In March 2003, OTE International Investments and the MCIT, as the representative of the Romanian government, completed the RomTelecom Transaction involving an equity increase of approximately US$ 242.6 million (Euro 229.2 million) in RomTelecom, fully subscribed by OTE International. This amount comprised the conversion of approximately US $ 98.3 million (Euro 94.6 million) of debt into equity, US$ 55.7 million (Euro 55.0 million) representing a bridge loan from OTE International to RomTelecom and approximately US$ 42.6 million (Euro 39.6 million) representing management fees due and payable by RomTelecom to OTE International. The remainder consisted of a cash contribution of US $ 144.3 million (Euro 134.6 million) from OTE International to RomTelecom in exchange for new shares in RomTelecom. Approximately, US$ 20.0 million in respect of outstanding management fees remains payable to OTE International by RomTelecom. In addition, the transaction involved OTE International’s acquisition of a further 3.12% interest in RomTelecom’s expanded share capital from MCIT for approximately US$ 31.0 million (Euro 28.8 million). The equity increase and the direct acquisition of shares resulted in OTE International achieving ownership of approximately 54.01% of the expanded share capital of RomTelecom. For the purpose of the RomTelecom Transaction, a valuation of RomTelecom’s equity of US $ 750.0 million, prior to the capital increase, was agreed.
We hold a 58.95% share (as of March 2003) in COSMOTE Mobile Telecommunications S.A., or COSMOTE, a leading mobile telephony services provider in Greece. COSMOTE is a company incorporated in and operating under the laws of Greece. We hold a 54.01% share interest (as of March 2003) in RomTelecom, a fixed and mobile telecommunications company incorporated under the laws of and operating in Romania.
The following is a list of our other subsidiaries and various equity participations:
We hold an interest of 99.99% (the balance of 0.01% is held by OTE SAT) in OTEGlobe S.A., which is responsible for the commercial management of our international wholesale telephony traffic. OTEGlobe is a company incorporated in and operating under the laws of Greece.
We hold an interest of 80.2% in OTENET S.A., or OTEnet, a leading Internet service provider in Greece. OTEnet is a company incorporated in and operating under the laws of Greece. OTEnet holds an 80% interest in Voicenet S.A., a company specializing in data and voice over Internet Protocol services, incorporated in and operating under the laws of Greece.
We hold an interest of 99.9995%, with the remaining interest of 0.0005% being held by Temagon S.A. (formerly OTE Consulting S.A.), in OTE Estate, our Greek subsidiary that manages our real estate assets and provides development services. Our shareholders approved a spin-off of our real estate business to OTE Estate and the transfer of all relevant assets and the completion of the approved spin-off was completed in June 2003. OTE Estate expects to reach a decision in the third quarter of 2003 regarding the appointment of external consultants to optimize the development and management of its real estate assets through the provision of financial, technical, legal and valuation services pursuant to the terms of a competitive tender initiated by it in 2002. OTE Estate is a company incorporated in and operating under the laws of Greece.
We hold an interest of 99.99%, and the the remaining interest of 0.01% is held by OTENET S.A., in INFOTE S.A., or InfOTE, our Greek subsidiary which provides directory and other information services. Our shareholders approved a spin-off of our directory services business to InfOTE and the transfer of all relevant assets. The formalities required for the consummation of the spin-off were completed in 2002. InfOTE is a company incorporated in and operating under the laws of Greece.
We hold an interest of 51.4% in Hellascom International S.A., our subsidiary specializing in the promotion of collaborations and undertaking of telecommunications projects. Hellascom International was incorporated in and operates under the laws of Greece.
We hold an interest of 99% in Temagon, our subsidiary specializing in the provision of consulting services. We are currently in negotiations with external investors who are expected to acquire an interest in Temagon and become our strategic partners. Temagon was incorporated in and operates under the laws of Greece.
We hold an interest of 93.82% in Satellite Mobile and Personal Communications S.A., or OTE SAT-Maritel, our satellite telecommunications subsidiary. The other shareholders are Maritime Community, Global One Communications Hellas S.A. and Alcatel S.A. (6.17% in aggregate) and Temagon (0.008%). OTE SAT-Maritel was incorporated in and operates under the laws of Greece. By way of a merger agreement of October 18, 2002, OTE SAT merged with Piraeus Maritime Telecommunications Services S.A., or Maritel, previously our maritime telecommunications subsidiary.
We hold an interest of 99.9%, with the remaining interest of 0.1% being held by Temagon, in OTE Insurance-Agency S.A. (“OTE Insurance”), our insurance brokerage services subsidiary which was incorporated in and operates under the laws of Greece. We expect that in due course an external strategic investor or group of strategic investors will acquire an interest in OTE Insurance.
We hold an interest of 50% in Multicom S.A., a company specializing in the high technology sectors of Internet and Information Technology, which was incorporated and operates under the laws of Greece.
We hold an interest of 33% in Lofos Pallini S.A. (ex Pallini Village S.A.) a company, which is managing the development of the Pallini project. Lofos Pallini S.A. was incorporated in and operates under the laws of Greece. OTE Estate holds an interest of 0.0033% in Lofos Pallini S.A.
We hold a direct interest of 26% in CosmoONE Hellas Market Site S.A., or CosmoONE, in addition to our indirect effective interest of a further 15.33% through COSMOTE. CosmoONE is a company active in e-commerce, which was incorporated in and operates under the laws of Greece.
We hold an interest of 40% in EDEKT-OTE S.A., the incorporated pension and insurance fund for our employees. EDEKT-OTE is incorporated in and operating under the laws of Greece.
We hold a 100% interest in OTE International Investments Limited, or OTE International, formerly known as OTEROM, our international investments holding and management subsidiary. OTE International was incorporated and operates under the laws of Cyprus. As at December 31, 2002 OTE International held our 35% economic interest and 51% voting interests in RomTelecom, the Romanian public telephony operator, a company incorporated and operating under the laws of Romania. In March 2003, through a transaction with the Romanian Government, we increased our interest (economic and voting) in RomTelecom to 54.01%.
As of December 31, 2002, we held an interest of 85%, and we currently hold an interest of 83.34%, in Hellas Sat Consortium Limited, which was incorporated in and operates under the laws of Cyprus. The company’s objective is to provide telecommunications and broadcast space segment capacity through owned satellite.
We hold an interest of 100% in OTE PLC, our financing subsidiary. OTE PLC is a company incorporated in and operating under the laws of the United Kingdom.
We hold an interest of 100% in COSMOBULGARIA MOBILE, or Globul, our Bulgarian mobile operator, a company incorporated in and operating under the laws of Bulgaria.
We hold an interest of 100% in OTE AUSTRIA HOLDING GmbH, a company incorporated in and operating under the laws of Austria, to which we intend to transfer our holding in Globul, our subsidiary operating under the laws of Bulgaria.
We hold a 100% interest in MTS MOBILE TELECOMMUNICATIONS SERVICES AD, or MTS, a company incorporated in and operating under the laws of the FYROM.
We hold a 100% interest in OTE MTS HOLDING BV, a company incorporated in and operating under the law of Holland, which is the sole shareholder of MTS, our subsidiary operating in the Former Yugoslav Republic of Macedonia.
We hold an indirect interest, through COSMOTE and its 97%-owned subsidiary COSMO-HOLDING ALBANIA of an effective 48.63% in Albanian Mobile Communications, or AMC, our Albanian mobile operator, a company incorporated in and operating under the laws of Albania.
We hold an interest of 52.67% in HATWAVE HELLENIC-AMERICAN TELECOMMUNICATIONS WAVE LTD., or Hatwave, our subsidiary participating in Greek and international telecommunications projects and holding our 25.7% participation in the Ukrainian Wave project. Hatwave was incorporated in and operates under the laws of Cyprus.
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We hold an interest of 90% in the Armenian Telephone Company, or ArmenTel, the Armenian public telephony operator. ArmenTel is a company incorporated in and operating under the laws of Armenia. In the first quarter of 2003, we announced that we would be willing to dispose of our stake in ArmenTel.
We hold an interest of 20% in Telekom Srbija, the public telephony operator in Serbia. Telekom Srbija is a company incorporated in and operating under the laws of Serbia.
We hold a direct interest of 40%, in addition to our indirect interest of 5.14% through Hellascom International, in Trans Jordan Telecommunications Services Company Ltd, a company providing card phone telephony services in Jordan, incorporated in and operating under the laws of Jordan.
We hold a direct interest of 10%, in addition to our indirect shareholding of 19% through Hellascom International and Trans Jordan, in Yemen Public Payphone, a company incorporated in and operating under the laws of Yemen.
4.D. Property, Plant and Equipment
Our subsidiary OTE Estate owns 2,279 properties with an aggregate surface of approximately 9,250 million square meters, of which 2,027 properties are built with approximately 2,225 buildings with an aggregate surface of approximately 1,150 million square meters. Almost all of the property is free of encumbrances.
The most significant property is OTE’s headquarters, a thirteen story office building just north of central Athens containing 84,050 square meters of floor space, of which approximately 40,000 square meters are built as office space on 52,400 square meters of grounds.
The above properties include at least 30 properties whose taxable value exceeds Euro 2.9 million each.
The management, exploitation and development of our real estate assets is the responsibility of our subsidiary company, OTE Estate, which has been the freeholder of the property since June 6, 2003.
Due to the procedure of the spin-off of the real estate, OTE has become a lessee of OTE Estate, for all the property that OTE uses for its telecommunication needs. The relevant lease governing the terms of our properties has been in effect since October 1, 2001.
We have entered into a partnership agreement with a consortium consisting of Hellenic Technodomiki and Aktor construction companies, in order to develop our real estate in the area of Pallini. A company under the trade name of “Lofos Pallini S.A.” (formerly Pallini Village S.A.) has been formed where we hold a 33 % of its share capital and OTE Estate holds 0.0033%. The purpose of the development is the construction, subject to approval by the Olympic Games Committee, of the Media Village, which will provide accommodation for press representatives covering the Olympic Games that will take place in Athens in 2004. Following the Games, the properties will be used for residential purposes. The current book value of this property is approximately Euro 0.76 million, but in accordance with our agreement with the consortium of construction companies, our revenues from our participation in the project at the end of 2004, will be at least Euro 18.6 million.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read this section along with our consolidated financial statements, including the notes thereto and the audit report, that are included in this Form 20-F. These consolidated financial statements have been prepared in accordance with US GAAP. We also publish financial statements for Greek statutory purposes in accordance with Greek GAAP, which are not included in this Form 20-F.
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5.A. Operating Results
Overview
We are the dominant provider of public switched voice telephony in the Greek telecommunications market, with significant market power in mobile, Internet and data communications. Our domestic and international public switched telephony services accounted for approximately 57.3% of our operating revenues in 2002 and our domestic public switched telephony services accounted for approximately 49.2% of our operating revenues in 2002. Revenues from our other services, the largest components of which are revenues from mobile telephony services, telecard sales and leased lines, have made up an increasing percentage of our operating revenues, accounting for, 32.8% in 2000, 37.3% in 2001 and 42.7% in 2002.
On January 1, 2001, the Greek market for public switched telephony services was liberalized and we now face competition in the provision of telephony services from a variety of new entrants. We also face direct competition in a number of important areas such as mobile telephony, data communications, telephone equipment sales and Internet services and competition in international telephony.
As a result of the reduction of the State’s interest in our capital below 50%, certain provisions benefiting State-owned entities which were previously available to us are no longer available. In particular, in 2002 we were subject to paying real estate property tax (TAP) and capital accumulation tax in case of share capital increase, from which to date we had been exempted. In addition, as a result of existing legislation, a cap currently applies in respect of lump-sum payments to our employees upon retirement. The Supreme Court of Greece, through Decision 10/1998, ruled that this cap on lump-sum payments payable by us to our employees upon their retirement is of continuing application to us. However, this decision could be overturned and Greek courts may ultimately rule that this special provision should not apply to us, as a consequence of which we may be required to pay our employees, upon such ruling, retirement lump-sum payments at market rates. We cannot reassure you that we shall continue to benefit from these special provisions.
Investment Program
Over the last few years, we have undertaken a program to upgrade and expand the capability of our network in order to expand our service offerings and to prepare for competition. Our additions to fixed assets were approximately Euro 1,112.9 million in 2002, Euro 1,360.1 million in 2001 and Euro 1,044.9 million in 2000. We have increased our leverage during the past several years in the course of our investment program. As of December 31, 2002, we had Euro 2,617.8 million (US $ 3,089.0 million) aggregate principal of long-term indebtedness, compared to Euro 2,333.3 million (US $ 2,151.0 million) as of December 31, 2001, and compared to Euro 2,278.8 million (US $ 2,101.0 million) as of December 31, 2000.
We have already implemented many of our plans, including near-100% digitalization of our trunk and switching network by the end of 2001. Beginning in 2002, investments have started to decline and the focus of our capital expenditure program is now on mobile services, Internet services, broadband, Internet Protocol, capacity in trunk network using DWDM and generally in the dimensioning of the network to maintain the quality standards already achieved. In 2003, as a group of companies, we expect to invest approximately Euro 955.0 million (including employee labor costs and excluding COSMOTE’s investment for the initial pilot 3G network rollout). See “4.B. Business Overview-Investment Program 2003”.
Pricing Policy
In recent years, we have gradually increased monthly rental and local call charges to levels that better reflect our costs of providing these services, and reduced long-distance and international call charges. We implemented these changes to our tariff structures, in an effort to align our charges with those of other European Union member states, prepare for competition and comply with the applicable European Union directives.
At the time of our most recent tariff adjustments, we took into account the EETT requirements for cost-oriented tariffs and for the first time, we supported our proposals with concrete findings of our new enterprise costing-profitability (ECOS) system, the principles and methodology of which have been approved by the EETT. With respect to interconnection, and in accordance with EU and EETT regulation, by the end of 2001, we had implemented the long run average incremental costing on the basis of current cost accounting” (“LRAIC”) methodology, in order to support our interconnection tariff decisions. The methodology used by us for the setting of tariffs for retail services is fully distributed costing on the basis of historical accounting (“FDC”). The methodology used by us for the setting of tariffs and charges for wholesale services such as interconnection and unbundled local loop services, is long run average incremental costing on the basis of LRAIC. See “Regulation-European Union Regulation”.
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Our latest adjustments on January 13 and 27, 2002 regarding monthly leased lines rental charges, local and domestic long distance tariff rates were also based on enterprise costing system findings.
We believe, on the basis of our ECOS data, that the pricing policy we followed throughout recent years on the basis of cost methodologies was in the right direction. We believe that in the future our tariff policy will need to consider mainly the requirements of the EETT for cost-oriented tariffs, according to regulatory rules, the competitive pressures of the liberalized Greek telecommunications market, and also the requirement for the provision of universal service at reasonable prices to all users. In parallel, our ECOS system (which became fully operational in 2002) enables us to implement a pricing policy based on cost-oriented considerations, and our new billing system, when completed, will enable us to pursue a policy of product offerings based on tariff packages, rather than merely on nominal tariff changes.
Domestic telephony pricing. Our revenues from domestic public switched voice telephony services are derived mainly from call charges, monthly rental charges and connection charges. The same tariff rates apply to business and residential customers, and there are no volume discounts. Following the amendment to the tariff rates on January 13 and 27, 2002, and as a result of the application of the Euro as of January 1, 2002, the comparison of charges between European Union States is immediate due to the common currency denomination. Such a comparison reveals that the price of local telephony remains the lowest in the European Union and that the price of monthly local and national telephony is below the average.
However, given that other companies which have recently entered the Greek market, primarily through the use of a selection carrier code and which take advantage of the low charges of selection and termination of calls from and to our network, are offering lower charges, especially for long distance and international telephony and for calls to mobile phones, we aim to lower the cost in order to achieve competitive prices given that all alterations to tariffs, including the reduction thereof, requires approval by the EETT where such reductions relate to tariffs previously approved by the EETT. In parallel, we believe that the operation of our enterprise costing-profitability system, which became fully operational during 2002, will enable us to implement a pricing policy based on cost-oriented considerations and our new billing system will enable us to pursue a policy of product offerings based on tariff packages rather than merely on nominal tariff changes.
International telephony pricing. Historically, our international charges have been high in comparison to local and long-distance charges. As a result, although our international charges are currently approximately in line with the EU average, subscribers have viewed international calls as costly. Currently, international charges for the main call destinations are the same for both peak and off-peak hours, although there are five additional charging zones where a peak-off peak tariff differentiation applies.
We introduced weighted average tariff reductions in international telephony charges of 12.4% in 2000 and 10% in 2001. International telephony charges remained unchanged in 2002. We introduced these tariff reductions in order to further align international telephony charges with the rates charged in other European Union member countries and in response to competition in international telephony resulting from liberalization of the public switched telephony market.
Inflation
In 2002, 2001, 2000, inflation in Greece, measured as the increase in the Consumer Price Index, averaged 3.6%, 3.4% and 3.2% respectively. Through May 31, 2003, the rate of inflation was 3.8%. Changes in the Consumer Price Index have in the past affected, and may in the future continue to affect, the tariff rate increases that we may implement. See “— Tariff Rebalancing” and “4.B. Business Overview — Tariff Rebalancing and Pricing Policy.” Historically, the inflation rate has led to increases in revenues through tariff increases as well as increases in certain operating costs. Although in recent years, inflation has not had a material effect on our financial position and results of operations, the following discussion should be read in light of the historic inflation rates.
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Litigation
We are party to various litigation and claims arising during the normal course of business. See “4.B. Business Overview — Legal Proceedings.” A reserve of Euro 29.1 million has been provided as of December 31, 2002 in relation to litigation and claims, the outcomes of which can be reasonably estimated. We do not expect that these outcomes, individually or in the aggregate, will have a material adverse effect on our results of operations and cash flows. See Note 16 to the consolidated financial statements.
Results of Operations for the Three Years ended December 31, 2002
The following table sets forth, for each of the three years in the period ended December 31, 2002, selected consolidated income statement data income statement date is also expressed as a percentage of total operating revenues.
| | | 2000 | | | 2001 | | | 2002 |
| | |
| | |
| | |
|
| | | € | | | % of revenues(1) | | | € | | | % of revenues(1) | | | € | | | % of revenues |
| | | (€ in millions, other than percentage and operating data) |
| Revenues: | | | | | | | | | | | | | | | | | |
Domestic telephony(2)................................................... | | 2,016.5 | | | 56.1 | | | 2,169.1 | | | 53.3 | | | 2,120.5 | | | 49.2 |
International telephony(3)............................................. | | 398.7 | | | 11.1 | | | 382.2 | | | 9.4 | | | 349.9 | | | 8.1 |
| Mobile Telephony Services......................................... | | 375.4 | | | 10.4 | | | 656.9 | | | 16.1 | | | 950.3 | | | 22.1 |
Other revenues(4)........................................................... | | 805.6 | | | 22.4 | | | 864.3 | | | 21.2 | | | 888.2 | | | 20.6 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Total revenues ................................................................. | | 3,596.2 | | | 100.0 | | | 4,072.5 | | | 100.0 | | | 4,308.9 | | | 100.0 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Operating expenses: | | | | | | | | | | | | | | | | | |
| Payroll and employee benefits..................................... | | (827.0 | ) | | 23.0 | | | (837.6 | ) | | 20.5 | | | (873.5 | ) | | 20.3 |
| Payments to international operators........................... | | (232.2 | ) | | 6.5 | | | (224.1 | ) | | 5.5 | | | (204.4 | ) | | 4.7 |
| Payments to mobile telephony operators................... | | (437.4 | ) | | 12.1 | | | (424.4 | ) | | 10.4 | | | (559.6 | ) | | 13.0 |
| Depreciation and amortization..................................... | | (504.0 | ) | | 14.0 | | | (589.8 | ) | | 14.5 | | | (700.2 | ) | | 16.2 |
| Other................................................................................ | | (740.8 | ) | | 20.6 | | | (878.5 | ) | | 21.6 | | | (951.2 | ) | | 22.1 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Total operating expenses................................................. | | (2,741.4 | ) | | 76.2 | | | (2,954.4 | ) | | 72.5 | | | (3,288.9 | ) | | 76.3 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Operating income............................................................. | | 854.8 | | | 23.8 | | | 1,118.1 | | | 27.5 | | | 1,020.0 | | | 23.7 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Other income/(expense): | | | | | | | | | | | | | | | | | |
| Interest expense............................................................. | | (109.0 | ) | | 3.0 | | | (131.5 | ) | | 3.2 | | | (118.4 | ) | | 2.7 |
| Interest income............................................................... | | 93.9 | | | 2.6 | | | 60.5 | | | 1.5 | | | 63.1 | | | 1.5 |
| Foreign exchange gains/(losses), net......................... | | (52.4 | ) | | 1.5 | | | 5.1 | | | 0.1 | | | (17.7 | ) | | 0.4 |
Write-down of investments(5)...................................... | | (15.1 | ) | | 0.4 | | | (256.3 | ) | | 6.3 | | | (116.4 | ) | | 2.7 |
| Losses on investments................................................. | | (3.9 | ) | | 0.1 | | | (11.1 | ) | | 0.3 | | | (20.1 | ) | | 0.5 |
| Gains on sale of investments....................................... | | 298.0 | | | 8.3 | | | 2.9 | | | 0.1 | | | 0.0 | | | - |
| Other expense, net......................................................... | | (11.0 | ) | | 0.3 | | | (44.5 | ) | | 1.1 | | | (22.3 | ) | | 0.5 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | | 200.5 | | | 5.6 | | | (374.9 | ) | | 9.2 | | | (231.8 | ) | | 5.4 |
| | |
| | |
| | |
| | |
| | |
| | |
|
Income before provision for income taxes and minority interests......................................................... | | 1,055.3 | | | 29.4 | | | 743.2 | | | 18.2 | | | 788.2 | | | 18.3 |
| Income taxes...................................................................... | | (402.8 | ) | | 11.2 | | | (268.8 | ) | | 6.6 | | | (304.4 | ) | | 7.1 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Income before minority interests................................. | | 652.5 | | | 18.2 | | | 474.4 | | | 11.6 | | | 483.8 | | | 11.2 |
| Minority interests........................................................... | | (23.8 | ) | | 0.7 | | | (79.2 | ) | | 2.0 | | | (97.7 | ) | | 2.3 |
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| | |
| | |
| | |
| | |
| | |
|
Net income before cumulative effect of accounting change............................................................................. | | 628.7 | | | 17.5 | | | 395.2 | | | 9.7 | | | 386.1 | | | 9.0 |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cumulative effect of accounting change for SFAS No.142 net of income taxes.......................................... | | 0 | | | - | | | 0 | | | - | | | (40.3 | ) | | - |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net Income(5)...................................................................... | | 628.7 | | | - | | | 395.2 | | | - | | | 345.8 | | | - |
| | |
| | |
| | |
| | |
| | |
| | |
|
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| | As at and for the Year ended December 31, |
| | | 2000 | | | 2001 | | | 2002 |
| | |
| | |
| | |
|
| Operating Data: | | | | | | | | | | | | | | | | | |
Operating revenues per access line in service(6) (Euro)............................................................................... | | 625.3 | | | | | | 713.8 | | | | | | 782.4 | | | |
Operating revenues per employee(7) (Euro millions)............................................................................ | | 0.17 | | | | | | 0.19 | | | | | | 0.21 | | | |
Access lines in service per employee(8)......................... | | 289.0 | | | | | | 302.4 | | | | | | 305.6 | | | |
| |
|
| Notes: |
| (1) | Refers to the percentage of total operating revenues. |
| (2) | Domestic telephony and other revenues include tariffs charged to customers on outgoing calls to subscribers of the unaffiliated domestic mobile telephony operators (STET Hellas, Vodafone and since June 2002, Q-Telecom) of approximately Euro 406.7 million in 2002, Euro 419.7 million in 2001 and Euro 434.3 million in 2000. Substantially all of these amounts were billed to us by these operators. However, we charge these operators Euro 0.053 per minute. Also includes revenues from pay telephones, operator assistance, reconnection charges and paging services. |
| (3) | Includes revenues from incoming, including transit, and outgoing traffic, gross of amounts charged by foreign telephone operators, and payments from the unaffiliated domestic mobile telephony operators, STET Hellas, Vodafone and since June 2002, Q-Telecom to us for international calls. The respective revenues from COSMOTE and ArmenTel are eliminated on consolidation. |
| (4) | Includes telecard sales, leased lines and data communications, services rendered, directories, the Greek State’s participation in social costs, interconnection charges, radio communications, Audiotex, telex and telegraphy, Internet services, ATM, integrated services digital network and sales of telecommunications equipment. |
| (5) | In August 1999, ICO Global Communications commenced a proceeding for reorganization under chapter 11 of the US Bankruptcy Code. On February 18, 2000, ICO filed a reorganization plan with the US Bankruptcy Court. Such plan was approved by the Bankruptcy Court on May 3, 2000. Based on this approval and ongoing negotiations, we have concluded that it is appropriate to fully provide against our original investment in ICO of Euro 108.9 million out of which Euro 99.8 million and Euro 9.1 million were charged to the 1999 and 2000 consolidated statements of operations, respectively. On May 17, 2000, ICO successfully emerged from chapter 11 of the US Bankruptcy Code. Furthermore, in 2001, based on an independent valuation for RomTelecom, which indicated that the fair value of our investment therein was less than its carrying amount, we recorded an impairment charge of Euro 256.3 million (Euro 166.6 million, net of tax), which is included in the 2001 consolidated statement of operations. In 2002, we recorded an impairment charge of Euro 114.9 million on the value of our investment in Telekom Srbija, based on an independent valuation of this company. Furthermore, as a result of the accounting change for SFAS No. 142 effective as of January 1, 2002, we recorded a charge of approximately US$ 62.0 million (Euro 40.3 million, net of tax), relating to the write-off of goodwill which arose upon the acquisition of our consolidated subsidiary, ArmenTel. See Note 6 to the consolidated financial statements. |
| (6) | Based upon the number of access lines in service at the end of each period, not including revenues and access lines in service of ArmenTel, of which we acquired a 90% interest on March 3, 1998. Equivalent for the period ended December 31, 2002, to US$ 923.2, based on the noon buying rate on June 17, 2003 of Euro 1.00 per US$ 1.18. We exclude ArmenTel because it operates in a country with significantly different economic and demographic conditions from the other countries in which we conduct our business. ArmenTel’s revenues were € 58.1 million, € 69.8 million and € 74.0 million for the years 2000, 2001 and 2002, respectively. |
| (7) | Does not include ArmenTel’s revenues or employees. Equivalent, as of December 31, 2002, to US $ 0.248, based on the noon buying rate on June 17, 2003, of Euro 1.00 per US $ 1.18. We exclude Armentel because it operates in a country with significantly different economic and demographic conditions from the other countries we conduct our business. Armentel’s revenues were € 58.1 million, € 69.8 million and € 74.0 million for the years 2000, 2001 and 2002, respectively. |
| (8) | Includes OTE public switched telephone network access lines in service at the end of respective period. Also includes our employees currently working with us or seconded or transferred to our subsidiaries (19,604 in 2000 , 18,545 in 2001 and 17,710 in 2002). |
Revenues
Revenues amounted to Euro 4,308.9 million in 2002, compared to Euro 4,072.5 million in 2001 and to Euro 3,596.2 million in 2000, representing year-on-year increases in revenues of 5.8% and 13.2% in 2002 and 2001, respectively. Revenues per average access line in service, based on the number of our access lines in service at the end of each year and not including ArmenTel’s revenues and access lines in service, were Euro 782.4 million, Euro 713.8 million and Euro 625.3 million in 2002, 2001 and 2000, respectively. Revenues per employee, based on the number of employees at the end of each year and not including ArmenTel’s revenues of Euro 74.0 million and approximately 5,910 employees at December 31, 2002, Euro 69.8 million and approximately 7,159 employees as of December 31, 2001, Euro 58.1 million and approximately 7,729 employees as of December 31, 2000, were Euro 0.21 million in 2002, Euro 0.19 million in 2001 and Euro 0.17 million in 2000. We exclude ArmenTel because it operates in a country with significantly different economic and demographic conditions from the other countries in which we conduct our business. The increasing revenues increasing access lines per employee were due to both increases in revenues and reductions in the numbers of our employees in the respective periods.
Approximately 57.3% of our revenues in 2002 were derived from the provision of domestic (49.2%) and international (8.1%) telephony services. In 2001, 62.7% of our revenues were derived from the provision of domestic (53.3%) and international (9.4%) telephony services and, in 2000, 67.2% of our revenues were derived from the provision of domestic (56.1%) and international (11.1%) telephony services. An increasing percentage of our revenues are derived from other operations, which constituted approximately 42.7%, 37.3% and 32.8% of our revenues for 2002, 2001 and 2000, respectively. 94.9% of our total revenues in 2002 were generated by activities in Greece.
Domestic Telephony Revenues
Operating revenues from domestic telephony include call charges for local and long-distance calls, monthly line rental charges, initial connection charges for new lines, and other domestic telephony revenues. Call charges include revenues from tariffs charged to our customers on outgoing calls to subscribers of unaffiliated domestic mobile telephony operators, such as STET Hellas, Vodafone and, since June 2002, Q-Telecom. Substantially all of these revenues are transferred to these operators. Other domestic telephony includes revenues from pay telephones, operator assistance, disconnection charges and paging services. These revenues depend on, among other factors, the number of access lines in service, the number of new lines connected, call volumes and tariffs.
The following table sets out the breakdown of revenues from domestic telephony services for the three years ended December 31, 2002 together with a percentage breakdown of such amounts for the year ended December 31, 2002, in each case by reference to call charges, monthly rental charges, connection charges and the other category.
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Breakdown of Revenues from Domestic Telephony Services
| | | Year ended December 31, |
| | |
|
| | | 2000 | | 2001 | | 2002 | | % of total
2002 |
| | |
| |
| |
| |
|
| | | (Euro in millions, except percentages) |
| Domestic Telephony: | | | | | | | | |
| Call charges(1)....................................................................................................................... | | 1,509.8 | | 1,580.3 | | 1,418.6 | | 66.9 |
| Monthly rental charges...................................................................................................... | | 454.5 | | 528.8 | | 639.8 | | 30.2 |
| Connection charges............................................................................................................ | | 7.9 | | 7.3 | | 8.9 | | 0.4 |
| Other(2).................................................................................................................................. | | 44.3 | | 52.7 | | 53.2 | | 2.5 |
| | |
| |
| |
| |
|
| Total domestic telephony services | | 2,016.5 | | 2,169.1 | | 2,120.5 | | 100.0 |
| | |
| |
| |
| |
|
| |
|
| Notes: |
| (1) | Includes tariffs charged to customers on outgoing calls to subscribers of the unaffiliated domestic mobile telephony operators (STET Hellas and Vodafone, and since June 2002, Q-Telecom) on behalf of such mobile telephony operators of approximately Euro 406.7 million in 2002, Euro 419.7 million in 2001 and Euro 434.3 million in 2000. Substantially all of these amounts were billed to us by these operators. In addition, we charge the mobile telephony operators an interconnection fee of Euro 0.053 per minute. |
| (2) | Includes revenues from pay telephones, operator assistance, disconnection charges and paging services. |
Our operating revenues from domestic telephony services were Euro 2,120.5 million in 2002, Euro 2,169.1 million in 2001 and Euro 2,016.5 million in 2000. This represented a decline in domestic telephony operating revenues of 2.2% in 2002, as compared to growth of 7.6% in 2001. The decline in revenues from domestic telephony revenues in 2002 compared to 2001 was mainly due to the decline in call charges, which were particularly impacted by the last tariff rebalancing in February 2002, as well as increasing competition and fixed-to-mobile substitution. Domestic call charges were Euro 1,418.6 million in 2002, Euro 1,580.3 million in 2001 and Euro 1,509.8 million in 2000, representing a decrease of approximately 10.2% in 2002 and an increase of approximately 4.7% in 2001.
In August 2000, we increased monthly rental charges from Euro 6.75 to Euro 7.04, an increase of 4.3%, and increased our local calls tariff from Euro 0.021 to Euro 0.026 per minute, an increase of 28.6%. In March 2001, we increased monthly rental charges from Euro 7.04 to Euro 8.22, an increase of 16.7%, and our local calls tariff from Euro 0.026 to Euro 0.031, an increase of 16.7%. In January 2002, we increased monthly rental charges from Euro 8.22 to Euro 9.98, an increase of 21.4%, while we reduced our local calls tariff from Euro 0.031 to Euro 0.026. In addition, in January 2002 we abolished the previous structure of differentiating tariffs between peak and off-peak daily time zones. Following such change, all tariffs now remain unchanged on a 24-hour basis and apply uniformly for all seven days of the week. Due to the above-mentioned change, our average local call tariff decreased by 11%.
On February 1, 2000 we reduced the weighted average long-distance tariff by 10.6% after having already reduced the same tariff in previous years in order to align our long-distance rates with those in other European Union member countries, and to minimize the threat of competition from the mobile telephony operators. In March 2001, we reduced our domestic long-distance tariff unit from Euro 0.117 to Euro 0.082 per minute, a decrease of 30%. The calculation of weighted average tariff charges in a period is based on traffic volumes in that period recorded for a particular period of time and for a particular number of switching centers during the prior year and therefore assumes identical volume patterns. In January 2002 we reduced our domestic long-distance tariff from Euro 0.082 to Euro 0.063 per minute, a decrease of 23.2%.
Revenues derived from fixed-to-mobile calls increased to Euro 634.0 million in 2002 from Euro 612.7 million in 2001 and Euro 571.0 million in 2000. The growth in mobile telephony in Greece has accounted for the increase in revenues derived from fixed-to-mobile calls in recent years. Thus, if we deduct revenues from fixed-to-mobile calls from our domestic telephony revenues in 2002, 2001 and 2000, then the remaining revenues from domestic telephony decreased in 2002 to Euro 1,486.5 million, increased in 2001 to Euro 1,556.4 million and in 2000 to 1,445.5 million. Thus, the significant growth in mobile telephony in Greece has compensated in part for the decline in recent years in revenues from call charges.
Revenues from monthly rental charges were approximately Euro 639.8 million, Euro 528.8 million and Euro 454.5 million in 2002, 2001 and 2000, respectively, representing year-on-year increases of 20.9% and 16.3% in 2002 and 2001, respectively. These increases were due primarily to increases in monthly rental rates of 21.4% in 2002 and 16.7% in 2001.
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We have experienced a general increase in revenues from connection charges. Connection charges for the fixed network are deferred and amortized to income over the estimated service life of a subscriber’s line. These revenues were approximately Euro 8.9 million, Euro 7.3 million and Euro 7.9 million in 2002, 2001 and 2000, respectively.
International Telephony Revenues
Revenues from international telephony consist of amounts earned from outgoing international calls made by our subscribers which are reported gross of amounts payable to foreign telephony operators, amounts earned from settlement charges for incoming calls and transit calls from foreign telephone operators, and payments from unaffiliated domestic mobile operators, such as STET Hellas and Vodafone, and, since June 2002, Q-Telecom, for outgoing traffic through our network. The respective revenues from COSMOTE and ArmenTel are eliminated in consolidation. Revenues for international services depend on the volume of traffic, the rates charged to our subscribers for outgoing calls and international settlement rates charged by each counterparty under bilateral settlement agreements with foreign telephone operators for outgoing, incoming and transit calls.
The following table sets out a breakdown of revenues from international telephony services for the three years ended December 31, 2002 and a percentage breakdown for the year ended December 31, 2002, in each case by reference to outgoing traffic, incoming and transit traffic and payments from mobile operators.
Breakdown of Revenues from International Telephony Services
| | | Year ended December 31, |
| | |
|
| | | | | | | | | % of total |
| | | 2000 | | 2001 | | 2002 | | 2002 |
| | |
| |
| |
| |
|
| | | (€ in millions, except percentages) |
| Outgoing traffic....................................................................................................................... | | 214.9 | | 202.6 | | 185.5 | | 53.0 |
| Incoming and transit traffic(1)............................................................................................... | | 134.0 | | 138.1 | | 127.9 | | 36.6 |
| Payments from mobile operators......................................................................................... | | 49.8 | | 41.5 | | 36.5 | | 10.4 |
| | |
| |
| |
| |
|
| Total | | 398.7 | | 382.2 | | 349.9 | | 100.0 |
| | |
| |
| |
| |
|
| |
|
| Notes: |
| (1) | Represents revenues from payments by foreign operators before settlement of amounts due to them in respect of outgoing traffic, included within operating expenses payments to international operators. |
Revenues from international telephony were approximately Euro 349.9 million, Euro 382.2 million and Euro 398.7 million in 2002, 2001 and 2000, respectively, representing a decrease of 8.5% in 2002 and 4.2% in 2001. Revenues from outgoing traffic were Euro 185.5 million, Euro 202.6 million and Euro 214.9 million in 2002, 2001 and 2000, respectively, representing a decrease of 8.4% in 2002 and 5.7% in 2001.
Revenues from incoming and transit traffic were approximately Euro 127.9 million, Euro 138.1 million and Euro 134.0 million in 2002, 2001 and 2000, respectively, representing a decrease of 7.4% in 2002 and an increase of 3.1% in 2001. Revenues from payments from unaffiliated mobile operators were approximately Euro 36.5 million, Euro 41.5 million and Euro 49.8 million in 2002, 2001 and 2000 respectively, representing decreases of 12% in 2002 and 17.1% in 2001.
Traffic volume for international telephony is measured in chargeable minutes. The decreases in revenues from international telephony in 2001 and 2002 were primarily driven by the decline in international traffic affected by the onset of competition as a result of liberalization as well as by the decline in international settlements rates between the international telecommunications organizations.
International telecommunications traffic in Greece experiences seasonal fluctuations in demand, with peak outgoing traffic occurring in the summer and incoming traffic peaking during September and October.
The following table sets out international traffic including outgoing calls originated by mobile telephony operators in Greece.
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International Traffic Volume Data
| | | Year ended December 31, |
| | |
|
| | | 2000 | | 2001 | | 2002 | |
| | |
| |
| |
| |
| Outgoing: | | | | | | | |
| Total outgoing traffic (millions of chargeable minutes)............................................................................ | | 793.2 | | 825.1 | | 897.9 | |
| Growth in outgoing traffic (% per annum).................................................................................................. | | 8.7 | | 4.0 | | 8.8 | |
Minutes of outgoing traffic/access lines in service(1).............................................................................. | | 140.7 | | 146.5 | | 163.1 | |
| Incoming: | | | | | | | |
| Total incoming traffic (millions of chargeable minutes)............................................................................ | | 889.8 | | 891.0 | | 840.6 | |
| Growth in incoming traffic (% per annum).................................................................................................. | | 12.2 | | 0.1 | | (5.6 | ) |
Minutes of incoming traffic/access lines in service(1).............................................................................. | | 157.9 | | 158.2 | | 152.7 | |
| |
|
| Note |
| (1) | Based on the average number of access lines in service calculated as the arithmetic average of beginning and end-of-period balances. Does not include access lines in service of ArmenTel. |
Revenues from foreign operators with respect to incoming and transit traffic constituted 3.0%, 3.4% and 3.7% of our total revenues and approximately 36.6%, 36.2% and 33.6% of our international revenues in 2002, 2001 and 2000, respectively. Although we record payments to and from operators on a gross basis, only net payments are received from or made to foreign operators. Payments to foreign operators are included in operating expenses. For the purpose of international settlements, amounts payable with respect to outgoing traffic and amounts receivable with respect to incoming and transit traffic to and from each country are generally expressed in SDRs used for the settlement of international call revenues between foreign telephone operators. Settlements generally are made in US Dollars approximately every three months.
We estimate that a small proportion of outgoing traffic has been substituted by incoming call-back traffic, particularly from the United States, the United Kingdom, Canada and Australia. In recent years, we have significantly reduced our international tariffs to these countries in response to competition from call-back operators, declines in international settlement rates and in order to conform our charges for calls to those destinations with corresponding charges of other European operators.
Mobile Telephony Services
Revenues generated by mobile telephony services contributed Euro 950.3 million on a consolidated basis and Euro 1,077.0 million on a stand alone basis for COSMOTE in 2002 and Euro 656.9 million on a consolidated basis and Euro 812.4 million on a stand alone basis for COSMOTE in 2001. The growth in revenues was attributable to increases in mobile penetration and usage in Greece and in Albania.
Other Revenues
Other revenues include revenues from telecard sales, directories, data communications and leased lines, radio communications, services rendered, Internet services, integrated services digital network, interconnection charges from unaffiliated mobile telephony operators, such as STET Hellas, Vodafone and, since June 2002, Q-Telecom, the Greek State’s participation in social costs, sales of telecommunications equipment, audiotex services and telex and telegraphy.
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The following table provides a detailed breakdown of other revenues:
| | | Year ended December 31, |
| | |
|
| | | (Euro in Millions) |
| | | 2000 | | 2001 | | 2002 |
| | |
| |
| |
|
| Traditional Services: | | | | | | |
| Telecards................................................................................................................................................................ | | 186.5 | | 176.3 | | 175.4 |
| Directories.............................................................................................................................................................. | | 40.5 | | 38.6 | | 44.2 |
| Radio communications......................................................................................................................................... | | 27.2 | | 24.9 | | 29.0 |
| Audiotex................................................................................................................................................................. | | 43.2 | | 55.9 | | 69.1 |
| Telex and telegraphy............................................................................................................................................ | | 11.9 | | 9.4 | | 5.4 |
| | |
| |
| |
|
| Total........................................................................................................................................................................... | | 309.3 | | 305.1 | | 323.1 |
| | |
| |
| |
|
| New Business: | | | | | | |
| Leased lines and data communications........................................................................................................... | | 157.2 | | 178.5 | | 170.6 |
| ISDN...................................................................................................................................................................... | | 29.2 | | 48.0 | | 68.8 |
| Sales of telecommunications equipment......................................................................................................... | | 74.8 | | 99.8 | | 86.3 |
| Internet services................................................................................................................................................. | | 18.4 | | 28.5 | | 39.2 |
| ATM..................................................................................................................................................................... | | 9.3 | | 18.6 | | 14.9 |
| | |
| |
| |
|
| Total......................................................................................................................................................................... | | 288.9 | | 373.4 | | 379.8 |
| | |
| |
| |
|
| Other: | | | | | | |
| Services rendered................................................................................................................................................ | | 68.2 | | 105.6 | | 72.4 |
| State’s participation in social expenses........................................................................................................... | | 32.3 | | - | | - |
| Interconnection charges.................................................................................................................................... | | 83.4 | | 66.1 | | 96.2 |
| Miscellaneous..................................................................................................................................................... | | 23.5 | | 14.1 | | 16.7 |
| | |
| |
| |
|
| | | 207.4 | | 185.8 | | 185.3 |
| | |
| |
| |
|
| Total non-telephony............................................................................................................................................... | | 805.6 | | 864.3 | | 888.2 |
| | |
| |
| |
|
Revenues from the sale of telecards decreased to Euro 175.4 million in 2002 from Euro 176.3 million in 2001 and from Euro 186.5 million in 2000, representing decreases of 0.5% in 2002 and 5.3% in 2001, respectively. These decreases are mainly attributed to the increase in mobile telephony usage, which offsets the increase in the cost of the local tariff unit. Revenues from the sale of telecards are seasonal, due to increased tourist traffic in summer months, and are generally higher in the second half of the year.
Revenues from directory services increased to Euro 44.2 million in 2002 from Euro 38.6 million in 2001, which was a decrease from Euro 40.5 million generated by directory services in 2000. The increase in 2002 was mainly due to an expansion in demand for advertising, while the reduction in 2001 compared to 2000 was due to a decline in the demand for advertising.
Revenues from radio communications were approximately Euro 29.0 million in 2002 compared to Euro 24.9 million in 2001 and Euro 27.2 million in 2000. This represented an increase in revenues of approximately 16.5% in 2002 and a decline of 8.6% in 2001. The increase in revenues in 2002 from radio communications was due to the launch of a new satellite service which resulted in an increase in maritime services traffic and an increase in the number of connections. The decline in 2001 revenues was due to a reduction in traffic for maritime services.
Audiotex is a service, which offers telephone users direct access to premium information services consisting of live or taped information. Audiotex contributed to our revenues approximately Euro 69.1 million in 2002, Euro 55.9 million in 2001 and Euro 43.2 million in 2000. The 2002 and 2001 increases were mainly due to increased traffic.
There has been a steady reduction in the volume of telex and telegraphy services, consistent with trends in other countries. Our telex and telegraphy services contributed revenues of approximately Euro 5.4 million in 2002, Euro 9.4 million in 2001 and Euro 11.9 million in 2000. We believe that revenues from telex and telegraphy will continue to decline in the coming years due to the continued growth of electronic mail, facsimile and other means of transmitting data. However, we currently intend to maintain these services, due to their social importance.
Revenues from leased lines and data communications were approximately Euro 170.6 million in 2002, Euro 178.5 million in 2001 and Euro 157.2 million in 2000. This represented a decrease in revenues of approximately 4.4% in 2002, compared to an increase of approximately 13.4% in 2001. The revenues from leased lines and data communications declined by approximately 4.4% in 2002, as previously discussed mainly because of the decline in tariffs at the beginning of 2002, although the number of Hellascom-digital circuits rose during 2002 mainly due to the expansion of the networks of COSMOTE and OTE NET subsidiaries.
Revenues from ISDN were approximately Euro 68.8 million in 2002 compared to Euro 48.0 million in 2001 and Euro 29.2 million in 2000. This represented an increase in revenues of approximately 43.3% in 2002 and 64.4% in 2001. The increase in both 2002 and 2001 was mainly attributable to the increase in basic and primary rate access customers.
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Revenues from sales of telecommunications equipment were approximately Euro 86.3 million in 2002, Euro 99.8 million in 2001 and Euro 74.8 million in 2000. The 13.5% decline in 2002 was primarily due to lower sales of mobile handsets.
Revenues from internet services were approximately Euro 39.2 million in 2002 compared to Euro 28.5 million in 2001 and Euro 18.4 million in 2000. This represented an increase in revenues of approximately 37.5% in 2002 and 54.9% in 2001. The increase in both 2002 and 2001 was mainly attributable to an increase of our customer base, an increase in the average revenue per customer and the introduction and promotion of a series of value added services.
