“Abbreviated” proceeding no. 273/2001, in relation to which, on September 24, 2002, we and Telefónica de España, S.A. appeared before Central Instruction Court no. 1 filing a criminal suit (alleging a crime of bankruptcy) against the directors of Sintel and Mastec Internacional, S.A., as parties suffering damages. Such companies have been entitled to appear as parties to the proceeding.
Preliminary proceeding no. 362/2002, which was commenced on October 23, 2002, by Central Instruction Court no. 1 for a possible extortion offense allegedly committed by the Board of Directors of Telefónica, S.A. Such proceeding has been joined to the aforementioned no. 273/2001. Following such joinder, on April 22, 2004, we were notified of a decision denying the filing of proceedings we requested on June 6, 2003, and ruling the court proceeding must continue. Thus far, no charges have been brought against us.
On June 29, 2004, we were notified of an enlargement of this criminal suit filed by the ex-employees of Sintel, which alleged Telefónica, S.A. has committed a crime of bankruptcy. On July 4, 2004 and August 5, 2004, Telefónica requested its rejection. At present, the judge has not ruled about the enlargement of this criminal suit.
| | Collective lawsuits filed by stockholders of Terra in the United States, in connection with the tender offer by us for Terra Networks, S.A. |
On May 29, 2003, two class actions were filed with the Supreme Court of New York State by stockholders of Terra Networks, S.A. against us, Terra Networks, S.A. and certain former and current directors of Terra Networks, S.A.
These actions are based on the claim that the price offered by us to the stockholders of Terra Networks, S.A. was not in keeping with the intrinsic value of the shares of that company, and seek to have the tender offer revoked or, in the alternative, to have damages awarded to them.
It should be noted that since the filing of the complaints, the related proceedings have remained inactive.
On June 21, 2003, a consumer association (ADICAE) filed a criminal lawsuit against Terra Networks, S.A., Telefónica, S.A. and against certain of our directors and directors of Terra Networks, S.A. On April 13, 2004, the Central Instruction Court superseded this lawsuit and directed the complainants to provide a €100,000 deposit (bond) as a prerequisite to file an appeal.
On April 16, 2004, ADICAE objected to the decision that required such deposit. The Central Instruction Court rejected the objection filed by ADICAE but the National Appellate Court admitted this appeal and reduced the deposit to €10,000. Subsequently, ADICAE paid such deposit and filed an appeal challenging the resolution of April 13, 2004. This appeal was rejected by the National Appellate Court. As a result, the proceeding has ended.
| | Appeal for judicial review no. 6461/03 filed at the National Appellate Court by the World Association of Stockholders of Terra Networks, S.A. (ACCTER) against the administrative decision made by the Spanish National Securities Market Commission (CNMV) to authorize the tender offer by us for Terra Networks, S.A. shares |
ACCTER filed an appeal for judicial review against the decision of the CNMV to authorize the tender offer made to Terra Networks, S.A. stockholders on June 19, 2003.
We have filed an application, admitted for consideration, to appear in the proceeding as an intervening nonparty to defend the lawfulness of the decision by the CNMV.
On March 8, 2005, ACCTER filed an enlargement of its initial appeal as a consequence of the merger between Telefónica, S.A. and Terra Networks, S.A.
Telefónica, S.A. and the Government Legal Service have filed responses against this enlargement of ACCTER’s initial appeal.
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On February 27, 2006, we were notified that the National Appellate Court rejected this appeal and confirmed CNMV’s decision.
On March 22, 2006, we were notified that ACCTER has filed an appeal of the National Appellate Court’s decision before the High Court.
| | Class action lawsuit filed by a stockholder of Terra Networks in the U.S. in connection with the merger between Telefónica, S.A. Terra Networks, S.A. |
On February 22, 2005, a class action lawsuit was filed with the Supreme Court of the State of New York County of Westchester by an owner of ADSs of Terra Networks, S.A. against Telefónica, S.A., Terra Networks, S.A. and certain former and current directors of Terra Networks, S.A. This action was based, among other things, on the claim that the price offered by us to the stockholders of Terra Networks, S.A. did not reflect the intrinsic value of the shares of Terra Networks. On April 28, 2005, the judge dismissed this lawsuit.
| | A proceeding contesting certain resolutions adopted by the Annual Stockholders’ Meeting of Terra Networks, S.A. on June 2, 2005 |
On June 30, 2005, the World Association of Stockholders of Terra Networks, S.A. (ACCTER) filed a complaint contesting the resolution of merger adopted by Terra Networks, S.A. Annual Stockholders’ Meeting held on June 2, 2005, based on the purported contravention of Article 60.4 of the Spanish Securities Market Law. Telefónica, S.A. has been duly served. On December 21, 2005, Telefónica, S.A. filed its response.
| | A proceeding filed by JAZZ TELECOM, S.A.U. (JAZZTEL) against Telefónica de España |
At the end of 2005, Jazztel filed several lawsuits regarding to the Local Loop Offer that was approved by the Telecommunications Market Commission.
In one of these lawsuits, Jazztel is claiming damages in an amount of €337,360,000 allegedly caused by Telefónica de España’s delay in carrying out the agreements signed in relation to the Local Loop Offer. On February, 3, 2006, Telefónica de España filed its response. This lawsuit is being adjudicated by the First Instance Court of Madrid Nº 54.
At the same time, Jazztel Public Limited Company, a holding company, filed another lawsuit against all members of Telefónica, S.A.’s and Telefónica de España, S.A.U.’s boards of directors based on the alleged breach of the Local Loop Offer by Telefónica de España. In this complaint Jazztel is seeking damages in the amount of €456,530,000. On March 8, 2006, Telefónica de España, S.A.U. filed its response. This lawsuit is being adjudicated by the Commercial Court of Madrid Nº 1.
The other lawsuit filed by Jazztel is based on alleged unfair competition on the part of Telefónica de España, S.A.U. regarding the Local Loop Offer. Telefónica de España has filed a motion to dismiss for lack of jurisdiction. This lawsuit is being prosecuted by Commercial Court of Madrid Nº 4.
Regulatory Sanctions
| | Spanish Competition Court’s resolution dated March 8, 2000 |
On March 8, 2000, the Spanish Competition Court imposed on Telefónica de España a fine amounting to €8,414,169.46 for violating Article 6 of the Spanish Competition Law 16/89 (Ley 16/89 de Defensa de la Competencia) and of Article 82 of the EC Treaty, finding there to have been practices in abuse of dominant position by Telefónica de España in the launching of the advertising campaign “Planes Claros”.
On September 22, 2003, Telefónica de España filed a contentious-administrative appeal before the Spanish Court “Audiencia Nacional” against such resolution. This appeal was partially admitted on the grounds that the Spanish Competition Court’s resolution was contrary to the law regarding the proportionality of the sanction imposed, and the fine was reduced to €901,518.16.
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Telefónica de España, the State lawyer, and the co-plaintiff, Retevisión, filed a final appeal before the Spanish Supreme Court (Recurso de Casación) against this judgment. Retevisión later withdrew its appeal.
At present, the court has yet to announce the date on which it will issue its ruling.
| | Telecommunications Market Commission’s resolution dated July 23, 2002 |
On July 23, 2002, the Telecommunications Market Commission imposed a fine amounting to €18 million on Telefónica de España for infringement of the “Closed User Group” regulation, as interpreted by the Telecommunications Market Commission.
On July 31, 2002, Telefónica de España filed a contentious-administrative appeal to the Spanish Court “Audiencia Nacional” against this sanction.
On July 8, 2004, the Appeals Court notified Telefónica de España that it had dismissed its appeal. On October 18, 2004, Telefónica de España filed a final appeal (Recurso de Casación) against the Court’s decision before the Spanish Supreme Court.
| | Telecommunications Market Commission’s resolution dated October 24, 2002 |
On October 24, 2002, the Telecommunications Market Commission imposed a fine amounting to €13.5 million on Telefónica de España for breach of its obligations relating to voice capacity and data interconnection.
On February 10, 2003, Telefónica de España filed a contentious-administrative appeal to the Spanish Court “Audiencia Nacional” against this sanction. On June 17, 2005, the Appeals Court notified Telefónica de España that it had dismissed its appeal. On October 24, 2005, Telefónica de España filed the correspondent final appeal (Recurso de Casación) against the Court’s decision. At present the court has yet to announce the date upon which it will issue its ruling.
| | Telecommunications Market Commission’s resolution dated July 10, 2003 |
On July 10, 2003, the Telecommunications Market Commission imposed a fine amounting to €8 million on Telefónica de España for infringement of the Telecommunications Market Commission’s resolution relating to the prices applied by Telefónica de España to Vic Telehome, S.A.
On September 10, 2003, Telefónica de España lodged a contentious-administrative appeal to the Spanish Court “Audiencia Nacional” against this sanction. A ruling in this matter is expected on April 19, 2006.
| | Spanish Competition Court’s resolution dated April 1, 2004 |
On April 1, 2004, the Spanish Competition Court imposed a fine amounting to €57 million on Telefónica de España for infringement of Article 6 of the Spanish Competition Law 16/89 (Ley 16/89 de Defensa de la Competencia) and of Article 82 of the EC Treaty, finding that we had abused our dominant position by making conditional the provision of certain supplementary services to customers to the inexistence of carrier pre-selection and by launching unfair advertising campaigns that misled customers and denigrated competitors.
On April 16, 2004, Telefónica de España filed a contentious-administrative appeal to the Spanish Court “Audiencia Nacional” against this sanction.
The Appeals Court has resolved to partially accept the suspension of the decision rendered by the Spanish Competition Court on April 1, 2004. The Appeals Court has specifically resolved to suspend our payment of the fine imposed on us by the Spanish Competition Court until a final judgment is rendered.
At present, the court has yet to announce the date on which it will issue its ruling.
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| | European Commission Statement of Objections dated February 22, 2006 |
On February 22, 2006, the European Commission (“EC”) sent Telefónica a Statement of Objections initiating a formal proceeding against us.
In the Statement of Objections, the EC alleges that Telefónica and its subsidiaries, Telefónica de España, S.A.U., Telefónica Data de España, S.A.U. and Terra Networks España, S.A., from at least 2001, are abusing their dominant position in the form of “margin squeeze” in the Spanish broadband Internet access markets. Telefónica is currently preparing its response to the Statement of Objections.
| | Proceedings and Convictions |
During the last five years, neither we nor, to the best of our knowledge, any person listed in Item 6 above:
- has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors; or
- has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as aresult of such proceeding was or is subject to a judgment, decree or final order enjoining future violationsof, or prohibiting or mandating activities subject to, U.S. federal or state laws or finding any violation withrespect to such laws.
Dividend Information
Between 1998 and 2002, we maintained a share dividend policy. At the Annual General Shareholders’ Meeting held on April 11, 2003, the shareholders approved the distribution of a cash dividend of €0.25 per share, marking the end of our prior dividend policy. The first payment was made on July 3, 2003, consisting of €0.13 per share, and the second payment of €0.12 per share was made on October 15, 2003. In both cases, the dividends were charged against “Additional paid-in capital”.
At the Annual General Shareholders Meeting held on April 30, 2004, the shareholders approved the distribution of a cash dividend of €0.20 per share and a distribution of a share premium of €0.20 per share payable in cash. The first payment of €0.20 per share payable from 2003 net income was made on May 14, 2004, and the second payment of €0.20 per share from additional paid-in capital reserve made on November 12, 2004.
On February 23, 2005, Telefónica’s Board of Directors approved an interim dividend of €0.23 per share payable in cash from 2004 net income. The dividend was paid on May 13, 2005.
In addition, at the annual general shareholders’ meeting held on May 31, 2005, the shareholders approved:
- the distribution of a share premium of €0.27 per share payable in cash. The payment was made on November11, 2005.
- the distribution of Telefónica’s treasury stock among its shareholders in the proportion of one share for every 25shares held, which was charged against paid-in capital reserve.
Further, Telefónica’s Board of Directors, at its meeting held on February 28, 2006, resolved to distribute an interim dividend of €0.25 per share payable in cash from 2005 net income. The dividend is expected to be paid on May 12, 2006.
The table below sets forth the annual cash dividends per share paid by us from net income for each of the periods listed.
| Fiscal Year ended December 31, | | Cash Dividends per Share |
| |
|
| | | (euro) |
| 2005 | | 0.25 |
| 2004 | | 0.23 |
| 2003 | | 0.20 |
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| Fiscal Year ended December 31, | | Cash Dividends per Share |
| |
|
| | | (euro) |
| 2002(1) | | — |
| 2001(1) | | — |
|
| (1) | Share dividends were paid at a ratio of one new share for every 50 shares outstanding on the applicable dividend record date. |
Distribution of Antena 3 shares to shareholders
In accordance with the resolution of our annual General Shareholders’ Meeting held on April 11, 2003, in October 2003, we completed an extraordinary distribution in-kind to our shareholders of shares of Antena 3, representing 30% of the share capital of that company.
ITEM 9. THE OFFERING AND LISTING
A. OFFER AND LISTING DETAILS
General
Our ordinary shares, nominal value one euro each, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges under the symbol “TEF”. They are also listed on various foreign exchanges such as the London, Frankfurt, Paris, Buenos Aires and Tokyo stock exchanges and are quoted through the Automated Quotation System of the Spanish stock exchanges. Our shares are eligible for deposit in the Euroclear system. Our BDSs are listed on the São Paulo Stock Exchange. Our ADSs are listed on the New York Stock Exchange and the Lima Stock Exchange.
The table below sets forth, for the periods indicated, the reported high and low quoted closing prices, as adjusted for all stock splits, for the shares on the Madrid Stock Exchange, which is the principal Spanish market for our shares.
| | | Per Share |
| |
|
| | | High | | Low |
| |
| |
|
| | | (euro) |
| Year ended December 31, 2001 | | 21.10 | | 10.11 |
| Year ended December 31, 2002 | | 15.75 | | 7.45 |
| Year ended December 31, 2003 | | 11.78 | | 7.82 |
| Year ended December 31, 2004 | | 13.96 | | 11.20 |
| Year ended December 31, 2005 | | 14.56 | | 12.32 |
| Quarter ended March 31, 2004 | | 13.44 | | 11.98 |
| Quarter ended June 30, 2004 | | 13.06 | | 11.33 |
| Quarter ended September 30, 2004 | | 12.25 | | 11.20 |
| Quarter ended December 31, 2004 | | 13.96 | | 12.59 |
| Quarter ended March 31, 2005 | | 14.56 | | 13.44 |
| Quarter ended June 30, 2005 | | 13.99 | | 13.02 |
| Quarter ended September 30, 2005 | | 14.06 | | 13.22 |
| Quarter ended December 31, 2005 | | 14.11 | | 12.32 |
| Quarter ended March 31, 2006 | | 13.47 | | 12.22 |
| Quarter ended June 30, 2006 (through April 7, 2006) | | 12.98 | | 12.93 |
| Month ended November 30, 2005 | | 13.08 | | 12.32 |
| Month ended December 31, 2005 | | 12.76 | | 12.46 |
| Month ended January 31, 2006 | | 13.25 | | 12.22 |
| Month ended February 28, 2006 | | 13.06 | | 12.39 |
| Month ended March 31, 2006 | | 13.47 | | 12.95 |
| Month ended April 30, 2006 (through April 7, 2006) | | 12.98 | | 12.93 |
|
| Source: Madrid Stock Exchange Information. |
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On April 7, 2006, the closing price of our shares on the Automated Quotation System of the Spanish stock exchanges was €12.93 per share, equal to $15.66 at the Noon Buying Rate for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York on that date.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF”. Citibank, N.A. is the Depositary issuing ADRs evidencing the ADSs pursuant to the Deposit Agreement dated as of November 13, 1996, as amended as of December 3, 1999 and as of June 23, 2000, among Telefónica, the Depositary and the holders from time to time of ADRs. Each ADS represents the right to receive three shares.
The table below sets forth, for the periods indicated, the reported high and low quoted closing sales prices, as adjusted for all stock splits, of our ADSs on the New York Stock Exchange:
| | | Per ADS |
| | |
|
| | | High | | Low |
| | |
| |
|
| | | (dollars) |
| Year ended December 31, 2001 | | 54.46 | | 27.35 |
| Year ended December 31, 2002 | | 39.43 | | 21.47 |
| Year ended December 31, 2003 | | 44.38 | | 26.08 |
| Year ended December 31, 2004 | | 56.70 | | 40.59 |
| Year ended December 31, 2005 | | 56.63 | | 43.41 |
| Quarter ended March 31, 2004 | | 51.67 | | 43.70 |
| Quarter ended June 30, 2004 | | 46.95 | | 40.59 |
| Quarter ended September 30, 2004 | | 45.25 | | 41.13 |
| Quarter ended December 31, 2004 | | 56.70 | | 46.66 |
| Quarter ended March 31, 2005 | | 56.63 | | 51.97 |
| Quarter ended June 30, 2005 | | 52.32 | | 48.20 |
| Quarter ended September 30, 2005 | | 52.24 | | 47.85 |
| Quarter ended December 31, 2005 | | 51.45 | | 43.41 |
| Quarter ended March 31, 2006 | | 48.45 | | 44.34 |
| Quarter ended June 30, 2006 (through April 7, 2006) | | 47.81 | | 46.70 |
| Month ended November 30, 2005 | | 47.37 | | 43.41 |
| Month ended December 31, 2005 | | 45.29 | | 44.13 |
| Month ended January 31, 2006 | | 48.05 | | 44.68 |
| Month ended February 28, 2006 | | 46.81 | | 44.34 |
| Month ended March 31, 2006 | | 48.45 | | 46.55 |
| Month ended April 30, 2006 (throughApril 7, 2006) | | 47.81 | | 46.70 |
At December 31, 2005, approximately 212,554,533 of our shares were held in the form of ADSs by 1,088 holders of record, including Cede & Co., the nominee of The Depository Trust Company. The number of ADSs outstanding was 92,076,186 at December 31, 2005.
Spanish Securities Market Legislation
The Spanish Securities Act, which became effective in 1989, restructured the organization and supervision of the Spanish securities markets. This legislation and the regulations implementing it:
- established an independent regulatory authority, the CNMV, to supervise the securities markets;
- established a framework to regulate trading practices, public offerings, tender offers and insider trading;
- required stock exchange members to be corporate entities;
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- required companies listed on a Spanish stock exchange to file annual audited financial statements and tomake public quarterly financial information;
- established the legal framework for the Automated Quotation System;
- exempted the sale of securities from transfer and value added taxes;
- deregulated brokerage commissions; and
- provided for transfer of shares by book-entry or by delivery of evidence of title.
Effective in November 1998, Law 24/1988 was amended by Law 37/1998, of November 16, 1998. The amendment introduced the following changes:
- The concept of the “investment services company” was created. Brokers, dealers and portfolio managingcompanies are considered to be investment services companies. These companies are entitled to renderinvestment services and complementary activities. Banks are not considered to be investment servicescompanies, although they may render investment services upon becoming members of the Spanish stockexchanges.
- An investment services company must be authorized by the Ministry of Treasury in order to renderinvestment services and complementary activities. Once authorization is obtained, the founders of theinvestment services company must incorporate the company as asociedad anónimaor asociedad deresponsabilidad limitada, both limited liability corporations and, once incorporated, the company must beregistered with the Commercial Registry (Registro Mercantil) and the CNMV. This registration must bepublished in the State Official Gazette.
- The European principle of “single passport” or “single license” was introduced within the Spanish legalsystem. Under this principle, an investment services company may render investment services andcomplementary activities within European Union member countries, either through a branch or directly.Any necessary authorizations and licenses must be obtained from the authorities of the country of domicile(the “home country principle”), but the applicable market conduct rules are those set forth in the legislationof the country in which the investment services company renders its services (the “host country principle”).
- Spanish investment services companies wishing to render their services overseas must be authorized to doso. However, in the event that they wish to provide services within the European Union, they need onlygive prior notice to the CNMV.
- An investment guarantee fund was created to protect investors from the insolvency of any investmentservices company. This fund has the same purpose as the deposit guarantee fund, which is currently incharge of refunding deposits made in insolvent Spanish financial entities. Spanish investment servicescompanies are obligated to maintain a stake in the investment guarantee fund through participation in theshare capital of the managing company of the fund.
On July 8, 2003, in order to increase the transparency of the Spanish financial markets, the Spanish parliament passed the so-called “Transparency Act” (Ley de Transparencia), also known as the “Ley Aldama”. The Act regulates the corporate governance structure of listed companies, setting out new reporting obligations and defining the duties of directors and their legal liabilities. The Transparency Act amends the Securities Market Act of 1988 (24/1988) and the Public Companies Act approved by Legislative Royal Decree 1564/1989.
On November 16, 2005, Royal Decree 1310/2005 on admission to trading of securities, public offers and required prospectuses was published. This Royal Decree incorporates Directive 2003/71/CE of the European Parliament and of the European Council dated November 4, 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, into Spanish law. Previously, this Directive had been partially incorporated into Spanish Law with the Royal Decree 5/2005 of March 11, 2005. Royal Decree 1310/2005 repeals Royal Decree 201/1992, of March 27, 1992, regarding admission to trading of securities and public offers and establishes the regulation of the applicable requirements for the admission of securities to the Spanish stock
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exchanges and the requirements for the preparation, review and distribution of the prospectus to be published when transferable securities are offered to the public.
On November 23, Royal Decree 1333/2005 on insider trading was published. The Royal Decree 1333/2005 develops the Securities market Law 24/1988, July 28, regarding market abuse and completes the incorporation into Spanish Law of the new European Community Regulation regarding this matter.
Securities Trading in Spain
The Spanish securities market for equity securities consists of four stock exchanges located in Madrid, Bilbao, Barcelona and Valencia and the Automated Quotation System, orMercado Continuo. During 2005, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish stock exchanges.
Automated Quotation System
The Automated Quotation System links the four Spanish stock exchanges, providing those securities listed on it with a uniform continuous market that eliminates certain of the differences among the local exchanges. The principal features of the system are the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by Sociedad de Bolsas, S.A., a corporation owned by the companies that manage the stock exchanges. All trades on the Automated Quotation System must be placed through a brokerage firm, an official stock broker or a dealer firm that is a member of a Spanish stock exchange. Beginning January 1, 2000, Spanish banks were able to become members of a Spanish stock exchange and are therefore able to place trades on the Automated Quotation System.
In a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day, an opening price is established for each security traded on the Automated Quotation System based on a real-time auction in which orders can be entered, modified or cancelled but are not executed. During this pre-opening session, the system continuously displays the price at which orders would be executed if trading were to begin. Market participants only receive information relating to the auction price (if applicable) and trading volume permitted at the current bid and offer price. If an auction price does not exist, the best bid and offer price and associated volumes are shown. The auction terminates with a random period of 30 seconds in which share allocation takes place. Until the allocation process has finished, orders cannot be entered, modified or cancelled. In exceptional circumstances (including the inclusion of new securities on the Automated Quotation System) and after giving notice to the CNMV, Sociedad de Bolsas, S.A. may establish an opening price without regard to the reference price (the previous trading day’s closing price), alter the price range for permitted orders with respect to the reference price and modify the reference price.
The computerized trading hours are from 9:00 a.m. to 5:30 p.m. During the trading session, the trading price of a security is permitted to vary up to a maximum so-called “static” range of the reference price, provided that the trading price for each trade of such security is not permitted to vary in excess of a maximum so-called “dynamic” range with respect to the trading price of the immediately preceding trade of the same security. If, during the trading session, there exist matching bid and ask orders over a security within the computerized system which exceed any of the above “static” and “dynamic” ranges, trading on the security is automatically suspended and a new auction is held where a new reference price is set, and the “static” and “dynamic” ranges will apply over such reference price. The “static” and “dynamic” ranges applicable to each particular security are set up and reviewed periodically by Sociedad de Bolsas, S.A.
Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization from Sociedad de Bolsas, S.A. at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day if there are no outstanding bids or offers, respectively, on the system matching or bettering the terms of the proposed off-system transaction and, if, among other things, the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding three months. These trades must also relate to individual
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orders from the same person or entity and be reported to the Sociedad de Bolsas, S.A. before 8:00 p.m. At any time trades may take place (with the prior authorization of the Sociedad de Bolsas, S.A.) at any price if:
- the trade involves more than €1.5 million and more than 40% of the average daily volume of the stockduring the preceding three months;
- the transaction derives from a merger or spin-off process, or from the reorganization of a group ofcompanies;
- the transaction is executed for the purposes of settling a litigation or completing a complex group ofcontracts; or
- Sociedad de Bolsas, S.A. finds other justifiable cause.
Information with respect to the computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to Sociedad de Bolsas, S.A. by the end of the trading day and published in theBoletín de Cotización and in the computer system by the beginning of the next trading day.
Clearance and Settlement System
A new financial act (Ley 44/2002 de Medidas de Reforma del Sistema Financiero) was enacted on November 22, 2002, to increase the efficiency of the Spanish financial markets. The new law introduced a new article, 44-bis to theLey del Mercado de Valores (the “Spanish Securities Act”) under which Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores S.A.U., or Iberclear, was created.
Iberclear is regulated by the Spanish Securities Act and where appropriate by Royal Decree 505/1987 of April 3, 1987, Royal Decree 166/1992 of February 14, 1992, and by any other related regulation. This company, which is a wholly owned subsidiary of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A. (the “Sociedad Holding”), has the following functions:
- bookkeeping of securities represented by means of book entries admitted to trading in the stock markets or in the public debt book entry market;
- managing the clearance and settlement system for the brokerage transactions in the stock markets and at the public debt book entry market; and
- providing technical and operational services directly linked to the registry, clearance and settlement of securities, or any other service required by Iberclear to be integrated with any other registry, clearance, and settlement systems.
Iberclear will provide the CNMV, the Bank of Spain and the Ministry of Economy with the information that these entities may request regarding the registry, clearance and settlement performed within the systems managed by Iberclear.
Transactions carried out on the Spanish stock exchanges are cleared and settled through Iberclear.
Only members of the system are entitled to use Iberclear, and membership is restricted to authorized broker members of the Spanish stock exchanges, the Bank of Spain (when an agreement, approved by the Spanish Ministry of Economy and Finance, is reached with Iberclear) and, with the approval of the CNMV, other brokers not members of the Spanish stock exchanges, banks, savings banks and foreign settlement and clearing systems. The clearance and settlement system and its members are responsible for maintaining records of purchases and sales under the book-entry system. Shares of listed Spanish companies are held in book-entry form. Iberclear, which manages the clearance and settlement system, maintains a registry reflecting the number of shares held by each of its member entities (each, anentidad adherida) as well as the amount of such shares held on behalf of beneficial owners. Each member entity, in turn, maintains a registry of the owners of such shares. Spanish law considers the
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legal owner of the shares to be the member entity appearing in the records of Iberclear as holding the relevant shares in its own name or the investor appearing in the records of the member entity as holding the shares.
The settlement of any transactions must be made three business days following the date on which the transaction was carried out.
Obtaining legal title to shares of a company listed on a Spanish stock exchange requires the participation of a Spanish official stockbroker, broker-dealer or other entity authorized under Spanish law to record the transfer of shares. To evidence title to shares, at the owner’s request, the relevant member entity must issue a certificate of ownership. In the event the owner is a member entity, Iberclear is in charge of the issuance of the certificate with respect to the shares held in the member entity’s name.
Brokerage commissions are not regulated. Brokers’ fees, to the extent charged, will apply upon transfer of title of shares from the Depositary to a holder of ADRs in exchange for such ADSs, and upon any later sale of such shares by such holder. Transfers of ADSs do not require the participation of an official stockbroker. The Deposit Agreement provides that holders depositing shares with the Depositary in exchange for ADSs or withdrawing shares in exchange for ADSs will pay the fees of the official stockbroker or other person or entity authorized under Spanish law applicable both to such holder and to the Depositary.
| B. | PLAN OF DISTRIBUTION |
| |
| | Not applicable. |
| |
| C. | MARKETS |
| |
| | Please see “—Offer and Listing Details”. |
| |
| D. | SELLING SHAREHOLDERS |
| |
| | Not applicable. |
| |
| E. | DILUTION |
| |
| | Not applicable. |
| |
| F. | EXPENSES OF THE ISSUE |
| |
| | Not applicable. |
ITEM 10. ADDITIONAL INFORMATION
| A. | SHARE CAPITAL |
| |
| | Not applicable. |
| |
| B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
The following summary describes certain material considerations concerning our capital stock and briefly describes certain provisions of our bylaws (estatutos) and Spanish law.
Corporate Objects
Section 4 of Part I of our bylaws sets forth our corporate purposes:
- delivery and provision of any and all kinds of public and private telecommunication services and, to suchend, to design, install, preserve, repair, improve, acquire, dispose of, connect, administer, manage andperform whatever other activities other than those mentioned above with respect to any types of networks,
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lines, satellites, items of equipment, systems and items of technical infrastructure, both existing or to be created in the future, including the property upon which any and all of the above items are set up;
- delivery and provision of any and all types of ancillary or supplementary services, as well as of any services that may stem from communication activities;
- research and development, promotion and application of any and all component principles, items of equipment and systems which are directly or indirectly used in telecommunications;
- manufacturing, production and, generally, any and all forms of industrial activities related to telecommunications; and
- acquisition, disposal and, generally, any and all forms of trade activities related to telecommunications.
Director Qualification In order to be elected as a director, a person must have held a number of our shares representing a nominal value of no less than €3,000 for at least three years prior to his or her election. These shares may not be transferred so long as such person remains a director. This requirement does not apply to any person who, at the time of his or her appointment, has either a labor or professional relationship with the company or is expressly exempted from such requirement by a vote of at least 85% of the Board of Directors.
Interested Transactions When a director has an interest in a transaction, such transaction must be presented to the Nominating, Compensation and Corporate Governance Committee. The Committee shall deliver an opinion to the Board of Directors about the fairness of the transaction to our shareholders and to us. The interested director may not attend the board meeting at which the related transaction is discussed and voted on.
We do not provide any loans or salary advances to our directors, management or employees.
A director must retire upon reaching the age of 70. Such retirement shall take effect at the first board meeting following the general shareholders’ meeting that approves the financial statements for the year in which such director turned 70.
Significant Differences in Corporate Governance Practices
Corporate Governance Guidelines In Spain, companies with securities listed on a Spanish stock exchange are expected to follow the Olivencia Code of Good Governance and the Aldama Report, which include recommendations for corporate governance guidelines and shareholder disclosure. Additionally, listed companies are now required by law to publish an Annual Report on Corporate Governance and also to publish corporate governance information on their websites. We base our corporate governance procedures on the recommendations of the Olivencia Code and the Aldama Report. As part of our corporate governance procedures, we have adopted regulations for our Board of Directors that govern, among other things, director qualification standards, responsibilities, compensation, access to management information, the Board of Directors’ purpose and each of our Board Committee’s purpose and responsibilities. Moreover, we have a Regulation of the General Shareholders’ Meeting that aims to reinforce its transparency, providing shareholders with a framework guaranteeing and facilitating exercise of their rights. The Annual Report on Corporate Governance published by us provides a detailed explanation of our corporate governance procedures and explains the role and duties of our Board of Directors and Board Committees.
Our Annual Report on Corporate Governance is available at our registered office and on our website at www.telefonica.com. None of the information contained on our website is incorporated in this Annual Report.
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Committees
We have had an Audit and Control Committee since 1997. Our Audit and Control Committee is composed of four non-executive directors, two of whom are deemed independent by our Board of Directors. The committee’s functions and duties are similar to those required by the NYSE.
We have a Nominating, Compensation and Corporate Governance Committee, which is composed of four non-executive directors. The functions, composition and competencies are regulated by the company and are very similar to those required by the NYSE.
Independence of the Board
As of the date of this Annual Report, we had 18 directors, out of which eight have been deemed independent by our Board of Directors. A significant majority of our current directors (12) are non-executive directors. The NYSE rules include detailed criteria for determining director independence. We, in accordance with our Board of Directors’ Regulation, assess the independence of our directors by evaluating, among other things, (i) the contractual, employment and commercial relations between directors and us, (ii) other Board of Directors positions held by directors and (iii) the director’s familial relationships. The Nominating, Compensation and Corporate Governance Committee evaluates these criteria and notifies the Board of Directors of its decision. Our Board of Directors, in turn, is responsible for assessing whether a director is deemed independent as reported in our Annual Report on Corporate Governance.
Internal audit function
We have a General Internal Audit Department responsible for internal audit matters and for ensuring the efficiency of the internal audit control process of our different units. This General Internal Audit Department reports directly to the Audit and Control Committee, thus supporting the adequate performance of all its functions.
Non-executive director meetings
Pursuant to the NYSE listing standards, non-executive directors of U.S. listed companies must meet on a regular basis without management present and the company must disclose a method for any interested parties to communicate directly with the non-executive directors. As a group, our non-executive directors do not meet formally without management present. We have procedures in place that allow any employee to anonymously and confidentially report instances of fraud, alterations of financial information or specific risks to the company and its subsidiaries.
Code of ethics The NYSE listing standards require U.S. companies to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. We have adopted, as required by the Sarbanes-Oxley Act, a code of ethics that applies to our principal executive officer, principal financial officer and to our senior financial officers. We also have an Internal Code of Conduct for securities markets issues to prevent insider trading misconduct and to control possible conflicts of interest. In addition, the Regulations of the Board of Directors set out in detail our directors’ main obligations relating to conflicts of interest concerning business opportunities, misappropriation of our assets, confidentiality and non-competition.
Description of Telefónica Capital Stock
Description of Share Capital
At April 12, 2006, our issued share capital consisted of 4,921,130,397 ordinary registered shares with a nominal value of €1.00 each. Our shareholders have delegated to the Board of Directors the authority to issue up to 2,274,667,655 new shares. The Board’s authorization to issue new shares expires on June 15, 2006.
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Meetings and Voting Rights
We hold our ordinary general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the Board of Directors. Extraordinary general shareholders’ meetings may be called, from time to time, at the discretion of our Board of Directors or upon the request of shareholders representing 5% of our paid-in share capital. We publish notices of all ordinary and extraordinary general shareholders’ meetings in the Official Gazette of the Commercial Registry and in at least one newspaper in Madrid at least one month before the relevant meeting.
Each share of Telefónica entitles the holder to one vote. However, only registered holders of shares representing a nominal value of at least €300, which currently equals at least 300 shares because our shares have a nominal value of €1.00 each, are entitled to attend a general shareholders’ meeting. Holders of shares representing a nominal value of less than €300, meaning less than 300 shares, may aggregate their shares by proxy and select a representative that is a shareholder to attend a general shareholders’ meeting or delegate his or her voting rights by proxy to a shareholder who has the right to attend the shareholders’ meeting. However, under our bylaws, no shareholder may vote a number of shares exceeding 10% of our total outstanding voting capital.
Any share may be voted by proxy. Proxies must be in writing and are valid only for a single meeting.
Only holders of record five days prior to the day on which a general meeting of shareholders is scheduled to be held may attend and vote at the meeting. Under the deposit agreement for the ADSs, our depositary accepts voting instructions from holders of ADSs. The depositary executes such instructions to the extent permitted by law and by the terms governing the shares. The depositary or its nominee, whichever is applicable, will be entitled to vote by proxy the shares represented by the ADSs.
Shareholders representing, in person or by proxy, at least 25% of our subscribed voting capital constitute a quorum for a general meeting of shareholders. If a quorum is not present at the first call, then the meeting can be held on second call. Regardless of the number of shareholders present at the meeting on second call, they are deemed to constitute a quorum.
Shareholders representing, in person or by proxy, at least 50% of our subscribed voting capital constitute a quorum on a first call for shareholders’ meetings at which shareholders will be voting on any of the following actions:
- issuance of bonds;
- increase or reduction of share capital;
- amendment of corporate purpose;
- any other amendment of our bylaws; or
- merger, split or spin-off of Telefónica.
When a quorum is present on the first call, these special resolutions must be adopted by the affirmative vote of shareholders representing a majority of our present subscribed voting capital.
If a quorum for the meeting is not present after the first call, upon a second call for the meeting, 25% of our subscribed voting capital will constitute a quorum. When shareholders representing less than 50% of the subscribed voting capital are in attendance, these special resolutions must be adopted by a vote of two-thirds of those shareholders present.
A shareholder who owns shares on the record date will not be entitled to vote his/her shares in a general meeting of shareholders if the shareholder, individually or as part of a group, has not complied with the notification requirements relating to the acquisition of additional shares beyond certain threshold amounts.
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DividendsShareholders vote on final dividend distributions at the shareholders’ meeting. Distributable profits are equal to:
- net profits for the year; plus
- profits carried forward from previous years; plus
- distributable reserves; minus
- losses carried forward from previous years; minus
- amounts allocated to reserves as required by law or by our bylaws.
The amount of distributable profits is based on Telefónica, S.A.’s unconsolidated financial statements prepared in accordance with Spanish GAAP, which differ from the Consolidated Financial Statements of the Telefónica Group prepared in accordance with IFRS included elsewhere in this Annual Report.
The Board of Directors can make interim dividend payments without a prior shareholder vote on the issue. However, under those circumstances, the dividend is limited to distributable net profits of the current year and is subject to certain legal requirements.
Unclaimed dividends revert to Telefónica five years from their date of payment.
Registration and Transfers
Our shares are in registered book-entry form. Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures carried out by the Spanish clearing institution. Transfers executed outside of stock exchange systems, that is, over the counter, are implemented pursuant to the general legal regime for book-entry transfer, including registration by the Spanish clearing institution.
There are no restrictions with respect to the transfer of our shares.
Liquidation Rights
Under Spanish law, upon our liquidation, the shareholders would be entitled to receive, on apro rata basis, any assets remaining after the payment of our debts and taxes and liquidation expenses.
C. MATERIAL CONTRACTS
Material Contracts
Agreement with BellSouth
On March 5, 2004, Telefónica Móviles entered into a stock purchase agreement with BellSouth to acquire 100% of BellSouth’s interests in its wireless operations in Argentina, Chile, Peru, Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and Panama.
The effective transfer of the shares of these companies was conditional, among other things, upon the attainment of the required regulatory authorizations in each country and on the approvals, if any, required, from the minority stockholders of the various operators. BellSouth’s holdings in the operators located in Ecuador, Guatemala and Panama were transferred on October 14, 2004. BellSouth’s holdings in the operators located in Colombia, Nicaragua, Peru, Uruguay and Venezuela were transferred on October 28, 2004. BellSouth’s holdings in the operator in Chile were transferred on January 7, 2005, and its holdings in the Argentinean operator were transferred on January 11, 2005.
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Under this agreement, the aforementioned operators were valued at $5,850 million, which represented the total acquisition cost for Telefónica Móviles, including assumed debt and net of gross cash as at such companies.
Agreement with O2
On October 31, 2005, Telefónica, S.A. entered into a Framework Agreement with O2 plc, which was amended on November 18, 2005. The Framework Agreement governed the conduct of Telefónica, S.A.’s cash tender offer for O2. See “Item 4—Information on the Company—History and Development of the Company—Public Takeover Offers”. In addition, under the Framework Agreement, Telefónica, S.A. agreed to certain service contracts and incentive arrangements with certain key managers of O2.
D. EXCHANGE CONTROLSExchange Controls and Other Limitations Affecting Security Holders
Preliminary Administrative Authorization of Certain Transactions (Golden Share)
On May 13, 2003, the European Court of Justice (“ECJ”) ruled (in the case C-463/00, European Communities Commission vs. The Kingdom of Spain) that the preliminary authorization rules (golden share) set forth in Law 5/1995, requiring prior governmental approval with respect to a limited number of fundamental corporate and control transactions affecting us, were no longer valid. In order to adapt Law 5/1995 to the ECJ’s May 13, 2003 ruling, Law 5/1995 was modified by virtue of the twenty-fifth additional provision of Law 62/2003, dated December 31, 2003, governing certain tax, administrative and social matters. This regulation establishes a new post-closing notification model, which, for the purposes of the Telefónica Group, is applicable until February 2007.
The post-closing notification requirements described in Law 5/1995 apply to us, Telefónica Móviles S.A., Telefónica de España, S.A.U. and Telefónica Móviles España, S.A.U. and must be observed in the following transactions:
- transfer or encumbrance of strategic assets located in Spain by Telefónica de España and TelefónicaMóviles España. Transactions affecting these assets carried out between Telefónica Group companies areexempt and need only be reported through a written communication to the competent regulatory body;
- transfer or encumbrance of shares or any other securities of Telefónica de España by Telefónica, S.A.,Telefónica Móviles S.A. by Telefónica, S.A. and Telefónica Móviles España by Telefónica Móviles S.A.,when such transactions result in a change of control, or the sale of holdings representing 50% or more;
- substitution of Telefónica Móviles España, S.A.U.’s business purpose;
- direct or indirect acquisition of our or Telefónica Móviles S.A.’s shares representing 10% or more of eachcompany’s share capital. Financial transactions which do not result in a change of control or in a change ofmanagement are exempt from the requirements of Law 5/1995; and
- voluntary winding-up, spin-off or merger need only be reported through a simple written communication,except where these operations affect strategic assets specified in Law 5/1995, which will require the post-closing notification. The above-mentioned transaction between members of the Telefónica Group affectingstrategic assets are exempt from the post-closing notification.
Ownership Limitations The new General Telecommunications Law (“GTL”) enacted on November 3, 2003 eliminated existing ownership limitations, which prohibited non-European nationals from owning directly or indirectly more than 25% of our assets or share capital, except under certain circumstances. Article 6 of the new GTL provides for the application of the reciprocity principle under existing international treaties or agreements signed and ratified by Spain. The Spanish government, upon request, may authorize exceptions to the reciprocity principle contained in the new GTL.
Trading by Telefónica in its own Shares or Shares of Companies under its Control
Consistent with applicable Spanish laws and regulations and the authorization of our shareholders, from time to time we or our affiliates engage in transactions involving securities of members of the Telefónica Group. These transactions may include purchases of shares of group members, forward contracts with respect to these shares and other similar transactions.
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At December 31, 2005, we held 136,647,061 shares of treasury stock, representing 2.78% of our capital stock. At [March 30, 2006], we held [239,580,268] shares of treasury stock, representing [4.868]% of our capital stock. In 2003 we announced our commitment to dedicate a minimum of €4 billion to the acquisition of our treasury stock over the 2003-2006 period, subject to free cash flow generation and our share price. Consistent with our commitment to shareholder remuneration, in April 2005 we announced our decision to extended our commitment announced in October 2003 through 2007 and increase the amount dedicated to the acquisition of treasury stock to €6 billion.
The Spanish Corporations Law prohibits the purchase by us and our subsidiaries of shares in the secondary market except in the following limited circumstances:
- the purchase of shares must be authorized by a general meeting of shareholders of Telefónica and, in thecase of a purchase of shares by a subsidiary, also by a general meeting of shareholders of the subsidiary;
- the shares so purchased have no economic or voting rights while held by Telefónica and have no votingrights while held by its subsidiaries;
- the purchaser must create reserves equal to the purchase price of any shares that are purchased and, if asubsidiary is the acquirer, the reserve must also be recorded by the parent company; and
- the total number of shares held by Telefónica and its subsidiaries may not exceed 5% of the total capital ofTelefónica.
Any acquisition of shares of Telefónica exceeding, or that causes Telefónica’s and its subsidiaries’ holdings to exceed, 1% of Telefónica’s share capital must be reported to the CNMV.
At the general meeting of shareholders held in May 2005, our shareholders extended their prior authorization to the Board of Directors to acquire shares of Telefónica for an additional 18 months from the date of such meeting. The authorization also applies to companies under our control. Pursuant to the authorization, the aggregate nominal value of the shares held by us or any of our subsidiaries cannot exceed 5% of our shareholders’ equity.
Other Restrictions on Acquisitions of Shares A person or group of persons that directly or indirectly exercises beneficial ownership or control of 5% or more of the outstanding shares, or which increases or decreases the number of shares which it owns or controls to an amount which equals or exceeds any multiple of 5% of such outstanding shares, must inform the following entities of such ownership:
- Telefónica;
- the stock exchange management companies of the Spanish stock exchanges on which the shares are listed;
- the CNMV; and
- in the case of a foreign person or group of persons, the General Directorate of Commercial Policy andForeign Investments.
A person or group that is a member of our Board of Directors or a member of our Management Committee must report any acquisition or transfer of our capital stock, regardless of the amount of shares acquired or transferred. A person or group of persons that fails to inform any of the above entities after reaching any of the indicated thresholds may incur fines and penalties. Additionally, if a company fails to inform us after reaching ownership or control of 10% of the outstanding shares or increases the shares it controls to equal or exceed any successive multiple of 5%, the rights corresponding to those shares will be suspended until a proper notification to us is made. For reporting requirements concerning acquisitions by us or our affiliates of our shares, see “—Trading by Telefónica in its own Shares or Shares of Companies under its Control” above.
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Dividend and Liquidation Rights According to Spanish law and our bylaws, dividends may only be paid out of profits or distributable reserves if the value of our net worth is not, and as a result of such distribution would not be, less than our capital stock. Pursuant to Spanish law, we are required to reserve 10% of our fiscal year net income until the amount in our legal reserve reaches 20% of our capital. Our legal reserve is currently at 20%.
