Table of Contents
OF THE SECURITIES EXCHANGE ACT OF 1934
GR 15181 Amaroussion
Athens, Greece
(Address of Principal Executive Offices)
Title of each class | Name of each exchange on which registered | |
American Depositary Shares, each representing one half of one | New York Stock Exchange | |
Ordinary Share | ||
Ordinary Shares nominal value€2.39 per share* |
* | Listed on the New York Stock Exchange not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission. |
Table of Contents
1 | ||||
2 | ||||
4 | ||||
4 | ||||
4 | ||||
4 | ||||
4 | ||||
8 | ||||
8 | ||||
8 | ||||
18 | ||||
18 | ||||
19 | ||||
75 | ||||
77 | ||||
77 | ||||
77 | ||||
77 | ||||
88 | ||||
96 | ||||
97 | ||||
98 | ||||
98 | ||||
99 | ||||
99 | ||||
107 | ||||
109 | ||||
113 | ||||
114 | ||||
114 | ||||
114 | ||||
114 | ||||
114 | ||||
114 | ||||
114 | ||||
114 | ||||
114 | ||||
115 | ||||
115 |
i
Table of Contents
115 | ||||||||
116 | ||||||||
116 | ||||||||
116 | ||||||||
116 | ||||||||
116 | ||||||||
120 | ||||||||
120 | ||||||||
121 | ||||||||
124 | ||||||||
124 | ||||||||
125 | ||||||||
125 | ||||||||
125 | ||||||||
127 | ||||||||
127 | ||||||||
127 | ||||||||
127 | ||||||||
127 | ||||||||
128 | ||||||||
128 | ||||||||
128 | ||||||||
128 | ||||||||
129 | ||||||||
129 | ||||||||
129 | ||||||||
129 | ||||||||
130 | ||||||||
130 | ||||||||
131 | ||||||||
132 | ||||||||
Exhibit 1 | ||||||||
Exhibit 12.1 | ||||||||
Exhibit 12.2 | ||||||||
Exhibit 13.1 | ||||||||
Exhibit 13.2 |
ii
Table of Contents
• | “U.S. Dollars”, “U.S. $” or “$” means the lawful currency of the United States; | ||
• | “Euro” or “€” means the common currency of Member States of the European Union participating in the third stage of European Monetary Union; | ||
• | “Denar” means the currency of the Former Yugoslav Republic of Macedonia (“FYROM”); | ||
• | “Dinar” means the currency of the Republic of Serbia; | ||
• | “Dram” means the currency of the Republic of Armenia; | ||
• | “Lei” or “RON” means the currency of the Republic of Romania; | ||
• | “Leva” or “BGN” means the currency of the Republic of Bulgaria; and | ||
• | “Lek” means the currency of the Republic of Albania. |
1
Table of Contents
• | statements regarding our results of operations, financial condition, future economic performance and plans to rebalance our tariffs; | ||
• | statements regarding our competitive position and statements regarding competition in the Greek telecommunications industry and in other countries where we have significant operations and regarding the effect of such competition on our results of operations; | ||
• | statements of our plans, objectives or goals, including those related to products or services; | ||
• | statements regarding our investment and expansion programs and anticipated investments in this regard; | ||
• | statements regarding new services or products and anticipated customer demand for these services or products; | ||
• | statements regarding our cost reduction programs, including our voluntary retirement programs; | ||
• | statements of assumptions; | ||
• | statements regarding the potential impact of regulatory actions on our business, financial condition and operations; and | ||
• | statements regarding the possible effects of adverse determinations in litigation, investigations, contested regulatory proceedings and other disputes. |
• | risks and uncertainties relating to our international operations; |
2
Table of Contents
• | economic and political developments in the countries where we conduct operations; | ||
• | the effect of, and changes in, regulation and government policy; | ||
• | the effects of competition and competitive activity requiring changes in pricing models and/or new product offerings or resulting in higher costs of acquiring new customers or providing new services, or slower customer growth or reduced customer retention; | ||
• | regulatory developments, including changes to our permitted tariffs, the terms of access to our network, the terms of interconnection and other issues; | ||
• | our ability to reduce costs and to realize synergies and productivity improvements; | ||
• | loss of suppliers or disruption of supply chains; | ||
• | our timely development and acceptance of new products and services and our ability to secure the timely delivery of key products from suppliers; | ||
• | the effects of technological changes in telecommunications and information technology and the possibility of rapid obsolescence of existing technology; | ||
• | changes in the projected growth rates of the fixed and mobile telecommunications industries, respectively; | ||
• | the possibility that technologies and services, including third generation (3G or UMTS) services, will not perform according to expectations or that vendors’ performance will not meet our requirements; | ||
• | the impact of legal or other proceedings against us or against any of our international operations; and | ||
• | our success at managing the foregoing and related risks. |
3
Table of Contents
For the Year ended December 31, | ||||||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2006 | |||||||||||||||||||
(Euro) | (Euro) | (Euro) | (Euro) | (Euro) | (U.S. $)(1) | |||||||||||||||||||
(millions except shares and per share data) | ||||||||||||||||||||||||
Income Statement Data | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Domestic telephony(2) | 2,120.5 | 2,349.5 | 2,262.9 | 2,308.1 | 2,256.7 | 2,978.2 | ||||||||||||||||||
International telephony(3) | 349.9 | 375.5 | 376.6 | 391.0 | 346.9 | 457.9 | ||||||||||||||||||
Mobile telephony services | 950.3 | 1,228.8 | 1,555.4 | 1,756.7 | 1,975.8 | 2,607.5 | ||||||||||||||||||
Other revenues(4) | 888.2 | 960.5 | 989.1 | 1,015.2 | 1,308.0 | 1,726.2 | ||||||||||||||||||
Total revenues | 4,308.9 | 4,914.3 | 5,184.0 | 5,471.0 | 5,887.4 | 7,769.8 | ||||||||||||||||||
Operating expenses | (3,288.9 | ) | (3,895.4 | ) | (4,546.1 | ) | (5,473.4 | ) | (4,825.3 | ) | (6,368.1 | ) | ||||||||||||
Operating income/(loss) | 1,020.0 | 1,018.9 | 637.9 | (2.4 | ) | 1,062.1 | 1,401.7 | |||||||||||||||||
Other income/(expense) | (231.8 | ) | (82.7 | ) | (112.1 | ) | (21.6 | ) | 68.8 | 90.8 | ||||||||||||||
Income/(loss) before income taxes and minority interests | 788.2 | 936.2 | 525.8 | (24.0 | ) | 1,130.9 | 1,492.5 | |||||||||||||||||
Income taxes | (304.4 | ) | (377.9 | ) | (120.8 | ) | (32.5 | ) | (441.5 | ) | (582.6 | ) | ||||||||||||
Income/(loss) before minority interests | 483.8 | 558.3 | 405.0 | (56.5 | ) | 689.4 | 909.9 | |||||||||||||||||
Minority interests | (97.7 | ) | (147.1 | ) | (233.7 | ) | (235.4 | ) | (180.4 | ) | (238.1 | ) | ||||||||||||
Net Income/(loss) before cumulative effect of accounting change | 386.1 | 411.2 | 171.3 | (291.9 | ) | 509.0 | 671.8 | |||||||||||||||||
Cumulative effect of accounting change for SFAS 142 (2002) and SFAS 143 (2003), net of income taxes(6) | (40.3 | ) | (0.5 | ) | — | — | — | — | ||||||||||||||||
Net income/(loss)(5)(6) | 345.8 | 410.7 | 171.3 | (291.9 | ) | 509.0 | 671.8 | |||||||||||||||||
Earnings/(losses) per share(7) (basic & diluted) | 0.7 | 0.8 | 0.4 | (0.6 | ) | 1.0 | 1.4 | |||||||||||||||||
Weighted average number of shares outstanding | 490,582,879 | 490,241,524 | 490,150,389 | 490,150,389 | 490,150,389 | 490,150,389 | ||||||||||||||||||
Other Financial Data | ||||||||||||||||||||||||
Dividends per share(8) | 0.7 | 0.7 | 0.35 | 0.0 | 0.55 | 0.42 | ||||||||||||||||||
Dividends per American Depositary Share (in U.S. Dollars)(9) | 0.368 | 0.413 | 0.2139 | 0.0 | N/A | N/A | ||||||||||||||||||
Operating margin (%)(10) | 23.7 | 20.7 | 12.3 | 0.0 | 18.0 | 18.0 | ||||||||||||||||||
Net income/(loss) margin (%)(11) | 8.0 | 8.4 | 3.3 | — | 8.6 | 8.6 | ||||||||||||||||||
Operating income before depreciation and amortization(12) | 1,720.2 | 1,928.6 | 1,661.0 | 1,051.5 | 2,155.6 | 2,844.8 | ||||||||||||||||||
Operating income before depreciation and amortization margin (%)(13) | 39.9 | 39.2 | 32.0 | 19.2 | 36.6 | 36.6 | ||||||||||||||||||
Ratio of earnings to fixed charges(14) | 6.5 | 6.3 | 3.9 | 0.9 | 6.2 | 6.2 |
4
Table of Contents
For the Year ended December 31, | ||||||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2006 | |||||||||||||||||||
(Euro) | (Euro) | (Euro) | (Euro) | (Euro) | (U.S. $)(1) | |||||||||||||||||||
(millions) | ||||||||||||||||||||||||
Cash Flow Data | ||||||||||||||||||||||||
Net cash provided by operating activities | 1,142.7 | 1,356.1 | 1,380.9 | 1,584.5 | 1,781.8 | 2,351.4 | ||||||||||||||||||
Capital expenditure | (1,112.9 | ) | (972.7 | ) | (843.6 | ) | (647.3 | ) | (938.1 | ) | (1,238.0 | ) | ||||||||||||
Net cash used in investing activities | (1,149.7 | ) | (909.5 | ) | (839.6 | ) | (926.7 | ) | (2,296.8 | ) | (3,031.1 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 108.4 | (289.1 | ) | (275.5 | ) | (13.4 | ) | 1,052.2 | 1,388.6 |
As of December 31, | ||||||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2006 | |||||||||||||||||||
(Euro) | (Euro) | (Euro) | (Euro) | (Euro) | (U.S. $)(1) | |||||||||||||||||||
(millions) | ||||||||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Cash and cash equivalents | 447.5 | 601.3 | 870.3 | 1,512.2 | 2,042.5 | 2,695.6 | ||||||||||||||||||
Telecommunications property, plant and equipment, net | 5,264.5 | 6,873.4 | 6,736.4 | 6,475.9 | 6,335.6 | 8,361.0 | ||||||||||||||||||
Licenses, net | 407.6 | 402.4 | 380.0 | 380.6 | 375.3 | 495.4 | ||||||||||||||||||
Investments(15) | 561.2 | 202.2 | 188.0 | 159.4 | 158.7 | 209.5 | ||||||||||||||||||
Total assets | 8,986.3 | 10,424.9 | 10,262.4 | 10,868.9 | 12,871.8 | 16,986.9 | ||||||||||||||||||
Total current liabilities | 1,822.7 | 1,810.7 | 2,041.9 | 2,294.5 | 2,889.1 | 3,812.7 | ||||||||||||||||||
Total long-term liabilities(16) | 3,335.5 | 4,031.3 | 3,777.7 | 4,361.1 | 5,374.1 | 7,092.2 | ||||||||||||||||||
Total shareholders’ equity | 3,496.0 | 3,590.3 | 3,422.6 | 3,244.5 | 3,526.8 | 4,654.4 |
As of and for the year ended December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
Operating Data(17) | ||||||||||||||||||||
Number of PSTN access lines in service (in thousands) | 5,413 | 5,200 | 5,079 | 4,928 | 4,778 | |||||||||||||||
Number of ISDN channels in services (in thousands) | 880 | 1,097 | 1,265 | 1,370 | 1,382 | |||||||||||||||
Total access lines in service (in thousands)(18) | 6,293 | 6,297 | 6,344 | 6,298 | 6,160 | |||||||||||||||
Lines connected to digital exchanges (% of number of access lines installed) | 96.5 | 99.6 | 99.9 | 100.0 | 100.0 | |||||||||||||||
Outgoing international traffic (million minutes) | 897.9 | 835.1 | 834.1 | 806.9 | 827.8 | |||||||||||||||
Incoming international traffic (million minutes) | 840.6 | 792.5 | 791.1 | 795.3 | 840.8 |
Notes: | ||
(1) | Solely for the convenience of the reader, Euro amounts have been translated into U.S. Dollars at the noon buying rate on December 29, 2006 of Euro 1.00 per U.S. $1.3197. | |
(2) | Includes charges to customers on outgoing calls to subscribers of unaffiliated mobile telephony operators of approximately Euro 406.7 million in 2002, Euro 430.4 million in 2003, Euro 378.7 million in 2004, Euro 376.8 million in 2005 and Euro 342.6 million in 2006. For fiscal year 2002, substantially all these amounts were billed to us by the mobile operators representing calls placed from our network to their subscribers. Simultaneously, we billed the mobile operators an interconnection fee relating to these calls. Effective since February 1, 2003, we have paid the mobile operators a new interconnection fee for calls terminating on their networks and we no longer bill them an interconnection fee. Domestic telephony also includes revenues from monthly rental charges, revenues from fixed-to-fixed and fixed-to-mobile calls and revenues from such services as operator assistance, connection and reconnection charges and paging services. | |
(3) | Includes revenues from incoming including transit, and outgoing, traffic, gross of amounts charged by foreign telephony operators, and payments from the unaffiliated domestic mobile telephony operators to us for international calls. The respective revenues from our consolidated subsidiaries providing mobile services are eliminated upon consolidation. | |
(4) | Includes telecard sales, leased lines, data telecommunications, services rendered, directory services, interconnection charges, radio communications, audiotex, telex and telegraphy, Internet services, asynchronous transfer mode (“ATM”), integrated services digital network (“ISDN”) and sales of telecommunication equipment. | |
(5) | In 2002, we recorded an impairment charge of Euro 114.9 million on our investment in Telecom Serbia, based on an independent valuation of this company. In 2003, we sold our participating interest in Inmarsat Ventures plc. This sale resulted in a pre-tax gain of Euro 31.6 million in 2003. Furthermore, in 2003, upon conclusion of the new collective bargaining agreement, a reserve of Euro 54.6 million, (established prior to the tax effect (benefit) of Euro 19.1 million, to cover our obligation to make contributions to TAP-OTE) was reversed to income. In 2004, we wrote off an amount of Euro 24.8 million related to management fees and accrued interest as a result of the settlement of Telecom Serbia’s arbitration. Net income in 2004 was positively affected by approximately Euro 77.0 million resulting from the decrease in the applicable tax rates in Greece and Romania in December 2004. In 2005, we recorded an accounting charge of Euro 939.6 million, representing the cost of the Voluntary Retirement Scheme. Furthermore, a total gain of Euro 23.8 million was recorded relating to the extinguishment of suppliers’ liabilities, in addition to dividends totalling Euro 19.4 million from Telecom Serbia and Eutelsat, gains totalling Euro 25.1 million from the sale of certain available-for-sale marketable equity securities, and a gain from the sale of our participation in Eutelsat. In 2006, we recorded a cost reduction of Euro 9.5 million, as the number of employees who retired with the completion of the Voluntary Retirement Scheme was less than the number of employees initially applied for, partially offset by a charge relating to an adjustment for the interest rate (which was below market rates) relating to the loan granted to the Auxiliary Fund in 2006 in connection with the Voluntary Retirement Scheme. |
5
Table of Contents
Furthermore, a gain of Euro 164.0 million was recorded from the sale of ArmenTel. Finally, dividends totalling Euro 21.6 million from Telecom Serbia and gains of Euro 10.3 million from sale of certain available for sale securities affected this year’s results. | ||
(6) | In 2002, we recorded a charge of approximately Euro 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, as a result of an accounting change under SFAS No. 142, which became effective as of January 1, 2002. | |
(7) | Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the relevant period. The number of shares granted under OTE’s previous stock option plans in 2002, 2003, 2004, 2005 and 2006 did not affect diluted earnings per share, since the exercise price of these options is equal to or less than the average price of our shares during the respective years. In 2005, these stock option plans were terminated. | |
(8) | Amounts as approved by the respective general assemblies of our shareholders to be distributed from each year’s statutory net income. The dividend of Euro 0.55 per share for the year 2006 was approved by our general assembly of June 21, 2007; it includes an amount of Euro 0.36 per share, a minimum dividend required under Greek law, which was reflected in our financial statements for the year 2006, with the balance to be reflected in our financial statements for the year 2007. | |
(9) | Because each American Depositary Share represents one-half of one ordinary share, the dividend per share has been divided by two to obtain the historical dividends declared per American Depositary Share and translated, solely for convenience, into U.S. Dollars at the noon buying rates as reported by the Federal Reserve Bank of New York on each dividend payment date, or on the following business day if such date was not a business day in Greece or the United States. As a result, the U.S. Dollar amounts for the dividends to be paid with respect to the year 2006 are not available, as these dividends have not yet been paid as at the date of this Annual Report. The noon buying rate may differ from the rate used by the depositary to convert Euros to U.S. Dollars for the purpose of making payments to holders of ADSs. | |
(10) | Operating income/(loss) as a percentage of total revenues. | |
(11) | Net income/(loss) as a percentage of total revenues. | |
(12) | Operating income before depreciation and amortization and the respective percentage margin is a non-GAAP financial measure that helps us to evaluate our core business’ operating results, before the effect of our investing and financing activities, and before the effect of depreciation and amortization (which is our most significant non-cash item) and to compare our performance with that of our peer group, which mainly consists of other European incumbent telecommunications operators. Further to the use of this non-GAAP financial measure, we also evaluate our performance and results based on operating income and net income in order to take into consideration the effects of other recurring items such as interest income/expense, foreign exchange gains or losses, earnings/losses and impairments on equity-method investments, income taxes and minority interests. You should not place undue reliance on this measure or consider it as an alternative to any other measure of performance under generally accepted accounting principles, as it may not be indicative of our historical operating results, nor is it meant to be predictive of our future results. Comparable measures, including EBITDA, are often calculated in different ways, can vary significantly depending upon accounting methods (particularly when acquisitions have occurred) or non-operating factors, and are used by different companies for different purposes, and therefore may not be comparable to similarly titled measures used by other companies. The following table provides a reconciliation of Net Income/(loss) to Operating income before depreciation and amortization. |
2002 | 2003 | 2004 | 2005 | 2006 | 2006 | |||||||||||||||||||
(Euro) | (Euro) | (Euro) | (Euro) | (Euro) | (U.S. $)(1) | |||||||||||||||||||
(millions) | ||||||||||||||||||||||||
Net income/(loss) | 345.8 | 410.7 | 171.3 | (291.9 | ) | 509.0 | 671.8 | |||||||||||||||||
Plus: | ||||||||||||||||||||||||
Depreciation and amortization | 700.2 | 909.7 | 1,023.1 | 1,053.9 | 1,093.5 | 1,443.1 | ||||||||||||||||||
Other income/expense(a) | 231.8 | 82.7 | 112.1 | 21.6 | (68.8 | ) | (90.8 | ) | ||||||||||||||||
Income taxes | 304.4 | 377.9 | 120.8 | 32.5 | 441.5 | 582.6 | ||||||||||||||||||
Minority interests | 97.7 | 147.1 | 233.7 | 235.4 | 180.4 | 238.1 | ||||||||||||||||||
Cumulative effect of accounting change | 40.3 | 0.5 | — | — | — | — | ||||||||||||||||||
Operating income before depreciation and amortization | 1,720.2 | 1,928.6 | 1,661.0 | 1,051.5 | 2,155.6 | 2,844.8 | ||||||||||||||||||
(a) | Other income/(expense) includes interest expense, interest income, net foreign exchange gains/(losses), write down of investments, earnings/(losses) from investments and gain/(loss) on sale of investments. |
(13) | Operating income before depreciation and amortization as a percentage of total revenues. | |
(14) | For the purpose of these ratios, “earnings” consist of income before income taxes, minority interests, income or loss from equity investments, amortization of capitalized interest and fixed charges. “Fixed charges” consist of interest expense (including capitalized interest) on all indebtedness. | |
(15) | Includes: |
• | as of December 31, 2002, Euro 341.4 million, in respect of our 35% interest in RomTelecom as of such date; due to the acquisition of a further 19.0% in RomTelecom on March 3, 2003, our interest in RomTelecom increased to 54.01% and accordingly, we started consolidating RomTelecom from that date; | ||
• | as of December 31, 2002, 2003, 2004, 2005 and 2006, Euro 173.1 million, Euro 182.9 million, Euro 170.6 million, Euro 155.1 million, and Euro 155.1 million, respectively, in respect of our 20% interest in Telecom Serbia; and |
6
Table of Contents
• | as of December 31, 2002, 2003, 2004, 2005 and 2006, Euro 37.3 million, Euro 12.9 million, Euro 12.9 million, Euro nil and Euro nil respectively, in respect of investments in satellite organizations. |
(16) | Net of current portion. | |
(17) | For Greece only. | |
(18) | Each ISDN channel is counted as the equivalent of one PSTN access line. |
7
Table of Contents
Year or month | Average(1) | High | Low | Period-End | ||||||||||||
2002 | 0.9495 | 1.0485 | 0.8594 | 1.0485 | ||||||||||||
2003 | 1.1411 | 1.2597 | 1.0361 | 1.2597 | ||||||||||||
2004 | 1.2478 | 1.3625 | 1.1801 | 1.3538 | ||||||||||||
2005 | 1.2400 | 1.3476 | 1.1667 | 1.1842 | ||||||||||||
2006 | 1.2661 | 1.3327 | 1.1860 | 1.3197 | ||||||||||||
December 2006 | 1.3205 | 1.3327 | 1.3073 | 1.3197 | ||||||||||||
January 2007 | 1.2993 | 1.3286 | 1.2904 | 1.2998 | ||||||||||||
February 2007 | 1.3080 | 1.3246 | 1.2933 | 1.3230 | ||||||||||||
March 2007 | 1.3246 | 1.3374 | 1.3094 | 1.3374 | ||||||||||||
April 2007 | 1.3513 | 1.3660 | 1.3363 | 1.3660 | ||||||||||||
May 2007 | 1.3518 | 1.3616 | 1.3419 | 1.3453 |
Note: | ||
(1) | The average noon buying rates on the last business day of each month during the relevant year. |
8
Table of Contents
9
Table of Contents
10
Table of Contents
11
Table of Contents
• | sufficient demand from our existing and potential customers to offset our past and anticipated investment in these services; | ||
• | our success in identifying appropriate technologies that may allow us to respond efficiently to our customers’ needs and to our competitors’ alternative technologies and our ability to continue investing on an incremental basis with a view to securing increased capacity and better quality of service with our existing infrastructure; | ||
• | our ability to compete effectively with other providers of these services; and | ||
• | our ability to timely reformulate our policies to conform to market conditions and needs. |
• | unanticipated changes in the legal or regulatory environment and licensing requirements; | ||
• | tariffs, taxes, price, wage and exchange controls and other trade barriers; | ||
• | other restrictions on, or costs of, repatriation of profits or capital; |
12
Table of Contents
• | political and social instability; | ||
• | significant economic volatility; | ||
• | strong inflationary pressures; and | ||
• | interest rate and exchange rate fluctuations. |
13
Table of Contents
14
Table of Contents
15
Table of Contents
16
Table of Contents
• | acquired businesses not delivering expected or appropriate returns; | ||
• | difficulties in assimilating managerial and operational resources; | ||
• | potential disruptions of ongoing businesses and diversion of managerial resources; | ||
• | difficulties in integrating technology or content and rights to products and properties and unanticipated expenses related to such integration; and | ||
• | potential impairment of relationships with employees, subscribers and suppliers of our subsidiaries as a result of the integration of new businesses. |
17
Table of Contents
• | In December 1995, we were granted the right to provide mobile telephony services in Greece using GSM 1800 technology; in October 1996, we established Cosmote to provide mobile telephony services and, in April 1997, we transferred our GSM 1800 license to Cosmote. | ||
• | In May 1996, we established OTENet, our 94.6% owned subsidiary, which has since developed from an Internet service provider to offering a range of integrated IP-based voice and data telecommunications services, IT application development and hosting services using Internet technologies. | ||
• | In 1998, we acquired 35% of the share capital of RomTelecom, the Romanian telecommunications operator, and in March 2003, we increased this interest to 54.01%. | ||
• | In August 2000, we established OTEGlobe, our wholly-owned subsidiary responsible for the marketing and sales of our international wholesale voice and data services and the technical operation and commercial development of our international data/IP network. | ||
• | On January 1, 2001, our exclusive right to provide fixed-line telephony services in Greece expired, and the Greek fixed-line market was opened to competition. |
18
Table of Contents
• | In August 2001, Cosmote was awarded a license to provide 3G mobile telephony services, which it launched commercially in May 2004. | ||
• | In August 2001, we established Hellas Sat Consortium Limited, our 99.05% satellite subsidiary which launched its own satellite, Hellas Sat-2, into orbit in May 2003. | ||
• | In 2001, we commenced installation of a nationwide IP/MPLS Network in order to provide IP-based solutions, including, among other services, managed IP virtual private network (IP-VPN) services for corporate subscribers and IP-Dial-Access Platform Services for Internet Service Providers and content providers. | ||
• | In June 2003, we launched our ADSL services. | ||
• | In June 2005, we commenced implementing our Voluntary Retirement Scheme, which to date has facilitated the early retirement of 4,759 of our employees. | ||
• | In July 2005, we transferred to Cosmote 70% of the share capital of Cosmote Romania, our mobile telephony subsidiary in Romania, and in the third quarter of 2005, we transferred to Cosmote the entire share capital of Globul and Cosmofon (our mobile telephony subsidiaries in Bulgaria and FYROM, respectively); in December 2005, Cosmote Romania re-launched commercial operations. | ||
• | Over the course of 2006, Cosmote acquired approximately 99% of Germanos S.A., a Greek-based international wholesale and retail distributor of technology and telecommunications products, for a total purchase price of Euro 1.5 billion. | ||
• | In November 2006, we sold our 90% interest in ArmenTel, the Armenian public telephony operator, to JSC Vimpel-Communications for a cash consideration of Euro 341.9 million. |
• | in Greece, using GSM 900 and GSM 1800, and 3G and LMDS technology, through Cosmote, our 66.78%-owned subsidiary, which had 5,217,927 mobile subscribers in Greece on December 31, 2006, representing a market share of approximately 37% of contract and prepaid mobile subscribers; | ||
• | in Albania, using GSM 900 and GSM 1800 technology, through Cosmote’s 82.45%-indirectly owned subsidiary, AMC, which had 990,279 mobile subscribers in Albania on December 31, 2006; | ||
• | in Bulgaria, using GSM 900 and GSM 1800, and 3G and LMDS technology, through Cosmote’s 100%-owned subsidiary, Globul, which had 3,270,878 mobile subscribers in Bulgaria on December 31, 2006; |
19
Table of Contents
• | in FYROM, using GSM 900 technology, through Cosmote’s 100%-indirectly owned subsidiary Cosmofon, which had 472,501 mobile subscribers in FYROM on December 31, 2006; and | ||
• | in Romania, using GSM 900 and GSM 1800 technology, through Cosmote’s 70%-owned subsidiary, Cosmote Romania, which had 1,225,603 subscribers in Romania on December 31, 2006. |
• | mobile telecommunications services; | ||
• | Internet services; | ||
• | broadband infrastructure in the access, transport and core network; | ||
• | network simplification and optimization, particularly through implementing advantages offered by the Internet Protocol (IP) features; | ||
• | expansion of the capacity of our transmission network using Dense Wavelength Division Multiplexing (DWDM), in order to be able to satisfy the demand for high bandwidth services; and | ||
• | consolidation of the various network management systems and centralizing the structure of our Network Operating Centers (NOC), in order to increase operating efficiency and savings. |
20
Table of Contents
• | continue to gradually upgrade our network; | ||
• | continue to develop and expand broadband-based products and services, including double-play (Internet and video) and triple-play (voice, Internet and video), differentiated by customer segment; | ||
• | continue to improve our front-line sales and customer care offerings in order to address changing market trends; | ||
• | leverage our telecommunications infrastructure to expand and increase the profitability of our wholesale business; | ||
• | continue to focus on upgrading and optimizing our operating procedures, in order to increase operating efficiency; and | ||
• | continue to create policies and develop processes enabling us to more timely and efficiently comply with the evolving regulatory framework. |
• | in Greece, through Cosmote: to maximize revenues and to further enhance profitability, through increased usage, reduction of churning, subscriber growth, promotion of new services and focused commercial policies; | ||
• | in Albania, through AMC: to further enhance growth by increasing penetration and to sustain its leading market position; | ||
• | in Bulgaria, through Globul: to increase subscriber numbers and usage and improve profit margins in order to enhance profitability; | ||
• | in FYROM, through Cosmofon: to increase the subscriber base and achieve profitability on a full-year basis; and | ||
• | in Romania, through Cosmote Romania: to continue increasing the subscriber base, while continuing to invest in network and distribution, with a view to achieving operating profitability. |
• | sustain revenues by slowing the decline in usage of both traditional services and the number of lines, through launching new services, such as high-speed Internet, and by introducing customer retention schemes with new offers (including, among other things, discounts and free minutes); | ||
• | invest in completing network digitalization and upgrading network management, in order to introduce new revenue-enhancing value-added services, including broadband data services, particularly for corporate clients; |
21
Table of Contents
• | promote newly-introduced television and content services; | ||
• | control operating expenses; | ||
• | benefit from synergies and leverage our Group resources in the Romanian market by benefiting from our local presence through RomTelecom, Cosmote Romania and Germanos’ operations in Romania; and | ||
• | continue to improve customers’ experiences with the service departments. |
• | increasing broadband penetration; | ||
• | defending our market share; | ||
• | maximizing our revenues from existing products and services; and | ||
• | developing and marketing innovative products and services. |
22
Table of Contents
• | PSTN and ISDN access and traffic and value-added services; | ||
• | ADSL; | ||
• | leased lines; | ||
• | IP-based solutions and IP-VPN services; | ||
• | IN services and premium rate services, including special interest chat lines and recordings; | ||
• | public telephone services; and | ||
• | directory inquiry services. |
• | interconnection; | ||
• | leased lines; | ||
• | data telecommunications services; | ||
• | ADSL; and | ||
• | local loop unbundling. |
23
Table of Contents
As of December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
PSTN access lines in service | 5,078,709 | 4,927,622 | 4,778,245 | |||||||||
ISDN channels in service | 1,264,992 | 1,369,830 | 1,382,124 | |||||||||
Total lines in service(1) | 6,343,701 | 6,297,452 | 6,160,369 | |||||||||
PSTN access lines installed | 6,022,358 | 6,001,969 | 5,924,464 | |||||||||
ISDN channels installed | 1,455,838 | 1,580,332 | 1,605,630 | |||||||||
Total lines installed(1) | 7,478,196 | 7,582,301 | 7,530,094 | |||||||||
Percentage of PSTN installed lines connected to digital exchanges | 99.99% | 100% | 100% |
Note: | ||
(1) | Each ISDN channel is counted as the equivalent of one PSTN access line. |
24
Table of Contents
25
Table of Contents
• | the regulatory framework, including developments in Greek and European Union regulations with respect to telecommunications services and basic telecommunications infrastructure; | ||
• | market conditions; | ||
• | the financial condition and operating capacity of competitors; | ||
• | the continuing effectiveness of our commercial policies and our overall ability to address increased competition; | ||
• | the strength and effectiveness of our marketing efforts; and | ||
• | fixed-to-mobile substitution. |
26
Table of Contents
2004 | 2004(1) | 2005(2) | 2006(3) | ||||||||||||||
(Euro) | |||||||||||||||||
Connection Charges | 29.34 | 29.34 | 29.34 | 29.34 | |||||||||||||
Monthly rental charges | 10.49 | 11.40 | 11.90 | 12.40 | |||||||||||||
Pulse charging (for the first 2 minutes) | 0.026 | 0.026 | 0.026 | 0.026 | |||||||||||||
Charge per second (after the first 2 minutes) | (Eurocents) | ||||||||||||||||
Weekdays peak | 0.043333 | 0.043333 | 0.043333 | 0.043333 | |||||||||||||
Saturdays/weekdays off-peak | 0.041667 | 0.041667 | 0.041667 | 0.041667 | |||||||||||||
Sundays | 0.040000 | 0.040000 | 0.040000 | 0.040000 |
Notes: | ||
(1) | As of December 31, 2004. | |
(2) | As of August 1, 2005. | |
(3) | As of April 3, 2006. |
27
Table of Contents
From December 31, 2003 | ||||
Minimum charge per call(1) | (Euro) | |||
First 25 seconds (weekdays peak hours) | 0.026 | |||
First 28 seconds (weekdays off-peak and Saturdays) | 0.026 | |||
Charge per second | (Eurocents per second) | |||
Weekdays peak (after first 25 seconds) | 0.103 | |||
Weekdays off-peak and Saturdays | 0.092 |
Note: | ||
(1) | On Sundays local call tariffs apply. |
Dec. 31, | Apr. 1 | Dec. 31, | ||||||||||||||||||||||||||||||
2003(1) | to | Oct. 1 to | 2004(2) | June 1(3) | Dec. 1(4) | From | From | |||||||||||||||||||||||||
to Apr. 1, | Oct. 1, | Dec. 31, | to May | to Nov. | to Dec. | Jan. 1, | June 1 | |||||||||||||||||||||||||
