Revenues from Telefónica Spain’s fixed business increased 1.4% to €12,581 million in 2008 from €12,401 million in 2007 principally due to the growth of Internet and broadband service revenues.
| | · | Revenues from traditional accesses include all revenues from our customers for rental and connection to public switched telephone network (PSTN) lines (for basic telephony service), ISDN lines (for integration of voice, data and video services), corporate services, PUT, additional recharges and advertising in telephone booths. Revenues from traditional accesses increased 6.2% to €2,944 million in 2008 compared to €2,772 million in 2007, partially as a result of revenues derived from recognizing the Universal Service Cost provided for the period 2003 through 2005, which we accounted for in 2008 as revenues of €182.8 million. |
| | · | Revenues from traditional voice services decreased 7.4% to €4,436 million in 2008 compared to €4,792 million in 2007. Excluding the impact of the change in the business model applicable to PUT services, as described above, traditional voice revenues would have decreased by 3.5%. This evolution is mainly affected by lower fixed-to-mobile traffic, the decrease of effective prices in international traffic and the increasing importance of traffic included in national flat tariff plans. |
| | · | Revenues from Internet and broadband services increased 8.7% to €3,017 million in 2008 compared to €2,775 million in 2007. Retail broadband service revenues increased 11.6% in 2008 compared to 2007, and accounted for 2.2 percentage points of Telefónica Spain’s, fixed business revenues growth. At the same time, wholesale broadband service revenues increased 2.6% in 2008 compared to 2007, mainly due to revenues associated with our larger customer base for unbundled local loop in 2008. |
| | · | Revenues from data services grew 2.6% to €1,190 million in 2008 from €1,160 million in 2007. |
| | · | Revenues from information technology services grew 1.2% to €443 million in 2008 from €437 million in 2007. |
Revenues from Telefónica Spain’s mobile business decreased 0.1% to €9,684 million in 2008 from €9,693 million in 2007, due to lower consumption by customers in terms of MOU and lower incoming revenues in terms of ARPU. Customer revenues increased 1.2% to €6,943 million in 2008 from €6,863 million in 2007, while interconnection revenues decreased 9.4% to €1,243 million in 2008 from €1,372 million in 2007, due primarily to the reduction in interconnection rates. Roaming-in revenues fell 9.9% to €198 million in 2008 from €220 million in 2007 due to the downward trend in roaming and wholesale prices. Revenue from handset sales increased 3.6% to €1,227 million from €1,184 million in 2007.
Expenses
Telefónica Spain’s total expenses decreased 6.8% to €10,901 million in 2008 from €11,701 million in 2007, principally due to lower personnel expenses, as described below.
| | · | Supplies decreased 0.7% to €4,604 million in 2008 from €4,639 million in 2007, mainly due to lower interconnection expenses. |
| | · | Personnel expenses decreased 23.7% to €2,375 million in 2008 from €3,111 million in 2007. Personnel expenses were affected in 2007 by non-recurring reorganization costs of €667 million. |
| | · | Other expenses decreased 0.7% to €3,922 million in 2008 from €3,951 million in 2007, principally due to a 2.3% decrease in external expenses to €3,212 million in 2008 from €3,287 million in 2007. This decrease in external expenses was mainly as a result of the change in the business model applicable to PUT services, as well as the fact that external expenses were affected in 2007 by Telefónica Spain’s recording of an EU fine provision of €151.9 million in that year. This decrease was partially offset by an increase in other expenses in 2008 primarily due to the recognition in 2008 of the Universal Service Cost for the period 2003 through 2005. |
In the fixed business, total expenses decreased 9.7% to €6,799 million in 2008 from €7,532 million in 2007, principally due to a decrease in personnel expenses.
| | · | Supplies decreased 1.5% to €2,962 million in 2008 from €3,008 million in 2007 mainly due to lower interconnection expenses and fewer equipment purchases. |
| | · | Personnel expenses decreased 21.6% to €2,071 million in 2008 from €2,642 million in 2007, principally due to the non-recurrence in 2008 of personnel restructuring charges recorded in 2007. The average number of employees for the fixed business in 2008 was 31,243, a 6.0% reduction in comparison with the average number of employees in 2007. |
| | · | Other expenses decreased 6.1% to €1,766 million in 2008 from €1,881 million in 2007, principally due to a 5.4% decrease in external expenses to €1,336 million in 2008 from €1,413 million in 2007 partially as a result of the change in the business model applicable to PUT services as well as the inclusion in 2007 of the non-recurring EU fine provision described above. This decrease was partially offset by an increase in other expenses in 2008 primarily due to the recognition of the Universal Service Cost in 2008 for the period 2003 through 2005 in an amount of €73 million. |
Telefónica Spain’s total expenses related to its mobile business decreased 0.7% to €5,502 million in 2008 from €5,541 million in 2007. Total expenses in 2007 were affected by the provision of €154 million related to a personnel reorganization program. Excluding this provision in 2007, Telefónica Spain’s expenses related to its mobile business would have increased by 2.1% from €5,387 million in 2007 to €5,502 million in 2008:
| | · | Supplies decreased 0.4% to €2,667 million in 2008 from €2,677 million in 2007 due to decreases in interconnection and roaming expenses. |
| | · | Personnel expenses decreased 34.6% to €299 million in 2008 from €457 million in 2007, principally due to the non-recurrence in 2008 of personnel restructuring charges recorded in 2007. Excluding the aforementioned provision, personnel expenses would have decreased by 1.5% to €299 million in 2008 from €304 million in 2007. |
| | · | Other expenses increased 5.4% to €2,537 million in 2008 from €2,407 million in 2007 due to higher customer management expenses, the growth in network costs and the impact of the recognition in 2008 of the Universal Service Cost for the period 2003 through 2005. |
Operating income before depreciation and amortization
As a result of the foregoing, Telefónica Spain’s OIBDA increased 8.9% to €10,285 million in 2008 from €9,448 million in 2007. Telefónica Spain’s OIBDA, as a percentage of Telefónica Spain’s revenues, was 49.4% in 2008 compared to 45.7% in 2007.
Depreciation and amortization
Telefónica Spain’s depreciation and amortization decreased 6.0% to €2,239 million in 2008 from €2,381 million in 2007, principally due to a decrease in the average value of assets subject to depreciation in 2008 compared to 2007.
Operating income
As a result of the foregoing, Telefónica Spain’s operating income increased 13.9% to €8,046 million in 2008 from €7,067 million in 2007. The decrease was the result of the 16% decrease in OIBDA, primarily due to the previously described sale of Airwave in 2007, which was offset by a decrease of 10.4% in depreciation and amortization.
Telefónica Europe
Revenues
Telefónica Europe’s revenues decreased 1.0% to €14,309 million in 2008 from €14,458 million in 2007. Telefónica Europe’s 2008 revenues were negatively affected by the decline of the pound sterling to euro exchange rate.
| | · | Revenues derived from Telefónica O2 UK decreased to €7,052 million in 2008 from €7,403 million in 2007 (an increase of 10.6% in local currency). The local currency increase in revenues was primarily driven by an increase in Telefónica O2 UK’s customer base and ARPU growth. |
| | · | Revenues derived from Telefónica O2 Germany increased 1.5% to €3,595 million in 2008 from €3,541 million in 2007. The increase was mainly the result of the increase of broadband revenues in 2008. |
| | · | Revenues derived from Telefónica O2 Ireland decreased 3.4% to €957 million in 2008 compared to €991 million in 2007. The decrease was mainly the result of a lower customer spending in terms of euros and lower usage in terms of minutes. |
| | · | Revenues derived from Telefónica O2 Czech Republic, including Slovakia operations, increased by 14.4% to €2,581 million in 2008 from €2,257 million in 2007 (an increase of 2.9% in local currency) driven by growth in Slovakia in the year after launch of mobile services in that market. Revenues in the Czech fixed line segment increased 0.2% in local currency compared to 2007, while the mobile business was the key driver of growth with an increase in revenues of 2.8% in local currency. |
Expenses
Telefónica Europe’s total expenses decreased 4.3% to €10,523 million in 2008 from €10,999 million in 2007.
| | · | Supplies decreased 2.6% to €6,611 million in 2008 from €6,787 million in 2007, mainly due to the decline of the pound sterling to euro exchange rate over the period. |
| | · | Personnel expenses decreased 14.9% to €1,340 million in 2008 from €1,575 million in 2007 principally due to the non-recurrence in 2008 of personnel restructuring charges recorded in 2007. |
| | · | Other expenses decreased 2.4% to €2,573 million in 2008 from €2,637 million in 2007, mainly due to the decrease in external services. |
Operating income before depreciation and amortization
As a result of the foregoing, Telefónica Europe’s OIBDA decreased 16.0% to €4,180 million in 2008 from €4,977 million in 2007. OIBDA in 2007 included non-recurring capital gains from the sale of Airwave of €1,296 million and personnel reorganization and other non-recurring charges totaling €338 million related to the UK, Irish and German businesses. OIBDA in 2008 included €174 million as the result of the release in 2008 of provisions made in respect of potential contingencies which were not realized once these risks had dissipated.
| | · | OIBDA in Telefónica O2 UK decreased 4.3% to €1,839 million in 2008 from €1,923 million in 2007 (an increase of 11.1% in local currency). |
| | · | OIBDA in Telefónica O2 Germany increased 62.9% to €770 million in 2008 from €473 million in 2007. The increase was the result of cost reduction measures and the inclusion in 2007 of non-recurring personnel reorganization expenses. |
| | · | OIBDA in Telefónica O2 Ireland decreased 4.7% to €301 million in 2008 from €316 million in 2007. |
| | · | OIBDA in Telefónica O2 Czech Republic, including Slovakia operations, increased 14.7% to €1,159 million in 2008 from €1,010 million in 2007 (an increase of 3.2% in local currency). |
Depreciation and amortization
Telefónica Europe’s depreciation and amortization decreased 10.4% to €3,035 million in 2008 from €3,386 million in 2007 mainly due to exchange rate effects.
Operating income
As a result of the foregoing, Telefónica Europe’s operating income decreased 28.1% to €1,145 million in 2008 from €1,591 million in 2007.
Telefónica Latin America
Revenues
Revenues at Telefónica Latin America increased 10.4% to €22,174 million in 2008 from €20,078 million in 2007 (an increase of 14.2% on a constant euro basis). On a constant euro basis, the countries contributing most to this revenue growth were Brazil (4.7 percentage points), Venezuela (2.8 percentage points) and Argentina (2.4 percentage points).
In 2008, Brazil continued to make the largest contribution to Telefónica Latin America’s revenues (38.8%) followed by Venezuela (12.5%) and Argentina (11.4%).
| | · | Telefónica Latin America’s revenues from Brazil increased to €8,606 million in 2008 from €7,662 million in 2007 (an increase of 12.2% in local currency), with both fixed and mobile businesses contributing (increases of 8.2% and 22.3%, respectively, in local currency). With respect to Vivo, Telefónica Latin America’s mobile business in Brazil, revenues increased to €2,932 million in 2008 from €2,396 million in 2007 (an increase of 22.3% in local currency), driven by strong growth in the customer base, an increase in outgoing revenues as a result of plan upgrades by existing customers, increased focus on mobile broadband, and by the acquisition of Telemig in the second quarter of 2008. With respect to Telesp, Telefónica Latin America’s fixed line business in Brazil, revenues increased to €6,085 million in 2008 from €5,619 million in 2007 (an increase of 8.2% in local currency). This increase was due to the growth of broadband, pay TV and data/IT services, which have increased as a percentage of total revenues (16.3% in 2008 compared to 12.9% in 2007). Traditional fixed line revenues also grew (2.7% in local currency), mainly driven by higher fixed-to-mobile traffic and more value added services, which helped to offset the decrease in accesses and public telephony revenues. |
| | · | Telefónica Latin America’s revenues from Venezuela increased to €2,769 million in 2008 from €2,392 million in 2007 (an increase of 23.9% in local currency), primarily driven by higher growth in service revenues of 14.6% (an increase of 22.6% in local currency). This growth in local currency was greater than the 14.1% rate of growth in the customer base over the same period. |
| | · | Telefónica Latin America’s revenues from Argentina increased to €2,527 million in 2008 from €2,264 million in 2007 (an increase of 21.3% in local currency). Of this, Telefónica Móviles Argentina’s revenues increased to €1,585 million in 2008 from €1,353 million in 2007 (an increase of 27.3% in local currency). This increase was primarily driven by an increase of 18.0% in service revenues (an increase of 28.2% in local currency). Revenues in the fixed line business increased to €1,027 million in 2008 from €984 million in 2007 (an increase of 13.5% in local currency), with the traditional fixed line business contributing 3.1 percentage points to this growth, the Internet business contributing 5.8 percentage points and data and IT businesses contributing 3.0 percentage points. |
| | · | Telefónica Latin America’s revenues from Chile increased to €1,936 million in 2008 from €1,814 million in 2007 (an increase of 13.3% in local currency). Growth was primarily driven by the mobile, broadband and pay TV businesses, which offset the decline in the traditional fixed telephony business. With respect to Telefónica Móviles Chile, Telefónica Latin America’s mobile business in Chile, revenues increased to €1,051 million in 2008 from €930 million in 2007 (an increase of 20.0% in local currency). Service revenues increased 13.4% in 2008 (an increase of 20.3% in local currency), driven by growth in ARPU. This trend was underpinned by migration to GSM technology, growth in the contract customer base (27.9% |
| | | of Telefónica Móviles Chile’s mobile accesses were contract access at December 31, 2008 compared to 24.5% at December 31, 2007), plan upgrades and the sale of minute bundles and value added services. With respect to Telefónica Chile, Telefónica Latin America’s fixed line business in Chile, revenues in 2008 remained relatively unchanged from 2007 at €974 million (an increase of 6.1% in local currency). Pay TV services growth and increased broadband penetration drove the local currency increase in Internet and broadband revenues, offsetting a decrease in revenues from the traditional fixed telephony business. |
| | · | Telefónica Latin America’s revenues from Mexico increased to €1,631 million in 2008 from €1,431 million in 2007 (an increase of 23.8% in local currency). This growth was underpinned by service revenues growth of 21.6% in 2008 (an increase of 32.1% in local currency). This increase in local currency was greater than the 22.8% rate of growth in the customer base over the same period. |
| | · | Telefónica Latin America’s revenues from Peru increased to €1,627 million in 2008 from €1,513 million in 2007 (an increase of 7.6% in local currency). Revenue growth was primarily driven by outgoing revenues in the pre-pay segment of the mobile business and broadband services and by pay TV in the fixed line business. With respect to Telefónica Móviles Perú, Telefónica Latin America’s mobile business in Peru, revenues increased to €773 million in 2008 from €603 million in 2007 (an increase of 28.4% in local currency), driven primarily by revenue growth in the pre-pay segment. Service revenues increased 20.0% in 2008 (an increase of 20.1% in local currency). With respect to Telefónica del Perú, Telefónica Latin America’s fixed line business in Peru, revenues decreased to €977 million in 2008 from €1,031 million in 2007 (a decrease of 5.1% in local currency). This decrease was primarily due to a decrease in revenues from public use telephony and fixed telephony as a consequence of Telefónica del Perú no longer being the default provider of long distance services as well as the continued migration of customers to mobile rather than fixed services. In the second half of 2008, Telefónica del Perú lowered the rates on calls from public use telephony to mobile, which slowed the pace of revenue decreases from public use telephony. In contrast, revenues from broadband and pay TV increased over the same period (21.0% and 6.0% in local currency, respectively). |
| | · | Telefónica Latin America’s revenues from Colombia decreased to €1,490 million in 2008 from €1,569 million in 2007 (a decrease of 3.9% in local currency). The growth in Internet and broadband revenues in the fixed business and service revenues derived from the mobile business did not offset the reduction of interconnection tariffs implemented in December 2007. With respect to Telefónica Móviles Colombia, Telefónica Latin America’s mobile business in Colombia, revenues decreased to €815 million in 2008 from €869 million in 2007 (a decrease of 5.1% in local currency). Service revenues decreased 6.6% in 2008 (a decrease of 5.5% in local currency) primarily due to a regulated reduction of interconnection tariffs. Revenues for the fixed line telephony business decreased to €710 million in 2008 from €739 million in 2007 (a decrease of 2.9% in local currency) primarily due to the lower revenues from traditional fixed telephony services not compensated by increased broadband and pay TV revenues. |
| | · | Telefónica Latin America’s revenues from Central America decreased to €568 million in 2008 from €585 million in 2007 (an increase of 4.2% on a constant euro basis). This growth on a constant euro basis was primarily driven by improved commercial performance in the region. Service revenues grew 5.2% on a constant euro basis in 2008 compared to 2007. |
| | · | Telefónica Latin America’s revenues from Ecuador increased to €318 million in 2008 from €291 million in 2007 (an increase of 16.8% in local currency). Service revenues increased 13.1% in 2008 (an increase of 20.8% in local currency). |
Expenses
Telefónica Latin America’s total expenses increased 5.4% in 2008 to €14,338 million from €13,605 million in 2007.
| | · | Supplies increased 7.0% to €6,371 million in 2008 from €5,953 million in 2007, mainly due to higher interconnection costs and an increase in the cost of handsets driven by growth of gross adds and upgrades. |
Supplies for Telefónica Latin America in Brazil increased to €2,479 million in 2008 from €2,045 million in 2007 (an increase of 21.1% in local currency), principally due to the increase of interconnection mobile costs as a result of outgoing traffic growth and higher co-billing costs in the fixed line business as a result of higher services traffic and more data services out of São Paulo.
Supplies for Telefónica Latin America in Venezuela decreased to €770 million in 2008 from €780 million in 2007 (an increase of 5.5% in local currency), principally due to lower handsets costs (generally, GSM handsets are less expensive than CDMA handsets) that partially compensated for higher roaming interconnection costs.
Supplies for Telefónica Latin America in Argentina increased to €650 million in 2008 from €556 million in 2007 (an increase of 27.0% in local currency), principally due to higher interconnection costs as a result of higher traffic and capacity needs as well as higher inflation.
Supplies for Telefónica Latin America in Chile increased to €503 million in 2008 from €472 million in 2007 (an increase of 13.0% in local currency), principally due to higher inflation, mobile interconnection costs, mobile handsets upgrades, purchases of pay TV content and the construction of increased broadband capacity.
Supplies for Telefónica Latin America in Mexico decreased to €716 million in 2008 from €732 million in 2007 (an increase of 6.3% in local currency). This increase in local currency was primarily due to an increase in interconnection costs driven by the growth of traffic and an increase in contract segment commercial activity.
Supplies for Telefónica Latin America in Peru increased to €413 million in 2008 from €386 million in 2007 (an increase of 6.9% in local currency). This increase was primarily driven by increased marketing efforts in both the mobile and fixed line businesses, and an increase in mobile traffic and interconnection tariffs.
Supplies for Telefónica Latin America in Colombia decreased to €394 million in 2008 from €530 million in 2007 (a decrease of 24.8% in local currency), principally due to a reduction in interconnection tariffs implemented by Colombian regulation in December 2007.
Supplies for Telefónica Latin America in Ecuador increased to €112 million in 2008 from €109 million in 2007 (an increase of 9.5% in local currency), principally due to an increase in interconnection costs driven by a growth of traffic.
| | · | Personnel expenses for Telefónica Latin America decreased 8.0% to €1,735 million in 2008 from €1,886 million in 2007, principally due to the non-recurrence in 2008 of personnel restructuring charges recorded in 2007. |
Personnel expenses for Telefónica Latin America in Brazil decreased to €513 million in 2008 from €547 million in 2007 (a decrease of 6.3% in local currency), primarily as a result of the non-recurrence in 2008 of expenses associated with Telesp’s program for restructuring its workforce in 2007.
Personnel expenses for Telefónica Latin America in Venezuela increased to €131 million in 2008 from €108 million in 2007 (an increase of 30.4% in local currency), principally due to the effects of higher inflation on wages.
Personnel expenses for Telefónica Latin America in Argentina decreased to €303 million in 2008 from €323 million in 2007 (an increase of 2.0% in local currency). This increase in local currency was due to higher expenses in the mobile business which offset reduced expenses in the fixed line business due to reduced headcount as a result of restructuring of the workforce realized during 2007.
Personnel expenses for Telefónica Latin America in Chile increased to €182 million in 2008 from €169 million in 2007 (an increase of 14.7% in local currency). This increase was primarily driven by the implementation in 2008 of new labor legislation in Chile and higher inflation.
Personnel expenses for Telefónica Latin America in Mexico increased to €96 million in 2008 from €86 million in 2007 (an increase of 20.7% in local currency) principally due to an increase in the average number of employees in 2008 compared to 2007 and an increase in average wages.
Personnel expenses for Telefónica Latin America in Peru decreased to €159 million in 2008 from €251 million in 2007 (a decrease of 36.7% in local currency). 2007 personnel expenses were affected by a non-recurring €108 million charge related to workforce restructuring.
Personnel expenses for Telefónica Latin America in Colombia decreased to €122 million in 2008 from €123 million in 2007 (an increase of 0.4% in local currency), primarily driven by workforce restructuring costs in both the mobile and fixed line businesses.
Personnel expenses for Telefónica Latin America in Ecuador increased to €26 million in 2008 from €24 million in 2007 (an increase of 16.4% in local currency), principally due to an increase in the average number of employees.
| | · | Other expenses for Telefónica Latin America increased 8.1% to €6,232 million in 2008 from €5,767 million in 2007, principally due to an increase in customer service activities and higher costs associated with the retention and acquisition of customers. |
Other expenses for Telefónica Latin America in Brazil increased to €2,543 million in 2008 from €2,354 million in 2007 (an increase of 9.3% in local currency). This increase was primarily driven by higher sales and recharge commissions in the mobile business due to commercially aggressive offers and higher FISTEL (a regulatory tax linked to net adds of customers) costs due to stronger customer base growth in Vivo. Other expenses also increased in the fixed line business mainly due to higher call center and maintenance expenses, primarily as a result of the growth of broadband and pay TV clients.
Other expenses for Telefónica Latin America in Venezuela increased to €553 million in 2008 from €449 million in 2007 (an increase of 31.7% in local currency), driven primarily by increased network expenses due to the launch of a GSM network and higher operational taxes and acquisition costs.
Other expenses for Telefónica Latin America in Argentina increased to €678 million in 2008 from €626 million in 2007 (an increase of 17.1% in local currency), principally as a result of higher inflation and a broader range of services offered.
Other expenses for Telefónica Latin America in Chile increased to €556 million in 2008 from €477 million in 2007 (an increase of 18.6% in local currency), principally due to increased customer service activities and network upgrades and repairs.
Other expenses for Telefónica Latin America in Mexico decreased to €430 million in 2008 from €468 million in 2007 (a decrease of 1.1% in local currency), due to the implementation of measures to control commissions and marketing and logistics costs.
Other expenses for Telefónica Latin America in Peru increased to €467 million in 2008 from €404 million in 2007 (an increase of 11.2% in local currency), principally due to the higher commission expenses, increased customer service activities and mobile advertising as a result of higher commercial activity.
Other expenses for Telefónica Latin America in Colombia increased to €515 million in 2008 from €476 million in 2007 (an increase of 9.6% in local currency), principally due to higher bad debt allowances in the mobile business.
Other expenses for Telefónica Latin America in Ecuador increased to €93 million in 2008 from €86 million in 2007 (an increase of 15.4% in local currency), principally due to an increase in commercial activity and the tax paid for the renewal of the mobile license.
Operating income before depreciation and amortization
As a result of the foregoing, Telefónica Latin America’s OIBDA, increased 18.6% to €8,445 million in 2008 from €7,121 million in 2007 (an increase of 22.5% on a constant euro basis). By country, Venezuela contributed most to OIBDA growth (5.1 percentage points), followed by Brazil (4.0 percentage points) and Mexico (3.9 percentage points). In absolute terms, in 2008 Brazil was the largest contributor to Telefónica Latin America’s OIBDA, accounting for 39.7% of the total, followed by Venezuela at 15.7% and Argentina at 10.9%.
Telefónica Latin America’s OIBDA in 2008 as a percentage of Telefónica Latin America’s revenues for the same period was 38.1%, 2.6 percentage points higher than in 2007.
| | · | Telefónica Latin America’s OIBDA in Brazil increased to €3,359 million in 2008 from €3,056 million in 2007 (an increase of 9.8% in local currency). |
| | · | Telefónica Latin America’s OIBDA in Venezuela increased to €1,328 million in 2008 from €1,060 million in 2007 (an increase of 34.0% in local currency). |
| | · | Telefónica Latin America’s OIBDA in Argentina increased to €919 million in 2008 from €788 million in 2007 (an increase of 26.7% in local currency). |
| | · | Telefónica Latin America’s OIBDA in Chile increased to €740 million in 2008 from €716 million in 2007 (an increase of 9.7% in local currency). |
| | · | Telefónica Latin America’s OIBDA in Mexico increased to €420 million in 2008 from €179 million in 2007 (an increase of 154.2% in local currency). The increase was the result of cost control measures and revenue growth. |
| | · | Telefónica Latin America’s OIBDA in Peru increased to €621 million in 2008 from €482 million in 2007 (an increase of 29.0% in local currency). |
| | · | Telefónica Latin America’s OIBDA in Colombia increased to €515 million in 2008 from €503 million in 2007 (an increase of 3.6% in local currency). |
| | · | Telefónica Latin America’s OIBDA in Central America decreased to €217 million in 2008 from €236 million in 2007 (a decrease of 1.5% on a constant euro basis). |
| | · | Telefónica Latin America’s OIBDA in Ecuador increased to €92 million in 2008 from €73 million in 2007 (an increase of 35.0% in local currency). |
Depreciation and amortization
Telefónica Latin America’s depreciation and amortization increased 2.4% to €3,645 million in 2008 from €3,559 million in 2007.
Operating income
As a result of the foregoing, Telefónica Latin America’s operating income increased 34.8% to €4,800 million in 2008 from €3,562 million in 2007.
Atento
Revenues
Atento’s revenues increased by 10.8% to €1,301 million in 2008 from €1,174 million in 2007. The increase in revenues was primarily driven by an increase in the customer activity of Telefónica, primarily in Brazil, Peru, Morocco and Central America, partially offset by a lower activity in Spain.
Expenses
Atento’s expenses increased 10.0% to €1,120 million in 2008 from €1,018 million in 2007 primarily due to the increase in structural costs from the leasing of capacity associated with the growth of the business. This growth in expenses was partially offset by migrating services from the Spanish market to Latin American markets, which limited the growth of personnel expenses.
Operating income before depreciation and amortization
Atento’s OIBDA increased 15.4% to €186 million in 2008 from €161 million in 2007, driven by an increase in activity and a slower growth rate for operational expenses.
Operating income
Atento’s operating income increased 17.4% to €154 million in 2008 from €131 million in 2007.
Cash Flow Analysis
The table below sets forth consolidated cash flow information for the periods indicated. Positive figures refer to cash inflows and those in parenthesis refer to cash outflows.
| | | | |
| | | | | | | | | | |
| IFRS | | (in millions of euros) | |
| Net cash from operating activities | | | 15,551 | | | | 16,366 | | | | 16,148 | |
| Net cash used in investing activities | | | (4,592 | ) | | | (9,101 | ) | | | (9,300 | ) |
| Net cash used in financing activities | | | (9,425 | ) | | | (7,765 | ) | | | (2,281 | ) |
Net cash from operating activities
Net cash from operating activities decreased 1.3% to €16,148 million in 2009 from €16,366 million in 2008. In 2008, the increase was 5.2% from €15,551 million in 2007.
In 2009, we had cash received from customers (€67,358 million) less cash paid to suppliers and employees (€46,198 million) totaling €21,160 million, 2.9% more than the €20,560 million generated in 2008. This increase was largely driven by our extensive business diversification, our execution skills in a challenging environment and efficient management of both operating expenses and capital expenditure. Our strong commercial efforts also helped to drive modest growth in total accesses (primarily in mobile and broadband accesses). In 2008, cash received from customers less cash paid to suppliers and employees (€20,560 million) rose 2.3% compared to €20,105 million in 2007, due mostly to our strong position in our main markets, extensive business diversification and strategic commitment to growth in our operating markets.
Cash received from customers decreased by 2.5% to €67,358 million in 2009 from €69,060 million in 2008. This decrease was in line with the decline in revenues. In 2008, cash received from customers increased by 2.9% to €69,060 million from €67,129 million in 2007. This growth was the result of modestly higher revenue due to the growth in accesses, which in turn was due to the success of the commercial campaigns to win and retain customers.
Cash paid to suppliers and employees in 2009 decreased 4.8% to €46,198 million from €48,500 million in 2008. This reduction is the result of the drive to contain expenses and to maximize the efficiency of the cost structure. In addition, cash paid to employees in 2009 and 2008 was broadly in line with the evolution of the average headcount. In 2008 cash paid to suppliers and employees rose 3.1% to €48,500 million from €47,024 million in 2007. This increase was primarily attributable to greater commercial efforts in the various geographic areas while maximizing the efficiency of the cost structure and to higher interconnection charges.
Payments for net interest and other finance expenses decreased by 25.0% to €2,170 million in 2009 from €2,894 million in 2008, due to the decline in average interest rates applicable to our debt during the year and the reduction in our financial debt outstanding during the year. These figures do not include payments to be made on the main issuances of our debt securities made in 2009, with interest payments that will begin to become due in 2010. In 2008 payments for net interest and other finance expenses decreased 10.2% to €2,894 million from €3,221 million in 2007 mostly due to the decrease in our debt outstanding over the period.
Taxes paid in 2009 increased by 108.2% to €2,942 million from €1,413 million in 2008 due to the €1,297 million payment made by Telefónica, S.A. in the year. The increase was mainly due to the absence in 2009 of tax credits in Group companies. Taxes paid in 2008 fell 3.0% to €1,413 million from €1,457 million in 2007.
Net cash used in investing activities
Net cash used in investing activities in 2009 increased by 2.2% to €9,300 million from €9,101 million in 2008, mainly due to the investment of certain short-term cash surpluses in higher yielding financial investments.
Net cash used in investing activities increased by €4,509 million in 2008 to €9,101 million from €4,592 million in 2007. This net increase was primarily attributable to the following investments in 2008: the acquisitions of Telemig by Brasilcel for €347 million, of shares of CNC and China Unicom for €688 million and €424 million, respectively, and of a 51.8% interest in CTC from minority shareholders for €640 million. This net increase was partially offset by a 22.2% decrease in payments on investments in companies, net of cash and cash equivalents acquired, from €2,798 million in 2007 to €2,178 million in 2008. The main investment in 2007 was for a 42.3% stake in Telco for €2,314 million.
Payments on investment in property, plant and equipment and intangible assets in 2009 decreased by 3.8% to €7,593 million from €7,889 million in 2008. This decrease was in line with the evolution of the investment in capital expenditures in the period. Payments on investment in property, plant and equipment and intangible assets in 2008 totaled €7,889 million, an increase of €615 million from 2007, driven by further investment in fiber optics, 3G technology, pay TV technology and ADSL.
Proceeds on disposals of companies, net of cash and cash equivalents disposed amounted to €34 million in 2009. Proceeds on disposals of companies, net of cash and cash equivalents disposed, amounted to €686 million in 2008 mainly due to the €648 million obtained from the sale of Sogecable. In 2007, the figure was €5,346 million, as a result of our disposals of stakes in Airwave and Endemol for €2,841 million and €2,107 million, respectively.
Interest received on cash surpluses not included under cash equivalents in 2009 amounted €548 million. Net disposals of these investment in 2008 and 2007 amounted €76 million and €74 million, respectively.
Net cash used in financing activities
Net cash used in financing activities in 2009 decreased by 71% to €2,281 million from €7,765 million in 2008, mainly due to the increase of proceeds from the issuance of debentures and bonds in 2009 for aggregate proceeds of €8,617 million compared to aggregate proceeds of €1,317 million raised in 2008.
Net cash used in financing activities in 2008 totaled €7,765 million, down from €9,425 million in 2007. The €1,660 million decline is primarily due to a decrease in the repayment of financing as a result of a decrease in our average outstanding net debt in 2008 to €45,785 million compared to €48,938 million in 2007.
Anticipated Uses of Funds
Our principal liquidity and capital resource requirements consist of the following:
| | · | capital expenditures for existing and new operations; |
| | · | acquisitions of new licenses or other operators or companies engaged in complementary or related businesses; |
| | · | costs and expenses relating to the operation of our business; |
| | · | dividend, other shareholder remuneration, and pre-retirement payments; and |
| | · | debt service requirements relating to our existing and future debt. |
We have announced a capital expenditure target in the range of €7,450 million to €7,650 million for 2010. This target range was proposed based on constant 2009 exchange rates and excludes the effects of Venezuela being considered a hyperinflationary economy in 2009 and any effects should it remain a hyperinflationary economy in 2010. This target range also excludes any spectrum licenses which we may acquire and investments in our Real Estate Efficiency Program in Spain, a multi-year program related to the optimization of our real estate assets and rented properties in Spain. In 2010, we expect to continue investing mainly in our 3G and broadband networks to meet existing growth opportunities related to broadband, increased network traffic and the offering of new products and services utilizing new or evolving technologies. By region, our capital expenditures will be mainly directed to Latin America, as we view this region to possess the most growth potential for the Group, but we will manage spending depending on the needs of each country and return on potential investments, as our main goal is to sustain cash flow generation. Nevertheless, we expect to continue to make investments in our mobile and fixed networks due to increased usage and the need to offer new services and greater functionality afforded by new or evolving technologies. Our principal capital expenditures are described in “Item 4. Information on the Company”. Our anticipated amounts of capital expenditures and investments in affiliates and the underlying assumptions are subject to risks and uncertainties, and actual capital expenditures and investments in affiliates may be less than or exceed these amounts. See “Cautionary Statement Regarding Forward-Looking Statements”.
We may also use funds to acquire new licenses or other operators or companies engaged in complementary or related businesses.
We also have liquidity requirements related to the costs and expenses relating to the operation of our business, our payment of dividends, shareholder remuneration and pre-retirement payment commitments and financial and real estate investments. In 2009, with respect to these items, we had the following principal cash expenditures: €4,557 million in connection with the payment of dividends on Telefónica S.A. shares, €1,178 million in connection with financial and real estate net investments, €959 million in connection with our share buyback program and €793 million in connection with commitments under pre-retirement plans.
We also have liquidity requirements related to debt service requirements in connection with our existing and future debt. At December 31, 2009, we had gross financial debt of €56,791 million compared with €53,188 million at December 31, 2008. For the amortization schedule of our consolidated gross financial debt at December 31, 2009, see “—Anticipated Sources of Liquidity” below. Our net financial debt increased to €43,551 million at December 31, 2009 compared to €42,733 million at December 31, 2008. 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 and net debt”.
For a discussion of our liquidity risk management policy, see Note 16 to our Consolidated Financial Statements.
Anticipated Sources of Liquidity
Cash flows from operations are our primary source of cash funding for existing operations, capital expenditures, interest obligations and principal payments. We also rely on external borrowings, including a variety of short- and medium-term financial instruments, principally bonds and debentures, and borrowings from financial institutions. Cash and cash equivalents are mainly held in euro and euro-denominated instruments. We believe that, in addition to internal generation of funds, our medium-term note program, our euro commercial paper program, our corporate domestic promissory note program and available lines of credit will provide us with substantial flexibility for our future capital requirements as existing debt is retired. As of the date of this Annual Report, our management believes that our working capital is sufficient to meet our present requirements.
The following table shows the amortization schedule of our consolidated gross financial debt at December 31, 2009, as stated in euro using the European Central Bank buying rate for euro on such date. We may have exchange
rate financial derivatives instruments assigned to the underlying debt instruments. In 2009, the average cost of net debt, which we measure as net financial expense divided by our average net debt, was 7.31%. The effects derived from Venezuela as a hyperinflationary economy as described in “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Significant Factors Affecting the Comparability of our Results of Operations in the Periods Under Review—Classification of Venezuela as a Hyper inflationary Economy”, resulted in an increase in net financial expense of €630 million in 2009. Excluding such effects in 2009 and negative exchange differences, our average cost of net debt in 2009 would have been 5.54%. The table below includes the fair value of those derivatives classified as financial liabilities (negative mark-to-market) under IFRS (€1,432 million). It does not include the fair value of derivatives classified as financial assets (positive mark-to-market) under IFRS (€537 million). For a further description of liquidity risk faced by us, see Note 16 to our Consolidated Financial Statements, and for a description of our financial liabilities, see Note 13 to our Consolidated Financial Statements.
| | | AMORTIZATION SCHEDULE FOR THE YEAR ENDED DECEMBER 31, | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions of euros) | |
| Non-convertible euro and foreign currency debentures and bonds | | | 5,090 | | | | 3,275 | | | | 1,749 | | | | 4,174 | | | | 4,763 | | | | 13,911 | | | | 32,962 | |
| Promissory notes and commercial paper | | | 812 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 812 | |
| Other marketable debt securities | | | 61 | | | | 54 | | | | — | | | | — | | | | — | | | | 1,954 | | | | 2,069 | |
| Loans and other payables (principal and interest accrued) | | | 1,789 | | | | 6,132 | | | | 3,695 | | | | 1,433 | | | | 513 | | | | 4,396 | | | | 17,958 | |
| Derivatives financial liabilities | | | 1,432 | | | | 255 | | | | 106 | | | | 65 | | | | 63 | | | | 1,069 | | | | 2,990 | |
| Total | | | 9,184 | | | | 9,716 | | | | 5,550 | | | | 5,672 | | | | 5,339 | | | | 21,330 | | | | 56,791 | |
| (*) | Estimated future interest payments as of December 31, 2009 on our interest-bearing-debt are as follows: €2,382 million in 2010, €2,074 million in 2011, €1,818 million in 2012, €1,620 million in 2013, €1,355 million in 2014 and €8,190 million in subsequent years. With respect to floating rate debt, we estimate future interest payments as the forward rates derived from yield curves quoted for the different currencies on December 31, 2009. |
During 2009, we obtained financing of over €14,000 million (excluding financing under short-term commercial paper programs), mainly in connection with refinancing 2009 maturities and pre-financing part of the 2010 debt maturities.
In 2009, as a part of our refinancing plan to enhance our flexibility, primarily, we issued: (i) five-year bonds in an aggregate principal amount of €2,000 million, with an annual interest rate of 5.431%, on February 3, 2009; (ii) seven-year bonds in an aggregate principal amount of €1,000 million, with an annual interest rate of 5.496%, on April 1, 2009 increased up to an aggregate principal amount of €1,500 million, on June 3, 2009; (iii) six-year bonds in an aggregate principal amount of €400 million, which bear interest at a floating rate based on three-month EURIBOR plus a margin of 1.825%, on June 2, 2009 (iv) ten-year bonds in an aggregate principal amount of $1,000 million, with an annual interest rate of 5.877%, on July 6, 2009; (v) five and a half-year bonds in an aggregate principal amount of $1,250 million, with an annual interest rate of 4.949%, on July 6, 2009; (vi) ten-year bonds in an aggregate principal amount of €1,750 million, with an annual interest rate of 4.693%, on November 11, 2009; (vii) 13-year bonds in an aggregate principal amount of 650 million pounds sterling, with an annual interest rate of 5.289%, on December 10, 2009; (viii) five-year bonds in an aggregate principal amount of €100 million, which bear interest at a floating rate based on three-month EURIBOR plus a margin of 0.7%, on December 23, 2009. In 2009, some of our Latin American companies issued bonds with an aggregate principal amount equivalent to approximately €2,000 million.
In addition, on February 13, 2009, Telefónica, S.A. signed an agreement with the banks involved in its €6,000 million credit facility granted on June 28, 2005 and maturing on June 28, 2011, to extend the maturity of €4,000 million of the €6,000 million drawn-down in exchange for the payment of additional fees and an upward adjustment in interest rates, as follows: (i) the maturity date for €2,000 million outstanding was extended to June 28, 2012 and (ii) the maturity date for the remaining €2,000 million outstanding was extended to June 28, 2013.
During 2009, we have continued to be active under certain commercial paper programs (domestic and European) (with an outstanding balance of €800 million at December 31, 2009).
At December 31, 2009, we had unused committed credit lines of approximately €7,200 million, all of which bear interest at a floating rate based on market indices, principally the Euro Interbank Offered Rate, or EURIBOR and the London Interbank Offered Rate, or LIBOR. An aggregate of €2,779 million in principal amount of such credit lines are scheduled to expire prior to December 31, 2010.
On March 24, 2010 we issued five-year bonds in an aggregate principal amount of €1,400 million, with an annual interest rate of 3.406%.
Our borrowing requirements are not significantly affected by seasonal trends.
The table below sets forth the ratings of our short- and long-term debt as of the date of this Annual Report. A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision at any time and should be evaluated independently of any other rating.
| | | | | | | | | | |
| Moody’s | | Telefónica, S.A. | | Baa1 | | P-2 | | Positive | | February 17, 2009 |
| JCR | | Telefónica, S.A. | | A | | - | | Stable | | December 17, 2008 |
| Standard & Poor’s | | Telefónica, S.A. | | A- | | A-2 | | Stable | | December 2, 2008 |
| Fitch | | Telefónica, S.A. | | A- | | F-2 | | Stable | | November 25, 2008 |
| | · | Moody’s, on February 17, 2009, raised Telefónica S.A.’s rating outlook to “Baa1/positive outlook” from “Baa1/stable outlook”. |
| | · | JCR, the Japanese rating agency, on December 17, 2008, upgraded its credit rating for Telefónica, S.A. to “A/stable outlook” from “A-/stable outlook”. |
| | · | Standard & Poor’s, on December 2, 2008, upgraded its rating of Telefónica S.A. from “BBB+/positive outlook” to “A-/stable outlook”. |
| | · | Fitch, on November 25, 2008, upgraded its rating from “BBB+/positive outlook” to “A-/stable outlook”. |
Our ability to use external sources of financing will depend in large part on our credit ratings. We believe that we are well-positioned to raise capital in financial markets. However, negative conditions in the financial markets or a downgrade of any of the ratings of our debt by any of Fitch, Moody’s, JCR and/or Standard & Poor’s may increase the cost of our future borrowing or may make it more difficult to access the public debt markets. In connection with the credit rating agencies’ review of our debt ratings, the rating agencies may give considerable weight to the general macroeconomic and political conditions, the performance of our businesses in countries where we operate, our financial and shareholder remuneration policy, our acquisition policy, our ability to integrate acquisitions and our ability to refinance debt.
For a discussion of our liquidity and country risk management policy, see Note 16 to our Consolidated Financial Statements.
Intragroup Loans
We lend funds to our operating subsidiaries, directly or through holding companies that head our different lines of business. At December 31, 2009, we had loans outstanding totaling €5,975 million (€13,594 million at December 31, 2008) to companies in the Telefónica Group (including subsidiaries located in Latin American countries). These funds are derived from retained cash flows, loans, bonds and other sources (such as asset disposals).
We continue to be firmly committed to technological innovation as a key tool for achieving sustainable competitive advantage, preempting market trends and differentiating our products. Through the introduction of new
technologies and the development of new products and business processes, we seek to become more effective, efficient and customer-oriented.
We have developed an open model for the management of technological innovation in order to promote the application of technical research to the development of commercial products and services. We focus on certain applied research and development, or R&D, priorities which are aligned with our strategy. This model promotes open innovation initiatives such as the creation of a venture capital fund and participation in enterprise collaboration forums, among other things. It also makes use of the knowledge developed at technological centers, universities, and start-up companies, among other sources, and encourages innovation in collaboration with other agents, who will become “technological partners”, including clients, universities, public administrations, suppliers, content providers and other companies. We believe that differentiating our products from those of our competitors and improving our market position cannot be based solely on acquired technology. We also believe it is important to foster R&D activities in an effort to achieve this differentiation and to advance other innovation activities. Our R&D policy is aimed at:
| | · | developing new products and services in order to gain market share; |
| | · | fostering customer loyalty; |
| | · | improving business practices; and |
| | · | increasing the quality of our infrastructure and services to improve customer service and reducing costs. |
In 2009, we undertook technological innovation projects focusing on profitable innovation, process efficiency, the creation of new sources of revenues, customer satisfaction, the consolidation of our presence in new markets and technological leadership.
Our technological innovation activities are an integral part of our strategy to create value through broadband, IP network, wireless and new generation (fiber optic) networks communications and services.
In 2009 we undertook projects to promote increased access to information technology, new services focused on new Internet business models, advanced user interfaces, mobile TV and other broadband services. These projects, among others, were undertaken based on our objective to quickly identify emerging technologies that might have a relevant impact on our businesses, and to test such technologies with trials relating to new services, applications and platform prototypes.
In 2009, new business and operational support systems were developed and existing systems were improved.
Most of our R&D activities are carried out by Telefónica Investigación y Desarrollo S.A.U., or Telefónica I+D, our wholly owned subsidiary, which works principally for our lines of business. In performing its functions, Telefónica I+D receives assistance from other companies and universities. Telefónica I+D’s mission focuses on improving our competitiveness through technological innovation and product development. Telefónica I+D leads experimental and applied research and product development to increase the range of our services and reduce operating costs. It also provides technical assistance to our Latin American and European operations. Telefónica I+D’s activities include the following:
| | · | development of new products and fixed telephone services, particularly the development of such value added services as broadband, digital home, mobile communications and Internet services for the public, corporate, mobile TV and multimedia sectors; |
| | · | development of new modes of communications for communities, telemedicine, home and company telemonitoring and new infrastructure to provide such services, such as the Internet protocol environment and new generation networks, such as fiber optics; |
| | · | development of innovative solutions for the real time provisioning, operating and billing of our networks and services, which includes the development of management systems designed to strengthen infrastructure and its quality providing security, privacy and trust; |
| | · | development of business support systems to better identify customer characteristics in order to provide personalized and innovative solutions; and |
| | · | applied research to undertake, understand and develop those aspects, opportunities and specialty new technologies for the evolution of our different businesses. |
In 2009, approximately 41% of Telefónica I+D’s funding assigned to R&D was for the benefit of the business in Spain, 33% for businesses in Latin America, 13% for Telefónica (primarily the Corporate Innovation Program, which includes projects with a medium- to long-term focus involving two or more business units), 6% for Telefónica Europe and 7% to third-party customers.
At December 31, 2009, Telefónica I+D had 1,221 employees, who also collaborated with qualified professionals from 84 companies and more than 50 universities.
Our total R&D expenses were €594 million, €668 million and €693 million in 2007, 2008 and 2009, respectively. These expenses represented 1.1%, 1.2% and 1.2% of our consolidated revenues, respectively. These figures have been calculated using the guidelines set out in the OECD Manual. These guidelines include expenses for research and development that, because of timing of projects or accounting classifications, we do not include in their entirety in our consolidated statement of financial position.
During 2009, Telefónica registered 57 patents, 48 of which were registered at Spanish Patent Office and nine of which were registered at European or U.S. patent offices.
We are an integrated diversified telecommunications group that offers a wide range of services, mainly in Spain, Europe, and Latin America. Our activity is based upon providing fixed and mobile services, Internet and data, pay TV and value added services, among others. In addition, our holdings in China Unicom and Telecom Italia create opportunities for strategic alliances that reinforce our competitive position, scale and efficiency.
Our business is impacted by general economic conditions and other similar factors in each of the countries in which we operate. The continuing recession in Spain and uncertainty about an economic recovery elsewhere may negatively affect the level of demand of existing and prospective customers, as our services may not be deemed critical for these customers.
As a multinational telecommunications company that operates in regulated markets, we are subject to different laws and regulations in each of the jurisdictions in which we provide services. We can expect the regulatory landscape to change in Europe as a consequence of the revised regulations resulting from the implementation of the review of the common regulatory framework currently in place in the European Union. In addition, we may also face pressure from regulatory initiatives in some European countries regarding tariffs, the reform of rights of spectrum use and allocation, issues related to the quality of service and the regulatory treatment of new broadband infrastructure deployments.
We face intense competition in most of our markets, and we are therefore subject to the effects of actions taken by our competitors. The intensity of the competition may deepen, having an impact on tariff structures, consumption, market share and commercial activity, which could result in decreases in current and potential customers, revenues and profitability.
However, we are in a strong competitive position in most of the markets where we operate. We intend to continue to seek and take advantage of growth opportunities, such as by boosting both fixed and mobile broadband services and by furthering the development of services beyond connectivity, information technology services and related businesses. We seek to lead the industry by anticipating trends in the new digital environment.
We will continue transforming our operating model to increase our operational efficiency and capture the synergies arising from our integrated approach to businesses, processes and technologies and will maintain a regional approach to tackle this transformation more efficiently. At the same time, we will continue to be strongly committed to technological innovation as a key tool for achieving sustainable competitive advantages, anticipating market trends and differentiating our products. We continually seek to become a more efficient and customer-oriented Group, by introducing new technologies and developing new products and business processes.
In Spain, we will continue to intensify our commercial focus on offering higher quality services, by increasing the effectiveness of our sales channels and further improving our networks to increase customer satisfaction. We will seek to strengthen relations with our customers through targeted commercial offerings. We will focus on boosting mobile and fixed broadband growth and bundling services more effectively, taking into account the different geographical areas in which we operate. Efficiency will continue to play a very important role in all areas of management, both in commercial and operational areas, including systems, networks and processes.
In Latin America, our strategy is based on a regional model that captures growth and efficiency of scale without losing sight of the local management of the client. The mobile business will continue to play a fundamental role as an engine of regional growth. That is why we continue to further improve the capacity and coverage of our networks, adapting our distribution network to enhance the quality of our offer both in voice and data in order to keep and attract high value customers. With regard to the fixed telephony business, we will encourage the increase of broadband speed and expand the supply of bundled services. We will further advance efficiency, in operational and commercial terms and attempt to achieve further synergies by implementing global, regional and local projects.
In Europe, customers will remain at the center of our strategy and management priorities in the region. With the objective of offering our customers the best value, we will boost the mobile and fixed broadband services to strengthen our market position. Various initiatives will be implemented to improve our operating efficiency.
In summary, in the context of continued economic uncertainty, intense competition and regulatory pressure on pricing, we will continue strengthening our business model to make it more efficient and capture the synergies arising from the integrated approach of businesses, processes and technologies, while focusing even more on the client.
We have commitments that could require us to make material payments in the future. These commitments are not included in our consolidated statement of financial position at December 31, 2009 although they are described in the notes to our Consolidated Financial Statements. These commitments primarily relate to put rights pursuant to which third parties can require us to purchase some or all of their interests in certain of our subsidiaries or joint ventures, as in the case of Brasilcel, and contingent obligations in the form of guarantees. For additional detail on our off-balance sheet commitments, see Note 21(b) to our Consolidated Financial Statements.
The following table describes our contractual obligations and commitments with definitive payment terms which may require significant cash outlays in the future. The amounts payable (including accrued interest payments) are as of December 31, 2009. For additional information, see our Consolidated Financial Statements included elsewhere herein.
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in millions of euros) | |
| Financial liabilities (1)(2) | | | 56,791 | | | | 9,184 | | | | 15,266 | | | | 11,011 | | | | 21,330 | |
| Operating lease obligations (3) | | | 6,547 | | | | 1,023 | | | | 1,700 | | | | 1,327 | | | | 2,497 | |
| Purchase obligations (4) | | | 3,151 | | | | 1,305 | | | | 769 | | | | 395 | | | | 682 | |
| Other liabilities (5) | | | 1,695 | | | | 296 | | | | 1,399 | | | | — | | | | — | |
| Total | | | 68,184 | | | | 11,808 | | | | 19,134 | | | | 12,733 | | | | 24,509 | |
| (1) | Capital (finance) lease obligations are not calculated separately and are instead included as part of our long-term debt obligations. |
| (2) | This item includes the fair value of those derivatives classified as financial liabilities (negative mark-to-market) under IFRS (€1,432 million). Future interest payments as of December 31, 2009 on our interest-bearing-debt are as follows: €2,382 million in 2010, €2,074 million in 2011, €1,818 million in 2012, €1,620 million in 2013, €1,355 million in 2014 and €8,190 million in subsequent years. With respect to floating rate debt, we estimate future interest payments as the forward rates derived from yield curves quoted for the different currencies on December 31, 2009. It does not include the fair value of derivatives classified as financial assets (positive mark-to-market) under IFRS (€537 million). For a more detailed description of our financial derivative transactions, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and Note 16 to our Consolidated Financial Statements. |
| (3) | Our operating lease obligations have in some cases extension options conditioned on the applicable law of each country. Accordingly, we have included only those amounts that represent the initial contract period. |
| (4) | This item includes definitive payments due for agreements to purchase goods (such as network equipment) and services. |
| (5) | “Other liabilities” include long-term obligations that require us to make cash payments, excluding financial debt obligations included in the table under “Financial Liabilities” above. Because of the nature of the risks covered by “Other liabilities” such as “Other provisions”, it is not possible to determine a reliable schedule of potential payments, if any. For details of the composition of “other provisions” see Note 15 to our Consolidated Financial Statements. |
In addition, at December 31, 2009, we have short and long term employee benefits provisions amounting to €667 million and €3,594 million, respectively.
For details of the composition of, and changes in, our debt, see “—Liquidity and Capital Resources—Anticipated Sources of Liquidity” and Note 13 to our Consolidated Financial Statements.
During 2009, our Board of Directors met 13 times. At March 25, our Board of Directors had met three times during 2010. At March 25, 2010, our directors, their respective positions on our Board and the year they were appointed to such positions were as follows:
| | | | | | |
| Chairman | | | | | | |
| César Alierta Izuel(1) | | 64 | | 1997 | | 2012 |
| Vice-chairmen | | | | | | |
| Isidro Fainé Casas(1)(2) | | 67 | | 1994 | | 2011 |
| Vitalino Manuel Nafría Aznar(3)(4)(5)(6)(7) | | 59 | | 2005 | | 2011 |
Members (vocales) | | | | | | |
| Julio Linares López(1)(8) | | 64 | | 2005 | | 2011 |
| José María Abril Pérez (1)(3)(5) | | 58 | | 2007 | | 2013 |
| José Fernando de Almansa Moreno-Barreda(5)(6)(9) | | 61 | | 2003 | | 2013 |
| Jose María Álvarez –Pallete López | | 46 | | 2006 | | 2012 |
| David Arculus (5)(6) | | 63 | | 2006 | | 2011 |
| Eva Castillo Sanz (6)(9)(11) | | 47 | | 2008 | | 2013 |
| Carlos Colomer Casellas(1)(8)(10)(11) | | 65 | | 2001 | | 2011 |
| Peter Erskine(1)(8)(9)(10) | | 58 | | 2006 | | 2011 |
| Alfonso Ferrari Herrero (1)(4)(5)(6)(7)(10)(11) | | 68 | | 2001 | | 2011 |
| Luiz Fernando Furlán(5) | | 63 | | 2008 | | 2013 |
| Gonzalo Hinojosa Fernández de Angulo (1)(4)(5)(7)(9)(10)(11) | | 64 | | 2002 | | 2012 |
| Pablo Isla Álvarez de Tejera(6)(7)(8)(10)(11) | | 46 | | 2002 | | 2012 |
| Antonio Massanell Lavilla(2)(4)(7)(8)(11) | | 55 | | 1995 | | 2011 |
| Francisco Javier de Paz Mancho (1)(5)(6)(7) | | 51 | | 2007 | | 2013 |
| (1) | Member of the Executive Commission of the Board of Directors. |
| (2) | Nominated by Caja de Ahorros y Pensiones de Barcelona (“La Caixa”). |
| (3) | Nominated by Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”). |
| (4) | Member of the Audit and Control Committee of the Board of Directors. |
| (5) | Member of the International Affairs Committee. |
| (6) | Member of the Regulation Committee. |
| (7) | Member of the Human Resources and Corporate Reputation and Responsibility Committee. |
| (8) | Member of the Innovation Committee. |
| (9) | Member of the Strategy Committee. |
| (10) | Member of the Nominating, Compensation and Corporate Governance Committee. |
| (11) | Member of the Service Quality and Customer Service Committee. |
Board Committees
At March 25, 2010, the committees of our Board of Directors and members thereof are as follows:
Executive Commission
Our Board of Directors has expressly delegated all of its authority and power to the Executive Commission except as prohibited by Spanish corporate law, under our Articles of Association, or under our Board Regulations. This commission is made up of fewer directors and meets more frequently than our Board of Directors. The members of the Executive Commission are Mr. César Alierta Izuel, Mr. Isidro Fainé Casas, Mr. Julio Linares López, Mr. José María Abril Pérez, Mr. Carlos Colomer Casellas, Mr. Peter Erskine, Mr. Alfonso Ferrari Herrero,
Mr. Gonzalo Hinojosa Fernández de Angulo, Mr. Francisco Javier de Paz Mancho and Mr. Ramiro Sánchez de Lerín García-Ovies, as secretary.
Audit and Control Committee
The Audit and Control Committee functions are regulated by our bylaws and our Board Regulations. The Audit and Control Committee has the primary objective of providing support to our Board of Directors in its supervisory and oversight functions, specifically having the following responsibilities:
| | · | to report, through its chairman, to our general meeting of shareholders on matters raised at the general meeting of shareholders relating to the functions and matters of competence of the committee; |
| | · | to propose to our Board of Directors to submit to our general meeting of shareholders the appointment of our auditors referred to in Article 204 of the Stock Company Act, as well as, when appropriate, the terms of their engagement, scope of professional assignment and revocation or non-renewal of their appointment; |
| | · | to supervise the internal audit services; |
| | · | to have an understanding of the process for gathering financial information and the internal control systems; and |
| | · | to maintain the necessary relations with the auditors to receive information on all matters that may put their independence at risk, and any other matters related to the process of auditing our accounts, as well as to receive information and maintain communication with our auditors as required by laws relating to the audit process and with respect to technical regulations on auditing. |
The Audit and Control Committee meets at least once per quarter and as many times as considered necessary. During 2009, the Audit and Control Committee met ten times and, as of the date of this Annual Report, had met three times in 2010. The members of the Audit and Control Committee are Mr. Gonzalo Hinojosa Fernández de Angulo (chairman), Mr. Antonio Massanell Lavilla, Mr. Alfonso Ferrari Herrero and Mr. Vitalino Manuel Nafría Aznar.
Nominating, Compensation and Corporate Governance Committee
The Nominating, Compensation and Corporate Governance Committee is responsible for, among other things, reporting to our Board of Directors with respect to proposals for the appointment, re-election and removal of directors, members of the Executive Committee and the other committees of our Board of Directors and top members of our management and management of our subsidiaries. In addition, the Nominating, Compensation and Corporate Governance Committee is responsible for proposing to the Board of Directors, within the framework established in the bylaws, the compensation for the directors and reviewing it periodically to ensure that it is in keeping with the tasks performed by them, as provided in Article 35 of the Board Regulations, to propose to the Board of Directors, within the framework established in the bylaws, the extent and amount of the compensation, rights and remuneration of a financial nature, of the Chairman, the executive directors and the senior executive officers of Telefónica, including the basic terms of their contracts, for purposes of contractual implementation thereof and to supervise compliance with Telefónica’s internal rules of conduct and the corporate governance rules thereof in effect from time to time.
The members of the Nominating, Compensation and Corporate Governance Committee are Mr. Alfonso Ferrari Herrero (chairman), Mr. Carlos Colomer Casellas, Mr. Peter Erskine, Mr. Gonzalo Hinojosa Fernández de Angulo and Mr. Pablo Isla Álvarez de Tejera. During 2009, the Nominating, Compensation and Corporate Governance Committee met nine times, and as of the date of this Annual Report, had met four times in 2010.
Human Resources and Corporate Reputation and Responsibility Committee
The Human Resources and Corporate Reputation and Responsibility Committee is responsible for reviewing our personnel policy and making proposals to our Board of Directors regarding our personnel policy, corporate reputation, responsibility and the promotion of our values within the Telefónica Group. The Human Resources and
Corporate Reputation and Responsibility Committee met five times during 2009, and as of the date of this Annual Report had met once in 2010. The members of the Human Resources and Corporate Reputation and Responsibility Committee are Mr. Francisco Javier de Paz Mancho (chairman), Mr. Alfonso Ferrari Herrero, Mr. Gonzalo Hinojosa Fernández de Angulo, Mr. Pablo Isla Álvarez de Tejera, Mr. Antonio Massanell Lavilla and Mr. Vitalino Manuel Nafría Aznar.
Regulation Committee
The Regulation Committee’s main objective is to monitor the main regulatory matters which affect us. Another responsibility of the Regulation Committee is to act as a communication and information channel between our management team and our Board of Directors concerning regulatory matters. The members of the Regulation Committee are Mr. Pablo Isla Álvarez de Tejera (chairman), Mr. José Fernando de Almansa Moreno-Barreda, Mr. David Arculus, Ms. Eva Castillo Sanz, Mr. Alfonso Ferrari Herrero, Mr. Vitalino Manuel Nafría Aznar and Mr. Francisco Javier de Paz Mancho. During 2009, the Regulation Committee met six times, and as of the date of this Annual Report, had met once in 2010.
Service Quality and Customer Service Committee
The Service Quality and Customer Service Committee is responsible for monitoring and reviewing the standards of quality of the main services we provide. The Service Quality and Customer Service Committee acts as an information channel between our senior management team and our Board of Directors. The members of the Service Quality and Customer Service Committee are Mr. Antonio Massanell Lavilla (chairman), Ms. Eva Castillo Sanz, Mr. Carlos Colomer Casellas, Mr. Alfonso Ferrari Herrero, Mr. Gonzalo Hinojosa Fernández de Angulo, and Mr. Pablo Isla Álvarez de Tejera. During 2009 the Service Quality and Customer Service Committee met four times, and as of the date of this Annual Report, had met once in 2010.
International Affairs Committee
The International Affairs Committee is responsible for analyzing international events and matters that affect the Telefónica Group and reporting these events and possible consequences to our Board of Directors. The International Affairs Committee pays close attention to events taking place in countries where we have operations and which may affect our competitive position, corporate image and financial results. The International Affairs Committee also oversees our non-profit foundations in such countries. The members of the International Affairs Committee are Mr. José Fernando de Almansa Moreno-Barreda (chairman), Mr. José María Abril Pérez, Mr. David Arculus, Mr. Alfonso Ferrari Herrero, Mr. Luiz Fernando Furlán, Mr. Gonzalo Hinojosa Fernández de Ángulo, Mr. Vitalino Manuel Nafría Aznar and Mr. Francisco Javier de Paz Mancho. During 2009, the International Affairs Committee met four times, and as of the date of this Annual Report had met once in 2010.
Innovation Committee
The Innovation Committee is responsible for advising and assisting in all matters regarding innovation. Its main object is to examine, analyze and periodically monitor the Group’s innovation projects, provide guidance and help ensure the implementation and development of innovation initiatives across the Group. The members of the Innovation Committee are Mr. Carlos Colomer Casellas (chairman), Mr. Pablo Isla Álvarez de Tejera, Mr. Antonio Massanell Lavilla, Mr. Peter Erskine and Mr. Julio Linares López. During 2009, the Innovation Committee met eight times, and as of the date of this Annual Report, had met three times in 2010.
Strategy Committee
Without prejudice to any other tasks that the Board of Directors may assign thereto, the primary duty of the Strategy Committee is to support the Board of Directors in the analysis and implementation of the global strategy policy of the Telefónica Group. The members of the Strategy Committee are Mr. Peter Erskine (chairman), Mr. José Fernando de Almansa Moreno-Barreda, Ms. Eva Castillo Sanz and Mr. Gonzalo Hinojosa Fernández de Angulo. The Strategy Committee met ten times during 2009, and as of the date of this Annual Report, had met three times in 2010.
Biographies of Directors
Mr. César Alierta Izuel serves as our Executive Chairman and Chairman of our Board of Directors. Mr. Alierta began his career in 1970 as general manager of the capital markets division at Banco Urquijo, S.A. in Madrid, where he worked until 1985. Subsequently, he founded and served as chairman of Beta Capital Sociedad de Valores, S.A. which he combined as from 1991 with his post as chairman of the Spanish Financial Analysts’ Association (Asociación Española de Analistas Financieros). Between 1996 and 2000, he was director and chairman of Tabacalera, S.A. At that time Tabacalera, S.A. changed its name into Altadis, S.A. (following its merger with the French Group, Seita-Société Nationale D’Éxplotation Industrielle des Tabacs et Allumettes) and he became director and chairman of Altadis, S.A. He has also been a member of the board of directors of the Madrid Stock Exchange (Bolsa de Madrid), Plus Ultra Compañía de Seguros y Reaseguros, S.A. and of Iberia, S.A. On January 1997, Mr. Alierta was appointed as a director of Telefónica and on July 26, 2000, he was appointed as our Executive Chairman. Mr. Alierta is director of Telecom Italia since November 8, 2007 and of China Unicom (Hong Kong) Limited since October 15, 2008. Mr. Alierta holds a law degree from the University of Zaragoza and an MBA from Columbia University (New York) and is currently a member of the Columbia Business School Board of Overseers.