Dividends payable by us to non-residents of Spain ordinarily are subject to a Spanish withholding tax. For the tax implications of dividends, see “—Taxation”.
Upon our liquidation, our shareholders would be entitled to receivepro rata any assets remaining after the payment of our debts and taxes and expenses of the liquidation. Any change in the rights of shareholders to receive dividends and payment upon liquidation would require an amendment to our bylaws by resolution adopted by a general meeting of shareholders. If there were more than one class of shares, such amendment would also require the approval of each class of shareholders affected by the amendment.
Preemptive Rights and Increases of Share Capital Pursuant to the Spanish Corporations Law, shareholders and holders of convertible bonds have preemptive rights to subscribe for any new shares and for bonds convertible into shares. Such rights may not be available under special circumstances if waived by a resolution passed at a general meeting of shareholders in accordance with Article 159 of the Spanish Corporations Law, or the Board of Directors, if authorized. Further, such rights, in any event, will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger in which shares are issued as consideration. Such rights:
- are transferable;
- may be traded on the Automated Quotation System; and
- may be of value to existing shareholders because new shares may be offered for subscription at priceslower than prevailing market prices.
Absent an exemption from registration, shares issuable upon exercise of rights must be registered under the Securities Act of 1933 in order to be offered to holders of ADRs. If we decided not to register the shares, the rights would not be distributed to holders of ADRs. Pursuant to the Deposit Agreement, however, holders of ADRs are entitled to receive their proportionate share of the proceeds, if any, from sale by the Depositary of any rights accruing to holders of ADRs.
E. TAXATION
The following is a general summary of the material Spanish and U.S. federal income tax consequences to U.S. Holders (as defined below) of the ownership and disposition of shares or ADSs. This summary is based upon Spanish and U.S tax laws (including the U.S. Internal Revenue Code of 1986, as amended (the “Code”), final, temporary and proposed Treasury regulations, rulings, judicial decisions and administrative pronouncements), and the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, signed February 22, 1990, (the “Treaty”), all as currently in effect and all of which are subject to change or changes in interpretation, possibly with retroactive effect. In addition, the summary is based in part on the representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related agreements will be performed in accordance with its terms.
As used herein, the term “U.S. Holder” means a beneficial owner of one or more shares or ADSs:
| | (a) | that is, for U.S. federal income tax purposes, one of the following: |
| | | | |
| | | i. | a citizen or resident of the United States, |
| | | | |
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| | | ii. | a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States or any political subdivision thereof, or |
| |
| | | iii. | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source; |
| |
| | (b) | who is entitled to the benefits of the Treaty under the Limitation on Benefits provisions contained in the Treaty; |
| |
| | (c) | who holds the shares or ADSs as capital assets for U.S. federal income tax purposes; |
| |
| | (d) | who owns, directly, indirectly or by attribution, less than 10% of the share capital or voting stock of Telefónica; and |
| |
| | (e) | whose holding is not effectively connected with a permanent establishment in Spain. |
This summary does not address tax considerations that may apply to holders that are subject to special tax rules, such as U.S. expatriates, insurance companies, tax-exempt organizations, certain financial institutions, persons subject to the alternative minimum tax, dealers and certain traders in securities or foreign currencies, persons holding shares or ADSs as part of a straddle, hedging, conversion or other integrated transaction, persons who acquired their shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation, partnerships or other entities classified as partnerships for U.S. federal income tax purposes or persons whose functional currency is not the U.S. dollar. Such holders may be subject to U.S. federal income tax consequences different from those set forth below.
If a partnership holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds shares or ADSs is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the shares or ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the availability of foreign tax credits to U.S. Holders of ADSs and the reduced tax rate for dividends received by certain non-corporate U.S. Holders of ADSs, both as described below, could be affected by actions taken by parties to whom ADSs are pre-released.
For purposes of the Treaty and U.S. federal income tax, U.S. Holders of American Depositary Receipts will generally be treated as owners of the ADSs evidenced thereby and the shares represented by such ADSs.
This discussion assumes that Telefónica is not, and will not become, a passive foreign investment company (“PFIC”), as discussed below under “U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules”.
U.S. Holders of shares or ADSs should consult their own tax advisors concerning the specific Spanish and U.S. federal, state and local tax consequences of the ownership and disposition of shares or ADSs in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. In particular, U.S. Holders are urged to consult their own tax advisors concerning whether they are eligible for benefits under the Treaty.
Spanish Tax Considerations
Taxation of Dividends
Under Spanish law, dividends paid by a Spanish resident company to a U.S. Holder of shares or ADSs are subject to an income tax withheld at source on the gross amount of dividends, currently at a 15% tax rate.
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Taxation of Extraordinary Distributions The holders of ordinary shares and ADSs of Telefónica received two specials distributions in 2005:
(1) On June 20, 2005, prior to the merger Telefónica, S.A. with Terra Networks, S.A., holders of Telefónica shares received a dividend of one Telefónica share for every 25 Telefónica shares already held, treated as a distribution of paid-in surplus (reserva de prima de emisión), and
(2) On November 11, 2005, holders of Telefónica shares and ADSs received a dividend declared by the Board of Directors of Telefónica on November 24, 2004 in the amount of €0.27 per Telefónica ordinary share consisting of a distribution of paid-in surplus (reserva de prima de emisión).
Under Spanish law, these distributions of paid-in surplus (reserva de prima de emisión), are subject to special tax treatment. In general, the amount of these distributions received in cash or in kind (shares) is not taxable under Spanish income tax law but instead reduces the tax acquisition cost of the shares or ADSs on which it was distributed for Spanish tax purposes (i.e., in the event of a subsequent sale or disposition of such shares or ADSs, the amount of gain realized will be higher). In the case of the distribution of Telefónica ordinary shares, the amount by which a holder must reduce the tax acquisition cost of its Telefónica shares or ADSs will be the market value of the shares received. However, if the amount of the distributions received in cash or in shares is higher than the U.S. Holder’s adjusted tax acquisition cost for the Telefónica shares or ADSs, then the amount by which the distributions exceed the U.S. Holder’s adjusted tax acquisition cost generally will be subject to tax in Spain at a 15% tax rate and such U.S. Holder will be required to file a Spanish Form 210 within one month of the distribution. No amount will be withheld by Telefónica in respect of Spanish taxes on those distributions of paid-in surplus.
Taxation of Capital Gains Spanish income tax is generally levied at a 35% tax rate on capital gains of non-residents of Spain who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation and who do not operate through a fixed base or a permanent establishment in Spain.
Under the Treaty, capital gains realized by U.S. Holders arising from the disposition of shares or ADSs will not be taxed in Spain, provided that the seller has not maintained a direct or indirect holding of 25% or more in our capital during the 12 months preceding the disposition of the shares or ADSs. U.S. Holders will be required to establish that they are entitled to the exemption from tax under the Treaty by providing to the relevant Spanish tax authorities Spanish Form 210 and a certificate of residence on IRS Form 6166 from the IRS stating that to the best knowledge of the IRS, such U.S. Holder is a U.S. resident within the meaning of the Treaty. Spanish law requires that both of these forms be filed within one month from the date the capital gain is realized. Beginning July 5, 2004, U.S. Holders were required to request the IRS Form 6166 certificate of residence by filing IRS Form 8802 with the IRS. The U.S. Holder must attach to IRS Form 8802 a statement by the U.S. Holder declaring that it was or will be a resident of the United States for the period for which the Treaty benefit is claimed.
Spanish Wealth Tax Individual U.S. Holders who hold shares or ADSs located in Spain are subject to the Spanish Wealth Tax (Impuesto sobre el Patrimonio) (Spanish Law 19/1991), which imposes tax on property located in Spain on the last day of any year. Shares or ADSs located outside of Spain are not subject to the Spanish Wealth Tax. However, the Spanish tax authorities may argue that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. If such a view were to prevail, U.S. Holders who held shares or ADSs located in Spain or deemed to be located in Spain on the last day of any year would be subject to the Spanish Wealth Tax for such year at marginal rates varying between 0.2% and 2.5% of the average market value of such shares or ADSs during the last quarter of such year, as published by the Spanish Ministry of Economic Affairs. U.S. Holders should consult their tax advisors with respect to the Spanish Wealth Tax.
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Transfers of shares or ADSs on death and by gift to individuals are subject to Spanish inheritance and gift taxes (Impuesto sobre Sucesiones y Donaciones), respectively, if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of death, regardless of the residence of the heir or beneficiary. The applicable tax rate, after applying all relevant factors, ranges from between 7.65% and 81.6% for individuals. Gifts of shares granted to corporate U.S. Holders are subject to corporate tax which is generally levied at the rate of 35%.
Expenses of Transfer
Transfers of shares or ADSs will be exempt from any transfer tax (Impuesto sobre Transmisiones Patrimoniales) or value added tax. Additionally, no stamp tax will be levied on such transfers.
U.S. Federal Income Tax Considerations
Taxation of Dividends
Distributions received by a U.S. Holder on shares or ADSs, including the amount of any Spanish taxes withheld, other than certainpro rata distributions of shares to all shareholders (including ADS holders), will constitute foreign source dividend income to the extent paid out of Telefónica’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). The amount of the dividend a U.S. Holder will be required to include in income will equal the U.S. dollar value of the euro, calculated by reference to the exchange rate in effect on the date the payment is received by the Depositary (in the case of ADSs) or by the U.S. Holder (in the case of shares), regardless of whether the payment is converted into U.S. dollars on the date of receipt. If a U.S. Holder realizes gain or loss on a sale or other disposition of euro, it will be U.S. source ordinary income or loss. Corporate U.S. Holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by Telefónica. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends received by certain non-corporate U.S. Holders in taxable years beginning before January 1, 2009 will be taxable at a maximum rate of 15%. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at this favorable rate.
Certainpro rata distributions of shares to all shareholders (including ADS holders), such as Telefonica's June 30, 2005 one-for-twenty-five share distribution, are not subject to tax, except to the extent of cash received in lieu of fractional shares which will be treated as a redemption of the fractional shares. A U.S. Holder's basis in its existing shares or ADSs must be allocated between its existing shares or ADSs and the distributed shares (including fractional shares treated as redeemed and shares sold by the Depositary on an ADS holder's behalf) based upon their respective fair market values on the date of the distribution.
Spanish taxes withheld from dividends on shares or ADSs at a rate not exceeding the rate provided in the Treaty will be creditable against a U.S. Holder’s U.S. federal income tax liability, subject to applicable restrictions and limitations that may vary depending upon the U.S. Holder’s circumstances and the discussion above regarding concerns expressed by the U.S. Treasury. Instead of claiming a credit, a U.S. Holder may elect to deduct such Spanish taxes in computing its taxable income, subject to generally applicable limitations. The limitation of foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex. Therefore, U.S. Holders should consult their own tax advisors regarding the availability of foreign tax credits in their particular circumstances.
Taxation Upon Sale or Other Disposition of Shares or ADSs
A U.S. Holder will generally recognize U.S. source capital gain or loss on the sale or other disposition of shares or ADSs, including a sale of distributed shares by the depositary on the ADS holder’s behalf, which will be long-term capital gain or loss if the U.S. Holder has held such shares or ADSs for more than one year. The amount of the U.S. Holder’s gain or loss will be equal to the difference between such U.S. Holder’s tax basis in the shares or ADSs sold or otherwise disposed of and the amount realized on the sale or other disposition, as determined in U.S. dollars.
As discussed under “Spanish Tax Considerations—Taxation of Capital Gains” above, gain realized by a U.S. Holder on the sale or other disposition of shares or ADSs may be subject to Spanish tax unless the U.S. Holder provides the relevant Spanish tax authorities with both a certificate of U.S. tax residence on IRS Form 6166 and Spanish Form 210. Spanish law requires that both of these forms be filed within one month from the date on which the capital gain is realized. U.S. Holders are advised to submit IRS Form 8802 and the accompanying declaration to the IRS well in advance of the date on which the IRS Form 6166 that will be issued by the IRS may be required by
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the Spanish tax authorities, as there may be delays in obtaining the necessary forms. U.S. Holders should consult their own tax advisors regarding the potential Spanish tax consequences of a sale or other disposition of shares or ADSs and the procedures available for an exemption from such tax.
Passive Foreign Investment Company Rules Telefónica believes that it was not a PFIC for U.S. federal income tax purposes for its 2005 taxable year. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25% owned equity investments) from time to time, there can be no assurance that Telefónica will not be considered a PFIC for any taxable year. If Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder held a share or ADS, certain adverse tax consequences could apply to the U.S. Holder.
If Telefónica was treated as a PFIC for any taxable year during which a U.S. Holder held a share or ADS, gain recognized by a U.S. Holder on a sale or other disposition of a share or ADS would be allocated ratably over the U.S. Holder’s holding period for the share or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before Telefónica became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the amount allocated to each such taxable year. Further, any distribution in respect of shares or ADSs in excess of 125% of the average of the annual distributions on shares or ADSs received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available (including a mark-to-market election) to U.S. Holders that may help to mitigate the adverse tax consequences resulting from PFIC status.
In addition, if Telefónica were to be treated as a PFIC in a taxable year in which it pays a dividend or the prior taxable year, the favorable dividend rate discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
Information Reporting and Backup Withholding Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless the U.S. Holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is furnished to the IRS.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable.
G. STATEMENTS BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
Where You Can Find More Information We file Annual Reports on Form 20-F and furnish periodic reports on Form 6-K to the SEC. You may read and copy any of these reports at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services. Some SEC filings of ours are also available at the website maintained by the SEC at “http://www.sec.gov”.
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Our ADSs are listed on the New York Stock Exchange under the symbol “TEF”. You may inspect any periodic reports and other information filed with or furnished to the SEC by us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
As a foreign private issuer, we are exempt from the rules under the Exchange Act which prescribe the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act.
We are subject to the informational requirements of the Spanish securities commission and the Spanish stock exchanges, and we file reports and other information relating to our business, financial condition and other matters with the Spanish securities commission and the Spanish stock exchanges. You may read such reports, statements and other information, including the annual and biannual financial statements, at the public reference facilities maintained in Madrid and Barcelona. Some of our Spanish securities commission filings are also available at the website maintained by the Spanish securities commission at http://www.cnmv.es.
We have appointed Citibank, N.A. to act as depositary for the Telefónica ADSs. Citibank will, as provided in the deposit agreement, arrange for the mailing of summaries in English of such reports and communications to all record holders of the ADSs of Telefónica. Any record holder of Telefónica ADSs may read such reports and communications or summaries thereof at Citibank’s office located at 111 Wall Street, New York, New York 10043.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Telefónica Group is exposed to diverse financial market risks due to (i) our business activities, (ii) the debt incurred to finance our business, (iii) our shareholdings in various companies and (iv) other related financial instruments that we have entered into.
The principal market risks that affect the companies in the Telefónica Group are:
- Exchange rate risk.This risk arises mainly due to (i) the Telefónica Group’s international presence, withinvestments and businesses in countries with currencies other than the euro, mainly in Latin America, butalso in the Czech Republic (following our acquisition of a majority stake in the Cesky Group in 2005) andin the United Kingdom (following our acquisition of substantially all of the shares of O2in 2006), and (ii)the existence of debt in currencies other than the those of the countries in which the Telefónica Group isoperating or different from the currency of the country in which the obligor is established.
- Interest rate risk.This risk arises mainly due to fluctuations in interest rates affecting (i) the financial costsassociated with variable interest rate debt (or debt with a short-term maturity and anticipated renewal) and(ii) the value of our long-term liabilities with fixed interest rates (whose market value rises as interest ratesdecrease).
- Share price risk.This risk arises as a result of variations in the value of (i) our shareholdings in othercompanies in that may be sold, (ii) the derivatives affecting those shareholdings, (iii) the shares held in theTelefónica Group’s own portfolio (treasury shares) and (iv) the derivatives affecting such shares.
Additionally, the Telefónica Group faces liquidity risk arising from the possible imbalances between our capital needs (due to operating and financial expenses, investment, debt maturities and committed dividends) and our sources of funds (revenue, divestments, financing commitments with financial institutions and capital raising in the capital markets). The cost of these funds may be affected by variations in the credit margins (over reference interest rates) demanded by lending institutions.
Finally, we face political risk and country risk (which is directly related to market and liquidity risks), which arise from political, economic and social instability in the countries in which the Telefónica Group operates, especially in Latin America.
The Telefónica Group actively manages the above-mentioned risks, in an effort to stabilize:
- cash flows, so as to facilitate financial planning and profit from investment opportunities;
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- the profit and loss account, in order to facilitate its understanding and the forecast of our future results byinvestors; and
- the value of our own resources, by protecting the value of the investments made.
In the event that these objectives are mutually exclusive, our corporate finance area will evaluate the policy to be followed in each particular situation.
In connection with our risk management policy, the Telefónica Group uses financial derivative instruments, mainly related to exchange rates, interest rates and share prices.
Exchange Rate Risk
The objective of our exchange rate risk management policy is that, in the event of depreciation of foreign currencies relative to the euro, potential losses in the value of the assets related to our business are offset by savings from the reduction in the euro value of our debt denominated in such currencies.
The degree of hedge (defined as the percentage of debt in foreign currency over the value of assets) implemented tends to be larger:
| | 1. | the greater the estimated correlation between the value of the assets and the exchange rate of the foreign currency; |
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| | 2. | the smaller the estimated cost of the hedge (calculated as the difference between the additional costs from the financing in local currency and the expected depreciation of the foreign currency with respect to the euro); and |
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| | 3. | the greater the liquidity of the money and derivative markets. |
In general, the estimated correlation between the value of the asset and the exchange rate of the foreign currency is larger the larger the weight of the cash flows generated in early years as a percentage of the estimated value of the asset.
We aim to protect against future depreciation of Latin American currencies in relation to the euro is by issuing debt denominated in Latin American currencies. At December 31, 2005, debt in Latin American currencies was approximately €5.4 billion. Nevertheless, this amount is not uniformly incurred by currency in proportion to the cash flows generated by our Latin American operations in such currencies. Therefore, the future effectiveness of the Telefónica Group’s exchange rate risk protection will depend on which Latin American currencies depreciate relative to the euro. Additionally, we aim to protect against losses in the value of the Telefónica Group’s Latin American assets due to variations in exchange rates by issuing debt denominated in U.S. dollars, both at the parent company level (the debt is considered associated with an investment provided that the hedge is considered an effective hedge under applicable accounting rules) and in the countries where there is not a capital market for local currency or where the derivatives market is not sufficiently liquid.At December 31, 2005, the Telefónica Group’s debt denominated in U.S. dollars was equivalent to €2.99 billion.
Another essential element of our exchange rate risk management policy is to seek to minimize negative financial results due to exchange rate variations while maintaining currency positions open. These positions arise due to three reasons: (i) the low level of liquidity of certain derivative markets or the difficulty in obtaining financing in local currency, which prevents us from implementing a hedge at a low cost (such as in Argentina); (ii) financing through intercompany loans, whose accounting treatment is different from financing with capital contributions; and (iii) our decisions to take a currency position.
In 2005, the Telefónica Group had net exchange differences of €162.04 million resulting from the management of its exchange rate risk. These gains derived mainly from the Telefónica Group’s decision not to hedge completely the U.S. dollar denominated loans provided to its Latin American subsidiaries, which enabled it to profit from an appreciation of the Latin American currencies relative to the U.S. dollar and of the U.S. dollar relative to the euro.
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In June 2005, we acquired a 51.1% interest in Cesky Telecom and in September 2005 we acquired an additional 18.3% interest for the equivalent of an aggregate of €3.663 billion. This acquisition was financed with debt and a significant part of such acquisition cost (equivalent to €1.839 billion) was transformed through the use of derivatives into synthetic debt denominated in Czech crowns. As a result, a substantial part of the value of the acquired asset has been left exposed to Czech crown-euro exchange rate variations. This decision reflects the Telefónica Group’s positive assessment of the anticipated future development of the Czech economy. From the date of our acquisition of the 51.1% interest in Cesky Telecom through December 31, 2005, the Czech crown appreciated 3.5% relative to the euro.
The Telefónica Group’s recent acquisition of the U.K. company, O2, was financed through a multicurrency loan entered into in 2005. The final currency composition of the debt incurred in connection with the acquisition will take into account the Telefónica Group’s estimate of the value of O2 attributable to its operations in the Euro zone (Germany and Ireland) and the absence of perfect correlation between the value of the business in the United Kingdom and the exchange rate between the British pound and the euro, which suggested not to finance the total acquisition cost in British pounds.
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SENSITIVITY TO INTEREST RATES AND EXCHANGE RATES OF DEBT OBLIGATIONS
AT DECEMBER 31, 2005
(in millions of euro, except percentages)
| | MATURITY DATES | | FAIR VALUE | |
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| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Subsequent | | Total | | Underlying
Debt | | Associated
Derivatives | | TOTAL | |
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| EURO | | 10,300 | | 577 | | 332 | | 2,123 | | 2,040 | | 10,235 | | 25,606 | | 20,554 | | 6,387 | | 26,941 | |
| Floating Rate | | 6,313 | | (286 | ) | (426 | ) | 398 | | (338 | ) | 2,035 | | 7,696 | | 9,620 | | (1,864 | ) | 7,756 | |
| Spread-Ref Euribor | | 0.03 | % | (0.05 | )% | 0.61 | % | 1.27 | % | (1.25 | )% | 0.54 | % | 0.26 | % | | | | | | |
| Fixed Rate | | 3,979 | | 855 | | 750 | | 325 | | 2,154 | | 7,000 | | 15,063 | | 8,075 | | 8,094 | | 16,169 | |
| Interest Rate | | 3.03 | % | 5.10 | % | 4.18 | % | 5.73 | % | 7.06 | % | 3.91 | % | 4.25 | % | | | | | | |
| Bounded Rate | | 8 | | 8 | | 8 | | 1,400 | | 224 | | 1,200 | | 2,848 | | 2,860 | | 157 | | 3,016 | |
| Other European Currencies | | (6,104 | ) | — | | 308 | | 515 | | 567 | | — | | (4,714 | ) | 141 | | (4,836 | ) | (4,695 | ) |
| Instruments in C2K | | 651 | | — | | 308 | | 515 | | 567 | | — | | 2,041 | | 141 | | 1,902 | | 2,043 | |
| Floating Rate | | 717 | | — | | — | | 0 | | 361 | | — | | 1,078 | | — | | 1,077 | | 1,077 | |
| Spread | | — | | — | | — | | 0.05 | % | 0.02 | % | — | | 0.01 | % | | | | | | |
| Fixed Rate | | (66 | ) | — | | 308 | | 515 | | 206 | | — | | 963 | | 141 | | 825 | | 966 | |
| Interest Rate | | 1.90 | % | — | | 3.39 | % | 3.15 | % | 3.17 | % | — | | 3.32 | % | | | | | | |
| Instruments in GBP | | (6,755 | ) | — | | — | | — | | — | | — | | (6,755 | ) | — | | (6,738 | ) | (6,738 | ) |
| Floating Rate | | (6,755 | ) | — | | — | | — | | — | | — | | (6,755 | ) | — | | (6,738 | ) | (6,738 | ) |
| Spread | | — | | — | | — | | — | | — | | — | | — | | | | | | | |
| Fixed Rate | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Interest Rate | | — | | — | | — | | — | | — | | — | | — | | | | | | | |
| AMERICA | | 861 | | 1,779 | | 1,245 | | 1,449 | | 920 | | 2,167 | | 8,421 | | 9,250 | | (126 | ) | 9,124 | |
| Instruments in USD | | (980 | ) | 183 | | 515 | | 973 | | 361 | | 1,748 | | 2,800 | | 8,738 | | (5,324 | ) | 3,414 | |
| Floating Rate | | (615 | ) | (136 | ) | 288 | | 44 | | — | | 223 | | (196 | ) | 2,366 | | (2,472 | ) | (106 | ) |
| Spread | | (0.57 | )% | (0.65 | )% | 0.22 | % | (4.30 | )% | — | | 0.59 | % | (2.25 | )% | | | | | | |
| Fixed Rate | | (365 | ) | 319 | | 215 | | 70 | | 180 | | 1,454 | | 1,873 | | 5,402 | | (3,011 | ) | 2,390 | |
| Interest Rate | | 1.02 | % | 8.92 | % | 7.10 | % | 5.02 | % | 9.93 | % | 7.68 | % | 9.23 | % | | | | | | |
| Bounded Rate | | — | | — | | 12 | | 859 | | 181 | | 71 | | 1,123 | | 971 | | 159 | | 1,130 | |
| Instruments in ARS | | 439 | | 93 | | — | | — | | — | | 0 | | 531 | | 18 | | 505 | | 524 | |
| Floating Rate | | 136 | | — | | — | | — | | — | | — | | 136 | | 2 | | 129 | | 130 | |
| Spread | | — | | — | | — | | — | | — | | — | | — | | | | | | | |
| Fixed Rate | | 285 | | 79 | | — | | — | | — | | 0 | | 364 | | (16 | ) | 377 | | 361 | |
| Interest Rate | | 7.88 | % | 8.77 | % | — | | — | | — | | 10.38 | % | 8.08 | % | | | | | | |
| Bounded Rate | | 18 | | 14 | | — | | — | | — | | — | | 32 | | 32 | | — | | 32 | |
| Instruments in BRL | | 203 | | 1,047 | | 213 | | 100 | | 148 | | 25 | | 1,903 | | 412 | | 1,571 | | 1,983 | |
| Floating Rate | | 203 | | 1,047 | | 213 | | 100 | | 148 | | 25 | | 1,736 | | 412 | | 1,409 | | 1,821 | |
| Spread | | (1.43 | )% | (0.30 | )% | (1.69 | )% | (3.62 | )% | — | | 2.69 | % | (0.72 | )% | | | | | | |
| Fixed Rate | | 167 | | — | | — | | — | | — | | — | | 167 | | 0 | | 161 | | 162 | |
| Interest Rate | | 10.38 | % | — | | — | | — | | — | | — | | 10.38 | % | | | | | | |
| Instruments in CLP | | 442 | | 100 | | 217 | | 80 | | — | | — | | 839 | | (43 | ) | 871 | | 827 | |
| Floating Rate | | 300 | | — | | 20 | | 18 | | — | | — | | 338 | | — | | 331 | | 331 | |
| Spread | | — | | — | | (0.28 | )% | (0.33 | )% | — | | — | | (0.03 | )% | | | | | | |
| Fixed Rate | | 142 | | 100 | | 197 | | 62 | | — | | — | | 501 | | (43 | ) | 539 | | 496 | |
| Interest Rate | | 4.28 | % | 4.45 | % | 4.80 | % | 5.07 | % | — | | — | | 4.62 | % | | | | | | |
| Instruments in UFC | | 73 | | 3 | | 150 | | 194 | | 109 | | 75 | | 614 | | 139 | | 456 | | 595 | |
| Floating Rate | | 70 | | — | | — | | — | | 106 | | — | | 176 | | 111 | | 58 | | 169 | |
| Spread | | 0.08 | % | — | | — | | — | | 0.45 | % | — | | 0.30 | % | | | | | | |
| Fixed Rate | | 3 | | 3 | | 150 | | 194 | | 3 | | 75 | | 428 | | 28 | | 398 | | 426 | |
| Interest Rate | | 6.49 | % | 6.49 | % | 2.57 | % | 3.51 | % | 6.49 | % | 4.74 | % | 3.45 | % | | | | | | |
| Instruments in PEN | | 262 | | 215 | | 16 | | 11 | | 23 | | 196 | | 723 | | 353 | | 384 | | 736 | |
| Floating Rate | | 43 | | 25 | | — | | — | | — | | — | | 68 | | — | | 65 | | 65 | |
| Spread | | — | | — | | — | | — | | — | | — | | — | | | | | | | |
| Fixed Rate | | 219 | | 190 | | 16 | | 11 | | 23 | | 196 | | 655 | | 353 | | 319 | | 671 | |
| Interest Rate | | 6.10 | % | 5.80 | % | 7.94 | % | 7.00 | % | 6.07 | % | 7.99 | % | 6.64 | % | | | | | | |
| Instruments in COP | | 242 | | 58 | | 128 | | — | | — | | 5 | | 433 | | 44 | | 405 | | 449 | |
| Floating Rate | | 97 | | — | | 0 | | — | | — | | 0 | | 97 | | 0 | | 96 | | 96 | |
| Spread | | 0.00 | % | — | | 6.50 | % | — | | — | | 6.50 | % | 0.00 | % | | | | | | |
| Fixed Rate | | 146 | | 58 | | 128 | | — | | — | | 5 | | 337 | | 44 | | 308 | | 352 | |
| Interest Rate | | 9.51 | % | 8.79 | % | 8.04 | % | — | | — | | 9.50 | % | 8.83 | % | | | | | | |
| Instruments in MXN | | 646 | | 80 | | 6 | | 91 | | 279 | | 118 | | 1,220 | | 238 | | 992 | | 1,231 | |
| Floating Rate | | 702 | | 13 | | 3 | | 88 | | 277 | | — | | 1,083 | | 279 | | 808 | | 1,086 | |
| Spread | | (0.01 | )% | (0.66 | )% | (0.52 | )% | 2.59 | % | 0.60 | % | — | | 0.35 | % | | | | | | |
| Fixed Rate | | (56 | ) | 67 | | 3 | | 3 | | 2 | | 118 | | 137 | | (41 | ) | 185 | | 144 | |
| Interest Rate | | 2.61 | % | 7.93 | % | 8.83 | % | 8.83 | % | 8.83 | % | 9.25 | % | 11.27 | % | | | | | | |
| Instruments in GTQ | | 5 | | — | | — | | — | | — | | — | | 5 | | (10 | ) | 14 | | 5 | |
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| | MATURITY DATES | | FAIR VALUE | |
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| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Subsequent | | Total | | Underlying
Debt | | Associated
Derivatives | | TOTAL | |
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| Floating Rate | | 15 | | — | | — | | — | | — | | — | | 15 | | — | | 14 | | 14 | |
| Spread | | — | | — | | — | | — | | — | | — | | — | | | | | | | |
| Fixed Rate | | (10 | ) | — | | — | | — | | — | | — | | (10 | ) | (10 | ) | — | | (10 | ) |
| Interest Rate | | 2.00 | % | — | | — | | — | | — | | — | | 2.00 | % | | | | | | |
| ASIA | | 1 | | (1 | ) | 0 | | 0 | | — | | 1 | | 1 | | 291 | | (289 | ) | 2 | |
| Instruments in JPY | | 1 | | (1 | ) | 0 | | 0 | | — | | 1 | | 1 | | 291 | | (289 | ) | 2 | |
| Floating Rate | | 1 | | 0 | | 0 | | 0 | | — | | 1 | | 2 | | 148 | | (147 | ) | 2 | |
| Spread | | 3.79 | % | 3.79 | % | 3.79 | % | 1.25 | % | — | | 3.79 | % | 3.79 | % | | | | | | |
| Fixed Rate | | 0 | | (1 | ) | — | | — | | — | | 0 | | (1 | ) | 143 | | (142 | ) | 0 | |
| Interest Rate | | (1.64 | )% | 2.16 | % | — | | — | | — | | 2.30 | % | 3.76 | % | | | | | | |
| AFRICA | | — | | — | | — | | — | | — | | 91 | | 91 | | — | | 82 | | 82 | |
| Instruments in MAD | | — | | — | | — | | — | | — | | 91 | | 91 | | — | | 82 | | 82 | |
| Floating Rate | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Spread | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Fixed Rate | | — | | — | | — | | — | | — | | 91 | | 91 | | — | | 82 | | 82 | |
| Interest Rate | | — | | — | | — | | — | | — | | 4.54 | % | 4.54 | % | | | | | | |
| TOTAL | | 5,058 | | 2,355 | | 1,885 | | 4,087 | | 3,527 | | 12,494 | | 29,406 | | 30,236 | | 1,218 | | 31,454 | |
| Total Floating Rate | | 1,227 | | 663 | | 98 | | 648 | | 554 | | 2,284 | | 5,474 | | 12,937 | | (7,234 | ) | 5,704 | |
| Total Fixed Rate | | 3,805 | | 1,670 | | 1,767 | | 1,180 | | 2,568 | | 8,938 | | 19,928 | | 13,437 | | 8,135 | | 21,572 | |
| Total Bounded Rate | | 26 | | 22 | | 20 | | 2,259 | | 405 | | 1,271 | | 4,003 | | 3,862 | | 316 | | 4,179 | |
| EXCHANGE RATE OPTIONS | | (15 | ) | — | | — | | — | | — | | — | | (15 | ) | — | | (15 | ) | (15 | ) |
| OTHER LIABILITIES | | — | | — | | — | | — | | — | | — | | 502 | | — | | — | | — | |
| NET DEBT | | | | | | | | | | | | | | 29,887 | | | | | | | |
The table below is an extract of the previous table that shows the sensitivity to interest rates originated by our position on interest rate swaps.
SENSITIVITY TO INTEREST RATES AT DECEMBER 31, 2005
DETAIL FOR INTEREST RATE SWAPS
(in millions of euro, except percentages)
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| EURO | | 0 | | (0 | ) | (0 | ) | — | | — | | — | | 0 | | 74 | |
| Fixed to floating | | — | | — | | (0 | ) | — | | — | | — | | (0 | ) | (95 | ) |
| Receiving leg | | (334 | ) | (241 | ) | (740 | ) | (497 | ) | (196 | ) | (139 | ) | (2,147 | ) | (2,159 | ) |
| Average Interest Rate | | 2.51 | % | 5.72 | % | 4.69 | % | 3.06 | % | 3.06 | % | 6.73 | % | 4.07 | % | | |
| Paying leg | | 334 | | 241 | | 740 | | 497 | | 196 | | 139 | | 2,147 | | 2,065 | |
| Average Spread | | (0.12 | )% | 0.05 | % | (0.62 | )% | (0.00 | )% | (0.00 | )% | (0.04 | )% | (0.23 | )% | | |
| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | 178 | |
| Receiving leg | | (330 | ) | (615 | ) | (1,199 | ) | (326 | ) | — | | (5,000 | ) | (7,469 | ) | (7,493 | ) |
| Average Spread | | — | | 0.08 | % | (0.18 | )% | — | | — | | — | | (0.02 | )% | | |
| Paying leg | | 330 | | 615 | | 1,199 | | 326 | | — | | 5,000 | | 7,469 | | 7,671 | |
| Average Interest Rate | | 1.61 | % | 4.81 | % | 4.22 | % | 3.55 | % | — | | 3.40 | % | 3.57 | % | | |
| Floating to floating | | 0 | | (0 | ) | — | | — | | — | | — | | 0 | | (9 | ) |
| Receiving leg | | (28 | ) | (57 | ) | — | | (300 | ) | — | | (92 | ) | (477 | ) | (448 | ) |
| Average Spread | | — | | 0.26 | % | — | | 0.63 | % | — | | 0.20 | % | 0.47 | % | | |
| Paying leg | | 28 | | 57 | | — | | 300 | | — | | 92 | | 477 | | 438 | |
| Average Spread | | 0.15 | % | 0.33 | % | — | | 0.11 | % | — | | 0.10 | % | 0.14 | % | | |
| CZK | | — | | — | | — | | — | | — | | — | | — | | 2 | |
| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | 2 | |
| Receiving leg | | — | | — | | (101 | ) | (515 | ) | (206 | ) | — | | (822 | ) | (823 | ) |
| Average Spread | | — | | — | | 0.03 | % | 0.03 | % | 0.01 | % | — | | 0.02 | % | | |
141
| | MATURITY DATES | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Subsequent | | TOTAL | | Fair
Value | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Paying leg | | — | | — | | 101 | | 515 | | 206 | | — | | 822 | | 825 | |
| Average Interest Rate | | — | | — | | 3.17 | % | 3.15 | % | 3.17 | % | — | | 3.16 | % | | |
| USD | | — | | — | | — | | — | | — | | — | | — | | (15 | ) |
| Fixed to floating | | — | | — | | — | | — | | — | | — | | — | | 2 | |
| Receiving leg | | — | | — | | — | | — | | (551 | ) | — | | (551 | ) | (556 | ) |
| Average Interest Rate | | — | | — | | — | | — | | 4.71 | % | — | | 4.71 | % | | |
| Paying leg | | — | | — | | — | | — | | 551 | | — | | 551 | | 554 | |
| Average Spread | | — | | — | | — | | — | | — | | — | | — | | | |
| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | (14 | ) |
| Receiving leg | | — | | (127 | ) | (79 | ) | (31 | ) | (413 | ) | (187 | ) | (837 | ) | (799 | ) |
| Average Spread | | — | | 0.73 | % | 0.02 | % | — | | — | | — | | 0.11 | % | | |
| Paying leg | | — | | 127 | | 79 | | 31 | | 413 | | 187 | | 837 | | 785 | |
| Average Interest Rate | | — | | 5.98 | % | 4.94 | % | 4.34 | % | 4.10 | % | 4.34 | % | 4.53 | % | | |
| BRL | | — | | — | | — | | — | | — | | — | | — | | 0 | |
| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | 0 | |
| Receiving leg | | — | | (21 | ) | — | | — | | — | | — | | (21 | ) | (21 | ) |
| Average Spread | | — | | 9.43 | % | — | | — | | — | | — | | 9.43 | % | | |
| Paying leg | | — | | 21 | | — | | — | | — | | — | | 21 | | 21 | |
| Average Interest Rate | | — | | — | | — | | — | | — | | — | | — | | | |
| MXN | | — | | — | | — | | — | | — | | — | | — | | 2 | |
| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | 2 | |
| Receiving leg | | (106 | ) | (59 | ) | (1 | ) | (1 | ) | (1 | ) | — | | (168 | ) | (169 | ) |
| Average Spread | | (0.63 | )% | (0.83 | )% | (0.54 | )% | (0.54 | )% | (0.54 | )% | — | | (0.70 | )% | | |
| Paying leg | | 106 | | 59 | | 1 | | 1 | | 1 | | — | | 168 | | 171 | |
| Average Interest Rate | | 7.73 | % | 7.94 | % | 8.43 | % | 8.43 | % | 8.43 | % | — | | 7.82 | % | | |
The tables below describe all interest rates, foreign exchange options and interest rate options to which we were a party at December 31, 2005. Options are identified by notional amount and average strike price, and are classified by both type and maturity.