Mobile Operator | 2004 | 2004 | 2004 | 31, 2006 | 30, 2006 | 31, 2006 | 2007(5) | 2007(6) | ||||||||||||||||||||||||
(Euro per minute) | ||||||||||||||||||||||||||||||||
Cosmote | 0.210 | 0.210 | 0.185 | 0.179 | 0.154 | 0.150 | 0.150 | 0.1393 | ||||||||||||||||||||||||
Vodafone | 0.210 | 0.210 | 0.185 | 0.179 | 0.154 | 0.150 | 0.150 | 0.1397 | ||||||||||||||||||||||||
Wind Hellas | 0.240 | 0.220 | 0.190 | 0.184 | 0.159 | 0.155 | 0.1585 | 0.1497 | ||||||||||||||||||||||||
Q-Telecom | 0.270 | 0.270 | 0.235 | 0.229 | 0.204 | 0.20 | 0.1585 | 0.1497 |
Notes: | ||
(1) | As of December 31, 2003, we apply per second charging with a minimum call duration of 30 seconds. | |
(2) | Our retention fee was reduced from Euro 0.04 to Euro 0.034 per minute as of December 31, 2004. | |
(3) | Due to a reduction in the termination charge of mobile operators as of June 1, 2006. | |
(4) | Our retention fee was reduced from Euro 0.034 to Euro 0.030 per minute as of December 1, 2006. | |
(5) | As of January 1, 2007, we apply per second charging without a minimum call duration of 30 seconds, which has resulted in an increase in our retention fee from 0.030 to 0.0326. Moreover, the termination fees of the mobile companies were further reduced. | |
(6) | Charging per second still applies, and the retention fee remains unchanged. New prices were introduced due to reductions in the termination fee. |
28
Table of Contents
29
Table of Contents
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Outgoing: | ||||||||||||
Total outgoing traffic (millions of chargeable minutes) | 834.1 | 806.9 | 827.8 | |||||||||
Growth in outgoing traffic (% per year) | (0.1 | ) | (3.26 | ) | 2.59 | |||||||
Incoming: | ||||||||||||
Total incoming traffic (millions of chargeable minutes) | 791.1 | 795.3 | 840.8 | |||||||||
Growth in incoming traffic (% per year) | (0.2 | ) | 0.53 | 5.72 |
30
Table of Contents
For the Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
Total Revenues | 839.0 | 925.7 | 891.0 | |||||||||
Operating Profit(Loss) | 96.7 | 132.4 | 137.9 | |||||||||
Net Income/(Loss) | 200.7 | 237.9 | 102.3 | |||||||||
Our share in RomTelecom’s net income/(loss) | 108.4 | 128.5 | 55.3 |
31
Table of Contents
For the Year Ended December 31, | |||||||||||||||
2004 | 2005 | 2006(1) | |||||||||||||
(Euro in millions) | |||||||||||||||
ArmenTel | |||||||||||||||
Total Revenues | 85.4 | 114.1 | 135.6 | ||||||||||||
Operating Profit | 25.2 | 40.8 | 41.4 | ||||||||||||
Net income | 20.5 | 41.8 | 14.6 | ||||||||||||
Net income attributed to our consolidated net income | 18.5 | 37.6 | 13.1 |
Note: | ||
(1) | Amounts are for the period to November 2006, as the business was sold at that date. |
32
Table of Contents
• | Wireless voice telephony: We offer a full range of wireless services with a variety of payment plans and packages, including payment on a contract and prepaid basis. | ||
• | Enhanced calling features: We offer voicemail, call hold, call waiting, call forwarding and conference calling; subscribers may receive a number of these services bundled with basic voice services or as optional supplements to their basic voice service. | ||
• | Wireless data transmission: We offer subscribers the ability to use handsets for data transmission, including for short messaging services (SMS) and multimedia messaging services (MMS), which allow subscribers to send messages with images, photographs and sound. Subscribers may also receive selected information, such as news, sports, scores and stock quotes. We also provide wireless connectivity for devices such as laptops and personal digital assistants (PDAs). Certain of these services are at different stages of development in each of our mobile markets. In Greece, in May 2004, Cosmote commercially launched its 3G services and introduced video streaming for the first time in the Greek mobile market. In June 2006, Cosmote first made HSDPA technology commercially available in the Greek market. Cosmote also offers i-mode®, an Internet mobile service using a number of i-mode® compatible handsets, including 3G i-mode® services in Greece and since September 2006, in Bulgaria. | ||
• | Wireless Internet access: This enables retail and corporate customers to send and receive emails, browse web pages, purchase goods and services in e-commerce transactions and use other data services. Cosmote also offers WLAN services in cooperation with OTENet hotspots. | ||
• | Corporate services: We provide business solutions, including wireless infrastructure in offices, private |
33
Table of Contents
networking and VPNs. VPNs enable companies to define a private numbering plan (closed usergroup) for users within a single organization and to use value-added applications, including short dialing, call barring and favorable pricing within the VPN group. | |||
• | International roaming: Wireless subscribers traveling abroad are able to make and receive calls while in the coverage area of a foreign operator’s mobile network and to be billed for this service by their home network operator. | ||
• | Other value-added wireless services: Cosmote offers Blackberry® email solutions to its corporate and individual customers in Greece. We also offer vehicle fleet management services to customers in Greece and abroad in cooperation with Spacenet. |
34
Table of Contents
• | to sustain or increase market share leadership and further enhance profitability in Greece; | ||
• | to enhance subscriber growth and voice usage and stimulate value-added services and increase their revenues contribution to build the most reliable mobile networks and offer the most reliable services in the markets in which it operates; | ||
• | to establish model “work-place” businesses, in terms of quality and efficiency; | ||
• | to differentiate itself from competition on all fronts; and | ||
• | to optimize its capital structure and increase returns to shareholders. |
• | in Greece: to maximize revenues, through increased usage, reduction of churning, subscriber growth, promotion of new services and focused commercial policies and to further enhance profitability; | ||
• | in Albania, through AMC: to further enhance growth through increasing penetration and sustain its leading market position; | ||
• | in Bulgaria, through Globul: to increase subscriber numbers and profit margins; | ||
• | in FYROM, through Cosmofon: to increase its subscriber base and achieve full-year profitability; and | ||
• | in Romania, through Cosmote Romania: to continue the rapid increase of the subscriber base, while continuously investing in network and distribution, with a view to achieving operating profitability. |
• | contract and prepaid services; | ||
• | international dialing and roaming; | ||
• | value-added services, including voicemail, SMS, MMS, call diversion and caller identification (CLIP); | ||
• | video streaming and video calling; | ||
• | Internet browsing on the move through 3G HSDPA, GPRS and WLAN technologies; | ||
• | mobile Internet services, including i-mode®; and | ||
• | advanced value-added services using WAP, SIM microbrowser, voice recognition and GPRS |
35
Table of Contents
technologies. |
• | a network of commercial representatives and distributors; | ||
• | 24 Cosmote-branded stores, including 14 in Athens and three in Thessaloniki; | ||
• | 374 Germanos branded stores, throughout Greece; | ||
• | Cosmote’s corporate accounts sales forces; and | ||
• | four distributors of the Cosmokarta and WHATSUP packages and prepaid airtime cards and 10 distributors of prepaid airtime electronic cards. |
36
Table of Contents
• | for regulatory purposes, Wind Hellas and Q-Telecom should be treated as a single operator, since they were under common ownership; | ||
• | termination on each individual operator’s network constitutes a separate market, meaning that there are three separate markets for termination in Greece—being the networks of Cosmote, Vodafone and Wind Hellas/Q-Telecom; | ||
• | each operator holds Significant Market Power in its respective market; and | ||
• | a range of regulatory remedies should be imposed on each operator. |
• | cost-orientation, to be achieved through a “glide path” pursuant to which each operator’s termination charges must be gradually reduced to the level of cost through three predetermined stages over a 10-month period, each operator’s termination cost being determined by a series of Long Run Incremental Cost (LRIC) models formulated by the EETT; | ||
• | provision of access; | ||
• | transparency; | ||
• | non-discrimination; | ||
• | accounting separation (to be subject to a separate consultation exercise); and | ||
• | publication of a Reference Interconnection Offer (RIO). |
From Jan. 1, 2004 | From Oct. 1, 2004 | From June 1, 2006 | From Jan. 1, 2007 | |||||||||||||||||
to Sept. 30, 2004(1) | to May 31, 2006(1) | to Dec. 31, 2006(1) | to May 31, 2007 | From June 1, 2007 | ||||||||||||||||
(Euro per minute) | ||||||||||||||||||||
Mobile operator | ||||||||||||||||||||
Vodafone | 0.1800 | 0.1450 | 0.1200 | 0.1174 | 0.1067 | |||||||||||||||
Wind Hellas | 0.1800 | 0.1450 | 0.1200 | 0.1174 | 0.1067 | |||||||||||||||
Q-Telecom | 0.1800 | 0.1450 | 0.1200 | 0.1174 | 0.1067 |
(1) | A minimum duration charge of 30 seconds applies. |
From Jan. 1, 2004 | From Oct. 1, 2004 | From June 1, 2006 | From Jan. 1, 2007 | |||||||||||||||||
to Sept. 30, 2004(1) | to May 31, 2006(1) | to Dec. 31, 2006 | to May 31, 2007 | From June 1, 2007 | ||||||||||||||||
(Euro per minute) | ||||||||||||||||||||
Mobile operator | ||||||||||||||||||||
Vodafone | 0.1800 | 0.1450 | 0.1200 | 0.1174 | 0.1071 | |||||||||||||||
Wind Hellas | 0.1900 | 0.1500 | 0.1250 | 0.1259 | 0.1171 | |||||||||||||||
Q-Telecom | 0.2300 | 0.1950 | 0.1700 | 0.1259 | 0.1171 |
(1) | A minimum duration charge of 30 seconds applies. |
37
Table of Contents
From Jan. 1, 2004 | From Oct. 1, 2004 | From June 1, 2006 | From Jan. 1, 2007 | |||||||||||||||||
to Sept. 30, 2004(1) | to May 31, 2006(1) | to Dec. 31, 2006(1) | to May 31, 2007 | From June 1, 2007 | ||||||||||||||||
(Euro per minute) | ||||||||||||||||||||
Fixed operator (OTE or other) | 0.1700 | 0.1450 | 0.1200 | 0.1174 | 0.1067 |
(1) | A minimum duration charge of 30 seconds applies. |
Weekdays | Weekdays 00:00 to 08:00 | |||||||||||||||
08:00 to 20:00 | and 20:00 to 00:00 | Saturdays | Sundays | |||||||||||||
(Euro per minute) | ||||||||||||||||
Local/minute | 0.0052 | 0.0049 | 0.0049 | 0.0038 | ||||||||||||
Single transit/minute | 0.0085 | 0.0079 | 0.0079 | 0.0062 | ||||||||||||
Double transit/minute | 0.0109 | 0.0102 | 0.0102 | 0.0080 |
38
Table of Contents
39
Table of Contents
• | the wholesale market for access and call origination on public mobile networks; | ||
• | the wholesale market for voice call termination on individual mobile networks; and | ||
• | the wholesale national market for international roaming on public mobile networks. |
40
Table of Contents
41
Table of Contents
42
Table of Contents
For the Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
AMC | ||||||||||||
Revenues | 121.2 | 137.6 | 151.0 | |||||||||
Operating Profit | 49.5 | 60.0 | 66.0 | |||||||||
Net income | 35.5 | 41.5 | 49.9 | |||||||||
Net income attributed to our consolidated net income | 17.2 | 22.0 | 27.6 |
For the Year ended December 31, | ||||||||||||
2004 | 2005 | 2006(1) | ||||||||||
(Euro in millions) | ||||||||||||
Globul | ||||||||||||
Revenues | 177.5 | 274.1 | 342.3 | |||||||||
Operating profit | 6.1 | 43.1 | 53.3 | |||||||||
Net profit (loss) | (7.7 | ) | 26.3 | 32.4 |
Note: | ||
(1) | As of December 31, 2006, AMC had 990,279 mobile subscribers in Albania. |
43
Table of Contents
For the Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
Cosmofon | ||||||||||||
Revenues | 23.5 | 40.4 | 53.7 | |||||||||
Operating profit/(loss) | (21.2 | ) | (10.7 | ) | (5.5 | ) | ||||||
Net profit/(loss) | (21.8 | ) | (12.8 | ) | (8.0 | ) |
44
Table of Contents
For the Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
Cosmote Romania | ||||||||||||
Revenues | n/a | 8.0 | 43.8 | |||||||||
Operating profit/loss | n/a | (41.1 | ) | (93.7 | ) | |||||||
Net profit/loss | n/a | 79.7 | (1) | (91.6 | ) |
Note: | ||
(1) | Includes a gain of approximately Euro 119 million in connection with the extinguishment of suppliers’ liabilities relating to the settlement of relevant disputes in 2005. |
Weekdays | ||||||||||||||||
Weekdays | 00:00 to 08:00 | |||||||||||||||
08:00 to 20:00 | and 20:00 to 00:00 | Saturdays | Sundays | |||||||||||||
(Euro per minute) | ||||||||||||||||
Local/minute | 0.0052 | 0.0049 | 0.0049 | 0.0038 | ||||||||||||
Single transit/minute | 0.0085 | 0.0079 | 0.0079 | 0.0062 | ||||||||||||
Double transit/minute | 0.0109 | 0.0102 | 0.0102 | 0.0080 |
45
Table of Contents
• | professional systems integration services, including consulting on business continuity planning; | ||
• | information security and capacity planning; | ||
• | project management; | ||
• | network monitoring; and | ||
• | managed services and maintenance contracts. |
• | fixed and wireless fast Internet services for business and residential customers; | ||
• | a web-based surveillance service; and | ||
• | web hosting services. |
46
Table of Contents
47
Table of Contents
• | establishing agreements with international carriers for the routing of international traffic and for applicable accounting rates; | ||
• | negotiating wholesale tariffs with mobile operators for incoming and outgoing international traffic through our network; | ||
• | negotiating wholesale tariffs with domestic alternative carriers for routing their international traffic through our network; and | ||
• | planning, engineering and operating our International Voice Network. |
48
Table of Contents
• | international managed clear channel; | ||
• | Internet transit for carriers; | ||
• | international managed MPLS and VPN; and | ||
• | wholesale VoIP and voice trunking. |
• | international private leased circuits (half circuits); | ||
• | full, end-to-end, managed SDH digital circuits and wavelength (l) capacity from Greek cities to London and other European cities; and | ||
• | indefeasible rights of use (long-term leasing of international circuits). |
49
Table of Contents
• | increasing incoming and outgoing voice traffic by channeling the majority of traffic along highly competitive routes and maintaining the quality of services at all levels, and by targeting the growing segments of international voice traffic from mobile telephony carriers and alternative fixed network operators (VoIP). Another major task in OTEGlobe’s commercial strategy is to expand further in wholesale VoIP and NGN voice services in order to capitalize on the new trends in the market place as well to protect existing revenues streams; and | ||
• | increasing data revenues by servicing the rapidly growing broadband traffic in Greece and in the Southeastern European region and by addressing new market segments (such as the corporate market). |
• | designing and implementing its own infrastructure (including dark fiber and long-term leased capacities) throughout the Balkan region, and thoroughly assessing the scope of its participation in the implementation of major networks infrastructure in the greater regions of Southeastern Europe, the Middle East and the Arabian peninsula; and | ||
• | enhancing strategic agreements for interconnection with telecommunications carriers in the regional market. |
50
Table of Contents
51
Table of Contents
(i) | retail, by enabling end-users to purchase high-speed Internet access directly from Internet service providers; and | ||
(ii) | wholesale, by providing ADSL access to other operators and enabling them to provide ADSL access and high-speed Internet access directly to the end customer. |
Download/Upload | Activation fee | Wholesale Monthly fee | Retail Monthly fee | |||||||||
(Euro) | ||||||||||||
768 Kbps/192 Kbps | 34.99 | 12.435 | 14.63 | |||||||||
1024 Kbps/256 Kbps | 34.99 | 14.875 | 17.50 | |||||||||
2048 Kbps/256 Kbps | 34.99 | 19.805 | 23.30 | |||||||||
4096/Kbps/256 Kbps | 34.99 | 25.500 | 30.00 | |||||||||
8192 Kbps/384 Kbps | 34.99 | 31.450 | 37.00 |
Note: | ||
(1) | VAT not included |
52
Table of Contents
53
Table of Contents
• | constant bit rate (CBR), which is specified so that data is sent in a steady stream; this rate is appropriate for real-time applications requiring high quality of service, such as teleconference, and is analogous to a leased line; | ||
• | real-time variable bit rate (rt-VBR), which is specified so that data is sent in bursts rather than in a steady stream; this rate is appropriate for real-time applications requiring a high quality of service, such as packetized voice and compressed video; | ||
• | non-real-time-VBR, which is equivalent to rt-VBR, but appropriate for non-real-time applications requiring a lower quality of service; and | ||
• | unspecified bit rate (UBR), which does not guarantee any throughput levels and is appropriate for non-real- time applications with no quality of service requirements, such as file transfers. |
54
Table of Contents
55
Table of Contents
• | “134”, our customer service line for residential and small business customers, which received approximately 4.2 million calls in 2006 and, based on recent customer satisfaction surveys, achieved over 94% customer satisfaction; | ||
• | “OTELINE”, our contact services center, which offers one-to-one marketing for all of our products and services and customer programs and realized over 3.2 million contracts with customers in 2006; | ||
• | “www.oteshop.gr”, our electronic shop, which had approximately two million visitors and received approximately 20,000 orders in 2006; | ||
• | “www.whitepages.gr”, our site for telephone directory services, which had 7.5 million visitors in 2006; |
56
Table of Contents
• | “11888”, voice telephony directory services and entertainment information, which received approximately 52 million calls in 2006 and achieved over 95% customer satisfaction based on survey evidence; | ||
• | OTE Tele-Information, our voice portal, offering weather forecasts, airplane, ship, rail and bus schedules, hospital and pharmacy information and sports results, which received approximately 73 million calls in 2006; | ||
• | “1502”, our citizen service center, which received approximately 150,000 calls in 2006; | ||
• | “112”, the pan-European emergency call number; and | ||
• | www.otewholesale.gr, our electronic shop for wholesale services offered to other operators and ISPs. |
57
Table of Contents
• | the GSM Network in FYROM for Cosmofon (completed December 2006) and the GSM network extension for ArmenTel (completed on November 16, 2006); | ||
• | support to OTE for restoration of cable faults, implementation of new telephone connections and execution of structured cabling projects for OTE customers. |
58
Table of Contents
59
Table of Contents
60
Table of Contents
• | supporting and enhancing our new IT-intensive valued-added services relating to broadband, IP and content; | ||
• | improving the infrastructure of our information systems; and | ||
• | expanding the implementation of our information systems in the areas of ERP, CRM, operational support systems (OSS), provisioning and billing. |
61
Table of Contents
62
Table of Contents
63
Table of Contents
• | Helias Koutsokostas & Company Limited Partnership filed a claim against us alleging Euro 7.8 million in damages. The hearing was initially scheduled for October 13, 2005 and rescheduled for February 21, 2008, in order to be heard in conjunction with a counterclaim that we filed against the plaintiff for Euro 0.7 million in damages. | ||
• | K. Prinianakis S.A. filed a claim against us alleging Euro 10.9 million in damages. The hearing, initially scheduled for January 27, 2005, was adjourned twice and rescheduled for November 15, 2007. We terminated the franchise agreement and filed a counterclaim against K. Prinianakis S.A. for Euro 0.3 million in damages, which will also be heard on November 15, 2007. In 2003, the Court of First Instance of Athens issued a decision holding K Prinianakis S.A. liable for the full amount of our claim, which K. Prinianakis S.A. appealed unsuccessfully on December 7, 2005, and a new hearing of the case is now scheduled for December 12, 2007. |
64
Table of Contents
• | DEP Info Ltd. filed a claim against us, alleging Euro 6.9 million in damages. We filed a counterclaim against DEP Info Ltd. for Euro 1.7 million in damages. Both claims were heard on March 9, 2006, and the court rejected DEP Info’s claim in its entirety. | ||
• | Infoshop S.A. filed a claim against us alleging Euro 6.9 million in damages. A hearing scheduled for January 27, 2005 was adjourned and rescheduled for November 15, 2007. |
65
Table of Contents
66
Table of Contents
67
Table of Contents
68
Table of Contents
• | Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the “Access Directive”); | ||
• | Directive 2002/20/EC on the authorization of electronic communications networks and services (the “Authorization Directive”); | ||
• | Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (the “Framework Directive”); | ||
• | Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services (the “Universal Service Directive”); | ||
• | Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the e-commerce sector (the “Directive on Privacy and Electronic Communications”); and | ||
• | Directive 2002/77/EC on competition in the markets for electronic networks and services. |
• | Decision 2002/676/EC on a regulatory framework for radio spectrum policy in the European Community (the “Radio Spectrum Decision”); | ||
• | Decision 2002/627/EC establishing the European Regulators Group for Electronic Communications Networks and Services; | ||
• | Recommendation C 497/11.02.2003 of the Commission for the identification of those product and service markets within the electronic communications sector, the characteristics of which may be such as to justify the imposition of regulatory obligations (the “Recommendation”); and | ||
• | Guidelines of the Commission for market analysis and the assessment of Significant Market Power, according to article 15 of the Framework Directive (the “Guidelines”). |
69
Table of Contents
• | establish the rights, responsibilities, decision making powers and procedures of national regulatory authorities and the EU Commission; and | ||
• | identify specific policy objectives that national regulatory authorities must achieve in carrying out their responsibilities (namely promoting open and competitive European markets for telecommunications services, promoting the interests of European citizens and consolidating the European Union’s internal market in a converging technological environment). |
• | the establishment of a right of appeal against the decision of a national regulatory authority; | ||
• | the establishment of a consultation and transparency mechanism regarding actions by national regulatory authorities; | ||
• | the encouragement of cooperation of national regulatory authorities with each other and with the European Commission; | ||
• | the right of the European Commission to request a national regulatory authority to withdraw a measure where it concerns a decision of a relevant market that is different from those defined in the Recommendation, or the designation (or non-designation) of entities with Significant Market Power, and where such decisions would create a barrier to the common market or would be incompatible with EU Law and, in particular, with the policy objectives that national regulatory authorities are supposed to follow. | ||
• | the re-definition of the term “Significant Market Power”, based on the concept of dominance, as defined in the case law of the Court of Justice and the Court of First Instance of the European Community regarding competition, to the effect that “an entity shall be deemed to have Significant Market Power if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers”. Previously the term “Significant Market Power” was defined primarily with reference to whether an entity had a market share over 25% in the relevant market. |
70
Table of Contents
• | the free provision of networks and electronic communications services, under the protection of public security, interests and health; | ||
• | the development of free competition and equality; | ||
• | the development of the internal market; | ||
• | the development of users’ interests; and | ||
• | the protection of users’ personal data. |
71
Table of Contents
• | to develop, install, use and manage any microwave multipoint distribution systems for radio and television signals; | ||
• | to develop, install, use and manage any kind of transmission infrastructure for a cable television network; and | ||
• | to provide cable television services, including the distribution of television programs via cable, which right had previously been granted exclusively to us and ERT, the Greek State television network. |
72
Table of Contents
73
Table of Contents
74
Table of Contents
75
Table of Contents
Country of | Equity | |||||
Name | Incorporation | Participation | Type of business | |||
OTE International Solutions S.A. (“OTEGlobe”) | Greece | 100.0% | Wholesale telephony services | |||
OTENet S.A. (“OTENet”) | Greece | 94.59% | Internet services | |||
Voicenet S.A. | Greece | 79.52(1) | Internet protocol services | |||
OTEestate S.A. (“OTE Estate”) | Greece | 100.0% | Real estate | |||
INFOTE S.A. (“Infote”) | Greece | 100.0% | Directory and information services | |||
Hellascom International S.A. (“Hellascom”) | Greece | 100.0% | Telecommunication services | |||
OTESAT-Maritel S.A. (“OTESAT-Maritel”) | Greece | 94.08% | Satellite telecommunications services | |||
OTE Insurance Agency S.A. (“OTE Insurance”) | Greece | 100.0% | Insurance brokerage services | |||
Multicom S.A. | Greece | 50.0%(2) | Internet and IT | |||
Lofos Pallini S.A. | Greece | 33.0% | Project management | |||
CosmoONE Hellas Market Site S.A. (“Cosmo one”) | Greece | 51.55%(3) | E-commerce services | |||
EDEKT—OTE S.A. | Greece | 40.0% | Pension fund | |||
OTE International Investments Limited | Cyprus | 100.0% | Investment holding company | |||
Albanian Mobile Communications Sh.a (“AMC”) | Albania | 55.24%(4) | Mobile telecommunications services | |||
Trans Jordan Telecommunications Services Company Ltd. | Jordan | 50.0%(5) | Telephony Services provided including telecards | |||
Yemen Public Payphone | Yemen | indirect(6) | Payphone operator | |||
OTENet Cyprus Ltd. | Cyprus | 70.02%(7) | Internet Service Provider | |||
OTENet Telecommunications ltd | Cyprus | 67.14%(8) | Telecommunications | |||
EOS High Technology Applications S.A. | Greece | 50.51%(9) | Satellite Business Solutions | |||
OTE Investment Services S.A. | Greece | 100.0%(10) | Consulting Services/Local & International investments | |||
Hellas Sat Consortium Limited (“Hellas Sat”) | Cyprus | 99.05% | Satellite communications | |||
Hellas Sat S.A. | Greece | 99.04% | Satellite telecommunications | |||
OTE plc | United Kingdom | 100.0% | Financing services | |||
CosmoBulgaria Mobile EAD (“Globul”) | Bulgaria | 67.0%(11) | Mobile telecommunications services | |||
Former Yugoslav | ||||||
Cosmofon Mobile Telecommunications | Republic of | |||||
Services AD Skopje (“Cosmofon”) | Macedonia | 67.0%(11) | Mobile telecommunications services | |||
OTE MTS Holding BV | Holland | 67.0%(11) | Investment Holding Company | |||
Cosmote Romania S.A. (previously named Cosmorom) (“Cosmote Romania”) | Romania | 63.1%(12) | Mobile telecommunications services | |||
HATWAVE Hellenic-American Telecommunications Wave Ltd. (“Hatwave”) | Cyprus | 52.67% | Holding company | |||
Telecom Serbia | Serbia | 20.0% | Public telephony operator | |||
OTE PLUS S.A. (“OTE Plus”) | Greece | 99.0% | Consulting Services | |||
OTE PLUS Bulgaria EAD | Bulgaria | 99.0%(13) | Consulting Services | |||
OTE PLUS Romania SRL | Romania | 99.0%(14) | Consulting Services | |||
DIERG ASIA Interim Employment S.A. | Greece | 99.05%(15) | Interim Employment Services | |||
OTE ACADEMY S.A. (“OTE Academy”) | Greece | 100.0% | Training Services | |||
Cosmoholding Cyprus Ltd. (“Cosmoholding Cyprus”) | Cyprus | 67.0%(16) | Investment holding company | |||
Germanos S.A. (“Germanos”) | Greece | 66.35%(16) | Retail services | |||
E-Value S.A. | Greece | 46.44%(17) | Services Company | |||
Germanos Telecom S.A. — Skopje | Skopje | 66.35%(17) | Commerce | |||
Germanos Telecom Romania S.A (“Germanos Romania”) | Romania | 66.34%(17) | Commerce | |||
Sunlight Romania SRL — Filiala | Romania | 66.34%(17) | Commerce | |||
Germanos Telecom Bulgaria AD | Bulgaria | 66.35%(17) | Commerce | |||
Mobilbeeep Ltd. | Greece | 67.00%(17) | Commerce | |||
Grigoris Mavromichalis and Partners Limited Company | Greece | 65.68%(17) | Commerce | |||
Georgios Prokopis and Partners Limited Company | Greece | 33.18%(17) | Commerce | |||
Joannis Tsaparas and Partners Limited Company | Greece | 33.84%(17) | Commerce | |||
Cosmo-Holding Albania S.A. (“CHA”) | Albania | 64.99% | Investment Holding Company | |||
OTE Austria Holding GmBH | Austria | 100% | Investment Holding Company |
76
Table of Contents
Notes: | ||
(1) | An interest of 84.07% is indirectly owned through OTENet S.A. Our effective interest is 79.52%. | |
(2) | Under liquidation. | |
(3) | We and Cosmote each hold a 30.87% equity interest. | |
(4) | Effective interest of 55.24% held through Cosmote and its 97% owned subsidiary Cosmo-Holding Albania. | |
(5) | Under liquidation; we hold a direct interest of 40.0% and an indirect interest of 10.0% through Hellascom International. | |
(6) | Under liquidation; we hold a direct interest of 10.0% and an indirect interest of 27.5% through Hellascom International and Trans Jordan Telecommunications, respectively. | |
(7) | Our effective interest is 70.02% (60% is owned by OTENet S.A. and 20% is owned by Germanos S.A.). | |
(8) | Our effective interest is 67.14% (52.14% is owned by OTENet S.A. and 15% is owned by OTE Globe S.A.). | |
(9) | Our effective interest is 50.51% (51% is owned by Hellas Sat S.A.). | |
(10) | Subsidiary of OTE International Investments (Cyprus). | |
(11) | Our effective interest is 67.0% through Cosmote. | |
(12) | Our effective interest is 63.1% (70.0% is owned by Cosmote and 30% is owned by RomTelecom). | |
(13) | Our effective interest is 99% (100% is owned by OTEPlus S.A.) | |
(14) | Under liquidation since February 2007. Our effective interest rate is 99% (100% is owned by OTEPlus S.A.) | |
(15) | Our effective interest is 99.05% (95% is owned by OTEPlus S.A. and 5% by Infote S.A.) | |
(16) | We own these interests indirectly. | |
(17) | These companies are owned by Germanos S.A. |
77
Table of Contents
78
Table of Contents
2004 | 2005 | 2006 | ||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
Euro | revenues(1) | Euro | revenues(1) | Euro | revenues(1) | |||||||||||||||||||
(Euro in millions, other than percentage and operating data) | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Domestic telephony(2) | 2,262.9 | 43.7 | 2,308.1 | 42.2 | 2,256.7 | 38.3 | ||||||||||||||||||
International telephony(3) | 376.6 | 7.2 | 391.0 | 7.1 | 346.9 | 5.9 | ||||||||||||||||||
Mobile telephony services | 1,555.4 | 30.0 | 1,756.7 | 32.1 | 1,975.8 | 33.6 | ||||||||||||||||||
Other revenues(4) | 989.1 | 19.1 | 1,015.2 | 18.6 | 1,308.0 | 22.2 | ||||||||||||||||||
Total revenues | 5,184.0 | 100.0 | 5,471.0 | 100.0 | 5,887.4 | 100.0 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Payroll and employee benefits(6) | (1,226.9 | ) | 23.7 | (1,323.0 | ) | 24.2 | (1,260.8 | ) | 21.4 | |||||||||||||||
Charges for Voluntary Retirement Scheme(5)(6) | (28.9 | ) | 0.6 | (939.6 | ) | 17.2 | 9.5 | 0.2 | ||||||||||||||||
Charges from international operators | (226.7 | ) | 4.4 | (217.9 | ) | 4.0 | (208.8 | ) | 3.5 | |||||||||||||||
Charges from domestic operators | (644.6 | ) | 12.4 | (665.5 | ) | 12.1 | (720.9 | ) | 12.2 | |||||||||||||||
Depreciation and amortization | (1,023.1 | ) | 19.7 | (1,053.9 | ) | 19.2 | (1,093.5 | ) | 18.6 | |||||||||||||||
Extinguishment of liabilities(5) | — | — | 23.8 | 0.4 | — | — | ||||||||||||||||||
Cost of telecommunications equipment(7) | (181.2 | ) | 3.5 | (180.7 | ) | 3.3 | (363.5 | ) | 6.2 | |||||||||||||||
Other operating expenses(7) | (1,214.7 | ) | 23.4 | (1,116.6 | ) | 20.4 | (1,187.3 | ) | 20.2 | |||||||||||||||
Total operating expenses | (4,546.1 | ) | 87.7 | (5,473.4 | ) | 100.0 | (4,825.3 | ) | 81.9 | |||||||||||||||
Operating income | 637.9 | 12.3 | (2.4 | ) | 0.0 | 1,062.1 | 18.1 | |||||||||||||||||
Other income/(expense): | ||||||||||||||||||||||||
Interest expense | (163.3 | ) | 3.2 | (164.5 | ) | 3.0 | (208.9 | ) | 3.5 | |||||||||||||||
Interest income | 47.6 | 0.9 | 53.9 | 1.0 | 70.8 | 1.2 | ||||||||||||||||||
Foreign exchange gains | 13.3 | 0.3 | 41.2 | 0.7 | 14.6 | 0.2 | ||||||||||||||||||
Earnings/(losses) from investments(5) | 6.7 | 0.1 | 20.0 | 0.4 | 22.9 | 0.4 | ||||||||||||||||||
Gain on sale of investments(5) | 6.4 | 0.1 | 30.7 | 0.5 | 180.2 | 3.1 | ||||||||||||||||||
Other expense, net | (22.8 | ) | 0.4 | (2.9 | ) | 0.0 | (10.8 | ) | 0.2 | |||||||||||||||
(112.1 | ) | 2.2 | (21.6 | ) | 0.4 | 68.8 | 1.2 | |||||||||||||||||
Income/(loss) before income taxes and minority interests | 525.8 | 10.1 | (24.0 | ) | 0.4 | 1,130.9 | 19.3 | |||||||||||||||||
Income taxes | (120.8 | ) | 2.3 | (32.5 | ) | 0.6 | (441.5 | ) | 7.5 | |||||||||||||||
Income/(loss) before minority interests | 405.0 | 7.8 | (56.5 | ) | 1.0 | 689.4 | 11.8 | |||||||||||||||||
Minority interest | (233.7 | ) | 4.5 | (235.4 | ) | 4.3 | (180.4 | ) | 3.1 | |||||||||||||||
Net income/(loss) | 171.3 | 3.3 | (291.9 | ) | 5.3 | 509.0 | 8.7 | |||||||||||||||||
Operating Data:(8) | ||||||||||||||||||||||||
Number of PSTN access lines in service (in thousands) | 5,078,709 | 4,927,622 | 4,778,245 | |||||||||||||||||||||
Number of ISDN channels in service (in thousands) | 1,264,992 | 1,369,830 | 1,382,124 | |||||||||||||||||||||