Mr. Isidro Fainé Casas serves as Vice-Chairman of our Board of Directors. For over 40 years, Mr. Fainé has worked in several financial institutions, including amongst others: Banco Atlántico, S.A., (1964), Banco de Asunción (Paraguay) (1969), Banco Riva y García, S.A. (1973), Banca Jover, S.A. (1974), and Banco Unión, S.A. (1978). Mr. Fainé is currently chairman of Caja de Ahorros y Pensiones de Barcelona (“la Caixa”) and of Criteria CaixaCorp, S.A., vice-chairman of Abertis Infraestructuras, S.A. and of Confederación Española de Cajas de Ahorros, and second vice-chairman of Repsol YPF, S.A. He is also a member of the board of directors of Banco Portugués de Investimento, S.A. (BPI), Hisusa, Holding de Infraestructuras y Servicios Urbanos, S.A., Grupo Financiero Inbursa and a non-executive director of Bank of East Asia. Mr. Fainé holds a doctorate degree in economics, a diploma in Alta Dirección (Senior Management) from IESE Business School (Instituto de Estudios Superiores de la Empresa) and an ISMP in business administration from Harvard University. He is a member of the Real Academia de Ciencias Económicas y Financieras.
Mr. Vitalino Manuel Nafría Aznar serves as Vice-Chairman of our Board of Directors. In 1966 he joined Banco de Vizcaya, S.A. In 1983, Mr. Nafría Aznar was appointed general manager of Induban, S.A. (Banco de Financiación Industrial) in Bilbao. In 1988 he worked as regional manager for Aragón, Navarra y Rioja at Banco Bilbao Vizcaya (BBV). In 1990, he was appointed business manager of BBV. In April 1998, he was appointed director of the board of directors and general manager of BBV in Mexico. In July 2000, he was appointed chief executive officer and director of the board of directors of Grupo Financiero BBA Bancomer (GFBB). In December 2001, he was appointed member of the executive committee of BBVA and in January 2003 he became general manager of BBVA America. Since January 2005 he has been the Retail Banking Manager in Spain and Portugal for BBVA. He is now in early retirement. Since February 2009, he is chairman of the board of directors of Metrovacesa, S.A.
Mr. Julio Linares López serves as a director of our Board of Directors and as our Chief Operating Officer since December 19, 2007. In May 1970, he joined our Research and Development Center, where he held several positions until he was appointed head of our Technology Department. In April 1990, he was appointed General Manager of Telefónica Investigación y Desarrollo, S.A. In December 1994, he became deputy general manager of the Marketing and Services Development department in the commercial area and subsequently, deputy general manager for Corporate Marketing. In July 1997, he was appointed chief executive officer of Telefónica Multimedia S.A. and chairman of Telefónica Cable and Producciones Multitemáticas, S.A. In January 2000, he was appointed executive chairman of Telefónica de España, S.A., a position which he held until December 2005, when he was appointed our managing director for Coordination, Business Development and Synergies. He is currently member of the board of directors of Telecom Italia. Mr. Linares holds a degree in telecommunications engineering from the Polytechnic University of Madrid (Universidad Politécnica de Madrid).
Mr. José María Abril Pérez serves as a director of our Board of Directors. From 1975 to 1982 he served as financial manager of Sociedad Anónima de Alimentación (SAAL). Since then, and until he joined the Banco Bilbao Vizcaya Argentaria Group (BBVA), he was financial manager of Sancel-Scott Ibérica, S.A. In 1985 he joined Banco Bilbao, S.A. as managing director of Investment Corporate Banking. From January to April 1993, he was appointed
executive coordinator of Banco Español de Crédito, S.A. In 1998, he became general manager of the Industrial Group of BBVA. In 1999, he was appointed member of the executive committee of the BBVA Group. He has also been a member of the board of directors of Repsol, S.A., Iberia, S.A. and Corporación IBV. In 2002 he became managing director of the Wholesale and Investment Banking Division and a member of the executive committee of BBVA, and he is now in early retirement. Until July 2007, he was vice president of Bolsas y Mercados Españoles, S.A. He is currently a member of the board of directors of Advancell, S.A. He holds a degree in economics from the University of Deusto (Bilbao, Spain) and he has been professor at such university for nine years.
Mr. José Fernando de Almansa Moreno-Barreda serves as a director of our Board of Directors. In December 1974 he joined the Spanish Diplomatic Corps (Cuerpo Diplomático) and served from 1976 to 1992 as Secretary of the Spanish Embassy in Brussels, Cultural Counselor of the Spanish Delegation to Mexico, Chief Director for Eastern European Affairs, Director of Atlantic Affairs in the Spanish Foreign Affairs Ministry, Counselor to the Spanish Permanent Representation to NATO in Brussels, Minister-Counselor of the Spanish Embassy in the Soviet Union, General Director of the National Commission for the 5th Centennial of the Discovery of the Americas and Deputy General Director for Eastern Europe Affairs in the Spanish Foreign Affairs Ministry. From 1993 to 2002, Mr. Fernando de Almansa was appointed Chief of the Royal Household by His Majesty King Juan Carlos I, and is currently personal advisor to His Majesty the King. He is also a substitute director of BBVA Bancomer México, S.A. de C.V.. He holds a law degree from the University of Deusto (Bilbao, Spain).
Mr. José María Álvarez-Pallete López serves as a director of our Board of Directors and, since July 2006, as Chairman of Telefónica Latin America. He began his career at Arthur Young Auditors in 1987. In 1988, he joined Benito & Monjardín/Kidder, Peabody & Co., where he held various positions in the research and corporate finance departments. In 1995, he joined Valenciana de Cementos Portland, S.A. (Cemex) as head of the Investor Relations and Studies department. In 1996 he was promoted to chief financial officer of Cemex Group in Spain, and in 1998, to chief administration and financial officer of Cemex in Indonesia, headquartered in Jakarta, and he was appointed member of the Board of Cemex Asia, Ltd. In February 1999 he joined the Telefónica Group as general manager of Finance for Telefónica International, S.A. In September of the same year he was promoted to chief financial officer of Telefónica. In July 2002, he was appointed chairman and chief executive officer of Telefónica Internacional, S.A. Mr. Álvarez-Pallete holds a degree in economics from the Complutense University of Madrid. He also studied economics at the Université Libre de Belgique and holds an International Management Program from the Pan-American Institute of Executive Business Administration (IPADE) and an advance research degree from the Universidad Complutense of Madrid.
Sir David Arculus serves as a director of our Board of Directors. From 1998 to 2001, he was chairman of Severn Trent Plc. and IPC Group Ltd. From 2002 to 2004, he was chairman of Earls Court and Olympia Ltd. From 2004 to January 2006, he served as chairman of O2 (now Telefónica Europe). Sir David Arculus was deputy president of the Confederation of British Industry (CBI) until 2006 and is currently a member of the board of directors of Pearson, Plc. He is also chairman of Numis, Plc. In 1972 he received an MBA from the London Business School. In 1996, he received his master’s degree in engineering and economics from Oriel College, Oxford, and in 2003 he received a degree Honoris Causa from the University of Central England.
Ms. Eva Castillo Sanz serves as a director of our Board of Directors. Ms. Castillo began her career at the Spanish broker Beta Capital Sociedad de Valores, S.A., where she worked for five years. After that, she worked for another five years for Goldman Sachs International in London in the International Equities department. In 1997 Ms. Castillo joined Merrill Lynch as head of Equity Markets for Spain and Portugal. In 1999, she was promoted to Country Manager for Spain and Portugal and in 2000 she became chief executive officer of Merrill Lynch Capital Markets Spain. After that, Ms. Castillo was appointed chief operating officer for EMEA Equity Markets. In October 2003 she was appointed head of Global Markets & Investment Banking in Spain and Portugal, as well as president of Merrill Lynch Spain. Until December 2009, she headed Global Wealth Management business operations in Europe, the Middle East and Africa, including Merrill Lynch Bank (Suisse) and the International Trust and Wealth Structuring business. She was a member of the Merrill Lynch EMEA Executive Committee, the Global Wealth Management Executive and Operating Committees. Ms. Castillo holds degrees in business, economics and law (ICADE – 3) from the Universidad Pontificia de Comillas of Madrid.
Mr. Carlos Colomer Casellas serves as a director of our Board of Directors. Mr. Colomer began his career in 1970 as marketing vice-chairman of Henry Colomer, S.A. In 1980, he was appointed chairman and general manager
of Henry Colomer, S.A. and Haugron Cientifical, S.A. In 1986, he was also appointed president of Revlon for Europe. In 1989, he became chairman of Revlon International and in 1990, he was appointed executive vice-president and chief operating officer of Revlon Inc. In 2000, he was appointed chairman and chief executive officer of the Colomer Group. Mr. Colomer is chairman of the Colomer Group. He is also chairman of Ahorro Bursátil, S.A. SICAV and Inversiones Mobiliarias Urquiola, S.A. SICAV. Mr. Colomer has a degree in economics from the University of Barcelona and an MBA from IESE Business School (Instituto de Estudios Superiores de la Empresa).
Mr. Peter Erskine serves as a director of our Board of Directors. He began his career in the field of marketing and brand management in Polycell and in Colgate Palmolive. He worked for several years at the Mars Group, serving as vice-chairman for Europe of Mars Electronics. In 1990 he was appointed vice-president of Marketing and Sales of Unitel. From 1993 to 1998, he held a number of senior positions, including director of British Telecom (BT) Mobile and president and chief executive officer of Concert. In 1998 he became managing director of BT Cellnet. Subsequently, in 2001 he became chief executive officer and a director of the board of directors of Telefónica O2 Europe, Plc (now Telefónica Europe). In 2006 he became executive chairman of Telefónica O2 Europe, Plc and from July 2006 until December 2007 he served as general manager of the business unit Telefónica Europe. In 2008, he joined the Telecom Advisory Boards of Apax Partners and MacQuarie European Infrastructure Fund, and become a member of the Strategy Advisory Committee of Henley Management Centre. In January 2009 he joined the Board of Ladbrokes P.L.C. as a non executive director. Currently, he is also member of the advisory board of Henley Management Centre. In 1973, he received a degree in psychology from Liverpool University.
Mr. Alfonso Ferrari Herrero serves as a director of our Board of Directors. From 1968 to 1969 he was assistant to the financial manager of Hidroeléctrica del Cantábrico, S.A. From 1969 to 1985, he worked in Banco Urquijo, S.A. holding several positions as analyst, manager of Industrial Investments and as a representative in several subsidiaries in his capacity as member of the board of directors of Banco Urquijo, S.A. From 1985 to 1996 he was a member of the board of directors and manager of Corporate Finance of Beta Capital Sociedad de Valores, S.A., of which Mr. Ferrari was a co-founder. From 1996 until 2000 served as chairman and chief operating officer of Beta Capital, S.A. He has a doctorate in industrial engineering from the Industrial Engineers Technical School of the Polytechnic University of Madrid (Escuela Técnica Superior de Ingenieros Industriales de la Universidad Politécnica de Madrid) and holds an MBA from Harvard University.
Mr. Luiz Fernando Furlán serves as a director of our Board of Directors. Throughout his career he has been a member of the board of directors of several companies in Brazil and abroad such as Sadia, S.A., Embraco, S.A. (Brasmotor Group-Brazil) and Panamco (Pan American Beverages, Inc. – USA). He was also member of the consulting board of IBM in Latin America and of ABN Amro Bank in Brazil, as well as chairman of Brazilian Chicken Exporters Association (ABEF), Brazilian Association of Public Owned Companies (ABRASCA) and of Mercosur European Union Business Forum (MEBF). He also was vice-president of Sao Paulo Entrepreneurs Association (FIESP). From 2003 to 2007 he was Minister of Development, Industry and Foreign Trade of Brazil. Currently he is also chairman of the board of directors of Brasil Foods, S.A. and of Amazonas Sustainability Foundation and member of the board of directors of Redecard S.A. and Amil Participações S.A., and member of the Advisory/Consultive Board of Panasonic (Japan) and McLarty & Associates (USA). He holds a degree in chemical engineering from the Industrial Engineering Faculty of São Paulo and in business administration from University of Santana (São Paulo), with specialization in financial administration from Fundação Getúlio Vargas (São Paulo).
Mr. Gonzalo Hinojosa Fernández de Angulo serves as a director of our Board of Directors. He began his career in 1966 in Cortefiel, S.A. and served in several management positions since then. From 1976 to 1985 Mr. Hinojosa was general manager of Cortefiel, S.A. and from 1985 until 2006 he served as chief executive officer of the company, a post which he combined with his appointment as chairman since 1998. From 1991 through 2002, he served as a director of Banco Central Hispano Americano, S.A. and as a director of Portland Valderribas, S.A. He has also served as a director of Altadis, S.A. and of Dinamia Capital Privado, S.A., SCR. Mr. Hinojosa has a degree in industrial engineering from the Industrial Engineers Technical School of the Polytechnic University of Madrid (Escuela Técnica Superior de Ingenieros Industriales de la Universidad Politécnica de Madrid).
Mr. Pablo Isla Álvarez de Tejera serves as a director of our Board of Directors. Mr. Isla began his career in 1988 as Government Attorney (Abogado del Estado), and he joined the Body of Government Attorneys that year, in the first position of the candidates, for the Spanish Ministry of Transportation, Tourism and Communications. In 1991 he moved to the General Management of the Legal Services of the Spanish Government (Dirección General
del Servicio Jurídico del Estado). From 1992 to 1996, Mr. Isla served as general manager of the Legal Services Department of Banco Popular, S.A. In 1996, he was appointed general manager of the National Heritage Department of the Treasury Department of Spain (Ministerio de Economía y Hacienda). He also served as General Secretary of Banco Popular Español, S.A. from 1998 to 2000. In July 2000, Mr. Isla was appointed chairman of the board of Grupo Altadis and co-chairman of the company. Since June 2005, Mr. Isla is the deputy chairman and chief executive officer of Inditex, S.A. Mr. Isla has a degree in law from the Universidad Complutense of Madrid.
Mr. Antonio Massanell Lavilla serves as a director of our Board of Directors. In 1971 he joined the Caja de Ahorros y Pensiones de Barcelona (“la Caixa”), where he held several posts and in 1990, he was appointed assistant manager and secretary of the Steering Committee. In the same year, he was appointed member of the board of directors of VidaCaixa, S.A., Seguros de la Caixa, S.A., Socredit (Monaco), and Sociedad Española de Medios de Pago, S.A. From 1992 to 1994, Mr. Massanell served as Chairman of the Steering Committee of Sistema 6000 de la Confederación Española de Cajas de Ahorros. Mr. Massanell is currently executive deputy general manager of la Caixa and a member of the boards of directors of e-la Caixa 1, S.A., Boursorama, S.A., Caixa Capital Risc, S.G.E.C.R., S.A., and Serveis Informátics “La Caixa”, S.A. He is also chairman of Port Aventura Entertainment, S.A. and Barcelona Digital Centre Tecnológic (former Fundació Barcelona Digital). Mr. Antonio Massanell Lavilla holds a degree in economics from the University of Barcelona.
Mr. Francisco Javier De Paz Mancho serves as a director of our Board of Directors. From 1990 to 1993, he was Secretary to the Board of the Spanish Consumers Association (Unión de Consumidores de España, UCE). From 1993 to 1996, he served as general manager of Internal Trade of the Spanish Ministry of Tourism and Commerce. From 1994 to 1996, he was chairman of the Observatory of Trading of the Spanish Ministry of Tourism and Commerce (Observatorio de la Distribución Comercial del Ministerio de Comercio y Turismo); from 1996 to 2004, he was corporate strategy manager of the Panrico Donuts Group. From 1998 to 2004, he served as director of Mutua de Accidentes de Zaragoza (MAZ) and of the Panrico Group. From 2004 to 2006, he was director of Tunel de Cadí, S.A.C. and from 2003 to 2004, he served as chairman of the Patronal Pan y Bollería Marca (COE). From 2004 to 2007, he was chairman of the National Company MERCASA. He has also been a member of the board of directors of Altadis, S.A., and of the Economic and Social Board and its permanent commission. From July 2006, he has been a member of the Executive Committee of the Chambers Board (Consejo Superior de Cámaras). Mr. de Paz has a diploma in publicity and information and followed studies in law. He followed a Programa de Alta Dirección de Empresas from the IESE Business School (Instituto de Estudios Superiores de la Empresa, University of Navarra).
Executive Officers/Management Team
At March 25, 2010, our executive management team was composed of six general managers, in addition to our three executive officers who are also directors on our Board of Directors.
| | | | | | |
| Mr. César Alierta Izuel | | Chairman of the Board of Directors and Chief Executive Officer | | 2000 | | 64 |
| Mr. Julio Linares López | | Chief Operating Officer | | 2007 | | 64 |
| Mr. José María Álvarez –Pallete López | | Chairman of Telefónica Latin America | | 2002 | | 46 |
| Mr. Guillermo Ansaldo Lutz | | Chairman of Telefónica Spain | | 2007 | | 48 |
| Mr. Matthew Key | | Chairman of Telefónica Europe | | 2007 | | 47 |
| Mr. Santiago Fernández Valbuena | | General Manager of Finance and Corporate Development | | 2002 | | 52 |
| Mr. Luis Abril Pérez | | Technical General Secretary to the Chairman | | 2002 | | 62 |
| Mr. Calixto Ríos Pérez | | General Manager of Internal Audit | | 2002 | | 65 |
| Mr. Ramiro Sánchez de Lerín García-Ovies | | General Legal Secretary and Secretary to the Board | | 2003 | | 55 |
Biographies of the Executive Officers and Senior Management
We present below the biographies of our executive officers and senior management who do not also serve on our Board of Directors.
Mr. Guillermo Ansaldo Lutz serves as Chairman of Telefónica Spain since December 2007, and he is also member of the Executive Committee of Telefónica. From 1989 to 2000 he worked for McKinsey & Company holding different positions in Spain and Argentina. In 1995, he was appointed partner of McKinsey & Company in Argentina. From 2000 to 2004 he was the chief executive officer of Telefónica de Argentina, S.A. and since April 2005, he held the position of chief executive officer of Telefónica de España, S.A. He holds a degree in industrial engineering from the Universidad de Buenos Aires and an MBA from The Amos Tuck School of Business Administration, Dartmouth College.
Mr. Matthew Key serves as Chairman of Telefónica Europe and is a member of the Executive Committee of Telefónica. From 1984 until 1998 he held various positions of responsibility in Arthur Young, the Grand Metropolitan Plc (1988), Coca Cola & Schweppes Beverages Ltd (1993-1995), Kingfisher Plc and finally, from 1998 to 2002, Vodafone Plc. From 2000 to 2002 he worked as non-executive director of Vodafone Egypt. He has served as chairman and non-executive director of Telco Mobile since 2003. From 2003 to 2005 he was non-executive director of Link Stores. In February 2002, he was appointed chief financial officer of Telefónica O2 UK until December 2004. In January 2005, he was appointed chief executive officer of Telefónica O2 UK. He holds a degree in economics from Birmingham University.
Mr. Santiago Fernández Valbuena serves as General Manager of Finance and Corporate Development since December 2002 and is a member of the Executive Committee of Telefónica. He has served as our chief financial officer since July 2002. He joined Telefónica Group in 1997 as chief executive officer of Fonditel, Telefónica’s pension assets manager. Previously, he was the managing director of Societé Génerale Equities, and also head of Equities & Research at Beta Capital in Madrid. Mr. Fernández Valbuena served as president of the Research Commission at the Spanish Institute of Financial Analysts. He has held senior teaching positions with the MBA programs of the Manchester Business School and Instituto de Empresa. He holds a degree in economics from the Universidad Complutense of Madrid and he also holds an M.S. and a PhD degree in economics and finance from Northeastern University in the United States.
Mr. Luis Abril Pérez serves as our Technical General Secretary to the Chairman. Mr. Abril started his professional career as a microeconomics professor in the Universidad Comercial de Deusto, where he went on to head its Finance Department. In 1978, he moved to Banco de Vizcaya, S.A., as treasury director and then worked as head of the president’s technical department. During his work with the Banco Bilbao Vizcaya Group (1988 to 1991), he acted as general director for the Asset Management division. From 1994 to 1999, Mr. Abril acted as general director for Banco Español de Crédito, S.A. (Banesto), and he later acted as general director for communications for Banco Santander Central Hispano, S.A. (1999 to 2001). Mr. Abril holds a degree in economics and a law degree from the Universidad Comercial de Deusto and he also holds an MBA from the North European Management Institute, Oslo, Norway.
Mr. Calixto Ríos Pérez serves as our General Manager of Internal Audit. In 1973, Mr. Ríos joined Banco Exterior de España, S.A. as the General Manager of Extebank in New York City. Subsequently he was appointed chief executive officer and chief operating officer of Extebandes in Venezuela. Later, Mr. Ríos returned to Madrid as the general manager of International Banking Subsidiaries of Banco Exterior de España, S.A. In 1990, he was appointed chief executive officer responsible for overseeing the construction, management and marketing of the Olympic Village for the Olympic games of Barcelona and a year later was appointed chief financial officer of Tabacalera, S.A. After the merger of Tabacalera with the French company, Seita, he was appointed advisor to the chairman and head of Strategy and Planning. In November 2000, he joined the Telefónica Group as general manager for Institutional Relations, and in July 2002 he was appointed general manager for Internal Auditing and Communications. He holds a degree in economics from the Universidad Complutense of Madrid.
Mr. Ramiro Sánchez de Lerín García-Ovies serves as our General Secretary and Secretary to our Board of Directors. He began his career in Arthur Andersen, first working for its audit department and later for its tax department. In 1982, he became a Government Attorney (Abogado del Estado) and started working for the local tax authorities in Madrid (Delegación de Hacienda de Madrid). Afterwards he was assigned to the State Secretariat for the European Communities and later to the Foreign Affairs Ministry. He has been general secretary and secretary of the Board of Elosúa, S.A., Tabacalera, S.A., Altadis, S.A. and Xfera Móviles, S.A. He has also held teaching positions in Instituto Católico de Administración y Dirección de Empresas (ICADE), Instituto de Empresa and Escuela de Hacienda Pública.
Directors
The compensation of our directors is governed by Article 28 of our bylaws, which states that the aggregate compensation amount that we may pay to all of our directors as remuneration and attendance fees shall be fixed by the shareholders at the general meeting of shareholders, and such amount shall remain unchanged until the shareholders decide to modify it. The Board of Directors shall determine the exact amounts to be paid within such limit and the distribution thereof among the directors. In this respect, on April 11, 2003, our shareholders set the maximum gross annual amount to be paid to the Board of Directors at €6 million. This includes fixed payments and fees for attending meetings of the Board of Directors’ advisory or control committees described above. In addition, the compensation provided for above is in addition to other professional or employment compensation accruing to the directors by reason of any executive or advisory duties that they perform for the Group, other than the supervision and collective decision-making duties inherent in their capacity as directors.
Therefore, the compensation paid to our directors in their capacity as members of the Board of Directors, the Executive Commission and/or any of the advisory and control committees consists of a fixed amount payable monthly plus fees for attending the meetings of the Board’s advisory or control committees. In this respect, executive board members, other than the Chairman, only receive compensation for discharging their executive duties as stipulated in their respective contracts and not in their capacity as directors.
The following table presents the fixed annual amounts paid to directors for membership in the Board of Directors, Executive Commission and any advisory or control committees.
| | | | | | | | Advisory or Control Committees | |
| | | (in euros) | |
| Chairman | | | 300,000 | | | | 100,000 | | | | 28,000 | |
| Vice Chairman | | | 250,000 | | | | 100,000 | | | | — | |
Board member (vocal): | | | | | | | | | | | | |
| Executive | | | — | | | | — | | | | — | |
| Proprietary | | | 150,000 | | | | 100,000 | | | | 14,000 | |
| Independent | | | 150,000 | | | | 100,000 | | | | 14,000 | |
| Other external | | | 150,000 | | | | 100,000 | | | | 14,000 | |
In addition, each director is paid a fee of €1,250 for attendance at each meeting of an advisory or control committee.
Total compensation paid to our directors for discharging their duties in 2009 amounted to €4,081,333 in fixed compensation and €252,500 in fees for attending advisory or control committee meetings. It should also be noted that the compensation paid to our directors for serving as members on the boards of directors of other Telefónica Group companies amounted to €1,791,104. In addition, the directors who are members of the regional advisory committees, including the Telefónica Corporate University Advisory Council, received additional aggregate compensation of €553,750 in 2009.
The following table presents the breakdown by item of the compensation and benefits paid to Telefónica directors for discharging their duties in 2009:
| | | | | | | | | | | | |
| Board Members | | Board of Directors | | | Executive Commission | | | | | | | | | Total | |
| | | (in euros) | |
| Chairman | | | | | | | | | | | | | | | |
| César Alierta Izuel | | | 300,000 | | | | 100,000 | | | | — | | | | — | | | | 400,000 | |
| Vice chairmen | | | | | | | | | | | | | | | | | | | | |
| Isidro Fainé Casas | | | 250,000 | | | | 100,000 | | | | — | | | | — | | | | 350,000 | |
| Vitalino Manuel Nafría Aznar | | | 250,000 | | | | — | | | | 56,000 | | | | 22,500 | | | | 328,500 | |
| Members | | | | | | | | | | | | | | | | | | | | |
| Julio Linares López | | | — | | | | — | | | | — | | | | — | | | | — | |
| José María Abril Pérez | | | 150,000 | | | | 100,000 | | | | 14,000 | | | | 1,250 | | | | 265,250 | |
| José Fernando de Almansa Moreno-Barreda | | | 150,000 | | | | — | | | | 56,000 | | | | 21,250 | | | | 227,250 | |
| José María Álvarez-Pallete López | | | — | | | | — | | | | — | | | | — | | | | — | |
| David Arculus | | | 150,000 | | | | — | | | | 28,000 | | | | 11,250 | | | | 189,250 | |
| Eva Castillo Sanz | | | 150,000 | | | | — | | | | 14,000 | | | | 10,000 | | | | 174,000 | |
| Carlos Colomer Casellas | | | 150,000 | | | | 100,000 | | | | 56,000 | | | | 16,250 | | | | 322,250 | |
| Peter Erskine | | | 150,000 | | | | 100,000 | | | | 56,000 | | | | 25,000 | | | | 331,000 | |
| Alfonso Ferrari Herrero | | | 150,000 | | | | 100,000 | | | | 84,000 | | | | 38,750 | | | | 372,750 | |
| Luiz Fernando Furlán | | | 150,000 | | | | — | | | | 14,000 | | | | 3,750 | | | | 167,750 | |
| Gonzalo Hinojosa Fernández de Angulo | | | 150,000 | | | | 100,000 | | | | 98,000 | | | | 42,500 | | | | 390,500 | |
| Pablo Isla Álvarez de Tejera | | | 150,000 | | | | — | | | | 84,000 | | | | 16,250 | | | | 250,250 | |
| Antonio Massanell Lavilla | | | 150,000 | | | | — | | | | 65,333 | | | | 28,750 | | | | 244,083 | |
| Francisco Javier de Paz Mancho | | | 150,000 | | | | 100,000 | | | | 56,000 | | | | 15,000 | | | | 321,000 | |
| Total | | | 2,600,000 | | | | 800,000 | | | | 681,333 | | | | 252,500 | | | | 4,333,833 | |
In addition, the breakdown of the total paid to executive directors Mr. César Alierta Izuel, Mr. Julio Linares López and Mr. José María Álvarez-Pallete López for discharging their executive duties by item is as follows:
| | | |
| | | (in euros) | |
| Salaries | | | 5,947,604 | |
| Variable compensation | | | 8,058,179 | |
| Compensation in kind(1) | | | 100,051 | |
| Contributions to pension plans | | | 25,444 | |
| (1) | “Compensation in kind” includes life and other insurance premiums (general medical and dental insurance). |
In addition, under the Pension Plan for Senior Executives, we made total contributions in 2009 on behalf of executive directors of €1,925,387. The Pension Plan for Senior Executives is wholly funded by us. This plan envisages annual defined contributions equivalent to specific percentages of the relevant executives’ fixed remuneration, in accordance with their professional category, and extraordinary contributions in accordance with the circumstances of each such executive as detailed in the plan. See Note 21 to the Consolidated Financial Statements.
Our executive directors also receive compensation under the Performance Share Plan approved at the general shareholders’ meeting of June 21, 2006 and described in more detail below. The maximum number of shares corresponding to the second, third and fourth phases of the Performance Share Plan will be granted on July 1, 2010, July 1, 2011, and July 1, 2012 respectively, to each of our executive directors if all the terms established for such delivery are met as follows: for Mr. César Alierta Izuel, 116,239, 148,818 and 173,716 shares, respectively; for Mr. Julio Linares López, 57,437, 101,466 and 130,287 shares, respectively; and for Mr. José María Álvarez-Pallete López, 53,204, 67,644 and 78,962 shares, respectively. With respect to the payout under the first phase of the Performance Share Plan in July 2009, the beneficiaries received, in accordance with the general terms and conditions of the Performance Share Plan, all the shares assigned to them as follows: to Mr. César Alierta Izuel, 129,183 shares; to Mr. Julio Linares López, 65,472 shares; and to Mr. José María Álvarez-Pallete López, 62,354 shares. This maximum payout was made because our total shareholder return, or TSR (as defined in the
Performance Share Plan) exceeded that of the relevant comparison group. See Note 21 to the Consolidated Financial Statements.
It should be noted that the non-executive directors do not receive and did not receive in 2009 any compensation in the form of pensions or life insurance, nor do they participate in the share-based payment plans linked to our share price.
In addition, we do not grant and did not grant in 2009 any advances, loans or credits to the directors, or to our top executives, in accordance with the requirements of the Sarbanes-Oxley Act.
Executive Officers and Senior Management
In 2009, our six executive officers (excluding those that are also Directors) were paid a total compensation package of €10,533,852 in the aggregate.
Contributions made on behalf of these six executives under the Pension Plan for Senior Executives mentioned above amounted to an aggregate amount of €922,728 in 2009.
In addition, the maximum number of shares corresponding to the second, third and fourth phases of the Performance Share Plan, described below, to be delivered to these senior executives as a group, if all the established terms are met, is 130,911 shares, 306,115 shares and 394,779 shares, respectively. Similarly, as explained above, these senior executives received a total of 284,248 shares in 2009 as a result of satisfaction of the TSR requirement for the first phase under the Performance Share Plan.
Finally, executive officer contracts, including those of executive directors, generally include a severance clause entitling such executives to three years of salary plus another year based on the length of service with us. The annual salary on which the indemnity is based is the director’s last fixed salary and the average amount of the last two variable payments received by contract.
Incentive Plans
In each of 2007, 2008 and 2009, the Telefónica Group had the following incentive payment plans linked to the share price of Telefónica, S.A. in effect.
Telefónica, S.A. share plan: “Performance Share Plan”
At our general meeting of shareholders on June 21, 2006, our shareholders approved the introduction of a long-term incentive plan for managers and senior executives of Telefónica, S.A. and other Telefónica Group companies (the “Performance Share Plan”). Under the Performance Share Plan, selected participants who meet the qualifying requirements are given a certain number of our shares as a form of variable compensation.
The Performance Share Plan was initially intended to last seven years. It is divided into five phases, each three years long, beginning on July 1 (the “Start Date”) and ending on June 30 three years later (the “End Date”). At the start of each phase the number of shares to be awarded to Performance Share Plan beneficiaries is determined based on their success in meeting targets set. The shares are delivered, assuming targets are met, at the End Date of each phase. Each phase is independent from the others. The first started on July 1, 2006 (with all shares delivered on July 1, 2009, as described above) and the fifth phase begins on July 1, 2010 (with any shares earned delivered from July 1, 2013).
Award of the shares is subject to a number of conditions:
| | · | The beneficiary must continue to work for us throughout the three years of the phase, subject to certain special conditions related to departures. |
| | · | The actual number of shares awarded at the end of each phase will depend on success in meeting targets and the maximum number of shares assigned to each executive. Success is measured by comparing TSR, which includes both the share price of and dividends on our shares, with the TSRs of a basket of listed |
| | | telecommunications companies that comprise the comparison group. Each employee who is a member of the plan is assigned at the start of each phase a maximum number of shares. The actual number of shares awarded at the end of the phase is calculated by multiplying this maximum number by a percentage reflecting degree of success at the date in question. This will be 100% if the TSR of Telefónica is equal to or better than that of the third quartile of the comparison group and 30% if Telefónica’s TSR is in line with the average. The percentage rises on a linear basis for all points between these two benchmarks. If the TSR is below average no shares are awarded. |
The end of the first phase of the Performance Share Plan was on June 30, 2009, which included the following maximum number of shares allocated:
| | | | | | |
| 1st phase July 1, 2006 | | 6,530,615 | | 6.43 | | June 30, 2009 |
With the expiration of the first phase of the Performance Share Plan in July 2009 a total of 3,309,968 shares (corresponding to a total of 4,533,393 gross shares less a withholding of 1,224,610 shares prior to delivery) were delivered to our directors included in the first phase. The shares delivered were deducted from our treasury shares in 2009.
All the shares delivered under the first phase of the Performance Share Plan were hedged with a derivative instrument acquired in 2006. The cost of this instrument was €46 million, which in unit terms is €6.43 per share. At June 30, 2009, the bank with whom the financial instrument was contracted delivered to us the shares contracted. These were initially accounted for as treasury shares.
The maximum number of the shares issuable in each of the three outstanding phases at December 31, 2009 is as follows:
| | | | | | |
| 2nd phase July 1, 2007 | | 5,556,234 | | 7.70 | | June 30, 2010 |
| 3rd phase July 1, 2008 | | 5,286,980 | | 8.39 | | June 30, 2011 |
| 4th phase July 1, 2009 | | 6,356,597 | | 8.41 | | June 30, 2012 |
The Performance Share Plan is equity-settled via the delivery of shares to the participants. Accordingly, an expense of €23 million, €38 million and €43 million of employee benefits was recorded in 2007, 2008 and 2009, respectively.
To ensure that we had enough shares to meet our obligations at the end of the first phase begun in 2006, we bought an instrument from a financial institution that delivered to us, at the end of the phase, a number of shares determined using the same measure of success as the plan, i.e. an instrument that mirrored the features of the first phase of the plan. The cost of this instrument was €46 million, which in unit terms is €6.43 per share, assuming the maximum number of shares under this instrument. See Note 20 to our Consolidated Financial Statements.
We have not arranged for any similar derivative for the second phase.
For the third phase, we have arranged a financial instrument under the same conditions as for the first phase, with possible delivery to us of up to 2,500,000 shares under such instrument. The cost of the financial instrument is €25 million, equivalent to €9.96 per share assuming the maximum number of shares under this instrument. See Note 20 to our Consolidated Financial Statements.
For the fourth phase of the Performance Share Plan, we have acquired an instrument from a financial institution with the same features of the fourth phase of the Performance Share Plan, whereby at the end of the phase, we may obtain part of the shares necessary to settle the phase (4,000,000 shares). The cost of the financial instrument was €34 million, equivalent to €8.41 per share. See Note 20 to our Consolidated Financial Statements.
Telefónica, S.A. share option plan targeted at Telefónica Europe employees: “Performance Cash Plan”
In addition to the Performance Share Plan, another plan called the “Performance Cash Plan”, operating under the same conditions as the Performance Share Plan is targeted at employees of Telefónica Europe. This plan entails delivery to Telefónica Europe executives of a specific number of theoretical options in Telefónica, S.A., which are cash-settled at the end of each phase via a payment equivalent to the market value of the shares on settlement date up to a maximum of three times the value of the theoretical options, established for each phase, of the shares at the delivery date.
The value of the theoretical options is established as the average share price in the 30 days immediately prior to the start of each phase, except for the first phase, where the average share price during the 30 days immediately prior to May 11, 2006 (€12.83) was taken as the reference.
The estimated duration of this plan is also seven years, with five phases, each of three years, commencing on July 1 of each year, starting in 2006.
Like the Performance Share Plan, the performance rate for setting payments is measured based on the TSR of Telefónica shares with respect to the comparison group’s TSRs. Payments will be made in line with the following criteria:
| · | Below average | 0% |
| | | |
| · | Average | 30% |
| | | |
| · | Equal to or higher than the third quartile | 100% |
The aggregate number of options assigned to the three phases outstanding at December 31, 2009 was 412,869.
The fair value at December 31, 2009 of the options delivered in each phase in force at that time was €19.55 per option. This value is calculated by taking our share price and including the estimated TSR and is updated at each year end.
Please see “—Directors and Senior Management” above.
Employees and Labor Relations
The table below sets forth the average number of employees at the dates indicated for the Telefónica Group during 2007, 2008 and 2009 and each of the consolidated companies of the Group which comprise our different lines of business and other consolidated subsidiaries.
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Telefónica Spain | | | 37,688 | | | | 35,792 | | | | 35,708 | | | | 35,562 | | | | 35,318 | | | | 35,338 | |
| Telefónica Latin America | | | 48,844 | | | | 49,946 | | | | 49,990 | | | | 49,849 | | | | 50,709 | | | | 51,606 | |
| Telefónica Europe | | | 29,249 | | | | 29,305 | | | | 28,828 | | | | 28,888 | | | | 28,249 | | | | 27,023 | |
| Subsidiaries and other companies | | | 128,271 | | | | 133,444 | | | | 137,249 | | | | 142,736 | | | | 140,875 | | | | 143,459 | |
| Total | | | 244,052 | | | | 248,487 | | | | 251,775 | | | | 257,035 | | | | 255,151 | | | | 257,426 | |
The number of employees shown in the table above corresponds to the consolidated companies. It is also worth highlighting the large number of employees at the various companies of the Atento Group performing call center activities included in the total numbers above, with an average of 129,885 in 2009 and 132,256 at December 31, 2009.
Of our total employees at December 31, 2009, approximately 51.8 % were women (50.8% at December 31, 2008).
Employee Benefits
We have a pension plan for our Spanish employees. Our contribution corresponds to 4.51% of an employee’s fixed salary (for those employees who joined Telefónica de España S.A.U. before June 30, 1992 the amount is 6.87%). The obligatory minimum employee contribution is 2.2%. This plan is fully funded.
As of December 31, 2009, 52,912 of our employees were members of the pension plan managed by our subsidiary Fonditel Entidad Gestora de Fondos y Pensiones, S.A. (54,819 employees as of December 31, 2008 and 57,675 at December 31, 2007). The total amount contributed in 2009 by the different Telefónica Group companies was €97 million (€98 million and €95 million in 2008 and 2007 respectively).
In addition, in 2006, we approved a Management Benefits Plan (Retirement Plan) for senior executives, wholly funded by us, which complements the current pension plan. This Management Benefits Plan envisages annual defined contributions by Telefónica equivalent to specific percentages of the executives’ fixed remuneration, in accordance with such executive’s professional category, and extraordinary contributions in accordance with the circumstances of each executive, payable in line with the conditions of this plan.
No provision was made for this Management Benefits Plan by us, as its operation has been fully outsourced to an investment fund that is responsible for its operation.
At March 25, 2010, the following members of our Board of Directors beneficially owned directly or indirectly an aggregate of 6,429,677 shares, representing approximately 0.141% of our capital stock.
| | Percentage of Shares Beneficially Owned | |
| Mr. César Alierta Izuel(1) | | | 0.089 | % |
| Mr. Isidro Fainé Casas | | | 0.010 | % |
| Mr. Vitalino Manuel Nafría Aznar | | | — | |
| Mr. Julio Linares López | | | 0.006 | % |
| Mr. José María Abril Pérez | | | — | |
| Mr. José Fernando de Almansa Moreno-Barreda | | | — | |
| Mr. Jose María Álvarez-Pallete López | | | 0.004 | % |
| Mr. David Arculus | | | — | |
| Ms. Eva Castillo Sanz | | | 0.002 | % |
| Mr. Carlos Colomer Casellas(2) | | | 0.001 | % |
| Mr. Peter Erskine | | | 0.002 | % |
| Mr. Alfonso Ferrari Herrero(3) | | | 0.013 | % |
| Mr. Luiz Fernando Furlán | | | — | |
| Mr. Gonzalo Hinojosa Fernández de Angulo | | | 0.011 | % |
| Mr. Pablo Isla Alvarez de Tejera | | | — | |
| Mr. Antonio Massanell Lavilla | | | — | |
| Mr. Francisco Javier de Paz Mancho | | | 0.001 | % |
| (1) | Since March 2, 2007, Mr. Alierta Izuel holds 8,200,000 European call options over our shares with an exercise price of €22, which, if exercised, must be exercised on March 2, 2011 and settled in cash. In addition to this, since April 11, 2008, he holds 2,000,000 European call options over our shares with an exercise price of €30, which, if exercised, must be exercised on March 2, 2011 and settled in cash. |
| (2) | On April 6, 2009, Mr. Colomer Casellas reported to the Spanish Securities Markets Commission (CNMV) the sale of 14,815 puts over Telefónica, S.A. shares, with an exercise price of €13.50, as well as the sale of 24,000 puts over Telefónica, S.A. shares with an exercise price of €12.50. On August 6, 2009 Mr. Colomer Casellas reported to the CNMV the purchase of the above-mentioned 14,815 puts over our shares which were sold on April 6, 2009. On August 6, 2009 he reported the sale of 33,334 puts over our shares, with an exercise price of €15 that, if exercised, must be exercised on 31 May, 2010. On September 21, 2009 Mr. Colomer Casellas reported the purchase of the above-mentioned 24,000 puts over our shares, which were sold on April 6, 2009. |
| (3) | In connection with his acquisition of 485,000 shares of Telefónica S.A. made on October 11, 2007, Mr. Ferrari Herrero holds 485,000 put warrants over our shares with an exercise price of €18.48 that, if exercised, must be exercised on October 11, 2010. |
At March 25, 2010, members of our executive management team (excluding members of our Board of Directors listed above) beneficially owned an aggregate 878,888 of our shares, representing approximately 0.0193% of our capital stock.
None of our directors or executive officers beneficially owned shares representing one percent or more of our share capital at March 25, 2010.
None of our directors and executive officers held options in respect of shares representing one percent or more of our share capital at March 25, 2010.
General
At March 25, 2010, we had 4,563,996,485 shares outstanding, each having a nominal value of €1.00 per share. All outstanding shares have the same rights.
At March 25, 2010, according to information provided to us or to the Spanish National Securities Commission, the CNMV, beneficial owners of 3% or more of our voting stock were as follows:
| | | | | | |
| Banco Bilbao Vizcaya Argentaria, S.A.(1) | | | 252,999,646 | | | | 5.54 | % |
| Caja de Ahorros y Pensiones de Barcelona (“la Caixa”)(2) | | | 235,973,505 | | | | 5.17 | % |
| Blackrock, Inc.(3) | | | 177,257,649 | | | | 3.88 | % |
| Capital Research and Management Company(4) | | | 144,578,826 | | | | 3.16 | % |
| Based on the information provided by Banco Bilbao Vizcaya Argentaria, S.A. as at December 31, 2009 for the 2009 Annual Report on Corporate Governance. |
| (2) | Based on information provided by Caja de Ahorros y Pensiones de Barcelona, “la Caixa” as at December 31, 2009 for the 2009 Annual Report on Corporate Governance. The 5.16% indirect shareholding in Telefónica is owned by Criteria CaixaCorp, S.A. |
(3) | According to notification sent to the Spanish National Securities Commission, the CNMV, dated February 4, 2010. |
| (4) | According to notification sent to the Spanish National Securities Commission, the CNMV, dated May 20, 2009. |
To the extent that our shares are represented by account in the book-entry form, we do not keep a shareholder registry and our ownership structure cannot be known precisely. Based on the information available to us there is no individual or corporation that directly or indirectly through one or more intermediaries may exercise any type of control over us. Nevertheless, we have certain shareholders whose holdings are considered material.
At December 31, 2009, approximately 171,523,317 of our shares were held in the form of ADSs by 917 holders of record, including Cede & Co., the nominee of the Depository Trust Company. The number of ADSs outstanding was 57,174,439 at December 31, 2009.
Ownership Limitations
There are no limitations with respect to the ownership of our assets or share capital except those derived from the application of the reciprocity principle. Article 6 of the General Telecommunications Law, or the 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 GTL.
During 2009 and through the date of this Annual Report, none of our directors and no member of our management team has been involved in any related party transactions with us.
Our Board of Directors' Regulations grant the Board of Directors the exclusive power to authorize any transactions with major shareholders or with our directors. Prior to authorizing any such transaction, our Board will receive an opinion from the Nominating, Compensation and Corporate Governance Committee addressing the fairness of the transaction to our shareholders and us. Any of our directors that may have an interest in the proposed transaction must abstain from voting on the proposed transaction.
Two of our major shareholders are financial institutions. We have entered into related party transactions with both companies within our ordinary course of business, and always on arm’s length terms. During 2009, the
executed transactions were generally loans or capital markets transactions provided to us by these financial institutions and agreements for us to provide telecommunications and broadband services to such institutions.
Related Party Transactions with Significant Shareholders
The main transactions between Telefónica Group companies and our significant shareholders were the following:
Banco Bilbao Vizcaya Argentaria, S.A. and subsidiaries comprising its consolidated group “BBVA”:
| | · | Financing transactions arranged under market conditions, with approximately €531 million drawn down at December 31, 2009 (€436 million at December 31, 2008). |
| | · | Time deposits under market conditions amounting to €878 million at December 31, 2009 (€355 million at December 31, 2008). |
| | · | Derivative transactions arranged at market conditions, for a total nominal amount of approximately €7,824 million at December 31, 2009 (€6,930 million at December 31, 2008). |
| | · | Guarantees granted by BBVA under market conditions for approximately €237 million at December 31, 2009 (€13 million at December 31, 2008). |
| | · | Dividends and other benefits paid to BBVA in 2009 for €287 million (€279 million in 2008). |
| | · | Services, mainly telecommunications and telemarketing, rendered by Telefónica Group companies to the BBVA Group, under market conditions. |
Caja de Ahorros y Pensiones de Barcelona, “la Caixa”, and subsidiaries comprising the consolidated group:
| | · | Financing transactions arranged under market conditions, with approximately €643 million drawn down at December 31, 2009 (€682 million at December 31, 2008). |
| | · | Time deposits under market conditions amounting to €1,293 million at December 31, 2009 (€368 million at December 31, 2008). |
| | · | Derivative transactions entered into under market conditions, for a total nominal amount of approximately €800 million in 2009. There was no amount in 2008. |
| | · | Dividends and other benefits paid to La Caixa in 2009 for €260 million (€237 million in 2008). |
| | · | Guarantees granted by La Caixa under market conditions for approximately €17 million at December 31, 2009 (€1 million at December 31, 2008). |
| | · | The telecommunications services rendered by Telefónica Group companies to La Caixa group companies, under market conditions. |
Intra-Group Loans
We are the parent company of the Telefónica Group and operate through our subsidiaries and affiliated companies. We coordinate group policies, including financial policy and, in some cases, actual financial management is conducted by us. Most of the transactions we perform with other members of the Telefónica Group relate to financing transactions, including covering their needs for funds and providing interest rate and exchange rate hedges.
At December 31, 2009, as recorded in our parent company accounts, we loaned a total of €5,975 million (€13,594 million at December 31, 2008) to companies of the Telefónica Group while companies of the Telefónica Group and their associates loaned us a total of €45,280 million (€46,694 million at December 31, 2008), of which €10,767 million (€12,331 million at December 31, 2008) was loaned to us by Telefónica Europe, B.V. and €24,532 million
(€17,771 million at December 31, 2008) was loaned to us by Telefónica Emisiones S.A.U., our financing subsidiaries devoted to raising funds in the capital markets, and €8,915 million (€12,671 million at December 31, 2008) was loaned to us by Telefónica Finanzas, S.A.U., our subsidiary in charge of financial support for Telefónica Group companies.
With respect to the balances with associated companies, the line item “Loans to Associates” on the consolidated statement of financial position at December 31, 2009, presents an amount of €18 million (€126 million at December 31, 2008).
Not applicable.
Consolidated Financial Statements
Please see Item 18.
Legal Proceedings
Telefónica and its group companies are party to several legal proceedings which are currently in progress in the courts of law and the arbitration bodies of the various countries in which we are present.
Based on the advice of our legal counsel it is reasonable to assume that these legal proceedings will not materially affect our financial position or solvency, regardless of the outcome. We highlight the following unresolved legal proceedings or those underway in 2009:
Contentious proceeding in connection with the merger between Terra Networks, S.A. and Telefónica, S.A.
On September 26, 2006, Telefónica was notified of the claim filed by former shareholders of Terra Networks, S.A. (Campoaguas, S.L., Panabeni, S.L. and others) alleging breach of contract in respect of the terms and conditions set forth in the prospectus of the initial public offering of shares of Terra Networks, S.A. dated October 29, 1999. This claim was rejected by a ruling issued on September 21, 2009, and the appellants ordered to pay court costs. This ruling was appealed on December 4, 2009.
Claim before the Center for Settlement of Investment Disputes (ICSID) against the Argentine government
As a result of the enactment by the Argentine government of Public Emergency and Exchange Rules Reform Law 25,561, of January 6, 2002, Telefónica considered that the terms and conditions of the share transfer agreement approved by Decree 2332/90 (the “Transfer Agreement”) and the pricing agreement ratified by Decree 2585/91, both of which were executed by Telefónica with the Argentine government, had been affected appreciably, since the law rendered ineffective any dollar or other foreign currency adjustment clauses, or indexation clauses based on price indexes of other countries, or any other indexation mechanism in contracts with the public authorities. The law also required that prices and rates derived from such clauses be denominated in pesos at an exchange rate of one peso to one U.S. dollar.
Accordingly, since negotiations with the Argentine Government were unsuccessful, on May 14, 2003, Telefónica filed a request for arbitration with the International Center for Settlement of Investment Disputes (ICSID) pursuant to the Agreement for the Promotion and Reciprocal Protection of Investments between the Argentine Republic and the Kingdom of Spain. On December 6, 2004, Telefónica filed the “Memorial” or claim with the ICSID.
On February 15, 2006, Telefónica de Argentina signed a memorandum of understanding with the Argentine government as a prerequisite to reaching an agreement to renegotiate the Transfer Agreement pursuant to the provisions of Article 9 of Law 25,561. Among other issues, the memorandum of understanding envisaged the suspension by Telefónica de Argentina and Telefónica for a certain period of all claims, appeals and demands
planned or underway, based on events or measures taken as a result of emergency situation established by Law No. 25,561 with regard to the Transfer Agreement and the license granted to Telefónica de Argentina.
On August 21, 2009, after successive extensions of the period of suspension included in the memorandum of understanding, Telefónica and the Argentine government agreed to consider this arbitration proceeding concluded. As a result, both parties requested the ICSID Court to suspend the proceeding, which the court agreed to on September 24, 2009.
Appeal for judicial review of the Spanish Competition Court (TDC) ruling of April 1, 2004
On April 1, 2004, the TDC ruled that Telefónica de España had engaged in unfair trade practices prohibited under Article 6 of Antitrust Law 16/1989, dated July 17, and Article 82 of the EC Treaty, consisting in the abuse of a dominant market position, by conditioning the provision of certain services to the non-existence of predialing arrangements with rival operators and running disloyal advertising campaigns. It imposed a fine of €57 million.
Telefónica de España filed an appeal for judicial review of this decision. On January 31, 2007, the National Appellate Court ruled in favor of the appeal, thereby overturning the TDC’s ruling. The State attorney filed an appeal to overturn the Supreme Court ruling on January 15, 2008, which Telefónica contested in July of 2008. This court has set April 6, 2010 as the judgment date.
Cancellation of the UMTS license granted to Quam GMBH in Germany
In December 2004, the Germany Telecommunications Market Regulator revoked the UMTS license granted in 2000 to Quam GmbH, in which Telefónica has a stake. After obtaining a suspension of the revocation order, on January 16, 2006, Quam GmbH filed a suit against the order with the German courts. This claim sought to overturn the revocation order and, if this failed, to be reimbursed for the total or partial payment of the original amount paid for the license.
This claim was rejected by the Cologne Administrative Court. Quam GmbH has appealed the decision before the Supreme Administrative Court of North Rhine-Westphalia, which also rejected its appeal.
Finally, Quam GmbH filed a new claim in third instance before the Federal Supreme court for Administrative Cases, which was not admitted for processing. Quam GmbH appealed this decision on August 14, 2009, and is currently awaiting another decision by this court.
Appeal against the European Commission ruling of July 4, 2007 against Telefónica de España’s broadband pricing policy
On February 22, 2006, we were sent a statement of objections, initiating disciplinary proceedings for conduct that goes against Article 82 of EC Treaty rules. Subsequently, on July 9, 2007, the European Commission issued a decision, imposing a fine of €152 million on us and Telefónica de España. The ruling charged us with applying a margin squeeze between the prices we charged competitors to provide regional and national wholesale broadband services and our retail broadband prices using ADSL technology from September 2001 to December 2006.
On September 10, 2007, we and Telefónica de España both filed appeals to overturn the decision before the Court of First Instance of the European Community. The Kingdom of Spain also lodged an appeal to overturn the decision. Meanwhile, France Telecom and the Spanish Association of Bank Users (AUSBANC) filed requests to intervene, to which we have submitted our comments.
Appeal against the decision by Agencia Nacional de Telecomunicações (ANATEL) regarding the inclusion of interconnection and network usage revenues in the Fundo de Universalização de Serviços de Telecomunicações (FUST).
Brasilcel, N.V. (Vivo) Group operators, together with other Brazilian wireless operators, appealed ANATEL’s decision of December 16, 2005, to include interconnection and network usage revenues and expenses in the calculation of the amounts payable into the Fund for Universal Access to Telecommunications Services (Fundo de Universalização de Serviços de Telecomunicações, or FUST for its initials in Portuguese), a fund to pay for the
obligations to provide universal service, with retroactive application from 2000. On March 13, 2006, the Brasilia Federal Regional Court granted the injunction requested by the appellants, preventing ANATEL’s decision from being applied. On March 6, 2007, a ruling in favor of the mobile operators was issued, stating that it was not appropriate to include the revenues received from other operators in the taxable income for the FUST calculation and rejecting the retroactive application of ANATEL’s decision. ANATEL filed an appeal to overturn this decision with the Brasilia Regional Federal Court no.1. This appeal is pending resolution.
At the same time, Telesp and Telefónica Empresas, S.A., together with other fixed line operators through ABRAFIX (Associação Brasileira de Concessionárias de Serviço Telefonico Fixo Comutado) appealed ANATEL’s decision of December 16, 2005, also obtaining injunctions. On June 21, 2007, Federal Regional Court no. 1 ruled that it was not appropriate to include the interconnection and network usage revenues and expense in FUST taxable income and rejected the retroactive application of ANATEL’s decision. ANATEL filed an appeal to overturn this ruling on April 29, 2008 before Brasilia Federal Regional Court no. 1. This appeal is pending resolution.
Proceeding before the Prague District Court against the ruling of the Czech Telecommunications Office dated December 22, 2003.
On December 22, 2003, the Czech Telecommunications Office issued a ruling that required Cesky Telecom (now Telefónica O2 Czech Republic) to pay T-Mobile Czech Republic, a.s. 898 million Czech crowns (equivalent to approximately €26 million) in interconnection fees (call termination) for the period from January to November 2001.
Although the administrative procedure filed by Telefónica O2 Czech Republic against this resolution had yet to be resolved, in 2007 T-Mobile Czech Republic asked the Prague District Court no. 3 to enforce the decision, entailing an amount of approximately 1,859 million Czech crowns (approximately €57.3 million) of principal and interest. The Prague District Court accepted the petition and on May 23, 2007, issued a ruling initiate the execution of against any asset of Telefónica O2 Czech Republic. Telefónica O2 Czech Republic requested that the execution ordered by the Prague District Court 3 be limited to certain assets or be ruled inadmissible. No definitive ruling has yet been made. Telefónica O2 Czech Republic paid approximately 2,023 million Czech crowns (approximately €82 million) to prevent a potential order of execution and to remove the preventive embargo on its assets. Nonetheless, the procedure continued in the courts. In April 2009, an agreement was reached between T-Mobile Czech Republic and Telefónica O2 Czech Republic that ended the procedure, whereby T-Mobile Czech Republic returned approximately 1,053 million Czech crowns (approximately €40 million) to Telefónica O2 Czech Republic. All disputes and related proceedings between T-Mobile and Telefónica O2 Czech Republic regarding interconnection fees in 2001 were terminated according to this settlement agreement. The relevant courts issued decisions on termination of all related proceedings during May and June 2009.
Public civil procedure by the Sao Paulo government against Telesp for alleged repeated malfunctioning in the services provided by Telesp requesting compensation for damages to the customers affected.
In February 3, 2009, the Public Ministry of the State of Sao Paulo initiated proceedings against Telesp for alleged repeated malfunctioning in the telecommunication services provided by Telesp. The proceedings sought compensation for damages to the customers affected. A general claim was filed by the Public Ministry of the State of Sao Paulo suggesting an indemnification of 1,000 million Brazilian reais, calculated on the company’s revenue base over the last five years. Telesp’s potential responsibility will only be known in the calculation and enforcement of the award by affected consumers.
This proceeding was suspended via resolution dated November 5, 2009, for a period of 90 days, to assess the proposed agreement being negotiated between the parties. As no agreement was reached, the suspension was lifted and the procedure remains in the courts. It is not currently possible to evaluate the amount involved in this lawsuit.
Tax proceedings.
For information on legal proceedings related to tax matters, see Note 17 to our Consolidated Financial Statements.
Dividend information and shareholders’ return
Dividend background
The table below sets forth the annual cash dividends declared per share and the year to which such dividends correspond. Generally, the dividend for a given year is paid in two tranches, one in the second-half of the relevant year and the other during the first half of the following year.
| | | |
| | | (euro) | |
| 2009(1) | | | 1.15 | |
| 2008 | | | 1.00 | |
| 2007 | | | 0.75 | |
| 2006 | | | 0.60 | |
| 2005(2) | | | 0.52 | |
| (1) | On January 28, 2009, our Board of Directors approved a proposal to increase the dividend for 2009 to a total amount of €1.15 per share, to be payable in two tranches. In accordance with this, a cash dividend of €0.50 per share was paid on November 11, 2009, charged against unrestricted reserves. In addition, the appropriate corporate resolutions will be passed during 2010 to complete the committed dividend payment for 2009. |
| (2) | This amount includes a cash dividend of €0.27 per share paid on November 11, 2005 and charged against share premium. Additionally, there was a distribution on June 2005 of our treasury stock among our shareholders in the proportion of one share for every 25 shares held, also charged against share premium. |
At our Seventh Investor Conference held on October 10, 2009, in Madrid, we announced a proposal to distribute a dividend of €1.40 per share for 2010. This dividend will be payable in two tranches. Additionally, we announced that we had set as a target to increase, up to a minimum of €1.75 per share, the dividend for 2012.
Payments of any future dividends will be dependent on our results of operations, liquidity and capital resources and market conditions at the time, all of which may be influenced by a variety of factors. See “Cautionary Statement Regarding Forward-Looking Statements”.
Treasury shares and share buyback program
We held the following Telefónica, S.A. shares as treasury shares at the dates indicated:
| | | | | | Acquisition price (euro per share) | | | Trading price (1) (euro per share) | | | Market value(2) (in millions of euros) | | | Percentage of our capital stock (3) | |
| Treasury shares at December 31, 2009 | | | 6,329,530 | | | | 16.81 | | | | 19.52 | | | | 124 | | | | 0.13868 | % |
| Treasury shares at December 31, 2008 | | | 125,561,011 | | | | 16.68 | | | | 15.85 | | | | 1,990 | | | | 2.66867 | % |
| Treasury shares at December 31, 2007 | | | 64,471,368 | | | | 16.67 | | | | 22.22 | | | | 1,433 | | | | 1.35061 | % |
| (1) | Closing price of our shares on the Automated Quotation System of the Spanish stock exchange at the indicated dates. |
| (2) | Market value is calculated as trading price times number of shares held on treasury at the indicated dates. |
| (3) | Calculated using capital stock at each date. |
Telefónica S.A. is the only Group company which owns any Telefónica, S.A. shares.
The following transactions involving treasury shares were carried out in 2008 and 2009:
| | | | |
| Treasury shares at December 31, 2009 | | | 6,329,530 | |
| Acquisitions | | | 65,809,222 | |
| Share exchange of Telefónica, S.A. shares for China Unicom shares | | | (40,730,735 | ) |
| Performance Share Plan | | | (3,309,968 | ) |
| Share cancellation | | | (141,000,000 | ) |
| Treasury shares at December 31, 2008 | | | 125,561,011 | |
| Acquisitions | | | 129,658,402 | |
| Disposals | | | (68,759 | ) |
| Share cancellation | | | (68,500,000 | ) |
| Treasury shares at December 31, 2007 | | | 64,471,368 | |
The amount paid to acquire Telefónica, S.A. shares in 2009 was €1,005 million (€2,225 million in 2008).
At December 31, 2009, we held call options on 150 million Telefónica, S.A. shares. At December 31, 2008, we held put options on 6 million Telefónica, S.A. shares.
On February 27, 2008, and within our shareholder remuneration policy, our Board of Directors announced the launching of a new 2008 share buyback program for a total amount of 100 million Telefónica, S.A. shares. On October 13, 2008, we announced an increase in the program size by 50%, implying the acquisition of 50 million shares in addition to the 100 million shares already bought since the beginning of 2008. At March 31, 2009, we completed the second tranche of the program. Therefore the share buyback program for a total amount of 150 million shares was concluded.
In accordance with our commitment to cancel the shares purchased as part of share buyback programs, our annual general shareholders’ meeting held on April 22, 2008, approved the reduction of our share capital by €68,500,000, by cancelling 68,500,000 shares of treasury stock. This capital reduction was completed in July 2008.
Further, our annual general shareholders’ meeting held on June 23, 2009 approved the reduction of our share capital by the amount of €141,000,000 by means of the cancellation of 141,000,000 shares of our treasury stock. This capital reduction was completed in December 2009. This capital reduction required us to amend Article 5 of our bylaws, relating to share capital, which as of the date of this Annual Report stands at €4,563,996,485, made up of an equal number of ordinary shares, all of a single series and with a nominal value of €1.00 per share, totally paid in.
General
Our ordinary shares, nominal value €1.00 each, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges and are quoted through the Automated Quotation System under the symbol “TEF”. They are also listed on various foreign exchanges such as the London, Buenos Aires and Tokyo stock exchanges. Our BDRs 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 our shares on the Madrid Stock Exchange, which is the principal Spanish market for our shares, and our ADSs on the New York Stock Exchange:
| | | | | | | |
| | | | | | | | | | | | | |
| Year ended December 31, 2005 | | | 14.560 | | | | 12.320 | | | | 56.63 | | | | 43.41 | |
| Year ended December 31, 2006 | | | 16.400 | | | | 11.920 | | | | 64.91 | | | | 44.34 | |
| Year ended December 31, 2007 | | | 23.260 | | | | 15.200 | | | | 103.11 | | | | 60.44 | |
| Year ended December 31, 2008 | | | 22.780 | | | | 12.730 | | | | 101.92 | | | | 47.65 | |
| Year ended December 31, 2009 | | | 19.750 | | | | 13.690 | | | | 89.08 | | | | 51.73 | |
| Quarter ended March 31, 2008 | | | 22.780 | | | | 17.890 | | | | 101.92 | | | | 82.18 | |
| Quarter ended June 30, 2008 | | | 19.540 | | | | 16.760 | | | | 91.87 | | | | 78.79 | |
| Quarter ended September 30, 2008 | | | 17.950 | | | | 15.990 | | | | 83.26 | | | | 72.02 | |
| Quarter ended December 31, 2008 | | | 17.350 | | | | 12.730 | | | | 72.74 | | | | 47.65 | |
| Quarter ended March 31, 2009 | | | 16.420 | | | | 13.690 | | | | 68.09 | | | | 51.73 | |
| Quarter ended June 30, 2009 | | | 16.250 | | | | 14.410 | | | | 68.66 | | | | 56.29 | |
| Quarter ended September 30, 2009 | | | 19.060 | | | | 15.605 | | | | 84.03 | | | | 65.37 | |
| Quarter ended December 31, 2009 | | | 19.750 | | | | 18.480 | | | | 89.08 | | | | 80.63 | |
| Month ended September 30, 2009 | | | 19.060 | | | | 17.210 | | | | 84.03 | | | | 73.58 | |
| Month ended October 31, 2009 | | | 19.340 | | | | 18.480 | | | | 86.81 | | | | 80.63 | |
| Month ended November 30, 2009 | | | 19.650 | | | | 18.755 | | | | 88.51 | | | | 83.33 | |
| Month ended December 31, 2009 | | | 19.750 | | | | 19.040 | | | | 89.08 | | | | 82.13 | |
| Month ended January 31, 2010 | | | 19.820 | | | | 17.275 | | | | 85.65 | | | | 71.60 | |
| Month ended February 28, 2010 | | | 17.500 | | | | 16.440 | | | | 73.01 | | | | 67.58 | |
| Month ended March 31, 2010 (through March 23, 2010) | | 18.065 | | | 17.470 | | | 73.99 | | | 70.87 | |
Source: Madrid Stock Exchange Information and Bloomberg.
On March 23, 2010, the closing price of our shares on the Automated Quotation System of the Spanish stock exchanges was €17.750 per share, equal to $24.02 at the Noon Buying Rate on March 19, 2010 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 ADSs in form of certificated ADSs (American Depositary Receipts, or ADRs) or uncertificated ADSs pursuant to the deposit agreement dated as of November 13, 1996, as amended as of December 3, 1999 and as further amended as of June 23, 2000 and as of March 9, 2007 among Telefónica, the Depositary and the holders from time to time of ADSs (the “Deposit Agreement”). Each ADS represents the right to receive three shares.
At December 31, 2009, approximately 171,523,317 of our shares were held in the form of ADSs by 917 holders of record, including Cede & Co., the nominee of The Depository Trust Company. The number of ADSs outstanding was 57,174,439 at December 31, 2009.