| | INTEREST RATE OPTIONS | |
| |
|
|
|
|
|
|
|
|
|
|
| |
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011+ | |
| |
| |
| |
| |
| |
| |
| |
| Collars | | | | | | | | | | | | | |
| Notional bought | | 7,512,651 | | 7,512,651 | | 19,285,889 | | 2,259,446,375 | | 11,773,238 | | 70,639,428 | |
| Strike Cap | | 5.520 | % | 5.520 | % | 4.745 | % | 3.725 | % | 4.250 | % | 4.250 | % |
| Strike Floor | | 5.415 | % | 5.415 | % | 3.941 | % | 2.740 | % | 3.000 | % | 3.000 | % |
| Notional sold | | — | | — | | — | | — | | — | | 1,500,000,000 | |
| Strike Cap | | — | | — | | — | | — | | — | | 6.823 | % |
| Strike Floor | | — | | — | | — | | — | | — | | 4.184 | % |
| Caps | | | | | | | | | | | | | |
| Notional sold | | 7,512,651 | | 7,512,651 | | 19,285,889 | | 2,559,446,375 | | 11,773,238 | | 70,639,428 | |
| Strike | | 7.000 | % | 7.000 | % | 6.237 | % | 3.796 | % | 5.750 | % | 5.750 | % |
| Floors | | | | | | | | | | | | | |
| Notional bought | | — | | — | | — | | 2,247,673,137 | | — | | — | |
| Strike | | — | | — | | — | | 0.010 | % | — | | — | |
| Notional sold | | — | | — | | — | | — | | 393,800,158 | | 700,000,000 | |
| Strike | | — | | — | | — | | — | | 4.431 | % | 2.146 | % |
| | FOREIGN EXCHANGE OPTIONS | |
| |
|
|
|
|
|
|
|
|
|
|
| |
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011+ | |
| |
| |
| |
| |
| |
| |
| |
| Call USD / Put ARS | | | | | | | | | | | | | |
| Notional boughtoptions | | 212,919,154 | | — | | — | | — | | — | | — | |
| Strike | | 2.9645 | | — | | — | | — | | — | | — | |
| Notional sold options | | 312,081,925 | | — | | — | | — | | — | | — | |
| Strike | | 3.1168 | | — | | — | | — | | — | | — | |
| Put USD / Call ARS | | | | — | | — | | — | | — | | — | |
| Notional boughtoptions | | 46,201,302 | | — | | — | | — | | — | | — | |
| Strike | | 2.7200 | | — | | — | | — | | — | | — | |
| Put USD / Call EUR | | | | — | | — | | — | | — | | — | |
| Notional bought options | | 1,380,494,535 | | — | | — | | — | | — | | — | |
142
| | FOREIGN EXCHANGE OPTIONS | |
| |
|
|
|
|
|
|
|
|
|
|
| |
| | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011+ | |
| Strike | | 1.2108 | | — | | — | | — | | — | | — | |
| Notional sold options | | 1,122,785,454 | | — | | — | | — | | — | | — | |
| Strike | | 1.2644 | | — | | — | | — | | — | | — | |
| Call USD / Put MXN | | | | — | | — | | — | | — | | — | |
| Notional bought options | | 77,731,627 | | — | | — | | — | | — | | — | |
| Strike | | 11.4550 | | — | | — | | — | | — | | — | |
| Notional sold options | | 77,731,627 | | — | | — | | — | | — | | — | |
| Strike | | 12.4550 | | — | | — | | — | | — | | — | |
143
SENSITIVITY TO INTEREST RATES AND EXCHANGE RATES OF DEBT OBLIGATIONS
AT DECEMBER 31, 2004
(in millions of euro, except percentages)
| | MATURITY DATES | | FAIR VALUE | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
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|
| |
| | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Subsequent | | TOTAL | | Underlying
Debt | | Associated
Derivatives | | TOTAL | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| EURO | | 5,754 | | 2,125 | | 534 | | 775 | | 1,286 | | 4,960 | | 15,434 | | 12,152 | | 4,432 | | 16,584 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Floating Rate | | (3 | ) | 6 | | (286 | ) | (47 | ) | (2 | ) | 137 | | (195 | ) | 2,606 | | (2,777 | ) | (171 | ) |
| Spread-Ref Euribor | | (776.70 | )% | 34.24 | % | (0.05 | )% | 5.36 | % | (72.67 | )% | 3.12 | % | (12.95 | )% | — | | — | | — | |
| Fixed Rate | | 5,309 | | 2,111 | | 812 | | 814 | | 788 | | 4,599 | | 14,433 | | 8,808 | | 6,736 | | 15,544 | |
| Interest Rate | | 4.58 | % | 3.97 | % | 5.27 | % | 4.16 | % | 4.24 | % | 6.07 | % | 4.96 | % | — | | — | | — | |
| Bounded Rate | | 448 | | 8 | | 8 | | 8 | | 500 | | 224 | | 1,196 | | 738 | | 473 | | 1,211 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| AMERICA | | 201 | | 741 | | 741 | | 1,055 | | 908 | | 1,635 | | 5,281 | | 8,492 | | (2,761 | ) | 5,730 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Instruments in USD | | (1,777 | ) | 24 | | 316 | | 235 | | 629 | | 1,600 | | 1,027 | | 7,707 | | (6,232 | ) | 1,474 | |
| Floating Rate | | (699 | ) | (155 | ) | 45 | | 73 | | — | | (5 | ) | (741 | ) | 2,548 | | (3,239 | ) | (690 | ) |
| Spread | | (0.33 | )% | (0.66 | )% | 3.81 | % | 1.20 | % | — | | (10.38 | )% | (0.87 | )% | — | | — | | — | |
| Fixed Rate | | (428 | ) | 179 | | 271 | | 152 | | 61 | | 1,387 | | 1,622 | | 5,158 | | (3,155 | ) | 2,004 | |
| Interest Rate | | 7.34 | % | 9.77 | % | 9.43 | % | 7.24 | % | 5.02 | % | 7.89 | % | 8.33 | % | — | | — | | — | |
| Instruments in ARS | | 134 | | 59 | | 55 | | — | | — | | — | | 248 | | 89 | | 127 | | 217 | |
| Floating Rate | | 66 | | 16 | | 1 | | — | | — | | — | | 82 | | 18 | | 64 | | 82 | |
| Spread | | — | | 2.40 | % | — | | — | | — | | — | | 0.47 | % | — | | — | | — | |
| Fixed Rate | | 68 | | 43 | | 54 | | — | | — | | — | | 165 | | 71 | | 63 | | 135 | |
| Interest Rate | | 8.83 | % | 8.64 | % | 9.27 | % | — | | — | | 10.38 | % | 8.92 | % | — | | — | | — | |
| Instruments in BRL | | 493 | | 308 | | 117 | | 544 | | 49 | | 9 | | 1,520 | | 307 | | 1,243 | | 1,550 | |
| Floating Rate | | 15 | | 260 | | 117 | | 544 | | 49 | | 9 | | 994 | | 307 | | 671 | | 977 | |
| Spread | | (7.68 | )% | (0.95 | )% | (2.06 | )% | (0.50 | )% | (5.59 | ) | — | | (1.16 | )% | — | | — | | — | |
| Fixed Rate | | 478 | | 48 | | — | | — | | — | | — | | 526 | | — | | 573 | | 573 | |
| Interest Rate | | 15.68 | % | — | | — | | — | | — | | — | | 14.26 | % | — | | — | | — | |
| Instruments in CLP | | 241 | | 11 | | 80 | | 173 | | 63 | | — | | 568 | | (137 | ) | 697 | | 560 | |
| Floating Rate | | 368 | | — | | — | | 16 | | 14 | | — | | 398 | | — | | 396 | | 396 | |
| Spread | | — | | — | | — | | (0.28 | )% | (0.33 | )% | — | | (0.02 | )% | — | | — | | — | |
| Fixed Rate | | (127 | ) | 11 | | 80 | | 157 | | 49 | | — | | 170 | | (137 | ) | 302 | | 164 | |
| Interest Rate | | 3.42 | % | 3.30 | % | 4.45 | % | 4.80 | % | 5.07 | % | — | | 5.66 | % | — | | — | | — | |
| Instruments in UFC | | 391 | | 27 | | 2 | | 83 | | 151 | | 12 | | 666 | | 230 | | 458 | | 689 | |
| Floating Rate | | 300 | | 25 | | — | | 81 | | — | | — | | 406 | | 97 | | 306 | | 403 | |
| Spread | | 0.03 | % | 0.33 | % | — | | 0.95 | % | — | | — | | 0.23 | % | — | | — | | — | |
| Fixed Rate | | 91 | | 2 | | 2 | | 2 | | 151 | | 12 | | 260 | | 133 | | 152 | | 285 | |
| Interest Rate | | 6.74 | % | 6.49 | % | 6.49 | % | 6.49 | % | 3.50 | % | 6.17 | % | 4.83 | % | — | | — | | — | |
| Instruments in PEN | | 393 | | 119 | | 75 | | 14 | | 10 | | 12 | | 623 | | 210 | | 415 | | 626 | |
| Floating Rate | | 137 | | 2 | | — | | — | | — | | — | | 139 | | — | | 136 | | 136 | |
| Spread | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Fixed Rate | | 256 | | 117 | | 75 | | 14 | | 10 | | 12 | | 484 | | 210 | | 279 | | 490 | |
| Interest Rate | | 5.08 | % | 6.06 | % | 6.33 | % | 7.94 | % | 7.00 | % | 5.00 | % | 5.63 | % | — | | — | | — | |
| Instruments in COP | | 133 | | 101 | | 30 | | — | | — | | — | | 264 | | 38 | | 213 | | 251 | |
| Fixed Rate | | 129 | | 5 | | — | | — | | — | | — | | 134 | | 28 | | 94 | | 122 | |
| Interest Rate | | 0.35 | % | 4.00 | % | — | | — | | — | | — | | 0.50 | % | — | | — | | — | |
| Fixed Rate | | 4 | | 96 | | 30 | | — | | — | | — | | 130 | | 10 | | 119 | | 128 | |
| Interest Rate | | 15.00 | % | 9.65 | % | 10.55 | % | — | | — | | — | | 10.01 | % | | | | | | |
| Instruments in MXN | | 192 | | 92 | | 66 | | 6 | | 6 | | 2 | | 364 | | 46 | | 316 | | 363 | |
| Floating Rate | | 88 | | 3 | | 11 | | 3 | | 3 | | 1 | | 109 | | — | | 107 | | 107 | |
| Spread | | (0.37 | )% | (0.52 | )% | (0.66 | )% | (0.52 | )% | (0.52 | )% | (0.52 | )% | (0.41 | )% | — | | — | | — | |
| Fixed Rate | | 104 | | 89 | | 55 | | 3 | | 3 | | 1 | | 255 | | 46 | | 209 | | 255 | |
| Interest Rate | | 8.09 | % | 7.75 | % | 7.93 | % | 8.83 | % | 8.83 | % | 8.83 | % | 7.96 | % | — | | — | | — | |
| Instruments in GTQ | | 1 | | — | | — | | — | | — | | — | | 1 | | 1 | | — | | 1 | |
| Fixed Rate | | 1 | | — | | — | | — | | — | | — | | 1 | | 1 | | — | | 1 | |
| Interest Rate | | 10.50 | % | — | | — | | — | | — | | — | | 10.50 | % | — | | — | | — | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| ASIA | | (2 | ) | — | | 1 | | — | | — | | — | | (1 | ) | 327 | | (326 | ) | 1 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Instruments in JPY | | (2 | ) | — | | 1 | | — | | — | | — | | (1 | ) | 327 | | (326 | ) | 1 | |
| Floating Rate | | 0 | | 0 | | 1 | | — | | — | | — | | 1 | | 185 | | (184 | ) | 1 | |
144
| | MATURITY DATES | | FAIR VALUE | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| |
| | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Subsequent | | TOTAL | | Underlying
Debt | | Associated
Derivatives | | TOTAL | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Spread | | 3.79 | % | 3.79 | % | 3.79 | % | — | | — | | — | | 3.79 | % | — | | — | | — | |
| Fixed Rate | | (2 | ) | — | | — | | — | | — | | — | | (2 | ) | 142 | | (142 | ) | (0 | ) |
| Interest Rate | | — | | — | | — | | — | | — | | — | | — | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| AFRICA | | 31 | | — | | — | | — | | — | | — | | 31 | | — | | 31 | | 31 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Instruments in MAD | | 31 | | — | | — | | — | | — | | — | | 31 | | — | | 31 | | 31 | |
| Fixed Rate | | — | | — | | — | | — | | — | | — | | 31 | | — | | 31 | | 31 | |
| Interest Rate | | 4.23 | % | — | | — | | — | | — | | — | | 4.23 | % | — | | — | | — | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| TOTAL | | 5,984 | | 2,866 | | 1,276 | | 1,830 | | 2,194 | | 6,594 | | 20,745 | | 20,971 | | 1,376 | | 22,347 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Total Floating Rate | | 401 | | 162 | | (111 | ) | 670 | | 64 | | 142 | | 1,328 | | 5,789 | | (4,425 | ) | 1,364 | |
| Total Fixed Rate | | 5,785 | | 2,696 | | 1,379 | | 1,142 | | 1,062 | | 6,011 | | 18,075 | | 14,444 | | 5,166 | | 19,611 | |
| Total Bounded Rate | | (202 | ) | 8 | | 8 | | 18 | | 1,068 | | 442 | | 1,342 | | 738 | | 634 | | 1,372 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| EXCHANGE RATE OPTIONS | | (25 | ) | — | | — | | — | | — | | — | | (25 | ) | — | | (25 | ) | (25 | ) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| OTHER LIABILITIES | | | | | | | | | | | | | | 268 | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| NET DEBT | | | | | | | | | | | | | | 20,982 | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
145
The table below is an extract of the previous table that shows the sensitivity to interest rates originated by our position on interest rate swaps.
SENSITIVITY TO INTEREST RATES AT DECEMBER 31, 2004
DETAIL FOR INTEREST RATE SWAPS
(in millions of euro, except percentages)
| | MATURITY DATES | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Subsequent | | TOTAL | | Fair Value | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| EURO | | — | | — | | (0 | ) | (0 | ) | — | | — | | — | | (123 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| Fixed to floating | | — | | — | | — | | (0 | ) | — | | — | | (0 | ) | (233 | ) |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| Receiving leg | | (1,085 | ) | (34 | ) | (241 | ) | (640 | ) | 3 | | (135 | ) | (2,132 | ) | (2,360 | ) |
| Average Interest Rate | | 2.23 | % | 5.77 | % | 5.72 | % | 4.94 | % | 6.37 | % | 6.74 | % | 3.77 | % | — | |
| Paying leg | | 1,085 | | 34 | | 241 | | 640 | | (3 | ) | 135 | | 2,132 | | 2,126 | |
| Average Spread | | (0.01 | )% | (0.51 | )% | 0.05 | % | (0.71 | )% | 0.11 | % | (0.04 | )% | (0.21 | )% | — | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| Floating to fixed | | — | | — | | (0 | ) | — | | — | | — | | (0 | ) | 131 | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| Receiving leg | | (1,905 | ) | (1,130 | ) | (615 | ) | (1,199 | ) | (326 | ) | (1,550 | ) | (6,725 | ) | (6,736 | ) |
| Average Spread | | 0.00 | % | — | | 0.08 | % | (0.18 | )% | — | | — | | (0.03 | )% | — | |
| Paying leg | | 1,905 | | 1,130 | | 615 | | 1,199 | | 326 | | 1,550 | | 6,725 | | 6,867 | |
| Average Interest Rate | | 0.65 | % | 2.94 | % | 4.81 | % | 4.22 | % | 3.55 | % | 3.90 | % | 2.94 | % | — | |
| | |
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| Floating to floating | | — | | — | | (0 | ) | — | | — | | — | | (0 | ) | (21 | ) |
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| Receiving leg | | (290 | ) | (28 | ) | (57 | ) | — | | (300 | ) | (92 | ) | (767 | ) | (794 | ) |
| Average Spread | | 0.34 | % | — | | 0.26 | % | — | | 0.63 | % | 0.20 | % | 0.42 | % | — | |
| Paying leg | | 290 | | 28 | | 57 | | — | | 300 | | 92 | | 767 | | 773 | |
| Average Spread | | 0.29 | % | 0.15 | % | 0.33 | % | — | | 0.11 | % | 0.10 | % | 0.20 | % | — | |
| USD | | — | | — | | — | | — | | — | | — | | — | | (43 | ) |
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| Fixed to floating | | — | | — | | — | | — | | — | | — | | — | | (60 | ) |
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| Receiving leg | | (758 | ) | — | | — | | — | | — | | (477 | ) | (1,235 | ) | (1,296 | ) |
| Average Interest Rate | | 7.31 | % | — | | — | | — | | — | | 4.71 | % | 6.30 | % | — | |
| Paying leg | | 758 | | — | | — | | — | | — | | 477 | | 1,235 | | 1,236 | |
| Average Spread | | 0.53 | % | — | | — | | — | | — | | — | | 0.33 | % | — | |
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| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | 17 | |
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| Receiving leg | | (132 | ) | (44 | ) | (44 | ) | (49 | ) | (27 | ) | (519 | ) | (815 | ) | (813 | ) |
| Average Spread | | 0.01 | % | 0.08 | % | 0.08 | % | 0.08 | % | — | | — | | 0.01 | % | — | |
| Paying leg | | 132 | | 44 | | 44 | | 49 | | 27 | | 519 | | 815 | | 830 | |
| Average Interest Rate | | 2.62 | % | 6.63 | % | 6.63 | % | 5.37 | % | 4.34 | % | 4.17 | % | 4.27 | % | — | |
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| BRL | | — | | — | | — | | — | | — | | — | | — | | (0 | ) |
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| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | (0 | ) |
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| Receiving leg | | (398 | ) | — | | — | | — | | — | | — | | (398 | ) | (456 | ) |
| Average Spread | | — | | — | | — | | — | | — | | — | | — | | — | |
| Paying leg | | 398 | | — | | — | | — | | — | | — | | 398 | | 455 | |
| Average Interest Rate | | 15.55 | % | — | | — | | — | | — | | — | | 15.55 | % | — | |
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| MXN | | — | �� | — | | — | | — | | — | | — | | — | | (0 | ) |
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| Floating to fixed | | — | | — | | — | | — | | — | | — | | — | | (0 | ) |
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| Receiving leg | | (47 | ) | (88 | ) | (49 | ) | (1 | ) | (1 | ) | (1 | ) | (187 | ) | (186 | ) |
| Average Spread | | (0.06 | )% | (0.63 | )% | (0.83 | )% | (0.54 | )% | (0.54 | )% | (0.54 | )% | (0.54 | )% | — | |
| Paying leg | | 47 | | 88 | | 49 | | 1 | | 1 | | 1 | | 187 | | 186 | |
| Average Interest Rate | | 9.43 | % | 7.73 | % | 7.94 | % | 8.43 | % | 8.43 | % | 8.43 | % | 8.22 | % | — | |
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The tables below describe all interest rates, foreign exchange options and interest rate options to which we were a party at December 31, 2004. Options are identified by notional amount and average strike price and are classified by both type and maturity.
| | INTEREST RATE OPTIONS |
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| | 2005 | | | 2006 | | 2007 | | 2008 | | | 2009 | | | 2010+ | |
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| Collars | | | | | | | | | | | | | | | | |
| Notional bought | | 3,385,015,018 | | | — | | — | | 60,101,210 | | | 2,134,160,487 | | | 1,591,770,061 | |
| Strike Cap | | 2.483 | % | | — | | — | | 5.520 | % | | 3.694 | % | | 6.675 | % |
| Strike Floor | | 2.259 | % | | — | | — | | 5.415 | % | | 2.740 | % | | 4.416 | % |
| Caps | | | | | | | | | | | | | | | | |
| Notional sold | | 3,385,015,018 | | | — | | — | | 60,101,210 | | | 2,434,160,487 | | | 91,770,061 | |
| Strike | | 2.941 | % | | — | | — | | 7.000 | % | | 4.628 | % | | 5.750 | % |
| Floors | | | | | | | | | | | | | | | | |
| Notional sold | | 1,400,000,000 | | | — | | — | | — | | | — | | | 1,071,097,628 | |
| Strike | | 2.400 | % | | — | | — | | — | | | — | | | 2.914 | % |
| Notional bought | | 400,000,000 | | | — | | — | | — | | | — | | | — | |
| Strike | | 2.125 | % | | — | | — | | — | | | — | | | — | |
| | FOREIGN EXCHANGE OPTIONS |
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| | 2005 | | | 2006 | | 2007 | | 2008 | | 2009 | | 2010+ | |
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| Call USD / Put ARS | | | | | | | | | | | | | | |
| Notional bought options | | 199,397,988 | | | — | | — | | — | | — | | — | |
| Strike | | 3.0726 | % | | — | | — | | — | | — | | — | |
| Notional sold options | | 176,973,309 | | | — | | — | | — | | — | | — | |
| Strike | | 3.5036 | % | | — | | — | | — | | — | | — | |
| Put USD / Call ARS | | | | | | | | | | | | | | |
| Notional bought options | | — | | | — | | — | | — | | — | | — | |
| Strike | | — | | | — | | — | | — | | — | | — | |
| Notional sold options | | 209,102,840 | | | — | | — | | — | | — | | — | |
| Strike | | 2.8914 | % | | — | | — | | — | | — | | — | |
| Call USD / Put EUR | | | | | | | | | | | | | | |
| Notional bought options | | 181,337,640 | | | — | | — | | — | | — | | — | |
| Strike | | 1.3315 | % | | — | | — | | — | | — | | — | |
| Notional sold options | | 40,378,827 | | | — | | — | | — | | — | | — | |
| Strike | | 1.3354 | % | | — | | — | | — | | — | | — | |
| Put USD / Call EUR | | | | | | | | | | | | | | |
| Notional bought options | | 1,054,254,460 | | | — | | — | | — | | — | | — | |
| Strike | | 1.3255 | % | | — | | — | | — | | — | | — | |
| Notional sold options | | 671,756,846 | | | — | | — | | — | | — | | — | |
| Strike | | 1.3588 | % | | — | | — | | — | | — | | — | |
Interest Rate Risk
The Telefónica Group’s financial expenses are exposed to variations in interest rates. In 2005, the short-term interest rate indices with respect to which the greatest portions of the Telefónica Group’s debt were exposed, were principally Euribor, the Brazilian SELIC rate, U.S. dollar Libor and the Chilean UF. At December 31, 2005, 55% of the Telefónica Group’s total debt (or 66% of its long-term debt) had its interest rate fixed for a period exceeding one year. Of the remaining 45% of the Telefónica Group’s total debt (floating or fixed-rate debt with maturity within one year), 14 percentage points (or 16% of the Telefónica Group’s long-term debt) had its rate bounded for a period exceeding one year, whereas at December 31, 2004, 83% of the Telefónica Group’s long-term debt had its rate fixed.
New debt incurred in 2005 has also resulted in exposure to the interest rates prevailing at the time of issuance of such debt or at the time such debt was hedged. For example, we entered into interest rate swaps to fix the financial expenses related to our €6 billion syndicated loan. In addition, changes in interest rates affect the actuarial (loss)/gain from pension liabilities that we recognize. The decrease in interest rates in 2005 has resulted in an increase in the value of those liabilities.
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In 2005, the Telefónica Group’s net financial expense was €1.634 billion, a decrease of 0.3% from 2004. Excluding the impact of variations in foreign exchange rates, the Telefónica Group’s net financial expense would have been €1.796 billion in 2005 compared to €1.462 billion in 2004, or an increase of 22.9% compared to 2004. This increase was mainly due to the fact that the Telefónica Group’s total average net debt (€29.533 billion at December 31, 2005, including pension commitments) increased 18.6% at December 31, 2005 compared to December 31, 2004. The remainder of the increase is due to the variation of interest rates in Brazil (an average Selic rate of 19.14% in 2005 compared to 16.38% in 2004) and the increase in debt denominated in Latin American currencies following the acquisition of the former BellSouth mobile operators in October 2004 and January 2005. Net financial expense in 2005 represented 5.5% of the Telefónica Group’s average total net debt for the year (6.1% excluding the impact of variations in foreign exchange rates).
Telefónica financed the acquisition of O2 through an £18.5 billion syndicated loan facility, which was reduced to £18 billion pursuant to a modification. Our borrowings under this syndicated loan facility have increased the Telefónica Group’s exposure to interest rate fluctuations. In January 2006, Telefónica refinanced the loan in part by issuing approximately €4 billion and £1.25 billion in long-term debt with the aim of extending the average maturity of its debt and with fixed interest rates similar to those used for purposes of Telefónica’s estimated valuation of O2 in connection with its acquisition.
Share Price Risk The Telefónica Group is exposed to equity risks due to movements in the price of our Telefónica shares as a result of our share buy-back program, which was announced in October 2003 and renewed in April 2005 for an estimated amount of €6 billion up to and including 2007. This renewal is subject to the Telefónica Group’s cash flow generation and to the evolution of the price of Telefónica shares.
At December 31, 2005, Telefónica, S.A. owned over 136 million of its shares and held options to purchase an additional 56 million shares, which were exercisable during the first quarter of 2006. This strategy seeks to protect against share price increases which make share repurchases more expensive and therefore limit the amount of shares that we can purchase given that the buy-back program is subject to a pre-set maximum amount we can spend. Pursuant to this strategy, the Telefónica Group can sustain a maximum economic loss equal to the premium paid for the option to purchase shares in the event that, upon expiration of the exercise period, the price of Telefónica’s shares is below the exercise price. Notwithstanding, in that case, Telefónica could buy its shares in the market for such lower price.
Telefónica also remains susceptible to variations in the price of the shares it owns in companies in which it has made investments, especially to the extent that these companies are not part of the Telefónica Group’s core business and may be subject to divestment. For example, in 2005, we sold a 25% stake in Endemol for approximately €281.3 million, resulting in pre-tax gains of €55.6 million.
Liquidity Risk The Telefónica Group seeks to adjust the maturity profile of its debt to its cash flow generation ability so as to comfortably repay its debt obligations. In practice, this implies the two following criteria:
| | 1. | The average maturity of the Telefónica Group’s debt must exceed the time required to repay that debt, assuming that internal projections are fulfilled and that all cash flows generated are assigned to repayment of debt rather than to dividend payments or acquisitions. |
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| | 2. | The Telefónica Group must be able to pay for all of its commitments in the following 12 months, without having to incur additional debt (although supported by the credit lines committed by financial institutions), assuming compliance with the Telefónica Group’s budget. |
With respect to the first criterion, at December 31, 2005, the average maturity of the Telefónica Group’s net financial debt of €30.066 billion was 5.0 years. For a reconciliation of net financial debt to gross financial debt (the sum of current and non-current interest-bearing liabilities), see “Presentation of Financial Information—Non-GAAP Financial Information—Net Financial Debt.” Thus, the
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Telefónica Group would need to generate more than €30 billion during the five years ended December 31, 2010 in order to be able to repay all debt that has a longer average maturity.
With respect to the second criterion, as at December 31, 2005, the aggregate amount of debt maturing in 2006 (€9.066 billion including derivatives) is less than the Telefónica Group’s estimated availability of funds, calculated as the sum of: (i) cash and cash equivalents and temporary financial investments at December 31, 2005 of €3.561 billion (€2.213 billion in cash and cash equivalents and €1.348 billion in temporary financial investments); (ii) the annual cash flow generation estimated for 2006; (iii) available credit lines committed by financial institutions with initial maturities exceeding one year or with the possibility of being extended at Telefónica’s option (an aggregate of €3.029 billion at December 31, 2005, including Cesky Telecom and Endemol BV); and (iv) €1.264 billion line of credit with an initial maturity exceeding one year or with the possibility of being extended at Telefónica’s option, which was used to finance in part the purchase of shares of O2 and which may be made available by refinancing them with syndicated loan of €18.5 billion dedicated to the acquisition of that company. Our estimated availability of funds in 2006 is expected to permit the payment of the minimum dividend of €0.50 per share (for an aggregate of approximately €2.4 billion) and for the continuation of the share buy-back program. See “Cautionary Statement Regarding Forward-Looking Statements” and “Item 3.D.—Risk Factors”.
In light of our acquisition of substantially all of the shares of O2 in 2006, assuming the exercise of Telefónica’s option described in (iii) and (iv) above, the amount of debt maturing in 2007 would be £2.175 billion (approximately €3.175 billion). This is due to the fact that Telefónica was able to cancel a part of the syndicated loan related to the acquisition given that (i) the acquisition cost was £17.9 billion, (ii) the company received exchange requests of shares of O2 for loan notes and (iii) the company issued long-term bonds in January 2006 in an aggregate principal amount of €4.0 billion and £1.250 billion. As a result, the syndicated loan amounts to £14.175 billion, of which only £2.175 billion cannot be extended beyond October 2007.
If we add to this amount the debt scheduled to mature in 2007 (approximately €2.4 billion), this would result in an aggregate principal amount of €5.5 billion maturing in 2007, which is similar to the aggregate principal amount scheduled to mature in 2006 (minus anticipated available funds). This amount will be affected by the outcome of the refinancing processes that is expect to take place during 2006. This process will have two opposite effects:
- an increase in the aggregate principal amount scheduled to mature in 2007 due to the short-term refinancingof part of the debt that is scheduled to mature in 2006 (especially commercial paper); and
- a reduction in the aggregate principal amount scheduled to mature in 2007 because of the new long-termfinancing incurred (bonds and loans) that will be mainly used to refinance the syndicated loan related to theacquisition of O2.
The obtaining of new long-term financing is exposed to the risks that generally characterize financial markets, both in terms of volume and costs. The potential variation in costs is not only due to the applicable reference rates (treasury bonds or spot rates), but also to the variation in the credit spread to be paid on them.
If the Telefónica Group’s operations generate the cash flows forecasted by the Group, we would expect to be able to satisfy during the latter part of 2006 the second criterion (relating to repayment of commitments in 12 months) with respect to the aggregate principal amount of debt scheduled to mature in 2007. See “Cautionary Statement Regarding Forward-Looking Statements” and “Item 3.D.—Risk Factors”.
Country Risk
Sovereign risk perception (measured by credit spreads) of the Latin American region ended 2005 below 280 basis points, the lowest level in history, as a result of several macroeconomic milestones. For a discussion of the macroeconomic environment in Latin America in 2005, see “Item 5 — Operating and Financial Review and Prospects — Operating Environment — Operating Environment by Country.”
In 2005, some governments in the region took advantage of the existing excess liquidity and the demand for emerging market risk, to exchange external for internal debt under favorable conditions (Argentina, Colombia and Peru) or to repurchase negotiable instruments issued in external markets (Argentina, Brazil, Mexico, Panama and Peru) so as to extend maturities of the long-term debt and thus increase the percentage of external debt denominated in local currency (particularly in the cases of Mexico and Brazil).
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These measures have led to the lowest levels of country risk premium in history and to a 4% appreciation of the real effective exchange rate of the region relative to the rest of the world’s currencies and more moderate public debt ratios (approximately 46% of GDP at December 31, 2005). This has strengthened investor confidence and investment rates have returned to levels in 1998, prior to the sharp economic downturn that lasted until 2002.
Even though macroeconomic conditions were generally stable in 2005 certain risks are still present at the microeconomic level. Such risks involve the high degree of regulatory discretion, the amount of bureaucratic procedures applicable to business enterprises and the rigidity of certain markets for factors of production. Similarly, additional reforms are needed with respect to the tax, education and health systems.
Despite the improvements in sovereign risk perception and the positive outlook for the region, we continue to monitor closely any unexpected loss in value of our Latin American assets due to social, economic or political instability. To monitor our country risk we continue to follow two basic guidelines:
| | 1. | To partially match our Latin American assets with liabilities of our Latin American companies that we do not guarantee so that any loss in such assets would be partially offset by a reduction in liabilities; and |
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| | 2. | To repatriate funds generated by our Latin American operations, when it is not expected that these funds would generate profits in the relevant country in the near future. |
In accordance with the first guideline, at December 31, 2005 the Telefónica Group’s Latin American companies had net financial debt (calculated as described above) of €2.716 billion that is not guaranteed by the Telefónica Group’s Spanish companies, of which €1.583 billion corresponds to Brazil and €760 million corresponds to Argentina. This represents 9% of the Group’s net financial debt at that date.
In connection with the acquisition of the former BellSouth mobile operators by the Telefónica Group, Telefónica, S.A. guaranteed certain debt of some of these companies. Part of this debt has been refinanced without guarantees by Telefónica, S.A. For example, in December 2005, the Chilean mobile operator acquired from BellSouth entered into a loan of approximately $180 million (with no guarantee by Telefónica, S.A.) in order to refinance another loan guaranteed by Telefónica, S.A. For this reason, the amount of this loan is included in the external debt of the Telefónica Group that is not guaranteed by Telefónica, S.A. presented above (even though the refinancing did not occur until the beginning of January). Additionally, during 2005 and the beginning of 2006, the mobile operator acquired from BellSouth in Peru has refinanced, with no guarantee from Telefónica, S.A., a loan in an amount of $200 million that was guaranteed by Telefónica, S.A. whose outstanding aggregate principal amount of $163 million was not included in the external debt of the Telefónica Group that is not guaranteed by Telefónica, S.A. at December 31, 2005 presented above.
Also as an exceptional measure, Telefónica, S.A. has guaranteed a program for the issuance ofCertificados Bursátilesfor an amount up to 12 billion Mexican pesos of its indirect subsidiary Telefónica Finanzas de México, S.A. de C.V. The issued aggregate principal amount under this program at December 31, 2005 amounted to 5 billion Mexican pesos (approximately €383 million). Since January 1, 2006, new issuances have increased the outstanding amount under such program to 11.5 billion Mexican pesos (approximately €912 million), which is not included in the external debt of the Telefónica Group guaranteed by Telefónica, S.A. presented above. Likewise, the amount of external debt of the Telefónica Group guaranteed by Telefónica, S.A. presented above has not been reduced by the cash available for use at December 31, 2005 that has been obtained from such issuances). The exceptional factors that have led Telefónica, S.A. to guarantee such debt are:
- the difficulty in making contributions from the Telefónica Group, both in the form of capital contributions (due to the existence of a minority shareholder) and as intragroup loans (due to taxinefficiency);
- the inability to obtain external financial resources for the required amount at a reasonable cost, giventhe extended expansion stage in which the company involved, which corresponds to a phase ofnegative operating results due to its intense commercial activity and the substantial investment ininfrastructure; and
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- the possibility of legally implementing the guarantee with no need to provide for structuralsubordination to the other creditors of Telefónica (from the point of view of the credit rating agencies).
With regard to fund repatriation, in 2005 a net amount of €1.490 billion was received from Latin America (€1.684 billion excluding Mexico), the largest part in the form of dividends (€884 million) and the rest in the form of interest and principal from loans granted to Latin American subsidiaries and management fees. On the other hand, the flow of funds to Mexico was due to Telefónica Móviles; need to make tangible investment, which totaled €261 million, and operating investments resulting from a negative OIBDA of €159 million.
The contribution to OIBDA of Telefónica, S.A. from different countries has been impacted by the acquisition of the former BellSouth mobile operators in Chile and Argentina in January 2005 and the acquisition of a majority stake in Cesky Telecom. In terms of contribution, the most important countries were in the Euro zone with a contribution of 61.8%, followed by Brazil (18.5%), Argentina (4.7%), Chile (4.2%), Venezuela (3.9%), Peru (3.8%) and the Czech Republic (3%).
Derivative Policy
At December 31, 2005, our notional amount of outstanding derivatives with external counterparties amounted to €58.134 billion. This amount reflects the fact that derivatives may be applied several times on the same underlying item for an amount equal to such underlying item’s face value. For example, a debt denominated in foreign currency may be converted to floating rate debt in euro, and then, for each of the interest rate periods an interest rate may be fixed by using a fixed rate agreement. Even if we consider only the underlying item’s face value, it is necessary to take extreme care in the use of derivatives so as to avoid potential problems as a result of errors or due to lack of full knowledge about the real position and its risks. Our policy with respect to the use of derivatives places emphasis on the following points:
| i. | Existence of a clearly identified underlying item on which the derivative is applied. |
| |
| | Among the acceptable underlying items are financial results, income and cash flows both in local currencies or in currencies other than the local one. These flows can be contractual (such as debt and interest payments and accounts payable in foreign currency) or reasonably certain or foreseeable (capital expenditures program, future debt issuances and commercial paper programs). The consideration as an underlying item in the previously mentioned cases will not depend on whether such item satisfies the criteria required by the accounting rules to be treated as a hedged item as happens, for example, in the case of certain intercompany transactions. In the case of the parent company of the Group, Telefónica, S.A., we can consider as an underlying item the investment held in a subsidiary with a functional currency that is not the euro. |
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| | The hedges designed with an economic rationale, that is, which have been assigned an underlying item and that under certain circumstances can compensate the variations in value of the underlying item, do not always fulfill the requirements and efficiency tests established by the different accounting rules to be treated as hedges. The decision to maintain hedges once it has been assessed that they do not fulfill the efficiency test or when they do not meet certain criteria will depend on the marginal variability that these hedges can cause on the income statement and therefore the difficulty they pose when following the principle of income statement stability. Notwithstanding this, the results are recorded in the profit and loss account. |
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| ii. | Matching the underlying item and one side of the derivative. |
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| | This matching is especially sought for the foreign currency debt and derivatives hedging payments in foreign currencies of the subsidiaries in the Telefónica Group, as a way of eliminating the risk of variations of interest rates in foreign currency. Nevertheless, even when a perfect hedge of the flows is sought, the scarcity of liquidity of certain markets, especially those associated with Latin American countries, has led historically to poor adjustments between the features of the hedges and the underlying debts. The Telefónica Group intends to reduce these imperfect matches as long as this objective does not involve disproportionate transaction costs. In this sense, if the match is not perfect due to the above-mentioned reasons, we will seek to modify the financial duration of the underlying item in foreign currency so that the interest rate risk in foreign currency is minimized. |
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| | In certain cases, the accounting definition of the underlying item to which the derivative is assigned doesn’t match the time horizon of an underlying contract. |
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| iii. | Coincidence between the company that contracts the derivative and the company that owns the underlying item. |
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| | In general, we will look for a situation in which the hedging derivative and the hedged item or the risk we expect to be hedged are in the same company. Nonetheless, on some occasions, the hedges have been implemented by holding companies (for example, Telefónica, S.A, Telefónica Móviles, S.A and Telefónica Internacional, S.A.) of the companies where the underlying item is recorded. This has led to a situation in which the operations did not fulfill the hedging criteria required by the accounting rules and so their result has been recorded in the profit and loss account. The main reasons for the separation between the hedge and the underlying item have been the possibility of differences in the legal validity of local hedges as opposed to international validity (as a consequence of unforeseen legal modifications) and the different credit quality of the counterparties (of the companies in the Telefónica Group involved as well as that of the banking institutions). |
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| iv. | Ability to carry out the valuation of the derivative by using calculation systems available to the Telefónica Group. |
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| | Telefónica uses several tools for the valuation and risk management of derivatives and debt. These include the Kondor+ system, licensed by Reuters, which is widely used among diverse financial institutions, as well as the specialized financial library, the MBRM financial library. |
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| v. | Sale of options only when there is an underlying exposure. |
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| | The sale of puts or call options is only permitted when: (i) there exists an underlying exposure (recorded on our balance sheet or associated with a highly probable external cash flow) that offsets the potential loss of exercising the option, or (ii) the option is included in some structure where there exists another derivative that can compensate the loss. Similarly, options may be sold that are part of option structures where the net premium is larger or equal to zero at the time of contracting. |
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| | For example, it is feasible to sell short-term options on interest rate swaps that give the counterparty the right to enter a swap that receives a certain fixed rate, lower than the prevailing rate at the time of the sale. In this manner, if interest rates decline, Telefónica would earn the premium and transform part of its debt from floating to fixed at levels below the initial ones. |
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| vi. | Hedge Accounting. |
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| | Risks with hedges that qualify for hedge accounting (that is, hedges where there exists a symmetry between the underlying item and the hedge operation) are mainly: |
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| | | The fluctuation of market interest rates (whether the market rate, the credit spread or both), which has an influence in the valuation of the underlying item or in the determination of the cash flows it generates. |
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| | | The variation of the exchange rate, which modifies the valuation of the underlying item in terms of the company’s functional currency and which has an influence in the cash flow determination in terms of the functional currency. |
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- The oscillation in the volatility associated with any financial variable, financial asset or liability thatmodifies the valuation or the cash flow determination of debts and investments with implicit options,whether or not these are separable.
- The change in the valuation of any financial asset, especially shares of companies that are within theavailable-for-sale portfolio.
As for the underlying item:
- Hedges can be implemented for the totality or for a part of such item.
- The risk being hedged might be the whole term of the operation or just a temporary fraction of it.
- The underlying item can be: (i) a highly probable future transaction; (ii) a contractible underlying item(such as a loan, a payment in foreign currency, an investment or a financial asset); or (iii) a combination ofboth giving rise to a more extended term definition of underlying item. Thus, hedges have longer maturitythan the underlying items with which they are associated. This happens when Telefónica enters long-termswaps, caps or collars to protect itself against interest rate increases that could cause an increase in financialexpenses generated by payables, commercial paper and certain floating rate loans with maturity earlier thanthat of the hedge. These financing operations are likely to be renewed at a floating rate. Also, the companycommits to this renewal when it defines the underlying item in a much more general way, that is, as afinancing program at floating rates whose maturity matches the maturity of the hedge.
Hedges might be of the following types:
- Fair value hedges.
- Effective cash flow hedges, for any value of the risk being hedged (e.g., interest rate risk or foreignexchange risk) or for a range of value associated with such risk (such as interest rates within 2% and 4% orinterest rates above 4%). In this last case, we will use options as the hedging instrument, and we will onlyrecognize as an effective hedge the intrinsic value of the option, recognizing variations in the time value ofthe option to the profit and loss account.
- Net investment hedges linked to consolidated subsidiaries of the Telefónica Group. In general, these will becarried out by Telefónica, S.A. and the rest of holding companies in the Telefónica Group. Wheneverpossible, real debt in foreign currency will be used for these hedges. Nonetheless, on many occasions, thiswill not be possible for many Latin American currencies, since non-resident companies cannot issue debt inthose currencies as they are non-convertible. Similarly, it might be the case that the liquidity of the debtmarket in terms of that particular currency is not sufficient enough in relation to the objective of the hedge(e.g., the Czech crown or British pound) or that an acquisition is accomplished by means of accumulatedcash instead of raising funds in the capital markets. In these cases, both forwards and cross-currency swapswill be used as hedging instruments to hedge the net investments. For cross-currency swaps where we payforeign currency at a fixed rate, we will use the forward method (the interest differential and the variationsin the value of the derivative due to movements in interest rates are accounted for as reserves). For cross-currency swaps where we pay foreign currency at a floating rate, we will use the spot method (the interestdifferential and the variations in the value of the derivative due to movements in interest rates areaccounted for in the profit and loss account). As an exception to this general rule, for those currencieswhere the interest rate differential is high with respect to the euro (e.g., Brazil), short-term structures arechosen (approximately one year), and the spot method is used even if cross-currency swaps for payingforeign currency at a floating rate have been contracted so as to make the comprehension of the incomestatement easier. For hedges with forwards, we analyze each case currency-by-currency. Due to technicalmarket reasons or due to a potential change in foreign-exchange risk perception, we could reverse inadvance the designation of the hedge independently of its maturity. Similarly, for those hedging positionswith near maturity (within three months) and as a result of technical reasons such as liquidity and the sizeof the market, maturity can be anticipated (by taking the opposite position or unwinding the derivative inthe market) if it has been decided to renew the hedge. In this case, the hedge designation would be revoked
153
and it would be considered similar to the maturity of the hedge. On the other hand, we could also carry outin advance the rollover of the hedge, revoking the designation of the first one so as to design the secondone. On some occasions, the renewal of the hedge with derivatives could be implemented through debtinstruments in foreign currency.
- Hedges can be made up of a set of derivatives.
- The management of accounting hedges does not need to be static. That is, the hedging relationship does notneed to remain unchanged until the end of the hedge, but it could be altered in order to perform an adequatemanagement so as to adhere to stated principles of stabilizing cash flows and financial results, andprotecting the value of our own resources. Therefore, a hedge designation could be revoked before itsmaturity as a result of a change in the underlying item or as a consequence of a change in the risk perceivedwith respect to the underlying item. The derivative instruments included in those hedges could bereassigned to other potential new hedges. These will need to be well-documented and fulfill applicableefficiency tests.
Our risk management guidelines are issued by the corporate finance area of the Telefónica Group and implemented by the financial managers of the companies in the Telefónica Group, ensuring they are in line with the individual interests of the relevant company and those of the Telefónica Group. The corporate finance area of the Telefónica Group may authorize exceptions to this policy for justified reasons, including the low level of liquidity of the markets with respect to clearly limited and reduced risks. Similarly, the incorporation of new companies in the Telefónica Group as a result of acquisitions or mergers requires an adaptation period.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USEOF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a)Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.
(b)Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16.
A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Antonio Massanell, the chairman of our Audit and Control Committee, meets the requirements of an “audit committee financial expert” as defined by the SEC.
154
B. CODE OF ETHICS
We have adopted a code of ethics (Normas de Conducta Para Financieros Grupo Telefónica), applicable to our Chief Executive Officer, Chief Financial Officer, principal accounting officer, controller and persons performing similar functions within the Telefónica Group. A copy of our code of ethics is filed as an Exhibit to this Annual Report.
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The fees accrued for the fiscal year 2005 from the various member firms of the Ernst & Young international organization, to which Ernst & Young, S.L., our auditors, belong, amounted to €14.84 million. The fees accrued for the fiscal year 2004 from the various member forms of the Deloitte Touche Tohmatsu international organization, to which Deloitte, S.L., our auditors during that year, belong, amounted to €13.26 million. These fees include the total amounts of the Spanish and foreign companies in which the Telefónica Group has effective control or joint control with third parties.
| | | For the year ended
December 31, |
| | |
|
| | | 2005 | | 2004 |
| | |
| |
|
| | | (in millions of euro) |
| Audit Fees | | 12.54 | | 11.00 |
| Audit-Related Fees(1) | | 0.61 | | 1.16 |
| Tax Fees(2) | | 0.31 | | 0.23 |
| All Other Fees(3) | | 1.38 | | 0.87 |
| | |
| |
|
| Total Fees | | 14.84 | | 13.26 |
| | |
| |
|
| | | | | |
|
| (1) | Audit-Related Fees:The services included under this caption are basically due diligence services related to business combinations, review of information required by the different regulatory authorities and attestation services related to financial reporting that are not required by statute or regulation. |
| |
| (2) | Tax Fees:The services included under this caption are, among others, consultancy and tax advising, review of tax returns, studies of transference prices, tax reviews and issuance of tax opinions required by local regulations. |
| |
| (3) | All Other Fees: The services included under this caption are assistance in relation to the Sarbanes-Oxley Act, improvement and consolidation of Internet portals, process consulting related to project implementation and quality assurance and revision of operating procedures related to security. |
| |
| D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
| |
| Not applicable. |
155
| E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
| |
| Period of Fiscal Year | | (a) Total Number of
Shares Purchased | | (b) Average Price Paid per
Share (euros) | | (c) Total Number of Shares (or Units)
Purchased as Part of Publicly
Announced Plans or Programs(1) (2) |
| |
| |
| |
|
| January 1 to January 31 | | 12,065,043 | | 13.44 | | 11,440,421 | |
| February 1 to February 28 | | 41,463,332 | | 6.00 | | 27,718,807 | |
| March 1 to March 31 | | 1,300,000 | | 13.50 | | 129,787 | |
| April 1 to April 30 | | 18,829,787 | | 13.28 | | — | |
| May 1 to May 31 | | — | | — | | — | |
| June 1 to June 30 | | 16,963,451 | | 13.56 | | 16,963,451 | |
| July 1 to July 31 | | 18,229,268 | | 13.61 | | 18,229,268 | |
| August 1 to August 31 | | 17,225,000 | | 13.74 | | 17,225,000 | |
| September 1 to September 30 | | 11,829,486 | | 13.65 | | 11,829,486 | |
| October 1 to October 31 | | 12,723,831 | | 13.65 | | 12,723,831 | |
| November 1 to November 30 | | 70,850,000 | | 12.78 | | 65,273,777 | |
| December 1 to December 31 | | 8,559,672 | | 12.55 | | — | |
| | |
| | | |
| |
| Total | | 230,038,870 | | 11.92 | | 181,533,828 | |
| | |
| | | |
| |
| | | | | | | | |
|
| (1) | (The number of shares of the treasury stock at the end of year 2005 amounted to 136,647,061 (207,245,179 at the end of year 2004). |
| |
| (2) | All purchases listed are related to our announcement in 2003 of our commitment to dedicate a minimum of €4 billion to the acquisition of our treasury stock over the 2003-2006 period, subject to free cash flow generation and our share price. Consistent with our commitment to shareholder remuneration, in April 2005 we announced our decision to execute a renewed and extended €6 billion share buyback program until 2007. |
156
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Please see pages F-1 through F-146.
ITEM 19.EXHIBITS
Exhibit
Number | | Description |
| |
|
| 1.1 | | Amended and Restated Articles of Association (English translation) |
| 4.1 | | Merger Plan of Telefónica, S.A. and Telefónica Móviles, S.A dated as of March 29, 2006* |
| 4.2 | | Framework Agreement between Telefónica, S.A. and O2 plc dated October 31, 2005, together with the amendment thereto dated November 18, 2005 |
| 4.3 | | Merger Plan of Telefónica, S.A. and Terra Networks, S.A. dated as of February 23, 2005** |
| 4.4 | | Stock purchase agreement dated as of March 5, 2004 by and among Telefónica Móviles, S.A., each of the entities listed on Schedule 1 thereto, and Bell South Corporation*** |
| 4.5 | | Strategic Alliance Framework Agreement dated as of February 12, 2003 between Telefónica, S.A. and Terra Networks S.A.†**** |
| 4.6 | | Shareholders’ Agreement dated as of October 17, 2002 among Telefónica Móviles, S.A., Portugal Telecom, SGPS, S.A., PT Móveis, SGPS, S.A. and Brasilcel B.V.†**** |
| 4.7 | | Subscription Agreement dated as of October 17, 2002 among Telefónica Móviles, S.A., Portugal Telecom, SGPS, S.A., PT Móveis, SGPS, S.A. and Brasilcel B.V.†**** |
| 8.1 | | Subsidiaries of Telefónica, S.A. (see note 1 to the consolidated financial statements and Appendix I thereto) |
| 11.1 | | Code of Conduct for Financial Officers*** |
| 12.1 | | Certification of César Alierta Izuel, Chief Executive Officer of Telefónica, S.A., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 12.2 | | Certification of Santiago Fernández Valbuena, Chief Financial Officer of Telefónica, S.A., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 13.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
| * | Incorporated by reference to Telefónica, S.A.’s filing made pursuant to Rule 425 under the U.S. Securities Act of 1933, as amended, on March 29, 2006. |
| | |
| ** | Included as Annex A-1 to the joint information statement/prospectus contained in the registration statement on Form F-4 of Telefónica, S.A. and Terra Networks, S.A. (registration no. 333-123162). |
| |
| *** | Incorporated by reference to Telefónica, S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2003. |
| |
| **** | Incorporated by reference to Telefónica, S.A.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2002. |
| |
| † | Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended, and Rule 24b-2 promulgated thereunder. Omitted information has been marked with a star (*). |
157
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| | | | |
| | TELEFÓNICA, S.A. |
| |
| |
| | By: | /s/ César Alierta Izuel |
| |
|
| | | Name: | César Alierta Izuel |
| | | Title: | Chief Executive Officer |
| |
| |
| | TELEFÓNICA, S.A. |
| |
| |
| | By: | /s/ Santiago Fernández Valbuena |
| |
|
| | | Name: | Santiago Fernández Valbuena |
| | | Title: | Chief Financial Officer |
| | | | |
Date: April 12, 2006
158
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Telefónica, S.A.
| | | Page |
| | | |
| Independent Auditor’s Report for the year ended December 31, 2005 | | F-2 |
| | | |
| Independent Auditor’s Report for the year ended December 31, 2004 | | F-3 |
| | | |
| Consolidated Balance Sheets as of December 31, 2005 and 2004 | | F-4 |
| | | |
| Consolidated Income Statements for the years ended December 31, 2005 and 2004 | | F-5 |
| | | |
| Consolidated Cash Flow Statements for the two years ended December 31, 2005 and 2004 | | F-6 |
| | | |
| Consolidated Statements of Recognized Income and Expense for the years ended December 31, 2005 and 2004 | | F-7 |
| | | |
| Notes to the Consolidated Financial Statements for the years ended December 31, 2005 and 2004 | | F-8 |
| | | |
| Appendices to the Consolidated Financial Statements for the years ended December 31, 2005 and 2004 | | A-1 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Telefónica, S.A.