Total access lines in service (in thousands)(9) | 6,343,701 | 6,297,452 | 6,160,369 | |||||||||||||||||||||
Lines connected to digital exchanges (% of number of access lines installed) | 99.9 | 100.0 | 100.0 | |||||||||||||||||||||
Outgoing international traffic (million minutes)(10) | 834.1 | 806.9 | 827.8 | |||||||||||||||||||||
Incoming international traffic (million minutes)(10) | 791.1 | 795.3 | 840.8 |
Notes: | ||
(1) | Refers to the percentage of total consolidated revenues. | |
(2) | Includes charges to customers on outgoing calls to subscribers of unaffiliated mobile telephony operators of approximately Euro 342.6 million in 2006, Euro 376.8 million in 2005 and Euro 378.7 million in 2004. Includes revenues from monthly rental charges, revenues from fixed-to-fixed and fixed-to-mobile calls and other revenues from domestic telephony services. | |
(3) | Includes revenues from incoming, including transit, and outgoing traffic, gross of amounts charged by foreign telephony operators, and payments we receive from unaffiliated domestic mobile telephony operators for international calls. The respective revenues from our consolidated subsidiaries providing mobile services are eliminated upon consolidation. | |
(4) | Includes telecard sales, leased lines and data telecommunications, services rendered, directory services, interconnection charges, radio telecommunications, audiotex, telex and telegraphy, Internet services, ATM, ISDN and sales of telecommunication equipment. | |
(5) | In 2004, we wrote off an amount of Euro 24.8 million, related to management fees and accrued interest as a result of the settlement of Telecom Serbia’s arbitration. Net income in 2004 increased by approximately Euro 77.0 million resulting from a decrease in the applicable tax rates in Greece and Romania in December 2004. In 2005, we took a charge of Euro 914.5 million, representing the cost of the Voluntary Retirement Scheme. Furthermore, a gain of Euro 23.8 million was recorded relating to the extinguishment of liabilities from suppliers, in addition to dividends totaling Euro 19.4 million from Telecom Serbia and Eutelsat and gains totaling Euro 25.1 million from the sale of certain available for sale marketable securities and from the sale of our participation in Eutelsat. In 2006, we recorded a cost reduction of Euro 9.5 million, as the number of employees who retired with the completion of the Voluntary Retirement Scheme was less than the number of employees initially applied for, partially offset by a charge relating to an adjustment for the interest rate (which was below market rates) relating to the loan granted to the Auxiliary Fund in 2006 in connection with the Voluntary Retirement Scheme. Furthermore, a pre-tax gain of 164.0 million was recorded from the sale of ArmenTel. Finally, dividends totaling 21.6 million from Telecom Serbia and gains of Euro 10.3 million from sale of certain available for sale |
79
Table of Contents
securities affected this year’s results. | ||
(6) | In 2004, “Charges for Voluntary Retirement Scheme” were reclassified from “Payroll and employee benefits” as previously reported, and are presented as a separate line item. | |
(7) | In 2006, “Cost of telecommunications equipment” was reclassified from “Other operating expenses” as previously reported and is presented as a separate line item. Furthermore, amount of Euro 42.8 in 2005 and amount of Euro 37.8 in 2004 were classified from “other operating expenses” to “charges from international operators.” | |
(8) | As of the end of the relevant period, unless otherwise indicated. For Greece only. | |
(9) | Each ISDN channel is counted as the equivalent of one PSTN access line. | |
(10) | For the relevant period. |
Year ended December 31, | ||||||||||||||||
% of total | ||||||||||||||||
2004 | 2005 | 2006 | 2006 | |||||||||||||
(Euro in millions, except percentages) | ||||||||||||||||
Domestic Telephony: | ||||||||||||||||
Call charges(1) | 1,319.0 | 1,274.8 | 1,172.8 | 52.0 | ||||||||||||
Monthly rental charges | 849.2 | 950.1 | 991.8 | 43.9 | ||||||||||||
Other | 94.7 | 83.2 | 92.1 | 4.1 | ||||||||||||
Total domestic telephony services | 2,262.9 | 2,308.1 | 2,256.7 | 100.0 |
Note: | ||
(1) | Includes charges to customers on outgoing calls to subscribers of unaffiliated mobile telephony operators of Euro 342.6 million in 2006, Euro |
80
Table of Contents
376.8 million in 2005 and Euro 378.7 million in 2004, (representing 15.2%, 16.3% and 16.7% of domestic telephony revenues in 2006, 2005 and 2004, respectively. During the three-year period under review, we have not charged an interconnection fee for calls from our network to subscribers of unaffiliated mobile operators). |
81
Table of Contents
Year ended December 31, | ||||||||||||||||
% of total | ||||||||||||||||
2004 | 2005 | 2006 | 2006 | |||||||||||||
(Euro in millions, except percentages) | ||||||||||||||||
Outgoing traffic | 169.0 | 150.5 | 132.3 | 38.1 | ||||||||||||
Incoming and transit traffic(1) | 169.9 | 202.4 | 172.7 | 49.8 | ||||||||||||
Payments from mobile operators | 37.7 | 38.1 | 41.9 | 12.1 | ||||||||||||
Total | 376.6 | 391.0 | 346.9 | 100.0 | ||||||||||||
Note: | ||
(1) | Represents revenues from payments by foreign operators before settlement of amounts due to them in respect of outgoing traffic, which are included in operating expenses as payments to international operators. |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Outgoing: | ||||||||||||
Total outgoing traffic (millions of chargeable minutes) | 834.1 | 806.9 | 827.8 | |||||||||
Growth in outgoing traffic (% per annum) | (0.1 | ) | (3.26 | ) | 2.59 | |||||||
Incoming: | ||||||||||||
Total incoming traffic (millions of chargeable minutes) | 791.1 | 795.3 | 840.8 | |||||||||
Growth in incoming traffic (% per annum) | (0.2 | ) | 0.53 | 5.72 |
82
Table of Contents
83
Table of Contents
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
Prepaid cards | 147.2 | 126.6 | 100.6 | |||||||||
Directory services | 54.1 | 56.1 | 58.0 | |||||||||
Radio communications | 18.9 | 24.1 | 25.2 | |||||||||
Audiotex | 72.2 | 25.9 | 17.9 | |||||||||
Telex and telegraphy | 6.5 | 3.6 | 3.6 | |||||||||
Leased lines and data communications | 147.1 | 211.4 | 214.0 | |||||||||
ISDN | 121.2 | 141.4 | 158.9 | |||||||||
Sales of telecommunications equipment | 117.3 | 107.7 | 341.6 | |||||||||
Internet services/ADSL | 61.1 | 81.0 | 133.1 | |||||||||
ATM | 26.0 | 23.1 | 32.1 | |||||||||
Services rendered | 85.0 | 72.3 | 74.9 | |||||||||
Interconnection charges | 84.3 | 101.7 | 96.8 | |||||||||
Miscellaneous | 48.2 | 40.3 | 51.3 | |||||||||
Total other revenues | 989.1 | 1,015.2 | 1,308.0 | |||||||||
84
Table of Contents
85
Table of Contents
86
Table of Contents
87
Table of Contents
88
Table of Contents
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
Net cash provided by operating activities | 1,380.9 | 1,584.5 | 1,781.8 | |||||||||
Net cash used in investing activities | (839.6 | ) | (926.7 | ) | (2,296.8 | ) | ||||||
Net cash provided by/(used in) financing activities | (275.5 | ) | (13.4 | ) | 1,052.2 | |||||||
Effect of exchange rate changes on cash | 3.2 | (2.5 | ) | (6.9 | ) | |||||||
Net increase in cash and cash equivalents | 269.0 | 641.9 | 530.3 |
89
Table of Contents
Type of Loan | Principal Amount | Interest Rate | Maturity Date | |||||
(Euro in millions) | ||||||||
Global Medium Term Note (Euro 1,250 million) | 1,243.7 | 5% | 2013 | |||||
Global Medium Term Note (Euro 900 million) | 892.9 | 4.625% | 2016 | |||||
Global Medium Term Note (Euro 650 million) | 626.6 | 3.75% | 2011 | |||||
Global Medium Term Note (Euro 600 million) | 600.0 | EURIBOR + 0.28% | 2009 | |||||
OTE plc’s Syndicated Credit facility (Term Loan) | 500.0 | EURIBOR + 0.225% | 2011 | |||||
Bond Euro 1,100 million | 491.3 | 6.125% | 2007 | |||||
European Investment Bank Loan | 52.5 | 8.3% | 2009 | |||||
Other bank loans | 168.5 | Various | Various | |||||
Total | 4,575.5 |
• | Euro 1.25 billion notes issued in August 2003 at a fixed rate of 5%, maturing in 2013; and | ||
• | Euro 0.25 billion notes issued in November 2003 at a floating rate, maturing in 2006 (which have been repaid in full). |
90
Table of Contents
91
Table of Contents
92
Table of Contents
• | Connection charges: Connection charges for the fixed network are deferred and amortized to income over the estimated service life of a subscriber. No connection fees are charged for mobile services. | ||
• | Domestic monthly network service fees: Revenues related to the monthly network service fees, net of credits and discounts, are recognized in the month that the telecommunication service is provided. Unearned revenues are included in “Deferred revenue” in the accompanying consolidated balance sheets. | ||
• | Domestic local and long distance calls: Revenues for local and long-distance calls are recognized based on traffic generated by the caller, the destination of the call and the service utilized based on the telephony tariffs. Unbilled revenues from the billing cycle date to the end of each period are estimated based on traffic. | ||
• | International telephony revenues: International telephony revenues include outgoing, international calls which are reported gross of amounts payable by the Group to foreign telephony operators for termination of calls on their networks since the credit and collection risk remains solely with the Group. International telephony revenues also include incoming and transit traffic from foreign telephony operators routed through the Group’s fixed network as well as payments from mobile operators generated from their networks and routed through the Group’s fixed networks. International telephony revenues are recognized based on traffic generated by the caller at the telephony tariff international settlement rates under bilateral settlement agreements. | ||
• | Mobile telephony: Mobile telephony fees consist of fees based on usage of airtime generated by the caller, the destination of the call and the service utilized. Revenues for usage charges are recognized in the period when the services are provided. Interconnection fees due from other mobile operators for mobile-to-mobile calls originating from their network are recognized based on incoming traffic and established interconnection rates. Unbilled revenues from the billing cycle date to the end of each period are estimated based on traffic. | ||
• | Mobile telephony prepaid airtime cards: Revenues from prepaid airtime cards, net of discounts allowed, are recognized based on airtime usage. Unused airtime is included in “Deferred revenue” in the accompanying consolidated balance sheets. All prepaid airtime cards have a contractual life of two years or less. The majority of deferred revenue from all categories of prepaid airtime cards is used within the following year. Upon the expiration of prepaid airtime cards, any unused airtime is recognized to income. | ||
• | Traditional prepaid cards: Revenues from traditional prepaid cards, net of discounts allowed, are recognized based on usage. Unused traffic is included in “Deferred revenue” in the accompanying consolidated balance sheets. All traditional prepaid cards have a contractual life of two years or less. The majority of deferred revenue from all categories of traditional prepaid cards is used within the following year. Upon the expiration of the traditional prepaid cards, any unused traffic is recognized as income. | ||
• | Directories: Revenues from directory services consist of fees from advertising and are recognized in the period when the respective services are provided. | ||
• | Radio communications: Revenues from radio communications are recognized based on traffic. | ||
• | Audiotex: Audiotex revenues are recognized based on traffic. |
93
Table of Contents
• | Telex and telegraphy: Revenues from telex and telegraphy are recognized in the period when the services are provided. | ||
• | Leased lines and data telecommunications: Revenues from leased lines and data telecommunications are recognized in the period when the services are provided. | ||
• | Integrated Services Digital Network: Revenues related to the ISDN monthly rental charges, net of credits and discounts, are recognized in the month that the telecommunication service is provided. | ||
• | Sales of telecommunication equipment: Revenues from the sale of telecommunications equipment consist mainly of handsets and accessories. Revenues, net of discounts, are recognized at point of sale. Handsets that are offered in mobile telephone packages have been determined to be revenue arrangements with multiple deliverables (such as handset sale and ongoing services). Total consideration received in these arrangements is allocated and measured using units of accounting within the arrangement based on relative fair values. | ||
• | Internet Services: Revenues related to the monthly Internet access charges, net of credits and discounts, are recognized in the month that the Internet service is provided. | ||
• | Asynchronous Transfer Mode (ATM): Revenues from asynchronous transfer mode services are recognized in the period when the services are provided. | ||
• | Services rendered: Revenues are recognized in the period when the services are provided. | ||
• | Interconnection charges: Interconnection charges represent call termination fees from domestic mobile operators and other domestic fixed-line operators. Interconnection fees are recognized based on traffic. |
• | Discounts, Commissions, Subsidies: Cosmote’s Master Dealer sales channel consists of a network of commercial representatives and distributors. Airtime and acquisition commission costs due to the Group’s Master Dealers for each subscriber acquired through their sales channel are expensed as incurred. Commissions paid for the renewal of each contract subscriber initially 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. Discounts, representing the difference between the wholesale price of prepaid cards and boxes (consisting of handsets and prepaid airtime) to the Group’s Master Dealers, and the retail sale price to the ultimate customers, are deducted from the respective revenue. | ||
• | Connection costs: Connection costs for the fixed network are deferred and amortized to expense over the estimated service life of a subscriber. | ||
• | Advertising costs: Advertising costs are expensed as incurred. | ||
• | Research and development costs: Research and development costs are expensed as incurred. | ||
• | Charges from international and domestic operators: Charges from international and domestic operators are expensed as incurred. |
94
Table of Contents
(i) | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This statement defines fair value and establishes a framework for measuring fair value. Additionally, this statement expands disclosure requirements for fair value with a particular focus on measurement inputs. SFAS No. 157 is effective for annual reporting periods ending December 31, 2008. The Group is evaluating the impact, if any, the adoption of this standard will have on its financial position or results of operations. | ||
(ii) | In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (Including an amendment of SFAS 115)”. This statement permits entities to choose to measure certain defined eligible items, at fair value at specific election dates. The entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the entity does not report earnings) at each subsequent reporting date. SFAS No. 159 is effective for annual reporting periods ending December 31, 2008. The Group is evaluating the impact, if any, the adoption of this standard will have on its financial position or results of operations. | ||
(iii) | In September 2006, the EITF reached a consensus on Issue No. 06-1, “Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider”. EITF Issue No. 06-1 provides guidance regarding whether the consideration given by a service provider to a manufacturer or reseller of specialized equipment should be characterized as a reduction of |
95
Table of Contents
revenue or an expense. This issue is effective for annual reporting periods ending December 31, 2008. Entities are required to recognize the effects of applying this issue as a change in accounting principle through retrospective application to all prior periods unless it is impracticable to do so. The Group is evaluating the impact, if any, the adoption of this consensus will have on its financial position or results of operations. | |||
(iv) | In June 2006, the EITF reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross Versus Net Presentation)”. EITF Issue No. 06-3 requires that companies disclose their accounting policy regarding the gross or net presentation of certain taxes. Taxes within the scope of EITF Issue No. 06-3 are any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and some excise taxes. EITF Issue No. 06-3 is effective for annual reporting periods ending December 31, 2007. The Group currently records its revenues net of value-added taxes. | ||
(v) | In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48, an interpretation of SFAS No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for annual reporting periods ending December 31, 2007. The cumulative effect of adopting FIN 48 generally will be recorded directly to retained earnings. However, to the extent the adoption of FIN 48 results in a revaluation of uncertain tax positions acquired in purchase business combinations, the cumulative effect will be recorded as an adjustment to any goodwill remaining from the corresponding purchase business combination. The Group is evaluating the impact, if any, the adoption of this interpretation will have on its financial position or results of operations. |
• | Metropolitan Ethernet technologies and services; | ||
• | Next Generation SDH technologies; | ||
• | MPLS technologies and services; | ||
• | Security Monitor of Outdoor Distributing Cabinets; | ||
• | Voice over IP for VPNs and Voice over xDSL; |
96
Table of Contents
• | IPTV; | ||
• | VDSL2; | ||
• | WiMAX trials and pilot network; and | ||
• | Fixed and mobile integration technologies. |
• | DESEREC (Dependable Security by Enhanced Reconfigurability — aims to increase the dependability of critical open and interconnected information systems by a multi-disciplinary, coordinated effort); | ||
• | MOBILE-IN (Unified Service Development and Provisioning in heterogeneous Wireless networks); | ||
• | D-SPACE (Service Development of Tele-manipulation of Telescopes and Remote Sensors); | ||
• | LIAISON (Development of services on a TETRA platform); | ||
• | DAIDALOS (Provisioning of Personalized, Location-Based Services); and | ||
• | WEBPOOL (Virtual Learning Environment for European Local Policies). |
97
Table of Contents
Payments due by maturity at December 31, 2006 | ||||||||||||||||||||
more | ||||||||||||||||||||
less than | than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Long-Term Debt Obligations | 4,575.5 | 528.1 | 725.6 | 1,144.1 | 2,177.7 | |||||||||||||||
Purchase Obligations | 634.6 | 193.4 | 89.7 | 86.3 | 265.2 | |||||||||||||||
Capital Lease Obligations | 0.1 | 0.1 | — | — | — | |||||||||||||||
Operating Lease Obligations | 485.5 | 52.1 | 94.8 | 91.6 | 247.0 | |||||||||||||||
Total | 5,695.7 | 773.7 | 910.1 | 1,322.0 | 2,689.9 | |||||||||||||||
98
Table of Contents
99
Table of Contents
Name | Position | Capacity | Appointed | Expiry(1) | Age | |||||||||
Panagis Vourloumis | Chairman/ Managing Director | Executive | June 21, 2007 | 2010 | 70 | |||||||||
Iakovos G. Georganas | Vice-Chairman | Non-Executive | June 16, 2005 | 2008 | 75 | |||||||||
Panagiotis Tampourlos | Director | Independent | June 21, 2007 | 2010 | 55 | |||||||||
Nikos Stefanou | Director | Non-Executive | June 21, 2007 | 2010 | 45 | |||||||||
George Tzovlas | Director | Independent | June 21, 2007 | 2010 | 57 | |||||||||
Elias Gounaris | Director | Non-Executive | June 21, 2007 | 2010 | 66 | |||||||||
Xeni Skorini | Director | Independent | June 22, 2006 | 2009 | 66 | |||||||||
George C. Bitros | Director | Non-Executive | June 22, 2006 | 2009 | 67 | |||||||||
Charalambos Dimitriou | Director | Non-Executive | June 22, 2006 | 2009 | 51 | |||||||||
Theodore Veniamis | Director | Non-Executive | June 16, 2005 | 2008 | 57 | |||||||||
Georgios Gerapetritis | Director | Independent | June 16, 2005 | 2008 | 40 |
Note: | ||
(1) | Each Director’s term expires on the date of the General Assembly of the respective year of expiry. |
100
Table of Contents
• | the composition of our Board of Directors; | ||
• | transparency and disclosure of information; and |
• | the protection of shareholders’ rights. |
101
Table of Contents
(i) | an internal audit department responsible for continuously monitoring our company’s operations including, among other things, monitoring the implementation and continuous observance of our Internal Regulations and Articles of Incorporation, as well as all regulations pertaining to our company; | ||
(ii) | a shareholders’ relations department responsible for providing information to shareholders relating to distribution and payment of dividends, corporate actions and information concerning the General Assembly of shareholders; and | ||
(iii) | an announcement department responsible for the announcement of all notices and statements pertaining to the company. |
102
Table of Contents
• | integrity of our financial statements; | ||
• | adequacy of internal audit procedures and systems; | ||
• | observance and adequacy of accounting and financial reporting processes; | ||
• | operation of internal audit procedures; | ||
• | evaluation of our external auditors, mainly referring to their independence, integrity, efficiency and performance; and | ||
• | our observance of our legal and regulatory framework. |
• | examining and evaluating the efficiency and effectiveness of internal audit procedures that we apply, including the adequacy of security and control of informational systems, and informing the Board of its conclusions regarding these matters; | ||
• | discussing with management and our external auditors, our quarterly, semi-annual and annual financial statements prior to their publication; | ||
• | evaluating the completeness and consistency of our financial statements, pursuant to the information that is known to its members; | ||
• | examining, following the completion of the annual audit, the significant issues that have arisen during the audit, the results of the audit and any issues raised by the external auditors during the execution of their work; | ||
• | advising our Board regarding the selection of external auditors; | ||
• | examining the audit framework and methodology of the annual audit conducted by the external auditors, evaluating their performance and recommending to the Board their release from any liability to us with respect to the audit of our statutory financial statements; | ||
• | pre-approving all services rendered by, and fees due to, the external auditors; | ||
• | examining and evaluating the independence of the external auditors and suggesting to the Board measures to be taken in order to maintain their independence; |
103
Table of Contents
• | supervising the internal audit function and being mindful of the independent and effective function of the internal auditors, including, among other matters, examining and evaluating the formation procedure of the activity programs of the internal audit’s organizational units and recommending their approval to the Board, monitoring the implementation of the annual activity programs of the internal audit’s organizational units, and evaluating the progress and effectiveness of the internal audit work; | ||
• | designing, establishing and implementing procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters, as well as the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. Our Audit Committee has adopted a complaints procedure in accordance with Rule 10A-3 of the Exchange Act; | ||
• | examining, along with management and our external auditors, any exchange of information with the supervisory authorities, as well as any public reports and publications regarding critical issues relating to our financial statements; and | ||
• | examining, along with our legal counsel, any legal issues that may significantly affect our financial statements or our compliance with the applicable statutory framework. |
• | may delegate to its members the exercise of particular competences facilitated by specific written authorizations; | ||
• | may engage, following the approval of our Board, independent counsel and other advisers; | ||
• | determines our obligation to provide the necessary funding for the performance of its tasks; and | ||
• | has free access to all of our information and records. |
104
Table of Contents
Name | Position | Age | ||||
Panagis Vourloumis | Chairman and Managing Director | 70 | ||||
Iordanis Aivazis (1) | Chief Operating Officer | 57 | ||||
Evangelos Martigopoulos | Managing Director of Cosmote | 48 | ||||
Yorgos Ioannidis(2) | Managing Director of RomTelecom | 57 | ||||
Michael Tsamaz | Chief Executive Officer of OTEGlobe S.A. and Managing Director of OTE Investment Services S.A. | 48 | ||||
Elias Drakopoulos(3) | Managing Director of OTENet | 43 | ||||
Christini Spanoudaki(4) | Chief Financial Officer | 47 | ||||
Maria Efthimerou(5) | Chief Technology Officer | 52 | ||||
Soula Evans | Chief Commercial Officer for Business and Residential Customers | 47 | ||||
Konstantinos Kappos | Chief Information Officer | 52 | ||||
Andreas Karageorgos | Chief Regional Officer | 55 | ||||
Nikolaos Tsatsanis | Chief Human Recourses Officer | 58 | ||||
Kosmas Liaros(6) | Chief Internal Audit Officer | 45 | ||||
Christos Katsaounis | Chief Officer of National Wholesale Services | 44 | ||||
Konstantinos Ploumpis | General Director of Regulatory Affairs | 38 | ||||
Paraskevas Passias | General Counsel(7) | 41 |
Notes: | ||
(1) | In his capacity as Chief Operating Officer, Mr. Aivazis is in charge of the following divisions: Residential and Business Customers, National Wholesale Services, Technology, Regions, Information Technology and Finance. Mr. Aivazis assumed this position on June 8, 2007. | |
(2) | Mr. Ioannidis replaced James Hubley in this position on February 9, 2007 | |
(3) | Mr. Drakopoulos replaced Mr. Ioannidis in this position on February 9, 2007. | |
(4) | Mrs. Spanoudaki assumed this position on June 8, 2007. | |
(5) | Mrs. Efthimerou replaced Mr. Ioannidis in this position on February 9, 2007. | |
(6) | Mr. Liaros replaced Georgios Michos in this position on January 1, 2007. | |
(7) | Dr. Passias is General Counsel of OTE and his area of responsibility excludes regulatory and competition affairs and legal issues of subsidiaries. |
105
Table of Contents
106
Table of Contents
107
Table of Contents
Maximum number of | Maximum number of | |||||||
Basic Rights | Additional Rights | |||||||
Beneficiaries | in the first three years | in the first three years | ||||||
Managing Directors of Subsidiaries | 35,000 | 7,000 | ||||||
Directors | 18,000 | 4,500 | ||||||
Deputy Directors | 9,500 | 3,100 |
108
Table of Contents
(a) | The participation in the Cosmote Stock Option Plan of executives of Germanos in Greece and abroad; | ||
(b) | From October 2007, participants must be deemed to have “fully met the requirements of their position” at their annual performance appraisal, in order to be granted Basic or Additional Stock Options for the respective year; | ||
(c) | Rights granted as of October 2006 may be exercised by eligible executives at discounts of 10% to 25% to the reference price, depending on their seniority and on condition of: (i) Cosmote Group’s specific targets (as set by Cosmote’s Board of Directors) having being achieved; and (ii) having achieved high individual performance (higher than the level “fully meets the requirements of the position”). |
As of December 31, | ||||||||||||
2004(1) | 2005(1) | 2006(1) | ||||||||||
Administration | 4,454 | 4,064 | 3,409 | |||||||||
Finance | 879 | 800 | 653 | |||||||||
Technical | 9,628 | 8,647 | 6,551 | |||||||||
Support Staff | 898 | 900 | 752 | |||||||||
Specialists | 347 | 328 | 298 | |||||||||
Other Staff | — | — | 92 | |||||||||
Total Permanent Staff | 16,206 | 14,739 | 11,755 | |||||||||
Personnel on temporary contracts | 96 | 23 | 20 | |||||||||
Total | 16,302 | 14,762 | 11,775 | |||||||||
Change (%) | (5.1 | %) | (9.5 | %) | (20.2 | %) | ||||||
Access lines in service per employee(2) | 389 | 427 | 523 | |||||||||
Notes: | ||
(1) | Includes our employees currently working with us or transferred or seconded to our subsidiaries. | |
(2) | Includes OTE fixed-line telephony 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. |
109
Table of Contents
• | following a benchmarking survey, we have implemented a scheme to converge our management compensation and market practices; we have rationalized and simplified our compensation arrangements, aiming to ensure that all employees are paid a fair market wage and receive further performance incentives; | ||
• | we aim to improve our performance appraisal process; | ||
• | we focus our recruitment efforts on personnel with the necessary specialized and technical knowledge, mainly in the areas of telecommunications engineering, economics, finance and accounting, sales and marketing and information technology; | ||
• | we are training our employees to function in a customer-oriented manner, having instituted several customer service training programs; in 2006, 3,158 of our employees attended 273 seminars on topics selected to improve the quality and efficiency of their performance; and | ||
• | we have streamlined our management structure, delegating decision-making responsibility to more junior levels in order to accelerate our response to customer demands. |
Regional Departments | No. of Employees | |||||||
As of December 31, | ||||||||
2005 | 2006 | |||||||
Attica Services | 2,409 | 1,923 | ||||||
Northern Greece | 2,766 | 2,038 | ||||||
Southern-Western Greece | 2,184 | 1,600 | ||||||
Crete Islands | 1,050 | 872 | ||||||
Employees of our OTE Shops in Greek regions | 2,292 | 1,601 | ||||||
Remainder of our employees (Athens) | 4,061 | 3,741 | ||||||
Total | 14,762 | 11,775 | ||||||
110
Table of Contents
111
Table of Contents
112
Table of Contents
Number of | Number of | |||||||||||||||||||||||
Number of | Number of | Number of | Number of | OTE shares | Cosmote shares | |||||||||||||||||||
OTE | OTE | Cosmote shares | Cosmote | held by family | held by family | |||||||||||||||||||
Name | shares held | options held | held | options held | members | members | ||||||||||||||||||
Panagis Vourloumis | 0 | 0 | 3,540 | 66,500 | 0 | 460 | ||||||||||||||||||
Iordanis Aivazis | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Iakovos G. Georganas | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Panagiotis Tampourlos | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Nikos Stefanou | 340 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
George Tzovlas | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Elias Gounaris | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Xeyi Skorini | 0 | 0 | 120 | 0 | 227 | 340 | ||||||||||||||||||
George C. Bitros | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Charalambos Dimitriou | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Theodore Veniamis | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Georgios Gerapetritis | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Evangelos Martigopoulos | 0 | 0 | 39,910 | 98,510 | 0 | 0 | ||||||||||||||||||
Yorgos Ioannidis | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Michael Tsamaz | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Elias Drakopoulos | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Christini Spanoudaki | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Maria Efthimerou | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Soula Evans | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Konstantinos Kappos | 136 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Andreas Karageorgos | 35 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Nikolaos Tsatsanis | 0 | 0 | 0 | 0 | 88 | 110 | ||||||||||||||||||
Kosmas Liaros | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Christos Katsaounis | 300 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Konstantinos Ploumpis | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Paraskevas Passias | 0 | 0 | 0 | 0 | 0 | 0 |
113
Table of Contents
December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Euro in millions) | ||||||||||||
Accounts receivable from state entities and organizations | 128.3 | 106.8 | 228.3 | |||||||||
Total | 128.3 | 106.8 | 228.3 |
114
Table of Contents
Athens Exchange | NYSE | |||||||||||||||||||||||
Average Daily | Average Daily | |||||||||||||||||||||||
High | Low | Trading Volume | High | Low | Trading Volume(2) | |||||||||||||||||||
Price per share | Price per ADS(1) | |||||||||||||||||||||||
(Euro) | (U.S. $) | |||||||||||||||||||||||
2002 | 18.88 | 10.12 | 877,172 | 8.39 | 5.20 | 58,208 | ||||||||||||||||||
2003 | 11.64 | 8.40 | 1,110,817 | 7.80 | 4.67 | 73,648 | ||||||||||||||||||
2004 | 13.44 | 9.40 | 1,110,205 | 8.90 | 5.80 | 85,633 | ||||||||||||||||||
2005 | 18.46 | 13.04 | 1,309,218 | 11.17 | 8.46 | 32,943 | ||||||||||||||||||
2006 | 23.72 | 15.94 | 1,094,406 | 15.72 | 10.03 | 26,366 | ||||||||||||||||||
2005 | ||||||||||||||||||||||||
First quarter | 15.00 | 13.04 | 1,208,221 | 9.96 | 8.46 | 44,590 | ||||||||||||||||||
Second quarter | 16.04 | 13.82 | 867,122 | 9.80 | 8.78 | 29,533 | ||||||||||||||||||
Third quarter | 17.84 | 15.86 | 1,881,853 | 10.85 | 9.60 | 20,533 | ||||||||||||||||||
Fourth quarter | 18.46 | 16.48 | 1,249,672 | 11.17 | 9.86 | 37,737 | ||||||||||||||||||
2006 | ||||||||||||||||||||||||
First quarter | 19.04 | 17.60 | 1,181,272 | 11.65 | 10.58 | 24,768 | ||||||||||||||||||