Spanish Securities Market Legislation
The Spanish Securities Markets Act (Ley del Mercado de Valores, or the LMV), enacted in 1988 and further amended, regulates the primary and secondary securities markets in Spain by establishing principles for their
organization and operation, rules governing the activities of persons and institutions operating in these markets and a system for their supervision. This legislation and the regulation implementing it (mainly, as far as private issuers are concerned, Royal Decree 1310/2005, of November 4, in relation to the issuance of securities and its admission to listing in official secondary markets, and Royal Decree 1362/2007, of October 19, concerning the transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market):
| · | establishes an independent regulatory authority, the CNMV, to supervise the securities markets; |
| · | establishes the rules for surveillance, supervision and sanction provided for the representation of transferable securities by book entries or by certificate; |
| · | establishes a framework for the issuance of securities; |
| · | establishes a framework for trading activities; |
| · | establishes the disclosure obligations of issuers, particularly the obligation to file annual audited financial statements and to make public quarterly financial information; |
| · | establishes the framework for tender offers; |
| · | establishes the code of conduct for all market participants; and |
| · | regulates market abuse infringements. |
On March 11, 2005 Royal Decree Law 5/2005 was approved, modifying the LMV in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of the prospectuses in order to grant to the issuer a single passport for such document, valid throughout the European Union; (ii) incorporates the application of the country of origin principle by which the prospectus will be approved by the Member States of the European Union where the issuer has its registered office but it also introduces as a new matter the possibility that in certain circumstances, such as issues with high minimum denominations (€1,000 or more), the issuer may designate the relevant European Union competent authority for prospectus approval.
Subsequently, Royal Decree 1310/2005 partially developed the LMV in relation to the admission to trading of securities in the official secondary markets, the sales or subscription public offers and the prospectus required to those effects.
Royal Decree 1333/2005 developed the LMV in relation to market abuse, implementing Directive 2003/6/EC of the European Parliament and of the Council, relating insider dealing and market manipulation practices (“market abuse”).
On April 12, 2007 Law 6/2007 was approved, modifying the LMV in order to implement the Directive 2004/25/EC of the European Parliament and of the Council relating to public tender offers and the Directive 2004/109/EC relating to the transparency of issuers. Law 6/2007 intends: (i) to encourage an efficient market for corporate control, while protecting the rights of minority shareholders of listed companies and (ii) to enforce transparency in financial markets.
In relation to public tender offers, Law 6/2007 (i) establishes the cases in which a company must launch a takeover bid over the whole share capital of the relevant company; (ii) establishes that takeover bids shall be launched once a specific stake on the share capital of the company has been reached; (iii) adds new obligations for the board of directors of the target companies of the takeover bid in terms of defensive measures against the takeover bid; (iii) regulates the squeeze-out and sell-out procedure when a 90% of the share capital is held following a takeover bid. Royal Decree 1066/2007 completes the regulation currently in place for takeover bids in Spain.
Regarding transparency of issuers whose shares are accepted to trading on an official market, Law 6/2007 (i) modifies the reporting requirements of the periodic financial information of listed companies and issuers of listed
securities; (ii) establishes a new disclosure regime for significant shareholders; (iii) adds new information and disclosure requirements for issuers of listed securities; (iv) establishes a civil liability procedure of the issuer and board of directors in connection with the financial information disclosed by issuers of securities; and (v) confers new supervisory powers upon the CNMV with respect to the review of accounting information.
On December 19, 2007 Law 47/2007 was approved, modifying the LMV in order to implement the Directive 2004/39/EC of the European Parliament and of the Council, on Markets in Financial Instruments (MiFID); the Directive 2006/73/EC of the European Parliament and of the Council on organizational requirements and operating conditions regarding the Market in Financial Instruments Directive, and the Directive 2006/49/EC of the European Parliament and of the Council on the capital adequacy of investment firms and credit institutions. Its principal aim is to establish a general legal framework for financial markets in the European Union, in particular with regard to financial services, as well as to ensure appropriate transparency for investors through a regular flow of the relevant information concerning security issuers. Amongst other things, the new regime (i) establishes new multilateral trading facilities for listing shares apart from the stock markets; (ii) reinforces the measures for the protection of investors; (iii) establishes new organizational requirements for investment firms; (iv) implements new supervisory powers for CNMV, establishing cooperation mechanisms amongst national supervisory authorities.
On July 4, 2009, Law 3/2009, regarding structural modifications on Spanish Corporations (Ley 3/2009, de 3 de abril, sobre modificaciones estructurales de las sociedades mercantiles) came into force, modifying the maximum threshold established in the Spanish Corporation Act as to the number of treasury shares held by listed companies and their subsidiaries from 5% up to 10% of their total capital outstanding.
Securities Trading in Spain
The Spanish securities market for equity securities consists of four stock exchanges located in Madrid, Bilbao, Barcelona and Valencia and the Automated Quotation System, or Mercado Continuo. During 2009, 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 allowed to become members of Spanish stock exchange and, therefore, can trade through 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. The regime concerning opening prices was changed by an internal rule issued by the Sociedad de Bolsas. The new regime sets forth that all references to maximum changes in share prices will be substituted by static and dynamic price ranges for each listed share, calculated on the basis of the most recent historical volatility of each share, and made publicly available and updated on a regular basis by the Sociedad de Bolsas. The computerized trading hours are from 9:00 a.m. to 5:30 p.m., during which time the trading price of a security is permitted to vary by up to the stated levels. If, during the open session, the quoted price of a share exceeds these static or dynamic price ranges, Volatility Auctions are triggered, resulting in new static or dynamic price ranges being set for the share object of the same. Between 5:30 p.m. and 5:35 p.m. a closing price is established for each security through an auction system similar to the one held for the pre-opening early in the morning.
Trading hours for block trades are also from 9:00 a.m. to 5:30 p.m. Between 5:30 p.m. and 8:00 p.m., certain 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 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 stock during the preceding three months; |
| · | the transaction derives from a merger or spin-off process, or from the reorganization of a group of companies; |
| · | the transaction is executed for the purposes of settling a litigation or completing a complex group of contracts; 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 the Boletín de Cotización and in the computer system by the beginning of the next trading day.
Please note that the regime set forth above may be subject to change, as article 36 of the LMV, which defines trades in Spanish Exchanges, has been recently revised, in virtue of Law 47/2007. Thus, the Spanish stock exchanges are currently reviewing their trading rules in light of this new regulation.
Clearance and settlement system
The Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores S.A.U., formerly Iberclear, was created by the Ley 44/2002 de Medidas de Reforma del Sistema Financiero, enacted on November 22, 2002 to increase the efficiency of the Spanish financial markets. Such law introduced a new article, 44-bis to the LMV which established the framework for the constitution of Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores S.A.U.
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. (Bolsas y Mercados Españoles), 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, an entidad participante) as well as the amount of such shares held on behalf of beneficial owners. Each member entity, in turn, maintains a registry of the owners of such shares. Spanish law considers the legal owner of the shares to be 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.
Not applicable.
Please see “—Offer and Listing Details” above.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Our bylaws (estatutos) have been amended as our share capital was reduced in December 2009. According to this amendment, article 5 was amended to reflect this change as follows:
1. The share capital is €4,563,996,485, represented by 4,563,996,485 ordinary shares in a single series and with a nominal value of one euro each, which have been fully paid up.
2. The shareholders acting at the general shareholders’ meeting may, subject to the requirements and within the limits established by law for such purpose, delegate to the Board of Directors the power to increase the share capital.
The following summary describes certain material considerations concerning our capital stock and briefly describes certain provisions of our bylaws and Spanish law.
Corporate Objectives
Article 4 of Title I of our bylaws sets forth our corporate purposes:
| | · | The provision and operation of all kinds of public or private telecommunications services and, for such purpose, the design, installation, maintenance, repair, improvement, acquisition, disposition, interconnection, management, administration of, and any other activity not included in the preceding enumeration with respect to, all kinds of telecommunications networks, lines, satellites, equipment, systems and technical infrastructure whether now existing or to be created in the future, including the premises in which any and all of the foregoing items are located; |
| | · | the provision and operation of all kinds of services that are ancillary or supplemental to or result from telecommunications services; |
| | · | the research and development, promotion and application of all kinds of component principles, equipment and systems directly or indirectly used for telecommunications; |
| | · | manufacturing and production activities and, in general, all other forms of industrial activity in connection with telecommunications; and |
| | · | acquisition, disposition and, in general, all other forms of commercial activity in connection with 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 or persons related to him or her has an interest in a transaction with us or with any of the companies of our Group, such transaction (if unrelated to the ordinary course of our business or if not performed on an arm’s length basis) must be presented to the Nominating, Compensation and Corporate Governance Committee. Such committee shall assess the transaction from the point of view of equal treatment of shareholders and the arm’s length basis of the transaction. The performance of such transactions require the authorization of our Board of Directors, after the favorable report of the committee. The interested director must refrain from participating in votes that affect such transaction.
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 Conthe Code published in May 2006, which contains corporate governance and shareholder disclosure recommendations. It combines and substitutes the former Spanish Corporate Governance Codes: the Olivencia Code of Good Governance and the Aldama Report. Spanish listed companies are 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 Conthe Code. 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. For a more detailed description regarding our corporate governance practices see “Item 16G. Corporate Governance”.
Description of Our Capital Stock
Description of share capital
At Mach 25, 2010, our issued share capital consisted of 4,563,996,485 ordinary registered shares with a nominal value of €1.00 each. Pursuant to the resolution adopted by our shareholders at their annual general meeting, in June 2009, the Board of Directors was authorized to execute a capital reduction by the amount of €141,000,000, by means of the cancellation of 141,000,000 Telefónica S.A. shares held as treasury shares. The Board of Directors on December 16, 2009 resolved to execute the capital reduction by the cancellation of Telefónica S.A. shares held as treasury shares thereby reducing our share capital by €141,000,000 to € 4,563,996,485, made up of an equal number of ordinary shares.
Our shareholders have delegated to the Board of Directors the authority to issue up to 2,460,565,198 new shares. The Board of Directors is authorized to exclude preemptive rights, in whole or in part, pursuant to the applicable provisions of the Spanish Corporation Law. The Board’s authorization to issue new shares expires on June 21, 2011.
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, S.A. 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) are entitled to attend a general shareholders’ meeting. Holders of shares representing a nominal value of less than €300 (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 our 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:
| | · | 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.
Dividends
Shareholders 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 our unconsolidated financial statements prepared in accordance with Spanish GAAP, which differ from the Consolidated Financial Statements prepared in accordance with IFRS included elsewhere in this Annual Report.
The Board of Directors can approve 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 us five years from their date of payment.
Registration and transfers
Our shares are in registered book-entry form. Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures carried out by the Spanish clearing institution. Transfers executed outside of stock exchange systems, that is, over the counter, are implemented pursuant to the general legal regime for book-entry transfer, including registration by the Spanish clearing institution.
There are no restrictions with respect to the transfer of our shares.
Liquidation rights
Under Spanish law, upon our liquidation, the shareholders would be entitled to receive, on a pro rata basis, any assets remaining after the payment of our debts and taxes and liquidation expenses.
Material Contracts Related to Our Investment in Telecom Italia
On April 28, 2007, we, together with a group of Italian investors (the “Italian Investors”), made up of Assicurazioni Generali S.p.A. (“Generali”), Sintonia S.A.(“Sintonia”), Intesa Sanpaolo S.p.A. (“Intesa Sanpaolo”) and Mediobanca S.p.A. (“Mediobanca”), entered into a co-investment agreement, or the Co-Investment Agreement, to establish the terms and conditions for our participation in what is now Telco. Through Telco, on October 23, 2007, we and the Italian Investors purchased the entire share capital of Olimpia S.p.A., or Olimpia, which held approximately 18% of the ordinary share capital of Telecom Italia. As of the date of this Annual Report, the Italian Investors hold a total of 57.7% of Telco’s share capital and we hold the remaining 42.3%.
In addition to Telco’s participation in Telecom Italia’s ordinary share capital through its interest in Olimpia, pursuant to the Co-Investment Agreement, on October 25, 2007 Generali and Mediobanca contributed to Telco ordinary shares of Telecom Italia they held on that date. These shares in the aggregate amounted to 5.6% of Telecom Italia’s ordinary share capital and brought Telco’s direct and indirect participation in Telecom Italia’s ordinary share capital to approximately 23.6%.
On April 28, 2007, the Italian Investors also entered into a shareholders’ agreement, or the Shareholders’ Agreement, which establishes, among other things, the principles of corporate governance of Telco and Olimpia, respectively, the principles related to the transfer of Telco’s shares and any Olimpia shares or Telecom Italia shares directly or indirectly owned by Telco and the principles of designation, among the parties, of candidates to be included in a common list for the appointment of directors of Telecom Italia under the voting list mechanism provided for by Telecom Italia’s by-laws.
On November 19, 2007 the parties to the Shareholders’ Agreement amended the Shareholders’ Agreement as well as the bylaws of Telco to include the specific limitations imposed by ANATEL as initially posted on its website on October 23, 2007 and subsequently published on November 5, 2007 as ANATEL’s “Ato” no. 68,276 dated October 31, 2007. We refer to such agreement as the Amendment to the Shareholders’ Agreement.
Pursuant to the Shareholders’ Agreement, we entered into an option agreement, or the Option Agreement, with Telco on November 6, 2007, which provides that, in the event that a decision to dispose, directly or indirectly, in any form or manner (including through measures with equivalent effect, such as mergers and demergers of Telco or Olimpia) or encumber Telecom Italia shares or Olimpia shares or any rights attached thereto, including but not limited to voting rights, is taken by the board of directors of Telco by a simple majority resolution according to the procedure specifically provided for by the Shareholders’ Agreement and we are a dissenting party, then we will have the right, to be exercised within 30 days of such decision being taken, to buy from Telco the Telecom Italia shares or the Olimpia shares, as the case may be, at the same price and conditions offered by the third party offering to acquire such Telecom Italia shares or Olimpia shares.
On December 10, 2007, an agreement was reached to merge Olimpia into Telco, as a result of which Telco’s entire stake in the voting shares of Telecom Italia (23.6%) became a direct stake. In March 2008, Telco acquired
121.5 million additional shares of Telecom Italia, equivalent to 0.9% of its share capital, bringing its total direct interest to 24.5% of Telecom Italia voting shares.
On October 28, 2009 Sintonia requested, pursuant to the Shareholders Agreement, the non-proportional de-merger of Telco, with the withdrawal of its pro rata share of the assets and liabilities of Telco (comprised of Telecom Italia shares held by Telco representing approximately 2.06% of Telecom Italia’s share capital). The terms of Sintonia’s exit were approved on November 26, 2009, and the transaction closed on December 22, 2009. Upon Sintonia’s exit, Telco’s interest in Telecom Italia was reduced to 22.4% of Telecom Italia’s share capital. At the same time, our stake in Telco increased from 42.3% to 46.18%, thereby allowing us to maintain our indirect interest in Telecom Italia at 10.49% of Telecom Italia’s voting rights (7.21% of the dividend rights).
On October 28, 2009 Telco investors, other than Sintonia, entered into an agreement, or the Renewal Agreement, through which they agreed (i) not to request the non-proportional de-merger of Telco with the withdrawal of their corresponding share of Telecom Italia shares held by Telco at that time (as was previously done by Sintonia) and (ii) to extend and modify the Shareholders Agreement, which we refer to as the “Renewal Agreement”, for an additional term of three years until April 27, 2013 (effective as of April 28, 2010) substantially on the same terms and conditions, except to provide (a) that the right of Telco’s investors to request the non-proportional de-merger of Telco will only be exercisable in the period between October 1, 2012 and October 28, 2012, and (b) for an early withdrawal right period exercisable between April 1, 2011 and April 28, 2011. On the same date and in connection with the Renewal Agreement, separately, we entered into an Amendment Deed to the Call Option Agreement with Telco (i) to extend the term of the Option Agreement to coincide with the expiration date of the Renewal Agreement and (ii) to exempt certain transactions regarding the Telecom Italia shares, namely those related to the exercise of de-merger and early withdrawal rights pursuant to the Renewal Agreement.
On January 11, 2010, Telco arranged a €1,300 million loan with Intesa Sanpaolo, Mediobanca, Société Générale, S.p.A. and Unicredito, S.p.A. maturing on May 31, 2012, part of which is secured with the Telecom Italia shares held by Telco. The lending banks have granted Telco shareholders, including ourselves, a call option on the Telecom Italia shares that they may be entitled to receive as a result of the potential execution of the pledge.
In line with the commitments assumed by Telco shareholders, on December 22, 2009, the rest of Telco’s financing needs with respect to debt maturities were met with a bridge loan granted by shareholders, including ourselves, Intesa Sanpaolo and Mediobanca for approximately €902 million, and a bank bridge loan granted by Intesa Sanpaolo and Mediobanca for the remaining €398 million.
The financing from the bridge loans described above was cancelled with the proceeds of a bond issuance subscribed by Telco’s shareholders, on a pro rata basis in accordance with their interests in Telco, on February 19, 2010 for an aggregate principal amount of €1,300 million. Our subscription amounted to an aggregate principal amount of €600 million.
Material Contract Related to Our Investment in China Unicom
On September 6, 2009, Telefónica and China Unicom entered into a subscription agreement, or the Subscription Agreement, pursuant to which each party conditionally agreed to invest the equivalent of $1 billion in the other party through the acquisition of shares in the other party. Moreover, both parties entered into a strategic alliance agreement which provides for, among other areas for cooperation, joint procurement of infrastructure and client equipment, common development of mobile service platforms, joint provisions of service to multinational customers, roaming, research and development, sharing of best practices and technical, operational and management know-how, joint development of strategic initiatives in the area of network evolution, joint participation in international alliances and exchanges of senior management.
On October 21, 2009, the mutual share exchange pursuant to the Subscription Agreement was implemented through the subscription by Telefónica Internacional of 693,912,264 newly issued shares of China Unicom and a contribution in kind to China Unicom of 40,730,735 shares of Telefónica.
Following the completion of the transaction, we increased our share of China Unicom’s voting share capital from 5.38% to 8.06% and obtained the right to appoint a member to its board of directors, while China Unicom
became owner of approximately 0.87% of our voting share capital at that date. Subsequently, after a capital reduction carried out by China Unicom, we reached a shareholding equivalent to 8.37% of the company’s voting share capital.
Under the Subscription Agreement, we agreed with China Unicom that for a period of one year from completion of the acquisition of the mutual share exchange, we shall not, directly or indirectly, sell, transfer or dispose of any of the China Unicom shares held, directly or indirectly, by us or any of our subsidiaries (save for the transfer of such shares to any member of the Telefónica group). China Unicom has made an analogous undertaking with respect to its participation in our share capital.
In addition, subject to Telefónica or any of its subsidiaries holding in aggregate, directly or indirectly, not less than 5% of the issued share capital of China Unicom from time to time and to the extent not prohibited under applicable law, the articles of association of China Unicom and the Hong Kong Listing Rules, we shall be entitled to nominate one representative to the Board of Directors of China Unicom.
Finally, with effect from completion, and for so long as the strategic alliance agreement is in effect, China Unicom shall not (i) offer, issue or sell any significant number of its ordinary shares (including those held in treasury by the company itself, if any), or any securities convertible into or other rights to subscribe for or purchase a significant number of China Unicom’s ordinary shares (including those held in treasury by the company itself, if any), to any of our current major competitors or (ii) make any significant investment, directly or indirectly, in any of our current major competitors. We have made similar undertakings.
The strategic alliance agreement between the parties terminates on the third anniversary and automatically renews thereafter for one year terms, subject to either party’s right to terminate on six month’s notice. Also, the strategic alliance agreement may be terminated by China Unicom if we sell our shares in China Unicom causing it to own less than 5% of the issued share capital of China Unicom or by us if China Unicom sells our shares and ceases to own at least 0.5% of our issued share capital. In addition, the strategic alliance agreement is subject to termination in the event either party is in default and automatically terminates on a change in control of China Unicom.
Exchange Controls and Other Limitations Affecting Security Holders
Ownership limitations
There are no limitations with respect to the ownership of our assets or share capital except those derived from the application of the reciprocity principle as described above.
Trading by us in our own shares or shares of companies under our 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 our Group. These transactions may include purchases of shares of group members, forward contracts with respect to these shares and other similar transactions.
At December 31, 2008, we held 125,561,011 shares of treasury stock, representing 2.66867% of our capital stock. At December 31, 2009, we held 6,329,530 shares of treasury stock, representing 0.13868% of our capital stock. As a part of our shareholders’ remuneration policy, we have implemented various share buyback programs since 2003. For further description about our shareholders’ return, see “Item 8. Financial Information—Dividend Information and Share Buyback Programs”.
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 our shareholders and, in the case 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 us and have no voting rights while held by our subsidiaries; |
| | · | the purchaser must create reserves equal to the purchase price of any shares that are purchased and, if a subsidiary is the acquirer, the reserve must also be recorded by the parent company; and |
| | · | the total number of shares held by us and our subsidiaries may not exceed 10% of our total capital. |
Any acquisition of our shares exceeding, or that causes us and our subsidiaries’ holdings to exceed, 1% of our voting rights must be reported to the CNMV.
At our annual general shareholders meeting held on June 23, 2009, our shareholders extended their prior authorization to the Board of Directors to acquire our shares 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 our shares held by us or any of our subsidiaries cannot exceed the limit established by applicable laws (which is, as of the date of this Annual Report, 10% of our outstanding capital).
Other restrictions on acquisitions of shares
A person or group of persons that directly or indirectly exercises beneficial ownership or control of 3% or more of the voting rights, or which increases or decreases the number of shares which it owns or controls to an amount which equals or exceeds 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% and 90% of such voting rights, must inform us and the CNMV of such ownership.
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. A person or group that is a member of our Board of Directors or a member of our Executive Commission must report any acquisition or transfer of our capital stock, regardless of the amount of shares acquired or transferred.
For reporting requirements concerning acquisitions by us or our affiliates of our shares, see “—Trading by us in our own shares or shares of companies under our control” above.
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 receive pro rata any assets remaining after the payment of our debts and taxes and expenses of such 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 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:
| | · | 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 prices lower 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.
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 of the date hereof 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 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,
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 all of the 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, 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 American depositary receipts are released before shares are delivered to the depositary (“pre-release”), or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary receipts. 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, each as described below, could be affected by actions taken by such parties or intermediaries.
For purposes of the Treaty and U.S. federal income tax, U.S. Holders of ADSs will generally be treated as owners of the underlying shares represented by such ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those 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 Telefónica to U.S. Holders of ordinary shares or ADSs are subject to Spanish Non-Resident Income Tax, withheld at source, currently at an 19% tax rate. For these purposes, upon distribution of the dividend, Telefónica or its paying agent will withhold an amount equal to the tax due according to the rules set forth above (i.e., applying the general withholding tax rate of 19%).
However, under the Treaty, if you are a U.S. Holder, you are entitled to a reduced withholding tax rate of 15%.
To benefit from the Treaty-reduced rate of 15%, you must provide to Telefónica through its paying agent in Spain, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S. Internal Revenue Service (“IRS”) stating that, to the best knowledge of the IRS, such U.S. Holders are residents of the United States within the meaning of the Treaty and entitled to its benefits.
If the certificate referred to in the above paragraph is not provided within said term, you may afterwards obtain a refund of the amount withheld in excess of the rate provided for in the Treaty.
Spanish Refund Procedure
According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Holder, you are required to file:
| | · | the corresponding Spanish tax form, |
| | · | the certificate referred to in the preceding section, and |
| | · | evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you. |
The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities.
U.S. Holders are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.
Additionally, under Spanish law, the first €1,500 of dividends obtained by individuals who are not resident in Spain for tax purposes, and do not operate through a permanent establishment in Spain, will be exempt from taxation in certain circumstances. U.S. Holders should consult their tax advisors to determine whether this exemption is available.
Taxation of capital gains
As of January 1, 2010, the rate applicable to 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 is 19% under Spanish law.
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 a certificate of residence issued by 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 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. As of January 1, 2008 a 100% tax allowance has been approved by Law 4/2008 dated December 23, 2008, to any resident or non resident tax payer.
Inheritance and gift tax
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 relevant personal, family and wealth factors ranges from between 7.65% and 81.6% for individuals. While inheritance and gift taxes are generally state taxes, certain autonomous communities have the right to establish their own tax rates and deductions and to control the management and settlement of such taxes.
Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at an 19% tax rate on the fair market value of the shares as a capital gain. If the donee is a United States resident corporation, the exclusions available under the Treaty described in the section “—Taxation of Capital Gains” above will be applicable.
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 certain pro 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). Because Telefónica does not maintain calculations of its earnings and profits under U.S. federal income tax principles it is expected that distributions generally will be reported to U.S. Holders as dividends. 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 the dividend is converted to U.S. dollars on the date of receipt, a U.S. holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its 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, 2011 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.
Certain pro rata distributions of shares to all shareholders (including ADS holders) are not generally subject to tax.
Spanish income 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. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. See “Spanish Tax Considerations—Taxation of dividends” above for a discussion of how to obtain the applicable treaty rate. Instead of claiming a credit, a U.S. Holder may elect to deduct foreign taxes (including the Spanish taxes) in computing its taxable income, subject to generally applicable limitations. An election to deduct foreign taxes (instead of claiming foreign tax credits) applies to all taxes paid or accrued in the taxable year to foreign countries and possessions o the United States. The limitations on 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, 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 will be exempt from Spanish tax on capital gains under the Treaty. If a U.S. Holder is eligible for the exemption from Spanish tax on capital gains but does not follow appropriate procedures for obtaining the exemption, such holder will not be entitled to credit the amount of Spanish tax on capital gains paid against its U.S. Federal income tax liability. 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 2009 taxable year. However, because 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 were 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 resulting tax liability. The same treatment would apply to any distribution in respect of shares or ADSs to the extent it exceeds 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. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the shares or ADSs.
In addition, if Telefónica were treated as a PFIC in a taxable year in which it pays a dividend or in 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 it is not subject to backup withholding. 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 timely furnished to the IRS.
Not Applicable.
Not Applicable.
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 of our SEC filings are also available at the website maintained by the SEC at “http://www.sec.gov”.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF”. You may inspect any periodic reports and other information filed with 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.
Not applicable.
We are exposed to various financial market risks as a result of: (i) our ordinary business activity, (ii) debt incurred to finance our business, (iii) our investments in companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting us are as follows:
| | · | Exchange rate risk arises primarily from (i) our international presence, through our investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom and the Czech Republic), and (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt. |
| | · | Interest rate risk arises primarily from changes in interest rates affecting (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. |
| | · | Share price risk arises primarily from changes in the value of our equity investments that may be bought, sold or otherwise involved in transactions, from changes in the value of derivatives associated with such investments, from changes in the value of our treasury shares and from equity derivatives. |
We are also exposed to liquidity risk if a mismatch arises between our financing needs (including operating and financial expense, investment, debt redemptions and dividend commitments) and our sources of finance (including revenues, divestments, credit lines from financial institutions and capital market transactions). The cost of financing could also be affected by movements in credit spreads (over benchmark rates) demanded by lenders.
Finally, we are exposed to “country risk” (which overlaps with market and liquidity risks). This refers to the possible decline in the value of 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 we operate, especially in Latin America.
We seek to actively manage these risks through the use of derivatives (primarily on exchange rates, interest rates and share prices) and by incurring debt in local currencies, where appropriate, with a view to stabilizing cash flows, our income statement and, to a lesser extent, part of the value of our investments. In this way, we attempt to protect our solvency, facilitate financial planning and take advantage of investment opportunities.
We manage our exchange rate risk and interest rate risk in terms of net debt and net financial debt as calculated by us. We believe that these parameters are more appropriate to understanding our debt position. Net debt and net financial debt take into account the impact of our cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net debt nor net financial debt as calculated by us should be considered an alternative to gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of our liquidity. For a more detailed description on reconciliation of net debt and net financial debt to gross financial debt, see “Item 5. Operating and Financial Review and Prospects—Presentation of Financial Information—Non-GAAP financial information—Net financial debt and net debt”.
For a more detailed description on quantitative and qualitative disclosures about market risks see Note 16 to our Consolidated Financial Statements.
The Depositary of our ADR program is Citibank, N.A., and the address of its principal executive office is 388 Greenwich Street, 14th Floor, New York, New York 10013.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF”. Each ADS represents the right to receive three shares of capital stock of €1.00 nominal value each, of Telefónica, S.A. The Depositary issues ADSs in form of certificated ADSs (American Depositary Receipts, or ADRs) or uncertificated ADSs pursuant to the Deposit Agreement.
Under the terms of the Deposit Agreement, as of the date of this Annual Report, an ADS holder may have to pay the following services fees to the Depositary.
| | | | Associated Fee / By Whom Paid |
| (a) Depositing or substituting the underlying shares | | Issuance of ADSs upon the deposit of shares | | Up to U.S.$5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)(1) |
| | | | | |
| (b) Receiving or distributing dividends | | Distribution of cash dividends or other cash distributions; distribution of share dividends or other free share distributions; distribution of securities other than ADSs or rights to purchase additional ADSs | | Up to U.S.$5.00 for each 100 ADSs (or portion thereof) held (in the case of cash distributions, deducted from the relevant distribution; in the case of all other distributions, billed to the relevant holder)(2) |
| | | | | |
| (c) Selling or exercising rights | | Distribution or sale of securities | | Up to U.S.$5.00 for each 100 ADSs (or portion thereof) held (billed to the relevant holder) |
| | | | | |
| (d) Withdrawing an underlying security | | Acceptance of ADSs surrendered for withdrawal of deposited securities | | Up to U.S.$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)(1) |
| | | | | |
| | | | Associated Fee / By Whom Paid |
| (e) Transferring, splitting or grouping receipts | | Transfers | | Up to U.S.$1.50 per ADS so presented (charged to person presenting certificate for transfer) |
| | | | | |
| (f) General depositary services, particularly those charged on an annual basis | | Other services performed by the Depositary in administering the ADSs | | Up to U.S.$5.00 for each 100 ADSs (or portion thereof) held on the applicable record date (billed to person holding ADSs on applicable record date established by the Depositary)(2) |
| | | | | |
| (g) Expenses of the Depositary | | Certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges in connection with: · compliance with foreign exchange control regulations or any law or regulation relating to foreign investment; · the Depositary or its custodian’s compliance with applicable law, rule or regulation; · stock transfer or other taxes and other governmental charges; · cable, telex, facsimile transmission/delivery; · expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency); · any other charge payable by Depositary or its agents. | | Expenses payable at the sole discretion of the Depositary (billed or deducted from cash distributions to person holding ADSs on applicable record date established by the Depositary) |
| (1) | In the case of ADSs issued by the Depositary into The Depository Trust Company (“DTC”) or presented to the Depositary via DTC, the ADS issuance and cancellation fees will be payable to the Depositary by DTC Participant(s) receiving the ADSs from the Depositary or the DTC Participant(s) surrendering the ADSs to the Depositary for cancellation, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC Participant(s) to the account(s) of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participant(s) as in effect at the time. |
| (2) | For ADSs held through DTC, the Depositary fees for distributions other than cash and the Depositary service fee are charged by the Depositary to the DTC Participants in accordance with the procedures and practices prescribed by DTC from time to time and the DTC Participants in turn charge the amount of such fees to the beneficial owners for whom they hold ADSs. |
The Depositary has agreed to reimburse or pay on behalf of Telefónica, S.A, certain reasonable expenses related to our ADS program and incurred by us in connection with the program (such as NYSE listing fees, legal and accounting fees incurred with preparation of Form 20-F and on going SEC compliance and listing requirements, distribution of proxy materials, investor relations expenses, etc). The Depositary has covered all such expenses incurred by us during 2009 for an amount of $2,283,245. The amounts the Depositary reimbursed or paid are not perforce related to the fees collected by the depositary from ADS holders.
As part of its service to us, the Depositary has agreed to waive fees for the standard costs associated with the administration of our ADS program, associated operating expenses and investor relations advice estimated to total $125,000.
None.
Not applicable.
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 Rule 13a-15(e) under the Securities Exchange Act of 1934) 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.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Telefónica is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a–15(f) under the Securities Exchange Act of 1934. Telefónica’s internal control system is designed to provide reasonable assurance as to the reliability of financial reporting and the preparation of the published financial statements under generally accepted accounting principles.
Any internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls and procedures, which may not prevent or detect misstatements.
Telefónica management assessed the effectiveness of Telefónica’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on its assessment and those criteria, Telefónica management believes that, at December 31, 2009 Telefónica’s internal control over financial reporting is effective.
Report of the Independent Registered Public Accounting Firm
Telefónica’s independent registered public accounting firm, Ernst & Young S.L., has issued a report on the effectiveness of the company’s internal control over financial reporting. The report is included on page F-1.1.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our Board of Directors has determined that Mr. Antonio Massanell Lavilla meets the requirements of an “audit committee financial expert” as defined by the SEC.
In December 2006, we adopted a code of business conduct and ethics, the Telefónica Business Principles, which apply to all Telefónica Group employees. In March 2008, we decided to modify such Business Principles in order to gather in them all components of the code of ethics definition in Section 406 of Sarbanes-Oxley Act, and consequently our code of ethics for senior officers was replaced by the Telefónica Business Principles. A copy of the Telefónica Business Principles is filed as an Exhibit to this Annual Report. For more information, please see “Item 16G. Corporate Governance—Code of Ethics.”
The expenses accrued in respect of the fees for services rendered in 2008 and 2009 of various member firms of the Ernst & Young international organization, to which Ernst & Young, S.L. (the auditors of the Telefónica Group) belongs, amounted to €24.45 million and €24.07 million, respectively.
The detail of these amounts is as follows:
| | | | |
| | | | | | | |
| | | (in millions of euros) | |
| Audit services (1) | | | 22.79 | | | | 22.62 | |
| Audit-related services (2) | | | 1.65 | | | | 1.40 | |
| Tax services (3) | | | — | | | | 0.01 | |
| All other services (4) | | | 0.01 | | | | 0.04 | |
| Total Fees | | | 24.45 | | | | 24.07 | |
| (1) | Audit services: services included under this heading are mainly the audit of the annual and review of the interim financial statements, work to comply with the requirements of the Sarbanes-Oxley Act (Section 404) and the review of our annual report on Form 20-F. |
| (2) | Audit-related services: services included under this heading are mainly related to the review of the information required by regulatory authorities, agreed financial reporting procedures not requested by legal or regulatory bodies and the review of corporate responsibility reports. |
| (3) | Tax services: services included under this heading are related to a tax compliance. |
| (4) | All other services: services included under this heading relate to training. |
The above includes expenses accrued in respect of certain fees of fully and proportionately consolidated Telefónica Group companies. A total of €1.39 million and €1.17 million corresponding to 50% of the expenses accrued in respect of the fees of proportionally consolidated companies were included in 2008 and 2009, respectively.
The Audit and Control Committee’s Pre-Approval Policies and Procedures
The engagement of any service rendered by our external auditor or any of its affiliates must always have the prior approval of our Audit and Control Committee. Such Committee has developed a Pre-approval Policy regarding the engagement of professional services by our external auditor, in accordance with the Spanish Audit Law and the Sarbanes-Oxley Act. This Policy establishes the obligation to obtain prior approval from our Audit and Control Committee for any service to be rendered by our external auditor to Telefónica or any of its subsidiaries.
This Policy sets forth restrictions on engaging our external auditor for the performance of non-audit services, according to which the engagement of our external auditor for the provision of such services is only permitted when there is no other firm available to provide the needed services at a comparable cost and with a similar level of quality. Moreover, this Policy prohibits the engagement of our external auditor for the provision of certain type of services that would be considered as “prohibited services”.
In addition, the Audit and Control Committee oversees the total amount of fees paid to our external auditor for the provision of non-audit services in order to assure that such fees do not exceed a certain percentage of the total amount of fees paid for the provision of audit services.
Not applicable.
| | | Year ended December 31, 2009 | |
| | Total Number of Shares Purchased | | | Average Price Paid per Share (euros) | | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1)(2) | |
| January 1 to January 31 | | | 12,059,322 | | | | 14.69 | | | | 12,059,322 | |
| February 1 to February 28 | | | 2,000,000 | | | | 14.24 | | | | 2,000,000 | |
| March 1 to March 31 | | | 8,375,000 | | | | 14.69 | | | | 8,375,000 | |
| April 1 to April 30 | | | 2,550,000 | | | | 14.84 | | | | — | |
| May 1 to May 31 | | | 1,000,000 | | | | 14.88 | | | | — | |
| June 1 to June 30 | | | 6,825,000 | | | | 15.60 | | | | — | |
| July 1 to July 31 | | | 12,300,000 | | | | 10.52 | | | | — | |
| August 1 to August 31 | | | 1,600,000 | | | | 17.08 | | | | — | |
| September 1 to September 30 | | | 7,400,000 | | | | 18.69 | | | | — | |
| October 1 to October 31 | | | 8,499,900 | | | | 18.95 | | | | — | |
| November 1 to November 30 | | | 1,250,000 | | | | 18.84 | | | | 1,250,000 | |
| December 1 to December 31 | | | 1,950,000 | | | | 19.46 | | | | 1,106,597 | |
| Total | | | 65,809,222 | | | | 16.04 | | | | 24,790,919 | |
| (1) | The number of shares of treasury stock at December 31, 2009 amounted to 6,329,530 (125,561,011 at December 31, 2008). |
| (2) | As part of our shareholder remuneration policy, in 2008, we announced plans to buy back up to 150 million of our shares, which we concluded in the first quarter of 2009. For a further description of our share buyback programs, see “Item 8. Financial Information—Dividend Information and Share Buyback Programs”. We managed the share price risk of our share buyback programs by setting the timetable for execution in accordance with the pace of cash flow generation, the share price and other market conditions, and subject to any applicable limitations established by law, regulations or our bylaws. |
In addition, a maximum of 2,356,597 shares could be assigned for the fourth phase (Start Date: July 1, 2009) of the Performance Share Plan.
For a more detailed description of our plans or programs, see “Item 8. Financial Information—Dividend Information and Share Buyback Programs” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Share Price Risk”.
During the years ended December 31, 2008 and 2009 and through the date of this Annual Report, the principal independent accountant engaged to audit our financial statements, Ernst & Young S.L., has not resigned, indicated that it has declined to stand for re-election after the completion of its current audit or been dismissed. For each of the years ended December 31, 2008 and 2009, Ernst & Young S.L. has not expressed reliance on another accountant or accounting firm in its report on our audited annual accounts for such periods.
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 Conthe Code published in May 2006, which contains corporate governance and shareholder disclosure recommendations. It combines and substitutes the former Spanish Corporate Governance Codes: the Olivencia Code of Good Governance and the Aldama Report. Spanish listed companies are 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 Conthe Code. 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 on our website at www.telefonica.com. None of the information contained on our website is incorporated in this Annual Report.
Committees
We have had an Audit and Control Committee since 1997. Our Audit and Control Committee is composed of four non-executive directors, all of whom are deemed Rule 10A-3 independent by our Board of Directors. The Committee’s functions and duties are similar to those required by the New York Stock Exchange. The Audit and Control Committee shall consist of not less than three nor more than five directors appointed by our Board of Directors. All Committee members shall be external directors. When appointing such members, our Board of Directors shall take into account the appointees’ knowledge and experience in matters of accounting, auditing and risk management.
We have had a Nominating, Compensation and Corporate Governance Committee since 1997, which is composed of five external directors. The functions, composition and competencies of this Committee are regulated by the Board of Directors’ Regulations and are very similar to those required by the NYSE. The Nominating, Compensation and Corporate Governance Committee shall consist of not less than three nor more than five directors appointed by the Board of Directors. All members of the Committee must be external directors and the majority thereof must be independent (The Chairman of the Nominating, Compensation and Corporate Governance Committee, who shall in all events be an independent director, shall be appointed from among its members).
Additionally we have a Human Resources and Corporate Reputation and Responsibility Committee, a Regulation Committee, a Service Quality and Customer Service Committee, an International Affairs Committee, an Innovation Committee and a Strategy Committee. The functions, composition and competencies are regulated by the Board of Directors’ Regulations.
Independence of the Board
As of the date of this Annual Report, we have 17 directors, out of which eight have been deemed independent by our Board of Directors attending to the director’s classification contained in the Conthe Corporate Governance Code. A significant majority of our current directors, 14, are non-executive directors. We, in accordance with the Conthe Code, assess the independence of our directors. Among other things, independent directors: (i) shall not be, past employees or executive directors of any of the Group companies, unless three or five years have elapsed, respectively, (ii) shall not receive any payment or other form of compensation from us or our group on top of their directors’ fees, unless the amount involved is not significant, (iii) shall not be partners, now or on the past three years, in the external auditor or in the firm responsible for the audit report, (iv) shall not be executive directors or senior officers of another company where one of our executive directors or senior officers is an external director, (v) shall not have material business dealings with us or any other company in our group, (vi) shall not be spouses, nor partners maintaining an analogous affective relationship, nor close relative of any of our executive directors or senior officers and (vii) shall not stand in any of the situations listed in (i), (v) or (vi) above in relation to a significant shareholder or a shareholder with board representation.
The classification of each director shall be explained by the Board of Directors to the shareholders at the general shareholders’ meeting at which the appointment thereof must be made or ratified. Furthermore, such classification shall be reviewed annually by our Board of Directors after verification by the Nominating, Compensation and Corporate Governance Committee, and reported in the Annual Corporate Governance Report.
Internal Audit Function
We have an Internal Audit Department responsible for internal audit matters and for ensuring the efficiency of the internal audit control process of our different units. This 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 Telefónica 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. Nevertheless, every committee of the Board of Directors is composed exclusively of non-executive directors (other than the Innovation Committee, which includes Julio Linares, one of our executive directors), thus giving each of these committees, the chance to analyze and discuss any matter related to our management, within its respective area of responsibility.
Whistleblowing
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 Telefónica 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. In 2004 we adopted, as required by the Sarbanes-Oxley Act, a code of ethics that applied to our principal executive officer, principal financial officer and to our senior financial officers. In December 2006, we adopted a code of business conduct and ethics, the “Telefónica Business Principles”, which apply to all Telefónica Group employees. On March 2008, we decided to modify such Business Principles in order to incorporate within them all components of the code of ethics definition in Section 406 of Sarbanes Oxley Act, and consequently our code of ethics for senior officers was replaced by such Business Principles.
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.
We have responded to Item 18 in lieu of responding to this Item.
Please see pages F-1.1 through F-122.
| | |
| 1.1 | | Amended and Restated bylaws (English translation) |
| 4.1 | | Shareholders’ Agreement dated as of April 28, 2007 among Telefónica S.A., Assicurazioni Generali S.p.A., Sintonia S.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A.* |
| 4.2 | | Co-investment Agreement dated as of April 28, 2007 among Telefónica S.A., Assicurazioni Generali S.p.A., Sintonia S.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A.* |
| 4.3 | | Call Option Agreement, dated November 6, 2007, between Telefónica, S.A. and Telco** |
| 4.4 | | Amendment to the Shareholders’ Agreement and Bylaws, dated November 19, 2007 among Telefónica S.A., Generali, Sintonia S.A., Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.** |
| 4.5 | | Renewal Agreement, dated October 28, 2009, by and among Telefónica S.A., Assicurazioni Generali S.p.A. (on its own behalf and on behalf of its subsidiaries Generali Vie S.A., Alleanza Toro S.p.A., INA Assitalia S.p.A., Generali Lebensversicherung A.G.), Intesa Sanpaolo S.p.A. and Mediobanca S.p.A. *** |
| 4.6 | | Amendment Deed to the Call Option, dated October 28, 2009, by and between Telefónica S.A. and Telco S.p.A. *** |
| 4.7 | | Subscription Agreement, dated September 6, 2009 between Telefónica, S.A. and China Unicom (Hong Kong) Limited**** |
| 8.1 | | Subsidiaries of Telefónica (see Note 1 to the Consolidated Financial Statements and Appendix V thereto) |
| 11.1 | | Code of Ethics (“Telefónica Business Principles”) |
| 12.1 | | Certification of César Alierta Izuel, Chief Executive Officer of Telefónica, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 12.2 | | Certification of Santiago Fernández Valbuena, Chief Financial Officer of Telefónica, 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 Annual Report on Form 20-F for the fiscal year ended December 31, 2006. |
| ** | Incorporated by reference to Telefónica’s Schedule 13D/A filed on November 26, 2007. |
| *** | Incorporated by reference to Telefónica’s Schedule 13D/A filed on November 23, 2009. |
| **** | Incorporated by reference to Telefónica’s Schedule 13D/A filed on September 17, 2009. |
We agree to furnish to the SEC upon request, copies of the instruments defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
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: | Chairman and Chief Executive Officer | |
| TELEFÓNICA, S.A. | |
| | |
| | |
| By: | /s/ Santiago Fernández Valbuena | |
| | Name: | Santiago Fernández Valbuena | |
| | Title: | Chief Financial Officer | |
Date: March 26, 2010
TELEFÓNICA, S.A. AND SUBSIDIARIES COMPOSING THE
TELEFÓNICA GROUP
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (CONSOLIDATED ANNUAL ACCOUNTS) |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Telefónica, S.A.
We have audited Telefónica, S.A.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Telefónica, S.A.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Telefónica, S.A.’s internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Telefónica, S.A. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Telefónica, S.A. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 18, 2010 expressed an unqualified opinion thereon.
ERNST & YOUNG, S.L.
| | | | | |
/s/ José Luis Perelli Alonso | | | | |
| José Luis Perelli Alonso | | | | |
| | | | | |
| | | | | |
Madrid, Spain
March 18, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Telefónica, S.A.
We have audited the accompanying consolidated statements of financial position of Telefónica, S.A. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Telefónica, S.A.’s Directors. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telefónica, S.A. and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Telefónica S.A.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2010 expressed an unqualified opinion thereon.
ERNST & YOUNG, S.L.
| | | | | |
/s/ José Luis Perelli Alonso | | | | |
| José Luis Perelli Alonso | | | | |
| | | | | |
| | | | | |
Madrid, Spain
March 18, 2010
TELEFÓNICA GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT DECEMBER 31
(MILLIONS OF EUROS)
| ASSETS | NOTE | | 2009 | | | 2008 | |
| | | | | | | | |
| A) NON-CURRENT ASSETS | | | | 84,311 | | | | 81,923 | |
| | | | | | | | | | |
| Intangible assets | (Note 6) | | | 15,846 | | | | 15,921 | |
| Goodwill | (Note 7) | | | 19,566 | | | | 18,323 | |
| Property, plant and equipment | (Note 8) | | | 31,999 | | | | 30,545 | |
| Investment properties | | | | 5 | | | | 1 | |
| Investments in associates | (Note 9) | | | 4,936 | | | | 2,777 | |
| Non-current financial assets | (Note 13) | | | 5,988 | | | | 7,376 | |
| Deferred tax assets | (Note 17) | | | 5,971 | | | | 6,980 | |
| | | | | | | | | | |
| B) CURRENT ASSETS | | | | 23,830 | | | | 17,973 | |
| | | | | | | | | | |
| Inventories | | | | 934 | | | | 1,188 | |
| Trade and other receivables | (Note 11) | | | 10,622 | | | | 9,315 | |
| Current financial assets | (Note 13) | | | 1,906 | | | | 2,216 | |
| Tax receivables | (Note 17) | | | 1,246 | | | | 970 | |
| Cash and cash equivalents | (Note 13) | | | 9,113 | | | | 4,277 | |
| Non-current assets held for sale | | | | 9 | | | | 7 | |
| | | | | | | | | | |
| TOTAL ASSETS (A + B) | | | | 108,141 | | | | 99,896 | |
| | | | | | | | | | |
| EQUITY AND LIABILITIES | NOTE | | 2009 | | | 2008 | |
| | | | | | | | | | |
| A) EQUITY | | | | 24,274 | | | | 19,562 | |
| | | | | | | | | | |
| Equity attributable to equity holders of the parent | | | | 21,734 | | | | 17,231 | |
| Non-controlling interests | (Note 12) | | | 2,540 | | | | 2,331 | |
| | | | | | | | | | |
| B) NON-CURRENT LIABILITIES | | | | 56,931 | | | | 55,202 | |
| | | | | | | | | | |
| Non-current interest-bearing debt | (Note 13) | | | 47,607 | | | | 45,088 | |
| Non-current trade and other payables | (Note 14) | | | 1,249 | | | | 1,117 | |
| Deferred tax liabilities | (Note 17) | | | 3,082 | | | | 3,576 | |
| Non-current provisions | (Note 15) | | | 4,993 | | | | 5,421 | |
| | | | | | | | | | |
| C) CURRENT LIABILITIES | | | | 26,936 | | | | 25,132 | |
| | | | | | | | | | |
| Current interest-bearing debt | (Note 13) | | | 9,184 | | | | 8,100 | |
| Current trade and other payables | (Note 14) | | | 14,023 | | | | 13,651 | |
| Current tax payables | (Note 17) | | | 2,766 | | | | 2,275 | |
| Provisions | (Note 15) | | | 963 | | | | 1,106 | |
| | | | | | | | | | |
| TOTAL EQUITY AND LIABILITIES (A+B+C) | | | | 108,141 | | | | 99,896 | |
The accompanying Notes 1 to 25 and Appendices I to V are an integral part of these consolidated statements of financial position
TELEFÓNICA GROUP
CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31
(MILLIONS OF EUROS)
| INCOME STATEMENT | NOTE | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | |
| Revenue from operations | (Note 19) | | | 56,731 | | | | 57,946 | | | | 56,441 | |
| Other income | (Note 19) | | | 1,645 | | | | 1,865 | | | | 4,264 | |
| Supplies | | | | (16,717 | ) | | | (17,818 | ) | | | (17,907 | ) |
| Personnel expenses | | | | (6,775 | ) | | | (6,762 | ) | | | (7,893 | ) |
| Other expenses | (Note 19) | | | (12,281 | ) | | | (12,312 | ) | | | (12,081 | ) |
| Depreciation and amortization | (Note 19) | | | (8,956 | ) | | | (9,046 | ) | | | (9,436 | ) |
| | | | | | | | | | | | | | |
| OPERATING INCOME | | | | 13,647 | | | | 13,873 | | | | 13,388 | |
| | | | | | | | | | | | | | |
| Share of profit (loss) of associates | (Note 9) | | | 47 | | | | (161 | ) | | | 140 | |
| | | | | | | | | | | | | | |
| Finance income | | | | 814 | | | | 827 | | | | 703 | |
| Exchange gains | | | | 3,085 | | | | 6,189 | | | | 4,645 | |
| Finance costs | | | | (3,581 | ) | | | (3,648 | ) | | | (3,554 | ) |
| Exchange losses | | | | (3,625 | ) | | | (6,165 | ) | | | (4,638 | ) |
| | | | | | | | | | | | | | |
| Net financial expense | (Note 16) | | | (3,307 | ) | | | (2,797 | ) | | | (2,844 | ) |
| | | | | | | | | | | | | | |
| PROFIT BEFORE TAX FROM CONTINUING OPERATIONS | | | | 10,387 | | | | 10,915 | | | | 10,684 | |
| | | | | | | | | | | | | | |
| Corporate income tax | (Note 17) | | | (2,450 | ) | | | (3,089 | ) | | | (1,565 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS | | | | 7,937 | | | | 7,826 | | | | 9,119 | |
| | | | | | | | | | | | | | |
| Profit after tax from discontinued operations | (Note 18) | | | - | | | | - | | | | - | |
| PROFIT FOR THE YEAR | | | | 7,937 | | | | 7,826 | | | | 9,119 | |
| | | | | | | | | | | | | | |
| Non-controlling interests | (Note 12) | | | (161 | ) | | | (234 | ) | | | (213 | ) |
| PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT | | | | 7,776 | | | | 7,592 | | | | 8,906 | |
| | | | | | | | | | | | | | |
| Basic and diluted earnings per share from continuing operations attributable to equity holders of the parent (euros) | (Note 19) | | | 1.71 | | | | 1.63 | | | | 1.87 | |
| Basic and diluted earnings per share attributable to equity holders of the parent (euros) | (Note 19) | | | 1.71 | | | | 1.63 | | | | 1.87 | |
The accompanying Notes 1 to 25 and Appendices I to V are an integral part of these consolidated income statements
| CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | | Year ended December 31 | |
| (MILLIONS OF EUROS) | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Profit for the year | | | 7,937 | | | | 7,826 | | | | 9,119 | |
| | | | | | | | | | | | | |
| Other comprehensive income | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Gain (loss) on measurement of available-for-sale investments | | | 638 | | | | (1,167) | | | | (75) | |
| Reclassification of (losses) gains included in the income statement | | | (4) | | | | (142) | | | | 107 | |
| Income tax impact | | | (105) | | | | 281 | | | | 24 | |
| | | | 529 | | | | (1,028) | | | | 56 | |
| | | | | | | | | | | | | |
| (Losses) gains on hedges | | | (794) | | | | 1,302 | | | | 875 | |
| Reclassification of (losses) gains included in the income statement | | | (77) | | | | 50 | | | | 17 | |
| Income tax impact | | | 262 | | | | (402) | | | | (292) | |
| | | | (609) | | | | 950 | | | | 600 | |
| | | | | | | | | | | | | |
| Translation differences | | | 1,982 | | | | (4,051) | | | | (1,375) | |
| | | | | | | | | | | | | |
| Actuarial gains and losses and impact of limit on assets for defined benefit pension plans | | | (189) | | | | (182) | | | | 54 | |
| Income tax impact | | | 53 | | | | 55 | | | | (17) | |
| | | | (136) | | | | (127) | | | | 37 | |
| | | | | | | | | | | | | |
| Share of income (loss) recognized directly in equity of associates | | | 233 | | | | (59) | | | | (3) | |
| Income tax impact | | | 2 | | | | (13) | | | | (11) | |
| | | | 235 | | | | (72) | | | | (14) | |
| | | | | | | | | | | | | |
| Total other comprehensive income | | | 2,001 | | | | (4,328) | | | | (696) | |
| | | | | | | | | | | | | |
| Total comprehensive income recognized in the year | | | 9,938 | | | | 3,498 | | | | 8,423 | |
| | | | | | | | | | | | | |
| Attributable to: | | | | | | | | | | | | |
| Equity holders of the parent | | | 9,418 | | | | 3,612 | | | | 8,158 | |
| Non-controlling interests | | | 520 | | | | (114) | | | | 265 | |
| | | | 9,938 | | | | 3,498 | | | | 8,423 | |
The accompanying Notes 1 to 25 and Appendices I to V are an integral part of these consolidated statements of comprehensive income
| CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (MILLIONS OF EUROS) | Attributable to equity holders of the parent | | |
| Share capital | Share premium | Legal reserve | Revaluation reserve | Treasury shares | Retained earnings | Available-for-sale investments | Hedges | Equity of associates | Translation differences | Total | Non-controlling interests | Total equity |
| Financial position at December 31, 2008 | 4,705 | 460 | 984 | 172 | (2,179) | 16,069 | (566) | 1,413 | (216) | (3,611) | 17,231 | 2,331 | 19,562 |
| Profit for the year | - | - | - | - | - | 7,776 | - | - | - | - | 7,776 | 161 | 7,937 |
| Other comprehensive income (loss) | - | - | - | - | - | (136) | 527 | (609) | 235 | 1,625 | 1,642 | 359 | 2,001 |
| Total comprehensive income | | | | | | 7,640 | 527 | (609) | 235 | 1,625 | 9,418 | 520 | 9,938 |
| Dividends paid (Note 12) | - | - | - | - | - | (4,557) | - | - | - | - | (4,557) | (295) | (4,852) |
| Hyperinflation restatement to 01/01/09 | | | | | | | | | | 613 | 613 | - | 613 |
| Net movement in treasury shares | - | - | - | - | (656) | - | - | - | - | - | (656) | - | (656) |
| Acquisitions and disposals of Non-controlling interests | - | - | - | - | - | - | - | - | - | - | - | (122) | (122) |
| Capital reduction (Note 12) | (141) | - | - | - | 2,308 | (2,167) | - | - | - | - | - | - | - |
| Other movements | - | - | - | (15) | - | (300) | - | - | - | - | (315) | 106 | (209) |
| Financial position at December 31, 2009 | 4,564 | 460 | 984 | 157 | (527) | 16,685 | (39) | 804 | 19 | (1,373) | 21,734 | 2,540 | 24,274 |
| |
| Financial position at December 31, 2007 | 4,773 | 522 | 984 | 180 | (232) | 13,025 | 457 | 463 | (144) | 97 | 20,125 | 2,730 | 22,855 |
| Profit for the year | - | - | - | - | - | 7,592 | - | - | - | - | 7,592 | 234 | 7,826 |
| Other comprehensive income (loss) | - | - | - | - | - | (127) | (1,023) | 950 | (72) | (3,708) | (3,980) | (348) | (4,328) |
| Total comprehensive income | | | | | | 7,465 | (1,023) | 950 | (72) | (3,708) | 3,612 | (114) | 3,498 |
| Dividends paid (Note 12) | - | - | - | - | - | (4,165) | - | - | - | - | (4,165) | (333) | (4,498) |
| Net movement in treasury shares | - | 1,074 | - | - | (3,151) | (232) | - | - | - | - | (2,309) | - | (2,309) |
| Acquisitions and disposals of Non-controlling interests | - | - | - | - | - | - | - | - | - | - | - | (42) | (42) |
| Capital reduction (Note 12) | (68) | (1,136) | - | - | 1,204 | - | - | - | - | - | - | - | - |
| Other movements | - | - | - | (8) | - | (24) | - | - | - | - | (32) | 90 | 58 |
| Financial position at December 31, 2008 | 4,705 | 460 | 984 | 172 | (2,179) | 16,069 | (566) | 1,413 | (216) | (3,611) | 17,231 | 2,331 | 19,562 |
| |
| Financial position at December 31, 2006 | 4,921 | 2,869 | 984 | 1,358 | (329) | 5,717 | 401 | (137) | (130) | 1,524 | 17,178 | 2,823 | 20,001 |
| Profit for the year | - | - | - | - | - | 8,906 | - | - | - | - | 8,906 | 213 | 9,119 |
| Other comprehensive income (loss) | - | - | - | - | - | 37 | 56 | 600 | (14) | (1,427) | (748) | 52 | (696) |
| Total comprehensive income | | | | | | 8,943 | 56 | 600 | (14) | (1,427) | 8,158 | 265 | 8,423 |
| Dividends paid (Note 12) | - | - | - | - | - | (3,077) | - | - | - | - | (3,077) | (324) | (3,401) |
| Net movement in treasury shares | - | (13) | - | - | (2,105) | (13) | - | - | - | - | (2,131) | - | (2,131) |
| Acquisitions and disposals of Non-controlling interests | - | - | - | - | - | - | - | - | - | - | - | (95) | (95) |
| Capital reduction (Note 12) | (148) | (2,054) | - | - | 2,202 | - | - | - | - | - | - | - | - |
| Other movements | - | (280) | - | (1,178) | - | 1,455 | - | - | - | - | (3) | 61 | 58 |
| Financial position at December 31, 2007 | 4,773 | 522 | 984 | 180 | (232) | 13,025 | 457 | 463 | (144) | 97 | 20,125 | 2,730 | 22,855 |
| The accompanying Notes 1 to 25 and Appendices I to V are an integral part of these consolidated statements of changes in equity. |
TELEFÓNICA GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
(MILLIONS OF EUROS)
| | NOTE | | 2009 | | | 2008 | | | 2007 | |
| Cash flows from operating activities | | | | | | | | | | |
| | | | | | | | | | | |
| Cash received from customers | | | | 67,358 | | | | 69,060 | | | | 67,129 | |
| Cash paid to suppliers and employees | | | | (46,198 | ) | | | (48,500 | ) | | | (47,024 | ) |
| Dividends received | | | | 100 | | | | 113 | | | | 124 | |
| Net interest and other financial expenses paid | | | | (2,170 | ) | | | (2,894 | ) | | | (3,221 | ) |
| Taxes paid | | | | (2,942 | ) | | | (1,413 | ) | | | (1,457 | ) |
| | | | | | | | | | | | | | |
| Net cash from operating activities | (Note 23) | | | 16,148 | | | | 16,366 | | | | 15,551 | |
| | | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Proceeds on disposals of property, plant and equipment and intangible assets | | | | 242 | | | | 276 | | | | 198 | |
| Payments on investments in property, plant and equipment and intangible assets | | | | (7,593 | ) | | | (7,889 | ) | | | (7,274 | ) |
| Proceeds on disposals of companies, net of cash and cash equivalents disposed | | | | 34 | | | | 686 | | | | 5,346 | |
| Payments on investments in companies, net of cash and cash equivalents acquired | | | | (48 | ) | | | (2,178 | ) | | | (2,798 | ) |
| Proceeds on financial investments not included under cash equivalents | | | | 6 | | | | 31 | | | | 14 | |
| Payments made on financial investments not included under cash equivalents | | | | (1,411 | ) | | | (114 | ) | | | (179 | ) |
| Interest (paid) received on cash surpluses not included under cash equivalents | | | | (548 | ) | | | 76 | | | | 74 | |
| Government grants received | | | | 18 | | | | 11 | | | | 27 | |
| | | | | | | | | | | | | | |
| Net cash used in investing activities | (Note 23) | | | (9,300 | ) | | | (9,101 | ) | | | (4,592 | ) |
| | | | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Dividends paid | (Note 12) | | | (4,838 | ) | | | (4,440 | ) | | | (3,345 | ) |
| Transactions with equity holders | | | | (947 | ) | | | (2,241 | ) | | | (2,152 | ) |
| Proceeds on issue of debentures and bonds | (Note 13) | | | 8,617 | | | | 1,317 | | | | 4,209 | |
| Proceeds on loans, borrowings and promissory notes | | | | 2,330 | | | | 3,693 | | | | 6,658 | |
| Cancellation of debentures and bonds | (Note 13) | | | (1,949 | ) | | | (1,167 | ) | | | (1,756 | ) |
| Repayments of loans, borrowings and promissory notes | | | | (5,494 | ) | | | (4,927 | ) | | | (13,039 | ) |
| | | | | | | | | | | | | | |
| Net cash flow used in financing activities | (Note 23) | | | (2,281 | ) | | | (7,765 | ) | | | (9,425 | ) |
| | | | | | | | | | | | | | |
| Effect of foreign exchange rate changes on collections and payments | | | | 269 | | | | (302 | ) | | | (261 | ) |
| | | | | | | | | | | | | | |
| Effect of changes in consolidation methods and other non-monetary effects | | | | - | | | | 14 | | | | - | |
| | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents during the period | | | | 4,836 | | | | (788 | ) | | | 1,273 | |
| | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS AT JANUARY 1 | | | | 4,277 | | | | 5,065 | | | | 3,792 | |
| | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS AT DECEMBER 31 | (Note 13) | | | 9,113 | | | | 4,277 | | | | 5,065 | |
| | | | | | | | | | | | | | |
| RECONCILIATION OF CASH AND CASH EQUIVALENTS WITH THE STATEMENT OF FINANCIAL POSITION | |
| | | | | | | | | | | | | | |
| BALANCE AT JANUARY 1 | | | | 4,277 | | | | 5,065 | | | | 3,792 | |
| Cash on hand and at banks | | | | 3,236 | | | | 2,820 | | | | 2,375 | |
| Other cash equivalents | | | | 1,041 | | | | 2,245 | | | | 1,417 | |
| | | | | | | | | | | | | | |
| BALANCE AT DECEMBER 31 | (Note 13) | | | 9,113 | | | | 4,277 | | | | 5,065 | |
| Cash on hand and at banks | | | | 3,830 | | | | 3,236 | | | | 2,820 | |
| Other cash equivalents | | | | 5,283 | | | | 1,041 | | | | 2,245 | |
The accompanying Notes 1 to 25 and Appendices I to V are an integral part of these consolidated statements of cash flow
TELEFÓNICA, S.A. AND SUBSIDIARIES COMPOSING THE TELEFÓNICA GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONSOLIDATED ANNUAL ACCOUNTS) FOR THE YEAR ENDED DECEMBER 31, 2009
| (1) | BACKGROUND 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,” “Telefónica”, or “the Group”) operating mainly in the telecommunications, media and contact center industries.
The parent company of this Group is Telefónica, S.A. (“Telefónica” or “the Company”), a public limited company incorporated on April 19, 1924 for an indefinite period. Its registered office is at Gran Vía 28, Madrid (Spain).
Appendix V lists the subsidiaries, associates and investees in which the Telefónica Group has direct or indirect holdings, their corporate purpose, country, functional currency, share capital, the Telefónica Group’s effective shareholding and their method of consolidation.
Corporate structure of the Group
Telefónica’s basic corporate purpose, pursuant to Article 4 of its Bylaws, is the provision of all manner of public or private telecommunications services, including 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 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 Telefónica Group follows a regional, integrated management model through three business areas defined by the geographical markets in which it operates, and with an integrated view of the wireline and wireless businesses:
| | - | Telefónica Latin America |
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.
In addition, certain wireline and wireless telephony services are provided under regulated rate and price systems.
A more detailed segmentation of the activities carried out by the Group is provided in Note 4.
| (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 comprising the Telefónica Group, whose individuals financial statements were prepared in accordance with the generally accepted accounting principles prevailing in the various countries in which they are located, and for
purposes of these consolidated financial statements are presented in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) which do not differ for the purposes of the Telefónica Group from IFRS as adopted by the European Union, to give a true and fair view of the consolidated equity and financial position at December 31, 2009, and of the consolidated results of operations, changes in consolidated equity and the consolidated cash flows obtained and used in the year then ended. The figures in these consolidated financial statements are expressed in millions of euros, unless otherwise indicated, and therefore may be rounded. The euro is the Group’s reporting currency.
