct for R.F.I. sites
(annual fee) 631 (631) 0
-------------------------------------------------------------------------------------------------------------------------------
Total 3.557.970 54.100 (1.088.653) (2.072.987) 450.430
The cost incurred for assignment of one of the five blocks of frequencies
provided for by art. 3 of Communications Authority resolution 410/99 amounts to
2,442,841 thousand euros.
Moreover, as foreseen in point 8.2.1 of the auction regulations, the Company
took advantage of the possibility granted to new entrants, pursuant to
Authority resolution 388/00/CONS, to have access to additional asymmetrical
spectrum for a sum of 826,331 thousand euros.
Art. 9.1-f) of the auction regulations states that companies awarded UMTS
licences should "pay a sum of 2,056,827,596.36 euros, the minimum amount that
allows for the award of a licence. At the same time, it is required that
payment of the difference between the total amount offered - including any sum
for additional blocks - and the minimum amount be made in no more than 10
annual instalments from 2001".
As mentioned in other sections of these Explanatory Notes, the Company paid the
said sum of 2,056,827,596.36 euros and deferred payment of the remaining
expense totalling 1,203,344,574.88 euros.
Taking into account current unfavourable market prospects, and after careful
analysis backed up by expert legal opinion (from Professor Franco Bonelli,
Professor Berardino Libonati, Professor Roberto Mastroianni, Paolo Colucci and
Domenico Luca Scordino), the Company decided to exercise its right to return
the additional frequency spectrum (2x5MHx) and, at the same time, to be
released from its obligation to pay the remaining instalments of the cost of
such frequency. This right is based on the following principal reasons:
o From a legal standpoint, allocation of additional spectrum constitutes a
supplementary provision issued in the sole interest of the beneficiary,
and for which the beneficiary, via a recognised principle, has the right
of relinquishment.
o In the light of changed market conditions and prospects, the financial
commitments relating to additional spectrum produce an effect opposite to
that originally intended, thereby transforming an asymmetrical advantage
into a competitive disadvantage for IPSE and as such constituting an
unjustified and unsustainable burden.
o The frequency spectrum and related maintenance therefore did not meet the
expectations of the Ministry of Communications and the Company at the time
of allocation.
o The unavailability and resulting postponement of the development and
production of new network technologies, as well as of the production of
reliable handsets capable of exploiting the full potential of UMTS
services, contributed to rendering IPSE's payment for additional
frequencies untenable as they put back the date of widespread distribution
and effective use of the new services.
o The haphazard transformation of the market to IPSE's competitive
disadvantage was compounded by Italy's failure to comply with EU
regulations regarding the introduction of UMTS, as well as the recent
allocation of additional GSM frequencies to second-generation operators
with Resolution 286/02/CONS. This allocation has enabled aggressive
expansion of GPRS services and further widened the gap between
second-generation and new-entry UMTS operators, thus
A-11
contributing to delays in the development of the UMTS market and also
diminishing the strategic importance of additional UMTS spectrum.
The reduction of debt relating to the amounts due for the additional frequency
spectrum, totalling 826,331 thousand euros, thus derives from IPSE's exercise
of its right to relinquish the said right. Such reduction was posted, despite
the Ministry of Communications' objection to the Company's request notified on
May 19, 2003. Indeed, the Company intends to defend its right via appropriate
legal action that is currently under consideration.
With regard to the reduction of debt, no provisions for risk were made in
compliance with Italian Accounting Profession Principle No. 19, which states
that such provisions for potential liability should be made if an unfavourable
event is deemed "likely" and not just "possible". In this case, according to
the legal opinion sought by the Company, the unfavourable event - if litigation
should follow -, represented by the obligation to effect payment of the charges
for the additional spectrum relinquished by the Company, is considered to be
possible rather than likely.
Furthermore, IPSE has the right - deemed to be enduring, full and effective -
to request payment of the said amount relating to frequency spectrum by its
shareholders, if such sum turns out to be due (in which case the unfavourable
event considered as possible would become a concrete event that would compel
IPSE to effect payment). In this respect, it should also be pointed out that
IPSE's shareholders have pledged a back-to-back guarantee to MCC (and also
launched a progressive cash collateralisation of the amount guaranteed) for the
surety issued by MCC to the Ministry of the Economy and Finance - Treasury
Department.
Therefore, the risk that the Company's finances and operations might be
detrimentally affected by the withdrawal of shareholders' guarantees may be
reasonably considered as remote.
Moreover, IPSE, in accordance with its asserted right to return the additional
frequency spectrum, entered an amount due in relation to the higher amount paid
for interest on the above-mentioned deferred payment regarding such spectrum.
In line with the previous year, the Company capitalised the financial charges
and incidental costs, which derive from the deferral of payment in the form of
ten annual instalments. This facility was granted by point 5 a) of the Call for
Bids (Official Gazette no. 117, July 31, 2000, part II) for the "auction of
licences to install and operate third-generation UMTS mobile telecommunications
systems - IMT 2000" (hereafter the Call for Bids). Such charges and costs also
include the difference, totalling 1,203,345 thousand euros, between the final
bid made in order to obtain the licence and the minimum bid price already paid.
In particular, the following costs have been capitalised:
o interest expense on the deferral of payment to the Ministry of the Economy
- the Treasury Department, amounting to 30,341 thousand euros, net of the
above-mentioned higher amounts paid regarding additional frequency
spectrum;
o commissions relating to the Guarantee Facility Agreement signed by
Mediocredito Centrale in relation to the bank surety issued to the
Ministry of the Economy - the Treasury Department, totalling 46,151
thousand euros.
Finally, the Company carried out a prudent and accurate assessment of the
hypothetical value of the UMTS licence - which in the light of the above
information related solely to the main frequency spectrum - taking into account
current market conditions. Two independent advisors (Arthur D. Little and Banca
IMI) were then commissioned to give their opinion on the assessment. This was
done with a view to benchmarking the Company's valuation.
In accordance with the advice of these independent third parties the Company
wrote down the historical cost incurred for allocation of one of the five
blocks, and the related incidental charges capitalised as of December 31, 2002,
for an amount equivalent to around 82% of the total of 2,072,987 thousand
euros.
The write-down was carried out on the basis of:
a) the new business plan scenario, which foresees the start-up of
spectrum trading during the first half of 2004, based on the industry
regulations currently being implemented;
b) the opinions, based on the new scenario, of authoritative independent
advisors.
A-12
Naturally, the decision to adopt a new business model does not preclude the
possibility, if the right conditions should occur, of defining a new strategy
that would enable the Company to take advantage of any opportunities that may
arise.
The write-down was applied on a prudent basis given that:
1) the value attributed to the licence (450,430 thousand euros) is close
to the lower limit of the intervals established by the advisors
(between a minimum of 450 million euros and a maximum of 1,150
million euros) and is based on existing uncertainties regarding:
- Ipse 2000's share of the savings that may be available to
operators potentially interested in acquiring the Company's
frequencies;
- the discount rate to be applied to revenues deriving from likely
spectrum trading;
- future traffic growth and the size and timing of market
penetration of the new UMTS services;
- extensive saturation of the GSM market;
2) the Company remains committed to extracting the highest possible value
from spectrum trading and, in this sense, there are no grounds for
asserting with certainty that the full value of the write-down is of a
permanent nature;
3) it was necessary to take account of the absence to date of agreements with
other operators and thus the uncertainty of being able to realise a higher
value for the licence over time.
The costs incurred in 2000 for government advisors during the auction, and the
fees charged by the consultants hired in order to obtain the licence, which
were previously capitalised, were also written down in the same proportion.
Further details regarding the amount due to the Ministry and the surety are
provided below.
Intangibles in process and advances
Movements in "Intangibles in process and advances" are shown in the following
schedule:
euro000
---------------------------------------------------------------------------------------
Net value Increase Write-downs Increased Reclass Net value
31.12.01 31.12.02
---------------------------------------------------------------------------------------
Start-up costs 26.710 68 (24.339) (2.440) 0
Information technology 6.715 (5.363) (1.081) (271) 0
Network 5.625 (4.827) (798) 0
---------------------------------------------------------------------------------------
Total 39.051 68 (34.529) (4.320) (271) 0
Start-up costs, shown in detail in the following schedule, refer to the costs,
providing long-term benefits, deriving from the activities of specific
departments within the Company during the start-up phase. Such costs, which in
2001 maintained their useful lives even though the market launch of the service
was postponed, were fully written down following the Company's decision to
concentrate its strategy on the development of spectrum trading.
Other items under intangibles in process regard the cost of design and
development of the network, and the charges incurred for the development and
implementation of information systems relating to projects to be completed.
Such items were also written down following the above-mentioned decision.
Other
This item underwent the following movements during 2002:
euro000
----------------------------------------------------------------------------------------------------------------------------
Net value Increases Disposals Writedowns Extraordinary Decrease in Amort. Reclass. Net value
31.12.01 items allowances 31.12.01
for amort.