We have audited the accompanying consolidated balance sheet of Telefónica, S.A. and companies composing the Telefónica Group as of December 31, 2005, and the related consolidated statements of income, cash flows and recognized income and expense for the year then ended. These consolidated financial statements are the responsibility of the controlling Company's Directors. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telefónica, S.A. and companies composing the Telefónica Group as of December 31, 2005 and of the consolidated results of its operations and its cash flows for the year then ended in conformity with International Financial Reporting Standards as adopted by the European Union, which differ in certain respects from U.S. generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in Note 23 to the consolidated financial statements.
Ernst & Young, S.L.
/s/ José Miguel Andrés Torrecillas
José Miguel Andrés Torrecillas
Madrid, Spain
April 12, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Telefónica, S.A.:
We have audited the accompanying consolidated balance sheet of Telefónica, S.A. and of the companies comprising the Telefónica Group (the “Company”) as of December 31, 2004, the related consolidated statements of income, cash flows and recognized income and expense for the year then ended. These consolidated financial statements are the responsibility of the controlling Company’s Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provide a reasonable basis for our opinion.
Comparative financial statements related to the year ended December 31, 2003, as required in IAS 1,Presentation of Financial Statements, are not presented. In our opinion, disclosure of such comparative information isrequired under International Financial Reporting Standards, as adopted by the European Union.
In our opinion, except for the omission of the comparative financial statements as discussed in the preceding paragraph, such consolidated financial statements present fairly, in all material respects, the financial position of Telefónica, S.A. and of the companies composing Telefónica Group as of December 31, 2004, and the results of their operations and their cash flows for the year ended December 31, 2004, in conformity with International Financial Reporting Standards, as adopted by the European Union.
As discussed in Note 2, the Company adopted International Financial Reporting Standards as adopted by the European Union (“IFRS-EU”) in preparing their consolidated financial statements as of December 31, 2005. For purposes of these consolidated financial statements, the Company has developed accounting policies based on IFRS-EU issued to date that are effective at the Company’s reporting date of December 31, 2005. IFRS 1,First-time Adoption of International Financial Reporting Standards, requires that an entity develops accounting policies based on the standards and related interpretations effective at the reporting date of its first IFRS-EU financial statements. IFRS 1 also requires that those policies be applied as of the date of transition to IFRS-EU and throughout all periods presented in the first IFRS-EU financial statements. Accordingly, the figures for 2004 differ from those previously contained in the approved consolidated financial statements for 2004, which were prepared in accordance with the accounting principles generally accepted in Spain (“Spanish GAAP”) in force in that year.
IFRS-EU vary in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Information relating to the nature and effect of such differences is presented in Note 23 to the consolidated financial statements. In prior years, pursuant to Item 17(c)(iv)(A) of Form 20-F, the Company’s reconciliation from Spanish GAAP to U.S. GAAP excluded any adjustments attributable to the effect of differences resulting from the accounting for inflation under Spanish GAAP. With the Company’s adoption of IFRS-EU, Item 17(c)(iv)(A) of Form 20-F is no longer applicable.
Therefore, for purposes of the information relating to the nature and effect of differences between IFRS-EU and U.S. GAAP, consolidated shareholders’ equity and consolidated net income under U.S. GAAP have been restated for the year ended December 31, 2004, in order to remove the effects of inflation that previously were not made.
/s/ Deloitte, S.L.
Madrid, Spain
April 12, 2006
F-3
| TELEFÓNICA GROUP |
| CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 |
| (MILLIONS OF EUROS) | | | | |
|
|
|
|
|
| ASSETS | | 2005 | | 2004 |
|
|
|
|
|
| A) NON-CURRENT ASSETS | | 59,545.00 | | 48,954.47 |
|
|
|
|
|
| Intangible assets (Note 5) | | 7,877.11 | | 5,674.13 |
| Goodwill (Note 6) | | 8,910.23 | | 5,949.44 |
| Property, plant and equipment (Note 7) | | 27,992.60 | | 23,193.37 |
| Investment property | | 34.81 | | 28.37 |
| Investments in associates (Note 9) | | 1,664.35 | | 1,651.68 |
| Non-current financial assets (Note 8) | | 4,681.23 | | 3,500.34 |
| Deferred tax assets (Note 16) | | 8,384.67 | | 8,957.14 |
| | | | | |
| B) CURRENT ASSETS | | 13,628.77 | | 11,124.39 |
|
|
|
|
|
| Inventories | | 919.51 | | 655.52 |
| Trade and other receivables (Note 10) | | 7,515.75 | | 5,919.75 |
| Current financial assets (Note 8) | | 1,517.76 | | 2,556.61 |
| Current tax receivables (Note 16) | | 1,448.26 | | 1,069.49 |
| Cash and cash equivalents | | 2,213.21 | | 914.35 |
| Non-current assets held for sale | | 14.28 | | 8.67 |
|
|
|
|
|
| TOTAL ASSETS (A + B) | | 73,173.77 | | 60,078.86 |
|
|
|
|
|
| | | | | |
| | | | | |
| EQUITY AND LIABILITIES | | 2005 | | 2004 |
|
|
|
|
|
| A) EQUITY (Note 11) | | 16,158.43 | | 12,342.47 |
|
|
|
|
|
| Equity attributable to equity holders of the parent | | 12,733.29 | | 10,439.76 |
| Minority interests | | 3,425.14 | | 1,902.71 |
| | | | | |
| B) NON-CURRENT LIABILITIES | | 35,126.47 | | 27,742.58 |
|
|
|
|
|
| Interest-bearing debt (Note 12) | | 25,167.58 | | 17,492.23 |
| Trade and other payables (Note 13) | | 1,128.21 | | 1,200.08 |
| Deferred tax liabilities (Note 16) | | 2,477.44 | | 1,642.61 |
| Provisions (Note 14) | | 6,353.24 | | 7,407.66 |
| | | | | |
| C) CURRENT LIABILITIES | | 21,888.87 | | 19,993.81 |
|
|
|
|
|
| Interest-bearing debt (Note 12) | | 9,235.87 | | 10,210.40 |
| Trade and other payables (Note 13) | | 9,718.56 | | 7,696.05 |
| Cuurent tax payables (Note 16) | | 2,191.62 | | 1,824.94 |
| Provisions | | 742.82 | | 259.70 |
| Liabilities linked to noncurrentassets held for sale | | - | | 2.72 |
|
|
|
|
|
| TOTAL EQUITY AND LIABILITIES (A+B+C) | | 73,173.77 | | 60,078.86 |
|
|
|
|
|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated balance sheets.
F-4
| TELEFÓNICA GROUP |
| CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31 |
| (MILLIONS OF EUROS) |
|
|
|
|
|
|
|
| INCOME STATEMENT | | 2005 | | | 2004 | |
|
|
|
|
|
|
|
| Revenues from operations (Note 17) | | 37,882.16 | | | 30,280.92 | |
| Other income (Note 19) | | 1,418.26 | | | 1,133.41 | |
| Supplies | | (10,065.05 | ) | | (7,637.33 | ) |
| Personnel expenses (Note 19) | | (5,656.34 | ) | | (5,095.17 | ) |
| Other expenses (Note 19) | | (8,302.60 | ) | | (6,459.80 | ) |
| Depreciation and amortization | | (6,717.68 | ) | | (5,666.03 | ) |
|
|
|
|
|
|
|
| II. OPERATING INCOME | | 8,558.75 | | | 6,556.00 | |
|
|
|
|
|
|
|
| Share of profit (loss) of associates (Note 9) | | (128.21 | ) | | (50.49 | ) |
|
|
|
|
|
|
|
| Net financial expenses | | (1,796.37 | ) | | (1,462.06 | ) |
| Net exchange differences | | 162.04 | | | (177.05 | ) |
|
|
|
|
|
|
|
| Net financial income (expense) (Note 15) | | (1,634.33 | ) | | (1,639.11 | ) |
|
|
|
|
|
|
|
| III. PROFIT BEFORE TAXES FROM CONTINUING OPERATIONS | | 6,796.21 | | | 4,866.40 | |
|
|
|
|
|
|
|
| Corporate income tax (Note 16) | | (1,969.15 | ) | | (1,512.78 | ) |
|
|
|
|
|
|
|
| | | | | | | |
| IV PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS | | 4,827.06 | | | 3,353.62 | |
|
|
|
|
|
|
|
| Profit from discontinued operations after taxes (Note 18) | | - | | | 131.97 | |
|
|
|
|
|
|
|
| V. PROFIT FOR THE YEAR | | 4,827.06 | | | 3,485.59 | |
|
|
|
|
|
|
|
| Minority interests (Note 11) | | (381.21 | ) | | (309.92 | ) |
|
|
|
|
|
|
|
| Profit for the entire year attributable to equity | | 4,445.85 | | | 3,175.67 | |
| holders of the parent | | | | | | |
|
|
|
|
|
|
|
| Basic and diluted earnings per share attributable to equity holders of the parent (Note | | 0.913 | | | 0.637 | |
| 19) (euros) | | | | | | |
|
|
|
|
|
|
|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated income statements.
F-5
| TELEFÓNICA GROUP |
| CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED DECEMBER 31 |
| (MILLIONS OF EUROS) |
|
|
|
|
|
|
|
| | | 2005 | | | 2004 | |
|
|
|
|
|
|
|
| Cash flows from operating activities | | | | | | |
|
|
|
|
|
|
|
| Cash received from customers | | 44,353.14 | | | 36,367.10 | |
| Cash paid to suppliers and employees | | (30,531.54 | ) | | (24,674.10 | ) |
| Dividends received | | 70.58 | | | 71.24 | |
| Net interest and other financial expenses paid | | (1,520.00 | ) | | (1,307.11 | ) |
| Taxes paid | | (1,233.04 | ) | | (326.00 | ) |
|
|
|
|
|
|
|
| Net cash from operating activities | | 11,139.14 | | | 10,131.13 | |
|
|
|
|
|
|
|
| Cash flows from investing activities | | | | | | |
|
|
|
|
|
|
|
| Proceeds on disposals of property, plant and equipment and intangible assets | | 113.20 | | | 241.27 | |
| Payments on investments in property, plant and equipment and intangible assets | | (4,423.22 | ) | | (3,488.15 | ) |
| Proceeds on disposals of companies, net of cash and cash equivalents disposed | | 501.59 | | | 531.98 | |
| Payments on investments in companies, net of cash and cash equivalents acquired | | (6,571.40 | ) | | (4,201.57 | ) |
| Proceeds on financial investments not included under cash equivalents | | 147.61 | | | 31.64 | |
| Payments made on financial investments not included under cash equivalents | | (17.65 | ) | | (76.35 | ) |
| Interest received on short-term investments not included under cash equivalents | | 625.18 | | | 1,139.51 | |
| Capital grants received | | 32.67 | | | 13.51 | |
|
|
|
|
|
|
|
| Net cash used in investing activities | | (9,592.02 | ) | | (5,808.16 | ) |
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|
|
|
|
|
|
| Cash flows from financing activities | | | | | | |
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|
|
|
|
|
|
| Dividends paid (Note 11) | | (2,768.60 | ) | | (2,865.81 | ) |
| Proceeds from issue of stock | | (2,054.12 | ) | | (1,938.56 | ) |
| Proceeds on issue of debentures and bonds | | 875.15 | | | 572.99 | |
| Proceeds on loans, credits and promissory notes | | 16,533.96 | | | 10,135.11 | |
| Cancellation of debentures and bonds | | (3,696.52 | ) | | (1,790.57 | ) |
| Repayments of loans, credits and promissory notes | | (9,324.54 | ) | | (8,049.77 | ) |
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|
|
|
|
|
|
| Net cash from financing activities | | (434.67 | ) | | (3,936.61 | ) |
|
|
|
|
|
|
|
| Effect of foreign exchange rate changes on collections and payments | | 165.73 | | | 74.18 | |
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|
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|
|
| Effect of changes in consolidation methods and other nonmonetary effects | | 9.62 | | | (36.76 | ) |
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|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents during the year | | 1,287.80 | | | 423.78 | |
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| CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR | | 914.35 | | | 490.57 | |
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| CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR | | 2,202.15 | | | 914.35 | |
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| | | | | | | |
| | | | | | | |
| RECONCILIATION OF NET CASH FLOWS AND CASH EQUIVALENTS WITH THE BALANCE SHEET |
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| | | | | | | |
| Net increase (decrease) in cash and cash equivalents during the year | | 1,287.80 | | | 423.78 | |
|
|
|
|
|
|
|
| | | | | | | |
| CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR | | 914.35 | | | 490.57 | |
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|
|
|
|
|
|
| Cash on hand and at banks | | 855.02 | | | 336.42 | |
| Other cash equivalents | | 59.33 | | | 154.15 | |
| | | | | | | |
| CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR | | 2,202.15 | | | 914.35 | |
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|
|
|
|
|
| Cash on hand and at banks | | 1,555.17 | | | 855.02 | |
| Other cash equivalents | | 658.04 | | | 59.33 | |
| Bank overdrafts (1) | | (11.06 | ) | | - | |
(1) Included under “interest bearing - debt ” on the consolidated balance sheet.
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated cash flow statements.
F-6
TELEFÓNICA GROUP
CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE FOR THE YEARS ENDED DECEMBER 31
(MILLIONS OF EUROS)
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| | | 2005 | | | 2004 | |
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|
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| Gain (loss) on available-for-sale investments | | (79.78 | ) | | 111.08 | |
| Gain (loss) on cash flow hedges | | (125.60 | ) | | (274.89 | ) |
| Translation differences | | 2,577.09 | | | (316.24 | ) |
| Share of income (loss) directly recognized in equity of associates | | (49.67 | ) | | (94.72 | ) |
| Tax effect of items recognized directly in equity | | 71.88 | | | 90.50 | |
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|
| Net income (loss) recognized directly in equity | | 2,393.92 | | | (484.27 | ) |
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| | | | | | | |
| Profit for the year | | 4,827.06 | | | 3,485.59 | |
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| | | | | | | |
| Total income and expense recognized in the year (Note 11) | | 7,220.98 | | | 3,001.32 | |
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| | | | | | | |
| Attributable to: | | | | | | |
| Equity holders of the parent | | 6,397.33 | | | 2,699.37 | |
| Minority interests | | 823.65 | | | 301.95 | |
| |
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| | | 7,220.98 | | | 3,001.32 | |
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|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated statements of recognized income and expense.
F-7
| TELEFÓNICA, S.A. AND SUBSIDIARIES COMPOSING THE |
| TELEFÓNICA GROUP |
| |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONSOLIDATED |
| ANNUAL ACCOUNTS) FOR THE YEAR ENDED DECEMBER 31, 2005 AND 2004 |
(1) INTRODUCTION AND GENERAL INFORMATION
Telefónica Group organizational structure
Telefónica, S.A. and its subsidiaries and investees make up an integrated group of companies (the “Telefónica Group,” “the Group” or "the Company”) operating mainly in the telecommunications, media and entertainment industries.
The parent company of this Group is Telefónica, S.A. (“Telefónica”), incorporated on April 19, 1924. Its registered office is at calle Gran Vía 28, Madrid (Spain).
Appendix I lists the subsidiaries, associates and investees in which the Telefónica Group has direct or indirect holdings, their lines of business, their registered offices, their net worth and results at year-end, their gross book value, their contribution to the reserves of the Consolidated Group and the consolidation method used.
Corporate structure of the Group
Telefónica’s basic corporate purpose, per Article 4 of its bylaws, is the provision of all manner of public and private telecommunications services, and all manner of ancillary or complementary telecommunications services or related services. All the business activities that constitute this stated corporate purpose may be performed either in Spain or abroad and may be carried out either wholly or partially by the Company, either through shareholdings or equity interests in other companies or legal entities with an identical or a similar corporate purpose.
The main groups of subsidiaries through which Telefónica carries out its corporate purpose and manages its business areas or basic lines of business are as follows:
| – | Telefónica de España Group: the wireline telephony business and the related supplementary services provided in Spain. |
| | |
| – | Telefónica Móviles Group: the national and international wireless telephony business, except in the Czech Republic. |
| | |
| – | Telefónica Internacional Group: investment and management of investments in the wireline telephony industry in Latin America. |
| | |
| – | Telefónica Publicidad e Información, S.A. - TPI (the directories business), Atento, N.V. (call center services), Telefónica de Contenidos, S.A. (media, entertainment and content) and Cesky Telecom (the fixed line and wireless telephony business in the Czech Republic). |
The business activities carried out by most of the Telefónica Group companies are regulated by broad ranging legislation, pursuant to which permits, concessions or licenses must be obtained in certain circumstances to provide the various services.
F-8
In addition, certain wireline and wireless telephony services are provided under regulated rate and price systems.
A more detailed breakdown of the activities carried out by the Group is provided in Note 17.
(2) BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements were prepared from the accounting records of Telefónica, S.A. and of each of the companies composing the Telefónica Group, which were drawn up in accordance with the generally accepted accounting principles prevailing in the various countries in which the companies composing the Consolidated Group are located, and presented in accordance with the International Financial Reporting Standards (IFRS) to give a true and fair view of the net worth, financial position, results of operations and cash flow obtained and used in 2005. The figures in these consolidated financial statements are expressed in millions of euros unless indicated otherwise. The euro is the Group’s operating currency.
The annual consolidated financial statements for the year ended December 31, 2004, approved at Telefónica, S.A.’s Ordinary Shareholders’ Meeting on May 31, 2005, were prepared in accordance with Spain’s generally accepted accounting principles (the Spanish General Chart of Accounts or “Spanish GAAP”). Pursuant to European Parliament regulation 1606/2002 of July 19, 2002, Telefónica is obliged to apply the International Financial Reporting Standards (IFRS) endorsed by the European Union for preparing and presenting its consolidated financial information as from January 1, 2005. Accordingly, the consolidated financial statements for the year ended December 31, 2005 have been prepared under IFRS, and the 2004 consolidated financial information included for comparative purposes was restated in accordance with IFRS.
The accompanying consolidated financial statements for the year ended December 31, 2005 were prepared by the Company’s Board of Directors at its meeting on February 28, 2006 for approval at the General Shareholders’ Meeting. The Board expects the financial statements to be approved without any modification.
Note 4 contains a detailed description of the most significant accounting policies used to prepare the financial statements for 2004 and 2005 (2004 information for comparative purposes only).
First-time adoption of International Financial Reporting Standards
The transition of the Telefónica Group's consolidated financial statements to IFRS has been carried out by applyingIFRS 1: First-Time Adoption of International Financial Reporting Standards, taking January 1, 2004 as the beginning of the first comparative period presented under the new accounting standards. This date is considered the IFRS transition date.
F-9
As a general rule, the accounting policies in force on December 31, 2005 must be applied retroactively to prepare an opening balance sheet for the date of transition and all following years. IFRS 1 provides for certain exceptions to the complete retroactive restatement of the opening balance sheet under IFRS. The main exceptions are as follows:
IFRS 3 – Business
Combinations | The Telefónica Group has elected to apply IFRS 3BusinessCombinationsprospectively from the transition date, i.e., it has notrestated business combinations occurring prior to January 1, 2004. |
IAS 16 – Fair value or
revaluation as deamed
cost | The Telefónica Group has chosen to continue to carry its plant,property and equipment and intangible assets at their respectivecarrying amounts under former Spanish GAAP, without restatingany of these items at their fair value at January 1, 2004. |
IAS 19 – Employee
Benefits | The Telefónica Group has elected to recognize all cumulativeactuarial gains and losses at January 1, 2004. |
IAS 21– Accumulated
translation differences | The Telefónica Group has elected to reset the accumulatedtranslation adjustments up to the IFRS transition date to zero. |
IAS 32 and IAS 39 –
Financial instruments | The Telefónica Group has chosen not to apply the exceptionpermitting the application of IAS 39Financial Instruments:Recognition and Measurementand IAS 32Financial Instruments:Presentation and Disclosurefrom January 1, 2005, applying thesestandards as from the IFRS transition date, i.e., January 1, 2004. |
IFRS 2 – Share-based
Payments. | The Telefónica Group has elected not to apply IFRS 2Share-basedPaymentsto measure share-based payment schemes to be settled in shares and granted prior to November 7, 2002. |
The preparation of our consolidated financial statements under IFRS requires a series of modifications to the presentation and measurement standards applied by the Company until December 31, 2004, as certain IFRS principles and requirements are substantially different from their Spanish GAAP equivalents.
The following is a detailed description of the main differences between the two sets of accounting principles as applied by the Company and the impact on equity at December 31, and January 1, 2004 and net profit in 2004.
F-10
Reconciliation of consolidated equity under Spanish GAAP and IFRS at January 1, 2004 and December 31, 2004.
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|
| Millions of euros | | Consolidated
equity at
1/1/04 | | | Consolidated
equity at
12/31/04 | |
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| | | | | | | |
| Equity under Spanish GAAP | | 16,756.56 | | | 16,225.10 | |
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|
| Goodwill and other fair value adjustments made in business combinations | | (3,609.98 | ) | | (3,341.74 | ) |
| Treasury shares and own equity instruments | | (367.95 | ) | | (846.76 | ) |
| Revenue recognition | | (392.78 | ) | | (340.52 | ) |
| Corporate income tax | | (416.76 | ) | | (403.46 | ) |
| Capitalized expenses (start-up and share capital issuance expenses) | | (265.82 | ) | | (207.71 | ) |
| Post-employment benefits and severance payments | | (168.39 | ) | | (316.06 | ) |
| Inflation adjustment (hyperinflationary economies) | | (68.26 | ) | | (163.34 | ) |
| Financial instruments and exchange changes | | 66.26 | | | (123.35 | ) |
| Associates (significant influence) | | 18.80 | | | (17.21 | ) |
| Other adjustments | | 52.24 | | | (25.19 | ) |
| Total adjustments | | (5,152.64 | ) | | (5,785.34 | ) |
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| Equity attributable to holders of the parent | | 11,603.92 | | | 10,439.76 | |
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| Minority interests | | 2,446.28 | | | 1,902.71 | |
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| Consolidated equity under IFRS | | 14,050.20 | | | 12,342.47 | |
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|
Reconciliation between net profit for the year under Spanish GAAP and IFRS for 2004
|
|
|
|
| Millions of euros | | Consolidated
net income
12/31/04 | |
|
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| | | | |
| Net profit under Spanish GAAP | | 2,877.29 | |
|
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|
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| | | | |
| Goodwill and other fair value adjustments made in business combinations | | 454.93 | |
| | | | |
| Revenue recognition | | 60.74 | |
| Corporate income tax | | (133.52 | ) |
| Capitalized expenses (start-up and share capital issuance expenses) | | 67.50 | |
| Post-employment benefits and severance payments | | (88.75 | ) |
| Inflation adjustment (hyperinflationary economies) | | (75.77 | ) |
| Financial instruments and exchange rate changes | | (49.57 | ) |
| Other adjustments | | 62.82 | |
| Total adjustments | | 298.38 | |
|
|
|
|
| Net profit for the year under IFRS | | 3,175.67 | |
|
|
|
|
The amounts in the preceding table were calculated after taxes and minority interests.
Goodwill and other fair value adjustments made in business combinations
Under Spanish GAAP, goodwill and fair value adjustments in business combinations involving foreign companies may be translated at the historic exchange rate. Under IFRS, these items should be denominated in the currency of the foreign company and, accordingly, must be translated at the prevailing exchange rate at the balance sheet closing date.
F-11
Under IFRS, goodwill and intangible assets of indefinite useful life are no longer amortized, although they are subject to an annual impairment test to determine their recoverability. Under Spanish GAAP, goodwill and all intangible assets are systematically amortized on a straight-line basis over their estimated useful lives, which cannot exceed certain limits.
Under IFRS, the cost of administrative concessions is amortized on a straight-line basis over their useful lives. Under Spanish GAAP, the Telefónica Group systematically depreciated these concessions over their useful lives using methods based on revenues generated or the number of customers in each financial year.
These adjustments have a net negative impact on equity of 3,341.74 and 3,609.98 million euros at December 31, and January 1, 2004, respectively. The positive impact of these adjustments on the 2004 income statement totals 454.93 million euros.
The impact of translating these items at the closing exchange rate is a decrease in “Goodwill” of 1,114.76 million and 992.57 million euros at December 31, and January 1, 2004, respectively, and a decrease in “Administrative concessions” of 2,450.90 million and 2,521.73 million euros at December 31, and January 1, 2004, respectively.
The change in the license amortization method (from progressive to straight-line) results in disposals of 215.85 million euros and 166.62 million euros in “Administrative concessions” on the balance sheet at December 31, 2004 and January 1, 2004, respectively.
These reductions are partially offset by the 433.53 million euros reversal of goodwill amortization for 2004 under “Goodwill.” Goodwill amortizations taken in 2003 and before are not subject to reversal since the Telefónica Group elected not to apply IFRS 3Business Combinations retroactively.
Treasury shares and own equity instruments
Under Spanish GAAP, treasury shares are classified as an asset unless the shares are to be amortized by virtue of an agreement approved at the General Shareholders’ Meeting prior to their acquisition. They are carried at the lower of cost, market value or underlying carrying amount, and restated as appropriate. Under IFRS, treasury shares are netted from equity; transactions with treasury shares impact capital and reserves and are not taken to consolidated net income.
Thus, the “Treasury shares” on the balance sheets at December 31, and January 1, 2004 (690.18 and 133.46 million euros, respectively) under Spanish GAAP are reclassified to “Own equity instruments” within equity under IFRS.
Under IFRS, certain instruments issued to hedge employee share option plans are considered equity instruments when the contract settlement terms provide for an exchange of a fixed number of shares for a fixed monetary amount. A liability is simultaneously recorded on the balance sheet under IFRS, since the issuer is obliged to acquire its own equity instruments to settle the contract.
Accordingly, “Interest-bearing debt” on the balance sheet under IFRS at December 31, 2004 and January 1, 2004 increases by 157.52 million euros, with an equivalent decrease in “Own equity instruments” under “Equity.”
F-12
Revenue recognition
Under Spanish GAAP, connection fees generated when customers connect to our network are recognized as revenues when a customer contracts our services, as are the related expenses. In addition, revenues from handset sales are recorded when the handset is delivered physically.
Under IFRS, connections fees are recognized in income together with the corresponding revenues from handset and other equipment sales, provided there are no amounts contingent on delivery of other devices that have yet to be delivered to the customer. Connection revenues not recognized together with revenues from equipment sales are deferred and recognized in income throughout the average estimated customer relationship period. Under IFRS, revenues from handset and equipment sales are recognized once the sale is considered complete, i.e., generally when delivered to the end customer.
These adjustments have a net negative impact on equity of 340.52 and 392.78 million euros at December 31, and January 1, 2004, respectively. The impact on the 2004 income statement is additional revenue of 60.74 million euros. These differences in revenue recognition policies result in the recognition of “Deferred revenues” of 489.14 million and 561.14 million euros on the liability side of the 2004 closing and opening balance sheets under IFRS, respectively. Revenues are taken to the income statement over the course of the average estimated length of the customer relationship.
Corporate income tax
Under Spanish GAAP, the accounting treatment of deferred tax items is income statement-oriented, taking into consideration temporary differences between accounting income and the taxable income. Under IFRS, deferred taxes are recognized based on balance sheet analysis and the temporary differences considered are those generated as a result of the difference between the fiscal value of assets and liabilities and their respective carrying amounts.
As a result, the Company recorded additional deferred tax assets and liabilities under IFRS at December 31, 2004 of 407.18 million and 786.79 million euros, respectively. At January1, 2004, the Company recorded deferred tax assets and liabilities under IFRS of 539.80 million and 537.61 million euros, respectively. A portion of these deferred tax liabilities was generated by business combinations taking place prior to 2004. The net negative impact on equity is 403.46 million and 416.76 million euros at December 31, and January 1, 2004, respectively. The negative impact on the income statement for the year ended December 31, 2004 is 133.52 million euros.
Capitalized expenses
Under Spanish GAAP, start-up and pre-operating expenses can be capitalized and are amortized over a period of no more than five years. Under IFRS, outlays that do not meet the requirements for being considered qualifying assets must be expensed when incurred.
Costs associated with share capital increases are also capitalized and amortized over a period of no more than five years under Spanish GAAP. Under IFRS, these costs are taken to “Capital and reserves” and are deducted from the gross proceeds recorded for the corresponding capital increase.
F-13
These adjustments reduce equity by 207.71 million and 265.82 million euros at December 31, and January 1, 2004, respectively. The positive impact on the 2004 income statement amounts to 67.50 million euros.
Post-employment benefits and severance payments
Both Spanish GAAP and IFRS require provisioning for pension plan commitments, although the standards differ in terms of the method used for measuring these commitments. Under Spanish GAAP, in certain instances a portion of the actuarial losses associated with pension plans may be deferred. Under IFRS, although some deferral is allowed, all known actuarial gains and losses must be recorded in the year in accordance with the method elected by the Telefónica Group.
As a result, restated pension provisions are 239.96 million euros higher on the IFRS balance at December 31, 2004 (108.58 million euros higher at January 1, 2004). The net negative impact on equity is 316.06 million and 168.39 million euros at December 31, and January 1 2004, respectively.
Minority interests
Under Spanish GAAP, minority interests are presented in a specific, separate item on the liability side of the balance sheet. Under IFRS, minority interests are part of equity.
Preference shares issued by Telefónica Finance, a subsidiary of Telefónica, S.A., are reclassified under IFRS from “Minority interests” to a financial liability, because although they enjoy the unconditional right to avoid the cash payment of principal, there is the obligation to pay dividends on these instruments as long as there are distributable earnings.
The result of the application of these new accounting policies is a net increase in equity of 1,902.71 million euros at December 31, 2004, as well as a 1.877,50 million euro increase in “Interest-bearing debt” The corresponding impact on equity at January 1, 2004 is 2,446.28 million euros.
Financial reporting in hyperinflationary economies
Under Spanish GAAP, monetary adjustment of the financial statements of consolidated foreign subsidiaries is permitted under certain circumstances, where local accounting standards require inflation accounting.
Under IFRS, certain qualitative and quantitative indicators must be analyzed to determine whether hyperinflation exists and whether it is therefore necessary to restate financial statements for inflation in terms of current purchasing power at the balance sheet closing date. At year-end, none of the economics of the countries in which the Telefónica Group operates was considered hyperinflationary under IFRS criteria.
The net negative impact under IFRS on equity of restating monetary correction adjustments made is 163.34 million and 68.26 million euros at December 31, and January 1, 2004, respectively. The negative impact on the income statement for the year ended December 31, 2004 is 75.77 million euros.
F-14
Definition of associates: significant influence
Under Spanish GAAP, significant influence is presumed to exist in the case of as an investment of 3% or more in the voting rights of a listed company (20% or more in the case of unlisted companies). IFRS establishes the significant influence investment threshold at 20% or more of voting rights. Both cases allow for proof of the contrary, but the adoption of IFRS has meant that certain investments which were classified as “Investments in associates” under Spanish GAAP must be reconsidered as “available-for-sale financial assets” under IFRS. This implies restatement at market value at each closing date, taking any unrealized gains or losses arising from changes in market value directly to equity.
The application of this new policy results in a reduction in equity of 17.21 million euros and an increase of 18.80 million euros at December 31, and January 1, 2004, respectively.
Financial instruments and exchange rate movements
Under Spanish GAAP, financial assets, including derivatives, are carried at the lower of cost or market value, while financial liabilities are carried at repayment value. Financial assets are removed from the balance sheet when they are sold, transferred or at maturity.
Under IFRS, financial assets and liabilities are classified according to a series of categories that determine whether they are carried at fair value or amortized cost. Similarly, certain gains and losses on financial instruments are taken directly to equity until the instrument in question is taken off the balance sheet or is written down in the event of impairment. In addition, IFRS establish very strict criteria for derecognizing financial assets from the balance sheet, based on an analysis of the risk and rewards of ownership of assets transferred.
The application of hedge accounting criteria under IFRS requires fulfilling very specific requirements. As a result, certain hedging transactions that meet hedge accounting criteria under Spanish GAAP do not meet the equivalent IFRS criteria.
Under Spanish GAAP, the difference between unrealized exchange rate gains in excess of exchange rate losses taken to the income statement for the period must be capitalized. Under IFRS, all exchange rate gains and losses must be taken to the income statement.
The impact of these new accounting policies for financial assets and liabilities is a decrease in equity of 123.35 million euros and an increase of 66.26 million euros at December 31, and January 1, 2004, respectively. The application of these policies results in a 49.57 million euro increase in expenses in the 2004 income statement.
Finally, under Spanish GAAP, exchange rate gains and losses generated on intra-group foreign currency loans (mainly dollar-denominated) are eliminated from the income statement on consolidation. Under IFRS, exchange rate gains and losses from intra-group loans are not eliminated on consolidation unless the loan can be considered part of the net investment in the foreign operation. This policy change has no impact on equity at December 31, 2004 or at January 1, 2004.
F-15
Other differences
There are other accounting standards that do not affect capital and reserves, but do affect presentation of balance sheet items.
Among the reclassifications made, goodwill arising from the acquisition of investments in associates is included under “Investments in associates” in the IFRS balance sheet and amounts to 1,162.37 million and 806.37 million euros at the closing and opening balance sheet for 2004, respectively.
Comparative information and changes in the consolidation scope
The main changes in the consolidation scope in 2005 (the full detail of all the changes in 2005 and 2004 is included in Appendix II) are as follows:
Telefónica
In July, Telefónica, S.A. took over and merged Terra Networks, S.A., effective for economic purposes from January 1, 2005. Terra Networks, S.A. was dissolved and all of its assets and liabilities were transferred to Telefónica, S.A. by means of a share swap consisting of two Telefónica, S.A. treasury shares for every nine Terra shares. Terra S.A., which was fully consolidated by the Telefónica Group, is accordingly no longer part of the consolidation scope.
In 2005, Endemol Investment B.V., a 99.7% -owned subsidiary of Telefónica, S.A. held a public offering of Endemol, N.V. shares. The offering price was 9 euros per share and the total number of shares sold amounted to 31,250,000 ordinary shares, representing 25% of the company’s share capital. The sale generated a profit of 55.58 million euros, which was recognized in the Telefónica Group’s income statement under “Gain on disposal of assets" under “Other income” (see Note 19).
The shares placed in the offering trade on the AEX Euronet Amsterdam index of the Amsterdam Stock Exchange since November 22, 2005.
On December 21, Portugal Telecom, S.G.P.S., S.A. cancelled a total of 37,628,550 treasury shares equivalent to 3.23% of its share capital. On conclusion of the share cancellation, the Telefónica Group’s holding in the Portuguese telecom operator stood at 9.84% (9.96% in nominal terms). P.T. is still accounted for in the Telefónica Group’s consolidated financial statements by the equity method.
On June 10, the European Commission authorized Telefónica’s bid to take over Czech operator Cesky Telecom a.s. by acquiring 51.1% of its share capital. The acquisition was concluded on June 16 at a price of 502 Czech crowns per share. Telefónica then launched a tender offer for the remaining 48.9% of Cesky Telecom then in the hands of minority shareholders. The offer concluded on September 19, with Telefónica acquiring 58,985,703 shares at a price of 456 Czech crowns per share. In all, Telefónica paid 3,662.53 million euros in exchange for its interest in the Czech telecom operator. After these acquisitions, Telefónica’s owns 69.41% of the company. Cesky Telecom is now fully consolidated in the Telefónica Group.
F-16
T.P.I. Group
On November 11, 2005, Telefónica Publicidad e Información, S.A. (parent company) and Telefónica Publicidad e Información Internacional, S.A.U. bought from Telefónica de Argentina, S.A. 95% and 5%, respectively, of the shares constituting the total equity of Argentine company Telinver, S.A. for a total outlay of 57.0 million euros (66.72 million US dollars). The operation was financed by Telefónica de Argentina, S.A. via debt maturing in 2008. The company is still fully consolidated within the Telefónica Group’s consolidation scope, with Telefónica now effectively owning 59.90% of the shares instead of 99.98% .
Telefónica Móviles Group
The acquisitions of 100% of the Chilean and Argentine operators owned by BellSouth were completed on January 7 and January 11, 2005, respectively, thereby completing the purchase of the Latin American operators from BellSouth begun the year before.
The total acquisition cost for Telefónica Móviles, adjusted for the outstanding net debt at these two operators, was 519.39 million euros for Radiocomunicaciones Móviles, S.A. (Argentina) and 317.56 million euros for Telefónica Móviles Chile, S.A.
On October 8, 2004, TCP approved a capital increase of approximately 2,054 million reais. The capital increase concluded on January 4, 2005, with Brasilcel, N.V. subscribing for the shares not subscribed by other shareholders. In the wake of this capital increase and the monetization of assets in July 2005 (details below), Brasilcel, N.V. increased its shareholding from 65.12% to 66.1% .
In July 2005, Brasilcel N.V. capitalized the assets used by Tele Centro Oeste Celular Participaçoes, S.A. (TCO), Celular CRT, S.A. (CRT), Tele Sudeste Celular Participaçoes (TSD), S.A. and Tele Leste Celular Participaçoes, S.A. (TBE). This capitalization did not entail any cash outlay for Brasilcel, N.V., but did increase Telefónica’s shareholdings in these companies. Brasilcel, N.V.’s equity stake in these subsidiaries thereby increased to 91.0% of TSD, 50.7% of TBE, 66.4% of CRT and 34.7% of TCO.
In December Telefónica Móviles, S.A. reached an agreement to buy 8% of Telefónica Móviles México, S.A. de C.V in exchange for shares in Telefónica, S.A. The sale entailed an outlay of 177.27 million euros and gave Telefónica Móviles 100% control of the subsidiary, which is still fully consolidated in the Telefónica Group.
This acquisition cost Telefónica Móviles 177 million euros and was structured as an exchange of Telefónica Móviles México S.A. shares for 14,135,895 Telefónica S.A. shares.
(3) PROPOSED DISTRIBUTION OF INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Under Spanish GAAP, Telefónica, S.A. obtained income of 1,754.39 million euros in 2005.
The proposed distribution of 2005 income that the Company’s Board of Directors will submit for approval at the General Shareholders’ Meeting is as follows: a) 64.15 million euros of profit for the year to the legal reserve, which then would represent 20% of share capital; b) a fixed gross dividend of 0.25 euros per share for the Company’s outstanding shares carrying dividend rights; and c) the remainder to voluntary reserves.
F-17
| | | Millions of euros |
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| Distributable income | | 1,754.39 |
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| to: | | |
| Legal reserve | | 64.15 |
| Dividend (maximum distributable amount of 0.25 euros) | | |
| per share for all the shares comprising the Company’s | | 1,230.28 |
| share capital (4,921,130,397 shares). | | |
| Voluntary reserve | | (minimum) 459.96 |
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| Total | | 1,754.39 |
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At its meeting of February 28, 2006, the Company’s Board of Directors agreed to distribute an interim dividend charged to 2005 income of a gross 0.25 euros per outstanding share carrying dividend rights up to a total amount of 1,230.28 million euros. This interim dividend will be paid on May 12, 2006. Consequently, the proposed dividend to be paid out of 2005 income will be fully settled through payment of the aforementioned interim dividend (see Subsequent Events - Note 22).
(4) VALUATION CRITERIA
As indicated in Note 2, pursuant to European Parliament regulation 1606/2002, of July 19, 2002, Telefónica is obliged to apply the International Financial Reporting Standards (IFRS) enclosed by the European Union for the preparation and presentation of its consolidated financial information as from January 1, 2005. Accordingly, the consolidated financial statements for the year ended December 31, 2005 have been prepared under IFRS, and the 2004 consolidated financial information included for comparative purposes has been presented in keeping with the same standards.