Second quarter | 19.16 | 15.94 | 1,208,622 | 12.20 | 10.03 | 40,875 | ||||||||||||||||||
Third quarter | 19.94 | 16.32 | 837,909 | 12.68 | 10.37 | 17,170 | ||||||||||||||||||
Fourth quarter | 23.72 | 19.18 | 1,161,143 | 15.72 | 12.14 | 22,625 | ||||||||||||||||||
2007 | ||||||||||||||||||||||||
January | 24.40 | 22.52 | 1,156,960 | 16.00 | 14.73 | 38,305 | ||||||||||||||||||
February | 23.70 | 20.50 | 1,654,034 | 15.48 | 13.58 | 41,779 | ||||||||||||||||||
March | 21.90 | 19.92 | 1,446,155 | 14.36 | 13.31 | 31,732 | ||||||||||||||||||
April | 22.14 | 20.46 | 1,353,432 | 15.14 | 13.80 | 133,571 | ||||||||||||||||||
May (until May 15) | 22.40 | 21.34 | 1,025,153 | 15.29 | 14.47 | 49,666 |
Notes: | ||
(1) | Each ADS represents one half of one share. | |
(2) | Number of ADSs. |
115
Table of Contents
• | the establishment, management and operation of telecommunications infrastructure; |
• | 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 use 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. |
116
Table of Contents
117
Table of Contents
• | to request the Board to convene an extraordinary General Assembly; | ||
• | to postpone once a resolution is 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 us, 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. |
• | merger, liquidation or winding up; | ||
• | all increases or decreases in share capital, except for increases authorized by resolution to the General Assembly; | ||
• | 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; | ||
• | 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 on, or abolition of, pre-emptive rights with respect to share capital increases with payment in cash or in kind. |
118
Table of Contents
119
Table of Contents
• | the certificate of a broker or other relevant person evidencing the purchase of shares; and | |
• | our certificate as to the entitlement to the payment of dividends on shares. |
120
Table of Contents
121
Table of Contents
• | 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 U.S. federal income taxation regardless of its source; or | ||
• | a trust if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of the substantial decisions of such trust or the trust elects under U.S. Treasury Regulations to be treated as a U.S. person (a “U.S. Holder”). |
122
Table of Contents
123
Table of Contents
124
Table of Contents
125
Table of Contents
Expected Maturity Date | ||||||||||||||||||||||||||||||||||
Base | There- | Fair | ||||||||||||||||||||||||||||||||
Currency | 2007 | 2008 | 2009 | 2010 | 2011 | After | Total | Value | ||||||||||||||||||||||||||
(Euro in millions) | ||||||||||||||||||||||||||||||||||
Long-term Debt | ||||||||||||||||||||||||||||||||||
Fixed Rate | ||||||||||||||||||||||||||||||||||
€650 million 3.75% Nov 2011 bond | Euro | — | — | — | — | 626.6 | 0.0 | 626.6 | 603.0 | |||||||||||||||||||||||||
€1,250 million 5% Aug 2013 bond | Euro | — | — | — | — | — | 1,243.7 | 1,243.7 | 1,258.6 | |||||||||||||||||||||||||
€900 million 4.625% May 2016 bond | Euro | — | — | — | — | — | 892.9 | 892.9 | 875.9 | |||||||||||||||||||||||||
€1,100 million 6.125% Feb 2007 bond | Euro | 491.3 | — | — | — | — | — | 491.3 | 492.3 | |||||||||||||||||||||||||
Loan from E.I.B | Euro | 16.1 | 17.6 | 18.8 | 0.0 | 0.0 | 0.0 | 52.5 | 48.3 | |||||||||||||||||||||||||
Other bank loans | Various | 14.1 | 14.1 | 16.2 | 8.3 | 9.0 | 40.9 | 102.6 | 93.5 | |||||||||||||||||||||||||
Floating Rate | ||||||||||||||||||||||||||||||||||
Syndicated loan facility | Euro | — | — | — | — | 500.0 | 0.0 | 500.0 | 500.0 | |||||||||||||||||||||||||
€600 million floating rate Nov 2009 note | Euro | — | — | 600.0 | — | — | — | 600.0 | 600.0 | |||||||||||||||||||||||||
Other bank loans | Various | 6.6 | 58.8 | 0.1 | 0.1 | 0.1 | 0.2 | 65.9 | 65.9 | |||||||||||||||||||||||||
Total long-term debt | 528.1 | 90.5 | 635.1 | 8.4 | 1,135.7 | 2,177.7 | 4,575.5 | 4,537.5 | ||||||||||||||||||||||||||
Short-term Debt | ||||||||||||||||||||||||||||||||||
Floating rate | Euro | 25.2 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 25.2 | 25.2 | |||||||||||||||||||||||||
Total short-term debt |
126
Table of Contents
127
Table of Contents
Hellenic Telecommunications Organization S.A.:
June 28, 2007
• | compliance with the laws and the regulations of countries where we develop business activities; | ||
• | reliability of information, reports and internal audits; | ||
• | confidentiality of information, especially of a nature affecting share price and corporate reputation; | ||
• | avoidance of conflicts between personal and professional interests; | ||
• | non-discrimination against employees, customers and vendors and the avoidance of non-transparent agreements with competitors; and | ||
• | accountability for adherence to the Code of Ethics. |
128
Table of Contents
Ernst & Young | ||||||||||||||||
(Hellas) Certified | ||||||||||||||||
Auditors | KPMG | |||||||||||||||
Accountants S.A. | SOL S.A. | Kyriacou Certified Auditors A.E | ||||||||||||||
2004 | 2004 | 2005 | 2006 | |||||||||||||
Euro in thousands | ||||||||||||||||
Audit fees | 1,340 | 350 | 1,659 | 2,582 | ||||||||||||
Audit-Related Fees | 67 | 13 | 2 | 168 | ||||||||||||
Tax Fees | 83 | — | 31 | 55 | ||||||||||||
All Other Fees | 50 | 8 | — | — | ||||||||||||
Total Fees | 1,540 | 371 | 1,692 | 2,805 | ||||||||||||
129
Table of Contents
Page | ||||
Index to the Consolidated Financial Statements | F 1 | |||
Reports of Independent Registered Public Accounting Firms | F 2 | |||
Consolidated Balance Sheets as of December 31, 2005 and 2006 | F 4 | |||
Consolidated Statements of Income for the years ended December 31, 2004, 2005 and 2006 | F 6 | |||
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2005 and 2006 | F 7 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006 | F 8 | |||
Notes to the consolidated financial statements | F 9 |
1.1 | Articles of Incorporation. |
12.1 | Certification of chief executive officer pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
12.2 | Certification of chief financial officer pursuant to 18 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
13.1 | Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
13.2 | Certification of chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
130
Table of Contents
HELLENIC TELECOMMUNICATIONS ORGANIZATION S.A. | ||||||
Date: June 28, 2007 | By: | /s/ PANAGIS VOURLOUMIS | ||||
Name: Panagis Vourloumis Title: Chairman & Managing Director |
131
Table of Contents
132
Table of Contents
133
Table of Contents
134
Table of Contents
135
Table of Contents
AND SUBSIDIARIES
Table of Contents
Page | ||
F-2 | ||
F-4 | ||
F-6 | ||
F-7 | ||
F-8 | ||
F-9 |
Table of Contents
Hellenic Telecommunications Organization S.A.:
June 28, 2007
F-2
Table of Contents
Hellenic Telecommunications Organization S.A.:
CERTIFIED AUDITORS ACCOUNTANTS S.A.
May 31, 2005
F-3
Table of Contents
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||||||
2005 | 2006 | |||||||||||
Amounts in millions, except share and per share data | Notes | € | € | |||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 2 | (o) | 1,512.2 | 2,042.5 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of€275.2 and€254.4 as of December 31, 2005 and 2006, respectively | 3 | 944.5 | 932.6 | |||||||||
Due from related parties | 4 | 106.8 | 228.3 | |||||||||
Advances to pension funds | 15 | 35.7 | 35.7 | |||||||||
Loans and advances to employees | 15 | 102.8 | 2.6 | |||||||||
Available-for-sale marketable equity securities | 5 | 32.9 | 36.4 | |||||||||
Subsidies receivable | 7 | 2.9 | 2.9 | |||||||||
Materials and supplies | 2 | (e) | 127.2 | 204.6 | ||||||||
Deferred income taxes | 13 | 67.9 | 7.1 | |||||||||
Other current assets | 228.9 | 365.9 | ||||||||||
Total current assets | 3,161.8 | 3,858.6 | ||||||||||
Other assets: | ||||||||||||
Investments | 6 | 159.4 | 158.7 | |||||||||
Advances to pension funds | 15 | 180.7 | 188.1 | |||||||||
Loans and advances to employees, net of current portion | 15 | 18.3 | 30.3 | |||||||||
Other long-term assets | 95.2 | 117.1 | ||||||||||
Total other assets | 453.6 | 494.2 | ||||||||||
Telecommunication property, plant and equipment, net | 7 | 6,475.9 | 6,335.6 | |||||||||
Intangible assets: | ||||||||||||
Telecommunication licenses, net | 8 | 380.6 | 375.3 | |||||||||
Goodwill | 9 | 245.8 | 1,106.3 | |||||||||
Other intangible assets, net | 10 | 151.2 | 701.8 | |||||||||
Total intangible assets | 777.6 | 2,183.4 | ||||||||||
TOTAL ASSETS | 10,868.9 | 12,871.8 | ||||||||||
F-4
Table of Contents
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||||||
2005 | 2006 | |||||||||||
Amounts in millions, except share and per share data | Notes | € | € | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Short-term borrowings | 11 | 14.3 | 25.2 | |||||||||
Current maturities of long-term debt | 14 | 321.7 | 528.1 | |||||||||
Accounts payable | 708.8 | 945.5 | ||||||||||
Reserve for staff retirement indemnities | 15 | 19.8 | 6.8 | |||||||||
Reserve for voluntary retirement program | 15 | 434.9 | 316.7 | |||||||||
Reserve for Youth Account | 15 | 51.5 | 48.3 | |||||||||
Accrued and other liabilities | 12 | 471.9 | 500.6 | |||||||||
Deferred revenue | 175.5 | 193.1 | ||||||||||
Income taxes payable | 13 | 90.9 | 144.4 | |||||||||
Dividends payable | 18 | 5.2 | 180.4 | |||||||||
Total current liabilities | 2,294.5 | 2,889.1 | ||||||||||
Long-term liabilities: | ||||||||||||
Long-term debt, net of current maturities | 14 | 3,112.2 | 4,047.4 | |||||||||
Reserve for staff retirement indemnities | 15 | 186.6 | 328.7 | |||||||||
Reserve for voluntary retirement program | 15 | 603.8 | 372.8 | |||||||||
Reserve for Youth Account | 15 | 276.5 | 338.9 | |||||||||
Deferred income taxes | 13 | 36.6 | 186.7 | |||||||||
Other long-term liabilities | 145.4 | 99.6 | ||||||||||
Total long-term liabilities | 4,361.1 | 5,374.1 | ||||||||||
Minority interests | 968.8 | 1,081.8 | ||||||||||
Commitments and contingencies | 19 | |||||||||||
Shareholders’ equity: | ||||||||||||
Share capital, nominal value€2.39 each at December 31, 2005 and 2006, respectively (490,582,879 and 490,150,389 shares authorized, issued and outstanding at December 31, 2005 and 2006, respectively) | 16 | 1,172.5 | 1,171.5 | |||||||||
Paid-in surplus | 578.3 | 577.6 | ||||||||||
Treasury stock (432,490 and nill shares at December 31, 2005 and 2006, respectively) | 16 | (5.9 | ) | — | ||||||||
Legal reserve | 17 | 256.7 | 283.3 | |||||||||
Retained earnings | 1,445.6 | 1,747.2 | ||||||||||
Accumulated other comprehensive loss | 2 | (v) | (202.7 | ) | (252.8 | ) | ||||||
Total shareholders’ equity | 3,244.5 | 3,526.8 | ||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 10,868.9 | 12,871.8 | ||||||||||
F-5
Table of Contents
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, | ||||||||||||||||
2004 | 2005 | 2006 | ||||||||||||||
Amounts in millions, except share and per share data | Notes | € | € | € | ||||||||||||
Revenues: | ||||||||||||||||
Domestic telephony | 22 | 2,262.9 | 2,308.1 | 2,256.7 | ||||||||||||
International telephony | 22 | 376.6 | 391.0 | 346.9 | ||||||||||||
Mobile telephony | 22 | 1,555.4 | 1,756.7 | 1,975.8 | ||||||||||||
Other revenues | 22 | 989.1 | 1,015.2 | 1,308.0 | ||||||||||||
Total revenues | 5,184.0 | 5,471.0 | 5,887.4 | |||||||||||||
Operating expenses: | ||||||||||||||||
Payroll and employee benefits | (1,226.9 | ) | (1,323.0 | ) | (1,260.8 | ) | ||||||||||
Charges for voluntary retirement program | 15 | (28.9 | ) | (939.6 | ) | 9.5 | ||||||||||
Charges from international operators | (226.7 | ) | (217.9 | ) | (208.8 | ) | ||||||||||
Charges from domestic operators | (644.6 | ) | (665.5 | ) | (720.9 | ) | ||||||||||
Depreciation and amortization | 7, 8, 10 | (1,023.1 | ) | (1,053.9 | ) | (1,093.5 | ) | |||||||||
Extinguishment of liabilities | 1 | (h) | — | 23.8 | — | |||||||||||
Cost of telecommunications equipment | 2(zb) | (181.2 | ) | (180.7 | ) | (363.5 | ) | |||||||||
Other operating expenses | 23 | (1,214.7 | ) | (1,116.6 | ) | (1,187.3 | ) | |||||||||
Total operating expenses | (4,546.1 | ) | (5,473.4 | ) | (4,825.3 | ) | ||||||||||
Operating income / (loss) | 637.9 | (2.4 | ) | 1,062.1 | ||||||||||||
Other income/(expense): | ||||||||||||||||
Interest expense | 7, 11, 14 | (163.3 | ) | (164.5 | ) | (208.9 | ) | |||||||||
Interest income | 47.6 | 53.9 | 70.8 | |||||||||||||
Foreign exchange gains | 2 | (d) | 13.3 | 41.2 | 14.6 | |||||||||||
Earnings from investments | 6 | 6.7 | 20.0 | 22.9 | ||||||||||||
Gain on sale of investments | 24 | 6.4 | 30.7 | 180.2 | ||||||||||||
Other expense, net | (22.8 | ) | (2.9 | ) | (10.8 | ) | ||||||||||
(112.1 | ) | (21.6 | ) | 68.8 | ||||||||||||
Income / (loss) before provision for income taxes and minority interests | 525.8 | (24.0 | ) | 1,130.9 | ||||||||||||
Income taxes | 13 | (120.8 | ) | (32.5 | ) | (441.5 | ) | |||||||||
Income / (loss) before minority interests | 405.0 | (56.5 | ) | 689.4 | ||||||||||||
Minority interests | (233.7 | ) | (235.4 | ) | (180.4 | ) | ||||||||||
Net Income / (loss) | 171.3 | (291.9 | ) | 509.0 | ||||||||||||
Earnings / (losses) per share (basic and diluted) | 2 | (r) | 0.35 | -0.60 | 1.04 | |||||||||||
Weighted average number of shares outstanding (basic and diluted) | 490,150,389 | 490,150,389 | 490,150,389 | |||||||||||||
F-6
Table of Contents
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||||
Comprehensive | Share | Paid-in | Treasury | Legal | Unaccrued | Retained | Comprehensive | |||||||||||||||||||||||||||||||
Notes | Income / (Loss) | Capital | Surplus | Stock | Reserve | Compensation | Earnings | Loss | Total | |||||||||||||||||||||||||||||
Balance, December 31, 2003 | 1,204.7 | 505.7 | (276.6 | ) | 256.7 | (0.1 | ) | 1,957.2 | (57.3 | ) | 3,590.3 | |||||||||||||||||||||||||||
Net income | 171.3 | — | — | — | — | — | 171.3 | — | 171.3 | |||||||||||||||||||||||||||||
Dividends declared | — | — | — | — | — | (171.6 | ) | — | (171.6 | ) | ||||||||||||||||||||||||||||
Treasury stock cancelled | (30.6 | ) | (18.2 | ) | 261.5 | — | — | (212.7 | ) | — | 0.0 | |||||||||||||||||||||||||||
Deferred compensation | — | — | — | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||||||||
Other comprehensive income/(loss): | ||||||||||||||||||||||||||||||||||||||
Unrealized gain from available for sale marketable equity securities, net of€2.4 tax | 2 (v), 5 | 4.3 | — | — | — | — | — | — | 4.3 | 4.3 | ||||||||||||||||||||||||||||
Additional minimum liability for employee benefit plans, net of€2.3 tax | (10.1 | ) | — | — | — | — | — | — | (10.1 | ) | (10.1 | ) | ||||||||||||||||||||||||||
Deferred tax on subsidiary’s statutory revaluation surplus | 2 (v) | (184.7 | ) | — | — | — | — | — | — | (184.7 | ) | (184.7 | ) | |||||||||||||||||||||||||
Foreign currency translation | 2 (v) | 23.0 | — | — | — | — | — | — | 23.0 | 23.0 | ||||||||||||||||||||||||||||
Comprehensive income / (loss) | 3.8 | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 2004 | 1,174.1 | 487.5 | (15.1 | ) | 256.7 | 0.0 | 1,744.2 | (224.8 | ) | 3,422.6 | ||||||||||||||||||||||||||||
Net loss | (291.9 | ) | — | — | — | — | — | (291.9 | ) | — | (291.9 | ) | ||||||||||||||||||||||||||
Treasury stock cancelled | (1.6 | ) | (0.9 | ) | 9.2 | — | — | (6.7 | ) | — | 0.0 | |||||||||||||||||||||||||||
Effect of transactions between companies under common control on minority interest | 1(e), 1(f), 1(g) | — | 91.7 | — | — | — | — | 91.7 | ||||||||||||||||||||||||||||||
Other comprehensive income/(loss): | ||||||||||||||||||||||||||||||||||||||
Unrealized gain from available for sale marketable equity securities, net of€0.7 tax | 2 (v), 5 | 0.3 | — | — | — | — | — | — | 0.3 | 0.3 | ||||||||||||||||||||||||||||
Additional minimum liability for employee benefit plans, net of€0.6 tax | 3.7 | — | — | — | — | — | — | 3.7 | 3.7 | |||||||||||||||||||||||||||||
Deferred tax on subsidiary’s statutory revaluation surplus | 2 (v) | (2.5 | ) | — | — | — | — | — | — | (2.5 | ) | (2.5 | ) | |||||||||||||||||||||||||
Foreign currency translation | 2 (v) | 20.6 | — | — | — | — | — | — | 20.6 | 20.6 | ||||||||||||||||||||||||||||
Comprehensive income / (loss) | (269.8 | ) | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2005 | 1,172.5 | 578.3 | (5.9 | ) | 256.7 | 0.0 | 1,445.6 | (202.7 | ) | 3,244.5 | ||||||||||||||||||||||||||||
Net income | 509.0 | — | — | — | — | — | 509.0 | — | 509.0 | |||||||||||||||||||||||||||||
Statutory minimum dividend | — | — | — | — | — | (176.6 | ) | — | (176.6 | ) | ||||||||||||||||||||||||||||
Transfer to legal reserve | 26.6 | (26.6 | ) | |||||||||||||||||||||||||||||||||||
Treasury stock cancelled | (1.0 | ) | (0.7 | ) | 5.9 | — | (4.2 | ) | — | 0.0 | ||||||||||||||||||||||||||||
Other comprehensive income/(loss): | ||||||||||||||||||||||||||||||||||||||
Unrealized gain from available for sale marketable equity securities, net of€2.6 tax | 2 (v), 5 | 7.7 | — | — | — | — | — | — | 7.7 | 7.7 | ||||||||||||||||||||||||||||
Release of additional minimum liability for employee benefit plans, net of€6.8 tax | 2 (v) | 20.5 | — | — | — | — | — | — | 20.5 | 20.5 | ||||||||||||||||||||||||||||
Cumulative effect of adoption of SFAS No.158, net of€55.7 tax | 2 (v) | — | — | — | — | — | — | (167.2 | ) | (167.2 | ) | |||||||||||||||||||||||||||
Foreign currency translation | 2 (v) | 88.9 | — | — | — | — | — | — | 88.9 | 88.9 | ||||||||||||||||||||||||||||
Comprehensive income / (loss) | 626.1 | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 2006 | 1,171.5 | 577.6 | (0.0 | ) | 283.3 | 0.0 | 1,747.2 | (252.8 | ) | 3,526.8 | ||||||||||||||||||||||||||||
F-7
Table of Contents
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Amounts in millions | € | € | € | |||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income / (loss) | 171.3 | (291.9 | ) | 509.0 | ||||||||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,023.1 | 1,053.9 | 1,093.5 | |||||||||
Deferred income taxes | (87.6 | ) | (189.0 | ) | 116.0 | |||||||
Provision for doubtful accounts | 137.6 | 110.4 | 97.9 | |||||||||
Provision for staff retirement indemnities and youth account | 81.0 | 92.8 | 108.2 | |||||||||
Provision for voluntary retirement cost | — | 914.5 | (32.8 | ) | ||||||||
Discounting of long-term assets and long-term liabilities | — | — | 46.5 | |||||||||
Provision for litigation and claims | 21.1 | 47.8 | 35.9 | |||||||||
Extinguishment of liabilities | — | (23.8 | ) | — | ||||||||
Amortization of payments to pension funds | 35.2 | 35.2 | 35.2 | |||||||||
Write down of Olympic Games’ projects | 32.0 | — | — | |||||||||
Minority interests | 233.7 | 235.4 | 180.4 | |||||||||
Deferred compensation | 0.1 | — | — | |||||||||
(Gain) on sale of investments | (6.4 | ) | (30.7 | ) | (180.2 | ) | ||||||
(Earnings)/Losses from investments | 18.1 | (20.0 | ) | (22.9 | ) | |||||||
(Increase)/decrease in: | ||||||||||||
Accounts receivable | 46.3 | (64.6 | ) | 245.3 | ||||||||
Due from related parties | 9.6 | 21.5 | (121.5 | ) | ||||||||
Materials and supplies | 20.5 | 4.8 | (32.6 | ) | ||||||||
Other current assets | (63.6 | ) | (76.2 | ) | (101.0 | ) | ||||||
Increase/(decrease) in: | ||||||||||||
Accounts payable | (56.3 | ) | (113.9 | ) | 154.7 | |||||||
Accrued and other liabilities | (103.6 | ) | (28.9 | ) | (53.2 | ) | ||||||
Deferred revenue | 30.5 | (5.6 | ) | 21.3 | ||||||||
Income taxes payable | (62.8 | ) | 7.4 | 72.5 | ||||||||
Loans and advances to employees | (42.4 | ) | (36.0 | ) | (28.8 | ) | ||||||
Dividends received | — | 21.3 | 12.3 | |||||||||
Repayment of loans and advances to employees | 19.7 | 26.5 | 114.8 | |||||||||
Advances and payments to pension funds | (0.3 | ) | — | (65.8 | ) | |||||||
Payment of staff retirement indemnities and youth account, net of employees’ contributions | (76.7 | ) | (101.7 | ) | (404.9 | ) | ||||||
Other long-term receivables | 0.8 | (4.7 | ) | (18.0 | ) | |||||||
Net Cash provided by Operating Activities | 1,380.9 | 1,584.5 | 1,781.8 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Capital expenditures | (843.6 | ) | (647.3 | ) | (938.1 | ) | ||||||
Telecommunications licenses fees | — | (32.9 | ) | (24.3 | ) | |||||||
Payment for purchases of subsidiaries, net of cash acquired | (12.8 | ) | (294.2 | ) | (1,672.2 | ) | ||||||
Proceeds from sale of subsidiaries, net of cash disposed | — | — | 299.8 | |||||||||
Investments in and advances to associates and available for sale marketable equity securities | (0.4 | ) | — | — | ||||||||
Proceeds from investments | 17.2 | 47.7 | 38.0 | |||||||||
Net Cash used in Investing Activities | (839.6 | ) | (926.7 | ) | (2,296.8 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
Treasury stock acquired | — | — | — | |||||||||
Net change in short-term borrowings | (15.6 | ) | (23.0 | ) | (9.7 | ) | ||||||
Increase in long-term debt | 0.9 | 588.3 | 2,365.1 | |||||||||
Repayment of long-term debt | (70.6 | ) | (399.4 | ) | (1,198.0 | ) | ||||||
Proceeds from EU subsidies for investing activities | 19.5 | — | — | |||||||||
Proceeds from issuance of minority shareholders | 11.1 | 12.8 | 12.0 | |||||||||
Dividends paid | (149.8 | ) | (2.0 | ) | (1.6 | ) | ||||||
Dividends paid to minority shareholders | (71.0 | ) | (190.1 | ) | (115.6 | ) | ||||||
Net Cash used in Financing Activities | (275.5 | ) | (13.4 | ) | 1,052.2 | |||||||
Effect of exchange rate changes on cash | 3.2 | (2.5 | ) | (6.9 | ) | |||||||
Net Increase in Cash and Cash Equivalents | 269.0 | 641.9 | 530.3 | |||||||||
Cash and cash equivalents at beginning of year | 601.3 | 870.3 | 1,512.2 | |||||||||
Cash and Cash Equivalents at end of year | 870.3 | 1,512.2 | 2,042.5 | |||||||||
Supplemental disclosures of Cash Flow Information: | ||||||||||||
Cash paid for: | ||||||||||||
— interest, net of amounts capitalized | 177.8 | 195.1 | 178.5 | |||||||||
— income taxes | 348.4 | 229.5 | 210.4 | |||||||||
526.2 | 424.6 | 388.9 | ||||||||||
F-8
Table of Contents
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. Until 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 rights expired and the relevant market is open to competition. | ||
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. 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. Number portability is available since June 1, 2004. | ||
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 consolidated subsidiaries: |
Ownership interest | ||||||||||||
Company Name | Line of Business | 2005 | 2006 | |||||||||
Direct ownership | ||||||||||||
• | COSMOTE MOBILE TELECOMMUNICATIONS S.A. (“Cosmote”) | Mobile telecommunications services | 64.37 | % | 67.00 | % | ||||||
• | OTE INTERNATIONAL INVESTMENTS LTD | Investment holding company | 100.00 | % | 100.00 | % | ||||||
• | ARMENIA TELEPHONE COMPANY CJSC (“ArmetTel”) | Fixed line and mobile telephony services | 90.00 | % | — | |||||||
• | OTE AUSTRIA HOLDING GMBH | Investment holding company | 100.00 | % | 100.00 | % | ||||||
• | HELLAS SAT CONSORTIUM LIMITED (“Hellas Sat”) | Satellite communications | 95.69 | % | 99.05 | % | ||||||
• | COSMO-ONE HELLAS MARKET SITE S.A. (“COSMO-ONE”) | E-commerce services | 50.74 | % | 51.55 | % | ||||||
• | OTENET S.A. (“OTEnet”) | Internet services | 94.59 | % | 94.59 | % | ||||||
• | HELLASCOM INTERNATIONAL S.A. (“Hellascom”) | Telecommunication projects | 100.00 | % | 100.00 | % | ||||||
• | OTE PLC | Financing services | 100.00 | % | 100.00 | % | ||||||
• | OTE SAT-MARITEL S.A. (“OTE SAT — Maritel”) | Satellite telecommunications services | 93.99 | % | 94.08 | % | ||||||
• | OTE PLUS S.A. (“OTE Plus”) | Consulting services | 99.00 | % | 99.00 | % | ||||||
• | OTE ESTATE S.A. (“OTE Estate”) | Real estate | 100.00 | % | 100.00 | % | ||||||
• | INFOTE S.A. (“InfOTE”) | Directory and information services | 100.00 | % | 100.00 | % | ||||||
• | OTE INTERNATIONAL SOLUTIONS S.A. (“OTEGlobe”) | Wholesale telephony services | 100.00 | % | 100.00 | % | ||||||
• | HATWAVE HELLENIC-AMERICAN TELECOMMUNICATIONS WAVE LTD. (“Hatwave”) | Holding company | 52.67 | % | 52.67 | % | ||||||
• | OTE INSURANCE AGENCY S.A. (“OTE Insurance”) | Insurance brokerage services | 100.00 | % | 100.00 | % | ||||||
• | OTE ACADEMY S.A. (“OTE Academy”) | Training services | 100.00 | % | 100.00 | % | ||||||
Indirect ownership | ||||||||||||
• | ROMTELECOM S.A. (“Romtelecom”) | Fixed line telephony services | 54.01 | % | 54.01 | % | ||||||
• | COSMOTE ROMANIA S.A. (previously named COSMOROM) | Mobile telecommunications services | 61.26 | % | 63.10 | % | ||||||
• | OTE MTS Holding B.V. | Investment holding company | 64.37 | % | 67.00 | % | ||||||
• | COSMOFON MOBILE TELECOMMUNICATIONS SERVICES A.D. — SKOPJE (“Cosmofon”) | Mobile telecommunications services | 64.37 | % | 67.00 | % | ||||||
• | COSMO BULGARIA MOBILE EAD (“Globul”) | Mobile telecommunications services | 64.37 | % | 67.00 | % | ||||||
• | COSMO-HOLDING ALBANIA S.A. (“CHA”) | Investment holding company | 62.44 | % | 64.99 | % | ||||||
• | ALBANIAN MOBILE COMMUNICATIONS Sh.a (“AMC”) | Mobile telecommunications services | 53.07 | % | 55.24 | % | ||||||
• | COSMO-HOLDING CYPRUS LTD(«Cosmoholding Cyprus») | Investment holding company | — | 67.00 | % | |||||||
• | GERMANOS S.A. (Germanos) | Retail services | — | 66.35 | % |
F-9
Table of Contents
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): | |
Information relating to acquisitions, establishment and disposals of the Group’s subsidiaries during the years presented, is summarized as follows: |
(a) | Cosmote: Cosmote was incorporated on October 2, 1996 and is one of the four operators licensed to provide mobile telecommunication services in Greece. | ||
In 2004, Cosmote’s share capital was increased by€0.6 as a result of new shares issued relating to the options exercised under its share option plans [See Note 20(b)]. As the respective shares were offered in excess of their carrying value, OTE recognized a pre-tax gain of€4.7, which is included in “Other income/(expense)” in the accompanying 2004 consolidated statement of operations (See Note 24). | |||
In 2005, Cosmote’s share capital was increased by€0.6 as a result of new shares issued relating to the options exercised under its share option plans [See Note 20(b)]. As the respective shares were offered in excess of their carrying value, OTE recognized a pre-tax gain of€5.4, which is included in “Other income / (expense)” in the accompanying 2005 consolidated statement of operations (See Note 24). | |||
In 2005, OTE increased its participation in Cosmote through the acquisition of an additional 5.60% interest from minority shareholders with a total cash consideration of€274.2, and consequently its participation reached 64.37%. This acquisition was accounted for as a step acquisition under the purchase method of accounting and accordingly, the net assets acquired have been recorded at their fair value. | |||
The fair values of the significant assets acquired and liabilities assumed of Cosmote in 2005, are as follows: |
Property, plant & equipment | 46.4 | |||
Intangible assets | 92.9 | |||
Licenses | 17.6 | |||
Other assets | 19.8 | |||
Total assets | 176.7 | |||
Debt | (15.2 | ) | ||
Deferred tax liability | (24.8 | ) | ||
Other liabilities | (24.3 | ) | ||
Total liabilities | (64.3 | ) | ||
Fair value of net assets acquired | 112.4 | |||
Goodwill on acquisition | 161.8 | |||
Total cash consideration | 274.2 | |||
F-10
Table of Contents
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): |
Property, plant & equipment | 36.7 | |||
Intangible assets | 60.3 | |||
Licenses | 17.0 | |||
Other assets | 20.6 | |||
Total assets | 134.6 | |||
Debt | (14.6 | ) | ||
Deferred tax liability | (15.0 | ) | ||
Other liabilities | (36.9 | ) | ||
Total liabilities | (66.5 | ) | ||
Fair value of net assets acquired | 68.1 | |||
Goodwill on acquisition | 123.0 | |||
Total cash consideration | 191.1 | |||
F-11
Table of Contents
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): |
(b) | OTEnet: In 2005, OTE increased its participation interest in OTEnet by 4.39% through the acquisition of minority interests for cash consideration of€5.9, increasing its participating interest in OTEnet’s share capital from 90.20% to 94.59%. The acquisition was accounted for as a step acquisition under the purchase method of accounting and accordingly, the net assets acquired have been recorded at their fair value. Accordingly,€1.7 has been allocated to intangible assets (brand name) (See Note 10) and the remaining€4.2 to goodwill (See Note 9). | ||
(c) | Hellas Sat: Hellas Sat was incorporated in Cyprus on August 9, 2001, as a limited liability company. | ||
In 2005, OTE increased its participation interest in Hellas Sat by 12.35% through the acquisition of minority interests for a cash consideration of€2.6, and its participating interest therein was increased from 83.34% to 95.69%. This acquisition was accounted for as a step acquisition using the purchase method of accounting and accordingly, the net assets acquired have been recorded at their fair value, which approximated their book value. | |||
In 2006, OTE increased its participation interest in Hellas Sat by 3.36% through the capitalization of debt granted by OTE, and its participating interest therein was increased from 95.69% to 99.05%. This acquisition was accounted for as a step acquisition using the purchase method of accounting and accordingly, the net assets acquired have been recorded at their fair value, which approximated their book value. | |||
(d) | Hellascom: In June 2005, OTE acquired the remaining 48.60% minority interests in Hellascom for a cash consideration of€11.5. The acquisition was accounted for as a step acquisition under the purchase method of accounting and accordingly, the net assets acquired have been recorded at their fair value, and accordingly,€25.0 has been allocated to accounts receivable and other assets and€13.5 has been allocated to accounts payable and other liabilities. | ||
(e) | Cosmoholding Cyprus: Cosmoholding Cyprus, Cosmote’s wholly-owned subsidiary, was incorporated in Cyprus on August 29, 2006, as a holding company for the purpose of acquiring a 42% stake of Germanos and submitting a public tender offer for the acquisition of the 100% of the latter (See (f) below). Cosmoholding Cyprus’ sole asset is its investment in Germanos. | ||
(f) | Germanos: On May 9, 2006, Cosmote announced that it had reached an agreement with Mr. P. Germanos, major shareholder and founder of the listed company Germanos, for the acquisition of a 42% interest in the above company for consideration of nineteen Euro per share, subject to the receipt of all the necessary regulatory approvals from the appropriate authorities. Following the acquisition of this interest, Cosmote would then launch a public tender offer to purchase the remaining 58% of the shares of Germanos from the minority shareholders. It was agreed that the battery sector of Germanos that is not considered core to the operations of Cosmote would be sold back to Mr Germanos at fair value and furthermore, following the public tender offer, Mr Germanos would re-invest in Germanos for a period of three to five years by acquiring from Cosmote a 10% interest in the shares of Cosmoholding Cyprus, a wholly-owned subsidiary of Cosmote, which after the three to five years’ period would be bought back from Cosmote. (See Note 27 (iii)). |
F-12
Table of Contents
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): |
Property, plant & equipment | 68.2 | |||
Intangible assets (Note 10) | 556.8 | |||
Other assets | 453.4 | |||
Total assets | 1,078.4 | |||
Debt | (2.7 | ) | ||
Deferred tax liability | (113.7 | ) | ||
Other liabilities | (154.5 | ) | ||
Total liabilities | (270.9 | ) | ||
Fair value of net assets acquired | 807.5 | |||
Goodwill on acquisition | 737.5 | |||
Total cash consideration | 1,545.0 | |||
F-13
Table of Contents
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): |
(g) | Armentel: In April 2006, OTE after consultation with the Government of Armenia, initiated the process of examining options for the disposal of its 90% participating interest in Armentel, through an auction process. On November 16, 2006, OTE announced that it had completed the sale of the 90% stake in Armentel to Vimpel-Communications for a total cash consideration of€341.9. The related expenses for the completion of the sale amounted to€5.2. This sale resulted in a pre-tax gain of€164.0, which is included in “Gain on sale of investments” in the 2006 accompanying consolidated statement of operations (See Note 24). Armentel is included in the consolidated financial statements until the date the Group ceased to control that company (November 16, 2006). | ||
The following table presents Armentel’s results for the two years ended December 31, 2005 and for the period January 1, 2006 — November 16, 2006: |
1/1/2006- | Year ended December | Year ended December | ||||||||||
16/11/2006 | 31, 2005 | 31, 2004 | ||||||||||
Total Revenues | 135.6 | 114.1 | 85.4 | |||||||||
Operating expenses | (94.2 | ) | (73.3 | ) | (60.2 | ) | ||||||
Operating income before interest | 41.4 | 40.8 | 25.2 | |||||||||
Interest income/(expense) | 0.2 | 5.9 | (0.7 | ) | ||||||||
Profit before tax | 41.6 | 46.7 | 24.5 | |||||||||
Income Tax | (27.0 | ) | (4.9 | ) | (4.0 | ) | ||||||
Profit for the period | 14.6 | 41.8 | 20.5 | |||||||||
ASSETS | ||||
Non current assets | 224.4 | |||
Cash and cash equivalents | 36.9 | |||
Other currents assets | 43.8 | |||
Total Assets | 305.1 | |||
LIABILITIES | ||||
Long-term liabilities | 23.0 | |||
Short-term liabilities | 86.1 | |||
Total Liabilities | 109.1 | |||
Net assets sold | 196.0 | |||
OTE’s share in Armentel’s net assets (90%) | 176.4 | |||
Selling Price | 341.9 | |||
Disposal expenses | (5.2 | ) | ||
OTE’s stake in Armentel’s net assets (90%) | (176.4 | ) | ||
Adjustments due to intercompany transactions | 3.7 | |||
Gain on sale of investment | 164.0 | |||
F-14
Table of Contents
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): | |