The accompanying consolidated financial statements for the year ended December 31, 2009 were prepared by the Company’s Board of Directors at its meeting on February 24, 2010 for submission for approval at the General Shareholders’ Meeting, which is expected to occur without modification.
Note 3 contains a description of the most significant accounting policies used to prepare these consolidated financial statements.
For comparative purposes, the accompanying financial statements for 2009 include the consolidated statement of financial position at December 31, 2008 and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows, and the notes thereto for the years ended December 31, 2008 and 2007.
Comparative information and main changes in the consolidation scope
The accompanying consolidated statements of comprehensive income and consolidated statements of changes in equity for the year ended December 31, 2009 are presented in accordance with the amendment to IAS 1 “Revised Presentation of Financial Statements” (see Note 3.s). Accordingly, the information presented for the years ended December 31, 2008 and 2007 has been adapted to such amendment, and, therefore, differs, on a presentation basis, from the information contained in the approved 2008 and 2007 consolidated financial statements.
The main changes in the consolidation scope affecting comparability of the consolidated information for 2009 and 2008 (see Appendix I for a more detailed explanation of the changes in consolidation scope in both years and the main transactions in 2007) are as follows:
2009
| | a) | Classification of Venezuela as a hyperinflationary economy |
Throughout 2009 and in the first days of 2010, a number of factors arose in the Venezuelan economy that led the Telefónica Group to reconsider the treatment it follows with respect to the translation of the financial statements of investees, as well as the recovery of its financial investments in that country. Within these factors it is worth highlighting the level of inflation reached in 2009 and the cumulative inflation over the last three years; the restrictions to the official foreign exchange market and, finally, the devaluation of the Bolivar fuerte on January 8, 2010 (see Note 24).
As a result, in accordance with IFRS, Venezuela must be considered a hyperinflationary economy in 2009. The main implications of this are as follows:
| | · | That the 2008 figures should not be restated. |
| | · | Adjustment of the historical cost of non-monetary assets and liabilities and the various items of equity of these companies from their date of acquisition or inclusion in the |
| | | consolidated statement of financial position to the end of the year to reflect the changes in purchasing power of the currency caused by inflation. |
The cumulative impact of the accounting restatement to adjust for the effects of hyperinflation for years prior to 2009 is reflected in the translation differences at the beginning of the 2009 financial year.
| | · | Adjustment of the income statement to reflect the financial loss caused by the impact of inflation in the year on net monetary assets (loss of purchasing power). |
| | · | The various components of the income statement and statement of cash flows have been adjusted for the inflation index since their generation, with a balancing entry in financial results and a reconciling item in the statement of cash flows, respectively. |
| | · | All components of the financial statements of the Venezuelan companies have been translated at the closing exchange rate, which at December 31, 2009 was 2.15 Bolivares fuertes per dollar (3.1 Bolivares fuertes per euro). |
The main effects on the Telefónica Group’s consolidated financial statements for 2009 derived from the items mentioned above are as follows:
| | Millions of euros |
| Revenue | 267 |
| Operating income excluding the impact of depreciation and amortization cost | 64 |
| Net profit | (548) |
| Translation differences | 1,224 |
| Impact on equity | 676 |
| | b) | Tax amortization of goodwill |
In December 2007, the European Commission opened an investigation involving the Kingdom of Spain with respect to the potential consideration as state aid of the tax deduction for the tax basis amortization of goodwill generated on certain foreign investments under the provisions of article 12.5 of the revised Spanish corporate income tax law (“TRLIS”). This investigation led to widespread uncertainties regarding the scope of the European Commission’s decision on the future for, among others, the Telefónica Group.
In the case of the Telefónica Group, as a result of this uncertainty the Company deemed it necessary to recognize a liability as the deduction was applied in the consolidated financial statements until the investigation was concluded.
In December 2009, the text of the European Commission’s decision regarding the investigation was released, which deems the deduction as state aid. Investments made prior to December 21, 2007 (as is the case for the Telefónica Group’s investments in O2 Group companies, the operators acquired from BellSouth, Colombia Telecomunicaciones, S.A., ESP and Telefónica O2 Czech Republic, a.s.) are not affected by this decision. As a result of this decision, and considering the corporate structure of these investments, the consolidated income statement of the Telefónica Group for the year ended December 31, 2009 reflects a lower income tax expense due to the reversal of this liability in an amount of 591 million euros.
| | c) | Share exchange between Telefónica, S.A. and China Unicom Limited, and signing of strategic alliance agreement |
On September 6, 2009, Telefónica and the Chinese telecommunications company, China Unicom (Hong Kong) Limited (“China Unicom”) entered into a wide strategic alliance which includes, among others, the areas of: the joint procurement of infrastructure and client equipment; common development of mobile service platforms; joint provision of services to multinational customers; roaming; research and development; co-operation and sharing of best practices and technical, operational and management know-how; joint development of strategic initiatives in the area of the network evolution and joint participation in international alliances; and exchange of senior management.
In addition, on the same date, Telefónica and China Unicom executed a mutual share exchange agreement through which each party agreed to invest the equivalent of 1,000 million US dollars in ordinary shares of the other party.
On October 21, 2009, the mutual share exchange was implemented through the subscription by Telefónica, S.A., through its wholly owned subsidiary Telefónica Internacional, S.A.U., of 693,912,264 newly issued shares of China Unicom, satisfied by a contribution in kind to China Unicom of 40,730,735 shares of Telefónica, S.A. (see Note 12).
Following the completion of the transaction, Telefónica increased its share of China Unicom’s voting share capital from 5.38% to 8.06% and obtained the right to appoint a member to its board of directors, while China Unicom became owner of approximately 0.87% of Telefónica’s voting share capital at that date. Subsequently, after a capital reduction carried out by China Unicom, the Telefónica Group reached a shareholding equivalent to 8.37% of the company’s voting share capital.
The investment in China Unicom is now included in the consolidation scope under the equity method. The total amount of this investment at December 31, 2009 amounts to 2,301 million euros.
2008
| | a) | Tender offer for all the remaining outstanding shares of Telefónica Chile, S.A. |
On September 17, 2008, Telefónica launched a tender offer through its subsidiary Inversiones Telefónica Internacional Holding, Ltda. to acquire all the outstanding shares of Telefónica Chile, S.A. (“CTC”) that it did not control directly or indirectly, amounting to 55.1% of CTC’s share capital.
Once the acceptance period had ended and the transaction had been settled, Telefónica’s indirect ownership in CTC increased from 44.9% to 96.75%.
Subsequently, pursuant to Chilean law, on December 1, 2008, Inversiones Telefónica Internacional Holding, Ltda. launched a new tender offer for all the shares of CTC that it did not own directly or indirectly after settlement of the first offer, under the same economic terms as the initial offer. The acceptance period for the second offer ended on December 31, 2008, but was then extended to January 6, 2009, as allowed by Chilean law.
Upon the end of the acceptance period of the second tender offer, Telefónica’s indirect ownership percentage in CTC’s share capital increased from 96.75% of all of CTC’s
outstanding shares, reached in the first tender offer, to 97.89%. The total payment for the two tranches amounted to 558,547 million Chilean pesos, equivalent to 658 million euros.
The principal accounting policies used in preparing the accompanying consolidated financial statements are as follows:
| | a) | Translation methodology |
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. |
| | 3. | Statements of cash flow, which were translated at the average exchange rate for the year. |
Goodwill and statement of financial position items remeasured to fair value when a stake is acquired in a foreign operation are recognized as assets and liabilities of the company acquired and therefore translated at the closing exchange rate.
The exchange rate differences arising from the application of this method are included in “Translation differences” under “Equity attributable to equity holders of the parent” in the accompanying consolidated statements of financial position, net of the portion of said differences attributable to non-controlling interests, which is shown under “Non-controlling interests.” When a foreign operation is sold, totally or partially, or contributions are reimbursed, cumulative translation differences since January 1, 2004 (the IFRS transition date) related to such operation recognized in equity are taken proportionally to the income statement as a gain or loss on the disposal.
The financial statements of Group companies whose functional currency is the currency of a hyperinflationary economy are adjusted for inflation in accordance with the procedure described in the following paragraph prior to their translation to euros. Once restated, all the items of the financial statements are converted to euros using the closing exchange rate. Amounts shown for prior years for comparative purposes are not modified.
To determine the existence of hyperinflation, the Group assesses the qualitative characteristics of the economic environment of the country, such as the trends in inflation rates over the previous three years. The financial statements of companies whose functional currency is the currency of a hyperinflationary economy are adjusted to reflect the changes in purchasing power of the local currency, such that all items in the statement of financial position not expressed in current terms (non-monetary items) are restated by applying a general price index at the financial statement closing date, and all income and expense, profit and loss are restated monthly by applying appropriate adjustment factors. The difference between initial and adjusted amounts is taken to profit or loss.
| | b) | Foreign currency transactions |
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 exchange rates then prevailing.
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 investments in foreign investees designated as hedges of foreign currency risk to which these investments are exposed (see Note 3 i), and exchange gains or losses on intra-group loans
considered part of the investment in a foreign operation, which are included under the “Translation differences” component of “Equity” in the consolidated statement of financial position.
For acquisitions 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 or joint venture. After initial measurement, goodwill is carried at cost, less any accumulated impairment losses.
In the transition to IFRS, Telefónica availed itself of the exemption allowing it not to restate business combinations taking place before January 1, 2004. As a result, the accompanying consolidated statements of financial position include goodwill 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 shares of consolidated subsidiaries, and their carrying amounts plus increases in the fair value of assets and liabilities recognized in equity.
In all cases, goodwill is recognized as an asset denominated in the currency of the company acquired.
Goodwill is tested for impairment annually or more frequently if there are certain events or changes indicating the possibility that the carrying amount may not be fully recoverable.
The potential impairment loss is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill relates when originated. If this recoverable amount is less than the carrying amount, an irreversible impairment loss is recognized in income (see Note 3 f).
Intangible assets are stated at acquisition or production cost, less any accumulated amortization or any accumulated impairment losses.
The useful lives of intangible assets are assessed individually to be either finite or indefinite. Intangible assets with finite lives are amortized systematically over the useful economic life and assessed for impairment whenever events or changes indicate that their carrying amount may not be recoverable. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, or more frequently in the event of indications that their carrying amount may not be recoverable (see Note 3 f).
Management reassesses the indefinite useful life classification of these assets on an annual basis.
Amortization methods and schedules are revised annually at year end and, where appropriate, adjusted prospectively.
Research and development costs
Research costs 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 on a straight-line basis over the period during which the related project is expected to generate economic benefits, starting upon its completion.
Recoverability is considered to be reasonably assured when the Group can demonstrate the technical feasibility of completing the intangible asset, whether it will be available for use or sale, its intention to complete and its ability to use or sell the asset and how the asset will generate future economic benefits.
As long as intangible assets developed internally are not in use, the associated capitalized development costs are tested for impairment annually or more frequently if there are indications that the 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.
Service concession arrangements
These arrangements relate to the acquisition cost of the licenses granted to the Telefónica Group by various public authorities to provide telecommunications services 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 the moment commercial exploitation commences.
Customer base
This represents the allocation of acquisition costs attributable to customers acquired in business combinations. Amortization is on a straight-line basis over the estimated period of the customer relationship.
Software
Software is stated at cost and amortized on a straight-line basis over its useful life, generally estimated at three years.
| | e) | Property, plant and equipment |
Property, plant and equipment is stated at cost less any accumulated depreciation and any accumulated impairment in value. 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 “Other income - Own work capitalized.” Cost includes, where appropriate, the initial estimate of decommissioning, retirement and site reconditioning costs when the Group is under obligation to incur such costs due to the use of the asset.
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 a period of at least 18 months to bring the assets to their intended use or sale.
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.
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, whenever there are indications that the assets’ carrying amount exceeds the higher of its fair value less costs to sell or its value in use. The impairment provision is not maintained if the factors giving rise to the impairment disappear (see Note 3 f).
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:
| | Years of estimated |
| | useful life |
| Buildings | 25 – 40 |
| Plant and machinery | 10 – 15 |
| Telephone installations, networks and subscriber equipment | 5 – 20 |
| Furniture, tools and other items | 2 – 10 |
Assets’ estimated residual values and methods and depreciation periods are reviewed, and adjusted if appropriate, prospectively at each financial year end.
| | f) | Impairment of non-current assets |
Non-current assets, including property, plant and equipment, goodwill and intangible assets are evaluated at each reporting date for indications of impairment losses. Wherever such indications exist, or in the case of assets which are subject to an annual impairment test, a recoverable amount is estimated, as the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows deriving from the use of the asset or its cash generating unit, as applicable, are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired. In this case, the carrying amount is written down to recoverable amount and the resulting loss is taken to the income statement. Future depreciation or amortization charges are adjusted for the asset’s new carrying amount over its remaining useful life. Each asset is assessed individually for impairment, unless the asset does not generate cash inflows that are largely independent of those from other assets (or cash-generating units).
The Group bases the calculation of impairment on the business plans of the various cash-generating units to which the assets are allocated. These business plans generally cover a period of three to five years. For longer periods, an expected constant or decreasing growth rate is applied to the projections based on these plans from the fifth year. The growth rates used in 2009 are as follows:
| Rates | 2009 |
| Businesses in Spain | 0.88%-0.94% |
| Businesses in Latin America | 1.21%-3.25% |
| Businesses in Europe | 1.00%-2.00% |
The main variables used by management to determine recoverable amounts are ARPU (average revenues per user), customer acquisition and retention costs, share of net adds in accesses, market shares, investments in non-current assets, growth rates and discount rates.
Pre-tax discount rates adjusted for country and business risks are applied. The following ranges of rates were used in 2009:
| Rates | 2009 |
| Businesses in Spain | 6.8%-7.3% |
| Businesses in Latin America | 8.6%-19.4% |
| Businesses in Europe | 6.3%-8.5% |
When there are new events or changes in circumstances that indicate that a previously recognized impairment loss no longer exists or has been decreased, a new estimate of the asset’s recoverable amount is made. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. The reversal is limited to the net carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss and the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount. Impairment losses relating to goodwill cannot be reversed in future periods.
The determination of whether an arrangement is, or contains a lease is based on the substance of the agreement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset and the agreement conveys a right to the Telefónica Group to the use of the asset.
Leases where the lessor does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased item to the Group. These are classified at the inception of the lease, in accordance with its nature and the associated liability, at the lower of the present value of the minimum lease payments or the fair value of the leased property. Lease payments are apportioned between the finance costs and reduction of the principal of lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance costs are reflected in the income statement over the lease term.
| | h) | Investments in associates |
The Telefónica Group’s investments in companies over which it exercises significant influence (evidenced via representation on the board of directors or agreements with shareholders) but does not control or manage jointly with third parties are accounted for using the equity method. The carrying amount of investments in associates includes related goodwill and the consolidated income statement reflects the share of profit or loss from 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.
| | i) | Financial assets and liabilities |
All normal purchases and sales of financial assets are recognized in the statement of financial position on the trade date, i.e. the date that the Company commits to purchase or sell the asset. The Telefónica Group classifies its financial instruments into four categories for initial recognition purposes: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. When appropriate, the Company re-evaluates the designation at each financial year end.
Financial assets held for trading, i.e., investments made with the aim of realizing short-term returns as a result of price changes, are included in the category financial assets at fair value through profit or loss and presented as current assets. Derivatives are classified as held for trading unless they are designated as effective hedging instruments. The Group also 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 measuring assets and liabilities or for recognizing gains and losses on different bases. Also in this category are financial assets for which an investment and disposal strategy has been designed based on their fair value. Financial instruments included in this category are recorded at fair value and are remeasured at subsequent reporting dates at fair value, with any realized or unrealized gains or losses recognized in the income statement.
Financial assets with fixed maturities that the Group has the positive intention and ability (legal and financial) to hold until maturity are classified as held-to-maturity and presented as “Current assets” or “Non-current assets,” depending on the time left until settlement. Financial assets falling into this category are measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the income statement when the investments are settlement or impaired, as well as through the amortization process.
Financial assets which the Group 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 investments are recorded under “Non-current assets,” unless it is probable and feasible that they will be sold within 12 months. Financial assets in this category are measured at fair value. Gains or losses arising from changes in fair value are recognized in equity at each financial year end until the investment is derecognized or determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognized in profit or loss. Dividends from available-for-sale investments are recognized in the income statement when the Group has the right to receive the dividend. Fair value is determined in accordance with the following criteria:
| | 1. | Listed securities on active markets: |
| | | |
| | | Fair value is considered to be the quoted market price at the closing date. |
| | | |
| | 2. | Unlisted securities: |
| | | |
| | | Fair value is determined using valuation techniques such as discounted cash flow analysis, option valuation models, or by reference to arm’s length market transactions. When fair value cannot be reliably determined, these investments are carried at cost. |
Loans and receivables include financial assets with fixed or determinable payments that are not quoted in an active market 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 recognized in the income statement when the loans and receivables are derecognized or impaired, as well as through the amortization process. Trade receivables are recognized at the original invoice amount. A provision is recorded when there is objective evidence of customer collection risk. The amount of the provision is calculated as the difference between the carrying amount of the doubtful trade receivables and their recoverable amount. As a general rule, current trade receivables are not discounted.
The Group assesses at each reporting date whether a financial asset is impaired. If there is objective evidence that an impairment loss on a financial asset carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.
For equity instruments included in available-for-sale financial assets, the Company assesses individually for each security whether there is any objective evidence that an asset is impaired
as a result of one or more events indicating that the carrying amount of the security will not be recovered. If there is objective evidence that an available-for-sale financial instrument is impaired, the cumulative loss recognized in equity, measured as the difference between the acquisition cost (net of any principal payments and amortization made) and the fair value at that date, less any impairment loss on that investment previously recognized in the income statement.
Financial assets are only fully or partially derecognized when:
| | 1. | The rights to receive cash flows from the asset have expired; |
| | 2. | An obligation to pay the cash flows received from the asset to a third party has been assumed; or |
| | 3. | The rights to receive cash flows from the asset have been transferred to a third party and all the risks and rewards of the asset have been substantially transferred. |
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and at banks, demand deposits and other highly liquid investments with an original maturity of three months or less. These items are stated at historical cost, which does not differ significantly from realizable value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents are shown net of any outstanding bank overdrafts.
Preferred stock
Preferred shares are classified as a liability or equity instrument depending on the issuance terms. A preferred 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, whereas it is recorded as a financial liability on the statement of financial position whenever the Telefónica Group does not have the right to avoid cash payments.
Issues and interest-bearing debt
These debts are recognized initially at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, these financial liabilities are measured 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. Interest-bearing debt is considered non-current when its maturity is over 12 months or the Telefónica Group has full discretion to defer settlement for at least another 12 months from the reporting date.
Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender under substantially different terms, such an exchange is treated as a derecognition of the original liability and the recognition of a new liability, and the difference between the respective carrying amounts is recognized in the income statement.
Derivative financial instruments and hedge accounting
Derivative financial instruments are initially recognized at fair value, normally equivalent to cost. Their carrying amounts are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. They are classified as current or non-current depending on whether they fall due within less than or after one year, respectively. Derivatives that meet all the criteria for consideration as long-term
hedging instruments are recorded as non-current assets or liabilities, depending on their positive or negative values.
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.
The Group designates certain derivatives as:
| | 1. | Fair value hedges, when hedging the exposure to changes in the fair value of a recognized asset or liability; |
| | 2. | Cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a forecast transaction; or |
| | 3. | Hedges of a net investment in a foreign operation. |
A hedge of the foreign currency risk in a firm commitment is accounted for 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 the 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 taken directly to the income statement. Fair value changes from hedges that relate to firm commitments or forecast transactions that result in the recognition of non-financial assets or liabilities are included in the initial measurement of those assets or liabilities. Otherwise, changes in fair value previously recognized in equity are recognized in the income statement in the period in which the hedged transaction affects profit or loss.
An instrument designed to hedge foreign currency exposure from a net investment in a foreign operation is accounted for in a similar manner to cash flow hedges.
The application of the Company’s corporate risk-management policies could result in financial risk-hedging transactions that make economic sense, yet do not comply with the criteria and effectiveness tests required by accounting policies to be treated as hedges. 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 derivatives are taken directly to the income statement. Transactions used to reduce the exchange rate risk relating to the income contributed by foreign subsidiaries are not treated as hedging transactions.
From inception, the Group formally documents the hedging relationship between the derivative and the hedged item, as well as the associated risk management objectives and strategies. The documentation includes identification of the hedge instrument, the hedged item or transaction and the nature of the risk being hedged. In addition, it states how it will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Hedge effectiveness is assessed, prospectively and retrospectively, both at the inception of the hedge relationship and 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, the hedge no longer meets the criteria for hedge accounting or the Company revokes the designation. In these instances, gains or losses accumulated in equity are not taken to the income statement until the forecast transaction or commitment affects profit or loss. However, if the hedged transaction is no longer expected to occur, the cumulative gains or losses recognized directly in equity are taken immediately to the income statement.
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.
Materials stored for use in investment projects and inventories for consumption and replacement are valued 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 the inventories acquired.
Obsolete, defective or slow-moving inventories have been written down to estimated net realizable value. The recoverable amount of inventory is calculated based on inventory age and turnover.
Treasury shares are stated at cost and deducted from equity. Any gain or loss obtained on the purchase, sale, issue or cancellation of treasury shares is recognized directly in equity.
Pensions and other employee obligations
Provisions required to cover the accrued liability for defined-benefit pension plans are determined using “the projected unit credit” actuarial valuation method. The calculation is based on demographic and financial assumptions for each country considering the macroeconomic environment. The discount rates are determined based on market yield curves. Plan assets are measured at fair value. Actuarial gains and losses on post-employment defined-benefit plans are recognized immediately in equity.
For defined-contribution pension plans, the obligations are limited to the payment of the contributions, which are taken to the income statement as accrued.
Provisions for post-employment benefits (e.g. early retirement or other) are calculated individually based on the terms agreed with the employees. In some cases, these may require actuarial valuations based on both demographic and financial assumptions.
Other provisions
Provisions are recognized when the Group has a present obligation (legal or constructive), as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted, and the corresponding increase in the provision due to the passage of time is recognized as a finance cost.
The Group has compensation systems linked to the market value of its shares, providing employees share options. Certain compensation plans are cash-settled, while others are equity-settled.
For cash-settled share-based transactions, the total cost of the rights granted is recognized as an expense in the income statement over the vesting period with recognition of a corresponding liability (“Performance period”). The total cost of the options is measured initially at fair value at the grant date using statistical techniques, taking into account the terms and conditions established in each share option plan. At each subsequent reporting date, the Group reviews its estimate of fair value and the number of options it expects to be exercised, remeasuring the liability, with any changes in fair value recognized in the income statement
For equity-settled share option plans, fair value at the grant date is measured by applying statistical techniques or using benchmark securities. The cost is recognized, together with a corresponding increase in equity, over the vesting period. At each subsequent reporting date, the Company reviews its estimate of the number of options it expects to vest, with a corresponding adjustment to equity.
This heading in the accompanying consolidated income statement includes all the expenses and credits arising from the corporate income tax levied on the Spanish Group companies and similar taxes applicable to the Group’s foreign operations.
The income tax expense of each year includes both current and deferred taxes, where applicable.
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.
Deferred taxes are calculated based on a statement of financial position analysis of the temporary differences generated as a result of the difference between the tax bases of assets and liabilities and their respective carrying amounts.
The main temporary differences arise due to discrepancies between the tax bases and carrying amounts of plant, property and equipment, intangible assets, and non-deductible provisions, as well as differences in the fair value and tax bases of net assets acquired from a subsidiary, associate or joint venture.
Furthermore, deferred taxes arise from unused tax credits and tax loss carryforwards.
The Group determines deferred tax assets and liabilities by applying the tax rates that will be effective when the corresponding asset is received or the liability is settled, based on tax rates and tax laws that are enacted (or substantively enacted) at the reporting date.
Deferred income tax assets and liabilities are not discounted to present value and are classified as non-current, irrespective of the date of their reversal.
The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
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.
Deferred income tax relating to items directly recognized in equity is recognized in equity. Deferred tax assets and liabilities resulting from business combinations are recognized in connection with the purchase price allocation. Subsequent increases in required deferred tax assets are deducted from goodwill.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Revenue and expenses are recognized on the income statement based on an accruals basis; i.e. when the goods or services represented by them take place, regardless of when actual payment or collection occurs.
The Telefónica Group principally obtains revenues from providing the following telecommunications services: traffic, connection fees, regular (normally monthly) network usage fees, interconnection, network and equipment leasing, handset sales and other services, value-added services (e.g. text or data messaging) and maintenance. Products and services may be sold separately or in promotional packages (bundled).
Revenues from calls carried on Telefónica’s networks (traffic) entail an initial call establishment fee plus a variable call rate, based on call length, distance and type of service. Both wireline and wireless traffic is recognized as revenue as service is provided. For prepaid calls, the amount of unused traffic generates a deferred revenue recognized in “Trade and other payables” on the statement of financial position. Prepaid cards generally expire within 12 months and any deferred revenue from prepaid traffic is taken directly to the income statement when the card expires as the Group has no obligation to provide service after this date.
Revenue from traffic sales and services at a fixed rate over a specified period of time (flat rate) are recognized on a straight-line basis over the period of time covered by the rate paid by the customer.
Connection fees arising when customers connect to the Group’s network are deferred and taken to the income statement throughout the average estimated customer relationship period, which varies by type of service. All related costs, except those related to network enlargement expenses, administrative expenses and overhead, are recognized in the income statement as incurred.
Installment fees are taken to the income statement on a straight-line basis over the related period. Equipment leases and other services are taken to profit or loss as they are consumed.
Interconnection fees from wireline-wireless and wireless-wireline calls and other customer services are recognized in the period in which the calls are made.
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. The amount assigned to points awarded is recognized as deferred income until the points are exchanged and recognized as sales or services based on the product or service chosen by the customer. This exchange can be 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 statements of
financial position include the related deferred revenue, based on an estimate of the value of the points accumulated at year end, under “Trade and other payables.”
Bundle packages, which include different elements, are sold in the wireline, wireless and internet businesses. They are assessed to determine whether it is necessary to separate the separately identifiable elements and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values (i.e. the fair value of each element relative to the total fair value of the package).
As connection or initial activation fees, or upfront non-refundable fees, cannot be separately identifiable as elements in these types of packages, any revenues received from customer for these items are allocated to the remaining elements. However, amounts contingent upon delivery of undelivered elements are not allocated to delivered elements.
All expenses related to mixed promotional packages are taken to the income statement as incurred.
| | p) | Use of estimates, assumptions and judgments |
The key assumptions concerning the future and other relevant sources of uncertainty in estimates at the reporting date that could have a significant impact on the consolidated financial statements within the next financial year are discussed below.
A significant change in the facts and circumstances on which these estimates and related judgments are based could have a material impact on the Group’s results and financial position.
Property, plant and equipment, intangible assets and goodwill
The accounting treatment of investments in property, plant and equipment and intangible assets entails the use of estimates to determine the useful life for depreciation and amortization purposes and to assess fair value at their acquisition dates for assets acquired in business combinations.
Determining useful life 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 an item of property, plant and equipment or an intangible asset is considered to be impaired, the impairment loss is recognized in the income statement for the period. The decision to recognize an impairment loss involves estimates of the timing and amount 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.
Income taxes
The Group assesses 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 period for which the deferred tax assets remain deductible. This analysis is based on the estimated schedule for reversing deferred tax liabilities, 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 realization of deferred tax assets and the projected 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.
Provisions
Provisions are recognized when the Group has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 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 statement of financial position date, including the opinions of independent experts such as legal counsel or consultants.
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.
Revenue recognition
Connection fees
Connection fees, generated when customers connect to the Group’s network, are deferred and recognized as revenue over the average estimated customer relationship period.
The estimate of the average estimated customer relationship period is based on the recent history of customer churn. Potential changes in estimates could lead to changes in both the amount and timing of the future recognition of revenues.
Bundled offers
Bundled offers that combine different elements are assessed to determine whether it is necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values.
Determining fair values for each identified element requires estimates that are complex due to the nature of our business.
A change in estimates of fair values could affect the apportionment of revenue among the elements and, as a result, revenues in future years.
The consolidation methods applied are as follows:
| | - | Full consolidation method for companies over which the Company controls either by exercising effective control or by virtue of agreements with the other shareholders. |
| | - | Proportionate consolidation method for companies which are jointly controlled with third parties (joint ventures). Similar items are grouped together such that the corresponding proportion of these companies’ overall assets, liabilities, expenses and revenues, and cash flows are integrated on a line by line basis into the consolidated financial statements. |
| | - | Equity method for companies in which there is significant influence, but not control or joint control with third parties. |
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 of the consolidated companies 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 consolidated statement of cash flows 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 was sold or the company was liquidated, and those of the new companies included in the Group from the date on which the holding was acquired or the company was incorporated through year end.
Revenue and expenses associated with discontinued operations 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 that represent a line of business or geographic unit which has been disposed of or is available for sale.
The share of non-controlling interests in the equity and results of the fully consolidated subsidiaries is presented under “Non-controlling interests” on the consolidated statement of financial position and income statement, respectively.
| | r) | Acquisitions and disposals of non-controlling interests |
Acquisitions of equity shares of subsidiaries from non-controlling interests:
The Telefónica Group treats increases in equity investments of companies already controlled by the Group via purchases of non-controlling interests by recognizing any difference between the acquisition price and the carrying amount of the minority interest’s participation as goodwill.
Disposals of investments in subsidiaries without relinquishing control:
In transactions involving the sale of investments in subsidiaries in which the Group retains control, the Telefónica Group derecognizes the carrying amount of the shareholding sold, including any related goodwill. The difference between this amount and the sale price is recognized as a gain or loss in the consolidated income statement.
Commitments to acquire non-controlling interests (put options):
Put options granted to non-controlling interests of subsidiaries are measured at the exercise price and classified as a financial liability, with a deduction from non-controlling interests on the consolidated statement of financial position. Where the exercise price exceeds the balance of non-controlling interests, the difference is recognized as an increase in the goodwill of the
subsidiary. At each reporting date, the difference is adjusted based on the exercise price of the options and the carrying amount of non-controlling interests.
| | s) | New IFRS and interpretations of the International Financial Reporting Interpretations Committee (IFRIC) |
The accounting policies applied in the preparation of the financial statements for the year ended December 31, 2009 are consistent with those used in the preparation of the Group’s consolidated annual financial statements for the year ended December 31, 2008, except for the adoption of new standards, amendments to standards and interpretations published by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), and adopted by the European Union, effective as of January 1, 2009, noted below:
| | § | Amendment to IAS 23, Borrowing costs |
The amendment consists of the elimination of the possibility to immediately recognize in profit or loss the borrowing costs related to the production or development of qualifying assets. This amendment has had no impact on the accounting policies applied by Telefónica.
| | § | Amendment to IAS 1, Revised Presentation of Financial Statements |
The revised standard separates owner from non-owner changes in equity. The statement of changes in equity includes only details of transaction with owners, with non-owner changes presented as a single line. In addition, the standard introduces the statement of comprehensive income which can be presented in one single statement or in two linked statements. Telefónica has elected to present two statements. This change is not mandatory, but the Group has decided to use the proposed titles, which are:
| | § | statement of financial position, instead of “balance sheet” |
| | § | statement of comprehensive income, instead of “statement of recognized income and expense” |
| | § | statement of changes in equity instead of “movements in equity” |
| | § | statement of cash flows instead of “cash flow statement” |
| | § | Amendment to IFRS 2, Share-based Payment: Vesting Conditions and Cancellations |
This amendment clarifies the definition of vesting conditions and prescribes the accounting treatment of an award that is cancelled because a non-vesting condition is not met. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | Amendments to IAS 32, Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation |
These amendments include a limited scope exemption for puttable financial instruments to be classified as equity if they fulfill specified criteria. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | Improvements to IFRSs (May 2008) |
These improvements establish a broad amount of amendments to current IFRSs with the aim of removing inconsistencies and clarifying wording. These improvements did not have any impact on the financial position or performance of the Group.
| | § | Amendment to IFRS 7, Financial Instruments: Disclosures |
This amendment enhances the disclosure required about fair value measurements and liquidity risk. In addition, it introduces a three-level hierarchy of fair value measurement and the requirement to disclose any kind of change in the method of measuring fair value and the reasons behind it. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | Amendments to IAS 39 and IFRIC 9, Embedded derivatives |
These amendments clarify the impact that a reclassification of a financial asset out of the fair value through profit or loss category has on the assessment of whether an embedded derivative shall be separated from its host contract. Additionally, it prohibits the reclassification when the embedded derivative is not subject to a separate valuation upon the moment of reclassification of a hybrid contract out of the aforementioned category. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | IFRIC 12, Service Concession Arrangements |
This interpretation provides guidance on the accounting by operators for obligations assumed and related rights acquired under service concession arrangements.The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | IFRIC 13, Customer Loyalty Programmes |
This interpretation establishes that entities that have programs which award points or credits to their customers as the result of a commercial transaction, which in the future will be redeemed for free or discounted products or services, must treat these points as part of the commercial transaction that generates them. In other words, it is a transaction with multiple components, combining the sale of the product or service itself and the sale of points or credits, therefore such that a part of the amount earned must be allocated to the points awarded and its recognition deferred until their redemption. The portion corresponding to the points will be determined by reference to their fair value. The adoption of this amendment has not had a significant impact on the financial position or performance of the Group.
| | § | IFRIC 15, Agreements for the Construction of Real Estate |
This interpretation refers to agreements for the construction of real estate and addresses to related issues: it determines whether the construction of real estate is within the scope of IAS 11, Construction Contracts, or IAS 18, Revenue and, when revenue from the construction of real estate should be recognized. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | IFRIC 16, Hedges of a Net Investment in a Foreign Operation |
This interpretation establishes the criteria for the recognition of hedges of a net investment in foreign operations, including the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group the hedging instruments can be held and how an entity should determine the amount of foreign currency gain or loss relating to both the hedging instrument and the hedged item that must be recognized in profit or loss on disposal of the investment. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
| | § | IFRIC 18, Transfers of Assets from Customers |
This interpretation applies to deliveries of assets from customers as of July 1, 2009. This interpretation establishes the criteria for accounting transactions in which an entity receives from a customer an item of property, plant and equipment (or cash for their acquisition or construction) that the entity must use either to connect the customer to a network and/or to
provide the customer with ongoing access to a supply of goods or services. The adoption of this amendment has not had any impact on the financial position or performance of the Group.
In addition, the Amendment to IAS 39 Hedges of Transactions between Segments, included in Improvements to IFRS published in April 2009, is effective for annual periods beginning on or after January 1, 2009, but has not been adopted by the European Union at the date of preparation of these consolidated financial statements. This amendment clarifies that hedge accounting may not be applied to transactions between segments in accordance with the principle of IAS 39, which does not allow hedge accounting to be applied to intragroup transactions in the consolidated financial statements. The application of this interpretation would not have had an impact on the 2009 consolidated financial statements.
New IFRS and Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) not effective as of December 31, 2009
At the date of preparation of the accompanying consolidated financial statements, the following IFRS and IFRIC interpretations had been published, but their application was not mandatory:
| Standards and amendments | Mandatory application: annual periods beginning on or after |
| IFRS 9 | Financial Instruments | January 1, 2013 |
| Revised IFRS 3 | Business Combinations | July 1, 2009 |
| Amendment to IAS 27 | Consolidated and Separate Financial Statements | July 1, 2009 |
| Improvements to IFRSs (April 2009) | January 1, 2010 (*) |
| Revised IAS 24 | Related Party Disclosures | January 1, 2011 |
| Amendments to IAS 39 | Eligible Hedged Items | July 1, 2009 |
| Amendment to IFRS 2 | Group Cash-Settled Share-Based Payment Transactions | January 1, 2010 |
| Amendments to IAS 32 | Classification of Rights Issues | February 1, 2010 |
| (*) The amendments to IFRS 2, IAS 38 (regarding intangible assets acquired in business combinations) IFRIC 9 and IFRIC 16 become effective for all annual periods beginning on or after July 1, 2009. In addition, no effective date has been established for the additional guidance to the appendix to IAS 18 for determining whether an entity is acting as a principal or as an agent, as this appendix does not form part of the standard. |
| Interpretations | Mandatory application: annual periods beginning on or after |
| IFRIC 17 | Distributions of Non-Cash Assets to Owners | July 1, 2009 |
| IFRIC 19 | Extinguishing Financial Liabilities with Equity Instruments | July 1, 2010 |
| Amendment to IFRIC 14 | Prepayment of Minimum Funding Requirements | January 1, 2011 |
The Group is currently assessing the impact of the application of these standards, amendments and interpretations. Based on the analyses made to date, the Group estimates that their adoption will not
have a significant impact on the consolidated financial statements in the initial period of application. However, the changes introduced by the revised IFRS 3 and amendments to IAS 27 will affect future acquisitions and transactions with non-controlling interests carried out on or after January 1, 2010, as well as the subsequent recognition of tax assets acquired in business combinations prior to that date, as provided for in the transitional provisions. Meanwhile, the changes introduced by IFRS 9 will affect financial assets and future transactions with financial assets carried out on or after January 1, 2013.
Combining the wireline and wireless telephony services underscores the need to manage the business by region in order to offer customers the best integrated solutions and support wireless-wireline convergence.
To implement this management model, the Group has three large business areas: Telefónica Spain, Telefónica Europe and Telefónica Latin America, with each overseeing the integrated business. This forms the basis of the segment reporting in these consolidated financial statements.
Telefónica Spain oversees the wireline and wireless telephony, broadband, internet, data, broadband TV, value added services operations and their development in Spain.
Telefónica Latin America oversees the same operations in Latin America.
Telefónica Europe oversees the wireline, wireless, broadband, value added services and data operations in the UK, Germany, the Isle of Man, Ireland, the Czech Republic and the Slovak Republic.
The Telefónica Group is also involved in the media and contact center businesses through investments in Telefónica de Contenidos and Atento, included under “Other and eliminations” together with the consolidation adjustments.
The segment reporting takes into account the impact of the purchase price allocation (PPA) to assets acquired and the liabilities assumed from the companies included in each segment. The assets and liabilities presented in each segment are those managed by the heads of each segment.
The Telefónica Group manages its borrowing activities and tax implications centrally. Therefore, it does not disclose the related assets, liabilities, revenue and expenses breakdown by reportable segments.
For the presentation of the segment reporting, revenue and expenses arising from the use of the trademark and management services and that do not affect the Group’s consolidated results have been eliminated from the operating results of each Group segment.
Inter-segment transactions are carried out at market prices.
Key information for these segments is as follows:
| 2009 |
| Millions of euros | Telefónica Spain | Telefónica Latin America | Telefónica Europe | Other and eliminations | Total Group |
| Revenue from operations | 19,703 | 22,983 | 13,533 | 512 | 56,731 |
| External sales | 19,354 | 22,786 | 13,468 | 1,123 | 56,731 |
| Inter-segment sales | 349 | 197 | 65 | (611) | - |
| Other operating income and expenses | (9,946) | (13,840) | (9,623) | (719) | (34,128) |
| Depreciation and amortization | (2,140) | (3,793) | (2,895) | (128) | (8,956) |
| OPERATING INCOME | 7,617 | 5,350 | 1,015 | (335) | 13,647 |
| CAPITAL EXPENDITURE | 1,863 | 3,450 | 1,728 | 216 | 7,257 |
| INVESTMENTS IN ASSOCIATES | 3 | 2,453 | - | 2,480 | 4,936 |
| NON-CURRENT ASSETS | 14,082 | 25,016 | 26,962 | 1,351 | 67,411 |
| TOTAL ALLOCATED ASSETS | 26,156 | 44,678 | 32,097 | 5,210 | 108,141 |
| TOTAL ALLOCATED LIABILITIES | 13,363 | 22,862 | 6,435 | 41,207 | 83,867 |
| 2008 |
| Millions of euros | Telefónica Spain | Telefónica Latin America | Telefónica Europe | Other and eliminations | Total Group |
| Revenue from operations | 20,838 | 22,174 | 14,309 | 625 | 57,946 |
| External sales | 20,518 | 21,974 | 14,253 | 1,201 | 57,946 |
| Inter-segment sales | 320 | 200 | 56 | (576) | - |
| Other operating income and expenses | (10,553) | (13,729) | (10,129) | (616) | (35,027) |
| Depreciation and amortization | (2,239) | (3,645) | (3,035) | (127) | (9,046) |
| OPERATING INCOME | 8,046 | 4,800 | 1,145 | (118) | 13,873 |
| CAPITAL EXPENDITURE | 2,208 | 4,035 | 2,072 | 86 | 8,401 |
| INVESTMENTS IN ASSOCIATES | 99 | 107 | - | 2,571 | 2,777 |
| NON-CURRENT ASSETS | 14,372 | 21,959 | 27,265 | 1,193 | 64,789 |
| TOTAL ALLOCATED ASSETS | 32,273 | 37,942 | 32,726 | (3,045) | 99,896 |
| TOTAL ALLOCATED LIABILITIES | 20,754 | 21,998 | 6,420 | 31,162 | 80,334 |
| 2007 |
| Millions of euros | Telefónica Spain | Telefónica Latin America | Telefónica Europe | Other and eliminations | Total Group |
| Revenue from operations | 20,683 | 20,078 | 14,458 | 1,222 | 56,441 |
| External sales | 20,423 | 19,901 | 14,417 | 1,700 | 56,441 |
| Inter-segment sales | 260 | 177 | 41 | (478) | - |
| Other operating income and expenses | (11,235) | (12,957) | (9,481) | (*) 56 | (33,617) |
| Depreciation and amortization | (2,381) | (3,559) | (3,386) | (110) | (9,436) |
| OPERATING INCOME | 7,067 | 3,562 | 1,591 | 1,168 | 13,388 |
| CAPITAL EXPENDITURE | 2,381 | 3,343 | 2,125 | 178 | 8,027 |
| INVESTMENTS IN ASSOCIATES | 95 | 70 | - | 3,023 | 3,188 |
| NON-CURRENT ASSETS | 14,451 | 23,215 | 31,658 | 1,226 | 70,550 |
| TOTAL ALLOCATED ASSETS | 34,423 | 37,618 | 39,144 | (5,312) | 105,873 |
| TOTAL ALLOCATED LIABILITIES | 22,014 | 22,205 | 10,215 | 28,584 | 83,018 |
(*) “Other operating income and expenses” for the “Other and inter-group eliminations” segment includes the 1,368 million euro gain on the sale of Endemol (see Note 19).
The breakdown of the segment revenues from operations by business and the main countries in which the Group operates is as follows:
| | Millions of euros |
| | 2009 | 2008 | 2007 |
| Country | Wireline | Wireless | Other and eliminations | Total | Wireline | Wireless | Other and eliminations | Total | Wireline | Wireless | Other and eliminations | Total |
| Spain | 12,167 | 8,965 | (1,429) | 19,703 | 12,581 | 9,684 | (1,427) | 20,838 | 12,401 | 9,693 | (1,411) | 20,683 |
| Latin America | | | | 22,983 | | | | 22,174 | | | | 20,078 |
| Brazil | 5,766 | 3,036 | (426) | 8,376 | 6,085 | 2,932 | (411) | 8,606 | 5,619 | 2,396 | (353) | 7,662 |
| Argentina | 1,047 | 1,643 | (81) | 2,609 | 1,027 | 1,585 | (85) | 2,527 | 984 | 1,353 | (73) | 2,264 |
| Chile | 893 | 1,010 | (72) | 1,831 | 974 | 1,051 | (89) | 1,936 | 974 | 930 | (90) | 1,814 |
| Peru | 1,006 | 840 | (130) | 1,716 | 977 | 773 | (123) | 1,627 | 1,031 | 603 | (121) | 1,513 |
| Colombia | 615 | 685 | (31) | 1,269 | 710 | 815 | (35) | 1,490 | 739 | 869 | (39) | 1,569 |
| Mexico | N/A | 1,552 | N/A | 1,552 | N/A | 1,631 | N/A | 1,631 | N/A | 1,431 | N/A | 1,431 |
| Venezuela | N/A | 3,773 | N/A | 3,773 | N/A | 2,769 | N/A | 2,769 | N/A | 2,392 | N/A | 2,392 |
| Remaining operators and inter-segment eliminations | | | | 1,857 | | | | 1,588 | | | | 1,433 |
| Europe | | | | 13,533 | | | | 14,309 | | | | 14,458 |
| UK | 70 | 6,442 | - | 6,512 | 33 | 7,019 | N/A | 7,052 | 10 | 7,393 | N/A | 7,403 |
| Germany | 558 | 3,188 | - | 3,746 | 496 | 3,099 | N/A | 3,595 | 353 | 3,188 | N/A | 3,541 |
| Czech Republic | 1,015 | 1,248 | (3) | 2,260 | 1,183 | 1,388 | 10 | 2,581 | 1,067 | 1,192 | (2) | 2,257 |
| Ireland | 1 | 904 | N/A | 905 | N/A | 957 | N/A | 957 | N/A | 991 | N/A | 991 |
| Remaining operators and inter-segment eliminations | | | | 110 | | | | 124 | | | | 266 |
| Other and inter-segment eliminations | | | | 512 | | | | 625 | | | | 1,222 |
| Total | | | | 56,731 | | | | 57,946 | | | | 56,441 |
| (5) | BUSINESS COMBINATIONS AND ACQUISITIONS OF NON-CONTROLLING INTERESTS |
Business combinations:
2009
No significant business combinations were carried out in 2009 that had been completed as of December 31, 2009.
2008
On April 8, 2008, VIVO, through its subsidiary Tele Centro Oeste IP, S.A. (TCO IP, S.A.), launched a voluntary tender offer for shares representing up to one third of the free float of the preferred stock of Telemig Celular Participaçoes, S.A. and its subsidiary Telemig Celular, S.A. at a price per share of 63.90 and 654.72 Brazilian reais, respectively. This offer, which concluded on May 15, 2008, reached a level of acceptance of close to 100%, which implied the acquisition by TCO IP, S.A. of 31.9% and 6% of the preferred shares of Telemig Celular Participaçoes, S.A. and Telemig Celular, S.A., respectively.
Furthermore, in accordance with Brazilian Corporations law, TCO IP, S.A. submitted a mandatory tender offer on July 15, 2008, for all the voting stock in Telemig Celular Participaçoes, S.A. and Telemig Celular, S.A. at a price per share equivalent to 80% of the purchase price of the voting
stock of these companies. After this offer VIVO owned, directly and indirectly, 90.65% of the share capital of Telemig Celular, S.A. and 58.9% of the share capital of Telemig Celular Participaçoes, S.A. Both companies are included in the Telefónica Group’s consolidation scope using proportionate consolidation.
After the acquisition of these shareholdings, the purchase price was allocated to the assets acquired and the liabilities assumed using generally accepted measurement methods for each type of asset and/or liability based on the best information available.
The fair value of the licenses was determined using the Multi-period Excess Earnings Method (MEEM) by discounting the estimated future cash flows of the company’s wireless business based on the assumptions contained in the Business Economic Valuation (BEV) prepared in accordance with Brazilian corporation law.
The calculation only considered estimated revenue generated by new customers in the business plan and not existing customers in the portfolio at the time of the transaction. All applicable costs are deducted from the estimated revenue, while the impact on cash flows of changes in working capital and the acquisition of assets is also considered, thus obtaining the estimated net cash flow attributable to the asset.
The carrying amounts, fair values, goodwill and acquisition prices of the assets acquired and the liabilities assumed in this transaction at the date control was obtained bearing considering the effects of proportionality, were the following:
Millions of euros (Data at 50%) | Telemig Group |
Carrying amount | Fair value |
| Intangible assets | 18 | 562 |
| Property, plant and equipment | 126 | 183 |
| Other assets | 376 | 477 |
| | | |
| Deferred tax liabilities | 3 | 208 |
| Other liabilities | 265 | 263 |
| Net asset value | 252 | 751 |
| Non-controlling interests | 119 | 335 |
| Acquisition cost | | 451 |
| Goodwill (Note 7) | | 35 |
The amount paid for the acquisition in 2008 was 522 million euros. Acquisition cost was calculated bearing in mind the exchange rate effect of the difference between the exchange rate applied upon the initial inclusion of Telemig’s assets and liabilities in the Telefónica Group’s consolidated financial statements and the average exchange rate of the payments made in the acquisition of the shareholding.
The impact of this acquisition on cash and cash equivalents was as follows:
| Millions of euros | Telemig Group |
| Cash and cash equivalents of companies acquired | 175 |
| Cash paid in the acquisition plus related costs | 522 |
| Total net cash outflow (Note 23) | 347 |
Acquisitions of non-controlling interests:
2009
There were no acquisitions of significant non-controlling interests in 2009. The detail of transactions carried out in the year is provided in Appendix I (see Note 24).
2008
The effect of the tender offer for CTC’s non-controlling interests was recognized in 2008. The impact of this acquisition on equity attributable to non-controlling interests amounted to 397 million euros (see Note 12); while the related goodwill was 277 million euros (see Note 7).
Movements in the items comprising net intangible assets in 2009 and 2008 are as follows:
| | Millions of euros |
| | Balance at 12/31/08 | Additions | Amortization | Disposals | Transfers and other | Translation differences and hyperinflation adjustments | Balance at 12/31/09 |
| |
| |
| Development costs | 175 | 84 | (81) | (2) | (14) | - | 162 |
| Service concession arrangements | 8,697 | 10 | (786) | - | (8) | 929 | 8,842 |
| Software | 2,394 | 964 | (1,312) | - | 772 | 130 | 2,948 |
| Customer base | 3,046 | - | (512) | - | 24 | 123 | 2,681 |
| Other intangible assets | 1,229 | 81 | (170) | (1) | (51) | 51 | 1,139 |
| Prepayments on intangible assets | 380 | 166 | - | - | (479) | 7 | 74 |
| Net intangible assets | 15,921 | 1,305 | (2,861) | (3) | 244 | 1,240 | 15,846 |
| | Millions of euros |
| | Balance at 12/31/07 | Additions | Amortization | Disposals | Transfers and other | Translation differences and hyperinflation adjustments | Inclusion of companies | Exclusion of companies | Balance at 12/31/08 |
| |
| |
| Development costs | 177 | 96 | (81) | - | (14) | (3) | - | - | 175 |
| Service concession arrangements | 9,670 | 293 | (757) | - | 50 | (1,103) | 544 | - | 8,697 |
| Software | 2,452 | 933 | (1,111) | (15) | 276 | (160) | 22 | (3) | 2,394 |
| Customer base | 4,153 | 1 | (585) | - | (136) | (387) | - | - | 3,046 |
| Other intangible assets | 1,534 | 16 | (209) | (3) | 108 | (218) | 3 | (2) | 1,229 |
| Prepayments on intangible assets | 334 | 292 | - | - | (233) | (14) | 1 | - | 380 |
| Net intangible assets | 18,320 | 1,631 | (2,743) | (18) | 51 | (1,885) | 570 | (5) | 15,921 |
The gross cost, accumulated amortization and impairment losses of intangible assets at December 31, 2009 and 2008 are as follows:
| Millions of euros | Balance at December 31, 2009 |
| Gross cost | Accumulated amortization | Impairment losses | Net intangible assets |
| Development costs | 1,613 | (1,451) | - | 162 |
| Service concession arrangements | 14,074 | (5,232) | - | 8,842 |
| Software | 11,175 | (8,226) | (1) | 2,948 |
| Customer base | 5,476 | (2,795) | - | 2,681 |
| Other intangible assets | 2,143 | (973) | (31) | 1,139 |
| Prepayments on intangible assets | 74 | - | - | 74 |
| Net intangible assets | 34,555 | (18,677) | (32) | 15,846 |
| Millions of euros | Balance at December 31, 2008 |
| Gross cost | Accumulated amortization | Impairment losses | Net intangible assets |
| Development costs | 1,613 | (1,438) | - | 175 |
| Service concession arrangements | 12,430 | (3,733) | - | 8,697 |
| Software | 9,207 | (6,813) | - | 2,394 |
| Customer base | 5,072 | (2,026) | - | 3,046 |
| Other intangible assets | 2,055 | (822) | (4) | 1,229 |
| Prepayments on intangible assets | 380 | - | - | 380 |
| Net intangible assets | 30,757 | (14,832) | (4) | 15,921 |
Within the “Additions” column, the main additions in 2009 and 2008 relate to investments in software.
“Additions” of service concession arrangements in 2009 include the renewal of the operator’s license in Nicaragua for an amount equivalent to 10 million euros, and in 2008 the spectrum license at VIVO for 225 million euros and the operator’s license in Ecuador for 90 million US dollars, equivalent to 62 million euros.
“Inclusion of companies” in 2008 mainly reflects the impact of the inclusion of the Telemig Group in the consolidation scope (see Note 5).
At December 31, 2009 and 2008, the Company carried intangible assets with indefinite useful lives of 111 and 104 million euros, respectively, related primarily to permanent licenses to operate wireless telecommunications services in Argentina.
Intangible assets 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 significant impairment recognized in the consolidated financial statements for 2009 or 2008 as a result of these impairment tests.
“Other intangible assets” includes the amounts allocated to trademarks acquired in business combinations, of 1,477 and 1,411 million euros at December 31, 2009 and 2008 (901 and 999 million euros net of the related accumulated amortization).
The movement in this heading assigned to each Group segment was the following:
| Millions of euros |
| 2009 | Balance at 12/31/08 | Acquisitions | Disposals | Translation differences and hyperinflation adjustments | Balance at 12/31/09 |
| Telefónica Spain | 3,238 | - | - | - | 3,238 |
| Telefónica Latin America | 5,450 | 23 | (209) | 1,056 | 6,320 |
| Telefónica Europe | 9,452 | - | - | 358 | 9,810 |
| Other | 183 | 7 | - | 8 | 198 |
| Total | 18,323 | 30 | (209) | 1,422 | 19,566 |
| Millions of euros |
| 2008 | Balance at 12/31/07 | Acquisitions | Translation differences and other | Balance at 12/31/08 |
| Telefónica Spain | 3,233 | 5 | - | 3,238 |
| Telefónica Latin America | 5,524 | 406 | (480) | 5,450 |
| Telefónica Europe | 10,830 | 5 | (1,383) | 9,452 |
| Other | 183 | 16 | (16) | 183 |
| Total | 19,770 | 432 | (1,879) | 18,323 |
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 impairment tests carried out did not identify the need to recognize any material write-downs to goodwill at the 2009 and 2008 year ends as the recoverable amount, in all cases based on value in use, was higher than carrying amount.
In addition, sensitivity analyses were performed on changes reasonably expected to occur in the primary valuation variables, and the recoverable amount remained above the net carrying amount.
2009
The primary disposals in 2009 correspond to the measurement of the purchase commitment for non-controlling interests of Colombia de Telecomunicaciones, S.A. for 90 million euros (see Note 21) and the impact of the corporate restructuring carried out at the VIVO Group.
In addition, the favorable evolution of exchange rates applied to goodwill has led to an increase in this line item of 719 million euros in the year, and the impact of recognizing Venezuela as a hyperinflationary economy (see Note 2) led to an increase in goodwill of 713 million euros.
2008
The primary acquisitions of goodwill in 2008 correspond to the acquisition of the Telemig Group, which led to the recognition of 35 million euros of goodwill, and the first tranche of the buyout by CTC’s non-controlling interests, which generated 277 million euros of goodwill.
In 2008, “Translation differences and other” had a major impact on the movement in the year owing to currency depreciation in several countries in which the Group operates, especially the pound sterling, which resulted in a decrease in goodwill of 1,343 million euros.
| (8) | PROPERTY, PLANT AND EQUIPMENT |
The composition and movement of the items comprising net “Property, plant and equipment” in 2009 and 2008 was the following:
| | |
| | Balance at 12/31/08 | Additions | Depreciation | Disposals | Transfers and other | Translation differences and hyperinflation adjustments | Inclusion of companies | Balance at 12/31/09 |
| Land and buildings | 7,031 | 34 | (454) | (19) | (852) | 352 | - | 6,092 |
| Plant and machinery | 19,250 | 1,356 | (4,980) | (100) | 4,607 | 1,254 | 4 | 21,391 |
| Furniture, tools and other items | 1,546 | 285 | (661) | (6) | 362 | 134 | - | 1,660 |
| Total PP&E in service | 27,827 | 1,675 | (6,095) | (125) | 4,117 | 1,740 | 4 | 29,143 |
| PP&E in progress | 2,485 | 3,973 | - | (4) | (3,937) | 102 | - | 2,619 |
| Advance payments on PP&E | 6 | 6 | - | - | (2) | - | - | 10 |
| Installation materials | 227 | 298 | - | (3) | (297) | 2 | - | 227 |
| Net PP&E | 30,545 | 5,952 | (6,095) | (132) | (119) | 1,844 | 4 | 31,999 |
| | |
| | Balance at 12/31/07 | Additions | Depreciation | Disposals | Transfers and other | Translation differences | Inclusion of companies | Balance at 12/31/08 |
| Land and buildings | 7,289 | 68 | (628) | (166) | 850 | (385) | 3 | 7,031 |
| Plant and machinery | 20,814 | 2,520 | (4,977) | (117) | 2,352 | (1,429) | 87 | 19,250 |
| Furniture, tools and other items | 1,784 | 397 | (654) | (15) | 129 | (162) | 67 | 1,546 |
| Total PP&E in service | 29,887 | 2,985 | (6,259) | (298) | 3,331 | (1,976) | 157 | 27,827 |
| PP&E in progress | 2,274 | 3,406 | - | (16) | (2,957) | (250) | 28 | 2,485 |
| Advance payments on PP&E | 15 | 6 | - | - | (15) | - | - | 6 |
| Installation materials | 284 | 373 | (44) | 28 | (403) | (11) | - | 227 |
| Net PP&E | 32,460 | 6,770 | (6,303) | (286) | (44) | (2,237) | 185 | 30,545 |
The gross cost, accumulated depreciation and impairment losses of property, plant and equipment at December 31, 2009 and 2008 are as follows:
| | Balance at December 31, 2009 |
| Gross cost | Accumulated depreciation | Impairment losses | Net PP&E |
| Land and buildings | 11,560 | (5,456) | (12) | 6,092 |
| Plant and machinery | 87,017 | (65,548) | (78) | 21,391 |
| Furniture, tools and other items | 6,184 | (4,534) | 10 | 1,660 |
| Total PP&E in service | 104,761 | (75,538) | (80) | 29,143 |
| PP&E in progress | 2,619 | - | - | 2,619 |
| Advance payments on PP&E | 10 | - | - | 10 |
| Installation materials | 260 | - | (33) | 227 |
| Net PP&E | 107,650 | (75,538) | (113) | 31,999 |
| | Balance at December 31, 2008 |
| Gross cost | Accumulated depreciation | Impairment losses | Net PP&E |
| Land and buildings | 11,752 | (4,703) | (18) | 7,031 |
| Plant and machinery | 75,414 | (56,077) | (87) | 19,250 |
| Furniture, tools and other items | 5, 286 | (3,737) | (3) | 1,546 |
| Total PP&E in service | 92,452 | (64,517) | (108) | 27,827 |
| PP&E in progress | 2,486 | - | (1) | 2,485 |
| Advance payments on PP&E | 6 | - | - | 6 |
| Installation materials | 317 | (57) | (33) | 227 |
| Net PP&E | 95,261 | (64,574) | (142) | 30,545 |
Among the main investments in 2009 and 2008 were additions by Telefónica de España of 1,276 million euros (1,042 million euros in the fixed line and 234 million euros in the wireline business) and 1,681 million euros, respectively. In the fixed line business, investments mainly went to broadband, Imagenio and data service for large corporate customers, and to maintenance of the traditional business. Investment in the wireless business mainly went to the deployment of 3G.
Telefónica Latin America’s investments in 2009 and 2008 amounted to 3,187 million and 3,393 million euros, respectively. Investment in 2009 centered on driving wireline technologies, namely the transformation in growth businesses (broadband and pay-TV), and in the wireless business on extending coverage and capacity for the rollout of GSM networks.
Investment by Telefónica Europe in 2009 and 2008 amounted to 1,356 million and 1,634 million euros, respectively. Investment here in 2009 focused primarily on all the operators’ 3G networks to continue expanding coverage, with further amounts earmarked for investment in the ADSL business in the UK, Germany and the Czech Republic.
“Inclusion of companies” in 2008 reflects the 182 million euros impact of the consolidation of Telemig.
“Translation differences” reflects the impact of exchange rate movements on opening balances as well as the impact of the recognition of Venezuela as a hyperinflationary economy (see Note 2). The effect of exchange rates on movements in the year is included in the column corresponding to such movement.
Telefónica Group companies have purchased 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.
Property, plant and equipment deriving from finance leases amounted to 691 million euros at December 31, 2009 (733 million euros at December 31, 2008) (see Note 22).
The net amounts of “Property, plant and equipment” temporarily out of service at December 31, 2009 and 2008 were not significant.
| (9) | ASSOCIATES AND JOINT VENTURES |
Associates
The breakdown of amounts recognized in the consolidated statement of financial position and income statement related to associates is as follows:
| Description | Millions of euros |
| | 12/31/09 | 12/31/08 |
| Investments in associates | 4,936 | 2,777 |
| Long-term loans to associates | 3 | 49 |
| Short-term loans to associates | 15 | 77 |
| Receivables from associates for current operations (Note 11) | 189 | 120 |
| Loans granted by associates (Note 14) | 149 | 109 |
| Payables to associates for current operations (Note 14) | 113 | 73 |
| Revenue from operations with associates | 204 | 212 |
| Work performed by associates and other operating expenses | 484 | 533 |
In addition, the Telefónica Group, through its stake in Telco S.p.A., has an indirect equity interest in Telecom Italia S.p.A. equivalent to 7.21% of its voting shares. Key information on the balances and transactions between the Telefónica Group and Telecom Italia S.p.A. and group companies is as follows:
| Description | Millions of euros |
| | 12/31/09 | 12/31/08 |
| Receivables from current operations (Note 11) | 73 | 65 |
| Payables from current operations (Note 14) | 25 | 54 |
| Operating revenue | 379 | 406 |
| Operating expenses | 420 | 504 |
Balances and transactions with Portugal Telecom, SGPS, S.A. through Brasilcel, N.V. group companies are shown at 50%.
The breakdown of the main associates and key financial highlights for the last 12-month periods available at the time of preparation of these consolidated financial statements are as follows:
| December 31, 2009 | Millions of euros |
| COMPANY | % Holding | Total Assets | Total liabilities | Operating income | Profit/(loss) for the year | Carrying amount | Fair value |
| Telco S.p.A. (Italy) (*) | 46.18% | 7,111 | 3,703 | - | (39) | 2,026 | 2,026 |
| Portugal Telecom, SGPS, S.A. (Portugal) | 9.86% | 14,948 | 12,965 | 6,674 | 516 | 458 | 764 |
| China Unicom (Hong Kong) Limited | 8.37% | 37,397 | 16,203 | 21,490 | 3,687 | 2,301 | 2,301 |
| Hispasat, S.A. (Spain) | 13.23% | 841 | 383 | 151 | 71 | 56 | N/A |
| Other | | | | | | 95 | |
| TOTAL | | | | | | 4,936 | |
| December 31, 2008 | Millions of euros |
| COMPANY | % Holding | Total Assets | Total liabilities | Operating income | Profit/(loss) for the year | Carrying amount | Fair value |
| Telco S.p.A. (Italy) (*) | 42.30% | 7,241 | 3,688 | - | (1,556) | 2,082 | 2,082 |
| Portugal Telecom, SGPS, S.A. (Portugal) | 9.86% | 13,713 | 12,513 | 6,734 | 582 | 456 | 544 |
| Medi Telecom, S.A. (Morocco) | 32.18% | 1,217 | 951 | 464 | 30 | 95 | N/A |
| Hispasat, S.A. (Spain) | 13.23% | 716 | 335 | 138 | 47 | 50 | N/A |
| Other | | | | | | 94 | |
| TOTAL | | | | | | 2,777 | |
(*) Through this company, Telefónica effectively has an indirect stake in Telecom Italia S.p.A.’s voting shares at December 31, 2009 and 2008 of approximately 10.49%, representing 7.21% of the dividend rights.
The detail of the movement in investments in associates in 2009 and 2008 was the following:
| Investments in associates | Millions of euros |
| Balance at 12/31/07 | 3,188 |
| Acquisitions | 4 |
| Disposals | (55) |
| Inclusion of companies | 1 |
| Translation differences | (45) |
| Income (loss) | (161) |
| Dividends | (65) |
| Transfers and other | (90) |
| Balance at 12/31/08 | 2,777 |
| Acquisitions | 772 |
| Disposals | (114) |
| Translation differences | 103 |
| Income (loss) | 47 |
| Dividends | (58) |
| Transfers and other | 1,409 |
| Balance at 12/31/09 | 4,936 |
Changes at December 31, 2009 and 2008 reflect the amounts from transactions detailed in the changes to the consolidation scope (see Appendix I and Note 2). The figure for 2009 reflects the inclusion in the consolidation scope of the equity investment in China Unicom Limited for 2,301 million euros. Of this amount, 1,467 million euros were transferred from “Non-current financial assets – Equity investments” (see Note 13) following the acquisition of an additional 2.68% of this company.