The main valuation methods used in preparing the 2004 and 2005 consolidated financial statements (the 2004 statements are for comparative purposes) were as follows:
| a) | Goodwill |
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| | For acquisitions taking place after January 1, 2004, the IFRS transition date, goodwill represents the excess of the acquisition cost over the acquirer’s interest, at the acquisition date, in the fair values of identifiable assets, liabilities and contingent liabilities acquired from a subsidiary, associate or joint venture. After the initial measurement, goodwill is carried at cost, adjusted for any potential accumulated impairment. Telefónica has elected to apply the exemption provided for in first-time adoption of IFRS permitting it not to restate business combinations taking place before January 1, 2004 (see Note 2). As a result, the accompanying consolidated balance sheets include goodwill on consolidation, net of amortization deducted until December 31, 2003, arising before the IFRS transition date, from the positive consolidation difference between the amounts paid to acquire the shares of consolidated subsidiaries, and their underlying carrying amounts plus amounts taken to equity accounts and recorded as an increase in the value of these assets. In all cases, goodwill is recognized as an asset denominated in the currency of the company acquired. |
F-18
| | Goodwill is tested for impairment annually or more frequently if there are certain events or changes indicating the possibility that the net carrying amount is not fully recoverable. Impairment is determined based on analysis of the recoverable amount of the cash-generating unit (or group of cash generating units) to whitch goodwill allocated upon acquisition date. If this recoverable amount does not exceed the net carrying amount, an irreversible impairment loss is recognized in income (see Note 4 h). |
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| b) | Translation methodology |
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| | The financial statements of the Group’s foreign subsidiaries were translated to euros at the year-end exchange rates, except for: 1. Capital and reserves, which were translated at historical exchange rates. 2. Income statements, which were translated at the average exchange rates for the year. Goodwill and restatements of balance sheet items to reflect fair value arising when a stake is acquired in a foreign operation are recognized as assets and liabilities of the company acquired and therefore translated at the year-end exchange rate. The exchange rate differences arising from application of this method are included in “Translation Differences” under “Equity attributable to equity holders of the parent” in the accompanying consolidated balance sheets, net of the portion of said differences relating to minority interests, which is recorded under “Minority Interests.” When a foreign operation is sold, totally or partially, translation differences in relation to said entity accumulated since January 1, 2004 -the IFRS transition date - recognized directly in equity are taken proportionally to the income statement as part of the gain or loss generated by the disposal. |
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| c) | Foreign currency transactions |
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| | Monetary transactions denominated in foreign currencies are translated to euros at the exchange rates prevailing on the transaction date, and are adjusted at year-end to the prevailing exchange rates. All realized and unrealized exchange gains or losses are taken to the income statement for the year, with the exception of gains or losses arising from specific-purpose financing of foreign currency investments in investees to hedge the exchange rate risk to which these investments are exposed, as well as exchange gains or losses on intra-group loans which are considered part of investment in the foreign operation, that are recorded under “Translation differences” in the consolidated balance sheet (see Note 4 v). |
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| d) | Intangible assets |
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| | ”Intangible assets” are recorded at their acquisition or production cost less accumulated amortization or any impairment losses. The useful economic life of an intangible asset is analyzed on a case-by-case basis to assess if it is indefinite or finite. Intangible assets with a finite useful life are amortized systematically over the course of their useful lives and are tested for impairment whenever there is an indication that the net carrying amount may not be recoverable. Intangible assets with an indefinite useful life are not amortized, but are subject to impairment tests on at least an annual basis, and more frequently in the event of indicators that their net carrying amount may not be fully recoverable (see Note 4 h). In all cases, amortization methods and schedules are revised annually and, where appropriate, adjusted prospectively. |
F-19
| | Research and development expenses Research expenses are expensed as incurred. Costs incurred in developing new products to be marketed or used for the Group’s own network, and whose future economic viability is reasonably certain, are capitalized and amortized by the straight-line method over the period during which the project in question is estimated to generate economic benefits, starting upon its completion. As long as intangible assets developed internally are not in use, the associated capitalized development costs are subject to impairment tests on at least an annual basis, and more frequently if there are indicators that their net carrying amount may not be fully recoverable. Costs incurred in connection with projects that are not economically viable are charged to the consolidated income statement for the year in which this circumstance becomes known. Administrative concessions These relate to the acquisition cost of the licenses to operate of telephony services granted to the Telefónica Group by various public authorities and to the value assigned to licenses held by certain companies at the time they were included in the Telefónica Group. These concessions are amortized on a straight-line basis over the duration of related licenses from inception. Industrial property and software These items are recorded at cost and are amortized on a straight-line basis over their useful lives, generally estimated at three years. |
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| e) | Property, plant and equipment |
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| | Property, plant and equipment are recorded at cost less accumulated depreciation and any impairment losses. Land is not depreciated. Cost includes external and internal costs comprising warehouse materials used, direct labor used in installation work and the allocable portion of the indirect costs required for the related investment. The latter two items are recorded as revenues under “Internal expenditures capitalized” and “Other income.” Cost includes, where appropriate, the initial estimate of decommissioning, withdrawal and site reconditioning costs when they correspond to obligations arising as a result of the use of the related assets. Interest and other financial expenses incurred and directly attributable to the acquisition or construction of qualifying assets are capitalized. Qualifying assets at the Telefónica Group are those assets that require preparation of at least 18 months for their intended use or sale. Specifically, the financial expenses incurred in connection with the construction of the Telefónica Group’s future headquarters in Madrid (District C), amounting to 8.79 million euros in 2005, were capitalized (1.7 million euros in 2004). The costs of expansion, modernization or improvement leading to increased productivity, capacity or efficiency or to a lengthening of the useful lives of assets are capitalized when recognition requirements are met. Upkeep and maintenance expenses are expensed as incurred. |
F-20
| | The Telefónica Group assesses the need to write down, if appropriate, the carrying amount of each item of property, plant and equipment to its recoverable amount at each year-end, whenever indicators exist that the assets’ net carrying amount may not be fully recoverable through the generation of sufficient revenues to cover all the costs and expenses. The impairment provision is maintained only as long as the factors giving rise to the impairment exist (see Note 4 h). The Group’s subsidiaries depreciate their property, plant and equipment once they are in full working condition using the straight-line method based on the assets’ estimated useful lives, calculated in accordance with technical studies which are revised periodically based on technological advances and the rate of dismantling, as follows: |
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| | | Years of
estimated
useful life |
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| Buildings | | 25–40 |
| Plant and machinery | | 10–15 |
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| Telephone installations, networks and subscriber | | 5–20 |
| equipment | | |
| Furniture, office equipment and other | | 2–10 |
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| | Estimated residual value and the depreciation methods and schedules are revised at each balance sheet date and adjusted prospectively, where appropriate. |
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| f) | Investment property (real estate investments) |
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| | Investment properties are carried at cost, net of accumulated depreciation and any accumulated impairment losses. Land is not depreciated. Other investment properties are depreciated over their estimated useful life on a straight-line basis. Recoverability is analyzed when there are indications that the net carrying amount may exceed recoverable amount (see Note 4 h). The Telefónica Group includes under “Investment property” the carrying amount of real estate assets that are not part of operations and for which there are no defined disposal plans at the date of preparation of the consolidated financial statements. |
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| g) | Leases |
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| | The determination of whether a contract represents a lease arrangement depends on an analysis of the nature of the agreement; specifically whether the terms of the contract refer to the use of a specific asset and whether the agreement grants the Telefónica Group the right to use said asset. Leases in which the lessor preserves substantially all the risks and rewards associated with the ownership of the leased assets are considered operating leases. Payments made pursuant to such operating leases are expensed on a straight-line basis over the life of the lease. Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. These are recognized at the inception of the lease, classified in accordance with its nature and the associated debt, at the lower of the present value of the minimum lease payments and the fair value of the leased asset. Lease payments are apportioned between reduction of the lease principal, interest expense and financial charges, so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement over the lease term. |
F-21
| h) | Impairment of non-current assets |
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| | Non-current assets, including goodwill and intangible assets are evaluated at each balance sheet date for indications of impairment losses. Wherever such indications exist, or in the case of assets which are subject to an annual impairment test, the Company estimates recoverable value as the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the time value of money and risks specific to the asset. An asset is considered to be impaired when its recoverable amount is less than its carrying amount. In this case, the net carrying amount is restated to recoverable amount and the resulting loss is taken to the income statement. Future depreciation charges are adjusted for the new carrying amount for the asset’s remaining useful life. The Company carries out asset impairment tests on an individual basis, except when the cash flows generated by the assets are not independent of these generated by other assets (cash-generating units). When indications of an impairment reversal exist, the corresponding asset’s recoverable amount is recalculated. Impairment losses are only reversed if they arise from a change in the assumptions used to calculate the recoverable amount since the most recent impairment loss was recognized. In this case, the asset’s carrying amount is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the cash-generating unit in prior years. The reversal is recognized in the income statement and future depreciation charges are adjusted to reflect the new carrying amount. Goodwill impairment losses may not be reversed in subsequent years. |
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| i) | Investments in associates |
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| | The Telefónica Group’s investments in companies in which it has significant influence, but which are neither a subsidiary nor a joint venture, are accounted for by the equity method. The carrying amount of investments in associates includes related goodwill and the consolidated income statement reflects the share in the income or loss on operations of the associate. If the associate recognizes any gains or losses directly in equity, the Group also recognizes the corresponding portion of these gains or losses directly in its own equity. |
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| j) | Financial assets |
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| | All conventional financial asset purchases and sales are recognized on the balance sheet on the transaction date, i.e., when the Group assumes the commitment to purchase or sell such assets. The Telefónica Group classifies its financial assets into four categories for initial recognition purposes: financial assets measured at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. Classification is reviewed annually, where appropriate. |
F-22
| | Financial assets held for trading, i.e., investments made with the aim of realizing short-term returns as a result of price changes, are classified as financial assets measured at fair value through profit or loss and are presented as current assets. All derivative financial instruments fall under this category, with the exception of those qualifying as hedging instruments. Meanwhile, the Group classifies certain financial instruments under this category when doing so eliminates or mitigates measurement or recognition inconsistencies that could arise from the application of other criteria for recording assets and liabilities or for recognizing gains and losses on different bases, thereby providing more meaningful information. Also in this category are financial assets for which an investment and disposal strategy have been designed based on their fair value. Financial instruments included in this category are recorded at fair value and are measured again at subsequent reporting dates for fair value, with any realized or unrealized losses or gains taken to the income statement. When the Company has the positive intention and ability (legal and financial) to hold financial assets to maturity, these are classified as held-to-maturity and are recorded under “Current assets” and “Non-current assets,” depending on the time left until maturity. Financial assets falling into this category are carried at amortized cost using the effective interest rate method, with gains and losses recognized in the income statement at settlement or upon impairment, as well as due to scheduled amortization. Financial assets which the Company intends to hold for an unspecified period of time and could be sold at any time to meet specific liquidity requirements or in response to interest-rate movements are classified as available-for-sale. These instruments are recorded as “Non-current assets,” unless it is probable and feasible that they will be sold within 12 months. Available-for-sale investments are carried at fair value. Gains or losses arising from changes in fair value are recognized in equity at each closing date until the asset is disposed of or is determined to be impaired, at which time they are taken to the income statement. Dividends from available-for-sale shareholdings are taken to the income statement once the Company’s right to receive said dividend is recognized. Fair value is determined in accordance with the following criteria: |
| | 1. | Listed securities on active markets: Fair value is considered to be the market value on the closing date. |
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| | 2. | Unlisted securities on active markets: Fair value is determined using valuation techniques such as discounted cash flow analysis, option valuation models, or by referring to comparable transactions. When fair value cannot be determined reliably, these investments are carried at cost. |
| | Loans and receivables include financial assets that are not traded on organized markets and do not fall into any of the previous categories. These assets are carried at amortized cost using the effective interest rate method. Gains and losses are taken to the income statement when the assets are disposed of or impaired, as well as due to scheduled amortization. |
F-23
| | Financial instruments are subject to impairment testing at each closing date. If there is objective evidence of impairment of a financial asset recognized at amortized cost, the excess of the carrying amount over the estimated recoverable amount is recorded as an impairment loss in the income statement. The estimated recoverable amount is the net present value of the asset’s estimated future cash flows (excluding potential future losses), discounted using the original effective interest rate of the asset. If there is objective evidence that an available-for-sale financial instrument is impaired, the loss recognized in equity is taken to the income statement. This loss is calculated as the difference between the original cost (net of any principal repayments) and its fair value at that date, net of any impairment losses taken in prior periods. Financial assets are only derecognized from the balance sheet in the following circumstances: |
| | 1. | The rights to receive the cash flows associated with the asset have expired. |
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| | 2. | The Company has assumed payment of all cash flows received from the asset to a third party. |
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| | 3. | The Company has transferred the rights to receive the cash flows from the asset to a third party, transferring substantially all the risks and rewards associated with the asset. |
| k) | Inventories |
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| | Materials stored for use in investment projects and inventories for consumption and replacement are stated at the lower of weighted average cost and net realizable value. When the cash flows associated with the purchase of inventory are effectively hedged, the corresponding gains and losses accumulated in equity become part of the cost of purchased inventories. Obsolete, defective or slow-moving inventories have been reduced to estimated net realizable value. The recoverable amount of inventory is calculated based on inventory age and turnover. |
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| l) | Trade receivables Trade receivables are carried at their face value, subject to a valuation allowance if there is objective evidence of default risk on the part of the debtor. The allowance recognized is measured as the difference between the carrying amount of the doubtful trade receivables and their recoverable amount. As a general rule, short-term commercial bills are not discounted. |
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| m) | Cash and cash equivalents Cash and cash equivalents comprise cash on hand and at banks, demand deposits and other highly liquid investments with a maturity of less than three months. These items are stated at historical cost, which does not differ significantly from realizable value. For the purposes of the consolidated cash flow statement, cash and cash equivalents are stated net of any bank overdrafts. |
F-24
| n) | Treasury shares Treasury shares are stated at cost and netted from equity. Any gain or loss arising on the acquisition, sale, issuance or cancellation of treasury shares is recognized directly in equity. |
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F-25
| o) | Preference shares Preference shares are classified as a liability or equity instrument depending on the issuance terms. A preference share issue is considered equity only when the issuer is not obliged to give cash or another financial instrument in the form of either principle repayment or dividend payment, where as it is recorded as a financial liability on the balance sheet whenever the Telefónica Group does not have full discretion to avoid cash payments. |
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| p) | Capital grants received Capital grants received are recorded in “Deferred revenues” under “Trade and other payables” on the balance sheet once there is reasonable certainty that they will be paid and the related requirements met. They are expensed to the income statement on a straight-line basis over the course of the useful life of the financial assets financed by the grants in “Capital grants” under “Other income.” Operating grants are expensed in line with the expenses they are designed to cover. Most of the subsidies have been received by Telefónica de España and the conditions under which they were granted are being met (see Note 13). |
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| q) | Pensions and other employee obligations At year end the Group records in the consolidated balance sheet the provisions required to cover the accrued liability for the existing obligations that have not been externalized, based on the projected unit credit actuarial method, discounting the estimated future cash flows using interest rates of high-quality bonds. The liabilities recorded under “Pre-retirements, social security costs and voluntary severances” are measures at as indicated basis and are discounted by applying market yield curves. For defined-contribution pension plans, the contributions accrued in the year are take into the income statement under “Personnel expenses” (see Note 19). The Group’s main commitments in this regard are detailed in Note 14. |
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| r) | Technical reserves These relate mainly to the mathematical reserves, which represent the amount by which the present value of life insurance, pension and reinsurance commitments exceeds the net premiums to be paid by the policyholders to the subsidiaries, Seguros de Vida y Pensiones Antares, S.A. and Casiopea Reaseguradora, S.A. These reserves are applied when the commitments covered are paid. |
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| s) | Other provisions Provisions are made when a past event gives rise to a present obligation (legal or constructive) on the part of the Group, the settlement of which requires an outflow of resources embodying economic benefits that is considered probable and can be estimated reliably. If a total or partial recovery of a provision from a third party is considered virtually certain (for example by virtue of an insurance policy), an asset is recorded on the balance sheet and the expense related to the provision is taken to income net of the expected reinbursement. If the impact of the time value of money is significant, the provision is discounted, and the corresponding increase in the provision is recorded as a financial expense. |
F-26
| t) | Share-based payments The Group has compensation systems linked to the market value of its shares (see Note 19), providing employees stock options. Certain compensation plans are settled in cash or shares, at the option of the beneficiary, while others are settled via the delivery of shares. IFRS 2 is applied to compensation schemes linked to the share price granted after November 7, 2002 for employees of Endemol (see Note 2). The accounting treatment in these cases is as follows: Option plans that can be cash-settled or equity-settled at the option of the employee are recognized at the fair value on the grant date of the liability and equity components of the compound instrument granted. Considering the terms and conditions of the share option plan, the fair value of both components is the same and, accordingly, the accounting treatment of plans of this nature is that established for cash-settled transactions. In cash-settled share option plans, the total cost of the rights to shares granted are expensed over the period during which terms the beneficiary earns the full right to exercise the options (vesting period). The total cost of the options is initially measured based on their fair value at the grant date calculated by the Black-Scholes option pricing model, taking into account the terms and conditions established in each share option plan. At each subsequent reporting date, the Company revises its estimate of fair value and the number of options it expects to vest, booking any change in the liability through the income statement for the period, if appropriate. For equity-settled share option plans, fair value at the grant date is measured using the binomial methodology. These plans are expensed during the vesting period with a credit to equity. At each subsequent reporting date, the Company revises its estimate of the number of options it expects to be exercised, with a corresponding adjustment to equity. For the remaining share-based compensation schemes granted prior to November 7, 2002, the preceding valuation criteria is followed, consisting of recording a provision evenly throughout the duration of the plan based on the best estimate of the net future expenditure required to settle the obligation in accordance with its terms and conditions. |
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| u) | Interest-bearing debt These debts are recognized initially at fair value of the consideration received, net of directly attributable transaction costs. In subsequent periods, the financial liabilities are carried at amortized cost using the effective interest rate method. Any difference between the cash received (net of transaction costs) and the repayment value is recognized in the income statement over the life of the debt. Financial debts are considered noncurrent when their maturity is over twelve months or the Telefónica Group has full discretion to defer settlement for at least another twelve months from the closing date. Financial liabilities are derecognized from the balance sheet when the corresponding obligation is settled, cancelled or matures. When a financial liability is replaced with another on substantially different terms, this is accounted for as a derecognition of the original liability and the recognition of a new one and the difference between their respective fair values is taken to income. |
F-27
| v) | Derivatives financial instruments and hedge accounting Derivative financial instruments are initially recognized at fair value, normally equivalent to cost. Their carrying amounts are adjusted at each subsequent balance sheet date to fair value, classified under current financial assets or current financial liabilities depending on whether fair value is positive or negative, respectively. Derivative financial instruments that meet all the criteria for consideration as long-term hedging instruments are recorded as noncurrent assets and liabilities depending on their fair value. The accounting treatment of any gain or loss resulting from changes in the fair value of a derivative depends on whether the derivative in question meets all the criteria for hedge accounting and, if appropriate, on the nature of the hedge. Accordingly, the Group designates certain derivatives as: |
| | 1. | Instruments to hedge risk associated with the fair value of an asset or liability or of a firmly committed transaction (fair value hedge), or |
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| | 2. | Instruments to hedge risk associated with changes in cash flows due to risks associated with a recorded asset or liability or with an expected transaction (cash flow hedge), or |
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| | 3. | Instruments to hedge net investment in a foreign operation |
| | An instrument designed to hedge foreign currency exposure in a firm transaction could be designated as either a fair value or a cash flow hedge. Changes in fair value of derivatives that qualify as fair value hedges are recognized in the income statement, together with changes in the fair value of the hedged asset or liability attributable to the risk being hedged. Changes in fair value of derivatives that qualify and have been assigned to hedge cash flows, which are highly effective, are recognized in equity. The portion considered ineffective is recognized directly in income. Fair value changes from hedges that relate to firm commitments or forecast transactions that result in the recognition of nonfinancial assets or liabilities are included in the initial measurement of those assets or liabilities. Otherwise, changes in fair value previously deferred to equity are recognized in the income statement in the period in which the hedged transaction affects income. An instrument designed to hedge foreign currency exposure from a net investment in a foreign operation is accounted for in the same way as a cash flow hedge as described in the preceding paragraph. The application of the company’s corporate risk-management policies could result in financial risk-hedging transactions that make economic sense, yet are not strictly IFRS compliant for hedge accounting. Alternatively, the Group may opt not to apply hedge accounting criteria in certain instances. In these cases, gains or losses resulting from changes in the fair value of the derivatives are taken directly to the income statement. Derivatives used to reduce the exchange rate risk relating to the income contributed by Latin American subsidiaries are not treated as hedging transactions. |
F-28
| | From inception, the Group formally documents the hedging relationship between the derivative and the hedged asset or liability, as well as the associated risk management objectives and strategies. This documentation includes identification of the hedge instrument, the hedged asset, liability or transaction and the nature of the risk hedged. In addition, it states the manner in which hedge effectiveness, i.e., the extent to which the hedge instrument offsets any changes in the underlying hedged item’s fair value or cash flows that can be attributed to the risk hedged, is measured. Its effectiveness is measured, prospectively and retroactively, both at the beginning of the hedge transaction as well as on a systematic basis throughout the life of the hedge. Hedge accounting is discontinued whenever the hedging instrument expires or is sold, terminated or settled, or no longer qualifies for hedge accounting. In these instances, gains or losses accumulated in equity are not recognized in income until the forecast of the committed transaction occurs. However, if the hedged transaction is no longer expected to occur, the cumulative gains or losses recognized directly in equity are taken immediately to income. The fair value of derivative financial instruments used for hedging purposes is detailed in Note 15. In addition, the statement of recognized income and expense provides a detail of the movements in gains and losses from cash flow hedges. The fair value of the derivative portfolio includes estimates based on calculations using observable market data, as well as specific pricing and risk-management tools commonly used by financial entities. |
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| w) | Corporate income tax This heading in the accompanying consolidated income statement includes all the debits and credits arising from the corporate income tax levied on the Spanish Group companies and similar taxes applicable to the Group companies abroad (see Note 16). Corporate income tax recorded each year includes both current and deferred taxes, if any. The carrying amounts of assets and liabilities related to current taxes for current and prior period taxes represents the estimated amount owed to/due from, the tax authorities. The tax rates and regulations used as a basis for calculating these amounts are those in effect at the closing date. Deferred taxes are calculated based on balance sheet analysis. The temporary differences considered are those generated as a result of the difference between tax bases of the assets and liabilities and their respective carrying amount. The main temporary differences arise due to discrepancies between the tax bases and carrying amounts of plant, property and equipment, intangible assets, nondeductible provisions as well as differences in the fair value and tax bases of net assets acquired of a subsidiary, associate or joint venture. A part of deferred taxes arise from unused tax credits and tax loss carryforwards. The Group estimates deferred tax assets and liabilities by applying the tax rates it believes will be effective when the corresponding asset is received or the liability settled, based on prevailing tax rates and regulations (practically enclosed) at the closing date. |
F-29
| | At each closing, the carrying amount of deferred tax assets on the balance sheet is tested for impairment and the necessary restatements are made if there is uncertainty as to their recoverability. Also at each closing, deferred tax assets not recognized on the balance sheet are evaluated. These are recorded to the extent that their recoverability via future taxable profits becomes probable. Deferred tax liabilities on investments in subsidiaries, branches, associates and joint ventures are not recognized if the parent company is in a position to control the timing of the reversal and if the reversal is unlikely to take place in the foreseeable future. The tax effect of items taken to equity is recognized directly in equity. Deferred tax assets and liabilities resulting from business combinations are added to or netted from goodwill. Deferred tax assets and liabilities are only offset when they relate to taxes imposed by the same fiscal authority on the same tax entity and where the right to offset current tax assets and liabilities is legally recognized. |
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| x) | Revenues and expenses Revenues and expenses are recognized on the income statement on an accrual basis, i.e., when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. Promotional offers and packages including different elements are sold in the wireline, wireless and internet businesses. They are assessed to determine whether it is necessary to separate out the different components and apply the corresponding revenue recognition policy to each one. Total package revenue is split among the identified components based on their respective fair values. Revenue is not taken on served elements if these are contingent upon delivery of the pending elements. Connection fees originated when customers connect to our network are recognized as revenues together with the corresponding revenues from handset and other equipment sales, provided there are no amounts contingent on pending delivery of other goods or services to the customer. Connection revenues not recognized together with revenues from equipment sales are deferred and taken to the income statement throughout the average estimated customer relationship period. Revenues from handset and equipment sales are recognized once the sale is considered complete, i.e., generally when delivered to the end customer. In the wireless telephony business there are loyalty campaigns whereby customers obtain points for the telephone traffic they generate. These points can be exchanged for discounts on the purchase of handsets, traffic or other types of services based on the number of points earned and the type of contract involved. The accompanying consolidated balance sheets include the related provision, based on an estimate of the value of the points accumulated at year-end, under “Trade and other payables.” “Deferred revenues” under “Trade and other payables” on the liability side of the consolidated balance sheet includes the amount relating to purchases made by customers of the prepaid phone cards and recharges that at year-end had still not been earned and recognized as revenue since the customers had not consumed the total amount of traffic relating to their cards. |
F-30
| | In the directories publishing business, advertising revenues and the associated costs are generally recognized when the advertisement is published, regardless of when the related monetary or financial flow arises. The revenues related to billings for advertising in unpublished guides are recorded under “Deferred revenues” in the “Trade and other payables” in liabilities, whereas the associated costs are recorded as “Inventories” until the guides are published. |
| | |
| y) | Use of estimates in recognizing assets and liabilities The main assumptions made and other significant sources of uncertainty in the estimates made at the closing date that could have a material impact on the carrying amount of assets and liabilities in the next financial year are: A significant change in the facts and circumstances on which these estimates are based could have a material negative impact on the Group’s earnings and financial position. Property, plant and equipment and goodwill The accounting treatment of property, plant and equipment and intangible assets entails the use of estimates to determine their useful lives for depreciation and amortization purposes to assess fair value at their acquisition dates, especially for assets acquired in business combinations. Determining useful lives requires making estimates in connection with future technological developments and alternative uses for assets. There is a significant element of judgment involved in making technological development assumptions, since the timing and scope of future technological advances are difficult to predict. When property, plant and equipment are considered to be impaired, the corresponding loss is taken to the income statement for the period. The decision to recognize an impairment loss involves estimates of the timing and potential scope of the impairment, as well as analysis of the reasons for the potential loss. Furthermore, additional factors, such as technological obsolescence, the suspension of certain services and other circumstantial changes are taken into account. The Telefónica Group evaluates its cash-generating units’ performance regularly to identify potential goodwill impairments. Determining the recoverable amount of the cash-generating units to which goodwill is allocated also entails the use of assumptions and estimates and requires a significant element of judgment. Deferred tax assets and liabilities The Group evaluates the recoverability of deferred tax assets based on estimates of future earnings. The ability to recover these taxes depends ultimately on the Group’s ability to generate taxable earnings over the course of the period for which the deferred tax assets remain deductible. This analysis is based on the estimated schedule for reversing deferred taxes as well as estimates of taxable earnings, which are sourced from internal projections and are continuously updated to reflect the latest trends. The appropriate classification of tax assets and liabilities depends on a series of factors, including estimates as to the timing and materialization of deferred tax assets and the forecast tax payment schedule. Actual Group company income tax receipts and payments could differ from the estimates made by the Group as a result of changes in tax legislation or unforeseen transactions that could affect tax balances. |
F-31
| | Provisions Provisions are recognized when an event in the past gives rise to a current obligation for the Group, the settlement of which requires an outlay that is considered probable and can be estimated reliably. This obligation may be legal or constructive, deriving from inter alia regulations, contracts, normal practices or public commitments that lead third parties to reasonably expect that the Group will assume certain responsibilities. The amount of the provision is determined based on the best estimate of the outflow of resources required to settle the obligation, bearing in mind all available information at the closing date, including the opinions of independent experts such as legal counsel or consultants. No provision is recognized if the amount of liability cannot be estimated reliably. In this case, the relevant information is provided in the notes to the financial statements. Given the uncertainties inherent in the estimates used to determine the amount of provisions, actual outflows of resources may differ from the amounts recognized originally on the basis of the estimates. |
| | |
| z) | Consolidation methods The consolidation methods applied are as follows: |
| | – | The companies over which the Company exercises effective control, or which it controls by virtue of agreements with the other shareholders, are fully consolidated. |
| | | |
| | – | Companies which are jointly controlled with third parties (joint ventures) are proportionally consolidated. Similar items are grouped together such that the corresponding proportion of these companies’ overall assets, liabilities, expenses and revenues and cash flows are integrated line by line into the consolidated financial statements. |
| | | |
| | – | The companies in which there is significant influence, but not control or joint control with third parties, are accounted for by the equity method. |
| | | |
| | In certain circumstances, some of the Group’s investees may require a qualified majority to adopt certain resolutions. This, together with other factors, is taken into account when selecting the consolidation method. All material accounts and transactions between the consolidated companies were eliminated on consolidation. The returns generated on transactions involving capitalizable goods or services by subsidiaries with other Telefónica Group companies were eliminated on consolidation. The financial statements for the consolidated subsidiaries have the same financial year-end as the parent company’s individual financial statements and are prepared using the same accounting policies. In the case of Group companies whose accounting and valuation methods differed from those of Telefónica, adjustments were made on consolidation in order to present the consolidated financial statements on a uniform basis. The consolidated income statement and cash flow statement include the revenues and expenses and cash flows of companies that are no longer in the Group up to the date on which the related holding is sold or the company is liquidated, and those of the new companies included in the Group from the date on which the holding is acquired or the company is incorporated through year-end. |
F-32
| | Revenues and expenses associated with discontinued businesses are presented in a separate line on the consolidated income statement. Discontinued operations are those with identifiable operations and cash flows (for both operating and management purposes) and represent a line of business or geographic unit which has been disposed of or is available for sale. The value of stakes held by minority investors in the equity and earnings of the fully consolidated subsidiaries is consolidated and presented under "Minority interests" on the consolidated balance sheet and income statement (see Note 11). |
| | |
| aa) | IFRS and IFRIC interpretations not yet effective |
| | |
| | At the date of preparation of the consolidated financial statements, the following IFRS and IFRIC interpretations have been published but their application is not mandatory: |
| Standards and amendments to standards | | Effective date |
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|
| IFRS 6 | | Exploration for and Evaluation of Mineral Assets | | January 1, 2006 |
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|
| IFRS 7 | | Financial Instruments: Disclosures | | January 1, 2007 |
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|
| Amendment | | Presentation of Financial Statements – Capital Disclosures | | January 1, 2007 |
| to IAS 1 | | |
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|
| Amendment | | Employee Benefits | | January 1, 2006 |
| to IAS 19 | | |
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|
| Amendment | | The Effects of Changes in Foreign Exchange Rates – Net | | |
| to IAS 21 | | Investment in a Foreign Operation | | January 1, 2006 |
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|
| Amendment | | Financial Instruments: Recognition and Measurement – | | January 1, 2006 |
| to IAS 39 | | Fair Value Option | |
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|
| Amendment | | Financial Instruments: Recognition and Measurement - | | January 1, 2006 |
| to IAS 39 | | Cash Flow Hedges of Forecast Intragroup Transactions | |
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|
| Amendment | | Financial Instruments: Recognition and Measurement – | | January 1, 2006 |
| to IAS 39 | | Financial Guarantee Contracts | |
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|
| Interpretations | | | | Effective date |
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|
| IFRIC 4 | | Determining Whether an Arrangement Contains a Lease | | January 1, 2006 |
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|
| IFRIC 5 | | Rights to Interests Arising from Decommissioning, | | January 1, 2006 |
| | Restoration and Environmental Rehabilitation Funds | |
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|
| IFRIC 6 | | Liabilities Arising from Participating in a Specific Market -
Waste Electrical and Electronic Equipment | | Years beginning after December 1,
2005 |
| | |
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|
| IFRIC 7 | | Applying the Restatement Approach under IAS 29 | | March 1, 2006 |
| | Financial Information in Hyperinflationary Economies | |
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|
| IFRIC 8 | | Scope of IFRS 2 Share-based Payment | | May 1, 2006 |
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| | In accordance with the recommendation of advance application and temporary provisions, the Group has adopted the amendment to IAS 39 Financial Instruments: Recognition and Measurement – Fair Value Option before the effective date. |
F-33
The Group believes that the first-time adoption of the aforementioned standards and interpretations will not have a significant impact on its consolidated financial statements.
(5) INTANGIBLE ASSETS
The detail of the movements in intangible assets in 2005 and 2004 is as follows:
|
|
|
| | | Millions of euros |
| | |
|
|
|
|
|
|
| | | Balance at
12/31/04 | | Additions | | | Disposals | | | Transfers | | | Translation
differences | | Inclusion of
companies | | Exclusion of
companies | | | Balance at
12/31/05 |
|
|
|
|
|
|
|
|
| Cost: | | | | | | | | | | | | | | | | | | | | |
| Development costs | | 1,281.61 | | 93.48 | | | (0.89 | ) | | (48.42 | ) | | 4.80 | | 6.79 | | - | | | 1,337.37 |
| Administrative concessions | | 4,636.84 | | 48.85 | | | (2.18 | ) | | (45.65 | ) | | 1,019.11 | | 370.23 | | - | | | 6,027.20 |
| Industrial property and software | | 4,176.06 | | 722.19 | | | (46.17 | ) | | 214.57 | | | 343.42 | | 210.11 | | - | | | 5,620.18 |
| Other intangible assets | | 729.01 | | 212.80 | | | (64.49 | ) | | (228.08 | ) | | 121.22 | | 1,161.80 | | (0.06 | ) | | 1,932.20 |
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|
| Total gross intangible assets | | 10,823.52 | | 1,077.32 | | | (113.73 | ) | | (107.58 | ) | | 1,488.55 | | 1,748.93 | | (0.06 | ) | | 14,916.95 |
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| Accumulated amortization: | | | | | | | | | | | | | | | | | | | | |
| Development costs | | 1,177.50 | | 80.57 | | | (0.89 | ) | | (1.37 | ) | | 0.35 | | - | | - | | | 1,256.16 |
| Administrative concessions | | 1,089.37 | | 338.25 | | | (2.42 | ) | | 0.60 | | | 259.72 | | - | | - | | | 1,685.52 |
| Industrial property and software | | 2,785.61 | | 820.41 | | | (55.25 | ) | | (31.58 | ) | | 223.07 | | - | | - | | | 3,742.26 |
| Other intangible assets | | 89.59 | | 255.21 | | | (36.38 | ) | | (15.84 | ) | | 58.33 | | - | | - | | | 350.91 |
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|
|
| Total accumulated amortization | | 5,142.07 | | 1,494.44 | | | (94.94 | ) | | ( 48.19 | ) | | 541.47 | | - | | - | | | 7,034.85 |
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|
|
| Provisions for impairment | | 7.32 | | 1.40 | | | (0.15 | ) | | (4.63 | ) | | 1.05 | | - | | - | | | 4.99 |
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|
|
|
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|
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|
| Net intangible assets | | 5,674.13 | | (418.52 | ) | | (18.64 | ) | | (54.76 | ) | | 946.03 | | 1,748.93 | | (0.06 | ) | | 7,877.11 |
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|
|
|
| | | Millions of euros |
| | |
|
|
|
|
|
|
| | | Balance at
1/1/04 | | Additions | | | Disposals | | | Transfers | | | Translation
differences | | | Inclusion of
companies | | Exclusion of
companies | | | Balance at
12/31/04 |
|
|
|
|
|
|
|
|
| Cost: | | | | | | | | | | | | | | | | | | | | | |
| Development costs | | 1,199.63 | | 86.92 | | | (2.29 | ) | | (0.09 | ) | | (2.56 | ) | | - | | - | | | 1,281.61 |
| Administrative concessions | | 3,757.90 | | 7.34 | | | - | | | (4.35 | ) | | (80.12 | ) | | 956.07 | | - | | | 4,636.84 |
| Industrial property and software | | 3,709.85 | | 499.13 | | | (18.59 | ) | | 81.33 | | | (11.50 | ) | | 65.80 | | (149.96 | ) | | 4,176.06 |
| Other intangible assets | | 478.19 | | 44.91 | | | (45.49 | ) | | (5.69 | ) | | 1.52 | | | 273.52 | | (17.95 | ) | | 729.01 |
|
|
|
|
|
|
|
|
| Total gross intangible assets | | 9,145.57 | | 638.30 | | | (66.37 | ) | | 71.20 | | | (92.66 | ) | | 1,295.39 | | (167.91 | ) | | 10,823.52 |
|
|
|
|
|
|
|
|
| Accumulated amortization: | | | | | | | | | | | | | | | | | | | | | |
| Development costs | | 1,089.79 | | 88.05 | | | - | | | (0.27 | ) | | (0.07 | ) | | - | | - | | | 1,177.50 |
| Administrative concessions | | 904.70 | | 200.34 | | | - | | | (7.76 | ) | | (7.91 | ) | | - | | - | | | 1,089.37 |
| Industrial property and software | | 2,114.49 | | 776.64 | | | (10.31 | ) | | 7.63 | | | (12.94 | ) | | - | | (89.90 | ) | | 2,785.61 |
| Other intangible assets | | 88.98 | | 60.07 | | | (35.07 | ) | | (1.00 | ) | | (3.97 | ) | | - | | (19.42 | ) | | 89.59 |
|
|
|
|
|
|
|
|
| Total accumulated amortization | | 4,197.96 | | 1,125.10 | | | (45.38 | ) | | (1.40 | ) | | (24.89 | ) | | - | | (109.32 | ) | | 5,142.07 |
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|
|
|
|
|
|
|
| Provisions for impairment | | 26.97 | | 1.04 | | | (3.65 | ) | | (9.02 | ) | | 0.43 | | | - | | (8.45 | ) | | 7.32 |
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|
|
|
|
|
|
|
| Net intangible assets | | 4,920.64 | | (487.84 | ) | | (17.34 | ) | | 81.62 | | | (68.20 | ) | | 1,295.39 | | (50.14 | ) | | 5,674.13 |
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|
The main additions in 2005 relate to investments in software.
Inclusions of companies in 2005 mainly correspond to the addition of the Cesky Telecom assets, which gave rise a to 350.70 million euro increase in costs. In addition, the process of allocating the acquisition price was completed before year end, giving rise to increases in “Administrative concessions,” “Industrial property and software” and “Other intangible assets” of 60.07 million, 102.86 million and 1,018.95 million euros, respectively, under “Inclusion of companies.”
In addition, the inclusion of Telefónica Móviles Chile, S.A. and Radiocomunicaciones Móviles, S.A. led to an increase in cost of 127.47 million euros. As a result of the allocation of the acquisition price for these two companies, 84.69 million euros were included under “Other intangible assets.”
F-34
Meanwhile, because of the acquisition of a further 1.78% of Tele Centro Oeste Participaçoes, S.A. (see Note 2), 27.32 million euros were assigned to the net value of “Administrative concessions.”
The main item under “Inclusion of companies” in 2004 was the addition of the assets relating to the companies acquired by Telefónica Móviles from BellSouth, which gave rise to an increase in cost of 246.58 million euros.
Independent appraisals of the assets acquired from BellSouth resulted in the allocation in 2004 of 644.27 million euros to “Administrative concessions,” a 20.83 million euro increase in “Industrial property and software” and 193.32 million euros as customers acquired recorded under “Other intangible assets.”
The main decrease in 2004 related to the deconsolidation of Lola Films, with a cost and accumulated amortization of 140.55 million and 83.20 million euros, respectively.
In 2005, Group companies capitalized 136.21 million euros (2004: 175.90 million euros) of intangible assets corresponding primarily to software development. Related projects may or may not have been fully completed.
At December 31, 2005 and 2004, the Company carried intangible assets of indefinite useful life at 145.30 million and 66.99 million euros, respectively, related primarily to permanent licenses to operate wireless telecommunications services in Argentina.
The Company’s management reviews the indefinite useful life classification of these assets each year.
They are also subject to impairment tests whenever there are indications of a potential loss in value and, in any event, at the end of each year. There was no impact on the consolidated financial statements for 2005 or 2004 as a result of these impairment tests.
Intangible assets with a defined useful life are amortized on a straight-line basis over their estimated useful lives. Amortization charges in 2005 and 2004 amounted to 1,494.44 million and 1,125.09 million euros, respectively, of which 13.61 million euros correspond to assets related to operations discontinued in 2004.
The amount of fully amortized intangible assets at December 31, 2005 and 2004 were 3,658.77 and 2,497.57 million euros, respectively.
F-35
(6) GOODWILL AND BUSINESS COMBINATIONS
The movement in this heading in 2005 and 2004 were as follows:
|
|
|
|
| | | Millions of
euros | |
|
|
|
|
| Balance at 01/01/04 | | 3,981.77 | |
|
|
|
|
| Additions | | 2,288.82 | |
| Disposals | | (55.79 | ) |
| Impairment losses | | (120.67 | ) |
| Transfers | | (13.80 | ) |
| Translation differences | | (130.89 | ) |
|
|
|
|
| Balance at 12/31/04 | | 5,949.44 | |
|
|
|
|
| Additions | | 2,452.91 | |
| Disposals | | (179.28 | ) |
| Transfers | | (140.32 | ) |
| Translation differences | | 827.48 | |
|
|
|
|
| Balance at 12/31/05 | | 8,910.23 | |
|
|
|
|
Goodwill generated in the acquisition of foreign companies is treated as an asset denominated in the currency of the company acquired, and is therefore subject to exchange rate differences, which are included under “Translation differences.”
The detail of the movements in goodwill of the Group’s main companies is shown in Appendix III.
Impairment tests carried out in 2005 did not uncover the need to write down goodwill as recoverable amounts were higher than carrying amounts in all cases.
In 2004, impairment testing uncovered the need to write down goodwill by 120.67 million euros. The goodwill written off in 2004 included mainly 109.51 million euros relating to the investment in Telefónica UK.
The Company uses business plans (generally five years) of various cash-generating units to which goodwill is allocated, applying a before-tax, risk-adjusted (country and business) discount rate to carry out its impairment tests. Forecasted growth rates are applied and growth beyond the fifth year is extrapolated at a constant rate. These tests are performed annually and each time there are indications that the recoverable amount of goodwill may be impaired.
2005
The main increases in goodwill in 2005 related to the following companies:
|
|
|
|
| | | Millions of
euros | |
|
|
|
|
| Radiocomunicaciones Móviles, S.A. | | 547.22 | |
| Telefónica Móviles Chile Inversiones, S.A. | | 219.44 | |
| Cesky Telecom | | 912.66 | |
| Eurotel Praha | | 443.56 | |
| Telefónica Móviles Mexico Group | | 90.95 | |
| Other | | 239.08 | |
|
|
|
|
| Total | | 2,452.91 | |
|
|
|
|
F-36
Disposals in goodwill in 2005 relate mainly to the sale of 25% of Endemol N.V.’s share capital (see Note 2).
The acquisition price of the companies acquired from BellSouth and Cesky Telecom were assigned to assets acquired and liabilities and contingent liabilities assumed on the basis of conclusions drawn from the valuation performed by independent appraisers (see Notes 5 and 7).
2004
The main increases in goodwill in 2004 were as follows:
|
|
|
|
| | | Millions of
euros | |
|
|
|
|
| Olympic, Ltda. | | 536.09 | |
| Otecel, S.A. | | 451.37 | |
| Telcel, C.A. | | 491.12 | |
| Telefónica Móviles Panamá | | 305.15 | |
| Telefonía Celular de Nicaragua | | 76.65 | |
| Other companies | | 428.44 | |
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|
|
| Total | | 2,288.82 | |
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|
|
The exclusions of companies in 2004 mainly include the sale of Lycos, Inc. for 55.79 million euros.
(7) PROPERTY, PLANT AND EQUIPMENT
The detail and accumulated depreciation of property, plant and equipment in 2005 and 2004 are as follows:
| | | Millions of euros |
| | |
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
| | | Balance at
12/31/04 | | Additions | | | Disposals | | | Inclusion of
companies | | Exclusion of
companies | | | Translation
differences | | Transsfers | | | Balance at
12/31/05 |
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|
|
|
|
|
|
|
| Cost: | | | | | | | | | | | | | | | | | | | | |
| Land and buildings | | 6,427.52 | | 129.26 | | | (97.83 | ) | | 2,183.39 | | (1.29 | ) | | 577.22 | | 174.85 | | | 9,393.12 |
| Plant and machinery | | 59,499.89 | | 1,350.01 | | | (2,219.45 | ) | | 905.72 | | (5.11 | ) | | 5,899.94 | | 1,851.92 | | | 67,282.92 |
| Furniture, tools and other items | | 2,832.24 | | 336.02 | | | (261.70 | ) | | 118.50 | | (0.95 | ) | | 363.38 | | 177.13 | | | 3,564.62 |
| |
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|
|
| Total PP&E in service | | 68,759.65 | | 1,815.29 | | | (2,578.98 | ) | | 3,207.61 | | (7.35 | ) | | 6,840.54 | | 2,203.90 | | | 80,240.66 |
| Construction in progress | | 1,168.52 | | 2,255.25 | | | (1.91 | ) | | 39.47 | | (0.01 | ) | | 180.52 | | (1,966.52 | ) | | 1,675.32 |
| Advances payments for PP&E | | 9.05 | | 7.55 | | | 0.17 | | | 5.09 | | - | | | 1.25 | | (4.87 | ) | | 18.24 |
| Installation materials | | 264.18 | | 313.23 | | | (6.26 | ) | | 9.18 | | - | | | 8.69 | | (279.00 | ) | | 310.02 |
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|
| Gross PP&E | | 70,201.40 | | 4,391.32 | | | (2,586.98 | ) | | 3,261.35 | | (7.36 | ) | | 7,031.00 | | (46.49 | ) | | 82,244.24 |
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| Accumulated depreciation: | | | | | | | | | | | | | | | | | | | | |
| Buildings | | 2,374.18 | | 388.82 | | | (34.60 | ) | | - | | (0.77 | ) | | 211.05 | | (10.43 | ) | | 2,928.25 |
| Plant and machinery | | 42,524.11 | | 4439.96 | | | (2,132.85 | ) | | - | | (4.14 | ) | | 3,952.87 | | 12.91 | | | 48,792.86 |
| Furniture, tools and other items | | 2,016.90 | | 394.46 | | | (255.77 | ) | | - | | (0.65 | ) | | 274.52 | | (8.84 | ) | | 2,420.62 |
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| Total accumulated depreciation | | 46,915.19 | | 5,223.24 | | | (2,423.22 | ) | | | | (5.56 | ) | | 4,438.44 | | (6.36 | ) | | 54,141.73 |
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|
|
| Provisions for impairment | | 92.84 | | 41.83 | | | (29.20 | ) | | - | | - | | | 9.01 | | (4.57 | ) | | 109.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net PP&E | | 23,193.37 | | (873.75 | ) | | (134.56 | ) | | 3,261.35 | | (1.80 | ) | | 2,583.55 | | (35.56 | ) | | 27,992.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
|
|
|
| | | Millions of euros |
| | |
|
| | | Balance at
1/1/04 | | Additions | | | Disposals | | | Inclusion of
companies | | Exclusion of
companies | | | Translation
differences | | | Transsfers | | | Balance at
12/31/04 |
|
|
|
|
|
|
|
|
| Cost: | | | | | | | | | | | | | | | | | | | | | |
| Land and buildings | | 6,117.22 | | 197.17 | | | (137.80 | ) | | 112.66 | | (5.50 | ) | | (40.62 | ) | | 184.39 | | | 6,427.52 |
| Plant and machinery | | 58,293.73 | | 1,158.26 | | | (1,205.89 | ) | | 488.50 | | (7.35 | ) | | (347.52 | ) | | 1,120.16 | | | 59,499.89 |
| Furniture, tools and other items | | 2,766.95 | | 179.01 | | | (187.29 | ) | | 44.79 | | (26.99 | ) | | (26.68 | ) | | 82.45 | | | 2,832.24 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| PP&E in service | | 67,177.90 | | 1,534.44 | | | (1,530.98 | ) | | 645.95 | | (39.84 | ) | | (414.82 | ) | | 1,387.00 | | | 68,759.65 |
| Construction in progress | | 1,060.52 | | 1,331.42 | | | (4.66 | ) | | 50.62 | | - | | | (26.90 | ) | | (1,242.48 | ) | | 1,168.52 |
| Advance payments for PP&E | | 6.92 | | 1.05 | | | (0.04 | ) | | 0.66 | | - | | | (0.43 | ) | | 0.89 | | | 9.05 |
| Installation materials | | 182.34 | | 294.29 | | | (4.69 | ) | | 10.39 | | - | | | (1.79 | ) | | (216.36 | ) | | 264.18 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross PP&E | | 68,427.68 | | 3,161.20 | | | (1,540.37 | ) | | 707.62 | | (39.84 | ) | | (443.94 | ) | | (70.95 | ) | | 70,201.40 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated depreciation: | | | | | | | | | | | | | | | | | | | | | |
| Buildings | | 2,216.46 | | 225.08 | | | (48.85 | ) | | - | | (1.18 | ) | | (8.08 | ) | | (9.25 | ) | | 2,374.18 |
| Plant and machinery | | 39,880.33 | | 3,985.85 | | | (1,128.82 | ) | | - | | (6.66 | ) | | (202.85 | ) | | (3.74 | ) | | 42,524.11 |
| Furniture, tools and other items | | 1,883.76 | | 347.35 | | | (166.50 | ) | | - | | (12.83 | ) | | (22.77 | ) | | (12.11 | ) | | 2,016.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total accumulated depreciation | | 43,980.55 | | 4,558.28 | | | (1,344.17 | ) | | | | (20.67 | ) | | (233.70 | ) | | (25.10 | ) | | 46,915.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provisions for impairment | | 101.13 | | 14.49 | | | (26.60 | ) | | - | | - | | | (2.62 | ) | | 6.44 | | | 92.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net PP&E | | 24,346.00 | | (1,411.57 | ) | | (169.60 | ) | | 707.62 | | (19.17 | ) | | (207.62 | ) | | (52.29 | ) | | 23,193.37 |
|
|
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|
|
Inclusion of companies in 2005 include Cesky Telecom’s assets for a gross amount of 3,091.15 million euros and Telefónica Móviles Chile, S.A. and Radiocomunicaciones Móviles, S.A. for a gross amount of 154.97 million euros.