Revenues from services rendered, which consist of, among others, transfers of existing lines, maintenance fees and revenues from consolidated subsidiaries, excluding COSMOTE, OTEnet, OTEGlobe and ArmenTel, were approximately Euro 72.4 million in 2002, Euro 105.6 million in 2001 and Euro 68.2 million in 2000, representing a decrease of 31.4% and an increase of 54.5% for 2002 and 2001, respectively. The decline in revenues from services rendered in 2002 was primarily due to the delay in launching some new services we provided and the smaller number of new services we provided during the year. The increase in revenues from services rendered in 2001 was primarily due to increased revenues from our subsidiaries, excluding COSMOTE, OTEnet, OTEGlobe and ArmenTel.
Revenues from the Greek State’s participation in social costs were approximately nil in 2002 and 2001 and Euro 32.3 million in 2000. These revenues represent funds owed to us by the Greek State up to December 31, 2000, as reimbursement for providing economically nonviable social services to remote geographical areas of Greece. The amount of Euro 32.3 million, which constituted an outstanding receivable as at December 31, 2000 was offset against the dividend to be distributed to the Greek State for the year 2001. See “7.A. Major Shareholders — The Greek State as Sovereign.” See also Note 2 (p) to the consolidated financial statements.
Revenues from interconnection charges were approximately Euro 96.2 million in 2002, Euro 66.1 million in 2001 and Euro 83.4 million in 2000. The decrease in 2001 is mainly due to the charge of Euro 19.7 million in 2001, as a result of our agreement with the unaffiliated mobile operators in order to settle all pending issues related to interconnection charges up to December 31, 2001. The increase in 2002 was mainly due to increased mobile telephony usage and due to the fact that the interconnection revenues for 2002 also include interconnection charges from fixed telephony operators.
Operating Expenses
General. Our total operating expenses amounted to approximately Euro 3,288.9 million in 2002, Euro 2,954.4 million in 2001 and Euro 2,741.4 million in 2000. This represents increases in operating expenses of approximately 11.3% in 2002 and 7.8% in 2001. The increases were primarily due to increases in voluntary retirement costs, depreciation and amortization, payments to unaffiliated mobile telephony operators as a result of increased mobile usage and other costs. Operating expenses as a percentage of operating revenues increased slightly to 76.3% in 2002 from 72.5% in 2001.
Payroll and Employee Benefits. Payroll and employee benefits amounted to approximately Euro 873.5 million in 2002 as compared to Euro 837.6 million in 2001 and Euro 827.0 million in 2000. This represents increases of 4.3% in 2002 and 1.3% in 2001. The increase in 2002 is mainly attributable to: (i) the carry-over effect of the payroll and social contributions increase that occurred in December 2001, therefore impacting the year ended December 31, 2002 and not the year 2001, (ii) the salary increase due to personnel “seniority”, (iii) the growth in COSMOTE’s payroll expenses as a result of an increased number of employees (COSMOTE’s increased payroll contributes 1.2% in payroll growth across our group) and (iv) the effect of the salary increases which comprised a 3.3% increase, effective of June 30, 2002, and a 3.3% increase, effective as of December 1, 2002. Conversely, personnel costs have been positively affected by OTE’s personnel reduction program as a result of the voluntary retirement schemes that we have been implementing at parent company level. Provisions of approximately Euro 30.6 million, Euro 39.1 million and Euro 89.5 million were established in 2002, 2001 and 2000, respectively, are included in payroll and employee benefits in the consolidated statements of operations to cover the contributions which OTE is obliged to pay to the pension funds over the following year for employees who accepted OTE’s offers of early retirement during the related years.
Payroll and employee benefits costs include payroll, certain related benefits, provision for Staff Retirement Indemnities, provision for our Youth Account, employer contributions made to TAP-OTE and the Auxiliary Lump Sum Benefit Plan, and payments to fund operating deficits of TAP-OTE. Staff Retirement Indemnities payments are required under Greek labor law upon dismissal or retirement of an employee, with the amount paid depending on the length of service and salary of that employee. The Youth Account is a special benefit whereby we provide a lump sum payment to the children of employees when the children reach the age of 21 or upon the occurrence of certain other specified events. Reserves for Staff Retirement Indemnities and the Youth Account are provided for on an accrual basis based upon actuarial studies. Provisions for Staff Retirement Indemnities and for the Youth Account were Euro 33.2 million and Euro 45.7 million respectively in 2002 compared to Euro 24.6 million and Euro 36.8 million, respectively in 2001 and Euro 29.4 million and Euro 33.2 million, respectively, in 2000. See “6.C. Employees — Employee Insurance Funds.”
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A significant portion of our payroll and employee benefit expenses has been employer contributions to, and payments to fund operating deficits of, the TAP-OTE pension fund. The TAP-OTE fund, which is a separate legal entity from OTE, is the main fund providing pension and medical benefits to our employees.
Until December 1993, we made advances to the TAP-OTE fund in excess of the maximum sum required to cover deficits in order to counter the financial difficulties faced by the fund. In March 1995, TAP-OTE agreed to pay us approximately Euro 19.7 million of this debt in monthly installments of Euro 0.3 million. The amount was fully collected through December 31, 2000. In addition, during 1997 a dispute between the TAP-OTE fund and us concerning a further amount of Euro 27.6 million was resolved in our favor by the Legal Counsel of the State. The Legal Counsel of the State ruled that the 1990 law requiring us to cover the deficits of the TAP-OTE fund took effect when published in late 1990 and not at the beginning of that year. Pursuant to a letter sent to TAP-OTE dated February 25, 1999, from us, we were to net Euro 2.9 million against the contribution owed to TAP-OTE each year beginning in 1999, for as long as this receivable remains outstanding. In 1999, we proceeded to withhold this amount and, accordingly, the receivable amount as of December 31, 2000, was Euro 24.7 million. Additional withholdings, which took place in 2001 from the monthly contributions to TAP-OTE, reduced the receivable amount to Euro 21.4 million as of December 31, 2001. See Note 12 to our consolidated financial statements.
Although TAP-OTE did not object to the above mentioned withholdings, in February 2002, it refused to provide us with a confirmation that it was not in default with its monthly social security payments, on the grounds that monthly social security contributions must be paid in full and withholdings from such contributions are not permitted. In order to resolve this issue, in May 2002, we agreed to refund all withholdings made from contributions to TAP-OTE, and as a result the receivable amount was readjusted to Euro 24.7 million as at December 31, 2002. By its letter dated May 24, 2002, TAP-OTE officially accepted our claim for the above-mentioned amount but, simultaneously, raised an issue of a possible legal right to write-off this claim. Both parties sought a legal opinion on this issue from a mutually acceptable legal counsel and delivery of this is expected to be forthcoming during the third quarter of 2003. Our management and legal counsel believe that such legal opinion will be favorable to us and, that revised arrangements for the collection of the amount receivable will be put in place.
Under existing Greek legislation, we were responsible for contributions to fund TAP-OTE’s operating deficits up to a maximum annual amount of Euro 32.3 million per year, to be annually adjusted for inflation by a joint decision of the then Ministers of National Economy and Finance by the percentage change in the Consumer Price Index for the relevant year.
Pursuant to legislation enacted in 1999, a separate fund came into operation on January 12, 2001 in the form of a société anonyme under the name EDEKT-OTE S.A., in order to finance the TAP-OTE deficit through contributions by ourselves, the Greek State and the Employee Auxiliary Pension Fund, and the return generated on those contributions. We hold a 40% equity interest in EDEKT-OTE, while the Greek State holds 5%, the Auxiliary Pension Fund 35%, TAP-OTE holds 15% and OME-OTE holds 5%.
In 2000, 2001 and 2002, we paid to TAP-OTE Euro 33.4 million, Euro 32.3 million and Euro 41.3 million, respectively. In addition, we paid an amount of Euro 82.5 million in 2000 and 2001 to TAP-OTE. In the fourth quarter of 2001, based on Law 2937/2001 which finalized the arrangements regarding our obligations to contribute to TAP-OTE and EDEKT-OTE, we incurred an additional charge of Euro 50.2 million related to past pension obligations to TAP-OTE. The aforementioned law also provided that we should, in addition, make a payment of Euro 352.2 million to EDEKT-OTE as prepayment equal to the present value of our obligations to cover the annual deficit of TAP-OTE for a period of ten years starting from January 1, 2002. This amount, which was paid on August 3, 2001, will be amortized over this ten-year period. The Greek State and the Auxiliary Pension Fund are also required to make contributions of approximately Euro 264.1 million and Euro 410.9 million, respectively, to EDEKT-OTE. See Note 12(a) to the consolidated financial statements.
Pursuant to Law 3029/2002, a portion of TAP-OTE’s Pension Fund and certain other pension funds are to be merged with IKA-ETAM, the main social security fund in Greece by January 1, 2008 at the latest. In accordance with the provisions of this law, matters in relation to employees’ and employers’ contributions of TAP-OTE’s pension fund and the other pension funds concerned and the term of the obligation to meet the operating deficits of the fund (as defined by Law 2084/1992) will be subject to determination by ministerial decision. The enactment of Law 3029/2002 may require OTE to partially cover future operating deficits of TAP-OTE.
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Payroll expenses exclude direct technical costs relating to the construction of telecommunications plant and equipment, which are capitalized. Such expenses were approximately Euro 142.0 million, Euro 141.5 million and Euro 144.1 million in 2002, 2001 and 2000, respectively.
The number of personnel has been steadily decreasing over the past five years at an average annual rate of 5.2%, mainly by means of natural attrition and early retirement schemes. The current early retirement program is in effect until December 31, 2003. In 2000, a total of 2,232 employees left OTE, of which 1,952 accepted early retirement incentives, in 2001, a total of 1,216 employees left OTE, of which 1,071 accepted early retirement incentives. In 2002 a total of 856 employees left OTE, 699 of whom accepted early retirement incentives. The effects of our early retirement scheme, together with our policies to recruit only specialized personnel, to retrain employees whose skills have become obsolete and to outsource certain activities currently undertaken by our personnel, have reduced personnel numbers to approximately 17,710 employees by the end of 2002.
In June 2001, we concluded a collective labor agreement with OME-OTE that provides for a general wage increase of 3.3% for 2001 and 3.3% for 2002, after taking into consideration expected retirements over this period and the increase of the maximum amount of retirement indemnities payable to the employees by an additional two months of salary effective January 2, 2002. In 2001, the salary and employee benefit expenses remained at 2000 levels, because the increases in salaries were offset by decreases in salary and benefits costs as a result of early retirement and cost reduction measures that we implemented.
Payments to international operators. Operating expenses for international traffic amounted to approximately Euro 204.4 million in 2002 compared to Euro 224.1 million in 2001 and Euro 232.2 million in 2000. This represents a decrease of 8.8% and 3.4% in 2002 and 2001, respectively. International traffic expenses consist predominantly of charges by foreign telephone operators for outgoing telephone traffic, as well as a relatively small amount of charges by foreign operators with respect to our telex, telegraphy and satellite activities. In general, our operating expenses for international traffic vary with our revenues from international telephony, as they are both tied to international traffic volume. The decrease in international traffic expenses in 2001 and 2002 was primarily due to a decrease in settlement charges for international calls.
Payments to mobile telephony operators. Operating expenses for payments to unaffiliated mobile telephony operators, such as STET Hellas, Vodafone and, since June 2002, Q-Telecom, amounted to approximately Euro 559.6 million in 2002, Euro 424.4 million in 2001 and Euro 437.4 million in 2000. This represented an increase of approximately 31.9% in 2002 and a decrease of approximately 3% in 2001. The decline of approximately 3.0% in 2001 was in line with the decrease in revenues from outgoing calls to subscribers of the unaffiliated mobile telephony operators. The increase in 2002 in operating expenses for payments to unaffiliated mobile telephony operators was largely due to increased fixed-to-mobile traffic.
Depreciation and amortization. Depreciation and amortization amounted to Euro 700.2 million in 2002, Euro 589.8 million in 2001 and Euro 504.0 million in 2000. This represented increases of approximately 18.7% in 2002, and 17.1% in 2001. The increases in depreciation expense are due to additions of fixed assets in connection with our program of enhancing the capability of our fixed line and mobile networks, although in 2002, investment in fixed assets decreased by 18.2%, after having increased by 30.2% in 2001. See “4.B. Business Overview — Investment Program 2003.”
We obtain subsidies mainly from the European Union in order to fund specific projects over a specific time period. Such subsidies are accounted for on an accrual basis and reduce the acquisition cost of the subsidized asset. The European Commission has informed the Ministry of Transport and Communications in writing that any suspension of European Union subsidies has been withdrawn. See “4.B. Business Overview — Investment Program 2003 — European Union Subsidies” and “— Regulation.” See also Note 7 to the consolidated financial statements.
Other operating expenses. Other operating expenses amounted to approximately Euro 951.2 million in 2002, Euro 878.5 million in 2001 and Euro 740.8 million in 2000. This represented increases of approximately 8.3% and 18.6% for 2002 and 2001, respectively. The increase in other operating expenses in 2002 compared to 2001 was primarily due to the payment of higher commissions to dealers and increased taxes, other than income taxes. The higher taxes mainly relate to real estate taxes that OTE was liable to pay, following the reduction in the Government’s share in OTE as a result of which OTE is now subject to the laws applicable to the payment of real estate tax by the private companies.
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Operating Income
Operating income was approximately Euro 1,020.0 million in 2002, Euro 1,118.1 million in 2001 and Euro 854.8 million in 2000 representing a decrease of 8.8% in 2002 and an increase of 30.8% in 2001, respectively. The decrease in 2002 reflects an 11.3% increase in operating expenses for that period. The 30.8% increase in operating income in 2001 compared to 2000 reflects a 13.2% increase in revenues, while operating expenses increased by 7.8% during the same period.
Other Income/(Expense)
Interest expense decreased to Euro 118.4 million in 2002 compared to Euro 131.5 million in 2001 and Euro 109.0 million in 2000 due to the fall in average interest rates for short-term borrowing and the prepayment of COSMOTE’s syndicated loan.
Losses on investments amounted to Euro (20.1) million in 2002, Euro (11.1) million in 2001 and Euro (3.9) million in 2000. The higher net loss in 2001 is mainly due to a loss of Euro 16.1 million resulting from our 35% participation (during that year) in RomTelecom. The increase in losses on investments in 2002 is mainly attributable to RomTelecom’s losses of Euro 65.9 million which were primarily the result of an impairment charge of approximately Euro 76.0 million attributable to a write down in the value of Cosmorom’s fixed assets. See Note 6 to the consolidated financial statements.
Foreign exchange gains/ (losses) amounted to Euro 17.7 million in 2002, Euro 5.1 million in 2001 and Euro 52.4 million in 2000. The losses for 2000 resulted primarily from the depreciation of the Drachma against the US Dollar during such period, together with the level of debt in foreign currencies. Foreign exchange losses in 2002 were the result of the depreciation of the US Dollar against the Drachma and the Euro combined with an increase in our receivables payable in foreign currencies from third parties.
The gain on sale of investment of Euro 298.0 million in 2000 substantially represents proceeds from the initial public offering of COSMOTE in October 2000. There were no material dispositions in 2001. See Note 1 to the consolidated financial statements.
In August 1999, ICO Global Communications commenced a proceeding for reorganization under chapter 11 of the US Bankruptcy Code. On February 18, 2000, ICO filed a reorganization plan with the US Bankruptcy Court. Such plan was approved by the Bankruptcy Court on May 3, 2000. Based on the terms of this plan, we have concluded that it is appropriate to fully provide against our original investment in ICO of Euro 108.9 million, out of which Euro 99.8 million and Euro 9.1 million were charged to the 1999 and 2000 consolidated statements of operations, respectively. On May 17, 2000, ICO successfully emerged from chapter 11 of the US Bankruptcy Code.
Furthermore, in 2001, based on an independent valuation for RomTelecom, which indicated that the fair value of our investment therein was less than its carrying amount, we recorded an impairment charge of Euro 256.3 million (Euro 166.6 million net of tax), which is included in the 2001 consolidated statement of operations. In 2002, we recorded an impairment charge of Euro 114.3 million relating to our investment in Telekom Srbija, based on an independent valuation of this company.
Taxation
Income tax provisions amounted to Euro 304.4 million for the year ended December 31, 2002 compared to Euro 268.8 million for the year ended December 31, 2001 and Euro 402.8 million for the year ended December 31, 2000. The provision taken in 2002 was the result of a charge of approximately Euro 342.3 million, which was partially affected by the recognition of deferred tax assets of Euro 37.9 million. The 2001 provision was the result of a charge of approximately Euro 364.4 million and the recognition of deferred tax assets of Euro 95.6 million. The 2000 provision was the result of a charge of approximately Euro 240.2 million and the recognition of deferred tax liabilities of Euro 162.6 million during that year. In accordance with Greek tax regulation, the income tax rate is 35% for corporations listed on the Athens Stock Exchange, while for non-listed corporations the income tax rate was reduced to 37.5% for 2002 and is further reduced to 35%, effective 2003. Our effective tax rates for the years ended December 31, 2002, 2001 and 2000 under US GAAP were approximately 38.6%, 36.2% and 38.2%, respectively. Variations in the effective rates primarily result from non-taxable income and expenses which are not tax deductible. See Note 10 to the consolidated financial statements.
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We had net deferred tax assets of Euro 139.6 and of Euro 61.3 million and a net deferred tax liability of Euro 31.7 million as of December 31, 2002, 2001 and 2000, respectively. A provision for deferred income taxes of approximately Euro 162.6 million was charged to the 2000 consolidated statement of operations mainly relating to income resulting from COSMOTE’s initial public offering. In 2001, an amount of Euro 95.6 million was recognized as a deferred tax asset, mainly relating to the impairment of our investment in RomTelecom. In 2002, an amount of Euro 37.9 million was recognized as a deferred tax asset, which includes deferred tax assets relating to the impairment during the period of our investment by Telekom Srbija by Euro 114.9 million.
In early 2003, the tax audit of OTE’s books for the years 1999-2001 was completed and additional income taxes and penalties of approximately Euro 22.4 million were assessed, which were charged against the related reserve provided in prior years. Furthermore, a provision of Euro 7.0 million has been made in respect of the unaudited fiscal year 2002 which is considered by management to be adequate.
Net Income
Net income amounted to Euro 345.8 in 2002, Euro 395.2 million in 2001 and Euro 628.7 million in 2000, reflecting a decrease of 12.5% in 2002 and a decrease of 37.2% in 2001. Net income as a percentage of operating revenues decreased to 8% from 9.5% in 2001 and 17.5% in 2000.
Net income for 2000 was affected by two non-recurring items. First, we incurred a cost of Euro 112.7 million related to charges for our voluntary retirement program. Second, the offering of COSMOTE’s shares resulted in income of Euro 294.6 million. Our net income before these additional items, after taking into account the relative tax effect, was Euro 510.6 million, resulting in a 14.2% margin.
Net income for 2001 was affected by two non-recurring items. First, we incurred a charge of Euro 50.2 million related to past pension obligations to TAP-OTE. Second, we recorded an impairment charge of Euro 256.3 million relating to our investment in RomTelecom (See Note 6 to the consolidated financial statements). Our net income before these items, after taking into account the relative tax effect, was Euro 594.3 billion, resulting in a 14.6% margin.
Net income for 2002 was affected by: (i) the impact of an accounting change to reflect SFAS No.142 which resulted in a write off by Euro 40.3 million, net of tax, relating to goodwill recognized in previous years upon the acquisition of ArmenTel; (ii) the increased minority interests as a result of COSMOTE’s increased participation in the group’s operating results; and (iii) the increased foreign exchange losses mainly as a result of the appreciation of the Euro against the US Dollar during the year.
Comprehensive Income
Effective January 1, 1998, we adopted SFAS No. 130, “Reporting Comprehensive Income”, which established new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires companies to report, in addition to net income, other components of comprehensive income. Adoption of this standard had no effect on our results of operations or financial position as reported in the consolidated financial statements.
In 2001 and 2000, our net income differed from our comprehensive income mainly due to foreign currency translation adjustments. These adjustments amounted to Euro 27.4 million and Euro 32.0 million, respectively, and they primarily relate to the translation of foreign currency statements in foreign investments.
In 2002, comprehensive income was mainly affected by the accounting recognition of additional minimum liability for Youth Account by Euro 32.9 million (Euro 50.6 million, net of relevant tax of Euro 17.7 million).
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5.B. Liquidity and Capital Resources
Liquidity, Capital Expenditures and Capital Resources
Liquidity
The following table provides a summary of our cash flows for each of the years in the three-year period ended December 31, 2002.
| | Year ended December 31, | |
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| |
| | | 2000 | | | 2001 | | | 2002 | |
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| | |
| | |
| |
| | | (€ in millions) |
| Net cash provided by operating activities.......................................................................................................... | | 899.7 | | | 1,186.3 | | | 1,142.7 | |
| Net cash used in investing activities................................................................................................................... | | (903.4 | ) | | (1,774.9 | ) | | (1,149.7 | ) |
| Net cash provided by financing activities.......................................................................................................... | | 747.6 | | | 9.8 | | | 108.4 | |
| Effect of exchange rate changes on cash............................................................................................................ | | 0.6 | | | 1.5 | | | (0.7 | ) |
| Net increase (decrease) in cash and cash equivalents..................................................................................... | | 744.5 | | | (577.3 | ) | | 100.7 | |
Our primary source of liquidity is cash generated from operations. Cash generated from operations was approximately Euro 1,142.7 million in 2002, Euro 1,186.3 million in 2001 and Euro 899.7 million in 2000. The slight decline in 2002 is mainly attributable to increased income taxes payable during the year. The increase in 2001 is mainly attributed to decreased income taxes payable during the years and improved profitability of COSMOTE, our mobile subsidiary. Depreciation and amortization increased for both 2001 and 2002 because of significant progress in implementing our investment program. Accounts payable decreased in 2002 as a result of a reduction in amounts payable to unaffiliated domestic mobile telephony operators, such as STET Hellas, Vodafone and, since June 2002, Q – Telecom, as well as in payments to our suppliers Intracom and Siemens. Cash provided by operating activities in 2001 was affected by the outflow in August 2001 of Euro 352.2 million to EDEKT-OTE.
Accounts receivable, net of provisions for doubtful accounts, were approximately Euro 1,164.5 million as of December 31, 2002, Euro 998.4 million as of December 2001 and Euro 967.6 million as of December 31, 2000. The increases in accounts receivable in 2002 and 2001 were largely due to the growth in our revenues and the increased accounts receivable from other telecommunications operators in Greece and from our consolidated subsidiaries, primarily COSMOTE and AMC.
Net cash provided by financing activities was approximately Euro 108.4 million in 2002, Euro 9.8 million in 2001 and Euro 747.6 million in 2000. Major inflows in 2002 related to the net increase in long-term and short-term borrowings of Euro 467 million which was partially off-set by dividends paid for 2001 of Euro 338.2 million. The small inflow of cash from financing activities in 2001 was mainly attributed to dividends paid amounting to Euro 309.1 million and treasury stock acquired of Euro 13.4 million, partly offset by an increase of approximately Euro 116.0 million in short-term borrowings through COSMOTE and OTE International Ltd. and a net increase in long-term debt of approximately Euro 193.6 million.
The inflow of cash from financing activities in 2000 was due to the following reasons:
| • | the capital contributions made by the minority shareholders of COSMOTE through its IPO; |
| • | the increase in long-term debt, mainly due to the new syndicated loan obtained by COSMOTE, which, however, was partly used to repay loans previously obtained by the company; and |
| • | the proceeds from our Notes Offering of February 2000. |
The overall increase was partially offset by treasury stock acquired in 2000 of Euro 194.9 million.
It is our intention to extend the maturity profile of our debt and reduce concentration of maturities. To this end, in June 2000 our Board of Directors initially approved the establishment of a Medium Term Note, or MTN program. On November 7, 2001, the MTN program contractual documentation was signed between OTE PLC (as issuer), OTE (as guarantor) and a syndicate of banks (as underwriters) for a total amount of up to Euro 1.5 billion, with a maximum maturity of up to 10 years. On June 6, 2003, our Board of Directors approved the extension of the maturity of notes issued under the MTN program to 30 years. The MTN program has not been activated and no amounts are outstanding thereunder. In view of the fact that the holders of the Euro 1.1 billion 6.125% notes due 2007 issued by OTE PLC and guaranteed by us approved the waivers and the proposed amendments at the meeting of holders of June 30, 2003, we intended to enter into a new loan facility in the aggregate amount of approximately Euro 1.0 billion with a maturity of up to five years in order to refinance COSMOTE’s US $ 410.0 million loan facility, our overdraft facilities and assorted other loans held by our subsidiaries. In addition, we also expect to issue approximately Euro 1.0 billion of notes under the MTN program with a long term maturity in order to refinance our US $ 1.0 billion syndicated loan. For a discussion of certain non-technical defaults of the terms and conditions of the notes due 2007 issued by OTE PLC and the Waivers and Proposed Amendments and a non-payment breach of our US $ 1.0 billion syndicated loan and the related waivers, see “Item 13. Defaults, Dividend Arrearages and Delinquencies.”
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We decided in early 2000 to fund our needs and place our cash resources only in Euro, which is our functional currency as of January 1, 2002. Thus, substantially all of our debt is currently in Euro and we effect the placements of our cash resources in Euro. This policy continued also within 2001 and 2002. Our Group Treasury, which is responsible for funding strategy, asset and liability management is not operating as a profit center. It operates under approved policies designed to reduce the level of risk only to interest rate management.
In May 2003, both Moody’s and Standard & Poor’s placed our credit rating on creditwatch with negative implications. Both rating agencies are expected to announce the outcome of their review in July 2003.
Capital Expenditures
Net cash used in investing activities was Euro 1,149.7 million in 2002, Euro 1,774.9 million in 2001 and Euro 903.4 million in 2000. The bulk of our investing activities are related to capital expenditures for telecommunications property, plant and equipment, our extensive network improvement program, and our international investment strategy. Our capital expenditures for telecommunications property, plant and equipment were Euro 1,112.9 million in 2002, Euro 1,360.1 million in 2001 and Euro 1,044.9 million in 2000. The increase in investment expenditures in 2001 primarily reflected the acceleration of our network capital expenditures program together with capital expenditures incurred by our consolidated subsidiaries COSMOTE and ArmenTel.
During 2002, COSMOTE acquired an EGSM 900 License at a cost of Euro 38.2 million.
In January 2001, we acquired the second GSM900 license in Bulgaria for a price of US $ 135 million. In August 2001, COSMOTE was awarded a third generation (3G) mobile license, at a cost of Euro 161.4 million, out of which Euro 113.0 million was paid up to December 31, 2001. In November 2001, MTS was granted the second mobile telephony license in the Former Yugoslav Republic of Macedonia (FYROM) for a consideration of Euro 28.5 million, out of which Euro 15.5 million was paid up to December 31, 2001. During 2000 and 2001, OTE International granted loans of an aggregate principal amount of approximately Euro 87.0 million to RomTelecom, out of which Euro 55.0 million were in the form of a bridge loan which was subsequently converted into shares in RomTelecom as part of the RomTelecom Transaction under which OTE International Investments Ltd. increased its interest in RomTelecom to 54.01% (see Note 6 to the consolidated financial statements).
We have a number of outstanding commitments on supplier contracts, which, at December 31, 2002, 2001 and 2000, approximated Euro 411.8 million, Euro 494.2 million and Euro 769.8 million respectively, mainly representing orders placed under the framework contracts and COSMOTE’s purchase of mobile telephony equipment. See “4.B. Business Overview — Mobile Telephony” and “— Investment Program 2003 — Framework Contracts.”
Capital Resources
At December 31, 2002, we had total long-term debt of approximately Euro 2,617.8 million, including Euro 41.6 million of current maturities, compared to total long-term debt of approximately Euro 2,333.3 million, including Euro 391.0 million of current maturities, at December 31, 2001 and to total long-term debt of approximately Euro 2,278.8 million, including Euro 22.6 million of current maturities, at December 31, 2000. For further information concerning long-term debt, see Note 11 to the consolidated financial statements.
We also received from the European Union approximately Euro 0, Euro 25.2 million and Euro 0 of investment subsidies during 2002, 2001 and 2000, respectively. In the period from 1996 to 2002 inclusive, we received in aggregate investment subsidies of approximately Euro 159.1 million. On April 6, 2001, the European Commission informed the Ministry of Transport and Communications in writing that any suspension of subsidies was withdrawn.
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In our opinion, our working capital is sufficient for present requirements. In case a necessity arises, we may resort to debt financing.
We expect to fund our capital expenditures and investments from long term debt financing as well as cash flows from operations. COSMOTE expects to finance its capital expenditures for the most part through its own generated funds, mainly cash from operating activities and OTEnet through the syndicated loan facility entered into with Alpha Bank in February 2003. With the exception of RomTelecom, our investment program for 2003 for international operations is expected to be largely self-financed or financed by project finance-type lending. We have a syndicated loan for the equivalent of approximately US $ 1.0 billion and in 2000 our financing subsidiary, OTE PLC, launched a successful Euro 1.1 billion Eurobond issue, guaranteed by us, which generated proceeds we have used to finance our operations.
We expect that COSMOTE will incur capital expenditures for 2003-2004 of approximately Euro 390.0 million (Euro 210.0 million in 2003 and Euro 180.0 million in 2004) to upgrade and enhance its current 2G and 2.5G network in Greece and Albania (excluding any expenditure for investments which may be required in connection with the 3G network developments costs, regional and domestic acquisitions, joint ventures or other equity investments). Initial capital expenditure for 3G pilot network rollout is planned to be around Euro 35.0 million for 2003 and 2004. In November 2002, COSMOTE entered into a syndicated loan for Euro 420.0 million to refinance its existing syndicated loan and to fund its operations. In December 2001, we concluded the sale of OTE-Leasing to Piraeus Leasing, a member of the Piraeus Banking Group for a consideration of Euro 5.9 million in cash and Euro 15.0 million in shares of Piraeus Bank, reducing also consolidated debt by Euro 141.0 million. Hellascom International obtained a long-term loan from a consortium of banks of US $ 12.0 million to finance its capital expenditures which was paid off in February 2002. Hellascom International obtained two new loans in February 2002, one for an aggregate principal amount of US $ 5.0 million from Alpha Bank S.A. and the other one for US $ 8.0 million from Société Generale. The two loans were subsequently converted into Euro-denominated loans of Euro 5,099,959 and Euro 8,617,829, respectively. See Note 11 to the consolidated financial statements.
On October 17, 2002, the extraordinary general assembly of our shareholders approved the renewal of the authorization granted to us to buy back up to 10% of our own shares on the Athens Stock Exchange. Thus, for a period of twelve months from the date of that extraordinary general assembly (i.e. until July 4, 2000) we are authorized to purchase the balance of the 10% of our share capital which we have not purchased by such date (i.e. 7.33%) for a price per share between Euro 1 and Euro 30. During 2002, we did not purchase any shares.
As of December 31, 2002, we had repurchased approximately 13.5 million shares in aggregate, which represents approximately 2.7% of our share capital, at a cost of approximately Euro 272.6 million.
Greek law provides that where a company purchases its own shares such shares have to be cancelled within three years from the date of purchase. A two year extension to this three year period may be granted by way of approval from the Hellenic Capital Market Commission and from the company’s shareholders. The general assembly of our shareholders of September 4, 2001 approved the extension of the three year period for an additional period of two years. The Hellenic Capital Markets Commission has approved the extension of this period to nine (9) months and we are expecting an approval of the extension for additional fifteen (15) months to be forthcoming in due course. We do not currently intend to cancel any of the shares which we have purchased and certain of these may be reserved for our share option plans. See Note 13 to the consolidated financial statements.
On February 7, 2000, we proceeded with an offering in reliance on Regulation S and Rule 144A under the United States Securities Act of 1933, as amended, through OTE PLC, our wholly owned subsidiary incorporated in the United Kingdom, of Guaranteed Notes due February 7, 2007, or the Notes, bearing interest at a rate of 6.125% per annum and guaranteed by us. The aggregate principal amount of the Notes offered was Euro 1,100,000,000, of which Euro 800,000,000 was offered at an issue price of 99.640% and Euro 300.0 million was offered at an issue price of 100.195%. Immediately, we used Euro 261.0 million of the proceeds of this offering to repay outstanding balances of our revolving credit facility, reducing our currency translation losses by Euro 15.64 million for the year 2000, and a further amount equivalent to US $ 135.0 million for the acquisition of the second GSM license in Bulgaria. On August 3, 2001, we paid to EDEKT-OTE an amount of Euro 352.2 million, equal to the present value of our future contributions for 10 years starting from January 1, 2002. This amount was partly paid from the proceeds of the 2000 OTE PLC Euro 1.1 billion Eurobond issue and partly from a draw down of Euro 250.0 million under our revolving credit facility of US $ 1.0 billion.
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Contractual Obligations
As of December 31, 2002, our main contractual obligations consist of the following:
| • | Long-term debt of approximately Euro 2,617.8 million, out of which Euro 41.6 million are due within the next year, Euro 1,384.0 million are due within the next two to three years, Euro 1,154.0 million are due within the next four to five years and Euro 38.2 million are due within the next five years and thereafter. |
| |
| • | Operating lease commitments of approximately Euro 131.6 million, out of which Euro 11.8 million are due within the next year, Euro 23.6 million are due within the next two to three years, Euro 23.3 million are due within the next four to five years and Euro 72.9 million are due within 5 years and thereafter. |
| |
| • | Capital commitments on supplier contracts and contractual agreements of Euro 411.8 million. |
5.C. Research and Development, Patents and Licenses
Research and Development
We have established a centralized research and development department as part of our telecommunications systems division. Over the past three years, we have spent Euro 23.0 million in aggregate on research and development. We have five thematic labs in a space of 800 sq.m in Maroussi Athens, covering most or all of the new technologies. An optical ring connects the R&D facilities with our network which is designed to achieve optimal implementation of the research projects. The research and development department is in a close collaboration with the Greek National Universities and Research institutions and participates in some research and development projects of the European Union. The primary motive in conducting research and development is to introduce new technologies and services to our network in a systematic and efficient manner. We strive to achieve optimum results by testing proposed technologies and by training our personnel in their use.
The R&D department covers the research needs of the OTE group for new technologies and for some new commercial products.
The following activities/projects have already been completed and demonstrated in our research and development laboratories:
| • | ATM; |
| • | IN protocols harmonization; |
| • | ADSL; |
| • | Fiber in the Local Loop technologies; |
| • | Multiprotocol networks and applications; |
| • | Telemedicine over satellite for ships at 2Mbps; and |
| • | SMS in the fixed (PSTN) network. |
A pilot ADSL network of around 250 customers has been operational for approximately two years. A live demonstration was also realized with a ship traveling in the Ionian Sea showing the operation of telemedicine over satellite for ships with 2Mbps service.
During 2003, we expect that the following projects will be completed:
| • | fast Internet services through direct broadcast satellite; |
| • | Protocols over our DWDM platform; |
| • | fixed and mobile networks and services integration /3G mobile networks; and |
| • | ADSL (services over ADSL, service selection platforms, services distribution). |
We embarked on the following new projects in 2003:
| • | PKI- Public Key Infrastructure and network security; and |
| • | a vertical medical Portal. |
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5.D. Trend Information
Some recent trends and developments affecting our business
Our business has been affected in recent years by a number of important trends. The telecommunications market in Greece has experienced growth in demand as a result of a number of factors, including the growth of Greek economy, its increasing integration with European markets and the advent of factors such as mobile telecommunications, the Internet and the growth of data traffic. The mobile telecommunications market in particular has grown substantially in the last four years, as the demand for, and use of, mobile telephones continues to increase substantially. In addition, we believe that growth in the use of the Internet may contribute to growth in traffic on our fixed network. In the future, we expect that both penetration levels and the quality of content for mobile data and Internet applications, will be the significant drivers of growth in the mobile and Internet markets. These factors are reshaping the telecommunications business in Greece.
The telecommunications sector in Greece has also undergone a radical regulatory transformation. Historically, only we, as the incumbent public telecommunications operator, had the right to provide fixed-line public telephony service or networks in Greece. However, as a result of liberalization which has been underway in Greece, as well as other European markets, as of January 1, 2001, we lost our exclusive right to provide fixed-line telephony services in Greece. As a result a number of new competitors have entered the Greek telecommunications markets as of the year 2002.
Although liberalization, competition and specific regulation of our activities have caused our tariffs to decline in recent years, our revenues have continued to grow, driven by new services, mobile leased lines, data and Internet services.
Fixed-line telephony services
Fixed-line telephony services continued to be our largest segment, contributing 57.3% of our operating revenues in 2002. We started to experience competition in the sector as a result of liberalization.
The market for international telecommunications is becoming increasingly competitive at a rate faster than domestic telecommunications, and pricing is becoming more transparent, as a result of both the Greek and the global liberalization of telecommunications markets. This may make it more difficult for us to compete, as other telecommunications companies will have alternatives to routing calls through our network. This may harm the profitability of our wholesale international network services in the future. In addition, international traffic from and to Greece still represents a sizeable part of the overall international traffic, which we carry on our network. Our success in the wholesale international market therefore depends mainly on our success in the retail market in Greece.
In December 2000, pursuant to an auction by the EETT, we were granted two licenses to offer fixed wireless access services in Greece, the first within the 3.5 GHz frequency band and the second within the 25 GHz frequency band. We had to commit an aggregate amount of Euro 11.8 million for these two licenses. In the 3.5 GHz frequency band, which is mainly used for voice telephony services, two more licenses were granted in addition to ours. In addition, in the 25 GHz frequency band, which is mainly used for voice and local multipoint distribution services, the EETT granted a further four licenses in addition to our license. The fixed access license in the 25 GHz frequency band has been transferred to COSMOTE following the approval of the EETT.
Mobile communications
The Greek mobile telecommunications market has demonstrated strong growth in recent years. COSMOTE, our mobile telephony subsidiary benefited from this substantial growth.
The Greek mobile telecommunications market accounted at the end of 2002 for approximately 9.3 million mobile telephone users, representing a penetration rate of approximately 85.5%. These customer numbers represented an increase of approximately 17% compared with 2001.
In August 2001, COSMOTE was awarded a 3G license. COSMOTE expects that it may incur significant capital expenditure developing the 3G network.
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Completion of this investment may be hindered by stringent planning controls over the positioning of masts, particularly in rural areas. In addition, the technology for the new services is not yet fully developed by the suppliers of the handsets and other equipment to be used by COSMOTE and its competitors in providing these services. Developing 3G technologies may take longer than anticipated and may prove not to be superior to the existing technologies. The size of the market of these services is as yet unknown and may fall short of the industry’s expectations. COSMOTE cannot be certain that the demand for these services will justify the related costs. In some locations, the investment may not be commercially desirable. Furthermore, rolling out 3G network at a time when other 3G services providers in Europe roll out their own networks, may, given the limited number of 3G equipment suppliers, create high demand, extend delivery times and cause delays in the construction of COSMOTE’s 3G network.
The potential level of competition, together with these uncertainties, means that COSMOTE cannot give you any assurance that it will make an economic return from its planned investments in 3G license or network. Its failure to generate significant revenues from its planned 3G mobile services offerings may adversely affect our business, financial condition and results of operations.
The aforementioned also applies to the Fixed Wireless License in the 25GHz frequency spectrum, which COSMOTE acquired from our company in March 2002. Apart from our company and COSMOTE there are another six (6) holders of Fixed Wireless Access Licenses in Greece.
In August 2002, following a tender initiated by the EETT, COSMOTE was awarded the use of 2X5MHz of spectrum in the EGSM 900 spectrum band for 2G mobile telecommunications services (2G) for Euro 38.2 million, the reserve price for such GSM spectrum as set by the EETT.
In October 2002, following an application of COSMOTE to the EETT, according to the Special Licenses Regulation, COSMOTE was granted a Special authorization for the use of spectrum zone 2.4 GHz and the provision of W-Lan Public Mobile Communications Services.
Data/Internet Protocol
We provide data transmission services in Greece. We expect the market to experience strong growth as businesses adopt new data-intensive business applications, such as electronic commerce, corporate intranets and virtual private networks, voice communication over the Internet, video streaming, broadcast multimedia, application hosting services and other products and services based on Internet Protocol data transmission. We believe that these new applications are, and will continue to, drive the demand for bandwidth and for our value-added services, such as local access network-interconnect services and frame relay which give our business customers greater flexibility in the transmission of data and higher bandwidth capacity. The same factors are also driving demand for integration and management of applications and private networks that connect workstations within a building or connect a number of business sites. As a result of the demand for bandwidth, we are investing in building high capacity data/Internet Protocol infrastructure, including a public asynchronous transfer mode backbone network and local networks. We expect both demand for and investments in bandwidth to continue to grow in the future. We believe that telecommunications and specialized data/Internet Protocol providers may compete with us in building high capacity data/Internet Protocol networks as of 2002.
We also expect that the development of new capacity will lead to a decline in prices, which in turn will spur demand for new applications and consequently bandwidth. Our objective will be to offset future price decreases by attracting increased volumes of data traffic we handle and offering value-added services.
Internet, customer relationship management and media
OTEnet, our Internet service provider subsidiary is the leading Internet service provider in Greece, with the largest market share of dial-up subscribers. At the end of 2002, the Internet penetration rate in Greece was in the range of approximately 10-12%, with approximately 1,500,000 million users, which was lower than the average penetration rate in Western Europe. OTEnet is experiencing substantial growth in Internet service provider subscribers and Internet traffic and we believe that use of the Internet will continue to be driven in large part by increasing computer and modem penetration, the implementation of faster, high bandwidth technologies such as asymmetric digital subscriber line, the introduction of mobile Internet access, decreasing prices of bandwidth and access, the introduction of easy-to-use navigational tools and the growth in the number of information, entertainment and commercial services available on the Internet.
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European Monetary Union
The Euro was implemented by participating member states of the EU on January 1, 1999 and resulted in the adoption of a single currency for the eleven European countries that initially became part of the European Monetary Union, or EMU and the fixing of irrevocable exchange rates between the national currencies of such countries and the Euro. Pursuant to a decision of the Council of the Heads of State or Government of the European Union in June 2000, Greece was found to have met the criteria for monetary convergence to join the EMU. As a result, Greece joined the EMU on January 1, 2001. The exchange rate of the Greek Drachma against the Euro was fixed at Drs 340.75 per Euro 1.00. The Euro was introduced as national currency of Greece by Law 2842/2000, with effect from January 1, 2001 and a transitional period covering the year 2001 was introduced, during which our functional currency was still the Greek Drachma and transactions could be consummated and undertakings undertaken by reference to the Euro, while settlement of transactions in cash was only possible in Drachmas (when in cash). Effective January 1, 2002, the Drachma has ceased to exist and as of March 1, 2002, the Euro is our functional currency and banknotes and coins in Drachmas have been fully withdrawn and replaced by banknotes and coins in Euro.