Disposals in 2009 include the sale by Telefónica Móviles España, S.A.U., a wholly owned subsidiary of Telefónica, S.A., of its 32.18% stake in Moroccan operator Medi Telecom, S.A., along with outstanding loans to shareholders, for a total amount of 400 million euros. The net gain from this transaction before tax amounts to 220 million euros (see Note 19).
Disposals in 2008 included the disposal of a 0.476% stake in Portugal Telecom, SGPS, S.A. The Telefónica Group’s effective shareholding in this company at December 31, 2008 was 9.857%.
Results for 2008 include the impact of the write-down of Telco S.p.A.’s investment in Telecom Italia S.p.A. To estimate the impact, the Telefónica Group took the estimated synergies to be obtained by improving certain processes in its European operations through the alliances reached with Telecom Italia S.p.A. The amount shown in “Share of profit (loss) of associates” in the
income statement for 2008 reflects a 209 million euros loss in this respect (146 million euros after the related tax effect) at Telefónica, S.A..
Joint ventures
On December 27, 2002, Telefónica Móviles, S.A. and PT Movéis Servicios de Telecomunicaçoes, S.G.P.S., 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 integrated in the consolidated financial statements of the Telefónica Group using proportionate consolidation.
The contributions of Brasilcel, N.V. to the Telefónica Group’s 2009, 2008 and 2007 consolidated statements of financial position and income statements are as follows:
| | Millions of euros |
| | 2009 | 2008 | 2007 |
| Current assets | 1,170 | 1,234 | 1,193 |
| Non-current assets | 5,617 | 4,616 | 4,358 |
| Current liabilities | 1,170 | 1,351 | 1,328 |
| Non-current liabilities | 1,505 | 1,212 | 644 |
| Operating revenue | 2,743 | 2,662 | 2,152 |
| Operating expenses | 2,046 | 2,063 | 1,778 |
Significant shareholders
The main transactions between Telefónica Group companies and significant shareholders of Telefónica, S.A. are described below. All of these transactions were carried out at market prices.
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) and subsidiaries comprising the consolidated group:
| | · | Financing transactions arranged under market conditions, with approximately 531 million euros drawn down at December 31, 2009 (436 million euros at December 31, 2008). |
| | · | Time deposits amounting to 878 million euros at December 31, 2009 (355 million euros at December 31, 2008). |
| | · | Derivative transactions contracted under market conditions, for a total nominal amount of approximately 7,824 million euros at December 31, 2009 (6,930 million euros at December 31, 2008). |
| | · | Guarantees granted by BBVA for approximately 237 million euros at December 31, 2009 (13 million euros at December 31, 2008). |
| | · | Dividends and other benefits paid to BBVA in 2009 for 287 million euros (279 million euros in 2008). |
| | · | Services, mainly telecommunications and telemarketing, rendered by Telefónica Group companies to the BBVA Group, under market conditions. |
Caja de Ahorros y Pensiones de Barcelona (“la Caixa”), and subsidiaries comprising the consolidated group:
| | · | Financing transactions arranged under market conditions, with approximately 643 million euros drawn down at December 31, 2009 (682 million euros at December 31, 2008). |
| | · | Time deposits amounting to 1,293 million euros at December 31, 2009 (368 million euros at December 31, 2008). |
| | · | Derivative transactions arranged under market conditions, for a total nominal amount of approximately 800 million euros in 2009, with no amounts in 2008. |
| | · | Dividends and other benefits paid to la Caixa in 2009 for 260 million euros (237 million euros in 2008). |
| | · | Guarantees granted for 17 million euros at December 31, 2009 (1 million euros in 2008). |
| | · | Telecommunications services rendered by Telefónica Group companies to la Caixa group companies under market conditions. |
Associates and joint ventures
The most significant balances and transactions with associates and joint ventures and their contributions to the consolidated statement of financial position and income statement are detailed in Note 9.
Directors and senior executives
During the financial year to which these accompanying annual financial statements refer, the directors and senior executives did not perform any transactions with Telefónica or any Telefónica Group company other than those in the Group’s normal trading activity and business.
Compensation and other benefits paid to members of the Board of Directors and senior executives, as well as the detail of the equity interests held in companies engaging in an activity that is identical, similar or complementary to that of the Company and the performance of similar activities by the directors for their own account or for third parties, are detailed in Note 21 of these consolidated financial statements.
| (11) | TRADE AND OTHER RECEIVABLES |
The breakdown of this consolidated statement of financial position heading at December 31, 2009 and 2008 is as follows:
| | Balance at | Balance at |
| Millions of euros | 12/31/09 | 12/31/08 |
| Trade receivables | 10,877 | 10,116 |
| Receivables from associates (Note 9) | 262 | 120 |
| Other receivables | 1,103 | 585 |
| Allowance for uncollectibles | (2,589) | (2,196) |
| Short-term prepayments | 969 | 690 |
| Total | 10,622 | 9,315 |
Public-sector trade receivables in the countries in which the Group operates at December 31, 2009 and 2008 amounted to 666 million and 539 million euros, respectively.
The breakdown of trade receivables at December 31, 2009 and 2008 is as follows:
| Millions of euros | 12/31/09 | 12/31/08 |
| Trade receivables billed | 7,544 | 7,153 |
| Trade receivables unbilled | 3,333 | 2,963 |
| Total | 10,877 | 10,116 |
The movement in impairment losses in 2009 and 2008 is as follows:
| | Millions of euros |
| Impairment losses at December 31, 2007 | 2,070 |
| Allowances | 1,232 |
| Retirements/amount applied | (926) |
| Inclusion of companies | 6 |
| Translation differences | (186) |
| Impairment losses at December 31, 2008 | 2,196 |
| Allowances | 1,209 |
| Retirements/amount applied | (970) |
| Translation differences | 154 |
| Impairment losses at December 31, 2009 | 2,589 |
The balance of trade receivables billed net of impairment losses at December 31, 2009 amounted to 4,955 million euros (4,957 million euros at December 31, 2008), of which 2,981 million euros were not yet due (2,642 million euros at December 31, 2008).
Of the amounts due, only net amounts of 204 and 216 million euros are over 360 days at December 31, 2009 and 2008, respectively. They are mainly with the public sector.
a) Share capital and share premium
At December 31, 2009, Telefónica, S.A.’s share capital amounted to 4,563,996,485 euros and consisted of 4,563,996,485 fully paid ordinary shares of a single series, par value of 1 euro, all recorded by the book-entry system and traded on the Spanish electronic 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 listed on the New York, London, Tokyo, Buenos Aires, Sao Paulo and Lima Stock Exchanges.
With respect to authorizations given regarding share capital, on June 21, 2006, authorization was given at the Annual Shareholders’ Meeting of Telefónica, S.A. for the Board of Directors, at its discretion and in accordance with the Company’s needs, 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 increase of 2,460 million euros, equivalent to half of the Company’s share capital at that date, by issuing and placing new ordinary shares, be they ordinary or of any other type permitted by the Law, with a fixed or variable premium, with or without pre-emptive subscription rights and, in all cases, in exchange for cash, and expressly considering the possibility that the new shares may not be fully subscribed in accordance with the terms of Article 161.1 of the Spanish Corporation Law. The Board of Directors was also empowered to exclude, partially or fully, pre-emptive subscription rights under the terms of Article 159.2 of the Spanish Corporation Law and related provisions.
In addition, at the May 10, 2007 Shareholders’ Meeting, authorization was given for the Board of Directors to issue fixed-income securities and preferred shares at one or several times within a maximum period of five years from that date. These securities may be in the form of
debentures, bonds, promissory notes or any other kind of fixed-income security, plain or, in the case of debentures and bonds, convertible into shares of the Company and/or exchangeable for shares of any of the group companies. They may also be preferred shares. The total maximum amount of the securities issued agreed under this authorization is 25,000 million euros or the equivalent in another currency. As at December 31, 2009, the Board of Directors had exercised these powers, approving three programs to issue corporate promissory notes for 2008, 2009 and 2010.
In addition, on June 23, 2009, shareholders voted to authorize the acquisition by the Board of Directors of treasury shares, for a consideration, up to the limits and pursuant to the terms and conditions established at 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 the maximum legal percentage at any time (currently 10% of Telefónica, S.A.’s share capital).
Finally, on December 28, 2009, the deed of capital reduction formalizing the implementation by the Company’s Board of Directors of the resolution adopted by the Shareholders’ Meeting on June 23, 2009, was executed. Capital was reduced through the cancellation of treasury shares previously acquired by the Company as authorized by the Shareholders’ Meeting. As a result, 141,000,000 Telefónica, S.A. treasury shares were cancelled and the Company’s share capital was reduced by a nominal amount of 141,000,000 euros. Article 5 of the Corporate Bylaws relating to the amount of share capital was amended accordingly to show 4,563,996,485 euros. At the same time, a reserve was recorded for the cancelled shares for 141 million euros. The balance of this reserve at December 31, 2009 was 498 million euros. The cancelled shares were delisted on December 30, 2009.
Proposed appropriation of profit attributable to equity holders of the parent
Telefónica, S.A. obtained 6,252 million euros of profit in 2009.
At its meeting of April 29, 2009, Telefónica, S.A.’s Board of Directors resolved to pay an interim dividend against 2009 profit of a fixed gross 0.5 euros for each of the Company's outstanding shares carrying dividend rights. This dividend was paid in full on May 12, 2009, and the total amount paid was 2,277 million euros.
Accordingly, the Company’s Board of Directors will submit the following proposed appropriation of 2009 profit for approval at the Shareholders’ Meeting:
| | Millions of euros |
| Total distributable profit | 6,252 |
| Interim dividend (paid in May 2009) | 2,277 |
| Goodwill reserve | 2 |
| Voluntary reserves | 3,973 |
| Total | 6,252 |
b) Dividends
Dividends paid in 2009
At its meeting held on June 23, 2009, the Company’s Board of Directors resolved to pay a dividend charged to unrestricted reserves for a fixed gross amount of 0.5 euros per outstanding
share carrying dividend rights. This dividend was paid in full on November 11, 2009, and the total amount paid was 2,280 million euros.
In addition, as indicated above, in May 2009 an interim dividend against 2009 profit of a gross 0.50 euros per share was paid, entailing a total payment of 2,277 million euros.
In accordance with Article 216 of the Spanish Corporations Law, the following table shows the provisional statement issued substantiating the existence of sufficient liquidity at the time the resolution to distribute this dividend was adopted.
| Liquidity statement at April 29, 2009 | Millions of euros |
| | |
| Income from January 1 through March 31, 2009 | 3,024 |
| Mandatory appropriation to reserves | - |
| Distributable income | 3,024 |
| | |
| Proposed interim dividend (maximum amount) | 2,352 |
| | |
| Cash position at April 29, 2009 | |
| Funds available for distribution | |
| Cash and cash equivalents | 2,218 |
| Unused credit facilities | 4,667 |
| Proposed interim dividend (maximum amount) | (2,352) |
| Difference | 4,533 |
The Company manages its liquidity risks (see Note 16) in order to have cash available for the following year.
Dividends paid in 2008
At its meeting held on April 22, 2008, the Company’s Board of Directors agreed to pay an additional dividend charged against 2007 profit of a gross 0.40 euros per share. A total of 1,869 million euros was paid in May 2008.
In addition, in November 2008 an interim dividend against 2008 profit of a gross 0.50 euros per share was paid, entailing a total payment of 2,296 million euros.
Dividends paid in 2007
At its meeting held on May 10, 2007, the Company’s Board of Directors resolved to pay an additional dividend charged against 2006 profit of a gross 0.30 euros per share. A total of 1,425 million euros was paid in May.
In addition, in November an interim dividend against 2007 profit of a gross 0.35 euros per share was paid, entailing a total payment of 1,652 million euros.
According to the revised text of Spanish Corporation Law, companies must transfer 10% of profit for the year to a legal reserve until this reserve reaches at least 20% of share capital. The legal reserve can be used to increase capital by the amount exceeding 10% of the increased share capital amount. Except for this purpose, until the legal reserve exceeds the limit of 20%
of share capital, it can only be used to offset losses, if there are no other reserves available. At December 31, 2009, the Company had duly set aside this reserve.
The balance of “Revaluation reserves” arose as a result of the revaluation made pursuant to Royal Decree-Law 7/1996 dated June 7.
The revaluation reserve may be used, free of tax, to offset any losses incurred in the future and to increase capital. From January 1, 2007, it may be allocated to unrestricted reserves, provided that the capital gain has been realized.
The capital gain will be deemed to have been realized in respect of the portion on which the depreciation has been recorded for accounting purposes or when the revalued assets have been transferred or derecognized. In this respect, an amount of 15 million euros in 2009 (8 million euros in 2008 and 1,178 million euros in 2007) corresponding to revaluation reserves subsequently considered unrestricted has been reclassified to “Retained earnings.”
Retained earnings
| | These reserves include undistributed profits of companies comprising the consolidated Group less interim dividends paid against profit for the year, actuarial gains and losses, and the impact of the asset ceiling on defined-benefit plans. |
| d) | Translation differences |
The translation differences relate mainly to the effect of exchange rate fluctuations on the net assets of the companies located abroad after the elimination of intra-group balances and transactions (see Note 3.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 and the impact of the restatement of financial statements of companies in hyperinflationary economies.
Group companies took an exemption that allows all translation differences generated up to the IFRS transition date to be reset to zero, with the impact on prior years recognized as retained earnings.
The breakdown of the accumulated contribution of translation differences at December 31 is as follows:
| Millions of euros | 2009 | 2008 | 2007 |
| Telefónica Latin America | 1,052 | (834) | 669 |
| Telefónica Europe | (2,524) | (2,793) | (619) |
| Other adjustments and intra-group eliminations | 99 | 16 | 47 |
| Total Telefónica Group | (1,373) | (3,611) | 97 |
At December 31, 2009, 2008 and 2007, Telefónica Group companies held the following shares in the Telefónica, S.A. parent company:
| | No. of shares | Euros per share | Market Value Millions of euros | % |
| Acquisition price | Trading price |
| Treasury shares at 12/31/09 | 6,329,530 | 16.81 | 19.52 | 124 | 0.13868% |
| Treasury shares at 12/31/08 | 125,561,011 | 16.68 | 15.85 | 1,990 | 2.66867% |
| Treasury shares at 12/31/07 | 64,471,368 | 16.67 | 22.22 | 1,433 | 1.35061% |
Telefónica S.A. owns the only treasury shares in the Group. No other Group company owns any Telefónica treasury shares.
In 2009, 2008 and 2007 the following transactions involving treasury shares were carried out:
| | No. of shares |
| Treasury shares at 12/31/06 | 75,632,559 |
| Acquisitions | 149,099,044 |
| Disposals | (12,621,573) |
| Lycos and Endemol employee share option plans | (4,750) |
| Exchange of Telefónica, S.A. shares for Telefónica Móviles, S.A. shares | (147,633,912) |
| Treasury shares at 12/31/07 | 64,471,368 |
| Acquisitions | 129,658,402 |
| Disposals | (68,759) |
| Share cancellation | (68,500,000) |
| Treasury shares at 12/31/08 | 125,561,011 |
| Acquisitions | 65,809,222 |
| Exchange of Telefónica, S.A. shares for China Unicom shares | (40,730,735) |
| Employee share option plan | (3,309,968) |
| Share cancellation | (141,000,000) |
| Treasury shares at 12/31/09 | 6,329,530 |
The amount paid to acquire treasury shares in 2009 was 1,005 million euros (2,225 million and 2,324 million euros in 2008 and 2007, respectively).
At December 31, 2009, the Group held call options on 150 million treasury shares, and at December 31, 2008, put options on 6 million treasury shares.
| f) | Non-controlling interests |
“Non-controlling interests” represents the share of non-controlling interests in the equity and income or loss for the year of fully consolidated Group companies. The movements in this heading of the 2009, 2008 and 2007 consolidated statement of financial position are as follows:
| Millions of euros | Balance at 12/31/08 | Capital contributions and inclusion of companies | Profit (loss) for the year | Change in translation differences | Acquisitions of non-controlling interests and exclusion of companies | Dividends paid | Other movements | Balance at 12/31/09 |
| Telefónica O2 Czech Republic, a.s. | 1,095 | - | 114 | 21 | - | (186) | - | 1,044 |
| Telefónica Chile, S.A. | 23 | 1 | 1 | 6 | (8) | (1) | - | 22 |
| Telesp Participaçoes, S.A. | 385 | - | 101 | 118 | - | (64) | 2 | 542 |
| Brasilcel (Holdings) | 774 | - | 46 | 214 | (108) | (41) | - | 885 |
Fonditel Entidad Gestora de Fondos de Pensiones, S.A. | 20 | - | 3 | - | - | - | - | 23 |
| Iberbanda, S.A. | 9 | - | (3) | - | - | - | - | 6 |
Colombia Telecomunicaciones, S.A., ESP | - | - | (104) | - | - | - | 104 | - |
| Other | 25 | - | 3 | (2) | (7) | (3) | 2 | 18 |
| Total | 2,331 | 1 | 161 | 357 | (123) | (295) | 108 | 2,540 |
| Millions of euros | Balance at 12/31/07 | Capital contributions and inclusion of companies | Profit (loss) for the year | Change in translation differences | Acquisitions of non-controlling interests and exclusion of companies | Dividends paid | Other movements | Balance at 12/31/08 |
| Telefónica O2 Czech Republic, a.s. | 1,192 | - | 112 | (12) | - | (197) | - | 1,095 |
| Telefónica Chile, S.A. | 473 | - | 25 | (72) | (397) | (7) | 1 | 23 |
| Telesp Participaçoes, S.A. | 464 | - | 127 | (93) | - | (113) | - | 385 |
| Brasilcel (Holdings) | 545 | 348 | 61 | (163) | - | (12) | (5) | 774 |
Fonditel Entidad Gestora de Fondos de Pensiones, S.A. | 19 | - | 4 | - | - | (2) | (1) | 20 |
| Iberbanda, S.A. | 11 | 8 | (10) | - | - | - | - | 9 |
Colombia Telecomunicaciones, S.A., ESP | - | - | (89) | - | - | - | 89 | - |
| Other | 26 | - | 4 | (3) | (1) | (2) | 1 | 25 |
| Total | 2,730 | 356 | 234 | (343) | (398) | (333) | 85 | 2,331 |
| Millions of euros | Balance at 12/31/06 | Profit (loss) for the year | Change in translation differences | Acquisitions of non-controlling interests and exclusion of companies | Dividends paid | Other movements | Balance at 12/31/07 |
| Telefónica O2 Czech Republic, a.s. | 1,239 | 92 | 14 | - | (153) | - | 1,192 |
| Telefónica Chile, S.A. | 515 | 25 | (28) | (31) | (8) | - | 473 |
| Telesp Participaçoes, S.A. | 445 | 119 | 35 | - | (135) | - | 464 |
| Endemol, N.V. | 54 | 11 | - | (45) | (20) | - | - |
| Brasilcel (Holdings) | 493 | 19 | 35 | - | (2) | - | 545 |
Fonditel Entidad Gestora de Fondos de Pensiones, S.A. | 17 | 4 | - | - | (2) | - | 19 |
| Iberbanda, S.A. | 21 | (12) | - | - | - | 2 | 11 |
Colombia Telecomunicaciones, S.A., ESP | - | (50) | - | - | - | 50 | - |
| Other | 39 | 5 | (4) | (19) | (4) | 9 | 26 |
| Total | 2,823 | 213 | 52 | (95) | (324) | 61 | 2,730 |
2009
The reorganization of Brasilcel Group companies in 2009 following the acquisition of the Telemig Group in 2008, decreased the balance of “Non-controlling interests” by 108 million euros.
Also noteworthy was the impact of the dividends paid during the year by Telefónica O2 Czech Republic, a.s. and Telesp Participaçoes, S.A.
2008
The main variation in 2008 relates to the acquisition of Telefónica Chile, S.A.’s non-controlling interests (see Note 2), which decreased the balance of “Non-controlling interests” by 397 million euros, and to the acquisition of the Telemig Group companies, which increased the balance by 335 million euros.
Also worth highlighting was the movement caused by the dividends paid by Telefónica O2 Czech Republic, a.s. operators, of 197 million euros, and by Telesp Participaçoes, S.A., of 113 million euros.
2007
Movements in non-controlling interests in 2007 included the dividends paid by Telefónica O2 Czech Republic, a.s. and Telesp Participaçoes, S.A., as well as the profit (loss) for the year attributable to non-controlling interests.
| (13) | FINANCIAL ASSETS AND LIABILITIES |
1. Financial assets
The breakdown of financial assets of the Telefónica Group at December 31, 2009 and 2008 is as follows:
| | December 31, 2009 |
| | Fair value through profit or loss | | | Measurement hierarchy | | | |
| Millions of euros | Held for trading | Fair value option | Available-for-sale | Hedges | Level 1 (Quoted prices) | Level 2 (Other directly observable market inputs) | Level 3 (Inputs not based on observable market data) | Amortized cost | Total carrying amount | Total fair value |
| Non-current financial assets | 930 | 233 | 1,248 | 1,572 | 1,508 | 2,475 | - | 2,005 | 5,988 | 5,988 |
| Equity investments | - | - | 654 | - | 570 | 84 | - | - | 654 | 654 |
| Long-term credits | 91 | 233 | 594 | - | 918 | - | - | 1,022 | 1,940 | 1,940 |
| Deposits and guarantees given | - | - | - | - | - | - | - | 1,496 | 1,496 | 983 |
| Derivative instruments | 839 | - | - | 1,572 | 20 | 2,391 | - | - | 2,411 | 2,411 |
| Impairment losses | - | - | - | - | - | - | - | (513) | (513) | - |
| Current financial assets | 859 | 134 | 237 | 59 | 769 | 520 | - | 9,730 | 11,019 | 11,019 |
| Financial investments | 859 | 134 | 237 | 59 | 769 | 520 | - | 617 | 1,906 | 1,906 |
| Cash and cash equivalents | - | - | - | - | - | - | - | 9,113 | 9,113 | 9,113 |
| Total financial assets | 1,789 | 367 | 1,485 | 1,631 | 2,277 | 2,995 | - | 11,735 | 17,007 | 17,007 |
| | December 31, 2008 |
| | Fair value through profit or loss | | | Measurement hierarchy | | | |
| Millions of euros | Held for trading | Fair value option | Available-for-sale | Hedges | Level 1 (Quoted prices) | Level 2 (Other directly observable market inputs) | Level 3 (Inputs not based on observable market data) | Amortized cost | Total carrying amount | Total fair value |
| Non-current financial assets | 1,182 | 92 | 2,327 | 2,404 | 2,334 | 3,671 | - | 1,371 | 7,376 | 7,642 |
| Equity investments | - | - | 1,584 | - | 1,503 | 81 | - | - | 1,584 | 1,585 |
| Long-term credits | - | 88 | 743 | - | 831 | - | - | 863 | 1,694 | 1,562 |
| Deposits and guarantees given | - | - | - | - | - | - | - | 905 | 905 | 905 |
| Derivative instruments | 1, 182 | 4 | - | 2,404 | - | 3,590 | - | - | 3,590 | 3,590 |
| Impairment losses | - | - | - | - | - | - | - | (397) | (397) | - |
| Current financial assets | 700 | 273 | 181 | 388 | 275 | 1,267 | - | 4,951 | 6,493 | 6,605 |
| Financial investments | 700 | 273 | 181 | 388 | 275 | 1,267 | - | 674 | 2,216 | 2,328 |
| Cash and cash equivalents | - | - | - | - | - | - | - | 4,277 | 4,277 | 4,277 |
| Total financial assets | 1,882 | 365 | 2,508 | 2,792 | 2,609 | 4,938 | - | 6,322 | 13,869 | 14,247 |
The calculation of the fair values of the Telefónica Group’s debt instruments required an estimate, for each currency and subsidiary, of a credit spread curve using the prices of the Group’s bonds and credit derivatives.
Derivatives are measured using the valuation techniques and models normally used in the market, based on money-market curves and volatility prices available in the market.
a) Non-current financial assets
The movement in items composing “Non-current financial assets” and the related impairment losses at December 31, 2009 and 2008 are as follows:
| Millions of euros |
| | Investments | Long-term credits | Derivative financial assets | Deposits and guarantees | Long-term prepayments | Impairment losses | Total |
| Balance at 12/31/07 | 2,235 | 1,572 | 1,483 | 813 | 97 | (381) | 5,819 |
| Acquisitions | 1,124 | 793 | 1,049 | 201 | 42 | (40) | 3,169 |
| Disposals | (664) | (433) | - | (66) | (18) | 22 | (1,159) |
| Inclusion of companies | - | 9 | - | 63 | - | (1) | 71 |
| Translation differences | (8) | (114) | 131 | (107) | (4) | 2 | (100) |
| Fair value adjustments | (1,095) | (34) | 1,172 | - | (7) | 1 | 37 |
| Transfers | (8) | (191) | (245) | 1 | (18) | - | (461) |
| Balance at 12/31/08 | 1,584 | 1,602 | 3,590 | 905 | 92 | (397) | 7,376 |
| Acquisitions | 3 | 921 | - | 842 | 35 | (114) | 1,687 |
| Disposals | (33) | (503) | (1,118) | (364) | (26) | - | (2,044) |
| Inclusion of companies | - | - | - | - | - | - | - |
| Translation differences | 9 | 90 | (38) | 146 | 6 | (2) | 211 |
| Fair value adjustments | 565 | (53) | (5) | - | - | - | 507 |
| Transfers | (1,474) | (221) | (18) | (33) | (3) | - | (1,749) |
| Balance at 12/31/09 | 654 | 1,836 | 2,411 | 1,496 | 104 | (513) | 5,988 |
“Investments” includes 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 (see Note 3.i).
Among these is the Telefónica Group’s shareholding in Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) since 2000 of 468 million euros (314 million euros at December 31, 2008), representing 0.98% of its share capital.
In 2009, the Telefónica Group’s stake in China Unicom was transferred to “Investments in associates” following the share exchange described in Note 2. The amount transferred was 1,467 million euros.
In January 2008, Telefónica, S.A., through its Telefónica Internacional, S.A.U. subsidiary, signed an agreement to acquire an additional stake of approximately 2.22% in Chinese telecommunications company China Netcom Group Corporation (Hong Kong) Limited (CNC). On September 22, it carried out this purchase for approximately 313 million euros.
In addition, in September 2008, Telefónica Internacional, S.A.U. reached another agreement to acquire an additional stake of approximately 5.74% of CNC’s share capital.
This acquisition was structured in two tranches: the first, carried out in September 2008, entailed shares representing 2.71% of CNC for approximately 374 million euros, and the second, carried out after the merger between CNC and China Unicom (Hong Kong) Limited (“CU"), entailed shares of the new company representing up to 3.03% of CNC’s share capital.
On October 14, 2008 the merger between these companies was carried out. The exchange ratio applied in calculating the number of shares corresponding to the new company arising from the merger between CNC and CU was 1.508 shares of the new company for each year of the former company.
Once the merger was completed, the second tranche was carried out, requiring an investment by the Telefónica Group of approximately 413 million euros.
After these acquisitions and the merger, the Telefónica Group’s stake in CU at December 31, 2008 stood at approximately 5.38%, recognized at December 31, 2008 at approximately 1,102 million euros.
In addition, in 2008, Telefónica tendered all the shares it owned in Sogecable, S.A. in the takeover bid launched for this company by the Prisa Group. The amount received from the sale was 648 million euros. This investment was included in the statement of financial position at December 31, 2007 in “Equity investments” under “Non-current financial assets,” for 634 million euros. The gain obtained on the sale was 143 million euros, recognized under “Other income” in the accompanying consolidated income statement (see Note 19).
Given the poor situation of financial markets, at year-end the Group assessed the securities in its portfolio of listed available-for-sale assets individually for impairment. The analysis did not uncover the need to recognize any impairment losses.
“Long-term credits” includes mainly the investment of the net level premium reserves of the Group’s insurance companies, primarily in fixed-income securities, amounting to 1,023 million and 792 million euros at December 31, 2009 and 2008, respectively. It also includes the long-term loans to associates described in Note 9.
“Derivative financial assets” includes the fair value of economic hedges of assets or liabilities in the consolidated statement of financial position whose maturity is 12 months or greater, as part of the Group’s financial risk-hedging strategy (see Note 16).
“Deposits and guarantees” consists mainly of balances to cover guarantees and stood at 1,496 million euros at December 31, 2009 (905 million euros at December 31, 2008). These deposits will decrease as the respective obligations they guarantee are reduced.
b) Current financial assets
This heading in the accompanying consolidated statement of financial position at December 31, 2009 and 2008 includes mainly the following items:
| | - | “Current financial assets” recognized at fair value to cover commitments undertaken by the Group’s insurance companies, amounting to 140 million euros at December 31, 2009 (276 million euros at December 31, 2008). The maturity schedule for these financial assets is established on the basis of payment projections for the commitments. |
| | - | Derivative financial assets with a short-term maturity or not used to hedge non-current items in the consolidated statement of financial position, which amounted to 537 million euros (1,086 million euros in 2008). The variation in the balance between the two years was due to exchange- and interest-rate fluctuations (see Note 16). |
| | - | Short-term deposits and guarantees amounting to 470 million euros at December 31, 2009 (125 million euros at December 31, 2008). |
| | - | Current investments of cash surpluses which, given their characteristics, have not been classified as “Cash and cash equivalents.” |
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 statement of financial position.
The composition of this heading at December 31, 2009 and 2008 is as follows:
Millions of euros | Balance at 12/31/09 | Balance at 12/31/08 |
| Issues | 35,843 | 30,079 |
| Interest-bearing debt | 20,948 | 22,926 |
| Other financial liabilities | - | 183 |
| Total | 56,791 | 53,188 |
| Total non-current | 47,607 | 45,088 |
| Total current | 9,184 | 8,100 |
The maturity profile of financial liabilities at December 31, 2009 is as follows:
| (Millions of euros) | Maturity | |
| 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | Total |
| Debentures and bonds | 5,090 | 3,275 | 1,749 | 4,174 | 4,763 | 13,911 | 32,962 |
| Promissory notes & commercial paper | 812 | - | - | - | - | - | 812 |
| Other marketable debt securities | 61 | 54 | - | - | - | 1,954 | 2,069 |
| Loans and other payables | 1,789 | 6,132 | 3,695 | 1,433 | 513 | 4,396 | 17,958 |
| Derivative financial liabilities | 1,432 | 255 | 106 | 65 | 63 | 1,069 | 2,990 |
| TOTAL | 9,184 | 9,716 | 5,550 | 5,672 | 5,339 | 21,330 | 56,791 |
| | · | The estimate of future interest that would accrue on the Group’s financial liabilities at December 31, 2009 is as follows: 2,382 million euros in 2010, 2,074 million euros in 2011, 1,818 million euros in 2012, 1,620 million euros in 2013, 1,355 million euros in 2014 and 8,190 million euros in years after 2014. For variable rate financing, the Group mainly estimates future interest using the forward curve of the various currencies at December 31, 2009. |
| | · | The amounts shown in this table take into account the fair value of derivatives classified as financial liabilities (i.e., those with a negative market value) and exclude the fair value of derivatives classified as current financial assets (i.e., those with a positive market value, of 537 million euros). |
The composition of the Group’s financial liabilities at December 31, 2009 and 2008 is as follows:
| Millions of euros | December 31, 2009 |
Fair value through profit or loss | Hedges | Measurement hierarchy | Liabilities at amortized cost | Total carrying amount | Total fair value |
Held for trading | Fair value option | Level 1 (Quoted prices) | Level 2 (Other directly observable market inputs) | Level 3 (Inputs not based on observable market data) |
| Issues | - | - | - | - | - | - | 35,843 | 35,843 | 37,890 |
| Interest-bearing debt | 705 | - | 2,285 | 147 | 2,843 | - | 17,958 | 20,948 | 20,840 |
| Total financial liabilities | 705 | - | 2,285 | 147 | 2,843 | - | 53,801 | 56,791 | 58,730 |
| Millions of euros | December 31, 2008 |
| Fair value through profit or loss | Hedges | Measurement hierarchy | Liabilities at amortized cost | Total carrying amount | Total fair value |
| Held for trading | Fair value option | Level 1 (Quoted prices) | Level 2 (Other directly observable market inputs) | Level 3 (Inputs not based on observable market data) |
| Issues | - | - | - | - | - | - | 30,079 | 30,079 | 28,203 |
| Interest-bearing debt | 1,013 | 3 | 1,980 | - | 2,996 | - | 19,930 | 22,926 | 22,253 |
| Other financial liabilities | - | - | - | - | - | - | 183 | 183 | 183 |
| Total financial liabilities | 1,013 | 3 | 1,980 | - | 2,996 | - | 50,192 | 53,188 | 50,639 |
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 of these consolidated financial statements.
a) Issues
The movement in issues of debentures, bonds and other marketable debt securities in 2009 and 2008 is as follows:
| Millions of euros | Domestic currency issues | Foreign currency issues | Short-term promissory notes and commercial paper | Other long-term marketable debt securities | Total |
| Balance at 12/31/07 | 11,716 | 14,058 | 2,202 | 2,081 | 30,057 |
| New issues | 1,247 | 70 | 14 | 15 | 1,346 |
| Redemptions, conversions and exchanges | (737) | (448) | (643) | (22) | (1,850) |
| Changes in consolidation scope | - | 4 | - | - | 4 |
| Revaluation and other movements | 1,405 | (885) | 22 | (20) | 522 |
| Balance at 12/31/08 | 13,631 | 12,799 | 1,595 | 2,054 | 30,079 |
| New issues | 5,750 | 2,855 | 105 | - | 8,710 |
| Redemptions, conversions and exchanges | (1,152) | (802) | (909) | - | (2,863) |
| Changes in consolidation scope | - | - | - | - | - |
| Revaluation and other movements | (654) | 535 | 82 | (46) | (83) |
| Balance at 12/31/09 | 17,575 | 15,387 | 873 | 2,008 | 35,843 |
Debentures, bonds and other marketable debt securities
Telefónica, S.A. has a full and unconditional guarantee on issues made by Telefónica Emisiones, S.A.U. and Telefónica Europe, B.V., both of which are wholly owned subsidiaries of Telefónica, S.A.
Appendix II presents the characteristics of all outstanding debentures and bond issues at year-end 2009 and 2008, as well as the significant issues made in each year.
Promissory notes & commercial paper
At December 31, 2009 and 2008, Telefónica, S.A. had a promissory note program for issuance of up to 2,000 million euros. The outstanding balances at December 31, 2009 and 2008 were 254 million euros and 741 million euros, respectively, carrying average interest rates of 1.318% and 4.49%, respectively.
At December 31, 2009, Telefónica Europe, B.V. had a commercial paper program secured by Telefónica, S.A. for issuance of up to 2,000 million euros. The outstanding balances on this program at December 31, 2009 and 2008 were 551 million euros and 840 million euros, respectively, carrying average interest rates of 1.17% and 3.70%, respectively.
Other marketable debt securities
This heading consists mainly of preferred shares issued by Telefónica Finance USA, LLC, with a redemption value of 2,000 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 minimum effective annual rates of 7% and 4.25%, respectively, and from then 3-month Euribor plus a 4% spread. |
| | · | Interest is paid every three calendar months provided the Telefónica Group generates consolidated net income. |
b) Interest-bearing debt
The detail of “Interest-bearing debt” is as follows:
| Millions of euros | Balance at 12/31/09 | Balance at 12/31/08 |
| Current | Non-current | Total | Current | Non-current | Total |
| | | | | | | |
| Loans and other payables | 1,789 | 16,169 | 17,958 | 3,752 | 16,178 | 19,930 |
| Derivative financial liabilities (Note 16) | 1,432 | 1,558 | 2,990 | 747 | 2,249 | 2,996 |
| Total | 3,221 | 17,727 | 20,948 | 4,499 | 18,427 | 22,926 |
The average interest rate on outstanding loans and other payables at December 31, 2009 was 3.58% (4.28% in 2008). This percentage does not include the impact of hedges arranged by the Group.
The main financing transactions included under “Interest-bearing debt” outstanding at December 31, 2009 and 2008 and their nominal amounts are provided in Appendix IV.
Interest-bearing debt arranged in 2009 and 2008 mainly includes the following:
| | · | On February 13, 2009, Telefónica, S.A. executed, with a group of participating banks in the 6,000 million euro syndicated line of credit dated June 28, 2005 maturing on June 28, 2011, an extension of 4,000 million euros of the 6,000 million euros available at such date, for an additional period of one year for 2,000 million euros and two years for the remaining 2,000 million euros. |
| | · | On December 28, 2009, Colombia de Telecomunicaciones, S.A., ESP. signed a loan for 310,000 million Colombian pesos (equivalent to 105 million euros at December 31, 2009) maturing on December 28, 2014. |
| | · | On January 15, 2008, Telefónica Móviles Colombia, S.A. drew down the entire amount of financing arranged on December 10, 2007, which was structured in two tranches. Tranche A, for 125 million US dollars, entailed bilateral financing with the Inter-American Development Bank (IDB) maturing in 7 years. Tranche B entailed a 5-year 475 million US dollar syndicated credit facility with a group of banks, in which the IDB acted as agent bank. |
| | · | On January 30, 2008, Telefónica Finanzas, S.A.U. (Telfisa) drew down the 450 million euros of facilities arranged with the European Investment Bank (EIB) related to the “Telefónica Mobile Telephony II” project, of which 375 million euros mature in seven years and the remaining 75 million euros in eight years. |
| | · | On May 1, 2008, Vivo, S.A. drew down an additional 750 million Brazilian reais of the financing arranged with the Brazilian Development Bank (BNDES) on August 9, 2007 |
| | | and maturing on August 15, 2014. In 2009, an additional 89 million Brazilian reais were drawn down. |
| | · | On June 9, 2008, Compañía de Telecomunicaciones de Chile, S.A. (CTC) extended the maturity of a 150 million US dollar syndicated loan to May 13, 2013. |
| | · | On October 28, 2008, Telesp drew down an additional 886 million Brazilian reais of the financing arranged with the BNDES on October 23, 2007 and maturing on May 15, 2015. In 2009, an additional 273 million Brazilian reais were drawn down. |
The main repayments or maturities of bank interest-bearing debt in 2009 and 2008 are as follows:
| | · | On July 6, 2009, the syndicated loan facility arranged by Telefónica, S.A. with a group of banks on July 6, 2004, for 3,000 million euros, matured as scheduled. |
| | · | Telefónica Finanzas, S.A.U. (Telfisa) made the payments corresponding to 2009 on certain finance deals arranged with the EIB for an amount equal to approximately 77 million euros (502 million euros in 2008), of which 26 million euros relate to financing matured (440 million euros in 2008). |
At December 31, 2009, the Telefónica Group had total unused credit facilities from various sources amounting to over 7,200 million euros (over 7,400 million euros at December 31, 2008).
Loans by currency
The breakdown of loans by at December 31, 2009 and 2008, along with the equivalent value of foreign-currency loans in euros, are as follows:
| | Outstanding balance (in millions) |
| | Currency | Euros |
| Currency | 12/31/09 | 12/31/08 | 12/31/09 | 12/31/08 |
| Euros | 10,835 | 11,592 | 10,835 | 11,592 |
| US dollars | 2,498 | 3,267 | 1,734 | 2,444 |
| Brazilian reais | 3,114 | 3,228 | 1,242 | 992 |
| Argentine pesos | 603 | 51 | 110 | 11 |
| Colombian pesos | 7,675,200 | 7, 819,166 | 2,610 | 2,502 |
| Yen | 17,258 | 58,832 | 130 | 467 |
| Chilean peso | 151,943 | 176,163 | 208 | 199 |
| New soles | 1,120 | 1,096 | 269 | 251 |
| Pounds sterling | 708 | 1,383 | 798 | 1,452 |
| Czech crown | 301 | 389 | 11 | 14 |
| Other currencies | | | 11 | 6 |
| Total Group | N/A | N/A | 17,958 | 19,930 |
(14) | TRADE AND OTHER PAYABLES |
The composition of “Trade and other payables” is as follows:
| Millions of euros | 12/31/09 | 12/31/08 |
| Non-current | Current | Non-current | Current |
| Trade payables | - | 6,963 | - | 7,845 |
| Advances received on orders | - | 115 | - | 94 |
| Other payables | 752 | 5,130 | 582 | 4,316 |
| Deferred income | 497 | 1,528 | 535 | 1,214 |
| Payable to associates (Note 9) | - | 287 | - | 182 |
| Total | 1,249 | 14,023 | 1,117 | 13,651 |
“Deferred income” principally includes the amount of connection fees not yet recognized in the income statement, customer loyalty programs, and advance payments received on prepay contracts. These will be recognized as revenue over the estimated customer relationship period (see Note 3.o) or as the purchases related to the revenue are incurred.
The detail of “Other payables” under “Current liabilities” at December 31, 2009 and 2008 is as follows:
| Millions of euros | Balance at 12/31/09 | Balance at 12/31/08 |
| Dividends payable by Group companies | 157 | 157 |
| Payables to suppliers of property, plant and equipment, current | 3,598 | 2,915 |
| Accrued employee benefits | 695 | 595 |
| Other non-financial non-trade payables | 680 | 649 |
| Total | 5,130 | 4,316 |
The amounts of provisions in 2009 and 2008 are as follows:
| Millions of euros | 12/31/09 | 12/31/08 |
| Current | Non-current | Total | Current | Non-current | Total |
| Employee benefits: | 667 | 3,594 | 4,261 | 791 | 4,002 | 4,793 |
| - Post-employment plan | 652 | 2,418 | 3,070 | 781 | 2,993 | 3,774 |
| - Post-employment defined benefit plans | - | 911 | 911 | - | 741 | 741 |
| - Other benefits | 15 | 265 | 280 | 10 | 268 | 278 |
| Other provisions | 296 | 1,399 | 1,695 | 315 | 1,419 | 1,734 |
| Total | 963 | 4,993 | 5,956 | 1,106 | 5,421 | 6,527 |
Employee benefits
In the last few years, Telefónica has carried out early retirement plans in order to adapt its cost structure to the prevailing environment in the markets where it operates, making certain strategic decisions relating to its size and organization.
In this respect, on July 29, 2003, the Ministry of Labor and Social Affairs approved a labor force reduction plan for Telefónica de España through various voluntary, universal and non-discriminatory programs, which was announced on July 30, 2003. The plan concluded on December 31, 2007, with 13,870 employees taking part for a total cost of 3,916 million euros.
Provisions recorded for this plan at December 31, 2009 and 2008 amounted to 2,295 and 2,689 million euros, respectively.
Furthermore, at December 31, 2009, the Group had recorded provisions totaling 775 million euros (1,085 million euros at December 31, 2008) for other planned adjustments to the workforce and plans prior to 2003.
The companies bound by these commitments calculated provisions required at 2009 and 2008 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.
The Group made efforts in 2007 to adapt headcount in line with the integration of its businesses, for which it recorded provisions of 838 million euros, mainly in Latin America (306 million euros), Spain (325 million euros) and Europe (158 million euros) (see Note 19).
The movement in provisions for post-employment plans in 2009 and 2008 is as follows:
| Millions of euros | Total |
| Provisions for post-employment plans at 12/31/07 | 4,584 |
| Additions | 321 |
| Retirements/amount applied | (1,121) |
| Transfers | 1 |
| Translation differences and accretion | (11) |
| Provisions for post-employment plans at 12/31/08 | 3,774 |
| Additions | 109 |
| Retirements/amount applied | (1,021) |
| Transfers | 59 |
| Translation differences and accretion | 149 |
| Provisions for post-employment plans at 12/31/09 | 3,070 |
| | b) | Post-employment defined benefit plans |
The Group has a number of defined-benefit plans in the countries where it operates. The following tables present the main data of these plans:
| 12/31/09 | Spain | Europe | Latin America | |
| Millions of euros | ITP | Survival | UK | Germany | Brazil | Other | Total |
| Obligation | 451 | 191 | 922 | 37 | 159 | 11 | 1,771 |
| Assets | - | - | (744) | (58) | (116) | - | (918) |
| Net provision before asset ceiling | 451 | 191 | 178 | (21) | 43 | 11 | 853 |
| Asset ceiling | - | - | - | 15 | 12 | - | 27 |
| Net provision | 451 | 191 | 178 | - | 80 | 11 | 911 |
| Net assets | - | - | - | 6 | 25 | - | 31 |
| 12/31/08 | Spain | Europe | Latin America | |
| Millions of euros | ITP | Survival | UK | Germany | Brazil | Other | Total |
| Obligation | 485 | 188 | 587 | 33 | 104 | 12 | 1,409 |
| Assets | - | - | (579) | (51) | (78) | - | (708) |
| Net provision before asset ceiling | 485 | 188 | 8 | (18) | 26 | 12 | 701 |
| Asset ceiling | - | - | - | 13 | 19 | - | 32 |
| Net provision | 485 | 188 | 10 | - | 46 | 12 | 741 |
| Net assets | - | - | 2 | 5 | 1 | - | 8 |
The movement in the present value of obligations in 2009 and 2008 is as follows:
| | Spain | Europe | Latin America | |
| Millions of euros | ITP | Survival | UK | Germany | Brazil | Other | Total |
| Present value of obligation at 12/31/07 | 483 | 152 | 947 | 37 | 99 | 40 | 1,758 |
| Translation differences | - | - | (199) | - | (38) | (30) | (267) |
| Current service cost | - | 7 | 39 | 3 | 1 | 1 | 51 |
| Interest cost | 22 | 7 | 50 | 2 | 9 | - | 90 |
| Actuarial losses and gains | 35 | 26 | (235) | (8) | 40 | 1 | (141) |
| Benefits paid | (55) | (4) | (21) | - | (7) | - | (87) |
| Plan curtailments: | - | - | 6 | (1) | - | - | 5 |
| Present value of obligation at 12/31/08 | 485 | 188 | 587 | 33 | 104 | 12 | 1,409 |
| Translation differences | - | - | 42 | - | 38 | (4) | 76 |
| Current service cost | - | 7 | 22 | 2 | 1 | 2 | 34 |
| Interest cost | 16 | 7 | 42 | 2 | 12 | 1 | 80 |
| Actuarial losses and gains | 3 | (4) | 241 | - | 11 | - | 251 |
| Benefits paid | (53) | (7) | (18) | - | (7) | - | (85) |
| Plan curtailments: | - | - | 6 | - | - | - | 6 |
| Present value of obligation at 12/31/09 | 451 | 191 | 922 | 37 | 159 | 11 | 1,771 |
Movements in the fair value of plan assets in 2009 and 2008 are as follows:
| | Europe | Latin America | |
| Millions of euros | UK | Germany | Brazil | Other | Total |
| Fair value of plan assets at 12/31/07 | 970 | 44 | 89 | 65 | 1,168 |
| Translation differences | (189) | - | (24) | (63) | (276) |
| Expected return on plan assets | 67 | 2 | 9 | - | 78 |
| Actuarial losses and gains | (327) | (1) | 5 | - | (323) |
| Company contributions | 81 | 6 | 2 | 1 | 90 |
| Employee contributions | 1 | - | - | - | 1 |
| Benefits paid | (24) | - | (3) | (3) | (30) |
| Fair value of plan assets at 12/31/08 | 579 | 51 | 78 | - | 708 |
| Translation differences | 42 | - | 29 | (3) | 68 |
| Expected return on plan assets | 43 | 2 | 7 | 3 | 55 |
| Actuarial losses and gains | 59 | (2) | 5 | - | 62 |
| Company contributions | 36 | 7 | 2 | - | 45 |
| Employee contributions | 1 | - | - | - | 1 |
| Benefits paid | (16) | - | (5) | - | (21) |
| Fair value of plan assets at 12/31/09 | 744 | 58 | 116 | - | 918 |
The amounts of actuarial gains and losses of these plans recognized directly in equity in accordance with the asset ceilings of these plans in 2009, 2008 and 2007, before the related tax effect, are as follows:
| Millions of euros | 2009 | 2008 | 2007 |
| Spain | 1 | (61) | 25 |
| Europe | (184) | (85) | 36 |
| Latin America | (6) | (36) | (7) |
| Total | (189) | (182) | 54 |
The Group’s principal defined-benefit plans are:
a) Plans in Spain:
| | a. | ITP: Telefónica Spain reached an agreement with its employees whereby it recognized supplementary pension payments for employees who had retired as of June 30, 1992, equal to the difference between the pension payable by the social security system and that which would be paid to them by ITP (Institución Telefónica de Previsión). Once the aforementioned supplementary pension payments had been quantified, they became fixed, lifelong and non-updateable and sixty percent (60%) of the payments are transferable to the surviving spouse, recognized as such as of June 30, 1992, and to underage children. |
The amount for this provision totaled 451 million euros at December 31, 2009 (485 million euros at December 31, 2008).
| | b. | Survival: Survivors of serving employees who did not join the defined pension plan are still entitled to receive survivorship benefits at the age of 65. |
The amount for this provision totaled 191 million euros at December 31, 2009 (188 million euros at December 31, 2008).
These plans do not have associated assets which qualify as “plan assets” under IAS 19.
The main actuarial assumptions used in valuing these plans are as follows:
| | Survival | ITP |
| | 12/31/09 | 12/31/08 | 12/31/09 | 12/31/08 |
| Discount rate | 0.382%-3.903% | 2.596%-3.900% | 0.382%-3.903% | 2.596%-3.900% |
| Expected rate of salary increase | 2.50% | 2.50% | - | - |
| Mortality tables | PERM/F-2000C Combined with OM77 | PERM/F-2000C Combined with OM77 | 92% PERM 2000C/100% PERF 2000 C | PERM/F 2000 C |
b) Plans in the rest of Europe:
The various O2 Group companies consolidated within the Telefónica Group have defined-benefit post-employment plans, covered by qualifying assets.
The number of beneficiaries of these plans at December 31, 2009 and 2008 is as follows:
| Employees | 2009 | 2008 |
| UK | 4,613 | 4,636 |
| Germany | 5,594 | 4,964 |
| Other | 401 | 393 |
| Total | 10,608 | 9,993 |
The main actuarial assumptions used in valuing these plans are as follows:
| | 12/31/09 | 12/31/08 |
| | UK | Germany | UK | Germany |
| Nominal rate of salary increase | 4.6% | 3.80% | 4.0% | 3.25% -3.80% |
| Nominal rate of pension payment increase | 3.6% | 1.0%-4.0% | 2.8%-3.0% | 2.0%-4.0% |
| Discount rate | 5.8% | 6.1% | 6.6% | 6.2% |
| Expected inflation | 3.6% | 1.0%-4.0% | 3.0% | 2% |
| Expected return on plan assets | | | | |
| - Shares | 8.0% | N/A | 7.4% | N/A |
| - UK government bonds | 4.4% | N/A | 3.6% | N/A |
| - Other bonds | 5.3% | N/A | 6.6% | N/A |
| - Rest of assets | 4.4% -8.8% | 4.25%-4.30% | 3.6% -7.6% | 4.25%-4.30% |
| Mortality tables | Pa00mcfl0.5 | Prf. Klaus Heubeck (RT 2005 G) | Pa00mcfl0.5 | Heubeck RT 2005 G |
c) Plans in Latin America:
Subsidiary Telecomunicações de São Paulo, S.A. and its subsidiaries, and group companies of Brasilcel, N.V. had various pension plan, medical insurance and life insurance obligations with employees.
The main actuarial assumptions used in valuing these plans are as follows:
| | 12/31/09 | 12/31/08 |
| Discount rate | 9.8% | 10.14% |
| Nominal rate of salary increase | 6.14% - 6.79% | 6.44% - 7.10% |
| Expected inflation | 4.6% | 4.90% |
| Cost of health insurance | 7.74% | 8.04% |
| Expected return on plan assets | 9.83% - 14.94% | 10.88% - 11.15% |
| Mortality tables | AT 83 | AT 83 |
The valuations used to determine the value of obligations and plan assets, where appropriate, were performed as of December 31, 2009 by external and internal actuaries. The projected unit credit method was used in all cases.
c) Other benefits
This heading mainly includes the amount recorded by Telefónica Spain related to the amount accrued of long-service bonuses to be awarded to employees after 25 years’ service.
Other provisions
The movement in “Other provisions” in 2009 and 2008 is as follows:
| | Millions of euros |
| Other provisions at December 31, 2007 | 1,866 |
| Additions | 448 |
| Retirements/amount applied | (518) |
| Transfers | (5) |
| Inclusion of companies | 64 |
| Translation differences | (121) |
| Other provisions at December 31, 2008 | 1,734 |
| Additions | 381 |
| Retirements/amount applied | (571) |
| Transfers | (29) |
| Translation differences | 180 |
| Other provisions at December 31, 2009 | 1,695 |
“Other provisions” includes the amount recorded in 2007 in relation to the 171 million euro fine imposed on Telefónica de España, S.A.U. by the EC anti-trust authorities.
Also included are the provisions for dismantling of assets recognized by Group companies in the amount of 270 million euros (200 million euros in 2008).
Finally, “Other Provisions” in 2009 and 2008 also includes the provisions recorded (or used) by the Group companies to cover the risks inherent in the realization of certain assets, the contingencies arising from their respective business activities and the risks arising from commitments and litigation acquired in other transactions, recognized as indicated in Note 3.l.
Given the nature of the risks covered by these provisions, it is not possible to determine a reliable schedule of potential payments, if any.
| (16) | DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT POLICIES |
Telefónica is exposed to various financial market risks as a result of: (i) its ordinary business activity, (ii) debt incurred to finance its business, (iii) its investments in companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting Telefónica are as follows:
Exchange rate risk arises primarily from (i) Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom and the Czech Republic), and (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt.
Interest rate risk arises primarily from changes in interest rates affecting (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.
Share price risk arises primarily from changes in the value of our equity investments that may be bought, sold or otherwise involved in transactions, from changes in the value of derivatives associated with such investments, from changes in the value of our treasury shares and from equity derivatives.
Telefónica is also exposed to liquidity risk if a mismatch arises between its financing needs (including operating and financial expense, investment, debt redemptions and dividend commitments) and its sources of finance (including revenues, divestments, credit lines from financial institutions and capital market transactions). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.
Finally, Telefónica is exposed to “country risk” (which overlaps with market and liquidity risks). This refers to the possible decline in the value of 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 operates, especially in Latin America.
Telefónica actively manages these risks through the use of derivatives (primarily on exchange rates, interest rates and share prices) and by incurring debt in local currencies, where appropriate, with a view to stabilizing cash flows, the income statement and partially, albeit to a lesser extent, investments. In this way, Telefónica attempts to protect its solvency, facilitate financial planning and take advantage of investment opportunities.
Telefónica manages its exchange rate risk and interest rate risk in terms of net debt and net financial debt as calculated by them. Telefónica believes that these parameters are more appropriate to understanding its debt position. Net debt and net financial debt take into account the impact of our cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net debt nor net financial debt as calculated by Telefónica should be considered an alternative to gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of our liquidity. For a more detailed description on reconciliation of net debt and net financial debt to gross financial debt (see Note 2).
Exchange rate risk
The fundamental objective of our exchange rate risk management policy is that, in event of depreciation in foreign currencies relative to the euro, any potential losses in the value of the cash flows generated by our businesses in such currencies, caused by depreciation in exchange rates of a foreign currency relative to the euro, are offset (to some extent) by savings from the reduction in the euro value of our debt denominated in such currencies. The degree of exchange rate hedging we employ varies depending on the type of investment.
At December 31, 2009, net debt in Latin American currencies was equivalent to approximately 5,622 million euros. However, the composition of this net debt in the various Latin American currencies is not proportional to the cash flows generated at any given moment. The future effectiveness of the strategy described above as a hedge of exchange rate risks therefore depends on which currencies depreciate relative to euro.
Telefónica aims to protect itself against declines in Latin American currencies relative to the euro affecting our asset values through the use of dollar-denominated debt, incurred either in Spain (where such debt is associated with an investment as long as it is considered to be an effective hedge) or in the country itself, where the market for local currency financing or hedges may be inadequate or non-existent. At December 31, 2009, Telefónica net debt denominated in dollars was equivalent to 1,744 million euros, of which 981 million euros was related to assets in Latin America and the remaining 763 million euros was related to its investment in China Unicom.
At December 31, 2009, pound sterling-denominated net debt was approximately 2.3 times the value of our 2009 operating income excluding the impact of the depreciation and amortization cost from the Telefónica Europe business unit in the United Kingdom. Telefónica’s aim is to maintain this same proportion of pound sterling-denominated net debt to operating income excluding the impact of the depreciation and amortization cost as the Telefónica net debt to operating income excluding the impact of the depreciation and amortization cost ratio, on a consolidated basis, in order to help them to reduce its sensitivity to changes in the pound sterling to euro exchange rate. Pound sterling-denominated net debt at December 31, 2009, was equivalent to 3,799 million euros, less than the 3,855 million euros at December 31, 2008.
To protect our investment in the Czech Republic, Telefónica has net debt denominated in Czech crowns, which at December 31, 2009 was equivalent to 2,513 million euros, almost 59% of the original cost of the investment and less than 2.3 times the operating income excluding the impact of the depreciation and amortization cost of Telefónica Europe’s business in the Czech Republic, down from approximately 3,034 million euros at December 31, 2008.
We also manage exchange rate risk by seeking to minimize the negative impact of any remaining exchange rate exposure on the income statement, regardless of whether we have open positions. Such open position exposure can arise for any of three reasons: (i) a thin market for local derivatives or difficulty in sourcing local currency finance which makes it impossible to arrange a low-cost hedge (as in Argentina and Venezuela), (ii) financing through intra-group loans, where the accounting treatment of exchange rate risk is different from that for financing through capital contributions, and (iii) as the result of a deliberate policy decision, to avoid the high cost of hedges that are not warranted by expectations or high risk of depreciation.
In 2009, exchange rate management resulted in negative exchange rate differences totaling 209 million euros, compared to 24 million euros in positive differences in 2008.
To illustrate the sensitivity of exchange gains or losses to variability in exchange rates, assuming the exchange rate position affecting the income statement at the end of 2009 were constant during 2010 and Latin American currencies depreciated against the dollar and the rest of the currencies against the euro by 10%, Telefónica estimates that exchange gains or losses
recorded for 2010 would be 46 million euros less. Nonetheless, Telefónica manages its exposure on a dynamic basis to mitigate their impact.
Interest rate risk
Telefónica financial expenses are exposed to changes in interest rates. In 2009, the rates applied to the largest amount of our short-term debt were mainly based on the Euribor, the Czech crown Pribor, the Brazilian SELIC, the dollar Libor and the Colombian UVR. In nominal terms, at December 31, 2009, 52.6% of Telefónica’s net debt (or 50% of long-term net debt) was at rates fixed for more than one year, compared to 43.8% of net debt (46.3% of long-term net debt) in 2008. Of the remaining 47.4% (net debt at floating or fixed rates maturing in less than one year), the interest rate on 24 percentage points was set for a period of more than one year (10.7% of long-term net debt), compared to 28 percentage points on debt at floating or fixed rates maturing in less than one year (17% of long-term debt) at December 31, 2008. This decrease in 2009 from 2008 is due to the cancellation and maturity (without renewal) of an amount equivalent to 2,234 million euros of caps and floors euros, US dollars and pounds sterling in anticipation of a fall in interest rates.
In addition, early retirement liabilities were discounted to present value over the year, using the curve on the swap rate markets. The decrease in interest rates has increased the market value of these liabilities. However, this increase was nearly completely offset by the increase in the value of the hedges on these positions.
Net financial expenses rose 18.2% to 3,307 million euros in 2009 from 2,797 million euros de 2008, mainly due to the impact of Venezuela. Stripping out exchange-rate effects, net financial expense for 2009 totaled 2,767 million euros, a 1.9% decrease from the 2,821 million euros recorded in 2008.
To illustrate the sensitivity of net financial expense to variability in short-term interest rates, assuming a 100 basis point increase in interest rates in all currencies in which there are financial positions and no change in the currency make-up and balance of the position at year end, we estimate that net financial expense at December 31, 2009 would have been 124 million euros higher.
Share price risk
Telefónica is exposed to changes in the value of our 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.
As part of the shareholder remuneration policy, in 2008, Telefónica announced plans to buy back up to 150 million of our shares. This buyback plan was finished on March 31, 2009.
According to the Telefónica, S.A. share option plan, Performance Share Plan (PSP) - -(see Note 20)- the shares delivered under such plan may be either the parent company treasury shares, acquired by them or any of its Group companies; or newly-issued shares. The possibility of delivering shares to employees in the future, in accordance with relative total shareholders’ return, implies a risk since there could be an obligation to hand over a maximum number of shares at the end of each cycle, whose acquisition (in the event of acquisition in the market) in the future could imply a higher cash outflow than required on the start date of each cycle if the share price is above the corresponding price on the phase start date. In the event that new shares are issued for delivery to the beneficiaries of the plan, there would be a dilutive effect for our ordinary shareholder as a result of the higher number of shares delivered under such plan outstanding.
To reduce the risk to us associated with variations in share price under this plan, Telefónica has acquired derivatives that replicate the risk profile of some of the shares derivable under the plan as explained in Note 20.
In addition, part of the 6,329,530 treasury shares of the parent company held at December 31, 2009 may be used to cover shares deliverable under the PSP. The net asset value of the treasury shares could increase or decrease depending on variations in Telefónica, S.A.’s share price.
Additionally, at the Ordinary General Shareholders’ Meeting of 2009, an incentive plan for Group employees to purchase Telefónica shares was approved. The cost of this plan will not exceed 60 million euros. The plan is expected to be implemented during the first half of 2010. Telefónica will assess if will have to take any action in order to reduce any risk related to the future delivery of shares.
Liquidity risk
Telefónica seeks to match the schedule for its debt maturity payments to its capacity to generate cash flows to meet these maturities, while allowing for some flexibility. In practice, this has been translated into two key principles:
| | 1. | The average maturity of our net financial debt is intended to stay above 6 years, or be restored above that threshold in a reasonable period of time if it eventually falls below it. This principle is considered as a guideline when managing debt and access to credit markets, but not a rigid requirement. When calculating the average maturity for the net financial debt and part of the undrawn credit lines can be considered as offsetting the shorter debt maturities, and extension options on some financing facilities may be considered as exercised, for calculation purposes. |
| | 2. | Telefónica must be able to pay all commitments over the next 12 months without accessing new borrowing or accessing the capital markets (although including firm credit lines arranged with banks), assuming budget projections are met. |
As of December 31, 2009, the average maturity of 43,551 million euros of net financial debt was 6.55 years. Telefónica would need to generate approximately 6,649 million euros per year to repay the debt in this period if we used all our cash for this purpose.
At December 31, 2009, gross financial debt scheduled maturities in 2010 amounted to approximately 8,647 million euros (including the net position of derivative financial instruments), which is lower than the amount of funds available, calculated as the sum of: (i) current financial assets and cash at December 31, 2009 (10,482 million euros excluding derivative financial instruments), (ii) annual cash generation projected for 2010; and (iii) undrawn credit facilities arranged with banks whose original maturity is over one year (an aggregate of more than 4,480 million euros at December 31, 2009). This gives us flexibility with regard to accessing capital or credit markets in the next 12 months. For a further description of our liquidity and capital resources, see Note 13.2 Financial Liabilities and Appendix III.
Country risk
Telefónica managed or mitigated country risk by pursuing two lines of action (in addition to its normal business practices):
| | 1. | Partly matching assets to liabilities (those not guaranteed by the parent company) in its Latin American companies such that any potential asset impairment would be accompanied by a reduction in liabilities; and, |
| | 2. | Repatriating funds generated in Latin America that are not required for the pursuit of new, profitable business development opportunities in the region. |
Regarding the first point, at December 31, 2009, its Latin American companies had net financial debt not guaranteed by the parent company of 4,044 million euros, which represents 9.29% of our consolidated net financial debt.
Regarding the repatriation of funds to Spain, it has received 1,790 million euros from our Latin America companies in 2009, of which 766 million euros was from dividends and 1,024 million
euros from intra-group loans (payments of interest and repayments of principal) and capital reductions. These amounts were equally offset by additional amounts invested in its Latin American companies, mainly in Peru (27 million euros), in Argentina (2 million euros) and in Colombia (1 million euros). As a result of the foregoing, net funds repatriated to Spain from our Latin America companies amounted to the equivalent of 1,760 million euros as of December 31, 2009.
In this regard, it is worth noting that since February 2003, Venezuela has had an exchange control mechanism in place, managed as indicated above by the Currency Administration Commission (CADIVI). The body has issued a number of regulations (“providencias”) governing the modalities of currency sales in Venezuela at official exchange rates. Foreign companies which are duly registered as foreign investors are entitled to request approval to acquire currencies at the official exchange rate by the CADIVI, in line with regulation number 029, article 2, section c) "Remittance of earnings, profits, income, interest and dividends from international investment." Telcel, its subsidiary in Venezuela, obtained the aforementioned requested approval on Venezuelan Bolivar fuerte 295 million in 2006, Venezuelan Bolivar fuerte 473 million in 2007 and Venezuelan Bolivar fuerte 785 million in 2008. At December 31, 2009, payment of a dividend in the amount of Venezuelan Bolivar fuerte 1,152 million is pending approval.
Credit risk
Telefónica is exposed to credit risk through its trading in derivatives with counterparties of high creditworthiness and senior debt ratings of at least “A”. In Spain, where it holds most of Telefónica’s derivatives portfolio, it has netting agreements with financial institutions, with debtor or creditor positions offset in case of bankruptcy, limiting the risk to the net position. For other subsidiaries, particularly those in Latin America, given the stable sovereign rating provides a ceiling and is below “A,” trades are with local financial entities whose rating by local standards is considered to be of high creditworthiness.
Meanwhile, with credit risk arising from cash and cash equivalents, Telefónica places its cash surpluses in high quality and highly liquid money-market assets. These placements are regulated by a general framework, revised annually based on the conditions of the market and countries where Telefónica operates. The general framework sets: (i) the maximum amounts to be invested by counterparty based on its rating (long-term debt rating); (ii) the maximum tenor of the investment; and (iii) the instruments in which the surpluses may be invested. For the parent company, which places the bulk of Telefónica surpluses, the maximum placement in 2009 was 180 days and the creditworthiness of the counterparties used, measured by their debt ratings, remained above A- and/or A3 by Standard & Poor’s and Moody’s, respectively.
These placements are regulated by a general framework, authorization procedures and homogeneous management practices within Telefónica, based on particular conditions and best international practices observed in the telecom sector, and incorporating this commercial credit risk management approach to Telefónica’s decision policy both from a strategic and operating (in the ordinary course of business) perspective.
Telefónica also considers managing commercial credit risk as crucial to meeting its business and customer base growth targets in a manner that is consistent with Telefónica’s risk-management policy.
Therefore, Telefónica’s commercial credit risk-management approach is based on continuous monitoring of the risk assumed and the resources necessary to manage its various units, in order to optimize the risk-reward relationship in its operations and the assessment, particularly, those clients that could cause a material impact on Telefónica’s financial condition.
Telefónica’s maximum exposure to credit risk is initially represented by the carrying amounts of the assets (see Notes 11 and 13) and the guarantees given by Telefónica.
Capital management
Telefónica’s corporate finance department, which is in charge of Telefónica’s capital management, takes into consideration several factors when determining Telefónica’s capital structure, with the aim of ensuring sustainability of the business and maximizing the value to shareholders.
Telefónica monitors its cost of capital with a goal of optimizing its capital structure. In order to do this, Telefónica monitors the financial markets and updates to standard industry approaches for calculating weighted average cost of capital, or WACC “weighted average cost of capital”. Telefónica also uses a gearing ratio that enables it to obtain and maintain the desired credit rating over the medium term, and with which Telefónica can match its potential cash flow generation and the alternative uses of this cash flow at all times.
These general principles are refined by other considerations and the application of specific variables, such as country risk in the broadest sense, tax efficiency and volatility in cash flow generation, when determining our financial structure.
Derivatives policy
At December 31, 2009, the nominal value of outstanding derivatives with external counterparties amounted to 131,614 million equivalent, a 7.3% decrease from December 31, 2008 (141,984 million euros equivalent). This figure is inflated by the use in some cases of several levels of derivatives applied to the nominal value of a single underlying liability. For example, a foreign currency loan can be hedged into floating rate, and then each interest rate period can be fixed using a fixed rate hedge, or FRA (forward rate agreement). Even using such techniques to reduce the position, it is still necessary to take extreme care in the use of derivatives to avoid potential problems arising through error or a failure to understand the real position and its associated risks.
Telefónica’s derivatives policy emphasizes the following points:
| | 1) | Derivatives based on a clearly identified underlying. |
Acceptable underlyings include profits, revenues and cash flows in either a company’s functional 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 asset in the above cases does not depend on whether it complies with accounting rules requirements for hedge accounting, as is required in the case of certain intra-group transactions, for instance. Parent company investments in subsidiaries with functional currencies other than the euro also qualify as acceptable underlying assets.
Economic hedges, which are hedges with a designated underlying asset and which in certain circumstances offset fluctuations in the underlying asset value, do not always meet the requirements and effectiveness tests laid down by 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 goal of a stable income statement. In any event, the variations are recognized in the income statement.
| | 2) | Matching of the underlying to one side of the derivative. |
This matching basically applies to foreign currency debt and derivatives hedging foreign currency payments by Telefónica’s 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 liquidity in 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
hedge. Telefónica intends to reduce these mismatches, provided that doing so does not involve disproportionate costs. In this regard, if adjustment does prove too costly, the financial timing of the underlying asset in foreign currency will be modified in order to minimize interest rate risk in foreign currency.
In certain cases, the timing of the underlying as defined for derivative purposes may not be exactly the same as the timing of the contractual underlying.
| | 3) | Matching the company contracting the derivative and the company that owns the underlying. |
Generally, the aim is to ensure that the hedging derivative and the hedged asset or liability belong to the same company. Sometimes, however, the holding companies (Telefónica, S.A. and Telefónica Internacional, S.A.) have arranged hedges on behalf of a subsidiary that owns the underlying asset. The main reasons for separating the hedge and the underlying asset 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 Telefónica group companies or the banks).
| | 4) | Ability to measure the derivative’s fair value using the valuation systems available to us. |
| | | Telefónica uses a number of tools to measure and manage risks in derivatives and debt. The main ones are Kondor+, licensed by Reuters, which is widely used by financial institutions, and MBRM specialist financial calculator libraries. |
| | 5) | Sale of options only when there is an underlying exposure. |
Telefónica considers the sale of options when: i) there is an underlying exposure (on the consolidated statement of financial position or associated with a highly probable cash outflow) that would offset the potential loss for the year if the counterparty exercised 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 possible 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, we would swap part of our debt from floating rate to a lower fixed rate, having received a premium.
The main risks that may qualify for hedge accounting are as follows:
| | · | Variations in market interest rates (either money-market rates, credit spreads or both) that affect the value of the underlying asset or the measurement of the cash flows; |
| | · | Variations in exchange rates that change the value of the underlying asset in the company’s functional currency and affect the measurement of the cash flow in the functional currency; |
| | · | Variations in the volatility of any financial variable, asset or liability that affect either the valuation or the measurement of cash flows on debt or investments with embedded options, whether or not these options are separable; and |
| | · | Variations in the valuation of any financial asset, particularly shares of companies included in the portfolio of “Available-for-sale financial assets”. |
Regarding the underlying:
| | · | Hedges can cover all or part of the value of the underlying; |
| | · | The risk to be hedged can be for the whole period of the transaction or for only part of the period; and |
| | · | The underlying may be a highly probable future transaction, or a contractual underlying (loan, foreign currency payment, investment, financial asset, etc.) or a combination of both that defines an underlying with a longer term. |
This may on occasion mean that the hedging instruments have longer terms than the related contractual underlying. This happens when we enter into long-term swaps, caps or collars to protect ourselves against interest rate rises that may raise the financial expense of our 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 Telefónica commits to this by defining the underlying asset in a more general way as a floating rate financing program whose term coincides with the maturity of the hedge.
Hedges can be of three types:
| | · | Cash flow hedges. Such hedges 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%, above 4%, etc.). In this last case, the hedging instrument used is options and only the intrinsic value of the option is recognized as an effective hedge. Changes in the time value of options are recognized in the income statement. To prevent excessive swings in the income statement from changes in time value, the hedging ratio (amount of options for hedging relative to the amount of options not treated as hedges) is assigned dynamically, as permitted by the standard. |
| | · | Hedges of net investment in consolidated foreign subsidiaries. Generally such hedges are arranged by the parent company and the other Telefónica’s holding companies. Wherever possible, these hedges are implemented through real debt in foreign currency. Often, however, this is not always possible as many Latin American currencies are non-convertible, making it impossible for non-resident 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 (for example, the Czech crown and pounds sterling), or that an acquisition is made in cash with no need for market finance. In these circumstances derivatives, either forwards or cross-currency swaps are used to hedge the net investment. |
Hedges can comprise a combination of different derivatives.
Management of accounting hedges is not static, and the hedging relationship may change before maturity. Hedging relationships may change to allow appropriate management that serves our stated principles of stabilizing cash flows, stabilizing net financial income/expense and protecting our share capital. The designation of hedges may therefore be cancelled, before maturity, because of a change in the underlying, a change in perceived risk on the underlying or a change in market view. Derivatives included in these hedges may be reassigned to new hedges where they meet the effectiveness test and the new hedge is well documented. To gauge the efficiency of transactions defined as accounting hedges, we analyze the extent to which the changes in the fair value or in the cash flows attributable to the hedged item would offset the changes in fair value or cash flows attributable to the hedged risk using a linear regression model.
The main guiding principles for risk management are laid down by Telefónica’s Finance Department and implemented by company chief financial officer (who is responsible for balancing the interests of each company and those of Telefónica as a whole). The Corporate Finance Department may allow exceptions to this policy where these 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 us as a result of mergers or acquisitions may also need time to adapt.
The breakdown of the financial results recognized in 2009, 2008 and 2007 is as follows:
| (Millions of euros) | 2009 | 2008 | 2007 |
| Interest income | 528 | 589 | 524 |
| Dividends received | 45 | 67 | 72 |
| Other financial income | 151 | 217 | 107 |
| Interest expenses | (3,036) | (3,333) | (3,175) |
| Ineffective portion of cash flow hedges | (17) | (71) | (43) |
| Accretion of provisions and other liabilities | (254) | (453) | (200) |
| Changes in fair value of financial assets at fair value through profit or loss | 124 | 341 | 25 |
| Changes in fair value of financial liabilities at fair value through profit or loss | (132) | (115) | (4) |
| Transfer from equity to profit and loss from cash flow hedges | 77 | (50) | (17) |
| Transfer from equity to profit and loss from available-for-sale assets | 4 | (2) | (107) |
| (Gain)/loss on fair value hedges | (427) | 912 | 75 |
| Loss/(gain) on adjustment to items hedged by fair value hedges | 439 | (883) | (102) |
| Other expenses | (269) | (40) | (6) |
| Net finance costs excluding foreign exchange differences | (2,767) | (2,821) | (2,851) |
The breakdown of Telefónica’s derivatives at December 31, 2009, their fair value at year-end and the expected maturity schedule is as set forth in the table below:
| Millions of euros | Fair value: at 12/31/09 (**) | Maturity (notional amount) (*) |
| Derivatives | 2010 | 2011 | 2012 | Subsequent years | Total |
| Interest rate hedges | (282) | 3,044 | (103) | 163 | (2,520) | 584 |
| Cash flow hedges | 147 | 1,769 | 1,143 | 659 | 3,024 | 6,595 |
| Fair value hedges | (429) | 1,275 | (1,246) | (496) | (5,544) | (6,011) |
| Exchange rate hedges | 1,055 | 1,792 | 788 | 112 | 4,900 | 7,592 |
| Cash flow hedges | 1,055 | 1,797 | 788 | 112 | 4,900 | 7,597 |
| Fair value hedges | - | (5) | - | - | - | (5) |
| Interest and exchange rate hedges | 157 | 14 | (419) | (314) | (281) | (1,000) |
| Cash flow hedges | 152 | 51 | (426) | (171) | (360) | (906) |
| Fair value hedges | 5 | (37) | 7 | (143) | 79 | (94) |
| Hedge of net investment in foreign operations | (276) | (2,555) | (958) | (113) | (868) | (4,494) |
| Derivatives not designated as hedges | (612) | 6,110 | 341 | 388 | (744) | 6,095 |
| Interest rate | (299) | 5,532 | 413 | 483 | (1,770) | 4,658 |
| Exchange rate | (270) | 738 | (9) | (28) | 1,026 | 1,727 |
| Interest and exchange rate | (43) | (160) | (63) | (67) | - | (290) |
The Company also has debt assigned to the investment of 944 million dollars, 2,643 million pound sterling and 302 million Czech crowns (data in equivalent euros).
The breakdown of Telefónica’s derivatives at December 31, 2008, their fair value at year-end and the expected maturity schedule is as set forth in the table below:
| Millions of euros | Fair value: at 12/31/08 (**) | Maturity (notional amount) (*) |
| Derivatives | 2009 | 2010 | 2011 | Subsequent years | Total |
| Interest rate hedges | (612) | 2,031 | 1,747 | 520 | 72 | 4,370 |
| Cash flow hedges | 183 | 2,028 | 493 | 1,749 | 3,505 | 7,775 |
| Fair value hedges | (795) | 3 | 1,254 | (1,229) | (3,433) | (3,405) |
| Exchange rate hedges | 519 | 985 | 2,382 | 793 | 3,717 | 7,877 |
| Cash flow hedges | 519 | 985 | 2,382 | 793 | 3,717 | 7,877 |
| Fair value hedges | 0 | 0 | 0 | 0 | 0 | 0 |
| Interest and exchange rate hedges | (173) | 12 | 458 | 18 | 399 | 887 |
| Cash flow hedges | (71) | 18 | 232 | 4 | 288 | 542 |
| Fair value hedges | (102) | (6) | 226 | 14 | 111 | 345 |
| Hedge of net investment in foreign operations | (546) | (2, 830) | (517) | (1,125) | (751) | (5,223) |
| Derivatives not designated as hedges | (868) | 7,328 | (627) | (578) | (164) | 5,959 |
| Interest rate | (271) | 8,587 | (303) | (609) | (1,100) | 6,575 |
| Exchange rate | (395) | (839) | (137) | 96 | 1,026 | 146 |
| Interest and exchange rate | (202) | (420) | (187) | (65) | (90) | (762) |
(*) For interest rate hedges, the positive amount is in terms of fixed “payment.”
For exchange rate hedges, a positive amount means payment in functional vs. foreign currency.
(**) Positive amounts indicate payables.
A list of derivative products entered into at December 31, 2009 and 2008 is provided in Appendix III.
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. The consolidated tax group comprised 40 companies in 2009 (39 in 2008).
Modification of tax rates
In 2009 and 2008, the impact of changes in the tax rates applicable to the income statements of the main Telefónica Group companies was not material.
Deferred tax
The movements in deferred taxes in 2009 and 2008 are as follows:
| | Millions of euros |
| | Deferred tax assets | Deferred tax liabilities |
| Balance at December 31, 2008 | 6,980 | 3,576 |
| Increases | 771 | 188 |
| Decreases | (811) | (955) |
| Transfers | (864) | (51) |
| Net international movements | (106) | 324 |
| Company movements and others | 1 | - |
| Balance at December 31, 2009 | 5,971 | 3,082 |
| | Millions of euros |
| | Deferred tax assets | Deferred tax liabilities |
| Balance at December 31, 2007 | 7,829 | 3,926 |
| Increases | 1,308 | 571 |
| Decreases | (1,979) | (526) |
| Transfers | (39) | (43) |
| Net international movements | (159) | (352) |
| Company movements and others | 20 | - |
| Balance at December 31, 2008 | 6,980 | 3,576 |
Tax credits for loss carryforwards
The tax loss carryforwards in Spain at December 31, 2009 at the main Group companies amounted to 3,968 million euros (3,643 million euros for companies belonging to the tax group).
The statement of financial position at December 31, 2009 includes a 500 million euro deferred tax asset corresponding to 1,666 million euros of tax loss carryforwards in Spain.
The 2002 tax return included a negative adjustment for 2,137 million euros from Telefónica Móviles, S.A. (now Telefónica, S.A.) arising through the transfer of certain holdings of Group companies acquired in previous years, which was questioned by the Spanish tax authorities. The challenging of this adjustment in the tax audit has not affected the consolidated financial statements as in accordance with past rulings by the tax authorities, which differed from the interpretation put forward by the Company, the Company decided then not to capitalize it.
In relation to the sale by Terra Networks, S.A. (now Telefónica, S.A.) of its stake in Lycos Inc. in 2004, the Company has begun procedures to recognize a higher tax loss of up to 7,418 million euros because of measuring as acquisition value for tax purposes, the market value of Lycos Inc. shares received, rather than their carrying amount, in conformity with Article 159 of the Spanish Corporation Law. No effect on the consolidated financial statements has been considered until the Company receives a definitive ruling on this procedure.
The O2 Germany group has tax credits and deductible temporary differences incurred in prior years amounting to 8,517 million euros, of which 426 million euros have been recognized as deferred tax assets in line with the prospects of generating future taxable earnings. These losses were generated by O2 Germany and the rest of the Germany subsidiaries of the Telefónica Group prior to the acquisition of the O2 Group. These tax credits do not expire.
Unused tax credits recognized in the consolidated statement of financial position at the Latin American subsidiaries at December 31, 2009 amounted to 461 million euros.
Deductions
In the consolidated statement of financial position at December 31, 2009, the Group had recognized 252 million euros of unused tax credits, mainly export activity tax credits.
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 consolidated statement of financial position, whereas taxable temporary differences in tax bases give rise to deferred tax liabilities. The sources of deferred tax assets and liabilities from temporary differences recognized at December 31, 2009 and 2008 are as follows:
| | Millions of euros |
| | 2009 | 2008 |
| | Deferred tax | Deferred tax | Deferred tax | Deferred tax |
| | assets | liabilities | assets | liabilities |
| Property, plant and equipment | 922 | 395 | 809 | 387 |
| Intangible assets | 225 | 2,084 | 239 | 2,085 |
| Personnel commitments | 1,088 | 3 | 1,325 | 1 |
| Provisions | 769 | 30 | 598 | 11 |
| Investments in subsidiaries, associates and joint ventures | 626 | 147 | 1,083 | 256 |
| Other | 702 | 423 | 620 | 836 |
| Total | 4,332 | 3,082 | 4,674 | 3,576 |
Tax payables and receivables
Current tax payables and receivables at December 31, 2009 and 2008 are as follows:
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| | Millions of euros |
| | Balance at | Balance at |
| | 12/31/09 | 12/31/08 |
| Taxes payable: | | |
| Tax withholdings | 118 | 91 |
| Indirect taxes | 897 | 704 |
| Social security | 178 | 187 |
| Current income taxes payable | 872 | 873 |
| Other | 701 | 420 |
| Total | 2,766 | 2,275 |
| | Millions of euros |
| | Balance at | Balance at |
| | 12/31/09 | 12/31/08 |
| Tax receivables: | | |
| Indirect tax | 662 | 452 |
| Current income taxes receivable | 377 | 365 |
| Other | 207 | 153 |
| Total | 1,246 | 970 |
Reconciliation of book profit before taxes to taxable income
The reconciliation between accounting profit and the income tax expense for 2009, 2008 and 2007 is as follows:
| | Millions of euros |
| | 2009 | 2008 | 2007 |
| Accounting profit before tax | 10,387 | 10,915 | 10,684 |
| Tax expense at prevailing statutory rate | 3,116 | 3,275 | 3,472 |
| Effect of statutory rate in other countries | (20) | (99) | 458 |
| Variation in tax expense from new taxes | (15) | 12 | (22) |
| Permanent differences | (402) | 243 | (1,893) |
| Changes in deferred tax charge due to changes in tax rate | - | - | (36) |
| Capitalization of tax deduction and tax relief | (143) | (175) | (200) |
| Use of loss carryforwards | (5) | (106) | (203) |
| Decrease in tax expense arising from temporary differences | (82) | (2) | (8) |
| Consolidation adjustments | 1 | (59) | (3) |
| Income tax expense | 2,450 | 3,089 | 1,565 |
| Breakdown of current/deferred tax expense | | | |
| Current tax expense | 3,848 | 3,371 | 2,152 |
| Deferred tax benefit | (1,398) | (282) | (587) |
| Total income tax expense | 2,450 | 3,089 | 1,565 |
Permanent differences arise mainly from events that produce taxable income not recognized in the consolidated income statement.
As described in Note 2.b), in December 2009, the European Commission released its decision regarding the investigation involving the Kingdom of Spain on the potential consideration of the deduction for tax amortization of the financial goodwill arising on certain foreign shareholding acquisitions as government aid under the provisions of article 12.5 of the revised Spanish Income Tax Law (“TRLIS”), deeming the deduction to be state aid. This decision does not affect investments made before December 21, 2007 (see Note 2). As a result of this decision, income tax in the Telefónica Group’s consolidated income statement for the year ended December 31, 2009 is 591 million euros lower due to the reversal of this liability, included in “Permanent differences” for 2009 in the preceding table.
In 2007, the Company recognized a tax credit arising from the recognition of a higher tax loss carryforward amounting to 2,812 million euros generated on the disposal of the stake in Endemol Investment Holding, B.V. as a difference between the tax and carrying amount of the Endemol shares at the time of disposal. The positive impact recognized in “Income tax expense” in the consolidated income statement for the year amounted to 914 million euros, presented in the preceding table under “Permanent differences” for 2007. Also included under “Permanent differences” for 2007 are the accounting gain on this disposal, of 1,368 million euros, and the accounting gain on the disposal of Airwave for 1,296 million euros.
On September 25, 2002, tax inspections commenced at several companies included in tax group 24/90, of which Telefónica is the parent company. The taxes inspected were corporate income tax (for the years from 1998 to 2000) and VAT, tax withholdings and payments relating to personal income tax, tax on investment income, property tax and nonresident income tax (1998 to 2001).
The tax assessments related to this review, which included settlement agreements and imposed fines on Telefónica, were signed by the company in disagreement in October 2004 and July 2005. The total amount of these assessments was 140 euros. The final outcome of these assessments is not expected give rise to material additional liabilities on the Telefónica Group consolidated financial statements.
In April 2007, Telefónica, S.A. filed an administrative appeal before the National Court of Justice. The company also requested that the execution of the settlements and penalties appealed be suspended by providing the appropriate guarantees.
Telefónica presented in writing its conclusions on September 1, 2008.
On February 22, 2010, Telefónica received the notification of the ruling by the National courts dated February 4, 2010, in which it partially accepted the Company’s allegations.
Telefónica is assessing the impacts, both positive and negative, of this ruling, and as it may appeal for an overturn in the Supreme Court, it does not expect this to give rise additional material liabilities.
A new tax inspection commenced in June 2006 and concluded in July 2008. The taxes subject to review were corporate income tax for the years 2001 to 2004, VAT, tax withholdings and payments on account in respect of personal income tax, tax on investment income, property tax and non-resident income tax for the years 2002 to 2004.
In addition to the above, the Company has proposed additional adjustments to the tax amounts considered by Telefónica Móviles, S.A.U. in 2002 (of 2,137 million euros), of approximately 346 million euros. As a result, the inspection resolved the controversy with a new settlement of said tax, which was not accepted by Telefónica for the same reasons put forward before the Central Administrative Economic Court, which on September 10, 2009 ruled against the interests of the Company.
Telefónica filed an administrative appeal before the National Court of Justice against this resolution of September 10, 2009.
The assessment of this case has not uncovered the need to recognize additional liabilities in the Telefónica Group’s consolidated financial statements.
No material liabilities arose as a result of the inspection of the other items and financial years reviewed, and the Company has not and will not file any appeal.
Meanwhile, after the related inspections, four tax assessments were raised by the State Treasury of Sao Paulo against Telecomunicações de São Paulo, S.A. -Telesp (“Telesp”) in relation to the Merchandise Circulation Tax (ICMS) -similar to the VAT levied on telecommunications services- for different periods between 2001 and 2007. The aggregate amount of the assessments is approximately 413 million euros.
After deciding on the actions to take against the Sao Paolo tax authorities, the Company lost one of the suits in administrative proceedings and is awaiting a decision in first instance in the court proceedings, while the other three in the second instance of administrative proceedings.
The company believes the arguments presented could reasonably lead to favorable rulings by the pertinent judicial bodies.
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 completed in 2008, the main companies of the tax group are open to inspection for all years from 2005.
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, Venezuela and the Netherlands. |
| | · | The last four years in Ecuador, Nicaragua and Peru. |
| | · | The last three years in Chile, El Salvador, the US and Panama. |
| | · | The last two years in Uruguay. |
| | · | In Europe, O2 Group has the last three years open to inspection in the UK, the last five in Germany and the last two in the Czech Republic. |
The tax audit of the open years is not expected to give rise to additional material liabilities for the Group.
| (18) | DISCONTINUED OPERATIONS |
None of the Group’s principal operations were discontinued in 2009, 2008 or 2007.
Revenue from operations:
The breakdown of “Revenue from operations” is as follows:
| Millions of euros | 2009 | 2008 | 2007 |
| Rendering of services | 52,498 | 53,751 | 52,436 |
| Net sales | 4,233 | 4,195 | 4,005 |
| Total | 56, 731 | 57,946 | 56,441 |
Other income
The breakdown of “Other income” is as follows:
| | Millions of euros |
| 2009 | 2008 | 2007 |
| Ancillary income | 584 | 702 | 601 |
| Own work capitalized | 720 | 736 | 708 |
| Government grants | 54 | 59 | 57 |
| Gain on disposal of assets | 287 | 368 | 2,898 |
| Total | 1,645 | 1,865 | 4,264 |
“Gain on disposal of assets” in 2009 includes the gain of 220 million euros obtained on the sale of Medi Telecom, S.A. In 2008, this heading mainly included the gain of 143 million euros on the sale of the stake in Sogecable, S.A. (see Note 13) and in 2007, mainly the gains of the holdings in Airwave O2, Ltd. and Endemol Investment Holding, B.V. for 1,296 million and 1,368 million euros, respectively.
Also included are gains on the disposal of properties in line with the Telefónica Group’s real estate efficiency plan via the selective sale of properties in Spain and the Czech Republic, which amounted to 47, 104 and 161 million euros in 2009, 2008 and 2007, respectively.
Other expenses
The breakdown of “Other expenses” in 2009, 2008 and 2007 is as follows:
| Millions of euros | 2009 | 2008 | 2007 |
| Leases | 1,068 | 914 | 938 |
| Advertising | 1,123 | 1,626 | 2,198 |
| Other external services | 7,729 | 7,539 | 6,854 |
| Taxes | 1,203 | 1,147 | 974 |
| Other operating expenses | 203 | 250 | 303 |
| Changes in trade provisions | 874 | 748 | 666 |
| Losses on disposal of non-current assets | 81 | 88 | 148 |
| Total | 12,281 | 12,312 | 12,081 |
The estimated payment schedule for the next few years on operating leases and acquisition commitments is as follows:
| 12/31/09 | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | Over 5 years |
| Operating leases | 6,547 | 1,023 | 1,700 | 1,327 | 2,497 |
| Purchase and contract commitments | 3,151 | 1,305 | 769 | 395 | 682 |
The main finance lease transactions are described in Note 22.
Headcount and employee benefits
a) Number of employees
The table below presents the breakdown of the Telefónica Group’s average number of employees in 2009, 2008 and 2007, together with total headcount at December 31 each year. The employees shown for each subgroup include the Telefónica Group companies with similar activities in accordance with segment reporting.
| | 2009 | 2008 | 2007 |
| Average | Year-end | Average | Year-end | Average | Year-end |
| Telefónica Spain | 35,318 | 35,338 | 35,708 | 35,562 | 37,688 | 35,792 |
| Telefónica Latin America | 50,709 | 51,606 | 49,990 | 49,849 | 48,844 | 49,946 |
| Telefónica Europe | 28,249 | 27,023 | 28,828 | 28,888 | 29,249 | 29,305 |
| Subsidiaries and other companies | 140,875 | 143,459 | 137,249 | 142,736 | 128,271 | 133,444 |
| Total | 255,151 | 257,426 | 251,775 | 257,035 | 244,052 | 248,487 |
The number of employees shown in the table above corresponds to the consolidated companies. It is worth highlighting the large number of employees at the various companies of the Atento Group performing contact center activities, whose average and year-end headcount for 2009 were 129,885 and 132,256, respectively.
Of the final headcount at December 31, 2009, approximately 51.8% are women (50.8% at December 31, 2008).
b) Employee benefits
The Telefónica Group has arranged a defined-contribution pension plan for its employees in Spain. Under this plan, the company makes contributions of 4.51% of the regular base salary (6.87% for employees of Telefónica de España, S.A.U. whose hiring date was prior to June 30, 1992). This is in addition to a 2.21% compulsory contribution by each participant. This plan is entirely externalized in outside funds.
At December 31, 2009, a total of 52,912 Group employees were covered by the pension plans managed by the subsidiary Fonditel Entidad Gestora de Fondos de Pensiones, S.A. (54,819 and 57,675 at December 31, 2008 and 2007, respectively). The contributions made by the various companies in 2009 amounted to 97 million euros (98 and 95 million euros in 2008 and 2007, respectively).
Furthermore, in 2006, the Group approved a Pension Plan for Senior Executives, wholly funded by the company, which complements the previous plan. This plan envisages annual defined contributions equivalent to specific percentages of the executives’ fixed remuneration, in accordance with their professional category, and extraordinary contributions in accordance with the circumstances of each executive, payable in line with the conditions of said Plan. No provision was made for this plan as it has been fully externalized.
Depreciation and amortization
The breakdown of “Depreciation and amortization” on the consolidated income statement is as follows:
| Millions of euros | 2009 | 2008 | 2007 |
| Depreciation of property, plant and equipment | 6,095 | 6,303 | 6,497 |
| Amortization of intangible assets | 2,861 | 2,743 | 2,939 |
| Total | 8,956 | 9,046 | 9,436 |
Earnings per share
Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent (adjusted for any dilutive effects inherent in converting potential ordinary shares issued) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
Both basic and diluted earnings per share attributable to equity holders of the parent are calculated based on the following data:
| | Millions of euros |
| | 2009 | 2008 | 2007 |
| Profit attributable to ordinary equity holders of the parent from continuing operations | 7,776 | 7,592 | 8,906 |
| Profit attributable to ordinary equity holders of the parent from discontinued operations | - | - | - |
| Total profit attributable to equity holders of the parent for basic earnings | 7,776 | 7,592 | 8,906 |
| Adjustment for dilutive effects of the conversion of potential ordinary shares | - | - | - |
| Total profit attributable to equity holders of the parent for diluted earnings | 7,776 | 7,592 | 8,906 |
| No. of shares | Thousands |
| 2009 | 2008 | 2007 |
| Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share | 4,552,656 | 4,645,852 | 4,758,707 |
| Telefónica, S.A. “Performance Share Plan” share option plan | 7,908 | 5,182 | 1,808 |
| Weighted average number of ordinary shares (excluding treasury shares) outstanding for diluted earnings per share | 4,560,564 | 4,651,034 | 4,760,515 |
The denominators used in the calculation of both basic and diluted earnings per share have been adjusted to reflect any transactions that changed the number of shares outstanding without a corresponding change in equity as if they had taken place at the start of the first period under consideration.
There have been no transactions involving existing or potential ordinary shares between the end of the year and the date of preparation of the consolidated financial statements.
Basic and diluted earnings per share attributable to equity holders of the parent broken down by continuing and discontinued operations are as follows:
| Figures in euros | Continuing operations | Discontinued operations | Total |
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 |
| Basic earnings per share | 1.71 | 1.63 | 1.87 | - | - | - | 1.71 | 1.63 | 1.87 |
| Diluted earnings per share | 1.71 | 1.63 | 1.87 | - | - | - | 1.71 | 1.63 | 1.87 |
| (20) | SHARE-BASED PAYMENT PLANS |
At year-end 2009, 2008 and 2007, the Telefónica Group had the following shared-based payment plans linked to the share price of Telefónica, S.A. The main plans in force at the end of 2009 are as follows:
| | a) | Telefónica, S.A. share plan: “Performance Share Plan” |
At the General Shareholders’ Meeting of Telefónica, S.A. on June 21, 2006, its shareholders approved the introduction of a long-term incentive plan for managers and senior executives of Telefónica, S.A. and other Telefónica Group companies. Under this plan, selected participants who met the qualifying requirements were given a certain number of Telefónica, S.A. shares as a form of variable compensation.
The plan was initially intended to last seven years. It is divided into five phases, each three years long, beginning on July 1 (the “Start Date”) and ending on June 30 three years later (the “End Date”). At the start of each phase the number of shares to be awarded to Plan beneficiaries is determined based on their success in meeting targets set. The shares are delivered, assuming targets are met, at the End Date of each phase. Each phase is independent from the others. The first started on July 1, 2006 (with shares delivered on July 1, 2009) and the fifth phase begins on July 1, 2010 (with any shares to be delivered from July 1, 2013).
Award of the shares is subject to a number of conditions:
| | - | The beneficiary must continue to work for the company throughout the three years of the phase, subject to certain special conditions related to departures. |
| | - | The actual number of shares awarded at the end of each phase will depend on success in meeting targets and the maximum number of shares assigned to each executive. Success is measured by comparing the Total Shareholder Return (“TSR”), which includes both share price and dividends offered by Telefónica shares, with the TSRs offered by a basket of listed telecoms companies that comprise the comparison group. Each employee who is a member of the plan is assigned at the start of each phase a maximum number of shares. The actual number of shares awarded at the end of the phase is calculated by multiplying this maximum number by a percentage reflecting their success at the date in question. This will be 100% if the TSR of Telefónica is equal to or better than that of the third quartile of the Comparison Group and 30% if Telefónica's TSR is in line with the average. The percentage rises linearly for all points between these two benchmarks. If the TSR is below average no shares are awarded. |
June 30, 2009 marked the end of the first phase of this plan, which entailed the following maximum number of shares allocated:
| | No. of shares | Unit value | End date |
1st phase July 1, 2006 | 6,530,615 | 6.43 | June 30, 2009 |
With the maturity of the plan, in July 2009 a total of 3,309,968 shares (corresponding to a total of 4,533,393 gross shares less a withholding of 1,224,610 shares prior to delivery) were delivered to Telefónica Group directors included in the first phase. The shares delivered were deduced from the Company’s treasury shares in 2009.
All the shares included in the first phase of the plan were hedged with a derivative instrument acquired in 2006. The cost of this instrument was 46 million euros, which in unit terms is 6.43 euros per share. At June 30, 2009, the bank with which the financial instrument was entered into delivered to Telefónica, S.A. the own shares contracted. These were accounted for as treasury shares.
The maximum number of the shares issuable in each of the three outstanding phases at December 31, 2009 is as follows:
| Phase | No. of shares | Unit value | End date |
2nd phase July 1, 2007 | 5,556,234 | 7.70 | June 30, 2010 |
3rd phase July 1, 2008 | 5,286,980 | 8.39 | June 30, 2011 |
4th phase July 1, 2009 | 6,356,597 | 8.41 | June 30, 2012 |
This plan is equity-settled via the delivery of shares to the participants. Accordingly, a balancing entry for the 43, 38 and 23 million euros of employee benefits expenses recorded in 2009, 2008 and 2007 was made in equity.
For the sole purpose of ensuring the shares necessary at the end of the phase begun in 2008 (the third phase of the plan), Telefónica, S.A. purchased an instrument from a financial institution that will deliver to Telefónica, at the end of the phase, a total of 2,500,000 shares, part of the shares necessary to settle the phase. This instrument is indexed to the success of the plan; i.e. the instrument has the features as the plan. The cost of the financial instrument was 25 million euros, equivalent to 9.96 euros per option (see Note 16).
For the fourth phase of the Plan, Telefónica, S.A. has acquired an instrument from a financial institution with the same features of the plan, whereby at the end of the phase, Telefónica will obtain part of the shares necessary to settle the phase (4,000,000 shares). The cost of the financial instrument was 34 million euros, equivalent to 8.41 euros per option (see Note 16).
| | b) | Telefónica, S.A. share option plan targeted at Telefónica Europe employees: “Performance Cash Plan” “Performance Share Plan” |
In addition to the Performance Share Plan, another plan called the Performance Cash Plan, operating under the same conditions as the Performance Share Plan is targeted at employees of the Europe segment. This plan entails delivery to this segment’s executives of a specific number of theoretical options in Telefónica, S.A. which, in the event, would be cash-settled at the end of each phase via a payment equivalent to the market value of the shares on settlement date up to a maximum of three times the notional value of the shares at the delivery date.
The value of the theoretical options is established as the average share price in the 30 days immediately prior to the start of each phase, except for the first phase, where the average share price during the 30 days immediately prior to May 11, 2006 (12.83 euros) was taken as the reference.
The estimated duration of this plan is also 7 years, with 5 phases, each of 3 years, commencing on July 1 of each year, starting in 2006.
Like the Telefónica, S.A. Performance Share Plan, the performance rate for setting payments is measured based on the TSR on Telefónica shares with respect to the comparison group’s TSRs, in line with the following criteria:
| | · | Below average | 0% | |
| | · | Average | 30% | |
| | · | Equal to or higher than the third quartile | 100% | |
The number of options assigned at December 31, 2009 was 412,869.
The fair value at December 31, 2009 of the options delivered in each phase in force at that time was 19.55 euros per option.
This value is calculated by taking the Telefónica share price and including the estimated TSR and is updated at each year end.
| | a) | Litigation and arbitration |
Telefónica and its group companies are party to several lawsuits or proceedings that are currently in progress in the law courts and administrative and arbitration bodies of the various countries in which the Telefónica Group is present.
Considering the reports of the Company’s legal advisors regarding these proceedings, it is reasonable to assume that this litigation or cases will not materially affect the financial position or solvency of Telefónica Group, regardless of the outcome.
Among unresolved cases or those underway in 2009 (see Note 17 for details of tax-related cases), we would highlight the following:
| | 1. | Contentious proceedings in connection with the merger between Terra Networks, S.A. and Telefónica |
On September 26, 2006, Telefónica was notified of the claim filed by former shareholders of Terra Networks, S.A. (Campoaguas, S.L., Panabeni, S.L. and others) alleging breach of contract in respect of the terms and conditions set forth in the Prospectus of the Initial Public Offering of shares of Terra Networks, S.A. dated October 29, 1999. This claim was rejected via ruling issued on September 21, 2009, and the appellants charged for the court costs. This ruling was appealed on December 4, 2009.
| | 2. | Claim before the Center for Settlement of Investment Disputes (ICSID) against the Argentine Government |
As a result of the enactment by the Argentine Government of Public Emergency and Exchange Rules Reform Law 25561, of January 6, 2002, Telefónica considered that the terms and conditions of the Share Transfer Agreement approved by Decree 2332/90 and the Pricing Agreement ratified by Decree 2585/91, both of which were executed by the Company with the Argentine government, had been affected appreciably, since the Law rendered ineffective any dollar or other foreign currency adjustment clauses, or indexation clauses based on price indexes of other countries, or any other indexation mechanism in contracts with the public authorities. The law also required that prices and rates derived from such clauses be denominated in pesos at an exchange rate of one Argentine peso to one US dollar.
Accordingly, since negotiations with the Argentine Government were unsuccessful, on May 14, 2003, Telefónica filed a request for arbitration with the International Center for Settlement of Investment Disputes (ICSID) pursuant to the Agreement for the Promotion and Reciprocal Protection of Investments between the Argentine Republic and the Kingdom of Spain. On December 6, 2004, Telefónica filed the “Memorial” or claim with the ICSID, as well as the initial testimonies supporting the claim.
On February 15, 2006, Telefónica Argentina signed a memorandum of understanding with the Argentine government as a prerequisite to reaching an agreement to renegotiate the transfer contract pursuant to the provisions of Article 9 of Law 25561. Among other issues, the memorandum of understanding envisaged the suspension for a certain period of all claims, appeals and demands planned or underway, based on events or measures taken as a result of emergency situation established by Law No. 25561 with regard to the Transfer Agreement and the license granted to Telefónica Argentina.
On August 21, 2009, after successive extensions of the period of suspension included in the memorandum of understanding, Telefónica and the Argentine Government agreed to consider this arbitration proceeding concluded. As a result, both parties requested the ICSID Court to file the proceeding, which the court agreed to on September 24, 2009.
| | 3. | Appeal for judicial review of the Spanish Competition Court (TDC) ruling of April 1, 2004. |
On April 1, 2004, the TDC ruled that Telefónica de España had engaged in unfair trade practices prohibited under Article 6 of Antitrust Law 16/1989, dated July 17, and Article 82 of the EC Treaty, consisting in the abuse of a dominant market position, by conditioning the provision of certain services to the non-existence of predialing arrangements with rival operators and running disloyal advertising campaigns. It imposed a fine of 57 million euros.
Telefónica de España filed an appeal for judicial review of this decision. On January 31, 2007, the National Appellate Court ruled in favor of the appeal, thereby overturning the TDC’s ruling. The State attorney filed an appeal to overturn the Supreme Court ruling on January 15, 2008, which Telefónica contested in July of 2008. This Court has set April 6, 2010 as the judgment date.
| | 4. | Cancellation of the UMTS license granted to Quam GMBH in Germany. |
In December 2004, the German Telecommunications Market Regulator revoked the UMTS license granted in 2000 to Quam GmbH, in which Telefónica has a stake. After obtaining a suspension of the revocation order, on January 16, 2006, Quam GmbH filed a suit against the order with the German courts. This claim sought two objectives: 1) to overturn the revocation order issued by the German Telecommunications Market Regulator, and 2) if this failed, to be reimbursed for the total or partial payment of the original amount paid for the license; i.e. 8.4 million euros.
This claim was rejected by the Cologne Administrative Court. Quam GmbH appealed the decision before the Supreme Administrative Court of North Rhine-Westphalia, which also rejected its appeal.
Finally, Quam GmbH filed a new claim in third instance before the Federal Supreme court for Administrative Cases, which was not admitted for processing. Quam GmbH appealed this decision on August 14, 2009, and is currently awaiting another decision by this court.
| | 5. | Appeal against the European Commission ruling of July 4, 2007 against Telefónica de España’s broadband pricing policy. |
On July 9, 2007, Telefónica was notified of the decision issued by the European Commission imposing a fine of approximately 152 million euros for breach of Article 82 of EC Treaty rules by charging unfair prices between whole and retail broadband access services. The ruling charged Telefónica with applying a margin squeeze between the prices it charged competitors to provide regional and national wholesale broadband services and its retail broadband prices using ADSL technology between September 2001 and December 2006.
On September 10, 2007, Telefónica and Telefónica de España filed an appeal to overturn the decision before the Court of First Instance of the European Communities. The Kingdom of Spain, as an interested party, also lodged an appeal to overturn the decision. Meanwhile, France Telecom and the Spanish Association of Bank Users (AUSBANC) filed requests to intervene, to which Telefónica has submitted its comments.
| | 6. | Claim against the decision by Agencia Nacional de Telecomunicações (ANATEL) regarding the inclusion of interconnection and network usage revenues in the Fundo de Universalização de Serviços de Telecomunicações (FUST). |
Brasilcel, N.V. (VIVO) Group operators, together with other Brazilian wireless operators, appealed ANATEL’s decision of December 16, 2005, to include interconnection and network usage revenues and expenses in the calculation of the amounts payable into the Fund for Universal Access to Telecommunications Services (Fundo de Universalização de Serviços de Telecomunicações or FUST for its initials in Portuguese) –a fund to pay for the obligations to provide universal service- with retroactive application from 2000. On March 13, 2006, the Brasilia Federal Regional Court granted the injunction requested by the appellants, preventing ANATEL’s decision from being applied. On March 6, 2007, a ruling in favor of the wireless operators was issued, stating that it was not appropriate to include the revenues received from other operators in the taxable income for the FUST’s calculation and rejecting the retroactive application of ANATEL’s decision. ANATEL filed an appeal to overturn this decision with Brasilia Regional Federal Court no. 1. This appeal is pending resolution.
At the same time, Telesp and Telefónica Empresas, S.A., together with other wireline operators through ABRAFIX (Associação Brasileira de Concessionárias de Serviço Telefonico Fixo Comutado) appealed ANATEL’s decision of December 16, 2005, also obtaining injunctions. On June 21, 2007, Federal Regional Court no. 1 ruled that it was not appropriate to include the interconnection and network usage revenues and expense in the FUST’s taxable income and rejected the retroactive application of ANATEL’s decision. ANATEL filed an appeal to overturn this ruling on April 29, 2008 before Brasilia Federal Regional Court no. 1.
| | 7. | Proceeding before the Prague District Court against the ruling of the Czech Telecommunications Office dated December 22, 2003. |
On December 22, 2003, the Czech Telecommunications Office issued a ruling that required Cesky Telecom, a.s. (now Telefónica O2 Czech Republic, a.s.) to pay T-Mobile Czech Republic, a.s. (T-mobile) an amount of approximately 898 million Czech crowns (approximately 26.4 million euros) in interconnection fees (call termination) for the period from January to November 2001.
Although the administrative procedure filed by Telefónica O2 Czech Republic, a.s. (Telefónica O2 Czech Republic) against this resolution had yet to be resolved, in 2007 T-Mobile asked Prague District Court no. 3 to execute the ruling, entailing an amount of approximately 1,859 million Czech crowns (approximately 57.3 million euros) of principal and interest. The Court accepted the petition and on May 23, 2007 issued a ruling to initiate the execution against any asset of Telefónica O2 Czech Republic, whose inadmissibility it had requested.
Telefónica O2 Czech Republic paid approximately 2,023 million Czech crowns (approximately 82 million euros) to prevent a potential order of execution and to remove the preventive embargo on its assets. Nonetheless, the procedure continued in the courts. In April 2009, an agreement was reached between T-Mobile and Telefónica O2 Czech Republic that ended the procedure, whereby T-Mobile returned approximately 1,053 million Czech crowns (approximately 40 million euros) to Telefónica O2 Czech Republic.
| | 8. | Public civil procedure by the Sao Paulo government against Telesp for alleged reiterated malfunctioning in the services provided by Telesp compensation for damages to the customers affected. |
This proceeding was filed by the Public Ministry of the State of Sao Paulo for alleged reiterated malfunctioning in the services provided by Telesp, seeking compensation for damages to the customers affected. A general claim is filed by the Public Ministry of the State of Sao Paulo, for 1,000 million Brazilian reais, calculated on the company’s revenue base over the last five years. A potential charge of responsibility for compensation by Telesp would be carried out through the settlement and executing of the ruling at the request of individual consumers. It is impossible to quantify the amount of this lawsuit at present.
This proceeding was suspended via resolution dated November 5, 2009, for a period of 90 days, to assess the proposed agreement being negotiated between the parties. As no agreement was reached, the suspension was lifted and the procedure remains in the courts.
Commitments
Agreements with Portugal Telecom (Brazil).
In accordance with the agreements signed between the Telefónica Group and the Portugal Telecom Group governing their 50/50 joint venture, Brasilcel, N.V., which groups together their cellular businesses in Brazil, the Portugal Telecom Group is entitled to sell to Telefónica, S.A., which is obliged to buy, its holding in Brasilcel, N.V. should there be a change in control at Telefónica or at any of its subsidiaries that hold a direct or indirect ownership interest in Brasilcel, N.V.
Similarly, Telefónica is entitled to sell to the Portugal Telecom Group, which is obliged to buy, its holding in Brasilcel, N.V. if there is a change of control at Portugal Telecom, SGPS, S.A., at PT Móveis, SGPS, S.A or at any of their subsidiaries that hold a direct or indirect ownership interest in Brasilcel, N.V.
The price in both cases will be determined on the basis of an independent appraisal (under the terms provided for in the definitive agreements) performed by investment banks, selected using the procedure established in these agreements. The related payment could be made, at the choice of the group exercising the put option, in cash or in shares of the wireless telephony operators contributed by the related party, making up the difference, if any, in cash.
Telefónica Internacional, S.A.U. as strategic partner of Colombia Telecomunicaciones, S.A. ESP.
Pursuant to the terms of the Framework Investment Agreement signed on April 18, 2006 between Telefónica Internacional, S.A.U., the Colombian Government and Colombia Telecomunicaciones, S.A. ESP, shareholders of Colombia Telecomunicaciones, S.A. ESP may offer, from April 28, 2006, at any time and in a single package, all the shares they hold in Colombia Telecomunicaciones, S.A. ESP to Telefónica Internacional, S.A.U., who shall be obliged to acquire them, directly and via one of its subsidiaries. The sale/purchase price of each share will be determined based on the valuation of each share offered in sale by an independent investment bank designated by agreement between the two parties.
Guarantees provided for Ipse 2000 (Italy).
At December 31, 2009, the Telefónica Group had provided guarantees for the Italian company Ipse 2000 S.p.A. (holder of a UMTS license in Italy and in which the Company has a stake through Solivella B.V.) to ensure the amounts payable to the Italian government in connection with the grant of the license. The only payment pending at December 31, 2009, was the last of the 10 monthly payments scheduled.
In this respect, Telefónica (together with the other strategic partners of Ipse 2000, S.p.A) arranged a counterguarantee (cash collateral) for a bank which, in turn, issued a bank guarantee for the Italian authorities as security for the deferred payment of the UMTS license.
At December 31, 2009, the amount corresponding to the Telefónica Group in this cash collateral was 97.5 million euros.
Commitments relating to the acquisition in Germany of HanseNet Telekommunikation GmbH by Telefónica Deutschland GmbH
On December 3, 2009, Telefónica’s subsidiary in Germany, Telefónica Deutschland GmbH (“Telefónica Deutschland”), signed an agreement to acquire all of the shares of German company HanseNet Telekommunikation GmbH (“HanseNet”). The purchase price agreed by the parties was based on the firm value of 900 million euros, subject to a series of adjustments upon completion of the transaction.
The purchase and sale was subject to compliance with a series of conditions, including approval of the transaction by the pertinent competition authorities, which was obtained on January 29, 2010. The transaction was completed in February 2010; hence the outstanding payment commitment was fulfilled (see Note 24).
Agreements with PRISA-SOGECABLE
On November 25, 2009, Telefónica signed an agreement with Promotora de Informaciones, S.A. (“Prisa”) and Sogecable, S.A.U. (“Sogecable”) for the acquisition of a 21% stake in DTS Distribuidora de Televisión Digital, S.A. (“DTS”), the company that will include the pay-TV services of PRISA Group (Digital+), for a firm value of 2,350 million euros.
Additionally, on the same date Telefónica signed a shareholder agreement with Prisa and Sogecable for DTS (“Shareholder agreement”), which will come into effect following completion of the transaction and will establish, among other things, that in the event of a change in control at Telefónica, Sogecable will have the right to acquire from Telefónica, which will be obliged to sell,
its stake in DTS. Similarly, in the event of a change of control at Prisa, Telefónica will have the right to buy from Sogecable, which will be obliged to sell, its stake in DTS. In these events, the acquisition would be carried out at the real value of the shares based on an independent valuation by investment banks in accordance with the procedure stipulated in the agreement (see Note 24).
The contingencies arising from the litigation and commitments described above were evaluated (see Note 3.1) when the consolidated financial statements for the year ended December 31, 2009 were prepared, and the provisions recorded in respect of the commitments taken as a whole are not material.
Through its investees and in line with its environmental policy, the Telefónica Group has undertaken various environmental-management initiatives and projects. In 2009 and 2008 these initiatives and projects resulted in expenditure and investment for insignificant amounts, which were recognized in the consolidated income statement and consolidated statement of financial position, respectively.
The Group has launched various projects with a view to reducing the environmental impact of its existing installations, with project costs being added to the cost of the installation to which the project relates.
In addition, in line with its commitment to the environment, the Group announced the creation of a Climate Change Office to provide a framework for strategic and RD&I projects in the quest for energy efficient solutions. This initiative entails the launch and implementation of solutions in each area that contributes to optimizing the company's processes (operations, suppliers, employees, customers and society).
| | • | In the area of operations, the main objective is to develop and implement projects that will allow for more efficient networks and systems by reducing and optimizing energy consumption. |
| | • | In the area of suppliers, active efforts are underway to include energy efficiency criteria in the purchasing process for all product lines in the Telefónica value chain. |
| | • | In the area of employees, the aim is to foster among the Company’s employees a culture of respect and awareness regarding the environment and energy saving. |
| | • | In the area of customers, work is being carried out to better leverage ICTs (information and communication technologies) and increase energy efficiency with the objective of reducing carbon emissions. |
| | • | And finally, in the area of society, the objective is to promote change in citizens’ behavior through Telefónica's actions. |
The Group has also rolled out internal control mechanisms sufficient to pre-empt any environmental liabilities that may arise in future, which are assessed at regular intervals either by Telefónica staff or renowned third-party institutions. No significant risks have been identified in these assessments.
Fees for 2009 and 2008 of the various member firms of the Ernst & Young international organization, to which Ernst & Young, S.L. (the auditors of the Telefónica Group) belongs amounted to 24.07 and 24.45 million euros, respectively.
The detail of these amounts is as follows:
| | Millions of euros |
| | 2009 | 2008 |
| Audit services (1) | 22.62 | 22.79 |
| Audit-related services (2) | 1.40 | 1.65 |
| Tax services (3) | 0.01 | 0.00 |
| All other services (4) | 0.04 | 0.01 |
| TOTAL | 24.07 | 24.45 |
| | (1) | Audit services: services included under this heading are mainly the audit of the annual and interim financial statements, work to comply with the requirements of the Sarbanes-Oxley Act (Section 404) and the review of the 20-F report to be filed with the US Securities and Exchange Commission (SEC). |
| | (2) | Audit-related services: This heading mainly includes services related to the review of the information required by regulatory authorities, agreed financial reporting procedures not requested by legal or regulatory bodies and the review of corporate responsibility reports. |
| | (3) | Tax services: the services included under this heading relate to the review of tax obligations. |
| | (4) | All other services: the services included under this heading relate to training. |
Ernst & Young’s fees include amounts in respect of fully and proportionately consolidated Telefónica Group companies. A total of 1.17 and 1.39 million euros, respectively, corresponding to 50% of the fees by proportionally consolidated companies, were included in 2009 and 2008, respectively.
Fees for 2009 and 2008 of other auditors amounted to 21.60 million euros and 15.95 million euros, respectively, as follows:
| | Millions of euros |
| | 2009 | 2008 |
| Audit services | 0.86 | 0. 71 | |
| Audit-related services | 2.17 | 1.05 | |
| Tax services | 3.95 | 4. 35 | |
| All other services | 14.62 | 9.84 | |
| TOTAL | 21.60 | 15.95 | |
Other auditors’ fees include amounts in respect of fully and proportionately consolidated Telefónica Group companies. In 2009 and 2008, a total of 0.24 and 0.34 million euros, respectively, corresponding to 50% of the fees by proportionately consolidated companies, were included.
| | d) | Trade and other guarantees |
The Company is required to issue trade guarantees and deposits for concession and spectrum tender bids and in the ordinary course of its business. No significant additional liabilities in the accompanying consolidated financial statements are expected to arise from guarantees and deposits issued.
| | e) | Directors’ and Senior executives’ compensation and other benefits |
The compensation of Telefónica, S.A.’s Directors is governed by Article 28 of the Bylaws, which states that the compensation amount that the Company may pay to all of its Directors as remuneration and attendance fees shall be fixed by the shareholders at the General Shareholders’ Meeting, which amount shall remain unchanged until and unless the shareholders decide to modify it. The Board of Directors shall determine the exact amount to be paid within such limit and the distribution thereof among the Directors. In this respect, on April 11, 2003, shareholders set the maximum gross annual amount to be paid to the Board of Directors at 6 million euros. This includes a fixed payment and fees for attending meetings of the Board of Director’s advisory or control committees. In addition, the compensation provided for in the preceding paragraphs, deriving from membership on the Board of Directors, shall be compatible with other professional or employment compensation accruing to the Directors by reason of any executive or advisory duties that they perform for the Company, other than the supervision and collective decision-making duties inherent in their capacity as Directors.
Therefore, the compensation paid to Telefónica directors in their capacity as members of the Board of Directors, the Executive Commission and/or the advisory and control committees consists of a fixed amount payable monthly plus fees for attending the meetings of the Board’s advisory or control committees. In this respect, it was also agreed that executive Board members, other than the Chairman, would not receive the fixed amounts established for their directorships, but only receive the corresponding amounts for discharging their executive duties as stipulated in their respective contracts.
The following table presents the fixed amounts established for membership to the Telefónica Board of Directors, Standing Committee and the advisory or control committees.
(Euros) Position | Board of Directors | Standing Committee | Advisory or Control Committees |
| Chairman | 300,000 | 100,000 | 28,000 |
| Vice Chairman | 250,000 | 100,000 | - |
Board member: Executive Proprietary Independent Other external | - 150,000 150,000 150,000 | - 100,000 100,000 100,000 | - 14,000 14,000 14,000 |
In addition, the amounts paid for attendance at each of the Advisory or Control Committee meetings is 1,250 euros.
Total compensation paid to Telefónica Directors for discharging their duties in 2009 amounted to 4,081,333 euros in fixed compensation and 252,500 euros in fees for attending the Board Advisory or Control Committee meetings. It should also be noted that the compensation paid to Company directors sitting on the Boards of other Telefónica Group companies amounted to 1,791,104 euros. In addition, the Company directors who are members of the regional advisory committees, including the Telefónica Corporate University Advisory Council, received a total of 553,750 euros in 2009.
The following table presents the breakdown by item of the compensation and benefits paid to Telefónica Directors for discharging their duties in 2009:
(Euros)
Board Members | Board of Directors | Standing Committee | Other Board Committees | TOTAL |
| Fixed payment | Attendance fees |
| Chairman | | | | | |
| Mr. César Alierta Izuel | 300,000 | 100,000 | - | - | 400,000 |
| Vice chairmen | | | | | |
| Mr. Isidro Fainé Casas | 250,000 | 100,000 | - | - | 350,000 |
Mr. Vitalino Manuel Nafría Aznar | 250,000 | - | 56,000 | 22,500 | 328,500 |
| Members | | | | | |
Mr. Julio Linares López | - | - | - | - | - |
| Mr. José María Abril Pérez | 150,000 | 100,000 | 14,000 | 1,250 | 265,250 |
| Mr. José Fernando de Almansa Moreno-Barreda | 150,000 | - | 56,000 | 21,250 | 227,250 |
| Mr. José María Álvarez-Pallete López | - | - | - | - | - |
| Mr. David Arculus | 150,000 | - | 28,000 | 11,250 | 189,250 |
| Ms. Eva Castillo Sanz | 150,000 | - | 14,000 | 10,000 | 174,000 |
| Mr. Carlos Colomer Casellas | 150,000 | 100,000 | 56,000 | 16,250 | 322,250 |
| Mr. Peter Erskine | 150,000 | 100,000 | 56,000 | 25,000 | 331,000 |
| Mr. Alfonso Ferrari Herrero | 150,000 | 100,000 | 84,000 | 38,750 | 372,750 |
| Mr. Luiz Fernando Furlán | 150,000 | - | 14,000 | 3,750 | 167,750 |
| Mr. Gonzalo Hinojosa Fernández de Angulo | 150,000 | 100,000 | 98,000 | 42,500 | 390,500 |
| Mr. Pablo Isla Álvarez de Tejera | 150,000 | - | 84,000 | 16,250 | 250,250 |
| Mr. Antonio Massanell Lavilla | 150,000 | - | 65,333 | 28,750 | 244,083 |
| Mr. Francisco Javier de Paz Mancho | 150,000 | 100,000 | 56,000 | 15,000 | 321,000 |
| TOTAL | 2,600,000 | 800,000 | 681,333 | 252,500 | 4,333,833 |
In addition, the breakdown of the total paid to executive directors Mr.César Alierta Izuel, Mr.Julio Linares López and Mr. José María Álvarez-Pallete López for discharging their executive duties by item is as follows:
| ITEM | 2009 (euros) |
| Salaries | 5,947,604 |
| Variable compensation | 8,058,179 |
Compensation in kind (1) | 100,051 |
| Contributions to pension plans | 25, 444 |
| (1) “Compensation in kind” includes life and other insurance premiums (general medical and dental insurance). |
In addition, with respect to the Pension Plan for Senior Executives (see Note 19), the total amount of contributions made by the Telefónica Group in 2009 in respect of executive Directors was 1,925,387 euros.
In relation to the “Performance Share Plan” approved at the General Shareholders’ Meeting of June 21, 2006 (see Note 20), the maximum number of shares corresponding to the second, third and fourth phases of the Plan will be given (on July 1, 2010, July 1, 2011 and July 1, 2012) to each of Telefónica, S.A.’s executive Directors if all the terms established for such delivery are met, is as follows: For Mr. César Alierta Izuel, 116,239, 148,818 and 173,716 shares, respectively; for Mr. Julio Linares López, 57,437, 101,466 and 130,287 shares, respectively, for Mr. José María Álvarez-Pallete López, 53,204, 67,644 and 78,962 shares, respectively. Similarly, with respect to the execution of the first phase of the Plan in July 2009, since the Total Shareholder Return (“TSR”) of Telefónica was higher in this phase than the TSRs of companies representing 75% of the market cap of the comparison group, the beneficiaries received, in accordance with the general terms and conditions of the Plan, all the shares assigned to them as follows: to Mr. César Alierta Izuel, 129,183 shares; to Mr. Julio Linares López, 65,472 shares; and to Mr. José María Álvarez-Pallete López, 62,354 shares.
It should be noted that the external Directors do not receive and did not receive in 2009 any compensation in the form of pensions or life insurance, nor do they participate in the share-based payment plans linked to Telefónica’s share price.
In addition, the Company does not grant and did not grant in 2009 any advances, loans or credits to the directors, or to its top executives, thus complying with the requirements of the Sarbanes-Oxley Act passed in the U.S., which is applicable to Telefónica, S.A. as a listed company in that market.
Meanwhile, the six senior executives of the Company, excluding those that are directors, received a total for all items in 2009 of 10,533,852 euros. In addition, the contributions by the Telefónica Group in 2009 with respect to the Pension Plan described in Note 19 for these directors amounted to 922,728 euros.
Furthermore, the maximum number of shares corresponding to the second, third and fourth phases of the “Performance Share Plan” assigned to the Company’ senior executives for each of the periods is 130,911 shares for the second phase, 306,115 shares for the third phase and 394,779 shares for the fourth phase. Similarly, as explained above, these senior executives received a total of 284,248 shares in the first phase of the Plan.
| | f) | Equity interests in companies engaging in an activity that is identical, similar or complementary to that of the Company and the performance of similar activities by the directors on their own behalf or on behalf of this parties: |
Pursuant to Article 127 ter. 4 of the Spanish Corporation Law, introduced by Law 26/2003 of July 17, which amends Securities Market Law 24/1988 of July 28, and the revised Spanish Corporation Law, in order to reinforce the transparency of listed corporations, details are given below of the companies engaging in an activity that is identical, similar or complementary to the corporate purpose of Telefónica, S.A., including Telefónica Group companies, in which the members of the Board of Directors own equity interests, and of the functions, if any, that they discharge in them, on their own behalf or on behalf of others:
| Name | Activity | Company | Position or functions | Stake %1 |
| Mr. César Alierta Izuel | Telecommunications | Telecom Italia S.p.A. | Director | -- |
| Telecommunications | China Unicom (Hong Kong) Limited | Director | -- |
| Mr. Isidro Fainé Casas | Telecommunications | Abertis Infraestructuras, S.A. | Vice Chairman | < 0.01% |
| Mr. Julio Linares López | Telecommunications | Telefónica de España, S.A.U. | Director | -- |
| Telecommunications | Telefónica Móviles España, S.A.U. | Director | -- |
| Telecommunications | Telefónica Europe, Plc. | Director | -- |
| Telecommunications | Telecom Italia S.p.A. | Director | -- |
| Mr. José Fernando de Almansa Moreno-Barreda | Telecommunications | Telefónica Internacional, S.A.U. | Director | -- |
| Telecommunications | Telefónica del Perú, S.A.A. | Director | -- |
| Telecommunications | Telefónica de Argentina, S.A. | Director | -- |
| Telecommunications | Telecomunicaçoes de Sao Paulo, S.A. | Director | -- |
| Telecommunications | Telefónica Móviles México, S.A. de C.V. | Director | -- |
| Mr. José María Álvarez-Pallete López | Telecommunications | Telefónica Internacional, S.A.U. | Executive Chairman | -- |
| Telecommunications | Telefónica DataCorp, S.A.U. | Director | -- |
| Telecommunications | Telefónica de Argentina, S.A. | Acting Director | -- |
| Telecommunications | Telecomunicaçoes de Sao Paulo, S.A. | Director/Vice Chairman | -- |
| Telecommunications | Telefónica Chile, S.A. | Acting Director | -- |
| Telecommunications | Telefónica Móviles México, S.A. de C.V. | Director/Vice Chairman | -- |
| Telecommunications | Colombia Telecomunicaciones, S.A. ESP | Director | -- |
| Telecommunications | Telefónica del Perú, S.A.A. | Director | -- |
| Telecommunications | Brasilcel, N.V. | Chairman of Supervisory Board | -- |
| Telecommunications | Telefónica Móviles Colombia, S.A. | Acting Director | -- |
| Telecommunications | Telefónica Larga Distancia de Puerto Rico, Inc. | Director | -- |
| Telecommunications | Telefónica Móviles Chile, S.A. | Acting Director | -- |
| Telecommunications | Portugal Telecom, SGPS., S.A. | Director | -- |
| Mr. David Arculus | Telecommunications | Telefónica Europe, Plc. | Director | -- |
| Telecommunications | British Sky Broadcasting Group, Plc. | -- | < 0.01% |
| Telecommunications | BT Group, Plc. | -- | < 0.01% |
| Mr. Peter Erskine | Telecommunications | Telefónica Europe, Plc. | Director | -- |
| Mr. Alfonso Ferrari Herrero | Telecommunications | Telefónica Internacional, S.A.U. | Director | -- |
| Telecommunications | Telefónica Chile, S.A. | Acting Director | -- |
| Telecommunications | Telefónica de Perú, S.A.A. | Director | -- |
| Telecommunications | Telefónica Móviles Chile, S.A. | Director | -- |
| Mr. Luiz Fernando Furlán | Telecommunications | Telecomunicaçoes de Sao Paulo, S.A. | Director | -- |
| Telecommunications | Telefónica Internacional, S.A.U. | Director | -- |
| Mr. Francisco Javier de Paz Mancho | Telecommunications | Atento Inversiones y Teleservicios, S.A.U. | Non-executive Chairman | -- |
| Telecommunications | Telefónica Internacional, S.A.U. | Director | -- |
| Telecommunications | Telefónica de Argentina, S.A. | Director | -- |
| Telecommunications | Telecomunicaçoes de Sao Paulo, S.A. | Director | -- |
Pursuant to Article 114.2 of the Spanish Corporation Law, also introduced by Law 26/2003 of July 17, it is stated that in the year to which these annual financial statements refer, the directors, or persons acting on their behalf, did not perform any transactions with Telefónica or any other company in the Telefónica Group other than in the normal course of the Company’s business or that were not on an arm’s length basis.