Inclusion of companies in 2004 include the assets relating to the companies acquired by Telefónica Móviles from BellSouth, which gave rise to an increase in costs of 701.50 million euros. As with intangible assets, Telefónica Móviles appraised the property, plant and equipment acquired as part of the purchase of the BellSouth operators in order to recognize them at fair value.
Among the investments made in 2005 and 2004 were additions by Telefónica de España of 1,073.08 and 911.32 million euros, respectively. These were mainly to develop the RIMA network (high performance IP network) and launch ADSL and, more recently, to provide integrated broadband services and solutions. The company has invested 2,440.61 million euros since launching broadband services in August 2001 (1,988.61 million euros at year-end 2004).
Also included are the enlargement and rollout of the GSM and GPRS networks, as well as the Telefónica Móviles Group operators’ UMTS network.
“Translation differences” reflect the impact of exchange rate movements on opening balances. The effect of exchange rates on movements in the year is included in the appropriate column for each movement.
Depreciation in 2005 and 2004 based on the various assets’ estimated useful lives (see Note 4.e) totaled 5,223.24 million and 4,558.28 million euros, respectively, of which 3.73 million euros in 2004 corresponded to assets related to discontinued operations.
F-38
At December 31, 2005 and 2004, the following items had been fully depreciated:
|
|
|
| | | Millions of euros |
| | |
|
|
|
| | | 12/31/05 | | 12/31/04 |
|
|
|
|
|
| Buildings | | 710.25 | | 354.45 |
| Plant and machinery | | 26,969.59 | | 23,121.34 |
| Other PP&E | | 1,636.18 | | 1,744.06 |
|
|
|
|
|
| Total | | 29,316.02 | | 25,219.85 |
|
|
|
|
|
Telefónica de España’s property, plant and equipment used to provide services currently regulated by the related license cannot be mortgaged without prior authorization by the government.
Telefónica Group companies have taken out insurance policies to reasonably cover the possible risks to which their property, plant and equipment used in operations are subject, with suitable limits and coverage. These policies include certain franchises for local and domestic long-distance networks and subscriber equipment.
Additions in 2005 and 2004 included in-house developments by the Telefónica Group totaling 482.11 and 223.28 million euros, respectively, recorded under “Internal expenditures capitalized” (see Note 19).
The net amount of “Plant, property and equipment” temporarily out of service at December 31, 2005 and 2004 totaled 39.37 million and 32.98 million euros, respectively.
(8) FINANCIAL ASSETS
Noncurrent financial assets
The detail of this heading and the corresponding provision at December 31, 2005 and 2004 is as follows:
|
|
|
|
| | | Millions of euros | |
| | |
|
|
| | | Other
investments | | | Other loans | | | Derivative
financial
assets | | | Deposits and
guarantees | | | Prepayments | | | Provisions | | | Total | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at 01/01/04 | | 1,617.40 | | | 1,399.50 | | | 637.61 | | | 644.55 | | | 121.85 | | | (56.92 | ) | | 4,363.99 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additions | | 21.60 | | | 327.46 | | | 685.42 | | | 476.93 | | | 54.22 | | | (50.43 | ) | | 1,515.20 | |
| Disposals | | (423.38 | ) | | (130.81 | ) | | (702.98 | ) | | (496.34 | ) | | (96.15 | ) | | 6.44 | | | (1,843.22 | ) |
| Inclusion of companies | | 0.01 | | | (12.58 | ) | | - | | | 1.50 | | | 1.44 | | | - | | | (9.63 | ) |
| Exclusion of companies | | (0.61 | ) | | - | | | - | | | - | | | (0.23 | ) | | 12.89 | | | 12.05 | |
| Translation differences | | 3.84 | | | (9.82 | ) | | (9.92 | ) | | 0.68 | | | (2.07 | ) | | 0.94 | | | (16.35 | ) |
| Fair value restatements | | 124.75 | | | 61.72 | | | (169.77 | ) | | 0.01 | | | 40.57 | | | - | | | 57.28 | |
| Transfers | | (456.84 | ) | | (93.21 | ) | | (12.02 | ) | | 16.44 | | | (3.07 | ) | | (30.28 | ) | | (578.98 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/04 | | 886.77 | | | 1,542.26 | | | 428.34 | | | 643.77 | | | 116.56 | | | (117.36 | ) | | 3,500.34 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additions | | 1,736.13 | | | 277.17 | | | 34.14 | | | 349.82 | | | 97.91 | | | (4.39 | ) | | 2,490.78 | |
| Disposals | | (136.09 | ) | | (259.96 | ) | | (77.79 | ) | | (380.56 | ) | | (50.16 | ) | | 25.33 | | | (879.23 | ) |
| Inclusion of companies | | - | | | 8.89 | | | - | | | (0.58 | ) | | 13.45 | | | (0.04 | ) | | 21.72 | |
| Exclusion of companies | | - | | | - | | | - | | | (0.14 | ) | | - | | | (0.01 | ) | | (0.15 | ) |
| Translation differences | | 10.05 | | | 48.23 | | | 7.60 | | | 32.92 | | | 14.57 | | | (11.93 | ) | | 101.44 | |
| Fair value restatements | | 43.44 | | | 16.12 | | | (28.31 | ) | | (0.03 | ) | | (0.57 | ) | | - | | | 30.65 | |
| Transfers | | (19.67 | ) | | (190.19 | ) | | (52.63 | ) | | (33.32 | ) | | (16.72 | ) | | (271.79 | ) | | (584.32 | ) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/05 | | 2,520.63 | | | 1,442.52 | | | 311.35 | | | 611.88 | | | 175.04 | | | (380.19 | ) | | 4,681.23 | |
|
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|
F-39
“Other investments” include the market value of investments in companies where Telefónica does not exercise significant control and for which there is no specific disposal plan for the short term. We would highlight the investment in Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), valued at 546.13 million euros (472.61 million euros at December 31, 2004).
“Additions” in 2005 reflects the shares acquired in O2, Plc. on the London Stock Exchange subsequent to the takeover bid launched by Telefónica for 100% of the UK operator’s share capital. At December 31, 2005, 4.97% of the company’s capital had been acquired for 1,265.83 million euros (see Subsequent Events - Note 22).
Meanwhile, in July, Telefónica Internacional, S.A.U. (TISA) acquired 2.99% of the share capital of Chinese operator China Netcom Group Corporation (Hong Kong) Limited (CNC) at a price of 11.45 Hong Kong dollars per share, representing a total investment of 240 million euros. In September, TISA acquired a further 2.01% of the Chinese company for 184 million euros. After this second acquisition, the Telefónica Group’s holding in the Chinese operator stood at 5%.
Disposals in 2005 include the sale in March of 14.41% of US company Infonet Services Corporation, Inc. The profit on the sale was 80.00 million euros, recognized under “Gains on disposal of assets” (see Note 19).
Disposals in 2004 correspond mainly to the sale of the shareholding in Pearson Plc.
Also in 2004, Telefónica increased its stake in Portugal Telecom, S.G.P.S., S.A. to 9.58% . Therefore, it began consolidating the Portuguese operator by the equity method as an investment in an associate (see Note 19 and Appendix II). The impact of this change is recognized in “Transfers” under “Other investments.”
“Other loans” includes mainly the investment of the net level premium reserves of the Group’s insurance companies, mainly in fixed-income securities, amounting to 754.68 million and 823.28 million euros at December 31, 2005 and 2004, respectively, carried at market value. It also includes long-term loans to associates (see Note 9).
“Derivative financial assets” includes the fair value of derivatives to hedge assets or liabilities whose maturity is twelve months or greater, as part of the Group’s financial risk-hedging strategy (see Note 15).
“Deposits and Guarantees” includes mainly 611.88 million euros to cover guarantees at December 31, 2005 (643.77 million euros at December 31, 2004). These deposits will decrease as the respective obligations they are guaranteeing are reduced.
“Prepayments” refer to amounts already paid but not yet included in the consolidated income statement because the related goods or services have not yet been consumed or their ownership has not been transferred.
F-40
Current financial assets
This heading in the accompanying consolidated balance sheet at December 31, 2005 and 2004 includes mainly the following items:
| — | “Current financial assets” recognized at market value to cover commitments assumed by theGroup’s insurance companies, amounting to 447.72 million euros at December 31, 2005(440.96 million euros at December 31, 2004). The maturity schedule for these financialassets is established on the basis of payment projections for the commitments. |
| | |
| — | Investments corresponding to the Telefónica Móviles Group amounting to 140.16 millioneuros (525.48 million euros in 2004). |
| | |
| — | Derivative financial assets not used to hedge non-current balance sheet items expected tomature within less than twelve months, which amounted to 169.64 million euros (466.26 millioneuros in 2004) (see Note 15). |
| | |
| — | Current investments of cash surpluses which, given their characteristics, have not beenclassified as “Cash and cash equivalents.” |
| | |
| — | Loans to associates (see Note 9). |
Current financial assets that are highly liquid and are expected to be sold within three months or less are recorded under “Cash and cash equivalents” on the accompanying consolidated balance sheet.
(9) INVESTMENTS IN ASSOCIATES, JOINT VENTURES AND OTHER RELATED-PARTIES
Associates
The detail of associates and key financial highlights are:
|
|
|
|
| December 31, 2005 | | Millions of euros | |
|
|
|
|
| COMPANY | | %
Holding | | Total
assets | | Total
liabilities | | Current
revenues | | Income
(loss) for
the year | | | Goodwill | | Carrying
amount | | Fair value | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sogecable, S.A. (SPAIN) | | 23.83 | | 2,380.00 | | 2,040.88 | | 1,518.96 | | 7.73 | | | 603.48 | | 675.94 | | 1,077.76 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Portugal Telecom, S.G.P.S., S.A. (PORTUGAL) (1) | | 9.84 | | 15,511.60 | | 11,780.40 | | 4,663.80 | | 318.60 | | | 509.81 | | 796.07 | | 961.65 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Lycos Europe, N.V. (NETHERLANDS) | | 32.10 | | 171.73 | | 45.36 | | 126.13 | | (20.24 | ) | | - | | 40.60 | | 355.20 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Médi Telecom, S.A. (MOROCCO) | | 29.90 | | 1,154.92 | | 991.36 | | 390.58 | | 26.43 | | | 9.82 | | 52.63 | | 52.63 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sistemas Técnicos de Loterías del Estado, S.A. | | 31.75 | | 90.19 | | 11.59 | | 56.85 | | 6.38 | | | - | | 23.07 | | 23.07 | |
| (SPAIN) | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Telefónica Factoring Establecimiento Financiero de | | 50.00 | | 91.67 | | 82.07 | | 7.43 | | 2.76 | | | - | | 5.00 | | 5.00 | |
| Crédito, S.A. (SPAIN) | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mobipay España, S.A. (SPAIN) | | 12.41 | | 3.17 | | - | | - | | (4.79 | ) | | - | | 0.42 | | 0.42 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ipse 2000, S.p.A. (ITALY) | | 46.44 | | 42.26 | | 1,033.59 | | - | | (1,223.39 | ) | | - | | - | | - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other | | N/A | | N/A | | N/A | | N/A | | N/A | | | | | 70.62 | | 70.62 | . |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL | | | | 19,445.54 | | 15,985.25 | | 6,763.75 | | (886.52 | ) | | 1,123.11 | | 1,664.35 | | 2,546.35 | . |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Figures at September 30, 2005
F-41
|
|
|
|
| December 31, 2004 | | Millions of euros | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| COMPANY | | %
Holding | | Total
assets | | Total
liabilities | | Current
revenues | | Income
(loss) for
the year | | | Goodwill | | Carrying
amount | | Fair value | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sogecable, S.A. (SPAIN) | | 23.83 | | 2,519.99 | | 2,351.82 | | 1,477.17 | | (152.83 | ) | | 603.48 | | 664.55 | | 971.62 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Portugal Telecom, S.G.P.S., S.A. (PORTUGAL) | | 9.58 | | 13,579.61 | | 10,533.68 | | 6,174.00 | | 577.09 | | | 512.61 | | 766.64 | | 1,029.08 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Lycos Europe, N.V. (NETHERLANDS) | | 32.10 | | 194.06 | | 47.86 | | 107.73 | | (45.48 | ) | | - | | 46.57 | | 205.64 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Médi Telecom, S.A. (MOROCCO) | | 29.75 | | 1,144.38 | | 1,010.52 | | 324.81 | | (26.88 | ) | | 9.58 | | 43.07 | | 43.07 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sistemas Técnicos de Loterías del Estado, S.A. | | 31.75 | | 81.61 | | 10.33 | | 50.10 | | 4.95 | | | - | | 22.57 | | 22.57 | |
| (SPAIN) | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Telefónica Factoring Establecimiento Financiero | | 50.00 | | 86.41 | | 77.12 | | 6.75 | | 2.44 | | | - | | 4.80 | | 4.80 | |
| de Crédito, S.A. (SPAIN) | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mobipay España, S.A. (SPAIN) | | 12.35 | | 15.91 | | 7.94 | | 2.92 | | (4.61 | ) | | - | | 0.88 | | 0.88 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ipse 2000, S.p.A. (ITALY) | | 46.23 | | 797.68 | | 724.88 | | 0.56 | | (61.84 | ) | | - | | 32.76 | | 32.76 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other | | N/A | | N/A | | N/A | | N/A | | N/A | | | | | 69.84 | | 69.84 | . |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL | | | | 18,419.65 | | 14,764.15 | | 8,144.04 | | 292.84 | | | 1,125.67 | | 1,651.68 | | 2,380.26 | . |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The detail of the movements in investments in associates in 2005 and 2004 was as follows:
|
|
|
|
| Investments in associates | | Millions of euros | |
|
|
|
|
| |
| Balance at 01/01/04 | | 981.32 | |
|
|
|
|
| Additions | | 578.19 | |
| Disposals | | (97.72 | ) |
| Exclusion of companies | | (0.24 | ) |
| Translation differences | | (47.46 | ) |
| Income (loss) | | (50.49 | ) |
| Dividends | | (13.84 | ) |
| Transfers | | 301.92 | |
|
|
|
|
| Balance at 12/31/04 | | 1,651.68 | |
|
|
|
|
| Additions | | 44.69 | |
| Disposals | | (7.18 | ) |
| Inclusion of companies | | 0.38 | |
| Exclusion of companies | | (0.32 | ) |
| Translation differences | | 74.19 | |
| Income (loss) | | (128.21 | ) |
| Dividends | | (36.47 | ) |
| Transfers | | 65.59 | |
|
|
|
|
| Balance at 12/31/05 | | 1,664.35 | |
|
|
|
|
The additions and disposals at December 31, 2005 and 2004 reflect the amounts resulting from transactions detailed in the changes to the consolidation scope (see Appendix II).
As detailed in Appendix II, Telefónica acquired an additional 4.88% shareholding in Portugal Telecom, S.G.P.S., S.A., taking a total (direct and indirect) holding to 9.58% at the end of 2004. As a result, Telefónica became the Portuguese operator’s core shareholder. As a result of this and other significant agreements with the company, the Company was considered to have significant influence and therefore began consolidating Portugal Telecom, S.G.P.S., S.A. by the equity method in 2004. The impact of this change is reflected in “Transfers” in 2004 (see Note 8).
In the course of 2005, Sogecable, S.A. increased its share capital by 7,560,261 shares with a par value of 2 euros each and bearing an issue premium of 22.47 euros. The Telefónica Group subscribed for 1,801,689 of these shares, paying a total of approximately 44.10 million euros. As result, the Group’s shareholding in Sogecable is unchanged, at 23.83% of its total share capital.
F-42
Noteworthy in connection with the balances receivable from associated companies at December 31, 2005 and 2004, is the financing granted to Sogecable, S.A. in accordance with the commitments assumed in relation to the integration of the satellite platforms (see Note 21.b). “Other loans – Noncurrent financial assets” at December 31, 2005 includes 242.37 million euros to Sogecable, S.A. (262.31 million euros at December 31, 2004) (see Note 8).
The figure at year end 2005 also includes 78.18 million euros owed from Medi Telecom and 351.03 million euros from Ipse 2000, S.p.A. (74.17 and 313.69 million euros, respectively, at December 31, 2004).
On January 31, 2006, the Italian Government informed Ipse 2000, S.p.A. of its decision to revoke the UMTS license granted to it in 2000. This impairment was recognized in the 2005 income statement and this investment was completely written off in the Group’s balance sheet. Net exposure at December 31, 2004, including financing granted, stood at 136.78 million euros. “Share of profit (loss) of associates” includes the impact of this decision. In 2005 and 2004, Ipse 2000, S.p.A.’s statutory accounts include items previously written off by the Telefónica Móviles Group of 26.09 and 95.04 million euros, respectively, and these are included under “Transfers” in the preceding table (see Subsequent Events - Note 22).
Joint ventures
On December 27, 2002, having complied with Brazilian regulatory provisions, Telefónica Móviles, S.A. and PT Movéis Servicos de Telecomunicaçoes, SGPS, S.A. (PT Movéis) set up a 50/50 joint venture, Brasilcel, N.V., via the contribution of 100% of the groups’ direct and indirect shares in Brazilian cellular operators. This company is consolidated in the consolidated financial statements of the Telefónica Group by the proportional method.
The contributions of Brasilcel, N.V. to the Telefónica Group’s 2004 and 2005 consolidated balance sheets and income statements are as follows:
|
|
|
|
|
| | | 2005 | | 2004 |
|
|
|
|
|
| Current assets | | 1,242.02 | | 948.35 |
| Noncurrent assets | | 3,448.29 | | 2,634.30 |
| Current liabilities | | 1,132.16 | | 1,156.44 |
| Noncurrent liabilities | | 1,028.98 | | 502.09 |
| Revenues | | 1,955.26 | | 1,550.83 |
| Expenses | | 1,857.98 | | 1,353.16 |
|
|
|
|
|
Other related parties
Following is a summary of the main transactions between Telefónica Group companies and significant shareholders of Telefónica, S.A.
F-43
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) and subsidiaries comprising the consolidated group:
- Financing transactions arranged under market conditions, with approximately 719.91million euros drawn down at December 31, 2005.
- Derivative transactions contracted under market conditions, for a nominal amount ofapproximately 3,320.17 million euros.
- Guarantees granted by BBVA for approximately 16.50 million euros.
- The rendering, mainly of telecommunications and telemarketing services, by TelefónicaGroup companies to the BBVA Group, under market conditions.
- Telefónica, S.A. reached an agreement with BBVA whereby Terra Networks, S.A.(now Telefónica, S.A.) acquired a 49% holding in Uno-e-Bank. Telefónica and BBVAalso signed a deal establishing the procedures and conditions for the integration of theBBVA group’s Spanish and international call center business in Atento, a TelefónicaGroup subsidiary (See Note 21.b.).
Caja de Ahorros y Pensiones de Barcelona, La Caixa, and subsidiaries comprising the consolidated group:
- Financing transactions arranged under market conditions, with approximately 835.97million euros drawn down at December 31, 2005.
- Telefónica Group companies provide La Caixa group companies mainlywith telecommunications services, under market conditions.
(10) TRADE AND OTHER RECEIVABLES
The detail of this heading at December 31, 2005 and 2004 is as follows:
| | Millions of euros | |
| |
|
|
|
|
| | Balance at | | Balance at | |
| | 12/31/05 | | 12/31/04 | |
|
|
|
|
|
|
| Customers | | 8,148.92 | | 6,570.42 | |
| Receivable from associates | | 71.80 | | 83.00 | |
| Sundry receivables | | 653.88 | | 612.97 | |
| Bad debt reserves | | (1,712.17 | ) | (1,568.44 | ) |
| Short-term prepayments | | 353.32 | | 221.80 | |
|
|
|
|
|
|
| Total | | 7,515.75 | | 5,919.75 | |
|
|
|
|
|
|
Public-sector trade receivables in the countries in which the group operates amounted to 552.31 million euros at December 31, 2005.
F-44
The detail of trade receivables at December 31, 2005 is as follows:
| Millions of euros |
|
|
|
| Trade receivables billed | 5,252.41 | |
| Trade receivables unbilled | 2,205.71 | |
| Bills of exchange receivable | 690.80 | |
|
|
|
| Total | 8,148.92 | |
|
|
|
In 2005 the reserves made for bad debt amounted to 498.85 million euros (322.72 million euros in 2004) recorded under “Changes in trade provisions” of “Other expenses” (see Note 19).
(11) EQUITY
The detail of the movements in equity accounts in 2005 and 2004 is as follows:
| | | Attributable to equity holders of the parent company | | | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
| | | | | |
| | Share capital | | Share
premium | | Own equity
instruments | | Other
reserves | | Translation
differences | | Total | | Minority
interests | | Total equity | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2004 | | 4,955.89 | | 7,987.14 | | (133.46) | | (1,205.65) | | - | | 11,603.92 | | 2,446.28 | | 14,050.20 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends | | - | | (951.64 | ) | - | | (972.53 | ) | 7.65 | | (1,916.52 | ) | (949.29 | ) | (2,865.81 | ) |
| Net purchase of own equity instruments | | - | | (1,747.82 | ) | (556.72 | ) | 273.49 | | - | | (2,031.05 | ) | - | | (2,031.05 | ) |
| Movements and sales of minorityinterests | | - | | - | | - | | - | | - | | - | | 79.65 | | 79.65 | |
| Income and expense recognized in the year | | - | | - | | - | | 3,007.65 | | (308.28 | ) | 2,691.72 | | 301.95 | | 3,001.32 | |
| Other movements | | - | | - | | - | | 91.69 | | (7.65 | ) | 91.69 | | 24.12 | | 108.16 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2004 | | 4,955.89 | | 5,287.68 | | (690.18 | ) | 1,194.65 | | (308.28 | ) | 10,439.76 | | 1,902.71 | | 12,342.47 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends | | - | | (1,296.27 | ) | - | | (1,083.15 | ) | 7.17 | | (2,372.25 | ) | (396.35 | ) | (2,768.60 | ) |
| Capital reduction | | (34.76 | ) | (122.68 | ) | 157.44 | | - | | - | | - | | - | | - | |
| Net movements in own equity instruments | | - | | (1,769.08 | ) | 159.67 | | (74.02 | ) | - | | (1,683.43 | ) | - | | (1,683.43 | ) |
| Purchases and sales of minority interests | | - | | - | | - | | (22.66 | ) | - | | (22.66 | ) | 1,042.42 | | 1,019.76 | |
| Transfers | | - | | (428.82 | ) | - | | 428.82 | | - | | - | | - | | - | |
| Income and expense recognized in the year | | - | | - | | - | | 4,262.68 | | 2,134.65 | | 6,397.33 | | 823.65 | | 7,220.98 | |
| Other movements | | - | | - | | - | | (18.28 | ) | (7.18 | ) | (25.46 | ) | 52.71 | | 27.25 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2005 | | 4,921.13 | | 1,670.83 | | (373.07 | ) | 4,688.04 | | 1,826.36 | | 12,733.29 | | 3,425.14 | | 16,158.43 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) Share capital and share premium
At December 31, 2005, Telefónica S.A.’s share capital amounted to 4,921,130,397 euros and consisted of 4,921,130,397 fully paid ordinary shares of a single series and of 1 euro par value each, all recorded by the book-entry system and traded on the Spanish computerized trading system (“Continuous Market”), where they form part of the “Ibex 35” index, on the four Spanish Stock Exchanges (Madrid, Barcelona, Valencia and Bilbao) and on the New York, London, Paris, Frankfurt, Tokyo, Buenos Aires, São Paulo and Lima Stock Exchanges.
F-45
On June 15, 2001, authorization was given at the Shareholders’ Meeting of Telefónica, S.A. for the Board of Directors to increase the Company’s capital, at one or several times, within a maximum period of five years from that date, under the terms of Article 153.1 b) of the Spanish Corporation Law (authorized capital) up to a maximum of 2,274.68 million euros, by issuing new ordinary shares, be they ordinary redeemable or of any other type permitted by the Law, with a fixed or variable premium, with or without preemptive subscription rights and, in all cases, in exchange for cash. At December 31, 2005, the Board of Directors had not made use of this authorization.
In addition, at the April 11, 2003 Shareholders’ Meeting, authorization was given for the Board of Directors to issue fixed-income securities at one or several times within a maximum period of five years from that date. These may be in the form of debentures, bonds, promissory notes or any other kind of fixed-income security either simple or, in the case of debentures and bonds, exchangeable for shares of the Company or of any of the group companies and/or convertible into shares of the Company. At December 31, 2005, the Board of Directors had not exercised these powers, except to approve three programs to issue corporate promissory notes for 2004, 2005 and 2006.
On May 31, 2005, shareholders voted to authorize the derivative acquisition by the Board of Directors of treasury shares, for a consideration, up to the limits and pursuant to the terms and conditions established by the Shareholders’ Meeting, within a maximum period of 18 months from that date. However, it specified that in no circumstances could the par value of the shares acquired, added to that of the treasury shares already held by Telefónica, S.A. and by any of its controlled subsidiaries, exceed 5% of Telefónica’s share capital.
Share capital and share premium in 2005The detail of the movements in these headings in 2005 was as follows:
| | | | | | Millions of euros | |
| | | | | |
|
|
| |
| | Date | | Number of
Shares | | Share capital | | Share
premium | |
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/04 | | | | 4,955,891,361 | | 4,955.89 | | 5,287.68 | |
|
|
|
|
|
|
|
|
|
|
| Capital reduction | | 6/6/05 | | (34,760,964 | ) | (34.76 | ) | (122.68 | ) |
| Distribution of treasury shares | | 6/28/05 | | - | | - | | (2,571.27 | ) |
| Cash dividend | | 11/11/05 | | - | | - | | (1,296.27 | ) |
| Value of treasury shares | | - | | - | | - | | 802.19 | |
| Merger with Terra Networks, S.A. | | - | | - | | - | | (428.82 | ) |
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/05 | | | | 4,921,130,397 | | 4,921.13 | | 1,670.83 | |
|
|
|
|
|
|
|
|
|
|
On June 6, 2005, the deed of capital reduction formalizing the implementation by the Company’s Board of Directors of the resolution adopted at the Shareholders’ Meeting on May 31, 2005, was executed. Capital was reduced through the cancellation of treasury shares previously acquired by the Company as authorized at the Shareholders’ Meeting. As a result, 34,760,964 Telefónica S.A. treasury shares were cancelled and the Company’s share capital was reduced by a par value of 34,760,964 euros. Article 5 of the Corporate bylaws was reworded accordingly, to restate share capital at 4,921,130,397 euros as of that date. Likewise, to render null and void the right of opposition provided for in Article 166 of the same Law, it was likewise decided, as permitted by Article 167.3 of the Spanish Corporation Law, to record a reserve for cancelled share capital for an amount equal to the par value of the cancelled shares, which can only be used if the same requirements as those applicable to the reduction of share capital are met. The cancelled shares were delisted on June 9, 2005.
F-46
Share capital and share premium in 2004
The detail of the movements in these headings in 2004 was as follows:
| | | | | | Millions of euros | |
| | | | | |
|
|
| |
| | Date | | Number of
Shares | | Share capital | | Share
premium | |
|
|
|
|
|
|
|
|
|
|
| Balance at 01/01/04 | | | | 4,955,891,361 | | 4,955.89 | | 7,987.14 | |
|
|
|
|
|
|
|
|
|
|
| Cash dividend | | 11/12/04 | | - | | - | | (951.64 | ) |
| Value of treasury shares | | - | | - | | - | | (1,747.82 | ) |
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/04 | | | | 4,955,891,361 | | 4,955.89 | | 5,287.68 | |
|
|
|
|
|
|
|
|
|
|
In 2004 the Company did not increase or decrease capital.
2005 dividendsAt its meeting of February 23, 2005, Telefónica, S.A.’s Board of Directors resolved to pay an interim dividend against 2004 income entailing a fixed gross 0.23 euros for each of the Company’s outstanding shares carrying dividend rights. This dividend was paid on May 13, 2005, and the total amount paid was 1,083.15 million euros.
In addition, on May 31, 2005, shareholders voted a distribution by paying a gross 0.27 per share for each of the Company’s outstanding shares eligible at the payment date, charged against “Share premium reserve.” This dividend was paid on November 12, 2005, and the total amount paid was 1,296.27 million euros.
At the same meeting shareholders voted to distribute treasury shares from the share premium reserve to Telefónica S.A. shareholders in the proportion of one share for every twenty-five held. This distribution took place on June 28, 2005 giving rise to a 2,571.28 million euro charge against “Share premium reserve.”
2004 dividendsOn April 30, 2004, an agreement was reached at the Shareholders’ Meeting to pay a cash dividend against 2003 income of 0.20 euros per outstanding share. This amount was paid on May 14, 2004, and the total amount paid was 972.53 million euros.
Also on April 30, 2004, shareholders voted to distribute 0.20 euros per outstanding share, charged against the share premium reserve. This amount was paid on November 12, 2004, and the total amount paid was 951.63 million euros.
b) Reserves
Legal reserve
Under the revised Spanish Corporation Law, 10% of income for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of share capital. The legal reserve can be used to increase capital provided that the balance of the remaining reserve does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses provided other reserves are insufficient for this purpose.
F-47
Revaluation reserves
“Revaluation Reserves” arose as a result of revaluations made from 1946 to 1987 and of the revaluation made pursuant to Royal Decree-Law 7/1996, June 7.
At December 31, 2005 and 2004 the revaluation amounted to contained 1,357.86 million euros.
Revaluation reserves, with no tax effect, may be used to offset future losses that may arise and to increase capital. From January 1, 2007, they may be allocated to unrestricted reserves, provided the capital gain has been realized. The capital gain will be deemed to have been realized in respect of the portion on which amortization has been taken for accounting purposes or when the revalued noncurrent assets have been transferred or retired.
Consolidation reserves
The movement in this heading corresponds to the prior years’ retained earnings.
c) Translation differences on consolidation
Translation differences relate mainly to the effect of exchange rate fluctuations on the net assets of the companies located abroad after elimination of intergroup balances and transactions (see Note 4-b). They also include exchange rate differences resulting from specific-purpose foreign-currency financing transactions relating to investments in investees and which hedge the exchange rate risk on these investments.
The Company has taken an exemption that allows all translation differences generated up to the IFRS transition date to be reset to zero (see Note 2). The related impact on prior years is recognized in “Consolidation reserves.”
Appendix I provides the detail of the contribution by Group companies to the translation differences on consolidation.
d) Own equity instruments
At December 31, 2005 and 2004, Telefónica group companies held the following shares in the Telefónica, S.A. parent company:
| | | | Euros per share | | | | |
| | | |
| | | | |
| | Number of shares | | Acquisition
price | | Trading
price | | Value | | % |
|
|
|
|
|
|
|
|
|
|
|
| Treasury shares at 12/31/05 | | 136,647,061 | | 12.996 | | 12.710 | | 1,736.78 | | 2.77674% |
|
|
|
|
|
|
|
|
|
|
|
| Treasury shares at 12/31/04 | | 207,245,179 | | 11.833 | | 13.228 | | 2,741.44 | | 4.18179% |
|
|
|
|
|
|
|
|
|
|
|
Telefónica S.A. owns the only treasury shares in the group. No other group company owns any Telefónica treasury shares.
In 2005 and 2004 the Company bought a total of 230,038,870 and 166,712,310 treasury shares amounting to 2,744.03 million and 2,031.05 million euros, respectively.
F-48
In addition, in 2005 the Company sold 48,503,517 shares for a total of 647.45 million euros and used 29,274,686 shares for the Terra Networks S.A. share exchange, 34,760,964 treasury shares for the capital reduction described above (see Note 2) and 188,096,296 treasury shares for the return of the share premium to shareholders through the delivery of treasury shares. The company also granted 1,525 treasury shares to employees under the EN-SOP share option plan (see Note 19).
The underlying carrying amount of treasury shares is recorded under "Own equity instruments” under “Equity” and the difference with respect to cost is recognized in equity under “Other reserves” (unrestricted reserves) and “Share premium.”
e) Equity attributable to minority interests“Minority interests” represents the share of minority shareholders in the equity and income or loss for the year of fully consolidated Group companies. The movements in this heading of the 2005 and 2004 consolidated balance sheets were as follows:
| Millions of
euros | |
| | | |
|
|
|
|
| Balance at 01/01/04 | | 2,446.28 | |
|
|
|
|
| Capital contributions and inclusion of companies | | 243.62 | |
| Income (loss) for the year | | 309.92 | |
| Translation differences | | (7.97 | ) |
| Incorporations and exclusion of companies | | (163.97 | ) |
| Dividends paid | | (949.29 | ) |
| Other movements | | 24.12 | |
|
|
|
|
| Balance at 12/31/04 | | 1,902.71 | |
|
|
|
|
| Capital contributions and inclusion of companies | | 1,346.53 | |
| Income (loss) for the year | | 381.21 | |
| Translation differences | | 442.44 | |
| Incorporations and exclusion of companies | | (304.11 | ) |
| Dividends paid | | (396.35 | ) |
| Other movements | | 52.71 | |
|
|
|
|
| Balance at 12/31/05 | | 3,425.14 | |
|
|
|
|
Appendix IV provides details of this heading and the movements affecting the main Group companies.
2005Changes in minority interests in 2005 included the first-time consolidation of Cesky Telekom (1,197.80 million euros), the acquisition of 23.20% of Terra Networks (300.35 million euros) following the takeover bid, and profit for the year attributable to minority interests (381.21 million euros).
2004The main movements in minority interests in 2004 were those relating to the distribution of dividends by Telefónica Empresas CTC Chile, S.A., Terra Networks, S.A. and Telesp Participaçoes, S.A.
F-49
f) Legislation regulating the sale of holdingsLaw 62/2003, December 30, on Tax, Administrative, Labor and Social Security Measures, based on the judgment of the European Court of Justice of May 13, 2003, amended the administrative authorization system set out in Law 5/1995, March 23, on the legal regime applicable to the disposal of public shareholdings in certain companies, to which certain corporate transactions and agreements of Telefónica S.A., Telefónica Móviles S.A., Telefónica Móviles España, S.A.U. and Telefónica de España, S.A.U. are subject pursuant to Royal Decree 8/1997, January 10.
The reform introduced a new model for administrative involvement, replacing the system of prior authorization with that of subsequent notification. The cases that must be notified were also reduced.
Specifically, provided no change in control occurs, it is now no longer necessary to notify the sale or encumbrance of shares representing up to 50% of the share capital in transactions concerning (i) Telefónica S.A’s shares in Telefónica de España S.A.U., (ii) Telefónica S.A.’s shares in Telefónica Móviles S.A. and (iii) Telefónica Móviles S.A.’s shares in Telefónica Móviles España S.A.U.
Notification is still required, however, for any direct, indirect or triggered acquisition, even through third-party trusts or third-party intermediaries, of shares in Telefónica S.A. or in Telefónica Móviles S.A. when they result in the disposal of at least 10% of the share capital. However, cases constituting mere financial transactions that do not have as their objective the control and/or management of these companies are excluded.
In addition, the disposal or encumbrance by Telefónica de España and Telefónica Móviles España of certain strategic assets located in Spain still have to be notified, except when these transactions are carried out between Group companies.
Pursuant to the reasoned opinion sent by the European Commission to the Spanish government on November 25, 2005, the Spanish Cabinet approved a bill to do away with this framework for the disposal of publicly-owned holdings in certain companies. If passed, this bill would bring forward the end of this system, which in Telefónica’s case was scheduled to finish on February 18, 2007.
(12) INTEREST-BEARING DEBTAND LOANSThe details of this heading in the years ending December 31, 2005 and 2004 are as follows:
| | Millions of euros |
| |
|
|
|
| | Balance at
12/31/05 | | Balance at
12/31/04 |
|
|
|
|
|
| Issues | | 15,834.07 | | 16,668.06 |
| Interest-bearing loans and borrowings | | 18,569.38 | | 11,034.57 |
|
|
|
|
|
| Total | | 34,403.45 | | 27,702.63 |
|
|
|
|
|
| Total non-current | | 25,167.58 | | 17,492.23 |
| Total current | | 9,235.87 | | 10,210.40 |
|
|
|
|
|
F-50
a) Issues
Debentures, bonds and other marketable securities
The details of the movements in the balances relating to issues of debentures, bonds and other marketable debt securities in the years ended December 31, 2005 and 2004 were as follows:
| | Millions of euros | |
| |
|
|
|
|
|
|
|
|
|
|
| | Simple domestic-currency issues | | Simple foreign-currency issues | | Promissory
notes &
Commercial
paper
programs | | Other marketable debt securities | | Total | |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/2004 | | 7,556.99 | | 5,235.25 | | 1,890.47 | | 1,985.35 | | 16,668.06 | |
|
|
|
|
|
|
|
|
|
|
|
|
| New issues | | 22.33 | | 895.86 | | 4,615.08 | | 17.09 | | 5,550.86 | |
| Redemptions, conversions and | | (2,296.96 | ) | 1,474.81 | | (4,043.57 | ) | 0.07 | | (7,815.27 | ) |
| exchanges | | | | | | | | | | | |
| Restatements and other movements | | 193.95 | | 1,189.84 | | 35.97 | | 11.16 | | 1,430.92 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at 12/31/2005 | | 5,476.31 | | 5,846.14 | | 2,497.95 | | 2,013.67 | | 15,834.07 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Maturity: | | | | | | | | | | | |
| Long term | | 3,907.99 | | 5,466.20 | | - | | 2,013.67 | | 11,387.86 | |
| Short term | | 1,568.32 | | 379.94 | | 2,497.95 | | - | | 4,446.21 | |
|
|
|
|
|
|
|
|
|
|
|
|
The main issues in 2005 were as follows (in millions of euros): Issues by Telefónica de Argentina, S.A.:
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| Marketable debentures | | 02/08/2005 | | 29.03 | | ARS | | 02/11/06 | | 8.00 | % |
| Marketable debentures | | 02/08/2005 | | 13.98 | | ARS | | 02/11/07 | | SURVEY + 2.5 (*) | |
|
|
|
|
|
|
|
|
|
|
|
|
Issues by Telefónica del Perú, S.A.A.:
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| Bonds T. Perú 3rd Program | | | | | | | | | | | |
| (5th-Series A) | | 01/12/2005 | | 16.85 | | PEN | | 01/12/07 | | 5.50% | |
| Bonds T. Perú 3rd Program | | 03/07/2005 | | 24.69 | | PEN | | 12/07/06 | | 5.19% | |
| (6th) | | | | | | | | | | | |
| Bonds T. Perú 3rdProgram | | | | | | | | | | | |
| (7th) | | 04/20/2005 | | 17.28 | | PEN | | 10/20/06 | | 5.50% | |
| Bonds T. Perú Senior | | | | | | | | | | | |
| Notes | | 10/11/2005 | | 186.16 | | PEN | | 04/11/16 | | 8.00% | |
|
|
|
|
|
|
|
|
|
|
|
|
Issues by Telefónica Finanzas México:
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| Certificados bursátiles –peso bonds | | 09/30/2005 | | 275.28 | | MXN | | 09/24/10 | | CETES 91 +0.61 | |
| Certificados bursátiles –peso bonds | | 09/30/2005 | | 117.8 | | MXN | | 09/21/12 | | 9.25 | |
|
|
|
|
|
|
|
|
|
|
|
|
F-51
Issues by Brasilcel:
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| Nonconvertible bonds | | 05/01/2005 | | 144.86 | | BRL | | 05/01/10 | | 104.2% CDI | |
| Nonconvertible bonds | | 05/01/2005 | | 36.21 | | BRL | | 05/01/09 | | 103.3% CDI | |
|
|
|
|
|
|
|
|
|
|
|
|
The main issues in 2004 were as follows (in millions of euros): Issues by Telefónica de Argentina, S.A.:
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| Marketable debentures | | 05/05/2004 | | 163.26 | | ARS | | 05/06/05 | | 8.05% | |
| Marketable debentures | | 10/28/2004 | | 134.85 | | ARS | | 10/28/05 | | 8.25% | |
| Marketable debentures | | 10/28/2004 | | 65.15 | | ARS | | 05/02/06 | | Floating BADLAR+2.4% | (*) |
|
|
|
|
|
|
|
|
|
|
|
|
| (*) 15% ceiling and 7% floor | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Issues by Telesp Celular Participaçoes, S.A.: | | | | | | | | | | | |
| | | | | | | | | | | | |
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| Marketable debentures | | 09/01/04 | | 1,500.00 | | BRL | | 09/01/07 | | 103.5% CDI (*) | |
|
|
|
|
|
|
|
|
|
|
|
|
| (*) Brazilian interbank deposit rate. | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Issues by Telefónica de Perú, S.A.A. under its bond programs: | | | | | |
| | | | | | | | | | | | |
| Item | | Date | | Face
value
(millions) | | Currency | | Maturity | | Interest rate | |
|
|
|
|
|
|
|
|
|
|
|
|
| T. Perú 3rdProgram (2nd-Series A) | | 04/20/04 | | 30.00 | | PEN | | 04/20/07 | | 5.3125% | |
| T. Perú 3rdProgram (3rd) | | 06/30/04 | | 30.00 | | PEN | | 12/30/07 | | 8.1250% | |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate promissory notes
The features of the main corporate promissory note issue program at December 31, 2005 and 2004 were as follows:
| Millions of euros | Aimed at | Euros | Method of sale |
| Limit | Face value |
| 2,000 | Participating entities | 1,000 | 15-day tenders at least once a month |
| 100,000 | Specific transactions |
The average interest rate on the outstanding position at December 31, 2005, was 2.39% (2.24% at December 31, 2004).
F-52
Commercial paperThe features of Telefónica Europe, BV’s commercial paper issue program are as follows:
| Millions of euros | Aimed at | Face value | Method of sale |
| Limit |
| 2,000 | Investors | 500,000USD | Specific transactions |
| 500,000EUR | Specific transactions |
| 100,000,000JPY | Specific transactions |
| 100,000GBP | Specific transactions |
The average interest rate on the outstanding position at December 31, 2005, was 2.36% (2.27% at December 31, 2004).
In addition, at December 31, 2005 Telefónica del Perú, S.A.A. had a commercial paper issue program with a maximum outstanding limit of 180 million dollars or its equivalent in local currency. As of that date 143 million dollars had not been used, and the remaining 37 million dollars, or its equivalent in local currency, had been drawn down in regular tranches at a weighted average interest rate at December 31, 2005 of 4.40%. At December 31, 2004, 151.8 million dollars had not been used and the remaining 28.2 million dollars or its equivalent in local currency had been drawn down in regular tranches at a 4.55% interest rate.
Telesp has a local bond program, with a maximum limit outstanding of 3,000 million reais, which allows the issue, up to this amount, of commercial paper and local bonds, at any maturity, with interest in reais at fixed rates, floating rates (CDI) or tied to other indices, e.g., inflation (GPI – M or CPI – A). In 2004, 1,500 million reais were drawn down. No amounts were drawn down in 2005, so until the program ends on October 15, 2006 there are still 1,500 million reais available.
Telesp Celular Participações runs a similar program to Telesp in terms of total issuance, maturity and interest rates for up to 2,000 million reais. In 2005 1,000 million reais were drawn down and further issues up to the remaining value until August 20, 2006, when the program ends.
Other marketable debt securitiesThis heading consists mainly of preference shares issued by Telefónica Finance USA, LLC, with a redemption value of 2,000.00 million euros. These shares were issued in 2002 and have the following features:
- Interest rate up to December 30, 2012 of 3-month Euribor, and maximum and minimumeffective annual rates of 7% and 4.25%, respectively, and from then 3-month Euriborplus a 4% spread.