The following table presents the pro-forma results of operations, revenues, net income / (loss) and earnings / (losses) per share, as if the acquisitions stated in (a), (b), (c), (d), (e) and (f) had occurred at the beginning of the year instead of the effective dates. Pro-forma adjustments are principally related to revenues, amortization of the fair value adjustments on the acquired tangible and intangible assets and the effect on the minority interest. |
2005 | 2006 | |||||||
Revenues | 6,310.1 | 6,614.2 | ||||||
Net income / (loss) | (251.8 | ) | 579.7 | |||||
Earnings / (losses) per share (basic and diluted) | (0.52 | ) | 1.18 |
These pro-forma results are not indicative of whether future performance or actual results, which would have occurred, had this acquisitions taken place at the beginning of the years presented. |
(h) | Romtelecom: On December 30, 1998, OTE, through its subsidiary OTE International Investments Ltd, acquired a 35.00% interest in Romtelecom S.A. On March 3, 2003, as part of OTE’s strategy to obtain control of Romtelecom, OTE International Investments Ltd. acquired an additional 19.01% in Romtelecom. As a result of this transaction OTE’s share in Romtelecom has increased to 54.01%, and, accordingly, OTE started consolidating Romtelecom from the date of the transaction closing, March 3, 2003. | ||
On May 27, 2005, Cosmote, Romtelecom and Cosmote Romania agreed the sale to Cosmote by Romtelecom of 70.00% of Cosmote Romania’s share capital. As part of this agreement, Cosmote would contribute€120 in cash to Cosmote Romania’s share capital in exchange for a 70.00% equity interest, with Romtelecom retaining a 30.00% interest. This transaction was among companies under common control and has been accounted for based on their book value. The minority interest did not participate in this transaction. As a result, its interest was diluted by€6.0, which has been treated as an adjustment (increase) in “Paid-in surplus” in the accompanying 2005 consolidated statement of shareholders’ equity. After the completion of this acquisition, the Group’s participating interest in Cosmote Romania increased by 7.25% from 54.01% to 61.26%. | |||
In December 2003, Intracom S.A. and Intrarom S.A. (the “claimants”) commenced arbitration proceedings before the International Court of Arbitration of the International Chamber of Commerce (“ICC”) against OTE, OTE International Investments Ltd, Romtelecom and Cosmote Romania, seeking to recover from the respondents an amount in excess of€156.4 allegedly due to the claimants pursuant to a 1999 contract made between the claimants and Ericsson Radio Systems AB (“Ericsson”) (collectively, the “Union of Suppliers”) on the one hand, and Cosmote Romania on the other. The claimants named as respondents Romtelecom, OTE International Investments Ltd and OTE in the proceedings on the basis that all the respondents together constitute an “undivided economic reality”, and that OTE allegedly had an obligation to fund Cosmote Romania but had failed to do so and that OTE allegedly gave an “impression” to the Union of Suppliers that it guaranteed Cosmote Romania’s obligations under the contract. Cosmote Romania has disputed the claim as to the amount, has made counterclaims against the claimants and requested that Ericsson be joined as a party in the arbitration proceeding. The court has ruled in favour of Cosmote Romania on the latter request, ordering that Ericsson be joined as a party. OTE strenuously denied any liability to the respondents and the jurisdiction of the ICC over them in this matter and intended to vigorously defend its position. |
F-15
Table of Contents
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): |
(i) | Cosmofon: Cosmofon 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. On April 20, 2005, the Board of Directors of OTE and Cosmote decided on the acquisition of Cosmofon by Cosmote (through the acquisition of the 100.00% of OTE MTS Holding B.V.), with a total cash consideration of€90.0. The transaction was approved by the General Assembly meetings of OTE’s and COSMOTE’s shareholders on June 16, 2005. After the completion of the transaction, the Group’s interest in Cosmofon’s share capital was reduced from 100.00% to 64.37%. This transaction was among companies under common control and has been accounted for based on their book value. The minority interest did not participate in this transaction. As a result, its interest was diluted by€8.3, which has been treated as an adjustment (increase) in “Paid-in surplus” in the accompanying 2005 consolidated statement of shareholders’ equity. | ||
(j) | Globul: Globul was incorporated in Bulgaria on January 9, 2001, as OTE’s wholly owned subsidiary, for the purpose of providing mobile telecommunication services in the Republic of Bulgaria. On April 20, 2005, the Board of Directors of OTE and Cosmote decided on the acquisition of Globul by Cosmote, with a total cash consideration of€400.0. The transaction was approved by the General Assembly meetings of OTE’s and COSMOTE’s shareholders on June 16, 2005. After the completion of the transaction, the Group’s interest in Globul’s share capital was reduced from 100.00% to 64.37%. This transaction was among companies under common control and has been accounted for based on their book value. The minority interest did not participate in this transaction. As a result, its interest was diluted by€77.4, which has been treated as an adjustment (increase) in “Paid-in surplus” in the accompanying 2005 consolidated statement of shareholders’ equity. |
F-16
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
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. | ||
In addition the Group evaluates its relationships with other entities to identify whether they are variable interest entities as defined by FASB Interpretation No 46(R) “Consolidation of Variable Interest Entities” (FIN 46R) and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Group is the primary beneficiary, then the equity is included in the consolidated financial statements in accordance with FIN 46(R). | |||
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 entities, in which the Group exercises significant influence over operating and financial policies, 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 included in “Gain on sale of investments” in the accompanying consolidated statements of operations. If those issuances of stock by the subsidiary are connected with corporate reorganizations, transactions amongst entities under common control 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 pursuant to the Greek tax and corporate regulations. Until December 31, 2004, OTE’s financial statements were prepared for statutory purposes in accordance with Greek generally accepted accounting principles (“Greek GAAP”). As of January 1, 2005 OTE prepares its statutory financial statements in accordance with International Financial Reporting Standards (“IFRS”). Certain adjustments have been made to these records to present the accompanying consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). |
F-17
Table of Contents
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. Areas in which significant estimates have been made, are but not limited to, the allowance for doubtful accounts receivable, useful lives of the definite life intangible assets, intangible assets impairment analyses, tax valuation allowances and tax accruals. | ||
(d) | Foreign Currency Translation:OTE’s functional currency is the Euro. Transactions involving other currencies are translated into Euro 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 remeasured to Euro at the foreign exchange rate prevailing at year-end. Gains or losses resulting from foreign currency remeasurement are reflected in the 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 using exchange rates at the end of each reporting period. Revenues and expenses are translated at the average exchange rates prevailing during the period. Foreign currency translation gains and losses are reported in “Accumulated Other Comprehensive Loss”, a separate component of shareholders’ equity. Transaction gains and losses are reported in the consolidated statements of operations. | |||
(e) | Materials and Supplies:Materials and supplies, which primarily include handsets, are stated at the lower of cost or market. The cost is determined using the weighted average cost method. | ||
(f) | Goodwill and Other Intangible Assets:In accordance with the U.S. Financial Accounting Standards Board (“FASB”) Statement No. 142 “Goodwill and Other Intangible Assets”, goodwill and indefinite life intangible assets (Brand Names), are not amortized but are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in business combinations accounted for as a purchase. 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, 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. For other indefinite life intangible assets, impairment is determined by comparing the asset’s respective carrying value to estimates of fair value by using the discounted cash flows method, which requires the use of estimates, judgement and projections. In the event that impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. |
F-18
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
(g) | Telecommunication Licences:Telecommunication licenses primarily represent definite life intangible assets acquired individually. The Group initially records these assets based on their fair values which represent the amount paid to acquire these assets. Telecommunication licenses are amortized on a straight-line basis over their useful lives (See Note 8). | ||
(h) | Customer Relationships / Franchise Agreements / Covenants not-to-compete and solicit: Customer relationships, franchise agreements and covenants not-to-compete and solicit represent definite life intangible assets acquired in business combinations. The Group initially measures these assets at fair value, which is determined using the income approach. Customer relationships are amortized on a straight-line basis over the estimated customer lives, which have been estimated to be between 6 to 13 years. Franchise agreements are amortized on a straight-line basis over their estimated useful life, which has been estimated to be 20 years. Covenants not-to-compete and solicit are amortized on a straight-line basis over the legal life of the covenant not-to-compete and solicit, as stipulated in the acquisition agreement signed between the relevant signing parties, which has been determined to be five years. | ||
(i) | Impairment of Long-Lived Assets:The Group follows FASB Statement 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, including property, plant and equipment and intangible assets with a determinable useful life. Long-lived assets are 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 is 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 impairment exists 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. | ||
(j) | Asset Retirement Obligations:The Group recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of a fair value can be made and if the removal costs do not exceed the salvage value of the relevant assets. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. | ||
Over the course of its life, the Group has leased property upon which it constructs its mobile transmission and relay towers. The Group enters into new leases each year and, in most cases, has the unilateral right to renew the initial lease term. The Group is legally required to dismantle the mobile transmission and relay towers and, where necessary, recondition the site at the end of the lease period. | |||
The Group recognized the fair value of the liability for the asset retirement obligations and capitalized the relative cost as part of the cost of the related asset and depreciates it on a straight-line basis over its expected life. |
F-19
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
Asset retirement obligations at December 31, 2004 | 4.2 | |||
Liability recognized in 2005 | 0.2 | |||
Accretion expense for the year | 0.1 | |||
Asset retirement obligations at December 31, 2005 | 4.5 | |||
Liability recognized in 2006 | 0.5 | |||
Accretion expense for the year | — | |||
Asset retirement obligations at December 31, 2006 | 5.0 | |||
(k) | 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 telecommunication property, plant and equipment at cost, which includes direct technical payroll costs related to construction and directly attributable 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. | |||
(l) | Depreciation:Depreciation is recorded on the straight-line basis, based upon the estimated useful lives of the assets, which are analyzed as follows: |
Classification | Estimated Useful Life | |||
Buildings | 20-40 Years | |||
Telecommunication equipment and installations: | ||||
• Telephone exchange equipment | 8-12 Years | |||
• Radio relay stations | 8 Years | |||
• Local and trunk network | 8-17 Years | |||
• Other | 5-10 Years | |||
Transportation equipment | 5-8 Years | |||
Furniture and fixtures | 3-5 Years |
F-20
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
(m) | Reserve for Staff Retirement Indemnities and Youth Account:The Group provides two defined benefit plans to its employees, the Staff Retirement Indemnities and Youth Account (collectively “Retirement and Youth Account”). Effective December 31, 2006, the Group adopted SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires the recognition of the overfunded or underfunded status of a benefit plan, measured as the difference between the fair value of the plan assets and the benefit obligations as an asset or liability in the consolidated balance sheet; it also requires that the changes in the funded status be recorded through comprehensive income in the year in which those changes occur. Accordingly, the Group has recognized the aggregate amounts of all underfunded plans in its consolidated balance sheet. See note 15 for a comprehensive discussion of our benefit plans, including a discussion of the adoption of SFAS No. 158. 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. | ||
(n) | Income Taxes:Income taxes are accounted for using the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income taxes are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Group establishes provisions for uncertain tax positions, based on judgement regarding potential future challenges to those positions (See Note 13). | ||
(o) | 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. The Group has no restricted cash as of December 31, 2005 and 2006. Cash and cash equivalents include current bank accounts and three-month time deposits. | ||
(p) | Recognition of Revenues:The Group recognizes revenues (net of value added tax) as services are rendered or as products are delivered to customers in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognitions”, and effective January 1, 2002 and January 1, 2004 it follows the Emerging Issues Task Force (“EITF”), Issues No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” and No. 00-21, “Revenue Arrangements with Multiple Deliverables”, respectively. 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. No connection fees are charged for mobile services. |
F-21
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
• | Domestic monthly network service fees:Revenues related to the monthly network service fees, net of credits and discounts are recognized in the month that the telecommunication service is provided. Unearned revenues are included in “Deferred revenue” in the accompanying consolidated balance sheets. | ||
• | Domestic local and long distance calls:Revenues for local and long-distance calls are recognized based on traffic generated by the caller, the destination of the call and the service utilized based on the telephony tariffs. Unbilled revenues from the billing cycle date to the end of each period are estimated based on traffic. | ||
• | International telephony revenues:International telephony revenues include outgoing, international calls which are reported gross of amounts payable by the Group to foreign telephony operators for termination of calls on their networks since the credit and collection risk remains solely with the Group. International telephony revenues also include incoming and transit traffic from foreign telephony operators routed through the Group’s fixed network as well as payments from mobile operators generated from their networks and routed through the Group’s fixed networks. International telephony revenues are recognized based on traffic generated by the caller at the telephony tariff international settlement rates under bilateral settlement agreements. | ||
• | Mobile telephony:Mobile telephony fees consist of fees based on usage of airtime generated by the caller, the destination of the call and the service utilized. Revenues for usage charges are recognized in the period when the services are provided. Interconnection fees due from other mobile operators for mobile-to-mobile calls originating from their network are recognized based on incoming traffic and established interconnection rates. Unbilled revenues from the billing cycle date to the end of each period are estimated based on traffic. | ||
• | Mobile telephony pre-paid airtime cards:Revenues from pre-paid airtime cards, net of discounts allowed, are recognized based on airtime’s usage. Unused airtime is included in “Deferred revenue” in the accompanying consolidated balance sheets. All pre-paid airtime cards have a contractual life of two years or less. The majority of deferred revenue from all categories of pre-paid airtime cards is used within the following year. Upon the expiration of pre-paid airtime cards, any unused airtime is recognized to income. | ||
• | Traditional pre-paid cards:Revenues from traditional pre-paid cards, net of discounts allowed, are recognized based on usage. Unused traffic is included in “Deferred revenue” in the accompanying consolidated balance sheets. All traditional pre-paid cards have a contractual life of two years or less. The majority of deferred revenue from all categories of traditional pre-paid cards is used within the following year. Upon the expiration of the traditional pre-paid cards, any unused traffic is recognized to income. | ||
• | Directories:Revenues from directory services consist of fees from advertising and are recognized in the period when the respective services are provided. | ||
• | Radio communications:Revenues from radio communications are recognized based on traffic. |
F-22
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
• | Audiotex:Audiotex revenues are recognized based on traffic. | ||
• | Telex and telegraphy:Revenues from telex and telegraphy are recognized in the period when the services are provided. | ||
• | Leased lines and data telecommunications: Revenues from leased lines and data telecommunications are recognized in the period when the services are provided. | ||
• | Integrated Services Digital Network:Revenues related to the monthly rental charges, net of credits and discounts, are recognized in the month that the telecommunication service is provided. | ||
• | Sales of telecommunication equipment:Revenues from the sale of telecommunications equipment mainly consist of handsets and accessories. Revenues, net of discounts are recognized at point of sale. Handsets that are offered in mobile telephone packages have been determined to be revenue arrangements with multiple deliverables (i.e. handset sale and on-going services). Total consideration received in these arrangements is allocated and measured using units of accounting within the arrangement based on relative fair values. | ||
• | Internet Services:Revenues related to the monthly internet access charges, net of credits and discounts, are recognized in the month when the service is provided. | ||
• | Asynchronous Transfer Mode (ATM):Revenues from asynchronous transfer mode services are recognized in the period when the services are provided. | ||
• | Services rendered:Revenues are recognized in the period when the services are provided. | ||
• | Interconnection charges:Interconnection charges represent call termination fees from domestic mobile operators and other domestic fixed line operators. Interconnection fees are recognized based on traffic. |
(q) | Recognition of operating expenses:Operating expenses are recognized as follows: |
• | Discounts, Commissions, Subsidies:Airtime and acquisition commission costs due to the Group’s Master Dealers [see Note 19(b)(i)] for each subscriber acquired through their sales channel are expensed as incurred. Commissions paid for the renewal of each contract subscriber initially 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. Discounts, representing the difference between the wholesale price of pre-paid cards and boxes (consisting of handsets and prepaid airtime) to the Group’s Master Dealers and the retail sale price to the ultimate customers are deducted from the respective revenue. | ||
• | Connection costs:Connection costs for the fixed network are deferred and amortized to expense over the estimated service life of a subscriber. |
F-23
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
• | Advertising Costs:Advertising costs are expensed as incurred. | ||
• | Research and Development Costs:Research and development costs are expensed as incurred. | ||
• | Charges from international and domestic operators:Charges from international and domestic operators are expensed as incurred. |
(r) | Earnings / (Losses) per Share:Basic and diluted earnings / (losses) per share are computed by dividing net income / (loss) by the weighted average number of shares outstanding during each year. Diluted earnings per share adjust basic earnings per share for the effects of potentially dilutive common shares. Potentially dilutive shares primarily include the dilutive effects of share issued under the Group’s equity plans. The number of shares granted under the Stock Option Plans during 2004, did not affect diluted earnings per share, since the exercise price of the options was equal to or less than the average price of the shares. In 2005 and 2006, the Group does not have any potentially dilutive shares as OTE’s Stock Option Plans were terminated. The difference between outstanding shares and weighted average number of shares outstanding used for both basic and diluted earnings / (losses) per share is attributable to purchases of treasury stock. | ||
(s) | Share-Based awards:Effective January 1, 2006, the Group adopted SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which revises SFAS No. 123. SFAS 123R requires the Group to measure the cost of employee services received in exchange for an award of equity-based securities using the fair value of the award on the date of grant, and the Group recognizes that cost over the period that the award recipient is required to provide service to the Group in exchange for the award. Any awards of liability instruments to employees would be re-measured at fair value at each reporting date through settlement. | ||
The Group adopted SFAS No. 123R using the modified prospective transition method and, accordingly, the results of prior periods have not been restated. This method requires that the provisions of SFAS No. 123R generally are applied only to share-based awards granted, modified, repurchased, or cancelled on or after January 1, 2006 and compensation cost is recognized for the portion of the outstanding awards for which the requisite service has not yet been rendered, based on the fair value of the award on the date of grant as calculated under SFAS 123. | |||
Prior to January 1, 2006, the Group accounted for its share-based awards to employees using the intrinsic value method prescribed in APB Opinion No. 25,“Accounting for Stock Issued to Employees”and in accordance with SFAS No. 123, disclosed the effect on net income and earnings per share as if the Group had applied the fair value recognition provisions to the share-based awards. In accordance to APB Opinion No. 25, the Group measured compensation cost for stock options granted to employees 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 this was recognized ratably over the vesting period. The intrinsic value of the options for which the measurement date had not been reached was measured on the basis of the current market value of the Group’s stock at the end of each period. |
F-24
Table of Contents
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, | ||||||||
2004 | 2005 | |||||||
Net Income / (Loss) as reported | 171.3 | (291.9 | ) | |||||
Add: Stock-based employee compensation expense included in net income, net of tax | 1.0 | 1.1 | ||||||
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax | (2.0 | ) | (1.7 | ) | ||||
Pro-forma Net Income / (Loss) | 170.3 | (292.5 | ) | |||||
Earning / (Losses) per share — Basic and diluted: | ||||||||
Basic and diluted— as reported | 0.35 | (0.60 | ) | |||||
Basic and diluted— pro forma | 0.35 | (0.60 | ) |
The adoption of SFAS No. 123R did not have a material effect on the accompanying consolidated financial statements. | |||
(t) | Available-for-Sale Marketable Securities:Available-for-sale marketable securities are carried at their fair value with the unrealized holding gains and losses reflected under “Accumulated other comprehensive loss” in the accompanying consolidated statements of shareholders’ equity, net of the related income tax. Realized gains and losses, are reclassified from “Accumulated other comprehensive loss” to “Other income/ (expense)” in the accompanying consolidated statements of operations based on specific identifications. The Group assess declines in the value of individual investments to determine whether the decline in the value of the individual investment is other-than-temporary and thus the investment impaired. The Group makes this assessment by considering available evidence, including changes in general market conditions, specific industry and individual company data, the length of time and the extent to which the market value has been less than cost, the financial condition of the company and the intent and ability to hold the investment. | ||
(u) | 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 long-term assets”, and amortized using the effective interest rate method over the life of the debt. Amortization for the years ended December 31, 2004, 2005 and 2006, amounted to€3.0,€1.4 and€1.5, respectively and is included in “Interest expense” in the accompanying consolidated statements of operations. |
F-25
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
(v) | Accumulated Other Comprehensive Loss:Accumulated other comprehensive loss as of December 31, 2004, 2005 and 2006, is analyzed as follows: |
December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Foreign currency translation | (28.0 | ) | (7.4 | ) | 81.5 | |||||||
Deferred tax liability on subsidiary’s statutory revaluation surplus | (184.7 | ) | (187.2 | ) | (187.2 | ) | ||||||
Unrealized gain from available for sale marketable equity securities, net of income taxes | 12.1 | 12.4 | 20.1 | |||||||||
Additional minimum liability for employee benefit plans, net of income taxes | (24.2 | ) | (20.5 | ) | — | |||||||
Change in employee benefit plans, net of income taxes | — | — | (167.2 | ) | ||||||||
(224.8 | ) | (202.7 | ) | (252.8 | ) | |||||||
Effective July 1, 2004, Romtelecom ceased hyperinflation accounting and changed its functional currency from€ to Romanian Lei. As of that date, the company recorded deferred taxes for differences related to its property, plant and equipment, which resulted from indexation for tax purposes, the recognition of which was prohibited as long as the Romanian economy was considered highly inflationary. As a result, an amount of€184.7 was charged to Accumulated Other Comprehensive Loss. | |||
(w) | Derivative Financial Instruments:The Group recognizes derivative instruments as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedge Activities”, as amended. Changes in the fair value of derivatives are recorded each period in the consolidated statement of operations or other comprehensive income / (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. The Group is primarily exposed to market risk associated with unfavourable movements in interest rates. The Group does not enter into derivative transactions for speculative or trading purposes. The Group enters into interest-rate swap agreements to modify the interest characteristics of its outstanding debt. Each interest-rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt (the accrual accounting method). The related amount payable to or receivable from counterparties is included in accrued and other liabilities or assets on the consolidated balance sheets. Gains and losses on terminations of interest-rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in the consolidated statements of operations in coincident with the extinguishment gain or loss. The Group at inception and on an on going basis assesses whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flow or fair value of the hedged item. If and when a derivative instrument is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in the consolidated statement of operations. |
F-26
Table of Contents
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) | Allowance for Doubtful Accounts:At each reporting period/date, all accounts receivable 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. | ||
(y) | Non-monetary transactions:Effective January 1, 2006, the Group follows FASB Statement No. 153 (“SFAS 153”), “Exchanges of Non-monetary Assets—an amendment of APB Opinion 29.” All non-monetary transactions are based on the fair value of assets exchanged. | ||
(z) | Accounting for Pre-existing business relationships:Effective January 1, 2005, the Group follows EITF Issue 04-1 (“EITF 04-1”), “Accounting for Pre-existing Relationships between the Parties to a Business Combination.” The Group accounts for the termination settlement of pre-existing contractual relationships separately from the business combinations. | ||
(za) | Significant New Accounting Pronouncements:Significant new accounting pronouncements are summarized as follows: |
(i) | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This statement defines fair value and establishes a framework for measuring fair value. Additionally, this statement expands disclosure requirements for fair value with a particular focus on measurement inputs. SFAS No. 157 is effective for annual reporting periods ending December 31, 2008. The Group is evaluating the impact, if any, that the adoption of this standard will have on its financial position or results of operations. | ||
(ii) | In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (Including an amendment of SFAS 115)”. This statement permits entities to choose to measure eligible items, as defined in the Statement, at fair value at specific election dates. The entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the entity does not report earnings) at each subsequent reporting date. SFAS No. 159 is effective for annual reporting periods ending December 31, 2008. The Group is evaluating the impact, if any, that the adoption of this standard will have on its financial position or results of operations. | ||
(iii) | In September 2006, the EITF reached a consensus on Issue No. 06-1, “Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider”. EITF Issue No. 06-1 provides guidance regarding whether the consideration given by a service provider to a manufacturer or reseller of specialized equipment should be characterized as a reduction of revenue or an expense. This issue is effective for annual reporting periods ending December 31, 2008. Entities are required to recognize the effects of applying this issue as a change in accounting principle through retrospective application to all prior periods unless it is impracticable to do so. The Group is evaluating the impact, if any, that the adoption of this consensus will have on its financial position or results of operations. |
F-27
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
2. | SIGNIFICANT ACCOUNTING POLICIES (continued): |
(iv) | In June 2006, the EITF reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)”. EITF Issue No. 06-3 requires that companies disclose their accounting policy regarding the gross or net presentation of certain taxes. Taxes within the scope of EITF Issue No. 06-3 are any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and some excise taxes. EITF Issue No. 06-3 is effective for annual reporting periods ending December 31, 2007. The Group currently records its revenues net of value-added taxes (See Note 1(p)). | ||
(v) | In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48, an interpretation of SFAS No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for annual reporting periods ending December 31, 2007. The cumulative effect of adopting FIN 48 generally will be recorded directly to retained earnings. However, to the extent the adoption of FIN 48 results in a revaluation of uncertain tax positions acquired in purchase business combinations, the cumulative effect will be recorded as an adjustment to any goodwill remaining from the corresponding purchase business combination. The Group is evaluating the impact, if any, that the adoption of this Interpretation will have on its financial position or results of operations. |
(zb) | Presentation Changes:Certain reclassifications have been made to the presentation of the 2004 and 2005 consolidated financial statements to conform to those of 2006. Cost of telecommunications equipment of€181.2 for 2004 and€180.7 for 2005, were extracted from “Other operating expenses” where previously reported, and are presented as a separate line item in the accompanying consolidated statements of operations. Furthermore,€37.8 for 2004 and€42.8 for 2005, were extracted from “Other operating expenses” where previously reported, and are included in “Charges from international operators” in the accompanying consolidated statements of operations. |