----------------------------------------------------------------------------------------------------------------------------
Leasehold improvements 8.838 240 (794) (2.577) (591) 130 (1.049) - 4.197
Information
technology 2.652 983 (3.672) (234) - 271 0
Network 11.118 8 (10.364) (762) - - 0
----------------------------------------------------------------------------------------------------------------------------
Total 22.608 1.231 (794) (16.613) (1.587) 130 (1.049) 271 4.197
A-13
Leasehold improvements primarily related to the restructuring of the property
in via Depero, while the costs sustained during 2001 relating to the
restructuring of the property in via Noale were totally written down due to
interruption of the lease contract. Such costs are amortised on the basis of
the minimum duration of the lease contract.
Other intangible fixed assets, which in 2001 included the cost of design and
development of the network and the implementation and development of
information systems completed at year end, were fully written down in the light
of the Company's new strategic decisions.
The following schedule summarises the rates of amortisation applied to the
above intangible fixed assets:
------------------------------------------------------------
Rates of amortisation applied to intangible fixed assets
------------------------------------------------------------
Software applications 5 years
Leasehold improvements 6 years
A-14
Tangible fixed assets
Net tangible fixed assets fell by 24,107 thousand euros, as the following
schedule shows:
euro000
----------------------------------------------------------------------------------------------------------
Plant and Industrial Other Work in Total
machinery and assets progress and
commercial advances
equipment
----------------------------------------------------------------------------------------------------------
A) Opening balance
1. Historical cost 18.555 395 11.233 400 30.582
2. Allowances for depreciation (1.646) (49) (1.040) - (2.736)
----------------------------------------------------------------------------------------------------------
Balances as of December 31, 2001 16.909 345 10.192 400 27.846
B) Movements during the year
3. Purchases 246 50 1.832 18 2.146
4. Disposals (9.599) (12) (3.999) (178) (13.788)
5. Write-downs (7.790) - (3.984) - (11.774)
6. Extraordinary items (438) - (277) (61) (776)
7. Allowances for depreciation 864 1 180 - 1.045
8. Depreciation (51) (102) (807) - (960)
9. Transfers and reclassifications 178 - - (178) (0)
----------------------------------------------------------------------------------------------------------
Total (16.590) (63) (7.055) (400) (24.107)
C) Closing balance (A+B)
7. Historical cost 9.380 433 9.066 0 18.879
9. Allowances for depreciation (833) (150) (1.667) - (2.651)
10. Write-downs and extraordinary items (8.228) - (4.261)
----------------------------------------------------------------------------------------------------------
Balances as of December 31, 2002 319 283 3.137 0 3.739
As of December 31, 2002, tangible fixed assets are not subject to mortgages,
liens or other collateral guarantees that might limit their availability to the
Company.
Plant and machinery
This item underwent the following movements during the year:
euro000
--------------------------------------------------------------------------------------------------------------------------------
Net value Increases Disposals Write- Extraordinary Decrease in Amort. Reclass. Net value
31.12.01 downs items allowances 31.12.02
for deprec.
--------------------------------------------------------------------------------------------------------------------------------
Exchanges and electronic
equipment 15.446 50 (9.599 (6.342) (214) 864 (41) - 165
Access and transmission
equipment 1.382 28 - (1.186) (224) - - 0
General equipment 3 (9) - - - - (10) 170 155
Other equipment 77 176 - (262) - - - 8 0
--------------------------------------------------------------------------------------------------------------------------------
Total 16.909 246 (9.599) (7.790) (438) 864 (51) 178 319
The most significant decreases regarded "Exchanges and electronic equipment"
and related to the sale of switching and traffic management equipment and of
intelligent network systems, as well as the write-down of internet, voice and
message transmission platforms.
"Access and transmission equipment", which included the cost of purchasing
transmission equipment (the national and pan-European backbone), was completely
written down due to the impossibility of reusing it for UMTS purposes.
The item "General equipment" includes internal equipment, cables and auxiliary
network apparatus.
Industrial and commercial equipment
This item underwent the following movements during the year:
euro000
--------------------------------------------------------------------------------
Net value Increases Disposals Decrease in Amort. Net value
31.12.01 allowances 31.12.02
for deprec.
--------------------------------------------------------------------------------
Equipment 345 50 (12) 1 (102) 283
--------------------------------------------------------------------------------
Total 345 50 (12) 1 (102) 283
A-15
This item primarily includes the cost of purchasing equipment and instruments
necessary to the operation of the network (probes, testers, measuring
equipment, etc.).
Other assets
This item underwent the following movements during the year:
euro000
--------------------------------------------------------------------------------------------------------------------------
Extra Decrease in Amort.
Net value Increases Disposals Write- ordinary allowances Net value
31.12.01 downs items for deprec. 31.12.02
--------------------------------------------------------------------------------------------------------------------------
Furniture 2.130 20 (1.259) (358) (20) 76 (74) 514
Office machines and computers 2.164 1.808 (2.712) - (90) 101 (269) 1.001
Peripheral and centralised
hardware 5.705 1 (23) (3.626) (167) 2 (421) 1.472
Other electronic equipment 193 3 (5) - - 1 (42) 149
Assets with a unit value of less
than (euro)516,456 - - - - - - - -
-------------------------------------------------------------------------------------------------------------------------
Total 10.192 1.832 (3.999) (3.984) (277) 180 (807) 3.137
The items, "Office machines and computers", "Peripheral and centralised
hardware" and "Other electronic equipment" include the cost of purchasing the
hardware used in the Company's information systems. Such hardware primarily
regards mainframe computers, servers and office automation equipment. The
decrease in the item "Peripheral and centralised hardware" is due to the
write-down of such equipment, which in the light of the Company's change in
strategy, is no longer useful. The decrease in the item "Office machines and
computers" is due to the sale of dealer stations acquired during the year and
of workstations of outgoing and other employees. The decrease in the item
"Furniture" derives from sales to Enel R.E. S.p.A. and the write-down of
non-recoverable assets from the offices in via Noale.
Work in progress and advances
This item underwent the following movements during the year:
euro000
--------------------------------------------------------------------------------------------------------
Net value Increases Disposals Extraordinary Reclass. Net value
31.12.01 items 31.12.02
--------------------------------------------------------------------------------------------------------
Other plant 8 - - - (8) 0
Equipment 170 - - - (170) 0
Furniture 160 18 (178) - - 0
Peripheral and centralised 61 0 (61) - 0
hardware
--------------------------------------------------------------------------------------------------------
Extraordinary items 400 18 (178) (61) (178) 0
The following schedule shows a summary of the rates of depreciation applied by
the Company.
------------------------------------------------------------------------
Tangible fixed assets Ordinary rates of
depreciation
------------------------------------------------------------------------
Plant and machinery
Exchanges and electronic equipment 18%
Access, transmission and technical equipment 15%
Internal and general equipment 12%
------------------------------------------------------------------------
Industrial and commercial equipment
Equipment 25%
------------------------------------------------------------------------
Other assets
Office machines and computers 20%
Furniture 12%
------------------------------------------------------------------------
Assets with a unit value of less than (euro)516,456 100%
Fixed asset investments
Fixed asset investments consist of a current account deposit, amounting to
9,852 thousand euros, pledged to Banca di Roma as a back-to-back guarantee for
the surety issued by the bank to Ferrovie dello Stato S.p.A.
A-16
CURRENT ASSETS
Debtors
None of the accounts recorded in the Financial Statements are formally due
after 12 months. The following notes provide information regarding individual
items.
Trade
As of December 31, 2002 trade debtors amount to 2,801 thousand euros.
Such accounts mainly derive from the sale of "Plant and machinery" and
"Furniture and fittings" to Ericsson Telecomunicazioni SpA and Enel R.E. S.p.A.
Other
This item underwent the following movements during the year:
(euro000)
---------------------------------------------------------------------------
Other debtors 31.12.02 31.12.01
---------------------------------------------------------------------------
Due from tax authorities
VAT 82.501 71.740
Withholding tax on interest earned 503 842
Total due from tax authorities 83.004 72.582
---------------------------------------------------------------------------
Due from Ministry for higher interest paid 64.808 -
Minority shareholders 23.263
Publitel 613 613
Advances paid to suppliers 70 461
Personnel 32 73
Other 512 47
Provisions for accounts due from the Ministry (64.808)
---------------------------------------------------------------------------
Total other debtors 107.494 73.776
The amount due from the tax authorities further increased during 2002, partly
due to the collection of invoices due for services rendered that were charged
to 2001.
The amount due from the Ministry of the Economy and Finance - Treasury
Department is due as previously indicated under the item "Permits, licences,
trademarks and other rights" with regard to reduction of the debt relating to
the return of additional frequency spectrum and the resulting higher interest
payments made during 2001 and 2002. Taking into account IPSE's absolute right
to recover such sum, this amount was prudently written down in consideration of
the discussions underway.
The amount due from minority shareholders derives from non-strategic
shareholders' failure to pay their share of the capital contribution requested
by IPSE and approved by the General Meeting of November 22, 2002, relating to
payment of the instalment to the Ministry of the Economy and Finance - Treasury
Department falling due on November 30, 2002.
The amount due from the shareholder, Publitel S.p.A., for which an injunction
was issued in 2002, derives from the shareholder's failure to pay in its share
of the capital contribution approved by the General Meeting of November 29,
2001.
Current asset investments
As of December 31, 2002 this item no longer figures in the Balance Sheet.
Cash at bank and in hand
As of December 31, 2002 the balance of this item includes the following:
(euro000)
------------------------------------------------------------------
Cash at bank and in hand 31.12.02 31.12.01
------------------------------------------------------------------
Bank and post office deposits 12.055 3.667
Cash and notes in hand - -
------------------------------------------------------------------
Total cash at bank and in hand 12.055 3.667
A-17
The Company's cash at bank and in hand rose by 8,388 thousand euros with
respect to the previous year, due to the increased amounts deposited in bank
and post office current accounts at year end.
The cash deposited with Banca di Roma as of December 31, 2002 amounts to 2,263
thousand euros, and is subject to restrictions on its use.
The available funds, with the exception of interest accrued and/or due to
accrue, may be used solely to effect the following payments:
o repayment of the financing deriving from the deferral allowed by point 5
a) of the Call for Bids;
o payment of any sum connected to the Guarantee Facility Agreement
(hereafter the GFA), of which the second amendment was signed on December
3, 2002.
Such payments may be made in favour of the Ministry of the Economy and Finance,
the State Provincial Treasury and Mediocredito Centrale S.p.A. as the GFA
Agent, or in favour of any other beneficiary indicated by the relevant
authorities in compliance with the indicated purposes.
Accrued income and prepaid expenses
"Accrued income and prepaid expenses" break down as follows:
(euro000)
-----------------------------------------------------------------------------
Accrued income and prepaid expenses 31.12.02 31.12.01
-----------------------------------------------------------------------------
Accrued income - 16
Prepaid expense on R.F.I. Contract 284.516 118.617
Prepaid fees for MCC surety 2.494 2.394
Prepaid fees for Capitalia surety 498 -
Other prepaid expenses 259 223
-----------------------------------------------------------------------------
Total accrued income and prepaid expenses 287.767 121.250
The item "Prepaid expense on R.F.I. contract" relates to the contract the
Company signed with R.F.I. on October 25, 2000. The terms of the contract,
which were finalised once the UMTS licence was formally assigned during 2001,
require the Company to pay a total of 315 million euros, excluding VAT, in
return for the rights granted. As defined in the contract, such amount is to be
paid in 16 annual instalments, without interest, due on December 31 of each
year.
In 2001 the current total value of the contract was determined in compliance
with Italian Accounting Profession Principle no. 19 regarding the accounting
treatment of debt, via the discounting of the sum due under the contract, based
on the 15-year IRS offered rate on July 3, 2001, equal to 5.81%. This amount,
totalling 190,839 thousand euros, was classified among intangible fixed assets
under the item "Permits and licences", while the implicit interest charge,
determined as the difference between the contracted value and the capitalised
amount, was classified under the item "Accrued income and prepaid expenses" and
was taken to the Profit and Loss Account on an accruals basis.
In view of the reduced number of sites selected as of December 31, 2001, the
capitalised cost was not subjected to amortisation in 2001. Moreover, the
implicit interest accrued in 2001, amounting to 5,544 thousand euros, was
capitalised.
In 2002, after careful examination of the contract, backed up by expert legal
advice (given by Mr Speroni from the legal firm Gianni, Origoni, Grippo &
Partners), the Company concluded that the contract could be more accurately
described as a lease agreement rather than as a concession of the right of
usufruct and possession. Consequently, the total amount was reclassified under
this item, taking to the Profit and Loss Account the rentals falling due in the
period July 1, 2001 - December 31, 2002, totalling 30,484 thousand euros.
Prepaid expenses deriving from the bank surety issued by Mediocredito Centrale
in favour of the Ministry of the Economy and Finance - Treasury Department,
described in the note to the memorandum accounts, regard the sums paid on
December 31, 2002, with the unaccrued portion held over as a prepayment. The
accrued portion was treated as an incidental cost of obtaining the licence and,
therefore, posted as an increase in the value of said licence.
Prepaid expenses deriving from the bank surety issued by Banca di Roma regard
the cost of commissions for the bank surety in favour of R.F.I. relating to the
first quarter of 2003, which were paid on December 31, 2002.
A-18
NOTES TO THE BALANCE SHEET - LIABILITIES AND SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY
The following schedule shows movements in shareholders' equity during 2002:
(euro000)
---------------------------------------------------------------------------------------------------------
Movements in shareholders' equity Share Legal Other Loss Net loss Total
capital reserve reserves carried for the shareholders'
forward year equity
---------------------------------------------------------------------------------------------------------
Balances as of 31.12.2001 2.150.000 359 185.356 (79.535) 2.256.180
---------------------------------------------------------------------------------------------------------
Net loss for the year carried
forward in accordance with the
resolution passed by the
General Meeting of April 22, 2002 (79.535) 79.535 -
---------------------------------------------------------------------------------------------------------
Capital contributions (Art. 24.1 of
Articles ofAssociation) in accordance
with the resolutions passed by
the Board of Directors'
meeting and the General Meeting 172.476 172.476
---------------------------------------------------------------------------------------------------------
Net profit (loss) for the year (2.335.973) (2.335.973)
---------------------------------------------------------------------------------------------------------
Balances as of 31.12.2002 2.150.000 359 357.832 (79.535) (2.335.973) 92.683
---------------------------------------------------------------------------------------------------------
Share capital
As of December 31, 2002 the share capital consisted of 2,150,000,000 ordinary
shares with a par value of 1 euro each. The share capital is fully subscribed
and paid in by the shareholders.
In compliance with the requirements of art. 2427, section 1, point 18 of the
Italian Civil Code, the Company has not issued dividend-bearing shares or
convertible bonds.
Capital contributions (other reserves)
This item registered an increase totalling 172,476 thousand euros. This
increase was due to the second instalment of payment over ten years of the UMTS
licence granted by the Ministry of the Economy and Finance - Treasury
Department and other related financial charges, and payment of the instalment
falling due on December 31, 2002 for the R.F.I. contract. Such payments have
been fully made, except for amounts due from non-strategic shareholders, as
reported in the item "Other" under the heading "Debtors". Such requests for
payment were carried out in implementation of Board of Directors' resolutions
during the year, which, in accordance with the articles of association, were
ratified by General Meeting.
Loss for the year
The loss for the year amounts to 2,335,973 thousand euros.
PROVISIONS FOR RISKS
In compliance with Italian Accounting Profession Principle No. 19, the Company
did not allocate provisions in relation to cancellation of the debt regarding
return of the additional frequency spectrum. For further information on the
reasons for this decision, including the Company's full and absolute right to
request payment of such debt by its shareholders, see the item "Permits,
licences, trademarks and similar rights".
A-19
PROVISION FOR EMPLOYEE TERMINATION INDEMNITIES
Movements in the provision for employee termination indemnities during 2002 are
shown in the following schedule:
((euro)000)
-------------------------------------------------------
Provision for empl. sev. indemnities
-------------------------------------------------------
Balance as of December 31, 2001 789
Advances and releases (972)
Provisions for the period 1.184
Transfers to supplementary pension
funds (41)
-------------------------------------------------------
Balance as of December 31, 2002 960
-------------------------------------------------------
CREDITORS
An aging schedule for creditors as of December 31, 2002 is provided at the end
of the notes to liabilities and shareholders' equity.
Other lenders
This item breaks down as follows:
---------------------------------------------------------------------------
Other lenders 31.12.02 31.12.01
---------------------------------------------------------------------------
Atlanet 8.080 4.200
Capitalia (formerly Banca di Roma) 6.725 3.500
Telefonica Moviles Espana S.A. 25.384 1.843
Solivella Investments 206.082 14.965
Edison 3.335 -
Sonera 3.660 -
---------------------------------------------------------------------------
Total other lenders 253.266 24.508
---------------------------------------------------------------------------
The loans granted by Atlanet, Capitalia (formerly Banca di Roma), Telefonica
Moviles Espana and Solivella Investments in December 2001 fell due on December
31, 2002. The Company has requested postponement of repayment, until December
31, 2003. Such request, carried out in accordance with the wishes expressed at
the Board of Directors' Meeting held on February 19, 2003, and ratified by the
Shareholders' Meeting held on the same day, was accepted by the parties, who
also agreed to capitalisation of the interest accrued as of December 31, 2002
and falling due on that date.
The line of credit requested from Telefonica Moviles Espana and Solivella
Investments on March 3, 2002, in order to cover operating requirements for
2002, amounts to 189,619 thousand euros. A request to extend this facility,
which provides for the repayment of principal and interest by December 31,
2002, for a further year was submitted. Such request was also ratified as
mentioned above, and the interest accrued to such date was capitalised.
A further loan agreement, similar to those above, was entered into on October
9, 2002 with Edison for an amount of 1,843 thousand euros. A request was also
made to postpone repayment of the principal and interest, falling due on
December 31, 2002, until December 31, 2003.
Finally, in December 2002, the strategic shareholders (Telefonica Moviles
Espana, Solivella Investments, Atlanet, Capitalia and Sonera) were asked to
make payments totalling 24,832 thousand euros to cover the failure by certain
shareholders to pay amounts due (of which the Company is a third-party
beneficiary as a result of binding agreements entered into between the
shareholders) in relation to payment of the second instalment of the licence
and related financial charges.
A-20
Trade creditors
This item breaks down as follows:
((euro)000)
---------------------------------------------------------------------------
Trade creditors 31.12.02 31.12.01
---------------------------------------------------------------------------
Ferrovie dello Stato 376.320 376.320
Other Italian suppliers 5.063 45.778
Overseas suppliers 270 1.693
Bills to be received 3.091 62.423
Credit notes to be received (375) (1.438)
---------------------------------------------------------------------------
Total trade creditors 384.369 484.776
---------------------------------------------------------------------------
As mentioned above, the Company has entered into a contract with R.F.I., with a
value of 315 million euros, plus VAT. Such amount is to be paid in 16 annual
instalments, without interest due on December 31 of each year. The instalment
falling due as December 31, 2002 was paid in January and February 2003. The
aging of this account is shown in the schedule provided at the end of the notes
to liabilities and shareholders' equity.
The amount referring to bills to be received regards trade creditors for
services and goods supplied by the end of the year and not yet billed.
Taxes due
Taxes due primarily relate to withholding tax (IRPEF) deducted from the wages
and salaries of employees and freelance professionals, and subsequently paid to
the tax authorities in January 2003.
Social security institutions
This item breaks down as follows:
((euro)000)
---------------------------------------------------------------------------
Social security institutions 31.12.02 31.12.01
---------------------------------------------------------------------------
INPS 448 871
Contributions on deferred remuneration 10 781
INAIL 134 310
INPDAI 38 197
Other social security institutions 17 146
---------------------------------------------------------------------------
Total social security institutions 648 2.305
---------------------------------------------------------------------------
This item refers to the amount due to INPS (448 thousand euros) for
contributions due from the Company and its employees for the month of December.
A-21
Other creditors
This item breaks down as follows:
((euro)000)
---------------------------------------------------------------------------
Other creditors 31.12.02 31.12.01
---------------------------------------------------------------------------
Other related parties
Telefonica mobile Solution, S.A.U. 82 7.576
Telefonica Moviles Intercontinental, S.A. 259
Related parties for bills to be received 830 18.453
Other amounts due to related parties 385 322
Total other related parties 1.297 26.610
Other:
Ministery of the Economy 136.345 1.083.010
Deferred remuneration due to personnel 5.637 4.217
Shareholders 394 394
Directors and Statutory Auditors 324 180
Other 186 174
---------------------------------------------------------------------------
Total other 142.885 1.087.975
---------------------------------------------------------------------------
Total other creditors 144.182 1.114.585
---------------------------------------------------------------------------
As mentioned above, the amount due to the Ministry of the Economy - Treasury
Department derives from charges for the UMTS licence, representing the
difference between the final bid made in order to obtain the licence and the
minimum bid price already paid, with deferred payment in the form of 10 annual
instalments.
During 2002 this amount was reduced in the following ways:
- As already mentioned in the notes to the item "Permits, licences,
trademarks and similar rights" recorded among intangible fixed assets, it
was reduced following the Company's decision to exercise its right to
return 5 MHz of frequency spectrum, which was duly notified to the
Ministry of Communications and the Ministry of the Economy - Treasury
Department. Consequently, the Company, with the adequate backing of expert
legal advice, reduced its debt to the Ministry of the Economy - Treasury
Department by 826,331 thousand euros, which is equivalent to the amount of
additional frequency allocated.
- The amount was further reduced following payment of the second instalment
on November 30, 2002. The total value of the instalment, totalling 156,647
thousand euros, consisted of the payment of principal totalling 120,334
thousand euros and the payment of interest amounting to 36,313 thousand
euros. Interest was calculated on the basis of the rate established by
point 9.1 f) of the auction regulations and confirmed by the ministerial
communique of December 11, 2002. The interest that accrued in the
subsequent month of December has been posted to accrued expenses.
Amounts due to employees consist of redundancy payments granted to outgoing
employees, which were negotiated at year end and will be paid during 2003.
Other creditors - related parties
This item regards relations with Telefonica group companies and breaks down as
follows:
(euro)000)
---------------------------------------------------------------------------
Other related parties 12.31.02 12.31.01
---------------------------------------------------------------------------
Telefonica mobile Solution, S.A.U. 82 7.576
Telefonica Moviles Intercontinental, S.A. 259
Total 82 7.835
Bills to be received from Telefonica
mobile Solution, S.A.U. 509
Bills to be received from Telefonica Moviles
Intercontinental, S.A. 639
Bills to be received from
Telefonica Moviles Espana, S.A. 745 17.220
Bills to be received from
Telefonica Sistemas, S.A. 85 85
Total 830 18.453
Other amounts due to related parties 385 322
---------------------------------------------------------------------------
Total other related parties 1.297 26.610
---------------------------------------------------------------------------
A-22
The amount due to Telefonica Moviles de Espana S.A., amounting to 745 thousand
euros, regards activities carried out in preparation for the market launch,
originally planned for 2001, and not yet invoiced as of December 31, 2002.
Further information on relations with the Telefonica group is provided in the
Management Report on Operations, in the section dealing with related party
transactions.
ACCRUED EXPENSES AND DEFERRED INCOME
This item breaks down as follows:
((euro)000)
---------------------------------------------------------------------
Accrued expenses and deferred income 31.12.02 31.12.01
---------------------------------------------------------------------
Accrued interest due to the Ministry 772 3.026
Accrued interest due to other lenders 160 144
Other accrued expenses - 64
---------------------------------------------------------------------
Total accrued expenses and deferred income 932 3.234
---------------------------------------------------------------------
Accrued expenses include 772 thousand euros regarding interest accrued to
December 2002 on the deferral of payment to the Ministry of Communications.
This item also covers the interest accrued on the loans from shareholders,
falling due in December 2002 as described above. Such interest amounts to 160
thousand euros, of which 87 thousand euros is due to the Telefonica group.
The aging schedule for creditors and accrued expenses is provided below:
((euro)000)
-------------------------------------------------------------------------------------------------
between
within 2 and 5 over
Creditors 12 months years 5 years total
-------------------------------------------------------------------------------------------------
Banks 419 419
Other lenders 253.266 253.266
Trade 33.008 94.200 257.160 384.368
Taxes due 1.268 1.268
Social security institutions 648 648
Other
Other related parties 1.297 1.297
Others 126.885 16.000 142.885
Total other 128.182 16.000 - 144.182
Total creditors 416.791 110.200 257.160 784.151
Accrued expenses 932 932
-------------------------------------------------------------------------------------------------
Total creditors and accrued expenses 417.723 110.200 257.160 785.083
-------------------------------------------------------------------------------------------------
A-23
MEMORANDUM ACCOUNTS
As of December 31, 2002 the "Memorandum accounts" refer to bank guarantees.
((euro)000)
---------------------------------------------------------------------
Memorandum accounts 31.12.02 31.12.01
---------------------------------------------------------------------
Mediocredito surety 1.006.444 1.136.733
Capitalia surety (R.F.I.) 99.000 100.000
Other sureties 92 334
---------------------------------------------------------------------
Total guarantees granted 1.105.536 1.237.067
---------------------------------------------------------------------
The total of 1,105,536 thousand euros represents the balance of the following
sureties:
o a surety of 1,006,444 thousand euros issued by MCC in favour of the
Ministry of the Economy and Finance - Treasury Department - guaranteeing
the commitments, described in paragraph 9.1, letter f) of the auction
regulations, given by the licensee following a request for the deferral of
payment to the Ministry, in accordance with point 5 a) of the Call for
Bids. The value of the surety is based on the residual principal due
before the Company exercised its right to relinquish additional spectrum.
Awaiting formal notification from the Ministry of Communications on the
related reduction, the surety was recorded at the afore-mentioned value of
962,675 thousand euros, plus three six-monthly instalments of interest
totalling 43,768 thousand euros; the interest was calculated at a rate of
3.031%. As of December 31, 2002, the surety was pledged in a current
account deposit as a back-to-back guarantee of 142,889 thousand euros by
the Company's shareholders.
o a surety of 99,000 thousand euros issued by Capitalia in favour of R.F.I.
S.p.A. as guarantee for the payments due under the 15-year contract with
IPSE, relating to the concession of the right of usufruct and possession
regarding a portion of the real estate assets of R.F.I. in order to
install telecommunications equipment.
o the remaining amount of 92 thousand euros regards sureties issued in
relation to property leases.
A-24
NOTES TO THE PROFIT AND LOSS ACCOUNT
TURNOVER
Revenues from sales and services
Revenues from sales and services, totalling 723 thousand euros, derived from
the sale of mobile handsets.
Capitalised costs and expenses
No capitalised costs and expenses were suspended during the year.
Other income
Other income primarily regards lease rentals recharged to employees in return
for use of company cars.
OPERATING COSTS
Raw, ancillary and consumable materials and goods for resale
The following schedule shows a breakdown of the cost of raw and ancillary
materials and goods for resale:
((euro)000)
---------------------------------------------------------------------
Raw, ancillary and consumable materials and
goods for resale 2002 2001
---------------------------------------------------------------------
Goods for resale 23 18.061
Gadgets - 678
Other consumables 16 1.214
Stationery and printers 32 250
---------------------------------------------------------------------
Total 71 20.203
---------------------------------------------------------------------
The sharp decrease is due to the interruption of marketing activities in
December 2001.
A-25
Services
The cost of services breaks down as follows:
((euro)000)
---------------------------------------------------------------------
Services 2002 2001
---------------------------------------------------------------------
Consultants' fees 2.704 14.618
Surety expenses 1.004
Seconded personnel - 8.759
Advertising and promotion 5 4.153
Fairs and expositions - 1.585
Insurance 211 129
Travel expenses 372 1.112
Utilities 719 71
Removals and transport 720 97
Maintenance 914 162
Sponsorship of fairs and events - 847
Security and cleaning 995 629
Agents' commissions 272 521
Canteen costs and luncheon vouchers 506 493
Telecommunications 871 485
Personnel training 21 479
Other personnel-related costs 150 356
Fees paid to Directors and Statutory
Auditors 217 180
Entertainment expenses 14 123
Recruitment costs 94
Other services 1.380 1.407
---------------------------------------------------------------------
Total 11.074 36.299
---------------------------------------------------------------------
The overall contraction in the cost of services is directly linked to the
Company's current cost-cutting strategy. The most significant amounts regard
consultancy and sureties relating to payments made to Capitalia for the surety
issued in favour of R.F.I. in connection with the contract entered into with
the latter as described above.
Leases and rentals
This item breaks down as follows:
((euro)000)
---------------------------------------------------------------------
Leases and rentals 2002 2001
---------------------------------------------------------------------
R.F.I. contract 20.323
Property leases 1.423 1.035
Transmission capacity (line rentals) 1.622 1.038
Car hire 1.619 550
Residential accommodation 187 193
Sundry hire charges 442 697
---------------------------------------------------------------------
Total 25.615 3.513
---------------------------------------------------------------------
As the schedule shows, leases and rentals primarily refer to the rental due to
R.F.I. in relation to the afore-mentioned contract for the period January 1,
2002 - December 31, 2002.
Other items include costs incurred during 2002 for renting properties in via
Depero and via Noale. The latter property, which was vacated by the Company in
August 2002, was subject to a penalty due to the owners (see the section below
on extraordinary expense).
The sum of 1,622 thousand euros regards the cost of using the lines and cables
used for transmission between the Company's offices.
Substantial costs were also incurred for car rentals.
A-26
Personnel costs
Personnel costs break down as follows:
((euro)000)
---------------------------------------------------------------------
Personnel costs 2002 2001
---------------------------------------------------------------------
Ordinary and variable remuneration 17.552 21.433
Other contributions 5.085 5.869
Termination indemnities 1.184 861
Other - 8
---------------------------------------------------------------------
Total 23.821 28.171
---------------------------------------------------------------------
The following schedule summarises the number of employees at year end.
-------------------------------------------------------
Headcount Ipse 2000
-------------------------------------------------------
Managers 11
Supervisors 54
Administrative staff 126
-------------------------------------------------------
Total employees 191
-------------------------------------------------------
As required by art. 2427 of the Italian Civil Code, the following schedule
shows the average number of employees for 2002.
-------------------------------------------------------
Average headcount Ipse 2000
-------------------------------------------------------
Managers 30
Supervisors 96
Administrative staff 262
-------------------------------------------------------
Total employees 388
-------------------------------------------------------
Amortisation, depreciation and write-downs
The technical and economic amortisation and depreciation of tangible and
intangible fixed assets continued during the year.
The following schedule provides a breakdown by category of asset.
(euro)000
----------------------------------------------------------------------
B.I. Intangible fixed assets
----------------------------------------------------------------------
1 start-up and expansion costs (25)
2 research, development and advertising costs -
3 rights (113)
4 permits, licences, trademarks and similar rights -
7 other (1.049)
----------------------------------------------------------------------
Total intangible fixed assets (1.187)
----------------------------------------------------------------------
B.II Tangible fixed assets
2 plant and machinery (51)
3 industrial and commercial equipment (102)
4 other assets (807)
Total tangible fixed assets (960)
----------------------------------------------------------------------
Total amortisation and depreciation (2.147)
----------------------------------------------------------------------
The write-down of amounts due included under current assets, totalling 64,808
thousand euros, regards the amount due from the Treasury Ministry for higher
interest paid during 2001 and 2002. This derives from the return of additional
frequency spectrum and the subsequent reduction in the amount due to said
Ministry as described above in the item "Permits and licences".
A-27
Changes in inventories of raw, ancillary and consumable materials and goods for
resale
This item reflects the decrease in stocks of mobile handsets and SIM and
scratch cards held on deposit with the Company's supplier of logistics
services, or held in stock by suppliers, as of December 31, 2002.
Other operating costs
((euro)000)
---------------------------------------------------------------------
Other operating costs 2002 2001
---------------------------------------------------------------------
Contributions 132 257
Membership fees 277 211
Magazine subscriptions 31 46
Other 34 70
Losses on loans 27 -
---------------------------------------------------------------------
Total 502 584
---------------------------------------------------------------------
Other operating costs breakdown as follows:
The most important items refer to contributions paid to the State Provincial
Treasury and membership fees due for 2002, respectively.
FINANCIAL INCOME AND EXPENSE
Financial income and expense is summarised below:
((euro)000)
---------------------------------------------------------------------
Financial income and expense 2002 2001
---------------------------------------------------------------------
Interest on term deposit 240 247
Interest on short-term deposit 291 1.083
Interest on ordinary current account 125 626
Other financial income 31 1
Total financial income 687 1.957
Interest expense on borrowing 43 144
Interest expense paid to shareholders 11.449 150
Other financial expense 19 36
Other financial expense (commitment fees) 1.030 -
Losses on foreign currency translation 20 62
---------------------------------------------------------------------
Total financial expense 12.561 392
---------------------------------------------------------------------
Total financial income (expense), net (11.874) 1.565
---------------------------------------------------------------------
Financial income for the year amounted to 687 thousand euros. This sum includes
291 thousand euros deriving from investment in money market deposits during
2002, and 240 thousand euros in accrued interest consisting of a current
account deposit pledged to Capitalia as a back-to-back guarantee for the surety
issued by the bank to R.F.I., and accrued interest amounting to 125 thousand
euros on bank and post office current accounts.
Financial expense primarily includes interest paid to shareholders on loans
granted as described above.
Net financial expense amounted to 11,874 thousand euros.
A-28
EXTRAORDINARY INCOME AND EXPENSE
The following schedule provides a breakdown of expense arising outside the
Company's ordinary activities.
((euro)000)
---------------------------------------------------------------------
Extraordinary expense 2002 2001
---------------------------------------------------------------------
Penalties for cancellation of advertising
campaigns - 8.673
Write-downs of fixed assets 67.234 13.211
Agents' termination indemnities 1.889 -
Fines and penalties 11.140 -
Redundancy payments 27.292 -
Losses on disposals 10.189 -
Extraordinary expense 2.527 -
R.F.I. contract 11.292
Write-downs of costs capitalised in 2001 - 193
---------------------------------------------------------------------
Total 131.564 22.077
---------------------------------------------------------------------
The sum of 67,234 thousand euros refers to the write-down of tangible and
intangible assets, initially posted to fixed assets, whose lives are no longer
deemed useful, due to the definitive abandonment of the market launch of
GSM/GPRS services and the refocusing of strategy on spectrum trading
activities.
Fines and penalties derive from interruption of existing contracts. The most
significant amount, totalling 7,700 thousand euros, was paid to Agricola Liete
S.p.A. following cancellation of the lease on the offices in via Noale.
Redundancy payments, as previously mentioned, relate to agreements negotiated
at year end with outgoing employees, of which a portion amounting to 5,637
thousand euros will be paid during 2003.
Losses on disposals relate to sales of fixed assets that cannot be adapted to
use within the field of UMTS technology.
Finally, expense relating to the R.F.I. contract refers to costs regarding 2001
previously capitalised among intangible assets. Such costs relate to rentals
for the period July 1, 2001 - December 31, 2001 and surety charges incurred
during the same year.
Extraordinary write-downs
As explained under the item "Permits and licences", the Company decided to
write down the original cost incurred for acquisition of one of the five blocks
and related financial charges incurred as of December 31, 2002, for an amount
of 2,072,987 thousand euros, equal to 82% of the original cost.
A-29
OTHER INFORMATION
LEGAL AND TAX-RELATED PROCEEDINGS
As of December 31, 2002 the Company was not party to any such proceedings.
REMUNERATION OF DIRECTORS AND STATUTORY AUDITORS
The Ordinary General Meeting of November 28, 2000 resolved to pay members of
the Board of Directors total remuneration of 75,000 euros per annum. During
2002, a new Chairman of the Board of Directors, Vittorio Ripa di Meana, was
appointed with remuneration of 60,000 euros per annum.
The remuneration due to members of the Board of Statutory Auditors for 2002
amounts to 105,000 euros.
Such expense is posted to operating costs.
GENERAL ASPECTS
Information regarding the Company's business purpose, subsequent material
events and related party transactions is provided in the Management Report on
Operations.
Subsequent material events
Initiatives with regard to regulatory bodies
On October 29, 2002, Ipse 2000 S.p.A. notified the Ministry of Communications
of its intention to relinquish its right to be allocated and hold additional
2x5MHz spectrum. In particular, the Company declared that technical, economic
and fair trading regulations had compelled them to submit such a request, which
was, for the above reasons, justified from a legal viewpoint. Ipse also asked
that its relinquishment of supplementary spectrum should release the Company
from the obligation to pay the related expenses.