________________________
1 In cases where the shareholding is less than 0.01% of share capital, “<0.01%” is noted.
The principal finance leases at the Telefónica Group are as follows:
| | a) | Future minimum lease payment commitments in relation to finance leases at O2 Group companies. |
| Millions of euros | Present value | Revaluation | Installments pending payment |
| Within one year | 52 | 6 | 58 |
| From one to five years | 203 | 86 | 289 |
| Total | 255 | 92 | 347 |
These commitments arise from plant and equipment lease agreements. Between March 30, 1991 and April 9, 2001, finance lease agreements were signed between O2 UK and a number of US leasing trusts. A part of the radio and switch equipment of its GSM network is subject to the terms of said agreements. The agreements have a term of 16 years and an early purchase option after the first 12 years.
At December 31, 2009 and 2008, net assets under this lease amounting to 208 and 186 million euros, respectively, were recognized under property, plant and equipment.
| | b) | Finance lease agreement at Colombia Telecomunicaciones, S.A. ESP. |
Similarly, via its subsidiary Colombia Telecomunicaciones, S.A. ESP, the Group has a finance lease agreement with PARAPAT, the consortium which owns the telecommunications assets and manages the pension funds for the entities which were predecessors to Colombia de Telecomunicaciones, S.A., E.S.P., and which regulate the operation of assets, goods and rights relating with the provision of telecommunications services by the company, in exchange for financial consideration.
This agreement includes the transfer of these assets and rights to Colombia de Telecomunicaciones, S.A., ESP once the last installment of the consideration has been paid in line with the payment schedule over a period of 17 years from 2006:
| | Present value | Revaluation | Installments pending payment |
| 2010 | 101 | 68 | 169 |
| 2011 | 97 | 86 | 183 |
| 2012 | 128 | 143 | 271 |
| 2013 | 123 | 170 | 293 |
| 2014 | 119 | 199 | 318 |
| Subsequent years | 808 | 2,891 | 3,699 |
| Total | 1,376 | 3,557 | 4,933 |
The net amount of property, plant and equipment recorded under the terms of this lease was 483 million euros at December 31, 2009 (547 million euros at December 31, 2008).
Net cash flow from operating activities
Net cash flow from operating activities fell 1.33% to 16,148 million euros in 2009 from 16,366 million euros in 2008, which was 5.24% higher than the 15,551 million euros obtained in 2007.
Telefónica Latin America, as the Group’s driver, Telefónica Europe, which is achieving solid results thanks to the advantages afforded by its larger size and efficiency gains, and the businesses in Spain, which boasts efficient commercial activity, coupled with control over costs and capex are all easing the pressure of revenue on operating cash flow.
Meanwhile, cash payments to suppliers and employees in 2009 decreased by 4.75% to 46,198 million euros from 48,500 million euros in 2008. This reduction is the result of cost containment amid efforts to maximize the efficiency of the cost structure. Employee benefits expense rose in 2009 in line with the increase the costs related to the higher average headcount in the year. In 2009, the Telefónica Group obtained operating cash flow (operating revenue less payments to suppliers for expenses and employee benefits expenses) totaling 21,161 million euros, 2.92% more than the 20,560 million euros generated in 2008. Driving this increase were the Company’s highly diversified business mix and its ability to deliver in an ever-changing environment, not to mention its skilled management of costs and investment. Strong commercial efforts are helping drive growth in accesses across all operating businesses and regions, helping generate operating cash flow. In 2008, operating cash flow totaled 20,560 million euros, 2.26% more than the 20,105 million euros generation in 2007. This increase was largely driven by the Group’s strong position in its main markets, the impact of the Company’s extensive business diversification and its strategic commitment to tapping the growth potential of its operating markets. Meanwhile, strong commercial efforts helped drive growth in accesses across all operating businesses and regions, thereby helping boost operating cash flow.
Customer collections increased by 2.46% to 67,358 million euros in 2009 (from 69,060 million euros in 2008), in line with the performance of revenues from operations in the year. Customer collections increased by 2.88% to 69,060 million euros in 2008 (from 67,129 million euros in 2007). This growth was the result of higher revenue due to the growth in accesses, which in turn was due to the success of the commercial campaigns to win and retain customers.
Meanwhile, cash payments to suppliers and employees in 2008 rose 3.14% to 48,500 million euros from 47,024 million euros in 2007. This slight increase was the result of greater commercial efforts in the various geographic areas, mainly to garner customer loyalty, and to higher interconnection charges, while maximizing the efficiency of the cost structure.
Cash flows arising from payments of interest and other finance costs in 2009 fell 25.02% to 2,170 million euros, due to the decline in interest rates during the year and the reduction in financial debt in previous years. These figures do not include payments on the main issues made in 2009, which will begin falling due as of 2010. Payments for net interest and other finance costs in 2008 fell 10.15% to 2,894 million euros (from 3,221 million euros in 2007) mostly due to the decrease in financial debt.
Taxes paid in 2009 soared 108.21% to 2,942 million euros from 1,413 million euros in 2008 due to the 1,297 million euros payment on account made by Telefónica, S.A. in the year. Taxes paid in 2008 were 3.02% lower than the 1,457 million euros paid in 2007.
Net cash used in investing activities
Net cash used in investing activities increased by 2.19% in 2009 to 9,300 million euros from 9,101 million euros in 2008.
Net cash used in investing activities increased by 4,509 million euros in 2008, to 9,101 million euros from 4,592 million euros in 2007. Payments on investments in companies (net of cash and cash equivalents acquired) in 2008 declined by 22.16%, from 2,798 million euros to 2,178 million euros. The main investments were the acquisitions of Telemig by Brasilcel, N.V. for 347 million euros, of shares of China Netcom and China Unicom for 688 and 424 million euros, respectively, and of 51.8% of CTC’s non-controlling interests for 640 million euros. The main payment on investments in 2007 was for the 42.3% stake in Telco S.p.A. for 2,314 million euros.
Payments on financial investments not included in cash equivalents amounted to 1,411 million euros, compared to 114 million euros in 2008. This increase was the result of investments in deposits and other long-term financial instruments.
Investment in property, plant and equipment and intangible assets in 2009 totaled 7,593 million euros, 3.75% less than the 7,889 million euros of 2008. This decrease is in line with the decline in acquisitions of property, plant and equipment during the year.
The amount at December 31, 2008 was 615 million euros higher than in 2007 (7,274 million euros) driven by further investment in fiber optics, 3G, TV and ADSL.
Proceeds from disposals of investments in companies, net of cash and cash equivalents acquired, amounted to 686 million euros in 2008, mainly due to the 648 million euros obtained from the sale of Sogecable. In 2007, this figure was 5,346 million euros and entailed disposals of stakes in Airwave and Endemol for 2,841 million and 2,107 million euros, respectively.
In 2009, net short-term financial investments included in cash flows from cash surpluses not included under cash equivalents in 2009 amounted to 548 million euros. Net disposals of these investments in 2008 amounted to 76 million euros.
Net cash used in financing activities
Net cash used in financing activities in 2009 totaled 2,281 million euros, 71% less than the 7,765 million euros of 2008, mainly due to the 8,617 million euros of proceeds from the issuance of debentures and bonds (1,317 million euros in 2008).
Net cash used in financing activities in 2008 totaled 7,765 million euros, down from 9,425 million euros in 2007. The 1,660 million euro decline was due basically to the decrease in the repayment of financing due to the decline in the debt balance in the last few years.
| (24) | EVENTS AFTER THE REPORTING PERIOD |
Significant events affecting Telefónica taking place from December 31, 2009 to the date of preparation of these consolidated financial statements include:
Financing
a) Maturity of debentures and bonds:
On January 25, 2010, Telefónica Emisiones, S.A.U. repaid at maturity the bonds issued on July 25, 2006 under the bond issuance program (“EMTN”) registered with the London Stock Exchange for an aggregate amount of 1,250 million euros.
b) Voluntary early redemptions:
The following issues were redeemed voluntarily before maturity in the early months of 2010:
| | - | On January 29, 2010, Telefónica, S.A. made a voluntarily repayment ahead of schedule of 500 million euros on the 6,000 million euro syndicated loan arranged on June 28, 2005 and amended on February 13, 2009 to extend the maturity of 4,000 million euros from June 28, 2011 by one year for 2,000 million euros and two years for the other 2,000 million euros. |
| | - | Similarly, on February 11, 2010, Telefónica, S.A. made a voluntary repayment of 500 million euros on the same loan. |
c) Financing of Telco
On January 11, 2010, Telco S.p.A. (“Telco”) arranged a 1,300 million euro loan with Intesa Sanpaolo, S.p.A., Mediobanca, S.p.A., Société Générale, S.p.A. and Unicredito, S.p.A. maturing on May 31, 2012, part of which is secured with Telecom Italia S.p.A. shares. The lending banks have granted Telco shareholders a call option on the Telecom Italia S.p.A. shares that they may be entitled to receive as a result of the potential execution of the pledge.
In line with the commitments assumed by Telco shareholders, on December 22, 2009, the rest of Telco’s financing needs with respect to debt maturities were met with a bridge loan granted by shareholders Telefónica, Intesa Sanpaolo, S.p.A. and Mediobanca, S.p.A., for approximately 902 million euros, and a bank bridge loan granted by Intesa Sanpaolo, S.p.A. and Mediobanca, S.p.A., for the remaining 398 million euros.
The financing from the bridge loans was substituted with a bond subscribed by Telco’s shareholder groups, on a pro-rate basis in accordance with their interests in the company, on February 19, 2010 for 1,300 million euros.
d) Financing of ECAs
On February 12, 2010, Telefónica, S.A. arranged long-term financing for an amount of 472 million US dollars at fixed rates with a guarantee of the Swedish Export Agency (EKN) to acquire network equipment from a Swedish service provider. This financing entailed three tranches: tranche A, for 232 million US dollars maturing on November 30, 2018, tranche B, for 164 million US dollars maturing on April 30, 2019, and tranche C, for 76 million US dollars maturing on November 30, 2019.
Devaluation of the Venezuelan Bolivar fuerte
Regarding the devaluation of the Venezuelan Bolivar fuerte on January 8, 2010 (see Note 2), the two main factors to consider with respect to the Telefónica Group’s 2010 financial statements will be:
| | · | The decrease in the Telefónica Group’s net assets in Venezuela as a result of the new exchange rate, with a balancing entry in equity of the Group. This effect is estimated at approximately 1,810 million euros. |
| | · | The translation of results and cash flows from Venezuela at the new devalued closing exchange rate. |
Finally, on January 19, the Venezuelan Authorities announced that they would grant a preferential rate of 2.60 Bolivar fuerte per dollar for new items, among which payment of dividends is included, as long as the request for Authorization of Acquisition of Foreign Exchange was filed before January 8, 2010. To that date, the Company had in fact requested authorizations related to the distribution of dividends of prior years (see Note 16).
Fulfillment of commitments relating to the acquisition in Germany of HanseNet Telekommunikation GmbH by Telefónica Deutschland GmbH
On February 16, 2010, having complied with the terms established in the agreement dated December 3, 2009 by the parties, the Telefónica Group completed the acquisition of 100% of the shares of HanseNet. The final amount paid out was approximately 912 million euros.
Amendment to the agreements signed with Prisa and Sogecable following the purchase of a stake in Digital+ by Gestevisión Telecinco, S.A.
Following the signing on the agreement between Prisa and Gestevisión Telecinco, S.A. (“Telecinco”) for the sale by Prisa to Telecinco of a 22% stake in Digital+, on January 29, 2010, Telefónica and Prisa signed a new agreement raising the percentage stake to be acquired by Telefónica from 21% to 22%. Meanwhile, following the agreement reached between Prisa and Telecinco, Telefónica has undertaken to renegotiate the terms of the Shareholder Agreement to reflect the shareholder structure of Digital+ following the acquisition of a stake in the company by Telecinco.
The estimated total investment to be made by Telefónica, after deduction of the net debt, will be around 495 million euros, of which approximately 230 million euros will be covered by the assumption by the buyer of subordinated loan between Telefónica de Contenidos, S.A.U. (creditor) and Sogecable (debtor).
This acquisition is subject, among other conditions, to the obtainment of the appropriate regulatory authorizations.
Acquisition of JAJAH
In January 2010, the Telefónica Group, through its wholly owned subsidiary Telefónica Europe plc, acquired 100% of the shares of JAJAH, the leading communications innovator, for 145 million euros.
| (25) | ADDITIONAL NOTE FOR ENGLISH TRANSLATION |
These consolidated financial statements were originally prepared in Spanish. In the event of discrepancy, the Spanish-language version prevails.
These financial statements are presented on the basis of International Reporting Standards as issued by the International Accounting Standars Board (IASB), which do not differ for the purposes of the Telefónica Group from IFRS as adopted by the European Union. Consequently, certain accounting practices applied by the Group do not conform with generally accepted principles in other countries.
APPENDIX I: CHANGES IN THE CONSOLIDATION SCOPE
The following changes took place in the consolidation scope in 2009:
Telefónica Europe
The companies BT Cellnet Ltd and SPT Telecom Finance, B.V. were disposed of. Both entities, previously included in the consolidated financial statements of the Telefónica Group using the full consolidation method, were removed from the consolidation scope.
In December, German company Telefónica Global Services, GmbH, a wholly owned subsidiary of the Telefónica Group, set up a German company, Telefónica Global Roaming, GmbH, with initial capital of 25 thousand euros. This company was included in the consolidation scope using the full consolidation method.
Telefónica Latin America
Pursuant to Chilean law, on December 1, 2008, Telefónica, S.A., through subsidiary Inversiones Telefónica Internacional Holding, Ltda., launched a second tender offer (“second offer”) for all the shares of Compañía Telefónica de Chile, S.A. (CTC) Telefónica did not already hold (representing 3.25% of CTC’s capital).
Upon completion of the second offer, Telefónica’s indirect stake in CTC increased from 96.75% to 97.89% at the date of filing the notice with the Spanish National Securities Commission, the CNMV, on January 9, 2009. The Telefónica Group still consolidates the Chilean company using the full consolidation method.
Pursuant to the corporate restructuring of the Brazilian group Vivo, on July 27, 2009 Telemig Celular, S.A. was absorbed by Telemig Celular Participaçoes, S.A., which was subsequently absorbed by Vivo Participaçoes, S.A. Following this transaction, Telemig Celular, S.A. and Telemig Celular Participaçoes, which had been fully consolidated in the Telefónica Group, were removed from the consolidation scope. The Telefónica Group still consolidates Vivo Participaçoes, S.A. using proportionate consolidation.
On November 19, 2009, within the scope of the same corporate restructuring, the companies Tagilo Participaçoes, Ltda., Sudestecel Participaçoes, Ltda., Avista Participaçoes, Ltda. and Vivo Brasil Comunicaçoes Ltda. were absorbed by Portelcom Participaçoes, S.A. All these companies, previously consolidated using proportionate consolidations, were removed from the Telefónica Group’s consolidation scope.
In September 2009, deeds of liquidation of Nicaraguan companies Telefónica Móviles Nicaragua, S.A., Doric Holdings y Compañía, Ltda. and Kalamai Holdings y Compañía, Ltda. were executed. The companies, which had been fully consolidated in the Telefónica Group, were removed from the consolidation scope.
On December 3, 2009, following approval by the National Securities Commission of the Argentine Republic, the Argentine securities regulator, Telefónica, S.A. acquired shares representing 1.8% of the share capital of Telefónica de Argentina, S.A. held by minority shareholders for a price of approximately 23 million euros. Following this acquisition, the Telefónica Group is owner of all of the shares of the Argentine company. This company is still fully consolidated in the consolidated financial statements of the Telefónica Group.
On October 21, 2009 Telefónica, S.A. and China Unicom (Hong Kong) Limited (“China Unicom”) completed the mutual share exchange agreement through which Telefónica, through Telefónica Internacional, S.A.U., subscribed for 693,912,264 newly issued shares of China Unicom, satisfied by the contribution in kind to China Unicom of 40,730,735 Telefónica shares. This entailed an investment of approximately 1,000 million US dollars of ordinary shares of China Unicom. Following this acquisition, the Telefónica Group’s shareholding interest in China Unicom’s voting share capital increased from 5.38% to 8.06%.
On November 5, the share buyback agreement of one of China Unicom’s core shareholders, SK Telecom Co., Ltd. (“SKT”), was carried out. Following the buyback and cancellation of the shares, the Telefónica Group’s holding in China Unicom’s share capital reached 8.37%. The Telefónica Group accounts for this investment using the equity method.
Other companies
In February 2009, Telefónica International Wholesale Services II, S.L. was incorporated, with initial capital of 3,006 euros, fully subscribed and paid by Telefónica, S.A.. This company is included in the consolidated financial statements of the Telefónica Group using the full consolidation method.
In 2009, Telefónica International Wholesale Services II, S.L. incorporated the European companies TIWS Hungary, TIWS Sweden and TIWS Latvia, subscribing and paying up 100% of their respective share capital. All of these companies have been included in the Telefónica Group’s consolidation scope using the full consolidation method.
In April, Dutch company Atento, N.V. acquired 100% of the shares of Venezuelan company Teleatención de Venezuela, C.A. for approximately 9 thousand euros. This company has been included in the Telefónica Group’s consolidation scope using the full consolidation method. It has been idle since its incorporation.
In April, Chilean company Compañía de Telecomunicaciones de Chile, Marketing e Información, S.A., a subsidiary of Atento Chile, S.A., was wound up. The company, which was fully consolidated in the Telefónica Group’s financial statements, was removed from the consolidation scope.
Spanish company Telefónica Remesas, S.A. was incorporated by Telefónica Telecomunicaciones Públicas, S.A., a wholly owned Telefónica Group subsidiary, with initial capital of 0.3 million euros, fully subscribed and paid. This company has been included in the Telefónica Group’s consolidation scope using the full consolidation method.
Telefónica Móviles España, S.A., a 100% owned subsidiary of Telefónica, S.A., sold its 32.18% stake in Moroccan company Medi Telecom, S.A. (Méditel) and the company’s outstanding loans, for 400 million euros to the rest of Méditel’s local partners. This company, which in 2008 was accounted for by the Telefónica Group using the equity method, was removed from the consolidation scope.
In September, Argentine company Atusa, S.A. was incorporated, with initial capital of 50 thousand Argentine pesos, which was fully subscribed. The Telefónica Group paid for 25% of the company. This company has been included in the Telefónica Group’s consolidated financial statements using the full consolidation method.
In 2009, Spanish company Atento Teleservicios España, S.A.U., a wholly owned subsidiary of the Telefónica Group, took over and merged Amsterdam-based company Atento EMEA, B.V. This
company, which was fully consolidated in the Telefónica Group’s consolidated financial statements, was removed from the consolidation scope.
Following the sale of Sintonia, S.A.’s stake in Telco S.p.A. (Telco), the Italian company with a 22.45% shareholding in telecommunications operator Telecom Italia S.p.A., Telefónica, S.A.’s stake in Telco increased from 42.3% to 46.18%, maintaining its effective interest in Telecom Italia S.p.A. through this company at 10.36% of the voting shares. The company is still accounted for in the Telefónica Group consolidated financial statements using the equity method.
In November, Telefónica Servicios Audiovisuales, S.A., a whole owned subsidiary of the Telefónica Group, acquired 100% of Spanish company Gloway Broadcast Services, S.L. (“Gloway”) for approximately 6 million euros. This company has been included in the Telefónica Group's consolidated financial statements using the full consolidation method.
The main changes in consolidation scope in 2008 were as follows:
Telefónica Spain
In June 2008, Spanish company Iberbanda, S.A. raised and then decreased capital to offset losses. In the move, Telefónica de España, S.A.U. subscribed more shares than corresponded to its shareholding, thereby raising its stake in the company from 51% to 58.94%. This company is still fully consolidated.
Telefónica Latin America
On September 17, 2008, Telefónica launched a tender offer through its Inversiones Telefónica Internacional Holding, Ltda. subsidiary to acquire all the outstanding shares of Compañía Telefónica de Chile, S.A. (“CTC”) that Telefónica did not control directly or indirectly. This amounted to 55.1% of CTC’s share capital. This included all CTC shares listed on the Santiago de Chile and New York Stock Exchanges (represented by American Depositary Shares). The offer was structured as a purchase of shares in cash, initially at a price of 1,000 Chilean pesos for class A shares and 900 Chilean pesos for class B shares. On October 11, 2008 the offer price was increased to 1,100 Chilean pesos for class A shares and 990 Chilean pesos for class B shares.
Upon completion of the acceptance period of the tender offer, a total of 496,341,699 shares issued by CTC were tendered, representing 94.11% of the shares to which the offer related and a total investment of approximately 640 million euros.
After settlement of the transaction, Telefónica’s indirect ownership in CTC’s share capital increased from 44.9% to 96.75%. This Chilean company was still included in the Telefónica Group’s consolidation scope using the full consolidation method.
Subsequently, pursuant to the obligations in Chilean law, on December 1, 2008, Telefónica, through subsidiary Inversiones Telefónica Internacional Holding, Ltda., presented a second tender offer to acquire all the outstanding shares of CTC that it did not own, directly or indirectly, after settlement of the first offer (representing 3.25% of CTC’s capital), on the same economic terms as the initial bid. This offer expired on January 9, 2009.
In August 2008, Telefónica del Perú, S.A.A. acquired 71.29% of Peruvian company Star Global Com, S.A.C. for 8 million US dollars. The company was included in the Telefónica Group’s consolidation scope using the full consolidation method.
On April 3, 2008, in accordance with the terms of a sale and purchase agreement entered into on August 2, 2007, after the pertinent administration authorizations were obtained, Vivo Participaçoes,
S.A. (“VIVO”) completed the acquisition of 53.90% of the voting stock (ON) and 4.27% of the preferred stock (PN) of Telemig Celular Participaçoes, S.A., the controlling shareholder of Telemig Celular, S.A., a mobile telephony operator in the State of Minas Gerais (Brazil). According to the terms of the sale and purchase agreement, the total purchase price was 1,163 million reais (approximately 429 million euros). VIVO also acquired the right held by the seller to subscribe in the future for paid up shares in Telemig Celular Participaçoes, S.A. for a price of approximately 70 million Brazilian reais (26 million euros).
Moreover, on April 8, 2008, VIVO, through its subsidiary Tele Centro Oeste IP, S.A., launched a voluntary tender offer for shares representing up to one third of the free float represented by the preferred stock in Telemig Celular Participaçoes, S.A. and in its subsidiary Telemig Celular, S.A. at a price of 63.90 and 654.72 Brazilian reais, respectively. Once the offer concluded, on May 15, 2008, having reached a level of acceptance of close to 100%, TCO IP, S.A. acquired 31.9% and 6% of the preferred shares of Telemig Celular Participaçoes, S.A. and Telemig Celular, S.A., respectively. Furthermore, in accordance with Brazilian Corporations law, TCO IP, S.A. submitted a mandatory tender offer on July 15 for all the voting stock in Telemig Celular Participaçoes, S.A. and Telemig Celular, S.A. at a price per share equivalent to 80% of the purchase price of the voting stock of these companies.
On December 19, 2008, approval was given by shareholders of Telemig Celular Participaçoes, S.A., Telemig Celular, S.A. and Vivo Participaçoes, S.A. (Vivo) in their respective extraordinary meetings to reorganize the Vivo Group, whereby TCO IP, S.A. was spun off. Its assets were subsequently integrated under Telemig Celular, S.A. and Telemig Celular Participaçoes, S.A., making Vivo a shareholder in both Brazilian companies, with direct and indirect stakes at December 31, 2008 amounting to 90.65% and 58.9%, respectively. Both companies were included in the Telefónica Group’s consolidation scope using proportionate consolidation.
Multi Holding Corporation, S.A., which was wholly owned by Telefónica, S.A., was wound up. Accordingly, the company, which was fully consolidated in the Telefónica Group’s financial statements, was removed from the consolidation scope.
On June 16, 2006, Telefónica de Argentina, S.A signed a contract to acquire the shares of Telefónica Data Argentina, S.A. (787,697 shares, representing 97.89% of its share capital) held by Telefónica Data Corp, S.A.U., a wholly owned subsidiary of Telefónica.
After extending the deadline for the sale, on January 28, 2008 Telefónica Data Corp, S.A.U. assumed the obligation to acquire all the shares of Telefónica Data Argentina, S.A. it did not already own (14,948 shares at a price of 224.30 Argentine pesos, representing 1.8578% of share capital). This acquisition was carried out on November 17, 2008.
As a result, Telefónica DataCorp, S.A.U. became owner of 802,645 shares, representing 100% of Telefónica Data Argentina, S.A. It subsequently transferred these shares to Telefónica de Argentina, S.A. in various stages, which ended on December 11, 2008.
Other companies
In November 2008, Telefónica del Perú, S.A.A. sold a total of 4,496,984 shares representing approximately 30% of the share capital of Teleatento del Perú, S.A.C. to Dutch company Atento, N.V. (1,124,246 shares), Chilean company Atento Chile (2,323,442 shares) and to shareholders of Teleatento del Perú, S.A.C. itself (1,049,296 shares), for approximately 103 million new soles. Following this transaction, the Telefónica Group holds 100% of the Peruvian company’s share capital. This company was still fully consolidated.
In October 2008, Atento Holding Inversiones y Teleservicios, S.A. (Atento HIT) set up Dutch company Atento EMEA, B.V., with start-up capital of approximately 21 thousand euros. This capital was provided via the spin-off of the wholly owned subsidiary Atento HIT, Atento, N.V. The companies it owned in Europe and Morocco then belonged to the new company Atento EMEA, while those located in Latin America and Italy were still controlled by Atento, N.V. Both the newly created Atento EMEA, B.V. and the existing Atento, N.V. were fully consolidated in the Telefónica Group. In addition, on March 4, 2008, Atento HIT acquired 100% of the shares of Telemarketing Prague, a.s.
In January 2008, Turmed, S.L. and the Telefónica Group, through its wholly owned Terra Networks Asociadas, S.L. subsidiary, sold their 100% stakes in Viajar.com Viajes, S.L.U. and Terra Business Travel, S.A., respectively, to the Spanish company Red Universal de Marketing y Bookings On Line, S.A. (RUMBO). The Telefónica Group consolidated this company using the equity method until February 2008 and then proportionately from March. Subsequently, on October 28, 2008, RUMBO, Viajar.com Viajes, S.L.U. and Terra Business Travel, S.A. were merged, with RUMBO absorbing Viajar.com Viajes, S.L.U. and Terra Business Travel, S.A., which were extinguished.
Terra Lycos Holding, B.V. and Telefónica U.S.A. Advisors Inc. were liquidated.
In March 2008, Telco S.p.A., in which Telefónica holds a stake of 42.3%, acquired 121.5 million shares at a price of 1.23 euros per share in the Italian company Telecom Italia (equivalent to 0.9% of its share capital), bringing its total direct interest to 24.5% of the voting rights and 16.9% of the dividend rights. The transaction implied a payment of 149.8 million euros.
As a result, the Telefónica Group indirectly held 10.4% of Telecom Italia’s voting rights and 7.1% of its dividend rights. Telco S.p.A. was included in the Telefónica Group’s consolidated financial statements by the equity method.
After a capital hike by Colombian company Telefónica Móviles Colombia, S.A., which Telefónica, S.A. fully subscribed, Telefónica, S.A.’s stake in the company increased to 49.42%, while the shareholding of Colombian company Olympic, Ltd., a 99.99% subsidiary of the Telefónica Group, decreased to 50.58%. The Telefónica Group still consolidated the Colombian operator using the full consolidation method.
In December, Portuguese company Portugal Telecom, SGPS, S.A. (PT) bought back and cancelled 46,082,677 shares in line with its share buyback program. This raised the Telefónica Group’s direct and indirect ownership interest to 10.48%. In accordance with article 20 of the Portuguese stock market code, Telefónica sold 4,264,394 shares of PT, thereby lowering its stake to 10%. This company was still included in the consolidation scope using the equity method.
In December 2008, Telefactoring Colombia, S.A. was incorporated, with start-up capital amounting to 4 billion Colombian pesos, fully subscribed and paid in. Telefónica subscribed and paid 1,620 million Colombian pesos, equivalent to a 40.5% stake. This company had yet to commence operations and was not included in the consolidation scope at the end of 2008.
Changes to the 2007 consolidation scope are described in the following sections.
Telefónica Europe
Telefónica O2 Europe Plc, a wholly owned subsidiary of Telefónica, S.A., and its 100%-owned subsidiary O2 Holdings, Ltd, sold 100% of the share capital of UK company Airwave O2, Ltd, for 1,932 million pounds sterling (equivalent to 2,841 million euros at the transaction date), obtaining a
gain of 1,296 million euros. This company, which had been fully consolidated in the Telefónica Group, was removed from the consolidation scope.
On December 20, 2007, the O2 Group transferred legal ownership to the entire business in Germany to Telefónica, S.A. through a dividend in kind for 8,500 million euros.
Telefónica Latin America
In 2007, Brazilian company Telecomunicaçoes de Sao Paulo, S.A. acquired 100% of Brazilian company NavyTree Participaçoes, S.A. for 361 million euros. This company was included in the consolidation scope using the full consolidation method.
Other companies
In February 2007, 100% of the shares of Endemol France were sold to Endemol, N.V., a company in which the Telefónica Group has a 75% stake.
In May, 2007, Telefónica, S.A. signed an agreement to sell its 99.7% stake in Dutch company Endemol Investment Holding, B.V. to a newly created consortium owned equally by Mediacinco Cartera, S.L., a newly created company owned by Italian company Mediaset and its listed Spanish subsidiary Gestevisión Telecinco, Cyrte Fond II, B.V. and G.S. Capital Partners VI Fund, L.P, for 2,629 million euros, obtaining capital gains of 1,368 million euros. This sale was carried out on July 3, 2007. This company, which had been fully consolidated in the Telefónica Group, was removed from the consolidation scope.
In August 2007, the Telefónica Group disposed of its 100% holding in Spanish company Azeler Automoción, S.A. for 0.34 million euros. This company, which had been fully consolidated in the Telefónica Group, was removed from the consolidation scope.
On April 28, 2007, Telefónica, S.A., together with its partners Assicurazioni Generali S.p.A., Intesa Sanpaolo, S.p.A., Mediobanca S.p.A. and Sintonía, S.A. (Benetton), entered into a “Co- Investment Agreement” and “Shareholders Agreement” with a view to establishing the terms and conditions of their acquisition of an indirect shareholding in Telecom Italia S.p.A. through an Italian company, currently called Telco S.p.A., in which Telefónica has a 42.3% interest. Both agreements were modified on October 25, 2007 following the inclusion of the Assicurazioni Generali Group companies indicated and the “Shareholders Agreement” was further amended on November 19, 2007.
On October 25, 2007 Telco S.p.A. acquired 100% of Olimpia, S.p.A., which held 17.99% of the voting shares of Telecom Italia S.p.A. Also on that date, Assicurazioni Generali S.p.A. (together with its group companies Alleanza Assicurazioni S.p.A., INA Assitalia S.p.A., Volksfürsorge Deutsche Lebenversicherung A.G. and Generali Vie S.A.) and Mediobanca S.p.A. contributed a total share of 5.6% of Telecom Italia S.p.A.’s voting shares (4.06% and 1.54%, respectively) to Telco S.p.A.
On December 10, 2007, an agreement was reached to takeover and merge Olimpia S.p.A. into Telco S.p.A., making Telco S.p.A’s entire stake in the voting shares of the Italian operator (23.6%) direct and leaving Telefónica with an indirect holding in the voting shares of Telecom Italia S.p.A. of 9.98% (6.88% of the dividend rights) for 2,314 million euros.
The “Shareholders Agreement” signed on April 28, 2007, contained a general clause whereby both Telefónica, at the shareholders meetings of Telco S.p.A. and Telecom Italia S.p.A, and the Telefónica directors appointed to the companies’ respective boards, would abstain from participating in and voting at the meetings dealing with issues regarding the provision of
telecommunications services by companies controlled by Telecom Italia S.p.A., in countries where there are legal or regulatory restrictions on the exercise of voting rights by Telefónica.
However, as indicated above, on November 19, 2007 the partners expounded on and detailed the “Shareholders Agreement”, as well as the Bylaws of Telco S.p.A., to include the specific limitations imposed by the Brazilian telecommunications regulator, Agência Nacional de Telecomunicações (“ANATEL”), as initially posted on its website on October 23, 2007 and subsequently published on November 5, 2007 as ANATEL’s “Ato” no. 68,276 dated October 31, 2007.
Pursuant to clause 8.5(a) of the “Shareholders Agreement,” on November 6, 2007 Telco S.p.A. and Telefónica entered into a Call Option Agreement giving Telefónica the option to buy shares of Telecom Italia S.p.A. in the event Telco S.p.A adopted a resolution to sell or pledge shares of Telecom Italia S.p.A (or rights related to its shares, such as voting rights) by simple majority and Telefónica were the “dissenting party,” under the terms of the “Shareholders Agreement.”
APPENDIX II: DEBENTURES AND BONDS
The list and main features of outstanding debentures and bonds at December 31, 2009 are as follows (in millions of euros):
| Telefónica and special purpose vehicles | | | | Maturity |
| Debentures and bonds | Currency | % Interest rate | Final rate | 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | Total |
| CAIXA 07/21/29 ZERO COUPON | EUR | 6.39% | 6.390% | - | - | - | - | - | 57 | 57 |
| ABN 15Y BOND | EUR | 1.0225xGBSW10Y | 3.80% | - | - | - | - | - | 50 | |
| TELEFÓNICA FEBRUARY 90C-12.60% | EUR | 12.6% | 12.600% | 4 | - | - | - | - | - | 4 |
| TELEFÓNICA FEBRUARY 90 F ZERO COUPON | EUR | 12.82% | 12.820% | 15 | - | - | - | - | - | 15 |
| Telefónica, S.A. | | | | 19 | - | - | - | - | 107 | 126 |
| T. EUROPE BV SEP_00 GLOBAL C | USD | 7.75% | 7.750% | 1,735 | - | - | - | - | - | 1,735 |
| T. EUROPE BV SEP_00 GLOBAL D | USD | 8.25% | 8.250% | - | - | - | - | - | 868 | 868 |
| TEBV FEB_03 EMTN FIXED TRANCHE A | EUR | 5.125% | 5.125% | - | - | - | 1,500 | - | - | 1,500 |
| TEBV FEB_03 EMTN FIXED TRANCHE B | EUR | 5.875% | 5.875% | - | - | - | - | - | 500 | 500 |
| T.EUROPE BV JULY A 2007 | JPY | 2.11% | 2.110% | - | - | 113 | - | - | - | 113 |
| T.EUROPE BV JULY B 2007 | JPY | 1 x JPYL6M + 0.40000% | 1.060% | - | - | 113 | - | - | - | 113 |
| Telefónica Europe, B.V. | | | | 1,735 | - | 226 | 1,500 | - | 1,368 | 4,829 |
| EMTN O2 EUR (I) | EUR | 4.375% | 4.375% | - | - | - | - | - | 1,750 | 1,750 |
| EMTN O2 EURO (II) | EUR | 3.75% | 3.750% | - | 2,250 | - | - | - | - | 2,250 |
| EMTN O2 GBP (I) | GBP | 5.375% | 5.375% | - | - | - | - | - | 844 | 844 |
| EMTN O2 GBP (II) | GBP | 5.375% | 5.375% | - | - | - | - | - | 563 | 563 |
| TELEF. EMISIONES JUN 06 TRANCHE B | USD | 5.984% | 5.984% | - | 694 | - | - | - | - | 694 |
| TELEF. EMISIONES JUN 06 TRANCHE C | USD | 6.421% | 6.421% | - | - | - | - | - | 868 | 868 |
| TELEF. EMISIONES JUN 06 TRANCHE D | USD | 7.045% | 7.045% | - | - | - | - | - | 1,388 | 1,388 |
| TELEF. EMISIONES JULY 06 | EUR | 1 x EURIBOR3M + 0.35000% | 1.083% | 1,250 | - | - | - | - | - | 1,250 |
| TELEF. EMISIONES SEPTEMBER 06 | EUR | 4.393% | 4.393% | - | - | 500 | - | - | - | 500 |
| TELEF. EMISIONES DECEMBER 06 | GBP | 5.888% | 5.888% | - | - | - | - | 563 | - | 563 |
| TELEF. EMISIONES JANUARY 06 A | EUR | 1 x EURIBOR6M + 0.83000% | 1.822% | - | - | - | - | - | 55 | 55 |
| TELEF. EMISIONES JANUARY 06 B | EUR | 1 x EURIBOR3M + 0.70000% | 1.422% | - | - | - | - | - | 24 | 24 |
| TELEF. EMISIONES FEBRUARY 07 | EUR | 4.674% | 4.674% | - | - | - | - | 1,500 | - | 1,500 |
| TELEF. EMISIONES JUNE A 07 | CZK | 1 x CZKPRIB_3M + 0.16000% | 1.710% | 91 | - | - | - | - | - | 91 |
| TELEF. EMISIONES JUNE B 07 | CZK | 4.351% | 4.351% | - | - | 113 | - | - | - | 113 |
| TELEF. EMISIONES JUNE C 07 | CZK | 4.623% | 4.623% | - | - | - | - | 98 | - | 98 |
| TELEF. EMISIONES JULY A 07 | USD | 5.855% | 5.855% | - | - | - | 521 | - | - | 521 |
| TELEF. EMISIONES JULY B 07 | USD | 1 x USDL3M + 0.33000% | 0.609% | - | - | - | 590 | - | - | 590 |
| TELEF. EMISIONES JULY C 07 | USD | 6.221% | 6.221% | - | - | - | - | - | 486 | 486 |
| TELEF. EMISIONES JUNE 08 | EUR | 5.58% | 5.580% | - | - | - | 1,250 | - | - | 1,250 |
| TELEF. EMISIONES FEBRUARY 09 | EUR | 5.431% | 5.431% | - | - | - | - | 2,000 | - | 2,000 |
| TELEF. EMISIONES APRIL 2016 | EUR | 5.4960% | 5.496% | - | - | - | - | - | 1, 000 | 1,000 |
| TELEF. EMISIONES JUNE 2015 | EUR | 1 x EURIBOR3M + 1.825% | 2.544% | - | - | - | - | - | 400 | 400 |
| TELEF. EMISIONES APRIL 1, 2016 | EUR | 5.496% | 5.496% | - | - | - | - | - | 500 | 500 |
| TELEF. EMISIONES JULY 6, 2015 | USD | 4.949% | 4.949% | - | - | - | - | - | 868 | 868 |
| TELEF. EMISIONES JULY 15, 2019 | USD | 5.877% | 5.877% | - | - | - | - | - | 694 | 694 |
| TELEF. EMISIONES NOVEMBER 11, 2019 | EUR | 4.693% | 4.693% | - | - | - | - | - | 1,750 | 1,750 |
| EMTN GBP 12/09/22 650 GBP | GBP | 5.289% | 5.289% | - | - | - | - | - | 732 | 732 |
| TELEF. EMISIONES DECEMBER 09 | EUR | 1 x EURIBOR3M + 0.70% | 1.409% | - | - | - | - | 100 | - | 100 |
| Telefónica Emisiones, S.A.U. | | 1,341 | 2,944 | 613 | 2,361 | 4,261 | 11,922 | 23,442 |
| Total Telefónica, S.A. and special purpose vehicles | | 3,095 | 2,944 | 839 | 3,861 | 4,261 | 13,397 | 28,397 |
| Foreign operators | | | Maturity | |
| Debentures and bonds | Currency | | 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | Total |
| Marketable debentures | USD | 9% | 101 | - | - | - | - | - | 101 |
| Marketable debentures | USD | 8.85% | - | 80 | - | - | - | - | 80 |
| Telefónica Argentina, S.A. | | | 101 | 80 | - | - | - | - | 181 |
| Series F | UF | 6.00% | 2 | 2 | 2 | 2 | 2 | 3 | 13 |
| Series L | UF | 3.75% | - | - | 86 | - | - | - | 86 |
| Series M | CLP | 6.05% | - | - | - | - | 28 | - | 28 |
| Series N | UF | 3.50% | - | - | - | - | 143 | - | 143 |
| CTC Chile | | | 2 | 2 | 88 | 2 | 173 | 3 | 270 |
| Series A | CLP | 5.60% | - | - | - | - | 44 | - | 44 |
| Telefónica Móviles Chile | | | - | - | - | - | 44 | - | 44 |
| Series A | USD | 7.75% | 3 | 2 | - | - | - | - | 5 |
| Series B | USD | 8.00% | 2 | 2 | 2 | - | - | - | 6 |
| Series C | USD | 8.50% | 3 | 3 | 3 | 3 | - | - | 12 |
| Otecel, S.A. | | | 8 | 7 | 5 | 3 | - | - | 23 |
| Peso bonds, Series A | MXN | 91-day CETES + 0.61% | 425 | - | - | - | - | - | 425 |
| Peso bonds, Series B | MXN | 9.250% | - | - | 186 | - | - | - | 186 |
| Telefónica Finanzas México | | | 425 | - | 186 | - | - | - | 611 |
| O2 sterling issue | GBP | 7.625% | - | - | 422 | - | - | - | 422 |
| O2 | | | - | - | 422 | - | - | - | 422 |
T. Peru 3rd Program (1st series) | PEN | VAC +5.00% | 12 | - | - | - | - | - | 12 |
T. Peru 4th Program (10th Series A) | PEN | 7.8750% | - | - | 7 | - | - | - | 7 |
T. Peru 4th Program (10th Series B) | PEN | 6.4375% | - | - | 12 | - | - | - | 12 |
T. Peru 4th Program (12th Series A) | PEN | VAC + 3.6875% | - | - | - | - | - | 15 | 15 |
T. Peru 4th Program (14th Series A) | PEN | 6.3750% | 12 | - | - | - | - | - | 12 |
T. Peru 4th Program (14th Series B) | PEN | 5.9375% | - | 8 | - | - | - | - | 8 |
T. Peru 4th Program (14th Series C) | PEN | 5.7500% | - | 11 | - | - | - | - | 11 |
T. Peru 4th Program (16th Series A) | PEN | 6.0000% | - | - | 24 | - | - | - | 24 |
T. Peru 4th Program (16th Series B) | PEN | 6.2500% | - | - | - | 7 | - | - | 7 |
T. Peru 4th Program (19th Series A) | PEN | VAC + 3.6250% | - | - | - | - | - | 15 | 15 |
T. Peru 4th Program (19th Series B) | PEN | VAC + 2.8750% | - | - | - | - | - | 12 | 12 |
T. Peru 4th Program (19th Series C) | PEN | VAC + 3.1875% | - | - | - | - | - | 5 | 5 |
T. Peru 4th Program (36th Series A) | PEN | VAC + 3.6875% | - | - | - | - | - | 38 | 38 |
T. Peru 4th Program (36th Series B) | PEN | VAC + 3.3750% | - | - | - | - | - | 13 | 13 |
T. Peru 4th Program (37th Series A) | PEN | VAC + 3.1250% | - | - | - | - | - | 12 | 12 |
T. Peru 4th Program (4th Series A) | PEN | 6.6250% | - | - | 19 | - | - | - | 19 |
T. Peru 4th Program (40th Series A) | PEN | 5.8750% | - | 7 | - | - | - | - | 7 |
T. Peru 4th Program (40th Series B) | PEN | 4.8750% | - | 4 | - | - | - | - | 4 |
T. Peru 4th Program (41st Series A) | PEN | 7.9375% | - | - | 4 | - | - | - | 4 |
T. Peru 4th Program (42nd Series A) | PEN | 7.3750% | - | - | - | 6 | - | - | 6 |
T. Peru 4th Program (42nd Series B) | PEN | 5.3125% | - | - | - | 5 | - | - | 5 |
T. Peru 4th Program (42nd Series C) | PEN | 6.0625% | - | - | - | 3 | - | - | 3 |
T. Peru 4th Program (45th Series A) | USD | 6.6875% | - | - | - | - | - | 15 | 15 |
T. Peru 4th Program (7th Series C) | PEN | 5.5625% | 4 | - | - | - | - | - | 4 |
T. Peru 4th Program (8th Series A) | PEN | 7.3750% | 7 | - | - | - | - | - | 7 |
T. Peru 4th Program (8th Series B) | PEN | 6.2500% | 13 | - | - | - | - | - | 13 |
T. Peru 4th Program (9th Series A) | PEN | 6.9375% | - | 14 | - | - | - | - | 14 |
T. Peru 4th Program (9th Series B) | PEN | 6.3750% | - | 21 | - | - | - | - | 21 |
T. Peru 5th Program (1st Series A) | PEN | 3.5000% | - | 7 | - | - | - | - | 7 |
T. Peru 5th Program (1st Series B) | PEN | 3.5000% | - | 6 | - | - | - | - | 6 |
T. Peru 5th Program (22nd Series A) | PEN | VAC + 3.5000% | - | - | - | - | - | 14 | 14 |
T. Peru 5th Program (3rd Series A) | PEN | 4.3750% | - | - | 7 | - | - | - | 7 |
T. Peru 5th Program (5th Series A) | PEN | 6.1875% | - | - | - | 5 | - | - | 5 |
| T. Peru Senior Notes | PEN | 8.0000% | - | - | - | 30 | 60 | 91 | 181 |
| Telefónica del Perú, S.A.A. | | | 48 | 78 | 73 | 56 | 60 | 230 | 545 |
T.M. Peru 1st Program (16th Series A) | PEN | 8.1875% | - | - | - | 6 | - | - | 6 |
T.M. Peru 1st Program (18th Series A) | PEN | 6.3125% | - | - | - | - | 10 | - | 10 |
T.M. Peru 1st Program (18th Series B) | PEN | 6.3750% | - | - | - | - | 15 | - | 15 |
T.M. Peru 1st Program (2nd Series A) | PEN | 7.0625% | - | 12 | - | - | - | - | 12 |
T.M. Peru 1st Program (2nd Series B) | PEN | 7.5625% | - | 6 | - | - | - | - | 6 |
T.M. Peru 1st Program (2nd Series C) | PEN | 7.5625% | - | 11 | - | - | - | - | 11 |
T.M. Peru 1st Program (3rd Series A) | PEN | 7.4375% | - | - | - | 8 | - | - | 8 |
T.M. Peru 1st Program (3rd Series B) | PEN | 7.6875% | - | - | - | 5 | - | - | 5 |
T.M. Peru 1st Program (8th Series A) | PEN | 6.4375% | 11 | - | - | - | - | - | 11 |
| Telefónica Móviles, S.A (Perú) | | | 11 | 29 | - | 19 | 25 | - | 84 |
| Nonconvertible bonds | BRL | 1.042* CDI | 159 | - | - | - | - | - | 159 |
| Nonconvertible bonds | BRL | 1.02 *CDI | - | 40 | - | - | - | - | 40 |
| Nonconvertible bonds | BRL | 1.1355* CDI | 42 | - | - | - | - | - | 42 |
| Nonconvertible bonds | BRL | 1.08 *CDI | - | - | 20 | - | - | - | 20 |
| Nonconvertible bonds | BRL | 1.12 *CDI | - | - | - | 128 | - | - | 128 |
| Nonconvertible bonds | BRL | CPI-A + 7% | - | - | - | - | 14 | - | 14 |
| Convertible bonds (Telemig) | BRL | CPI-A + 0.5% | - | - | - | - | - | 10 | 10 |
| Vivo Participações, S.A. | | | 201 | 40 | 20 | 128 | 14 | 10 | 413 |
| Nonconvertible bonds | BRL | 1 * CDI + 0.35000% | 598 | - | - | - | - | - | 598 |
| Telesp | | | 598 | - | - | - | - | - | 598 |
| Total issues other operators | | | 1,394 | 236 | 794 | 208 | 316 | 243 | 3,191 |
| TOTAL OUTSTANDING DEBENTURES AND BONDS | 4,489 | 3,180 | 1,633 | 4,069 | 4,577 | 13,640 | 31,588 |
The list and main features of outstanding debentures and bonds at December 31, 2008 are as follows (in millions of euros):
| Telefónica and special purpose vehicles | | | | Maturity |
| Debentures and bonds | Currency | | Final rate | 2009 | 2010 | 2011 | 2012 | 2013 | Subsequent years | Total |
| ABN 15Y BOND | EUR | 1.0225 * GBSW10Y | 5.260% | - | - | - | - | - | 50 | 50 |
| CAIXA 07/21/29 ZERO COUPON | EUR | 6.370% | 6.370% | - | - | - | - | - | 54 | 54 |
| TELEFÓNICA FEBRUARY 90 F ZERO COUPON | EUR | 12.579% | 12.579% | - | 14 | - | - | - | - | 14 |
| TELEFÓNICA FEBRUARY 90C-12.60% | EUR | 12.600% | 12.600% | - | 4 | - | - | - | - | 4 |
| TELEFÓNICA JUNE 99-EURIBOR+63BP | EUR | 1*EURIBOR1Y+0.63000% | 6.038% | 300 | - | - | - | - | - | 300 |
| TELEFÓNICA MARCH 99-4.50% | EUR | 4.500% | 4.500% | 500 | - | - | - | - | - | 500 |
| Telefónica, S.A. | | | | 800 | 18 | - | - | - | 104 | 922 |
| T. EUROPE BV SEP_00 GLOBAL C | USD | 7.750% | 7.750% | - | 1,796 | - | - | - | - | 1,796 |
| T. EUROPE BV SEP_00 GLOBAL D | USD | 8.250% | 8.250% | - | - | - | - | - | 898 | 898 |
| TEBV FEB_03 EMTN FIXED TRANCHE A | EUR | 5.125% | 5.125% | - | - | - | - | 1,,500 | - | 1,500 |
| TEBV FEB_03 EMTN FIXED TRANCHE B | EUR | 5.875% | 5.875% | - | - | - | - | - | 500 | 500 |
| T.EUROPE BV JULY A 2007 | JPY | 2.110% | 2.110% | - | - | - | 119 | - | - | 119 |
| T.EUROPE BV JULY B 2007 | JPY | 1 x JPYL6M + 0.40000% | 1.411% | - | - | - | 119 | - | - | 119 |
| Telefónica Europe, B.V. | | | | - | 1,796 | - | 238 | 1,500 | 1,398 | 4,932 |
| EMTN O2 EUR (I) | EUR | 4.375% | 4.375% | - | - | - | - | - | 1,750 | 1,750 |
| EMTN O2 EURO (II) | EUR | 3.750% | 3.750% | - | - | 2,250 | - | - | - | 2,250 |
| EMTN O2 GBP (I) | GBP | 5.375% | 5.375% | - | - | - | - | - | 787 | 787 |
| EMTN O2 GBP (II) | GBP | 5.375% | 5.375% | - | - | - | - | - | 525 | 525 |
| TELEF. EMISIONES JUN 06 TRANCHE A | USD | 1 * USDL3M + 0.30000% | 1.825% | 719 | - | - | - | - | - | 719 |
| TELEF. EMISIONES JUN 06 TRANCHE B | USD | 5.984% | 5.984% | - | - | 719 | - | - | - | 719 |
| TELEF. EMISIONES JUN 06 TRANCHE C | USD | 6.421% | 6.421% | - | - | - | - | - | 898 | 898 |
| TELEF. EMISIONES JUN 06 TRANCHE D | USD | 7.045% | 7.045% | - | - | - | - | - | 1,437 | 1,437 |
| TELEF. EMISIONES JULY 06 | EUR | 1 * EURIBOR3M + 0.35000% | 5.271% | - | 1,250 | - | - | - | - | 1,250 |
| TELEF. EMISIONES SEPTEMBER 06 | EUR | 4.393% | 4.393% | - | - | - | 500 | - | - | 500 |
| TELEF. EMISIONES DECEMBER 06 | GBP | 5.888% | 5.888% | - | - | - | - | - | 525 | 525 |
| TELEF. EMISIONES JANUARY 06 A | EUR | 1 * EURIBOR6M + 0.83000% | 3.891% | - | - | - | - | - | 55 | 55 |
| TELEF. EMISIONES JANUARY 06 TRANCHE B | EUR | 1 * EURIBOR3M + 0.70000% | 5.527% | - | - | - | - | - | 24 | 24 |
| TELEF. EMISIONES FEBRUARY 07 | EUR | 4.674% | 4.674% | - | - | - | - | - | 1,,500 | 1.500 |
| TELEF. EMISIONES MARCH 07 | EUR | 1 * EURIBOR3M + 0.13000% | 3.121% | 350 | - | - | - | - | - | 350 |
| TELEF. EMISIONES JUNE A 07 | CZK | 1 * CZKPRIB_3M + 0.16000% | 4.070% | - | 89 | - | - | - | - | 89 |
| TELEF. EMISIONES JUNE B 07 | CZK | 4.351% | 4.351% | - | - | - | 111 | - | - | 111 |
| TELEF. EMISIONES JUNE C 07 | CZK | 4.623% | 4.623% | - | - | - | - | - | 97 | 97 |
| TELEF. EMISIONES JULY A 07 | USD | 5.855% | 5.855% | - | - | - | - | 539 | - | 539 |
| TELEF. EMISIONES JULY B 07 | USD | 1 * USDL3M + 0.33000% | 3.356% | - | - | - | - | 611 | - | 611 |
| TELEF. EMISIONES JULY C 07 | USD | 6.221% | 6.221% | - | - | - | - | - | 503 | 503 |
| TELEF. EMISIONES JUNE 08 | EUR | 5.580% | 5.580% | - | - | - | - | 1,250 | - | 1,250 |
| Telefónica Emisiones, S.A.U. | | | | 1,069 | 1,339 | 2,969 | 611 | 2,400 | 8,101 | 16,489 |
| Total Telefónica, S.A. and special purpose vehicles | | 1,869 | 3,153 | 2,969 | 849 | 3,900 | 9,603 | 22,343 |
| Foreign operators | | | Maturity | |
| Debentures and bonds | Currency | | 2009 | 2010 | 2011 | 2012 | 2013 | Subsequent years | Total |
| Marketable debentures | USD | 9.125% | - | 141 | - | - | - | - | 141 |
| Marketable debentures | USD | 8.85% | - | - | 97 | - | - | - | 97 |
| Marketable debentures | USD | 8.85% | - | - | - | - | - | - | - |
| Telefónica de Argentina, SA | | | - | 141 | 97 | - | - | - | 238 |
| Series F | UFC | 6% | 2 | 2 | 2 | 2 | 2 | 4 | 13 |
| Series L | UFC | 3.75% | - | - | - | 73 | - | - | 73 |
| CTC Chile | | | 2 | 2 | 2 | 75 | 2 | 4 | 86 |
| Peso bonds, Series A | MXN | 91-day CETES + 0.61% | - | 425 | - | - | - | - | 425 |
| Peso bonds, Series B | MXN | 9.25% | - | - | - | 186 | - | - | 186 |
| Telefónica Finanzas México | | | - | 425 | - | 186 | - | - | 611 |
| O2 sterling issue | GBP | 7.625% | - | - | - | 394 | - | - | 394 |
| O2 | | | - | - | - | 394 | - | - | 394 |
8th issue T. Peru bonds | USD | 3.8125% | 12 | - | - | - | - | - | 12 |
T. Peru 1st Program (2nd) | PEN | VAC + 7% | 10 | - | - | - | - | - | 10 |
T. Peru 3rd Program (1st) | PEN | VAC + 5% | - | 11 | - | - | - | - | 11 |
T. Peru 4th Program (10th Series A) | PEN | 7.875% | - | - | - | 7 | - | - | 7 |
T. Peru 4th Program (10th Series B) | PEN | 6.4375% | - | - | - | 12 | - | - | 12 |
T. Peru 4th Program (12th Series A) | PEN | VAC + 3.6875% | - | - | - | - | - | 14 | 14 |
T. Peru 4th Program (14th Series A) | PEN | 6.375% | - | 11 | - | - | - | - | 11 |
T. Peru 4th Program (14th Series B) | PEN | 5.9375% | - | - | 8 | - | - | - | 8 |
T. Peru 4th Program (14th Series C) | PEN | 5.75% | - | - | 10 | - | - | - | 10 |
T. Peru 4th Program (16th Series A) | PEN | 6% | - | - | - | 23 | - | - | 23 |
T. Peru 4th Program (16th Series B) | PEN | 6.25% | - | - | - | - | 7 | - | 7 |
T. Peru 4th Program (19th Series A) | PEN | VAC + 3.625% | - | - | - | - | - | 14 | 14 |
T. Peru 4th Program (19th Series B) | PEN | VAC + 2.875% | - | - | - | - | - | 11 | 11 |
T. Peru 4th Program (19th Series C) | PEN | VAC + 3.1875% | - | - | - | - | - | 5 | 5 |
T. Peru 4th Program (36th Series A) | PEN | VAC + 3.6875% | - | - | - | - | - | 34 | 34 |
T. Peru 4th Program (36th Series B) | PEN | VAC + 3.375% | - | - | - | - | - | 11 | 11 |
T. Peru 4th Program (37th Series A) | PEN | VAC + 3.125% | - | - | - | - | - | 11 | 11 |
T. Peru 4th Program (13th Series A) | PEN | 5.2625% | 18 | - | - | - | - | - | 18 |
T. Peru 4th Program (4th Series A) | PEN | 6.625% | - | - | - | 18 | - | - | 18 |
T. Peru 4th Program (7th) | PEN | 6.1875% | 12 | - | - | - | - | - | 12 |
T. Peru 4th Program (7th Series B) | PEN | 5.875% | 4 | - | - | - | - | - | 4 |
T. Peru 4th Program (7th Series C) | PEN | 5.5625% | - | 4 | - | - | - | - | 4 |
T. Peru 4th Program (8th Series A) | PEN | 7.375% | - | 7 | - | - | - | - | 7 |
T. Peru 4th Program (8th Series B) | PEN | 6.25% | - | 12 | - | - | - | - | 12 |
T. Peru 4th Program (9th Series A) | PEN | 6.9375% | - | - | 13 | - | - | - | 13 |
T. Peru 4th Program (9th Series B) | PEN | 6.375% | - | - | 20 | - | - | - | 20 |
| T. Peru Senior Notes | PEN | 8% | - | - | - | - | 29 | 144 | 173 |
| Telefónica de Perú, S.A.A. | | | 56 | 45 | 51 | 60 | 36 | 244 | 492 |
T.M. Peru 1st Program (1st Series A) | PEN | 6.25% | 11 | - | - | - | - | - | 11 |
T.M. Peru 1st Program (2nd Series A) | PEN | 7.0625% | - | - | 11 | - | - | - | 11 |
T.M. Peru 1st Program (2nd Series B) | PEN | 7.5625% | - | - | 6 | - | - | - | 6 |
T.M. Peru 1st Program (2nd Series C) | PEN | 7.5625% | - | - | 10 | - | - | - | 10 |
T.M. Peru 1st Program (3rd Series A) | PEN | 7.4375% | - | - | - | - | 8 | - | 8 |
T.M. Peru 1st Program (3rd Series B) | PEN | 7.6875% | - | - | - | - | 5 | - | 5 |
T.M. Peru 1st Program (8th Series A) | PEN | 6.4375% | - | 11 | - | - | - | - | 11 |
| Telefónica Móviles, S.A. (Peru) | | | 11 | 11 | 27 | - | 13 | - | 62 |
| Nonconvertible bonds | BRL | 104.2% CDI | - | | - | - | - | 123 | 123 |
| Nonconvertible bonds | BRL | 103% CDI | | - | - | - | - | 31 | 31 |
| Convertible bonds (Telemig) I | BRL | CPI-A + 0.5% | - | - | - | - | - | 1 | 1 |
| Convertible bonds (Telemig) II | BRL | CPI-A + 0.5% | - | - | - | - | - | 3 | 3 |
| Convertible bonds (Telemig) III | BRL | CPI-A + 0.5% | - | - | - | - | - | 5 | 5 |
| Vivo Participações, S.A. | | | - | - | - | - | - | 163 | 163 |
| Nonconvertible bonds | BRL | 1 x CDI + 0.35000% | - | 461 | - | - | - | - | 461 |
| Telesp | | | - | 461 | - | - | - | - | 461 |
| Total issues other operators | 69 | 1,085 | 177 | 715 | 50 | 410 | 2,505 |
| TOTAL OUTSTANDING DEBENTURES AND BONDS | 1,938 | 4,239 | 3,146 | 1,563 | 3,950 | 10,013 | 24,849 |
The main debentures and bonds issued by the Group in 2009 are as follows:
| Item | Date | Nominal value | Currency of issuance | Maturity | Interest rate |
| (millions) | (millions of euros) |
| EMTN bonds | 02-03-09 | 2,000 | 2,000 | EUR | 02-03-14 | 5.431% |
| 04-01-09 | 1,000 | 1,000 | EUR | 04-01-16 | 5.496% |