F-28
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
3. | ACCOUNTS RECEIVABLE: | |
Accounts receivable are analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
• Subscribers | 845.9 | 803.9 | ||||||
• International traffic | 168.6 | 201.2 | ||||||
• Other accounts receivable | 70.7 | 64.7 | ||||||
1,085.2 | 1,069.8 | |||||||
Less- Allowance for doubtful accounts | (275.2 | ) | (254.4 | ) | ||||
810.0 | 815.4 | |||||||
Accrued unbilled revenues | 134.5 | 117.2 | ||||||
944.5 | 932.6 | |||||||
The movement of the allowance for doubtful accounts during the years ended December 31, 2004, 2005 and 2006 was as follows: |
Balance, | Balance from | Balance, end | ||||||||||||||||||
beginning of year | Expensed | disposed subsidiary | Utilized | of year | ||||||||||||||||
2004 | 173.1 | 137.6 | — | (88.7 | ) | 222.0 | ||||||||||||||
2005 | 222.0 | 110.4 | — | (57.2 | ) | 275.2 | ||||||||||||||
2006 | 275.2 | 97.9 | (6.1 | ) | (112.6 | ) | 254.4 |
4. | DUE FROM RELATED PARTIES: | |
The Greek State, a principal shareholder of OTE with an interest of 38.7%, is a related party to the Group. The Group, in the normal course of business, provides telecommunication services to State Entities and Organizations. | ||
Amounts due from related parties are as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
Accounts receivable from State Entities and Organizations | 106.8 | 228.3 | ||||||
106.8 | 228.3 | |||||||
Revenues generated from State Entities and Organizations approximate 5% — 7% of total revenues for each of the three years in the period ended December 31, 2006. |
F-29
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
5. | 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 based on quoted market prices. |
December 31, | ||||||||
2005 | 2006 | |||||||
Cost, net of impairments | 14.7 | 7.9 | ||||||
Gross Unrealized Gain | 18.2 | 28.5 | ||||||
Fair Value | 32.9 | 36.4 | ||||||
The movement of the gross unrealized gain during the years ended December 31, 2004, 2005 and 2006 was as follows: |
Balance, | Gross unrealized | Gross realized gain | Balance, end | |||||||||||||
beginning of year | gain for the year | in the year | of year | |||||||||||||
2004 | 11.9 | 6.7 | — | 18.6 | ||||||||||||
2005 | 18.6 | 12.0 | (12.4 | ) | 18.2 | |||||||||||
2006 | 18.2 | 20.6 | (10.3 | ) | 28.5 |
In 2004, an unrealized gain of€4.3, net of tax effect of€2.4 was recognized and is included in “Other comprehensive income / (loss)” in the accompanying 2004 consolidated statement of shareholders’ equity. | ||
In 2005, the Group sold certain available for sale-equity marketable securities. As a result, an amount of€8.2, net of tax effect of€4.2 previously included in “Other comprehensive income / (loss)” as an unrealized gain, was realized through the sale and is included in “Other income/(expense)” in the accompanying consolidated statements of operations. Furthermore, an unrealized gain of€8.5, net of tax effect of€3.5 was recognized and is included in “Other comprehensive income / (loss)” in the accompanying 2005 consolidated statement of shareholders’ equity. | ||
In 2006, the Group sold certain available for sale-equity marketable securities. As a result, an amount of€7.7, net of tax effect of€2.6 previously included in “Other comprehensive income / (loss)” as an unrealized gain, was realized through the sale and is included in “Other income / (expense)” in the accompanying consolidated statements of operations. Furthermore, an unrealized gain of€15.4, net of tax effect of€5.2 was recognized and is included in “Other comprehensive income / (loss)” in the accompanying 2006 consolidated statement of shareholders’ equity. | ||
6. | INVESTMENTS: |
December 31, | ||||||||
2005 | 2006 | |||||||
(a) Investment in Telekom Srbija a.d. (“Telekom Srbija”) | 155.1 | 155.1 | ||||||
(c) Other investments | 4.3 | 3.6 | ||||||
159.4 | 158.7 | |||||||
F-30
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
6. | INVESTMENTS (continued): | |
Investment in Telekom Srbija: | ||
OTE has 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 remaining interest is held by the Public Enterprice of PTT Traffic. The investment, which is shown at its written down value is accounted for under the cost method since July 1, 2003 because it was determined by OTE that it does not exercise significant influence based on the indicators as set forth in FASB Interpretation No. 35 “Criteria for Applying the Equity Method of Accounting for Investments in Common Stock an interpretation of APB 18” (see below). | ||
In late 2002, Telecom Italia, the other minority shareholder, which held 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. The withdrawal of Telecom Italia from Telekom Srbija, which was completed in February 2003, was expected to reduce OTE’s ability to influence the management of this company. In response to the above mentioned developments, OTE, in May 2003, served arbitration notices on Telekom Srbija, Telecom Italia and its affiliates and the Serbian PTT, in order to protect its interest in Telecom Srbija and requesting, among others, the collection of outstanding management fees of approximately€28.6 due from Telecom Italia and of a loan of€12.5 granted to Telekom Srbija on November 25, 1997 plus interest and penalties. | ||
In September 2004, a memorandum of understanding was signed between OTE, Telekom Srbija, the Serbian PTT and Telecom Italia, whereby the following was agreed: |
• | Telekom Srbija would pay to OTE the loan, the respective stamp duty and part of the accrued interest, | ||
• | All parties would waive their claims from each other, | ||
• | A new shareholders’ agreement would be executed between OTE, Telekom Srbija and the Serbian PTT, under the terms of which OTE would not be prevented from participating in a potential sell of shares in a company to whom the mobile business of Telekom Srbija may have been transferred, such selling procedure being at the sole discretion of the Government of the Republic of Serbia. | ||
• | OTE would be able to appoint the CFO and the Deputy General Director. | ||
• | Consent of both parties would be required for various transactions (i.e. approval of budget, material change in the business, approval of transactions greater than a specific amount etc.). However, in the event that OTE withholds consent, the implementation of the transactions or resolvement of issues would not be prevented or postponed. |
As a result, OTE wrote-off management fees of approximately€21.3 as well as accrued interest of approximately€3.5, which amounts were charged to the accompanying 2004 consolidated statement of operations. The loan, the respective stamp duty and part of the accrued interest in the amount of Euro 15.5 were fully repaid by the end of May 2005. The new shareholders’ agreement was signed in December 2004. Consequently, the arbitration proceedings were terminated. |
F-31
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
6. | INVESTMENTS (continued): | |
During 2004, Telekom Srbija’s Shareholders’ meeting decided to distribute dividends out of the 2003 profits and an interim dividend out of the expected 2004 profits. As a result, an amount of€9.0 is included in “Earnings/(losses) from investments” in the accompanying 2004 consolidated statement of operations. In June 2005, Telekom Srbija’s Shareholders’ meeting decided for a further distribution of dividends out of the 2004 profits and an interim dividend out of the expected 2005 profits. Thus, an amount of€14.5 is included in “Earnings/ (losses) from investments” in the accompanying 2005 consolidated statement of operations. In 2006, Telekom Srbija’s Shareholders’ meeting decided for a further distribution of dividends out of the 2005 profits. Thus, an amount of€21.6 is included in “Earnings/ (losses) from investments” in the accompanying 2006 consolidated statement of operations. Dividend distributions from Serbia to Greece are subject to a withholding tax of 20.00%. | ||
In 2005 and 2006, OTE reassessed its position regarding its investment in Telekom Srbija, based on the indicators as set forth in FASB Interpretation No. 35, “Criteria for Applying the Equity Method of Accounting for Investments in Common Stock an interpretation of APB Opinion No. 18”, and after taking into account the developments described above. OTE considered the historical disputes, the 80% ownership interest held by the Serbian Government, the fact that the roles of the Deputy General Director and the CFO are largely administrative rather than decision making and that the two appointed board members cannot influence the board’s decisions and, consequently, concluded that its investment in Telekom Srbija was to be continued to be accounted for at cost, since OTE does not exercise significant influence. | ||
Investments in satellite companies and organizations: | ||
OTE participated in international satellite companies and organizations. These were not traded investments, and since OTE did not exercise significant influence, they were carried at cost. These participations were sold as follows: | ||
In 2005, OTE sold its participating interest in Intelsat Ltd., for a consideration of€5.5. This sale resulted in a pre-tax gain of€2.0, which is included in “Gain on sale of investments” in the 2005 accompanying consolidated statement of operations (See Note 24). | ||
In 2005, OTE sold its participating interest in Eutelsat S.A. for cash consideration of€21.1. This sale resulted in a pre-tax gain of€11.7, which is included in “Gain on sale of investments” in the 2005 accompanying consolidated statement of operations (See Note 24). Furthermore, before the sale of its participating interest, OTE received a dividend of€4.9 from Eutelsat S.A., which is included in “Earnings / (losses) from investments” in the 2005 accompanying consolidated statement of operations. | ||
In 2004, OTE sold its participating interest in New Skies Satellite N.V. for a consideration of€1.7. This sale resulted in a pre-tax gain of€1.7, which is included in “Gain on sale of investments” in the 2004 accompanying consolidated statement of operations (See Note 24). |
F-32
Table of Contents
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: | |
Telecommunication property, plant and equipment is analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
Land | 25.6 | 36.7 | ||||||
Buildings | 730.2 | 798.4 | ||||||
Telecommunication equipment and installations | 10,787.7 | 11,724.7 | ||||||
Investment supplies | 143.9 | 207.9 | ||||||
Transportation equipment | 53.5 | 58.8 | ||||||
Furniture and fixtures | 438.5 | 513.9 | ||||||
Construction in progress | 673.1 | 626.7 | ||||||
12,852.5 | 13,967.1 | |||||||
Accumulated depreciation | (6,376.6 | ) | (7,631.5 | ) | ||||
6,475.9 | 6,335.6 | |||||||
Depreciation expense for the years ended December 31, 2004, 2005 and 2006 amounted to€990.6,€1,007.0 and€1,038.9, respectively and is included in “Depreciation and amortization” in the accompanying consolidated statements of operations. | ||
As of December 31, 2005 and 2006, 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. The receipt of these subsidies is subject to the submission of the related costs of the approved projects to the Ministry of National Economy. The outstanding amount of subsidies receivable as of December 31, 2005 and 2006 was€2.9. | ||
Interest costs capitalized during the years ended December 31, 2004, 2005 and 2006, amounted to€20.9,€15.1 and€10.6, respectively. Total interest costs incurred during the years ended December 31, 2004, 2005 and 2006, amounted to€186.2,€179.6 and€242.8, respectively. |
8. | TELECOMMUNICATION LICENSES: | |
Telecommunication licenses are analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
OTE’s licenses | 6.2 | 6.2 | ||||||
Cosmote’s licenses | 263.3 | 269.4 | ||||||
Globul’s licenses | 166.1 | 167.1 | ||||||
Cosmofon’s licenses | 28.5 | 28.5 | ||||||
Other licenses | 22.0 | 45.3 | ||||||
486.1 | 516.5 | |||||||
Accumulated amortization | (105.5 | ) | (141.2 | ) | ||||
380.6 | 375.3 | |||||||
F-33
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
8. | TELECOMMUNICATION LICENSES (continued): | |
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, a lump sum charge of€41.9 for providing terrestrial mobile telecommunication services was determined and paid. 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 on a straight-line basis over its life of 24 years. | ||
In December 2000, two licenses for fixed wireless access services were granted to OTE for a total consideration of€11.8, the first covering the 3.5 GHz range of frequencies (€3.2) and the second covering the 25GHz range of frequencies (€8.6). The second license was transferred to Cosmote in November 2002. These licenses are being amortized on a straight-line basis over their lives of 15 years. | ||
In 2002, a license for Terrestrial Trunked Radio Access (“TETRA) was granted to OTE for a total consideration of€3.0 for providing special radio communication services through a digital mobile radio network. This license is being amortized on a straight-line basis over its life of 15 years. | ||
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,€113.0 was paid in August 2001, while the remaining balance of€48.4 is payable, interest-free, in three equal annual instalments, commencing in December 2005. In December 2005 and in December 2006, the two instalments of€16.1 each were paid. 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 3G License at the acquisition date amounted to approximately€148.4. The discounted present value of the outstanding liability at the acquisition date of the 3G License amounted to approximately€35.4, which has been increased with the notional interest of approximately€10.7. The total liability at December 31, 2005 and 2006 amounted to approximately€30.9 and€15.6, respectively. Of these amounts,€14.8 and€ nil are included in “Other long-term liabilities”, while the current portion at December 31, 2005 and 2006, of€16.1 and€15.6, respectively, has been classified under current liabilities in the accompanying consolidated balance sheets. | ||
Interest capitalized on the cost of the 3G License during the related network’s construction period, amounted to approximately€11. Cosmote launched 3G services in June 2004 and the related 3G License started be amortized on a straight-line basis over its remaining life of approximately seventeen (17) years. | ||
On August 29, 2002, Cosmote was awarded a GSM 900 license at a cost of€38.2. This license is being amortized on a straight-line basis over its life of fifteen (15) years. |
F-34
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
8. | TELECOMMUNICATION LICENSES (continued): | |
In 2005, OTE increased its participation in Cosmote through the acquisition of an additional 5.60% [See Note 1(a)]. Through the purchase price allocation process, an amount of€4.6 was allocated to Cosmote’s group licenses. | ||
In 2006, OTE increased its participation in Cosmote through the acquisition of an additional 2.86% [See Note 1(a)]. Through the purchase price allocation process, an amount of€6.1 was allocated to Cosmote’s group licenses. | ||
Globul was incorporated in Bulgaria on January 9, 2001, for the purpose of providing 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. The company is also licensed to provide leased lines services as well as public telecommunications services in the territory of Bulgaria. On April 2005, a UMTS license was granted to Globul for a consideration of€21.9, being amortized on a straight-line basis over its term of twenty (20) years. | ||
Cosmofon 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 a Concession Agreement published as a decision of the Minister of the Transport and Communications of the Former Yugoslav Republic of Macedonia, Cosmofon was granted a GSM license for a consideration of€28.5, such license being amortized on a straight-line basis over its life of twenty-two (22) years. | ||
Cosmote Romania provides mobile telecommunications services in the 1800 Mhz bandwidth in accordance with a license granted by the Romanian Ministry of Communications and Information Technology (“MCTI”) in January 1999 for an initial period of ten years, which may be extended subject to the agreement of the parties. On June 30, 2003, Cosmote Romania was granted a license for the use of radiofrequencies in GSM 1800. In 2005, this license was modified in order to include the right of use of radiofrequencies in EGSM 900, while its duration was extended until 2014. The sale or transfer of such license is not allowed without the prior consent of the Telecommunications Regulatory Authority (ANRC). Such license is being amortized over its life of ten (10) years. | ||
AMC holds a licence to operate a GSM 900 network in Albania and was the sole provider of mobile telecommunications services in Albania up to February 2001, when a second license to operate a GSM 900 network in Albania was granted to a competitor, whose network became operational in January 2002. | ||
Amortization of the licenses held by the Group amounted to€27.9,€36.9 and€35.7 for the years ended December 31, 2004, 2005 and 2006, respectively, and is included in “Depreciation and amortization” in the accompanying consolidated statements of operations. The estimated aggregate amortization expense of the licenses for each of the five (5) succeeding fiscal years (2007-2011) approximates€35.7 per year. |
F-35
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
9. | GOODWILL: | |
Goodwill is analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
AMC | 70.7 | 70.7 | ||||||
OTEnet | 13.3 | 13.3 | ||||||
Cosmote | 161.8 | 284.8 | ||||||
Germanos | — | 737.5 | ||||||
245.8 | 1,106.3 | |||||||
In 2000, the Group acquired an 85% interest in AMC for a cash consideration of€93.6. The excess of the acquisition cost over the net identifiable assets and liabilities (i.e. goodwill) of approximately€70.7 (net of amortization of€7.0 upon the adoption of FASB Statement No. 142) on AMC is included in segment “All other”. The Group paid a premium over the net tangible and identified intangible assets of AMC because of potential strategic and financial benefits of expanding in the Balkans. | ||
In 2004, the Group purchased an additional 10.00% interest in OTEnet for a cash consideration of€12.8. In 2005, the Group purchased an additional 4.39% interest in OTEnet for a cash consideration of€5.9. The excess of the acquisition cost over the net identifiable assets and liabilities (e.g. goodwill) amounted to€13.3 in total and is included in the segment “All other” [See Note 1(b)]. | ||
In 2005, the Group purchased an additional 5.60% interest in Cosmote from minority shareholders for a cash consideration of€274.2. In 2006, the Group purchased an additional 2.86% interest in Cosmote from minority shareholders for a cash consideration of€191.1. The excess of the acquisition cost over the net identifiable assets and liabilities (e.g. goodwill) amounted to€161.8 in 2005 and€123.0 in 2006 and is included in the segment “Cosmote” [See Note 1(a)]. The Group paid a premium over the net tangible and identified intangible assets of Cosmote in order to obtain the statutory majority of the subsidiary. | ||
In 2006, the Group purchased a 66.35% interest in Germanos for a cash consideration of€1,545.0. The excess of the acquisition cost over the net identifiable assets and liabilities (e.g. goodwill) amounted to€737.5 and is included in the segment “All other” [See Note 1(f)]. The Group paid a premium over the net tangible and identified intangible assets of Germanos because of strategic and financial benefits that will derive from its retail network. | ||
The Group performed its annual goodwill impairment testing as described in Note 2(f) and concluded that the fair value of these reporting units was above the carrying amount at December 31, 2005 and 2006. | ||
In accordance with FASB Statement No. 109 “Accounting for Income Taxes”, a deferred income tax liability was not recorded on the goodwill, since it is not tax deductible. |
F-36
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
10. | OTHER INTANGIBLE ASSETS: | |
Other intangible assets are analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
Indefinite life | ||||||||
Brand name | 35.9 | 471.1 | ||||||
Definite life | ||||||||
Customer relationships | 81.5 | 120.4 | ||||||
Franchise agreements | — | 65.7 | ||||||
Covenants not-to-compete and solicit | — | 54.8 | ||||||
Additional minimum liability for employee benefit plans | 46.6 | — | ||||||
Other | 6.2 | 27.7 | ||||||
134.3 | 268.6 | |||||||
Accumulated amortization | (19.0 | ) | (37.9 | ) | ||||
115.3 | 230.7 | |||||||
Total | 151.2 | 701.8 | ||||||
Brand name:Brand name was identified as indefinite life intangible asset using the income approach through the Group’s acquisitions of additional share in Cosmote, OTEnet and Germanos. [See Notes 1(a), 1(b) and 1(f)]. Germanos brand name amounted to€414.8 There are no legal, regulatory or contractual limitations associated with the brand name. | ||
Customer relationships:Customer relationships were identified as definite life intangible asset using the income approach through the Group’s acquisitions of Romtelecom in 2003 and of additional share in Cosmote and OTEnet [See Notes 1(a), 1(b) and 1(e)]. | ||
Franchise agreements:Franchise agreements were identified as definite life intangible asset using the income approach through the Group’s acquisition of Germanos [See Note 1(f)]. | ||
Covenants not-to-compete and solicit:Covenants not-to-compete and solicit were identified as definite life intangible asset using the income approach through the Group’s acquisition of Germanos [See Note 1(f)]. | ||
Additional minimum liability for employee benefit plans:Additional minimum liability for each employee benefit plan where there are no plan assets represents the amount by which the Accumulated Benefit Obligation (“ABO”) exceeds the accrued benefit cost, if any. The amount of that additional minimum liability is determined by the actuarial valuation performed by external qualified experts. In 2006, following the adoption of FASB Statement No 158 “Employer’s Accounting for Defined Benefit Pensions and Other Postretirement Plans”, that additional minimum liability and the related intangible assets are no longer recognized. | ||
Amortization expense for the years ended December 31, 2004, 2005 and 2006 amounted€4.6,€10.0 and€18.9, respectively and is included in “Depreciation and amortization” in the accompanying consolidated statements of operations. The estimated aggregate amortization expense of the intangible assets for each of the five (5) succeeding fiscal years (2007-2011) approximates€31.3 per year. |
F-37
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
10. | OTHER INTANGIBLE ASSETS (continued): | |
In accordance with FASB Statement No. 109 “Accounting for income taxes”, deferred income tax liabilities were recorded on the net assets acquired and will reverse as a tax benefit in the accompanying consolidated statements of operations over the amortization period of the related intangible assets, or upon their write-off or disposition, if any. | ||
The Group has performed the annual impairment review of the indefinite life intangible assets and concluded that no impairment exists as at December 31, 2005 and 2006. Furthermore, the Group has determined that there were no events or changes in circumstances indicating that the carrying amount of the definite life intangible assets may not be recoverable. |
11. | 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€72.5 at December 31, 2006, of which€47.3 was unused as of the above date. | ||
The weighted average interest rates on short-term borrowings for the years ended December 31, 2004, 2005 and 2006, was approximately 4.3%, 3.5% and 3.6% respectively. | ||
On September 19, 2003, OTE PLC established a Euro Commercial Paper Programme under which it may issue and have outstanding at any time euro-commercial paper notes, fully and unconditionally guaranteed by OTE, up to a maximum aggregate amount of€500 or its equivalent in alternative currencies, with a maximum maturity of one (1) year. Notes may be interest-bearing or non-interest-bearing. Interest (if any) may accrue at a fixed rate or at a floating rate. No issuance of notes under this program took place as of the date of this report. |
12. | ACCRUED AND OTHER LIABILITIES: | |
Accrued and other liabilities are analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
Accrued social security contributions | 69.5 | 70.7 | ||||||
Accrued payroll | 14.0 | 11.5 | ||||||
Other taxes payable | 75.3 | 56.2 | ||||||
Accrued interest payable | 59.0 | 67.4 | ||||||
Reserve for pension contributions | 6.3 | 3.7 | ||||||
Reserve for litigation and claims | 105.3 | 121.3 | ||||||
Customer advances | 40.4 | 40.2 | ||||||
Derivative liability (see Note 14 (d)) | 2.0 | 1.9 | ||||||
Other | 100.1 | 127.7 | ||||||
471.9 | 500.6 | |||||||
F-38
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
13. | INCOME TAXES: | |
In accordance with the Greek tax regulations, the income tax rate through December 31, 2004, was 35%, but based on Law 3296/2004, which was enacted in 2004, the income tax rate is 32% in 2005, 29% in 2006 and 25% in 2007 and onwards. Furthermore, In accordance with the Romanian tax regulations, the income tax rate was 25% in 2004 and 16% in 2005 and onwards. | ||
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. | ||
Under Greek tax regulations, an income tax advance of 65% of each year’s current income tax liability is paid to the tax authorities. Such advance is then offset with the following year’s income tax liability. Any excess advance amounts are refunded to the companies following a tax examination. As of December 31, 2005 and 2006, an amount of€91.5 and€95.3, representing income tax advances paid by OTE in excess of its current income tax liability based on its statutory taxable profits is included under “Other current assets” in the accompanying 2005 and 2006 consolidated balance sheets. OTE has appealed to the tax authorities for a tax examination requesting the refund of that amount. In May 2006, the tax authorities commenced the tax audit of OTE’s books for the fiscal years 2002 — 2005, which has not yet been finalized. | ||
In 2004, the tax authorities completed the tax audit of AMC for the fiscal years 2000 and 2001, which resulted in an assessment of additional taxes of approximately€1.1 which are included in the provision for income taxes in the accompanying 2004 consolidated statement of operations. In late April 2005, the tax authorities completed the tax audit of Cosmote’s books for the years 2002 and 2003, which resulted in an assessment of net additional taxes of approximately€5.0, out of which€4.0 were charged against the related reserve provided in prior years and€1.0 were included in the provision for income taxes in the accompanying 2005 consolidated statement of operations. | ||
Furthermore, the Group has established a provision of€63.5 in respect with the unaudited tax years, which is considered by management to be adequate and is included under “Income taxes payable” in the accompanying consolidated balance sheets. | ||
The provision for income taxes reflected in the accompanying consolidated statements of operations is analyzed as follows: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Current income taxes — Domestic operations | (179.4 | ) | (188.1 | ) | (259.4 | ) | ||||||
Current income taxes — Foreign operations | (29.0 | ) | (33.4 | ) | (66.1 | ) | ||||||
Total current income taxes | (208.4 | ) | (221.5 | ) | (325.5 | ) | ||||||
Deferred income taxes — Domestic operations | (11.4 | ) | 199.5 | (125.4 | ) | |||||||
Deferred income taxes — Foreign operations | 99.0 | (10.5 | ) | 9.4 | ||||||||
Total deferred income taxes | 87.6 | 189.0 | (116.0 | ) | ||||||||
Total provision for income taxes | (120.8 | ) | (32.5 | ) | (441.5 | ) | ||||||
F-39
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
13. | INCOME TAXES (continued): | |
The reconciliation of the provision for income taxes to the amount determined by the application of the Greek statutory tax rate of 35% for 2004, 32% for 2005 and 29% for 2006, to pre-tax income is summarized as follows: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Income tax (expense)/ benefit at the statutory rate | (184.0 | ) | 7.7 | (328.0 | ) | |||||||
Additional tax assessments | (1.1 | ) | (1.0 | ) | (27.8 | ) | ||||||
Effect of change in statutory rates | 77.0 | (48.7 | ) | (12.2 | ) | |||||||
Tax on statutory revaluations of land & buildings | 37.2 | — | — | |||||||||
Tax on subsidiaries taxed at different rates | (6.8 | ) | 28.7 | 22.8 | ||||||||
Tax on statutory reserves | — | — | (20.3 | ) | ||||||||
Disallowed expenses | — | (15.8 | ) | (44.3 | ) | |||||||
Change in valuation allowance | (39.1 | ) | (5.0 | ) | (27.4 | ) | ||||||
Other | (4.0 | ) | 1.6 | (4.3 | ) | |||||||
Provision for income taxes | (120.8 | ) | (32.5 | ) | (441.5 | ) | ||||||
The effect of change in tax rates in 2004, 2005 and 2006 of€77.0,€48.7 and€12.2, respectively is primarily due to the deferred tax assets and liabilities remeasured at the following tax rates enacted in December 2004: |
• | Greek tax rate: 35% in 2004, 32% in 2005, 29% in 2006, 25% in 2007 and onwards. | ||
• | Romanian tax rate: 25% in 2004, 16% in 2005 and onwards. |
In connection with the Company’s sale in 2006 of its investment in Armentel, the tax authorities assessed a transaction tax of€25.5, which were paid. | ||
The pre tax income / (loss) from domestic operations which is included in the consolidated statements of operations was€382.5,€ (317.6) and€973.4, in 2004, 2005 and 2006, respectively. | ||
The pre tax income / (loss) from foreign operations which is included in the consolidated statements of operations was€143.3,€293.6 and€157.5, in 2004, 2005 and 2006, respectively. | ||
The Group has net operating losses carry forwards in the amount of approximately€292.1, which may be applied against future taxable profits. An analysis of the net operating losses carry forwards is presented in the table below: |
Balance, | ||||
Year of expiration | December 31, 2006 | |||
2007 | 109.4 | |||
2008 | 45.9 | |||
2009 | 41.9 | |||
2010 | 4.8 | |||
2011 | 5.2 | |||
Unlimited | 84.9 | |||
Total | 292.1 | |||
F-40
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
13. | 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, | ||||||||
2005 | 2006 | |||||||
Deferred tax asset | ||||||||
Write-down of cost investments | 28.5 | 28.5 | ||||||
Write-down of investments in subsidiaries | 14.3 | — | ||||||
Reserve for Staff Retirement Indemnities | 40.8 | 78.5 | ||||||
Reserve for Youth Account benefits | 61.6 | 79.0 | ||||||
Reserve for voluntary retirement program costs | 212.2 | 168.8 | ||||||
Reserve for litigation and claims | 21.0 | 27.8 | ||||||
Accrued and other liabilities | 13.3 | 12.8 | ||||||
Net operating losses carry forwards | 32.5 | 43.3 | ||||||
Expenses capitalized for statutory purposes | 5.6 | 3.7 | ||||||
Other | 1.4 | 9.1 | ||||||
Gross deferred tax asset | 431.2 | 451.5 | ||||||
Valuation allowance | (29.6 | ) | (57.0 | ) | ||||
Deferred Tax Asset | 401.6 | 394.5 | ||||||
Deferred tax liability | ||||||||
Property, plant and equipment | (80.6 | ) | (82.1 | ) | ||||
Untaxed reserves and investments | (245.9 | ) | (333.3 | ) | ||||
Intangible assets | (24.2 | ) | (148.8 | ) | ||||
Other | (19.6 | ) | (9.9 | ) | ||||
Deferred tax liability | (370.3 | ) | (574.1 | ) | ||||
Net deferred tax asset/(liability) | 31.3 | (179.6 | ) | |||||
Classified on the consolidated balance sheet as follows: | ||||||||
Net current deferred tax asset/(liability) | 67.9 | 7.1 | ||||||
Net non-current deferred tax asset/(liability) | (36.6 | ) | (186.7 | ) | ||||
31.3 | (179.6 | ) | ||||||
The Group has established a valuation allowance of€29.6 and of€57.0 at December 31, 2005, and 2006 respectively. The change in valuation allowance for 2004, 2005 and 2006 amounted to€39.1,€5.0 and€27.4, respectively and mainly relate to tax losses that are not expected to be recovered. | ||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax carryforwards utilizable. Management considers the scheduled reversal of deferred tax liabilities and the projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Group will realize the benefits of these deductible differences and tax carry forwards, net of the existing valuation allowance at December 31, 2005 and 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. |
F-41
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
14. | LONG-TERM DEBT: | |
Long-term debt is analyzed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
(a) European Investment Bank | 67.4 | 52.5 | ||||||
(b) Loans from suppliers | 34.0 | — | ||||||
(c) Syndicated loans | 500.0 | 500.0 | ||||||
(d) Bond€1,100 6.125% maturity February 2007 | 489.1 | 491.3 | ||||||
(e) Global Medium Term Note Program | 2,115.5 | 3,363.2 | ||||||
(f) Other bank loans | 227.9 | 168.5 | ||||||
Total long-term debt | 3,433.9 | 4,575.5 | ||||||
Less-Current maturities | (321.7 | ) | (528.1 | ) | ||||
Long-term portion | 3,112.2 | 4,047.4 | ||||||
As of December 31, 2005 and 2006, the fair value of the Group’s long-term debt amounted to approximately€3,527.0 and€4,537.5, respectively. | ||
The annual principal repayment of long-term debt subsequent to December 31, 2006, is as follows: |
Year | Amount | |||
2007 | 528.1 | |||
2008 | 90.5 | |||
2009 | 635.1 | |||
2010 | 8.4 | |||
2011 | 1,135.7 | |||
2012 and thereafter | 2,177.7 | |||
4,575.5 | ||||
(a) | EUROPEAN INVESTMENT BANK | ||
The long-term loan to OTE by the European Investment Bank (“EIB”) was granted in 1995 and is Euro denominated. The loan bears interest at 8.3% and is repayable in annual instalments (principal + interest) through 2009. | |||