Indeed, the additional spectrum was allocated during the auction - and at a
price that should have been particularly favourable - with the deliberate
purpose of creating an asymmetrical advantage. However, market changes altered
such effects turning them into an asymmetrical disadvantage for IPSE, and as
such an unsustainable burden.
On November 29, Ipse 2000 S.p.A. sent a second letter to the Ministry of
Communications confirming its request, whilst also making further observations
on the demand for urgent measures to reinstate fair trading conditions with
regard to UMTS systems.
For its part, the Ministry of Communications decided to seek the opinion of the
Communications Authority, particularly regarding the changed effectiveness of
the asymmetrical measures. The Authority expressed its view in a letter sent to
the Ministry of Communications on February 4, 2003. Whilst stating that any
decision on this matter rested exclusively with the Ministry, the Authority saw
no substantial objections, and above all no regulatory or legal obligations,
that prevented return of the additional spectrum.
Subsequent to this letter sent by the Authority, the assessment process of IPSE
2000 S.p.A.'s motives was deemed to be concluded, as the Company, backed by
expert legal advice, did not consider that any formal acceptance by the
Ministry of Communications or the Telecommunications Authority was necessary.
On May 2, 2003, the Company formally notified the Ministry of Communications,
the Communications Authority and the Ministry of the Economy of its decision to
relinquish the additional spectrum.
The relinquishment and its effects on Ipse's assets and commitments were
reflected in the financial statements by removing the corresponding value of
the additional spectrum from the value of the UMTS licence. At the same time,
the debt due to the Ministry of the Economy regarding the additional spectrum
was cancelled, despite the fact that such a debt is nevertheless guaranteed by
the Company's shareholders.
On May 19, 2003, the Ministry of Communications objected that "modifications to
licence conditions (...) are determined by the granting authority in accordance
with the principles of
A-30
proportionality, transparency and non-discrimination", and that as return of
the frequencies had not been "determined by this ministry, (...) the said
notification may not take effect".
The Company intends to defend its right through appropriate legal measures that
are currently being studied, whilst maintaining the above accounting treatment
in the balance sheet.
No other significant subsequent events occurred.
Renewal of shareholder loan
The loans granted by Atlanet, Capitalia (formerly Banca di Roma), Telefonica
Moviles Espana and Solivella Investments in December 2001 and by Edison in
October 2002 all fell due on December 31, 2002. The Company has requested
postponement of repayment, until December 31, 2003. Such request, carried out
in accordance with the wishes expressed at the Board of Directors' Meeting held
on February 19, 2003, and ratified by the Shareholders' Meeting held on the
same day, was accepted by the parties, who also agreed to capitalisation of the
interest accrued as of December 31, 2002 and falling due on that date.
The line of credit requested from Telefonica Moviles Espana and Solivella
Investments on March 3, 2002, in order to cover operating requirements for 2002,
amounts to 189,619 thousand euros. A request to extend this facility, which
provides for the repayment of principal and interest by December 31, 2002, for a
further year was submitted. Such request was also ratified as mentioned above,
and the interest accrued to such date was capitalised.
Subsequent events occurred between July 8th 2003 and April 10, 2005
Relinquishment of the additional frequency spectrum
In November 2003 the Company submitted another petition to the TAR of the Lazio
Region for the application of the provisions of the new Electronic
Communication Code. In this petition, the Company argued that the right to
relinquish (the frequency spectrum, network or service operation) is now
expressly laid down by the Code. Moreover, the Company indicated that one of
the effects of the Code was the full change of the sums to be paid as
"contribution" for the UMTS frequencies and that, in that respect, the Company
paid excess amounts (which should be returned).
A further action, before the Court, has been brought on May 31, 2004 by IPSE
against the Italian Government, challenging the subsequent assignment by the
Ministry of certain GSM frequencies to the incumbent operators, basically for
free. IPSE contends that this assignment has worsened its position as a new
entrant and reinforced the arguments set out in the above petition, actually
confirming the Government's illegitimate behavior in relation to UMTS operators
and technology and depressing artificially the value of frequencies. IPSE also
contends, inter alia, that the Code
A-31
of Telecommunications ("the code") has entirely superseded all prior rules in
the sector, including the laws and regulations and implementing rules
(including UMTS License terms and conditions) applicable to IPSE; as a result:
(a) because the Code states that, in principle, the value of each 5MHZ block -
payable as a "fee" to the Government - is of 7,2 millions Euro per year,
and because the Code is expressly retroactive, IPSE has paid amounts in
excess for the License and the spectrum (principal and additional) and the
Government must reimburse these excess payments to IPSE. Depending on the
calculations, IPSE is requesting reimbursement of an amount ranging from
1.4 and 1.7 billion Euros, in addition to the release from the residual
debt of 826 millions Euros for the additional spectrum;
(b) based on a number of other provisions of the Code, IPSE believes that all
of its arguments and allegations set out in all the other proceedings are
confirmed and actually reinforced.
The legal and technical arguments raised by IPSE, if accepted in whole or in
part by a Court of law, would have a very significant effect also on the other
operators and on the UMTS Licenses as a whole. Potentially, the Italian
Government could be called, in case of negative outcome for it, to reimburse
very material amounts (previously cashed in the UMTS auction procedure) and/or
to materially amend / suspend the application of the Code, in whole or in part.
All the actions filed by IPSE have been joined and the hearing has been fixed
for June 8, 2005 when a final decision could be taken by the Court on all the
matters.
As related to the European Commission, the Company submitted in June 2003 a
petition alleging a violation of community laws. Upon receipt of this petition,
the European Commission sent a letter (of a so-called administrative nature)
whereby clarifications were sought from the Italian State, concerning both the
rejection of the Company's relinquishment and the other measures adopted (on
the allocation of new frequencies to the GSM operators) which, according to the
Directors, gave rise to anti-competitive effects on the Italian market. By
letter dated December 21, 2004, the Commission informed IPSE of its intention
not to pursue IPSE's case. In response thereto, IPSE has filed a further
complaint, dated February 2, 2005, inviting the Commission to reconsider its
position and requested a meeting. Further to such meeting, the Commission
reserved a decision and pointed out, especially with regard to the assignment
of GSM frequencies (see point 1.b above), that an additional separate claim be
posted by IPSE directly with the Competition Services of the Commission.
On December 1, 2003, when the installment due to the Ministry of the Economy on
November 30, 2003 was paid, the Company paid also the interest accrued until
November 30, 2003 on the debt for the additional spectrum, which had been
eliminated from company accounts in fiscal year 2002. This payment gave rise to
an amount receivable from the Ministry of the Economy for the same amount. The
Company's shareholders paid the interest accrued on the debt for the additional
spectrum (reserving the right to seek restitution) in order not to undermine
the Company's claims, for which
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proceedings had been initiated or would eventually be initiated, and to spare
the shareholders the additional payments triggered by reason of the guarantees
presented, and the resulting requests for restitution to the State.
License valuation and realization
In 2004 the Company asked to Banca IMI, an updating of its Fairness Opinion on
the UMTS License valuation performed one year earlier. In June 2004, Banca IMI
confirmed the fairness valuation of the UMTS License from the precedent year,
based on improve market conditions (three out of four operators had already
launched there 3G services), lower operating costs and a lower tax rate,
compared with the precedent year figures. The value of the license was
determined on the basis of the best information available and estimates subject
to significant uncertainty, especially concerning:
(i) The lack, to date, of any agreement with other operators, and the
resulting effects on the coverage obligation;
(ii) The expected developments in the UMTS market, the ability to estimate the
time necessary for users to migrate from the GSM/GPRS to the UMTS
platform, the mix of services applicable in individual high-migration
geographic areas and the dimensioning of the technological structures on
which the calculation of cost savings is based;
(iii) The bargaining ability to obtain a sum today for an asset that will begin
to yield its benefits several years from now.
Furthermore, as at June 30, 2004, the Company did not comply with the coverage
obligation set forth by article 8 of the terms and conditions of the UMTS
license. In fact, as explained in the pending administrative proceedings,
especially those before the Regional Administrative Court (locally known as
TAR) of the Lazio Region in November 2003, and on the basis of the new legal
framework introduced by the Electronic Communication Code, the Company is of
the opinion that it is not required to fulfill the original coverage obligation
provided for by the UMTS license. However, the Ministry of Communications is
considering the original coverage obligation enforceable and is contemplating
the possibility of starting a sanctioning procedure against the Company. A
proceeding, between Ipse and the Government has in 2004 been commenced by IPSE
before the Court since:
(i) IPSE contends that, again, the Code provides no such requirement and has
superseded the prior coverage obligations; as a result, it is no longer
bound thereto;
(ii) IPSE, as permitted under Art. 14 of the Code and in furtherance of EU
Directives, has notified the Ministry its intention to become a "spectrum
trader" i.e. disposing commercially of its frequencies / license. IPSE
argues that, under the Code, spectrum trading exonerates the trader from
any coverage requirement, which (if any, see above) should fall on the
counterparty of a spectrum trading transaction.
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The Ministry, after an initial approach seemingly confirming IPSE's position,
has later changed its position, hinting that failure to comply with coverage
obligations (which, in its view, have survived) may result in sanctions, up to
and including the revocation of the License. IPSE has therefore proceeded to
challenge the Ministry's official documents on this aspect, again before the
Rome Administrative Court, by writ notified on October 13, 2004.
Based on the foregoing there are significant uncertainties in interpreting the
law on the dissolution of the coverage obligations, as claimed by the Company,
and the nature of the sanctions that might be inflicted at the end of an
inquiry, considering that the Electronic Communication Code allows the Ministry
of Communications, in the presence of "serious" violations, to adopt measures
designed to........."prevent a company from continuing to provide, in whole or
in part, networks or electronic communication services, suspending or canceling
rights of use". Any such measure would give rise to significant effects for the
ability of the Company to implement its "spectrum trading" strategy.
As permitted under the New Telecommunications Code, entered into force on
August 1, 2003, and by decision of the Board of Directors, IPSE started
negotiations with all the Italian Mobile Operators, for the rent and / or sale
of its frequency spectrum. Consequently, IPSE has notified the Ministry of
Communications of its intention to opt for the spectrum trading business model
stating, as requested by the Ministry, that it would be prepared, in case of
successful outcome of the negotiations, to renounce to become a direct operator
(as a consequence of the transfer of the spectrum awarded with the licence).
During September 2004, Ipse has received from all the Italian mobile operators
(Tim, Vodafone, Wind, and H3G) expressions of interest for the acquisition of
blocks of frequencies. The Company is now evaluating how to proceed with any
possible negotiation in order to obtain the best available conditions for the
sell. At the same time, negotiations were commenced between some of IPSE's
shareholders and third parties, to sell 100% of IPSE's equity. To the best of
IPSE's Management knowledge, in addition to the value of the frequencies, a
factor to be taken into account would be that the acquisition of IPSE's shares
by a profit making company could be accompanied by a future tax benefit for the
purchaser, therefore increasing the value of IPSE's spectrum. In this respect,
on December 24, 2004, ENEL (national electricity utility company, owner of 100%
of equity of the integrated telecommunication operator Wind) announced its
intention to buy 100% of IPSE's shares for a maximum price of (euro) 792
million. On December 31st 2004 both IPSE and ENEL announced the interruption of
these negotiations mainly for reasons internal to ENEL.
During the first months of 2005, other discussions with other potentially
interested third parties, were carried on, However, such discussions have not
to date produced any concrete development.
As of the date hereof, Management has no elements to make any statement or
assessments about the possible outcome of any negotiation already done or
on-going with third parties.
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RFI contract settlement
The Company through a letter dated November 27, 2003 exercised its withdrawal
rights for serious reasons from the agreement with Rete Ferroviaria Italiana
(RFI), covering the use of 1,500 sites owned by this company. In December 2003,
the Company initiated legal proceedings under article 700 of the code of civil
procedure in order to obtain legal forced relief in order for such withdrawal
effects to take place immediately. The claim was rejected on December 31, 2003,
as the Court of Rome denied the existence of "a danger" in all the cases
presented by the Company, rebutting all the arguments to support the
dissolution of IPSE 2000 S.p.A.'s contractual obligations but indicating
repeatedly the possible application to this agreement of the rules typically
applicable to leasing. Subsequently, as required under the contract, Ipse
started an arbitration procedure against RFI seeking confirmation of the
validity of its withdrawal from the contract. On March 2005, the parties have
reached a settlement, which is to be formalized and executed no later than the
first week of May 2005, on the following terms and conditions:
Ferrovie acknowledges the validity of IPSE's withdrawal dated November 27, 2003
and further that IPSE has neither selected, nor obtained the use of any sites;
Both parties acknowledge that the amount of 120 million Euros (including VAT) is
the sum owed by IPSE as consideration for:
(i) the exclusivity granted by Ferrovie to IPSE for 4 years, during which
Ferrovie could not dispose of any of the sites;
(ii) the preference right granted to IPSE by Ferrovie for the subsequent 3
years.
Given the amount already paid by IPSE and to be set off against the above, IPSE
shall pay to Ferrovie, in full and final settlement of the contract and the
controversy being arbitrated, the sum of Euro 93.360.000 (VAT included). The
effect of the foregoing settlement will be recorded as a loss of approximately
40 million Euros in Ipse's 2004 financial statements.
In relation to all legal matters discussed above, it must be noted that the
foregoing is a summary report of the current status of proceedings pending and
issues involved; though the foregoing statements are a true and fair summary,
they however must be qualified to the extent that the full legal analysis
thereof is contained in the company legal counsel reports, which shall be
deemed to be the sole comprehensive legal analysis applicable to the cases and
issues.
Summary of Principle GAAP Differences
The financial statements of the Company have been prepared in accordance with
generally accepted accounting principles in Italy ("Italian GAAP"), which
differ in certain significant respects from generally accepted accounting
principles in the United States of America ("US GAAP"). The Company has not
prepared financial
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statements in accordance with US GAAP or prepared a reconciliation of its
financial statements to US GAAP and, accordingly, cannot offer any assurances
that the differences described below would, in fact, be the accounting
principles creating the greatest differences between financial statements of
the Company prepared under US GAAP and under Italian GAAP. In addition, the
Company cannot estimate the net effect that applying US GAAP would have on its
results of operations or financial position, or any component thereof, in any
of the presentations of financial information. However, the effect of such
differences may be material, and in particular, it may be that the total
shareholders' equity and net income prepared on the basis of US GAAP would be
materially different due to these differences. The following summary may not
include all differences that exist between Italian GAAP and US GAAP.
The following paragraphs summarize certain significant differences between
Italian GAAP and US GAAP as of December 31, 2002 and not differences that may
exist presently. This description is not intended to provide a comprehensive
listing of all such differences specifically related to the Company or the
industries in which it operates. US GAAP is generally more restrictive and
comprehensive than Italian GAAP regarding recognition and measurement of
transactions, account classification and disclosure requirements. No attempt
has been made to identify all disclosure, presentation or classification
differences that would affect the manner in which transactions and events are
presented in the financial statements or the notes thereto.
Revenue Recognition
Under Italian Accounting Principles revenues are generally recognized when
ownership has been transferred or services rendered and are generally measured
as the amount invoiced to the client.
Under US GAAP, revenue is generally realized or realizable and earned when all
of the following conditions have been satisfied: (a) persuasive evidence of an
arrangement exists; (b) goods are delivered or service is rendered with a
resultant transfer of risks and reward to the buyer; (c) price is fixed or
determinable; and (d) collectibility is reasonably assured.
Start Up, Marketing, and Research Costs
Under Italian Accounting Principles, certain costs related to the formation,
start up, marketing and research of a company may be deferred and capitalized
as an intangible asset and amortized on a straight-line basis over a period not
exceeding five years, if certain conditions are met. These costs are written
down to their recoverable amount when an impairment exists.
Under US GAAP, formation, start-up, marketing, and research and development
costs are expensed as incurred.
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Extinguishment of Liabilities
Under Italian GAAP when a discrepancy exists between a legal interpretation of
the law of the creditor which relates to existence of the obligation for the
Company it is Board of Directors responsibility to appropriately support the
extinguishment of the debt through an independent legal opinion.
Under US GAAP a debtor shall derecognize a liability if and only if it has been
extinguished. A liability has been extinguished if either of the following
conditions is met: (a.) The debtor pays the creditor and is relieved of its
obligation for the liability. Paying the creditor includes delivery of cash,
other financial assets, goods, or services or reacquisition by the debtor of
its outstanding debt securities whether the securities are cancelled or held as
so-called treasury bonds, or (b.) The debtor is legally released from being the
primary obligor under the liability, either judicially or by the creditor.
In a legal defeasance, generally the creditor legally releases the debtor from
being the primary obligor under the liability. Whether the debtor has in fact
been legally released from being the primary obligor under the liability,
either judicially or by the creditor is a matter of law.
Deferred Taxes
Italian Accounting Principles and U.S. GAAP are substantially aligned.
The most significant differences are as follows: (a) according to Italian
Accounting Principles a deferred tax liability should not be recorded when the
liability is unlikely, and (b) under Italian Accounting Principles deferred tax
assets are recorded only if there is a reasonable certainty of their future
recovery.
Under U.S. GAAP, deferred taxes are recorded for all temporary differences,
including net operating loss carry-forwards. In addition, under U.S. GAAP, the
Company would record a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. In the event that the
Company was to determine that it would not be more likely than not to realize
all or part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determinations
were made. Under US GAAP deferred tax assets are based on rates that have been
enacted.
Impairment of Long-Lived Assets
According to Italian Accounting Principles long-lived assets are generally
tested for impairment, when circumstances indicate a potential impairment. When
an impairment other than temporary is identified, an impairment loss should be
charged to income. When there is a change in the economic conditions, previous
impairment can be reversed. Italian Accounting Principles do not
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address the concept of an asset group, which exists under U.S. GAAP.
Under U.S. GAAP a long-lived asset (asset group) shall be tested for impairment
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. For purposes of recognition and measurement of an
impairment loss, a long-lived asset or assets shall be grouped with other
assets and liabilities at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets and liabilities. The
carrying amount of a long-lived asset (asset group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (asset group). If a fixed asset is
impaired, an impairment loss shall be measured as the amount by which the
carrying amount of a long-lived asset (asset group) exceeds its fair value.
Once an impairment under U.S. GAAP is recognized, it cannot be reversed, except
in certain circumstances such as when assets are classified held-for-sale or
reclassified from assets held-for-sale to assets held for use.
Employees' Severance Indemnities (Reserve for Termination Indemnities)
Under Italian Accounting Principles, employees' severance indemnities ("TFR")
are accrued, net of advances paid, on the basis of what would be paid to them
if they left the company at period-end, without taking into account future
leaving or discounting the liability.
Under U.S. GAAP, EITF 88-1, "Determination of Vested Benefit Obligation for a
Defined Benefit Plan" addresses the accounting for the provisions of TFR, which
allows a Company to adopt an accounting method similar to Italian GAAP, or to
recognize an obligation based on the actuarial present value of the vested
benefits to which the employee is currently entitled but based on the employee's
expected date of separation or retirement
Provision for Risks and Charges
Under Italian Accounting Principles, provisions for liabilities and charges
should be made to cover losses or debts, the nature of which are clearly
defined and which at the balance sheet date are either likely to be incurred or
certain to be incurred, but for which the amount of, or the date on which they
will arise, is uncertain. The amount of future cash expenditures expected to be
required to settle the obligation is not required to be discounted. In
particular, restructuring costs can be recorded when an enterprise has
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formally decided to carry out the restructuring plan and the related costs can
be reliably estimated.
Under U.S. GAAP, loss contingencies are recorded when (a) it is probable that
an asset has been impaired or a liability has been incurred and (b) the amount
can be reasonably estimated.
Accounting and Disclosure Requirements for Guarantees
Under Italian Accounting Principles, guarantees are recorded in the memorandum
accounts.
Under U.S. GAAP, beginning in 2002 certain information is required to be
disclosed in the financial statements, while effective for certain guarantees
issued or modified after December 31, 2002, a guarantor is required to measure
and record a liability for the fair value of the obligations undertaken in
issuing the guarantee and disclose the characteristics of the guarantees in the
financial statements .
Restructuring Costs
Under Italian GAAP Restructuring costs may be accounted if an entity's
commitment to a plan exists and is approved by the Board of Directors.
Through December 31, 2002, US GAAP and Italian GAAP were similar as it related
to the accounting for restructuring costs. The primary difference related to
the timing of when the restructuring costs were expected to be incurred. Under
U.S. GAAP, the time frame for utilization of restructuring reserves should not
be more than one year, while under Italian GAAP, the utilization of
restructuring reserves does not have a specified limited time frame.
Effective for exit or disposal activities initiated after December 31, 2002, US
GAAP requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. It also concludes that
an entity's commitment to a plan, by itself, does not create a present
obligation to others that meets the definition of a liability. Under US GAAP,
fair value is the objective for initial measurement of the liability. In
respect to other exit costs, liabilities are simply recognised when they are
incurred, which is normally when the goods or services associated with the
activity are received.
Capital Increase Costs
Under Italian Accounting Principles, costs incurred in connection with the
issuance of equity (e.g., capital increases, mergers, spin-offs, acquisitions)
may be capitalized and amortized on a straight-line basis over a maximum period
of five years.
Under U.S. GAAP, such costs are recorded as a reduction of shareholders'
equity.
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Differences in Presentation and classification of income
Income Statement Presentation
Under Italian Accounting Principles, the statement of income provides to the
reader the "Value of production" and the "Costs of production" realized and
does not provide the reader with the value of sales and revenues or the cost
and expenses applicable only to sales and revenues. Therefore, costs are
classified by nature and not by destination.
Under U.S. GAAP, the function of the transaction is presented in the statement
of income by separately presenting such line items as "Net sales and gross
revenues," "Costs and expenses applicable to sales and revenues," "Gross
profit," "Other operating costs and expenses," "Selling, general and
administrative expenses," "Non-operating income and expenses," "Interest and
amortization of debt discount and expense" and "Income or loss from continuing
operations," which may not be similarly or separately disclosed on the face of
the income statement under Italian Accounting Principles. Additionally, costs
and expenses applicable to sales and revenues are included in the Italian
presentation of the income statement as "Change in work in progress,
semi-finished and finished product inventories," "Raw materials and supplies,"
"Services," "Personnel" and other applicable costs within "Costs of
production." Non-operating income presented in U.S. GAAP financial statements
would include the portion of "Other income and revenues" that would not be
classified as operating income on a U.S. GAAP income statement. Certain items
included in "Other income and revenues" under Italian Accounting Principles
would be netted against cost of goods sold or other operating expenses.
In addition, certain changes in accounting estimates are recorded within the
caption "Other income and revenues" if positive and in the caption "Other
operating costs" if negative under Italian Accounting Principles. Such changes
are recorded within the income statement caption which the original estimate
was recorded for U.S. GAAP purposes.
Under Italian Accounting Principles, extraordinary items generally include
items of a non-recurring nature. Certain recurring items are also reported as
extraordinary items under Italian Accounting Principles, such as gains and
losses on disposal of certain fixed assets and investments, adjustments of
prior year accruals to actual amounts realized and other matters.
Under U.S. GAAP, the definition of extraordinary items is more restrictive than
Italian Accounting Principles and only items that are both unusual in nature
and infrequent in occurrence are classified as extraordinary, net of tax
effect. Under U.S. GAAP, the restructuring costs generally are not considered
as extraordinary items. Under Italian Accounting Principles such costs have to
be classified as extraordinary.
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Cash Flows Statement
Cash flows statement information is provided voluntarily under Italian
Accounting Principles.
Under U.S. GAAP, a cash flow statement is required. In addition, foreign
currency translations adjustments are not included in cash flows provided by
investing activities but as a separate item. Also, the cash flow format under
U.S. GAAP would reconcile the beginning and end of the year cash. Under US GAAP
interest and dividend paid and received in general are presented in operations.
Finally, US GAAP allows cash flows to be presented both under the direct or
indirect method.
Differences in Disclosure
There are a number of significant disclosure differences between Italian
Accounting Principles and U.S. GAAP. Disclosures in financial statements are
generally more extensive under U.S. GAAP than under Italian Accounting
Principles. Some of the areas where U.S. GAAP require more disclosure than
Italian Accounting Principles include the following:
(a) description of cash and cash equivalents;
(b) details of balance sheet risks and commitments;
(c) concentrations of credit risk;
(d) details of financial instruments including:
(i) market values; and
(ii) nature of instruments and terms, including credit and market risk,
cash requirements, information regarding financial instruments used
to hedge firm commitments, amount of loss if any party to the
financial instruments fails to perform, and policy regarding
collateral requirements;
(e) financing facilities and terms including the description of the debt
instrument, due dates, interest rates, whether the debt is secured or
unsecured, any repayments due for the subsequent five years;
(f) description of leasing commitments including minimum lease payments for
the five subsequent years;
(g) the amount of asset valuation allowance on inventories and investments;
(h) reconciliation from the statutory tax rate to the effective tax rate and
information regarding net operating loss carry-forwards and their dates of
expiration;
(i) earnings per share information (the earning per share information is
provided voluntarily under Italian Accounting Principles and is required
U.S. GAAP only for public companies);
(j) reporting of comprehensive income (US GAAP);
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(k) non-cash transactions reference to the statement of cash flows and
interest and income taxes paid during each year;
(l) financial information relative to segments, such as revenues, operating
income and identifiable assets and export sales by geographic area and
major customers;
(m) classification of leasehold improvements and capitalized software and debt
issue costs;
(n) narratives relating to the use of estimates;
(o) details of related party transactions; and
(p) the impact, or expected impact, of recent accounting pronouncements in
accordance with SAB No. 74.
Recently Issued Accounting Pronouncements
Currently there are no pronouncements in draft issued by Consiglio Nazionale
dei Dottori Commercialisti e dei Ragionieri, and such body is not expected to
issue new pronouncements, because its main functions have been taken over by
the new Italian accounting regulatory body "Organismo Italiano di Contabilita",
which was created in 2003. The Organismo Italiano di Contabilita has not yet
issued any pronouncements in draft.
The following is a summary of accounting pronouncements that were issued or
effective subsequent to 2002 relating to US GAAP that may be relevant to the
Company:
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34)" ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation does not prescribe a
specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superseded. The disclosure requirements of FIN 45 were applicable for the year
ended December 31, 2002. The initial recognition and initial measurement
provisions of FIN 45 are applicable starting on January 1, 2003.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible,
long-lived assets and the associated asset retirement costs. This Statement
requires that the fair value of an asset retirement obligation be recorded as
a liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or the normal use of the asset. A corresponding
asset is recorded, which is depreciated over the life of the asset to be
retired. Subsequent to the initial measurement of the asset retirement
obligation, the liability is adjusted at the end of each period to reflect
the passage of time and changes in estimated future cash flows underlying the
obligation. The adoptino of SFAS No. 143 is effective on January 1, 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
and accounting reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee
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Termination Benefits and Other Costs to Exit an Activity (including certain
costs Incurred in a Restructuring)." The provisions of SFAS 146 are effective
for exit or disposal activities initiated after December 31, 2002.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets of APB Opinion No. 29, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005.
Carlos J. Macra
Chief Executive Officer
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