| 06-03-09 | 500 | 500 | EUR | 04-01-16 | 5.496% |
| 06-02-09 | 400 | 400 | EUR | 06-02-15 | 3-month Euribor + 1.825% |
| 11-10-09 | 1,750 | 1,750 | EUR | 11-11-19 | 4.693% |
| 12-10-09 | 650 | 732 | GBP | 12-09-22 | 5.289% |
| 12-23-09 | 100 | 100 | EUR | 12-23-14 | 3-month Euribor + 0.70% |
| SEC bond | 07-06-09 | 1,000 | 694 | USD | 07-15-19 | 5.877% |
| 07-06-09 | 1,250 | 868 | USD | 01-15-15 | 4.949% |
| Telefónica Emisiones, S.A.U. |
Debentures | 01-16-09 | 105 | 42 | BRL | 01-11-10 | 113.55% CDI |
| 10-15-09 | 49 | 20 | BRL | 10-15-19 | 108% CDI (until 10/15/12 (1)) |
| 10-15-09 | 320 | 128 | BRL | 10-15-19 | 112% CDI (until 10/15/13 (1)) |
| 10-15-09 | 36 | 14 | BRL | 10-15-19 | HCPI + 7% (until 10/15/14 (1)) |
| Vivo Participações, S.A. |
| Bonds | 04-15-09 | 5 | 143 | UFC | 04-01-14 | 3.50% |
| 04-22-09 | 20,500 | 28 | CLP | 04-01-14 | 6.05% |
| 08-05-09 | 32,000 | 44 | CLP | 07-15-14 | 5.60% |
| CTC Chile | | | | | | |
| Bonds | 02-12-09 | 16.675 | 4 | PEN | 02-12-12 | 7.9375% |
| 03-27-09 | 25 | 6 | PEN | 03-27-13 | 7.3750% |
| 06-08-09 | 14.30 | 3 | PEN | 06-08-13 | 6.0625% |
| 06-08-09 | 15.70 | 4 | PEN | 06-08-11 | 4.8750% |
| 05-19-09 | 30 | 7 | PEN | 05-19-11 | 5.8750% |
| 05-19-09 | 20.50 | 5 | PEN | 05-19-16 | 5.3125% |
| 04-22-09 | 22 | 15 | USD | 04-22-13 | 6.6875% |
| 06-16-09 | 21 | 5 | PEN | 06-17-13 | 6.1875% |
| 10-20-09 | 25 | 6 | PEN | 10-20-11 | 3.5% |
| 10-20-09 | 30 | 7 | PEN | 10-20-12 | 4.375% |
| 10-07-09 | 60 | 14 | PEN | 10-07-21 | VAC + 3.5% |
| 09-14-09 | 30 | 7 | PEN | 09-14-11 | 3.5% |
| Telefónica de Perú, S.A.A |
| Bonds | 01-23-09 | 23 | 6 | PEN | 01-23-13 | 8.1875% |
| 09-22-09 | 40 | 10 | PEN | 09-23-14 | 6.3125% |
| 10-05-09 | 62 | 15 | PEN | 10-06-14 | 6.375% |
| Telefónica Móviles, S.A. (Perú) |
| Securities | 04-01-09 / 06-2-09 | 15 | 7 | USD | 03-2-11 | 7.75% |
04-01-09 / 06-10-09 | 9 | 6 | USD | 03-16-12 | 8.00% |
| 04-01-09 | 20 | 14 | USD | 03-11-13 | 8.50% |
| Otecel, S.A. |
| | (1) | Date on which certain conditions are renegotiated |
The main debentures and bonds issued by the Group in 2008 are as follows:
| Item | Date | Nominal value | Currency of issuance | Maturity | Interest rate |
| (millions) | (millions of euros) |
| EMTN bonds | 06/12/2008 | 1,250 | 1,250 | EUR | 06/12/2013 | 5.58% |
| Telefónica Emisiones, S.A.U. |
| Bonds | 03/04/2008 | 34 | 8 | PEN | 03/04/2011 | 5.9375% |
| 03/18/2008 | 50 | 11 | PEN | 03/18/2018 | VAC (*) + 3.375% |
| 04/02/2008 | 45 | 10 | PEN | 04/02/2011 | 5.75% |
| 04/14/2008 | 30 | 7 | PEN | 04/14/2013 | 6.25% |
| 04/22/2008 | 49 | 11 | PEN | 04/22/2028 | VAC (*) + 2.8750% |
| 05/22/2008 | 48 | 11 | PEN | 05/22/2028 | VAC (*) + 3.1250% |
| 07/21/2008 | 20 | 5 | PEN | 07/21/2028 | VAC (*) + 3.1875% |
| Telefónica de Perú, S.A.A. |
APPENDIX III: FINANCIAL INSTRUMENTS
The detail of the type of financial instruments arranged by the Group (notional amount) by currency and interest rates at December 31, 2009 is as follows:
| | | | | | | | | Fair value |
| Millions of Euros | 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | Total | Underlying debt | Associated derivatives | TOTAL |
| EURO | (1,933) | 8,517 | 3,998 | 3,917 | 3,336 | 11,493 | 29,328 | 24,400 | 5,234 | 29,634 |
| Floating rate | (6,551) | 5,197 | 515 | 3,879 | 2,514 | (42) | 5,512 | 9,421 | (3,865) | 5,556 |
| Spread - Ref Euribor | (0.14%) | 0.25% | 1.49% | 0.05% | 0.03% | (11.71%) | (10.03%) | | | |
| Fixed rate | 4,618 | 3,320 | 133 | 38 | 822 | 10,285 | 19,216 | 10,347 | 9,109 | 19,456 |
| Interest rate | 4.47% | 1.88% | (4.63%) | 67.24% | 10.33% | 27.37% | 106.66% | - | - | |
| Rate cap | - | - | 3,350 | - | - | 1,250 | 4,600 | 4,632 | (10) | 4,622 |
| OTHER EUROPEAN CURRENCIES | 60 | 805 | 1,271 | 172 | 883 | 2,581 | 5,772 | 4,263 | 1, 875 | 6,138 |
| Instruments in CZK | 1,855 | 123 | 224 | - | 320 | (14) | 2,508 | 321 | 2, 212 | 2,533 |
| Floating rate | 283 | - | 111 | - | - | - | 394 | 91 | 304 | 395 |
| Spread | 0.07% | - | (0.00%) | - | - | - | 0.07% | | | |
| Fixed rate | 1,572 | 123 | 113 | - | 320 | (14) | 2,114 | 230 | 1,908 | 2,138 |
| Interest rate | 2.03% | 3.43% | 4.35% | - | 3.84% | 3.84% | 17.49% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in GBP | (1,795) | 682 | 1,047 | 172 | 563 | 2,595 | 3,264 | 3,942 | (337) | 3,605 |
| Floating rate | - | 55 | 231 | 166 | 563 | 619 | 1,634 | 320 | 1,420 | 1,740 |
| Spread | - | (0.50%) | 0.27% | 0.27% | - | - | 0.04% | | | |
| Fixed rate | (1,795) | 627 | 422 | 6 | - | 1,863 | 1,123 | 3,111 | (1,757) | 1,354 |
| Interest rate | 0.88% | 5.12% | 7.63% | 6.44% | - | 15.71% | 35.78% | - | - | |
| Rate cap | - | - | 394 | - | - | 113 | 507 | 511 | - | 511 |
| AMERICA | (1,136) | 1,349 | 1,089 | 1,344 | 830 | 4,138 | 7,614 | 13,663 | (6,802) | 6,861 |
| Instruments in USD | (200) | 87 | 45 | 629 | 56 | 1,325 | 1,942 | 11,208 | (9,622) | 1,586 |
| Floating rate | 291 | (152) | 90 | 436 | 19 | 21 | 705 | 1,560 | (1,094) | 466 |
| Spread | 0.19% | 1.98% | 0.82% | 0.61% | 0.35% | 0.70% | 4.66% | | | |
| Fixed rate | (501) | 229 | (55) | 183 | 27 | 1,285 | 1,168 | 9,580 | (8,528) | 1,052 |
| Interest rate | (0.60%) | 9.48% | 4.06% | 3.53% | 3.80% | 23.38% | 43.65% | - | - | |
| Rate cap | 10 | 10 | 10 | 10 | 10 | 19 | 69 | 68 | - | 68 |
| Instruments in UYU | (12) | 2 | - | - | - | - | (10) | 1 | - | 1 |
| Floating rate | - | - | - | - | - | - | - | - | - | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | (12) | 2 | - | - | - | - | (10) | 1 | - | 1 |
| Interest rate | 1.15% | 3.75% | - | - | - | - | 4.90% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in ARS | 216 | 143 | - | - | - | - | 359 | (120) | 461 | 341 |
| Floating rate | - | - | - | - | - | - | - | - | - | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | 216 | 143 | - | - | - | - | 359 | (120) | 461 | 341 |
| Interest rate | 12.18% | 14.68% | - | - | - | - | 26.86% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in BRL | (113) | 331 | 309 | 400 | 243 | 291 | 1,461 | 972 | 448 | 1,420 |
| Floating rate | (233) | 245 | 217 | 340 | 219 | 168 | 956 | 753 | 176 | 929 |
| Spread | (4.10%) | 3.03% | 3.37% | 2.16% | 3.10% | 1.60% | 9.16% | | | |
| Fixed rate | 120 | 86 | 92 | 60 | 24 | 123 | 505 | 219 | 272 | 491 |
| Interest rate | 11.63% | 9.59% | 9.74% | 5.29% | 9.93% | 19.16% | 65.34% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in CLP | 74 | 206 | 192 | 95 | 267 | - | 834 | (34) | 830 | 796 |
| Floating rate | 209 | 110 | 73 | 21 | 28 | - | 441 | 105 | 353 | 458 |
| Spread | 0.60% | 1.10% | 1.63% | 1.48% | - | - | 4.81% | | | |
| Fixed rate | (135) | 96 | 119 | 74 | 239 | - | 393 | (139) | 477 | 338 |
| Interest rate | 0.16% | 1.81% | 3.86% | 3.66% | 5.97% | - | 15.46% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in UFC | (77) | 80 | 2 | 2 | 2 | 3 | 12 | (296) | (264) | (560) |
| Floating rate | - | - | - | - | - | - | - | - | (103) | (103) |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | (77) | 80 | 2 | 2 | 2 | 3 | 12 | (296) | (161) | (457) |
| Interest rate | 1.23% | 4. 43% | 7.45% | 6.00% | 5.43% | 12.00% | 36.54% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in PEN | 84 | 246 | 102 | 89 | 103 | 315 | 939 | 827 | 143 | 970 |
| Floating rate | - | - | - | - | - | - | - | - | - | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | 84 | 246 | 102 | 89 | 103 | 315 | 939 | 827 | 143 | 970 |
| Interest rate | 11.43% | 5.23% | 6.56% | 7.25% | 7.61% | 36.07% | 74.15% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in COP | 200 | 254 | 253 | 129 | 159 | - | 995 | 563 | 670 | 1,233 |
| | | | | | | | | Fair value |
| Millions of Euros | 2010 | | | | | Subsequent years | | | | TOTAL |
| Floating rate | 9 | 59 | 81 | 108 | 138 | - | 395 | 409 | - | 409 |
| Spread | 3.19% | 2.74% | 2.86% | 2.96% | 3.28% | - | 15. 03% | | | |
| Fixed rate | 191 | 195 | 172 | 21 | 21 | - | 600 | 154 | 670 | 824 |
| Interest rate | 7.85% | 8.27% | 8.43% | 7.09% | 7.09% | - | 38.73% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in UVR | - | - | - | - | - | 2,175 | 2,175 | 2,175 | - | 2,175 |
| Floating rate | - | - | - | - | - | - | - | - | - | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | - | - | - | - | - | 2,175 | 2,175 | 2,175 | - | 2,175 |
| Interest rate | - | - | - | - | - | 23.01% | 23.01% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in VEB | (2, 264) | - | - | - | - | - | (2,264) | (2,263) | - | (2,263) |
| Floating rate | - | - | - | - | - | - | - | - | - | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | (2,264) | - | - | - | - | - | (2,264) | (2,263) | - | (2,263) |
| Interest rate | 0.98% | - | - | - | - | - | 0.98% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| Instruments in MXN | 959 | - | 186 | - | - | 29 | 1,174 | 633 | 532 | 1,165 |
| Floating rate | 263 | - | - | - | - | - | 263 | 421 | 3 | 424 |
| Spread | 0.61% | - | - | - | - | - | 0.61% | | | |
| Fixed rate | 696 | - | 186 | - | - | 29 | 911 | 212 | 529 | 741 |
| Interest rate | 5.74% | - | 9.25% | - | - | 12.52% | 27.51% | - | - | |
| Rate cap | | | | | | | | | | |
| Instruments in GTQ | (3) | - | - | - | - | - | (3) | (3) | - | (3) |
| Floating rate | (3) | - | - | - | - | - | (3) | (3) | - | (3) |
| Spread | 0.01% | - | - | - | - | - | 0.01% | | | |
| Fixed rate | - | - | - | - | - | - | - | - | - | - |
| Interest rate | - | - | - | - | - | - | - | - | - | - |
| Rate cap | - | - | - | - | - | - | - | - | - | |
| ASIA | - | - | - | - | - | - | - | 207 | (250) | (43) |
| Instruments in JPY | - | - | - | - | - | - | - | 207 | (250) | (43) |
| Floating rate | - | - | - | - | - | - | - | 113 | (113) | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | - | - | - | - | - | - | - | 94 | (137) | (43) |
| Interest rate | - | - | - | - | - | - | - | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| AFRICA | - | - | 88 | - | - | - | 88 | - | 84 | 84 |
| Instruments in MAD | - | - | 88 | - | - | - | 88 | - | 84 | 84 |
| Floating rate | - | - | - | - | - | - | - | - | - | - |
| Spread | - | - | - | - | - | - | - | | | |
| Fixed rate | - | - | 88 | - | - | - | 88 | - | 84 | 84 |
| Interest rate | - | - | 4.54% | - | - | - | 4.54% | - | - | |
| Rate cap | - | - | - | - | - | - | - | - | - | - |
| TOTAL | (3,009) | 10,671 | 6,446 | 5,433 | 5,049 | 18,212 | 42,802 | 42,533 | 141 | 42,674 |
| Floating rate | (5,732) | 5,514 | 1,318 | 4,950 | 3,481 | 766 | 10,297 | 13,190 | (2,919) | 10,271 |
| Fixed rate | 2,713 | 5,147 | 1,374 | 473 | 1,558 | 16,064 | 27,329 | 24,132 | 3,070 | 27,202 |
| Rate cap | 10 | 10 | 3,754 | 10 | 10 | 1,382 | 5,176 | 5,211 | (10) | 5,201 |
| Currency options | (99) | | | |
| Other | 848 | | | |
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 categorized into instruments entered into for trading purposes and instruments entered into for purposes other than trading purposes at December 31, 2009:
| INTEREST RATE SWAPS |
| | Maturity | |
| Millions of euros | 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | TOTAL | Fair value |
| TRADING PURPOSES | | | | | | | | |
| EUR | | | | | | | | (214) |
| Fixed to floating | - | - | - | - | - | - | - | (389) |
| Receiving leg | (790) | (1,685) | (420) | (1,250) | (1,065) | (1,736) | (6,946) | (5,823) |
| Average interest rate | 3.23% | 3.50% | 3.77% | 4.69% | 3.33% | 3.47% | 3.67% | - |
| Paying leg | 790 | 1,685 | 420 | 1,250 | 1,065 | 1,736 | 6,946 | 5,434 |
| Average spread | 0.80% | 0.01% | 0.05% | 0.03% | 0.01% | 0.00% | 0.11% | |
| Floating to fixed | - | - | - | - | - | - | - | 175 |
| Receiving leg | (8,742) | (935) | (231) | (710) | (950) | (2,195) | (13,763) | (11,185) |
| Average spread | 0.10% | - | - | - | - | - | 0.07% | - |
| Paying leg | 8,742 | 935 | 231 | 710 | 950 | 2,195 | 13,284 | 11,760 |
| Average interest rate | 1.31% | 1.57% | 2.18% | 2.18% | 3.52% | 3.27% | 1.84% | - |
| USD | - | - | - | - | - | - | - | (37) |
| Fixed to floating | - | - | - | - | - | - | - | (28) |
| Receiving leg | (594) | (63) | - | - | - | (229) | (886) | (914) |
| Average interest rate | - | 3.08% | - | - | - | 3.74% | 4.43% | - |
| Paying leg | 594 | 63 | - | - | - | 229 | 886 | 886 |
| Average spread | - | - | | | | - | - | - |
| Floating to fixed | - | - | - | - | - | - | - | (9) |
| Receiving leg | (486) | (191) | (451) | (416) | - | (635) | (2,179) | (473) |
| Average spread | 0.20% | 0. 35% | 3.99% | 3.61% | | - | 1.59% | - |
| Paying leg | 486 | 191 | 451 | 416 | - | 635 | 2,179 | 464 |
| Average interest rate | 2.62% | 0.50% | - | - | | 3.68% | 1.70% | - |
| MXN | - | - | - | - | - | - | - | - |
| Floating to fixed | - | - | - | - | - | - | - | - |
| Receiving leg | (1) | - | - | - | - | - | (1) | (1) |
| Average spread | (0.54%) | - | - | - | - | - | (0.54%) | |
| Paying leg | 1 | - | - | - | - | - | 1 | 1 |
| Average interest rate | 8.43% | - | - | - | - | - | 8.43% | |
| | | | | | | | | |
| INTEREST RATE SWAPS |
| | Maturity | |
| Millions of euros | 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | TOTAL | Fair value |
| NON TRADING PURPOSES | | | | | | | | |
| EUR | - | - | - | - | - | - | - | (274) |
| Fixed to floating | - | - | - | - | - | - | - | (669) |
| Receiving leg | (5,088) | (2,039) | (504) | (1,654) | (3,055) | (3,313) | (15,653) | (13,806) |
| Average interest rate | 3.23% | 3.50% | 3. 77% | 4.69% | 3.33% | 3.47% | 3.51% | - |
| Paying leg | 5,088 | 2,039 | 504 | 1,654 | 3,055 | 3,313 | 15,653 | 13,137 |
| Average spread | 0.80% | 0.01% | 0.05% | 0.03% | 0.01% | 0.00% | 0.27% | - |
| Floating to fixed | - | - | - | - | - | - | - | 395 |
| Receiving leg | (5,312) | (3,949) | (500) | (550) | (730) | (7,503) | (18,544) | (14,842) |
| Average spread | 0.19% | - | - | 3.48% | 2.35% | - | 0.25% | - |
| Paying leg | 5,312 | 3,949 | 500 | 550 | 730 | 7,503 | 18,544 | 15,237 |
| Average interest rate | 2.64% | 2.82% | 3.74% | - | 1.09% | 3.72% | 3.01% | - |
| CZK | - | - | - | - | - | - | - | 5 |
| Floating to fixed | - | - | - | - | - | - | - | 5 |
| Receiving leg | (430) | - | - | - | - | - | (430) | (430) |
| Average spread | 0.01% | - | - | - | - | - | 0.01% | - |
| Paying leg | 430 | - | - | - | - | - | 430 | 435 |
| Average interest rate | 3.35% | - | - | - | - | - | 3.35% | - |
| USD | - | - | - | - | - | - | - | (547) |
| Fixed to floating | - | - | - | - | - | - | - | (583) |
| Receiving leg | - | (694) | - | (521) | - | (4,304) | (5,519) | (6,103) |
| Average interest rate | | 3.90% | | 5.52% | | 4.84% | 4.79% | - |
| Paying leg | - | 694 | - | 521 | - | 4,304 | 5,519 | 5,520 |
| Average spread | - | - | - | - | - | - | - | - |
| Floating to fixed | - | - | - | - | - | - | - | 36 |
| Receiving leg | (26) | (26) | (26) | (616) | (26) | (51) | (771) | (769) |
| Average spread | - | - | - | - | - | - | - | - |
| INTEREST RATE SWAPS |
| | Maturity | |
| Millions of euros | 2010 | 2011 | 2012 | 2013 | 2014 | | TOTAL | Fair value |
| Paying leg | 26 | 26 | 26 | 616 | 26 | 51 | 771 | 805 |
| Average interest rate | 4.34% | 4.34% | 4.34% | 3.35% | 4.34% | 4.34% | 3.55% | - |
| | - | - | - | - | - | - | - | - |
| BRL | - | - | - | - | - | - | - | - |
| Floating to floating | - | - | - | - | - | - | - | - |
| Receiving leg | (598) | - | - | - | - | - | (598) | (483) |
| Average spread | 0.35% | - | - | - | - | - | 0.35% | - |
| Paying leg | 598 | - | - | - | - | - | 598 | 483 |
| Average spread | - | - | - | - | - | - | - | - |
| MXN | - | - | - | - | - | - | - | 3 |
| Floating to fixed | - | - | - | - | - | - | - | 3 |
| Receiving leg | (159) | - | - | - | - | - | (159) | (166) |
| Average spread | 0.61% | - | - | - | - | - | 0.61% | - |
| Paying leg | 159 | - | - | - | - | - | 159 | 169 |
| Average interest rate | 8.16% | - | - | - | - | - | 8.16% | - |
| GBP | - | - | - | - | - | - | - | 22 |
| Fixed to floating | - | - | - | - | - | - | - | 216 |
| Receiving leg | - | - | - | - | (563) | (732) | (1,295) | (1341) |
| Average interest rate | - | - | - | - | 5.25% | 3.92% | 4.50% | - |
| Paying leg | - | - | - | - | 563 | 732 | 1,295 | 1,557 |
| Average spread | | | | | - | 1.64% | 0.92% | - |
| Floating to fixed | - | - | - | - | - | - | - | (194) |
| Receiving leg | - | (609) | - | - | - | (455) | (1,064) | (1,065) |
| Average spread | - | - | - | - | - | - | - | - |
| Paying leg | - | 609 | - | - | - | 455 | 1,064 | 871 |
| Average interest rate | - | 5.12% | - | - | - | 4.96% | 5.05% | - |
| JPY | - | - | - | - | - | - | - | (4) |
| Fixed to floating | - | - | - | - | - | - | - | (4) |
| Receiving leg | - | - | (113) | - | - | - | (113) | (117) |
| Average interest rate | - | - | 1.68% | - | - | - | 1.68% | - |
| Paying leg | - | - | 113 | - | - | - | 113 | 113 |
| Average spread | - | - | - | - | - | - | - | - |
| CLP | - | - | - | - | - | - | - | - |
| Fixed to floating | - | - | - | - | - | - | - | 1 |
| Receiving leg | - | - | - | (21) | (28) | - | (49) | (48) |
| Average interest rate | - | - | - | 4.12% | 4.51% | | 4.34% | - |
| Paying leg | - | - | - | 21 | 28 | - | 49 | 49 |
| Average spread | - | - | - | - | - | - | - | - |
| Floating to fixed | - | - | - | - | - | - | - | (1) |
| Receiving leg | (82) | (96) | (51) | (95) | - | - | (324) | (147) |
| Average spread | 1.55% | - | - | - | - | - | 0.39% | - |
| Paying leg | 82 | 96 | 51 | 95 | - | - | 324 | 146 |
| Average interest rate | - | 1.82% | 3.74% | 3.76% | - | - | 2.23% | - |
Foreign exchange and interest rate options, by maturity, at December 31, 2009 are as follows:
| | CURRENCY OPTIONS |
| | MATURITIES |
| Figures in euros | 2010 | 2011 | 2012 | 2013 | Subsequent years |
| Put USD / Call EUR | | | | | |
| Notional amount of options bought | - | 201,305,012 | - | 70,803,832 | 1,664,931,279 |
| Strike | - | 1.59% | - | 1.50% | 1.75% |
| Notional amount of options sold | - | 195,129,693 | - | - | 831,255,453 |
| Strike | - | 1.49% | - | - | 1.20% |
| | INTEREST RATE OPTIONS | |
| | MATURITIES | |
| | Figures in euros | 2010 | 2011 | 2012 | 2013 | Subsequent years | |
| | Collars | | | | | | |
| | Notional bought | - | - | 1,119,299,628 | - | 2,161,986,806 | |
| | Strike Cap | - | - | 4.746% | - | 4.77% | |
| | Strike Floor | - | - | 3.409% | - | 3.48% | |
| | Caps | | | | | | |
| | Notional bought | - | - | 3,412,999,662 | - | | |
| | Strike | - | - | 4.205% | - | | |
| | Notional sold | - | - | 6,032,299,291 | - | 2,161,986,806 | |
| | Strike | - | - | 5.399% | - | 5.003% | |
| | Floors | | | | | | |
| | Notional bought | - | - | 2,619,299,628 | - | 2,094,499,493 | |
| | Strike | - | - | 2.844% | - | 0.802% | |
| | Notional sold | 363, 096,573 | - | 700,000,000 | - | - | |
| | Strike | 4. 382% | - | 2. 147% | - | - | |
Cash flows receivable or payable on derivative financial instruments settled via the swap of nominals, by currency of collection/payment, along with contractual maturities are as follows:
| Millions of euros | 2010 | 2011 | 2012 | 2013 | 2014 | Subsequent years | Total |
| Currency swaps | | | | | | | |
| Receive | ARS | - | - | - | - | - | - | - |
| Pay | ARS | (130) | (52) | - | - | - | - | (182) |
| Receive | BRL | - | - | - | - | - | - | - |
| Pay | BRL | (51) | (64) | (65) | (4) | (38) | (88) | (310) |
| Receive | CLP | 96 | 175 | 82 | 95 | - | - | 448 |
| Pay | CLP | (191) | (349) | (232) | (189) | (195) | - | (1,156) |
| Receive | COP | - | - | - | - | - | - | - |
| Pay | COP | (86) | (172) | (172) | (21) | (21) | - | (472) |
| Receive | CZK | - | - | - | - | - | - | - |
| Pay | CZK | (622) | (111) | (111) | - | (222) | - | (1,066) |
| Receive | EUR | 1,714 | 958 | 323 | - | 280 | 588 | 3,863 |
| Pay | EUR | (3,619) | (785) | (356) | (1,118) | - | (7,872) | (13,750) |
| Receive | GBP | 873 | - | - | - | - | - | 873 |
| Pay | GBP | (873) | (609) | - | - | - | (455) | (1,937) |
| Receive | JPY | 8 | 9 | 451 | - | - | 113 | 581 |
| Pay | JPY | - | - | - | - | - | - | - |
| Receive | MAD | - | - | - | - | - | - | - |
| Pay | MAD | - | - | (88) | - | - | - | (88) |
| Receive | MXN | - | - | - | - | - | - | - |
| Pay | MXN | (2) | - | - | - | - | - | (2) |
| Receive | PEN | - | - | - | - | - | - | - |
| Pay | PEN | (7) | (15) | (16) | (16) | (13) | (60) | (127) |
| Receive | UFC | 204 | 34 | 172 | - | 143 | - | 553 |
| Pay | UFC | (102) | (111) | (86) | - | - | - | (299) |
| Receive | USD | 1,959 | 1,297 | 160 | 1,286 | 67 | 7,283 | 12,052 |
| Pay | USD | (7) | (156) | - | (104) | - | - | (267) |
| TOTAL | (836) | 49 | 62 | (71) | 1 | (491) | (1,286) |
| | | | | | | | |
| Forwards | | | | | | | |
| Receive | ARS | 42 | - | - | - | - | - | 42 |
| Pay | ARS | (340) | - | - | - | - | - | (340) |
| Receive | BRL | - | - | - | - | - | - | - |
| Pay | BRL | (159) | - | - | - | - | - | (159) |
| Receive | CLP | 142 | - | - | - | - | - | 142 |
| Pay | CLP | (244) | (1) | - | - | - | - | (245) |
| Receive | COP | 22 | - | - | - | - | - | 22 |
| Pay | COP | (191) | - | - | - | - | - | (191) |
| Receive | CZK | - | - | - | - | - | 14 | 14 |
| Pay | CZK | (1,145) | - | - | - | - | - | (1,145) |
| Receive | EUR | 3,262 | - | - | - | - | - | 3,262 |
| Pay | EUR | (2,985) | (3) | (23) | (19) | - | (14) | (3,044) |
| Receive | GBP | 2,488 | - | - | - | - | - | 2,488 |
| Pay | GBP | (544) | - | - | - | - | - | (544) |
| Receive | MXN | - | - | - | - | - | - | - |
| Pay | MXN | (530) | - | - | - | - | - | (530) |
| Receive | PEN | 25 | - | - | - | - | - | 25 |
| Pay | PEN | (27) | - | - | - | - | - | (27) |
| Receive | UFC | 140 | - | - | - | - | - | 140 |
| Pay | UFC | (142) | - | - | - | - | - | (142) |
| Receive | USD | 2,112 | 4 | 24 | 20 | - | - | 2,160 |
| Pay | USD | (1,897) | - | - | - | - | - | (1,897) |
| TOTAL | 29 | - | 1 | 1 | - | - | 31 |
The breakdown of financial instruments arranged by us (notional amount) by currency and interest rates at December 31, 2008, is as follows:
| | | | | | | | | | FAIR VALUE | | |
| Millions of Euros | 2009 | 2010 | 2011 | 2012 | 2013 | Subsequent years | Total | | Underlying debt | Associated derivatives | TOTAL |
| | | | | | | | | | | | |
| EURO | 619 | 3,198 | 8,482 | 3,223 | 4,066 | 7,893 | 27,481 | | 24,421 | 2,626 | 27,047 |
| Floating rate | (9,170) | (1,210) | 6,475 | (158) | 4,112 | 799 | 848 | | 7,639 | (7,574) | 65 |
| Spread - Ref Euribor | -0.05% | -0.35% | 0.18% | 0.46% | 0.04% | 0.25% | 0.62% | | | | |
| Fixed rate | 9,439 | 4,408 | 1,607 | 31 | (46) | 5,844 | 21,283 | | 11,349 | 10,244 | 21,593 |
| Interest rate | 4.40% | 4.76% | 2.66% | -22.88% | -51.84% | 4.20% | 4.37% | | | | |
| Rate cap | 350 | - | 400 | 3,350 | - | 1,250 | 5,350 | | 5,433 | (44) | 5,389 |
| OTHER EUROPEAN CURRENCIES | 846 | 700 | 779 | 1,770 | 160 | 2,359 | 6,614 | | 3,557 | 2,964 | 6,521 |
| Instruments in CZK | 2,025 | 700 | 123 | 111 | - | 97 | 3,056 | | 303 | 2,753 | 3,056 |
| Floating rate | - | 278 | - | - | - | - | 278 | | 88 | 191 | 279 |
| Spread | - | 0.07% | - | - | - | - | 0.07% | | | | |
| Fixed rate | 2,025 | 422 | 123 | 111 | - | 97 | 2,778 | | 215 | 2,562 | 2,777 |
| Interest rate | 4.04% | 3.35% | 3.41% | 4.35% | - | 4.62% | 3.94% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in GBP | (1,179) | - | 656 | 1,659 | 160 | 2,262 | 3,558 | | 3,254 | 211 | 3,465 |
| Floating rate | - | - | 63 | 740 | 155 | (525) | 433 | | 59 | 569 | 628 |
| Spread | - | - | 4.60% | 0.27% | 0.27% | - | 0.34% | | | | |
| Fixed rate | (1,179) | - | 593 | 394 | 5 | 1,737 | 1,550 | | 1,916 | (472) | 1,444 |
| Interest rate | 3.16% | - | 5.12% | 7.63% | 6.44% | 5.27% | 7.42% | | | | |
| Rate cap | - | - | - | 525 | - | 1,050 | 1,575 | | 1,279 | 114 | 1,393 |
| AMERICA | (60) | 1,844 | 889 | 747 | 1,146 | 3,764 | 8,330 | | 12,334 | (6,555) | 5,779 |
| Instruments in USD | 473 | 205 | 245 | 188 | 782 | 921 | 2,814 | | 9,855 | (9,502) | 353 |
| Floating rate | (529) | 206 | 151 | 173 | 142 | 96 | 239 | | 2,492 | (2,374) | 118 |
| Spread | 0.85% | 0.41% | -1.34% | 0.96% | 1.89% | - | -0.98% | | | | |
| Fixed rate | 669 | (11) | 84 | 5 | 630 | 795 | 2,172 | | 6,957 | (7,143) | (186) |
| Interest rate | 4.09% | -48.90% | 26.66% | -7.92% | 3.20% | 13.20% | 8.28% | | | | |
| Rate cap | 333 | 10 | 10 | 10 | 10 | 30 | 403 | | 406 | 15 | 421 |
| Instruments in UYU | (2) | 2 | 2 | - | - | - | 2 | | 1 | - | 1 |
| Floating rate | - | - | - | - | - | - | - | | - | - | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | (2) | 2 | 2 | - | - | - | 2 | | 1 | - | 1 |
| Interest rate | -3.19% | 3.75% | 3.75% | - | - | - | 13.67% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in ARS | 110 | 141 | 59 | - | - | - | 310 | | (85) | 321 | 236 |
| Floating rate | - | - | - | - | - | - | - | | - | - | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | 110 | 141 | 59 | - | - | - | 310 | | (85) | 321 | 236 |
| Interest rate | -54.69% | 6.63% | 11.49% | - | - | - | -14.12% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in BRL | (209) | 726 | 161 | 154 | 154 | 311 | 1,297 | | 607 | 661 | 1,268 |
| Floating rate | (348) | 667 | 136 | 130 | 130 | 272 | 987 | | 548 | 469 | 1,017 |
| | | | | | | | | | FAIR VALUE | | |
| Millions of Euros | 2009 | 2010 | 2011 | 2012 | 2013 | Subsequent years | Total | | Underlying debt | Associated derivatives | TOTAL |
| Spread | 0.74% | 0.49% | 3.64% | 3.74% | 3.75% | - | 2.20% | | | | |
| Fixed rate | 139 | 59 | 25 | 24 | 24 | 39 | 310 | | 59 | 192 | 251 |
| Interest rate | 21.00% | 4.23% | 10.03% | 10.03% | 10.03% | 9.96% | 13.83% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in CLP | 349 | 105 | 170 | 102 | 78 | - | 804 | | (15) | 820 | 805 |
| Floating rate | 212 | 105 | 151 | 102 | 78 | - | 648 | | 113 | 475 | 588 |
| Spread | -0.20% | 0.09% | 0.06% | 0.13% | - | - | -0.01% | | | | |
| Fixed rate | 137 | - | 19 | - | - | - | 156 | | (128) | 345 | 217 |
| Interest rate | 8.59% | - | 4.70% | - | - | - | 8.11% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in UFC | 2 | 2 | 68 | 2 | 2 | 4 | 80 | | 173 | (95) | 78 |
| Floating rate | - | - | - | - | - | - | - | | 86 | (86) | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | 2 | 2 | 68 | 2 | 2 | 4 | 80 | | 87 | (9) | 78 |
| Interest rate | 6.53% | 6.56% | 4.43% | 7.45% | 6.00% | 6.00% | 4.74% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in PEN | 161 | 181 | 102 | 82 | 61 | 339 | 926 | | 807 | 155 | 962 |
| Floating rate | - | - | - | - | - | - | - | | - | - | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | 161 | 181 | 102 | 82 | 61 | 339 | 926 | | 807 | 155 | 962 |
| Interest rate | 5.63% | 7.13% | 6.67% | 6.70% | 7.45% | 6.23% | 6.47% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in COP | 579 | 56 | 82 | 33 | 69 | 183 | 1,002 | | 391 | 587 | 978 |
| Floating rate | 8 | 43 | 36 | 33 | 30 | - | 150 | | 148 | - | 148 |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | 571 | 13 | 46 | - | 39 | 183 | 852 | | 243 | 587 | 830 |
| Interest rate | 12.66% | 15.82% | 14.10% | - | 13.44% | - | 10.10% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in UVR | - | - | - | - | - | 2,006 | 2,006 | | 2,006 | - | 2,006 |
| Floating rate | - | - | - | - | - | - | - | | - | - | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | - | - | - | - | - | 2,006 | 2,006 | | 2,006 | - | 2,006 |
| Interest rate | - | - | - | - | - | 7.67% | 7.67% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in VEB | (1,998) | - | - | - | - | - | (1, 998) | | (1,999) | - | (1,999) |
| Floating rate | - | - | - | - | - | - | - | | - | - | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | (1,998) | - | - | - | - | - | (1,998) | | (1,999) | - | (1,999) |
| Interest rate | 10.34% | - | - | - | - | - | 10.34% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in MXN | 479 | 426 | - | 186 | - | - | 1,091 | | 597 | 498 | 1,095 |
| Floating rate | 47 | 266 | - | - | - | - | 313 | | 412 | 63 | 475 |
| Spread | 3.30% | 0.61% | - | - | - | - | 1.01% | | | | |
| Fixed rate | 432 | 160 | - | 186 | - | - | 778 | | 185 | 435 | 620 |
| Interest rate | 12.85% | 8.17% | - | 9.25% | - | - | 11.02% | | | | |
| | | | | | | | | | FAIR VALUE | | |
| Millions of Euros | 2009 | 2010 | 2011 | 2012 | 2013 | Subsequent years | Total | | Underlying debt | Associated derivatives | TOTAL |
| Rate cap | - | - | - | - | - | - | - | | | | |
| Instruments in GTQ | (4) | - | - | - | - | - | (4) | | (4) | - | (4) |
| Floating rate | (4) | - | - | - | - | - | (4) | | (4) | - | (4) |
| Spread | 0.01% | - | - | - | - | - | 0.01% | | | | |
| Fixed rate | - | - | - | - | - | - | - | | - | - | - |
| Interest rate | - | - | - | - | - | - | - | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| ASIA | | | | | | | | | 575 | (597) | (22) |
| Instruments in JPY | - | - | - | - | - | - | - | | 575 | (597) | (22) |
| Floating rate | - | - | - | - | - | - | - | | 152 | (158) | (6) |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | - | - | - | - | - | - | - | | 423 | (439) | (16) |
| Interest rate | - | - | - | - | - | - | - | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| AFRICA | - | - | - | 88 | - | - | 88 | | - | 84 | 84 |
| Instruments in MAD | - | - | - | 88 | - | - | 88 | | - | 84 | 84 |
| Floating rate | - | - | - | - | - | - | - | | - | - | - |
| Spread | - | - | - | - | - | - | - | | | | |
| Fixed rate | - | - | - | 88 | - | - | 88 | | - | 84 | 84 |
| Interest rate | - | - | - | 4.54% | - | - | 8.57% | | | | |
| Rate cap | - | - | - | - | - | - | - | | | | |
| TOTAL | 1,405 | 5,742 | 10,150 | 5,828 | 5,372 | 14,016 | 42,513 | - | 40,887 | (1,478) | 39,409 |
| Floating rate | (9,784) | 355 | 7,012 | 1,020 | 4,647 | 642 | 3,892 | - | 11,733 | (8,425) | 3,308 |
| Fixed rate | 10,506 | 5,377 | 2,728 | 923 | 715 | 11,044 | 31,293 | - | 22,036 | 6,862 | 28,898 |
| Rate cap | 683 | 10 | 410 | 3,885 | 10 | 2,330 | 7,328 | - | 7,118 | 85 | 7,203 |
| Currency options | | | | | | | (202) | | | (202) | |
| Other | - | - | - | - | - | - | 422 | | - | - | - |
| | CURRENCY OPTIONS |
| Figures in euros | MATURITIES |
| | 2009 | 2010 | 2011 | 2012 | 2013 | 2013+ |
| Call USD/Put BRL | | | | | | |
| Notional amount of options bought | 287,418,265 | - | - | - | - | - |
| Strike | 2.36 | - | - | - | - | - |
| Notional amount of options sold | 290,062,464 | - | - | - | - | - |
| Strike | 2.36 | - | - | - | - | - |
| Put USD / Call BRL | | | | | | |
| Notional amount of options bought | 114,284,734 | - | - | - | - | - |
| Strike | 1.86 | - | - | - | - | - |
| Notional amount of options sold | 143,709,133 | - | - | - | - | - |
| Strike | 1.86 | - | - | - | - | - |
| | | | | | | |
| Call USD / Put ARS | | | | | | |
| Notional amount of options bought | 15,825,484 | - | - | - | - | - |
| Strike | 3.38 | - | - | - | - | - |
| Call USD / Put EUR | | | | | | |
| Notional amount of options bought | 291,010,994 | - | 208,378,242 | - | 148,020,407 | 1,723,431,774 |
| Strike | 1.59 | - | 1.59 | - | 1.49 | 1.40 |
| Notional amount of options sold | 268,984,547 | - | 195,129,693 | - | - | 831,255,453 |
| Strike | 1.51 | - | 1.49 | - | - | 1.20 |
| | INTEREST RATE OPTIONS |
| | MATURITIES |
| Figures in euros | 2009 | 2010 | 2011 | 2012 | 2013+ |
| Collars | | | | | |
| Notional bought | 781,127,398 | - | 400,000,000 | 200,000,000 | 2,689,686,974 |
| Strike Cap | 3.897% | - | 4.000% | 3.80% | 4.53% |
| Strike Floor | 2.733% | - | 3.300% | 2.80% | 3.13% |
| Caps | | | | | |
| Notional bought | - | - | - | 6,784,908,136 | - |
| Strike | - | - | - | 4.28% | - |
| Notional sold | 700,000,000 | - | 400,000,000 | 6,784,908,136 | 2,689,686,974 |
| Strike | 4.75% | - | 4.55% | 5.156% | 5.24% |
| Floors | | | | | |
| Notional bought | 1,481,127,398 | - | 400,000,000 | 567,454,068 | 2,599,868,766 |
| Strike | 0.71% | - | 1.00% | 1.15% | 1.72% |
| Notional sold | 1,050,000,000 | 367,974,663 | - | 1,067,454,068 | - |
| Strike | 2.73% | 4.39% | - | 2.75% | - |
APPENDIX IV: INTEREST-BEARING DEBT
The main financing transactions included under this heading outstanding at December 31, 2009 and 2008 and their nominal amounts are as follows:
| Name | Amount of contract | Outstanding nominal balance (million euros) | Arrangement date | Maturity date |
| Summary | (millions) | 12/31/09 | 12/31/08 | | |
| Telefónica Europe, B.V. syndicated loan O2 acquisition | 5,250 | GBP | 3,091 | 4,203 | 12/07/06 | 12/14/13 |
| Telefónica Europe, B.V. loan | 15,000 | JPY | 113 | 119 | 08/23/07 | 07/27/37 |
| Telefónica, S.A. syndicated loan Cesky acquisition | 6,000 | EUR | 6,000 | 6,000 | 06/28/05 | 06/28/13 |
| Telefónica, S.A. syndicated loan with savings banks | 700 | EUR | 700 | 700 | 04/21/06 | 04/21/17 |
| TELFISA EIB financing | 257 | USD | 179 | 211 | 09/15/04 | 09/15/16 |
| TELFISA EIB financing | 109 | EUR | 109 | 125 | 11/15/04 | 09/15/16 |
| TELFISA EIB financing | 300 | EUR | 300 | 300 | 12/12/06 | 12/12/11 |
| TELFISA EIB financing | 100 | EUR | 100 | 100 | 01/31/07 | 01/31/15 |
| TELFISA EIB financing | 375 | EUR | 375 | 375 | 01/30/08 | 01/30/15 |
| Vivo loans | 765 | BRL | 287 | 211 | 07/13/07 | 08/15/14 |
| Telesp loans | 2,034 | BRL | 792 | 525 | 10/23/07 | 05/15/15 |
| CTC loans | 4 | UFC | 103 | 86 | 04/14/05 | 04/14/10 |
| CTC syndicated loans | 150 | USD | 104 | 108 | 10/28/05 | 06/21/11 |
| CTC syndicated loans | 150 | USD | 104 | 108 | 06/09/08 | 05/13/13 |
| Telefónica Móviles Chile syndicated loans | 180 | USD | 125 | 129 | 01/05/06 | 01/05/11 |
| Telefónica Móviles Chile syndicated loans | 100,000 | CLP | 105 | 113 | 11/15/06 | 11/15/12 |
| Colombia Telecomunicaciones loans | 310,000 | COP | 105 | 99 | 12/28/09 | 12/28/14 |
| Telefónica Móviles Colombia loans | 600 | USD | 417 | 431 | 12/20/07 | 11/15/12 |
| Other | | | 4,849 | 5,987 | |
| TOTAL | | | 17,958 | 19,930 | |
APPENDIX V: MAIN COMPANIES COMPRISING THE TELEFÓNICA GROUP
The table below lists the main companies comprising the Telefónica Group at December 31, 2009 and the main investments consolidated using the equity method.
Included for each company are the company name, corporate purpose, country, functional currency, share capital (in million of functional currency units), the Telefónica Group's effective shareholding and the company or companies through which the Group holds a stake.
| Name and corporate purpose | Country | Currency | Share capital | % Telefónica Group | Holding company |
| Parent company: | | | | | |
| Telefónica, S.A. | Spain | EUR | 4,564 | | |
| Telefónica Spain | | | | | |
Telefónica de España, S.A.U. Telecommunications service provider | Spain | EUR | 1,024 | 100% | Telefónica, S.A. (100%) |
Telefónica Móviles España, S.A.U. Wireless communications services provider | Spain | EUR | 423 | 100% | Telefónica, S.A. (100%) |
Telefónica Serv. de Informática y Com. de España, S.A.U. Telecommunications systems, networks and infrastructure engineering | Spain | EUR | 6 | 100% | Telefónica de España, S.A.U. (100%) |
Telefónica Soluciones Sectoriales, S.A.U. Consulting services for ICT companies | Spain | EUR | 14 | 100% | Telefónica de España, S.A.U. (100%) |
Interdomain, S.A.U. Internet resources operator | Spain | EUR | - | 100% | Telefónica Soluciones Sectoriales, S.A. (100%) |
Teleinformática y Comunicaciones, S.A.U. (TELYCO) Promotion, marketing and distribution of telephone and telematic equipment and services | Spain | EUR | 8 | 100% | Telefónica de España, S.A.U. (100%) |
Telyco Marruecos, S.A. Promotion, marketing and distribution of telephone services | Morocco | MAD | 6 | 54.00% | Teleinformática y Comunicaciones, S.A. (TELYCO) (54.00%) |
Telefónica Telecomunicaciones Públicas, S.A.U. Installation of public telephones | Spain | EUR | 1 | 100% | Telefónica de España, S.A.U. (100%) |
Telefónica Remesas, S.A. Remittance management | Spain | EUR | - | 100% | Telefónica Telecomunicaciones Públicas, S.A.U. (100%) |
Telefónica Salud, S.A. Management and operation of telecommunications and public television services | Spain | EUR | - | 51.00% | Telefónica Telecomunicaciones Públicas, S.A.U. (51.00%) |
Iberbanda, S.A. Broadband telecommunications operator | Spain | EUR | 3 | 58.94% | Telefónica de España, S.A.U. (58.94%) |
Telefónica Cable, S.A.U. Cable telecommunication services provider | Spain | EUR | 3 | 100% | Telefónica de España, S.A.U. (100%) |
| Telefónica Latin America | | | | | |
Telefónica Internacional, S.A. Investment in the telecommunications industry abroad | Spain | EUR | 2,839 | 100% | Telefónica, S.A. (100%) |
Telefónica International Holding, B.V. Holding company | Netherlands | USD | 548 | 100% | Telefónica Internacional, S.A. (100%) |
Latin American Cellular Holdings, B.V. (NETHERLANDS) Holding company | Netherlands | EUR | 281 | 100% | Telefónica, S.A. (100%) |
Telefónica Datacorp, S.A.U. Telecommunications service provider and operator | Spain | EUR | 700 | 100% | Telefónica, S.A. (100%) |
Telecomunicaçoes de Sao Paulo, S.A. - TELESP Wireline telephony operator in Sao Paulo | Brazil | BRL | 6,558 | 87.95% | Telefónica Internacional, S.A. (65.30%) Sao Paulo Telecomunicaçoes Participaçoes, Ltda. (22.65%) |
Brasilcel, N.V. (*) Joint Venture and holding company for wireless communications services | Netherlands | BRL | - | 50.00% | Telefónica, S.A. (50.00%) |
Vivo Participaçoes, S.A. (*) Holding company | Brazil | BRL | 8,780 | 33.31% | Brasilcel, N.V. y subsidiarias (29.63%) Subsidiaries of Telefónica Group (3.68%) |
Vivo, S.A. (*) Wireless services operator | Brazil | BRL | 5,999 | 33.31% | Vivo Participaçoes, S.A. (33.31%) |
Telemig Celular, S.A. (*) Wireless services operator | Brazil | BRL | 528 | 33.31% | Vivo Participaçoes, S.A. (33.31%) |
Compañía Internacional de Telecomunicaciones, S.A. Holding company | Argentina | ARS | 731 | 100% | Telefónica Holding de Argentina, S.A. (50.00%) Telefónica International Holding, B.V. (37.33%) Telefónica Internacional, S.A. (12.67%) |
Telefónica de Argentina, S.A. Telecommunications service provider | Argentina | ARS | 624 | 100% | Compañía Internacional de Telecomunicaciones, S.A. (51.49%) Telefónica Internacional, S.A. (16.20%) Telefónica Móviles Argentina, S.A. (29.56%) Telefónica International Holding, B.V. (0.95%) Telefónica, S.A. (1.80%) |
| Name and corporate purpose | Country | Currency | Share capital | % Telefónica Group | Holding company |
Telefónica Móviles Argentina, S.A. Wireless telephone services provider | Argentina | ARS | 1,198 | 100% | Telefónica Móviles Argentina Holding, S.A. (84.60%) Telefónica, S.A. (15.40%) |
Telcel, C.A. Wireless operator | Venezuela | VEF | 905 | 100% | Latin America Cellular Holdings, B.V. (97.21%) Telefónica, S.A. (0.08%) Comtel Comunicaciones Telefónicas, S.A. (2.71%) |
Telefónica Móviles Chile, S.A. Wireless communications services operator | Chile | CLP | 1,628,654 | 100% | TEM Inversiones Chile Ltda. (100%) |
Telefónica Chile, S.A. Local, long distance and international telephony services provider | Chile | CLP | 578,078 | 97.89% | Inversiones Telefónica Internacional Holding Ltda. (53.00%) Telefónica Internacional de Chile, S.A. (44.89%) |
Telefónica del Perú, S.A.A. Local, domestic and international long distance telephone service provider | Peru | PEN | 2,962 | 98.34% | Telefónica Internacional, S.A. (49.90%) Latin America Cellular Holdings, B.V. (48.28%) Telefónica, S.A. (0.16%) |
Telefónica Móviles Perú, S.A.C. Wireless communications services provider | Peru | PEN | 602 | 100% | Telefónica del Perú, S.A.A. (100%) |
Colombia Telecomunicaciones, S.A. ESP Communications services operator | Colombia | COP | 909,929 | 52.03% | Telefónica Internacional, S.A. (52.03%) |
Telefónica Móviles Colombia, S.A. Wireless operator | Colombia | COP | - | 100.00% | Olympic, Ltda. (50.58%) Telefónica, S.A. (49.42%) |
Telefónica Móviles México, S.A. de C.V. (MEXICO) Holding company | Mexico | MXN | 46,271 | 100% | Telefónica Internacional, S.A. (100%) |
Pegaso Comunicaciones y Sistemas, S.A. de C.V. Wireless telephone and communications services | Mexico | MXN | 27,173 | 100% | Telefónica Móviles México, S.A. de C.V. (100%) |
Telefónica Móviles del Uruguay, S.A. Wireless communications and services operator | Uruguay | UYU | 196 | 100% | Latin America Cellular Holdings, B.V. (68.00%) Telefónica, S.A. (32.00%) |
Telefónica Larga Distancia de Puerto Rico, Inc. Telecommunications service operator | Puerto Rico | USD | 111 | 98.00% | Telefónica Internacional, S.A. (98.00%) |
Telefónica Móviles Panamá, S.A. Wireless telephony services | Panama | USD | 71 | 100% | Telefónica, S.A. (56.31%) Panamá Cellular Holdings, B.V. (43.69%) |
Telefónica Móviles El Salvador, S.A. de C.V. Provision of wireless and international long distance communications services | El Salvador | SVC | 367, 541 | 99.08% | Telefónica El Salvador Holding, S.A. de C.V. (99.08%) |
Telefónica Móviles Guatemala, S.A. Wireless, wireline and radio paging communications services provider | Guatemala | GTQ | 1,420 | 99.98% | TCG Holdings, S.A. (65.99%) Telefónica, S.A. (13.60%) Guatemala Cellular Holdings, B.V. (13.12%) Panamá Cellular Holdings, B.V. (7.27%) |
Telefonía Celular de Nicaragua, S.A. Wireless telephony services | Nicaragua | NIO | 247 | 100% | Latin America Cellular Holdings, B.V. (98.00%) Telefónica El Salvador Holding, S.A. de C.V. (2.00%) |
Otecel, S.A. Wireless communications services provider | Ecuador | USD | 156 | 100% | Ecuador Cellular Holdings, B.V. (100%) |
Telefónica International Wholesale Services, S.L. International services provider | Spain | EUR | 230 | 100% | Telefónica, S.A. (92.51%) Telefónica Datacorp, S.A.U (7.49%) |
Telefónica International Wholesale Services America, S.A. Provision of high bandwidth communications services | Uruguay | UYU | 579 | 100% | Telefónica, S.A. (76.85%) Telefónica International Wholesale Services II, S.L. (23.15%) |
Telefónica International Wholesale Services France, S.A.S. Provision of high bandwidth communications services | France | EUR | - | 100% | Telefónica International Wholesale Services, S.L. (100%) |
Telefónica International Wholesale Services Argentina, S.A. Provision of high bandwidth communications services | Argentina | USD | 78 | 100% | T. International Wholesale Services America, S.A. (99.94%) Telefónica International Wholesale Services, S.L. (0.06%) |
Telefónica International Wholesale Services Brasil Participaçoes, LtdParticipaçoes, Ltd. Provision of high bandwidth communications services | Brazil | USD | 62 | 100% | Telefónica International Wholesale Services, S.L. (99.99%) Telefónica International, S.A. (0.01%) |
Telefónica International Wholesale Services Perú, S.A.C. Provision of high bandwidth communications services | Peru | USD | 20 | 100% | T. International Wholesale Services America, S.A. (100%) Telefónica Servicios Integrados, S.A.C. |
Telefónica International Wholesale Services USA, Inc. Provision of high bandwidth communications services | United States | USD | 36 | 100% | T. International Wholesale Services America, S.A. (100%) |
Telefónica International Wholesale Services Puerto Rico, Inc. Provision of high bandwidth communications services | Puerto Rico | USD | 24 | 100% | T. International Wholesale Services America, S.A. (100%) |
Telefónica International Wholesale Services Ecuador, S.A Provision of high bandwidth communications services | Ecuador | USD | 6 | 100% | T. International Wholesale Services America, S.A. (99.99%) Telefónica International Wholesale Services Perú, S.A.C. (0.01%) |
Terra Networks Brasil, S.A. ISP and portal | Brazil | BRL | 1,046 | 100% | Sao Paulo Telecomunicaçoes Participaçoes, Ltda. (100%) |
Terra Networks Mexico, S.A. de C.V. ISP, portal and real-time financial information services | Mexico | MXN | 45 | 99.99% | Terra Networks Mexico Holding, S.A. de C.V. (99.99%) |
| Name and corporate purpose | Country | Currency | Share capital | % Telefónica Group | Holding company |
Terra Networks Perú, S.A. ISP and portal | Peru | PEN | 10 | 99.99% | Telefónica Internacional, S.A. (99.99%) |
Terra Networks Argentina, S.A. ISP and portal | Argentina | ARS | 18 | 100% | Telefónica Internacional, S.A. (99.92%) TelefónicaTelefónica International Holding, B.V. (0.08%) |
Terra Networks Guatemala, S.A. ISP and portal | Guatemala | GTQ | 154 | 99.99% | Telefónica Internacional, S.A. (99.99%) |
TelefónicaTelefónica China, B.V. Holding company | Netherlands | EUR | - | 100% | Telefónica Internacional, S.A. (100%) |
| Telefónica Europe | | | | | |
Telefónica Europe plc Holding company | UK | GBP | 13,061 | 100% | Telefónica, S.A. (100%) |
MmO2 plc Holding company | UK | GBP | 20 | 99.99% | Telefónica Europe plc (99.99%) |
O2 Holdings Ltd. Holding company | UK | EUR | 12 | 100% | MmO2 plc (100%) |
Telefónica O2 UK Ltd. Wireless communications services operator | UK | GBP | 10 | 100% | O2 Networks Ltd. (80.00%) O2 Cedar Ltd. (20.00%) |
The Link Stores Ltd. Telecommunications equipment retailer | UK | GBP | - | 100% | Telefónica O2 UK Ltd. (100%) |
Be Un Limited (Be) Internet services provider | UK | GBP | 10 | 100% | Telefónica O2 UK Ltd. (100%) |
Tesco Mobile Ltd. (*) Wireless telephony services | UK | GBP | - | 50.00% | O2 Ash Ltd. (50.00%) |
O2 (Europe) Ltd. Holding company | UK | GBP | 1,239 | 100% | Telefónica, S.A. (100%) |
Telefónica O2 Germany GmbH & Co. OHG Wireless communications services operator | Germany | EUR | 51 | 100% | Telefónica O2 Germany Verwaltungs GmBh (99.99%) Telefónica O2 Germany Management GmBh (0.01%) |
Tchibo Mobilfunk GmbH & Co. KG (*) Telecommunications equipment retailer | Germany | EUR | 16 | 50.00% | Telefónica O2 Germany GmbH & Co. OHG (50.00%) |
TelefónicaTelefónica O2 Ireland Ltd. Wireless communications services operator | Ireland | EUR | 98 | 100% | Kilmaine, Ltd. (1%) O2 Netherland Holdings B.V. (99%) |
Manx Telecom Ltd. Telecommunications service provider | Isle of Man | GBP | 12 | 100% | O2 (Netherlands) Holdings BV (100%) |
Telefónica O2 Czech Republic, a.s. Telecommunications service provider | Czech Republic | CZK | 32,209 | 69.41% | Telefónica, S.A. (69.41%) |
Telefónica O2 Slovakia, s.r.o. Wireless telephony, internet and data transmission services | Slovak Republic | EUR | 192 | 69.41% | Telefónica O2 Czech Republic, a.s. (100%) |
| Other companies | | | | | |
Telefónica de Contenidos, S.A.U. Organization and operation of multimedia service-related businesses | Spain | EUR | 1,865 | 100% | Telefónica, S.A. (100%) |
Atlántida Comunicaciones, S.A. Media | Argentina | ARS | 22 | 100% | Telefónica Media Argentina S.A. (93.02%) Telefónica Holding de Argentina, S.A. (6.98%) |
Televisión Federal S.A.- TELEFE Provision and operation TV and radio broadcasting services | Argentina | ARS | 148 | 100% | Atlántida Comunicaciones S.A. (79.02%) Enfisur S.A. (20.98%) |
Telefónica Servicios Audiovisuales, S.A.U. Provision of all type of audiovisual telecommunications services | Spain | EUR | 6 | 100% | Telefónica de Contenidos, S.A.U. (100%) |
Gloway Broadcast Services, S.L. DSNG-based transmission and operation services | Spain | EUR | - | 100% | Telefónica Servicios Audiovisuales, S.A.U. (100%) |
Telefónica Servicios de Música, S.A.U. Provision of telemarketing services | Spain | EUR | 1 | 100% | Telefónica de Contenidos, S.A.U. (100%) |
Atento Inversiones y Teleservicios, S.A.U. Telecommunications service provider | Spain | EUR | 24 | 100% | Telefónica, S.A. (100%) |
Atento N.V. Telecommunications service provider | Netherlands | EUR | - | 100% | Atento Inversiones y Teleservicios, S.A. (100%) |
Atento Teleservicios España, S.A.U. Provision of all type of telemarketing services | Spain | EUR | 1 | 100% | Atento N.V. (100%) |
Atento Brasil, S.A. Telecommunications services provider | Brazil | BRL | 152 | 100% | Atento N.V. (100%) |
Atento Argentina, S.A. Telecommunications services provider | Argentina | ARS | 3 | 100% | Atento Holding Chile, S.A. (97.99%) Atento N.V. (2.01%) |
Teleatento del Perú, S.A.C. Telecommunications services provider | Peru | PEN | 14 | 100% | Atento N.V. (83.33%) Atento Holding Chile, S.A. (16.67%) |
Atento Chile, S.A. Telecommunications services provider | Chile | CLP | 11,128 | 99.06% | Atento Holding Chile, S.A. (71.16%) Compañía de Telecomunicaciones de Chile, S.A (26.52%) Telefónica Empresas Chile, S.A. (0.93%) Telefónica Larga Distancia, S.A. (0.45%) |
Atento Centroamérica, S.A. Provision of call-center services | Guatemala | GTQ | 55 | 100% | Atento N.V. (99.99%) Atento El Salvador, S.A. de C.V. (0.01%) |
Terra Networks Asociadas, S.L. Holding company | Spain | EUR | 7 | 100% | Telefónica, S.A. (100%) |
Red Universal de Marketing y Bookings Online, S.A. (RUMBO) (*) Online travel agency | Spain | EUR | 1 | 50.00% | Terra Networks Asociadas, S.L. (50.00%) |
| Name and corporate purpose | Country | Currency | Share capital | % Telefónica Group | Holding company |
Telefónica Learning Services, S.L. Vertical e-learning portal | Spain | EUR | 1 | 100% | Terra Networks Asociadas, S.L. (100%) |
Telefónica Ingeniería de Seguridad, S.A.U. Security services and systems | Spain | EUR | 1 | 100% | Telefónica, S.A. (100%) |
Telefónica Engenharia de Segurança Security services and systems | Brazil | BRL | 21 | 99.99% | Telefónica Ingeniería de Seguridad, S.A. (99.99%) |
Telefónica Capital, S.A.U. Finance company | Spain | EUR | 7 | 100% | Telefónica, S.A. (100%) |
Lotca Servicios Integrales, S.L. Aircraft ownership and operation | Spain | EUR | 17 | 100% | Telefónica, S.A. (100%) |
Fonditel Pensiones, Entidad Gestora de Fondos de Pensiones, S.A. Administration of pension funds | Spain | EUR | 16 | 70.00% | Telefónica Capital, S.A. (70.00%) |
Fonditel Gestión, Soc. Gestora de Instituciones de Inversión Colectiva, S.A. Administration and representation of collective investment schemes | Spain | EUR | 2 | 100% | Telefónica Capital, S.A. (100%) |
Telefónica Investigación y Desarrollo, S.A.U. Telecommunications research activities and projects | Spain | EUR | 6 | 100% | Telefónica, S.A. (100%) |
Telefónica Investigación y Desarrollo de Mexico, S.A. de C.V. Telecommunications research activities and projects | Mexico | MXN | - | 100% | Telefónica Investigación y Desarrollo, S.A. (100%) |
Telefônica Pesquisa e Desenvolvimento do Brasil, Ltda. Telecommunications research activities and projects | Brazil | BRL | 1 | 100% | Telefónica Investigación y Desarrollo, S.A. (100%) |
Casiopea Reaseguradora, S.A. Reinsurance | Luxemburg | EUR | 4 | 100% | Telefónica, S.A. (99.97%) Telefónica Finanzas, S.A. (TELFISA) (0.03%) |
Pléyade Peninsular, Correduría de Seguros y Reaseguros del Grupo Telefónica, S.A. Distribution, promotion or preparation of insurance contracts | Spain | EUR | - | 100% | Casiopea Reaseguradora, S.A. (83.33%) Telefónica, S.A. (16.67%) |
Altaïr Assurances, S.A. Direct insurance transations | Luxemburg | EUR | 6 | 100% | Casiopea Reaseguradora, S.A. (95.00%) Seguros de Vida y Pensiones Antares, S.A. (5.00%) |
Seguros de Vida y Pensiones Antares, S.A. Life insurance, pensions and health insurance | Spain | EUR | 51 | 100% | Telefónica, S.A. (89.99%) Casiopea Reaseguradora, S.A. (10.01%) |
Telefónica Finanzas, S.A.U. (TELFISA) Integrated cash management, consulting and financial support for Group companies | Spain | EUR | 3 | 100% | Telefónica, S.A. (100%) |
Fisatel Mexico, S.A. de C.V. Integrated cash management, consulting and financial support for Group companies | Mexico | MXN | 5 | 100% | Telefónica, S.A. (100%) |
Telfisa Global, B.V. Integrated cash management, consulting and financial support for Group companies | Netherlands | EUR | - | 100% | Telefónica, S.A. (100%) |
Telefónica Europe, B.V. Fund raising in capital markets | Netherlands | EUR | - | 100% | Telefónica, S.A. (100%) |
Telefónica Finance USA, L.L.C. Financial intermediation | United States | EUR | 2,000 | 0.01% | Telefónica Europe, B.V. (0.01%) |
Telefónica Emisiones, S.A.U. Financial debt instrument issuer | Spain | EUR | - | 100% | Telefónica, S.A. (100%) |
Spiral Investments, B.V. Holding company | Netherlands | EUR | 39 | 100% | Telefónica Móviles España, S.A.U. (100%) |
Solivella Investment, B.V. Holding company | Netherlands | EUR | 881 | 100% | Telefónica Móviles España, S.A.U. (100%) |
Aliança Atlântica Holding B.V. Holder of 5,225,000 Portugal Telecom, S.A. shares | Netherlands | EUR | - | 93.99% | Telefónica, S.A. (50.00%) Telecomunicaçoes de Sao Paulo, S.A. - TELESP (43.99%) |
Telefónica Gestión de Servicios Compartidos España, S.A. Provision of management and administration services | Spain | EUR | 8 | 100% | Telefónica, S.A. (100%) |
Telefónica Gestión de Servicios Compartidos, S.A.C. Provision of management and administration services | Argentina | ARS | - | 99.99% | T. Gestión de Servicios Compartidos España, S.A. (95.00%) Telefónica, S.A. (4.99%) |
Telefónica Gestión de Servicios Compartidos, S.A. Provision of management and administration services | Chile | CLP | 1,017 | 97.89% | Compañía de Telecomunicaciones de Chile, S.A (97.89%) |
Telefónica Gestión de Servicios Compartidos, S.A. Provision of management and administration services | Peru | PEN | 1 | 100% | T. Gestión de Servicios Compartidos España, S.A. (100%) |
Cobros Serviços de Gestao, Ltda. Provision of management and administration services | Brazil | BRL | - | 99.33% | T. Gestión de Servicios Compartidos España, S.A. (99.33%) |
Tempotel, Empresa de Trabajo Temporal, S.A. Temporary employment agency | Spain | EUR | - | 100% | T. Gestión de Servicios Compartidos España, S.A. (100%) |
Telefónica Gestao de Serviços Compartilhados do BRASIL, Ltda. Provision of management and administration services | Brazil | BRL | 12 | 99.99% | T. Gestión de Servicios Compartidos España, S.A. (99.99%) |
Telefónica Gestión de Servicios Compartidos Mexico, S.A. de C.V. Provision of management and administration services | Mexico | MXN | 50 | 100% | T. Gestión de Servicios Compartidos España, S.A. (100%) |
Telefónica Servicios Integrales de Distribución, S.A.U. Distribution services provider | Spain | EUR | 2 | 100% | T. Gestión de Servicios Compartidos España, S.A. (100%) |
Telefónica Compras Electrónicas, S.L. Development and provision of information society services | Spain | EUR | - | 100% | T. Gestión de Servicios Compartidos España, S.A. (100%) |
| Companies accounted for using the equity method | | | | | |
Telco S.p.A. Holding company | Italy | EUR | 3,588 | 46.18% | Telefónica, S.A. (46.18%) |
| Name and corporate purpose | Country | Currency | Share capital | % Telefónica Group | Holding company |
Telecom Italia S.p.A. Holding company | Italy | EUR | 10,674 | 10. 49% | Telco S.p.A. (10.49%) |
Portugal Telecom, SGPS, S.A. Holding company | Portugal | EUR | 27 | 9.86% | Telefónica, S.A. (8.51%) Telecomunicaçoes de Sao Paulo, S.A. - TELESP (0.79%) Aliança Atlântica Holding B.V. (0.56%) |
Lycos Europe, N.V. Internet portal | Netherlands | EUR | 3 | 32.10% | LE Holding Corporation (32.10%) |
Telefónica Factoring Mexico, S.A. de C.V. SOFOM ENR Factoring services provider | Mexico | MXN | 33 | 50% | Telefónica, S.A. (40.5%) Telefónica Factoring España, S.A. (9.50%) |
Hispasat, S.A. Operation of a satellite telecommunications system | Spain | EUR | 122 | 13.23% | Telefónica de Contenidos, S.A.U. (13.23%) |
Telefónica Factoring España, S.A. Factoring services provider | Spain | EUR | 5 | 50.00% | Telefónica, S.A. (50.00%) |
Telefónica Factoring Do Brasil, Ltd. Factoring services provider | Brazil | BRL | 5 | 50.00% | Telefónica, S.A. (40.00%) Telefónica Factoring España, S.A. (10.00%) |
Ipse 2000 S.p.A Installation and operation of 3G wireless communications systems | Italy | EUR | 13 | 39.92% | Solivella Investment, B.V. (39.92%) |
China Unicom (Hong Kong) Limited Telecommunications service operator | China | RMB | 2,329 | 8.37% | Telefónica Internacional, S.A. (8.37%) |
| | (*) | Companies consolidated using proportionate consolidation. |
Through these consolidated financial statements, O2 (Germany) GmbH & Co. OHG, complies with the provisions of Art. 264b HGB [“Handelsgesetzbuch”: Germany code of commerce], and is exempt in accordance with the stipulations of Art. 264b HGB.
F-122