Significant loan covenants include, among others, (i) that OTE must inform EIB on any material alteration to its equity and on any significant change in the ownership of its capital and (ii) that loans shall be immediately repayable in case that OTE ceases 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 | ||
Loans from suppliers related to Armentel, which had obtained vendor-financing facilities from suppliers, in relation to the supply of telecommunication equipment and the digitalization of the network of that company. Armentel was sold in 2006 (See Note 1 (g)), and consequently these loans are not included in the Group’s Long-term Debt as of December 31, 2006. |
F-42
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
14. | LONG-TERM DEBT (continued): |
(c) | SYNDICATED LOANS |
December 31, | ||||||||
2005 | 2006 | |||||||
(i) Cosmote’s loans | — | — | ||||||
(ii) OTE PLC’s loans | 500.0 | 500.0 | ||||||
500.0 | 500.0 | |||||||
(i) | Cosmote:On November 12, 2002, Cosmote entered into a credit facility agreement with a consortium of banks. The Loan beared interest at the LIBOR plus an applicable margin ranging from 0.50% — 0.70% (and mandatory costs) and was repayable in full by the latest on November 12, 2005; however, earlier repayment in full or part was permitted. | ||
On December 16, 2002, Cosmote entered into cross-currency swaps whereby it converted (i) the outstanding amount of the Loan, from US $ to€ (U.S.$350 million to€346.7) and (ii) the interest rate from the LIBOR plus 0.55% to the EURIBOR plus 0.60%. The swaps qualified for hedge accounting as fair value hedges and their fair value at December 31, 2004, was approximately€90.7. | |||
On September 2005, COSMOTE repaid the balance of that Loan and the above-mentioned swaps were fully settled. Losses for 2004 and gains for 2005 resulting from these derivative instruments amounted to approximately€20.7 and€90.7, respectively, and are included in “Foreign exchange gains” in the accompanying consolidated statements of operations. | |||
(ii) | OTE PLC:On September 2, 2005, OTE PLC signed a€850 million Syndicated Credit Facility guaranteed by OTE S.A. The facility consists of a€500 million Term Loan and a€350 million Revolving Credit Facility. On September 6, 2005 OTE PLC drew€500 million under the Term Loan, while up to December 31, 2006, no draw-downs had been made under the Revolving Credit Facility. The main terms of the facility are: Principal is due at maturity, whereas interest is paid periodically and is based on euribor plus a margin. The margin is adjustable based on OTE S.A. long-term credit rating. The initial margin was 0.2125% p.a. for the Term Loan and 0.1875% p.a. for the Revolving Credit Facility. Following a downgrade of OTE’s credit rating by Moody’s, the margins were adjusted to 0.225% for the Term Loan and 0.20% for the Revolving Credit Facility. The facility had an original tenor of 5 years and has an extension option of 1+1 year subject to lenders’ consent. The first extension option was exercised in 2006 and following the lenders’ relative consent, on August 15, 2006, the maturity of€474.2 (Term Loan) and€332.0 (Revolving Credit Facility) was extended to September 2011. | ||
The loan agreement includes a number of general covenants, and events of default such as negative pledge, restrictions on disposal of assets above certain thresholds, obligation to prepay the facility in case of a change of control combined with a rating downgrade below Baa2/BBB, cross default clause etc. |
F-43
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
14. | LONG-TERM DEBT (continued): |
(d) | BOND€1,100 6.125% MATURITY FEBRUARY 2007 | ||
On February 7, 2000, OTE PLC issued a bond of€1.1 billion, fully and unconditionally guaranteed by OTE bearing interest at 6.125% payable annually (each February), maturing on February 7, 2007. Principal is due at maturity. | |||
On November 2005, OTE PLC completed an Exchange Bond Program in order to refinance part of the above mentioned€1.1 billion bond. Based on that Program,€608.4 principal amount of existing bonds was exchanged for new notes issued under the Global Medium Term Note Program [See (e) below]. | |||
On September 13, 2005, OTE PLC entered in an Interest Rate Swap (IRS) agreement for a part of the outstanding amount of the Eurobond (€289) whereby it converted the interest rate from 6.125% to EURIBOR plus 3.7775%, maturing on February 7, 2007. The swap qualified for hedge accounting as fair value hedge and its fair value at December 31, 2005 of approximately€2.0 was recorded as a derivative liability and was included in “Accrued and other liabilities” reflected under current liabilities in the accompanying consolidated 2005 balance sheet. In 2005, the ineffective portion of the derivative instrument amounted to€0.3 and was included in “Interest expense” in the accompanying 2005 consolidated statement of operations. As of December 31, 2006, the swap did not qualify for hedge accounting and as a result a total loss of€2.0 was recorded in “Interest expense” in the accompanying consolidated 2006 statement of operations, while the derivative liability was adjusted to€1.9. | |||
(e) | GLOBAL MEDIUM TERM NOTE PROGRAM |
December 31, | ||||||||
2005 | 2006 | |||||||
(i) Bond€1,250, 5% due August 2013 | 1,243.0 | 1,243.7 | ||||||
(ii) Bond€250, floating, due November 2006 | 250.0 | — | ||||||
(iii) Bond€650, 3.75% due November 2011 | 622.5 | 626.6 | ||||||
(iv) Bond€900, 4.625% due May 2016 | — | 892.9 | ||||||
(v) Bond€600, floating due November 2009 | — | 600.0 | ||||||
2,115.5 | 3,363.2 | |||||||
On November 7, 2001, OTE PLC established a Global Medium Term Note Program for the issuance of€1.5 billion 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. On September 16, 2003, OTE’s Board of Directors approved to raise the aggregate principal amount of notes from the initial€1.5 billion to€2.5 billion, with effect from November 2004. Furthermore, on January 20, 2005, OTE’s Board of Directors approved to raise the aggregate principal amount of notes from the€2.5 billion to€3.5 billion, with effect from October 2005. On May 18, 2006, OTE’s Board of Directors approved to raise the aggregate principal amount of notes from€3.5 billion to€5.0 billion, with effect from August 2006. |
F-44
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
14. | LONG-TERM DEBT (continued): |
Notes issued under the Global Medium Term Note Program 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. OTE PLC used this facility and up to December 31, 2006 has issued notes amounting to€3.6 billion, fully and unconditionally guaranteed by OTE, analyzed as follows: |
(i) | €1,250.0 notes issued in August 2003 at 5%. Interest is payable annually (each August). These notes are maturing in August 2013. Principal is due at maturity. | ||
(ii) | €250.0 notes issued in November 2003 at floating rate. Interest is payable on a quarterly basis. These notes were maturing in November 2006, and were fully repaid at that date | ||
(iii) | €650 notes issued in November 2005 at 3.75%. As described in (d) above, in November 2005, OTE PLC completed the Exchange Bond Program in order to refinance part of the Eurobond of€1.1 billion, bearing interest at 6.125%, maturing on February 7, 2007. Based on that Program,€608.4 in principal amount of existing bonds was exchanged by bondholders and given the exchange ratio set at 1.0455,€636.0 in principal amount of new notes were issued under the Global Medium Term Note Program. For rounding purposes additional notes for an amount of€14.0 were issued. The notes mature in 2011 and bear interest at 3.75% payable annually (each November). Principal is due at maturity. As of December 31, 2005 and 2006, unamortized premiums amounted to€27.5 and€23.3, respectively. Amortization for 2005 and 2006 amounted to€1.0 and€4.2 and was charged to “Interest expense” in the accompanying consolidated statements of operations. | ||
(iv) | €900.0 notes issued in November 2006. These notes bear interest at 4.625% and mature in May 2016. Interest is payable annually (each May). Principal is due at maturity. | ||
(v) | €600.0 notes issued in November 2006. These notes bear interest at floating rate (Euribor plus a spread of 28 bps). These notes mature in November 2009. Interest is payable on a quarterly basis. Principal is due at maturity. |
The Global Medium Term Note Program includes some standard general covenants and events of default. Indicatively, it includes a negative pledge and a cross default clause. | |||
In particular, the Notes described under (iv) and (v) above include a Change of Control clause applicable to OTE which is triggered if both of the following events occur: a) any person or persons acting in concert (other than the Hellenic Republic) at any time directly or indirectly come(s) to own or acquire(s) more than 50 % of the issued ordinary share capital or of the voting rights of OTE and b) as a consequence of (a), the rating previously assigned to the bonds by any international rating agency is withdrawn or downgraded to non Investment grade, within a specific period and under specific terms and conditions. |
F-45
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
14. | LONG-TERM DEBT (continued): |
As of December 31, 2005 and 2006, unamortized discounts relating to the debt stated in (i) and (iv) above amounted to€7.0 and€13.4, respectively. Amortization for these debts for 2004, 2005 and 2006 amounted to€0.5,€0.6 and€0.8, respectively and was charged to “Interest Expense”, in the accompanying consolidated statements of operations. | |||
(f) | OTHER BANK LOANS |
December 31, | ||||||||
2005 | 2006 | |||||||
Romtelecom’s bank loans | 148.4 | 105.9 | ||||||
Globul’s bank loans | 75.0 | 59.7 | ||||||
Other bank loans | 4.5 | 2.9 | ||||||
227.9 | 168.5 | |||||||
Romtelecom has obtained long-term loans denominated in various currencies, amounting to approximately€148.4 as of December 31, 2005 and€105.9 as of December 31, 2006. The balance as of December 31, 2006 includes€54.5 representing Euro denominated loans and€51.4 representing Korean Won denominated loans (61.2 billion Korean Won). The balance as of December 31, 2005 includes€96.3 representing Euro denominated loans and€52.1 representing Korean Won denominated loans (63.8 billion Korean Won). Out of these loans approximately€6.5 (2005:€36.4) bear interest at floating rates (linked with LIBOR/EURIBOR plus margin 1.5%), while approximately€99.4 (2005:€112.0) bear interest at fixed rates ranging from 2.5% — 6.12% (2005: 2.5%-6.12%). Included in the abovementioned loans are two loans from the EBRD, which are subject to financial covenants. These covenants require Romtelecom to achieve certain ratios in respect of tangible net worth, financial debt, debt coverage and current ratio, computed on its annual consolidated financial statements prepared under International Financial Reporting Standards. All covenants have been complied for the years ended December 31, 2005 and 2006. | |||
On May 10, 2005, GLOBUL entered into a credit facility agreement with Bank Austria. The latter granted to GLOBUL a three year credit facility of€75.0, bearing interest at EURIBOR+1.25 % payable quarterly. Principal is due at maturity. Drawdowns under the facility through December 31, 2006, amounted to€59.7, which were partially used for the repayment of the company’s short-term borrowings. |
Interest expense relating to the long-term debt and short-term borrowings for 2004, 2005 and 2006 amounted to€186.2,€179.6 and€166.9, respectively and was charged in “Interest Expense” in the accompanying consolidated statements of operations. | ||
The Group as at December 31, 2006 is in compliance with all debt covenants. |
F-46
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | 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 increased. Pension levels for new employees from 1993 are 60% of final average salary after 35 years of service at age 65. From January 1, 2002, contribution rates were 25% of salary for the employer and 11% for the employee, regarding members joined before January 1, 1993. For members that joined after that date, the relevant contribution rates are 13.33% of salary for the employer and 6.67% for the employee. | |||
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, and a société anonyme under the name of EDEKT-OTE S.A. (“EDEKT”) was also established, 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. Pursuant to Law 2843/00, any deficits incurred by TAP-OTE are covered by the Greek State. | |||
Pursuant to Law 3029/02, TAP-OTE’s Pension Fund part only, is to merge with IKA-ETEAM (the main social security Fund in Greece) by January 1, 2008 at the latest. 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. |
F-47
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | 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 rate paid by the employee is 4%. | ||
(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. |
Advances made by OTE to the Auxiliary Fund against future contributions through December 31, 1993, amounted to€11.1. In 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 balance of the advances to the Auxiliary Fund as of December 31, 2005 and 2006 amounted to€5.1 and€4.6, respectively. | |||
According to law 3371/2005 and the provisions of the related Ministerial Decision, OTE should grant an interest bearing loan to the Auxiliary Fund in order to cover the Lump Sum benefits upon retirement due to the Voluntary Retirement Program. On October 23, 2006 the loan agreement was signed and its main terms are as follows: The total amount of the loan is up to€180, which will be granted partially in accordance with the Fund’s needs, as determined by the above mentioned Law and the related Ministerial Decision. If the Lump Sum benefits exceed the amount of€180, OTE will grant the additional amount, which could not exceed the amount of€10. In this case the above mentioned contract will be amended in order to include the final amount of the loan and to update the repayment table. The loan is repayable in 21 years including a two year grace period, meaning that the repayment will start on October 1, 2008 through monthly installments. The loan bears interest at 0.29%. As of December 31, the nominal amount of the part that was granted was€66.4. Because the above rate does not reflect the current market conditions, OTE recognized a provision of€23.3, which is included in “Charges for voluntary retirement program” in the accompanying 2006 consolidated statement of operations. |
F-48
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): | |
The advances to pension funds, which can be applied to fund any future contributions due under these plans are analysed as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
Payments and advances: | ||||||||
— EDEKT | 176.1 | 140.9 | ||||||
— Auxiliary Fund | 5.3 | 4.7 | ||||||
— Interest bearing loan to the Auxiliary Fund | — | 66.4 | ||||||
181.4 | 212.0 | |||||||
Less:unamortized discount based on imputed interest rates 3.8% and 4.0% for 2005 and 2006, respectively | ||||||||
— Auxiliary Fund | (0.7 | ) | (0.6 | ) | ||||
— Interest bearing loan to the Auxiliary Fund | (23.3 | ) | ||||||
Long-term portion | 180.7 | 188.1 | ||||||
December 31, | ||||||||
2005 | 2006 | |||||||
Payments and advances: | ||||||||
— EDEKT | 35.2 | 35.2 | ||||||
— Auxiliary Fund | 0.5 | 0.5 | ||||||
Short-term portion | 35.7 | 35.7 | ||||||
Advances to pension funds are reflected in the 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 is included in “Interest expense” and “Interest income”, respectively, in the accompanying consolidated statements of operations. | ||
OTE’s contributions to the TAP-OTE, the Auxiliary pension fund and other funds for the years ended December 31, 2004, 2005 and 2006, amounted to€204.2,€203.9 and€173.5, respectively, and are included in “Payroll and employee benefits” in the accompanying consolidated statements of operations. | ||
Based on actuarial studies performed in prior years, these pension funds incur (or will incur in the future) increased deficits. OTE does not have a legal obligation to cover any future deficiencies of these funds and the Company does not intend to voluntarily 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. |
F-49
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): | |
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 termination payment due in the 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 for retirement is limited to a fixed amount (which for 2006 amounted to€0.02 and is adjusted annually according to the inflation rate), plus 9 months salary. In practice, OTE employees receive the lesser of 100% of the maximum liability and€0.02 plus 9 months’ salary. Employees with service exceeding 25 years are entitled to draw loans from the Company against the accrued indemnity payable to them upon retirement. Outstanding loans amounted to€87.9 and€26.4 as of December 31, 2005 and 2006, 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. | |||
The Group used a December 31 measurement date for the defined benefit pension plans. The components of the staff retirement indemnity expense included in “Payroll and employee benefits” in the accompanying consolidated statements of operations are as follows: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Service cost-benefits earned during the year | 14.7 | 19.1 | 20.0 | |||||||||
Interest cost on projected benefit obligation | 19.0 | 18.4 | 16.5 | |||||||||
Net amortization and deferrals | 9.1 | 17.7 | 8.6 | |||||||||
42.8 | 55.2 | 45.1 | ||||||||||
F-50
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): |
December 31, | ||||||||
2005 | 2006 | |||||||
Projected benefit obligation at beginning of year | 509.6 | 559.9 | ||||||
Service cost | 23.4 | 20.0 | ||||||
Interest cost | 18.6 | 16.5 | ||||||
Actuarial loss | 35.5 | 1.6 | ||||||
Loss from termination benefits of the Voluntary Retirement Program | 19.8 | — | ||||||
Benefits paid | (47.0 | ) | (19.8 | ) | ||||
Projected benefit obligation at end of year | 559.9 | 578.2 | ||||||
Unrecognised net actuarial loss | (67.0 | ) | — | |||||
Unrecognised prior service cost | (72.3 | ) | — | |||||
Accrued benefit cost | 420.6 | 578.2 | ||||||
Reserve for staff retirement indemnities for eligible employees of the Voluntary Retirement Program | (242.7 | ) | (242.7 | ) | ||||
Additional minimum liability | 28.5 | — | ||||||
Total Accumulated benefit obligation | 206.4 | 335.5 | ||||||
Less: Current portion | (19.8 | ) | (6.8 | ) | ||||
Long-term portion of accumulated benefit obligation | 186.6 | 328.7 | ||||||
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Discount rate | 3.77 | % | 3.73 | % | 4.11 | % | ||||||
Assumed rate of increase in future compensation levels | 4.5 | % | 5.5 | % | 5.5 | % |
F-51
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): |
Year | Amount | |||
2007 | 7.0 | |||
2008 | 5.6 | |||
2009 | 7.1 | |||
2010 | 8.4 | |||
2011 | 22.4 | |||
2012-2016 | 208.1 |
(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. | |||
The Group used a December 31 measurement date for the defined benefit pension plans. The components of the Youth Account expense included in “Payroll and employee benefits” in the accompanying consolidated statements of operations are: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Service cost-benefits earned during the year | 20.1 | 20.9 | 21.9 | |||||||||
Interest cost on projected benefit obligation | 13.3 | 10.2 | 10.0 | |||||||||
Net actuarial gain | 4.8 | 6.5 | 11.2 | |||||||||
Settlement cost | — | — | 20.0 | |||||||||
38.2 | 37.6 | 63.1 | ||||||||||
December 31, | ||||||||
2005 | 2006 | |||||||
Projected benefit obligation at beginning of year | 295.7 | 306.3 | ||||||
Service cost | 20.9 | 21.9 | ||||||
Interest cost | 10.2 | 10.0 | ||||||
Actuarial (gains)/loss | 16.0 | 27.2 | ||||||
Prior service cost arising during the year | 18.2 | — | ||||||
Benefits paid | (54.7 | ) | (49.0 | ) | ||||
Projected benefit obligation at end of year | 306.3 | 316.4 | ||||||
Unrecognised net actuarial loss | (75.7 | ) | — | |||||
Unrecognised prior service cost | (18.2 | ) | — | |||||
Accrued benefit cost | 212.4 | 316.4 | ||||||
Additional minimum liability | 44.0 | — | ||||||
Accumulated benefit obligation | 256.4 | 316.4 | ||||||
Employee’s accumulated contributions | 71.6 | 70.8 | ||||||
Total reserve for Youth Account | 328.0 | 387.2 | ||||||
Less: Current portion | (51.5 | ) | (48.3 | ) | ||||
Long-term portion of reserve for Youth Account | 276.5 | 338.9 | ||||||
The accumulated benefit obligation as of December 31, 2005 and 2006 is not funded. |
F-52
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Discount rate | 3.77 | % | 3.57 | % | 4.04 | % | ||||||
Assumed rate of increase in future compensation levels | 3.5 | % | 4.5 | % | 4.5 | % |
Year | Amount | |||
2007 | 49.2 | |||
2008 | 57.2 | |||
2009 | 58.1 | |||
2010 | 41.7 | |||
2011 | 28.1 | |||
2012-2016 | 138.1 |
The following table illustrates the effect of applying SFAS No. 158 on individual line items of the accompanying consolidated balance sheet as of December 31, 2006: |
December 31, 2006 | ||||||||||||||||||||||||
Staff retirement indemnities | Youth Account | |||||||||||||||||||||||
Prior to the | Prior to the | |||||||||||||||||||||||
adoption of SFAS | Post adoption of | adoption of SFAS | Post adoption of | |||||||||||||||||||||
No. 158 | Adjustments | SFAS No. 158 | No. 158 | Adjustments | SFAS No. 158 | |||||||||||||||||||
Accumulated benefit obligations | (219.2 | ) | (116.3 | ) | (335.5 | ) | (226.5 | ) | (89.9 | ) | (316.4 | ) | ||||||||||||
Intangible asset | 16.7 | (16.7 | ) | — | — | — | — | |||||||||||||||||
Accumulated other comprehensive income / (loss) before taxes | — | (133.0 | ) | (133.0 | ) | — | (89.9 | ) | (89.9 | ) | ||||||||||||||
Deferred tax assets | — | 33.3 | 33.3 | — | 22.4 | 22.4 | ||||||||||||||||||
Accumulated other comprehensive income / (loss) | — | 99.7 | 99.7 | — | 67.5 | 67.5 | ||||||||||||||||||
F-53
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): | |
Voluntary Retirement Program | ||
In accordance with certain amendments to the collective labor agreement, OTE had 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. Furthermore, for each voluntary retirement program that was implemented, based on the respective collective labor agreements, OTE was required to pay bonuses to the eligible employees that would participate to these programs. In this respect, an amount of approximately€28.9,€25.1 and€ nil was charged in 2004, 2005 and 2006, respectively and is included in “Charges for voluntary retirement program” in the accompanying consolidated statements of operations. These charges include approximately€7.1,€5.6 and€ nil for 2004, 2005 and 2006, respectively, to cover the contributions that OTE was obliged to pay to the Auxiliary pension fund and approximately€21.8,€19.5 and€ nil for 2004, 2005 and 2006, respectively for the total cost of bonuses. As of December 31, 2005 and 2006, the related reserve amounted to€13.6 and€7.2 respectively, of which€6.3 and€3.7 respectively, are included in “Accrued and other liabilities” while the remaining amounts are included in “Other long — term liabilities” in the accompanying consolidated balance sheets. | ||
On May 25, 2005 OTE signed a collective labor agreement with its employees, which determines the employment status of all new employees recruited by OTE, who will be employed on the basis of employment contracts subject to private labor laws. Effectiveness of this agreement is conditioned upon the enactment by the Greek Parliament of the relevant law for the voluntary retirement scheme. | ||
The enactment of Law 3371/2005 and the collective labor agreement signed between OTE and its employees on July 20, 2005, instituted the framework for the voluntary retirement scheme. Pursuant to this law and the collective labor agreement, employees who would complete the number of years of service required for retirement within the period from 2005 to 2012 would be entitled to early retirement with full pension and other benefits. Eligible employees were required to submit applications within three months from the law’s enactment (until October 14, 2005). | ||
Based on the information and data that were available on December 31, 2005, the estimated total cost of the Voluntary Retirement Program in terms of payments amounted to approximately€1.1 billion. This amount referred to 4,859 employees who submitted applications and included: |
• | The total cost of employer’s and employees’ contributions to TAP-OTE for the period required to the employees in order to be entitled to pension. | ||
• | The amount of pensions TAP OTE will be required to prepay for these employees. | ||
• | The total cost of employer’s and employees’ contributions to Auxiliary Fund for the period required to the employees in order to be entitled to pension. | ||
• | The amount of pensions the Auxiliary Fund will be required to prepay for these employees. | ||
• | The total cost of employees’ contributions to Auxiliary Fund for the Lump Sum benefit. | ||
• | The total cost of bonuses based on the collective labor agreement signed on July 20, 2005. | ||
• | The termination payments upon retirement of the employees (staff retirement indemnities). |
F-54
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): | |
Because of the periodical payments of the majority of the above-mentioned costs (payments through 2012), the nominal amounts of these payments were discounted to their present values, using a discount rate of 3%, which approximated the rate of the Greek Government bonds with an equal duration as that of the Voluntary Retirement Program. | ||
With the completion of the Voluntary Retirement Program on October 14, 2006, the number of the eligible employees that met the conditions and finally retired were 4,759. The cost of the Voluntary Retirement Program and the respective liability have been revised accordingly. | ||
The components of the estimated cost of the Voluntary Retirement Program according to the initial estimation in 2005 and the re-estimation in 2006 are presented in the table below: |
Category of obligation | Estimation 2005 | Estimation 2006 | ||||||
Total employer’s and employees’ contributions to TAP-OTE & Auxiliary Fund | 232.2 | 223.5 | ||||||
Total pensions from TAP-OTE & Auxiliary Fund | 576.4 | 547.4 | ||||||
Total bonuses based on the collective labor agreement | 55.0 | 55.0 | ||||||
Total termination payments upon retirement (staff retirement indemnities) | 242.7 | 239.0 | ||||||
Total nominal cost of the Program | 1,106.3 | 1,064.9 | ||||||
Effect of discounting at present values | (67.6 | ) | (62.8 | ) | ||||
Discounted present value of the total obligation | 1,038.7 | 1,002.1 | ||||||
Minus already established reserves for staff retirement indemnities | (124.2 | ) | (120.4 | ) | ||||
Cost of Voluntary Retirement Program | 914.5 | 881.7 | ||||||
Cost of earlier voluntary retirement plan during the 1st half of 2005 | 25.1 | 25.1 | ||||||
Total cost of the Voluntary Retirement Program | 939.6 | 906.8 | ||||||
The amount of€939.6 is included in Charges for Voluntary Retirement Program in the accompanying 2005 consolidated statement of operations. The revision of€32.8 to the estimated cost of the Voluntary Retirement Program, is included in the same line in the 2006 Income Statement. |
F-55
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
15. | RESERVES FOR PENSIONS, STAFF RETIREMENT INDEMNITIES AND OTHER BENEFITS (continued): | |
Based on the estimated period of payment, these obligations are classified as follows: |
December 31, | ||||||||
2005 | 2006 | |||||||
Reserve for Voluntary Retirement Program (Short-term portion) | 434.9 | 316.7 | ||||||
Reserve for Voluntary Retirement Program (Long-term portion) | 603.8 | 372.8 | ||||||
Total | 1,038.7 | 689.5 | ||||||
The movement of the reserve for the cost of Voluntary Retirement Program during the year 2006 is as follows: |
Balance at the beginning of the year | 1,038.7 | |||
Payments made during the year | (337.6 | ) | ||
Adjustment due to re-estimation of the program’s cost | (32.8 | ) | ||
Adjustment of discounted amount due to passage of time | 21.2 | |||
Balance at the end of year | 689.5 | |||
The following table shows the undiscounted benefit amount expected to be paid for each year under the Voluntary Retirement Program: |
Year | Amount | |||
2007 | 316.7 | |||
2008 | 170.7 | |||
2009 | 120.6 | |||
2010 | 75.7 | |||
2011 | 39.0 | |||
2012 | 8.4 |
Based on Law 3371/2005, the Greek State would contribute a 4% stake in OTE’s share capital to TAP-OTE for the portion of the total cost that relates to employer’s and employees’ contributions to TAP-OTE and to the amount of pensions TAP OTE will be required to prepay. This contribution was subject to EU approval. | ||
16. | SHARE CAPITAL: | |
As of December 31, 2004, OTE owned 1,108,910 shares representing 0.23% of its outstanding share capital, which amounted to€1,174.1, divided into 491,259,299 registered shares with a nominal value of€2.39 (two point thirty nine Euro) each. | ||
The extraordinary General Assembly of July 6, 2005, approved the cancellation of 676,420 shares representing approximately 0.14% of OTE’s outstanding share capital, as the period that these shares could be held by OTE had expired. Following such resolution, as of December 31, 2005, OTE owned 432,490 shares representing 0.09% of its outstanding share capital, which amounted to€1,172.5, divided into 490,582,879 registered shares with a nominal value of€2.39 (two point thirty nine Euro) each. | ||
The extraordinary General Assembly of July 31, 2006, approved the cancellation of 432,490 shares representing approximately 0.09% of OTE’s outstanding share capital, as the period that these shares could be held by OTE had expired. Following such resolution, as of December 31, 2006, OTE had no own shares and its outstanding share capital amounted to€1,171.5, divided into 490,150,389 registered shares with a nominal value of€2.39 (two point thirty nine Euro) each. |
F-56
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
17. | 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, 2005 and 2006, this reserve amounted to€256.7 and€283.3. This reserve cannot be distributed to shareholders. | ||
18. | DIVIDENDS: | |
Under Greek corporate law, each year companies are generally required to declare from their statutory profits under IFRS, 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. Dividends declared in the year 2004 amounted to€171.6, representing a dividend per share of€0.35 (zero point thirty-five Euro). The General Assemblies of June 16, 2005 and June 22, 2006 decided that no dividends would be declared in 2005 and 2006. For the year ended December 31, 2006, the statutory minimum dividend of€176.6 was recorded as liability and is included under “Dividends payable” in the accompanying 2006 consolidated balance sheet. | ||
19. | 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. The tax authorities disputed these decisions before the Council of State, which accepted the appeals filed by the tax authorities and ordered for the re-examination of this case by the Administrative Court of Appeal. By its decision in December 2005, Administrative Court of Appeal in Athens rejected OTE’s appeals and held OTE liable for approximately€11.9, which amount has already been paid. OTE appealed this decision to the Council of State to discharge any liability and its appeal is pending. | ||
(ii) | 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€21.0. Out of the sale proceeds,€5.9 was collected in cash and the balance of€15.1 in shares in Piraeus Bank S.A. based on their fair value at that date. The disposal of OTE Leasing had no material effect on the Group’s financial position or results of operations. As prescribed in the agreements signed for the sale of OTE Leasing, 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. |
F-57
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
19. | COMMITMENTS AND CONTINGENCIES (continued): |
(iii) | 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 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. 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 according to the Greek Civil Procedure Code on May 7, 2003, claiming an amount of approximately€254.2. The arbitration proceedings were completed in 2006 and the arbitration court ruled in favor of Alpha Digital Synthesis S.A. and ordered OTE to pay an amount of€13.0. OTE has appealed this decision before the Athens Court of Appeals. By its decision on November 21, 2006 the Athens Court of Appeals rejected OTE’s appeal. OTE is considering a further appeal to the Supreme Court. | ||
(iv) | 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 was heard on April 21, 2005 and the court judged that the case should be referred to arbitration. ERT has not yet submitted a request for arbitration. ERT has also filed a law suit against OTE before the Athens Multi Member Court of First Instance, claiming an amount of€1.5 for alleged damages incurred by it due to circuit cut. The hearing scheduled for February 1, 2007 was cancelled and rescheduled for March 13, 2008. | ||
(v) | 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 for alleged damages incurred by it due to loss of customers as a result of OTE’s allegedly discriminatory policy in favor of OTENET. The hearing, initially scheduled for April 19, 2007, has been suspended. Furthermore, Forthnet S.A. filed a lawsuit against OTE before the Athens Multi Member Court of First Instance, claiming approximately€4.1 in damages, due to suspension of its subscribers’ number portability. The hearing, which after certain suspensions was scheduled for May 3, 2006 has been suspended. | ||