On June 25, 2001 our general assembly of shareholders approved the dual currency denomination of the share capital, namely that of the Greek Drachma and of the Euro, in accordance with the provisions of Law 2842/2000. The nominal value of our shares was set at Drs 750 (rounded) and Euro 2.20 and, accordingly, our share capital decreased by Euro 0.5 million with a corresponding increase in paid-in surplus. Since 2002, our shares have been denominated in Euro.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, doubtful accounts and long-lived assets. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that, of our significant accounting policies, the following may involve a higher degree of judgement and complexity:
| | - Principles of Consolidation: Our investments in significant entities other than consolidated entities, in which we exercise significant influence are accounted for using the equity method. Specifically, our decision to account for our investment in RomTelecom under the equity method required a high degree of judgement (See Note 6(a) to the consolidated financial statements). Under this method, the investment is carried at cost and is adjusted to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor and such amount reflects adjustments similar to those made in preparing consolidated financial statements, including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in the assets of the investee at the date of the acquisition. The investment of an investor is also adjusted to reflect the investor’s share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. Investments in which we don’t exercise significant influence, are accounted for at cost, adjusted for impairment whenever facts and circumstances determine that a decline in fair value below the cost basis is other than temporary. |
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| | - Legal Contingencies: We are currently involved in various claims and legal proceedings. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our financial position and results of operations. |
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| | - Concentrations of Credit Risk and Allowance for Doubtful Accounts: Financial assets that potentially subject us to concentrations of credit risk are trade accounts receivable. Due to the large volume and diversity of our customer base, concentrations of credit risk with respect to trade accounts receivable are limited. At each reporting period/date, all accounts receivable inclusive of unbilled revenue are assessed based on historical trends, statistical information and future expectations and a provision is recorded for the probable and reasonably estimable loss for these accounts. The balance of such allowance for doubtful accounts is adjusted by recording a charge to the consolidated statement of operations of the reporting period. Any amount written-off with respect to customer account balances is charged against the existing allowance for doubtful accounts. All accounts receivable for which collection is not considered probable are written-off. |
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| | - Telecommunication Property, Plant and Equipment: Telecommunication property, plant and equipment are stated at cost, net of subsidies received primarily from the European Union, plus interest costs incurred during periods of construction. Newly constructed assets are added to property, plant and equipment at cost, which includes direct technical payroll costs related to construction (inclusive of related employer contributions) and applicable general overhead costs. Repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets retired or sold are removed from the accounts at the time of sale or retirement, and any gain or loss is included in the accompanying consolidated statements of operations. An impairment loss is recognized when the estimated future cash flows (undiscounted and without interest) are less than the carrying amount of the asset. Measurement of an impairment loss is based on fair value of the asset computed using discounted cash flows if the asset is expected to be held and used. The accuracy of our assessments of fair value is based on management’s ability to accurately predict key variables such as traffic volume prices, spending on marketing and other economic variables. Predicting these key variables involves uncertainty about future events however, the assumptions we use are consistent with these employed for internal planning purposes. Assets held for sale are accounted for at the lower of carrying amount or fair value, less cost to sell. |
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| | - Goodwill: Goodwill is the excess of the purchase price over the fair value of not identifiable assets acquired in business combinations accounted for as a purchase. Prior to January 1, 2002 goodwill was amortized on a straight-line basis over periods not exceeding 20 years. Effective with the adoption of SFAS No.142 on January 1, 2002, we no longer amortize goodwill and instead test it for impairment at least annually. We test goodwill for impairment using the two-step test prescribed in Statement No. 142 which requires goodwill to be allocated to reporting units. In the first step, the fair value of the reporting unit is compared to carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment may exist, and the second step of the test is performed. In the second step, the implied fair value of the goodwill is compared to the carrying value of the goodwill and an impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the goodwill. As a result of the adoption of SFAS No. 142, we have re-assessed the classification of our previously acquired goodwill. The assessment did not result in any adjustments to previously recorded amounts. The completion of the first step of the goodwill impairment test indicated potential impairement of goodwill relating to ArmenTel. Consequently, we completed the second step of the goodwill impairment test, as a result of which, unamortized goodwill of ArmenTel of Euro 62 million as of January 1, 2002, net of the related deferred income tax of Euro 21.7 million was written off and reflected as “Cumulative effect of accounting change for SFAS No. 142, net of income taxes”, in the accompanying 2002 consolidated statement of operations. We also acquired goodwill of approximately Euro 70 million on the acquisition of our interest in AMC, which is included in the segment “All other”. The fair value of this reporting unit was above the carrying amount both at January 1 and December 31, 2002. See Note 2(g) to the consolidated financial statements. |
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| | The accuracy of our assessments of fair value is based on management’s ability to accurately predict key variables such as sales volume, prices, spending on marketing and other economic variables. Predicting these key variables involves uncertainty about future events, however the assumptions we use are consistent with those employed for internal planning purposes. |
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| | - Investments in associates: Our policy on valuation of investments in associates is described in Note 2(a) to the consolidated financial statements. Whenever a decline in fair value below the carrying amount is assessed to be other than temporary, an impairment charge is recognized in income statement. In order to determine whether a decline in value is other than temporary, we consider the political and economical conditions in the Countries that our investments operate. Fair values are determined based on discounted cash flow projections. Those projections represent our best assumptions on our investments’ future performance. As discussed in Note 6(a) to the consolidated financial statements, during 2002, we recognized an impairment charge of Euro 114.9 million in respect of our investment in Telekom Srbija and an impairment charge of approximately Euro 1.5 million in respect of our investment in RomTelecom. |
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| | -Income taxes: We account for income taxes using the liability method in accordance with SFAS No. 109 “Accounting for Income Taxes”. Deferred income taxes have been provided for the tax effects of temporary differences between financial reporting 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 recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Our estimates of income taxes and the significant items giving rise to the deferred asset and liabilities are shown in Note 10 to the consolidated financial statements. These reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or on results from final review of our tax returns by the competent tax authorities. |
By operation of Greek law and for periods from January 1, 2003, we will be under an obligation to prepare financial statements in accordance with International Financial Reporting Standards. The Minister of Finance of the Hellenic Republic has been authorized by law to extend the deadline for the implementation of IFRS for Greek companies.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors, Board Practices and Senior Management
We are currently managed by the Board of Directors, the Managing Director and the Executive Committee of Corporate Governance. Because of our history of operating as a state entity, much of the management structure, until recently, was organized along bureaucratic lines. We now separate our different activities into eight divisions.
We have reorganized the structure of our group. On July 17, 2002, we announced our organization into four dedicated business units (International activities, Domestic Wireline, Mobile and Internet) and the establishment of a Group Corporate Center designed to transform our group into a market-oriented, modern and competitive telecommunications group.
Board of Directors
Our Board of Directors consists of 15 members, elected for five-year terms. The term in office may be extended until the ordinary general assembly of shareholders immediately following the expiration of the five-year term, provided that the term of appointment may not exceed six years in total.
On September 4, 2001, the extraordinary general assembly of our shareholders resolved on a number of significant changes to our Articles of Incorporation, as a result of the reduction of the participation of the Greek State in our share capital to less than 51%. As a result of these changes, the Greek State is no longer entitled to nominate six of the 15 members of the Board, with an equal number of deputies, nor may it designate the Chairman of the Board and the Managing Director. Similar rights of direct nomination by minority shareholders, majority-owned subsidiaries, our employees and the Financial and Social Committee have also been abolished. Following such amendments, all members of the Board of Directors are now freely appointed by the general assembly of our shareholders. In addition, following the amendments, the Board of Directors may be constituted as a body corporate and elect its officers following internal consultations, without any of our
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shareholders being entitled or empowered to designate the persons assuming executive functions. These changes have created greater independence and accountability for the Board of Directors, which is now directly appointed by the general assembly of shareholders, which in turn will afford OTE greater efficiency and flexibility to better compete in an increasingly deregulated environment. The extraordinary general assembly of shareholders of September 4, 2001, also approved new articles of incorporation fully aligning OTE to the Greek Companies Law.
Based on these amendments, the extraordinary general assembly of our shareholders of March 13, 2002 elected a new Board of Directors, the composition of which is presented in detail in the table below.
Recently enacted Law 3016/2002 on corporate governance has established a new set of rules concerning transparency of operation and avoidance of conflicts of interest within Greek corporations having shares listed on the Athens Stock Exchange (ASE). This new law took effect from May 2002 but the application of certain provisions was deferred until June 30, 2003. The new law is intended to enhance and extent the regulatory framework on corporate conduct and governance that had been introduced in 2000 by the Capital Market Commission which issued a legally binding Code of Conduct for Companies having shares listed on the Athens Stock Exchange. The new law provides that at least 1/3 of the directors of affected companies, which term includes us, shall be “non-executive”, i.e. they will not be involved in the day-to-day business affairs of the listed company. Among the “non-executive” members of the Board at least two shall be “independent”, i.e. shall be persons who have neither a significant holding interest nor any other “relation of dependence” with the company or any affiliated companies thereof. In case the members of the Board of Directors are expressly appointed by, and represent the minority of shareholders, the presence of independent members on the Board of Directors shall not be necessary. In view of the aforementioned matters, applicable to the process for the nomination of the members of our Board of Directors, we will be under an obligation to include in our Board of Directors “independent non-executive” members from June 30, 2003. Extraordinary general assembly of our shareholders held on October 17, 2002 defined the capacities of the members of the Board of Directors in accordance with the provisions of Law 3016/2002 in relation to executive, non-executive and independent non-executive director status. Law 3016/2002 has been amended by Law 3091/2002 and our general assembly of shareholders is solely responsible for appointing independent non-executive members of the Board of Directors. The Board of Directors is responsible for defining the capacities of the other members of the Board of Directors as executive or non-executive.
The Board has the power to decide on any issue, which does not fall within the exclusive competence of the general assembly of our shareholders. Matters that fall within the exclusive competence of the general assembly of our shareholders include increasing our authorized share capital in certain circumstances, approving our financial statements, paying dividends, authorizing issuance of debt securities under certain circumstances, approving a merger, dissolution or reorganization in which we are involved, and certain other matters specified in our Articles of Incorporation.
The quorum for a meeting of the Board of Directors is eight directors, including the Managing Director or his/her substitute. In addition our Articles of Incorporation provide that the resolutions of the Board of Directors shall be adopted by affirmative vote of an absolute majority of the members present at the relevant meeting. The Board may delegate certain of its powers to its members, the Managing Director, the company’s executives or any committee comprised thereof.
The members of our Board of Directors are not entitled to any form of compensation upon termination of their appointment as members of the Board of Directors, for any reason.
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As at the date of this Form 20-F, our Board of Directors is comprised as follows:
| Name | | Position | | Appointed By | | Appointed | | Expiry |
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| Lefteris Antonacopoulos........................ | | Chairman/Managing | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | Director | | Shareholders | | | | |
| George Skarpelis....................................... | | Executive Vice- | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | Chairman | | Shareholders | | | | |
| Lazaros Aggelou...................................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| George Argyropoulos............................. | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Theodoros Veniamis............................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Iakovos Georganas................................. | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Michalis Georgantopoulos.................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Lana Mandila.......................................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Stavros Panas.......................................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| George Papakonstantinou..................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Christos Spanos...................................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Apostolos Tamvakakis.......................... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Phaedon–Theodoros Tamvakakis....... | | Director | | The General Assembly of | | March 13, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| John N. Sahalos...................................... | | Director | | The General Assembly of | | June 19, 2002 | | March 12, 2007 |
| | | | | Shareholders | | | | |
| Spyros Floudas....................................... | | Director | | The General Assembly of | | June 30, 2003 | | March 12, 2007 |
| | | | | Shareholders | | | | |
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| Note: Mr Christos Polyzogopoulas, who was appointed on March 13, 2002, resigned as a Director on February 5, 2003. At a meeting of the Board of Directors held on June 30, 2003, Mr. Spyros Floudas was appointed as a Director of OTE and his appointment was approved at the general assembly of our shareholders held on June 30, 2003. |
Lefteris Antonacopoulos. Mr. Antonacopoulos is a Chemistry graduate and holds a Masters Degree in Operational Research. In 1971 he began his career with the petroleum company Shell. In 1979 he was transferred to Shell Chemicals International in London. He returned to Shell Hellas in 1981 as Director of Personnel and Public Relations. He held the position of Business Manager from 1984 to 1989 when he was transferred to Shell International in the Hague as Business Manager for Central and Southern Europe. In 1992 he took up the position of Chairman and Managing Director with Shell Hellas S.A. In 1993 and 1994 he served as Chairman to the Petroleum Corporations Association. In May 1996 he was elected as a member of the Board of Directors and the Executive Committee of the Association of Greek Industries until October 1996 at which time he accepted the position of Chairman and Managing Director for the Shell group of companies in the Iberian Peninsula. In 1998 he was appointed as European Transformation Manager for the Industries and Outlet Network branches in London. In March of 1999 he was re-elected on the Board of Directors and the Executive Committee of the Association of Greek Industries and on May 24, 2000 he was elected as Chairman to the same. Mr. Antonacopoulos also serves as non-executive Chairman of the Board of Directors of COSMOTE, and also as Chairman of the Board of Directors of Hellas Sat Consortium Limited.
George Skarpelis. Mr. Skarpelis is a Graduate Engineer who has been working with us since 1968. He graduated from the National Technical University in 1967. From 1988 to 1999, he was the Chairman and Managing Director of Elltelka S.A., from 1993 to 1997 he was a member of the Board of Directors of D.E.P.A. (Public Petroleum Gas Enterprises) S.A.; he has been a member of the Board of Directors of Hellascom International S.A. from 1995 to 2000 and of COSMOTE from 1996 to 2000. Mr. Skarpelis has served as a member of our Board, as an advisor to our General Director for Investment and International Relations and as the General Manager of Telecommunications Systems. In December 1998, he was appointed to our Board of Directors and reappointed in May 2000, while he served as our Delegate Managing Director from December 1998 until January 1999. He has also served as Deputy Managing Director since April 1998 and as the Executive Vice-Chairman since November 2000. In addition, since December 1999, he has been the Chairman of RomTelecom and since November 2000, the Chairman of OTE International Investments Ltd. He also serves as Chairman of the Board of Directors of OTEnet, a position he has held since June 2000. He held the position of RomTelecom’s Chief Executive Officer between December 2002 and February 2003. In June 2003, he was appointed as a non-executive member of the Board of Directors of COSMOTE.
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Lazaros Aggelou. Mr. Aggelou is a graduate of the School of Physics of the Aristotle University of Thessaloniki and a graduate of the Higher School of Electronics and holds a Masters Degree in Electronics specializing in digital communications from the University of Wales. He has been with OTE since 1973 initially as a Radio Electronic Installations Technician, and since 1979 as a Telecommunications Engineer specialized in Optic Contact Systems, Digitalized Centres & Transmission Systems, Instructor for the OTE Schools on matters of Quality of Digitalized Systems and Microcomputers. He was involved in all stages of the development of the European initiative for the “Information Society” and is Chairman of the Project Management Team of the Periphery of Central Macedonia. He was elected Deputy Prefect of Thessaloniki Prefecture with authority on matters of Economic-Industrial Development and Employment from 1995 to 1998. From 1999 to 2002, Mr. Aggelou held the position of Regional Manager of the Periphery of Northern Greece for COSMOTE. Since July 2002, Mr. Aggelou has been the Chief Officer for Group Regulatory Affairs. Mr. Aggelou also serves as Chairman of the Board of Directors of OTEGlobe and is in charge of OTE’s team to manage the Third Community Support Framework.
George Argyropoulos. Mr. Argyropoulos is a graduate Mechanical-Electrical Engineer from the National Technical University of Athens (1975) specializing in electronics and telecommunications. He is member of the International Institute of Electrical and Electronics Engineers (IEEE) of the USA since 1974 and a member of the Technical Chamber of Greece since 1975. He worked with OTE from 1977 as an engineer in the department of Radio Systems Planning (1977-1987) and as Head Engineer for the same department (1987-1990), Advisor to the General Director of the Telecommunications System (1996-1997), Head of the Department of Competition (1997-1998), and Chief Technical Officer (1998-2002). He has been a member of the Board of Directors of RomTelecom since October 30, 1998 and from December of 1999 to November 2000 he was Chairman of the Board of Directors of ArmenTel; he serves as a member of the Board of Directors of OTEGlobe and since July 2002, Mr. Argyropoulos has been our Chief Officer for Group Technology, Chairman of the Board of Directors and Chief Executive Officer of Hellas Sat S.A. and Vice Chairman of Hellas Sat Consortium Limited.
Theodoros E. Veniamis. Mr. Veniamis is a ship owner and a graduate of the School of Economics and Trade of Athens (ASOEE). He has worked in different shipping businesses in London and Piraeus. He is the founder and Chairman of the Golden Union Group of Companies. He is a member of the Board of Directors of the Union of Greek Shipowners, a member of the Board of Directors of London Steamship Owners Mutual Insurance Association (P&I) and Vice President of the Greek Committee of Det Norske Veritas. He actively contributes in committees and unions. He has been Chairman of the Board of Directors of Maritel since July 1999.
Iakovos Georganas. Mr. Georganas holds a degree in Economics from the School of Economics and Trade of Athens (ASOEE) and attended the Advanced Management Program of the Harvard University Business School. He worked with the Greek Bank for Industrial Development (ETBA) from 1958 to 1991 and served from 1989 to 1991 as Vice-President and Member of the Hellenic Capital Market Commission. Since 1991, he has served as Vice-Chairman of the board of directors of Piraeus Bank and since June 2000 he has been President of the Bank of Piraeus Audit Committee.
Michalis Georgantopoulos. Mr. Georgantopoulos is a Civil Engineer of the National Technical University of Athens (1963) and holds a Masters degree in Statistics and Operational Research from the University of Paris (1970). He began his career in 1966 as a supervising Engineer with the Organization of School Buildings. Following that, and until 1971 he worked with the Planning Department of the Ministry of Education. He was later hired by the petroleum company FINA until 1985 and held several positions as Director. He was Marketing Manager with the Chemicals Department until 1989 and following that Operations Director with the petroleum products of EKO-ELDA S.A. until 1995. He holds the position of Managing Director of EKO-ELDA since 1995. He is a member of the Board of Directors of DEP S.A. and HELLENIC PETROLEUM S.A.
Lana Mandila. Mrs. Mandila is a graduate of the Athens School of Law and Political Studies. She holds a Masters in Political Studies and Philosophy from the University of Bonn. She has worked with several insurance companies (1982-1985). She is a legal advisor and attorney for the companies COSMOKAR S.A., KARENTA S.A., MANDYLAS S.A. of which she is also a member of the Board of Directors. She has also been a member of the Board of Directors of COMMERCIAL RENT S.A. since 2000.
Stavros M. Panas. Dr. Panas holds a Bachelor’s degree in Physics from the Aristotle University of Thessaloniki, Greece, a Master’s degree in Electrical Engineering from the University of Oklahoma, and a Ph.D. degree in Electrical Engineering from the Aristotle University of Thessaloniki, Greece. He has been with the
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Department of Electrical and Computer Engineering, Aristotle University of Thessaloniki, Greece since 1976, where he is now a Professor.
George S. Papakonstantinou. Dr. Papakonstantinou received his BSc in Economics from the London School of Economics (1983), his Masters’ Degree from New York University (1985) and his Ph.D. from the London School of Economics. He worked with the Organization of Economic Cooperation and Development in France from 1988 to 1998. He has published papers in international scientific periodicals. From 1998 to 2000 he was an Advisor to the Prime Minister on matters pertaining to the “Information Society” and from 2000 to 2002 he was Special Secretary to the Minister of National Economy for the “Information Society”. Since 2002, he has been an advisor to the Minister of Economy & Finance.
Christos Spanos. Mr. Spanos received his degree in Economics from the University of Athens, and a Master’s degree in Economics and an MBA from the University of York, Canada. He has worked for the Commercial Bank of Greece since 1983. In 1996, he was appointed General Director of the Ermis Mutual Funds.
Apostolos Tamvakakis. Mr. Tamvakakis has been Deputy Governor of the National Bank of Greece since 1998. He is a graduate of Economics from the Athens University and holds a Masters in Econometrics and Mathematical Economics from Saskatchewan University in Canada. From 1984 to 1986 he worked with Mobile Oil Hellas S.A., from 1986 to 1989 with the Hellenic Investment Bank, from 1990 with the Bank ABN AMRO and from 1993 until 1996 he was Deputy General Manager of that Bank. From December of 1996 until October of 1998 he was Deputy General Director of the National Mortgage Bank of Greece. He has participated in Investment Committees and has been member of numerous boards of directors. He is Chairman of the Steering Committee of the Inter –Alpha Group of Banks. He is a member of the EASE, Hellenic Management Association, Athens Club.
Phaedon-Theodoros Tamvakakis. Mr. Tamvakakis studied at the American College of Greece (Degree College) and specialized in Econometrics. He holds a Masters’ Degree in Economics of Investment and Finance from the University of Exeter, Great Britain. He began his career in 1985 with ELAIS S.A. He is a member of and also has been appointed as a director in financial organizations and companies. From 1997 to 2000 he was Chairman of the Vocational Training Center of the Athens Stock Exchange. He is a member of the Investment Committee of Alpha Trust Asset Manager Fund and member of the Board of Directors of Taylor Young Investment Management Ltd. He has been Managing Director of Alpha Trust Financial Investment Services Limited Liability Company since 1997.
John N. Sahalos. Dr. Sahalos received the B.Sc. degree in Physics, the M.Sc. in Electronic Physics (Radioelectrology), the Diploma of Civil Engineering and the PhD degree in Physics from the University of Thessaloniki. From 1971 to 1975 he was a Teaching Assistant and an Instructor at the Department of Physics at the University of Thessaloniki. From 1975 to 1976 he worked at the Department of Electrical and Computer Engineering of the Ohio State University as a Postdoctoral University Fellow. From 1977 to 1985 he was a Professor at the Department of Electrical and Computer Engineering at the University of Thrace, Greece. Since 1985 he has been a Professor at the School of Science of the University of Thessaloniki, where he is the leader of the Radiotelecommunications Group. He was a visiting Professor at the Department of Electrical and Computer Engineering, University of Colorado, Boulder as well as at the Universidad Politecnica de Madrid, Spain. He is a member of the Editorial Board of International Journals (IEEE, JAE). Dr. Sahalos is involved in numerous research and development projects in the areas of Communications, Microwaves, Antennas and Biomedical Engineering. He is the author of three books, three monographs and more than 250 articles published in the scientific literature.
Spyros Floudas. Mr Floudas is a graduate lawyer of the University of Athens (1972) with a post graduate degree in European studies from the University of Geneva (1973) and a diploma of higher federal studies from the Universities of Aosta and Nice. He speaks French and English fluently. He was the Coordinator within the Ministry of Economy and Finance of the Working Team for the Greek Presidency of the EU in 2003. From the 1994 to 2002 he served as the General Manager of the Hellenic Export Promotion Organization. From 1978 to 1994 he served in several positions in the then Ministry of National Economy. He has participated in numerous State Committees and Working Parties and he has issued many studies in conjunction with the Institut Universitaire des Etudes Europeenes de Geneve.
Audit Committee
We established an Audit Committee in April 1999. This is a committee of our Board, staffed by members of the Board. Its purpose is to assist the Board in its supervisory role by reviewing financial information provided to shareholders and other persons and by inspecting the control mechanisms that have been established by the Management and the Board.
According to its constitution, our Audit Committee should consist of three non-executive members of the Board who are not involved in the day-to-day business affairs of our company. Our Audit Committee holds four ordinary meetings each year and may also hold extraordinary meetings when deemed necessary. The Audit Committee’s constitution is reviewed at least annually and amended as and when required in accordance with
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international standards. According to its constitution, the following matters, amongst others, are within the Audit Committee’s authority:
| • | review our quarterly and annual financial statements and the execution of our budget; |
| • | review the scope of activities of our Internal Audit Department and opine to our Board of Directors regarding the approval of internal audit programs submitted by the Internal Audit Department; |
| • | review the scope and cost of audit and non-audit services provided by external auditors; |
| • | control and ensure the independence of external auditors; |
| • | request information from management on exposure to material risk and assess the measures taken by management to mitigate these risks; |
| • | review the sufficiency of control mechanisms and procedures relating to management expenses; and |
| • | conduct investigations, or delegate the authority to investigate, on any matter within its authorities. |
| • | discuss quality of accounting principles with external auditors as well as possible disagreements between the external auditors and management. |
Following a decision of our Board of Directors taken on December 18, 2002, the Audit Committee is constituted lawfully as a body. Presently its members are Mr. Iakovos Georganas (Chairman), Mr. Stavros Panas (Member) and Mr. Michalis Georgantopoulos (Member). Notwithstanding that the presence on the Audit Committee of a financial expert is not required as of the date of this Form 20-F, we consider that Mr. Georganas is a financial expert (as such term is defined in the instructions to this Form 20-F).
Managing Director
The Managing Director is our highest ranking executive. The Managing Director is one of the 15 members of our Board of Directors appointed by the general assembly of our shareholders, is an executive member of our Board of Directors, and is elected by our Board of Directors when this is constituted as a body (after elected by the general assembly of our shareholders). The Managing Director has certain constitutional powers granted to him under our articles and other powers delegated to him by the Board. Among the above-mentioned powers is the power to make proposals to our Board of Directors, concluding contracts on behalf of the Board of Directors up to a certain value which is in each case determined by the Board (which following a Board decision of March 2002 is Euro 7,336,557) and deciding on certain matters pertaining to personnel and our internal organization.
Executive Committee of Corporate Governance
On June 29, 2000, our general assembly of shareholders resolved to amend our Articles of Incorporation. Pursuant to our amended Articles of Incorporation, the Executive Committee of Corporate Governance was established to advise and assist the Managing Director on specific issues. It has no executive responsibilities.
The Executive Committee of Corporate Governance is mainly responsible for assisting the Managing Director to secure the coordination and operational cohesion of OTE and its subsidiaries, the resolution of significant issues pertaining to present management and the avoidance of conflicting or competing activities by subsidiaries, as well as the exercise of every other authority granted to it by our Board of Directors. Moreover, the Executive Committee assists the Managing Director in the choice of members for the Board of Directors of Subsidiaries and in the choice of high-ranking officers for OTE and its subsidiaries, as well as on other issues.
The Board of Directors resolved upon the composition of the Executive Committee as follows:
| Name | | Position |
| |
|
| Lefteris Antonacopoulos | | Chairman |
| George Skarpelis | | Member |
| Lazaros Aggelou | | Member |
| George Argyropoulos | | Member |
| Michalis Georgantopoulos | | Member |
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Senior Management-Group Management Team
OTE Group’s Management Team was established in November 2002 and currently its members are the following senior managers:
| Name |
|
| Lefteris Antonacopoulos |
| George Skarpelis |
| Evangelos Martigopoulos |
| Yorgos Ioannidis |
| Georgios Maniatis |
| Lazaros Aggelou |
| George Argyropoulos |
| Iordanis Aivazis |
| Soula Evans |
| George Rallis |
| |
| Notes: |
| (1) | The senior managers hold their respective positions in the Group Management Team until their appointment is revoked by the Managing Director. |
Lefteris Antonacopoulos. See above.
George Skarpelis. See above.
Evangelos Martigopoulos. Mr. Martigopoulos has been the Managing Director of COSMOTE since June 2000 and since July 2002 he is in charge of our mobile business unit. Moreover, since August 2000 he has been the Chairman of the Board of Directors of AMC. Between March 1998 and February 2000, Mr. Martigopoulos was Sales & Marketing Director of COSMOTE. In February 2000, he assumed the functions of General Commercial Manager of COSMOTE. Prior to that, he was Sales Manager at Databank, syNET and NCR Hellas, as well as Sales Account Manager at Digital. He has also worked as a Systems and Communications Analyst at Bull. Mr. Martigopoulos holds a M.Sc. in Power Electronics from Brunel University, UK and a B.Sc. in Electronics from the University of London, UK.
Yorgos Ioannidis. Mr. Ioannidis has been the Managing Director of OTEnet since June 2000. Since June 2002, he has been the Chairman of the Board of Directors of Voice@net and since July 2002, the head of our Internet business unit. Since April 2003 he has been the Chairman of the Board of Directors of CosmoONE and since June 2003 Chairman of the Board of Directors of InfOTE. He is also a non-executive member of COSMOTE’s Board of Directors. He worked with OTE as a Telecommunications Engineer from 1975 to 1993 and then worked for five years with Panafon-Vodafone as the Engineering Switching and Software Manager. In November 1997, he was appointed COSMOTE’s Engineering Director and in January 2000 he was appointed to the position of General Technical Director. Mr. Ioannidis holds a degree in Electrical Engineering from the Bosporus University of Istanbul and performed graduate studies at The Lowell Technological Institute in the United States.
Georgios Maniatis. Mr. Maniatis has been the CEO of Hellascom International since February 1998. He has worked with OTE since 1977 and has held various positions with the OME-OTE trade union, including serving as the President of OME-OTE for 8 years. He is currently a deputy member of the Economic and Social Committee. He is also the Vice President of the Institute of South-East Europe (INA). He has served as a member of the Board of Directors of OTE & COSMOTE and as a member of OTE’s Executive Committee of Corporate Governance. He has received a degree in Information Technology from the Athens University.
Lazaros Aggelou. See above
George Argyropoulos. See above
Iordanis Aivazis. Mr. Aivazis holds a degree in Economics from Athens University, a Master of Arts (M.A.) in Marketing and Finance from Lancaster University, UK, as well as a Postgraduate Diploma in Industrial Economics from the same university. He speaks English and French in addition to his native Greek. He worked at the Greek Bank for Industrial Development (ETBA) from 1980 to 1983, at the Greek Industry of Ammonia S.A. as member of the Board of Directors from 1982 to 1983, at Bank of America (1983 to 1986), at Midland Bank (1986-1994), at ABN-AMRO Bank as General Manager of the Corporate Banking Unit from 1994 to
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1995. He has also been a Vice President and Executive Director at Chios Securities (1998-1999), as well as Director of Corporate Banking and Risk Management at Chios Bank (1995-1999). From March 1999 to November 1999, he was Risk Management Manager as well as Manager of Investments & Capital Market of the Piraeus Group. From November 1999 until February 2001 he was General Manager at Egnatia Bank SA, Vice President of the Board of Directors of Egnatia Mutual Funds and Chairman and Managing Director of Egnatia Leasing SA. Since February 2001, he has been member of the Board of Directors and Executive Vice President of OTE International Investments Ltd. Since March 2003, he has held the position of our Chief Officer for Group Financial Affairs.
Soula Evans. Ms. Evans holds a first class degree in Economics from the University of Thessaloniki, Greece and a Masters degree in Economics from the University of Birmingham, UK. She has taught Economics at the City University of London and carried out research in Business Strategy at the London Business School. In 1987 she joined a management consulting company in London specializing in marketing, in 1992 she joined British Telecommunications plc and for almost eight years she served in a number of senior positions (product management, planning, regulation and pricing, marketing and strategy, etc). In 1999 she joined Eircom where she was director of Consumer and Business Markets, responsible for developing and implementing Eircom’s commercial strategy for residential and SME (small medium enterprise) customers. In September 2002, she was appointed Chief Officer for Business and Residential Customers at our Domestic Wireline business unit.
George Rallis. Mr. Rallis holds a degree in Mathematics from the University of Thessaloniki and an M.Sc. in Management from Lancaster University, UK. From 1993 to 1996 he worked with British Telecom in business analysis and planning. From 1997 to 2001 he worked with STET Hellas where latterly he held the position of Executive Director of Business Planning & Control. In March 2001, he was appointed as OTE’s Investor Relations Officer and in April 2003 he was appointed Chief Officer for Strategic Planning of the OTE Group.
Chief Legal Affairs Officer
Andreas Kalogeropoulos. Mr. Kalogeropoulos is an honors graduate of the University of Paris and holds a Ph.D. in law from the same university. He has been a member of the Athens Bar Association since 1976. He has served as charge de cours at the Athens Law University (1977-1980), Legal Counsel to the Greek government (1978-1980 and 1988-1990), as First Legal Secretary to the Court of Justice of the European Communities (1981-1987), First Legal Secretary to the Court of Auditors of the European Communities (1990-1992), charge des cours at the University of Paris (1995-1996), Judge of the Court of First Instance of the European Communities (1992-1998). Since 2000, he has been President of the Adjudication Panel of the European Investment Bank (E.I.B) and from 2001 to 2002 he was President of the European Lawyers Association. He was appointed as our Chief Legal Counsel in November 2000. Since July 2002, he has been Chief Officer for Group Legal Affairs and since August 2002 he has also been OTE’s Chief Legal Affairs Officer.
6.B. Compensation
For the 2002 financial year, our members of the Board of Directors and the senior managers named in subsection 6.A. above received aggregate remuneration and other benefits in kind from us and our subsidiaries of approximately Euro 2.79 million.
In accordance with the bonus compensation plan adopted by our Board of Directors, our Managing Director is entitled to a bonus additional to his base salary linked to the achievement of our operational targets and the performance of our share price. Our senior managers are entitled to bonuses based on the achievement of operational targets in their respective areas of responsibility, according to a bonus compensation plan approved by the Managing Director.
The extraordinary general assembly of our shareholders of September 4, 2001 approved a stock option plan to be offered to our top management (267 persons). Under this stock option plan, approximately 1% of OTE’s share capital is offered at Euro 17.07 per share. This is a three-year plan, which vests as follows: 40% on the first anniversary of the date of the grant, 30% within the second year of the date of the grant and the remaining 30% within the third year of the date of the grant. The rights vesting within the second and the third year of the date of the grant are conditional upon achievement of revenue growth and EBITDA targets as set forth by the annual budgets of the respective years. The extraordinary general assembly of our shareholders of January 28, 2002 extended the stock option plan approved in September 2001, whereby options for up to 9 million shares will be offered to our employees (500 shares per person unconditional upon meeting specific targets), over a two
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year period and options for up to 720 thousand shares will be granted to the top management of OTE’s non-listed subsidiaries (16 persons), under the same terms and conditions of the stock option plan applicable to our top management. The shares allocated to the plan will not exceed 2% of OTE’s share capital and the shares vesting under this stock option plan may be allocated from shares bought back by OTE pursuant to the share buy back program in place.
COSMOTE has a management share option plan (the “Management Plan”) in place for the management (Chairman, Managing Director, Legal Counsel, General Managers, Directors, Deputy Directors and Heads of Departments) for the purchase of COSMOTE’s shares. The Plan has been approved by resolution of the general meeting of COSMOTE’s shareholders held on September 6, 2000 and amended by resolutions of the general meetings of shareholders of COSMOTE held on June 12, 2001 and February 21, 2002, respectively. Eligible persons are entitled to options in respect of ordinary shares with an aggregate value of between two and five times their respective annual gross salaries, depending on their position (“Basic Options”). Further grants of options may be made by the Board of Directors of COSMOTE to participants at the end of each year in respect of ordinary shares with an aggregate value equal to their respective annual gross salary (“Additional Options”). In the framework of the law and COSMOTE’s Articles of Association, COSMOTE reserves the right to elect the procedure to be followed for the grant of shares to the eligible persons (i.e., increase of COSMOTE’s share capital according to article 13 par. 9 of the C.L. 2190/20, undertaking by the Company of its own shares etc.).
The Exercise Price for acquiring shares is defined as follows:
| (a) | The exercise price payable for each ordinary share under options granted at the time of the establishment of the Management Incentive Plan was 10% below the bottom end of the range for the Offer Price at the time of COSMOTE’s IPO in October 2000 (i.e., Euro 8.24 per share). |
| | |
| (b) | The exercise price for the purchase of ordinary shares under options granted on subsequent occasions by the Board of Directors of COSMOTE will be the average closing price of the shares for the month preceding the grant of options, determined by reference to the Daily Bulletin of the ASE. The same exercise price will be valid for the Additional Options as well. |
The number of ordinary shares which may be issued in any five year period after the establishment of the Management Plan pursuant to its terms or to the terms of any other share option scheme or under all other employee share schemes adopted by COSMOTE may not exceed 5% of COSMOTE’s share capital and in any event, may not exceed 10% of the existing shares of COSMOTE.
The Basic Options vest as follows: 40% vest one year after grant, 30% vest two years after grant and 30% vest three years after grant. The Basic Options of the Chairman vest after one year. Additional Options vest after three years from the date of grant. The Basic Options can be exercised in whole or in part until the fourth year from the date of grant. The Additional Options can be exercised in whole or in part during their maturity year or the year after.
Share options expire if the beneficiary leaves COSMOTE or is fired before they vest independently of their exercise date.
Following a resolution of the Board of Directors of COSMOTE in 2000, Basic Options were granted to 40 managers (including the Chairman of the Board) for the purchase of 1,187,010 shares of COSMOTE, in aggregate, at the exercise price of Euro 8.24 per share.
Also, in 2001 the Board of Directors approved the grant of: (a) Basic Options to 114 officers for the purchase of 950,390 shares of COSMOTE in aggregate, at the exercise price of Euro 9.78 per share (these grants mainly concern department directors, which were included in the Plan after its expansion by resolution of the shareholders’ general meeting held at June 12, 2001) and (b) Additional Options to 38 officers for the purchase of 296,920 shares of COSMOTE, at the exercise price of Euro 9.78 per share.
During 2001, 55,870 share options matured and accordingly, 55,870 new shares were issued in 2002 and granted representing 0.0169% of the paid in share capital of COSMOTE. Also, during 2002, 1,154,533 share options matured of which 83,250 were exercised. Accordingly, 83,250 new shares were issued in 2002 and granted, representing 0.0252% of the paid in share capital of COSMOTE.
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In addition, during 2002, the Board of Directors approved the grant of (a) Basic Options to 27 officers (including the new Chairman of the Board of Directors) for the purchase of 350,370 shares of COSMOTE, in aggregate, at the exercise price of Euro 8.96 per share and (b) Additional Options to 145 officers for the purchase of 833,765 shares of COSMOTE, at the exercise price of Euro 8.96 per share.
The aggregate amount contributed by us as a group to provide pension benefits for the members of our Board and the senior managers named in subsection 6.A above was approximately Euro 0.46 million in 2002.
6.C. Employees
We are involved in an ongoing process of fundamentally transforming the composition of our workforce. This is supported by the fact that, since January 2002, we have been exempted from the obligation to recruit our personnel under the supervision of the State Supreme Council for Personnel Selection. Thus, subsequent to such date, we hire our personnel in accordance with our business needs and management decisions and policies. In order to attract and retain talent, especially after the full liberalization of the Greek telecommunications market in 2001, we are pursuing the following personnel policies:
| • | we are continuing our early retirement incentives in order to reduce staffing overall; |
| • | we are actively recruiting personnel with the necessary specialized and technical knowledge. Our recruitment efforts are particularly geared to meet our present and future needs for employees trained in telecommunications engineering, economics, finance and accounting, sales and marketing, and information technology; |
| • | we are training existing employees to perform in a customer-oriented manner. For example, we have instituted several customer service-training programs for our technicians. In 2002, 8,400 of our employees attended 696 seminars on topics chosen to improve the quality and efficiency of their performance; |
| • | we have streamlined our management structure, pushing decision-making responsibility to lower levels in order to accelerate our response to customer demands; and |
| • | we intend to rationalize and simplify our compensation arrangements toward a goal that all employees be paid a fair market wage and receive further incentives for meeting and surpassing performance targets. |
Workforce Composition
The following table shows the number of our full-time personnel at the end of each of the three years in the periods ended December 31, 2002:
| | At December 31, |
| |
|
| | 2000(1) | | | 2001(1) | | | 2002(1) | |
| |
| | |
| | |
| |
| Management Utilization........................................................................................................................................... | 4,965 | | | 4,790 | | | 4,654 | |
| Finance....................................................................................................................................................................... | 985 | | | 962 | | | 937 | |
| Technical.................................................................................................................................................................... | 11,693 | | | 10,966 | | | 10,389 | |
| Support Staff............................................................................................................................................................. | 1,508 | | | 1,398 | | | 1,316 | |
| Specialists.................................................................................................................................................................. | 372 | | | 350 | | | 332 | |
| |
| | |
| | |
| |
| Total Permanent Staff.............................................................................................................................................. | 19,523 | | | 18,466 | | | 17,628 | |
| Personnel on temporary contracts........................................................................................................................ | 81 | | | 79 | | | 82 | |
| |
| | |
| | |
| |
Total........................................................................................................................................................................... | 19,604 | | | 18,545 | | | 17,710 | |
Change (%).............................................................................................................................................................. | (9.2 | ) | | (5.4 | ) | | (4.5 | ) |
Access lines in service per employee(2).............................................................................................................. | 289 | | | 302 | | | 306 | |
| | | | | | | | | |
| | | | | | | | | |
| |
|
| Notes: |
| (1) | Includes our employees currently working with us or transferred or seconded to our subsidiaries. |
| (2) | Includes OTE public switched telephone network access lines in service at the end of respective period. Also includes our employees currently working with us or seconded or transferred to our subsidiaries. |
Personnel’s Geographic Distribution per Regional Division
The following table presents the geographic distribution of our employees in Greece as at December 31, 2002:
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| Regional Division | | Number of
Employees |
| |
|
| Sterea hellas | | 802 |
| Thessaly | | 809 |
| Western Macedonia | | 338 |
| Central Macedonia | | 2,258 |
| Eastern Macedonia and Thrace | | 810 |
| Epirus | | 702 |
| Western Greece | | 1,236 |
| Peloponnesse | | 1,040 |
| Northern Aegean | | 373 |
| Islands | | 552 |
| Crete | | 981 |
| Attica Services | | 7,809 |
| |
|
TOTAL | | 17,710 |
| | |
|
| | | |
The average age of our employees is approximately 47 years, while the average number of years of service is 22. The number of our employees has been steadily decreasing over the past five years at an average annual rate of 5.2%, mainly by means of natural attrition and early retirement schemes. In 1998, a total of 1,110 employees, 110 more than the 1,000 expected under our 1998 business plan, retired, of which 859 accepted early retirement incentives. In 1999, a total of 537 employees retired, of which 364 accepted early retirement incentives. In 2000, a total of 2,232 employees left OTE, of which 1,952 accepted early retirement incentives. In 2001 a total of 1,216 employees left OTE, 1071 of which accepted an early retirement plan. In 2002 a total of 856 employees left OTE, 699 of which accepted early retirement incentives. The current early retirement program is in effect until December 31, 2003. The effects of our early retirement scheme, together with our policies to recruit only specialized personnel, to retrain employees whose skills have become obsolete and to outsource certain activities currently undertaken by our personnel have resulted in personnel numbers falling to approximately 17,710 employees by the end of 2002. For the year 2003, it is expected that 950 employees will leave OTE of which 800 are expected to accept early retirement incentives.
We believe that the quality of our newly recruited employees is as important to our future efficiency and success as is the reduction in the numbers of employees overall. Accordingly, we have intensified our efforts to find and to hire employees trained in technical, commercial and information technology fields.
We are evaluating and restructuring our pay schedules so that we can recruit and retain the skilled and motivated workforce that the telecommunications market demands. In an effort to enhance the employees’ feeling of security OTE has effected supplementary insurance policies with a private insurance company since January 1, 2002.
Under existing Greek legislation, the tenure of personnel of OTE is governed by the provisions of its general personnel regulations, which may be amended only by collective agreement.
Employee Insurance Funds
The TAP-OTE fund is the principal personnel insurance fund for our employees and is divided into a pension division and a health division. Members of this fund also include employees of the Hellenic Railway Organization and the Hellenic Postal Services. The pensions division pays all members who joined the fund prior to 1993 a pension equal to approximately 80% of the salary they received at the time of retirement. For employees who joined after 1993, a pension equal to 60% of the final salary is paid after 35 years of service at age 65. For employees who joined us prior to 1993, our contributions are 24.9% and employee contributions are 11% of salary. For employees who joined us after 1993, our contributions are 13.3% and employee contributions are 6.7%. The health division provides hospital and pharmaceutical care on a daily basis. For all employees, our current contributions are 5.1% of salary, and employee contributions are 2.55% of salary. In recent years and at present, the fund’s health division had a surplus, while its pension division had a deficit.
Until December 1993, we made advances to the TAP-OTE fund in excess of the maximum sum required to cover deficits in order to counter the financial difficulties faced by the fund. In March 1995, TAP-OTE agreed to pay us approximately Euro 19.7 million of this debt in monthly installments of Euro 0.3 million. The amount was fully collected through December 31, 2000. In addition, during 1997 a dispute between the TAP-OTE fund and us concerning a further amount of Euro 27.6 million was resolved in our favor by the Legal Counsel of the
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State. The Legal Counsel of the State ruled that the 1990 law requiring us to cover the deficits of the TAP-OTE fund took effect when published in late 1990 and not at the beginning of that year. Pursuant to a letter sent to TAP-OTE dated February 25, 1999, from us, we were to net Euro 2.9 million against the contribution owed to TAP-OTE each year beginning in 1999, for as long as this receivable remains outstanding. In 1999 we proceeded to withhold this amount and, accordingly, the receivable amount as of December 31, 2000, was Euro 24.6 million. Additional withholdings, which took place in 2001 from the monthly contributions to TAP-OTE, reduced the receivable amount to Euro 21.4 million as of December 31, 2001. See Note 12 to our consolidated financial statements included elsewhere in this Form 20-F. Although TAP-OTE did not object to the above mentioned withholdings, in February 2002, it refused to provide OTE with a confirmation that it was not in default with its monthly social security payments, on the grounds that monthly social security contributions must be paid in full and withholdings from such contributions are not permitted. In order to resolve this issue, in May 2002, OTE agreed to refund all withholdings made from contributions to TAP-OTE, and as a result the receivable amount increased to Euro 24.7 million as at December 31, 2002. By letter dated May 24, 2002, TAP-OTE officially accepted OTE’s claim for the above mentioned amount but, simultaneously, raised an issue of a possible legal right to write-off this claim. Both parties have sought a legal opinion on this issue from mutually acceptable legal counsel and such opinion is expected to be forthcoming during the third quarter of 2003. We believe and are so advised by legal counsel that such legal opinion will be favorable to us, that revised arrangements will be put in place for the collection of the amount receivable.
Under existing Greek legislation, we were responsible for contributions to fund TAP-OTE’s operating deficits up to a maximum annual amount of Euro 32.3 million per year, to be annually adjusted for inflation by a joint decision of the Ministers of National Economy and Finance by the percentage change in the Consumer Price Index for the relevant year.
Pursuant to legislation enacted in 1999, a separate fund came into operation on January 12, 2001, in the form of a société anonyme under the name EDEKT-OTE S.A., in order to finance the TAP-OTE deficit through contributions by us, the Greek State and the Employee Auxiliary Pension Fund, and the return generated on those contributions. We hold a 40% equity interest in EDEKT-OTE, while the Greek State holds 5%, the Auxiliary Pension Fund 35%, TAP-OTE holds 15% and OME-OTE holds 5%.
In 2000, 2001 and 2002 we paid TAP-OTE Euro 33.4 million, Euro 32.3 million and Euro 41.3 million, respectively by way of contributions. In addition, we paid an amount of Euro 82.5 million in 2000 and 2001 to TAP-OTE. In the fourth quarter of 2001, pursuant to Law 2937/2001 which finalized the arrangements regarding our obligations to contribute to TAP-OTE and to EDEKT-OTE, we incurred an additional charge of Euro 50.2 million related to past pension obligations of OTE to TAP-OTE.
The aforementioned law also provided that we should, in addition, make a payment of Euro 352.2 million to EDEKT-OTE as prepayment, equal to the present value of our obligations to cover the annual deficit of TAP-OTE for a period of ten years starting from January 1, 2002. This amount, which was paid on August 3, 2001, will be amortized over this ten-year period. The Greek State and the Auxiliary Pension Fund are also required to make contributions of approximately Euro 264.1 million and Euro 410.9 million, respectively, to EDEKT-OTE. See Note 12(a) to the consolidated financial statements.
Pursuant to Law 3029/2002, a portion of TAP-OTE’s Pension Fund and certain other pension funds are to be merged with IKA-ETAM, the main social security fund in Greece by January 1, 2008 at the latest. In accordance with the provisions of this law, matters in relation to employees’ and employers’ contributions of TAP-OTE’s pension fund and the other pension funds concerned and the term of the obligation to meet the operating deficits of the fund (as defined by Law 2084/1992) will be subject to determination by ministerial decision. The enactment of Law 3029/2002 may require OTE to partially cover future operating deficits of TAP-OTE.
We expect that up to 35% of the money in the EDEKT-OTE fund will eventually be invested in Greek mutual funds, shares of Greek companies, including up to 25% in our shares, and at least 40% in fixed income securities. Approximately 80% of the fund’s assets are managed by an independent investment company, and approximately 20% are managed by the fund’s Board of Directors. Income from the fund’s investments will be used to finance a guaranteed return on the Euro 410.9 million contributed by the Auxiliary Pension Fund, which return may be adjusted to correspond to a formula fixed by the Greek Central Bank. The remainder of the fund’s income from investment will remain available for TAP-OTE.
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The Employee Auxiliary Pension Fund provides pensions equal to 20% remuneration after 30 years of service to employees who were members before 1993. Law 2084/92 set minimum contribution levels and maximum pensions after 35 years of service for new members from 1993 onwards. The Employee Auxiliary Pension Fund also provides a lump sum to our employees on retirement or in the case of death. Under Law 2084/92, the maximum sum to be granted under this plan is Euro 0.03 million for 35 years of service and is readjusted annually. Currently, our and our employees’ contributions amount to 0.1% and 4% respectively. Under Law 2084/92, our contributions are dropping annually by 0.1%, which is the rate of increase of employee contributions to the pension division of the Auxiliary Pension Fund.
The Employee Auxiliary Pension Fund is currently in surplus, but may operate in deficit in the future. We are not liable by law to cover such deficit. However, we may be liable to pay higher contributions to such fund in the future, especially in view of our early retirement scheme.
Staff Retirement Indemnities and Other Benefits
Under Greek labor law, all employees are entitled to termination payments in the event of dismissal or retirement. We offer additional benefits such as the Youth Account, which pays employees’ children a lump sum on marriage, entry to university or reaching a certain age. This benefit is funded by employee contributions, interest accrued on these contributions and our contributions. Our contributions may total up to ten average monthly salaries depending on the length of time for which employees make contributions to this account. The annual provisions and the related liability for such benefits are reflected in our financial statements at the present values of the estimated liability based on an independent actuarial study.
Relationship with the Union
The vast majority of our full-time employees are members of the OME-OTE trade union. We believe that our relations with our employees and with the OME-OTE union are good and expect this situation to continue in the future.
Our management works with the OME-OTE union to ensure stable labor relations. Wage increases are set pursuant to our specific collective labor agreement within the framework and subject to the minimums set by a national collective labor agreement. Our specific collective labor agreement is usually for one or two-year terms. Negotiations between us and OME-OTE commence prior to the expiration of the current collective labor agreement and, once concluded, the new collective labor agreement enters into force immediately upon signing. The agreement covering 1997 and 1998 provided for a general wage increase of 5.2% for 1997 and 3.9% for 1998.
In June 2001, we concluded a collective labor agreement with OME-OTE that provides for a general wage increase of 3.3% for 2001 and 3.3% for 2002, after taking into consideration expected retirements over this period and the increase of the maximum amount of retirement indemnities payable to the employees by an additional two months salary effective January 2, 2002. These wage increases took place gradually. In 2001, the salary and employee benefit expenses remained at 2000 levels, because the increases in salaries were offset by decreases in salary and benefits costs resulting from the early retirement and cost reduction measures that we implement. On June 30, 2003 we concluded a collective labor agreement with OME – OTE which provides for wage increases of approximately 4.2% on average for 2003.
There have been strikes and other disruptions, which stemmed from employees’ concerns principally as to our future shareholding structure and the use of the proceeds of offerings in the course of our privatization. Our employees staged a four-day strike in October 1998 in support of the union’s position that part of the proceeds of the Greek State’s 1998 offering of our shares should be granted to us to fund our capital expenditures program. In September 2000 a seven-day strike also took place as a reaction against the intention of the Greek State to decrease its shareholding below 51%. Also, two one-day strikes took place on April 18 and May 1, 2002, as well as a one-day strike on June 18, 2002, as part of a strike organized by all Greek labor unions, as a reaction to a bill proposed by the government on the reorganization of the Greek insurance and pension funds system. Due to the nature of the strikes involved, they did not have any material effect upon our business.
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6.D. Share Ownership
The table below sets forth information on the shareholdings of the members of our Board of Directors and senior managers mentioned in Item 6.A. as at June 18, 2003:
| Name | | Number of shares |
| |
|
| Lefteris Antonacopoulos | | 800 |
| George Skarpelis | | 5,166 |
| Lazaros Aggelou | | 268 |
| George Argyropoulos | | 302 |
| Theodoros Veniamis | | 6,550 |
| Iakovos Georganas | | - |
| Michalis Georgantopoulos | | 390 |
| Lana Mandila | | 500 |
| Stavros Panas | | - |
| George Papakonstantinou | | - |
| Christos Spanos | | - |
| Apostolos Tamvakakis | | - |
| Phaedon–Theodoros Tamvakakis | | - |
| John N. Sahalos | | - |
| Spyros Floudas | | - |
| Evangelos Martigopoulos | | - |
| Yorgos Ioannidis | | - |
| George Maniatis | | - |
| Iordanis Aivazis | | - |
| Soula Evans | | - |
| George Rallis | | - |
| Andreas Kalogeropoulos | | - |
The persons collectively own less than 1.0% of all of our company’s outstanding shares.
The extraordinary general assembly of September 4, 2001 approved a stock option plan to be offered to our top management specifically to the Managing Director, the Executive Vice Chairman, General Directors, the Chief Legal Affairs Officer and the Section Managers and Management Advisors (in total, 267 persons). Under this stock option plan, OTE’s Board of Directors issued 4,881,000 options rights (approximately 1% of our share capital) at the exercise price of Euro 17.07 per share. This is a three-year plan, which vests as follows: 40% on the first anniversary of the date of the grant, 30% during the second year after the date of the grant and the remaining 30% during the third year after the date of the grant. The rights which vest during the second and third years after the date of the grant are conditional upon the achievement of revenue growth and EBITDA targets as set forth by the annual budgets for the respective years. Specifically, the Managing Director was granted 100,000 options, the Executive Vice Chairman was granted 75,000 options, the Chief Legal Affairs Officer was granted 60,000 options and the General Directors were granted 60,000 options each. For more details see Note 17 to the consolidated financial statements.
In addition to the resolution on spin-offs, the extraordinary general assembly of shareholders of January 28, 2002, approved the extension of the stock option plan previously approved in September 2001. Under this plan, options for up to 9,000,000 OTE shares will be offered to our employees over a two-year period (500 shares per person, unconditional upon meeting specific targets) and options for up to 720,000 OTE shares will be granted to the top management of our non-listed subsidiaries (specifically to the Managing Directors and General Directors of our non-listed subsidiaries, 16 persons) under the same terms and conditions applicable to the stock option plan previously approved for our company’s senior management. The exercise price is set at Euro 17.07 per share, the price of the stock options offered to our top management. The Managing Director of each non-listed subsidiary was granted 60,000 options. Including these options, the shares allocated to the plan will not exceed 2% of OTE’s share capital. All shares to be distributed within the framework of the stock option plan will most likely be shares bought back by us pursuant to the share buy back program in place. For more details, see Note 17 to the consolidated financial statements.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
Our Shareholders
According to Law 2843/2000, the Greek State’s equity interest in our voting securities may not fall below one third of the share capital of the company. This minimum threshold may only be amended following a change in the law.
The Greek State currently owns approximately 33.7% of our issued shares following an offer by OTE of shares to institutional investors in an accelerated book-build placement of 8% of the total of our issued shares made on June 13, 2002. Hellenic Exchangeable Finance S.C.A., a special purpose vehicle having its seat in the Grand Duchy of Luxemburg, holds 10.68% of our shares, which were transferred to it on August 2, 2001, by the Greek State.
In order to reduce its participation in OTE, the Greek State elected to implement the method of issuance of bonds convertible into shares. The issuer of such convertible bonds was not the Greek State itself, but a special purpose vehicle, established under the laws of the Grand Duchy of Luxemburg, operating under the trade name “Hellenic Exchangeable Finance S.C.A.”. The Greek State sold and transferred to such latter company, by virtue of a share transfer agreement dated August 2, 2001, a total of 53,841,600 registered shares, a portion of the shares it owned in OTE, representing in aggregate 10.68% of our issued share capital. Following consummation of that transfer, the participation of the Greek State in our share capital was reduced to approximately 42% (from an initial 52.4% prior to the transfer) and the purchaser, “Hellenic Exchangeable Finance S.C.A.” proceeded to the issuance of bonds, of an aggregate face value of Euro 1.0 billion, exchangeable into OTE shares. The exchangeable bonds bear interest at the rate of 2% per annum and mature in 2005. Upon maturity, bondholders may elect to either exchange their bonds for shares in OTE (among those previously transferred by the Greek State to Hellenic Exchangeable Finance S.C.A.) or to redeem their bonds and collect principal and interest on the bonds.
Hellenic Exchangeable Finance S.C.A., now the legal owner of 53,841,600 registered shares in our company, representing in aggregate 10.68% of our issued share capital, has created a pledge on such shares in favor of Bankers Trust Company Limited, a U.K. entity, which acts as trustee. Bankers Trust Company Limited has been authorized to vote such shares in our general assemblies of shareholders.
The September 2001 extraordinary general assembly of our shareholders approved new Articles of Incorporation fully aligning OTE to codified Law 2190/1920. This creates greater independence and accountability for the Board of Directors, which will now be directly appointed by the shareholders meeting, which in turn, will afford OTE greater efficiency and flexibility to better compete in an increasingly deregulated environment.
On March 13, 2002, the members of the Board of Directors were elected by the general assembly of our shareholders.
As of April 30, 2003, 138 registered holders of ADSs in the United States held approximately 13.3 million ADSs, representing approximately 1.30% of our outstanding shares.
The Greek State as Customer
The Greek State is our largest customer for telecommunications services. As of December 31, 2002, our accounts receivable from state entities and organizations totaled approximately Euro 139.3 million. See Note 5 to the consolidated financial statements.
The commercial relationship between us, as supplier, and the Greek State and other state-owned enterprises, as customers, is conducted on a normal, arm’s-length customer and supplier basis. We do not give the Greek State preferential customer treatment on the grounds that it is our largest shareholder or a sovereign state.
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The Greek State as Sovereign
Under existing Greek legislation, we are required, as a Greek telecommunications enterprise, to satisfy the country’s telecommunications needs, on the condition that we provide an “appropriate return” to our shareholders. This term is not defined by Greek statutory law and has otherwise not been officially interpreted by Greek courts or administrative authorities. Under the New Telecommunications Law, each telecommunications operator may provide universal service, or telephony services at reasonable prices to any user, regardless of the cost of such services for the provider. Any additional cost arising from the provision of universal service will be reimbursed by the EETT from contributions by other telecommunications operators. We are exclusively obliged, under the New Telecommunications Law in conjunction with a decision of the EETT, to provide universal service until December 31, 2003. We cannot reassure you that the State will not extend this obligation of ours for a further period after January 1, 2004.
Indebtedness Guaranteed by the Greek State
In the normal course of our business, we have entered into three loan agreements with the European Investment Bank. The Greek State has guaranteed our obligations under these agreements. The total amount guaranteed as of December 31, 1998 and 1999 was Euro 3.8 million and Euro 1.2 million, respectively. In 2000, 2001 and 2002, none of our obligations under these agreements was guaranteed by the Greek State.
7.B. Related Party Transactions
In the normal course of our business, we have entered into various agreements with our partly-owned subsidiaries and in particular COSMOTE, OTEnet and OTEGlobe, for the provision of various services, at arm’s length, regarding especially the provision of employees and support services. In particular:
| • | We provide COSMOTE with a number of our personnel, as well as distribution and maintenance services for COSMOTE’s products, on an arm’s-length basis, and COSMOTE leases certain transmission capacity from us. We also own and lease to COSMOTE a large number of the base station sites that COSMOTE requires to build out its network. |
| • | COSMOTE provides us and OTE International with financial, technical, commercial and operational management services as well as legal and regulatory support for our mobile telephony companies, Globul and MTS and, where specifically requested, management support on an ad hoc basis for all our other international mobile subsidiaries. |
| • | OTE International provides us with management services relating to ownership financing and conduct of relationships with government bodies for Globul and MTS. |
| • | We provide OTEnet with a limited number of our personnel, as well as distribution services for its products and maintenance services for its Internet Protocol network infrastructure and OTEnet leases transmission capacity from us, in each case on an arm’s length basis. |
| • | We provide OTEGlobe with a range of technical and operations support services, as well as with a number of our personnel, on an arm’s length basis. |
The Greek State, as a principal owner of OTE, is a related party to our group. The group, in the normal course of business, provides telecommunication services to state entities and organizations. Furthermore, until December 31, 2000, the State participated in costs incurred by OTE in providing telecommunication services to rural and underdeveloped areas See Note 2(p) to the consolidated financial statements and 7.A. “Major shareholders-The Greek State as a Customer”.
The following table presents amounts due from related parties as of December 31, 2000, 2001 and 2002, respectively:
| | December 31, |
| |
|
| | 2000 | | 2001 | | 2002 |
| |
| |
| |
|
| | (amounts in Euro millions) |
| Greek State............................................................................................................................................................ | 32.3 | | - | | - |
| Accounts receivable from State Entities and Organizations........................................................................ | 126.6 | | 122.1 | | 139.3 |
| RomTelecom......................................................................................................................................................... | 20.1 | | 50.4 | | 60.9 |
| |
| |
| |
|
| | 179.0 | | 172.5 | | 200.2 |
| |
| |
| |
|
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Revenues generated from state entities and organizations amounted to approximately 5% of total revenues for each of the three years in the period ended December 31, 2002.
Amounts due from RomTelecom relate to management fees billed to it by OTE International.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements” for a list of financial statements filed with this Form 20-F.
8.B. Significant Changes
Not applicable.
ITEM 9. THE OFFER AND LISTING
9.B. Plan of Distribution
Not applicable.
9.A4 & C. Listing and Market Details
The principal trading market for our shares is currently the Athens Stock Exchange. The shares are also listed for trading on the free market segments of the Frankfurt Stock Exchange and the Berlin Stock Exchange. American Depositary Shares, each representing one-half of one share, are listed on the New York Stock Exchange under the symbol “OTE” and are also admitted to the Official List of the London Stock Exchange and quoted on SEAQ International. The American Depositary Shares are also listed for trading on the free market segment of the Munich Stock Exchange. The Bank of New York acts as depositary for the American Depositary Shares.
As of April 30, 2003, 138 registered holders of American Depositary Shares in the United States held approximately 13.3 million of our American Depositary Shares, representing approximately 1.3% of our outstanding shares.
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The following tables set forth, for the periods indicated, the reported high and low quoted closing prices for the shares on the Athens Stock Exchange and the American Depositary Shares on the New York Stock Exchange, together with the average daily trading volume of the shares on the Athens Stock Exchange and the American Depositary Shares on the New York Stock Exchange.
| | Athens Stock Exchange | | NYSE |
| |
| |
|
| | High | | Low | | Average Daily
Trading Volume | | High | | Low | | Average
Daily Trading
Volume(2) |
| |
| |
| |
| |
| |
| |
|
| | Price per share
(Euro) | | | | Price per American
Depositary Share(1)
(US $) | | |
| |
| | | |
| | |
2000 | | | | | | | | | | | |
| First quarter..................................... | 32.5 | | 22.1 | | 1,151,307 | | 15.813 | | 11.313 | | 436,508 |
| Second quarter............................... | 29.2 | | 23.1 | | 772,348 | | 14.0 | | 11.125 | | 219,048 |
| Third quarter................................... | 25.4 | | 20.6 | | 958,812 | | 12.188 | | 9.875 | | 309,524 |
| Fourth quarter................................. | 21.6 | | 15.9 | | 703,097 | | 9.4375 | | 6.875 | | 184,127 |
| | | | | | | | | | | | |
| | | | | | | | | | | |
| First quarter..................................... | 18.1 | | 14.58 | | 576,764 | | 8.19 | | 6.51 | | 137,265 |
| Second quarter............................... | 17.6 | | 14.52 | | 964,368 | | 7.46 | | 6.32 | | 84,363 |
| Third quarter................................... | 18.14 | | 14.14 | | 846,830 | | 8.12 | | 6.12 | | 198,615 |
| Fourth quarter................................. | 20.60 | | 16.96 | | 616,889 | | 8.90 | | 7.62 | | 161,309 |
| | | | | | | | | | | | |
| | | | | | | | | | | |
| First quarter..................................... | 18.90 | | 16.60 | | 437,552 | | 8.28 | | 7.37 | | 64,450 |
| Second quarter............................... | 18.52 | | 15.16 | | 1,203,075 | | 8.39 | | 7.20 | | 63,648 |
| Third quarter................................... | 16.40 | | 11.00 | | 796,148 | | 7.97 | | 5.45 | | 66,634 |
| Fourth quarter................................. | 12.60 | | 10.00 | | 1,060,354 | | 6.07 | | 5.2 | | 38,490 |
| | | | | | | | | | | | |
| | | | | | | | | | | |
| First quarter..................................... | 11.64 | | 8.32 | | 1,287,982 | | 7.80 | | 4.73 | | 68,921 |
| |
|
| Notes |
| (1) | Each ADS represents one half of a share. |
| (2) | Number of ADSs. |
| (3) | As of January 1, 2002, our shares are quoted in Euro on the Athens Stock Exchange at a fixed rate of Drs. 340.75 per Euro 1.00. |
9.D. Selling Shareholders
Not applicable.
9.E. Dilution
Not applicable.
9.F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. Share capital
Not applicable.
10.B. Our Articles of Incorporation
We operate as a société anonyme under Greek law 2190/1920 as in effect, the Greek companies law, and we are registered with the Greek Register of Sociétés Anonymes under registration number 347/06/B/86/10. Our corporate seat is in the Municipality of Amaroussion, Greece. According to our Articles, our company purposes, among others, include:
| • | the establishment, management and operation of telecommunications infrastructure; |
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| • | the development and provision of telecommunications services, including satellite telecommunications services; |
| • | the production, ownership, use and exploitation of telecommunications equipment and other assets; and |
| • | the development and exploitation of new services based on technological advances in the areas of telecommunications, information technology, multimedia, Internet, or other services we can provide through our own networks or through networks we may be granted access to. |
It is our obligation in accordance with our Articles of Incorporation, to secure confidentiality of telecommunications for all our customers, including public services and armed forces and particularly to preserve the security of their telecommunications and information technology systems.
Board of Directors
In accordance with our Articles of Incorporation, it is prohibited for the members of our Board of Directors, as well as the Managing Director and any employees of our company, to undertake or participate on their own account or on the account of third parties in any commercial activity similar to those included in our company purposes, or to act as directors of, be partners of, hold a substantial interest in the share capital of, or be employed by companies whose company purposes are similar to ours.
In addition, in accordance with our Articles of Incorporation and Greek Company Law, our general assembly of shareholders has the power to set directors’ compensation. Loans or any form of credit provided by the company to any member of our Board of Directors, or any form of guarantee granted by the company in their favor, are prohibited and are absolutely void.
Any resolutions by our Board of Directors on issues related to the national security of Greece require prior consent by the Greek Ministry of National Defense.
Dividend Rights
Dividends may only be paid out of profits after the annual Greek GAAP financial statements are approved at a general shareholders’ meeting. Before the payment of dividends, we are required to allocate at least 5% of such net profits to the formation of an ordinary reserve until this reserve equals at least one-third of our share capital. The ordinary reserve is distributable to shareholders only upon our liquidation and after satisfaction of all prior claims. According to our Articles of Incorporation and the Greek Law 2190/1920 as in effect, the Greek companies law, we are required to pay an annual dividend equal to the greater of 6% of our paid-in share capital or 35% of our net profits for the previous financial year. All such amounts are currently based on our Greek GAAP financial statements. The distribution of the remainder of the net profits as well as any retained earnings from prior periods may only be decided at a general meeting with a quorum of holders of two-thirds of the outstanding shares and the affirmative vote of holders of two-thirds of the shares present or represented at this general meeting. If this quorum is not satisfied, then the quorum requirement is reduced to half and one-third at the second and third adjourned general meetings, respectively.
However, except in the case of a decrease in share capital, no distribution may be made to shareholders if the shareholders’ equity would become, as a result of the distribution, less than the amount of the share capital increased by the reserves, the distribution of which is prohibited by law.
The amount approved for distribution as dividend is required to be paid to shareholders within two months of the shareholders’ resolution approving our annual financial statements and declaring such dividend. Dividends not claimed by shareholders within five years are forfeited to the Greek State.
Voting Rights
Law 2843/2000 provides that under no circumstances may the Greek State hold less than 33.3% of our share capital. All of our issued shares bear voting rights, in direct proportion to the number of shares held by each shareholder. See “ — General Assembly of Shareholders.”
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General Meeting of Shareholders
The annual general assembly is required to be held each year, within six months from the end of our financial year, in order to approve our annual financial statements in accordance with Greek GAAP and to discharge Board members and auditors from liability in respect of their tenure of office during such year. Extraordinary general assemblies may be convened by the Board when it considers that a meeting is necessary, or pursuant to the request of the holders of 5% or more of our paid-in share capital. In addition, the auditors are entitled to request the Chairman to convene an extraordinary general assembly within ten days of the notice of such request. Greek law requires that a notice of a general assembly be published in the Government Gazette Issue of Sociétés Anonymes and Limited Liability Companies at least 10 days before the date set for the assembly, in a daily newspaper published in Athens and circulated nationwide, a daily financial newspaper and two newspapers with a wide circulation in Europe and the United States, at least 20 days before the date set for the assembly or 10 days before such date in the case of an adjourned assembly. Such notice must include the agenda, place, date and time for the general assembly. No notice is required if all shareholders are present or represented at the general assembly and no shareholder objects to the assembly taking place and to the adoption of resolutions at such assembly. Shareholders wishing to participate in the general assembly must deposit with us a certificate issued by the Central Securities Depository, according to Law 2396/1996, at least five days before the date of the assembly.
Shareholders entitled to participate in the general assembly may be represented by a legally authorized person. Unless otherwise specified by applicable law or in the Articles, the presence in person or by proxy of shareholders holding not less than 20% of the paid-in share capital is necessary for a quorum. If a quorum is not present at any general assembly, such general assembly is adjourned. There is no quorum requirement when an ordinary general assembly is reconvened, but only questions which were on the agenda of the adjourned general assembly may be discussed and voted upon. Unless otherwise specified by applicable law or in the Articles, the voting majority required for a resolution proposed at a general meeting is the absolute majority of the shares represented at such general assembly. Shareholders present but abstaining from voting are considered present or represented for purposes of determining the requisite quorum and majority.
Our Articles grant shareholders holding at least 5% of the paid-in share capital the right:
| • | to request the Chairman to convene an extraordinary general assembly; |
| • | to postpone once a resolution adopted at a general assembly; |
| • | to request the Board to provide information concerning any amounts we paid within the last two years to our directors, executive officers or other employees, as well as details of any contracts with these persons; |
| • | to request from the Board particular information in order to assess matters on the agenda of the general assembly; |
| • | to receive certain financial information about the company, which the Board may refuse to give only by providing the reasons for such refusal; and |
| • | to request a competent court to review our operations when it is believed that applicable laws, our Articles or resolutions of the general assembly are being violated. |
In addition, our Articles grant shareholders holding at least 20% of the paid-in share capital the right to request a competent court to review our operations, when it is believed that our company affairs are not properly managed.
According to our Articles, Law 2733/1999 and Law 2843/2000, our Articles may be amended by a resolution of a general assembly with the exception of the provisions relating to minority shareholders’ rights and the requirement that the Greek State retains at least 33.3% of our voting share capital, which can only be amended by subsequent law.
An increased quorum and voting majority of two-thirds of our share capital is required to adopt resolutions concerning certain matters, including;
| • | merger, liquidation or winding up; |
| • | all increases or decreases in share capital, except for increases resolved by the Board as authorized by the general assembly of shareholders; |
| • | the issue of bonds, except if authorized by resolutions of the Board; |
| • | any change in the method of distribution of profits; |
| • | any increase in shareholders’ obligations; |
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| • | any amendment of the provisions setting forth the matters requiring a supermajority quorum and vote for approval; |
| • | a change in the special voting majority of the Board required for a decision to increase share capital; and |
| • | restrictions or abolition of preemptive rights with respect to share capital increases with payment in cash or in kind. |
The increased quorum in these circumstances is two-thirds of the paid-in share capital at the first assembly, and one-half and one-third, at the second and third adjourned general assembly, respectively, and in any occasion a voting requirement of two-thirds of the shares present or represented is necessary.
Changes in Share Capital and Preemptive Rights
Our share capital may generally be increased pursuant to a resolution by the shareholders at general assembly at which a quorum of holders of two-thirds of our share capital is present. If such a quorum is not achieved, the quorum requirement is reduced to half and then to one-third at the second and third adjourned assemblies, respectively.
In addition, our Articles grant authority to the Board through December 27, 2001, or within a five-year period following a decision of the general meeting which so authorizes the Board to approve, by a two-thirds majority, an increase in our authorized share capital. The amount of such an increase cannot exceed our initial paid-in share capital at our incorporation or our paid-in share capital as of the date of the general assembly that authorized the Board to increase the share capital. However, if our capital reserves exceed one-quarter of our paid-in share capital, then a capital increase will always require a resolution by our general assembly with extraordinary quorum.
An increase in our share capital must also be approved by a resolution of the general assembly when our reserves exceed 25% of our paid-in share capital. In such a case, the necessary quorum is two-thirds of the paid-in share capital. If such quorum is not achieved, the quorum requirement is reduced to one-half and then to one-third at the second and third adjourned assemblies, respectively, with the requisite voting majority being two thirds of the shares present at each such general assembly. See “— General Assembly of Shareholders”.
All share capital increases, whether in cash or in kind, must first be offered on a preemptive basis to existing shareholders pro rata to their existing shareholdings, unless the preemptive rights of shareholders have been waived. Preemptive rights may only be waived by a decision of holders of two thirds of the paid-in share capital present at a general assembly at which a two-thirds quorum, which is reduced to one-half and one-third at the second and third adjourned assemblies, respectively, of the outstanding share capital is present. Preemptive rights are transferable during the subscription period for the related offering and may be quoted on the Athens Stock Exchange.
A resolution of the shareholders at a general assembly is also required for the reduction of our share capital. Such a resolution requires the approval of holders of two-thirds of the shares present or represented at a general assembly at which holders of two-thirds of the paid-in share capital are present or represented. This quorum requirement is reduced to one-half and one-third at the second and third adjourned assemblies, respectively.
On June 25, 2001 our general assembly of shareholders approved the dual currency denomination of the share capital, namely that of the Greek Drachma and of the Euro, in accordance with the provisions of Law 2842/2000. The nominal value of OTE’s shares was set at Drs 750 (rounded) and Euro 2.20 and, accordingly, our share capital decreased by Euro 0.5 million with an equal increase in paid-in surplus. Since 2002, the nominal value of our shares is denominated solely in Euro.
Rights on Liquidation
A liquidation procedure involves our dissolution after expiry of our initial company term of one hundred years from December 27, 1996, or pursuant to a resolution of our general meeting taken by a quorum of at least two-thirds of our paid-in share capital present or represented at the meeting and a majority of holders of two-thirds of the shares present or represented at the general meeting, or in case of insolvency. In any case, the general meeting is competent to designate the liquidators. During the liquidation procedure, the general meeting continues to be entitled to all its rights under applicable law and the Articles of Incorporation.
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If we are liquidated, assets remaining after payment of our debts, liquidation expenses and all of our remaining obligations will be distributed first to repay in full the nominal value of our shares, and the surplus, if any, will be distributed pro rata among our shareholders in proportion to the nominal value of their interests in our share capital.
Form and Transfer of Shares
Dematerialization of our shares has been completed.
Settlement of Athens Stock Exchange transactions on dematerialized shares takes place by means of book-entry transfers through each beneficial shareholder’s custodian. The settlement of transactions on dematerialized securities takes place through the facilities of the Central Securities Depositary. In respect of these securities, no material titles are issued, as they are registered with the Dematerialized Securities System, which is managed by the Central Securities Depositary, in book-entry form, as “electronic securities”, held for the respective holders by way of respective accounts.
The obligation to deliver the securities upon disposal and the claim to receive the securities upon purchase are satisfied by means of registrations in the respective accounts of the securities transferred, through either the member of the stock exchange that effects the transaction for the account of the beneficial owner of the securities or through a bank acting in a trustee-type capacity, to which the beneficial owner of the securities assigns its rights and obligations arising from the transaction.
Upon request by a beneficial owner of securities, the Central Securities Depositary issues certificates in respect of the securities registered in its accounts, confirming their values, the dividends these securities are entitled to receive and the beneficial owners of these securities who are entitled to participate in general meetings of shareholders of the respective companies. In cases where the beneficial owner of the securities proceeds to transactions, which affect its rights with respect to the securities registered with the Central Securities Depositary, the beneficial owner is required to notify such transactions to the Central Securities Depositary, in order for it to proceed to the necessary amendments to the respective book-entry accounts.
Under Greek law, when, as a result of a transfer of registered shares listed on the Athens Stock Exchange, such as our shares, a person acquires or disposes of shares in a company, as a result of which a person’s interest in the voting rights of the company reaches, exceeds or falls below 5%, 10%, 20%, 33.3%, 50% or 66.6%, or upon any acquisition or disposal of voting shares of more than 3% by a person holding more than 10% of a company’s voting shares, this person is required to notify in writing both the company and the appropriate stock exchange authorities of his or her resulting holdings in the share capital and the voting rights of the company within the next calendar day following this acquisition or disposal. The same obligation applies in respect of directors or senior managers of a company irrespective of the percentage of voting shares held by each and only towards the Athens Stock Exchange in case the volume of their daily trading in shares of their company exceeds Euro 293,470. Failure to make such notifications may result in the imposition of a fine ranging from Euro 2,934 to Euro 880,410 and potential suspension of voting rights for up to three years. Furthermore, according to the New Telecommunications Law, the EETT must be notified of every transfer of shares of any licensed telecommunications company, which equals or exceeds 2% of the share capital of such company within 15 days of the transfer.
Trading by companies in their own shares
Pursuant to Greek law and under limited circumstances, companies, such as us and our subsidiaries, may acquire and hold their own shares primarily for the purpose of distributing such shares to their employees. In addition, companies whose shares are listed on the Athens Stock Exchange, such as ours, may acquire up to 10% of their own share capital in order to stabilize their share price in circumstances in which it is believed that the share price is substantially lower than what would correspond to the state of the market and the financial condition and prospects of the company. The resolution to repurchase our own shares is taken by the general meeting requiring a simple quorum of shareholders and simple majority of votes. Such resolution of the general meeting must be communicated to the Athens Stock Exchange. The shares being repurchased must be fully paid and acquired from the broad investing public, otherwise, their purchase is invalid and may be so declared by the CMC. Shares so acquired must be disposed of within three years of their repurchase or otherwise be cancelled. Both the resolution to dispose of and the resolution to cancel the shares must be communicated to the Athens Stock Exchange and the appropriate supervisory authorities. All voting rights attached to shares that have been
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bought back and held by the company or its subsidiaries may not be exercised, but are taken into account for purposes of determining the existence of a quorum.
On October 17, 2002, the extraordinary general assembly of our shareholders approved the renewal of the authorization granted to us to buy back up to 10% of our own shares on the Athens Stock Exchange. Thus, for a period of twelve months from the date of that extraordinary general assembly (i.e. until 16 October 2003) we are authorized to purchase the balance of the 10% of our share capital which we have not purchased by such date (i.e. 7.33%) for a price per share between Euro 1 and Euro 30. During 2002, we did not purchase any shares.
As of December 31, 2002, we had repurchased approximately 13.5 million shares in aggregate, which represents approximately 2.7% of our share capital, at a cost of approximately Euro 272.6 million. See Note 13 to the consolidated financial statements.
Greek law provides that where a company purchases its own shares such shares have to be cancelled within three years from the date of purchase. A two year extension to this three year period may be granted by way of approval from the Hellenic Capital Market Commission and from the company’s shareholders. The general assembly of our shareholders of September 4, 2001 approved the extension of the three year period for an additional period of two years. The Hellenic Capital Markets Commission has approved the extension of this period to nine (9) months and we are expecting an approval of the extension for additional fifteen (15) months to be forthcoming in due course. We do not currently intend to cancel any of the shares which we have purchased and certain of these may be reserved for our share option plans.
10.C. Material contracts
Not applicable.
10.D. Exchange controls
Greece currently has no exchange controls that would restrict the payment of dividends or other capital distributions to a non-resident holder of shares or American Depositary Shares. In addition, Greece currently has no restrictions that would affect the rights of non-resident holders of shares or American Depositary Shares to dispose of such shares or American Depositary Shares, or to receive the proceeds of such disposition outside Greece.
However, in order to transfer funds outside of Greece, foreign investors may be asked to produce the following certificates:
| • | the certificate of a broker or other relevant person evidencing the purchase of shares;
|
| • | our certificate as to the entitlement to the payment of dividends on shares; and |
Additional certificates may be required if the bank considers that the transfer relates to money laundering.
10.E. Taxation
The following summary describes certain of the tax consequences of the ownership and disposition of shares and American Depositary Shares. It is not a complete description of all the possible tax consequences of such ownership and disposition.
Greek Taxation
Introduction
The following is a summary of certain Greek tax considerations, which may be relevant to the ownership and disposition of shares. The summary does not purport to be nor should it be relied upon as a comprehensive description or analysis of all the tax considerations, which may be relevant to a decision to own or dispose of shares.
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The summary is based on tax laws and regulations in effect in Greece on the date of this annual report, which are subject to change without notice. Holders of shares should consult their own tax advisers as to the Greek or other tax consequences arising from the ownership and disposition of shares, having regard to their particular circumstances.
Taxation of Dividends
The net income of société anonymes having registered shares listed on the Athens Stock Exchange is taxed at a flat rate of 35%, with the result that the dividends distributed therefrom to shareholders are paid out net of tax. No withholding taxes are imposed by Greece on the payment of dividends on the shares.
Taxation of Capital Gains
Under Article 38 of Law 2238/94, as now in force, capital gains resulting from the sale of listed securities by enterprises maintaining double entry accounting records are not subject to income tax, provided that such gain is maintained in a special reserve account in the accounting records. In the case of distribution of the reserve or dissolution of the enterprise, these gains are taxed accordingly.
Capital gains from the sale of listed securities earned by Greek and foreign natural persons without obligation to maintain double entry accounting records, enterprises domiciled in Greece without obligation to maintain double entry accounting records, and foreign enterprises which are not obliged to maintain double entry records in Greece, are exempt from taxation without the need to comply with any requirements.
Transfer Taxes
A transfer tax is imposed on transfers of Athens Stock Exchange-listed securities at the rate of 0.3% of the purchase price. The tax is borne by the seller and is charged by the Central Securities Depository to brokerage firms, who then in turn charge their clients. In the case of a transfer of registered shares, a levy (payable by each of the Buyer and the Seller) of 0.065% of the value of the transaction is applied by the Central Securities Depositary. In addition, a commission is paid to the brokers in the case of purchase or sale of listed shares.
Stamp Duty
The issuance and transfer of shares as well as the payment of dividends therefrom is exempt from stamp duty.
Inheritance or Succession Taxes
Inheritance or succession taxes are payable in Greece on shares of Greek domiciled companies on a progressive system which depends on the degree of the relationship between the deceased and the beneficiary. The taxable basis for stock exchange listed shares is prescribed in the Legislative Decree 118/1973, as amended.
Gift Tax (Donation Taxes)
A similar system of progressive taxation applies to the donation of listed shares.
Potential purchasers should consult their own tax advisers concerning the overall Greek tax (including Greek capital gains, inheritance or succession, and gift tax) consequences of the purchase, ownership and disposition of shares.
United States Federal Income Taxation
The following is a summary of certain US federal income tax consequences of the ownership or disposition of shares or American Depositary Shares by a holder who is a beneficial owner of shares or American Depositary Shares that is:
| • | a citizen of or an individual resident in the United States; |
| • | a corporation or certain other entities, created or organized in or under the laws of the United States or any state thereof (including the District of Columbia); |
| • | an estate whose income is subject to US federal income taxation regardless of its source; or |
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| • | a trust if a court within the United States is able to exercise primary supervision over its administration and one or more US persons have the authority to control all of the substantial decisions of such trust (a “US Holder”). |
A “Non-US Holder” is any beneficial owner of shares or American Depositary Shares that is not a US Holder. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a holder of shares or American Depositary Shares. In particular, this summary deals only with US Holders that will hold shares or American Depositary Shares as capital assets and does not address the tax treatment of special classes of US Holders, such as financial institutions, tax-exempt entities, insurance companies, persons holding shares or American Depositary Shares as part of a straddle, hedging or conversion transaction, US expatriates, persons subject to the alternative minimum tax, dealers in securities, traders in securities that elect to mark to market, persons that own (or are deemed to own for United States tax purposes) 10% or more of our voting stock and persons whose “functional currency” is not the US Dollar. This summary is based upon current US law as in effect on the date of this annual report which is subject to change (possibly with retroactive effect), and in part upon representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement and any related agreement will be performed in accordance with their respective terms.
Holders of shares or ADSs should consult their own tax advisers as to the consequences under US federal, state, local and applicable foreign tax laws of the ownership and disposition of shares and American Depositary Shares.
US Holders of American Depositary Shares will be treated for US federal income tax purposes as owners of the shares underlying the American Depositary Shares. Accordingly, except as noted, the US federal income tax consequences discussed below apply equally to US Holders of American Depositary Shares and shares.
Dividends
The gross amount of any distributions made by us to a US Holder will generally be subject to US federal income tax as foreign source dividend income to the extent paid or deemed paid out of our current or accumulated earnings and profits, as determined under US federal income tax principles. Such dividends will not be eligible for the dividends received deduction generally allowed to US corporations with respect to dividends received from other US corporations. To the extent that an amount received by a US Holder exceeds its allocable share of our current and accumulated earnings and profits, such excess will be treated first as a tax-free return of capital which will reduce such US Holder’s tax basis in his shares or American Depositary Shares and then, to the extent such distribution exceeds such US Holder’s tax basis, it will be treated as capital gain.
The gross amount of dividends paid in Euros will be included in the income of a US Holder in a US Dollar amount calculated by reference to the spot exchange rate in effect on the day the dividends are received by such holder (or, in the case of American Depositary Shares, by the Depositary), regardless of whether the payment is in fact converted into Dollars. If the Euros are converted into US Dollars on the date of the receipt, the US Holder generally would not be required to recognize any foreign currency gain or loss in respect of the receipt of Euros as dividends. Dividends will generally constitute foreign source “passive income” or, in the case of certain US Holders “financial services income” for US foreign tax credit purposes. A US Holder will have a tax basis in any Euros distributed equal to their US Dollar value on the date they are received by such holder (or, in the case of American Depositary Shares, by the Depositary). Any gain or loss recognized upon a subsequent disposition of Euros will generally be ordinary income or loss and will generally be income from sources within the United States for foreign tax credit purposes.
Sale or Exchange of Shares or American Depositary Shares
Gain or loss realized by a US Holder on the sale or other disposition of shares or American Depositary Shares will be subject to US federal income taxation as capital gain or loss in an amount equal to the difference between the US Holder’s adjusted tax basis in the shares or American Depositary Shares and the amount realized on the disposition. Such gain or loss generally will be treated as long-term capital gain or loss if the shares or American Depositary Shares have been held for more than one year. Any such gain or loss realized will generally be treated as US source gain or loss. In the case of a US Holder who is an individual, capital gains are subject to federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses is subject to significant limitations.
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The surrender of American Depositary Shares in exchange for shares (or vice versa) will not be a taxable event for US federal income tax purposes and US Holders will not recognize any gain or loss upon such a surrender.
If a US Holder receives any foreign currency on the sale of shares or American Depositary Shares, such US Holder may recognize ordinary income or loss as a result of currency fluctuations between the date of the sale of shares or American Depositary Shares and the date the sale proceeds are converted into US Dollars.
Passive Foreign Investment Company Considerations
We believe that we will not be treated as a passive foreign investment company (a “PFIC”) for US federal income tax purposes for the current taxable year and expect to continue our operations in such a manner that we will not be a PFIC. However, this is a factual determination that must be made after the close of each taxable year and therefore is subject to change. We would be a PFIC if for any taxable year in which US Holders held the shares or American Depositary Shares either (1) 75% or more of our gross income would consist of some specified types of “passive” income, such as dividends, interest, rents and royalties, or (2) the average percentage of our assets (by value) that produce or are held for the production of passive income would be at least 50%. If we were to become a PFIC for any taxable year during which a US Holder owned the shares or American Depositary Shares, such US Holder (1) would be subject to additional taxes on certain distributions received from us and on any gain realized upon the sale or other disposition of the shares or the American Depositary Shares, as the case may be, unless the US Holder made a mitigating tax election if available, and (2) would be required to file an annual information return describing the distributions received from us and any gain realized upon the disposition of a beneficial interest in us. US Holders should consult their own tax advisors regarding the potential application of the PFIC rules to their ownership of the shares or American Depositary Shares.
United States Information Reporting and Backup Withholding
A US Holder may be subject to information reporting to the IRS and possible backup withholding with respect to dividends paid on, or proceeds of the sale or other disposition of, a share or American Depositary Share, unless such US Holder is a corporation or comes within certain other categories of exempt recipients or provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Under recently enacted legislation, the backup withholding rate for payments made in 2003 is 28%. Amounts withheld under these rules may be credited against the US Holder’s US federal income tax liability and a US Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate IRS forms and furnishing any required information. A US Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the IRS.
Non-US Holders generally will not be subject to information reporting or backup withholding with respect to dividends on shares or American Depositary Shares, unless payment is made through a paying agent (or office) in the United States or through certain US-related financial intermediaries. However, Non-US Holders generally may be subject to information reporting and backup withholding with respect to the payment within the United States of dividends on shares or American Depositary Shares, unless such non-US Holder provides a taxpayer identification number, certifies under penalties of perjury as to its foreign status, or otherwise establishes an exemption.
Finalized Treasury regulations have generally expanded the circumstances under which backup withholding and information reporting may apply.
10.F. Dividends and paying agents
Not applicable.
10.G. Statement by experts
Not applicable.
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10.H. Documents on display
All reports and other information we file with the SEC may be obtained, upon written request, from the Bank of New York, as depositary for our ADSs, representing our ordinary shares, at its Corporate Trust office, located at 101 Barclay Street, New York, New York 10286. These reports and other information can also be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W. Washington D.C. 20549. Copies of this material are also available by mail from the Public Reference Section of the SEC, at 450 Fifth Street, N.W. Washington D.C. 20549, at prescribed rates. Also certain reports and other information concerning us will be available for inspection at the offices of The New York Stock Exchange.
10.I. Subsidiary Information
See subsection 4.C Organizational Structure. Also see Note 1 to the consolidated financial statements.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instruments
Our Treasury, which is responsible for our funding strategy, asset and liability management, is not operating as a profit center. It operates under approved policies that reduce the level of risk only to interest rate management.
We do not enter into financial instruments for trading or speculative purposes.
The Group’s strategy vis-à-vis derivatives is confined to employing such instruments with the purpose of reducing the “cost of carry” of fixed rate liabilities as well as to “lock in” fixed rates for the duration of the liabilities, depending on the prevailing interest rate environment.
Interest rate positions are monitored centrally at Group Treasury level and reported at a quarterly basis to the Board.
The following information summarizes the financial instruments held by us as of December 31, 2002, which are sensitive to changes in interest rates.
Interest Rate Risk
Interest Rate Swaps. Net settlement amounts under interest rate SWAP agreements are recorded as adjustments to interest expense during the period incurred. No such agreements existed during 1999 and 2000. In fiscal year 2001, we entered into interest rate swaps to cover the risk of change in the fair value of our fixed rate Euro bond. We have a policy of entering into such contracts with parties that meet stringent qualifications and, given the high level of credit quality of our derivative counterparties, we do not believe it is necessary to obtain credit enhancements for such contracts. For financial reporting purposes, these derivative instruments were not designated as hedges, as they did not meet the applicable criteria set by SFAS No. 133 as amended by SFAS No. 138. The fair value of such interest rate swaps outstanding as of December 31, 2002, amounted to Euro 25.3 million. The net gain that resulted from these derivative instruments for the year ended December 31, 2002, amounted to Euro 14.0 million.
In fiscal year 2002, COSMOTE, the Group’s consolidated subsidiary, entered into cross currency swaps to hedge against changes in the fair value of a certain portion of its foreign currency-denominated debt as a result of changes in foreign currency exchange rates. These swaps qualified for hedge accounting as fair value hedges and their fair value at December 31, 2002, was approximately Euro 13.0 million, which is recorded as a derivative liability.
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Approximately Euro 1,363.0 million (52.1%) of our total debt as of December 31, 2002 bears interest at floating rates. The table below presents information about our debt obligations. The information is presented in Euro equivalents which is our reporting currency:
| | Expected Maturity Date |
| | | | | | | | | | | | | | | | | | |
| | Base
Currency | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | There-
After | | Total | | Fair
Value |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| | (in millions of Euro) |
Long-term Debt | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Fixed Rate | | | | | | | | | | | | | | | | | |
| Bond Issue........................................ | Euro | | — | | — | | — | | — | | 1,098.9 | | — | | 1,098.9 | | 1,172.2 |
| Suppliers and their affiliates........... | Euro | | 11.3 | | 11.3 | | 11.3 | | 11.2 | | — | | — | | 45.1 | | 45.1 |
| Loan from E.I.B................................. | Euro | | 17.1 | | 12.6 | | 13.7 | | 14.8 | | 16.1 | | 36.5 | | 110.8 | | 135.8 |
| | | | | | | | | | | | | | | | | | |
| Floating Rate | | | | | | | | | | | | | | | | | |
| Consortium loans............................ | US $ | | — | | — | | 333.6 | | — | | — | | — | | 333.6 | | 333.6 |
| Revolving credits............................ | Euro | | — | | 975.8 | | — | | — | | — | | — | | 975.8 | | 975.8 |
| Suppliers and their Affiliates......... | US $ | | 13.2 | | 18.3 | | 7.4 | | 8.5 | | 4.5 | | 1.7 | | 53.6 | | 53.6 |
| | | | | | | | | | | | | | | | | | |
Total long-term debt....................... | | | 41.6 | | 1,018.0 | | 366.0 | | 34.5 | | 1,119.5 | | 38.2 | | 2,617.8 | | 2,716.1 |
| | | |
| |
| |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | | | | | | | | |
Short-term Debt | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Floating rate.................................... | Euro | | 292.8 | | — | | — | | — | | — | | — | | 292.8 | | 292.8 |
| | | | | | | | | | | | | | | | | | |
Total short-term debt..................... | | | 292.8 | | — | | — | | — | | — | | — | | 292.8 | | 292.8 |
| | | |
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| |
|
Foreign Exchange Rate Risk
Foreign exchange exposure arises from our equity investments in public telephony operations in certain Southeastern European countries. Specifically:
We decided in early 2000 that we would fund and place only in Euro, which is our functional currency as of January 1, 2002. Thus, depicted in the table above, substantially all of our debts are in Euro. Of our total borrowings at December 31, 2002, 86.7% is in Euro and 13.3% is in US Dollars. Similarly, the placements of our cash resources are also effected in Euro.