- Interest is paid every three calendar months provided the Telefónica Group obtainsconsolidated net income.
F-53
b) Interest-bearing debt
Balances with banks are as follows:
| | Millions of euros |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Balance at 12/31/05 | | Balance at 12/31/04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Current | | Non-
current | | Total | | Current | | Non-
current | | Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans and other payables (principal) | | 4,371.554 | | 12,453.50 | | 16,825.05 | | 3,864.37 | | 4,849.39 | | 8,713.76 |
| Loans and other payables (interest) | | 48.46 | | 12.53 | | 60.99 | | 43.83 | | 3.92 | | 47.75 |
| Derivative financial liabilities (Note 15) | | 369.65 | | 1,313.69 | | 1,683.34 | | 825.21 | | 1,447.85 | | 2,273.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total | | 4,789.66 | | 13,779.72 | | 18,569.38 | | 4,733.41 | | 6,301.16 | | 11,034.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The average interest rate on bank overdrafts and loans at December 31, 2005 was 4.35% (5.31% in 2004). This percentage does not include the impact of hedging arranged by the group.
The most significant financial transactions in 2005 and 2004 were as follows:
| | | | | | | | | |
| Item | | Amount
(millions) | | Currency | | Date | | Maturity | |
|
|
|
|
|
|
|
|
|
|
| Loan to CTC from BBVA | | 150.00 | | USD | | 11/04/05 | | 06/21/11 | |
| Telefónica, S.A. syndicated loan | | 6,000.00 | | EUR | | 06/28/05 | | 06/28/11 | |
| Loan to CTC from Citibank | | 150.00 | | USD | | 05/09/05 | | 12/09/08 | |
| Syndicated loan to Tel. Mvles Perú (1) | | 200.00 | | USD | | 02/25/05 | | 02/24/06 | |
| Syndicated loan to Tel. Mvles Chile (2) | | 180.00 | | USD | | 01/07/05 | | 01/05/11 | |
| ABN Amro Bank N.V. | | 377.08 | | USD | | 11/26/04 | | 11/15/10 | |
| Santander Overseas Bank | | 273.93 | | USD | | 10/28/04 | | 10/28/06 | |
| Telefónica, S.A. syndicated loan from Citibank | | 3,000.00 | | EUR | | 07/06/04 | | 07/06/09 | |
|
|
|
|
|
|
|
|
|
|
(1) This syndicated loan was originally arranged with a number of financial institutions, the first tranche (30 million dollars) on November 28, 2003 and the remaining two tranches (totaling 170 million dollars) on December 8, 2003, i.e., before the acquisition of BellSouth’s operators in Perú. The entire amount was renewed on February 25, 2005 until maturity on February 24, 2006, to which the guarantee of Telefónica, S.A. was added. On August 25, 2005, 40 million dollars were prepaid, leaving an outstanding balance at the end of 2005 of 160 million dollars.
(2) This syndicated loan was originally signed on April 22, 1997 by Bellsouth, i.e., before Telefónica acquired its operators in Chile. Accordingly, on January 7, 2005 it was modified due to the change in the shareholder structure deriving from the acquisition and including Telefónica, S.A.’s guarantee. A one-year maturity was established from this date. On December 29, 2005 the terms were renegotiated again to remove Telefónica, S.A. as an underwriter and extend the maturity to five years, until January 5, 2011.
F-54
Compañía de Telecomunicaciones de Chile concluded the renegotiation of its two syndicated loans in 2005, originally arranged for 180 and 225 million dollars. The maturity of the first, now for 150 million dollars, has been extended from April 2007 to December 2008 and has been adjusted to market rates. The second, also for 150 million dollars, has been rescheduled and rather than maturing in April 2008, with partial repayments from April 2006, now matures in June 2011, with the spread adjusted to market conditions.
On June 28, 2005 Telefónica S.A. arranged a 6,000 million euro syndicated loan with 40 Spanish and international financial institutions maturing June 28, 2011. The loan is denominated in euros and can be drawn down in either euros, US dollars, UK pound sterling, yen, Swiss francs or any other currency subject to prior agreement by the banking institutions. By the end of 2005, the entire amount had been drawn down in various stages.
On November 26, 2004, Telefónica, S.A. and several branches of ABN Amro Bank N.V. entered into a credit facility agreement amounting to 377.08 million dollars underwritten by the export credit agencies of Finland ("Finnvera") and Sweden ("EKN"), bearing fixed interest of 3.26% and with final maturity on November 15, 2010. This financing will cover up to 85% of the purchases of network equipment to be made by Telefónica Móviles Group companies from Ericsson and Nokia.
In addition, Santander Overseas Bank granted financing of 273.93 million dollars, underwritten by Telefónica, S.A., to Telefónica Móviles’ subsidiary in Colombia to refinance its debt. The financing bears a floating interest rate tied to three-month Libor plus a spread of 0.125% . This amount was renewed in October 2005.
On July 6, 2004, Telefónica arranged a 3,000 million euro syndicated loan with several Spanish and foreign banks. This loan matures in five years (July 6, 2009) and bears interest of Euribor/Libor plus a spread based on the Company’s credit rating. The commitments and obligations of the parties are those ordinarily assumed in syndicated financing transactions. In 2005, 1,300 million euros and 392 million dollars were drawn down and in 2004, 500 million euros and 760 million dollars.
The main repayments made in 2005 and 2004 were as follows:
| Item | | Amount
(millions) | | Currency | | Date |
|
|
|
|
|
|
|
| Telefónica, S.A. loan from BSCH | | 135.23 | | EUR | | 11/25/05 |
|
|
|
|
|
|
|
| CTC loan from ABN (*) | | 150.00 | | USD | | 11/04/05 |
|
|
|
|
|
|
|
| Telefónica, S.A. loan from BSCH | | 97 | | EUR | | 07/07/05 |
|
|
|
|
|
|
|
| Telefónica, S.A. loan from BSCH | | 50.35 | | EUR | | 03/17/05 |
|
|
|
|
|
|
|
| Repayment of BSCH syndicated loan (Tranche A) | | 254.25 | | EUR | | 02/19/04 |
|
|
|
|
|
|
|
| Early repayment of BSCH syndicated loan (Tranche A) | | 120.00 | | EUR | | 01/30/04 |
|
|
|
|
|
|
|
(*) This loan was refinanced by BBVA as indicated in the table of main financial transactions.
In 2004, Telefónica, S.A. made an early repayment and a prepayment on the 1,200 million euro syndicated loan arranged in 1999 with several financial institutions, the first amounting to 120 million euros on January 30 and the second amounting to 254.25 million euros on February 19. Both were made to Banco Santander Central Hispano (BSCH) from the A tranches of the syndicated loan.
F-55
Some of the financing arranged by various Telefónica group companies is subject to compliance with certain financial covenants. All the covenants were being complied with at the date these consolidated financial statements were drawn up.
The maturity schedule of interest-bearing debt at December 31, 2005 is as follows:
| | Millions of euros |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Item | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Subsequent years | | Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans and other payables | | 4,371.55 | | 1,121.45 | | 1,035.10 | | 3,214.90 | | 285.76 | | 6,796.29 | | 16,825.05 |
| Interest payable | | 48.46 | | 12.51 | | 0.02 | | - | | - | | - | | 60.99 |
| Financial derivative liabilities | | 369.65 | | 166.18 | | 221.52 | | 51.34 | | 763.20 | | 111.45 | | 1,683.34 |
| | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total | | 4,789.66 | | 1,300.14 | | 1,256.64 | | 3,266.24 | | 1048.96 | | 6,907.74 | | 18,569.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 the Telefónica Group had total financial facilities available from all sources of over 4,500 million euros (7,500 million euros at December 31, 2004), plus options to reschedule various existing finance facilities. It also had a 18,000 million pounds sterling syndicated loan arranged but not yet drawn related to the O2 takeover (see Subsequent Events - Note 22).
Foreign-currency loansThe detail of foreign-currency loans at December 31, 2005 and 2004, along with the equivalent value in euros, is as follows:
| | Outstanding balance (in millions) |
| |
|
|
|
|
|
|
|
| | Currency | | Euros |
| |
|
|
| |
|
|
|
| Currency | | 12/31/05 | | 12/31/04 | | 12/31/05 | | 12/31/04 |
|
|
|
|
|
|
|
|
|
| US dollars | | 5,892 | | 4,540 | | 4,415.39 | | 3,305.50 |
| Brazilian reais | | 530 | | 877 | | 96.45 | | 242.27 |
| Argentine pesos | | 129 | | 191 | | 36.20 | | 47.06 |
| Colombian pesos | | 120,017 | | 90,172 | | 44.53 | | 27.77 |
| Yen | | 46,616 | | 45,488 | | 267.65 | | 351.55 |
| Chilean pesos | | 67,057 | | 125,363 | | 110.65 | | 165.48 |
| New soles | | 507 | | 363 | | 125.35 | | 81.21 |
| Pound sterling | | 1 | | - | | 2.35 | | 0.06 |
| Mexican pesos | | 42 | | 109 | | 3.34 | | 7.13 |
| Other currencies | | - | | - | | 15.94 | | 6.56 |
|
|
|
|
|
|
|
|
|
| Group total | | - | | - | | 5,177.85 | | 4,234.59 |
|
|
|
|
|
|
|
|
|
F-56
(13) TRADE AND OTHER PAYABLES
The details of this heading are as follows:
| | | 12/31/05 | | 12/31/04 |
| |
|
|
|
|
|
|
|
|
| Millions of euros | | Non-current | | Current | | Non-current | | Current |
|
|
|
|
|
|
|
|
|
| Trade creditors | | - | | 6,911.97 | | - | | 5,553.09 |
| Advances received on orders | | - | | 20.95 | | - | | 79.18 |
| Other payables | | 438.21 | | 1,922.61 | | 533.58 | | 1,422.93 |
| Deferred revenues | | 690.00 | | 818.28 | | 666.50 | | 604.67 |
| Payable to associates | | - | | 44.75 | | - | | 36.18 |
|
|
|
|
|
|
|
|
|
| Total | | 1,128.21 | | 9,718.56 | | 1,200.08 | | 7,696.05 |
|
|
|
|
|
|
|
|
|
The breakdown of current and non-current deferred revenues at December 31, 2005 and 2004 is as follows:
| Millions of euros | | 12/31/05 | | 12/31/04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Non-current | | Current | | Total | | Non-current | | Current | | Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Connection fees and other | | | | | | | | | | | | |
| Deferred revenues | | 616.05 | | 818.28 | | 1,434.33 | | 564.81 | | 604.67 | | 1,169.48 |
| Capital grants | | 73.95 | | - | | 73.95 | | 101.69 | | - | | 101.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total | | 690.00 | | 818.28 | | 1,508.28 | | 666.50 | | 604.67 | | 1,271.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount recognized for connection fees covers the amount of customer connection charges not yet taken to the income statement. It will be recognized as income over the remaining estimated period of the customer relationship.
The 2005 consolidated income statement includes 42.30 million euros under “Sales and revenues from services” in respect of connection fees deferred from previous years.
Deferred connection fees levied in 2005 were 32.94 million euros.
Capital grants:The details of capital grants not yet recognized in income are as follows:
| | Millions of euros |
|
|
|
|
|
| Grantor | | 12/31/05 | | 12/31/04 |
|
|
|
|
|
| Government and regional bodies: provincial and municipal governments, etc. | | 8.14 | | 13.78 |
| EU– | | | | |
| ERDF 94/99 Program | | 38.33 | | 84.18 |
| ERDF 00/06 Program | | 26.16 | | - |
| Other | | 1.32 | | 3.73 |
|
|
|
|
|
| Total | | 73.95 | | 101.69 |
|
|
|
|
|
F-57
The detail of “Other payables - Current” at December 31, 2005 and 2004 is as follows:
| | Millions of euros |
| |
|
|
|
|
| | Balance at
12/31/05 | | Balance at
12/31/04 |
|
|
|
|
|
| Dividends payable by Group companies | | 255.81 | | 148.53 |
| Payables to suppliers of property, plant and equipment | | 408.94 | | 390.48 |
| Guarantees and deposits | | 39.03 | | 45.66 |
| Unpaid employee compensations | | 620.93 | | 443.13 |
| Other non-financial non-trade payables | | 597.90 | | 395.13 |
|
|
|
|
|
| Total | | 1,922.61 | | 1,422.93 |
|
|
|
|
|
(14) PROVISIONSThe detail of the movements in “Non-current provisions” in 2005 and 2004 is as follows:
| | | | | | Millions of euros | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Balance at
12/31/04 | | Additions | | Retirements/
Amount applied | | Inclusion of
companies | | Transfers
and other | | Balance at
12/31/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employee benefits | | 2,501.49 | | 122.66 | | (543.66 | ) | 0.45 | | 8.64 | | 2,089.58 |
| Services rendered | | 159.18 | | 23.42 | | (15.84 | ) | - | | (7.20 | ) | 159.56 |
| Staff restructuring | | 2,744.84 | | 689.98 | | (429.98 | ) | - | | 16.63 | | 3,021.47 |
| Other provisions | | 2,002.15 | | 147.88 | | (284.62 | ) | 100.81 | | (883.59 | ) | 1,082.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total | | 7.407,66 | | 983,94 | | (1.274,10 | ) | 101.26 | | (865.52 | ) | 6,353.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | Millions of euros | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Balance at
1/1/04 | | Additions | | Retirements/
Amount applied | | Inclusion of
companies | | Transfers
and other | | Balance at
12/31/04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employee benefits | | 2,867.49 | | 191.43 | | (577.98 | ) | 26.44 | | (5.68 | ) | 2,501.49 |
| Services rendered | | 150.03 | | 26.76 | | (17.62 | ) | - | | - | | 159.18 |
| Staff restructuring | | 2,322.20 | | 778.18 | | (376.04 | ) | - | | 20.50 | | 2,744.84 |
| Other provisions | | 2,044.33 | | 206.42 | | (207.35 | ) | 9.80 | | (50.95 | ) | 2,002.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total | | 7,384.05 | | 1,202.79 | | (1,178.99 | ) | 36.24 | | (36.13 | ) | 7,407.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The main provisions and commitments to employees recorded under this consolidated balance sheet heading are as follows.
F-58
Employee benefits
Details of provisions for employee benefits: | | Millions of euros |
| | |
|
|
|
| | 12/31/05 | | 12/31/04 |
|
|
|
|
|
| Supplementary employee pensions (a) | | 1,923.45 | | 2,345.06 |
| Group life insurance (b) | | 11.96 | | 12.63 |
| Technical reserves (c) | | 154.17 | | 143.80 |
|
|
|
|
|
| Total | | 2,089.58 | | 2,501.49 |
|
|
|
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| (a) | On July 8, 1992, Telefónica de España reached an agreement with its employees whereby it recognized supplementary pension payments for employees who had retired before June 30, 1992, equal to the difference between the pension payable by the social security system and that which would be paid to them by ITP (Institución Telefónica de Previsión). Once the aforementioned supplementary pension payments had been quantified, they became fixed, lifelong and nonupdateable. 60% of the payments are transferable to the surviving spouse recognized as such as of June 30, 1992, and to underage children. Remaining employees and employees hired after June 30, 1992 have a defined-contribution plan with a fixed contribution of 4.51% of their regulatory base salary plus at least a 2.21% obligatory contribution by the participating employee. There is no provision whatsoever for this plan as it has been externalized in external funds. |
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| (b) | Serving employees who did not join the pension plan continue to be entitled to receive survivorship benefits at the age of 65. |
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| (c) | Reserves relating to the insurance policies taken out to cover early retirement of employees who availed themselves of the labor force reduction plans implemented by Telefónica de España in the past and which were externalized. |
The companies bound by these commitments calculated provisions required at 2005 year-end using actuarial assumptions pursuant to current legislation, including the PERM/F-2000 C mortality tables and a variable interest rate based on market yield curves.
In addition, group subsidiary Telecomunicações de São Paulo, S.A. (Telesp) had various pension plan, medical insurance and life insurance commitments with its employees. In 2000, this company and other companies which were formerly included in the Telebras telecommunications system in Brazil entered into negotiations with their employees. The negotiations ended in October 2000 with the conversion of the former defined-benefit pension plan into a new defined-contribution pension plan and the elimination of the life insurance plan. Virtually all serving employees of these companies availed themselves of the new plan. The liability recorded at December 31, 2005, for this item, which amounted to 16.3 million euros, relates to the accrued commitments to be covered through future payments, net of the value of assets covering them (12.3 million euros in 2004).
At December 31, 2005, Telefónica de Argentina and CTC Chile had commitments of 50.4 million euros (compared to 45.2 million euros in 2004).
The movements in “Transfers and other” in 2005 and 2004 relate mainly to translation differences.
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Services renderedIt corresponds to the amount recorded by Telefónica de España for accrued long-service bonuses to be awarded to employees after 25 years’ service (159.18 million euros in 2004). Provisions are updated applying actuarial criteria (PERM / F - 2000C tables) and market yield curves.
Staff restructuringIn order to adapt to the competitive environment, in prior years Telefónica implemented early retirement and technology renewal plans, in order to adapt its cost structure to the new environment, and made certain strategic decisions relating to its sizing and organization policy.
In this respect, on July 29, 2003, the Ministry of Labor and Social Affairs approved a labor force reduction plan for Telefónica de España that includes up to 15,000 job losses in the period from 2003 to 2007, through voluntary, universal and non-discriminatory programs. The approval of the labor force reduction plan was announced on July 30, 2003. In 2005 and 2004, the Company approved a total of 1,877 and 2,417 requests for voluntary severance, for which provisions amounting to 577.92 million and 706.68 million euros, respectively, were allocated, with a charge to “Personnel expenses” in the consolidated income statement. The outstanding balances at December 31, 2005 and 2004, were 3,021.48 million and 2,744.84 million euros, respectively.
These provisions are calculated based on estimates of future payments applying actuarial criteria (PERM / F - 2000C tables) and market yield curves.
Other provisionsThis item includes a 2,371.46 million euro provision recorded in 2002 for value adjustments to UMTS licenses held by group investees in Germany, Austria, Switzerland and Italy. The balances, net of the amounts used, at the end of 2005 and 2004 were 437.04 million and 1,128.29 million euros, respectively.
The movements in “Other provisions – Non-current” for 2005 include the impact of applying the 632.40 million euro provision at December 31, 2004 due to impairment of the value of Ipse 2000, SpA, to loans and guarantees provided by Telefónica Móviles Group companies and reported under “Non-current financial assets” and “Current financial assets” at a value of 335.45 and 351.03 million euros, respectively.
In addition, certain Group companies, mainly in the Endemol Group, include earn-out clauses in their acquisitions, whereby part of the price is conditional on the newly-acquired company meeting some future target, usually growth in revenue, income, etc. Since a part of the acquisition price is therefore not fixed, estimates are made each year, using variables, some of which may need to be ratified by the sellers, to value the likely liabilities on these transactions and the related goodwill. Amounts provisioned at December 31, 2005, under “Non-current Provisions” and “Current provisions” were 319.22 and 15.60 million euros, respectively (19.15 million and 324.84 million euros, respectively, at December 31, 2004).
Finally, “Other Provisions” in 2005 and 2004 also includes the provisions recorded (or used) by the Group companies to cover the risks inherent to the realization of certain assets, the contingent assets and liabilities derived from their respective business activities and the risks arising from commitments acquired in other transactions.
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(15) DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT POLICIES
Telefónica Group is exposed to various financial market risks as a result of (i) its ordinary business, (ii) debt taken on to finance its business, (iii) investments in associated companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting the Group are as follows:
| | 1. | Exchange rate risk |
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| | | Exchange rate risks arise mainly from two sources. The first is Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro. These are largely in Latin America, but also in the Czech Republic and, since 2006, in the UK. The second is debt denominated in currencies other than that of the country where the business is conducted or the home country of the company taking on the debt. |
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| | 2. | Interest rate risk |
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| | | This arises from changes in (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates (whose market value rises as interest rates fall). |
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| | 3. | Share price risk |
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| | | This arises from changes in the value of equity investments that may be bought, sold or otherwise involved in transactions, from changes in the value of derivatives associated with such investments, from treasury shares and from equity derivatives. |
The Group is also exposed to liquidity risk if a mismatch arises between its financing needs (operating and financial expense, investment, debt redemptions and dividend commitments) and its sources of finance (revenues, divestments, credit lines from financial institutions and capital market operations). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.
Finally, there is so-called “country risk” (which overlaps with market and liquidity risks). This refers to the possible decline in assets, cash flows generated or cash flows returned to the parent company as a result of political, economic or social instability in the countries where Telefónica Group operates, especially in Latin America.
Telefónica Group actively manages these risks with a view to stabilizing:
- cash flows, to facilitate financial planning and take advantage of investment opportunities,
- the income statement, to make it easier for investors to understand and forecast company results, and
- share capital, to protect the value of the investment.
Where these aims conflict, the Group’s financial management will decide which should be given priority.
Telefónica uses derivatives to manage risks, basically on exchange rates, interest rates and shares.
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Exchange rate riskThe core aim of the Group’s exchange rate risk management policy is to offset (at least partly) any losses in the value of assets related to Telefónica’s business due to declines in exchange rates versus the euro, with savings on the euro value of foreign denominated debt (which will decline simultaneously). The degree of hedging (i.e., the proportion of foreign currency debt as a percentage of foreign currency assets) tends to be higher in the following circumstances:
| - | the closer the estimated correlation between the value of the asset and the value of the currency, |
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| - | the cheaper the estimated cost of hedging, measured as the difference between the additional financial expenses of borrowing in the local currency and the expected depreciation of the local currency versus the euro, and |
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| - | the more liquid the local currency and derivative markets. |
In general, the correlation between asset values and the exchange rate is closer when cash flows generated by the asset in the early years of the investment represent a large proportion of its estimated value.
The group’s primary method of protecting itself against future depreciation of Latin American currencies versus the euro is to take on debt denominated in Latin American currencies. At December 31, 2005, debt denominated in Latin American currencies was nearly 5,400 million euros. However, this debt is not evenly distributed as a proportion of cash flows generated in each country. Its future effectiveness as a hedge of exchange rate risks therefore depends on which currencies suffer devaluations.
The group further protects itself against declines in Latin American exchange rates affecting its assets through the use of dollar-denominated debt, either in Spain (where such debt is associated with the investment as long as it is considered to be an effective hedge) and in the country itself, where the market for local currency financing may be inadequate or non-existent. At December 31, the Group had dollar-denominated debt equivalent to 2,999 million euros.
The Group also manages exchange rate risk by seeking to minimize the negative impact of any remaining exchange rate exposure on the income statement. Such exposure can arise for any of three reasons: (i) a thin market for local derivatives or difficulty in sourcing local currency financing which makes it impossible to arrange a low-cost hedge (as in Argentina for example), (ii) financing through intra-group loans, where the accounting treatment of exchange rate risk is different from that for financing through capital contributions, (iii) as the result of a deliberate policy decision.
In 2005 exchange rate management resulted in gains of 162.0 million euros, mostly because it was decided not to fully hedge the dollar loans granted to Latin American subsidiaries. This resulted in a gain from these currencies’ appreciation against the dollar and the dollar’s appreciation against the euro.
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In addition, in 2005 the Group booked the acquisition of 69.4% of Cesky Telecom for the equivalent of 3,658 million euros. This acquisition was financed from debt, a significant part of which (equivalent to 1,839 million euros) was translated through exchange rate derivatives into synthetic Czech crown debt. This means that a significant part of the acquisition’s value remained exposed to the risk of fluctuations in the crown/euro exchange rate. This position was taken deliberately and reflected the same bullish outlook on the Czech economy that had motivated the acquisition in the first place. Between the acquisition date and December 31, 2005 the crown rose by 3.5% versus the euro.
The acquisition in January 2006 of UK company O2 plc was financed with a multi-currency loan agreed to in 2005.The final currency structure of the liabilities from this acquisition will take into account the contribution to O2’s value from its euro zone businesses (Germany and Ireland). It will also take account of the imperfect correlation between the value of the UK business and the euro/sterling exchange rate, which makes it inadvisable to fund the purchase wholly in sterling.
Interest rate riskTelefónica’s financial expenses are exposed to changes in interest rates. In 2005, the rates applied to the largest volumes of short-term debt were based on the Euribor, Brazilian SELIC, dollar Libor and Chilean UF. At December 31, 2005, 55% of total debt (or 66% of long-term debt) was at rates fixed for more than one year. Of the remaining 45% (either floating rate or at rates fixed for less than one year), 14% had interest rates capped for more than one year (16% of long-term debt). At December 31, 2004, 83% of long-term debt was at fixed rates. New debt taken on in 2005 has created a new exposure to long-term rates applying at the time of borrowing or hedging: notably, the 6,000 million euro syndicated loan and the associated interest rate swaps used to fix the financial expense.
Finally, early retirement liabilities were discounted to present value over the year using the implied interest rate curve on the swap markets. The decline in interest rates has increased the size of these liabilities.
Finance costs in 2005 were 1,634.33 million euros, 0.3% less than in 2004. Stripping out the impact of exchange rate differences, however, the figures for 2005 and 2004 would be 1,796.4 and 1,462.1 million euros, respectively. This means that, at constant currency, interest expenses were 22.9% higher in 2005 than in 2004. Most of this rise is due to the 18.6% rise in total average net debt to 29,533.9 million euros at December 31, 2005, including early retirement commitments. The rest is due to the rise in Brazilian interest rates (average SELIC of 19.14% in 2005 compared to 16.38% in 2004) and in Latin American debt, following acquisitions of cellular operators in 2004 and the start of 2005. The figure for financial expenses in 2005 gives an average cost of average total net debt of 5.5%, or 6.1% stripping out exchange rate gains.
The acquisition of O2 plc for nearly 17,900 million pounds sterling, funded by a syndicated loan that was then refinanced, will raise the Group’s interest rate exposure and introduce a new exposure to sterling. In January 2006 Telefónica issued long-term bonds for 4,000 million euros and 1,250 million pounds sterling with the aim of extending the average maturity of its debt. Interest rates were fixed at similar levels to those used to value the newly acquired O2 (see Subsequent Events - Note 22).
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Share price riskOne of the equity risks to which Telefónica is exposed is on the price of its own share. This arises from the share buyback program notified in October 2003 and renewed in April 2005, for a value estimated at 6,000 million euros to 2007 (inclusive), which depends on the generation of cash flows and on the share price.
At December 31, 2005, Telefónica S.A. held more than 136 million treasury shares (see Note 11) and had call options on 56 million more, expiring in the first four months of 2006. This option strategy affords some protection against a rise in share price that would reduce the number of shares it could buy with the preallocated funds. The maximum possible financial loss given the strategy in place is the premium on the options, if the share price is lower than the option strike price at maturity. On the other hand, in such a case Telefónica could buy shares more cheaply on the market.
Telefónica is also exposed to fluctuations in the share price of its investees, especially where these fall outside its core business and could be sold.
Liquidity riskTelefónica seeks to match the schedule for its debt maturity payments to its capacity to generate cash flows to pay them, allowing some leeway. In practice this translates into two key principles:
| 1. | Group debt must have a longer average maturity than the time it will take to earn the cash to pay it (assuming internal projections are met, and all cash flows generated go to pay down debt rather than dividends or acquisitions). |
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| 2. | The Group must be able to pay all commitments over the next 12 months without recourse to new borrowing or the capital markets (although including firm credit lines arranged with banks), assuming budget projections are met. |
At December 31, 2005, the average maturity of the Group’s 30,066.9 million euros net financial debt was 5 years. As announced at the conference held for investors in April 2005, Telefónica Group expects to generate more than 36,000 million euros in the four years from 2005-2008, assuming exchange rates remain at their 2004 levels. This therefore fulfils the first of the two principles: the Group can repay all its debt in less than four years, which is earlier than its average maturity date.
In addition, gross debt maturing in 2006 (8,824 million euros) is less than the financing available. Financing available is calculated as the sum of: i) financing available at December 31 of 3,561 million euros (current financial investments of 1,348 million euros and 2,213 million euros in cash), ii) forecast cash flow for 2006 (expected to be higher than in 2005 at 6,975 million euros), iii) unused credit lines arranged with banks whose initial maturity is over one year or extendible at Telefónica Group’s option (3,029 million euros at December 31 including Cesky Telecom and Endemol, B.V.), and iv) 1,264 million euros in credit lines with an initial maturity of over one year or extendible at Telefónica’s option that were used to buy shares in O2 plc, transferable to the 18,500 million pounds sterling syndicated loan put in place to fund the O2 acquisition. This structure allows sufficient leeway for the company to maintain its current dividend distribution policy and its share buyback program.
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The O2 plc acquisition makes it appropriate to analyze liquidity beyond 2006 and estimate possible additional sums maturing in 2007. After exercise of the extension option these could be 2,175 million pounds sterling (around 3,175 million euros). This is because it has been possible to cancel part of the syndicated loan arranged to make the acquisition (see Note 22) due to i) an adjustment in the cost of acquisition to near 17,900 million pounds sterling, ii) requests to exchange O2 shares for loan notes, and iii) the January 2006 long-term bond issue which raised 4,000 million euros and 1,250 million pounds sterling. The size of the loan was therefore reduced to 14,175 million pounds of which only 2,175 million cannot be extended beyond October 2007.
In addition, nearly 2,400 million euros of long-term debt is due to mature in 2007, giving a figure of around 5,500 million euros, similar to net maturities in 2006 (gross maturities less cash). This figure will change, however, as a result of the refinancing scheduled for 2006, which will have two contradictory impacts:
| - | an increase in maturities in 2007 due to short-term renewal of part of the debts maturing in 2006 (especially commercial paper) and |
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| - | a reduction in 2007 maturities due to the raising of long-term finance (bonds and loans) largely to pay off the syndicated loan taken out to acquire O2 plc. |
The use of long-term financing exposes the Group to financial market risks both in terms of volumes and expense. Fluctuations in financial expense are due not only to changes in benchmark rates (on sovereign bonds and swap rates) but also to changes on the credit spread paid over these benchmarks.
That said, given the scale of 2007 maturities, the Group should be able to meet its second principle – to cover its 12-month commitments with available finance – at the end of 2006, assuming operations generate cash flow as expected.
The O2 acquisition has also made it more important to be able to access credit rapidly, cheaply and on good terms.
To do this Telefónica has defined two targets as key to its financial policy:
| 1- | To maintain a minimum credit rating of BBB+/Baa1, |
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| 2- | To maintain net debt and similar financial commitments equal to or less than 2.5 times OIBDA (operating income before depreciation and amortization) in the medium term. |
The group is currently rated BBB+ by Standard & Poor’s, Baa1 by Moody’s and A- by Fitch. Pro-forma analysis using unaudited data to September 2005 (as though the O2 acquisition had already taken place by then) shows a net financial debt level of 3 times OIBDA.
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The main credit ratings at the end of 20051are as follows:
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| Unaudited figures | | 2005 operating highlights | | | |
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| I | | | | 15,276.4 | |
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| II | | Free cash flow | | 7,108.1 | |
| III | | Capex | | 4,409.9 | |
| IV | | Telefónica S.A. dividends | | 2,379.5 | |
| V=II+III-IV | | Retained cash flow (before capex) | | 9,138.5 | |
| VII | | Pro forma OIBDA | | 15,733.1 | |
| | Liabilities at December 31, 2005 | | | |
| A | | Interest-bearing debt | | 30,067.0 | |
| B | | Guarantees | | 449.0 | |
| C | | Net commitment from labor force reduction | | 3,057.7 | |
| D=A+B+C | | Total debt + Commitments | | 33,573.7 | |
| | Financial ratios | | | |
| | Interest-bearing debt/Pro forma OIBDA | | 1.91 | |
| | Total Debt + Commitments/Pro forma OIBDA | | 2.13 | |
| | Retained cash flow (before capex)/Total Debt + Commitments | | 27.23% | |
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Deducting the amount spent on O2 shares in 2005 reduces debt to 28,803 million euros. This would improve debt/pro forma OIBDA ratios by 0.08 percentage points and cash flow/total debt + commitments by 1.07 percentage points.
Country riskLatin American sovereign risk priced into the market at the end of 2005 was less than 280bps, an all-time low2, due to a number of macroeconomic developments. GDP grew by over 4% in 2005, continuing a trend of high and stable growth that has seen per capita income in the region rise by 11% since 2003, its highest growth rate since the 1970s. In addition, this growth has occurred with no rise in inflation (6%) and, most importantly, with the current account showing a record surplus of 30,000 million US dollars.
True, the favorable climate of international growth and high raw materials prices have produced clear improvements in the region’s terms of trade (31% above the 1990s average), helping drive export growth of near 10%. This inflow of export earnings has been accompanied by a sharp rise in remittances from expatriate workers to 47,400 million dollars.
The current account surplus, equal to 1.3% of GDP, has been further strengthened by 47,000 million dollars of direct foreign investment. This has made it possible to cancel 42,000 million dollars of foreign debt and accumulate 35,000 million dollars in international reserves, the highest level since 1990. In other words, the region has taken advantage of the favorable climate to address its weakest points of external vulnerability: high foreign debt and low reserves.
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1Credit rating agencies also adjust ratios to take into account operating leases and other commitments.
2Source: JP Morgan EMBI
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In addition, some regional governments have taken advantage of recent surplus liquidity and appetite for emerging market risk to swap external debt for domestic debt on favorable terms (Argentina, Colombia and Perú) or to redeem debt issued on foreign markets (Argentina, Brazil, Mexico, Panama and Perú) and thereby increase debt maturities in the long term and the percentage of foreign debt denominated in local currency (especially in Mexico and Brazil).
These measures – designed to bring the region’s credit rating up to investment grade – have been reflected in the lowest levels of country risk ever discounted by the markets, a 4% increase in the real trade-weighted exchange rate of the region versus the rest of the world and lower ratios of public borrowing to GDP (42.9%) . This in turn has boosted investor confidence and allowed a return to the historical high levels of investment of 1998 (near 23% of GDP), before the slump that lasted until 2002.
Although the macro-economic scenario looks stable and the economic policies being followed seem to us appropriate, Latin America still presents a number of micro-economic risks that distinguish it from the more developed countries. These notably include regulations, a bureaucratic way of doing business and rigid markets for some factors of production. These prevent the continent achieving higher levels of growth through investment and productivity. Also there needs to be greater change to the tax, education and health systems to build on the human development achieved in the last few years if the region is to meet the World Bank’s Millennium Development Goals.
Despite the improved economic climate mentioned above and the positive outlook for the region, Telefónica continues to monitor carefully the risk of unforeseen impairments to the value of its Latin American assets from possible social, economic or political instability. It has done this by pursuing two lines of action (in addition to its normal business practices):
| 1. | By partly matching assets to liabilities in its Latin American companies, not guaranteed by the parent company, such that any loss of the assets would also reduce liabilities, |
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| 2. | By repatriating funds generated in Latin America where there seems to be no adequately profitable opportunity to reinvest them in the future business development in the region. |
Regarding this first point, Telefónica’s Latin American companies now have external net debt unguaranteed by the Spanish companies of 2,716 million euros, 9% of the Group’s total net financial debt, with Brazil (1,583 million euros) and Argentina (760 million euros) particularly prominent.
Some ex-BellSouth companies had other debt guaranteed by Telefónica S.A. left over from the acquisition process. Part of this has now been refinanced without guarantees. In December 2005, for instance, the Chilean mobile subsidiary agreed to a credit of nearly 180 million dollars (without parent company guarantees) to replace another similar-sized loan guaranteed by Telefónica S.A. This was included in the total external debt without recourse in Latin America (although the replacement actually took effect at the start of January). In addition, Telefónica’s Peruvian mobile subsidiary refinanced a 200 million dollar loan, originally underwritten by Telefónica S.A., in the course of 2005 and at the start of 2006, without a guarantee from the parent company, for its outstanding balance at December 31 of 163 million dollars (not included in non-recourse Latin American debt at December 31).
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In addition, exceptionally, Telefónica S.A. guaranteed acertificados bursàtiles (peso bond) issuance program for up to 12,000 million Mexican pesos by its indirect subsidiary Telefónica Finanzas de México, S.A. de C.V. The amount issued under this program at December 31, 2005 came to 5,000 million pesos. Subsequent issues have raised this to 11,500 million pesos. The figure given for non-recourse Latin American debt includes neither this program nor the total unused cash at December 31. The special factors that led to the guarantee being extended in this case are:
| - | Difficulties in making contributions from Telefónica Group either in capital (there is a minority shareholder) or in debt (for tax reasons). |
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| - | Impossibility of raising sufficient external finance at reasonable cost. This is because the company has embarked on a long expansion phase, which means it is experiencing operating losses due to the heavy marketing spending and investment in infrastructure involved. |
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| - | Possibility of legally implementing the guarantee without creating a structural subordination for other Telefónica creditors (from the point of view of the rating agencies). |
Regarding the second point – repatriation of funds – Telefónica repatriated a net 1,684 million euros from Latin America (excluding Mexico) in 2005 mostly in dividends (884 million euros) and the rest as interest or repayments on loans to Latin American subsidiaries or management fees. Moving in the other direction, finance continued to flow into Mexico mainly to fund Telefónica Móviles’s capex (261 million euros) and OIBDA losses (159 million euros).
Finally, the exposure of Telefónica S.A.’s OIBDA to other countries has altered slightly as a result of final completion of the Bell South subsidiary takeover in early 2005 and the Cesky Telecom purchase. The largest contributors to OIBDA are now the euro zone (61.8%), Brazil (18.5%), Argentina (4.7%), Chile (4.2%), Venezuela (3.9%) and Perú (3.8%). Exposure to the Czech Republic was around 3% of Telefónica Group 2005 OIBDA.
Derivatives policyAt December 31, 2005, the nominal value of outstanding derivatives with external counterparties came to 58,134.5 million euros. This figure is inflated by the use in some cases of several levels of derivatives applied to the nominal value of a single underlying derivative. For instance, a foreign currency loan can be hedged into floating rate, and then each interest rate period can be fixed using an FRA. Even using such techniques to reduce the position, it is still necessary to take extreme care in the use of derivatives to avoid problems arising through error or a failure to understand the real position and its associated risks.
The Group’s derivatives policy emphasized the following points:
| i. | Derivatives based on clearly identified underlying elements. |
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| | Acceptable underlying elements include profits, income and cash flows in either a company’s operating currency or another currency. These flows can be contractual (debt and interest payments, settlement of foreign currency payables, etc.), reasonably certain or foreseeable (investment program, future debt issues, commercial paper programs, etc.). The acceptability of an underlying element in the above cases does not depend on whether it complies with IFRS requirements for hedged items, as is required in the case of certain intra-group transactions, for instance. Parent company investments in subsidiaries with operating currencies other than the euro also qualify as acceptable underlying elements. |
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| | Economic hedges, i.e. hedges with a designated underlying element and which in certain circumstances offset fluctuations in the underlying element, do not always meet the requirements and effectiveness tests laid down by the various accounting standards for treatment as hedges. The decision to maintain positions that cease to qualify as effective or fail to meet other requirements will depend on the marginal impact on the income statement and how far this might compromise the aim of a stable income statement. In any event the results are recognized on the income statement. On this point, in 2004 hedging relationships were adjusted to take into account the different treatment of certain transactions under IFRS from the previous GAAP, so as to maintain the full economic hedge while limiting the combined impact of the hedge and its underlying element in the income statement. |
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| ii. | Matching of the underlying element to one side of the derivative. This matching basically applies to foreign currency debt and derivatives hedging foreign currency payments by group subsidiaries. The aim is to eliminate the risk arising from changes in foreign currency interest rates. Nonetheless, even when the aim is to achieve perfect hedging for all cash flows, the lack of depth to certain markets, especially in Latin American currencies, has meant that historically there have been mismatches between the terms of the hedges and those of the debts they are meant to cover. Telefónica Group’s intention is to reduce these mismatches, wherever this does not entail disproportionate transaction costs. Where no perfect match is possible for these reasons the aim is to modify the financial duration of the foreign currency underlying element to minimize foreign currency interest rate risk. Sometimes, the timing of the underlying element as defined for derivative purposes may not be exactly the same as the timing of the contractual underlying element. |
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| iii. | Identity of the company contracting the derivative and the company that owns the underlying. Generally, Telefónica aims to ensure that the hedging derivative and the corresponding underlying element or risk should belong to the same company. Sometimes, however, the holding companies (Telefónica S.A., Telefónica Móviles S.A. and Telefónica International S.A.) have taken out hedges on behalf of a subsidiary that owns the underlying element. Such transactions fail to meet IFRS hedging criteria and resulting gains or losses are therefore recognized in the income statement. The main reasons for separating the hedge and the underlying element were possible differences in the legal validity of local and international hedges (as a result of unforeseen legal changes) and the different credit ratings of the counterparties (whether group companies or the banks). |
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| iv. | Capacity to measure the derivative’s market value using the valuation systems available to the Group. Telefónica uses a number of tools to measure and manage risks in derivatives and debt. These include notably Kondor+, licensed by Reuters, which is widely used in financial institutions, and MBRM specialist financial calculator libraries. |
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| v. | Sale of options only when there is an underlying exposure. Options can only be sold when: i) there is an underlying exposure (on the balance sheet or associated with a highly probable external cash flow) that would offset the potential loss for the year if the counterparty exercises the option, or ii) the option is part of a structure in which another derivative offsets any loss. The sale of options is also permitted in option structures where, at the moment they are taken out, the net premium is either positive or zero. For instance, it would be allowed to sell short-term options on interest rate swaps that entitle the counterparty to receive a certain fixed interest rate, below the level prevailing at the time the option was sold. This would mean that if rates fell and the counterparty exercised its option, Telefónica would swap part of its debt from a floating rate to a lower fixed rate and would in addition have received a premium. |
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| vi. | Hedge accounting: The main risks that may qualify for hedge accounting (i.e., where there is symmetry between the underlying element and the hedge) are: |
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| | | o | Variations in market interest rates (either money-market rates, credit spreads or both) that affect the value of the underlying element or the measurement of the cash flows. |
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| | | o | Variations in exchange rates that change the value of the underlying element in the company’s operating currency and affect the measurement of the cash flow in the operating currency. |
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| | | o | Variations in the volatility of any financial variable, asset or liability, that affects either the valuation or the measurement of cash flows on debt or investments with embedded options whether or not these options are separable. |
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| | | o | Variations in the valuation of any financial asset, particularly shares of companies held in the available-for-sale portfolio. |
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| | – | Regarding the underlying element: |
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| | | o | Hedges can cover the whole or part of the value of the underlying element. |
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| | | o | The risk to be hedged can be for the whole period of the transaction or for only part of the period. |
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| | | o | The underlying element may be a highly probable future transaction, or a contractual underlying element (loan, foreign currency payment, investment, financial asset, etc.) or a combination of both that defines an underlying element with a longer term. This may on occasion mean that hedges have longer terms than the contractual underlying elements that they cover. This happens when Telefónica enters into long-term swaps, caps or collars to protect itself against interest rate rises that may raise the financial expense of its promissory notes, commercial paper and some floating rate loans which mature earlier than their hedges. These floating rate financing programs are highly likely to be renewed and the company commits to this by defining the underlying element in a more general way as a floating rate financing program whose term coincides with the maturity of the hedge. |
F-70
| | – | Hedges can be of three types: |
| | | | |
| | | o | Fair value hedges. |
| | | | |
| | | o | Cash flow hedges. These can be set at any value of the risk to be hedged (interest rates, exchange rates, etc.) or for a defined range (interest rates between 2% and 4%, interest rates above 4%, etc). In this last case, the hedging instrument used is an option and only the intrinsic value of the option is recognized as an effective hedge. Changes in the time value of the option are taken to earnings. |
| | | | |
| | | o | Hedges on net investment by consolidated subsidiaries. Generally such hedges will be put in place by Telefónica S.A. and the other Group holding companies. Wherever possible, these hedges are implemented through real debt in foreign currency. Often, however, this is not possible as many Latin American currencies are non-convertible, making it impossible for nonresident companies to issue local currency debt. It may also be that the debt market in the currency concerned is too thin to accommodate the required hedge (Czech crown, UK pound sterling), or that an acquisition is made in cash with no need for market finance. In these circumstances the Group uses derivatives, either forwards or cross-currency swaps, to hedge the net investment. “Pay fixed-rate foreign currency” cross-currency swaps are valued using the forward method (the interest spread and changes in value of the derivative due to movements in interest rates are taken to equity). “Pay floating rate foreign currency” swaps are valued by the spot method (the interest spread and changes in value of the derivative due to movements in interest rates are taken to earnings). As an exception to this general rule, for currencies with high interest spreads to the euro (such as Brazil) the Group opts for short-term structures (around 1 year) and uses the spot method even when it is paying fixed-rate foreign currency, to make the income statement easier to understand. Hedges using forwards are analyzed on a currency by currency basis. Where technical market issues arise or the perception of exchange rate risk changes, the Group may decide to cancel the designation of a position as a hedge early, irrespective of its maturity. Similarly, for hedging positions nearing maturity (less than 3 months) for technical market reasons such as liquidity, etc., maturity may be brought forward (by taking an offsetting position or selling the derivative in the market). If it has been decided not to renew the hedge, the designation will be cancelled and the operation can then be treated as effectively the same as the hedge reaching maturity. Otherwise, the hedge can be renewed early, in which case the first hedge’s designation is cancelled and the new hedge designated in its stead. Sometimes, a derivative-based hedge may be renewed using foreign currency debt instruments. |
| | | | |
| | – | Hedges can comprise a combination of different derivatives. |
F-71
| | – | There is no reason to suppose management of accounting hedges will be static, with an unchanging hedging relationship lasting right through to maturity. In fact, hedging relationships may change to allow appropriate management that serve the Group’s stated principles of stabilizing cash flows, stabilizing net financial income/expense and protecting the Group’s share capital. The designation of hedges may therefore be cancelled, before maturity, either because of a change in the underlying element or because of a change in perceived risk on the underlying asset. Derivatives included in these hedges may be reassigned to new hedges where they meet the effectiveness test and the new hedge is well documented. |
The main guiding principles for risk management are laid down by Telefónica Group’s Corporate Finance Department and implemented by company CFOs (responsible for balancing the interests of each company and those of the Group). The Corporate Finance Department may allow exceptions to this policy where this can be justified, normally when the market is too thin for the volume of transactions required or on clearly limited and small risks. New companies joining the Group as a result of mergers or acquisitions may also need time to adapt.