(vi) | Greek Telecom S.A.:In 2004, Greek Telecom S.A. filed a lawsuit against OTE before the Athens Multi Member Court of First Instance, claiming approximately€45.4 in damages, due to alleged breach of contractual obligations arising out of disconnection of telecommunication services. The hearing was held on March 22, 2006 and the Court by its decision rejected Greek Telecom’s claim. | ||
(vii) | Telepassport S.A.:Telepassport S.A. filed a lawsuit against OTE before the Athens Multi Member Court of First Instance, claiming an aggregate amount of approximately€52.2 for alleged damages incurred by it as a result of OTE’s delay in delivering to it leased lines. The hearing, initially scheduled for June 8, 2005, has been suspended. |
F-58
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
19. | COMMITMENTS AND CONTINGENCIES (continued): |
(viii) | Boeing Satellite Systems, Inc. (“BSSI”):On September 2005, BSSI filed a Request for Arbitration against Hellas Sat breach of contract and seeking US $8 million in damages plus interest. In response, Hellas Sat has proffered various affirmative defenses and counterclaimed for over US $100 million in damages based on BSSI’s alleged fraud, anticipatory repudiation of contract and duress. The parties agreed to participate in a nonbinding mediation held on December 6, 2006 and executed a settlement agreement that same day. Under the terms of the agreement, Hellas Sat agreed to pay BSSI a total of US $4 million over two years in settlement of all claims asserted in the arbitration. | ||
(ix) | Teledome S.A.:Teledome S.A. filed lawsuits against OTE before the Athens Multi Member Court of First Instance, claiming an aggregate amount of approximately€8.1 for alleged damages incurred by it as a result of OTE’s delay in delivering to it leased lines and the application of non cost oriented interconnection charges by OTE. The hearings of the above lawsuits are scheduled in certain dates in 2007. Furthermore, Teledome S.A. filed lawsuits against OTE before the Athens Multi Member Court of First Instance, claiming approximately€10.8 in damages, due to suspension of its subscribers’ number portability and due to alleged breach of contractual obligations arising out of disconnection of telecommunication services. The hearings of these lawsuits are scheduled in certain dates in 2007 and 2008. | ||
(x) | Newsphone Hellas S.A.:Newsphone Hellas S.A. filed a lawsuit against OTE before the Athens Multi Member Court of First Instance, claiming an aggregate amount of approximately€7.2 for alleged damages incurred by it as a result of OTE’s refusal to include in its recorded message that directories information services, except from OTE, are provided by Newsphone also. The hearing was held on May 17, 2006 and the Court by its decision rejected Newsphone Hellas S.A.’s claim. | ||
(xi) | TELLAS S.A.:Tellas S.A. filed lawsuits against OTE before the Athens Multi Member Court of First Instance, claiming an aggregate amount of approximately€16.6 in damages due to suspension of its’ subscribers’ number portability. These cases were heard on May 2, 2007 and the decisions are pending. | ||
(xii) | LANNET S.A.:Lannet S.A filed a lawsuit against OTE before the Athens Multi Member Court of First Instance, claiming an amount of approximately€1.5 in damages due to suspension of its subscriber’s number portability. The hearing of the lawsuit was held on February 8, 2006 and the Court rejected the claim. | ||
(xiv) | Fasma Advertising Technical and Commercial S.A.:Fasma Advertising Technical and Commercial S.A. filed a lawsuit against OTE before the Athens Multi Member Court of First Instance, claiming an aggregate amount of€9.1 for breach of contract. The hearing is scheduled for 8 November 2007. |
F-59
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
19. | COMMITMENTS AND CONTINGENCIES (continued): |
(xv) | Franchise Agreements:OTE is involved in four disputes relating to franchise agreements for its retail telecommunications equipment outlets. Helias Koutsokostas & Company Limited Partnership filed a lawsuit against OTE claiming alleged damages in the amount of€7.9. The hearing initially scheduled for October 13, 2005 has been suspended and a new hearing is scheduled for February 21, 2008. In another franchise case, K. Prinianakis S.A. filed a lawsuit against OTE alleging€10.9 in damages. The hearing, which was scheduled for November 2, 2006, has been suspended and a new hearing is scheduled for November 15, 2007. In the third case, DEP INFO LTD has filed a lawsuit against OTE alleging€6.8 in damages. OTE has filed its own lawsuit against this company claiming€1.7 in damages. Both hearings were held on March 9, 2006 and the Court by its decisions rejected DEP INFO LTD’s lawsuit, while it accepted OTE’s lawsuit. In the fourth case, Infoshop S.A. filed a lawsuit against OTE claim in alleged damages in the amount of€7.0. A hearing scheduled for November 2, 2006 has been suspended, and a new hearing has is scheduled for November 15, 2007. | ||
(xvi) | Employees’ Claims:OTE’s employees have filed a number of lawsuits against OTE. | ||
(xvii) | Payphones Duties:From 1999 to 2006, the Municipality of Thessaloniki charged OTE with duties and penalties of an amount of approximately€13.0 for the installation and operation of payphones within the area of its responsibility. OTE strongly disputed the above assessments and had filed appeals before the Thessaloniki Administrative Court of First Instance and prepaid 40% of the above duties and penalties, amount that will be refunded to OTE if the outcome of that case will be favorable to the Company. The hearings for 2001 were held in the first and second instance and the courts accepted OTE’s appeals. | ||
(xviii) | 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. | ||
(xiv) | 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 in relation to litigations and claims, the outcomes of which are probable and can be reasonably estimated. It is not expected that the ultimate resolution of the remaining cases will have a material effect on the Group’s financial condition and results of operations. |
F-60
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
19. | COMMITMENTS AND CONTINGENCIES (continued): |
(b) | Commitments: |
(i) | Master Dealer Sales Channel:Cosmote’s master dealer sales channel consists of a network of commercial representatives and distributors. 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, semi-annual 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 which ranges from 5% 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 companies who were awarded licenses 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. | ||
(iii) | International Roaming:As of December 31, 2006, Cosmote had 410 roaming agreements with mobile telecommunications operators in 185 countries, of which 340 agreements in 165 countries were operational. These agreements provide that when one of Cosmote’s customers uses the services of a corresponding mobile network operator in another country, Cosmote is responsible for payment of charges for those services used in accordance with the corresponding mobile network operator’s tariff. Cosmote charges its customers according to the International Roaming Tariff Plan. Similarly, when a customer of another corresponding mobile operator uses Cosmote’s network, Cosmote charges the respective operator for the call at its international tariff. | ||
(iv) | Capital Commitments:The Group has a number of outstanding commitments on supplier contracts and contractual agreements, which at December 31, 2006, approximated€634.6. |
F-61
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
19. | COMMITMENTS AND CONTINGENCIES (continued): |
(v) | Operating Commitments:As of December 31, 2006, 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. Total rental expense, which is recognized on a straight line basis over the lease term, amounted to€56.7,€77.9 and€86.3 in 2004, 2005 and 2006, respectively, and is included in other operating expenses in the accompanying consolidated statements of operations. Future annual payments under these agreements are as follows: |
Year | Amount | |||
2007 | 52.1 | |||
2008 | 49.1 | |||
2009 | 45.7 | |||
2010 | 44.3 | |||
2011 | 47.3 | |||
Thereafter | 247.0 | |||
485.5 | ||||
(c) | Contingencies and significant risks: |
(i) | Hellas Sat:Hellas Sat provides space segment capacity, telecommunication and broadcast services through its own satellite system. For this purpose, based on concession agreements signed with the Greek State and the Cypriot State in 2001, an exclusive special operating licence was granted to the Group for a period of twenty years, for the access and use of a geostationary orbital slot of 39 degrees East and the associated radiofrequencies, through the construction, launch, operation and commercial utilization of a satellite network consisting of at least two satellites. The first satellite was successfully launched into orbit on May 14, 2003. Under the concession agreements, the Group undertook the obligation to provide free of charge three transmitters to the Greek State on an ongoing basis and free of charge, two upon the launch of the first satellite and the third upon the launch of the second satellite, as well as a lump sum payment of€1 to the Greek State and annual rental expenses to the Cypriot State in an aggregate of approximately€9.0 (€7.4 outstanding as of December 31, 2006) for the twenty years period. The Group has made available the first two transponders to the Greek State. The second satellite has not yet been launched nor has the third transmitter been made available to the Greek State. The Group is currently collaborating with the Greek State to complete and rectify the concession agreement and amend the special operating licence, in order to reflect developments in Hellas Sat’s business since 2001. In addition, the Group is currently in negotiations with the Republic of Cyprus with respect to the timing and manner of payment of the outstanding amount of€7.4 described above. As negotiations are of a fiscal nature, Hellas Sat does not expect their outcome to affect the validity or scope of its license. | ||
(ii) | Armentel:Under Armentel’s sale agreement, OTE will be liable to Vimpel-Communications with respect to liabilities arising with respect to certain warranties provided in that agreement, for a total amount of up to 20% of the purchase price for a period of up to one year following the completion of the disposal. |
F-62
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
20. | SHARE-BASED AWARDS: | |
Cosmote has seven, 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. | ||
(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€9.16 (nine point sixteen Euro). 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 precedents 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 after 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, based on 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 twenty (20) days following the increase of capital. |
F-63
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
20. | SHARE-BASED AWARDS (continued): |
(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 the First Plan was established. | ||
(vi) | Amendment:The shareholders in general meetings shall have the exclusive right to amend, modify, suspend or terminate the First Plan. | ||
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 Euro) at the grant date. | |||
Second Plan | |||
The second plan (“the Second 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 Cosmote 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 Euro) 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”) was approved on October 24, 2002, by Cosmote’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 Cosmote at an exercise price which is the average closing price of the Cosmote’s shares for the month preceding the grant of 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 Euro) at the grant date. Of the authorized and issued options rights, 833,765 options are additional rights granted to eligible employees under the First and Second Plans. The terms of the Third Plan are the same as those of the First and Second Plans. |
F-64
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
20. | SHARE-BASED AWARDS (continued): |
Fourth Plan The fourth plan (“the Fourth Plan”) was approved on October 23, 2003, by Cosmote’s Board of Directors. Under this plan, the Board of Directors authorized and issued 1,313,120 option rights. Options were granted to eligible employees in respect of shares of Cosmote at an exercise price which is the average closing price of the Cosmote’s shares for the month preceding the grant of options (i.e. September 2003), determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to€10.23 (ten point twenty three Euro) at the grant date. Of the authorized and issued options rights, 1,009,340 options are considered a new plan with additional rights granted to eligible employees under the First, Second and Third Plans. The terms of the Fourth Plan are the same as those of the First, Second and Third Plans. | |||
Fifth Plan | |||
The fifth plan (“the Fifth Plan”) was approved on October 21, 2004, by Cosmote’s Board of Directors. Under this plan, the Board of Directors authorized and issued 1,172,260 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 the Cosmote’s shares for the month preceding the grant of options (i.e. September 2004), determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to€13.46 (thirteen point forty six Euro) at the grant date. Of the authorized and issued option rights, 900,210 options are considered a new plan with additional rights granted to eligible employees under the First, Second, Third and Fourth Plans. The terms of the Fifth Plan are the same as those of the First, Second, Third and Forth Plans. | |||
Sixth Plan | |||
The sixth plan (“the Sixth Plan”) was approved on October 27, 2005, by Cosmote’s Board of Directors. Under this plan, the Board of Directors authorized and issued 1,282,020 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 the Cosmote’s shares for the month preceding the grant of options (i.e. September 2005), determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to€15.95 (fifteen point ninenty five Euro) at the grant date. Of the authorized and issued option rights, 898,230 options are considered a new plan with additional rights granted to eligible employees under the First, Second, Third, Fourth and Fifth Plans. The terms of the Sixth Plan are the same as those of the First, Second, Third, Forth and Fifth Plans. | |||
Seventh Plan | |||
The seventh plan (“the Seventh Plan”) was approved on October 30, 2006, by Cosmote’s Board of Directors. Under this plan, the Board of Directors authorized and issued 1,079,580 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 the Cosmote’s shares for the month preceding the grant of options (i.e. September 2006), determined by reference to the Daily Bulletin of the Athens Stock Exchange, equal to€18.84 (eighteen point eighty four Euro) at the grant date. Of the authorized and issued option rights, 940,680 options are considered a new plan with additional rights granted to eligible employees under the First, Second, Third, Fourth, fifth and Sixth Plans. The terms of the Seventh Plan are the same as those of the First, Second, Third, Forth, Fifth and Sixth Plans. |
F-65
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
20. | SHARE-BASED AWARDS (continued): |
(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. |
Number of shares | Weighted average | |||||||
subject to option | exercise price (Euro) | |||||||
Outstanding at January 1, 2004 | 4,676,785 | 9.36 | ||||||
Granted during the period | 1,172,260 | 13.46 | ||||||
Exercised during the period | (1,049,130 | ) | 8.34 | |||||
Forfeited during the period | (196,100 | ) | 9.52 | |||||
Outstanding at December 31, 2004 | 4,603,815 | 10.63 | ||||||
Exercisable at December 31, 2004 | 1,301,071 | 9.67 | ||||||
Outstanding at January 1, 2005 | 4,603,815 | 10.63 | ||||||
Granted during the period | 1,209,390 | 15.95 | ||||||
Exercised during the period | (1,288,250 | ) | 9.66 | |||||
Forfeited during the period | (128,300 | ) | 11.34 | |||||
Expired during the period | (51,070 | ) | 9.78 | |||||
Outstanding at December 31, 2005 | 4,345,585 | 12.37 | ||||||
Exercisable at December 31, 2005 | 1,093,508 | 9.41 | ||||||
Outstanding at January 1, 2006 | 4,345,585 | 12.37 | ||||||
Granted during the period | 1,079,580 | 18.84 | ||||||
Exercised during the period | (1,874,939 | ) | 11.10 | |||||
Forfeited during the period | (352,420 | ) | 13.15 | |||||
Expired during the period | (210,356 | ) | 10.02 | |||||
Outstanding at December 31, 2006 | 2,987,450 | 16.30 | ||||||
Exercisable at December 31, 2006 | 869,069 | 14.46 |
F-66
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
20. | SHARE-BASED AWARDS (continued): | |
The weighted average fair value of options was estimated using the Black-Scholes stock option pricing model based upon the following assumptions: |
First Plan (2000): | Dividend yield of 0.5%, annual standard deviation (volatility) of 37.00%, risk free interest rate of 5.00% and expected life of three years. | |
Second Plan (2001): | Dividend yield of 1.5%, annual standard deviation (volatility) of 28.80%, risk free interest rate of 5.00% and expected life of three years. | |
Third Plan (2002): | Dividend yield of 3.0%, annual standard deviation (volatility) of 25.20%, risk free interest rate of 5.00% and expected life of three years. | |
Fourth Plan (2003): | Dividend yield of 3.8%, annual standard deviation (volatility) of 24.30%, risk free interest rate of 5.00% and expected life of three years. | |
Fifth Plan (2004): | Dividend yield of 10.6%, annual standard deviation (volatility) of 23.70%, risk free interest rate of 5.00% and expected life of three years. | |
Sixth Plan (2005): | Dividend yield of 10.6%, annual standard deviation (volatility) of 22.10%, risk free interest rate of 5.00% and expected life of three years. | |
Seventh Plan (2006): | Dividend yield of 3.37%, annual standard deviation (volatility) of 24.79%, risk free interest rate of 3.97% and expected life of three years. |
All options granted in the year ended December 31, 2006, had an exercise price in excess of the market price at grant date. | ||
The following table provides details of all options outstanding as at December 31, 2006: |
Outstanding | Exercisable | |||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||
Weighted Average | Remaining | Exercise Price | ||||||||||||||||||
Plan | Number | Exercise Price (€) | Contractual Life | Number | (€) | |||||||||||||||
First | — | 8.24 | — | — | 8.24 | |||||||||||||||
Second | — | 9.78 | — | — | 9.78 | |||||||||||||||
Third | — | 8.96 | — | — | 8.96 | |||||||||||||||
Fourth | — | 10.23 | — | — | 10.23 | |||||||||||||||
Fifth | 828,400 | 13.46 | 1.82 | 521,305 | 13.46 | |||||||||||||||
Sixth | 1,079,470 | 15.95 | 2.82 | 347,764 | 15.95 | |||||||||||||||
Seventh | 1,079,580 | 18.84 | 3.82 | — | 18.84 | |||||||||||||||
Total | 2,987,450 | 16.30 | 869,069 | 14.46 | ||||||||||||||||
As a result of the intrinsic values of the options present at the grant dates, compensation expense recorded for 2004 and 2005 based on the straight-line method, amounted to€1.5 and€1.5, respectively. |
F-67
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
21. | REPORTABLE SEGMENTS: | |
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, Cosmote and Romtelecom, 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. Romtelecom is the public switch network operator in the Republic of Romania. 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 and Romtelecom, and its revenues mainly consist of income from domestic telephony, international telephony, mobile telephony, internet services, directories and sales of telecommunication equipment. | ||
Intersegment revenues mainly reflect intercompany transactions between the Group’s entities included in separate segments. Intercompany transactions between the Group’s entities included in the “all other” category, are not included in adjustments and eliminations. Adjustments and eliminations in segments assets mainly reflect intercompany loans between the segments and intercompany assets and liabilities. | ||
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. | ||
Segment information and reconciliation to the Group’s consolidated figures are as follows: |
Year ended | Adjustments & | |||||||||||||||||||||||||||
December 31, 2006 | OTE | Cosmote | Romtelecom | All Other | Totals | Eliminations | Consolidated | |||||||||||||||||||||
Revenues from external customers | 2,488.7 | 1,411.5 | 873.4 | 1,113.8 | 5,887.4 | — | 5,887.4 | |||||||||||||||||||||
Intersegment Revenues | 225.8 | 219.1 | 17.6 | 209.4 | 671.9 | (671.9 | ) | — | ||||||||||||||||||||
Interest income | 45.7 | 15.3 | 13.5 | 137.4 | 211.9 | (141.1 | ) | 70.8 | ||||||||||||||||||||
Interest expense | (130.5 | ) | (56.8 | ) | (8.5 | ) | (156.7 | ) | (352.5 | ) | 143.6 | (208.9 | ) | |||||||||||||||
Depreciation and Amortization | (528.0 | ) | (171.5 | ) | (182.7 | ) | (204.2 | ) | (1,086.4 | ) | (7.1 | ) | (1,093.5 | ) | ||||||||||||||
Earnings/(Losses) from investments | 22.9 | — | — | — | 22.9 | — | 22.9 | |||||||||||||||||||||
Income tax (expense) / benefit | (187.8 | ) | (143.1 | ) | (22.2 | ) | (88.4 | ) | (441.5 | ) | — | (441.5 | ) | |||||||||||||||
Operating income | 251.7 | 530.6 | 156.2 | 208.3 | 1,146.8 | (84.7 | ) | 1,062.1 | ||||||||||||||||||||
Net income | 476.3 | 344.7 | 120.6 | 105.4 | 1,047.0 | (538.0 | ) | 509.0 | ||||||||||||||||||||
Segment assets | 6,796.8 | 4,185.8 | 2,254.3 | 6,337.8 | 19,574.7 | (6,702.9 | ) | 12,871.8 | ||||||||||||||||||||
Expenditures for | ||||||||||||||||||||||||||||
segment assets | 225.7 | 140.6 | 208.1 | 388.0 | 962.4 | — | 962.4 |
F-68
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
21. | REPORTABLE SEGMENTS (continued): |
Year ended | Adjustments & | |||||||||||||||||||||||||||
December 31, 2005 | OTE | Cosmote | Romtelecom | All Other | Totals | Eliminations | Consolidated | |||||||||||||||||||||
Revenues from external customers | 2,509.5 | 1,338.6 | 917.1 | 705.8 | 5,471.0 | — | 5,471.0 | |||||||||||||||||||||
Intersegment Revenues | 197.5 | 178.9 | 8.6 | 141.1 | 526.1 | (526.1 | ) | — | ||||||||||||||||||||
Interest income | 39.2 | 4.7 | 1.9 | 163.8 | 209.6 | (155.7 | ) | 53.9 | ||||||||||||||||||||
Interest expense | (130.1 | ) | (17.8 | ) | (14.7 | ) | (158.5 | ) | (321.1 | ) | 156.6 | (164.5 | ) | |||||||||||||||
Depreciation and Amortization | (542.6 | ) | (169.8 | ) | (190.0 | ) | (154.7 | ) | (1,057.1 | ) | 3.2 | (1,053.9 | ) | |||||||||||||||
Earnings/(Losses) from investments | 20.0 | — | — | — | 20.0 | — | 20.0 | |||||||||||||||||||||
Income tax (expense) / benefit | 195.3 | (148.6 | ) | (12.8 | ) | (66.4 | ) | (32.5 | ) | — | (32.5 | ) | ||||||||||||||||
Operating income/(loss) | (822.5 | ) | 469.6 | 174.5 | 176.4 | (2.0 | ) | (0.4 | ) | (2.4 | ) | |||||||||||||||||
Net income / (loss) | (236.5 | ) | 315.6 | 256.1 | 106.3 | 441.5 | (733.4 | ) | (291.9 | ) | ||||||||||||||||||
Segment assets | 7,227.0 | 2,169.9 | 2,138.6 | 4,886.2 | 16,421.7 | (5,552.8 | ) | 10,868.9 | ||||||||||||||||||||
Expenditures for segment assets | 209.5 | 110.7 | 92.0 | 268.0 | 680.2 | — | 680.2 |
Year ended | Adjustments & | |||||||||||||||||||||||||||
December 31, 2004 | OTE | Cosmote | Romtelecom | All Other | Totals | Eliminations | Consolidated | |||||||||||||||||||||
Revenues from external customers | 2,558.4 | 1,258.6 | 817.9 | 549.1 | 5,184.0 | — | 5,184.0 | |||||||||||||||||||||
Intersegment Revenues | 194.9 | 204.1 | 22.8 | 115.4 | 537.2 | (537.2 | ) | — | ||||||||||||||||||||
Interest income | 52.8 | 5.0 | 9.8 | 137.2 | 204.8 | (157.2 | ) | 47.6 | ||||||||||||||||||||
Interest expense | (127.8 | ) | (10.0 | ) | (17.0 | ) | (165.7 | ) | (320.5 | ) | 157.2 | (163.3 | ) | |||||||||||||||
Depreciation and Amortization | (570.3 | ) | (168.0 | ) | (161.3 | ) | (126.3 | ) | (1,025.9 | ) | 2.8 | (1,023.1 | ) | |||||||||||||||
Earnings/(Losses) from investments | 6.9 | — | — | (0.2 | ) | 6.7 | — | 6.7 | ||||||||||||||||||||
Income tax (expense) / benefit | (27.0 | ) | (153.6 | ) | 93.7 | (33.9 | ) | (120.8 | ) | — | (120.8 | ) | ||||||||||||||||
Operating income | 31.5 | 437.1 | 132.4 | 44.5 | 645.5 | (7.6 | ) | 637.9 | ||||||||||||||||||||
Net income | (24.0 | ) | 276.9 | 230.1 | (123.3 | ) | 359.7 | (188.4 | ) | 171.3 | ||||||||||||||||||
Segment assets | 7,301.3 | 1,529.6 | 2,011.0 | 4,561.8 | 15,403.7 | (5,141.3 | ) | 10,262.4 | ||||||||||||||||||||
Expenditures for segment assets | 300.6 | 207.4 | 146.0 | 189.6 | 843.6 | — | 843.6 |
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, 2006: |
Revenues | Long-lived assets | |||||||||||||||||||||||
Country | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | ||||||||||||||||||
Greece | 3,944.8 | 3,988.4 | 4,239.4 | 4,790.4 | 4,403.6 | 5,560.8 | ||||||||||||||||||
Other countries | 1,239.2 | 1,482.6 | 1,648.0 | 2,520.9 | 2,849.9 | 2,958.2 | ||||||||||||||||||
5,184.0 | 5,471.0 | 5,887.4 | 7,311.3 | 7,253.5 | 8,519.0 | |||||||||||||||||||
Major Customers | ||
Revenues generated from State Entities and Organizations (Greek State) amounted to approximately 5% — 7% of total revenues for each of the three years in the period ended December 31, 2006. |
F-69
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
22. | REVENUES: | |
Revenues in the accompanying consolidated statements of operations consist of income from: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(i) Domestic Telephony | ||||||||||||
• Monthly network service fees | 849.2 | 950.1 | 991.8 | |||||||||
• Local and long-distance calls | ||||||||||||
— Fixed to fixed | 785.7 | 759.1 | 702.6 | |||||||||
— Fixed to mobile | 533.3 | 515.7 | 470.2 | |||||||||
1,319.0 | 1,274.8 | 1,172.8 | ||||||||||
• Other | 94.7 | 83.2 | 92.1 | |||||||||
2,262.9 | 2,308.1 | 2,256.7 | ||||||||||
(ii) International Telephony | ||||||||||||
• International traffic | 169.0 | 150.5 | 132.3 | |||||||||
• Payments from international operators | 169.9 | 202.4 | 172.7 | |||||||||
• Payments from mobile operators | 37.7 | 38.1 | 41.9 | |||||||||
376.6 | 391.0 | 346.9 | ||||||||||
(iii) Mobile telephony | 1,555.4 | 1,756.7 | 1,975.8 | |||||||||
(iv) Other revenues | ||||||||||||
• Prepaid cards | 147.2 | 126.6 | 100.6 | |||||||||
• Directories | 54.1 | 56.1 | 58.0 | |||||||||
• Radio communications | 18.9 | 24.1 | 25.2 | |||||||||
• Audiotex | 72.2 | 25.9 | 17.9 | |||||||||
• Telex and telegraphy | 6.5 | 3.6 | 3.6 | |||||||||
• Leased lines and Data communications | 147.1 | 211.4 | 214.0 | |||||||||
• Integrated Services Digital Network | 121.2 | 141.4 | 158.9 | |||||||||
• Sales of telecommunication equipment | 117.3 | 107.7 | 341.6 | |||||||||
• Internet services | 61.1 | 81.0 | 133.1 | |||||||||
• Asynchronous Transfer Mode | 26.0 | 23.1 | 32.1 | |||||||||
• Services rendered | 85.0 | 72.3 | 74.9 | |||||||||
• Interconnection charges | 84.3 | 101.7 | 96.8 | |||||||||
• Miscellaneous | 48.2 | 40.3 | 51.3 | |||||||||
989.1 | 1,015.2 | 1,308.0 | ||||||||||
Total revenues | 5,184.0 | 5,471.0 | 5,887.4 | |||||||||
F-70
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
23. | OTHER OPERATING EXPENSES: | |
Other operating expenses in the accompanying consolidated statements of operations consist of: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Services and fees | 155.1 | 155.9 | 173.7 | |||||||||
Cost of telecommunication materials, repairs and maintenance | 222.8 | 206.8 | 198.0 | |||||||||
Advertising costs | 142.0 | 133.3 | 164.0 | |||||||||
Utilities | 81.1 | 101.0 | 98.0 | |||||||||
Provision for doubtful accounts | 137.6 | 110.4 | 97.9 | |||||||||
Provision for litigation and claims | 21.1 | 47.8 | 35.9 | |||||||||
Travel costs | 15.4 | 17.0 | 17.6 | |||||||||
Commissions to independent distributors | 137.2 | 166.9 | 203.0 | |||||||||
Payments to audiotex providers | 60.5 | 21.7 | 17.1 | |||||||||
Rent | 56.7 | 77.9 | 86.3 | |||||||||
Taxes, other than income taxes | 41.5 | 30.1 | 47.1 | |||||||||
Write down of Olympic Games’ projects | 32.0 | — | — | |||||||||
Transportation | 7.0 | 7.0 | 9.6 | |||||||||
Other | 104.7 | 40.8 | 39.1 | |||||||||
Total other operating expenses | 1,214.7 | 1,116.6 | 1,187.3 | |||||||||
24. | GAIN ON SALE OF INVESTMENTS: | |
The gain on sale of investment is analysed as follows: |
Year ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Gain on sale of Armentel [See Note 1 (g)] | — | — | 164.0 | |||||||||
Gain on sale of satellite organizations [See Note 6(b)] | 1.7 | 13.7 | — | |||||||||
Gain on sale of available-for-sale marketable securities (See Note 5) | — | 11.4 | 10.3 | |||||||||
Gain from issuance of Cosmote’s shares in excess of carrying value [See Note 1(a)] | 4.7 | 5.4 | 5.9 | |||||||||
Other | — | 0.2 | — | |||||||||
6.4 | 30.7 | 180.2 | ||||||||||
F-71
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
25. | 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 equity securities are carried at their fair value based on quoted market prices. The fair value of the interest rate swaps is based on available market information. The Group held only fair value hedges during 2005 and 2006. 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, 2005 | December 31, 2006 | |||||||||||||||
Carrying amount | Fair Value | Carrying amount | Fair Value | |||||||||||||
Available-for-sale marketable equity securities | 32.9 | 32.9 | 36.4 | 36.4 | ||||||||||||
Long term debt at floating interest rates | 893.2 | 893.2 | 1,165.9 | 1,165.9 | ||||||||||||
Long term debt at fixed interest rates | 2,540.7 | 2,633.8 | 3,409.6 | 3,371.6 | ||||||||||||
3,433.9 | 3,527.0 | 4,575.5 | 4,537.5 | |||||||||||||
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. | ||
26. | ADOPTION OF STAFF ACCOUNTING BULLETIN No. 108 | |
Effective January 1, 2006, the Group adopted SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 requires a dual approach for quantifying misstatements using both a method that quantifies a misstatement based on the amount of misstatement originating in the current year statement of operations (rollover method), as well as a method that quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet (iron curtain method). | ||
Prior to the adoption of SAB No. 108, the Group quantified any misstatements in its consolidated financial statements using the statement of operations method in addition to evaluating qualitative characteristics. As this method focuses solely on the statement of operations, this can lead to the accumulation of misstatements in the balance sheet that may become material if recorded in a particular period. | ||
The adoption of SAB No. 108 did not have an impact on the Group’s financial position or results of operations. |
F-72
Table of Contents
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in millions of Euro, unless otherwise stated)
27. | SUBSEQUENT EVENTS: |
(i) | On May 10, 2007, the European Commission announced that it had concluded that the Greek government’s planned contribution to OTE’s Voluntary Retirement Program was compatible with EC Treaty state aid rules. Management expects the potential impact of this decision on OTE’s financial statements to be positive, but its extent will depend on the timing and procedures adopted by the Greek government to implement this decision. The Greek State’s total contribution to TAP-OTE, according to the same decision, shall not exceed the amount of€390.4. | ||
(ii) | On February 28, 2007, OTE signed a collective labor agreement with OME-OTE, according to which, eligible employees will be entitled to benefits in order to retire up to December 30, 2007. The deadline for the applications’ submission on behalf of the employees expired on March 31, 2007 and can not be recalled. The relative total cost was determined to€22.1 and will be included in 2007 consolidated statements of operations. | ||
(iii) | In connection with the acquisition of Germanos (See Note 1(f)), on January 15, 2007, Cosmoholding Cyprus issued to Mr. Panos Germanos 10% of its Class B shares with a nominal value of€100 (one hundred) per share for a cash consideration of€144.5. These shares are mandatorily redeemable on December 31, 2009 by Cosmoholding Cyprus with an option granted to Mr. Panos Germanos to extend the option to December 31, 2011. The shares are redeemable at the purchase price plus interest (six month Euribor). In addition, Mr. Panos Germanos would receive an annual bonus if certain financial targets met. These Class B shares will be recorded as liability since they are mandatorily redeemable and the bonus will be accrued as compensation cost when there is a probability that it will be earned. | ||
(iv) | On February 9, 2007, based on Cosmoholding Cyprus’ requirement, Germanos’ Extraordinary General Assembly approved the submission of application to the Hellenic Capital Market Commission for the delisting of Germanos shares from Athens Stock Exchange. The above application was approved on March 9, 2007. On April 10, 2007, Cosmoholding Cyprus’ squeeze-out of the remaining shares of Germanos was completed. | ||
(v) | On February 6, 2007, the Group through its subsidiary OTE PLC fully repaid the outstanding balance of the Eurobond 1,100, with 7 year duration, fixed-rate 6.125% of€491.6. | ||
(vi) | In April 2007, OTE acquired a 0.73% stake in the share capital of OTEnet, owned by Athens University of Business and Economics against the amount of€1.0 increasing its total interest in its subsidiary to 95.32%. | ||
(vii) | In May 2007, OTE announced its intention to consider the possibility to sale InfOTE, a wholly owned subsidiary providing directory and information services. Furthermore, in May 2007 OTE announced its intention to merge its subsidiary OTEnet, through the integration of OTEnet’s business activities to OTE. |
F-73