In recent years, most Southeastern European countries have experienced periods of high inflation. High inflation may result in high interest rates, devaluations of the local currency and government controls on currency exchange and prices. The Armenian dram, the Serbian dinar and the Romanian lei have been devalued in the past two years and may suffer further significant devaluations which could adversely affect the stated value of our shareholdings.
Foreign currency exposures are naturally hedged to the extent possible.
Equity risks. Our subsidiary, COSMOTE, in which we held a 58.97% interest as of December 31, 2002, had 330,055,870 outstanding shares as of that date, and is traded on the Athens Stock Exchange. Furthermore, COSMOTE’s Global Depositary Shares, each representing two ordinary shares, have been admitted to the Official List of the UKLA and have been admitted to trading and quoted on SEAQ International by the London Stock Exchange.
We hold a 2.45% participating interest in the Hellenic Exchanges Holding S.A., a listed company on the Athens Stock Exchange with a carrying cost of Euro 3.4 million as at December 31, 2002.
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In addition, we hold shares of Piraeus Leasing, a company whose shares are listed on the Athens Stock Exchange, with a carrying cost of Euro 9.0 million as at December 31, 2002.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
On May 27, 2003, we announced that Cosmorom, the wholly owned consolidated mobile telephony subsidiary of RomTelecom, had not reached agreement to date with its principal equipment supplier on the payment of outstanding trade liabilities claimed by the supplier to be owed by Cosmorom in the amount of approximately Euro 100.0 million, plus interest. We stated that we were not willing to provide additional funds by way of shareholders’ contributions or loan finance to enable Cosmorom to discharge such liabilities in full. OTE International, together with the other shareholder in RomTelecom, the Romanian State, is examining options in respect of the status of Cosmorom.
The failure by Cosmorom to make payment of outstanding trade liabilities owed to its equipment supplier caused a non-payment default by OTE under the Euro 1.1 billion 6.125% guaranteed notes due 2007 (issued by its subsidiary OTE PLC and guaranteed by OTE) and under our US $ 1.0 billion senior loan facility, as we had become RomTelecom’s majority shareholder in March 2003. We have addressed such non-payment defaults by, among other measures, obtaining appropriate waivers from noteholders and the syndicate of financial institutions participating in the loan facility. On May 30, 2003 we and OTE PLC issued a solicitation statement wherein we and OTE PLC sought consents from the holders of OTE PLC 6.125% issued pursuant to a fiscal agency agreement dated February 7, 2000 among OTE PLC, us and The Bank of New York as fiscal agent, to be represented and vote at a meeting of holders to: (i) waive any event of default arising under Condition 9(iii) of the Notes or otherwise caused by the failure of Cosmorom to make payment of any indebtedness (the “Waivers”); (ii) modify the events of default under the Notes by deleting references to “Subsidiaries” from Condition 9(iii) and replacing them with references to “Significant Subsidiaries” (excluding RomTelecom and OTE Estate S.A.); and (iii) modify the negative pledge covenant under the Notes by limiting its applicability to public external indebtedness issued or guaranteed by OTE PLC, us or Significant Subsidiaries (excluding RomTelecom and OTE Estate) which is intended to permit non-recourse financing to be undertaken by our subsidiaries in Southeastern Europe.
In connection with the Waivers and Proposed Amendments, we and OTE PLC agreed to pay certain amounts by way of consent payments in cash (Euro 2.50 or Euro 1.50), according to whether the relevant consents were received before or after the early consent payment deadline (which was June 16, 2003)), subject to certain conditions described therein, for each Euro 1,000 principal amount of the Notes for which consents were received on or prior to the applicable deadline.
As a result of the Waivers and Proposed Amendments being adopted by the holders, we and OTE PLC expect to disburse an amount of approximately Euro 2.5 million to holders who have given their consent to the Waivers and Proposed Amendments on or prior to the applicable deadline.
We wish to make the events of default across our principal public issues of debt broadly consistent and were seeking to ensure that any adverse operating performance or a default by a particular subsidiary or affiliate which is not itself a Significant Subsidiary does not result in the Notes becoming due and repayable. The term “Significant Subsidiary” is defined in the conditions to the Notes, with respect to any person, as a subsidiary of such Person (i) whose Relevant Total Assets are 5% or more of Relevant Total Assets of such Person and all of its subsidiaries on a consolidated basis or (ii) whose Operating Revenue is 5% or more of the Operating Revenue of such person and all of its subsidiaries on a consolidated basis. The term “Relevant Total Assets” means, in relation to a subsidiary of any Person, its total assets, less the aggregate of all receivables due from such Person or other subsidiaries of such Person and all intangible assets (including, without limitation, goodwill) as of the end of the most recent fiscal year as shown in such Person’s latest annual audited consolidated accounts from time to time. The term “Operating Revenue” means, in relation to a subsidiary of any Person, its total turnover for the most recent fiscal year as shown in such Person’s latest audited or unaudited, as the case may be, consolidated accounts. We and OTE PLC also obtained the consent of noteholders to the exclusion of RomTelecom and OTE Estate from the definition of Significant Subsidiaries.
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The exclusion of RomTelecom is due to the risks associated with the operating environment in Romania and the desire to insulate OTE and the holders of Notes from these risks. The provisions of the Events of Default as originally contained in Condition 9 of the Notes imposed burdensome restrictions on our consolidated operations, particularly in light of the regional expansion through equity investments and operating subsidiaries which our group has undertaken in the Southeastern European region in recent years. An unintended consequence of the specific events of default being as expansive as they were was that we may have become obliged to extend finance to underperforming subsidiaries or affiliates, not because there was a sound business case for doing so, and not in expectation of generating a satisfactory return on its investment, but simply to avoid the harmful consequences which would flow to us from an event of default occurring under the Notes.
We and OTE PLC believed that our interests and those of our respective creditors (including the holders of the Notes) are be best served by insulating our principal borrowings from the risks occasioned by conducting operations in jurisdictions where the business, political and foreign exchange risks encountered by their subsidiaries and affiliates are greater than those encountered by us in the Hellenic Republic.
Until the Waivers and Proposed Amendments were adopted at the meeting of the holders of the Notes held on June 30, 2003, the provisions of the negative pledge (Condition 2(c)) imposed restrictions on our ability to conduct our activities, particularly in light of our strategy for Southeastern Europe. In the past, our investments in Southeastern Europe have been funded principally through increases in share capital of the subsidiaries subscribed for by us. In the future, we anticipate that the funding requirements of our subsidiaries in Southeastern Europe will increasingly be met from project finance borrowings secured on the assets and revenues of the relevant subsidiaries without recourse to us, other members of our group or their respective assets. It is intended that, to the extent feasible, our exposure to each such operation will be limited to the capital contributions already made. As such, in seeking the Waivers and Proposed Amendments we were seeking to protect ourselves and, by extension, our creditors, from the political and business risks inherent in conducting operations in such countries while gaining the benefits of having operations in these expanding markets. Until the Waivers and Proposed Amendments were adopted at the meeting of the holders of the Notes held on June 30, 2003, we and other members of our group were precluded from undertaking non-recourse type borrowing by the terms of the negative pledge as previously contained in the Conditions of the Notes.
We and OTE PLC succeeded in limiting the negative pledge provision to security granted in connection with Relevant Indebtedness (as defined in the Notes), deleting the category of “Permitted Security Interests” and replacing it with a general prohibition against creating Security Interests to secure other publicly traded or quoted debt securities (Relevant Indebtedness) of OTE PLC, us or any of our respective Significant Subsidiaries, unless either approval is obtained from the holders of Notes for the granting of security in respect of the Notes or the Notes themselves are secured equally and ratably with the new issue of Relevant Indebtedness. We and OTE PLC sought to exempt OTE Estate from the application of the negative pledge covenant in order to confer on that company flexibility in exploring options for the realization of shareholder value, which may include disposals of a part of OTE Estate’s real estate assets or entry into sale and leaseback transactions or similar transactions which may require the issuance of publicly traded securities and the granting of security interests.
By a letter dated June 24, 2003, the agent for the syndicate of financial institutions participating in the US $ 1.0 billion loan facility agreed, on behalf of such financial institutions, to grant waivers to us in respect of the non-payment defaults arising under such facility as a result of Cosmorom’s failure to reach agreement with its principal equipment supplier.
At a meeting of noteholders held on June 30, 2003, the consent of holders to the Waivers and Proposed Amendments was obtained with holders representing Euro 913,297,000 in aggregate principal amount of the Notes voting in favor of the Waivers and the Proposed Amendments.
As of December 2002, RomTelecom’s current liabilities exceeded its current assets and, accordingly, RomTelecom breached the current ratio covenant and certain other provisions in its two EBRD facilities. By letter dated June 27, 2003, EBRD confirmed that it was extending to September 30, 2003 the grace periods to cure any existing defaults under the EBRD facilities, including this breach of covenant. Hence, the related loans are not repayable on demand. RomTelecom is not in default under any other loan agreements or contracts.
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ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
On October 17, 2002, the extraordinary general assembly of our shareholders approved the renewal of the authorization granted to us to buy back up to 10 per cent. of our own shares on the Athens Stock Exchange. Thus, for a period of twelve months from the date of that extraordinary general assembly (i.e. until October 16, 2003) we are authorized to purchase the balance of the 10% of our share capital which we have not purchased by such date (i.e. 7.33%) for a price per share between Euro 1 and Euro 30. During 2002, we did not purchase any shares.
For a further analysis see subsection 10.B Our Articles of Incorporation.
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports to the Securities and Exchange Commission. In addition, we reviewed our internal controls and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. Although we believe our pre–existing disclosure controls and procedures and internal controls were adequate to enable us to comply with our disclosure obligations, as a result of such review we intend to implement changes, primarily to formalize and document procedures already in place. You should note that the design and operation of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report on Form 20-F:
| | Page |
| |
|
| F-1 |
Report of Independent Auditors................................................................................................................................................................................... | F-2 |
Report of Independent Public Accountants................................................................................................................................................................ | F-3 |
| F-4 |
| F-6 |
| F-7 |
| F-8 |
| F-9 |
ITEM 19. EXHIBITS
| 1.1 | Articles of Incorporation as amended to date (certified English translation). |
| | |
| | |
| 2.1 | Certification of chief executive officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 3.1 | Certification of chief financial officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | HELLENIC TELECOMMUNICATIONS |
| | |
| | ORGANIZATION S.A. |
| | |
| | |
| | By:  |
| | |
| | Name: Lefteris Antonacopoulos |
| | |
| | Title: Chairman & Managing Director |
| | |
| Date: June 30, 2003. | |
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lefteris Antonacopoulos, certify that:
| 1. | I have reviewed this annual report on Form 20-F of Hellenic Telecommunications Organization S.A.; |
| | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this annual report; |
| | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| | | |
| a) | | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities particularly during the period in which this annual report is being prepared; |
| | | |
| b) | | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| | | |
| c) | | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
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| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| | | |
| a) | | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| | | |
| b) | | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| | |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| | |
| | |
| Date 30 June 2003 | |
| | Lefteris Antonacopoulos |
| | Chairman & Managing Director |
143
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Iordanis Aivazis, certify that:
| 1. | I have reviewed this annual report on Form 20-F of Hellenic Telecommunications Organization S.A.; |
| | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this annual report; |
| | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| | | |
| a) | | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities particularly during the period in which this annual report is being prepared; |
| | | |
| b) | | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| | | |
| c) | | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| | |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| | | |
| a) | | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| | | |
| b) | | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| | |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| | |
| Date 30 June 2003 |  |
| | Iordanis Aivazis |
| | Chief Financial Affairs Officer |
144
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors of
Hellenic Telecommunications Organization S.A.:
We have audited the accompanying consolidated balance sheets of Hellenic Telecommunications Organization S.A. (a Greek corporation) and subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Hellenic Telecommunications Organization S.A. and subsidiaries as of December 31, 2000 and for the year then ended, were audited by other auditors who have ceased operations as a foreign associated firm of the Securities and Exchange Commission Practice Section of the American Institute of Certified Public Accountants. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated May 30, 2001, except with respect to the matters discussed in Notes 3 and 21(c), (d) and (e), as to which the dates were June 20, 2001 and June 28, 2001, respectively, before the disclosure adjustments described in Note 2(g).
We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hellenic Telecommunications Organization S.A. and its subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed above, the consolidated financial statements of Hellenic Telecommunications Organization S.A., as of and for the year ended December 31, 2000, were audited by other auditors who have ceased operations as a foreign associated firm of the Securities and Exchange Commission Practice Section of the American Institute of Certified Public Accountants. As described in Note 2(g), these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (“Statement”) No. 142, “Goodwill and other Intangible Assets”, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2(g) with respect to 2000 included (a) agreeing the previously reported net income to the previously issued consolidated financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill and intangible assets that are no longer being amortized to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related net income per share amounts. In our opinion, the disclosures for 2000 in Note 2(g) are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2000 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2000 consolidated financial statements taken as a whole.
| ERNST & YOUNG | ASSOCIATED CERTIFIED
PUBLIC ACCOUNTANTS |
Athens, Greece
June 6, 2003
(except with respect to the matters
discussed in Notes 3 and 6(a),
as to which the date is June 30, 2003)
F-2
The audit report of Arthur Andersen, our former independent public accountants for the year ended December 31, 2000, which is set forth below, is included in this Annual Report on Form 20-F for purposes of including the opinion of Arthur Andersen on our financial statements for the fiscal year ended December 31, 2000. Our financial statements for the fiscal years ended December 31, 2001 and 2002, have been audited by and are reported on by Ernst & Young and SOL S.A. on page F-1 of this Annual Report on Form 20-F.
The audit report set forth below is a copy of the original audit report dated May 30, 2001, rendered by Arthur Andersen that was included in our Annual Report on Form 20-F for 2001 filed on July 15, 2002. We are including a copy of the May 30, 2001, Arthur Andersen audit report pursuant to Rule 2-02(e) of Regulation S-X under the Securities Exchange Act of 1934. Your ability to assert claims against Arthur Andersen based on its report may be limited. This audit report has not been reissued by Arthur Andersen in connection with this filing of the Annual Report on Form 20-F.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of the
Hellenic Telecommunications Organization S.A.:
We have audited the accompanying consolidated balance sheet of the Hellenic Telecommunications Organization S.A. (a Greek corporation) and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Hellenic Telecommunications Organization S.A. and its subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, in conformity with United States generally accepted accounting principles.
| ARTHUR ANDERSEN | ASSOCIATED CERTIFIED
PUBLIC ACCOUNTANTS |
Athens, Greece
May 30, 2001
(except with respect to the matters
discussed in Notes 3 and 21 (c),(d)
and (e), as to which the dates are June
20, 2001 and June 28, 2001,
respectively).
F-3
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | December 31, | |
| | | | |
| |
Amounts in millions, except share and per share data | | | | 2001 | | | 2002 | | | 2002 | |
| | | Notes | | € | | | € | | | U.S. $ | |
| | |
| |
| | |
| | |
| |
ASSETS | | | | | | | | | | | |
| | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
| Cash and cash equivalents | | 2 (m) | | 346.8 | | | 447.5 | | | 528.1 | |
| Restricted time deposit | | 1 (f) | | 12.8 | | | - | | | - | |
| Accounts receivable, net of allowance for doubtful accounts of € 124.2 and € 143.7 as of December 31, 2001 and 2002, respectively | | 4 | | 998.4 | | | 1,164.5 | | | 1,374.1 | |
| Due from related parties | | 5 | | 172.5 | | | 200.2 | | | 236.2 | |
| Advances to EDEKT OTE, TAP-OTE and auxiliary funds | | 12 | | 44.9 | | | 31.8 | | | 37.5 | |
| Loans and advances to employees | | 12 | | 24.9 | | | 28.4 | | | 33.5 | |
| Subsidies receivable | | 7 | | 22.4 | | | 22.4 | | | 26.4 | |
| Materials and supplies | | 2 (f) | | 106.4 | | | 66.5 | | | 78.5 | |
| Deferred income taxes | | 10 | | 6.2 | | | 8.6 | | | 10.2 | |
| Other current assets | | | | 128.0 | | | 154.1 | | | 181.8 | |
| | | | |
| | |
| | |
| |
Total current assets | | | | 1,863.3 | | | 2,124.0 | | | 2,506.3 | |
| | | | |
| | |
| | |
| |
Other assets: | | | | | | | | | | | |
| Investments in and advances to associates | | 2 (a), 6 (a) | | 653.5 | | | 523.9 | | | 618.2 | |
| Investments in satellite organizations | | 2 (a), 6 (b) | | 37.3 | | | 37.3 | | | 44.0 | |
| Available-for-sale marketable securities | | 2 (u) | | 24.6 | | | 12.4 | | | 14.6 | |
| Advances to EDEKT OTE, TAP-OTE and auxiliary funds | | 12 | | 330.1 | | | 305.5 | | | 360.5 | |
| Loans and advances to employees, net of current portion | | 12 | | 37.6 | | | 51.2 | | | 60.4 | |
| Deferred income taxes | | 10 | | 55.1 | | | 131.0 | | | 154.6 | |
| Other long-term receivables | | | | 41.7 | | | 59.1 | | | 69.8 | |
| | | | |
| | |
| | |
| |
Total other assets | | | | 1,179.9 | | | 1,120.4 | | | 1,322.1 | |
| | | | |
| | |
| | |
| |
| | | | | | | | | | | | |
Telecommunication property, plant and equipment | | 2 (i), 7 | | 7,649.5 | | | 8,734.5 | | | 10,306.7 | |
| Less: Accumulated depreciation | | | | (2,809.4 | ) | | (3,470.0 | ) | | (4,094.6 | ) |
| | | | |
| | |
| | |
| |
| | | | | 4,840.1 | | | 5,264.5 | | | 6,212.1 | |
| | | | |
| | |
| | |
| |
| | | | | | | | | | | | |
Telecommunication licences | | 2 (e) | | 381.2 | | | 431.1 | | | 508.7 | |
| Less: Accumulated amortization | | | | (11.6 | ) | | (23.5 | ) | | (27.7 | ) |
| | | | |
| | |
| | |
| |
| | | | | 369.6 | | | 407.6 | | | 481.0 | |
| | | | |
| | |
| | |
| |
| | | | | | | | | | | | |
Goodwill resulting from consolidated subsidiaries | | 2 (g) | | 154.0 | | | 76.8 | | | 90.6 | |
| Less: Accumulated amortization | | | | (22.3 | ) | | (7.0 | ) | | (8.3 | ) |
| | | | |
| | |
| | |
| |
| | | | | 131.7 | | | 69.8 | | | 82.3 | |
| | | | |
| | |
| | |
| |
TOTAL ASSETS | | | | 8,384.6 | | | 8,986.3 | | | 10,603.8 | |
| | | | |
| | |
| | |
| |
Exchange rate used for the convenience translation of the December 31, 2002 balances: € 1.00 to U.S. $ 1.18
The accompanying notes are an integral part of these consolidated balance sheets.
F-4
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | December 31, | |
| | | | |
| |
Amounts in millions, except share and per share data | | | | 2001 | | | 2002 | | | 2002 | |
| | | Notes | | € | | | € | | | U.S. $ | |
| | |
| |
| | |
| | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | |
| | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | |
| Short-term borrowings | | 8 | | 123.4 | | | 292.8 | | | 345.5 | |
| Current maturities of long-term debt | | 11 | | 391.0 | | | 41.6 | | | 49.1 | |
| Accounts payable | | | | 722.5 | | | 816.9 | | | 963.9 | |
| Accrued and other liabilities | | 9,12 | | 364.0 | | | 355.7 | | | 419.7 | |
| Deferred revenue | | 2 (q) | | 122.2 | | | 137.8 | | | 162.6 | |
| Income taxes payable | | 10 | | 244.4 | | | 170.2 | | | 200.8 | |
| Dividends payable | | 15 | | 6.7 | | | 7.7 | | | 9.1 | |
| | | | |
| | |
| | |
| |
Total current liabilities | | | | 1,974.2 | | | 1,822.7 | | | 2,150.7 | |
| | | | |
| | |
| | |
| |
| | | | | | | | | | | | |
Long-term liabilities: | | | | | | | | | | | |
| Long-term debt, net of current maturities | | 11 | | 1,942.3 | | | 2,576.2 | | | 3,039.9 | |
| Reserve for staff retirement indemnities | | 12 | | 262.5 | | | 263.2 | | | 310.6 | |
| Reserve for Youth Account | | 12 | | 293.7 | | | 352.8 | | | 416.3 | |
| Other long-term liabilities | | 12 | | 128.2 | | | 143.3 | | | 169.1 | |
| | | | |
| | |
| | |
| |
| | | | | 2,626.7 | | | 3,335.5 | | | 3,935.9 | |
| | | | |
| | |
| | |
| |
Minority interests | | | | 254.6 | | | 332.1 | | | 391.9 | |
| | | | |
| | |
| | |
| |
| | | | | | | | | | | | |
Shareholders’ equity: | | | | | | | | | | | |
| Share capital, nominal value € 2.20 and € 2.39 each at December 31, 2001 and 2002, respectively (504,054,199 shares authorized, issued and outstanding at December 31, 2001 and 2002) | | 13 | | 1,108.9 | | | 1,204.7 | | | 1,421.6 | |
| Paid-in surplus | | | | 596.3 | | | 506.9 | | | 598.1 | |
| Treasury stock (13,471,320 shares at December 31, 2001 and 2002) | | 13 | | (272.6 | ) | | (272.6 | ) | | (321.7 | ) |
| Legal reserve | | 14 | | 229.8 | | | 246.2 | | | 290.5 | |
| Retained earnings | | | | 1,916.3 | | | 1,900.1 | | | 2,242.1 | |
| Accumulated other comprehensive income / (loss) | | | | (45.2 | ) | | (85.7 | ) | | (101.0 | ) |
| Unaccrued compensation | | | | (4.4 | ) | | (3.6 | ) | | (4.3 | ) |
| | | | |
| | |
| | |
| |
Total shareholders’ equity | | | | 3,529.1 | | | 3,496.0 | | | 4,125.3 | |
| | | | |
| | |
| | |
| |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | 8,384.6 | | | 8,986.3 | | | 10,603.8 | |
| | | | |
| | |
| | |
| |
Exchange rate used for the convenience translation of the December 31, 2002 balances: € 1.00 to U.S. $ 1.18
The accompanying notes are an integral part of these consolidated balance sheets.
F-5
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | Year ended December 31, | |
| | | | |
| |
| Amounts in millions, except share and per share data | | | | 2000 | | | 2001 | | | 2002 | | | 2002 | |
| | | Notes | | € | | | € | | | € | | | U.S. $ | |
| | |
| |
| | |
| | |
| | |
| |
Revenues: | | | | | | | | | | | | | | |
| Domestic telephony | | 19 | | 2,016.5 | | | 2,169.1 | | | 2,120.5 | | | 2,502.2 | |
| International telephony | | 19 | | 398.7 | | | 382.2 | | | 349.9 | | | 412.9 | |
| Mobile telephony services | | 19 | | 375.4 | | | 656.9 | | | 950.3 | | | 1,121.4 | |
| Other revenues | | 19 | | 805.6 | | | 864.3 | | | 888.2 | | | 1,048.0 | |
| | | | |
| | |
| | |
| | |
| |
Total revenues | | | | 3,596.2 | | | 4,072.5 | | | 4,308.9 | | | 5,084.5 | |
| | | | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | |
| Payroll and employee benefits | | | | (827.0 | ) | | (837.6 | ) | | (873.5 | ) | | (1,030.7 | ) |
| Payments to international operators | | | | (232.2 | ) | | (224.1 | ) | | (204.4 | ) | | (241.2 | ) |
| Payments to mobile telephony operators | | | | (437.4 | ) | | (424.4 | ) | | (559.6 | ) | | (660.3 | ) |
| Depreciation and amortization | | | | (504.0 | ) | | (589.8 | ) | | (700.2 | ) | | (826.2 | ) |
| Other | | 20 | | (740.8 | ) | | (878.5 | ) | | (951.2 | ) | | (1,122.5 | ) |
| | | | |
| | |
| | |
| | |
| |
Total operating expenses | | �� | | (2,741.4 | ) | | (2,954.4 | ) | | (3,288.9 | ) | | (3,880.9 | ) |
| | | | |
| | |
| | |
| | |
| |
Operating income | | | | 854.8 | | | 1,118.1 | | | 1,020.0 | | | 1,203.6 | |
| | | | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | |
Other income/(expense): | | | | | | | | | | | | | | |
| Interest expense | | 8, 11 | | (109.0 | ) | | (131.5 | ) | | (118.4 | ) | | (139.7 | ) |
| Interest income | | | | 93.9 | | | 60.5 | | | 63.1 | | | 74.5 | |
| Foreign exchange (losses) / gains, net | | 2 (d) | | (52.4 | ) | | 5.1 | | | (17.7 | ) | | (20.9 | ) |
| Write down of investments | | 6 | | (15.1 | ) | | (256.3 | ) | | (116.4 | ) | | (137.4 | ) |
| Losses on investments | | | | (3.9 | ) | | (11.1 | ) | | (20.1 | ) | | (23.7 | ) |
| Gains on sale of investments | | 1(a), 2 (a) | | 298.0 | | | 2.9 | | | - | | | - | |
| Other expense, net | | 12 | | (11.0 | ) | | (44.5 | ) | | (22.3 | ) | | (26.3 | ) |
| | | | |
| | |
| | |
| | |
| |
| | | | | 200.5 | | | (374.9 | ) | | (231.8 | ) | | (273.5 | ) |
| | | | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | |
Income before provision for income taxes and minority interests | | | | 1,055.3 | | | 743.2 | | | 788.2 | | | 930.1 | |
| | | | | | | | | | | | | | | |
Income taxes | | 10 | | (402.8 | ) | | (268.8 | ) | | (304.4 | ) | | (359.2 | ) |
| | | | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | |
Income before minority interests | | | | 652.5 | | | 474.4 | | | 483.8 | | | 570.9 | |
| | | | | | | | | | | | | | | |
| Minority interests | | | | (23.8 | ) | | (79.2 | ) | | (97.7 | ) | | (115.3 | ) |
| | | | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | |
| Net income before cummulative effect of accounting change | | | | 628.7 | | | 395.2 | | | 386.1 | | | 455.6 | |
| | | | | | | | | | | | | | | |
| Cummulative effect of accounting change for SFAS No. 142, net of income taxes | | | | - | | | - | | | (40.3 | ) | | (47.6 | ) |
| | | | |
| | |
| | |
| | |
| |
Net Income | | | | 628.7 | | | 395.2 | | | 345.8 | | | 408.0 | |
| | | | |
| | |
| | |
| | |
| |
Earnings per share (basic and diluted) | | 2 (s) | | 1.3 | | | 0.8 | | | 0.7 | | | 0.8 | |
| | | | |
| | |
| | |
| | |
| |
Weighted average number of shares outstanding | | | | 498,888,534 | | | 490,970,480 | | | 490,582,879 | | | 490,582,879 | |
| | | | |
| | |
| | |
| | |
| |
Exchange rate used for the convenience translation of the December 31, 2002 balances: € 1.00 to U.S. $ 1.18
The accompanying notes are an integral part of these consolidated statements.
F-6
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | Notes | | Comprehensive
Income | | | Share
Capital | | | Paid-in
Surplus | | | Treasury
Stock | | | Legal
Reserve | | Unaccrued
Compensation | | | Retained
Earnings | | | Accumulated
Other
Comprehensive
Income/(Loss) | | | Total | |
| | |
| |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
Balance, December 31, 1999 | | | | | | | 1,109.4 | | | 590.3 | | | (64.3 | ) | | 182.5 | | - | | | 1,609.0 | | | (42.7 | ) | | 3,384.2 | |
| | | | | | | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | 628.7 | | | - | | | - | | | - | | | - | | - | | | 628.7 | | | - | | | 628.7 | |
| Transfer to legal reserve | | 14 | | | | | - | | | - | | | - | | | 26.4 | | - | | | (26.4 | ) | | - | | | 0.0 | |
| Dividends declared | | 15 | | | | | - | | | - | | | - | | | - | | - | | | (323.3 | ) | | - | | | (323.3 | ) |
| Treasury stock acquired | | | | | | | - | | | - | | | (194.9 | ) | | - | | - | | | - | | | - | | | (194.9 | ) |
| Unaccrued comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation | | | | (32.0 | ) | | - | | | - | | | - | | | - | | - | | | - | | | (32.0 | ) | | (32.0 | ) |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | 596.7 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
Balance, December 31, 2000 | | | | | | | 1,109.4 | | | 590.3 | | | (259.2 | ) | | 208.9 | | 0.0 | | | 1,888.0 | | | (74.7 | ) | | 3,462.7 | |
| | | | | | | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | 395.2 | | | - | | | - | | | - | | | - | | - | | | 395.2 | | | - | | | 395.2 | |
| Transfer to legal reserve | | 14 | | | | | - | | | - | | | - | | | 20.9 | | - | | | (20.9 | ) | | - | | | 0.0 | |
| Dividends declared | | 15 | | | | | - | | | - | | | - | | | - | | - | | | (346.0 | ) | | - | | | (346.0 | ) |
| Decrease in nominal value of shares | | | | | | | (0.5 | ) | | 0.5 | | | - | | | - | | - | | | - | | | - | | | 0.0 | |
| Treasury stock acquired | | | | | | | - | | | - | | | (13.4 | ) | | - | | - | | | - | | | - | | | (13.4 | ) |
| Deferred compensation | | | | | | | - | | | 5.5 | | | - | | | - | | (4.4 | ) | | - | | | - | | | 1.1 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain on available-for-sale Securities, net of € 1.1 tax | | | | 2.1 | | | - | | | - | | | - | | | - | | - | | | - | | | 2.1 | | | 2.1 | |
| Foreign currency translation | | | | 27.4 | | | - | | | - | | | - | | | - | | - | | | - | | | 27.4 | | | 27.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | 424.7 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
Balance, December 31, 2001 | | | | | | | 1,108.9 | | | 596.3 | | | (272.6 | ) | | 229.8 | | (4.4 | ) | | 1,916.3 | | | (45.2 | ) | | 3,529.1 | |
| | | | | | | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | 345.8 | | | - | | | - | | | - | | | - | | - | | | 345.8 | | | - | | | 345.8 | |
| Transfer to legal reserve | | 14 | | | | | - | | | - | | | - | | | 16.4 | | - | | | (16.4 | ) | | - | | | 0.0 | |
| Dividends declared | | 15 | | | | | - | | | - | | | - | | | - | | - | | | (345.6 | ) | | - | | | (345.6 | ) |
| Issuance of share capital | | | | | | | 95.8 | | | (95.8 | ) | | - | | | - | | - | | | - | | | - | | | 0.0 | |
| Additional minimum liability for Youth Account, net of € 17.7 tax | | | | (32.9 | ) | | - | | | - | | | - | | | - | | - | | | - | | | (32.9 | ) | | (32.9 | ) |
| Deferred compensation | | | | | | | - | | | 6.4 | | | - | | | - | | 0.8 | | | - | | | - | | | 7.2 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other than temporary impairment on available-for-sale securities, net of € 1.1 tax | | | | (2.1 | ) | | - | | | - | | | - | | | - | | - | | | - | | | (2.1 | ) | | (2.1 | ) |
| Foreign currency translation | | | | (5.5 | ) | | - | | | - | | | - | | | - | | - | | | - | | | (5.5 | ) | | (5.5 | ) |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | 305.3 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
Balance, December 31, 2002 | | | | | | | 1,204.7 | | | 506.9 | | | (272.6 | ) | | 246.2 | | (3.6 | ) | | 1,900.1 | | | (85.7 | ) | | 3,496.0 | |
| | | | | | | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
F-7
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year ended December 31, | |
| |
| |
| Amounts in millions | 2000 | | | 2001 | | | 2002 | | | 2002 | |
| | € | | | € | | | € | | | U.S. $ | |
| |
| | |
| | |
| | |
| |
Cash Flows from Operating Activities: | | | | | | | | | | | |
| Net income | 628.7 | | | 395.2 | | | 345.8 | | | 408.0 | |
Adjustments to reconcile to net cash provided by operating activities: | | | | | | | | | | | |
| Depreciation and amortization | 504.0 | | | 589.8 | | | 700.2 | | | 826.2 | |
| Deferred income taxes | 158.4 | | | (94.3 | ) | | (59.6 | ) | | (70.3 | ) |
| Provision for doubtful accounts | 87.8 | | | 83.1 | | | 89.8 | | | 106.0 | |
| Provision for staff retirement indemnities and youth account | 62.6 | | | 61.4 | | | 78.9 | | | 93.1 | |
| Provision for additional payments to TAP-OTE | - | | | 50.2 | | | - | | | - | |
| Amortization of payments to EDEKT - OTE | - | | | - | | | 36.0 | | | 42.5 | |
| Minority interests | 23.8 | | | 79.2 | | | 97.7 | | | 115.3 | |
| Deferred compensation | - | | | 1.1 | | | 7.2 | | | 8.5 | |
| (Gain)/Loss on sale of investments | (298.0 | ) | | (2.9 | ) | | - | | | - | |
| Losses on investments | 3.9 | | | 11.1 | | | 20.1 | | | 23.7 | |
| Write down of investments | 15.1 | | | 256.3 | | | 178.4 | | | 210.5 | |
(Increase)/decrease in: | | | | | | | | | | | |
| Accounts receivable | (182.1 | ) | | (142.5 | ) | | (255.9 | ) | | (302.0 | ) |
| Due from related parties | (40.5 | ) | | (32.7 | ) | | (34.1 | ) | | (40.2 | ) |
| Materials and supplies | (11.8 | ) | | (22.3 | ) | | 39.9 | | | 47.1 | |
| Other current assets | (32.6 | ) | | (26.9 | ) | | (21.9 | ) | | (25.8 | ) |
Increase/(decrease) in: | | | | | | | | | | | |
| Accounts payable | 65.6 | | | 136.0 | | | 94.4 | | | 111.4 | |
| Due to related parties | (1.2 | ) | | - | | | - | | | - | |
| Accrued and other liabilities | 137.3 | | | 132.5 | | | (9.6 | ) | | (11.4 | ) |
| Deferred revenue | 5.5 | | | 20.1 | | | 15.6 | | | 18.4 | |
| Income taxes payable | (87.9 | ) | | 171.9 | | | (74.2 | ) | | (87.6 | ) |
| Loans and advances to employees | (19.1 | ) | | (21.5 | ) | | (33.4 | ) | | (39.4 | ) |
| Repayment of loans and advances to employees | 21.8 | | | 17.9 | | | 16.2 | | | 19.1 | |
| Advances and payments to EDEKT, TAP-OTE and auxiliary funds | (24.6 | ) | | (371.3 | ) | | (1.7 | ) | | (2.0 | ) |
| Payment of staff retirement indemnities and youth account, net of employees’ contributions | (70.4 | ) | | (68.4 | ) | | (69.7 | ) | | (82.3 | ) |
| Other long-term receivables | (46.6 | ) | | (36.7 | ) | | (17.4 | ) | | (20.3 | ) |
| |
| | |
| | |
| | |
| |
Net Cash provided by Operating Activities | 899.7 | | | 1,186.3 | | | 1,142.7 | | | 1,348.5 | |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | | |
| Capital expenditures | (1,044.9 | ) | | (1,360.1 | ) | | (1,112.9 | ) | | (1,313.3 | ) |
| Telecommunications licences fees | (11.8 | ) | | (291.1 | ) | | (49.9 | ) | | (58.9 | ) |
| Payment for purchase of subsidiary, net of cash acquired | (37.1 | ) | | (47.2 | ) | | - | | | - | |
| Minority interest on previously equity accounted investment | - | | | - | | | 7.8 | | | 9.2 | |
| Investments in and advances to associates | (25.1 | ) | | (73.2 | ) | | (7.5 | ) | | (8.9 | ) |
| (Decrease) / increase in restricted cash | - | | | (12.8 | ) | | 12.8 | | | 15.1 | |
| Proceeds from sale of investments | 215.5 | | | 9.5 | | | - | | | - | |
| |
| | |
| | |
| | |
| |
Net Cash used in Investing Activities | (903.4 | ) | | (1,774.9 | ) | | (1,149.7 | ) | | (1,356.8 | ) |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | | |
| Treasury stock acquired | (194.9 | ) | | (13.4 | ) | | - | | | - | |
| Net change in short-term borrowings | (23.3 | ) | | 116.0 | | | 169.4 | | | 199.9 | |
| Increase in long-term debt | 1,725.3 | | | 412.8 | | | 734.7 | | | 867.0 | |
| Repayment of long-term debt | (723.9 | ) | | (219.2 | ) | | (437.1 | ) | | (515.8 | ) |
| Proceeds from EU subsidies for investing activities (see Note 2(i) and 7) | - | | | 25.3 | | | - | | | - | |
| Proceeds from issuance of minority shareholders | 167.0 | | | 3.8 | | | - | | | - | |
| Dividends paid | (202.6 | ) | | (309.1 | ) | | (338.2 | ) | | (399.1 | ) |
| Dividends paid to minority shareholders | - | | | (6.4 | ) | | (20.4 | ) | | (24.1 | ) |
| |
| | |
| | |
| | |
| |
Net Cash provided by Financing Activities | 747.6 | | | 9.8 | | | 108.4 | | | 127.9 | |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
| Effect of exchange rate changes on cash | 0.6 | | | 1.5 | | | (0.7 | ) | | (0.8 | ) |
Net Increase/ (Decrease) in Cash and Cash Equivalents | 744.5 | | | (577.3 | ) | | 100.7 | | | 118.8 | |
Cash and cash equivalents at beginning of year | 179.6 | | | 924.1 | | | 346.8 | | | 409.3 | |
| |
| | |
| | |
| | |
| |
Cash and Cash Equivalents at end of year | 924.1 | | | 346.8 | | | 447.5 | | | 528.1 | |
| |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Supplemental disclosures of Cash Flow Information: | | | | | | | | | | | |
| Cash paid for: | | | | | | | | | | | |
| -interest, net of amounts capitalized | 54.4 | | | 128.0 | | | 113.3 | | | 133.7 | |
| - -income taxes | 328.1 | | | 193.4 | | | 416.5 | | | 491.5 | |
| |
| | |
| | |
| | |
| |
| | 382.5 | | | 321.4 | | | 529.8 | | | 625.2 | |
| |
| | |
| | |
| | |
| |
Exchange rate used for the convenience translation of the December 31, 2002 balances: € 1.00 to U.S. $ 1.18
The accompanying notes are an integral part of these consolidated statements.
F-8
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 1. | COMPANY’S FORMATION AND OPERATIONS: |
| | |
| | The Hellenic Telecommunications Organization S.A. (hereinafter referred to as “OTE”), was founded in 1949 in accordance with Law 1049/49, as a state-owned Société Anonyme. OTE operates pursuant to Law 2246/94 (as amended), Law 2257/94 (OTE’s Charter) and Presidential Decree 437/95. Up to December 31, 2000, based on an extension granted on June 18, 1997, by the European Commission to the Greek State, OTE had the exclusive rights to install, operate and exploit the public fixed switched telecommunications network in Greece and to provide public fixed switched voice telephony services. Effective January 1, 2001 and pursuant to the provisions of the new Telecommunications Law 2867/2000, issued in December 2000, which amended certain provisions of the previous Law 2246/1994, the above mentioned exclusivity expired and the relevant market is open to competition. At December 31, 2002, OTE had a total of approximately 6.3 million access lines in service in Greece. |
| | |
| | OTE also benefited from an extension of the deadline under European Union (“EU”) regulations for the introduction of number portability and carrier selection and pre-selection to January 1, 2003. Number portability is expected to become available in July 2003, once certain technical problems between OTE’s and other operators’ networks have been resolved. Carrier pre-selection for international calls was implemented in December 2002, while carrier pre-selection for national, local and mobile calls was introduced on February 1, 2003. |
| | |
| | The accompanying consolidated financial statements include the accounts of OTE and all subsidiaries where OTE has control (hereinafter referred to as the “Group”). The following table summarizes OTE’s major subsidiaries and provides information relating to acquisitions, establishment and disposals of the Group’s subsidiaries during the years presented. |
| | Company Name | | Line of Business | Ownership Interest at December 31, | |
| |
| |
|
| |
| | | | | 2001 | | | 2002 | |
| | | | |
| | |
| |
| (a) | COSMOTE MOBILE TELECOMMUNICATIONS S.A. (“Cosmote”) | | Mobile telecommunication services | 58.98 | % | | 58.97 | % |
| | | | | | | | | |
| (b) | ARMENIA TELEPHONE COMPANY (“ArmenTel”) | | Provider of fixed line and mobile telecommunication services in the Republic of Armenia | 90.00 | % | | 90.00 | % |
| | | | | | | | | |
| (c) | OTE INTERNATIONAL INVESTMENTS LTD | | Investment holding company | 100.00 | % | | 100.00 | % |
| | | | | | | | | |
| (d) | COSMO-HOLDING ALBANIA S.A. (“CHA”) | | Investment holding company | 57.21 | % | | 57.21 | % |
| | | | | | | | | |
| (e) | COSMO BULGARIA MOBILE EAD (“Globul”) | | Mobile telecommunication services | 100.00 | % | | 100.00 | % |
| | | | | | | | | |
| (f) | MTS MOBILE TELECOMMUNICATION SERVICES A.D. – SKOPJE (“MTS”) | | Mobile telecommunication services | 100.00 | % | | 100.00 | % |
| | | | | | | | | |
| (g) | OTE LEASING S.A. (“OTE Leasing”) | | Leasing Services | 0.00 | % | | 0.00 | % |
| | | | | | | | | |
| (h) | COSMO-ONE HELLAS MARKET SITE S.A. (“COSMO-ONE”) | | E-commerce services | 41.33 | % | | 41.33 | % |
| | | | | | | | | |
| (i) | OTE MTS Holding B.V. | | Investment holding company | 100.00 | % | | 100.00 | % |
F-9
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| | Company Name | | Line of Business | Ownership Interest at December 31, | |
| |
| |
|
| |
| | | | | 2001 | | | 2002 | |
| | | | |
| | |
| |
| (j) | OTE AUSTRIA HOLDING GMBH | | Investment holding company | 100.00 | % | | 100.00 | % |
| | | | | | | | | |
| (k) | HELLAS SAT CONSORTIUM LIMITED | | Provider of satellite communications | 25.00 | % | | 85.00 | % |
F-10
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 1. | COMPANY’S FORMATION AND OPERATIONS (Continued): |
| | | |
| | (a) | Cosmote: Cosmote was incorporated on October 2, 1996 and is one of the four operators licensed to provide mobile telecommunication services in Greece. On October 3, 2000, OTE and Telenor-B Invest A.S. (Cosmote’s minority shareholder) offered and sold 48,750,000 ordinary shares of Cosmote in a combined offering at an issue price of € 9.39 (nine point thirty nine Euro) per share. Of these shares, 17,500,000 were new shares offered and issued by Cosmote while 31,250,000 were existing shares offered by the selling shareholders. As the respective shares were offered in excess of their carrying value, OTE recognized a pre-tax gain of € 294.6, which is included in “Other income/(expense)” in the accompanying 2000 consolidated statement of operations. |
| | | |
| | (b) | ArmenTel: On March 3, 1998, OTE purchased a 90% interest in ArmenTel from the Government of the Republic of Armenia (“GoA”) (41%) and Trans-World Telecom Ltd. (49%). The related acquisition cost amounted to € 120.3. The purchase of ArmenTel was accounted for under the purchase method of accounting. The resulting excess of the acquisition cost over the net identifiable tangible and intangible assets, or goodwill of ArmenTel amounted to € 77.3 and through December 31, 2001 was amortized on a straight-line basis over 20 years. Effective January 1, 2002, with the adoption of SFAS No. 142, the Group is no longer amortizing goodwill and is instead testing it for impairment at least annually. See Note 2(g) for further information regarding the adoption of this standard and the related goodwill tests. |
| | | |
| | | ArmenTel is the exclusive provider of all local, long distance, international and mobile telecommunication services in Armenia. ArmenTel has a Telecommunications Service Licence, which grants an exclusive right for fifteen years, ending in 2013, with an option for additional fifteen years, for all telecommunication services throughout Armenia including wireless paging, mobile telephony and cable television. |
| | | |
| | (c) | OTE International Investments Ltd.: OTE International Investments Ltd. (formerly OTEROM) is an OTE’s wholly owned subsidiary, incorporated on October 26, 1998 for the purpose of acquiring an initial 35% interest in Romtelecom S.A. (“Romtelecom”), the public switch network operator in the Republic of Romania (see Note 6). |
| | | |
| | (d) | CHA: CHA was incorporated on July 14, 2000. Its shareholders are Cosmote, with a 97% interest stake, and Telenor Mobile with a 3% interest stake. |
| | | |
| | | On August 22, 2000, Cosmote acquired from the Albanian Ministry of Public Economy and Privatization, through CHA, 85% of the share capital of the Albanian Mobile Communications (“AMC”) Sh.a, for a consideration of approximately € 93.6. Of this amount, approximately € 46.4 was immediately paid and the balance was paid on February 20, 2001. The resulting excess of the acquisition cost over the net identifiable tangible and intangible assets, or goodwill of AMC amounted to € 76.8 and through December 31, 2001, was amortized on a straight-line basis over 15 years. Effective January 1, 2002, with the adoption of SFAS No. 142, the Group is no longer amortizing goodwill and is instead testing it for impairment at least annually. See Note 2(g) for further information regarding the adoption of this standard and the related goodwill tests. |
| | | |
| | | The results of this investment have been included in the Group’s consolidated results of operations from the date of acquisition. The purchase of AMC was accounted for under the purchase method of accounting. The proforma effect assuming the acquisition took place at the beginning of 2000 would not have had a material effect on the Group’s net income or net income per share. |
F-11
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 1. | COMPANY’S FORMATION AND OPERATIONS (Continued): |
| | | |
| | | AMC holds a licence to operate a GSM 900 network in Albania and, through January 2002, was the sole provider of mobile telecommunications services in Albania. In February 2001, a second license to operate a GSM 900 network in Albania was granted. |
| | | |
| | (e) | Globul: Globul, OTE’s wholly owned subsidiary, was incorporated during 2001 in order to provide mobile telecommunication services in the Republic of Bulgaria. In this respect, a GSM license granted to OTE on January 11, 2001 by the Bulgarian State Telecommunications Commission for a consideration of € 144.2, was transferred to Globul at cost, such license being amortized over its term of fifteen years. |
| | | |
| | (f) | MTS: MTS was incorporated in Skopje on November 20, 2001, as OTE’s wholly owned subsidiary, for the purpose of providing mobile telecommunication services in the Former Yugoslav Republic of Macedonia. In this respect, and under the terms of the Concession Agreement published as a decision of the Minister of the Transport and Communications of the Former Yugoslav Republic of Macedonia, MTS was granted a GSM license for a consideration of € 28.5 for a term of 22 years. The amortization of the license will commence once the related network is complete and operational. Out of this amount, € 15.7 was paid on November 26, 2001 and the remaining amount of € 12.8 was held in escrow, to account for possible challenges to the validity of the award which was pending before competent courts. Following, a verdict of the Supreme Court of the Republic of Macedonia issued in June 2002, the funds held in escrow account were released and the balance of the consideration was paid. |
| | | |
| | (g) | OTE Leasing: On December 11, 2001, OTE disposed of its wholly owned subsidiary, OTE Leasing, to Piraeus Financial Leasing S.A., a subsidiary of Piraeus Bank S.A. for a consideration of € 21. The results of OTE Leasing up to the date of its disposal are included in the Group’s consolidated results of operations. Out of the sale proceeds, € 5.9 was collected in cash and the balance of € 15 in shares in Piraeus Bank S.A. based on their fair value at that date. These shares were classified as available for sale securities and are included under the caption “Available-for-sale marketable securities” in the accompanying 2001 and 2002 consolidated balance sheets. As a result of this sale, OTE recognized a pre-tax gain of € 0.1, which is included in “Other income / (expense)” in the 2001 consolidated statement of operations (see also Note 16). The disposal of OTE Leasing had no material effect on the Group’s financial position or results of operations. |
| | | |
| | (h) | COSMO-ONE: In 2001, the Group sold a 9.87% of its participating interest in COSMO-ONE for a consideration of € 1.1. This sale resulted to a pre-tax gain of € 0.21. Furthermore, in 2001, the Group did not exercise its preemptive rights in COSMO-ONE’s share capital increase, and, accordingly, its interest therein decreased by a further 10.34%. After the above noted transactions OTE’s participating interest in COSMO-ONE fell from 61.54% in 2000 to 41.33%. OTE maintained control of COSMO-ONE since 26% is held by itself, and 26% is held by Cosmote. |
| | | |
| | (i) | OTE MTS Holding B.V.: OTE MTS Holding B.V., OTE’s wholly owned subsidiary, was incorporated during 2001 for the purpose of acquiring OTE’s interest in MTS (See (f) above). |
| | | |
| | (j) | OTE AUSTRIA HOLDING GMBH: OTE AUSTRIA HOLDING GMBH, OTE’s wholly owned subsidiary, was incorporated during 2001 under the laws of Austria, for the purpose of acquiring OTE’s interest in Globul (See (e) above). |
F-12
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 1. | COMPANY’S FORMATION AND OPERATIONS (Continued): |
| | | |
| | (k) | Hellas Sat Consortium Limited: Hellas Sat Consortium Limited was incorporated in Cyprus on August 9, 2001 as a limited liability company. In 2002, OTE increased its participation in Hellas Sat Consortium Limited from 25% to 85% through a share capital increase of approximately € 40.2. The share capital increase did not generate any goodwill since the Company will commence operations in 2003. |
| | | |
| | | Hellas Sat Consortium Limited is to provide space segment capacity, telecommunication and broadcast services through its own satellite. The satellite was successfully launched into orbit on May 14, 2003. |
| | | |
| | | |
| 2. | SIGNIFICANT ACCOUNTING POLICIES: |
| | | |
| | (a) | Principles of Consolidation: The accompanying consolidated financial statements include the accounts of OTE and all subsidiaries where OTE has control. Control is presumed to exist when OTE through direct or indirect ownership retains the majority of voting interest or has the power to control the Board of the investee. |
| | | |
| | | All material intercompany balances and transactions and any intercompany profit or loss on assets remaining within the Group, have been eliminated in the accompanying consolidated financial statements. |
| | | |
| | | The Group’s investments in other significant entities, in which the Group exercises significant influence, are accounted for using the equity method. Under this method the investment is carried at cost, and is adjusted to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition and is adjusted for impairment whenever facts and circumstances determine that a decline in fair value below the cost basis is other than temporary. The amount of the adjustment is included in the determination of net income by the investor and such amount reflects adjustments similar to those made in preparing consolidated financial statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of acquisition. The investment of an investor is also adjusted to reflect the investor’s share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. |
| | | |
| | | Gains or losses arising from changes in the equity of a subsidiary due to issuances by that subsidiary of its own stock, are recorded in income by the Group, and are presented as a separate line item in “Other income/(expense)” in the consolidated statements of operations. If those issuances of stock by the subsidiary are connected with corporate reorganizations contemplated or planned by the Group, the gains or losses generated in the transaction are accounted for as capital transactions and recognized in “Paid-in surplus” in the consolidated financial statements. |
| | | |
| | | Investments in which the Group does not exercise significant influence are accounted for at cost and adjusted for impairment whenever facts and circumstances determine that a decline in fair value below the cost basis is other than temporary. |
| | | |
| | (b) | Basis of Financial Statements: OTE maintains its accounting records and publishes its statutory financial statements pursuant to the Greek tax and corporate regulations and has made certain adjustments to these records to present the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). |
F-13
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | (c) | Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| | | |
| | (d) | Foreign Currency Translation: Effective January 1, 2001 and pursuant to the Treaty for the European Union, Greece joined the Economic and Monetary Union (E.M.U.). Accordingly, the rate for the Greek Drachmae against the Euro (€) was fixed at Drs. 340.75: € 1.00. Effective January 1, 2002, the official currency for all E.M.U. member states is the Euro. Accordingly, as of January 1, 2002, OTE’s functional currency is the Euro. Transactions involving other currencies are translated into Euro (or Greek Drachmae through December 31, 2001) using the exchange rates which are in effect at the time of the transactions. At the balance sheet dates, monetary assets and liabilities, which are denominated in other currencies, are adjusted to reflect the current exchange rates. Gains or losses resulting from foreign currency remeasurement are reflected in the accompanying consolidated statements of operations. |
| | | |
| | | Except for operations in highly inflationary economies, where the financial statements are remeasured as if the reporting currency of OTE had been the functional currency of the subsidiary, the functional currency of the Group’s operations outside of Greece is the local country’s foreign currency. Consequently, assets and liabilities of operations outside Greece are translated into Euro (or Greek Drachmae through December 31, 2001) using exchange rates at the end of each reporting period. Revenues and expenses are translated at the average exchange rates prevailing during the period. Cumulative translation gains and losses are reported as cumulative translation adjustment in “Accumulated Other Comprehensive Income/(Loss)”, a separate component of shareholders’ equity. Transaction gains and losses are reported in the consolidated statements of operations. |
| | | |
| | (e) | Telecommunication Licences: Pursuant to the New Telecommunications Law 2867/2000 and Decision 229/26/9-10-2001 issued by the Greek Telecommunications and Postal Commission (“EETT”) OTE was granted a license for providing telecommunication services. In accordance with the Ministerial Decision 92093/29-12-1995, certain lump sum and annual charges were determined, which are recorded on an accrual basis. |
| | | |
| | | Furthermore, in accordance with the above-mentioned Ministerial Decision, a lump sum charge of € 41.9 for providing terrestrial mobile telecommunication services was determined. During 1996, OTE established Cosmote, for the purpose of providing terrestrial mobile telecommunication services. According to Law 2257/94 (as amended by Law 2465/97), the license for providing mobile telecommunication services was transferred, at carryover basis, to this subsidiary in February 1997. This license is being amortized over its term of 24 years. |
| | | |
| | | In December 2000, two licences for fixed wireless access services were granted to OTE, the first covering the 3.5 GHz range of frequencies and the second covering the 25GHz range of frequencies, for a total consideration of € 11.8. These licences are being amortized over their term of 15 years. |
F-14
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
F-15
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | | On August 6, 2001, Cosmote was awarded a third generation license (“the 3G License”) for a term of twenty (20) years at a cost of approximately € 161.4. Of this amount, € 112.9 was paid in August 2001, while the remaining balance of € 48.5 will be paid, interest-free, in three equal annual installments, commencing in December 2005. The 3G License and the related outstanding liability are presented in the accompanying consolidated balance sheets at their discounted present values (fair value). The discounted present value of the outstanding liability at the acquisition date of the 3G License amounted to approximately € 35.5, which has been increased with the notional interest through December 31, 2001 and 2002, of approximately € 0.9 and € 5.9. The total liability at December 31, 2001 and 2002, amounted to approximately € 36.4 and € 42.3, respectively and is included in “Other long-term liabilities” in the accompanying consolidated balance sheets. The notional interest of approximately € 0.9 and € 5.9 referred to above is included in interest expense in the accompanying 2001 and 2002 consolidated statements of operations. The discounted present value of the 3G License at the acquisition date amounted to approximately € 155.3. Interest is being capitalized to the cost of the 3G License during the related network’s construction period. Interest capitalized through December 31, 2001 and 2002, amounted to approximately € 2.9 and € 4.1, respectively. Furthermore, amortization of the 3G License will commence only once the related network is complete and operational. |
| | | |
| | | On August 29, 2002, Cosmote was awarded a GSM 900 License for a term of fifteen (15) years at a cost of € 38.2. |
| | | |
| | (f) | Materials and Supplies: Materials and supplies are stated at the lower of cost or market. The cost is determined using the weighted average cost method. A reserve is established when such items are determined to be technologically obsolete or slow moving. |
| | | |
| | (g) | Goodwill: Goodwill is the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations accounted for as a purchase. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over periods not exceeding twenty (20) years. Effective with the adoption of SFAS No. 142 on January 1, 2002, the Group is no longer amortizing goodwill, and is instead testing it for impairment at least annually. The goodwill impairment test is a two-step process that requires goodwill to be allocated to reporting units. In the first step, the fair value of the reporting unit is compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment may exist, and the second step of the test is performed. In the second step, the implied fair value of the goodwill is compared to the carrying value of the goodwill and an impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the goodwill. As a result of the adoption of SFAS No. 142, the Group has re-assessed the classification of its previously acquired goodwill. The assessment did not result in any adjustments to previously recorded amounts. The completion of the first step of the goodwill impairment test, indicated potential impairment of goodwill relating to Armentel. Consequently, the Group completed the second step of the goodwill impairment test, as a result of which, unamortized goodwill of Armentel of € 62.0 as of January 1, 2002, net of the related deferred income tax of € 21.7 was written off and reflected as “Cumulative effect of accounting change for SFAS No. 142, net of income taxes”, in the accompanying 2002 consolidated statement of operations. The Group has also acquired goodwill of approximately € 70 on AMC included in segment “All other”. The fair value of its reporting unit was above the carrying amount both at January 1 and December 31, 2002. |
F-16
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | | The following table summarizes and reconciles net income for the years ended December 31, 2000, 2001 and 2002, adjusted to exclude amortization expense recognized in such periods related to goodwill that is no longer amortized: |
| | | Year ended December 31, |
| | |
|
| | | 2000 | | 2001 | | 2002 |
| | |
| |
| |
|
| | Reported net income before cumulative effect of accounting change | 628.7 | | 395.2 | | 386.1 |
| | | | | | | |
| | Add back after tax amount for goodwill amortization | 17.7 | | 20.6 | | - |
| | |
| |
| |
|
| | Adjusted net income before cumulative effect of accounting change | 646.4 | | 415.8 | | 386.1 |
| | |
| |
| |
|
| | Basic and diluted income per share: | | | | | |
| | | | | | | |
| | Reported net income before cumulative effect of accounting change | 1.30 | | 0.80 | | 0.80 |
| | | | | | | |
| | Add back after tax amount for goodwill amortization | 0.04 | | 0.04 | | - |
| | |
| |
| |
|
| | Adjusted basic and diluted net income per share before cumulative effect of accounting change | 1.34 | | 0.84 | | 0.80 |
| | |
| |
| |
|
| | (h) | Impairment of Long-Lived Assets: The U.S. Financial Accounting Standards Board issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long lived assets and supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets to be Disposed of” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”. The Group adopted SFAS No. 144 as of January 1, 2002, without any effect on the Group’s financial position and results of operations. The standard requires that long-lived assets and certain identifiable intangibles held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss for an asset held for use should be recognized, when the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount. Conditions which may indicate that an impairment exits include an economic downturn in a market or a change in the assessment of future operations. Measurement of the impairment loss is based on the fair value of the asset, which is computed using discounted cash flows. |
F-17
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | (i) | Telecommunication Property, Plant and Equipment: Telecommunication property, plant and equipment are stated at cost, net of subsidies received primarily from the EU, plus interest costs incurred during periods of construction. |
| | | |
| | | Newly constructed assets are added to property, plant and equipment at cost which includes direct technical payroll costs related to construction (inclusive of related employer contributions) and applicable general overhead costs. Repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets retired or sold are removed from the accounts at the time of sale or retirement, and any gain or loss is included in the accompanying consolidated statements of operations. An impairment loss is recognized when the estimated expected future cash flows (undiscounted and without interest) are less than the carrying amount of the asset under SFAS No. 144. |
| | | |
| | (j) | Depreciation: Depreciation is computed based on the straight-line method at rates, which approximate average estimated economic useful lives. |
| | | |
| | (k) | Reserve for Staff Retirement Indemnities and Youth Account: Retirement and Youth Account obligations are calculated at the discounted value of the future retirement benefits and benefits to children of OTE’s employees deemed to have accrued at year-end, based on the employees earning retirement and Youth Account benefit rights steadily throughout the working period. Retirement and Youth Account obligations are calculated on the basis of financial and actuarial assumptions detailed in Note 12. Net pension costs for the period are included in payroll in the accompanying consolidated statements of operations and consist of the present value of benefits earned in the year, interest cost on the benefits obligation, prior service cost and actuarial gains or losses. Prior service costs are recognized on a straight-line basis over the average remaining service period of the employees expected to receive benefits under the plan. Unrecognised gains or losses are recognized over the average remaining service period of active employees and included as a component of net pension cost for a year if, as of the beginning of the year, it exceeds 10% of the projected benefit obligation. The retirement and Youth Account benefit obligations are not funded. Contributions that are related with employees who retire under the voluntary retirement program are recognized when employees accept the offer and the amounts can be reasonably estimated. |
| | | |
| | (l) | Income Taxes: Income taxes have been accounted for using the liability method in accordance with SFAS No. 109 “Accounting for Income Taxes”. Deferred income taxes have been provided for the tax effects of temporary differences between financial reporting 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 recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. |
| | | |
| | (m) | Cash and Cash Equivalents: The Group considers time deposits and other highly liquid investments with original maturities of three months or less to be cash equivalents. Restricted cash is excluded from cash and cash equivalents for cash flow purposes. |
F-18
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | (n) | Advertising Costs: Advertising costs are expensed as incurred (see Note 20). |
| | | |
| | (o) | Research and Development Costs: Research and development costs are expensed as incurred. Such costs for the years ended December 31, 2000, 2001 and 2002 amounted to € 7.9, € 5.2 and € 9.9 respectively, and are included in “Other operating expenses” in the accompanying consolidated statements of operations. |
| | | |
| | (p) | State’s Participation in Social Costs: Up to December 31, 2000, the Greek State, in accordance with Law 2257/94, participated in costs incurred by OTE in providing telecommunication services to rural and underdeveloped areas (social costs). The State’s participation in social costs incurred by OTE for 2000 amounted to € 32.3 per year, which amount is included in “Other revenues” in the accompanying 2000 consolidated statement of operations. The respective receivable as of December 31, 2000, has been offset against the dividend which was distributed to the State in 2001. As of January 1, 2001, the effective date of the liberalization of the public fixed switched voice telephony, the Greek State does not participate in such social costs. |
| | | |
| | (q) | Recognition of Revenues and Expenses: Fixed revenues primarily consist of connection and subscription fees, exchange network and facilities usage charges, other value added communication services fees, and sales of handsets and accessories. Revenues are recognized as follows: |
| | • | Connection charges: Connection charges for the fixed network are deferred and amortized to income over the estimated service life of a subscriber’s life. No connection fees are charged for mobile services. |
| | | |
| | • | Monthly network service fees: Revenues related to the monthly network service fees are recognized in the month that the telecommunication service is provided. |
| | | |
| | • | Usage Charges and Value Added Services Fees: Call fees consist of fees based on airtime and traffic generated by the caller, the destination of the call and the service utilized. Fees are based on traffic, usage of airtime or volume of data transmitted for value added communication services. Revenues for usage charges and value added communication services are recognized in the period when the services are provided. Revenues from outgoing calls made by OTE’s subscribers to subscribers of mobile telephony operators are presented at their gross amount in the consolidated statements of operations as the credit and collection risk remains solely with OTE. Interconnection fees for mobile-to-mobile calls are recorded at their contractual amounts, in line with Accounting Principles Board (“APB”) Opinion No. 29. Unbilled revenues from the billing cycle date to the end of each period are estimated based on traffic. The accrued unbilled revenues for services provided were approximately € 367.5 and € 239.1 as of December 31, 2001 and 2002, respectively and are included in “Accounts receivable” in the accompanying consolidated balance sheets. |
| | | |
| | | Revenues from the sale of pre-paid airtime cards and the pre-paid airtime, net of discounts allowed, included in the Group’s pre-paid services packages, are recognized based on usage. Unused air-time is included in “Deferred revenue” in the accompanying consolidated balance sheets. The entire balance of deferred revenue is realized within the following year. |
F-19
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| |
| | | Airtime and acquisition commission costs due to the Group’s Master Dealers for each subscriber acquired through their network are expensed as incurred. Commissions paid for each contract subscriber acquired by the Master Dealers as well as bonuses paid to Master Dealers in respect of contract subscribers who renew their annual contracts, are deferred and amortized to expense over the contract period. Bonuses for the achievement of mutually agreed targets and commissions based on revenues billed to each subscriber acquired by the Master Dealers are expensed as incurred. |
| | | |
| | • | Handsets and Accessories: Revenues from the sale of handsets and accessories, net of discounts allowed, are recognized upon shipment to dealers or at point-of-sale (in the case of sales through the Group’s retail outlets). |
| | | |
| | | Effective January 1, 2002, the Company adopted the Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products”. The adoption of Issue No. 01-9 by the Group did not have any effect on its consolidated statements of operations for the years presented. |
| | | |
| | (r) | Concentrations of Credit Risk and Allowance for Doubtful Accounts: Financial assets that potentially subject the Group to concentrations of credit risk are trade accounts receivable. Due to the large volume and diversity of the Group’s customer base, concentrations of credit risk with respect to trade accounts receivable are limited. At each reporting period/date, all accounts receivable inclusive of unbilled revenue are assessed based on historical trends and statistical information and a provision is recorded for the probable and reasonably estimable loss for these accounts. The balance of such allowance for doubtful accounts is adjusted by recording a charge to the consolidated statement of operations of the reporting period. Any amount written-off with respect to customer account balances is charged against the existing allowance for doubtful accounts. All accounts receivable for which collection is not considered probable are written-off. |
| | | |
| | (s) | Earnings per Share: Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during each year. In accordance with SFAS No. 128, the effect of options outstanding at December 31, 2001 and 2002, has been computed using the treasury stock method. The number of shares granted under the Share Option Plans during 2000, 2001 and 2002, did not affect diluted earnings per share, because the impact stock options was antidilutive. The difference between outstanding shares and weighted average number of shares outstanding used for both basic and diluted earnings per share is attributable to purchases of treasury stock for 2000 and 2001. There were no treasury stock transactions in 2002. |
| | | |
| | (t) | Stock-Based Compensation: The Group accounts for stock-based awards to employees using the intrinsic value method prescribed in APB Opinion No. 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 Group’s stock on the measurement date over the amount an employee must pay to acquire the stock (the “intrinsic value”), and is recognized ratably over the vesting period. The intrinsic value of the options for which the measurement date has not been reached is measured on the basis of the current market value of the Group’s stock at the end of each period. |
F-20
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | | The following table illustrates the effect on net income and earnings per share if the Group had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation. |
| | | Year ended December 31, |
| | |
| |
| | | 2000 | | | 2001 | | | 2002 | |
| | |
| | |
| | |
| |
| Net Income as reported | | 628.7 | | | 395.2 | | | 345.8 | |
| | | | | | | | | | |
| Add: Stock-based employee compensation expense included in net income | | - | | | 1.5 | | | 8.1 | |
| | | | | | | | | | |
| Deduct: Total stock-based compensation expense determined under fair value based method for all awards | | (0.2 | ) | | (4.0 | ) | | (38.9 | ) |
| | | | | | | | | | |
| Minority interests for Cosmote plans | | - | | | 1.0 | | | 12.6 | |
| | | | | | | | | | |
| | |
| | |
| | |
| |
| Pro forma net income | | 628.5 | | | 393.7 | | | 327.6 | |
| | |
| | |
| | |
| |
| | | | | | | | | | |
| Earning per share – Basic and diluted: | | | | | | | | | |
| Basic – as reported | | 1.3 | | | 0.8 | | | 0.7 | |
| Basic – pro forma | | 1.3 | | | 0.8 | | | 0.7 | |
| | (u) | Available-for-sale marketable securities: The Group has investments in equity securities, which are traded on the Athens Stock Exchange. These investments have been classified as available-for-sale and are carried at their fair value with the unrealized holding gains and losses reflected under “Other comprehensive income” in the accompanying consolidated statements of shareholders’ equity. Realized gains and losses, dividends and declines in value judged to be other than temporary are included in “Other income/(expense)” in the accompanying consolidated statements of operations. The fair value of these securities was below cost throughout 2002. The Group considered such reduction in value to be other than temporary, and consequently, recognized in the accompanying 2002 consolidated statement of operations a loss of € 8. |
| | | |
| | (v) | Borrowing Costs: Underwriting, legal and other direct costs incurred in connection with the issuance of long-term debt are treated as a deferred charge, classified as “Other assets”, and amortized using the effective interest rate method over the life of the debt. Amortization for the years ended December 31, 2000, 2001 and 2002, amounted to € 0.6, € 0.7 and € 0.7, respectively and is included in “Interest expense” in the accompanying consolidated statements of operations. |
| | | |
| | (w) | Accumulated Other Comprehensive Loss: As of December 31, 2000 and 2001, accumulated other comprehensive loss amounted to € 74.7 and € 45.2, respectively, mainly comprising of foreign currency translation and unrealized gain on available-for-sale securities. As of December 31, 2002, accumulated other comprehensive loss amounted to € 85.7, including foreign currency translation loss of € 52.8 and the additional minimum liability for Youth Account of € 32.9, net of € 17.7 tax. |
F-21
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | (x) | Derivative Financial Instruments: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivatives’ fair value recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 as amended by SFAS No. 138, is effective for fiscal years beginning after June 15, 2000, and cannot be applied retroactively. During fiscal year 2000, the Group did not engage in any transaction with derivative instruments or had any hedging activities, and as such there was no impact on adoption of the Standard. In fiscal year 2001, the Group entered into interest rate swaps to cover the change in the fair value of its fixed-rate Eurobond (see Note 11). The Group has a policy of entering into such contracts with parties that meet stringent qualifications and, given the high level of credit quality of its derivative counter parties, the Group does not believe it is necessary to obtain collateral arrangements. For financial reporting purposes, these derivative instruments were not designated as hedges, as they did not meet the applicable criteria set by SFAS No. 133. The fair value of such interest rate swaps outstanding as of December 31, 2001 and 2002, amounted to € 11.3 and € 25.3, respectively and is included in “Other current assets” in the accompanying consolidated balance sheets. Net loss for 2001 and net gain for 2002 resulted from these derivative instruments amounted to € 7.1 and € 14.0, respectively, and are included in “Other income/(expense)” in the accompanying 2001 and 2002 consolidated statements of operations. |
| | | |
| | | In fiscal year 2002, Cosmote, the Group’s consolidated subsidiary, entered into cross currency swaps to hedge against changes in the fair value of certain of its foreign currency denominated debt relating to changes in foreign currency exchange rate. These swaps qualified for hedge accounting as fair value hedges and their fair value at December 31, 2002, of approximately € 13 is recorded as a derivative liability and included in other long-term liabilities in the accompanying 2002 consolidated financial statements. |
| | | |
| | (y) | Recent Accounting Pronouncements: Recent Statements of Financial Accounting Standards issued by the Financial Accounting Standards Board (“FASB”) are summarized as follows: |
| | | |
| | (i) | SFAS No. 143, “Accounting for Asset Retirement Obligations”, relates to financial accounting and reporting requirements associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 is not expected to have material effect on the Group’s consolidated financial statements. |
| | | |
| | (ii) | SFAS No. 145: In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, Amendment of FASB Statement No. 13, and Technical Corrections”, which is effective for fiscal years beginning after May 15, 2002. This statement requires most gains and losses from extinguishment of debt to be presented as a gain or loss from continuing operations rather than as an extraordinary item. APB Opinion No. 30, “Reporting the Results of Operations, Reporting Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” will now be used to classify those gains and losses. This Statement also amends FASB No. 13, which requires that certain capital lease modifications be treated as a sale-leaseback transaction. Adoption of SFAS No. 145 is not expected to have a material effect on the Group’s consolidated financial statements. |
F-22
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | (iii) | SFAS No. 146: In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 replaces EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to exit an Activity” (including Certain Costs Incurred in a Restructuring) and changes the timing of recognition for certain exit costs associated with restructuring activities. Under SFAS No. 146 certain exit costs would be recognized over the period in which the restructuring activities occur. Currently, exit costs are recognized when the Group commits to a restructuring plan. SFAS No. 146 is applied prospectively to exit or disposal activities initiated after December 31, 2002, though early adoption is allowed. The Group will adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material effect on the Group’s consolidated financial statements. |
| | | |
| | (iv) | FASB Interpretation No. 45 (“FIN No. 45”): In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other”. FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under the guarantee. The disclosure provisions of FIN No. 45 are effective for financial statements of annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are affective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Adoption of FIN No. 45 is not expected to have a significant effect on the Group’s consolidated financial statements. |
| | | |
| | (v) | In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure”. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the proforma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the proforma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Group’s fiscal year 2002. The Group intends to continue to account for stock-based compensation based on the provisions of APB Opinion No. 25 and does not expect SFAS No. 148 to have a material effect on the Group’s financial position or results of operations. Refer to the “Stock-Based Compensation” section in Notes 2 and 17 for disclosures related to stock-based compensation. |
F-23
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 2. | SIGNIFICANT ACCOUNTING POLICIES (Continued): |
| | | |
| | (z) | Presentation Changes: The 2000 and 2001 consolidated accounts previously issued in Greek Drachma have been restated using the Euro as the reporting currency. The conversion rate effective on December 31, 2001 was the rate of Drachmas 340.75 per 1.00 Euro. The financial statements as reported in Euro depict the same trends as would have been presented if the Group had continued to present financial statements in Drachmas. |
| | | |
| 3. | TRANSLATIONS OF EURO AMOUNTS INTO U.S. DOLLARS: |
| | | |
| | As explained in Note 2(d), effective January 1, 2002, the Group’s measurement and reporting currency is the Euro. The translations of the Euro amounts into U.S. Dollars at the rate of U.S. $ 1.18 to € 1.00 are included solely for the convenience of the reader. The U.S. Dollar convenience exchange rate is computed based on the noon buying rate in New York for cable transfers in Euro, as certified for customs purposes by the Federal Reserve Bank of New York on June 17, 2003. The convenience translation should not be construed as representations that the Euro amounts have been, could have been, or could in the future be converted into U.S. Dollars at this or any other rate of exchange. |
| | | |
| 4. | ACCOUNTS RECEIVABLE: |
| | | |
| | Accounts receivable are analyzed as follows: |
| | December 31, | |
| |
| |
| | 2001 | | | 2002 | |
| |
| | |
| |
| • Subscribers | 631.2 | | | 906.8 | |
| • International traffic | 43.2 | | | 45.3 | |
| • Other accounts receivable | 80.7 | | | 117.0 | |
| |
| | |
| |
| | 755.1 | | | 1,069.1 | |
| Less- Allowance for doubtful accounts | (124.2 | ) | | (143.7 | ) |
| |
| | |
| |
| | 630.9 | | | 925.4 | |
| Accrued unbilled revenues (see Note 2 (q)) | 367.5 | | | 239.1 | |
| |
| | |
| |
| | 998.4 | | | 1,164.5 | |
| |
| | |
| |
| | The movement of the allowance for doubtful accounts receivable during the years ended December 31, 2000, 2001 and 2002 was as follows: |
| | | Balance, beginning of year | | Balance from newly acquired subsidiary | | Balance from subsidiary deconsolidated (see Note 1(g)) | | | Expensed | | Utilized | | | Balance,
end
of year |
| | |
| |
| |
| | |
| |
| | |
|
| 2000 | | 65.3 | | 3.8 | | - | | | 87.8 | | (50.7 | ) | | 106.2 |
| 2001 | | 106.2 | | - | | (5.1 | ) | | 83.1 | | (60.0 | ) | | 124.2 |
| 2002 | | 124.2 | | - | | - | | | 89.8 | | (70.3 | ) | | 143.7 |
F-24
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 5. | DUE FROM RELATED PARTIES: |
| | |
| | The Greek State, as a principal shareholder of OTE, is a related party to the Group. The Group, in the normal course of business, provides telecommunication services to State Entities and Organizations. Furthermore, until December 31, 2000, the State participated in costs incurred by OTE in providing telecommunication services to rural and underdeveloped areas (see Note 2(p)). |
| | |
| | Amounts due from related parties are as follows: |
| | December 31, |
| |
|
| | 2001 | | 2002 |
| |
| |
|
| Accounts receivable from State Entities and Organizations | 122.1 | | 139.3 |
| Romtelecom S.A. | 50.4 | | 60.9 |
| |
| |
|
| | 172.5 | | 200.2 |
| |
| |
|
| | Revenues generated from State Entities and Organizations amounted to approximately 5% of total revenues for each of the three years in the period ended December 31, 2002.
Amounts due from Romtelecom S.A. relate to management fees billed to it by OTE International Investments Ltd., based on the transaction documents signed upon OTE’s initial acquisition of the 35% interest in Romtelecom S.A. (see Note 6(a)). |
| | |
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS: |
| | |
| | OTE’s investments are analyzed as follows: |
| | |
| | December 31, |
| |
|
| | 2001 | | 2002 |
| |
| |
|
| (a) Investments in and advances to associates | 653.5 | | 523.9 |
| (b) Investments in satellite companies and organizations | 37.3 | | 37.3 |
| |
| |
|
| | 690.8 | | 561.2 |
| |
| |
|
| | (a) | Investments in and advances to associates: |
| | | |
| | | OTE’s investments in and advances to associates are analyzed as follows: |
| | December 31, |
| |
|
| | 2001 | | 2002 |
| |
| |
|
| Telekom Srbija a.d. | 269.0 | | 173.1 |
| Romtelecom S.A. | 363.7 | | 341.4 |
| Other investments | 20.8 | | 9.4 |
| |
| |
|
| | 653.5 | | 523.9 |
| |
| |
|
| | (i) | TELEKOM SRBIJA a.d. (“Telekom Srbija”): During June 1997, OTE acquired a 20% interest in Telekom Srbija, a company which was established on May 23, 1997, through the contribution of the telecommunications sector of the Public Enterprise of PTT Traffic, Serbia effective June 1, 1997. The acquisition cost amounted to € 312.0. The purchase of Telekom Srbija was accounted for under the purchase method of accounting. The resulting excess of the acquisition cost over the net identifiable tangible and intangible assets, or goodwill of Telekom Srbija, which amounted to € 80.1 and was amortized on a straight-line basis over twenty (20) years, has been written off in 2002 through the impairment charge described below. |
F-25
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
F-26
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| |
| | | On November 25, 1997, OTE granted a loan of DEM 25 million (€ 12.5) to Telekom Srbija for its working capital requirements. This loan bears interest at the European Interbank Offering Rate (“EURIBOR”) plus 10%. After consecutive extensions to the repayment schedule of this loan, negotiations for its further extension are still in process. |
| | | |
| | | Condensed financial statements for Telekom Srbija for the two year period ended December 31, 2002 are as follows: |
Condensed balance sheets
| December 31, |
| |
|
ASSETS | 2001 | | 2002 |
|
| |
|
| Current assets | 155.6 | | 273.6 |
| Property, plant and equipment, net | 919.1 | | 1,009.6 |
| Other non current assets | 92.1 | | 62.0 |
| |
| |
|
TOTAL ASSETS | 1,166.8 | | 1,345.2 |
| |
| |
|
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | |
| | | | |
| Other long-term liabilities | 5.6 | | 34.9 |
| Current liabilities | 198.6 | | 250.8 |
| Long-term debt | 19.7 | | 43.3 |
| Shareholders’ equity | 942.9 | | 1,016.2 |
| |
| |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 1,166.8 | | 1,345.2 |
| |
| |
|
Condensed statements of operations
| December 31, | |
| |
| |
| | 2000 | | | 2001 | | | 2002 | |
| |
| | |
| | |
| |
| Operating revenues | 365.4 | | | 438.0 | | | 506.7 | |
| Operating expenses | (303.8 | ) | | (387.4 | ) | | (415.3 | ) |
| |
| | |
| | |
| |
| | | | | | | | | |
| Operating profit | 61.6 | | | 50.6 | | | 91.4 | |
| | | | | | | | | |
| Other expense, net | (123.3 | ) | | (24.2 | ) | | (18.2 | ) |
| |
| | |
| | |
| |
Net income | (61.7 | ) | | 26.4 | | | 73.2 | |
| |
| | |
| | |
| |
| | | In December 2000, the National Bank of Yugoslavia devalued the Serban Dinar by approximately 83%. As a result, foreign exchange losses of approximately €102.7 were incurred and charged to the 2000 statement of operations of Telekom Srbija. |
| | | |
| | | The corporate income tax rate is 20% on profits in accordance with the Federal Republic of Yugoslavia’s tax and accounting legislation. Under the present tax legislation, Telekom Srbija is eligible for a 100% reduction in the effective corporate tax rate for a three-year period and for foreign shareholders’ investments for a five-year period, which began with the commencement of business on June 1, 1997. However, taxes have been provided on OTE’s share of the undistributed profits of Telekom Srbija at a rate of 35% as such taxes will be payable in Greece upon distribution of such profits. |
F-27
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| |
| | | Dividend distributions from Serbia to Greece are subject to a withholding tax of 20%. |
| | | |
| | | Due to the consequences of the NATO military actions conducted against Yugoslavia in 1999 and the current implementation of the United Nations’ Security Council Resolution 1244 relating to the situation in Kosovo and Metohija, Telekom Srbija does not have control over the telecommunication activities in Kosovo and Metohija. |
| | | |
| | | In late 2002, Telecom Italia, the other minority shareholder, which holds 29% of Telekom Srbija, forwarded to OTE a copy of an offer made to Telecom Italia by the Serbian PTT, and which it has accepted, for the acquisition by the latter of Telecom Italia’s shareholding in Telekom Srbija, in order to give OTE the opportunity to elect whether or not to exercise its pre-emption right to purchase Telecom Italia’s shareholding in Telekom Srbija. In this respect, the Minister of Telecommunications of Serbia announced that the Serbian Government would seek to veto OTE’s pre-emption right.
In response to the above mentioned developments, OTE, in May 2003, served arbitration notices on all related parties. |
| | | |
| | | The withdrawal of Telecom Italia from Telekom Srbija, is expected to reduce OTE’s ability to influence the management of this company. Furthermore, since its acquisition, OTE, has received no dividends from Telekom Srbija. These factors and an independent valuation of Telekom Srbija indicated a decline in its value, which was considered by management to be other than temporary. As a result, OTE recorded an impairment charge of € 114.9, which is included in the accompanying 2002 consolidated statement of operations and reduced the carrying amount of the investment to its fair value. |
| | | |
| | (ii) | ROMTELECOM S.A.: On December 30, 1998, OTE, through its subsidiary OTE International Investments Ltd, acquired a 35% interest in Romtelecom S.A., a company which was established on November 1, 1997, through the contribution of the business and substantially all of the assets and liabilities of Romtelecom RA. |
F-28
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | | (the former state telecommunication entity). The acquisition cost amounted to approximately € 557.1 (U.S. $ 675 million) and was paid on December 30, 1998. The resulting excess of the acquisition cost over the net identifiable tangible and intangible assets, or goodwill of Romtelecom, which amounted to € 152.3 and was amortized on a straight-line basis over 20 years was written off in 2001 through the impairment charge described below. |
| | | |
| | | Up to December 31, 1999, the corporate income tax rate in Romania was 38% on profits in accordance with the Republic of Romania’s tax and accounting legislation. Effective January 1, 2000, the income tax rate was reduced to 25%. The effect of the reduction in the tax rate has been accounted for in Romtelecom’s financial statements. However, the difference between the Company’s and Romtelecom’s tax rate (10%) has been provided on the Company’s share of the undistributed profits of Romtelecom. Dividends remitted to a foreign entity are subject to a 10% withholding tax. |
F-29
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | |
| | | Condensed consolidated financial statements for Romtelecom are as follows: |
| Condensed consolidated balance sheets | | | |
| | December 31, |
| |
|
ASSETS | 2001 | | 2002 |
|
| |
|
| Current assets | 303.4 | | 221.2 |
| Property, plant and equipment, net | 2,045.0 | | 1,939.8 |
| Other non-current assets | 26.7 | | 83.5 |
| |
| |
|
TOTAL ASSETS | 2,375.1 | | 2,244.5 |
| |
| |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| | | | |
| Current liabilities | 879.8 | | 635.4 |
| Long-term debt | 168.5 | | 200.6 |
| Other long-term liabilities | 178.3 | | 325.8 |
| Shareholders’ equity | 1,148.5 | | 1,082.7 |
| |
| |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 2,375.1 | | 2,244.5 |
| |
| |
|
| Condensed consolidated statements of operations | | | | | | | | |
| | Year ended
December 31, |
| |
|
| | 2000 | | | 2001 | | | 2002 | |
| |
| | |
| | |
| |
| Operating revenues | 898.4 | | | 955.4 | | | 958.7 | |
| Operating expenses | (782.3 | ) | | (911.6 | ) | | (999.1 | ) |
| |
| | |
| | |
| |
| | 116.1 | | | 43.8 | | | (40.4 | ) |
| Other expense, net | (64.7 | ) | | (65.7 | ) | | (43.5 | ) |
| |
| | |
| | |
| |
| | 51.4 | | | (21.9 | ) | | (83.9 | ) |
| Income taxes | (40.6 | ) | | (24.6 | ) | | 18.0 | |
| |
| | |
| | |
| |
Net loss | 10.8 | | | (46.5 | ) | | (65.9 | ) |
| |
| | |
| | |
| |
| | | The major terms of the transaction documents signed between OTE and the State Ownership Fund of Romania which was then acting as the seller on behalf of the Romanian State and representing Romtelecom, were as follows: |
| | - | Share transfer restrictions on OTE for a period of five years |
| | - | Until the fifth anniversary of the agreement, OTE was not allowed to acquire additional shares without the Romanian State’s written consent, except: |
| | a) | through the subscription for new shares in proportion to OTE’s holding or, if the shares are purchased under the usufruct agreement (see below). |
| | b) | no consent was required if holding did not exceed 40%. |
F-30
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | |
| | | The usufruct agreement signed between the aforementioned parties, granted OTE up to an additional 16% voting rights, for a period of five years (expiring in December 2003), thus holding 51% of the voting rights in the ordinary general shareholders’ meetings for so long as OTE’s and the Romanian State’s interests in Romtelecom did not fall below 35% and 25%, respectively. In the event that the Romanian State’s interest in Romtelecom fell below 25%, OTE was entitled to purchase an equity interest of up to 51% in order to maintain its voting rights. |
| | | |
| | | According to Romtelecom’s statutes, OTE could not exercise its temporary 16% voting rights in extraordinary general shareholders meetings. In all extraordinary general sharehorders’ meetings the Romanian State, through the Ministry of Communications, had 65% voting rights while OTE had 35% voting rights. The extraordinary general shareholders’ meeting decided upon the pledging or mortgaging of any assets worth more than half the company’s book value, dissolution or liquidation, changing the object of the company, mergers, increasing or reducing the company’s share capital or amending the company’s statutes. The Romanian State as special shareholder also has veto power in matters affecting its national security interests. |
| | | |
| | | Telecommunications and data transmission services are of great importance to Romania for various reasons, including economic, social strategic and national security considerations. The Romanian Government has exercised and may be expected to exercise significant influence over the operations of the telecommunications sector and, consequently, Romtelecom. Furthermore, the Romanian Government, acting through the Ministry of Communications and the Competition Council, has the general authority to regulate domestic tariffs. |
| | | |
| | | OTE, given the temporary nature of its additional 16% voting rights and considering the factors described below, believed that it did not have control of the company and, consequently, has accounted for its investment in Romtelecom using the equity method. The factors considered by OTE are as follows: |
| | | |
| | • | Romtelecom’s tariff increases were dependent upon a formula defined by the Romanian State which was in place for a 3 year period from the acquisition date. However, as a result of the Romanian State’s indirect influence, tariffs have not increased to the levels allowed by the aforementioned formula. |
| | | |
| | • | Romtelecom is organized in 41 territorial divisions all of which have the legal status of a branch. OTE has not been able to centralize these divisions to a smaller number of regional centers, which would improve Romtelecom’s cost structure, as such a decision could only be taken in an extraordinary general shareholders’ meeting where OTE held only 35% of the voting rights. |
| | | |
| | • | As disclosed above, OTE was not in the position to approve an increase in Romtelecom’s share capital as such increase could only be approved by an extraordinary general shareholders’ meeting where OTE held only 35% of the voting rights. Such an increase was contemplated as part of the Restructuring Plan approved by Romtelecom’s shareholders in an ordinary general meeting held on November 26, 2001, in light of the acute cash flow difficulties encountered by the company within 2001, as described in detail below. Despite OTE’s continuous efforts, such an increase in share capital was not agreed or accepted by the Romanian State, as at December 31, 2002. |
F-31
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | |
| | • | Romtelecom’s current seven executive directorates were approved by an extraordinary general shareholders’ meeting, where OTE held only 35% of the voting rights. |
| | | |
| | • | Romtelecom’s business plan prepared at the time of the acquisition, provided that it would obtain significant borrowings, which were expected to be secured through the pledging and mortgaging of the assets. The value of such secured assets was expected to be in excess of half of the Romtelecom’s book value, as reported under its statutory financial statements. Over the past four years, Romtelecom has not obtained substantial new financing, as the Romanian State, in its position as majority shareholder, was not willing to discuss the pledging of assets or future revenues of Romtelecom.
|
| | | As of December 31, 2001, Romtelecom’s current liabilities were in excess of its current assets and, accordingly, it had breached the current ratio covenant attached to its European Bank of Reconstruction and Development (“EBRD”) facilities. These conditions indicated the existence of a material uncertainty, which may cast significant doubt on Romtelecom’s ability to continue as a going concern. |
| | | |
| | | The factors set out above and a valuation of Romtelecom indicated a decline in its value other than temporary. As a result, OTE recorded an impairment charge of € 256.3 (€ 166.6 net of tax), which is included in the accompanying 2001 consolidated statement of operations. |
| | | |
| | | In 2002, Romtelecom reported losses of € 65.9, primarily the result of an impairment charge of approximately € 76 relating to Cosmorom’s, Romtelecom’s majority owned mobile subsidiary, fixed assets. At December 31, 2002, Cosmorom’s current liabilities exceeded its current assets by approximately € 156.0 and had a negative net asset position of € 51.0. In the absence of significant financial support from its shareholders, Cosmorom will not be able to continue to operate in the foreseeable future. As of December 31, 2002, Romtelecom’s current liabilities were in excess of its current assets, and, accordingly, it has breached the current ratio covenant attached to its EBRD facilities. By letter dated June 27, 2003, EBRD confirmed that it was extending to September 30, 2003, the grace periods to cure any existing defaults under the EBRD facilities including this breach of covenant.Taking into consideration the above factors and based on a new independent valuation, OTE recorded an additional impairment charge of approximately € 1.5, which is included in the accompanying 2002 consolidated statement of operations, in connection with its investment in Romtelecom. |
| | | |
| | | On March 3, 2003, as part of OTE’s strategy to obtain control on Romtelecom in order to implement its policies, OTE International Investments Ltd. acquired an additional 19.01% in Romtelecom through: (a) the acquisition of 994,546 existing shares from the Romanian State, for $ 31 million (€28.8) and (b) the issuance of 7,783,927 newly issued shares directly from Romtelecom for $ 242.6 million |
F-32
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | | |
| | | (€229.2). In accordance with the provisions of the purchase agreement, Romtelecom capitalized debts related to OTE International Investments Ltd. of $ 98.3 million (€94.6) while the remaining $ 144.3 million (Euro €134.6) was paid-in-cash. As a result of this transaction OTE’s share in Romtelecom has increased to 54.01%, and, accordingly, OTE will start consolidating Romtelecom from the date of the transaction closing, March 3, 2003. |
| | |
The fair values of the significant assets acquired and liabilities assumed of Romtelecom, are as follows: |
| Property, plant & equipment | | 1,728.1 |
| Other long-term assets | | 79.1 |
| Current assets | | 266.2 |
| | |
|
| Total assets | | 2,073.4 |
| | | |
| Current liabilities | | 511.3 |
| Long-term debt | | 198.8 |
| Other long-term liabilities | | 240.8 |
| Minority Interest | | 607.5 |
| | |
|
| | | 1,558.4 |
| Net assets of acquisition | | 515.0 |
| Less: Equity in Romtelecom held by OTE | | 254.0 |
| | |
|
Net assets acquired | | 261.0 |
| | |
|
| | | |
| Cash given to Romtelecom | | 134.6 |
| Cash given to Romanian State | | 28.8 |
| Debt capitalized | | 94.6 |
| Acquisition costs | | 3.0 |
| | |
|
Total consideration | | 261.0 |
| | |
|
| | | As discussed above, Cosmorom is experiencing financial difficulties and has overdue payments to its principal equipment supplier of approximately € 100. The failure by Cosmorom to make payments to its supplier and Romtelecom’s breach of the financial covenant discussed above, caused a non-payment default by OTE under (i) the € 1.1 billion 6.125% guaranteed notes due 2007 - the “Eurobond” (issued by its subsidiary OTE PLC and guaranteed by OTE) and (ii) OTE’s $ 1 billion revolving credit facility, as OTE has become Romtelecom’s major shareholder in March 2003.
In order to remedy the above mentioned events of default OTE has taken the following measures: |
| | | |
| | | i) Eurobond: On May 30, 2003 OTE and OTE PLC issued a solicitation statement wherein OTE and OTE PLC sought consents (the “Solicitation”) from the holders of OTE PLC’s outstanding bonds, to be represented and vote at a meeting of holders to: (i) waive any event of default arising under Condition 9(iii) of the bond or otherwise caused by the failure of Cosmorom to make payment of any indebtedness (the “Waivers”), (ii) modify the events of default under the bond by deleting references to “Subsidiaries” from Condition 9(iii) and replacing them with references to “Significant Subsidiaries” (excluding RomTelecom and OTE Estate S.A.) (the “Proposed Amendments”), and (iii) modify the negative pledge covenant under the Notes by limiting its applicability to RomTelecom and OTE Estate) which is intended to permit non-recourse financing to be undertaken by Subsidiaries in Southeastern Europe. |
F-33
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | | As a result of the proposed Amendments and Waivers being adopted by the Holders, OTE expects to disburse an amount of approximately € 2.5 to Holders who have given their consent on or prior to the applicable deadline. |
| | | |
| | | At the meeting of holders of Notes held on June 30, 2003, the consent of the requisite majority of Holders of the Notes to the Waivers and the Proposed Amendments was obtained. |
| | | |
| | | ii) Revolving credit facility: By a letter dated June 24, 2003, the agent for the syndicate of financial institutions participating in the $ 1 billion revolving credit facility agreed, on behalf of such financial institutions, to grant waivers to OTE in respect of non – payments defaults arising under such facility as a result of Cosmorom’s failure to reach agreement with its principal equipment supplier. |
| | | |
| | | Should Romtelecom not cure its current ratio covenant attached to its EBRD facilities as discussed above, this event will effect the terms of OTE’s revolving credit facility. Notwithstanding the above, OTE intends to refinance the $ 1 billion revolving credit facility either through the issuance of notes under its Global Medium Term Note Program or other currently available resources. |
| | | |
| | (b) | Investments in satellite companies and organizations: |
| | | |
| | | OTE participates in international satellite companies and organizations. These are not traded investments, and since OTE does not exercise significant influence, they are carried at cost. OTE’s participations in international satellite companies and organizations at December 31, 2001 and 2002 were as follows: |
| | December 31, |
| |
|
| | 2001 | | 2002 |
| |
| |
|
| | Cost | | (%) Interest | | Cost | | (%)Interest |
| |
| |
| |
| |
|
| (i) INTELSAT LTD | 3.48 | | 0.23 | | 3.48 | | 0.23 |
| (ii) INMARSAT VENTURES PLC | 24.44 | | 4.68 | | 24.44 | | 4.68 |
| (iii) EUTELSAT S.A. | 9.37 | | 0.87 | | 9.37 | | 0.87 |
| (iv) Other | 0.01 | | 0.31 | | 0.01 | | 0.31 |
| |
| | | |
| | |
| | 37.30 | | | | 37.30 | | |
| |
| | | |
| | |
F-34
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 6. | INVESTMENTS IN ASSOCIATES AND SATELLITE ORGANIZATIONS (Continued): |
| | |
| | (i) | Intelsat Ltd., a Bermuda-based holding company, was formed as a privately held commercial entity in July 2001 through the transformation of the International Telecommunications Satellite Organization (“IGO”), the International Organization of Satellite Communications with participation of approximately 148 telecommunications organizations, including OTE. As of the date of transformation, substantially all of the IGO’s assets, liabilities, rights, obligations and operations were transferred to the company and its wholly-owned subsidiaries, which, in turn, issued ordinary shares to the previous shareholders of IGO. |
| | | |
| | (ii) | Inmarsat Ventures Plc (formerly Inmarsat Holdings Ltd.), was converted to a limited liability company on March 15, 2001, registered in England and Wales. It is the parent company of Inmarsat Ltd. which, on April 15, 1999, has undertaken all assets and liabilities of the International Mobile Satellite Organization (“INMARSAT”), founded in 1979 in order to establish global satellite communications with ships, aeroplanes, trucks and trains with participation of 80 countries, including Greece. |
| | | |
| | (iii) | Eutelsat S.A., formed as a limited liability company on March 22, 2001, registered in Paris-France, to which the net assets of the European Telecommunication Satellite Organization (“EUTELSAT”) were transferred on July 2, 2001. In return, the company issued shares to EUTELSAT, which were then transferred to its former shareholders. Approximately 55 telecommunications operators and/or authorities participate in the company. |
| | | |
| 7. | TELECOMMUNICATION PROPERTY, PLANT AND EQUIPMENT: |
| | |
| | Telecommunication property, plant and equipment is stated at cost, net of related subsidies and is analyzed as follows: |
| | December 31, |
| |
| |
| | 2001 | | | 2002 | |
| |
| | |
| |
| Land | 20.1 | | | 19.7 | |
| Buildings | 278.0 | | | 390.2 | |
| Telecommunication equipment and installations | 5,865.2 | | | 6,858.1 | |
| Investment supplies | 184.9 | | | 194.4 | |
| Transportation equipment | 49.8 | | | 44.5 | |
| Furniture and fixtures | 207.7 | | | 237.4 | |
| Construction in progress | 1,043.8 | | | 990.2 | |
| |
| | |
| |
| | 7,649.5 | | | 8,734.5 | |
Accumulated depreciation | (2,809.4 | ) | | (3,470.0 | ) |
| |
| | |
| |
| | 4,840.1 | | | 5,264.5 | |
| |
| | |
| |
F-35
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 7. | TELECOMMUNICATION PROPERTY, PLANT AND EQUIPMENT (Continued): |
| | |
| | Depreciation is computed based on the straight-line method using rates that are substantially equivalent to average economic useful life rates and are analyzed as follows: |
| Classification | | Annual Depreciation Rates | |
| |
| |
| Buildings | | 5% | |
| Telecommunication equipment and installations: | | | |
• Telephone exchange equipment | | 8-12% | |
• Radio relay stations | | 12.5% | |
• Subscriber connections | | 10% | |
• Local and trunk network | | 6-12% | |
• Other | | 10-20% | |
| Transportation equipment | | 12-20% | |
| Furniture and fixtures | | 20% | |
| | Depreciation expense for the years ended December 31, 2000, 2001 and 2002 amounted to € 486.1, € 563.1 and € 687.5, respectively. |
| | | |
| | As of December 31, 2001 and 2002, cumulative subsidies provided to the Group for fixed asset acquisitions amounted to € 576.9 and have been reflected as a deduction from the acquisition cost of the related fixed assets. |
| | | |
| | The Group recognizes subsidies based on the progress of the subsidized projects and when all conditions to their payment are met. Subsidies relating to capital investments made during 2001 with respect to the aforementioned projects, and which have been offset against the respective purchase price of the assets acquired, amounted to approximately € 2.9. The receipt of these amounts is subject to the submission of the related costs of the approved projects to the Ministry of National Economy. In 1998, the European Commission had announced the temporary suspension of subsidies payable to OTE, pending harmonization of Greek Law to EU regulation of the telecommunications sector. The Ministry of Transport and Communications has advised the Group that the State has fully complied with the EU regulatory framework. The European Commission, by its letter dated April 6, 2001, addressed to the Ministry of Transport and Communications, announced the withdrawal of the above mentioned suspension. Based on communications with the applicable Ministries, OTE is expecting to collect the outstanding amounts during 2003. As a result, the Group’s management believes that no realization problem exists in respect to the collectibility of the respective receivables, which, at December 31, 2002, amounts to € 22.4 and are included in “Subsidies receivable”, reflected under current assets in the accompanying 2002 consolidated balance sheet. |
| | | |
| | Interest costs capitalized during the years ended December 31, 2000, 2001 and 2002, amounted to € 31.5, € 23.9 and € 26.1, respectively. |
| | | |
| 8. | SHORT-TERM BORROWINGS: |
| | | |
| | Short-term borrowings represent draw-downs under various lines of credit maintained by the Group with several banks. The aggregate amount of available lines of credit was € 731.2 and € 903.1, at December 31, 2001 and 2002, respectively of which, € 607.8 and € 610.3 were unused as of the above dates. |
F-36
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 8. | SHORT-TERM BORROWINGS (Continued): |
| | |
| | On December 30, 1999, OTE entered into a € 310.0 credit facility with the National Bank of Greece International Limited. This facility, bearing interest at the Euribor plus 0.2%, was fully drawn by OTE in January 2000 and was repaid on February 7, 2000, by partial use of the proceeds from the Eurobond issued by the Group (see Note 11(e)). |
| | |
| | The weighted average interest rates on short-term borrowings for the years ended December 31, 2001 and 2002, was approximately 6.1% and 5.8%, respectively. |
| | |
| | |
| 9. | ACCRUED AND OTHER LIABILITIES: |
| | |
| | Accrued and other liabilities are analyzed as follows: |
| | December 31, |
| |
|
| | 2001 | | 2002 |
| |
| |
|
| Accrued social security contributions | 46.8 | | 52.6 |
| Accrued payroll | 18.8 | | 16.4 |
| Other taxes payable | 48.9 | | 19.8 |
| Accrued interest payable | 66.6 | | 72.8 |
| Reserve for pension contributions | 58.3 | | 37.4 |
| Reserve for litigation and claims | 25.4 | | 27.2 |
| Customer advances | 51.0 | | 68.9 |
| Other | 48.2 | | 60.6 |
| |
| |
|
| | 364.0 | | 355.7 |
| |
| |
|
| 10. | INCOME TAXES: |
| | |
| | In accordance with the Greek tax regulations, the income tax rate is 35% for corporations registered on the Athens Stock Exchange while for the remaining corporations the tax rate was 40% up to 2000, but based on Law 2873/2000, was reduced to 37.5% in 2001 and to 35% in 2002. |
| | |
| | Tax returns are filed annually but the profits or losses declared for tax purposes remain provisional until such time as the tax authorities examine the returns and the records of the tax payer and a final assessment is issued. |
| | |
| | In early 2003, the tax audit of OTE’s books for the years 1999-2001 was completed and additional income taxes and penalties of approximately € 22.4 were assessed, which were charged against the related reserve provided in prior years. Furthermore, a provision of € 7.0 has been made in respect with the unaudited fiscal year 2002, which is considered by management to be adequate. |
F-37
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 10. | INCOME TAXES (Continued): |
| | |
| | The provision for income taxes reflected in the accompanying consolidated statements of operations is analyzed as follows: |
| | Year ended December 31, | |
| |
| |
| | 2000 | | | 2001 | | | 2002 | |
| |
| | |
| | |
| |
| Income taxes: | | | | | | | | |
| Current | (240.2 | ) | | (364.4 | ) | | (342.3 | ) |
| Deferred | (162.6 | ) | | 95.6 | | | 37.9 | |
| |
| | |
| | |
| |
| Total provision for income taxes | (402.8 | ) | | (268.8 | ) | | (304.4 | ) |
| |
| | |
| | |
| |
| | The reconciliation of the provision for income taxes to the amount determined by the application of the Greek statutory tax rate of 35%, to pre-tax income before the effect of accounting change is summarized as follows: |
| | Year ended December 31, |
| |
| |
| | 2000 | | | 2001 | | | 2002 | |
| |
| | |
| | |
| |
| Income tax at the statutory rate | (369.4 | ) | | (260.1 | ) | | (275.8 | ) |
| | | | | | | | | |
| Effect of change in statutory rate of subsidiary from 40% to 35% | (0.8 | ) | | - | | | - | |
| Tax on subsidiaries taxed at different rates | 2.6 | | | 0.2 | | | (0.5 | ) |
| |
| | |
| | |
| |
| | (367.6 | ) | | (259.9 | ) | | (276.3 | ) |
| |
| | |
| | |
| |
| Effects of non-taxable income and expenses not deductible for tax purposes: | | | | | | | | |
| - Change in valuation allowance | (24.0 | ) | | (14.3 | ) | | (41.0 | ) |
| - Amortization of goodwill | (6.2 | ) | | (7.2 | ) | | - | |
| - Other | (5.0 | ) | | 12.6 | | | 12.9 | |
| |
| | |
| | |
| |
| | (35.2 | ) | | (8.9 | ) | | (28.1 | ) |
| |
| | |
| | |
| |
| Provision for income taxes | (402.8 | ) | | (268.8 | ) | | (304.4 | ) |
| |
| | |
| | |
| |
| | The Group has net operating losses carry forwards in the amount of approximately € 60, which expire in 2007. |
F-38
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 10. | INCOME TAXES (Continued): |
| | |
| | Deferred income taxes relate to temporary differences between the book values and the tax bases of assets and liabilities. Significant components of the Group’s deferred tax assets and liabilities are summarized below: |
| | December 31, |
| |
| |
| | 2001 | | | 2002 | |
| |
| | |
| |
| Reserve for accrued and other liabilities | 15.0 | | | 11.3 | |
| Excess of bad debt provision over tax allowable provision | 43.5 | | | 57.9 | |
| Reserve for voluntary retirement program contributions | 7.0 | | | 7.1 | |
| Other | (15.8 | ) | | (9.8 | ) |
| Valuation allowance | (43.5 | ) | | (57.9 | ) |
| |
| | |
| |
| Net current deferred tax assets / (liabilities) | 6.2 | | | 8.6 | |
| |
| | |
| |
| | | | | | |
| Reserve for staff retirement indemnities | 91.7 | | | 89.6 | |
| Reserve for Youth Account benefits | 78.5 | | | 98.5 | |
| Reserve for voluntary retirement program contributions | 42.3 | | | 39.3 | |
| Property, plant and equipment | (125.4 | ) | | (106.9 | ) |
| Temporary differences on equity | (125.3 | ) | | (125.3 | ) |
| Impairments on subsidiaries and associates | 89.7 | | | 151.3 | |
| Other | 3.6 | | | 10.5 | |
| Valuation allowance | - | | | (26.0 | ) |
| |
| | |
| |
| Net non-current deferred tax assets / (liabilities) | 55.1 | | | 131.0 | |
| |
| | |
| |
| Net deferred tax assets / (liabilities) | 61.3 | | | 139.6 | |
| |
| | |
| |
| | The deferred tax asset on impairments includes an amount of € 21.7, recognized for the SFAS No. 142 impairment of goodwill in Armentel, with the corresponding benefit included in the “Cumulative effect of accounting change for SFAS No. 142, net of income taxes”, in the accompanying 2002 consolidated statement of operations. |
| | |
| 11. | LONG-TERM DEBT: |
| | |
| | Long-term debt is analyzed as follows: |
| | December 31, | |
| |
| |
| | 2001 | | | 2002 | |
| |
| | |
| |
| (a) European Investment Bank | 116.1 | | | 110.8 | |
| (b) Loans from suppliers and their affiliates | 97.3 | | | 98.7 | |
| (c) Consortium loans | 363.6 | | | 333.6 | |
| (d) Revolving Credit Facility | 657.9 | | | 975.8 | |
| (e) Euro Bond | 1,098.4 | | | 1,098.9 | |
| (f) Global Medium Term Note Program | - | | | - | |
| |
| | |
| |
Total long-term debt | 2,333.3 | | | 2,617.8 | |
| |
| | |
| |
Less- Current maturities | (391.0 | ) | | (41.6 | ) |
| |
| | |
| |
Long-term portion | 1,942.3 | | | 2,576.2 | |
| |
| | |
| |
| | At December 31, 2001 and 2002, the fair value of OTE’s long-term debt amounted to approximately € 2,388.3 and 2,716.1, respectively. |
F-39
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 11. | LONG-TERM DEBT (Continued): |
| | |
| | The annual repayment of long-term debt subsequent to December 31, 2002, is as follows: |
| Year | | Amount |
| |
|
| 2003 | | 41.6 |
| 2004 | | 1,018.0 |
| 2005 | | 366.0 |
| 2006 | | 34.5 |
| 2007 | | 1,119.5 |
| 2008 and thereafter | | 38.2 |
| | |
|
| | | 2,617.8 |
| | |
|
| | (a) | EUROPEAN INVESTMENT BANK |
| | | |
| | | The long-term loan to OTE by the European Investment Bank (“EIB”) was granted in 1995 and is denominated in Euro. The loan bears interest at 8.3% and after an amendment to the agreement on June 30, 2002, is repayable in annual instalments through 2009. |
| | | |
| | | Significant loan covenants include, among others, (i) that OTE must inform the EIB of any material alteration to its equity and of any significant change in the ownership of its capital and (ii) that loans shall be immediately repayable in case that OTE ceases or resolves to cease to carry on its business, is dissolved, liquidated or wound up or in the event of significant reduction in the value of its assets. |
| | | |
| | (b) | LOANS FROM SUPPLIERS AND THEIR AFFILIATES |
| | | |
| | (i) | OTE obtains long-term loans from Siemens Aktiengesellschaft for the purpose of financing the acquisition of investment supplies and services from Siemens Tele-Industry. A line of credit of € 56.4 million has been established and draw-downs are made according to the required cash outflow to the supplier. These loans denominated in Euro, bear interest at 5.29% - 5.94% and are repayable in five equal annual installments through the year 2006. |
| | | |
| | (ii) | Armentel has obtained long-term loans from Siemens A.G. for the purpose of financing the acquisition of investment supplies and services from Siemens A.G. The loans, denominated in U.S. dollars, bear interest at 8% and are repayable through 2004. |
| | | |
| | (iii) | Armentel has obtained vendor-financing facilities from Intracom, Siemens Tele-Industry and Greek Cable Industry, in relation with the supply of equipment and services to Armentel. These facilities which bear interest at one year LIBOR + 1.5%, six month LIBOR + 1.5% and 12.9%, respectively, are denominated in U.S. dollars and are repayable through 2014. |
F-40
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 11. | LONG-TERM DEBT (Continued): |
| |
| | (a) | On November 20, 2000, Cosmote entered into a credit facility agreement (the “Syndicated Loan”) with a consortium of international banks, which provided it with a syndicated revolving credit facility of € 350 million. |
| | | |
| | | The Syndicated Loan accrued interest at the Euribor interbank borrowing rate plus an applicable margin of 0.35% (and mandatory costs) and was repayable in one balloon installment 364 days after the agreement date unless Cosmote exercised an option to extend the maturity date in respect of amounts outstanding under this facility by a further 12 months. Cosmote exercised this option in 2001 and, accordingly, the Syndicated Loan was repaid during November 2002. |
| | | |
| | (b) | On November 12, 2002, Cosmote entered into a new credit facility agreement with a consortium of banks, which provided it with a term credit facility (“Term Loan”) of US $ 280 million and a revolving credit facility (“Revolving Loan”) of US $ 140 million (together hereinafter referred to as the “Loan”). |
| | | |
| | | The Loan bears interest at the Libor interbank borrowing rate plus an applicable margin ranging from 0.50% - 0.70% (and mandatory costs). The Term Loan is repayable in full by the latest on November 12, 2005; however, earlier repayment in full or part is permitted. Drawdowns under the Revolving Loan are repayable on the last interest period, as defined, for each particular drawdown or, if rolled-over, in the following interest period and at the latest on November 12, 2005. It is management’s intention to repay both the Term Loan and the Revolving Loan on November 12, 2005 and, accordingly, all drawndowns through December 31, 2002, have been classified as long-term. |
| | | |
| | | Drawdowns under the Term Loan and Revolving Loan through December 31, 2002, amounted to US $ 350 million. |
| | | |
| | | The Loan contains events of default including, without limitation, failure to make payments under the Loan and related documents, breach of representations and warranties, cross default under other agreements, certain events of insolvency relating to Cosmote, appointment of receivers and managers, cessation or expropriation of business, termination, suspension or revocation of the Licenses, enforcement of security, certain litigation or other proceedings, involuntary cease or suspension (for more than 5 business days) of trading of Cosmote’s shares on the Athens Stock Exchange, decrease of OTE’s ownership (directly or through its subsidiaries) to less than 35% of Cosmote’s issued share capital and the occurrence of events having a material charge (as defined therein). |
F-41
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 11. | LONG-TERM DEBT (Continued): |
| |
| | | Upon the occurrence of an Event of Default, the facility agent may, and shall if so directed by a majority of the banks, declare that an Event of Default has occurred, terminate the commitment under the Loan, declare all or any amounts under the Loan to be due and payable and take certain other actions. |
| | | |
| | | The Loan agreement contains a set-off clause with the banks, the facility agent and the other finance parties (“Set-Off” clause). The terms of the Set-Off clause provide that after the occurrence of an Event of Default and while such Event of Default is continuing a Finance Party may set-off or apply any matured obligations owed by the Borrower under the Finance Documents against any obligation (whether or not matured) owed by that Finance Party to the Borrower, regardless of the place of payment, booking or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off or application. If either obligation is unliquidated or unascertained, the Finance Party may set-off or apply in an amount estimated by it in good faith to be the amount of that obligation. |
| | | |
| | | The Loan also contains financial covenants including requirements to maintain minimum ratios of consolidated borrowings to consolidated EBITDA and consolidated EBITDA to consolidated interest expense. |
| | | |
| | | Furthermore, Cosmote has also given certain undertakings relating to the financial information given to the Agent, restrictions on disposals of assets, on investments and acquisitions, on maintenance of intellectual property rights, environmental matters, insurance status and maintenance of the nature of the business and compliance with laws and regulations. |
| | | |
| | | Cosmote cannot, subject to certain limited exceptions, dispose of assets with an aggregate book value or market value (whichever is higher) in excess of € 25.0 in any one financial year. |
| | | |
| | | Also, Cosmote cannot, subject to certain limited exceptions, dispose of equity participations or similar investments in entities who are in the Telecommunications Business (as defined therein) whose book value or market value (whichever is higher) exceeds € 50.0 in aggregate, except if these amounts are reinvested within 180 days in other entities who are in the Telecommunications Business or in assets relevant to the Telecommunications Business or if no disposal will result in Material Subsidiary (as defined therein) ceasing to be a Subsidiary. If the amounts are not reinvested within this period they should be applied towards mandatory prepayment and cancellation. |
| | | |
| | | On December 16, 2002, Cosmote entered into cross-currency swaps whereby it converted (i) the outstanding amount of the Loan, from US $ to € (US $ 350 million to € 346.7) and (ii) the interest rate from the Libor interbank borrowing rate plus 0.55% to the Euribor interbank borrowing rate plus 0.60%. The cross-currency swaps mature on November 12, 2005. |
F-42
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 11. | LONG-TERM DEBT (Continued): |
| |
| | | The swaps qualified for hedge accounting and their value at December 31, 2002, of approximately € 13 is recorded as a derivative liability and included in other long-term liabilities in the accompanying 2002 consolidated financial statements. |
| | | |
| | (ii) | Hellascom: On February 24, 1999, Hellascom obtained a long-term loan from a consortium of banks of US $ 7 million to finance capital expenditures. On April 20, 2000, the loan agreement was amended and the amount of the loan was increased to US $ 12 million. This loan, bearing interest at Libor plus 0.70%, was fully paid in 2002, and was included in current maturities of long-term debt in the accompanying 2001 consolidated balance sheet. |
| |
| | (d) | REVOLVING CREDIT FACILITY |
| | | |
| | | On June 10, 1999, OTE entered into a revolving credit facility of US $ 1 billion or equivalent in Euro from a group of banks. This facility, as amended on June 21, 2001, has a term of five years and bore interest at Libor or Euribor plus 0.3%. As of December 31, 2001, an amount of € 658 was outstanding. During 2002, a drawdown of € 361.3 was made under the loan and a repayment of € 43.3 was also made. Accordingly, the outstanding amount as of December 31, 2002 was € 975.8 . After the above mentioned drawdown, there is no remaining portion of the credit facility to be drawn down, at December 31, 2002. As discussed in Note 6(a) in the accompanying consolidated financial statements, a non-payment default by OTE under its revolving credit facility was caused as a result of OTE becoming Romtelecom’s major shareholder in March 2003. On June 24, 2003, OTE obtained the necessary Waivers for the non-payment default resulting from Cosmorom, while on June 27, 2003, it obtained confirmation from EBRD that it was extending to September 30, 2003, the grace periods to cure any existing defaults under the EBRD facilities. Notwithstanding the above, OTE intends to refinance its revolving credit facility either through the issuance of notes under its Global Medium Term Note Program (Note 11 (f) or other currently available resources). |
| | | |
| | (e) | EUROBOND |
| | | |
| | | On February 7, 2000, the Group’s subsidiary, OTE PLC issued a bond of € 1.1 billion, fully and unconditionally guaranteed by OTE bearing interest at 6.125%, maturing on February 7, 2007. As of December 31, 2002, unamortized discounts and premiums amounted to € 1.7 and € 0.3, respectively. Amortization for fiscal year 2002 amounted to € 0.3 and was charged to “Interest expense”, in the accompanying 2002 consolidated statement of operations. As discussed in Note 6(a) in the accompanying consolidated financial statements, a non-payment default by OTE under its Eurobond was caused as a result of OTE becoming Rometelecom’s major shareholder in March 2003, in remedy of which, OTE, on June 30, 2003, obtained the necessary Waivers and the Proposed Amendments from the Holders of the Notes. |
| | | |
| | (f) | GLOBAL MEDIUM TERM NOTE PROGRAM |
| | | |
| | | On November 7, 2001, OTE PLC established a Global Medium Term Note Program for the issuance of up to € 1.5 billion in aggregate principal amount of notes, fully and unconditionally guaranteed by OTE, with a maximum maturity of up to ten years. On June 5, 2003, OTE’s Board of Directors approved the extension of the maturity of the notes to thirty years. Notes may be interest-bearing or non-interest-bearing. Interest (if any) may accrue at a fixed rate or at a floating rate or other variable rate. No issuance of notes under the program took place as of the date of this report. |
F-43
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
F-44
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS: |
| |
| | OTE employees are covered by various pension, medical and other benefit plans as summarized below: |
| |
| | Defined Contribution Plans: |
| |
| | (a) | Main Pension Fund (TAP-OTE): |
| | | |
| | | The TAP-OTE fund, a multiemployer fund to which OTE contributes, is the main fund providing pension and medical benefits to OTE employees. The employees of the National Railway Company and the Greek Post Office are also members of this fund. The Group recognizes as net pension cost the contributions required for the period and as a liability any contributions due and unpaid. |
| | | |
| | | The TAP-OTE pension fund (hereinafter referred to as “TAP-OTE”) provides members who were members prior to 1993 with a pension of approximately 80% of salary at retirement age, which is estimated at an average of 55 years for current employees. In accordance with Law 2084/92, benefit levels have been reduced and retirement age has been advanced. Pension levels for new employees from 1993 is 60% of final average salary after 35 years of service at age 65. Up to December 31, 2001, contribution rates were 24.9% of salary for the employer and 11% for the employee. Effective January 1, 2002, the contribution rate for the employer was increased to 25%. |
| | | |
| | | The TAP-OTE medical fund provides day-to-day hospital and pharmaceutical care to active employees, retired employees and to dependants. The current contribution rates are 5.10% of salary for the employer and 2.55% plus 0.5% for each dependant of an employee. |
| | | |
| | | According to Law 2257/94, OTE was liable to cover the annual operating deficit of the TAP-OTE up to a maximum amount of € 32.3, which could be adjusted with the Consumer Price Index. Pursuant to Greek legislation (Law 2768/99), a fund was incorporated on December 8, 1999, as a société anonyme under the name of EDEKT-OTE S.A. (“EDEKT”), for the purpose of administering contributions to be made by OTE, the Greek State and the Auxiliary Pension Fund, in order to finance the TAP-OTE deficit. The Greek State’s and the Auxiliary Pension Fund’s contributions to the fund were set to € 264.1 and € 410.9, respectively. EDEKT’s authorized share capital amounts to € 2.9, divided into 100,000 shares with nominal value of € 29.3 (twenty nine point three Euro) each. OTE has a 40% interest in EDEKT acquired for a consideration of € 1.2. Pursuant to Law 2937/01, OTE’s contribution has been set at € 352.2, representing the equivalent to the net present value of ten (10) years’ (2002-2011) contributions to TAP-OTE. This amount was paid on August 3, 2001 and is being amortized over the ten-year period. |
F-45
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (Continued): |
| |
| | | Furthermore, pursuant to Law 2937/01, OTE was obliged to pay to TAP-OTE an amount of € 50.2 comprised as follows: (i) € 28.5 relating to interest for the period 1984 through 1993 on loans granted to TAP-OTE by the Medical Fund and (ii) € 21.7, relating to adjustments of its obligations to cover the annual operating deficit of the TAP-OTE for the years 1999 and 2000 by using a compounded consumer price index with fiscal year 1994 as the base year. The total amount of € 50.2 has been charged and included in “Other income/(expense)” in the accompanying 2001 consolidated statement of operations for the year 2001. |
| | | |
| | | Pursuant to Law 3029/02, TAP-OTE’s Pension Fund part only, is to merge with IKA-ETAM (the main social security Fund in Greece) the latest by January 1, 2008. In accordance with the provisions of this law, the duration of employers’ obligations to cover the annual operating deficits of their employees’ Pension Funds, as defined by Law 2084/92 will be determined through a Ministerial Decision. Enactment of Law 3029/02 may require OTE to cover future operating deficits of TAP-OTE. |
| | | |
| | | Due to financial difficulties of TAP-OTE, payments of € 47.2 were made through to December 31, 1993, in excess of those required to be covered by OTE, out of which € 19.6 have been settled and were fully collected through December 31, 2000. With respect with the remaining payments of € 27.6 made by OTE, TAP-OTE believed that these payments were made to cover the deficit incurred during the first ten months of 1990, in accordance with Law 1902/90, based on which law (published on October 17, 1990), OTE was obliged to cover the total deficits of TAP-OTE. TAP-OTE considered that the application of Law 1902/90 had a retroactive effect from January 1, 1990. However, in 1997, the Legal Counsel of the State, with its Decision 259/97, determined that Law 1902/90 is effective from the date it was published (October 17, 1990) and that, accordingly, OTE was not obliged to cover the deficits of TAP-OTE for the first ten months of 1990. During 1999, and after notification to TAP-OTE, OTE proceeded in withholding € 2.9 from the annual operating deficit payments, and, accordingly, the receivable amount as of December 31, 2000, amounted € 24.7. Additional withholdings took place in 2001 and reduced the receivable amount from TAP – OTE to € 21.4 as of December 31, 2001. |
| | | |
| | | Although TAP-OTE did not object to the above mentioned withholdings, in February 2002, it refused to provide OTE with a confirmation that it was not in default with its monthly social security payments, on the grounds that monthly social security contributions must be paid in full and withholdings from such contributions are not permitted. In order to resolve this issue, in May 2002, OTE agreed to refund all withholdings made from contributions to TAP-OTE, and the receivable amount was readjusted to € 24.7. By its letter dated May 24, 2002, TAP-OTE officially accepted OTE’s claim for the above mentioned amount but, simultaneously, raised an issue of a possible legal right to write-off this claim. Both parties agreed to request a legal opinion on this issue from a mutually acceptable legal counsel and expect this opinion to be forthcoming during the third quarter of 2003. OTE’s management and legal counsel believe that such legal opinion will be favorable to OTE, and that revised arrangements for the collection of the amount receivable will be put in place. |
| | | |
F-46
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (Continued): |
| |
| | (b) | Auxiliary Pension Fund: |
| | (i) | The Auxiliary Lump Sum benefit fund provides members with a lump sum benefit upon retirement or death which, in accordance with Law 2084/92, is capped at a maximum of € 0.03 after 35 years of service adjustable annually in line with the yearly change in the civil servants’ pensions. The current contribution rates are 0.1% of salary for the employer and 4% for the employee. According to Law 2084/92 the employer contribution rate decreases by 0.1% annually which in turn is transferred to the employer contribution rate of the TAP-OTE. |
F-47
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (Continued): |
| |
| | | During 1996 an interest-free loan of € 6.3 was advanced to this fund for the payment of lump sum benefits to staff who had retired in 1995 under the voluntary retirement program. This loan is being repaid in 80 equal monthly instalments, beginning January 1, 1997. |
| | | |
| | (ii) | The Auxiliary Pension Benefit fund provides members, who were members prior to 1993, with a pension of 20% of salary after 30 years service. Law 2084/92 has fixed minimum contributions and maximum benefits, after 35 years of service, for new entrants from 1993. |
| | | |
| | | Furthermore, for members that joined prior to 1993 it has made the benefits payable subject to “a decision of the Ministry of Health and Social Security following an actuarial study and the opinion of the Fund’s Board of Directors”. Advances made by OTE to the Auxiliary Fund against future contributions through December 31, 1993, amounted to € 11.1. During 1995, arrangements were made with the Auxiliary Fund for the settlement of € 11.1 in monthly instalments of € 0.04, effective January 1, 1996. |
| |
| | The receivable balance from the TAP-OTE and Auxiliary Fund comprised as follows: |
| |
| | December 31, |
| |
|
| | 2001 | | | 2002 |
| |
| | |
|
| Non-interest bearing payments and advances: | | | | |
| - EDEKT | 443.0 | | | 400.5 |
| - TAP-OTE | 17.8 | | | 24.7 |
| - Auxiliary Fund | 8.0 | | | 6.5 |
| |
| | |
|
| | 468.8 | | | 431.7 |
| |
| | |
|
Less: unamortized discount based on imputed interest rates 6.0% and 5.5% for 2001 and 2002, respectively | (138.7 | ) | | (126.2 | ) |
| |
| | |
|
Long-term portion | 330.1 | | | 305.5 |
| |
| | |
|
| | | | | |
| Non-interest bearing payments and advances: | | | | |
| - EDEKT | 42.3 | | | 42.5 |
| - TAP-OTE | 3.6 | | | - |
| - Auxiliary Fund | 1.5 | | | 1.4 |
| |
| | |
|
| | 47.4 | | | 43.9 |
| |
| | |
|
| | | | | |
Less: unamortized discount based on imputed interest rates of 6.0% and 5.5% for 2001 and 2002, respectively | (2.5 | ) | | (12.1 | ) |
| |
| | |
|
Short-term portion | 44.9 | | | 31.8 |
| |
| | |
|
| |
| | Advances to TAP-OTE and to the Auxiliary Fund are reflected in the accompanying consolidated financial statements at their present values, discounted by the use of risk-free interest rates prevailing in the Greek market, for periods approximating the periods of the expected cash flows. Discount derived from the initial recognition of present values and amortization are included in interest expense and interest income, respectively, in the accompanying consolidated statements of operations. |
F-48
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (Continued): |
| |
| | OTE’s contributions to the TAP-OTE and Auxiliary pension funds for the years ended December 31, 2000, 2001 and 2002, amounted to € 186.8, € 189.1 and € 189.7, respectively. |
| |
| | In accordance with amendments to the collective Labor Agreement, OTE has undertaken the obligation to make certain contributions to the pension funds for a period of approximately three to four years for all employees who retire under the voluntary retirement program. In this respect, an expense of approximately € 39.1 and € 30.6 was established in 2001 and 2002, respectively, and is included in payroll and employee benefits in the accompanying consolidated statements of operations, to cover the related contributions which OTE is obliged to pay over the following years for employees who accepted the offers during the related years. As of December 31, 2001 and 2002, the related reserve amounted to € 108.4 and € 106.4, respectively, of which € 58.3 and € 37.4, respectively, are included in “Accrued and other liabilities” while the remaining amounts are included in “Other long-term liabilities”. |
| |
| | An actuarial study performed in prior years, has indicated that in the future the pension funds will incur increased deficits. OTE does not have a legal obligation to cover any future deficiencies of these funds and, according to management, neither does it voluntarily intend to cover such possible deficiencies. However, there can be no assurance that OTE will not be required (through regulatory arrangements) to make additional contributions in the future to cover deficiencies of these funds. |
| |
| | Defined Benefit Plans: |
| |
| | (a) | Reserve for Staff Retirement Indemnities |
| |
| | | Under the Greek labor law, employees are entitled to termination payments in the event of dismissal or retirement with the amount of payment varying in relation to the employee’s compensation, length of service and manner of termination (dismissal or retirement). Employees who resign (except those with over fifteen years of service) or are dismissed with cause are not entitled to termination payments. The indemnity payable in case of retirement is equal to 40% of the amount which would be payable upon dismissal. In the case of OTE employees, the maximum amount is limited to a fixed amount (which for 2002 amounted to € 0.02 and is adjusted annually according to the inflation rate), plus 3 months salary. In practice, up to December 31, 2001, OTE employees received the lesser amount between 100% of the maximum liability and € 0.02 plus 3 months’ salary. Employees with service exceeding 25 years, are entitled to draw loans against the accrued indemnity payable to them upon retirement. Balances amounted to € 62.5 and € 79.6 as of December 31, 2001 and 2002, respectively and are included in “Loans and advances to employees” and “Loans and advances to employees, net of current portion” in the accompanying consolidated balance sheets. On June 25, 2001, OTE signed a new collective labour agreement with its employees, which, among other things, increased the maximum amount of retirement indemnities payable to its employees by an additional two months’ salary, effective January 2, 2002. |
| | | |
| | | The provisions and liability for such retirement indemnities have been accounted for in the accompanying consolidated financial statements in accordance with SFAS No. 87 and are based on an independent actuarial study. These retirement indemnities are paid to individuals at the time they retire from the Group. |
F-49
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12 | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (Continued): |
| |
| | | The components of the staff retirement indemnity expense are as follows: |
| |
| | Year ended December 31, |
| |
|
| | 2000 | | 2001 | | 2002 |
| |
| |
| |
|
| Service cost-benefits earned during the year | 12.4 | | 10.6 | | 11.7 |
| Interest cost on projected benefit obligation | 17.0 | | 14.0 | | 17.3 |
| Net amortization and deferrals | - | | - | | 4.2 |
| |
| |
| |
|
| | 29.4 | | 24.6 | | 33.2 |
| |
| |
| |
|
| |
| | | The following is a reconciliation of the projected benefit obligation to the liability recorded for staff retirement indemnities: |
| |
| | December 31, |
| |
|
| | 2001 | | | 2002 |
| |
| | |
|
| Projected benefit obligation at beginning of year | 255.1 | | | 300.2 |
| Service cost | 10.6 | | | 11.7 |
| Interest cost | 14.0 | | | 17.3 |
| Actuarial loss | 9.6 | | | 13.3 |
| Prior service cost arising during the year | 46.1 | | | 0 |
| Benefits paid | (35.2 | ) | | (32.9 | ) |
| |
| | |
|
| | | | | |
| Projected benefit obligation at end of year | 300.2 | | | 309.6 |
| Unrecognised net actuarial gain | 8.5 | | | (5.3 | ) |
| Unrecognised prior service cost | (46.2 | ) | | (41.1 | ) |
| |
| | |
|
| Accrued benefit cost | 262.5 | | | 263.2 |
| |
| | |
|
| |
| | | The assumptions underlying the actuarial valuation, in percentages, of staff retirement indemnities are as follows: |
| |
| | Year ended December 31, | |
| |
| |
| | 2000 | | | 2001 | | | 2002 | |
| |
| | |
| | |
| |
| Discount rate | 6% | | | 6% | | | 5.5% | |
| Assumed rate of increase in future compensation levels | 5% | | | 5% | | | 4.5% | |
| |
| | (b) | Reserve for Youth Account |
| | | |
| | | The Youth Account provides OTE’s employees’ children a lump sum payment generally when they reach the age of 21. The lump sum payment is made up of employees’ contributions, interest thereon and OTE’s contributions which can reach up to a maximum 10 months’ salary of the total average salary of OTE employees depending on the number of years of contributions. |
F-50
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 12 | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (Continued): |
| |
| | The provisions and liability for the Youth Account benefits have been accounted for in the accompanying financial statements in accordance with SFAS No. 87 and are based on an independent actuarial study. |
| |
| | The components of the Youth Account expense recognized by the Group are as follows: |
| |
| | Year ended December 31, |
| |
|
| | 2000 | | 2001 | | 2002 |
| |
| |
| |
|
| Service cost-benefits earned during the year | 16.4 | | 17.4 | | 20.8 |
| Interest cost on projected benefit obligation | 15.3 | | 15.5 | | 16.0 |
| Prior service cost | 0.4 | | 0.4 | | - |
| Net actuarial gain | 1.1 | | 3.5 | | 8.9 |
| |
| |
| |
|
| | 33.2 | | 36.8 | | 45.7 |
| |
| |
| |
|
| | | | | |
| |
| | The following is a reconciliation of the projected benefit obligation to the liability recorded for the Youth Account benefits: |
| |
| | December 31, |
| |
|
| | 2001 | | | 2002 |
| |
| | |
|
| Projected benefit obligation at beginning of year | 273.6 | | | 305.6 |
| Service cost | 17.4 | | | 20.8 |
| Interest cost | 15.5 | | | 16.0 |
| Actuarial gain | 35.7 | | | 11.7 |
| Additional minimum liability | - | | | 50.6 |
| Benefits paid | (36.6 | ) | | (39.0 | ) |
| |
| | |
|
| Projected benefit obligation at end of year | 305.6 | | | 365.7 |
| Unrecognised net actuarial gain | (80.8 | ) | | (84.1 | ) |
| Unrecognised prior service cost | (0.4 | ) | | - |
| |
| | |
|
| Accrued benefit cost | 224.4 | | | 281.6 |
| |
| | |
|
| Employee’s accumulated contributions | 69.3 | | | 71.2 |
| |
| | |
|
Total reserve for Youth Account | 293.7 | | | 352.8 |
| |
| | |
|
| |
| | The assumptions underlying the actuarial valuation, in percentages, of the Youth Account benefits are as follows: |
| |
| | Year ended December 31, | |
| |
| |
| | 2000 | | | 2001 | | | 2002 | |
| |
| | |
| | |
| |
| Discount rate | 6% | | | 6% | | | 5.5% | |
| Assumed rate of increase in future compensation levels | 3.5% | | | 3.5% | | | 3.5% | |
F-51
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 13. | SHARE CAPITAL: |
| | | |
| | On June 25, 2001, the shareholders at their ordinary general assembly approved the dual currency denomination of the share capital, namely that of the Greek Drachmae and Euro, in accordance with the provisions of Law 2842/2000. The nominal value of OTE’s shares was set at € 2.20 (two point twenty Euro) each and, accordingly, its share capital decreased by € 0.5 with an equivalent increase in paid-in surplus. |
| | | |
| | As of December 31, 2002, OTE’s share capital amounted to € 1,204.7, divided into 504,054,199 registered shares with a nominal value of € 2.39 (two point thirty nine Euro) each. Pursuant to a resolution of the extraordinary General Assembly of the shareholders dated October 17, 2002, the share capital was increased by € 95.8, through the increase of the nominal value of the shares of OTE by € 0.19 (zero point nineteen Euro) each, by capitalization of the 2000 statutory revaluation surplus. |
| | | |
| | The State’s direct participation in OTE’s share capital as of December 31, 2002, was approximately 33.7%. As a result of the State’s interest in OTE falling below 51%, OTE is no longer entitled to the benefit of certain provisions applying to state-owned entities. In particular, OTE has become subject to paying real estate property tax and capital accumulation tax in case of share capital increase both from which OTE had previously been exempted. In addition, as a result of existing legislation, currently a cap applies in respect of lump-sum payments to employees upon retirement (Note 12) and the application of this legislation has been confirmed by a decision of the Supreme Court of Greece. However, as a result of the reduction of the State’s interest in OTE’s share capital, the Greek courts may overturn this decision and may rule that this special provision should no longer apply and OTE should pay its employees retirement lump-sum payments at the rates provided by the respective labor law. If the benefit from this special provision is lost, this could adversely affect OTE’s operating results. |
| | | |
| | The extraordinary General Assembly of October 17, 2002 approved the renewal of the authorization granted to OTE to buy back up to 10 percent of its own shares on the Athens Stock Exchange. Thus, for a period of twelve months from such date (i.e. until October 16, 2003), OTE is authorized to purchase the balance of the 10% of its share capital which it has not purchased by such date (i.e. 7.33%) for a price per share between € 1 (one Euro) and € 30 (thirty Euro). |
| | | |
| | As of December 31, 2002, OTE had repurchased approximately 13.5 million shares (about 2.7% of its outstanding share capital) at cost of approximately € 272.6. The management does not currently intend to cancel any of these shares and certain of these may be reserved for OTE’s employee share option plans (see Note 17). During 2002, no shares were repurchased by OTE. |
| | | |
| 14. | LEGAL RESERVE: |
| | | |
| | Under Greek corporate law, corporations are required to transfer a minimum of five percent of their annual net profit shown in their statutory books to a legal reserve, until such reserve equals one-third of the outstanding share capital. At December 31, 2002, this reserve amounted to € 246.2. This legal resersve cannot be distributed to shareholders. |
F-52
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 15. | DIVIDENDS: |
| | |
| | Under Greek corporate law, each year companies are generally required to declare from their statutory profits, dividends of at least 35% of after-tax profits, after allowing for legal reserve, or a minimum of 6% of the paid-in share capital, whichever is the greater. However, companies can waive such dividend payment requirement with the unanimous consent of their shareholders. |
| | |
| | Furthermore, Greek corporate law requires the following conditions to be met before dividends can be distributed: |
| |
| | (a) | No dividends can be distributed to the shareholders as long as a company’s net equity, as reflected in the statutory financial statements, is, or after such distribution, will be less than the outstanding capital plus non-distributable reserves. |
| |
| | (b) | No dividends can be distributed to the shareholders as long as the unamortized balance of “Preoperating Expenses”, as reflected in the statutory financial statements, exceeds the aggregate of distributable reserves plus retained earnings. |
| |
| | On June 19, 2002, OTE’s shareholders at their ordinary general assembly approved a dividend distribution of € 345.6. |
| |
| 16. | COMMITMENTS AND CONTINGENCIES: |
| |
| | (a) | Litigation and Claims: |
| |
| | (i) | Stamp Tax Assessment: The tax authorities assessed stamp taxes and penalties against OTE of approximately € 27.9, relating to the period from 1982 to 1992. These taxes were assessed on interest on the balances due to/from the Greek State which were netted off during 1993 in accordance with the provisions of Law 2167/93. OTE’s management and tax consultants strongly disputed the above assessments and had filed an appeal with the tax courts. By its decisions, the Administrative Court of Appeal in Athens accepted OTE’s appeal and nullified the stamp taxes and penalties assessed against OTE. |
| | | |
| | | In accordance with prevailing legislation, 20% of the taxes and penalties disputed must be paid to the tax authorities so that legal proceedings can be initiated. In this respect, OTE had made payments of approximately € 11.4, in prior years. During 2000, and in accordance with the decision of the Administrative Court of Appeal, which accepted OTE’s appeal, such payments were netted off with income tax payable to the tax authorities. On August 11, 2000, the competent tax authority has appealed against the decision before the Council of State. The hearing date, after successive postponements, has been set for October 22, 2003. |
F-53
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 16. | COMMITMENTS AND CONTINGENCIES (Continued): |
| |
| | (ii) | Withheld Taxes: From the tax audit of the years 1992-1994 and from the temporary tax audit of fiscal year 1995, which were performed during 1996, additional taxes and penalties were assessed against OTE, principally consisting of an amount of € 10.1, which was assessed on payments made with respect to the Youth Account program and on interest accounted on the employees’ contributions to the Youth Account program. According to the tax authorities, payroll taxes should have been withheld on all of the above amounts and paid over to the State. |
| | | |
| | | The above mentioned amount of € 10.1 is due from the beneficiaries and has therefore been included in loans and advances to personnel in the accompanying consolidated balance sheets. However, as the probability of this amount being collected is considered remote, the Company has fully provided against this receivable in the accompanying consolidated financial statements. |
| | | |
| | (iii) | OTE Leasing: As prescribed in the agreements signed for the sale of OTE Leasing (see Note 1(g)), OTE is committed to indemnify Piraeus Financial Leasing S.A. up to an amount of approximately € 28.0, for possible losses to be incurred from the non-performance of lessees for contracts signed through to the date of sale of OTE Leasing. The conditions under which a lessee’s contract will be characterized as non-performing are described in detail in the sale agreements. Such OTE’s obligation is in force for a period between 3.5-5.5 years, depending on the nature of the lease contracts. OTE has raised a provision of € 15.6 for expected losses based on circumstances prevailing at December 31, 2002. |
| | | |
| | (iv) | Armentel’s arbitration: The Government of Armenia (“GoA”) has lodged an application for request for arbitration on the Paris International Court of Arbitration (the “Court”) of the International Chamber of Commerce, regarding the fulfilment of OTE’s investment obligations under the share purchase agreement. |
| | | |
| | | The share purchase agreement provides, among other, that OTE unconditionally agrees that it shall invest, not less than, in aggregate of U.S. $ 200 million within the five year period (the “Initial Investment Period”) commencing on March 3, 1998 (“Closing Date”), of which at least U.S. $ 100 million shall be invested during the first two years after the Closing Date (up to March 3, 2000). In addition, a further U.S. $ 300 million less the amount invested in the Initial Investment Period shall be invested during the five-year period after the Initial Investment Period. All investments made pursuant to the above shall be used for the purposes of improving, developing and maintaining the telecommunication network owned and operated by Armentel. Armentel did not complete U.S. $ 100 million of investment before March 3, 2000, however, its license provides a grace period of 6 to 12 months after this date to remedy the non-compliance. Armentel prepared a business plan that contemplated compliance with the investment requirements by March 3, 2001 and started its implementation. During 2001, GoA appointed a committee to review Armentel’s investment program. The committee reported that Armentel’s investments amounted to U.S. $ 70 million. Armentel, hired an independent consultant to review investments made in the period from March 1998 through March 2001, who, in turn, reported that Armentel’s investment amounted |
F-54
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 16. | COMMITMENTS AND CONTINGENCIES (Continued): |
| |
| | | to approximately U.S. $ 120 million. On January 29, 2001, the Court requested OTE and GoA (through its attorney) to give official notice of their intentions. OTE responded that in case GoA intended to proceed to an arbitration procedure, OTE would also proceed to contest the case. After successive requests made by the Court to the GoA, on May 7, 2002, its attorney replied that he will respond upon receipt of instructions by GoA. On January 17, 2003, OTE received a further invitation from the International Court of Arbitration to proceed with the arbitration process. No further correspondence from the claimant in this matter has been received. |
| | | |
| | | On January 31, 2002, Armentel signed a new agreement with GoA. According to article 5 of this agreement, amendments have been made to article 6.6 of the share purchase agreement whereby Armentel agrees to invest not less than an aggregate amount of US $ 200 million during the 6 year period commencing from the Closing Date (March 3, 1998 – Initial Investment Period), of which at least US $ 100 million shall be invested in the first two years after the Closing Date, and the remaining balance will be invested during the following four years. In addition, a further aggregate minimum amount (the “Secondary Investment Amount”) equal to US $ 265 million (initially US $ 300 million, subsequently reduced by US $ 35 million) less the amount invested in the Initial Investment Period shall be invested during the five year period after the Initial Investment Period. Management of the company have confirmed that it is their intention to comply with the terms of the Share Purchase Agreement. |
| | | |
| | | On May 5, 2003, OTE received a letter from the Armenian Ministry of Transport and Communication specifying that certain commitments of Armentel under its license had not been fulfilled. Armentel is accused by the GoA of not having fulfilled properly the following requirements of its license: network development requirements (teledensity, digitalisation of 800 villages); the investment program, Internet and data transmission services, the obligation of meeting on time the demand for mobile telephony; the billing requirements. It is also accused by the GoA of using devices which violate the privacy right of its Armenian customers. Armentel denies and rejects all the claims of the GoA and, at level of its Board of Directors, has taken all relevant decisions. Furthermore, Armentel has already communicated to the GoA the status of all its programs without any significant disputes from the Armenian side. Armentel and OTE are going to vigorously defend their positions in this matter, as OTE has already successfully done in similar cases in the past. |
| | | |
| | (v) | Econophone: On March 27, 2003, Econophone (Hellas) S.A., a Greek telecommunications operator and its parent Caesar Management Limited, filed a petition against OTE before the Athens First Instance Court, claiming the amount of approximately € 1,224 in damages allegedly caused to its property and for |
F-55
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| | | economic losses caused to it in each case as a result of OTE’s termination of the interconnection agreement between OTE and Econophone as a result of non payment by Econophone, the alleged refusal to perform the interconnection agreement in accordance with its terms and alleged overcharging of Econophone by OTE in invoices issued by OTE to Econophone. Management and legal counsel believe that Econophone’s claim is without merit and intend to contest the case vigorously; however, an adverse result could have a material effect on the Group’s consolidated financial condition and results of operations. |
| | | |
| | (vi) | Alpha Digital Synthesis S.A.: During January 2002, Alpha Digital Synthesis S.A., a Greek company licensed to provide subscriber television services in Greece, filed a law suit against OTE before the Athens Multi Member Court of First Instance, claiming an amount of € 55.5 for alleged damages incurred as a result of an alleged breach by OTE of the terms of a memorandum of understanding signed by the two parties. The case was scheduled to be heard on March 20, 2003. Alpha Digital Synthesis S.A. has withdrawn this claim and, in accordance with the terms of the memorandum of understanding, it submitted a request for arbitration on May 7, 2003, claiming an amount of approximately € 254.2. Management intends to vigorously defend against this case, however, at this time, it cannot make a reasonable estimate of the final outcome. |
| | | |
| | (vii) | Hellenic Radio and Television Broadcasting S.A. (“ERT”): During May 2002, ERT, the Greek publicly-owned television radio broadcaster, filed a law suit against OTE before the Athens Multi Member Court of First Instance, claiming an amount of € 42.9 for alleged damages incurred by it as a result of an alleged infringement by OTE of the terms of a memorandum of understanding signed by the two parties. The case, after successive postponements is scheduled to be heard on April 21, 2005. Management intends to vigorously defend against this case, however, at this time, it cannot make a reasonable estimate of the final outcome. |
| | | |
| | (viii) | Forthnet: In 2002, Forthnet S.A., which was awarded license to provide wireless telephony service, filed a civil claim, claiming an amount of € 26.7 due to loss of revenue allegedly caused by what is claimed to be OTE’s discriminatory policy in favor of OTENet. The hearing is scheduled for November 11, 2004. At this stage, management and legal counsel cannot make a reasonable estimate on the outcome of the case. |
| | | |
| | (ix) | International Investments: The District Attorney of Athens conducted a preliminary inquiry in order to ascertain whether there were any grounds to press criminal charges against individuals with respect to OTE’s international investments. OTE has furnished the information requested. Upon the conclusion of the preliminary inquiries, OTE understands from press reports, that the District Attorney initiated an investigation against certain current and former employees of OTE for specific alleged criminal offences. An investigating judge has been appointed to conduct the investigation. Furthermore, the District Attorney of Athens and respective authorities in Italy and Serbia have undertaken a preliminary inquiry in order to ascertain whether there were any grounds to press criminal charges against individuals with respect to OTE’s and Telecom Italia’s investment in Telekom Srbija. OTE will continue to cooperate with the District Attorney. |
F-56
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| | (x) | Program of Organizational Modernization of the Administration (SODE): A judge has undertaken a criminal investigation in order to ascertain whether there are any grounds for pressing criminal charges against individuals for improper use of EU funds assigned for the financing of OTE’s Program of Organizational Modernization of the Administration (SODE). OTE is cooperating with the judge and has provided the information requested. |
| | | |
| | (xi) | Agreement with Aurora Global Solutions S.A.: The District Attorney of Athens is conducting a preliminary inquiry in order to ascertain whether there are any grounds to press criminal charges against individuals with regard to the conclusion of a telecommunications services agreement with Aurora Global Solutions S.A. OTE is cooperating with the District Attorney to provide any information requested. |
| | | |
| | (xii) | Insurance Coverage: Since OTE’s telecommunication property, plant and equipment are located throughout Greece and the risk of a major loss is reduced, OTE does not carry any insurance coverage but, instead provides for all known damages and claims as of the balance sheet dates. |
| | | |
| | (xiii) | Other Legal Claims and Litigations: There are various litigations and claims between OTE and third parties, arising during the normal course of business. OTE’s claims against third parties, mainly suppliers and sub-contractors are not recorded until the respective amounts are collected. OTE has established appropriate provisions for the cases that reasonable estimate can be made, for the amount of € 3.3. It is not expected that their ultimate resolution of the remaining cases will have a material effect on the Group’s financial condition and results of operations. |
F-57
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 16. | COMMITMENTS AND CONTINGENCIES (Continued): |
| |
| | (i) | Master Dealer Network: Cosmote’s master dealer network consists of seven exclusive master dealers, namely OTE, Altcom S.A., Klimaphone S.A., Sanyocom S.A., Plaisio Computers S.A., Benrubi net S.A. and Spacephone S.A. (“Master Dealers”). Furthermore, it has entered into a non-exclusive distribution agreement with Germanos Batteries S.A. |
| | | |
| | | Master Dealers and their franchized independent distributors are prohibited from representing Cosmote’s competitors. For each subscriber acquired, Master Dealers are entitled to: |
| |
| | • | an amount per contract subscriber acquired by the Master Dealer that varies depending on the characteristics of each new subscriber. These amounts may be clawed back by Cosmote, with respect to customers who cancel within six months of activation. |
| | | |
| | • | a loyalty bonus in respect of contract subscribers who renew their annual contracts. |
| | | |
| | • | quarterly and annual bonuses if the Master Dealer achieves mutually agreed targets for number of contract subscribers connected to Cosmote’s network during the relevant periods. |
| | | |
| | • | a commission equal to 10%, of the revenues billed by Cosmote to each contract subscriber acquired by a Master Dealer and its network of franchised independent distributors. |
| |
| | | Cosmote also pays its Master Dealers a contribution to co-operative advertising. |
| |
| | | All payments due to Master Dealers are recognized on an accrual basis in the accompanying consolidated financial statements. |
| |
| | (ii) | Interconnection agreements: OTE, based on the interconnection regime which is in effect in Greece according to the Interconnection Directive of the European Union, has signed agreements with nineteen (19) companies who were awarded licences to provide wireless and mobile telephony services in Greece, in relation with call traffic routed between OTE’s and the other operators’ networks. The respective interconnection charges, which are accounted for on an accrual basis, have to be approved by the EETT. |
F-58
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 16. | COMMITMENTS AND CONTINGENCIES (Continued): |
| |
| | (iii) | Olympic Games 2004: In November 2000, a preliminary agreement was signed between the Company (acting as representative of the Joint Venture “OTE-COSMOTE-OTENET”), and the Organizational Committee of the Olympic Games 2004 (“Athens 2004”), under which, the Joint Venture “OTE-COSMOTE-OTENET” was declared the Major Sponsor of the Olympic Games 2004 in the Telecommunications Sector. In return, the Joint Venture will make contributions of € 58.6, out of which € 29.3 in cash and € 29.3 in telecommunication equipment and services. Out of the amount of € 29.3 in cash, € 4.4 were paid in December 2000 and the remaining balance of € 24.9 will be contributed in 14 quarterly instalments through June 2004. During 2001 and 2002, payments of € 7.1 per year were made, representing each year’s contributions. Such payments are expensed as incurred and included in “Other operating expenses” in the accompanying 2001 and 2002 consolidated statements of operations. |
| |
| | (iv) | Capital Commitments: The Group has a number of outstanding commitments on supplier contracts and contractual agreements, which at December 31, 2002, approximated € 411.8. |
F-59
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 16. | COMMITMENTS AND CONTINGENCIES (Continued): |
| |
| | (v) | Operating Commitments: As of December 31, 2002, the Group has entered into a number of operating lease agreements relating to the rental of buildings and transportation equipment, which expire on various dates through 2050. Future annual payments under these agreements are as follows: |
| |
| Year | | Amount |
| |
|
| 2003 | | 11.8 |
| 2004 | | 11.8 |
| 2005 | | 11.8 |
| 2006 | | 11.7 |
| 2007 | | 11.6 |
| Thereafter | | 72.9 |
| | |
|
| | | 131.6 |
| | |
|
| |
| 17. | STOCK-BASED COMPENSATION: |
| |
| | (a) | OTE: OTE has two compensatory share option plans. |
| | | |
| | | First Plan |
| |
| | | The first plan (“First Plan”) was approved on September 4, 2001, by OTE’s Extraordinary General Assembly and is administered by the Board of Directors. |
| |
| | | The principal terms of the First Plan that were approved by the shareholders are as follows: |
| |
| | (i) | Eligibility: Options are granted to OTE’s management, specifically to the Managing Director, to the Deputy Managing Director, to General Directors, to the Legal counsel and Section Managers. |
| | | |
| | (ii) | Exercise Price: The exercise price payable for each share under options granted was set as the average price of OTE’s share’s price for the month preceding the grant of options determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to € 17.07 at the grant date. |
| | | |
| | (iii) | Exercise of Options: Under the plan, OTE’s Board of Directors issued 4,881,000 option rights which will vest as follows: (1) 40% of the rights on the first anniversary of the date of the grant, (2) 30% of the rights within the second year of the date of the grant, and, (3) 30% of the rights within the third year of the date of the grant. The rights vesting within the second and the third year of the date of the grant can be exercized only if certain financial growth targets (including revenue growth and EBITDA) for fiscal years 2002 and 2003 will be met. If the financial targets for 2002 or 2003 are not met, eligible employees will still be able to exercise their options if OTE meets its cumulative financial growth targets in 2003. The 2002 targets were not met. Options shall expire in the following events: |
| |
| | • | If the employment is terminated for any reason prior to the payment of the purchase price, unless the Board of Directors determines otherwise. If the |
F-60
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| | | employee dies after the options vest, his beneficiaries may exercise any unexercised options, in accordance with and subject to certain provisions. |
F-61
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 17. | STOCK-BASED COMPENSATION (Continued): |
| |
| | • | If the employee voluntarily retires from OTE, the eligible employee can exercise options vested through the voluntary retirement date until the expiring date of the plan. |
| |
| | Second Plan |
| |
| | The second plan (“Second Plan”) was approved on January 28, 2002, by OTE’s Extraordinary General Assembly and is administered by the Board of Directors. |
| |
| | The principal terms of the Second Plan that were approved by the shareholders are as follows: |
| |
| | (i) | Eligibility: Options are granted to OTE’s employees and to the management of OTE’s Greek, not listed in the Athens Stock Exchange, subsidiaries, specifically to their Managing Directors, to the Deputy Managing Directors and to their General Directors. |
| | | |
| | (ii) | Exercise Price: The exercise price payable for each share under options granted was the same with that of the First Plan equal to € 17.07 at the grant date, which was January 15, 2002. |
| | | |
| | (iii) | Exercise of Options: Under this plan, OTE’s Board of Directors issued 8,920,000 option rights for all OTE employees which will vest as follows: (1) 50% of the rights on the first anniversary of the date of the grant and (2) 50% of the rights within the second year of the date of the grant. Also, OTE’s Board of Directors issued 720,000 option rights for the management of its subsidiaries, which will vest as follows: (1) 40% of the rights on the first anniversary of the date of the grant, (2) 30% of the rights during the second year of the date of grant, and, (3) 30% of the rights during the third year of the date of the grant. The rights vesting within the second and the third year of the date of the grant can be exercised only if certain financial growth targets (including revenue growth and EBITDA) for fiscal years 2003 and 2004 are met. Options shall expire in the following events: |
| |
| | • | If the employment is terminated for any reason prior to the payment of the purchase price. If the employee dies after the options vest, his beneficiaries may exercise any unexercised options, in accordance with and subject to certain provisions. |
| |
| | • | If the employee voluntarily retires from OTE, the eligible employee can exercise options vested through the voluntary retirement date until the expiring date of the plan. |
| |
| | The movement in the options outstanding during the two years ended December 31, 2002, is as follows: |
| |
| | Number of shares
subject to option | | | Weighted average
exercise price (€) |
| |
| | |
|
| Outstanding at January 1, 2001 | - | | | - |
| Granted during the period | 4,881,000 | | | 17.07 |
| |
| | |
|
| Outstanding at December 31, 2001 | 4,881,000 | | | 17.07 |
| Exercisable at December 31, 2001 | - | | | - |
| Outstanding at January 1, 2002 | 4,881,000 | | | 17.07 |
| Granted during the period | 9,640,000 | | | 17.07 |
| Exercised during the period | - | | | - |
| Forfeited during the period | (70,000 | ) | | 17.07 |
| Expired during the period | - | | | - |
| |
| | |
|
| Outstanding at December 31, 2002 | 14,451,000 | | | 17.07 |
| Exercisable at December 31, 2002 | 1,952,400 | | | 17.07 |
F-62
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| | The weighted average fair value of options granted in the two years ended December 31, 2002, was estimated using the Black-Scholes stock option pricing model. The following weighted average assumptions were used: |
| | |
| | Year ended December 31, |
| | 2001 | | | 2002 |
| |
| | |
|
| Dividend Yield | 4.1% | | | 3.8% |
| Volatility | 15.6% | | | 37.0% |
| Risk free rate | 5.0% | | | 5.0% |
| Expected life (years) | 3 | | | 4 |
| |
| | All options granted in 2001 and 2002, had an exercise price less than the market price at grant date. The weighted average exercise price was € 17.07 (seventeen point zero seven Euro) for both years and the weighted average fair value of the stock options granted in 2001 and 2002 was € 2.41 (two point forty one Euro) and € 4.99 (four point ninety nine Euro), respectively. |
| | |
| | The following table provides details of all options outstanding as at December 31, 2002. |
| | |
| | | Outstanding | | Exercisable |
| | |
| |
|
| Plan | | Number | | Weighted
Average
Exercise Price (€) | | Weighted
Average
Remaining
Contractual Life | | Number | | Weighted
Average
Exercise Price (€) |
| |
| |
| |
| |
| |
|
| First | | 4,881,000 | | 17.07 | | 3.56 | | 1,952,400 | | 17.07 |
| Second | | 9,570,000 | | 17.07 | | 3.56 | | - | | - |
| | |
| |
| |
| |
| |
|
| Total | | 14,451,000 | | 17.07 | | 3.56 | | 1,952,400 | | 17.07 |
| | |
| |
| |
| |
| |
|
| | (b) | Cosmote: |
| |
| | | Cosmote has three, compensatory management share option plans. |
| |
| | | First Plan |
| |
| | | The first plan (“First Plan”) was approved on September 6, 2000, by Cosmote’s Shareholders Extraordinary General Assembly and is administered by the Board of Directors. |
| |
| | | The principal terms of the First Plan that were approved by the shareholders are as follows: |
| |
| | (i) | Eligibility: Options can be granted to Cosmote’s management subject to the approval of their participation on the respective entry date in the First Plan by the Board of Directors in October each year. Further grants of options may be made by the Board of Directors to eligible employees at the end of each year. |
| |
| | (ii) | Entitlement to Options: Cosmote’s management will be entitled to options in respect of shares of the company with an aggregate value between two and a half times and five times their annual gross salaries. |
F-63
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 17. | STOCK-BASED COMPENSATION (continued): |
| |
| | (iii) | Exercise Price: The exercise price payable for each share under options granted at the time of the establishment of the First Plan will be 10% below the bottom end of the range for the Offer Price of € 9.1 (nine point one €). The exercise price for the purchase of shares under options granted on subsequent occasions by the Board of Directors will be the average closing price of Cosmote’s shares for the month preceding the grant of options determined by reference to the Daily Bulletin of the Athens Stock Exchange. This preferential price will also apply for any options that may be additionally granted. |
| | | |
| | (iv) | Exercise of Options: Options granted to an employee will vest on the third anniversary of the date of the grant provided certain conditions precedent are satisfied. In particular, as far as the options granted to the Chairman of the Board of Directors are concerned, these options vest one year of the date of the grant (i.e. October 20, 2001). During November 2001, the Chairman made an application to the Board of Directors in order to exercise 55,870 options, which was approved on December 21, 2001 and such options were exercised during January 2002. Exercise of options is not automatic and participants must make a written application in a prescribed form to exercise options in November of the year of the vesting to the Board of Directors. At the Board meeting to be held in December each year, the Board of Directors will ensure that the participants employment has not been terminated, approve or disapprove such application as appropriate, and agree to increase the share capital which would result from the exercise of the options approved in accordance with Law 2190/1920 (but only insofar as Cosmote has not purchased sufficient shares in the open market in respect of the options to be exercised). Options not exercised within four years of the date of grant shall lapse. Options shall expire in the following events: |
| |
| | • | If the employment is terminated for any reason prior to the payment of the purchase price, unless the Board of Directors of Cosmote determines otherwise. If the employee dies after the options vest, his beneficiaries may exercise any unexercised options, in accordance with and subject to certain provisions. |
| |
| | • | If a participant does not submit the written application for exercise within the time period defined, or does not pay in full the purchase price of shares within (20) twenty days following the increase of capital. |
| |
| | (v) | Limitations: The number of shares which may be acquired in any five year period after the establishment of the First Plan pursuant to its terms or to the terms of any other share option scheme or issued and allotted under all other employee share schemes adopted by Cosmote, may not exceed 5% of Cosmote’s share capital in issue from time to time and, in any event, may not exceed 10% of the share capital at the time of the establishment of the First Plan. |
| | | |
| | (vi) | Amendment: The shareholders in general meetings shall have the exclusive right to amend, modify, suspend or terminate the First Plan. |
F-64
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 17. | STOCK-BASED COMPENSATION (Continued): |
| |
| | Under the First Plan, Cosmote’s Board of Directors was authorized to issue and issued 1,187,010 option rights on October 20, 2000. Options were granted to Cosmote’s management in respect of shares of Cosmote with an aggregate value varying between two and a half times and five times their annual gross salaries, at an exercise price 10% below the bottom end of the range of the Offer Price, equal to € 8.24 (eight point twenty four €) at the grant date. |
| |
| | On February 21, 2002, Cosmote’s Shareholders Extraordinary General Assembly approved the amendment of certain terms of the management incentive plans, summarized as follows: |
| |
| | (i) | Options granted to an employee at the initial participation will vest as follows: 1) 40% of the rights on the first anniversary of the date of the grant, 2) 30% of the rights on the second anniversary of the date of the grant, and, 3) 30% of the rights on the third anniversary of the date of the grant. Any, additional rights to be granted under the plans as well as additional options to be granted to the Chairman of the Board of Directors will vest on the third anniversary of the date of the grant, |
| | | |
| | (ii) | The vested rights can be exercised, in their entirety or partially, up to November of the fourth anniversary of the date of the grant, |
| | | |
| | (iii) | Options not vested shall expire if the employment is terminated for any reason prior to the vesting of such options, irrespective of the time of their exercise, unless the Board of Directors of Cosmote determines otherwise, and |
| |
| | The above amendments did not have a significant effect on Cosmote’s consolidated financial statements since the intrinsic value of the award at the date of modification was below the intrinsic value at the date of the grant. |
| |
| | Second Plan |
| |
| | The second plan (“the Second Plan”), which is considered an extension of the First Plan was approved on October 26, 2001, by Cosmote’s Board of Directors. Under this plan, the Board of Directors authorized and issued 1,247,310 option rights. Options were granted to eligible employees in respect of shares of the company at an exercise price which is the average closing price of Cosmote’s shares for the month preceding the grant of options (i.e. September 2001), determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to € 9.78 (nine point seventy eight €) at the grant date. Of the authorized and issued options rights, 296,920 options are additional rights granted to eligible employees under the First Plan. |
| |
| | The terms of the Second Plan are the same as those of the First Plan except that, under the Second Plan, section managers and new executives are also eligible employees. |
| |
| | Third Plan |
| |
| | The third plan (“the Third Plan”), which is considered an extension of the First Plan was approved on October 24, 2002, by the Company’s Board of Directors. Under this plan, the Board of Directors authorized and issued 1,184,135 option rights. Options were granted to eligible employees in respect of shares of the Company at an exercise price which is the |
F-65
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| | average closing price of the Company’s shares for the month preceding the grant of |
F-66
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 17. | STOCK-BASED COMPENSATION (Continued): |
| |
| | options (i.e. September 2002), determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to € 8.96 (eight point ninety six €) at the grant date. Of the authorized and issued options rights, 833,765 options are additional rights granted to eligible employees under the First Plan. |
| |
| | The terms of the Third Plan are the same as those of the First and Second Plans, as amended February 21, 2002. |
| |
| | The movement in the options outstanding during the three years ended December 31, 2002, is as follows: |
| | Number of shares
subject to option | | | Weighted average
exercise price (€) |
| |
| | |
|
| Outstanding at January 1, 2000 | - | | | - |
| Granted during the period | 1,187,010 | | | 8.24 |
| |
| | |
|
| Outstanding at December 31, 2000 | 1,187,010 | | | 8.24 |
| Exercisable at December 31, 2000 | - | | | - |
| Outstanding at January 1, 2001 | 1,187,010 | | | 8.24 |
| Granted during the period | 1,247,310 | | | 9.78 |
| Forfeited during the period | (29,915 | ) | | 8.24 |
| |
| | |
|
| Outstanding at December 31, 2001 | 2,404,405 | | | 9.04 |
| Exercisable at December 31, 2001 | 55,870 | | | 8.24 |
| Outstanding at January 1, 2002 | 2,404,405 | | | 9.04 |
| Granted during the period | 1,184,135 | | | 8.96 |
| Exercised during the period | (55,870 | ) | | 8.24 |
| Forfeited during the period | (83,360 | ) | | 9.78 |
| Expired during the period | - | | | - |
| |
| | |
|
| Outstanding at December 31, 2002 | 3,449,310 | | | 9.01 |
| Exercisable at December 31, 2002 | 1,154,533 | | | 8.72 |
| | The weighted average fair value of options granted in the three years ended December 31, 2002, was estimated using the Black-Scholes stock option pricing model. The following weighted average assumptions were used: |
| | |
| | Year ended December 31, |
| | 2000 | | | 2001 | | | 2002 |
| |
| | |
| | |
|
| Dividend Yield | 0.5% | | | 1.4% | | | 3.5% |
| Volatility | 37.0% | | | 29.0% | | | 36.0% |
| Risk free rate | 5.0% | | | 5.0% | | | 5.0% |
| Expected life (years) | 3 | | | 3 | | | 3 |
| |
| | All options granted in each of the three years ended December 31, 2002, had an exercise price in excess of the market price at grant date. Furthermore, the weighted average exercise price and the average fair value at grant date for each of the years were estimated as follows: 2000: € 8.24 (eight point twenty four Euro) and € 11.1 (eleven point one Euro) respectively, 2001 : € 9.78 (nine point seventy eight Euro) and € 2.44 (two point forty four Euro) respectively, and 2002 : € 8.96 (eight point ninety six Euro) and € 1.74 (one point seventy four Euro) respectively. |
| | |
| | The following table provides details of all options outstanding as at December 31, 2002. |
| |
| | | Outstanding | | Exercisable |
| | |
| |
|
| Plan | | Number | | Weighted
Average
Exercise Price (€) | | Weighted
Average
Remaining
Contractual Life | | Number | | Weighted
Average
Exercise Price (€) |
| |
| |
| |
| |
| |
|
| First | | 1,101,225 | | 8.24 | | 1.80 | | 796,553 | | 8.24 |
| Second | | 1,163,950 | | 9.78 | | 2.82 | | 357,980 | | 9.78 |
| Third | | 1,184,135 | | 8.96 | | 3.82 | | - | | - |
| | |
| |
| |
| |
| |
|
| Total | | 3,449,310 | | 9.01 | | 2.82 | | 1,154,533 | | 8.72 |
| | |
| |
| |
| |
| |
|
F-67
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 17. | STOCK-BASED COMPENSATION (Continued): |
| |
| | In October 1995, SFAS No. 123 “Accounting for Stock-Based Compensation” was issued. The Group has adopted the disclosure provisions of SFAS No. 123, but opted to remain under the expense recognition provisions of Accounting Principles Board (APB) Opinion No 25, “Accounting for Stock Issued to Employees” in accounting for options granted under the Management Incentive Plan. Compensation expense recorded for 2001 and 2002 amounted to € 1.5 and € 8.1 respectively. Compensation expense for 2000 was negligible. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Group’s pro forma information for the three years ended December 31, 2002 is presented in Note 2(t) under heading “Stock-Based Compensation”. |
| |
| | The following information is provided as required by SFAS No. 131 “Disclosures about segments of an Enterprise and Related Information”. The information presented is based on the criteria set by SFAS No. 131 for the determination of the reportable segments, and is regularly reviewed by the Group’s chief operating decision makers. |
| |
| | Segments were determined based on the Group’s legal structure, as the Group’s chief operating decision makers review financial information separately reported by the parent company (OTE) and each of the Group’s consolidated subsidiaries. |
| |
| | Using the quantitative thresholds required by SFAS No. 131, OTE and Cosmote have been determined as reportable segments. OTE is the public fixed switched telecommunications network provider in Greece, mainly providing local, long-distance and international telecommunications services through public network. Cosmote provides mobile telecommunications services throughout Greece. Information about operating segments that do not constitute reportable segments under SFAS No. 131 have been combined and disclosed in an “all other” category. The “all other” category includes financial information for the consolidated subsidiaries, except for Cosmote. |
| |
| | Prior years’ segment financial information is also presented for comparative purposes. Accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Group evaluates segment performance based on operating income and net income. The Group accounts for intersegment sales and transfers as if the sales or transfers were to third parties at current market price. |
F-68
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 18. | REPORTABLE SEGMENTS (Continued): |
| |
Segment information and reconciliation to the Group’s consolidated figures are as follows: |
| | | Reportable Segments
| | | | | | | | | Adjustments & | | | | |
| Year ended December 31, 2002 | | OTE | | | Cosmote | | | All Other | | | Totals | | | Eliminations | | | Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| Revenues from external customers | | 3,146.8 | | | 831.0 | | | 331.1 | | | 4,308.9 | | | - | | | 4,308.9 | |
| Intersegment revenues | | 338.4 | | | 275.1 | | | 145.9 | | | 759.4 | | | (759.4 | ) | | 0.0 | |
| Interest income | | 56.5 | | | 1.8 | | | 74.4 | | | 132.7 | | | (69.6 | ) | | 63.1 | |
| Interest expense | | (97.1 | ) | | (9.4 | ) | | (81.5 | ) | | (188.0 | ) | | 69.6 | | | (118.4 | ) |
| Depreciation and amortization | | (511.2 | ) | | (124.3 | ) | | (65.1 | ) | | (700.6 | ) | | 0.4 | | | (700.2 | ) |
| Losses on investments | | 2.7 | | | - | | | (22.8 | ) | | (20.1 | ) | | - | | | (20.1 | ) |
| Income tax (expense) / benefit | | (197.3 | ) | | (112.3 | ) | | 5.2 | | | (304.4 | ) | | - | | | (304.4 | ) |
| Operating income | | 645.2 | | | 328.3 | | | 46.3 | | | 1,019.8 | | | 0.2 | | | 1,020.0 | |
| Net income | | 232.8 | | | 209.6 | | | (26.2 | ) | | 416.2 | | | (70.4 | ) | | 345.8 | |
| Investments in and advances to associates | | 178.6 | | | 0.1 | | | 346.6 | | | 525.3 | | | (1.4 | ) | | 523.9 | |
| Segment assets | | 8,126.3 | | | 1,253.1 | | | 2,651.9 | | | 12,031.3 | | | (3,045.0 | ) | | 8,986.3 | |
| Expenditures for segment assets | | 696.7 | | | 196.4 | | �� | 219.8 | | | 1,112.9 | | | - | | | 1,112.9 | |
| | | | | | | | | | | | | | | | | | | |
| | | Reportable Segments
| | | | | | | | | Adjustments & | | | | |
| Year ended December 31, 2001 | | OTE | | | Cosmote | | | All Other | | | Totals | | | Eliminations | | | Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| Revenues from external customers | | 3,169.4 | | | 613.5 | | | 289.6 | | | 4,072.5 | | | 0.0 | | | 4,072.5 | |
| Intersegment revenues | | 268.6 | | | 235.5 | | | 66.2 | | | 570.3 | | | (570.3 | ) | | 0.0 | |
| Interest income | | 43.6 | | | 1.3 | | | 84.0 | | | 128.9 | | | (68.4 | ) | | 60.5 | |
| Interest expense | | (106.3 | ) | | (10.8 | ) | | (82.8 | ) | | (199.9 | ) | | 68.4 | | | (131.5 | ) |
| Depreciation and amortization | | (436.1 | ) | | (93.5 | ) | | (60.4 | ) | | (590.0 | ) | | 0.2 | | | (589.8 | ) |
| Losses on investments | | 5.1 | | | (0.1 | ) | | (16.2 | ) | | (11.1 | ) | | 0.0 | | | (11.1 | ) |
| Income tax (expense) / benefit | | (244.6 | ) | | (92.4 | ) | | 68.2 | | | (268.8 | ) | | 0.0 | | | (268.8 | ) |
| Operating income | | 817.4 | | | 254.2 | | | 54.5 | | | 1,126.1 | | | (8.0 | ) | | 1,118.1 | |
| Net income | | 470.5 | | | 152.1 | | | (150.6 | ) | | 472.0 | | | (76.8 | ) | | 395.2 | |
| Investments in and advances to associates | | 278.9 | | | 0.1 | | | 376.7 | | | 655.7 | | | (2.2 | ) | | 653.5 | |
| Segment assets | | 7,603.6 | | | 1,104.7 | | | 2,620.3 | | | 11,328.6 | | | (2,944.0 | ) | | 8,384.6 | |
| Expenditures for segment assets | | 857.8 | | | 305.5 | | | 196.8 | | | 1,360.1 | | | 0.0 | | | 1,360.1 | |
F-69
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 18. | REPORTABLE SEGMENTS (Continued): |
| | | Reportable Segments
| | | | | | | | | Adjustments & | | | | |
| Year ended December 31, 2000 | | OTE | | | Cosmote | | | All Other | | | Totals | | | Eliminations | | | Consolidated | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| Revenues from external customers | | 3,063.8 | | | 393.4 | | | 139.0 | | | 3,596.2 | | | 0.0 | | | 3,596.2 | |
| Intersegment revenues | | 181.6 | | | 202.8 | | | 19.3 | | | 403.7 | | | (403.7 | ) | | 0.0 | |
| Interest income | | 72.5 | | | 2.8 | | | 82.3 | | | 157.6 | | | (63.7 | ) | | 93.9 | |
| Interest expense | | (83.2 | ) | | (14.7 | ) | | (73.7 | ) | | (171.6 | ) | | 62.6 | | | (109.0 | ) |
| Depreciation and amortization | | (418.3 | ) | | (57.6 | ) | | (28.3 | ) | | (504.2 | ) | | 0.2 | | | (504.0 | ) |
| Losses on investments | | (10.2 | ) | | 0.0 | | | 6.3 | | | (3.9 | ) | | 0.0 | | | (3.9 | ) |
| Income tax expense | | (358.5 | ) | | (37.8 | ) | | (6.5 | ) | | (402.8 | ) | | 0.0 | | | (402.8 | ) |
| Operating income | | 715.0 | | | 119.5 | | | 20.3 | | | 854.8 | | | 0.0 | | | 854.8 | |
| Net income | | 611.2 | | | 56.3 | | | 17.6 | | | 685.1 | | | (56.4 | ) | | 628.7 | |
| Investments in and advances to associates | | 268.6 | | | 0.2 | | | 590.3 | | | 859.1 | | | 0.0 | | | 859.1 | |
| Segment assets | | 6,657.5 | | | 739.5 | | | 2,283.7 | | | 9,680.7 | | | (2,000.8 | ) | | 7,679.9 | |
| Expenditures for segment assets | | 744.1 | | | 206.6 | | | 94.2 | | | 1,044.9 | | | 0.0 | | | 1,044.9 | |
Geographic Information
The following table provides geographic information about revenues from external customers and long-lived assets for the three year period ended December 31, 2002:
| | | Revenues | | Long-lived assets |
| | |
| |
|
| Country | | 2000 | | 2001 | | 2002 | | 2000 | | 2001 | | 2002 |
| |
| |
| |
| |
| |
| |
|
| Greece | | 3,527.2 | | 3,905.8 | | 4,087.5 | | 3,905.7 | | 4,666.3 | | 4,913.4 |
| Foreign countries | | 69.0 | | 166.7 | | 221.4 | | 297.1 | | 675.1 | | 828.5 |
| | |
| |
| |
| |
| |
| |
|
| | | 3,596.2 | | 4,072.5 | | 4,308.9 | | 4,202.8 | | 5,341.4 | | 5,741.9 |
| | |
| |
| |
| |
| |
| |
|
Major Customers
Revenues generated from State Entities and Organizations (Greek State) amounted to approximately 5% of total revenues for each of the three years in the period ended December 31, 2002.
F-70
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 19. | REVENUES: |
| |
| | Revenues in the accompanying consolidated statements of operations consist of income from: |
| | | | Year ended December 31, |
| | | |
|
| | | | 2000 | | 2001 | | 2002 |
| | | |
| |
| |
|
| (i) | | Domestic Telephony | | | | | |
| | | • Monthly network service fees | 454.5 | | 528.8 | | 639.8 |
| | | |
| |
| |
|
| | | • Local and long-distance calls | | | | | |
| | | - Fixed to fixed | 938.8 | | 967.6 | | 784.6 |
| | | - Fixed to mobile | 571.0 | | 612.7 | | 634.0 |
| | | |
| |
| |
|
| | | | 1,509.8 | | 1,580.3 | | 1,418.6 |
| | | |
| |
| |
|
| | | • Other | 52.2 | | 60.0 | | 62.1 |
| | | |
| |
| |
|
| | | | 2,016.5 | | 2,169.1 | | 2,120.5 |
| | | |
| |
| |
|
| (ii) | | International Telephony | | | | | |
| | | • International traffic | 214.9 | | 202.6 | | 185.5 |
| | | • Payments from international operators | 134.0 | | 138.1 | | 127.9 |
| | | • Payments from mobile operators | 49.8 | | 41.5 | | 36.5 |
| | | |
| |
| |
|
| | | | 398.7 | | 382.2 | | 349.9 |
| | | |
| |
| |
|
| | | | | | | | |
| (iii) | | Mobile telephony services | 375.4 | | 656.9 | | 950.3 |
| | | |
| |
| |
|
| | | | | | | | |
| (iv) | | Other revenues | | | | | |
| | | | | | | | |
| | | Traditional Services: | | | | | |
| | | • Telecards | 186.5 | | 176.3 | | 175.4 |
| | | • Directories | 40.5 | | 38.6 | | 44.2 |
| | | • Radio communications | 27.2 | | 24.9 | | 29.0 |
| | | • Audiotex | 43.2 | | 55.9 | | 69.1 |
| | | • Telex and telegraphy | 11.9 | | 9.4 | | 5.4 |
| | | |
| |
| |
|
| | | | 309.3 | | 305.1 | | 323.1 |
| | | |
| |
| |
|
| | | New Business: | | | | | |
| | | • Leased lines and Data communications | 157.2 | | 178.5 | | 170.6 |
| | | • Integrated Services Digital Network | 29.2 | | 48.0 | | 68.8 |
| | | • Sales of telecommunication equipment | 74.8 | | 99.8 | | 86.3 |
| | | • Internet services | 18.4 | | 28.5 | | 39.2 |
| | | • Asynchronous Transfer Mode | 9.3 | | 18.6 | | 14.9 |
| | | |
| |
| |
|
| | | | 288.9 | | 373.4 | | 379.8 |
| | | |
| |
| |
|
| | | Other | | | | | |
| | | • Services rendered | 68.2 | | 105.6 | | 72.4 |
| | | • State’s participation in universal services | 32.3 | | - | | - |
| | | • Interconnection charges | 83.4 | | 66.1 | | 96.2 |
| | | • Miscellaneous | 23.5 | | 14.1 | | 16.7 |
| | | |
| |
| |
|
| | | | 207.4 | | 185.8 | | 185.3 |
| | | |
| |
| |
|
| | | | 805.6 | | 864.3 | | 888.2 |
| | | |
| |
| |
|
F-71
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
| 20. | OTHER OPERATING EXPENSES: |
| |
| | Other operating expenses in the accompanying consolidated statements of operations consist of: |
| | Year ended December 31, |
| |
|
| | 2000 | | 2001 | | 2002 |
| |
| |
| |
|
| Services and fees | 70.5 | | 94.7 | | 110.1 |
| Repairs and maintenance | 84.3 | | 149.1 | | 111.8 |
| Advertising costs | 30.4 | | 70.2 | | 70.7 |
| Cost of equipment | 146.8 | | 133.7 | | 134.9 |
| Utilities | 65.1 | | 47.1 | | 85.9 |
| Provision for doubtful accounts | 87.8 | | 83.1 | | 89.8 |
| Provision for litigation and claims | - | | 12.9 | | - |
| Travel costs | 15.7 | | 15.2 | | 16.0 |
| Cost of prepaid airtime cards | 21.3 | | 24.9 | | 33.8 |
| Commission to independent distributors | 118.2 | | 105.7 | | 121.1 |
| Payments to audiotex providers | 28.9 | | 39.7 | | 51.9 |
| Rent | 15.8 | | 25.6 | | 30.3 |
| Taxes, other than income taxes | 13.2 | | 15.3 | | 22.1 |
| Transportation | 7.2 | | 9.3 | | 6.1 |
| Other | 35.6 | | 52.0 | | 66.7 |
| |
| |
| |
|
Total other operating expenses | 740.8 | | 878.5 | | 951.2 |
| |
| |
| |
|
| 21. | FAIR VALUE OF FINANCIAL INSTRUMENTS: |
| |
| | The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, accounts payable, accruals and short-term borrowings approximate the fair value because of the short-term maturity of these instruments. In addition, available-for-sale marketable securities are carried at their fair value based on quoted market prices. The fair value of long-term debt including current maturities is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Group for similar debt of the same remaining maturities. |
| |
| | The estimated fair values of the Group’s financial instruments are as follows: |
| | December 31, 2001 | | December 31, 2002 |
| |
| |
|
| | Carrying
amount | | Fair
Value | | Carrying
amount | | Fair
Value |
| |
| |
| |
| |
|
| Long term debt at floating interest rates | 1,089.8 | | 1,089.8 | | 1,363.0 | | 1,363.0 |
| Long term debt at fixed interest rates | 1,243.5 | | 1,298.5 | | 1,254.8 | | 1,353.1 |
| |
| |
| |
| |
|
| | 2,333.3 | | 2,388.3 | | 2,617.8 | | 2,716.1 |
| |
| |
| |
| |
|
F-72