Details of derivatives contracted by the Group are as follows:
| | Millions of euros | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | Notional value at Maturity | |
| Derivatives | | | |
|
|
|
|
|
|
|
|
| |
| | Fair value
12/31/05 | | 2006 | | 2007 | | 2008 | | Subsequent
years | | Total | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate hedges | | (58.73 | ) | 228.60 | | 318.62 | | 106.05 | | 9,685.19 | | 10,338.46 | |
| Cash flow hedges | | 69.72 | | 180.93 | | 318.62 | | 106.05 | | 8,428.64 | | 9,034.24 | |
| Fair value hedges | | (128.45 | ) | 47.67 | | - | | - | | 1,256.55 | | 1,304.22 | |
| Exchange rate hedges | | 729.54 | | 7,020.84 | | 77.64 | | (342.82 | ) | 2,366.50 | | 9,122.15 | |
| Cash flow hedges | | 718.96 | | 8,217.20 | | 77.64 | | 36.51 | | 2,366.50 | | 10,697.84 | |
| Fair value hedges | | 10.58 | | (1,196.36 | ) | - | | (379.33 | ) | - | | (1,575.69 | ) |
| Interest and exchange rate hedges | | 354.28 | | 511.16 | | 404.72 | | 816.01 | | 631.55 | | 2,363.44 | |
| Cash flow hedges | | 111.39 | | 70.67 | | 52.32 | | 481.03 | | 224.27 | | 828.28 | |
| Fair value hedges | | 242.89 | | 440.49 | | 352.40 | | 334.98 | | 407.28 | | 1,535.16 | |
| Hedge of net investment in foreign operations | | 127.53 | | (904.56 | ) | (81.06 | ) | (274.59 | ) | (1,136.37 | ) | (2,396.58 | ) |
| Derivatives not designated as hedges | | 50.55 | | (420.72 | ) | (277.83 | ) | (88.70 | ) | 197.45 | | (589.80 | ) |
| Interest rate | | 13.94 | | (79.03 | ) | 110.35 | | 87.01 | | 226.46 | | 344.79 | |
| Currency | | 12.60 | | 386.59 | | (214.71 | ) | (47.84 | ) | 40.58 | | 164.62 | |
| Interest and exchange rate | | 24.01 | | (728.28 | ) | (173.47 | ) | (127.87 | ) | (69.59 | ) | (1,099.21 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For hedges, the positive amount is in terms of fixed “payment”For exchange rate hedges, a positive amount means payment of operating vs. foreign currency.
Details of derivative products taken out at December 31, 2005 and 2004 are provided in Appendix VI.
F-72
(16) TAX MATTERS
Consolidated tax group
Pursuant to a Ministerial Order dated December 27, 1989, since 1990 Telefónica, S.A. has filed consolidated tax returns for certain Group companies. In 2005, the consolidated tax group comprised 48 companies (54 in 2004).
Deferred tax assets and liabilities
The detail of the movements in these headings in 2005 and 2004 was as follows:
| | Millions of euros | |
|
|
|
|
| |
| | Deferred
tax assets | | Deferred
tax liabilities | |
|
|
|
|
|
|
| Balance at January 1, 2005 | | 8,957.14 | | 1,642.61 | |
| Additions | | 1,838.76 | | 788.90 | |
| Disposals | | (2,696.68 | ) | (610.48 | ) |
| Transfers | | (57.57 | ) | 62.77 | |
| Net international movements | | 198.55 | | 269.01 | |
| Company movements and others | | 144.47 | | 324.63 | |
| |
|
|
|
|
| Balance at December 31, 2005 | | 8,384.67 | | 2,477.44 | |
|
|
|
|
|
|
| | Millions of euros | |
| |
|
|
|
|
|
| | Deferred
tax assets | | Deferred
tax liabilities | |
|
|
|
|
|
|
| Balance at January 1, 2004 | | 9,568.80 | | 1,339.23 | |
| Additions | | 1,194.85 | | 535.62 | |
| Disposals | | (1,909.28 | ) | (220.47 | ) |
| Transfers | | 54.86 | | (5.05 | ) |
| Net international movements | | 0.19 | | (32.02 | ) |
| Company movements and others | | 47.72 | | 25.30 | |
| |
|
|
|
|
| Balance at December 31, 2004 | | 8,957.14 | | 1,642.61 | |
|
|
|
|
|
|
At December 31, 2005, the Telefónica tax group has 515.35 million euros (519.81 million euros in 2004) of unused tax deductions from the years 1999 to 2005, in addition to those that could derive from investments made in 2005 and that are currently being evaluated by the Company.
The tax loss carryforwards in Spain at December 31, 2005 at the main Group companies totaled 11,562.60 million euros, of which 10,913.79 million, 113.77 million and 49.91 million were incurred in 2002, 2001 and 2000, respectively. These can only be offset over 15 years. The financial statements include a 3,152.35 million euro deferred tax asset corresponding to 9,006.71 million euros of tax loss carryforwards.
At December 31, 2004 the tax loss carryforwards in Spain at the main Group companies totaled 18,140.23 million euros, of which 15,848.57 million, 1,128.38 million and 633.42 million were incurred in 2002, 2001 and 2000, respectively. These can be offset over 15 years. The balance at December 31, 2004 includes a 4,473.34 million euro deferred tax asset corresponding to 12,780.97 million euros of tax loss carryforwards.
F-73
The 2002 income return included a negative adjustment for 2,137.24 million euros from Telefónica Móviles. This arose through the transfer of certain holdings acquired in previous years where the market value differed from the carrying amount as a result of having implemented Article 159 of the Corporation Law. However, as past rulings by the tax authorities differ from the interpretation being put forward by the company, no adjustment has been made to the financial statements in this respect. From Terra Networks España and Terra Networks Asociadas, the Group had unused tax losses at December 31, 2005 of 375.49 million and 31.16 million euros, respectively.
In connection with the sale of the holding in Lycos Inc. (see Appendix II), Terra Networks, S.A. (now Telefónica, S.A.) recognized a tax asset of 272 million euros in 2004, which was included in the total tax asset of 306 million euros recognized in 2004. This tax asset arose from the difference between the sale price of Lycos Inc. shares for 88 million euros and the carrying amount of the capital increase held to acquire the company, net of adjustments (mainly provisions for impairment) which had already been considered tax deductible prior to the sale.
In addition, the company has begun procedures to file a higher tax loss for 2004, of up to 7,418 million. It is arguing that for tax purposes the Lycos Inc. shares received should be valued at market value, rather than carrying amount, in conformity with Article 159 of the Spanish Corporation Law. However, as the tax authorities have opposed such claims in other similar cases and the final decision remains uncertain, no booking has been made for this concept as of the date of preparation of these consolidated financial statements.
Temporary differences
Temporary differences are generated as a result of the difference between tax bases of the assets and liabilities and their respective carrying amounts. Deductible temporary differences, tax deductions and credits and tax loss carryforwards give rise to deferred tax assets on the balance sheet, whereas taxable temporary differences in tax bases give rise to deferred tax liabilities. Details of the sources of deferred tax assets and liabilities from temporary differences recorded at December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| | | Millions of euros | |
| | |
|
|
| | | 2004 | | | 2005 | |
| | |
|
|
|
|
|
| | | Deferred tax
assets | | Deferred tax
liabilities | | | Deferred tax
assets | | Deferred tax
liabilities | |
|
|
|
|
|
|
|
|
|
|
|
| Property, plant and | | | | | | | | | | |
| equipment | | 77.57 | | 452.93 | | | 109.10 | | 652.43 | |
| Intangible assets | | 162.69 | | 769.01 | | | 77.80 | | 1,149.74 | |
| Personnel expenses | | 1,791.54 | | 8.58 | | | 1,744.95 | | 11.05 | |
| Inventories and | | | | | | | | | | |
| accounts receivable | | 142.26 | | (2.41 | ) | | 186.17 | | (1.93 | ) |
| Provisions | | 538.83 | | 156.19 | | | 545.97 | | 137.43 | |
| Investments in | | | | | | | | | | |
| associates, | | | | | | | | | | |
| subsidiaries and | | 1,119.25 | | 58.03 | | | 1,197.37 | | 63.48 | |
| joint ventures | | | | | | | | | | |
| Other | | 455.13 | | 200.28 | | | 503.16 | | 465.24 | |
|
|
|
|
|
|
|
|
|
|
|
| Total | | 4,287.27 | | 1,642.61 | | | 4,364.52 | | 2,477.44 | |
|
|
|
|
|
|
|
|
|
|
|
F-74
Taxes payable and tax receivables
Current taxes payable and tax receivables at December 31, 2005 and 2004 are as follows:
|
|
|
|
|
| | | Millions of euros |
| | |
|
| | | Balance at
12/31/05 | | Balance at
12/31/04 |
|
|
|
|
|
| Taxes payable: | | | | |
| Tax withholdings | | 78.15 | | 89.52 |
| Indirect taxes payable | | 966.96 | | 811.97 |
| Social Security | | 177.74 | | 171.02 |
| Current income taxes payable | | 818.35 | | 629.65 |
| Other | | 150.42 | | 122.78 |
|
|
|
|
|
| Total | | 2,191.62 | | 1,824.94 |
|
|
|
|
|
|
|
|
|
|
| | �� | Millions of euros |
| | |
|
| | | Balance at
12/31/05 | | Balance at
12/31/04 |
|
|
|
|
|
| Tax receivables: | | | | |
| Recoverable taxes and excess charges and others | | 6.59 | | 6.84 |
| Indirect tax receivables | | 710.70 | | 632.41 |
| Current income taxes receivable | | 522.34 | | 371.31 |
| Other | | 208.63 | | 58.93 |
|
|
|
|
|
| Total | | 1,448.26 | | 1,069.49 |
|
|
|
|
|
Reconciliation of the book profit before taxes to the taxable income
The reconciliation of the book profit before taxes to the taxable income for corporate income tax purposes and the determination of the corporate income tax expense for 2005 and 2004 is as follows:
|
|
|
|
|
|
|
| | | Millions of euros | |
| |
|
|
|
| | | 2005 | | | 2004 | |
|
|
|
|
|
|
|
| Book profit before taxes | | 6,796.21 | | | 4,866.40 | |
| Tax expense at prevailing statutory tax rate (1) | | 1,831.16 | | | 1,661.17 | |
| Changes in tax expense from new taxes | | 26.25 | | | 98.64 | |
| Permanent differences | | 672.14 | | | (93.23 | ) |
|
|
|
|
|
|
|
| Changes in deferred tax charge due to changes in tax rate | | 2.18 | | | (0.23 | ) |
| Capitalization of tax deduction and tax relief | | (176.51 | ) | | (169.14 | ) |
| Capitalized tax assets from previous years | | (373.63 | ) | | (51.08 | ) |
| Losses not recognized against tax | | 65.74 | | | 0.96 | |
|
|
|
|
|
|
|
| Disposals of tax assets for losses or tax credits and tax relief | | 39.48 | | | 41.67 | |
| Increase/(decrease) in tax expense arising from temporary differences | | (53.91 | ) | | 44.91 | |
| Consolidation adjustments | | (59.64 | ) | | (69.21 | ) |
|
|
|
|
|
|
|
| Adjustment to income tax for changes in previous year’s tax settlement | | (4.11 | ) | | 48.32 | |
|
|
|
|
|
|
|
| Corporate income tax charge | | 1,969.15 | | | 1,512.78 | |
|
|
|
|
|
|
|
| Detail of current/deferred tax expense | | | | | | |
|
|
|
|
|
|
|
| Current tax expense | | 2,657.63 | | | 1,742.35 | |
|
|
|
|
|
|
|
| Deferred tax expense | | (688.48 | ) | | (229.57 | ) |
|
|
|
|
|
|
|
| Total corporate income tax charge | | 1.969,15 | | | 1.512,78 | |
|
|
|
|
|
|
|
| (1) Considering prevailing taxes in each country. | | | | | | |
F-75
Permanent differences arise mainly from events that produce taxable income not recognized in the consolidated income statement.
The capitalization of tax deductions mainly include the 163.12 million euros used by the Spanish Tax Group in the year (double tax treaties and export promotion activity deductions). The use of prior years’ tax credits in 2005 derives mainly from the tax losses in Colombia and Argentina.
Tax losses were also generated in 2005 that are not recognized as deferred tax assets given that tax consolidation is not applicable in the Brazilian and Mexican wireless business (in Mexico due to the impact of the minority shareholding).
On September 25, 2002, tax inspections began on the books of several companies included in Tax Group 24/90, of which Telefónica, S.A. is the parent company. The taxes open to inspection are corporate income tax (for the years from 1998 to 2000) and VAT and tax withholdings and prepayments relating to personal income tax, tax on income from movable capital, property tax and nonresident income tax (1998 to 2001). The tax audits were concluded in 2005 with a final tax assessment, signed under protest, of approximately 135 million euros. This is not expected to give rise to material liabilities on the Telefónica Group consolidated financial statements as the Company expects to be successful in its appeal against the assessment presented before the Central Economic-Administrative Tribunal.
The years open for review by the tax inspection authorities for the main applicable taxes vary from one consolidated company to another, based on each country’s tax legislation, taking into account their respective statute-of-limitations periods. In Spain, as a result of the tax audit currently in progress, the Tax Group has the following years open for review: the years since 2002 for tax withholdings and prepayments relating to personal income tax, tax on income from movable capital, property tax, nonresident income tax and VAT; and the years since 2001 for corporate income tax (since 2001 and 2000, respectively, for the other Spanish companies).
In the other countries in which the Telefónica Group has a significant presence, the years open for inspection by the relevant authorities are generally as follows:
| | — | The last five years in Argentina, Brazil, Mexico, Colombia, Uruguay and theNetherlands. |
| |
| | — | The last four years in Peru, Guatemala and Venezuela. |
| |
| | — | The last three years in Chile, El Salvador, Ecuador, the USA and Panama. |
| |
The tax audit of the open years is not expected to give rise to additional material liabilities for the Group.
| (17) | SEGMENT INFORMATION |
| |
| | The Telefónica group is structured around the Business Lines it operates. Each is separately managed and organized to suit delivery of the specific products or services it provides. The group’s core Business Lines are: |
| | • | Telefónica de España: wireline telephony in Spain. |
| | • | Telefónica Móviles: wireless telephony in Spain and Latin America. |
| | • | Telefónica Latinoamérica: wireline telephony in Latin America. |
| | • | Cesky Telecom: integrated telecommunications provider in the Czech Republic. |
F-76
| | • | Telefónica Contenidos: audio-visual media and content in Europe and Latin America. |
| | • | Directories business: publication, development and sale of advertising for telephone directories throughout Europe and Latin America. |
| | • | Atento: call centers in Europe, Latin America and North Africa. |
Key information by business segment:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Millions of euros | | Telefónica
de España | | | Telefónica
Móviles | | | Telefónica
Latinoamérica | | | Cesky
group | | | Telefónica
de
Contenidos | | | Directories
Business | | | Atento | | | Other &
intragroup
eliminations | | | Total | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| External sales | | 11,019.45 | | | 15,068.41 | | | 7,902.02 | | | 1,035.24 | | | 1,251.21 | | | 559.57 | | | 383.85 | | | 662.41 | | | 37,882.16 | |
| Inter-segment sales | | 720.05 | | | 1,445.10 | | | 363.46 | | | 0.00 | | | 17.84 | | | 92.04 | | | 472.61 | | | (3,111.10 | ) | | - | |
| Other operating income | | 351.40 | | | 269.76 | | | 269.47 | | | 21.38 | | | 74.04 | | | 2.62 | | | 2.29 | | | 427.30 | | | 1,418.26 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Supplies | | (3,032.00 | ) | | (5,365.45 | ) | | (1,922.52 | ) | | (285.74 | ) | | (732.70 | ) | | (67.34 | ) | | (76.39 | ) | | 1,417.09 | | | (10,065.05 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Personnel expenses | | (2,695.84 | ) | | (799.67 | ) | | (762.26 | ) | | (137.444 | ) | | (205.79 | ) | | (120.28 | ) | | (579.80 | ) | | (355.26 | ) | | (5,656.34 | ) |
| |
| Other operating expenses | | (1,596.27 | ) | | (4,801.14 | ) | | (2,091.85 | ) | | (176.76 | ) | | (135.40 | ) | | (247.33 | ) | | (86.20 | ) | | 832.35 | | | (8,302.60 | ) |
| Depreciation and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| amortization | | (2,139.15 | ) | | (2,374.01 | ) | | (1,792.47 | ) | | (291.85 | ) | | (28.88 | ) | | (23.58 | ) | | (27.87 | ) | | (39.87 | ) | | (6,717.68 | ) |
|
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|
|
| OPERATING INCOME | | 2,627.64 | | | 3,443.00 | | | 1,965.85 | | | 164.83 | | | 240.32 | | | 195.70 | | | 88.49 | | | (167.08 | ) | | 8,558.75 | |
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
| Financial income (loss) | | (393.47 | ) | | (459.08 | ) | | (383.58 | ) | | (10.82 | ) | | (96.73 | ) | | (5.29 | ) | | (20.24 | ) | | (265.12 | ) | | (1,634.33 | ) |
| Share in income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| from companies | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| accounted for by the | | (2.14 | ) | | (154.21 | ) | | 4.40 | | | - | | | (6.43 | ) | | (0.04 | ) | | - | | | 30.21 | | | (128.21 | ) |
| equity method | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate income tax | | (737.31 | ) | | (946.04 | ) | | (319.20 | ) | | (35.98 | ) | | (49.20 | ) | | (65.07 | ) | | (16.65 | ) | | 200.30 | | | (1,969.15 | ) |
| Income (loss) from | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| discontinued operations | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| Minority interests | | (0.46 | ) | | 35.24 | | | (160.80 | ) | | - | | | (9.13 | ) | | - | | | (3.38 | ) | | (242.68 | ) | | (381.21 | ) |
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|
| PROFIT (LOSS) FOR | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| THE YEAR | | 1,494.26 | | | 1,918.91 | | | 1,106.67 | | | 118.03 | | | 78.83 | | | 125.30 | | | 48.22 | | | (444.37 | ) | | 4,445.85 | |
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|
| INVESTMENT IN PP&E | | 1,406.56 | | | 2,330.44 | | | 1,061.21 | | | 147.03 | | | 135.59 | | | 24.06 | | | 42.94 | | | 320.82 | | | 5,468.65 | |
| INVESTMENT IN | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ASSOCIATES | | 3.49 | | | 53.56 | | | 25.90 | | | - | | | 730.85 | | | 1.01 | | | - | | | 849.54 | | | 1,664.35 | |
| SEGMENT ASSETS | | 18,474.61 | | | 26,970.60 | | | 20,840.19 | | | 4,282.80 | | | 3,849.08 | | | 781.00 | | | 454.84 | | | (2,479.35 | ) | | 73,173.77 | |
| SEGMENT | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES | | 14,337.14 | | | 20,715.89 | | | 12,110.50 | | | 1,008.05 | | | 2,931.60 | | | 537.86 | | | 386.75 | | | 4,987.56 | | | 57,015.35 | |
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F-77
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| 2004 |
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| Millions of euros | | Telefónica
de España | | | Telefónica
Móviles | | | Telefónica
Latinoamérica | | | Telefónica
de
Contenidos | | | Directories
Business | | | Atento | | | Other &
intragroup
eliminations | | | Total | |
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| External sales | | 10,566.91 | | | 10,492.09 | | | 6,420.08 | | | 1,200.16 | | | 535.55 | | | 267.56 | | | 798.57 | | | 30,280.92 | |
| Inter-segment sales | | 635.32 | | | 1,469.28 | | | 328.30 | | | 18.97 | | | 80.89 | | | 338.93 | | | (2,871.69 | ) | | - | |
| Other operating income | | 343.48 | | | 199.84 | | | 589.87 | | | 25.53 | | | 2.56 | | | 4.61 | | | (32.48 | ) | | 1,133.41 | |
| |
| Supplies | | (2,789.98 | ) | | (3,687.93 | ) | | (1,593.34 | ) | | (705.03 | ) | | (60.73 | ) | | (48.82 | ) | | 1,248.50 | | | (7,637.33 | ) |
| |
| Personnel expenses | | (2,716.97 | ) | | (555.47 | ) | | (655.43 | ) | | (213.43 | ) | | (118.92 | ) | | (402.59 | ) | | (432.36 | ) | | (5,095.17 | ) |
| |
| Other operating expenses | | (1,478.73 | ) | | (3,280.21 | ) | | (1,794.64 | ) | | (141.19 | ) | | (234.51 | ) | | (74.59 | ) | | 544.07 | | | (6,459.80 | ) |
| Depreciation and | | (2,367.66 | ) | | (1,580.14 | ) | | (1,578.73 | ) | | (28.86 | ) | | (23.80 | ) | | (33.69 | ) | | (53.15 | ) | | (5,666.03 | ) |
| amortization | | | | | | | | | | | | | | | | | | | | | | | | |
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| OPERATING INCOME | | 2,192.37 | | | 3,057.46 | | | 1,716.11 | | | 156.15 | | | 181.04 | | | 51.41 | | | (798.54 | ) | | 6,556.03 | |
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| Financial income (loss) | | (523.72 | ) | | (496.10 | ) | | (344.63 | ) | | (121.65 | ) | | (5.70 | ) | | (10.48 | ) | | (136.83 | ) | | (1,639.11 | ) |
| Share in income (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
| from companies | | | | | | | | | | | | | | | | | | | | | | | | |
| accounted for by the | | (0.51 | ) | | (39.51 | ) | | 2.57 | | | (34.15 | ) | | (0.36 | ) | | - | | | 21.47 | | | (50.49 | ) |
| equity method | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate income tax | | (554.75 | ) | | (864.42 | ) | | (292.62 | ) | | (35.92 | ) | | (61.68 | ) | | (6.84 | ) | | 303.45 | | | (1,512.78 | ) |
| Income (loss) from | | | | | | | | | | | | | | | | | | | | | | | | |
| discontinued operations | | - | | | - | | | - | | | - | | | - | | | (0.11 | ) | | 132.08 | | | 131.97 | |
| Minority interests | | (0.18 | ) | | 25.22 | | | (327.10 | ) | | (5.00 | ) | | 0.52 | | | (1.69 | ) | | (1.69 | ) | | (309.92 | ) |
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| INCOME (LOSS) FOR | | | | | | | | | | | | | | | | | | | | | | | | |
| THE YEAR | | 1,113.21 | | | 1,682.65 | | | 754.33 | | | (40.57 | ) | | 113.82 | | | 32.29 | | | (480.06 | ) | | 3,175.67 | |
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| INVESTMENT IN PP&E | | 1,207.55 | | | 1,669.00 | | | 748.49 | | | 24.28 | | | 21.50 | | | 22.76 | | | 73.53 | | | 3,767.11 | |
| INVESTMENT IN | | | | | | | | | | | | | | | | | | | | | | | | |
| ASSOCIATES | | 6.20 | | | 75.37 | | | 254.58 | | | 718.10 | | | 1.08 | | | 0.00 | | | 596.35 | | | 1,651.68 | |
| SEGMENT ASSETS | | 18,831.49 | | | 23,197.01 | | | 19,071.70 | | | 4,074.93 | | | 658.03 | | | 328.94 | | | (6,083.24 | ) | | 60,078.86 | |
| SEGMENT | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES | | 14,778.30 | | | 19,370.49 | | | 12,730.20 | | | 2,846.15 | | | 461.58 | | | 337.26 | | | (2,787.60 | ) | | 47,736.38 | |
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The items broken down in the tables above were selected to reflect the main factors affecting management and strategic decisions in each segment.
In parallel with its Business Line management structure, Telefónica group also monitors its activities by geographical area with a view to maximizing the efficiency of the various businesses in each region.
Key information by geographical segment:
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| 2005 |
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| Millions of euros | | Spain | | Latin America | | Rest of
Europe | | RoW &
intragroup
eliminations (1) | | | Total |
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| Sales to third parties | | 19,674.74 | | 15,707.53 | | 2,099.73 | | 400.16 | | | 37,882.16 |
| Total assets | | 122,491.87 | | 37,478.56 | | 19,624.83 | | (106,421.49 | ) | | 73,173.77 |
| Investments in PP&E | | 2,483.47 | | 2,674.19 | | 180.62 | | 13.76 | | | 5,352.04 |
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F-78
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| 2004 |
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| Millions of euros | | Spain | | Latin America | | Rest of
Europe | | RoW &
intragroup
eliminations (1) | | | Total |
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| Sales to third parties | | 18,578.07 | | 10,330.50 | | 1,095.56 | | 276.79 | | | 30,280.92 |
| Total assets | | 123,069.62 | | 29,661.69 | | 15,974.86 | | (108,627.31 | ) | | 60,078.86 |
| Investments in PP&E | | 1,912.31 | | 1,761.88 | | 36.25 | | 56.67 | | | 3,767.11 |
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(1) Total assets under “RoW and intragroup eliminations” mainly include the impact of eliminations of investments in Group companies on consolidation.
(18) DISCONTINUED OPERATIONS
The Company did not discontinue any of its operations in 2005.
In October 2004 Terra Networks S.A. (now Telefónica, S.A.) agreed to sell Lycos Inc. to Daum Communications Corp. for 108 million dollars. For comparison purposes, Lycos’ results up to the effective date of its sale are recognized under “Income (loss) from discontinued operations” in the consolidated income statement for 2004.
Lycos Inc.’s results in 2004 until the effective date of its sale were as follows:
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| | | Millions of euros | |
|
|
| Operating income | | 82.34 | |
| Operating expense | | (93.70 | ) |
| Operating loss | | (11.36 | ) |
| Financial income (loss) | | (11.60 | ) |
| Share in income/loss of companies consolidated by the equity method | | (0.58 | ) |
| Loss before minority interests and tax | | (23.54 | ) |
| Corporate income tax | | 155.51 | |
| Income from discontinued operation | | 131.97 | |
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|
Net cash flow in 2004 until the effective date of sale:
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| | | Millions of euros | |
|
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|
|
| From operating activities | | (16.50 | ) |
| From investing activities | | 11.72 | |
| From financing activities | | 0.18 | |
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| Total increase (decrease) in net cash | | (4.6 | ) |
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|
F-79
The result of the company’s disposal was as follows:
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| | | Millions of euros | |
|
|
|
|
| Non-current assets | | 49,41 | |
| Current assets | | 53,29 | |
| Non-current liabilities | | (1,65 | ) |
| Current liabilities | | (52,81 | ) |
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|
| Total | | 48,24 | |
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|
| Sale price | | 87,86 | |
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| Income from the disposal | | 39,62 | |
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|
|
Taxable income from the disposal of Lycos was 155.36 million euros.
(19) REVENUES AND EXPENSES
Other income
The detail of this heading is as follows:
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|
|
| | | Millions of euros |
| | |
|
|
|
| | | 2005 | | 2004 |
|
|
|
|
|
| Non-core and other current operating income | | 438.98 | | 424.86 |
| Internal expenditures capitalized | | 601.34 | | 470.25 |
| Capital grants | | 74.80 | | 112.37 |
| Gain on disposal of assets | | 303.14 | | 125.93 |
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|
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| Total | | 1,418.26 | | 1,133.41 |
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|
Among gains on asset disposals is a gain obtained from the Telefónica Group’s real estate efficiency plan via the selective sale of properties, which generated proceeds of 65.83 million euros in 2005 (34.32 million euros in 2004).
The figure for 2005 also includes the proceeds from the sale of the 14.41% shareholding in US company Infonet Services Corporation, Inc. of 80.00 million euros (see Note 8) and from the offering of Endemol shares of 55.58 million euros (see Note 2).
In 2004, the Group recorded proceeds from the sales of 2.13% of Eutelsat, Terra México and Radio Móvil Digital of 21.43, 10.75 and 10.23 million euros, respectively.
F-80
Other expenses
The detail of this heading in 2004 and 2005 is as follows:
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|
|
| | | Millions of euros |
| | |
|
|
|
| | | 2005 | | 2004 |
|
|
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|
|
| External services | | 6,715.28 | | 5,072.03 |
| Local taxes | | 782.65 | | 525.29 |
| Other operating expenses | | 228.99 | | 225.73 |
| Changes in operating allowances | | 498.85 | | 361.83 |
| Impairment of goodwill (Note 6) | | - | | 120.67 |
| Loss on disposal non-current assets | | 76.83 | | 154.25 |
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| Total | | 8,302.60 | | 6,459.80 |
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|
|
Research and development costs expenses in 2005 amounted to 47.41 million euros.
Personnel expenses and employee benefits
The detail of personnel expenses is as follows:
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|
| | | Millions of euros |
| | |
|
|
|
| | | 2005 | | 2004 |
|
|
|
|
|
| |
| Wages, salaries and other personnel expenses | | 5,045.14 | | 4,346.06 |
| Staff restructuring expenses | | 611.20 | | 749.11 |
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|
|
|
|
| Total | | 5,656.34 | | 5,095.17 |
|
|
|
|
|
Staff restructuring expenses recorded by the Group include the costs of the Telefónica de España labor force reduction program of 577.92 and 706.68 million euros in 2005 and 2004, respectively.
Inclusion in the general social security system
Since January 1, 1992, Telefónica de España S.A.U. and its employees, who were formerly covered by a company employee welfare system, have been transferred to the general social security system. As a result of the inclusion of serving employees in the social security system, Telefónica de España S.A.U. must make additional social security contributions (2.2%) until 2016, based on the serving employees’ effective contribution bases applicable at each time during that period. These contributions totaled 23.68 million euros in 2005 (24.17 million euros in 2004).
Severance
“Wages, salaries and other personnel expenses” includes severance payments made to five executives who left the company in 2005 in line with the terms of their senior executive contracts.
F-81
Generally, senior executive contracts are associated with Executive Committee members and include a severance clause entailing three years of salary plus another year based on years of service at the Company. The annual salary comprises fixed compensation and an arithmetical average of the sum of the two most recent variable compensations received by contract.
Supplementary pension plan for employees
Various Telefónica Group companies have arranged a defined-contribution pension plan pursuant to Royal Decree-Law 1/2002, November 29, approving the revised Pension Plans and Funds Law. Under this plan, contributions of between 4.50% and 6.87% of the participating employees’ regulatory base salary (based on each employee’s respective hiring date and the company in question) are made to the plan. The obligatory contribution of the employee participant is generally a minimum of 2.2% of the employee’s regulatory base salary. The scheme uses an individual financial capitalization system.
At December 31, 2005, 45,262 Group employees were covered by the pension plans managed by the subsidiary Fonditel Entidad Gestora de Fondos de Pensiones, S.A. compared to 42,446 at December 31, 2004. The contributions made by the various companies in 2005 amounted to 93.99 million euros (93.55 million euros in 2004).
Number of employees
The following is a breakdown of the Telefónica Group’s average number of employees in 2005 and 2004, together with headcount at December 31 each year. The employees shown for each subgroup include the Telefónica Group companies with similar activities in order to present the employees by business.
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| | | 2005 | | 2004 |
| | |
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| | | Average | | Year end | | Average | | Year end |
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|
| Telefónica, S.A. | | 627 | | 650 | | 668 | | 622 |
| Telefónica de España Group | | 35,855 | | 35,053 | | 37,281 | | 36,425 |
| Telefónica Móviles Group | | 22,471 | | 22,739 | | 14,071 | | 19,797 |
| Telefónica Internacional Group | | 27,381 | | 28,856 | | 25,951 | | 25,905 |
| Directories Business | | 2,931 | | 2,942 | | 2,898 | | 2,876 |
| Cesky Telecom | | 9,402 | | 10,051 | | - | | - |
| Telefónica de Contenidos Group | | 5,735 | | 5,734 | | 5,520 | | 5,860 |
| Atento Group | | 84,365 | | 95,907 | | 62,429 | | 74,829 |
| Terra Networks Group | | - | | - | | 1,997 | | 1,584 |
| Other | | 6,319 | | 5,709 | | 6,004 | | 5,656 |
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| Total | | 195,086 | | 207,641 | | 156,819 | | 173,554 |
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The figures in the preceding table relate to consolidated companies.
In addition, group company Telefónica de España has filed various appeals for judicial review against the government in connection with a monetary claim relating to healthcare services provided in the years from 1999 to 2003 (inclusive). The company has recorded an account receivable of 90.47 million euros in this regard. Proceedings have likewise been instigated by or against the regulator, some of which are being conducted in the administrative jurisdiction and others before the courts.
F-82
Share-based payments
At year end 2005 Telefónica Group maintained the following shared-based compensation plans based on the share price of either Telefónica, S.A. or one of its subsidiaries.
a) Telefónica, S.A. share option plan targeted at all the employees of certain Telefónica group companies (“TIES Program”)
February 15, 2005 was the third and final exercise date for the TIES Program, a compensation plan based on the Telefónica S.A. share price involving share subscriptions and granting of share options, targeted at non-executive personnel of Telefónica group and created by resolutions of the Shareholders’ Meeting of April 7, 2000. However, as the initial reference value was higher than the market price at that time, there were no exercisable options and therefore all options were expired and cancelled and the TIES program was terminated.
Accordingly, the shares which were acquired in the past to cover the plan are relieved of their coverage consideration.
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|
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|
|
|
| | | Number of
options | | | Average strike
price (euros) |
|
|
|
|
|
|
| Options outstanding at December 31, 2003 | | 30,113,539 | | | 4.53 |
| Options expired/cancelled | | (321,112 | ) | | |
| Options outstanding at December 31, 2004 | | 29,792,427 | | | 4.53 |
| Options expired/cancelled | | (29,792,427 | ) | | |
| Options outstanding at December 31, 2005 | | - | | | |
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|
In February 2005, in accordance with a report issued by the Board of Directors on the resolutions adopted by the Shareholders' Meeting on April 7, 2000, in connection with item IX on the agenda (relating to the establishment of the TIES Program), Telefónica, S.A. acquired 34,760,964 shares from the two financial institutions acting as agents for the plan. These institutions had subscribed and fully paid in these shares when they were issued with the intention that they would subsequently be delivered to the plan’s beneficiaries. The shares were then cancelled by resolution of the Shareholders’ Meeting of May 31, 2005 (see Note 11).
b) Telefónica Móviles, S.A. share option plan (“MOS Program”)
On October 26, 2000, authorization was given at the Extraordinary Shareholders’ Meeting of Telefónica Móviles, S.A. to establish a corporate share option plan for the executives and employees of Telefónica Móviles, S.A. and its subsidiaries and, in order to facilitate coverage of the Company’s obligations to the beneficiaries of the plan, it was resolved to increase the share capital of Telefónica Móviles, S.A. by 11,400,000 euros through the issuance of 22,800,000 shares of 0.50 euro par value each.
Subsequently, at the Shareholders’ Meeting on June 1, 2001, Telefónica Móviles, S.A. introduced certain modifications and clarifications of the share option plan with a view to making it more attractive and efficient to encourage the loyalty of its beneficiaries.
F-83
Finally, on September 21, 2001, the Board of Directors of Telefónica Móviles S.A. resolved to develop and establish the terms and conditions of the share option plan in conformity with the aforementioned resolutions of the Shareholders’ Meetings on October 26, 2000 and June 1, 2001. The main features of this plan are as follows:
| 1. | The plan is open to all the executive directors, executives (including general managers or similar executives) and employees who on December 1, 2001 were working for companies in which Telefónica Móviles, S.A. directly or indirectly, during the term of the plan, (i) has a holding with voting rights of over 50%, or (ii) has the right to appoint over 50% of the members of the Board of Directors. |
| | |
| | Without prejudice to the above, the MOS Program envisaged the possibility of awarding new options at dates subsequent to its initial implementation. In order to carry this out, following the issuance of a report by the Appointments and Compensation Committee, the Board of Directors resolved to assign options to both the employees of the new companies which, when joining the Telefónica Móviles Group, met the aforementioned requirements and the employees hired by companies already participating in the MOS Program. The Board also resolved that employees could join the plan until December 31, 2003. Consequently, new beneficiaries joined the plan in 2002 and 2003. In 2003 certain companies were excluded from the MOS Program because they no longer met the related requirements. |
| | |
| 2. | There are three types of options: |
| | – | Type-A options, with a strike price of 11 euros. |
| | | |
| | – | Type-B options, with a strike price of 16.5 euros. |
| | | |
| | – | Type-C options, with a strike price of 7.235 euros. |
| | | |
| | Each beneficiary of the program will receive an equal number of type-A and type-B options and a number of type-C options equal to the sum of the type-A and type-B options received. |
| | |
| 3. | The executive directors and executives who are beneficiaries of the MOS Program must deposit one share of Telefónica Móviles, S.A. for every 20 options assigned to them. |
| | |
| 4. | Each option, regardless of type, entitled its holder to receive one share of Telefónica Móviles, S.A. |
| | |
| 5. | The options may be exercised at a rate of one-third each year from the day after the day on which two, three and four years have elapsed from the option grant date (January 2, 2002). The first exercise period commenced on January 2, 2004. The second period commenced on January 3, 2005. The third and last exercise period commenced on January 3, 2006. |
| | |
| 6. | At the exercise date, the options may be settled, at the beneficiary’s request, either (i) through delivery of shares of Telefónica Móviles, S.A., once the beneficiary has paid the option strike price, or (ii) cash settlement. |
| | |
F-84
In 2004, in the second exercise period, 778 employees exercised a total of 79,823 options. Of these employees, two beneficiaries opted for settlement by delivery of shares and the remainder by cash settlement. The amount received by these beneficiaries upon the exercise of their options was 109 thousand euros. In addition, in 2004, 859 employees, owning a total of 1,681,928 options, left the program as a result of early settlement or voluntary withdrawal. 844 thousand euros were paid for this option in 2004.
In 2005, in the third exercise period, 1,019 employees exercised a total of 383,116 options. Of these employees, six beneficiaries opted for settlement via the delivery of shares and the remainder for cash settlement. The amount received by these beneficiaries upon the exercise of their options was 320.4 thousand euros. In addition, in 2005, 605 employees, owning a total of 1,307,655 options, left the program as a result of early settlement or voluntary withdrawal. 791.7 thousand euros were paid for this option in 2005.
The total number of beneficiaries of the MOS Program was 6,970 at December 31, 2005. Of these beneficiaries, one is an executive director of Telefónica Móviles, S.A. and 10 are general managers or similar executives. 9,446,373 options had been assigned at December 31, 2005.
The details of the movements in 2005 and 2004 were as follows:
|
|
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|
|
|
| | | Number of
options | | | Average strike
price (euros) |
|
|
|
|
|
|
| Options outstanding at December 31, 2003 | | 12,819,072 | | | 10.49 |
| Options exercised | | (1,681,928 | ) | | |
| Options outstanding at December 31, 2004 | | 11,137,144 | | | 10.49 |
| Options exercised | | (1,690,771 | ) | | |
| Options outstanding at December 31, 2005 | | 9,446,373 | | | 10.49 |
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c) Share option plan of Terra Networks, S.A. (now of Telefónica, S.A.)
The Terra Networks, S.A. share option plan was approved at the Shareholders’ Meeting on October 1, 1999 and implemented by Board of Directors’ resolutions adopted on October 18, 1999 and December 1, 1999.
The plan provides, through the exercise of the share options by their holders, for the ownership by the employees and executives of the Terra-Lycos Group companies of a portion of the capital of Terra Networks, S.A. up to a maximum of 14,000,000 shares.
The approval and implementation of this compensation system were notified to the CNMV and were made public through the complete information memorandum verified and registered in the CNMV Official Register on October 29, 1999, and in the Prospectus presented to the U.S. Securities and Exchange Commission (SEC).
F-85
On December 1, 1999 and June 8, 2000, the Board of Directors, pursuant to the powers granted to it at the Shareholders’ Meeting, implemented the first phase of the plan by granting options to employees of the Terra Group. The main features of these options are as follows:
| 1. | Each of the share options under the plan entitles the holder (employee or executive) to acquire one share of Terra Networks, S.A. at a strike price of 11.81 euros per share. |
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| 2. | The duration was four years and three months (therefore, it ended on February 28, 2004), and the options could be exercised at a rate of one-third of those granted each year from the second year onwards. |
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| 3. | The exercise of the options is conditional upon the beneficiary remaining a Terra-Lycos Group employee. |
In 2001 the Board of Directors implemented the second phase of the Terra Networks, S.A. share option plan, which was approved at the Shareholders’ Meeting on June 8, 2000, and launched pursuant to a resolution adopted by the Board of Directors on December 22, 2000, at the recommendation of the Appointments and Compensation Committee based on a proposal of its Chairman, through the assignment of options to executives and employees who were already beneficiaries of the share option plan, in addition to the assignment of options to new employees who had joined the Terra-Lycos Group at that date.
The main features established by the Board of Directors for this assignment were as follows:
| 1. | Each of the share options under the plan entitles the holder to acquire one share of Terra Networks, S.A. at a strike price of 19.78 euros per share. |
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| 2. | The duration of the Plan was modified by a resolution adopted at the Shareholders’ Meeting on June 8, 2000, and was set at six years with a two-year grace period. The options can be exercised at a rate of one-quarter of those granted each year from the third year through the sixth year. |
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| 3. | The exercise of the options is conditional upon the beneficiary remaining a Terra Group employee. |
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| 4. | Options were granted to one executive director and four general managers and persons of a similar category, and this was duly notified to the CNMV on December 29, 2000. |
On February 21, 2001, the Board of Directors resolved to modify the resolution adopted on December 22, 2000, in respect of the duration and method of accrual of the share options. Accordingly, the period for the exercise of the options assigned was set at five years, and the options may be exercised at a rate of one-quarter each year from the end of the first year.
On June 7, 2001, a resolution was passed at the Shareholders’ Meeting of Terra Networks, S.A. to partially modify the resolution relating to the share option plan that was ratified and approved at the Shareholders' Meeting on June 8, 2000, as regards the extension of the share option plan to executives and directors, and extended the option exercise period to 10 years from that in which they were granted, stipulating that the options could be partially exercised each year during this period. In 2001 the Board of Directors did not extend the option exercise period.
F-86
On July 22, 2004, the Board of Directors of Terra Networks, S.A., after obtaining a favorable report from the Audit and Compliance Committee, resolved to reduce by 2 euros the strike price of the Terra Networks, S.A. share options granted to the beneficiaries of the Terra Group’s share option plans, on or after the date of dividend payment with a charge to share premium approved at the Shareholders’ Meeting of Terra Networks, S.A., i.e., July 30, 2004.
On December 31, 2004, options on 2,383,820 shares had been assigned to Terra Group employees and executives, all of which relate to the second phase of the option plan since the rights relating to the first phase expired in April. The weighted average share option strike price was 14.21 euros.
On December 31, 2004, the Terra Group’s executives held 650,000 share options under the Terra Networks, S.A. share option plan, the weighted average strike price of which is 16.37 euros.
On December 31, 2004, no directors of Terra Networks, S.A. owned share options.
As a result of the Telefónica S.A. and Terra Networks S.A. merger approved at the Shareholders’ meeting on May 31, 2005 and recorded in the Madrid Mercantile Register on July 16, 2005, Telefónica S.A. took over responsibility for Terra Networks S.A.’s outstanding share option plans.
Consequently, the options on Terra Networks, S.A. shares were automatically translated into options on Telefónica S.A. shares in the terms resulting from the exchange ratio of the merger.
The plan provides, through the exercise of the share options by their holders, for the ownership of a portion of the capital of Telefónica, S.A. by the employees and executives who then belonged to the Terra Group companies.
At December 31, 2005, a total of 117,900 call options on Telefónica, S.A. shares had been assigned. After the execution of the merger, the weighted average strike price was 28.28 euros.
The details of the movements in 2005 and 2004 were as follows:
