Pursuant to Rule 13a-16 or 15d-16 of the
1069 - 300 Lisboa, Portugal
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No ___X____
CONSOLIDATED REPORT
2004
CONTENTS
2004 ANNUAL REPORT
1
HIGHLIGHTS
| Euro million | 2004 | y.o.y | 2003 | 2002 | ||||
| Operating Revenues | 6,023 | 4.3% | 5,776 | 5,582 | ||||
| EBITDA | 2,326 | 2.6% | 2,268 | 2,230 | ||||
| Operating Income | 1,369 | 4.2% | 1,314 | 1,267 | ||||
| Net Income | 500 | 108.2% | 240 | 391 | ||||
| Net Income excluding Curtailment Costs | 624 | 38.5% | 451 | 427 | ||||
| Earnings per Share (Euro) | 0.43 | 123.9% | 0.19 | 0.31 | ||||
| Net Assets | 12,963 | (4.4%) | 13,558 | 13,726 | ||||
| Net Debt | 3,123 | (2.9%) | 3,216 | 4,037 | ||||
| Shareholder's Equity | 2,705 | (8.0%) | 2,941 | 3,111 | ||||
| Share Capital | 1,166 | (7.0%) | 1,254 | 1,254 | ||||
| Gearing (%) | 48.7 | 1.4pp | 47.3 | 53.1 | ||||
| EBITDA Margin (%) | 38.6 | (0.6pp) | 39.3 | 39.9 | ||||
| Net Debt / EBITDA (x) | 1.3 | (0.1x) | 1.4 | 1.8 | ||||
| EBITDA Cover (x) | 11.5 | 0.2x | 11.2 | 11.3 | ||||
| Capex | 783 | 20.2% | 652 | 776 | ||||
| Capex to Sales (%) | 13.0 | 1.7pp | 11.3 | 13.9 | ||||
| EBITDA minus Capex | 1,543 | (4.5%) | 1,616 | 1,454 | ||||
| Financial Investments | 309 | (33.3%) | 464 | 329 | ||||
| Operating Cash Flow | 1,756 | (7.2%) | 1,893 | 1,225 | ||||
| Acquisition of Treasury Stock | 495 | 152.8% | 196 | - | ||||
| Dividends | 267 | 32.8% | 201 | 125 | ||||
| Employees | 29,483 | 4,611 | 24,872 | 23,109 | ||||
Domestic Market |
15,107 | (115) | 15,222 | 16,893 | ||||
| International Markets | 14,376 | 4,726 | 9,650 | 6,216 | ||||
Financial Data by Business Segment
| Euro million | Wireline |
TMN |
Vivo |
PT Multimedia |
Other |
|||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||
| Operating Revenues | 2,124 | 2,138 | 1,444 | 1,347 | 1,503 | 1,362 | 729 | 683 | 223 | 246 | ||||||||||
| EBITDA | 902 | 907 | 747 | 690 | 496 | 509 | 192 | 135 | (11) | 27 | ||||||||||
| EBITDA margin (%) | 39.8 | 39.7 | 47.0 | 45.3 | 33.0 | 37.5 | 26.3 | 19.7 | n.m. | n.m. | ||||||||||
| Capex | 206 | 165 | 159 | 168 | 265 | 165 | 81 | 57 | 73 | 96 | ||||||||||
| EBITDA minus Capex | 696 | 742 | 588 | 521 | 232 | 344 | 111 | 77 | (84) | (69) | ||||||||||
| Capex to Sales (%) | 9.1 | 7.2 | 10.0 | 11.1 | 17.6 | 11.4 | 11.0 | 8.4 | n.m. | n.m. | ||||||||||
Operating Data
2
| 2004 | y.o.y | 2003 | 2002 | |||||
| Customer Base ('000) | ||||||||
| Wireline Accesses | 4,368 | 3.4% | 4,225 | 4,196 | ||||
| Mobile | 31,596 | 23.7% | 25,543 | 21,235 | ||||
| Pay-TV | 1,553 | 7.7% | 1,442 | 1,307 | ||||
| Broadband (Retail ADSL + Cable) | 695 | 77.7% | 391 | 184 | ||||
| Wireline | ||||||||
| Main Lines ('000) | 4,368 | 3.4% | 4,225 | 4,196 | ||||
| PSTN/ISDN | 3,948 | (2.2%) | 4,037 | 4,143 | ||||
| ADSL Wholesale | 420 | 123.4% | 188 | 53 | ||||
ADSL Retail |
380 | 136.2% | 161 | 43 | ||||
| Net Additions (1) ('000) | 144 | 397.2% | 29 | (109) | ||||
| PSTN/ISDN | (88) | (17.1%) | (106) | (158) | ||||
| ADSL Wholesale | 232 | 71.4% | 135 | 49 | ||||
ADSL Retail |
219 | 86.4% | 118 | 40 | ||||
| Pricing Plans ('000) | 947 | 148.1% | 382 | - | ||||
| ARPU (Euro) | 34.8 | 2.2% | 34.1 | 35.1 | ||||
| Voice | 31.3 | (1.1%) | 31.6 | 33.3 | ||||
| Data | 3.5 | 44.1% | 2.5 | 1.8 | ||||
| Total Traffic (106 min) | 16,478 | (9.7%) | 18,255 | 20,065 | ||||
| Retail | 7,250 | (8.8%) | 7,947 | 8,235 | ||||
| F2F Domestic | 5,326 | (8.8%) | 5,841 | 6,479 | ||||
| F2M | 918 | (10.2%) | 1,023 | 1,118 | ||||
| Wholesale | 9,229 | (10.5%) | 10,308 | 11,830 | ||||
| Internet | 3,151 | (37.3%) | 5,023 | 6,581 | ||||
| Call Completion Rate (%) | 99.8 | (0.1pp) | 99.9 | 99.9 | ||||
| Faults per 100 Access Lines (no.) | 9.7 | (0.4pp) | 10.1 | 10.2 | ||||
| Number of Leased Lines ('000) | 16 | (14.0%) | 19 | 20 | ||||
| Employees (no.) | 8,311 | (764) | 9,075 | 11,183 | ||||
| Fixed Lines per Employee | 526 | 60 | 466 | 375 | ||||
| Domestic Mobile (TMN) | ||||||||
| Active Customers ('000) | 5,053 | 3.4% | 4,887 | 4,426 | ||||
| Net Additions ('000) | 167 | (63.8%) | 461 | 521 | ||||
| Total Churn (%) | 27.7 | 4.2pp | 23.5 | 25.3 | ||||
| MOU (min.) | 121.0 | (1.7%) | 123.1 | 130.5 | ||||
| ARPU (Euro) | 24.4 | (3.4%) | 25.2 | 27.1 | ||||
| Customer Bill | 18.3 | (0.8%) | 18.4 | 19.0 | ||||
| Interconnection | 6.1 | (10.5%) | 6.8 | 8.1 | ||||
| Data as % of Service Revenues (%) | 10.0 | 1.4pp | 8.6 | 7.4 | ||||
| SARC (Euro) | 45.8 | (20.1%) | 57.3 | 65.0 | ||||
| CCPU (Euro) | 11.2 | (7.3%) | 12.1 | 13.5 | ||||
| ARPU minus CCPU (Euro) | 13.2 | 0.2% | 13.1 | 13.6 | ||||
| (1) | Including ADSL Wholesale. |
2004 ANNUAL REPORT
3
| Euro million | 2004 | y.o.y | 2003(1) | 2002(1) | ||||
| Brazilian Mobile (Vivo) | ||||||||
| Active Customers ('000) | 26,543 | 28.5% | 20,656 | 16,809 | ||||
| Market Share in Areas of Operation (%) | 50.9 | (5.4pp) | 56.2 | 60.8 | ||||
| Net Additions ('000) | 5,887 | 53.0% | 3,847 | 2,756 | ||||
| MOU (min.) | 89.0 | (11.7%) | 100.7 | 105.8 | ||||
| ARPU (R$) | 32.8 | (16.8%) | 39.4 | 40.9 | ||||
| SARC (R$) | 152.8 | 25.3% | 122.0 | 116.4 | ||||
| CCPU (R$) | 18.5 | (10.4%) | 20.6 | 21.4 | ||||
| ARPU minus CCPU (R$) | 14.3 | (23.7%) | 18.8 | 19.5 | ||||
| Multimedia (PT Multimedia) | ||||||||
| Homes Passed ('000) | 2,551 | 3.2% | 2,472 | 2,390 | ||||
Bi-directional ('000) |
2,418 | 8.8% | 2,221 | 2,048 | ||||
| Pay-TV Customers ('000) | 1,553 | 7.7% | 1,442 | 1,307 | ||||
Cable |
1,160 | 6.1% | 1,094 | 1,017 | ||||
DTH |
393 | 12.9% | 348 | 290 | ||||
| Pay-TV Net Additions ('000) | 111 | (17.2%) | 134 | 147 | ||||
| Pay to Basic ratio (%) | 55.6 | (3.9pp) | 59.5 | 53.3 | ||||
| Churn (%) | 12.6 | 0.1pp | 12.5 | 16.3 | ||||
| Cable Broadband Accesses ('000) | 315 | 36.9% | 230 | 140 | ||||
| Cable Broadband Net Additions ('000) | 85 | (5.5%) | 90 | 78 | ||||
| Pay-TV Blended ARPU (Euro) | 25.4 | 6.6% | 23.8 | 21.5 | ||||
| (1) Pro forma information including TCO. | ||||||||
4
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Explosive growth in broadband - PT’s aggressive push in broadband, which resulted in over 300,000 new broadband customers, made Portugal one of the fastest growing broadband markets in Europe and with one of highest penetrations.
-
Wireline turnaround - The strong rollout of ADSL and new pricing plans, combined with continued cost rationalisation, resulted in a stabilisation of wireline EBITDA.
-
Accelerated Growth in Brazil - Vivo consolidated its leading position in Brazilian mobile with 40% of the total market and over 50% in its areas of operation, amidst a strong acceleration in customer growth.
-
Continued innovation in mobile - TMN was the first operator to launch videocalls on 3G in Portugal, while Vivo became the first 3G operator in Brazil with the launch of EV-DO.
-
Profitable growth in multimedia - Continued top line growth, underpinned by customer and ARPU expansion in the Pay-TV business, combined with higher efficiency, resulted in an approximately 40% EBITDA margin in the Pay-TV business in the
fourth quarter.
-
Continued drive for efficiency - EBITDA margins of the domestic businesses improved in 2004 by 1.2pp, underpinned by the cost rationalisation efforts in place, of which the shared services initiative through PT Pro is a key element.
-
Reinforcement of commitment to Brazil - PT increased its exposure to the Brazilian mobile market in 2004, through the investment of Euro 269 million in the rights issue of TCP and the partial tender offers of TSD, CRT and TBE .
- Focus on shareholder remuneration - PT increased dividends per share by 38% for 2003 to Euro 0.22 and executed a 10% share buyback . At the end of 2004, PT cancelled 7% of share capital that corresponds to treasury shares bought under the share buyback program. Subject to shareholder
5
approval, PT has committed to increase dividends per share by almost 60% for 2004 to Euro 0.35 and execute a new share buyback of 3%. |
6
Introduction
Portugal Telecom had, during 2004, a very positive performance, both operationally and financially. This performance was achieved in an adverse domestic economic setting and, moreover, in a difficult sector context, in Portugal as well as in Brazil.
With respect to performance, I would like to call your attention to the 108.2% increase in net income (totalling Euro 500 million) and the reinforcement of the consolidated revenues and EBITDA (increases of 4.3% and 2.6% respectively). These results strengthened PT while at the same time achieving two main goals: the continuance of a reference shareholder remuneration in the telecommunications sector and the reduction of net debt. In fact, in spite of having distributed Euro 763 million to the shareholders in 2004, PT reduced its net debt by Euro 93 million.
The results shown in this annual report demonstrate how important it is to define and adhere to PT’s ‘vision for the future’ that I mentioned in the 2003 report, which has materialised in the aspects of Performance, Role within Portugal, International Vocation and Human Resources. In fact, PT has now a clear common line of action, which guides its entire strategy and activity, and that has allowed it to pursue, with success and despite the challenging environment, its competitive, operational and financial goals.
Moreover, Portugal Telecom, aware that evolutions and discontinuities, as well as new opportunities and threats, are a permanent reality in the telecommunications sector, continues to consider its ‘vision for the future’ as a systematic process of prospective analysis and planning, self-renovating it in light of the results of its own performance and the changes in its surroundings.
As for 2004, I wish to highlight and approach in more detail, on account of their increasing relevance and the progress achieved in the past year, four themes: Governance, Strategic Management, Internationalisation and Culture.
Corporate Governance
2004 ANNUAL REPORT7
In the terms of Corporate Governance, Portugal Telecom consolidated its model, having achieved important advancements in the past year. PT is currently a reference in terms of corporate governance among Portuguese companies.
I would also like to highlight on this point our fulfilment of the Sarbanes-Oxley requirements - arising from our listing in the New York Stock Exchange - that resulted in the approval of the code of ethics for Financial Officers, drawn up by the Governance Committee, which I preside.
PT’s achievements in terms of corporate governance result in a reference framework for the internal operation of the group, which consequently leads to the recognition by the financial markets of PT’s commitment to the highest ethical and professional practices.
Strategic Management
At the level of strategic management and as a result of the efforts undertaken in 2004, PT has at the present time an internal formal cycle for planning and control, with fully systematised components and timings.
This formal cycle is composed of a multi-year strategic plan, reviewed and updated on an annual basis by operational programmes, a timely approved annual budget, and systematic control and backing which guarantee its fulfilment. From this point of view, 2004 was key, since, on top of optimising ongoing processes, there is now an internal setup which is able to respond in a swift and structured manner to the oncoming developments of the group and its surroundings.
It also seems essential to recall the question of technologies, central to the strategy of PT, which today, more than ever, is prepared to face the challenges and opportunities brought on by increasingly fast cycles of innovation and the higher degree of uncertainty thereof. The Group presently has a clear strategic vision of its technological route and, what is more important, of the stance it must adopt in the distinct scenarios of technological evolution which may occur on a short or medium time frame.
I would also like to restate the permanent strategic commitment of Portugal Telecom towards innovation, promoting the adoption of advanced solutions in the markets it operates in, and producing up-to-
8
date examples of success, from which I would like to highlight the use of mobile telecommunications services and broadband Internet.
Internationalisation
In relation to international operations, which hold a growing importance in the PT’s activity, Brazil naturally stands out, where Vivo, already with approximately 26.5 million clients, continues to affirm itself, in an intensely competitive
context, as the major mobile operator in its fields of operation, securing its position as the biggest mobile operator in Latin America. I would also like to point out, due to the level of progress achieved, the very positive evolution in Angola,
marked by the development of the mobile operation of Unitel, which has reached approximately half a million clients; and in Timor, where the investment in advanced infrastructures for telecommunications represents a critical platform for the
country’s economic development.
Also noteworthy on behalf of their structuring character are the establishment of a conceptual framework for the Group’s internationalisation and the creation of PT Investimentos Internacionais. On account of this, the current operations should be regarded as progressive steps within a long term process towards the Group’s internationalisation, which will entail the intensification and complementing of the current strategic network of participations.
In effect, international investments will most likely turn out to be one of the most powerful factors in the dynamics and consistent affirmation of the Group in its global and regional context, contributing towards the reinforcement of Portugal’s role as a link between Europe, Latin America and Africa.
Group Culture
During 2004, we continued to reinforce the corporate culture bases of Portugal Telecom so as to - integrating its legacy from the past and understanding its present reality - exploit its contribution towards the Group’s strategic potential for
the future.
This issue has deserved special attention from my part, and will continue to do so, as it has clearly shown to be instrumental in drawing out and expressing the potential for knowledge, awareness, and action held within the Group.
2004 ANNUAL REPORT9
Conclusion
In the year of 2005, we must continue to take new concrete steps within the bounds of these four themes. The holding of an Employee Congress will not only constitute a landmark for the 2004-2006 period, but also represent the launching of a process
of broad and structured reflection. In this forum, questions pertaining to PT’s corporate culture, its operational capabilities and strategic potential, among other issues, will be approached, so as to provide, ‘as a whole’, an answer
to the challenges that will arise in the future.
In brief, Portugal Telecom, which I am proud to preside, has come to fulfil, in a successful and consistent manner, its strategic vision for the future, based on a presently solid position, capable of assuring high levels of security and returns to its Shareholders, satisfaction of its Customers’ needs, and of mobilisation to its Employees, as well as reinforcing the Group’s projection, certainly in Portugal, but, also, in the other economies in which it operates.
Ernâni Rodrigues Lopes
Chairman of the Board of Directors
CEO MESSAGE
2004 was another year of sound performance for Portugal Telecom. Solid execution throughout the year supported a strong generation of operating cash flow, which totalled Euro 1.8 billion. Summarising this past year, I would emphasise four key themes:
- Strong operational and financial performance;
- Significant growth across all businesses, both domestically and abroad;
- Ongoing effort to improve efficiency in the business; and
- Sector leadership in shareholder remuneration policy.
Shareholder remuneration policy
Portugal Telecom shareholders earned a total shareholder return in 2004 of 17%, which is above the return provided by the European telecommunications sector and the Portuguese market. During 2004, we executed the 10% share buyback announced in the
previous year and paid dividends in the amount of Euro 0.22 per share. Given the strength and visibility of the cash flow generated by the company, we announced in the second half of the year a proposal to increase dividends for 2004 by almost 60%,
to Euro 0.35 per share, and to reinforce the remuneration policy with an additional share buyback of 3%, to be executed until the end of 2005, depending on market conditions. We remained committed to a policy of progressive dividends in the future.
Strong customer growth
We continued to experience significant customer growth in our business in 2004, with emphasis on broadband, mobile and Pay-TV.
Our strategy of aggressively rolling out broadband in Portugal is proving to be a huge success for PT and the country in general, which registered one of the highest growth rates in broadband in Europe. We launched several new services throughout the year that resulted in an unrivalled broad and innovative product offering. Retail broadband customers for the group reached almost 700 thousand, which represented a growth of almost 80%. We believe that the aggressive target of one million broadband customers by the end of 2005 is within our reach.
Mobile was another important engine for growth in 2004. Brazil was the main contributor to customer growth, given the level of penetration
11
and competitive intensity of the market. During 2004, we consolidated our leading position in the market, reaching a total of 26.5 million customers, which represented a growth rate of almost 30%. We believe that the Brazilian mobile market should continue to offer an important growth avenue for PT. Despite the already high penetration rate in Portugal, the market continued to grow in 2004. It gave us a great sense of achievement to reach the 5 million customer mark at the end of the year, which allowed us to clearly reinforce our position of leadership.
The Pay-TV business also continued to grow at a healthy pace. Net additions totalled 111 thousand in 2004, bringing our total customer base to 1.6 million. We continue to believe that Pay-TV services in Portugal still offer a significant growth opportunity. We see a potential market for an additional one million customers over the medium term, which could translate into 100 to 150 thousand net additions per annum for PT. The Pay-TV business is expected to remain an important growth lever for the group.
Continued focus on customer needs
As I have said in the past, this performance could not have been achieved without an absolute focus on customer needs.
In Portugal, we continued to develop our offer of voice, video and data services further. The launch of one of the first prepaid broadband services in Europe, allied to the revamping of our two broadband brands, was central to underpin growth by entering new segments of the market. Also as a means of improving the price perception and value of fixed voice in Portugal, we launched three new pricing plan families, which had a significant take-up and should contribute towards greater retention. In terms of video, we continued to expand and to improve the quality of the offer. The repositioning of the Pay-TV brand during the year, towards a more sophisticated and hi-tech service, was also an important achievement.
In terms of mobile, Portugal saw the launch of 3G services by all three operators, with PT being the first to offer a service of videocalls. Euro 2004 provided an excellent opportunity to explore the potential of 3G from a marketing and service application point of view. Leveraging on exclusive content, a large number of services were launched that began to unveil the great potential of 3G for multimedia services. In Brazil, the rollout of 1xRTT and the launch of 3G data
12
services in certain key regions, using EV-DO, supported a continual launch of new services aimed at providing the best possible mobility experience, such as location-based services, virtual games and video-streaming, among others.
Improving operational efficiency
Our ongoing effort to run the business more efficiently resulted in important gains in 2004. Margins of the domestic businesses expanded across the board, with the reduction in Brazil being essentially linked to strong customer growth. Operating
margins before commercial costs in Brazil actually expanded on the back of greater scale and synergies across the group. Structural initiatives, such as the shared services, through PT PRO, and centralised purchasing platform, are starting to
produce savings at group level. In fact, the restructuring of business processes currently being undertaken is underpinning further staff reduction programmes in Portugal that is resulting in greater operating efficiency.
Solid execution
The challenges in 2004 were many, but I believe that we managed to deliver a solid execution across all business units, of which I highlight:
- The turnaround of the wireline division, with a stabilisation EBITDA;
- The reaching of aggressive margin targets in Pay-TV, in line with industry best practices;
- The fulfilment of demanding broadband growth targets;
- The continued growth in domestic mobile, supported on strong operational improvements;
- The consolidation of a clear leadership position in Brazilian mobile.
Managing the business responsibly
Portugal Telecom recognises the responsibility it has for all its stakeholders, and commits to the highest standards of business integrity and corporate governance, understanding the important impact it has on society, the environment and the
economy in general. Throughout 2004, we worked hard on becoming Sarbanes-Oxley compliant and made important progress in terms of managing the business with an ever increasing focus on sustainability.
13
The Executive Committee and I would like to end with a word of gratitude to our customers for choosing Portugal Telecom. We would equally like to thank all our employees for their dedication and professionalism, our suppliers for their support, and, of course, our shareholders for their trust and confidence.
Miguel Horta e Costa
Chief Executive Officer
Shareholder Remuneration
Shareholder return, giving preference to a progressive increase in dividends, continues to be a top priority to PT. PT’s solid financial position allowed for around Euro 1 billion being returned to shareholders in 2004, through a combination of the share buyback programme and an improved dividend payout.
Progressive increase in dividends
PT distributed Euro 0.10 per share in 2002, Euro 0.16 per share in 2003, and Euro 0.22 per share in 2004, an increase of 38% on the previous year. In 2005, the dividend per share for the year ended 31 December 2004 increases almost 60% over last
year to Euro 0.35.
Euro 1 billion to the shareholders in 2004
The 10% share buyback programme announced in September 2003 clearly positioned PT as a leading European telecom operator when it comes to shareholder remuneration. In 2004, PT returned approximately Euro 1 billion to its shareholders, through
dividends and the share buyback programme.
15
Under the 10% share buyback programme, the company was authorised by its General Meeting on 2 April 2004 to acquire up to 10% of its share capital. Under this programme, PT acquired a total of 59,155,441 treasury shares at an average price of Euro 8.13 per share. On 28 December 2004, PT reduced its share capital by 7% from Euro 1,254,285,000 to Euro 1,166,485,050, through the cancellation of 87,799,950 treasury shares, equivalent to 7% of share capital. In addition, as at the date of this report, PT had entered into equity swap contracts under the terms of which it has the option to acquire additional PT shares, equivalent to 3.0% of its previous share capital, at an average price of Euro 9.05 per share. Overall, the average price for the PT shares bought under the 10% share buyback programme was Euro 8.22 per share.
Buyback continues
Reinforcing its commitment to continue delivering compelling returns to its shareholders, PT announced in September 2004 that its management will propose a further share buyback of up to 3% of its share capital (considering the cancellation of the
treasury shares acquired under the current 10% share buyback programme), which, subject to market conditions and to PT’s financial condition, should be completed by the end of 2005.
17
Shares Performance
PT outperformed the market
PT shares outperformed both the DJ Stoxx Telecom and the Euronext PSI 20 indices in 2004, by 2.1pp and 1.4pp respectively, increasing 14.0% on the beginning of the year to close at Euro 9.10. This performance was even more impressive given PSI 20
for 2004 positioned as the third best performing among the major equity markets.
Among the major financial markets, the Bovespa registered the best performance in 2004 (+17.8%), followed by the IBEX (+17.4%) and the PSI20 (+12.6%) .
PT continues to be the most heavily traded company in Portugal
PT continues to be the domestic market leader in terms of liquidity and market capitalisation. Around 1,173 million PT shares were traded in 2004, equivalent to a daily average of 4.5 million, with the trading volume accounting for approximately 40%
of the total trading volume of Euronext Lisbon. PT represented 19.3% of the PSI20 index at the end of 2004, being the highest weight of the Portuguese major index. With approximately Euro 11 billion, PT is also the largest company in terms of market
capitalisation in Portugal.
19
ADRs (NYSE) increased by 23% y.o.y in 2004
In 2004, PT’s ADRs increased by 22.9%, closing the year at US$ 12.31. An average of approximately 110 thousand PT ADRs were traded daily in 2004 on the New York Stock Exchange. The number of ADRs outstanding at the end of 2004 was 61.9 million,
of which 66% were owned by international qualified shareholders. PT’s ADR programme continues to be one of the most active among European telecom operators. In 2004, PT ranked second in terms of ADRs outstanding as a percentage of total free
float, with more than 7%.
Rating
During 2004, PT has maintained an A- credit rating from Standard & Poor’s and an A3 rating from Moody’s, which corresponds to one of the strongest and stable ratings in the sector.
The key credit strength of PT is based on the capability to generate, on a sustainable basis, a strong operating free cash flow, as a result of strong and leading market positions in both fixed and mobile businesses in Portugal and in mobile business in Brazil, as well as the implementation of continued cost cutting initiatives. In addition, despite the initiatives to increase the return to shareholders, PT maintains a strong liquidity position, due to its high level of cash, its debt profile and the additional flexibility provided by its standby lines.
2004 ANNUAL REPORT21
The telecom companies have continued their effort to reduce debt, which improved the overall credit quality for the sector, with most of the companies’ ratings between BBB+ and A, according to Standard & Poor’s methodology. Last year, Deutsche Telekom, France Telecom and KPN were the ones that have experienced improvements in their rating quality.
Market Conditions
In 2004, the decrease of interest rates and the spread tightening led to the general increase of the 2009 Eurobonds price. Regarding the 2006 Eurobonds, despite the slight decrease of interest rates and the spread tightening, the price has gradually fallen during 2004, becoming closer to pair, as these Eurobonds are now close to maturity. The liquidity of the Floating Rate Notes has decreased hugely since the first half of 2004 as they become closer to maturity (February 2005), making the spread performance irrelevant.
22
During the last quarter of 2004, PT has cancelled Eurobonds in the total amount of Euro 236 million, as follows: Euro 121 million of its Eurobonds maturing in 2009; Euro 101 million of its Eurobonds maturing in 2006 and Euro 15 million of its Floating Rate Notes maturing in 2005. The Eurobonds had been bought back in the secondary market in 2002 and 2003 for a total amount of Euro 230 million.
The performance of PT’s Exchangeable Bonds in 2004 was determined mainly by the share price performance and its volatility and, to a lesser extent, by interest rates in the relevant maturities. The increase of PT shares price has led to a general increase of the Exchangeable Bonds price, despite the decrease of the share price volatility. The Exchangeable Bonds issued in 1999 with the initial amount of Euro 509 million matured on 7 June 2004. This was the main factor determining the performance of these Exchangeable Bonds during the period just before their maturity.
2004 ANNUAL REPORT23
During the last quarter of 2004, PT has cancelled 10,000 Exchangeable Bonds maturing in 2006 in the amount of Euro 50 million, which had been bought back in the secondary market in 2004 for a total amount of Euro 49.9 million.
24
Main Shareholders
PT has a diversified shareholder base
Almost three quarters of PT’s share capital is held by foreign shareholders, divided mainly among US and Europe, with the US representing almost a third of the outstanding capital.
The largest investors are BES Group and Telefónica, one of the biggest telecom operators in the world and PT’s partner in the Vivo joint venture in Brazil. Additionally, PT has as shareholders the Caixa Geral de Depósitos Group, the BPI Group, Cinveste, Telexpress, as well as large institutional shareholders, like Brandes, Capital and Fidelity. As of 31 December 2004, qualified holdings in PT’s share capital were as follows:
| Institution | No. of Shares | % of Capital | ||
| Telefónica | 113,085,650 | 9.7% | ||
| Banco Espírito Santo Group | 107,593,232 | 9.2% | ||
| Brandes Investment Partners | 83,572,177 | 7.2% | ||
| Capital Group Companies | 63,193,870 | 5.4% | ||
| Caixa Geral de Depósitos Group | 57,875,682 | 5.0% | ||
| Banco Português de Investimento Group | 28,741,615 | 2.5% | ||
| Cinveste | 28,338,141 | 2.4% | ||
| Fidelity Group | 23,592,185 | 2.0% | ||
| Telexpress * | 23,000,000 | 2.0% | ||
2004 ANNUAL REPORT
25
Investor Relations Activities
PT has a policy of providing its shareholders and other members of the international financial community with clear, transparent, two-way communications on a regular basis.
Investor Relations (IR) programme
PT’s senior management and IR team stepped up their investor relations activities in 2004. The company participated in several investor events including investor ‘roadshows’, analyst and investor presentations, one-on-one meetings and conference calls, as well as appropriate investor conferences in Europe and in the US.
In 2004, PT held a total of approximately 380 contacts with analysts and investors. 220 of these contacts were one-on-one meetings hosted during roadshows and 90 were at investor conferences, while the remaining 70 were at PT’s offices through one-on-one meetings and conference-calls.
During the year, PT held four roadshows in Europe and the US, of which the two most significant were held in March 2004, after the announcement of the full year results, and in October 2004 after the announcement of the first half results. The first roadshow covered 8 cities in 6 countries, while the second involved meetings with investors in 13 cities in 10 countries.
PT hosted two presentations to the financial community in Lisbon to present and discuss the company’s group and divisional strategy and prospects. The presentations, hosted by a range of PT’s senior management, included a profound discussion over several other issues including regulation, pensions funds, corporate governance and shared services.
IR Awards
The domestic and international financial community continues to recognise PT as a leader in terms of investor relations. This was recognised domestically by the awards PT received in July in the 2004 Investor Relations Awards, promoted by Deloitte,
Semanário Económico and Diário Económico, namely:
- Best Global Investor Relations Programme - PSI20
- Best Usage of Technology in terms of Investor Relations
- Annual Report (non-financial sector) - Honourable Mention
Internationally, PT won 2 major prizes at the IR Magazine Eurozone Awards, which is widely recognised as the leading international IR awards event:
- Grand Prix for Best Overall Investor Relations
-
Best Use of the Internet for Investor Relations
Recent Evolution
The PT Group has, over the last few years, been assuming as one of the main concerns the creation of a structure of Corporate Governance in line with the best international and national practices, providing an answer to the needs of transparency and quality of internal practices and of the information disclosed to investors, to the financial markets an the supervision authorities.
During 2004, the measures taken for such purpose by PT’s Board of Directors in the previous two years were consolidated and developed, namely:
- Redefine the Audit Committee’s tasks;
- Identify the adequate profile for the members of the Audit Committee, in view of what is provided in the Sarbanes-Oxley Act;
- Define the relationship between the Audit Committee and the Supervisory Board, in view of what is provided in the Portuguese Law and in the Sarbanes-Oxley Act;
- Define measures to be taken by the Group at the internal control system level.
Additionally, in 2002, the Governance Committee and the Strategy Committee were created and the adoption and disclosure of Code of Ethics of the PT Group was resolved, which assembled and clarified the rules of conduct and the values that shall guide all employees of the PT Group.
Also within the context of the new model of corporate governance in 2003 the new articles of association and operation rules of the Audit
2004 ANNUAL REPORT27
Committee were approved, in accordance with the rules of the NYSE, applicable to the PT Group from 2005. In addition, rules were established on the pre-approval of services barred to external auditors, in accordance with the rules issued by the Securities and Exchange Commission (SEC), in order to ensure the necessary independence of the external auditors.
Already in 2004, the referred Audit Committee consulted and hired external auditors for the years 2004 and 2005, and followed the development and execution of the Internal Control Programme in progress, in addition to its ordinary supervision activities of the Auditing functions.
The year 2004 was also the year of the restructuring of the Corporate Governance Committee now called Governance Committee, as well as of the definition and establishment by such entity of the Code of Ethics for Financial Offers, reinforcing the code of Ethics, existing since 2002, as regards the particularities inherent to the functions of preparation and information disclosure to the market.
In the Corporate Governance report, attached to this document, a detailed analysis is made of the PT Group’s corporate governance, in accordance with the established in CMVM’s Regulation no. 7/2001.
The creation of a Sustainability Committee aiming to ensure that the business sustainability is integrating and coherent with the Group’s strategy is under study.
At last, the creation of a Stakeholders’ Board through a redefinition of the scope and responsibilities of the Advisory Board is also under analysis.
STRUCTURE AND MANAGEMENTPT Group is now structured by business areas which correspond to 5 large core areas: Wireline Business in Portugal, Mobile Business in Portugal (TMN), Multimedia Business (PT Multimedia), International Business, which includes Vivo (the joint-venture with Telefónica Móviles for the mobile business in Brazil) and, finally, Instrumental Companies. The Business Units are coordinated by the holding of the Group, led by its Executive Committee, with the support of the Corporate Centre. The subsidiaries companies’ reporting is functional,
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not based on hierarchy and, therefore, effective articulation becomes possible.
Instrumental companies are oriented towards processes that are transversal to the PT Group: companies from the Group working for the Group.
PT, the holding of the PT Group, is responsible for the definition of policies and for the normalisation and harmonization of procedures, in order to ensure the implementation of the strategic guidelines defined by the management bodies.
Thus, every business area works in accordance with principles of management autonomy, guided by a common policy, under the coordination of a System of Corporate Planning and Control.
The Corporate Centre responsibilities aim to represent the functional needs of the PT Group and of its participated companies.
STATUTORY BODIESGENERAL MEETING
Composition and operating rules
The General Meeting is constituted by the shareholders with voting rights, the meeting occurs once a year or whenever required to the General Meeting Chairman by the Board of Directors, the Supervisory Board or by Shareholders representing at least 5% of the share capital.
At present, the board of PT’s General Meeting, elected on 4 April 2003 for a period of three years, has the following composition:
- Armando Marques Guedes (Chairman)
- Miguel Galvão Teles (Vice-President)
- Luís Sousa de Macedo (Secretary)
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Participation and exercise of the right to vote
Every shareholder with the right to vote, a vote corresponding to every Euro 500 of capital (e.g. to every 500 shares, at present) can participate in the General Meeting. The holders of American Depositary Shares (ADSs), each ADS representing a
common share, are entitled to the same rights as the holders of common shares. These rights shall be exercised through their respective representative.
Proposals to be submitted by the Board of Directors to the General Meeting as well as the reports that should legally accompany them and further preparatory information are made available to the shareholders in the company's registered offices at least 15 days prior to the meeting. Its contents are also disclosed in PT website.
In order to facilitate the access to those documents, especially to foreign shareholders, the Investor Relations Office, when requested, shall send such information by mail, fax or e-mail.
There are no restrictions whatsoever regarding the vote by correspondence, which may fall on all legally foreseen matters.
The result of the resolutions of the General Meeting is made public by the PT through its website, as well as through the Investor Relations Office.
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Main responsibilities of the General Meeting
The responsibilities of the General Meeting are established in the Articles of Association of Portugal Telecom.
Resolutions of the 2004 General Annual Meeting
The resolutions of the 2004 General Meeting are available at the Company’s website.
REMUNERATION COMMITTEE
The Shareholders General Meeting resolved to delegate on a Remuneration Committee the responsibility for the determination of the remuneration of the the members of the corporate bodies. The Remuneration Committee is composed by the following
members:
- Armando Marques Guedes
- Augusto Athayde D’Albergaria; e
- João Mello Franco
SUPERVISORY BOARD
Portugal Telecom has a Supervisory Board composed by the following elements:
- Pedro Matos Silva (Chairman)
- Gonçalo vaz Botelho (Member)
- Ascenção, Gomes, Cruz & Associado, represented by Mário Gomes
- José Vieira dos Reis (reserve Member)
Powers and Responsibilities
Proceed to the supervisory of the company, in the terms of the Portuguese Code of Commercial Companies.
Powers and Responsibilities
The Board of Directors is responsible for the global leadership of the PT Group and for its strategic guidelines, as well as for the management (through the Executive Committee) and the supervision functions, being also its responsibility to ensure the balance between mid and long-term goals and short term goals, in the pursuit of the interests of the company and of its shareholders.
The main responsibilities of the Board of Directors are established in PT Articles of Association.
2004 ANNUAL REPORT31
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PT's Board of Directors is comprised of an uneven number of members, between 15 and 23, elected by the shareholders in a general meeting by a majority of the issued votes, with a term of three years.
Any shareholder, regardless of the capital held, may individually submit proposals for election of the Board of Directors.
On the other hand, and in accordance with the articles of association, a minimum of shareholders representing at least 10% of the share capital, having voted against in the election of the Board of Directors, may appoint a member of the administration body.
The Board of Directors meetings are called by the Chairman, or in extraordinary cases, by two Directors or by the Supervisory Board. Board Members have equal voting rights and all resolutions of the Board of Directors are adopted based on a majority of votes. The Chairman is entitled to a casting vote, should parity occur.
The composition of the Board of Directors of PT is available at its website and the Directors’ CV’s are presented in the attached Corporate Governance Report.
Delimitation of responsibilities between the Board of Directors and the Executive Committee
In order to better ensure the performance of its functions, PT’s Board of Directors created an Executive Committee, delegating in it functions of daily management, and maintaining the supervision and control functions.
The Chief Executive Officer is the leader of the Group’s management team. Thus, the CEO is responsible for the operational management of the Group. On the other hand, the Chairman of the Board of Directors, in accordance with the law and the articles of association, has namely to:
- Coordinate the activity of the Board of Directors and distribute matters among Directors, whenever required by management conveniences;
- Watch over the correct implementation of the resolutions of the Board of Directors;
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- Watch over the correct exercise of the Board of Directors’ functions of surveillance and control of the Executive Committee’s activity.
Remuneration of the Directors
The Remuneration Committee is, by shareholders’ delegation, the Statutory Body responsible for the establishment of the remuneration policy of the Directors and for the definition of the remuneration of the Board of Directors. This Committee is
directly elected by shareholders, and is mostly composed by independent personalities. None of the Executive Directors are members of this committee, and they exercise no influence in the process of setting remuneration. The Remuneration Committee
may use external specialized consultants.
The variable remunerations attributed to the Chairman of the Board of Directors and to the members of the Executive Committee do not include any attribution plans of share acquisition options. The remaining non-executive Directors do not receive any variable remuneration.
The fixed and variable remunerations ascribed to PT’s Directors in 2004 are disclosed in the attached Corporate Governance Report.
EXECUTIVE COMMITTEEResponsibilities
Under the terms of the articles of association and in harmony with the established in commercial law, PT daily management belongs to an Executive Committee, comprised of 5 or 7 Directors. Members have equal voting rights and all resolutions of the Executive Committee require a majority of votes. The Chairman is entitled to a casting vote, should parity occur. The Executive Committee meets once a week.
Composition and operating rules
The Executive Committee sets the dates and frequency of its ordinary meetings. Extraordinary meetings can take place when called by the CEO, by two members of the Executive Committee or by the -Supervisory Board. The Executive Committee may not operate without the presence of the majority of its acting members, which can be ensured through vote by correspondence or by proxy.
To the CEO is due the coordination of the Executive Committee activities and distribute matters by other members, to call and chair
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the Executive Committee’s meetings and to assure the execution of the adopted resolutions.
The Executive Committee is comprised of the following directors:
| Chairman: | Miguel Horta and Costa | |
| Officers: | Zeinal Bava | |
| Carlos Vasconcellos Cruz | ||
Iriarte Esteves |
||
Paulo Fernandes |
2004 ANNUAL REPORT
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The following organization chart shows the allotment of responsibilities to the members of the Executive Committee:
CORPORATE BODIES SUPPORTING THE EXECUTIVE COMMITTEE
Advisory Board
The Advisory Board analyses, in conjunction with the Executive Committee, areas of special importance for PT, namely matters regarding regulation and competition, international investments, mergers, acquisitions and alienations. The Advisory Board
is chaired by Estanislau Mata Costa and further includes the following personalities; Manuel Pinto Barbosa, Diogo Lucena, Aníbal Santos, José Manuel Neves Adelino, José Manuel tribolet, João Confraria, Luís Todo
Bom and Luís Nazaré.
Disclosure Committee
In order to provide support to the Executive Committee in the process of disclosure of information to the markets, the Disclosure Committee has been constituted. This committee has the purpose of ensuring the quality and reliability of the
information disclosed to the financial markets and ensuring the fulfilment of all the national and international regulatory requirements relating to this matter. It is therefore the responsibility of this committee to approve and execute the
procedures and controls necessary to ensure that the disclosure of information by Portugal Telecom to the shareholders and investors (i) fulfils the applicable laws and regulations, (ii) is accurate, complete and timely and (iii) represents with
reliability the
financial condition and the results of the Group’s operations in all aspects that are materially relevant to the adequate knowledge of it’s financial condition and performance.
The disclosure procedures and controls referred above are fully described in the attached Corporate Governance Report.
| Name |
Functions | Members | Meetings frequency |
| Governance Committee | To study, revise and evaluate the corporate governance principles applicable to the PT Group, namely regarding the Directors’ responsibilities, the relations between Directors and Shareholders, relations with the Stakeholders and the general evaluation of the government terms of the Group in the performance of the Board of Directors and its Committees. To advise and propose to the Board of Directors the adoption and revision of the governance model of the holding of the Group, namely regarding internal rules and procedures related to corporate governance principles and practices, its articulation and relation with the management structure, the Shareholders, the other Stakeholders and the market, the prevention of conflicts of interest and the information discipline. To supervise and apply the Code of Ethics of the Pt Group, following its implementation and, when necessary or convenient, interpreting its rules and integrating the cases not provided for, as well as issuing opinions on the matters referred in the preceding and other similar matters, when demanded by the Board of Directors. |
Ernâni Rodrigues Lopes (Chairman); Miguel Horta e Costa; João Mello Franco; Henrique Granadeiro; Jorge Tomé; Jorge Bleck; Carlos Blanco de Moraes. |
Quarterly or whenever called by the Chairman |
| Audit Committee | To assist the Board of Directors and the Executive Committee in (1) supervising the quality and integrity of the financial information in the financial reporting documents, (2) evaluating the External Auditors’ independence and capability, (3) assessing the quality, integrity and efficiency of the internal control system, (4) evaluating the external auditors’ and the Internal Audit Department’s performance and (5) evaluating the compliance with legal provisions and regulations, as well as recommendations and guidelines issued by the relevant authorities. Ensuring the definition and/ or implementation of policies aiming at compliance with national and international laws and regulations to which PT is bound. | João Mello Franco (Chairman); Nuno Silvério Marques; Thomaz Paes de Vasconcellos. |
At least once every two months, and whenever necessary |
| Strategy Committee | To debate, analyse and present recommendations on the Group’s Strategic Plan. To deem the impact and efficiency of the Strategic Plan and the great strategic decisions made, suggesting possible adjustments. To study and prepare for further discussion at a meeting of the Board of Directors, issues suggested by the Chairman and/or the CEO, related with strategic topics that may arise during the year. Carlos Vasconcellos Cruz; | Ernâni Rodrigues Lopes (Chairman); Miguel Horta e Costa; Zeinal Bava; Iriarte Esteves; Paulo Fernandes; Joaquim Goes; Carlos Oliveira Cruz; Fernando Ulrich; António Viana Baptista; Luís Champalimaud; Patrick Monteiro de Barros. |
Quarterly |
SHAREHOLDERS
Shareholders Structure
The shareholders structure of PT is disclosed in the Capital Markets Chapter, as well as in the attached Corporate Governance Report.
Relationship With Shareholders
As established by commercial law, general meetings must be given a 30 days notice both in the official journal and in the daily press. The notice shall be posted in PT website. The contents of all proposals to be submitted by the administrative body
shall be made available to the shareholders at least 15 days before the meeting. They will also be made available in PT website.
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Class A shares, held in full by the Portuguese State, grant veto power in certain matters, which however is limited and essentially of a protective nature, as described in the attached Corporate Governance Report.
PT has a clear dividend policy which is explained in the articles of association in terms of a minimum percentage, and which is publicly announced in advance by the Board of Directors.
DIVIDENDS DISTRIBUTION POLICY AND SHARE BUYBACK PROGRAMME
Dividend distribution
The Board of Directors of PT has a dividends distribution policy that takes into consideration business opportunities of the PT Group, investors’ expectations and financing needs through equity, as well as the opportunity cost of capital.
Share Buyback Programme
It has been approved at the 2004 Annual General Meeting a share buyback programme, whose execution comprises the acquisition of own shares representing up to 10% of PT’s share capital. This program is presently in the stage of conclusion, its
structure preserving and respecting a neutrality principle, not only in what concerns any interference in the shareholding composition but also regarding price conditions impact and market operation rules.
Risk management is ensured by PT based on the identification and prior establishment of critical risks in terms of priorities, being developed after worth, risk management strategies and implemented controls as deemed adequate to reduce risk to an acceptable level.
Bearing in mind that the business risk's management is the responsibility of all personnel, PT has been developing methodologies aiming to create a risk-awareness culture, which establishes a common language to identify, define priorities, assess and control the critical business risks.
Main risk factors inherent to the business of the PT Group
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The main risk factors inherent to the business of the PT Group are described in detail in the attached Corporate Governance Report, among which:
- Regulation;
- Competition;
- Technological evolution;
- Strategic partnerships;
- Retaining talents;
- Financial markets.
Internal Control
Aiming to satisfy the regulation demands PT is subject to - both domestic and internationally - PT has developed an Internal Control project, coordinated by the Report and Consolidation Directorate, aiming essentially to guarantee the conformance
with objectives, policies and established procedures, guarantee the reliability of financial data, minimise fraud and ensure that the identified critical risks are controlled and reduced to an acceptable level.
The PT Group owns resources, namely a Directorate of corporate Internal Audit, which ensures the supervision of the execution of the defined control policies and procedures.
TRANSPARENCY
Ethics
The Code of Ethics is binding to all personnel, in order to guarantee a group of ethical conducts valid for all companies of the Group, its update and implementation being permanently checked by the Governance Committee. The complete text of the
Code of Ethics of the Group Portugal Telecom is available for consultation at the company's official website (www.telecom.pt) and can also be made available through the Investor Relations Office.
In 2004, the Board also approved the Code of Ethics for Financial Officers, highlighting the importance of specific ethic rules applicable to all employees that are, directly or indirectly, involved in the preparation, analysis and reporting of financial statements, press releases or any other information to disclose to the market related with any entities within the PT Group.
2004 ANNUAL REPORT39
Directors Independence
According to the independence criteria established by the CMVM, the Directors of PT can be generally considered to be independent, as analysed in greater detail in the attached Corporate Governance Report.
External Auditors
In order to safeguard independence of independent auditors, the Audit Committee, in accordance with its articles of association, is responsible for appointing and hiring independent auditors, terminating their functions and pre-approving any services to be contracted to external auditors. Moreover, the Audit Committee is responsible for the evaluation of external auditors’
independence and performance. The remunerations of the external auditors of the PT Group are disclosed in the attached Corporate Governance Report.
Investor Relations
The Investor Relations Office was created in March 1995, with the goal of ensuring adequate relations with shareholders, investors and analysts, as well as with financial markets in general, and in particular, with the Stock Exchanges where PT’s shares are listed and their respective supervising authorities (CMVM and SEC).
The activities performed by the investor relations are described in the preceding Capital Markets Chapter.
PT publishes annually the Report and Accounts, which includes detailed information about the company and is prepared according to the company’s and capital market applicable. Additionally, it is prepared a half-year Report an Accounts, containing synthetic information about the activity of the Group in the semester, and are prepared press-releases, disclosing to the market quarterly financial information.
The investor relations publish immediately information concerning relevant facts occurred in connection with its activity or securities which is made available to Shareholders through the website (www.telecom.pt). The shareholders may get the Reports and Accounts and Press-releases through PT website.
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2004 ANNUAL REPORT
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BUSINESS PERFORMANCE
Macro Economic Environment
International Economic Situation
The Global economy expanded significantly in 2004, underpinned by the strength of the US economy and the acceleration of the emerging market economies. Global GDP grew by 5% in real terms, up from 3.9% in 2003.
Global economic activity accelerated despite the strong increase in commodity prices, namely oil, which rose from USD 31 to USD 41.5 at the end of 2004, reflecting the climate of uncertainty in the Middle East. In the US, the evolution of energy prices and internal demand resulted in a moderate but sustained increase in inflation, which drove the Federal Reserve to raise the reference interest rate by 125bp to 2.25% . The European Central Bank, on the other hand, decided to maintain during 2004 the reference refinance rate unchanged at 2%, as the inflation pressures in Europe remained under control.
GDP in the US is estimated to have grown by 4.4% in real terms in 2004, up from 3% in 2003. In spite of the increase in interest rates, households and corporations continued to benefit from extremely favourable conditions for consumption and investment, with both consumer and corporate confidence rising throughout the year. The expansionary fiscal policy and the strength of the real estate market contributed to an acceleration of disposable income for households and to a growth of private consumption of nearly 4% in real terms. Corporate expenditure in equipment and software grew by around 14%, while the construction sector maintained a strong pace, benefiting from stable long term interest rates.
In the Euro Zone, GDP rose by 1.8% in real terms, after a 0.6% increase in 2003. Private consumption and corporate confidence levels remained weak, in part related to the delay in structural reforms and the continuation of restrictive public accounts policies. The appreciation of the Euro in relation to the dollar, of around 8%, hindered the evolution of net external demand. Nonetheless, with high liquidity levels, the Euro Zone registered an increase in credit to the private sector and for house purchases, which improved corporate and consumer confidence by the end of the year.
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43
GDP Evolution (in real terms)
Global Economy, US, China, Euro Zone and Japan
2002/2004
Economic Situation In Portugal
The Portuguese economy recovered in 2004, with GDP growing by 1.1% in real terms, after a decrease of 1.1% in 2003. The improving economy benefited further from Portugal hosting the Euro 2004 football championship and the Rock in Rio Lisbon event.
The positive evolution of the Portuguese economy throughout the year was underpinned by an improvement in internal demand, in particular of private consumption and investment. Household consumption increased by more than 2% (-0.3% in 2003), supported by a slight increase of disposable income and the higher consumption of durable goods. Investment expanded by 1.9%, compared to a decrease of 9.8% in 2003. Most investment components registered a positive development, with the exception of the construction sector. Net external demand contributed negatively to the GDP growth, with the 7.0% growth of imports outpacing the 6.5% growth of exports.
| 2000 | 2001 | 2002 | 2003 | 2004 | |
| GDP | 3.4 | 1.7 | 0.4 | -1.1 | 1.1 |
| Private Consumption | 2.9 | 1.2 | 1.1 | -0.3 | 2.2 |
| Public Consumption | 4.1 | 3.3 | 2.3 | 0.3 | 0.4 |
| Investment | 2.4 | 1.2 | -5.1 | -9.8 | 1.9 |
| Exports | 7.8 | 1.4 | 1.9 | 4.9 | 6.5 |
| Imports | 5.5 | 1.1 | -0.2 | -0.1 | 7.0 |
| Inflation (CPI) | 2.9 | 4.4 | 3.6 | 3.3 | 2.4 |
| Fiscal Deficit (% of GDP) | -2.9 | -4.4 | -2.7 | -2.8 | -2.9 |
| Public Debt (% of GDP) | 53.3 | 55.8 | 58.4 | 60.3 | 62.0 |
| Unemployment (% of Labor Force) | 4.0 | 4.1 | 5.1 | 6.3 | 6.5 |
| Current Balance (% of GDP) | -8.9 | -8.5 | -5.2 | -3.6 | -5.4 |
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Although GDP increased overall in 2004, there was a reversal of trend in the second half of the year, with confidence and labour market indicators reversing the positive trend. The unemployment rate began to rise again in the third quarter, with the year end level increasing from 6.3% in 2003 to 7.1% in 2004.
In spite of the pressure associated with the increase in energy prices, the consumer price index maintained a decelerating trend, with the average inflation rate decreasing from 3.3% in 2003 to 2.4% in 2004. This evolution was possible given the moderate increase in unit labour costs, the deceleration in the prices of non-energy industrial goods and the subdued increase of food prices.
In terms of fiscal policy, the recourse to extraordinary revenues equivalent to 2.2% of GDP allowed for a global fiscal deficit of 2.9% of GDP. The fiscal deficit adjusted to cyclical effects and to interest expense is estimated to have reduced by 1.2pp to 0.6% of GDP, reflecting a more restrictive fiscal policy in 2004.
Economic Situation In BrazilThe Brazilian economy expanded by 5.1% in 2004, which compares positively with a decrease of 0.2% in 2003. This is the highest GDP growth rate in a decade. The country benefited from strong demand for commodities in 2004, namely from countries like China, but also from an environment of low interest rates, high liquidity and low risk aversion, related to a weak dollar.
Most macroeconomic indicators ended the year with a positive performance, after a beginning of the year characterised by concerns over a possible inflection in monetary policy. Exports increased by 32%, a strong improvement from the 12% growth in 2003, while domestic consumption, which had decreased in 2003, also grew. Unemployment fell, reflecting the better macro-economic conditions.
Inflation in 2004 reached 7.6% (IPCA), as a result of high international prices for oil and other commodities. Notwithstanding, this marked an improvement against the 9.3% registered in 2003. To contain inflationary pressures, the Central Bank tightened monetary policy throughout the second half of 2004, increasing by 125bp the SELIC basic interest rate to 17.75% at year-end. The Brazilian Real
2004 ANNUAL REPORT45
performed well against the USD in 2004, appreciating by 8.1% and ending the year at 2.65. The improvement in the Brazilian Real reflects mainly the strength of the economy and the increase of real interest rates.
The Brazilian government also presented strong fiscal results in 2004. The consolidated primary budget surplus of the Public sector was the highest since 1994, when the Plano Real was implemented. As a percentage of GDP, the budget surplus was equivalent to 4.61% of GDP, higher than the 4.25% registered in 2003. The result guaranteed the fulfilment of internal and IMF fiscal targets and a reduction of net public debt as a percentage of GDP from 57.2% in 2003 to 51.8% of GDP. The balance also ended the year with a surplus of USD 33.7 billion, benefiting from the improvement in exports mentioned previously. In 2004, S&P and Fitch increased their rating for the Brazilian economy, reflecting the improving fundamentals of external accounts and of the solvency indices of public debt.
Evolution of USD/BRL and EUR/BRL
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Analysis Financial Condition and Results of Operations
In this section we present a detailed discussion and analysis of PT’s financial condition and business performance for the year 2004.
The following financial analysis should be read in conjunction with the consolidated financial statements and the Notes included elsewhere in this Report. The consolidated financial statements of Portugal Telecom are presented in Euros, and have been prepared in accordance with generally accepted accounting principles in Portugal (‘‘Portuguese GAAP’’).
During 2004, PT’s reportable segments were the following:
| Wireline | Retail - PT Comunicações e PT.com Wholesale - PT Comunicações Data and Corporate - PT Prime Other wireline operations - PT Comunicações e PT.com |
| Domestic Mobile | TMN |
| Brazilian Mobile | Vivo |
| PT Multimedia | Pay TV and Cable Internet - TV Cabo Portugal and PT Conteúdos Audiovisuals - Lusomundo Audiovisuais and Lusomundo Cinemas Media - Lusomundo Serviços and Lusomundo Media Other Multimedia Operations - PTM holding company |
2004 ANNUAL REPORT
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CONSOLIDATED RESULTS
| Euro million | 2004 | 2003 | y.o.y | |||
| Operating Revenues | 6,022.9 | 5,776.1 | 4.3% | |||
| Wireline | 2,123.8 | 2,138.1 | (0.7%) | |||
| Domestic Mobile (TMN) | 1,444.3 | 1,346.7 | 7.2% | |||
| Brazilian Mobile (Vivo) | 1,503.0 | 1,361.5 | 10.4% | |||
| Multimedia (PT Multimedia) | 729.0 | 683.5 | 6.7% | |||
| Other | 222.8 | 246.3 | (9.6%) | |||
| Operating Costs excluding D&A | 3,696.9 | 3,508.4 | 5.4% | |||
| Wages and Salaries | 746.2 | 705.9 | 5.7% | |||
| Post Retirement Benefits | 138.5 | 222.9 | (37.9%) | |||
| Costs of Telecommunications | 552.3 | 587.1 | (5.9%) | |||
| Subsidies | (15.1) | (20.6) | (26.7%) | |||
| Maintenance and Repairs | 119.6 | 126.5 | (5.5%) | |||
| Own Work Capitalised | (89.5) | (74.5) | 20.2% | |||
| Raw Materials and Consumables | 68.4 | 74.0 | (7.5%) | |||
| Costs of Products Sold | 594.7 | 550.2 | 8.1% | |||
| Telephone Directories | 86.9 | 90.4 | (3.9%) | |||
| Marketing and Publicity | 188.7 | 141.9 | 33.0% | |||
| General and Administrative Expenses | 1075.9 | 966.5 | 11.3% | |||
| Provision for Doubtful Receivables | 171.7 | 130.8 | 31.3% | |||
| Other Net Operating Income | (67.3) | (90.0) | (25.2%) | |||
| Taxes Other than Income Taxes | 126.0 | 97.1 | 29.7% | |||
| EBITDA | 2,325.9 | 2,267.7 | 2.6% | |||
| Depreciation and Amortisation | 957.3 | 954.0 | 0.4% | |||
| Operating Income | 1,368.6 | 1,313.7 | 4.2% | |||
| Other Expenses (Income) | 587.8 | 616.4 | (4.6%) | |||
| Net Interest Expenses | 202.9 | 201.8 | 0.5% | |||
| Net Foreign Currency Losses (Gains) | 32.7 | 41.9 | (21.9%) | |||
| Net Other Financial Expenses (Income) | 12.5 | (95.4) | n.m. | |||
| Goodwill Amortisation | 97.1 | 110.6 | (12.2%) | |||
| Losses (Gains) on Disp. of Fixed Assets | 12.0 | (28.6) | (142.0%) | |||
| Equity in Losses (Earnings) of Affiliates | (27.7) | 19.2 | n.m. | |||
| Work Force Reduction Programme Costs | 170.8 | 314.1 | (45.6%) | |||
| Non-recurring Items (Losses / (Gains)) | 87.4 | 52.8 | 65.6% | |||
| Income before Income Taxes | 780.8 | 697.3 | 12.0% | |||
| Provision for Income Taxes | (179.1) | (377.9) | (52.6%) | |||
| Income Applicable to Minority Interests | (101.6) | (79.2) | 28.2% | |||
| Consolidated Net Income | 500.1 | 240.2 | 108.2% | |||
| (1) Considering a Euro/Real average exchange rate of 3.6359 in 2004 and 3.4849 in 2003. | ||||||
48
Consolidated Operating Revenues
| Euro million | 2004 | 2003 | y.o.y | |||
| Wireline | 2,123.8 | 2,138.1 | (0.7%) | |||
| Domestic Mobile (TMN) | 1,444.3 | 1,346.7 | 7.2% | |||
| Brazilian Mobile (Vivo) (1) | 1,503.0 | 1,361.5 | 10.4% | |||
| Multimedia (PT Multimedia) | 729.0 | 683.5 | 6.7% | |||
| Pay-TV and Cable Internet | 494.6 | 432.2 | 14.4% | |||
| Other | 222.8 | 246.3 | (9.6%) | |||
| Total Operating Revenues | 6,022.9 | 5,776.1 | 4.3% | |||
| Domestic Retail Revenues | 1,837.8 | 1,801.9 | 2.0% | |||
| Wireline | 1,377.2 | 1,403.1 | (1.8%) | |||
| Pay-TV and Cable Internet | 460.6 | 398.8 | 15.5% | |||
| Avg. Revenue per Household (ARPH) | 42.0 | 41.1 | 2.0% | |||
| (1) Considering a Euro/Real average exchange rate of 3.6359 in 2004 and 3.4849 in 2003. | ||||||
Consolidated operating revenues increased by 4.3% y.o.y in 2004 to Euro 6,023 million, reflecting the higher contributions from Vivo, TMN and PT Multimedia. Assuming a flat Real/Euro exchange rate, operating revenues would have increased by 5.5% y.o.y in 2004 to Euro 6,093 million.
In 2004, the consolidation method of Mascom in Botswana was changed from full consolidation to equity accounting due to the divestment of this subsidiary, which was initiated in 2003 and completed in September 2004. The change in the consolidation method for Mascom had a negative impact of 1.1pp on the growth of consolidated operating revenues in 2004. In previous years, revenues from Mascom were booked under ‘‘Other Businesses’’.
Operating revenues from the domestic businesses rose by 3.1% y.o.y in 2004, underpinned by the strong performance of TMN and PT Multimedia.
In 2004, domestic retail revenues (wireline + pay-TV) increased by 2.0% y.o.y to Euro 1,838 million, with the average revenue per household (ARPH) increasing to Euro 42.0 per month from Euro 41.1 in 2003. The aggressive rollout of broadband services and video products are steadily changing the mix of the ARPH. In 2004, data and video revenues represented 9.9% and 20.6% of ARPH, respectively, as compared to 5.8% and 18.5% in 2003. Wireline net retail revenues (wireline retail revenues less corresponding telecommunications costs) increased by 3.6% y.o.y in 2004 to Euro 1,152 million, reflecting the successful rollout of ADSL and the new pricing plans.
2004 ANNUAL REPORT49
The contribution to consolidated operating revenues from the mobile businesses rose by 2.0pp y.o.y to 48.9% in 2004. Vivo represented 25.0% of consolidated operating revenues in 2004, an increase of 1.4pp over last year.
Consolidated Operating Revenues - Standalone Revenues by Segment
| Euro million | 2004 | 2003 | y.o.y | |||
| Wireline | 2,266.3 | 2,287.9 | (0.9%) | |||
| Domestic Mobile (TMN) | 1,588.3 | 1,522.6 | 4.3% | |||
| Brazilian Mobile (Vivo) (1) | 1,503.0 | 1,361.5 | 10.4% | |||
| Multimedia (PT Multimedia) | 729.8 | 684.3 | 6.6% | |||
| Pay-TV and Cable Internet | 495.6 | 432.8 | 14.5% | |||
| Other and Eliminations | (64.5) | (80.2) | (19.6%) | |||
| Total Operating Revenues | 6,022.9 | 5,776.1 | 4.3% | |||
| (1) | Considering a Euro/Real average exchange rate of 3.6359 in 2004 and 3.4849 in 2003. |
The difference in the growth rates of the standalone revenues and the contribution to consolidated revenues of the domestic mobile business is related to the decline in F2M interconnection fees during the year.
| EBITDA | ||||||||
| EBITDA by Business Segment | ||||||||
| Euro million | 2004 | 2003 | y.o.y | 2004 Margin | ||||
| Wireline | 902.4 | 907.3 | (0.5%) | 39.8 | ||||
| Domestic Mobile (TMN) | 746.7 | 689.9 | 8.2% | 47.0 | ||||
| Brazilian Mobile (Vivo) (1) | 496.3 | 508.7 | (2.4%) | 33.0 | ||||
| Multimedia (PT Multimedia) | 191.6 | 134.7 | 42.2% | 26.3 | ||||
| Pay-TV and Cable Internet | 182.8 | 128.2 | 42.6% | 36.9 | ||||
| Other | (11.1) | 27.2 | n.m. | n.m. | ||||
| Total EBITDA | 2,325.9 | 2,267.7 | 2.6% | 38.6 | ||||
| EBITDA Margin (%) | 38.6 | 39.3 | (0.6pp) | |||||
| (1) | Considering a Euro/Real average exchange rate of 3.6359 in 2004 and 3.4849 in 2003. |
EBITDA increased by 2.6% y.o.y in 2004 to Euro 2,326 million, despite the decrease of 0.6pp in EBITDA margin to 38.6% . In absolute terms, EBITDA growth in 2004 was equally driven by TMN and PT Multimedia. Margin performance improved across all of the domestic businesses, with margin pressure in Vivo being explained by robust customer growth and intensifying competition.
Based on a flat Real/Euro exchange rate, EBITDA would have increased by 3.6% y.o.y in 2004 to Euro 2,348 million. The change in the consolidation method for Mascom described above had a negative impact
50
of 1.2pp on the EBITDA growth in 2004. In previous years, the EBITDA from Mascom was booked under ‘‘Other Businesses’’.
In 2004, EBITDA of the domestic businesses increased by 6.3% y.o.y, supporting consolidated EBITDA growth in the period. A combination of the stabilisation of the wireline business and strong margin expansion in PT Multimedia and TMN supported this positive domestic performance.
The contribution to consolidated EBITDA from the mobile businesses rose by 0.6pp y.o.y to 53.4% in 2004. The contribution of TMN to consolidated EBITDA increased by 1.7pp y.o.y to 32.1% in 2004, while Vivo’s contribution decreased by 1.1pp y.o.y to 21.3% .
PT Multimedia’s contribution to consolidated EBITDA improved by 2.3pp y.o.y to 8.2% in 2004, on the back of the 42.6% y.o.y increase in the EBITDA of the Pay-TV and Cable Internet business, which achieved a 40% EBITDA margin in the fourth quarter of 2004.
| Consolidated Operating Costs | ||||||||||||
| Consolidated Operating Costs (1) | ||||||||||||
| Euro million | 2004 | 2003 | y.o.y | 2004 %Revenues | ||||||||
| Wages and Salaries | 746.2 | 705.9 | 5.7% | 12.4 | ||||||||
| Post Retirement Benefits | 138.5 | 222.9 | (37.9%) | 2.3 | ||||||||
| Telecommunication Costs | 552.3 | 587.1 | (5.9%) | 9.2 | ||||||||
| Costs of Products Sold | 594.7 | 550.2 | 8.1% | 9.9 | ||||||||
| Marketing and Publicity | 188.7 | 141.9 | 33.0% | 3.1 | ||||||||
| Provision for Doubtful Rec. | 171.7 | 130.8 | 31.3% | 2.9 | ||||||||
| General & Administrative Exp. | 1,075.9 | 966.5 | 11.3% | 17.9 | ||||||||
| Other Operating Costs | 228.9 | 203.0 | 12.8% | 3.8 | ||||||||
| Oper. Costs excluding D&A | 3,696.9 | 3,508.4 | 5.4% | 61.4 | ||||||||
| Depreciation & Amortisation | 957.3 | 954.0 | 0.4% | 15.9 | ||||||||
| Total Operating Costs | 4,654.3 | 4,462.4 | 4.3% | 77.3 | ||||||||
| (1) | Considering a Euro/Real average exchange rate of 3.6359 in 2004 and 3.4849 in 2003. |
Consolidated operating costs amounted to Euro 4,654 million in 2004, an increase of 4.3% y.o.y, in line with consolidated revenue growth.
Wages and salaries increased by 5.7% y.o.y in 2004 to Euro 746 million and represented 12.4% of operating revenues, compared to 12.2% in 2003. In the case of the wireline business, which accounted for 39.5% of consolidated wages and salaries, these costs fell by 6.2% y.o.y in 2004, benefiting from the staff reduction programme being executed. The contribution of Vivo to consolidated wages and salaries increased
2004 ANNUAL REPORT51
in 2004 by 23.8% y.o.y, primarily because TCO was only fully consolidated by Vivo as of May 2003.
In 2004, post retirement benefit costs (PRBs) decreased by 37.9% y.o.y to Euro 139 million and accounted for 2.3% of consolidated operating revenues. This decline was primarily due to a recent change in Portuguese law revising the method of
calculating the pension of an employee upon retirement, which generated a prior year service gain of Euro 67 million. Furthermore, the Portuguese State agreed to increase its contribution to healthcare costs, which also resulted in lower PRBs in
2004.
In 2004, telecommunications costs fell by 5.9% y.o.y to Euro 552 million, mainly as a result of lower traffic volumes in wireline and the decrease in fixed-to-mobile interconnection fees in Portugal. Telecommunications costs accounted for 9.2% of
consolidated operating revenues in 2004.
Costs of products sold increased by 8.1% y.o.y to Euro 595 million in 2004, primarily driven by the strong customer growth in Vivo and the gliding adjustment to IFRSs in terms of the accounting for SACs at TMN. SACs incurred during 2004 were no longer deferred, but expensed in the year, while those from previous years were still amortised in operating costs. This cost item represented 9.9% of consolidated operating revenues in 2004.
Marketing and publicity costs rose by 33.0% y.o.y in 2004 to Euro 189 million, mainly as a result of the increase in advertising spend and promotional activities in connection with the rollout of new products and services across all business units. The increase in this caption is also accounted for by the fact that TCO was only fully consolidated by Vivo as of May 2003. This cost item represented 3.1% of consolidated operating revenues in 2004.
Provisions for doubtful receivables, inventories and others increased by 31.3% y.o.y to Euro 172 million in 2004. The increase in this caption is primarily due to a higher level of provisioning in the wireline business, resulting mainly from one-off provisions to cover risks associated with cancellations of certain onerous contracts. Provisions accounted for 2.9% of consolidated operating revenues in 2004.
52
General and administrative expenses increased by 11.3% y.o.y in 2004 to Euro 1,076 million. In addition to the fact that TCO was only fully consolidated by Vivo as of May 2003, there was an increase in commercial costs, mainly in connection with commissions and call centres, resulting from the strong growth in broadband and pricing plans in the wireline business, and mobile customers in Brazil. General and administrative expenses accounted for 17.9% of consolidated operating revenues in 2004.
Depreciation and amortisation costs remained broadly flat in 2004 at Euro 957 million. Excluding the effect of a transfer to intangible assets of a portion of goodwill related to the value attributable to licenses held by Vivo’s subsidiaries described below, which had an impact in this caption of Euro 42 million, depreciation and amortisation would have decreased by 4,1% in 2004. Depreciation charges exceeded capex by Euro 174 million in 2004, resulting in a capex to depreciation ratio of 0.82 times in 2004. This cost item accounted for 15.9% of consolidated operating revenues in 2004.
Operating IncomeOperating income in 2004 rose by 4.2% y.o.y to Euro 1,369 million, with operating margin remaining flat at 22.7% .
Net IncomeNet income amounted to Euro 500 million in 2004, which represented an increase of 108.2% over the same period of last year. Excluding curtailment charges, net income would have increased by 38.5% y.o.y in 2004 to Euro 624 million.
Net interest expenses remained broadly flat in 2004 and amounted to Euro 203 million, which corresponds to an average cost of debt, including debt from Vivo in Brazil, of approximately 6.2% in 2004.
Net foreign currency losses decreased to Euro 33 million in 2004 from Euro 42 million in 2003, primarily because of the evolution of the Real exchange rate over the period.
Net other financial expenses amounted to Euro 13 million in 2004, which compares to a net other financial income of Euro 95 million in 2003. This caption includes various financial expenses including
2004 ANNUAL REPORT53
banking commissions and related taxes. In 2003, this caption included gains related to a reduction in the provision to cover estimated losses on certain equity swaps related to PT Multimedia and PT shares, as a result of the rise in the underlying share price as at 31 December 2003, and gains in certain derivative products. Net other financial expenses in 2004 also includes gains from the referred swaps on PT Multimedia shares.
Goodwill amortisation amounted to Euro 97 million in 2004, a decrease of 12.2% over last year. A portion of goodwill related to the value attributable to licences held by Vivo’s subsidiaries was transferred to intangible assets at the end of 2003. The amortisation of these licences, which in 2004 amounted to approximately Euro 33 million, is now included in ‘‘Depreciation and Amortisation’’. Excluding this effect, this caption would have increased 26.4% in 2004 mainly as result of a gliding adjustment to IFRSs consisting on the adoption of a linear method for the amortisation of goodwill, instead of a nonlinear method based on the revenues of Vivo used in prior years. In 2004, goodwill amortisation included mainly the amortisation of goodwill related to the investments in Vivo (Euro 39 million), PT Multimedia (Euro 10 million), PT.com (Euro 9 million), Lusomundo Media (Euro 8 million), PT Comunicações (Euro 7 million) and Lusomundo Audiovisuals (Euro 6 million).
Net losses on the disposal of fixed assets amounted to Euro 12 million, which compares to net gains of Euro 29 million in the previous year. In 2003, this caption included a one-off gain of Euro 35 million related with the sale of a building to the pension fund.
Equity accounting in earnings of affiliated companies amounted to Euro 28 million in 2004, which compares to a loss of Euro 19 million in 2003. In 2004, this caption included mainly PT’s share in the earnings of CTM (Macau), Unitel (Angola), Mascom (Botswana) and Páginas Amarelas totalling Euro 39 million, and in the losses of Médi Télécom (Morocco), TV Cabo Macau and Banco Best totalling Euro 10 million. The improvement in this caption of Euro 47 million is primarily explained by: (1) the reduction in the losses of Médi Télécom (from Euro 25 million to Euro 6 million) and Sport TV (from Euro 5 million to Euro 1 million); (2) the increase in the earnings of Unitel (from Euro 6 million to Euro 17 million); and (3) the change in the consolidation method of Mascom in 2004 from full consolidation to the equity method (earnings of Euro 8 million in 2004).
54
Workforce reduction programme costs amounted to Euro 171 million in 2004 (Euro 314 million in 2003) and were related primarily to the reduction of 651 employees in the wireline business. This curtailment cost item represents mainly the discounted value of salaries to be paid to pre-retired and suspended employees up to retirement age, thus representing an early recognition of future costs.
Net non-recurring costs amounted to Euro 87 million in 2004, which compares to Euro 53 million in 2003. In 2004, this caption included primarily a provision of Euro 40 million to cover any potential impairment of goodwill relating to the audiovisuals business, a provision of Euro 26 million in the Pay-TV business related to the dismantling of the analogue Premium channels offer and expenses of Euro 10 million incurred in the wireline business for the settlement of a litigation case with DECO (the Portuguese consumers association).
The provision for income taxes decreased to Euro 179 million in 2004 from Euro 378 million in 2003, mainly as a result of (1) the recognition in 2004 of a deferred tax asset of Euro 103 million in connection with tax losses carried forward at PT Multimedia, and (2) the Euro 142 million increase in this caption in 2003 resulting from an accounting adjustment in deferred taxes related to the decrease of the corporate tax rate in Portugal from 33% to 27.5% . In 2004, this caption includes a non-cash component in the amount of Euro 238 million that was recorded against a reduction of tax losses carried forward recorded in deferred tax assets in previous years.
2004 ANNUAL REPORT55
CAPEX
| Euro million | 2004 | 2003 | y.o.y | 2004 | ||||
| %Revenues | ||||||||
| Wireline | 206.4 | 165.3 | 24.9% | 9.1 | ||||
| Domestic Mobile (TMN) | 158.8 | 168.5 | (5.8%) | 10.0 | ||||
| Brazilian Mobile (Vivo) (1) | 264.5 | 164.6 | 60.7% | 17.6 | ||||
| Multimedia (PT Multimedia) | 80.5 | 57.4 | 40.2% | 11.0 | ||||
| Pay-TV and Cable Internet | 70.6 | 44.4 | 59.0% | 14.3 | ||||
| Other | 72.8 | 95.8 | (24.0%) | n.m. | ||||
| Total Capex | 783.0 | 651.6 | 20.2% | 13.0 | ||||
Total capex increased by 20.2% y.o.y in 2004 to Euro 783 million, as a result of the increase in wireline, Vivo and PT Multimedia capex. Total capex in 2004 was equivalent to 13.0% of consolidated operating revenues.
Wireline capex in 2004 increased by 24.9% y.o.y to Euro 206 million, equivalent to a capex to sales ratio of 9.1% . This increase is primarily related to the strong growth in broadband accesses.
TMN’s capex fell by 5.8% y.o.y to Euro 159 million in 2004, equivalent to 10.0% of operating revenues. Excluding the investment of Euro 33 million, in connection with the payment made in 2003 pursuant to an agreement between the three Portuguese mobile operators and OniWay, TMN’s capex in 2004 would have increased by 17.2% y.o.y. TMN spent almost a third of total capex in the UMTS rollout in 2004.
PT’s share of Vivo’s capex in 2004 amounted to Euro 265 million, an increase of 60.7% y.o.y and equivalent to 17.6% of operating revenues. This increase is primarily explained by the investment in capacity expansion, the progressive rollout of 1xRTT and the launch of EV-DO, as well as the fact that TCO was only fully consolidated by Vivo as of May 2003.
In 2004, PT Multimedia’s capex increased by 40.2% y.o.y to Euro 81 million, equivalent to 11.0% of operating revenues. Around a third of PT Multimedia’s capex was related to terminal equipment, including set-top boxes and cable modems.
Other capex decreased by 24.0% y.o.y to Euro 73 million in 2004 and was mainly related to the development of the shared services platform
56
and the rollout of Corporate SAP in order to improve efficiency in back-office processes. This caption also includes investments in IT and R&D, as well as capex related to fully consolidated businesses not included in the main segments.
2004 ANNUAL REPORT57
CASH FLOW
EBITDA minus Capex
| Euro million | 2004 | 2003 | y.o.y | 2004 | ||||
| %Revenues | ||||||||
| Wireline | 696.0 | 742.0 | (6.2%) | 30.7 | ||||
| Domestic Mobile (TMN) | 587.9 | 521.4 | 12.8% | 37.0 | ||||
| Brazilian Mobile (Vivo) (1) | 231.8 | 344.1 | (32.6%) | 15.4 | ||||
| Multimedia (PT Multimedia) | 111.1 | 77.2 | 43.8% | 15.2 | ||||
| Pay-TV and Cable Internet | 112.2 | 83.8 | 33.9% | 22.6 | ||||
| Other | (83.9) | (68.6) | n.m. | n.m. | ||||
| Total EBITDA minus Capex | 1,542.9 | 1,616.1 | (4.5%) | 25.6 | ||||
| (1) Considering a Euro/Real average exchange rate of 3.6359 in 2004 and 3.4849 in 2003. | ||||||||
EBITDA minus Capex totalled Euro 1,543 million in 2004, decreasing by 4.5% y.o.y, as a result of the decrease in wireline and Vivo, which offset the increase in TMN and PTM. The domestic businesses, on a combined basis, registered an improvement in EBITDA minus Capex of 4.1% y.o.y and accounted for approximately 90% of the total EBITDA minus Capex in 2004.
| Free Cash Flow | ||||||
| Euro million | 2004 | 2003 | y.o.y | |||
| EBITDA minus Capex | 1,542.9 | 1,616.1 | (4.5%) | |||
| Non-Cash Items included in EBITDA: | ||||||
| Post Retirement Benefit Costs | 138.5 | 222.9 | (37.9%) | |||
| Non-Cur. Prov., Tax Prov. & Other N.-Cash Items | 37.9 | 21.2 | n.m. | |||
| Change in Working Capital | 36.8 | 32.3 | 14.0% | |||
| Operating Cash Flow | 1,756.2 | 1,892.6 | (7.2%) | |||
| Acquisition of Financial Investments (1) | (322.8) | (343.0) | (5.9%) | |||
| Minorities from Rights Issues | 94.5 | 0.0 | n.m. | |||
| Interest Paid | (252.6) | (285.9) | (11.7%) | |||
| Payments Related to Post Retirement Benefits (2) | (298.6) | (225.1) | 32.7% | |||
| Income Taxes Paid by Certain Subsidiaries | (66.0) | (53.7) | 22.9% | |||
| Other Cash Movements | (34.8) | 229.5 | n.m. | |||
| Free Cash Flow | 876.0 | 1,214.4 | (27.9%) | |||
| (1) | In 2004, this caption included mainly the following payments: (1) Euro 16 million related to the acquisition of a further 17% stake in the share capital of Sport TV; (2) Euro 40 million related to an intercompany loan granted to Sport TV for the acquisition by this associated company of the Portuguese league football rights; (3) Euro 7 million for the acquisition of a 1.93% stake in the share capital of Media Capital; (4) Euro 10 million related with PT’s share in the acquisition by Vivo of a further 10.5% stake in the share capital of Sudestecel (an intermediate holding company that has a controlling position in Tele Sudeste Celular Participações); (5) Euro 13 million related to PT’s share in the payment by TCP of an additional instalment in connection with the acquisition of TCO made in 2003; (6) Euro 86 million related with PT’s share in the acquisition by Brasilcel of a further 4.2% in Tele Sudeste Celular Participações, 22.7% in Te
le Leste Celular Part
icipações and 15.5% in CRT Celular Participações; and (7) Euro 127 million related with PT’s share in the acquisition by TCP of a further 21.7% in TCO. |
| (2) | In 2004, this caption included (1) Euro 68 million related to additional contributions to the pension funds made during the period in connection with the work force reductions in 2003 |
58
| and 2004; (2) Euro 58 million related to normal contributions to the pension funds made during the period; (3) Euro 143 million related to payments of salaries to pre-retired and suspended employees; and (4) Euro 30 million related to payments to
PT-ACS in connection with healthcare services provided to retired, pre-retired and suspended employees. The 32.7% increase in this caption is due to the fact that in 2003 part of the total contributions to the pension funds were made through the
contribution in kind of a building in Lisbon (Euro 96 million). |
Operating cash flow decreased by 7.2% y.o.y in 2004 to Euro 1,756 million, mainly as a result of the decrease in EBITDA minus Capex, excluding PRBs and other non-cash items. Free cash flow amounted to Euro 876 million in 2004, a decrease of 27.9% y.o.y, primarily because (1) operating cash flow decreased by 7.2% as previously discussed; (2) in 2003 there was an inflow of Euro 201 million related to a reimbursement of income taxes; and (3) payments related to post retirement benefits increased by 32.7% in 2004. Excluding the inflow related to the reimbursement of income taxes in 2003, free cash flow in 2004 would have decreased by 13.5% y.o.y. In 2004, the acquisition of financial investments includes Euro 213 million related to the successful partial tender offers for Vivo subsidiaries, completed in the fourth quarter of 2004, in which Vivo increased the stake in its subsidiaries.
CONSOLIDATED BALANCE SHEET
Consolidated Balance Sheet
2004 ANNUAL REPORT59
| Euro million | 31 December 2004 | 31 December 2003 | ||
| Current Assets | 4,667.1 | 5,039.7 | ||
| Cash and Short Term Investments | 1,940.1 | 2,531.1 | ||
| Accounts Receivable, Net | 1,622.4 | 1,517.3 | ||
| Inventories, Net | 177.1 | 102.9 | ||
| Deferred Taxes Assets (Short Term) | 773.8 | 748.1 | ||
| Prepaid Expenses and Other Current Assets | 153.6 | 140.2 | ||
| Investments, net | 432.6 | 448.1 | ||
| Fixed Assets, net | 4,062.9 | 4,268.0 | ||
| Intangible Assets, net | 3,212.9 | 3,150.1 | ||
| Defered Tax Assets (Medium and Long Term) | 492.0 | 583.5 | ||
| Other | 96.1 | 68.5 | ||
| Total Assets | 12,963.4 | 13,557.8 | ||
| Current Liabilities | 3,783.1 | 3,354.5 | ||
| Short Term Debt | 1,396.8 | 1,191.1 | ||
| Accounts Payable | 1,399.6 | 1,225.9 | ||
| Accrued Expenses | 638.5 | 589.4 | ||
| Taxes Payable | 82.8 | 102.9 | ||
| Deferred Income | 237.5 | 212.4 | ||
| Deferred Taxes Liabilities (Short Term) | 27.9 | 32.8 | ||
| Medium and Long Term Debt | 3,666.2 | 4,555.6 | ||
| Accrued Post Retirement Liability | 1,269.9 | 1,256.0 | ||
| Deferred Tax Liabilities (Medium and Long Term) | 288.7 | 300.7 | ||
| Provisions for Other Risks and Charges | 460.9 | 361.4 | ||
| Other | 208.8 | 144.8 | ||
| Total Liabilities | 9,677.6 | 9,973.0 | ||
| Minority Interests | 581.0 | 644.0 | ||
| Total Shareholders' Equity | 2,704.8 | 2,940.8 | ||
| Total Liabilities, Minorities and Shareholders' Equity | 12,963.4 | 13,557.8 | ||
The gearing ratio [Net Debt / (Net Debt + Equity + Minority Interests)] as at 31 December 2004 increased to 48.7% from 47.3% at the end of 2003, while the equity plus long term debt to total assets ratio decreased to 49.1% from 55.3% over the same period. At the end of December 2004, the net debt to EBITDA ratio was 1.3 times and the EBITDA cover was 11.5 times.
The net exposure (assets minus liabilities) to Brazil amounted to approximately R$ 8,000 as at 31 December 2004 (Euro 2,206 million at the Real/Euro exchange rate prevailing as at 31 December 2004). The assets denominated in Brazilian Reais in the balance sheet as at 31 December 2004 amounted to Euro 4,164 million, equivalent to approximately 32.1% of total assets. Approximately 98% of the net exposure (assets minus liabilities) to Brazil is accounted for by the 50% stake in Vivo.
The accrued post retirement liability increased by Euro 14 million to Euro 1,270 million in 2004, primarily as a result of the difference between the Euro 299 million paid in connection with post retirement
60
benefits and the PRBs and curtailment costs of the period amounting to Euro 139 million and Euro 171 million, respectively.
Consolidated Net Debt
Change in Net Debt
| Euro million | 2004 | 2003 | y.o.y | |||
| Net Debt (Initial Balance) | 3,215.6 | 4,037.0 | (20.3%) | |||
| Free Cash Flow | 876.0 | 1,214.4 | (27.9%) | |||
| Gains on Certain Foreign Currency Derivatives | (20.9) | 54.9 | n.m. | |||
| Translation Effects of US Dollar and Real Denominated Debt | 0.3 | 1.6 | (81.5%) | |||
| Impact of TCO Consolidation | - | (52.9) | n.m. | |||
| Dividends Paid | (267.5) | (200.7) | 33.3% | |||
| Acquisitions of Treasury Shares (1) | (495.3) | (195.9) | 152.8% | |||
| Net Debt (Final Balance) | 3,123.0 | 3,215.6 | (2.9%) | |||
| Change in Net Debt | 92.6 | 821.4 | (88.7%) | |||
| Change in Net Debt (%) | (2.9%) | (20.3%) | 17.5pp | |||
Consolidated net debt as at 31 December 2004 amounted to 3,123 million, a decrease of Euro 93 million compared to year-end 2003, as a result of the Euro 876 million free cash flow generated in the period, which was used for the payment of dividends (Euro 267 million) and the acquisition of treasury shares (Euro 495 million). As part of the 10% share buyback programme announced in September 2003, PT had entered into equity swap contracts on PT shares that at the end of 2004 had a notional value of Euro 190 million, equivalent to 1.72% of share capital prior to cancellation of the 7% treasury shares held by PT.
2004 ANNUAL REPORT61
| Euro million | 31 December 2004 | 31 December 2003 | y.o.y | y.o.y | ||||
| Short Term | 1,396.8 | 1,191.1 | 205.8 | 17.3% | ||||
| Bank Loans | 473.9 | 293.8 | 180.1 | 61.3% | ||||
| Convertible Bonds | 0.0 | 450.5 | (450.5) | (100.0%) | ||||
| Other Bond Loans | 585.0 | 124.7 | 460.3 | 369.1% | ||||
| Other Loans | 338.0 | 322.1 | 15.9 | 4.9% | ||||
| Medium and long term | 3,666.2 | 4,555.6 | (889.4) | (19.5%) | ||||
| Convertible Bond | 390.3 | 440.3 | (50.0) | (11.4%) | ||||
| Other Bond Loans | 1,848.2 | 2,669.1 | (821.0) | (30.8%) | ||||
| Bank Loans | 1,337.0 | 1,363.6 | (26.6) | (1.9%) | ||||
| Other Loans | 90.7 | 82.5 | 8.1 | 9.9% | ||||
| Total Indebtedness | 5,063.1 | 5,746.7 | (683.6) | (11.9%) | ||||
| Cash and Short Term-Investments | 1,940.1 | 2,531.1 | (591.0) | (23.3%) | ||||
| Net Debt | 3,123.0 | 3,215.6 | (92.6) | (2.9%) | ||||
| Equity Swap Contracts on PT shares | 189.5 | 197.5 | (7.9) | (4.0%) | ||||
| Shareholders Loans to TCP | 88.1 | 582.3 | (494.2) | (84.9%) | ||||
As at 31 December 2004, 72.4% of total indebtedness was medium and long term, while 55.2% of total indebtedness was at fixed rates. As at 31 December 2004, 84.6% of total debt was denominated in Euros, 2.3% in US Dollars and 13.0% in Brazilian Reais. The average maturity of the loan portfolio is currently 3.5 years. At the end of the year, the only loans with rating triggers (if PT is downgraded to BBB+) were two EIB loans totalling Euro 150 million. In December 2004, PT established with EIB a further Euro 150 million stand-by facility, with the same rating triggers as the previous two. In addition, PT has fully underwritten and available commercial paper lines amounting to Euro 875 million, of which Euro 313 million had been drawn down as at 31 December 2004. PT also has stand-by facilities amounting to Euro 900 million, of which Euro 575 million had been drawn down as at 31 December 2004. Most of Vivo’s net debt (50% consolidated by PT, amounting to Euro 372 million), is either Real denominated or has been swapped into Reais.
PT’s average cost of debt in 2004 was 6.2%, including loans obtained in Brazil and denominated in Reais. Excluding Brazilian debt, the average cost of debt in 2004 was 4.7% .
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| Maturity | Net Debt | Notes | ||
| 2005 | (543.3) | Net cash position, which includes a Euro 585 million Eurobond issued in Nov. 2001 | ||
| 2006 | 1,524.5 | Includes a Euro 390 million Exchangeable Bond issued in Dec. 2001 | ||
| and a Euro 900 million Eurobond issued in Feb. 2001 | ||||
| 2007 | 458.4 | |||
| 2008 | 507.1 | |||
| 2009 | 959.0 | Includes a Euro 880 million Eurobond issued in Apr. 1999 | ||
| 2010 | 77.8 | |||
| 2011 | 66.5 | |||
| 2012 | 46.0 | |||
| 2013 | 25.9 | |||
| 2014 | 0.8 | |||
| Total | 3,123.0 | |||
Shareholders’ Equity
As at 31 December 2004, shareholders' equity amounted to Euro 2,705 million, a decrease of Euro 236 million from the end of last year, as a result mainly of: (1) the dividends paid in 2004 amounting to Euro 267 million; (2) the acquisition of treasury stock amounting to Euro 481 million, in line with the announced share buyback programme; (3) the distribution of PT shares to employees amounting to Euro 6 million; (4) the net income generated during the year of Euro 500 million; and (5) the effect of positive translation adjustments of Euro 21 million, mainly due to the appreciation of the Brazilian Real exchange rate against the Euro (Euro/R$ 3.6646 at year-end 2003 compared to Euro/R$ 3.6147 at the end of December 2004).
Further to the 10% share buyback programme announced in 2003, as at 31 December 2004, PT had repurchased 8.72% of its share capital, 7.0% through treasury stock and 1.72% through equity swap contracts on PT shares. On 28 December 2004, the 7.0% treasury stock was cancelled and, as a result, PT’s share capital was reduced from Euro 1,254 million to Euro 1,166 million.
As at 3 March 2005, PT had equity swap contracts under the terms of which it has the option to buy 37,628,550 PT shares, equivalent to 3.0% of share capital prior to the cancellation of the 7.0% treasury shares on 28 December 2004.
Pursuant to Portuguese legislation, the amount of distributable reserves is determined according to the standalone financial statements of the company prepared in accordance with Portuguese GAAP.
2004 ANNUAL REPORT
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As at 31 December 2004, distributable reserves of PT amounted to Euro 851 million. The level of distributable reserves is impacted by the amount of (1) treasury stock owned; (2) net income generated; and (3) dividends paid out. Additionally, distributable reserves may be negatively impacted by a depreciation of the Real/Euro exchange rate. Taking into account the level of PT’s exposure to Brazil as at 31 December 2004, such a depreciation would only have a negative impact on distributable reserves if the Real/Euro exchange rate were to depreciate beyond 4.2.
Post Retirement BenefitsAs at 31 December 2004, the projected benefit obligations (PBO) of PT’s post retirement benefits including pensions, healthcare obligations and salaries to pre-retired employees amounted to Euro 4,294 million (Euro 2,606 million for pensions, Euro 702 million for healthcare benefits, and Euro 986 million for salaries to pre-retired employees). The PBO was computed based on a discount rate of 5.75% for pensions and healthcare obligations and 4% for the obligations related to the payment of salaries to pre-retired employees. The PBO increased by Euro 247 million over the end of last year mainly as a result of the increase of Euro 164 million resulting from the workforce reduction programme covering 651 employees and the increase resulting from the change in actuarial assumptions (discount rate and mortality tables). PT’s post-retirement benefits (pension and healthcare plans), which have been closed to new participants, cover approximately 34,500 employees, with 32% of the employees still in service.
According to the rules of the ISP (‘‘Instituto de Seguros de Portugal’’, the Portuguese insurance regulator), the pension plans for retired staff have to be fully funded, which is the case for PT’s pension funds. Regarding funding of the pension funds for pre-retired staff and staff still in service, this can be completed until retirement age. The estimated average working life of staff still in service is 14 years. New funding of the pension funds is capped at 25% of the salaries of the employees included in the pension funds, because of tax reasons. In 2004, PT contributed also the maximum allowed, under those tax limits.
In Portugal there is no legislation covering the establishment of funds to cover post retirement healthcare benefits (Euro 702 million) and salaries to pre-retired employees (Euro 986 million). PT only has
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to pay for these benefits when the healthcare services are actually rendered to employees and a corresponding claim is charged to PT, and when salaries are paid by PT to pre-retired employees. Accordingly, there is no need to fund these benefits together at present. However, PT is analysing tax efficient alternatives that will allow the funding of certain of these obligations.
At 31 December 2004, the market value of the pension funds amounted to Euro 1,973 million, an increase of Euro 145 million from the end of 2003, that resulted primarily from the strong performance of the pension funds (actual return of 8.1% in 2004) through a diversified portfolio, including 35% in equities. At 31 December 2004, the unfunded gap on PT’s post retirement benefits amounted to Euro 2,321 million.
Restructuring of the pension funds management is complete, with new management guidelines already approved by PT’s Board of Directors and Executive Committee. The new custodian banks and asset managers by class have been also approved. The asset allocation as at 31 December 2004, was 35% equity, 34% bonds, 16% real estate and 15% cash and others. The effective year-to-date performance of the pension funds until the end of February 2005 was 1.3% . At 31 December 2004, the deferred costs related to post retirement benefits amounted to Euro 1,051 million and accordingly the net balance of unfunded liabilities and deferred costs was Euro 1,270 million, as reflected in PT’s balance sheet in the caption Accrued Post Retirement Liability and in accordance with the requirements of International Accounting Standard No. 19.
The deferred costs related to post-retirement benefits correspond to: (1) Euro 65 million related to the Initial Transition Obligation (obligation on the initial date for recognition of post retirement liabilities which was 1 January 1993), that is being amortised over an 18-year period corresponding to the expected working life of employees on that date; and (2) Euro 993 million related to actuarial losses and gains, which correspond to differences between the assumptions considered in the actuarial studies and the actual results related to those benefits (including differences in the return of pension fund assets, salary increases and healthcare costs), that is being amortised over a 14 year period corresponding to the average working life of employees.
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The interest cost associated with the full amount of the PBO has been charged to PT’s income statement under the caption Post Retirement Benefits, which is booked above the EBITDA line. In 2004, the interest cost of the plans amounted to Euro 213 million. The expected return on the pension funds assets, calculated based on a 6% rate of return assumption, was estimated at Euro 111 million and recorded as a deduction to the above mentioned interest cost. The service cost for staff in service and covered by the plans in 2004 amounted to Euro 24 million. The amortisation and deferral of actuarial losses amounted to Euro 80 million in 2004. Additionally, in 2004 there was a gain of Euro 67 million related to the change in the calculation of the pension benefit to 90% of the employee’s last year of salary, that was recorded in the income statement as a reduction to the 2004 PRBs. Thus the net periodic post retirement costs for 2004, which includes the interest cost of unfunded liabilities and the amortisation of deferred costs, was Euro 139 million. PT’s cash outflow in 2004 associated with post retirement benefits amounted to Euro 299 million, of which (1) Euro 126 million related to contributions to the pension funds; (2) Euro 30 million related to healthcare services rendered to pensioners and pre-retired employees; and (3) Euro 143 million related to salaries paid to pre-retired employees.
For the purposes of calculating the debt ratios, if the unfunded liability is treated as debt-like in nature, the EBITDA amount used to calculate those ratios needs to be adjusted accordingly. If the post retirement liabilities were fully funded, that would mean that the expected return on fund assets would equal the interest cost of the plans’ PBO and, as a result, the net periodic pension cost would have decreased and the EBITDA would have increased by the same amount. In the case of PT, the impact of funding the pension funds would be an increase in EBITDA of Euro 102 million.
Operating ReviewWireline Business
At 31 December 2004, PT owned 100% of the companies included in the wireline segment.
The turnaround of the wireline division during 2004 was underpinned by several key initiatives that focused on customer retention and the
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creation of new revenues opportunities. At the centre of this strategy lies broadband. The aggressive rollout of ADSL was a key initiative that led not only improved customer retention, but more importantly, to the creation of new revenues streams that cushioned the pressure felt in terms of traditional voice services.
The tremendous focus placed on broadband at group level meant that Portugal was one of the fastest growing broadband markets in Europe in 2004. Throughout the year new broadband products and offers were launched, resulting in an extensive and innovative product offering by PT. The launch of one of the first broadband prepaid offers in Europe was vital to drive growth and penetrate new market segments. The revamping of the ADSL product brand - Sapo ADSL - was also a major achievement, clearly contributing to the significant growth experienced in broadband.
Bearing in mind the importance of broadband for the development of the information society, and with PT’s objective of expanding the domestic broadband addressable market, several projects were undertaken aimed at increasing PC penetration in Portugal. The ‘‘PC for ALL’’ product, which bundled affordable quality PCs with consumer finance, was of major importance to introduce a new vitality in the domestic retail market for PCs. The project developed with the Ministry of Education, whereby PT provides broadband access to the vast majority of schools in Portugal, should also be key to develop info-literacy in the country.
The launch of three new pricing plan families, based on the concepts of simplicity, freedom and discount, was an important step towards improving price perception of wireline services in Portugal. The simplicity pricing plan, which essentially charges a single price for all fixed-to-fixed calls, had a meaningful take-up among consumers. Equally successful was the weekend flat rate offer, which drew on the experience gained with PT’s campaign that offered thirteen Spring Sundays of free fixed-to-fixed traffic. The combination of the weekend flat rate and the off-peak weekday bucket plans proved to be an important means of improving the value perception of the wireline product.
The sale of new trendy cordless phones, with ‘‘mobile handset’’ functionalities, is an important initiative to improve usage and customer retention, while the bundling of home security solutions is
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creating additional value and stickiness around the ownership of a traditional copper line.
As a result of the strong growth in ADSL and the slowdown in traditional line loss, total main lines increased by 144 thousand to 4,368 thousand, representing an increase of 3.4% over the previous year. Net disconnections of PSTN/ISDN lines amounted to 88 thousand in 2004, which compares favourably with 106 thousand in 2003. In terms of ADSL, wholesale connections rose to 420 thousand in 2004, up from 188 at the end of 2003. Retail ADSL posted even fasted growth, with the 219 thousand net additions bringing the total customer base to 380 thousand at the end of 2004.
Growth was extremely robust in terms of pricing plans, which at the end of 2004 totalled 947 thousand, increasing two and a half fold from the 382 thousand at the end of the previous year. Penetration of pricing plans at the end of 2004 stood at 24.0% of total PSTN/ISDN lines and 36.4% of residential lines.
In terms of the corporate and data business, the focus was also on customer retention and on improvement of the quality of the offering. In 2004, PT improved the internal CRM platforms and readjusted the portfolio of products and services in order to further focus its activity in the evolution of costumers needs. For instance, the offers have been adjusting as the corporate market continued in 2004 to increase the interest for high bandwidth trustful solutions. The increasing competition in the corporate segment has spurred the continual introduction of new services and solutions. Corporate bundles offering fixed, mobile, data and outsourcing services are provided both to large corporate customers and to SMEs. In this SMEs segment, PT developed pre-packaged offers that combine simplicity, flexibility and scalability and an interesting value for money proposal.
In May 2004, the relevant regulatory authorities approved the fixed telephony service prices proposed by PT for 2004. These prices were set within the rules of the pricing convention, complying with an annual price cap of CPI minus 2.75%, which assumed an inflation range of 1.5% to 2.5% as per the Portuguese State Budget for 2004. The new prices were implemented on 1 August 2004 and resulted in a 2.9% increase in line rental and a decrease of 20.7% and 28.0% in the price of regional and domestic long distance calls respectively.
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Fixed-to-fixed interconnection fees maintained their negative trend, falling by 12.2% for call termination and by 14.1% for call origination. Fixed-to-fixed interconnection fees are aligned with the European average. As for fixed-to-mobile, the interconnection price was cut by 10% on 1 July 2004 to Euro 0.185 (in TMN and Vodafone).
Total traffic decreased by 9.7% in 2004, as a result of a decrease of 8.8% in retail traffic and of 10.5% in wholesale traffic. The evolution of wholesale traffic was strongly influenced by the 37.3% decline in dial-up Internet traffic, as a result of the aggressive rollout of broadband, while retail traffic continued to be affected by fixed-to-mobile substitution and rising competition from alternative operators.
In spite of some pressure in terms of voice ARPU, which fell by 1.1% in 2004, total ARPU increased by 2.2% . This positive performance was underpinned by the strong expansion of data ARPU that increased by 44.1% in 2004 and already represented 10.1% of total ARPU in 2004. ADSL ARPU totalled Euro 32.4 in 2004, which compares with Euro 35.4 in the previous year. This normal dilution in ADSL ARPU is explained mainly by the take-up of lower segment products, such as prepaid, which has nonetheless been partly mitigated by the continued growth of sales to the SOHO market.
Total operating revenues of wireline decreased by 0.9% in 2004 to Euro 2,266 million, as shown in the table below.
Wireline Operating Revenues (1)2004 ANNUAL REPORT
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| Euro million | 2004 | 2003 | y.o.y | |||
| Retail | 1,383.8 | 1,410.2 | (1.9%) | |||
| Fixed Charges | 670.3 | 647.5 | 3.5% | |||
| Traffic | 590.9 | 682.8 | (13.5%) | |||
| Domestic | 514.7 | 593.0 | (13.2%) | |||
| International | 76.3 | 89.8 | (15.1%) | |||
| ADSL Retail | 99.9 | 39.5 | 152.9% | |||
| ISP and Other | 22.7 | 40.4 | (43.8%) | |||
| Wholesale | 442.0 | 444.8 | (0.6%) | |||
| Traffic | 247.9 | 238.7 | 3.9% | |||
| Leased Lines | 153.5 | 163.6 | (6.2%) | |||
| Other | 40.5 | 42.5 | (4.7%) | |||
| Data & Corporate | 242.0 | 235.9 | 2.6% | |||
| Data Communications | 102.3 | 92.6 | 10.5% | |||
| Leased Lines | 48.7 | 55.1 | (11.8%) | |||
| Network Manag. & Outsourcing | 20.1 | 27.2 | (26.1%) | |||
| Other | 71.0 | 60.9 | 16.4% | |||
| Other Wireline Revenues | 198.5 | 196.9 | 0.8% | |||
| Other Fixed Line Telephone Services | 25.4 | 17.3 | 46.3% | |||
| Sales of Telecom. Equipment | 37.6 | 37.0 | 1.7% | |||
| Telephone Directories | 129.7 | 136.1 | (4.7%) | |||
| Portals | 5.8 | 6.5 | (10.7%) | |||
| Total Operating Revenues | 2,266.3 | 2,287.9 | (0.9%) | |||
| (1) | Includes intragroup transactions. |
In terms of retail revenues, fixed charges increased by 3.5% in 2004 to Euro 670 million, on the back of a higher contribution from pricing plans, that accounted for 6.0% of fixed charges, and the increase in line rental in accordance with the price cap mechanism, that offset the line loss. In contrast, traffic revenues fell by 13.5% in 2004, as a result of declining traffic volumes, the implementation of the price cap, and the reduction of fixed-to-mobile prices. Retail ADSL revenues amounted to Euro 100 million in 2004, an increase of two and half times compared to the previous year, while ISP dial-up revenues fell to Euro 23 million as a result of the aggressive rollout of broadband. Overall, retail revenues decreased by 1.9% in 2004 to Euro 1,384 million.
The decline in traffic revenues is in part explained by the reduction of interconnection rates, namely fixed-to-mobile. However, fixed-to-mobile rate cuts also result in lower telecom costs, as the interconnection costs paid to mobile operators is reduced. As a result of this pass-through effect, net retail revenues, calculated as retail revenues less corresponding telecom costs, increased by 3.6% in 2004 to Euro 1,152 million.
Wholesale revenues decreased by 0.6% in 2004 to Euro 442 million, mainly as a result of the decrease in leased lines, partly compensated
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by the increase in traffic revenues in 2004. This increase is primarily related to the change in the accounting for transit traffic from net to gross, which had a positive impact of approximately Euro 23 million in 2004.
Data and corporate revenues increased by 2.6% in 2004 to Euro 242 million, mainly as a result of the increase of 10.5% in data communications to Euro 102 million. For this effect, it was essential the launch of new services for the Internet access, with bandwidth up to 155 Mbps, that meet the needs of the corporate segment. Data communications also benefited in 2004 from the hosting of the Euro 2004, as PT was responsible for projecting, installing and managing the communications and information services of the tournament. The increase in data communications was partly offset by the decrease in leased lines and network management and outsourcing revenues, as a result essentially of the increase in the competitive environment namely on prices.
EBITDA remained broadly flat in 2004, amounting Euro 902 million. The EBITDA margin registered a slight increase to 39.8%, benefiting from the ongoing cost rationalisation programme, the reduction in post retirement benefit costs and the decline in telecom costs (due to lower traffic volumes and interconnection rate cuts), that more than offset the increase in provisions in 2004.
Capex amounted to Euro 206 million in 2004, an increase of 24.9% y.o.y, primarily as a result of the aggressive rollout of broadband. Capex in the period was equivalent to 9.1% of operating revenues. Quality of service in 2004 was maintained with a call completion rate of 99.8% and 9.7 faults per 100 access lines.
EBITDA minus Capex in 2004 amounted to Euro 696 million, a decrease of 6.2% over the same period of last year and equivalent to 30.7% of operating revenues.
Wireline Income Statement (1)2004 ANNUAL REPORT
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| Euro million | 2004 | 2003 | y.o.y | |||
| Operating Revenues | 2,266.3 | 2,287.9 | (0.9%) | |||
| Services Rendered | 2,099.0 | 2,114.8 | (0.7%) | |||
| Telephone Directories | 129.7 | 136.1 | (4.7%) | |||
| Sales and Other | 37.6 | 37.0 | 1.7% | |||
| Operating Costs excluding D&A | 1,363.9 | 1,380.6 | (1.2%) | |||
| Wages and Salaries | 295.0 | 314.6 | (6.2%) | |||
| Post Retirement Benefits | 137.7 | 219.9 | (37.4%) | |||
| Costs of Telecommunications | 383.8 | 428.9 | (10.5%) | |||
| Own Work Capitalised | (28.0) | (36.1) | (22.5%) | |||
| Marketing and Publicity | 44.6 | 26.6 | 67.5% | |||
| General & Administrative | 270.1 | 211.7 | 27.6% | |||
| Provision for Doubtful Receivables | 69.3 | 22.3 | 211.3% | |||
| Other Net Operating Costs | 191.4 | 192.7 | (0.7%) | |||
| EBITDA | 902.4 | 907.3 | (0.5%) | |||
| Depreciation and Amortisation | 381.2 | 404.3 | (5.7%) | |||
| Operating Income | 521.2 | 502.9 | 3.6% | |||
| EBITDA Margin | 39.8% | 39.7% | 0.2pp | |||
| Capex | 206.4 | 165.3 | 24.9% | |||
| Capex as % of Revenues | 9.1% | 7.2% | 1.9pp | |||
| EBITDA minus Capex | 696.0 | 742.0 | (6.2%) | |||
| (1) | Includes intragroup transactions. |
At 31 December 2004, PT owned 100% of the domestic mobile business (TMN).
The domestic mobile business - TMN - reported a solid performance in 2004, consolidating its leading position, with around half of active customers in the market, and strongly increasing cash flow generation. Total subscribers at the end of the year topped the five million mark.
As the potential for customer growth becomes more limited, given the high level of mobile penetration, the focus shifts towards customer retention and segmentation in order to increase the value of the existing customer base. In order to achieve these objectives, TMN seeks to continually adjust its offer to meet customer needs, while at the same time attempting to improve the value derived from each customer. In 2004, TMN tackled this challenge in two ways. Firstly, by attempting to increase the mobility premium in the market (among the lowest in Europe), by increasing prices; and secondly, by striving to raise the percentage of revenues derived from data services. The aim to increase the customer bill is all the more important when set against a backdrop of falling fixed-to-mobile interconnection rates.
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In 2004, all three operators in the market launched 3G services, with TMN being the first operator to offer a service of videocalls. The 3G handsets available to customers are dual-mode, functioning both on UMTS and GSM/GPRS, and thus allowing customers to use all the voice, multimedia and data services already offered by TMN. UMTS coverage now extends to the largest cities in Portugal and is in the process of being expanded to cover the entire country.
The Euro 2004 Football Championship held in June provided an excellent opportunity to explore the potential of 3G from a marketing and service application point of view. Leveraging on the exclusive content for Portugal obtained from sponsoring the event, TMN used its multimedia portal - i9 - to launch a large numbers of services around the event, such as video downloads of goals, tourists helpdesk, among others. The event also had an important contribution in terms of roaming revenues in the second quarter of the year.
With the objective of improving customer retention and segmentation, TMN redesigned its entire offer of prepaid pricing plans. In what was known as the ‘‘TMN puts everything in black and white’’ campaign, the customers had the possibility of choosing the pricing plan that was most appropriate for their needs by launching a special advisory service for the effect. The take-up of the new pricing plans was very encouraging.
Another example of the drive to meet new customer needs was the launch of the ‘‘Serie K’’ sub-brand that targets the 10 to 15 year old segment. The results of this initiative have been very positive, with TMN improving its market share in the youth segment during 2004.
In terms of data services, TMN increased the price of SMS by 30% in July 2004 and simultaneously launched a campaign of large SMS bucket plans for heavy users. In effect, this allowed for an increase in the average yield per SMS, which, combined with higher overall usage, resulted in an increase of data revenues to 10% of service revenues.
ARPU decreased by 3.4% in 2004 to Euro 24.4, mainly as a result of the reduction in interconnection fees, the traffic promotions launched aimed at stimulating usage, and the rising weight of on-net traffic. Customer bill remained broadly flat at Euro 18.3 in 2004, with the increase in the yield per minute being offset by the rising weight of on-net calls. Interconnection bill fell by 10.5% in 2004 as a result
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of the several cuts in fixed-to-mobile interconnection fees over the past quarters. On 1 July 2004, fixed-to-mobile interconnection rates were cut by 10% to Euro 0.185. Minutes of usage (MOU) decreased by 1.7% in 2004 to 121 minutes, primarily as a result of the rising weight of double SIM card penetration and a subdued economic environment.
Operating revenues of TMN in 2004 reached Euro 1,588 million, an increase of 4.3%, primarily reflecting the growth of the customer base. Service revenues increased by 4.1% to Euro 1,440 million, underpinned by the 6.9% increase in billing revenues that more than offset the reduction in interconnection revenues due to the fall in the interconnection rates. Revenues from handset sales increased by 6.9% to Euro 148 million in 2004.
The focus on continually improving operating efficiency and contain subscriber acquisition and retention costs allowed for an expansion of the EBITDA margin in 2004 to 47.0% . As a result, EBITDA increased by 8.2% to Euro 747 million.
Capex in 2004 decreased by 5.8% y.o.y to Euro 159 million, equivalent to 10.0% of operating revenues. Capex was mainly directed towards the expansion of network capacity and coverage, improvements in quality of service and customer care, and UMTS investments (approximately a third of TMN’s capex).
As a result of the strong expansion of EBITDA and the reduction in capex, the cash flow generated, measured as EBITDA minus Capex, increased by 12.8% in 2004 to Euro 588 million.
Domestic Mobile Income Statement (1)
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| Euro million | 2004 | 2003 | y.o.y | |||
| Operating Revenues | 1,588.3 | 1,522.6 | 4.3% | |||
| Services Rendered | 1,440.2 | 1,384.1 | 4.1% | |||
| Billing | 1,081.1 | 1,011.5 | 6.9% | |||
| Interconnection | 359.0 | 372.6 | (3.6%) | |||
| Sales | 148.1 | 138.5 | 6.9% | |||
| Operating Costs excluding D&A | 841.6 | 832.7 | 1.1% | |||
| Wages and Salaries | 56.3 | 59.2 | (4.9%) | |||
| Costs of Telecommunications | 296.6 | 295.5 | 0.4% | |||
| Own Work Capitalised | (1.6) | (4.4) | (64.4%) | |||
| Cost of Products Sold | 170.9 | 154.7 | 10.4% | |||
| Marketing and Publicity | 28.5 | 26.3 | 8.5% | |||
| General & Administrative | 198.6 | 210.8 | (5.8%) | |||
| Provision for Doubtful Receivables | 31.4 | 31.4 | 0.1% | |||
| Other Net Operating Costs | 60.9 | 59.3 | 2.6% | |||
| EBITDA | 746.7 | 689.9 | 8.2% | |||
| Depreciation and Amortisation | 200.9 | 189.9 | 5.8% | |||
| Operating Income | 545.8 | 500.0 | 9.2% | |||
| EBITDA Margin | 47.0% | 45.3% | 1.7pp | |||
| Capex | 158.8 | 168.5 | (5.8%) | |||
| Capex as % of Revenues | 10.0% | 11.1% | (1.1pp) | |||
| EBITDA minus Capex | 587.9 | 521.4 | 12.8% | |||
| (1) | Includes intragroup transactions. |
At 31 December 2004, PT owned 50% of Brasilcel, which in turn owned an interest in TCP (65.12%), TSD (90.89%), CRT (68.33%) and TBE (50.59%) . TCP owned an interest in TCO (51.42%) and GT (100%).
Vivo experienced its best ever year in 2004, continuing its leading position in the explosive Brazilian mobile market. By the end of 2004, there were 65.6 million mobile subscribers in Brazil - an increase of 42% on 2003, with a record 19 million net additions. Mobile penetration in the country increased by over 10pp to almost 37%, 14pp higher than fixed line penetration in Brazil.
By the end of 2004 Vivo had more than 26.5 million active customers, an increase of 28.5%, adding almost 6 million subscribers during the year. The company again confirmed its position as the uncontested leader in this exciting market. Vivo now has 40.5% of the mobile market in Brazil, double that of its nearest competitor, and has now become the 10th biggest mobile operator in the world. All this achieved against a backdrop of intense commercial activity and competition.
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The company continues to lead the way in gaining net additions, developing brand awareness, innovation, quality of service and achieving profitability. Although the Vivo brand is a relative newcomer in Brazilian mobile communications, operating for less than two years, it is already one of the most recognised brands in the sector, winning several prizes and supporting the growth of the business.
The fact that the Brazilian population recognises and trusts the Vivo brand has been crucial in increasing penetration, namely as the acceleration of the Brazilian mobile market has been largely driven by prepaid customers, which represented at December 2004 already 80.5% of Vivo’s customer base (plus 4pp than in 2003). This growth in the proportion of prepaid subscribers has been the main reason behind the decline in ARPU and MOU. In 2004, Vivo’s blended ARPU decreased by 16.8%; over 75% of this decline is due to the increased number of prepaid customers and the impact of SMP rules (namely the introduction of ‘‘bill & keep’’ and loss of long distance traffic). MOU, and subsequently ARPU, was also impacted by the negative development of incoming traffic.
In 2004, Vivo launched new services, products and promotions in a successful effort to stand out from the crowd. Creative services such as locating services, virtual games and videostreaming were offered to ensure that the customer could differentiate Vivo from its competitors.
Attracting significant numbers of subscribers away from Vivo’s competitors saw the company increase its focus on the customer and customer needs in 2004. Improvements include the launch of innovative customer services, supported by the investment in the network capacity, and the rollout of more sophisticated technologies such as CDMA. Capex, which amounted to R$ 1.924 million in 2004, included the development of the CDMA 1xRTT 2.5G network, providing a larger bandwidth, therefore supplying a platform for more exciting services in the future. Vivo also invested in the first steps to fully launch EV-DO (Evolution Data Optimised), a system that supports third generation services.
Technological leadership and innovation has already had an important impact on the proportion of data included in total service revenues. In 2004, total data represented 4.0%, which compares with 2.2% in the
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previous year. Approximately 20% of data revenues were related to multimedia services, internet access and locating services, supported on the 1xRTT platform. It has also reduced churn by 0.5pp in 2004, reflecting improved customer satisfaction.
Vivo’s operating revenues, stated in Brazilian Reais, in accordance with Portuguese GAAP and including pro forma information from TCO in 2003, increased by 8.7% in 2004 to R$ 10,929 million. In 2004, EBITDA declined 4.3% in the period to R$ 3,609 million, while the EBITDA margin reached 33%, a higher level than the majority of the mobile industry in Brazil. The decline in EBITDA margin is explained by the rapid expansion of the customer base, increasing competition due to the reduction of equipment entry levels, aggressive marketing campaigns and new entrants launching mobile operations. Against this backdrop, the EBITDA performance was extremely encouraging and represented around 60% of the EBITDA of the total Brazilian mobile market.
Excluding costumer acquisition costs, the EBITDA margin would have increased by 1.6pp to 49.2%, reflecting the initiatives to control, reprocess and consolidate the group structure, namely in terms of the management, accounting and sales force. In 2004, Vivo also created a data process unit and initiated the consolidation of IT platforms, helping to improve efficiency and economies of scale across the company. The underlying trends of profitability remain extremely healthy and intact, enforcing confidence in the future of the business.
Vivo’s operating cash flow, measured as EBITDA minus capex, reached R$ 1,686 million in the year, making the company the only operator in the Brazilian mobile industry that was able to achieve positive operating cash flow in 2004.
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| Brazilian Mobile Income Statement (1) | ||||||||
| R$ million | 2004 | 2003 (2) | y.o.y | |||||
| Operating Revenues | 10,929.3 | 10,053.5 | 8.7% | |||||
| Services Rendered | 8,605.4 | 8,132.6 | 5.8% | |||||
| Sales | 2,324.0 | 1,920.8 | 21.0% | |||||
| Operating Costs excluding D&A | 7,320.0 | 6,281.7 | 16.5% | |||||
| Wages and Salaries | 677.3 | 558.4 | 21.3% | |||||
| Costs of Telecommunications | 638.1 | 872.0 | (26.8%) | |||||
| Costs of Products Sold | 2,699.2 | 2,126.8 | 26.9% | |||||
| Marketing and Publicity | 496.4 | 372.0 | 33.5% | |||||
| General & Administrative | 2,126.3 | 1,841.7 | 15.5% | |||||
| Provision for Doubtful Receivables | 396.1 | 419.9 | (5.7%) | |||||
| Other Net Operating Costs | 286.6 | 91.0 | 214.8% | |||||
| EBITDA | 3,609.3 | 3,771.7 | (4.3%) | |||||
| Depreciation and Amortisation | 1,947.6 | 1,832.5 | 6.3% | |||||
| Operating Income | 1,661.7 | 1,939.2 | (14.3%) | |||||
| EBITDA Margin | 33.0% | 37.5% | (4.5pp) | |||||
| Capex | 1,923.7 | 1,147.3 | 67.7% | |||||
| Capex as % of Revenues | 17.6% | 11.4% | 6.2pp | |||||
| EBITDA minus Capex | 1,685.6 | 2,624.4 | (35.8%) | |||||
| (1) | Information prepared in accordance with Portuguese GAAP. |
| (2) | Pro forma information including 12 months of TCO. |
Multimedia Business - PT Multimedia
At 31 December 2004, PT owned directly 57.56% of PTM and through equity swap contracts had access to an additional share capital of 9.74% . Furthermore, PT has also signed derivative contracts, which give the option to acquire up to an additional 4.8% of PTM under certain terms and market conditions.
Operating revenues increased by 6.6% in 2004 to Euro 730 million, primarily as a result of the growth in the Pay-TV and cable internet business. Traditional media revenues also recovered in 2004, benefiting from the recovery in the Portuguese advertising market, which was boosted by events like Euro 2004. The audiovisuals business was negatively impacted by the loss of the Sony distribution contract.
EBITDA margin improved by 6.6pp in 2004 to 26.3%, supported on improvements across all three businesses. This resulted in an increase of EBITDA of 42.3% to Euro 192 million. Despite an increase in total capex to Euro 81 million, EBITDA minus Capex improved by 43.8% in 2004 to Euro 111 million.
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| Euro million | 2004 | 2003 | y.o.y | |||
| Operating Revenues | 729.8 | 684.3 | 6.6% | |||
| Pay-TV and Cable Internet | 495.4 | 432.8 | 14.5% | |||
| Audiovisuals | 80.0 | 107.7 | (25.8%) | |||
| Media | 154.0 | 143.8 | 7.1% | |||
| Other | 0.5 | 0.0 | n.m. | |||
| Operating Costs excluding D&A | 538.2 | 549.6 | (2.1%) | |||
| Wages and Salaries | 86.7 | 83.8 | 3.5% | |||
| Costs of Telecommunications | 26.8 | 25.2 | 6.4% | |||
| Costs of Products Sold | 25.7 | 59.1 | (56.6%) | |||
| Marketing and Publicity | 39.6 | 30.2 | 30.9% | |||
| General & Administrative | 312.0 | 306.6 | 1.8% | |||
| Provision for Doubtful Receivables | 12.6 | 14.2 | (11.8%) | |||
| Other Net Operating Costs | 34.9 | 30.6 | 14.0% | |||
| EBITDA | 191.6 | 134.7 | 42.3% | |||
| Depreciation and Amortisation | 58.6 | 63.0 | (7.0%) | |||
| Operating Income | 133.0 | 71.7 | 85.5% | |||
| EBITDA Margin | 26.3% | 19.7% | 6.6pp | |||
| Capex | 80.5 | 57.4 | 40.2% | |||
| Capex as % of Revenues | 11.0% | 8.4% | 2.6pp | |||
| EBITDA minus Capex | 111.1 | 77.2 | 43.8% | |||
| (1) | Includes intragroup transactions. |
With the network rollout practically complete, the focus was placed on increasing the Pay-TV customer base, through cable and DTH, and the penetration of premium services and broadband. Homes passed totalled 2.6 million at the end of the year, of which approximately 95% were bi-directional and, therefore, broadband enabled.
Pay-TV customers increased by 7.7% in 2004 , reaching a total of 1.6 million by the end of the year, supported by growth in both the cable and DTH platforms. Given the relatively high penetration of Pay-TV in certain cabled areas, added focus is being given to DTH in order to continue driving customer growth. In August, the upfront cost of buying a DTH dish was cut by a third, which led to a meaningful pickup in sales. Additionally, the DTH distribution network was reorganised in order to improve sales momentum. The launch of an enriched digital offer also contributed towards customer growth in 2004.
2004 ANNUAL REPORT79
In terms of the premium offer, the sports channel continued to grow at a healthy pace, with 21 new subscriptions being added to a total of 441 thousand. As for the movie channels, the focus was on expanding and improving the quality of the offer to subscribers. With that in mind, a third channel, focused on action movies, was added to the existing two premium movie channels. The overall pay-to-basic ratio at the end of 2004 stood at 55.6% .
In line with the group strategy, cable broadband was a priority during 2004. The broadband customer base continued to grow strongly, reaching 315 thousand accesses at the end of the year, which represents an increase of 36.9% over the previous year. Cable broadband penetration at the end of 2004 reached 27.2% of total cable customers. The launch of the first prepaid broadband product in Portugal, under the brand ‘‘Zzt!’’, was a major success that clearly underpinned continued growth in broadband. Furthermore, it paved the way to rejuvenate the ‘‘Netcabo’’ brand, used for the other cable broadband products. The investments made to improve the packages and other materials of Netcabo’s points of sale, also helped improve the quality of service.
The repositioning the Pay-TV brand, “ TV Cabo” , towards a more sophisticated and hi-tech service was an important challenge during 2004. However, it necessarily had to backed-up by an important effort to improve quality of service and customer care.
During the course of 2004, important investments were made in terms of new CRM and billing systems, which should allow in the future for improved customer care and better market segmentation. The systems migration occurred primarily in the last four months. Once the new systems are stable, the quality of service should improve significantly.
Blended ARPU increased by 6.6% in 2004 to Euro 25.4, supported on the 4.5% increase in Pay-TV ARPU and the higher penetration of broadband services. Broadband ARPU fell by 13.4% to Euro 24.7, on the back of the normal dilution resulting from a higher weight of prepaid customers.
Operating revenues continued to grow strongly in 2004, rising by 14.5% to Euro 496 million, as a result of the increase in revenues from Pay-TV, broadband Internet and advertising.
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Revenue growth and a continued focus on operating efficiency resulted in an EBITDA margin of 39.6% in the fourth quarter of 2004, positioning PT’s Pay-TV business firmly in the top tier in the industry. This achievement marks a path of margin improvement in excess of 20pp over the past three years. For the whole year, the EBITDA margin reached 36.9%, with EBITDA amounting to Euro 183 million.
In 2004, capex increased by 59.0% to Euro 71 million, equivalent to 14.3% of revenues, primarily as a result of increased spend in IT and in the network redundancy to improve the programming offer and the quality of service. In 2004, capex also included the investment in the right to use satellite capacity of a fourth transponder. EBITDA minus Capex, increased by 33.9% in 2004 to Euro 112 million.
| Euro million | 2004 | 2003 | y.o.y | |||
| Operating Revenues | 495.6 | 432.8 | 14.5% | |||
| Pay-TV | 378.1 | 334.3 | 13.1% | |||
| Broadband | 81.4 | 64.7 | 25.8% | |||
| Advertising | 20.5 | 14.9 | 37.6% | |||
| Sales and other | 15.6 | 18.8 | 16.9% | |||
| EBITDA | 182.8 | 128.2 | 42.6% | |||
| Depreciation and Amortisation | 43.4 | 46.2 | (5.9%) | |||
| Operating Income | 139.4 | 82.0 | 69.9% | |||
| EBITDA Margin | 36.9% | 29.6% | 7.3pp | |||
| Capex | 70.6 | 44.4 | 59.0% | |||
| Capex as % of Revenues | 14.3% | 10.3% | 4.0pp | |||
| EBITDA minus Capex | 112.2 | 83.8 | 33.9% | |||
Audiovisuals Business
Operating revenues of the audiovisuals business decreased by 22.7% in 2004 to Euro 90 million. This performance was negatively impacted by the end of the distribution contract with Sony and the decline of 13.0% y.o.y in video revenues, as a result
of the combination of a less appealing movie portfolio, with the increase in piracy and the decrease in DVD reference prices.
In spite of the strong decrease in operating revenues, EBITDA in the audiovisuals business increased by 4.4% in 2004 to Euro 11 million, underpinned by a major cost rationalisation programme. The combination of a significant reduction in capex to Euro 4million, notwithstanding the investment in refurbishing and opening of several movie theatres,
2004 ANNUAL REPORT81
resulted in a strong improvement in the cash flow of this business, with EBITDA minus Capex totalling Euro 8 million in 2004.
Media Business (Lusomundo Media)
Lusomundo Media revenues increased by 7.0% in 2004 to Euro 154 million, on the back of the advertising market recovery initiated at the end of 2003 and the hosting by Portugal of events like Euro 2004 and Rock in Rio.
A combination of top line growth and EBITDA margin expansion, which almost doubled to 6.5%, resulted in EBITDA growth of 95.5% in 2004. EBITDA in the year amounted to Euro 10 million. The strong growth in EBITDA allowed for a meaningful improvement in cash flow, with EBITDA minus Capex increasing from less than Euro 1 million in 2003 to almost Euro 4 million in 2004.
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Research and Development
Applied research activity is concentrated in the Innovation Plan, which comprises projects ensuing from the Innovation Contract, collaborative R&D projects co-funded by the EU, EUROSCOM, and a set of national programmes intended to boost innovation. The 2004 Innovation Contract included 13 projects, covering areas such as the environment, home services, Wimax broadband radio accessing, IPV6, video on demand, interactive multimedia services, IP network signalling, and the supplying of telecommunication network resources and new business models.
In the domain of the IST (Information Society Technologies) Programme, the guidelines related to the projects belonging to the 5th Framework Programme were pursued, namely in the Seacorn and Opium projects, the area of development for 3G mobile networks, and the IST@Home project, which tested and presented access network solutions and home networks capable of supporting remote social services of the e-Care sort.
In early 2004, among the five projects from the first call for proposals of the 6th Framework Programme that were launched, the following can be highlighted: the integrated MUSE projects -advancements in the broadband access network -, and DAIDALOS -development and presentation of a Beyond 3G network architecture -, where PT is responsible for the technical guidelines.
The development, production and integration of NETB@ND technology telecommunication solutions showed a significant increase in 2004, and a concomitant growth in revenues, notably in the case of PT Comunicações. Among the most significant achievements stand the consolidation of the performance assessment solution for operators Vivo and Unitel, by type of service, and for fixed, mobile and IP networks; the try-and-buy trials conducted on operators TMN, PT Comunicações and Meditelecom; the awarding of a supply contract for SDH systems for Vivo’s access network; the installation of a fiber optic cabinets for Vivo; the deployment of MicroDslam Solutions (ADSL) at the Euro 2004 Stadiums and Rock-in-Rio Lisbon; the preparation of TMN’s UMTS trial network (‘‘try-and-buy” ), based on MABEL/AGORA_NG solutions, and the development of the broadband component in the GEREX System, which granted it unmatched ability and functionalities for the pre-qualification for network lines (annex A/B) for ADSL.
2004 ANNUAL REPORT83
In the area of intelligent networking services and solutions and of service platforms, the year of 2004 was marked by the contract award for the technical solution which will allow the unification of the pre-paid system on Vivo. Based on an innovative architecture, the NGN (Next Generation Network), which was made available still during 2004, will be able to support 50 million clients, up to the year of 2007. During 2004, the twenty NGN platforms deployed in the Group’s mobile operators have supplied services to over 22 million clients worldwide and processed over 18,000,000,000 calls, which is to say 573 calls per second.
Still in 2004, PT also won two international tenders launched by Vivo: one for the deployment of a global network management solution at the new National Centre for Network Management, jointly with HP and Telefónica Soluciones; and the other for a Datawarehouse solution, jointly with Telefónica Research and Development, which will most likely constitute the largest Datawarehouse in the whole of South America.
As for other service platforms, the following stand out: the coming into operation of the SMS real time pricing platform at Méditelecom, the implementation of UniBox (Unified Messaging Platform) at Cabo Verde Telecom, the development and deployment of MMS-C (Multimedia Messaging) on PT Comunicações’ fixed network, and the new achievements regarding TMN’s i9 portal.
In regard to voice services, certain advancements effected on behalf of TMN on the VoxTMN Platform are noteworthy - namely services such as TMN News, City Guide, VIP Call (telephonic content broadcasting service used during Euro 2004), VMS (recording and sending of voice messages to any phone network in Portugal), as well as the InfoAzores and collect call services. During the year of 2004, TMN delivered over 6 million calls using PT’s VoxTMN Platform.
The Group’s R&D costs totalled Euro 10.6 million in 2004, in comparison with last year’s Euro 14.3 million.
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Corporate sustainability: sharing a long term value
Sustainability is an integral part of the corporate strategy of Portugal Telecom, as a means of creating value for all stakeholders in the long term. PT’s economic and financial development was always accompanied by the concern for the development of society and the protection of the environment.
The sustainability strategy of Portugal Telecom rests on three main elements: economic, environmental and social. In order to correctly evaluate a company, it is important not only to study the financial performance, but also to analyse the social, environmental and economic components. The wealth creation for all stakeholders is only achievable through a sustainable and integrated development of the company.
PT has been developing, over the years, a set of internal and external processes and practices that illustrate its corporate responsibility and represent good sustainability practices.
PT will publish its first CSR (Corporate Social Responsibility) report, in the second quarter of 2005, where the procedures as well as economic, social and environmental indicators will be presented, allowing for the analysis of the company’s performance in terms of the three elements of sustainability. This report will also contain the commitments that PT assumes with its stakeholders. With a domestic scope, this report will follow the guidelines of the Global Reporting Initiative (GRI) and will be audited by an external firm.
Social Element: sharing value with the communityThe social element can be separated in the internal component which is related with the human resources management, and in the external component, social responsibility, related with the company’s life and integration in the community.
Human ResourcesThe commitment letter for strategic management of the Human Resources of Portugal Telecom, signed in 2004, illustrates the investment that PT intends to continue making regarding one of its main assets: the employees. These commitments include the establishment of objectives, a periodic performance analysis, the development of the perspectives of professional enrichment, the regular communication of strategic decisions, the development of mechanisms to improve the communication between employees and the management, as well as the implementation of employees’ satisfaction surveys.
Training continues to be very important for PT, having been reached a significant increase in terms of total number of hours of training and number of hours of training per employee, with a reduction of the cost per hour. During 2004, PT undertook the following hours of training:
- Wireline, mobile and multimedia
- 206 000 hours of training (an increase of 48% y.o.y)
- 20 hours of training per employee (an increase of 45% y.o.y)
- Training costs per hour: Euro 20.5 (a decrease of 23% y.o.y)
In addition, PT promotes several volunteer programmes, contributing to a number of corporate benefaction initiatives. Under these programmes, PT supports the necessary costs for the employees to co-operate in volunteer work, having established a maximum annual limit of 5 days per worker. The strategic areas of the volunteer programme include: training, consultancy and business, web, entertainment, culture and environment.
2004 ANNUAL REPORT85
During 2004, 709 volunteer initiatives were undertaken, involving 547 employees in a total of 3 939 hours. 601 institutions and 60 940 people were benefited.
PT’s support also extends to the families of the employees. At the end of 2004, PT launched a scholarship programme for the employees’ children, subject to their income level. PT also launched a programme to promote broadband, through the selling in special conditions of PCs with broadband access.
In the health sector, PT offers health insurance to all its employees and their families, reaching around 110 000 beneficiaries. It is managed by PT ACS, a non-profit organisation, whose objective is to promote and protect health, through the direct or indirect rendering of preventive, curative and rehabilitative medical.
As a result, there is a positive trend in terms of employee satisfaction, which rose to 6.7 in 2004 from 6.5 in 2003, on a scale of 10. Also encouraging is the fact that the participation in the survey improved from 42% in 2003 to 56% in 2004. Areas such as communication, regarding expectations and leadership, had the most significant improvement, within the analysed vectors.
Social ResponsibilityExternally, PT has developed over the years a vast number of social responsibility initiatives. The development of products and services for clients with handicaps, as well as services especially tailored for people with low income, such as the elderly, characterise the responsible nature of the company.
This commitment with the society is patent in the creation of the Fundação PT, an institution to implement and manage the social intervention policy, as well as to support the development of social responsibility. Its activities comprise many domains, namely:
- Information and knowledge society
- Reduction info-exclusion
- Programmes for citizens with special needs
- Development of personal and professional skills (through scholarships and awards)
- Preservation of PT’s history and heritage
- Cultural patronage
- Social benefaction
In 2004, the investment in social intervention and patronage of the Fundação PT (founded in July 2004) amounted to Euro 4 million.
Environmental Element: sharing value with the environmentEnvironmental policy is fundamental in the various companies of the Group. It translates, for example, in the environmental certification ISO 14001 of PT Comunicações and TMN (which represent around 80% of the domestic revenues of PT).
This certification involves the existence of an integrated environmental management model and the intervention at the value chain level: for example, the environmental element is one of the criteria in supplier selection.
- Waste management
- Efficient consumption of energy, water and fuel.
- The control of impacts, namely those of antennas
- Continued training
During 2004, PT signed the letter of sustainability of ETNO, European Telecommunication Network Operators Association, where it was recognised that sustainability must be at the centre of PT’s activity. In this letter, PT compromises to develop and include the issues pertaining to sustainability and the environment in its daily business activities.
Other subsidiaries such as PT Inovação, PT Contract, PT PRO and TV Cabo are also promoting business models based on environmental best practices.
Economic Element: sharing value with the shareholdersIn the economic element, which is related to the internal practices and processes of managing the company, PT is today a reference, in line with international best practices, through the fulfilment of the requirements for transparency and information disclosure to the capital markets and the supervisory bodies.
Issues related to the economic element were developed in the sections of capital market and corporate governance.
PROSPECTS
PT will continue to focus on exploring the growth potential of its existing asset portfolio in 2005, namely its integrated telecommunication and multimedia operations in Portugal and its mobile business in Brazil. Competitive and regulatory pressures, as well as the maturity of certain businesses, will demand a constant focus on operating efficiency across the company. PT intends to continue to promote customer retention, simultaneously seeking to increase the value of each customer through the offer of new and innovative services.
Wireline
The wireline business intends to continue to place a strong focus on minimising traditional line loss, through the aggressive promotion of broadband and a range of tailored pricing plans. Regulation should remain a key driver of business
performance, with the announced decision on fixed-to-mobile interconnection rates having a visible impact on operating revenues. Regulatory decisions on local loop unbundling prices and wholesale line rental may also present added challenges to
business performance. To face these challenges, PT will proceed with its cost rationalisation efforts, underpinned by a staff redundancy programme that should lead to continued headcount reduction in 2005. PT’s objective for the wireline
business is to preserve operating margins and cash flow generation.
Mobile
2004 ANNUAL REPORT87
The ongoing rollout of 3G services in Portugal will be a key strategic initiative of the domestic mobile business in 2005. UMTS coverage will continue to be expanded, while the launching [and promotion] of new services and applications based on 3G should result in a growing number of customers using this technology. Regulatory-imposed cuts on interconnection prices should place added pressure on revenue and EBITDA growth. PT plans to offset this pressure by focusing on increasing the mobility premium in the market, which is among the lowest in Europe, and by continuing to improve the operating efficiency of the business.
The focus in Brazilian mobile in 2005 should continue to be on profitable growth and retention of value customers. The market continues to offer an attractive growth opportunity that PT will continue to explore, consolidating its leading position in the market. A challenging competitive environment is likely to remain in place, which combined with expected strong customer growth, should continue to influence operating margins. The ongoing rollout of 1xRTT and the launch of EV-DO in new coverage areas should reinforce the company’s positioning as the first and leading 3G operator in Brazil.
Multimedia
The multimedia business plans to continue to take advantage of the significant growth potential that the Pay-TV market in Portugal still offers. To that end, the company intends to focus on growing the customer base, with particular emphasis being
given to the DTH platform. The strong push in broadband and the increase in premium services, levered on the set top boxes digitalisation, should underpin ARPU expansion in 2005. PT Multimedia plans to step up its efforts in terms of quality of
service and customer care, leveraging on important investments made during 2004, and by increasing the initiatives to further certificate its service providers. The focus on digital services as a means of improving the offer and enhancing customer
segmentation should be an important strategic initiative during 2005.
Financials
In terms of financial condition, PT intends to preserve its solid financial indicators, which give it significant financial flexibility to continue pursuing its stated strategy. PT plans to continue to invest in the growth opportunities presented by
its business portfolio, with particular emphasis on broadband, mobile and Pay-TV services, observing strict investment criteria.
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Shareholder Remuneration
Pursuant to the commitment of creating and delivering shareholder value, the Board of Directors shall submit a proposal to the company’s Annual General Meeting for the payment of a dividend per share of Euro 0.35 for the year ended 31 December
2004, which represents an increase of almost 60% over the previous year. Additionally, the Board of Directors has announced the proposal to execute a new share buyback of 3% to be completed by the end of 2005, depending on market conditions.
The Board of Directors
2004 ANNUAL REPORT
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CONSOLIDATED FINANCIAL STATEMENTS
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PORTUGAL TELECOM, SGPS, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003
| Notes | 2004 | 2004 | 2003 | |||||
| US Dollar | Euro | Euro | ||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | 597,281,611 | 441,188,958 | 258,903,507 | |||||
| Short-term investments and cash equivalents | 5 | 2,029,228,318 | 1,498,912,925 | 2,272,188,060 | ||||
| Accounts receivable-trade, net: | ||||||||
| Third parties | 6 | 1,578,807,958 | 1,166,204,726 | 1,118,013,145 | ||||
| Accounts receivable-other, net: | ||||||||
| Third parties | 7 | 571,830,925 | 422,389,515 | 365,374,895 | ||||
| Affiliates | 7 | 45,757,052 | 33,798,975 | 33,910,549 | ||||
| Inventories, net | 8 | 239,754,082 | 177,097,121 | 102,884,982 | ||||
| Deferred Taxes | 29 | 1,047,585,417 | 773,811,063 | 748,141,425 | ||||
| Prepaid expenses and other current assets | 9 | 208,007,196 | 153,646,917 | 140,241,889 | ||||
| Total current assets | 6,318,252,561 | 4,667,050,200 | 5,039,658,452 | |||||
| Investments, net | 10 | 585,671,041 | 432,612,676 | 448,079,192 | ||||
| Fixed Assets, net | 11 | 5,500,300,242 | 4,062,860,276 | 4,267,958,038 | ||||
| Intangible Assets, net - Other | 12 | 4,349,562,968 | 3,212,854,903 | 3,150,122,385 | ||||
| Non-Current Deferred Taxes | 29 | 666,040,542 | 491,978,536 | 583,471,389 | ||||
| Other Non-Current Assets, net | 7 | 130,035,968 | 96,052,569 | 68,525,804 | ||||
| Total assets | 17,549,863,321 | 12,963,409,160 | 13,557,815,260 | |||||
| Current Liabilities: | ||||||||
| Short term debt and current portion of medium and long-term debt | 13 | 1,891,046,780 | 1,396,843,537 | 1,191,078,724 | ||||
| Accounts payable-trade: | ||||||||
| Third parties | 963,411,992 | 711,635,391 | 672,392,961 | |||||
| Affiliates | 17,146,015 | 12,665,102 | 11,470,569 | |||||
| Accounts payable-other: | ||||||||
| Third parties | 14 | 766,358,206 | 566,079,337 | 535,007,267 | ||||
| Affiliates | 147,800,161 | 109,174,295 | 7,007,560 | |||||
| Accrued expenses | 15 | 864,415,369 | 638,510,392 | 589,394,613 | ||||
| Taxes payable | 16 | 112,111,484 | 82,812,442 | 102,925,601 | ||||
| Deferred Taxes | 29 | 37,830,631 | 27,944,032 | 32,793,924 | ||||
| Deferred income | 17 | 321,506,712 | 237,484,645 | 212,413,495 | ||||
| Total current liabilities | 5,121,627,350 | 3,783,149,173 | 3,354,484,714 | |||||
| Medium and Long-Term Debt | 13 | 4,963,326,528 | 3,666,218,443 | 4,555,614,003 | ||||
| Accrued Post Retirement Liability | 30.3 | 1,719,147,629 | 1,269,868,244 | 1,256,038,995 | ||||
| Non-Current Deferred Taxes | 29 | 390,877,738 | 288,726,354 | 300,731,656 | ||||
| Provisions for other risks and costs | 18 | 623,934,347 | 460,876,309 | 361,379,666 | ||||
| Other Non-Current Liabilities | 18 | 282,631,247 | 208,768,834 | 144,771,333 | ||||
| Total liabilities | 13,101,544,840 | 9,677,607,357 | 9,973,020,367 | |||||
| Minority Interests | 19 | 786,591,145 | 581,024,631 | 643,967,968 | ||||
| Shareholders' Equity: | ||||||||
| Share capital | 20 | 1,579,187,461 | 1,166,485,050 | 1,254,285,000 | ||||
| Capital issued premium | 20 | 124,150,081 | 91,704,891 | 91,704,891 | ||||
| Treasury shares | - | - | (210,040,062) | |||||
| Legal reserve | 20 | 208,789,907 | 154,225,075 | 144,184,287 | ||||
| Other reserves and retained earnings | 4,105,612,071 | 3,032,657,757 | 3,682,035,130 | |||||
| Cumulative foreign currency translation adjustments | (3,033,081,944) | (2,240,420,996) | (2,261,577,622) | |||||
| Net income | 677,069,760 | 500,125,395 | 240,235,301 | |||||
| Total equity | 3,661,727,335 | 2,704,777,172 | 2,940,826,925 | |||||
| Total liabilities and shareholder's equity | 17,549,863,321 | 12,963,409,160 | 13,557,815,260 | |||||
The accompanying notes form an integral part of these financial statements.
93
PORTUGAL TELECOM, SGPS, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PROFIT AND LOSS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
| Notes | 2004 | 2004 | 2003 | 2002 | ||||||
| US Dollar | Euro | Euro | Euro | |||||||
| Operating Revenues: | ||||||||||
| Services rendered | 21 | 7,142,826,657 | 5,276,131,376 | 5,056,469,413 | 4,950,845,832 | |||||
| Sales of merchandise and products | 21 | 835,235,333 | 616,956,222 | 583,532,339 | 492,030,480 | |||||
| Telephone directories | 21 | 175,677,716 | 129,766,373 | 136,109,823 | 139,156,808 | |||||
| Total operating revenues | 8,153,739,706 | 6,022,853,971 | 5,776,111,575 | 5,582,033,120 | ||||||
| Operating Costs and Expenses: | ||||||||||
| Wages and salaries | 22 | 1,010,160,412 | 746,166,651 | 705,902,478 | 694,775,367 | |||||
| Post retirement benefits | 30.4 | 187,517,504 | 138,511,969 | 222,942,179 | 183,213,062 | |||||
| Costs of telecommunications | 23 | 747,637,982 | 552,251,427 | 587,145,058 | 622,938,664 | |||||
| Depreciation and amortization | 11 and 12 | 1,296,043,468 | 957,337,471 | 953,978,392 | 962,824,885 | |||||
| Subsidies | (20,465,526) | (15,117,097) | (20,627,776) | (31,519,859) | ||||||
| Maintenance and repairs | 161,856,478 | 119,557,156 | 126,536,660 | 129,248,379 | ||||||
| Own work capitalized | (121,180,723) | (89,511,540) | (74,499,765) | (114,033,783) | ||||||
| Raw materials and consumables | 92,622,629 | 68,416,774 | 73,999,927 | 97,182,987 | ||||||
| Costs of products sold | 805,079,832 | 594,681,513 | 550,154,948 | 462,664,452 | ||||||
| Telephone directories | 117,605,143 | 86,870,397 | 90,419,679 | 92,049,002 | ||||||
| Marketing and publicity | 255,497,772 | 188,726,379 | 141,945,303 | 108,812,870 | ||||||
| Concession rent | 1 | - | - | - | 16,278,750 | |||||
| Other general and administrative | 24 | 1,456,610,898 | 1,075,942,457 | 966,525,817 | 925,561,923 | |||||
| Provision for doubtful receivables, inventories and other | 28 | 232,489,875 | 171,731,330 | 130,806,217 | 132,763,318 | |||||
| Other net operating income | (91,101,871) | (67,293,449) | (89,988,262) | (45,258,357) | ||||||
| Taxes other than income taxes | 170,570,352 | 125,993,760 | 97,143,507 | 77,840,569 | ||||||
| Total operating costs and expenses | 6,300,944,225 | 4,654,265,198 | 4,462,384,362 | 4,315,342,229 | ||||||
| Operating Income | 1,852,795,481 | 1,368,588,773 | 1,313,727,213 | 1,266,690,891 | ||||||
| Other Expenses (Income): | ||||||||||
| Net interest expenses | 274,629,263 | 202,858,076 | 201,838,301 | 197,060,843 | ||||||
| Net foreing currency exchange losses/(gains) | 44,332,332 | 32,746,589 | 41,905,966 | (87,776,346) | ||||||
| Other net financing costs/(income) | 25 | 16,914,521 | 12,494,106 | (95,372,242) | 111,736,185 | |||||
| Goodwill amortization | 12 | 131,484,426 | 97,122,489 | 110,612,770 | 142,909,438 | |||||
| Equity in (earnings)/losses of affiliated companies, net | 10 | (37,530,019) | (27,721,982) | 19,156,675 | 160,873,350 | |||||
| Net losses/(gains) on sales and disposals of fixed assets | 26 | 16,261,476 | 12,011,727 | (28,630,291) | (3,966,594) | |||||
| Work force reduction program costs | 30.4 | 231,281,630 | 170,838,846 | 314,084,702 | 53,701,919 | |||||
| Non-recurring itens, net | 27 | 118,348,034 | 87,419,142 | 52,784,472 | 38,622,625 | |||||
| Income Before Income Taxes | 1,057,073,818 | 780,819,780 | 697,346,860 | 653,529,471 | ||||||
| Provision for income taxes | 29 | (242,499,860) | (179,125,321) | (377,886,629) | (337,094,337) | |||||
| Net Income Before Minority Interests | 814,573,959 | 601,694,459 | 319,460,231 | 316,435,134 | ||||||
| Loss/(income) applicable to minority interests | 19 | (137,504,199) | (101,569,064) | (79,224,930) | 74,620,664 | |||||
| Net Income | 677,069,760 | 500,125,395 | 240,235,301 | 391,055,798 | ||||||
| Earnings per Share and ADS (USD/EUR) | 0,58 | 0,43 | 0,19 | 0,31 | ||||||
The accompanying notes form an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
(Amounts stated in Euros)
| Share Capital | Capital Issued Premium | Treasury Shares | Legal reserve | Other reserves | Cumulative foreign currency translation adjustments | Retained earnings | ||||||||
| Balance as of December 31, 2001 | 1,254,285,000 | 2,149,565,000 | - | 128,814,507 | 1,935,039,113 | (944,948,774) | 144,028,261 | |||||||
| Earnings allocated to reserves | - | - | - | 15,369,780 | - | - | (15,369,780) | |||||||
| Foreing currency translation adjustments (Note 3.s)) | - | - | - | - | - | (1,321,467,418) | - | |||||||
| Gains on the sale of own shares | - | - | - | - | (2,400,223) | - | - | |||||||
| Dividends paid | - | - | - | - | - | - | (125,428,500) | |||||||
| Provision for impairment | - | - | - | - | - | - | (500,000,000) | |||||||
| Other adjustments | - | - | - | - | 87,358,287 | - | (84,576,821) | |||||||
| Net income - 2002 | - | - | - | - | - | - | 391,055,798 | |||||||
| Balance as of December 31, 2002 | 1,254,285,000 | 2,149,565,000 | - | 144,184,287 | 2,019,997,177 | (2266,416,192) | (190,291,042) | |||||||
| Acquisition and sales of treasury shares, net | - | - | (210,040,062) | - | - | - | - | |||||||
| Distribution of PT shares to employees | - | - | - | - | (4,794,502) | - | - | |||||||
| Capital issed premium alocated to retained earnings | - | (2,057,860,109) | - | - | - | - | 2,057,860,109 | |||||||
| Foreing currency translation adjustments (Note 3.s)) | - | - | - | - | - | 4,838,570 | - | |||||||
| Gains on the sale of own shares | - | - | - | - | (276,767) | - | - | |||||||
| Dividends paid | - | - | - | - | (200,685,600) | - | - | |||||||
| Other adjustments | - | - | - | - | 39,628,924 | - | (39,403,169) | |||||||
| Net income - 2003 | - | - | - | - | - | - | 240,235,301 | |||||||
| Balance as of December 31, 2003 | 1,254,285,000 | 91,704,891 | (210,040,062) | 144,184,287 | 1,853,869,232 | (2,261,577,622) | 2,068,401,199 | |||||||
| Acquisition of treasury shares | - | - | (480,912,955) | - | - | - | - | |||||||
| Cancellation of treasury shares | (87.799.950) | - | 690.953.017 | - | (603,153,067) | - | - | |||||||
| Dividends paid | - | - | - | - | (76,724,707) | - | (190,774,979) | |||||||
| Distribution of PT shares to employees | - | - | - | - | (6,220,610) | - | - | |||||||
| Earnings allocated to the legal reserve | - | - | - | 10,040,788 | - | - | (10,040,788) | |||||||
| Foreing currency translation adjustments (Note 3.s)) | - | - | - | - | - | 21,156,626 | - | |||||||
| Other adjustments (1) | - | - | - | - | (688,003,474) | - | 685,304,951 | |||||||
| Net income - 2004 | - | - | - | - | - | - | 500,125,395 | |||||||
| Balance as of December 31, 2004 | 1,166,485,050 | 91,704,891 | - | 154,225,075 | 479,767,374 | (2,240,420,996) | 3,053,015,778 | |||||||
| (1) | The adjustment made to other reserves and retained earnings, includes basically: (i) an amount of Euro 720,000,000 related to reserves distributed by PT Comunicações and TMN; and (ii) Euro 34,695,049 representing the difference between the 2003 results of the subsidiary and affiliated companies considered in the preparation of the Company’s consolidated financial statements, and the dividends distributed by those entities during 2004. |
The accompanying notes form an integral part of these financial statements.
2004 ANNUAL REPORT95
PORTUGAL TELECOM, SGPS, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
| 2004 | 2004 | 2003 | 2002 | |||||
| US Dollar | Euro | Euro | Euro | |||||
| OPERATING ACTIVITIES | ||||||||
| Collections from clients | 9,447,649,939 | 6,978,615,703 | 6,508,513,684 | 6,521,776,690 | ||||
| Payments to suppliers | (4,690,922,120) | (3,465,003,782) | (2,796,599,245) | (2,940,476,605) | ||||
| Payments to emplyees | (1,147,733,186) | (847,786,369) | (822,506,844) | (763,798,144) | ||||
| Cash flow from operations | 3,608,994,632 | 2,665,825,552 | 2,889,407,595 | 2,817,501,941 | ||||
| Payments relating to income taxes | (89,310,668) | (65,970,356) | 144,366,627 | (289,131,732) | ||||
| Other payments relating to operating activities, net | (640,889,937) | (473,400,751) | (566,274,305) | (384,970,914) | ||||
| Cash flow before non operating activities | 2,878,794,028 | 2,126,454,445 | 2,467,499,917 | 2,143,399,295 | ||||
| Receivables relating to non recurring items | 1,187,265 | 876,987 | 7,157,682 | 43,098,416 | ||||
| Payments relating to non recurring items | (148,339,765) | (109,572,880) | (140,647,691) | (94,174,202) | ||||
| Cash flow from operating activities (1) | 2,731,641,528 | 2,017,758,552 | 2,334,009,908 | 2,092,323,509 | ||||
| INVESTING ACTIVITIES | ||||||||
| Cash receipts resulting from: | ||||||||
| Financial investments | 28,759,097 | 21,243,239 | 3,625,011 | 1,311,634,564 | ||||
| Tangible fixed assets | 48,391,921 | 35,745,251 | 116,621,650 | 29,038,119 | ||||
| Intangible assets | 4,832 | 3,569 | 32,686 | - | ||||
| Subsidies for investments | 4,032,913 | 2,978,958 | - | 196,288 | ||||
| Interest and related income | 357,243,603 | 263,882,112 | 283,952,038 | 245,909,913 | ||||
| Dividends | 22,488,318 | 16,611,256 | 26,225,115 | 20,734,668 | ||||
| Other | 46,416,517 | 34,286,096 | 193,841,327 | 17,622,306 | ||||
| 507,337,201 | 374,750,481 | 624,297,827 | 1625,135,858 | |||||
| Payments resulting from: | ||||||||
| Financial investments | (437,145,790) | (322,902,785) | (403,988,292) | (321,342,491) | ||||
| Tangible fixed assets | (844,975,096) | (624,150,610) | (560,712,772) | (855,984,006) | ||||
| Intangible assets | (21,245,215) | (15,693,023) | (55,036,318) | (358,641,234) | ||||
| Advance for the acquisition of a financial investment | (67,690) | (50,000) | (42,648,612) | (947,451,821) | ||||
| Other investments | (49,360,948) | (36,461,034) | (21,429,108) | (151,343,088) | ||||
| (1,352,794,739) | (999,257,452) | (1,083,815,102) | (2,634,762,640) | |||||
| Cash flow from investing activities (2) | (845,457,537) | (624,506,971) | (459,517,275) | (1,009,626,782) | ||||
| FINANCING ACTIVITES | ||||||||
| Cash receipts resulting from: | ||||||||
| Loans obtained | 23,181,256,280 | 17,123,102,585 | 6,777,581,209 | 13,457,226,263 | ||||
| Increases in share capital and paid-in surplus | 125,051,402 | 92,370,662 | - | 176,434,867 | ||||
| Sale of treasury shares | - | - | 39,159,546 | 34,299,931 | ||||
| Subsidies | 498,600 | 368,297 | 526,023 | 699,631 | ||||
| Other | 92,862,733 | 68,594,130 | 3,517,130 | 48,484 | ||||
| 23,399,669,015 | 17,284,435,674 | 6,820,783,908 | 13,668,709,176 | |||||
| Payments resulting from: | ||||||||
| Loans repaid | (24,201,134,292) | (17,876,447,254) | (7,397,524,940) | (13,472,717,994) | ||||
| Lease rentals (principal) | (36,794,152) | (27,178,425) | (9,037,369) | (4,136,597) | ||||
| Interest and related expenses | (726,905,806) | (536,937,366) | (603,550,509) | (506,569,415) | ||||
| Dividends | (402,271,293) | (297,142,335) | (227,516,018) | (129,035,959) | ||||
| Acquisition of treasury shares | (670,553,683) | (495,312,220) | (234,988,926) | (42,197,733) | ||||
| Other | (52,681,255) | (38,913,617) | (2,292,094) | (126,683) | ||||
| (26,090,340,482) | (19,271,931,217) | (8,474,909,856) | (14,154,784,381) | |||||
| Cash flow from financing activities (3) | (2,690,671,466) | (1,987,495,543) | (1,654,125,948) | (486,075,205) | ||||
| Variation of cash and equivalents (4)=(1)+(2)+(3) | (804,487,476) | (594,243,962) | 220,366,685 | 596,621,522 | ||||
| Effect of exchange differences | 4,931,329 | 3,642,583 | 10,378,990 | (45,211,595) | ||||
| Effect of Brasilcel consolidation | - | - | - | 485 410 651 | ||||
| Cash and equivalents at the beginning of the period (a) | 3,406,235,699 | 2,516,055,325 | 2,297,800,295 | 1,231,222,245 | ||||
| Cash and equivalents at the end of the period | 2,606,679,552 | 1,925,453,946 | 2,528,545,970 | 2,268,042,823 | ||||
| (a) | The balance of cash and cash equivalents as of December 31, 2003 and 2002 differs from the balance of cash and equivalents at the beginning of 2004 and 2003, respectively, as a result of changes in the consolidation perimeter. |
| 2004 | 2004 | 2003 | 2002 | |||||
| Euro | Euro | Euro | Euro | |||||
| DETAIL OF CASH AND EQUIVALENTS | ||||||||
| Cash | 17,137,273 | 12,658,645 | 28,049,854 | 7,540,373 | ||||
| Bank deposits | 580,144,338 | 428,530,313 | 230,853,653 | 345,862,930 | ||||
| Short-term investments | 2,029,228,318 | 1,498,912,925 | 2,272,188,060 | 1,923,104,592 | ||||
| Cash, bank deposits and treasury applications | ||||||||
| as stated in the balance sheet | 2,626,509,929 | 1,940,101,883 | 2,531,091,567 | 2,276,507,895 | ||||
| Other treasury elements | ||||||||
| Bank overdrafts (Note 13) | (19,830,377) | (14,647,937) | (2,545,597) | (8,465,072) | ||||
| Cash and equivalents | 2,606,679,552 | 1,925,453,946 | 2,528,545,970 | 2,268,042,823 | ||||
| The accompanying notes form na integral part of these financial statements. |
PORTUGAL TELECOM, SGPS, S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
(Amounts stated in Euro, Brazilian Real (BRL) and United States Dollar
(USD), except where otherwise stated)
a) Parent Company
Portugal Telecom, SGPS, S.A. (formerly Portugal Telecom, S.A., ‘‘Portugal Telecom’’) was incorporated on June 23, 1994 as a result of the merger, effective January 1, 1994, of Telecom Portugal, S.A. (‘‘TP"), Telefones de Lisboa e Porto, S.A. (‘‘TLP’’) and Teledifusora de Portugal, S.A. (‘‘TDP’’).
The shares of Portugal Telecom are traded on the Euronext Lisbon Stock Exchange and on the New York Stock Exchange.
b) Corporate purposePortugal Telecom is engaged indirectly through its subsidiary and affiliated companies (‘‘the Group’’ or ‘‘the Company’’) in rendering a comprehensive range of telecommunications and multimedia services in Portugal and other countries, including Brazil.
In Portugal the fixed telephone services were rendered directly by Portugal Telecom under the provisions of the Concession Agreement entered into with the Portuguese State on March 20, 1995 in accordance with Decree-Law 40/95, for an initial period of thirty years, subject to renewal for subsequent periods of 15 years. As a result of an internal reorganization of the Group and in accordance with the terms of Decree-Law 219/2000, the Concession Contract was transferred to PT Comunicações, S.A. (‘‘PT Comunicações’’), the Company’s wholly owned subsidiary for fixed line telecommunications. In exchange for the concession, PT Comunicações paid, up to 2002, an annual rent to the Portuguese State corresponding to 1% of the gross operating revenues from services covered by the Concession, after deduction of losses incurred in meeting the universal service obligation and certain other items. On December 11, 2002, according to the terms of the Modifying Agreement to the Concession Contract, PT Comunicações acquired the property of the Basic Network of Telecommunications and Telex (‘‘Basic Network’’).
Data transmission services are provided through PT Prime - Soluções Empresariais de Telecomunicações e Sistemas, S.A. (‘‘PT Prime’’). This company is also an Internet Service Provider ("ISP") for large clients.
2004 ANNUAL REPORT97
ISP services for residential clients are provided by PT.com - Comunicações Interactivas, S.A. (‘‘PT.com’’ - former PT Multimedia.com - Serviços de Acesso à Internet, SGPS, S.A.), which also provides services relating to the conception of publicity, publicity space and information on Internet portals.
Mobile services in Portugal are provided by TMN - Telecomunicações Móveis Nacionais, S.A. (‘‘TMN’’) under a GSM license granted by the Portuguese State in 1990 and under a UMTS license obtained in December 19, 2000.
PT Multimedia - Serviços de Telecomunicações e Multimedia, SGPS, S.A. (‘‘PT Multimedia’’) is the Group’s sub-holding for multimedia operations. Through its subsidiary TV Cabo Portugal, S.A. (‘‘TV Cabo Portugal’’), PT Multimedia renders cable and satellite television services in mainland Portugal, Madeira and Azores.
PT Multimedia also provides other multimedia services in Portugal, namely editing and selling of DVDs and video games, trough Lusomundo Audiovisuais, S.A. (‘‘Lusomundo Audiovisuais’’), the distribution and exhibition of movies, trough Lusomundo Cinemas, S.A. (‘‘Lusomundo Cinemas’’), and the publishing of large circulation newspapers and the edition of radio programs, through Lusomundo Media, SGPS, S.A. (‘‘Lusomundo Media’’).
On December 27, 2002 Portugal Telecom and Telefónica Móviles, S.A. (‘‘Telefónica Móviles’’) completed their joint-venture for the Brazilian mobile telecommunications market by contributing 100% of the share holdings that each group owned in mobile telecommunications companies in Brazil to a new incorporated company Brasilcel N.V. (‘‘Brasilcel’’ or ‘‘VIVO’’). Currently, VIVO provides mobile services in the Brazilian States of São Paulo (through Telesp Celular S.A. - “ Telesp Celular” ), Paraná and Santa Catarina (through Global Telecom S.A. - “ Global Telecom” ), Rio de Janeiro (through Telerj Celular S.A.), Espírito Santo (through Teleste Celular S.A.), Bahia (through Telebahia Celular S.A.), Sergipe (through Telegirpe Celular S.A.), Rio Grande do Sul (through Celular CRT S.A.) and eleven states in the Midwestern and Northern regions of Brazil (through Tele Centro Oeste Celular Participações S.A. and its subsidiaries - “ TCO” ). Telesp Celular, S.A., Global Telecom, S.A. and TCO are controlled by the sub-holding Telesp Celular Participações, S.A. (‘‘TCP’’), Telerj Celular, S.A. and Telest Celular, S.A. are controlled by the sub-holding Tele Sudeste Celular Participações, S.A. (‘‘Tele Sudeste), and Telebahia Celular, S.A. and Telergipe Celular, S.A. are controlled by the sub-holding Tele Leste Celular Participações, S.A. (‘‘Tele Leste’’).
2. Basis of Presentation
The consolidated financial statements are presented in Euros and have been prepared from the accounting records of Portugal Telecom and its subsidiary companies (listed in Exhibit I to these financial statements), which include adjustments and reclassifications in order to conform to the Company’s accounting policies and with generally accepted accounting principles in Portugal (‘‘Portuguese GAAP’’), and for certain situations not specifically addressed by these standards, International Accounting Standards (‘‘IAS’’) are considered. These financial statements also include certain reclassifications in order to conform more closely to the form and content of financial statements prepared in the United Kingdom and the United States of America.
98
The preparation of the financial statements in conformity with Portuguese GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
a) Consolidation Principles
-
The Company has fully consolidated the financial statements of all material subsidiary companies in which effective control is exercised by virtue of ownership of a majority of the voting rights (Exhibit I.1) or management control.
All significant inter-company account balances and transactions have been eliminated in the consolidated financial statements and the interests of the minority shareholders have been recognized in the consolidated financial statements. Any gains
generated on the sale of financial investments within the consolidation perimeter are reversed inside the consolidation perimeter.
-
Investments in associated companies (Exhibit I.3) and certain companies excluded from the consolidation (as indicated in Exhibit I.2) are recorded based on the equity method of accounting. Under this method, investments in associated companies are
initially recorded at cost, which is subsequently adjusted to the proportional equity of the related associated company, at the date of acquisition. The difference is recorded as an intangible asset under goodwill, and then amortized during the
estimated period to recover the investment.
Subsequently, investments in associated companies are periodically adjusted by an amount corresponding to Portugal Telecom’s share of the results and other changes in shareholders’ equity of those affiliated companies. Dividends received
from associated companies are recorded as a reduction of their corresponding book value. In relation to associated companies with a negative shareholders’ equity position, the Company records a provision under ‘‘Provision for other
risks and costs’’ in the balance sheet (Note 18). The loans granted to associated companies are recorded at nominal values less a provision for estimated losses, when applicable.
- Investments in other companies (participation of less than 20%) are recorded at cost and loans granted are recorded at nominal value less a provision for estimated losses, when applicable.
| b) | Changes in the Consolidated Group |
| The main changes in the consolidated Group in the year ended December 31, 2004 are summarized in Exhibit II. | |
3. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of the consolidated financial statements are:
a) Short-term investmentsShort-term investments consist of short-term treasury applications and marketable securities and are accounted for at the lower of cost or market value. Additionally,
2004 ANNUAL REPORT99
loans granted to affiliated companies represented by Floating Rate Notes negotiable in the financial markets are also accounted for as short-term investments.
b) Provision for doubtful accountsThe provision for doubtful accounts receivable is stated at the amount considered necessary to cover potential risks in the collection of overdue accounts receivable balances.
c) InventoriesInventories are stated at the lower of cost or market value; cost is determined on the weighted average cost method. A provision is recorded to cover obsolete inventories and certain items whose net realizable value is lower than cost.
d) Fixed assetsFixed assets acquired up to December 31, 1991 are carried at restated value (determined in accordance with the revaluation criteria established by the applicable Portuguese legislation). Fixed assets acquired after that date are stated at cost. Depreciation is provided on cost or restated value on a straight-line basis, over the estimated useful lives of the fixed assets, starting as from the month of its acquisition. A portion (40%) of the additional depreciation arising from the revaluation is not deductible for income tax purposes, originating a deferred tax liability of Euro 20,768,988 (Note 29).
The depreciation rates correspond to the following estimated average useful lives:
| Years | ||
| Buildings and other constructions | 10 - 50 | |
| Basic equipment: | ||
| Network installations and equipment | 5 - 25 | |
| Switching equipment | 5 - 10 | |
| Telephones, switchboards and other | 5 - 10 | |
| Submarine cables | 15 - 20 | |
| Satellite stations | 15 | |
| Other telecommunications equipments | 3 - 10 | |
| Other basic equipment | 4 - 20 | |
| Transportation equipment | 4 - 8 | |
| Tools and dies | 4 - 10 | |
| Administrative equipment | 3 - 10 | |
| Other tangible fixed assets | 3 - 10 |
A provision is recorded to reduce the carrying amount of basic equipment, which is to be disposed before the end of its useful life, to net realizable value (Note 18).
The cost of recurring maintenance and repairs is charged to income as incurred. Significant renewals and betterments are capitalized.
e) Intangible assetsThis caption consists primarily of goodwill, telecommunications licenses, software development costs and research and development costs. Except for goodwill, telecommunications licenses and the amount paid to the Portuguese State for the acquisition of the Basic Network (Note 12), intangible assets are amortized as from the month of its acquisition on a straight-line basis over periods ranging from three to six years.
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Goodwill, arising from the difference between the cost of the investments in subsidiaries and the related fair value of the subsidiaries' net assets on the date of acquisition, is capitalized and amortized on a straight-line basis during the expected period to recover the investment, as indicated in Note 12.
The excess amount paid by the Company for the net assets of Brasilcel’s subsidiaries includes a portion related with the licences owned by those subsidiaries. This portion is presented separately from goodwill in the caption ‘‘Industrial property and other rights’’ and is amortized based upon the projected revenues of those subsidiaries, during the corresponding estimated useful lifes of those assets.
The UMTS license obtained by TMN and other related intangibles (Note 12) are being amortized on a straight line basis over the remaining period of the license (until 2015), as from May 2004 following the start of operations of the UMTS system.
The amount paid to the Portuguese State for the acquisition of the Basic Network (Note 12) is being amortized on a straight-line basis over the remaining period of the concession (until 2025).
Additionally, this caption includes rental contracts of satellite capacity contracted by TV Cabo (Note 12) which are being amortized over the corresponding period of each contract. These contracts were considered as capital leases.
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f) Pension benefits
(i) Under the provisions of articles 5, 6 and 7 of Decree-Law 122/94, which were the legal basis for the incorporation of Portugal Telecom in 1994, the employees in service and those retired from the merged companies maintain all the rights and obligations to which they were entitled. Decree Law 219/2000 established that these obligations of Portugal Telecom were transferred to PT Comunicações on its incorporation. Therefore, PT Comunicações has the obligation to grant:
| Benefits | ||
| . To retirees and employees of PT Comunicações coming from and hired by CTT up to May 14, 1992 | Pension | |
| . To retirees and employees of PT Comunicações coming from TLP and TDP | Supplemental pension | |
| . To retirees and employees of PT Comunicações coming from and hired by CTT after May 14, 1992 | Not covered | |
| . To employees hired directly by Portugal Telecom or PT Comunicações | Not covered | |
There are three autonomous pension funds to cover these liabilities, one for each company merged into Portugal Telecom. These pension funds are managed autonomously by the pension fund management companies.
In addition, employees of PT Comunicações hired by Companhia Portuguesa Rádio Marconi, S.A. (a company fully incorporated in PT Comunicações in 2002 - “ Marconi” ) until February 1, 1998 have a special social security scheme through Caixa de Previdência do Pessoal da Companhia Portuguesa Rádio Marconi ("Caixa"), an independent entity reporting to the Ministry of Social Security. The employees hired after that date are covered by the Portuguese State Social Security system. PT Comunicações’ liabilities with these employees hired by Marconi are covered by three autonomous Pension Funds.
(ii) Lusomundo Media, through its subsidiary Global Notícias - Publicações, S.A. (‘‘Global Notícias’’ - former Diário de Notícias, S.A. and Jornal de Notícias, S.A.) has the obligation to grant a supplemental pension to retirees and employees hired up to 1979 by Diário de Notícias and up to 1994 by Jornal de Notícias.
(iii) PT - Sistemas de Informação, S.A. ("PT SI") has the obligation to grant supplemental pensions to employees who were transferred from PT Comunicações.
The amount of the Company’s liabilities with respect to pensions and pension supplements of PT Comunicações, Lusomundo Media and PT SI is estimated based on actuarial valuations prepared annually by an independent actuary. The liabilities that are not covered by any existing pension fund are covered by the accrued post retirement liability. Actuarial gains and losses arising from differences between the actuarial assumptions and financial and demographic information collected in the period are recorded in the balance sheet net of the accrued post retirement benefits, and are recognized in the profit and loss statement from the following year, on a straight line basis during the remaining average working life of active employees, in accordance with IAS 19. The adoption of IAS 19 was made since the Company considered that this standard is more adequate than the Portuguese Accounting Directive 19 to reflect the post retirement liabilities.
(iv) Up to December 31, 1999 Telesp Celular, TCO and the companies controlled by Tele Leste and Tele Sudeste were jointly responsible, with the other companies resulting from the Telebrás split, for a pension fund managed by Fundação Sistel de Seguridade Social ("SISTEL"). On December 28, 1999 these companies negotiated conditions for the
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creation of autonomous pension funds applicable to all active employees of each company and to retired employees after January 31, 2000. This statutory change was approved by the Brazilian Federal Government on January 13, 2000.
As a result of this agreement, Telesp Celular, TCO and the companies controlled by Tele Leste and Tele Sudeste implemented on October 31, 2000 defined contribution plans ("TCP PREV", ‘‘TCO PREV’’ and ‘‘Plano de Benefícios Visão Celular’’, respectively), that provide a supplemental pension, managed by SISTEL, covering the majority of the employees of these companies which will operate through contributions from both the employees and companies. The contributions of the employers for this plan are equivalent to the contributions of the employees, which correspond from 1% up to 9% of the salary based on the percentage chosen by the employee. The costs related with these contribution plans are recorded by the companies on the dates the related contributions are due.
In relation to the active employees previously covered by the SISTEL pension fund, Telesp Celular, TCO and the companies controlled by Tele Leste and Tele Sudeste proposed the migration to their new defined contribution plans which was accepted by 99% of the employees of Telesp Celular and TCO and 94% and 83% of the employees of the companies controlled by Tele Leste and Tele Sudeste, respectively. In relation to the employees that have not accepted the migration and as a result of the split in the SISTEL pension fund described above, Telesp Celular, TCO and the companies controlled by Tele Leste and Tele Sudeste established defined benefit plans ("PBS Telesp Celular", ‘‘PBS TCO’’, ‘‘PBS Tele Leste Celular’’ and ‘‘PBS Tele Sudeste Celular’’, respectively). These companies contribute with amounts determined based on actuarial studies (in accordance with Brazilian actuarial rules) made by an independent actuary. Presently, the contributions made by these companies correspond to 12% of the employees salaries.
(v) CRT Celular was responsible for a private retirement benefit plan. As this private retirement plan is a multi-employer plan, the related pension costs were recognized when contributions were due. In December 2003, CRT Celular obtained its release from this multi-sponsored plan and established a new defined contribution plan (“ Plano de Benefícios Visão CRT’’), which will operate through contributions from both the employees and companies. The costs related with this contribution plan are also recorded by the companies on the dates the related contributions are due.
(vi) The individuals employed by the Company’s remaining subsidiaries are included in the social security system of each respective country and are not covered by the benefits mentioned above.
g) Other employee benefits(i) In accordance with the terms of Article 8 of Decree-Law 122/94 relating to the harmonization of medical benefits applicable to the employees of PT Comunicações, a medical plan was designed applicable to its employees, active and retired (excluding the employees hired after July 31, 2003 and the employees hired by Marconi), and eligible relatives, which is managed by Portugal Telecom - Associação de Cuidados de Saúde (‘‘PT-ACS” ).
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The plan referred to above became effective on January 1, 1996. As from that date the health care services previously provided by Instituto das Obras Sociais ("IOS") and Caixa de Previdência do Pessoal dos TLP ceased to be used.
The following parties contribute to fund this health care plan:
- The principal beneficiaries (beneficiaries of one of the aforementioned health schemes) - 1.5% of salaries;
- Serviço Nacional de Saúde ("SNS") with Euro 281 per beneficiary of the plan; and
- Portugal Telecom with the balance required to fully cover the costs.
The retired and active employees of PT Comunicações hired by Marconi up to February 1, 1998 and eligible relatives are also entitled to medical benefits, which are provided through PT-ACS.
Certain employees of PT SI who were transferred from PT Comunicações are also covered by the health care benefits described above.
The health care liabilities and costs are calculated in a similar manner to the pension liabilities and costs referred to above, in accordance with employees past services.
The actuarially determined costs of health care to be provided as from retirement age are recorded in the statement of profit and loss in the caption "Post retirement benefits" and the Company’s obligations are recorded in the balance sheet in the caption "Accrued post retirement liability". Actuarial gains and losses arising from differences between the actuarial assumptions and financial and demographic information collected in the period, are recorded in the balance sheet, net of the accrued post retirement benefits, and are recognized in the profit and loss statement from the following year, on a straight line basis during the remaining average working life of active employees, in accordance with IAS 19.
The contributions from SNS and contributions of the employees of PT Comunicações (including the employees hired by Marconi) and PT SI are recorded as reductions in the cost for the year to which they relate.
(ii) The employees of Telesp Celular, TCO and the companies controlled by Tele Leste and Tele Sudeste, together with the employees of the other telecommunications operators in Brazil resulting from the Telebrás split, are entitled to medical benefits through "Fundo de Assistência Médica Sistel" ("Sistel Medical Fund"), which is a multi-employer fund. Accordingly, post retirement medical costs are recognized when contributions are due to the fund.
(iii) The individuals employed by the Company's remaining subsidiaries are included in the social security system of each applicable country and are not covered by the benefits mentioned above.
h) Pre-retirements, early retirements and suspended contracts
The Company records liabilities for the payment of salaries up to the date of retirement and for pensions, pension supplements and other employee benefits payable after that date, in relation to all employees that are under a suspended contract agreement, that have pre-retired or entered into the early retirement programs (Notes
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30.1 and 30.2), at the time that the Company signs the suspended contract, pre-retirement or early retirement benefits to the affected employees.
i) Vacation pay and bonusesThe Company provides an accrual at the end of each period for bonuses and vacation earned but not yet paid.
j) Current classificationAssets to be realized and liabilities to be settled within one year from the date of the balance sheet are classified as current.
k) Grants and subsidies for fixed assetsGrants and subsidies received from the Portuguese Government and from European Union entities to finance the acquisition of fixed assets are accounted for as deferred income and recognized in profit and loss over the useful lives of the related assets.
l) Own work capitalized (Self - constructed assets)
The value of works performed for own purposes and capitalized as part of fixed assets is included as a reduction in operating expenses. These works, which consist mainly of additions to telecommunications and other installations, are stated at the direct cost of labour, materials and services rendered by outside contractors, but do not include overhead allocations and financing costs.
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m) Leases
Fixed assets acquired under long-term lease contracts are recorded as capital leases, if they meet the criteria to be classified as such. The leased assets are recorded at the lower of the present value of the lease payments or the fair value of the leased assets at the time the arrangement commences and the corresponding liability is recognized in the balance sheet. The leased assets are depreciated over their estimated useful lives and the interest component of the lease payment is expensed in the period to which it relates, using the effective interest method.
n) Statements of cash flowsThe statements of cash flows are prepared in accordance with Portuguese GAAP, using the direct method. This methodology is also consistent with IAS 7, except for one difference related with the balance of ‘‘Cash and cash equivalents’’ from companies acquired or sold during the period. Under IAS 7, the balance of ‘‘Cash and cash equivalents’’ of such companies should be classified as ‘‘Cash from investing activities’’, while under Portuguese GAAP it appears as changes in consolidation.
The statements of cash flows present the annual cash flows of the Company and the cash and cash equivalents at period end. The Company classifies all highly liquid investments purchased with original maturity of three months or less as cash and cash equivalents. Cash flows are classified as to whether they relate to operating, investing or financing activities.
Cash flows from operating activities include collections from clients, payments to suppliers, payments to personnel and other collections and payments relating to operating activities.
Cash flows used in investing activities include the acquisitions and disposals of investments in associated companies and the purchase and sale of property, plant and equipment.
Cash flows from financing activities include the following: (i) borrowings and repayments of debt; (ii) acquisition and sale of treasury securities; and (iii) payments of dividends to shareholders.
o) Provision for income taxesPortugal Telecom, PT Multimedia and Lusomundo Media adopted the tax consolidation regime in Portugal. The provision for income taxes is determined on the basis of the estimated taxable income for all the companies covered by this regime (all 90% or more owned Portuguese subsidiaries). The remaining group companies, not covered by the tax consolidation regimes of Portugal Telecom, PT Multimedia or Lusomundo Media, are taxed individually based on their respective taxable income, at the applicable tax rates.
The Company adopted in 2000 the Accounting Directive No. 28 related with the computation of the income tax provision and the recognition of deferred taxes. As a result, the Company recognized deferred tax assets and liabilities (Note 29) for differences between the financial reporting and the tax basis of assets and liabilities at each reporting date related to differences arising from Portuguese financial reporting and tax reporting methodologies. Deferred tax assets are recorded only when management believes that these deferred tax assets will be realized to offset future taxable income or deferred tax liabilities.
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Income taxes, either current or deferred, arising from transactions or events recognized directly in shareholders’ equity are recorded in the same caption.
2004 ANNUAL REPORT107
p) Financial instruments and risk management
Financial instruments include basically interest rate and currency swap agreements to hedge the impact of changes in interest rates and currency rates on certain of the Company's long-term borrowings denominated in foreign currencies (Note 31).
Gains or losses from financial instruments which are hedging the above mentioned risks or certain assets or liabilities, are recorded symmetrically to the losses or gains arising from the related assets or liabilities. In the case that financial instruments are not hedging any risk, asset or liability, they are recorded based on their fair value at the balance sheet date; gains or losses arising from the change in the fair value of these financial instruments are recorded in the income statement of the period in which they occur.
Up-front premiums or expenses, received or paid, in connection with derivatives contracted by the Company are recognized in results on a straight line basis during the maturity period of those derivatives.
q) Recognition of operating revenues and related expenses
Revenues from telephone and other telecommunications services are recognized when earned. Billings for these services are made on a monthly basis throughout the month. Unbilled revenues from the billing cycle up to the end of each month are estimated based on the previous months’ traffic and are accrued at the end of the month. Differences between estimated and actual unbilled revenues, which have not been significant, are recognized in the following period.
Operating revenues are reported on a gross basis, with the compensations paid to other telecommunications carriers being accounted for as operating expenses (Note 23) in the same period the revenue is earned.
Revenues from telephone line rentals are recognized in the period to which they apply. Unbilled revenues relating to these rentals are accrued at the end of the period.
Revenues from mobile telephony services result essentially from: (i) fee for use of wireless network; (ii) interconnection fees; (iii) roaming; and (iv) pre-paid phone cards. These service revenues are recognized on the month the service is provided. In relation to the pre-paid phone cards, income is recognized for the pre-paid minutes of traffic used.
Revenues from the sale of terminal telecommunications equipments and the corresponding cost are recognized at the moment of sale.
Revenues from cable and satellite television services result essentially from: (i) amounts invoiced relating to monthly subscriptions for use of the service; (ii) advertising placed in the cable television channels; and (iii) rental and sale of equipment. Revenues from monthly subscriptions and installation are recognized in the period the services are rendered to the clients. Revenues from advertising are recognized in the period the advertising is inserted. Revenues from the rental of equipment are recognized in the period it is rented and revenues from the sale of equipment are recognized at the moment of sale.
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Revenues from ISP services result essentially from monthly subscriptions, the provision of access to the internet and telephone traffic generated by clients upon usage of the services. These revenues are recognized when invoiced.
Advertising revenues from telephone directories and related costs are recognized in the period in which the directories are effective.
Advertising revenues from publications of newspapers and magazines are recognized in the period in which the advertising is inserted.
Revenues derived from the sale of newspapers and magazines are recognized at the moment of sale, except for subscriptions fees where revenues are deferred over the subscription period.
Revenues from the exhibition of films results from the sale of cinema tickets and revenues from the distribution of films results from the sale to other cinema operators of distribution rights acquired by Lusomundo Audiovisuais from film distributors or makers. These revenues are recognized in the period of the exhibition or in the period of the sale of the rights.
r) International telecommunications services
Fees from international telecommunications services are remitted to operators in the country in which calls are terminated based on the traffic records of the country of origin and rates established in agreements between the telecommunications operators. The operator of the country of origin of the traffic is responsible for crediting the operator of the destination country and, if applicable, the operators of the transit countries. In circumstances in which PT Comunicações is the originator of an international telecommunications service, PT Comunicações recognizes the amounts remitted to international operators as a cost, and records revenues for the gross amounts billed. In instances in which PT Comunicações terminates an international call, the Company records only the net amount received from the originating carrier as revenues.
s) Foreign currency transactions and balances
Transactions denominated in foreign currencies are translated to Euros at the rates of exchange prevailing at the time the transactions are made. At the balance sheet date, assets and liabilities denominated in foreign currencies are adjusted to reflect the exchange rates published by "Banco de Portugal" (Central Bank) prevailing at such date. The resulting gains or losses on foreign exchange transactions are credited or charged to the profit and loss statement, except for unrealized exchange differences on long term intra-group balances, representing an extension of the related investments and where settlement is not expected in the foreseeable future, which are recorded in shareholders' equity in a specific caption in accordance with IAS 21.
The financial statements of subsidiaries operating in other countries are translated to Euros, using the following exchange rates:
- Assets and liabilities: exchange rates prevailing at the balance sheet date;
- Profit and loss statement: period average exchange rates;
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- Share capital, reserves and retained earnings: historical exchange rates; and
- Cash flow statement: annual average exchange rates for cash flows where these rates are closer to the effective exchange rates; in the remaining cash flows the exchange rate of the day of operation is used.
The effect of translation differences is recorded in shareholders' equity under the specific caption "Cumulative foreign currency translation adjustments".
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4. Translation of Euro to United States Dollar Amounts
The financial statements are stated in Euros. The translation of the Euro amounts to United States Dollars is included solely for the convenience of the readers, using the noon buying rate certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2004, which was Euro 1 to US$ 1.3538. The convenience translations should not be assumed as representations that Euro amounts have been, could have been, or could in the future be, converted into United States Dollars at this or any other rate of exchange.
5. Short term investments
This caption consists of:
| 2004 | 2003 | |||
| Short-term treasury appllications: | ||||
| Denominated in local currency (i) | 1,393,099,961 | 2,089,377,517 | ||
| Other currencies (ii) | 105,812,964 | 182,829,609 | ||
| 1,498,912,925 | 2,272,207,126 | |||
| Less: Provision for marketable securities (Note 28) | - | (19,066) | ||
| 1,498,912,925 | 2,272,188,060 | |||
| (i) | As of December 31, 2003 this caption included Euro 208,025,245 corresponding to 50% of a loan granted to TCP, denominated in local currency, which was not eliminated with the proportional consolidation of VIVO. This loan was repaid in November 2004. |
| (ii) | As of December 31, 2003 this caption included Euro 83,135,392 corresponding to 50% of the loans granted to TCP, denominated in U.S. Dollars, which was not eliminated with the proportional consolidation of VIVO. During 2004, an amount of Euro 33,559,504 was repaid and at year-end the loans outstanding amount to Euro 44,049,629. |
| As of December 31, 2004 and 2003 this caption also included Euro 39,828,143 and Euro 72,986,139, respectively, related with financial instruments contracted by Brasilcel’s subsidiaries, which currently are not covering any specific risk and, accordingly, are recorded at fair value. During 2004 some of these financial instruments were cancelled (approximately Euro 33 million). | |
This caption consists of:
| 2004 | 2003 | |||
| Third parties | ||||
| Accounts receivable from customers | 1,077,867,979 | 1,051,761,281 | ||
| Doubtful accounts receivable | 260,755,168 | 297,345,299 | ||
| Notes receivable | 154,292 | 211,130 | ||
| Unbilled revenues | 192,230,090 | 157,976,832 | ||
| 1,531,007,530 | 1,507,294,542 | |||
| Less: Provision for doubtful accounts receivable (Note 28) | (364,802,804) | (389,281,397) | ||
| 1,166,204,726 | 1,118,013,145 | |||
2004 ANNUAL REPORT
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The Company grants credit, in the normal course of business, to governmental and individual customers and, in the case of outbound traffic, to international telecommunications companies. As of December 31, 2004 and 2003 there were no significant concentrations of credit risk.
The Company classifies as doubtful specific accounts receivable balances overdue from customers. As these balances, together with other balances classified as accounts receivable from customers, are not fully collectible, the provision for doubtful accounts receivable reasonably covers the estimated losses relating to those balances.
7. Other Receivables and Other Non-Current Assets
These captions consist of:
| 2004 | 2003 | |||
| OTHER RECEIVABLES | ||||
| Third parties | ||||
| Accounts receivable from public entities | ||||
| Value added tax | 21,827,386 | 17,427,292 | ||
| Income tax receivable (Note 16) | 2,671,827 | 3,232,311 | ||
| Other tax receivable | 2,613,264 | 2,182,043 | ||
| 27,112,477 | 22,841,646 | |||
| Accounts receivable from foreign public entities (1) | 153,671,149 | 98,392,064 | ||
| Discounts given to retired Portuguese citizens (Note 33.c)) | 47,597,244 | 49,657,701 | ||
| Interest to be received | 38,010,025 | 40,273,623 | ||
| Contribution from SNS (Note 3.g)) | 20,786,447 | 19,051,992 | ||
| Advances to suppliers | 22,016,616 | 19,141,681 | ||
| Other billing | 6,760,692 | 8,696,276 | ||
| Funds from European Union | 3,923,129 | 10,360,925 | ||
| Unbilled revenues | 3,451,657 | 7,183,739 | ||
| Other | 114,933,090 | 108,223,695 | ||
| 411,150,049 | 360,981,696 | |||
| Less: Provision for doubtful accounts receivable (Note 28) | (15,873,011) | (18,448,447) | ||
| 395,277,038 | 342,533,249 | |||
| Total third party receivables | 422,389,515 | 365,374,895 | ||
| Affiliated companies | ||||
| Subsidiaries of Brasilcel (2) | 17,821,820 | 24,973,763 | ||
| Médi Telecom | 5,026,385 | 4,098,025 | ||
| Other | 10,950,770 | 4,838,761 | ||
| Total receivables from affiliated companies | 33,798,975 | 33,910,549 | ||
| OTHER NON-CURRENT ASSETS | ||||
| Taxes receivable (3) | 62,623,744 | 22,922,839 | ||
| Mobile clients retention plans (4) | 5,853,721 | 7,959,954 | ||
| Interest paid in advance (5) | 4,907,808 | 7,642,938 | ||
| Maintenance and repairs | 1,521,993 | 2,433,275 | ||
| Other | 24,744,145 | 29,566,858 | ||
| 99,651,411 | 70,525,864 | |||
| Less: Provision for doubtful accounts receivable (Note 28) | (3,598,842) | (2,000,060) | ||
| 96,052,569 | 68,525,804 | |||
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| (1) | As of December 31, 2004 this caption includes Euro 147,995,529 related with 50% of direct and indirect taxes to be recovered by Brasilcel's subsidiaries. |
| (2) | This caption corresponds to 50% of the balances receivable from subsidiaries of Brasilcel, which are not eliminated in the proportional consolidation of these subsidiaries. |
| (3) | As of December 31, 2004 and 2003 this caption relates to 50% of direct and indirect taxes to be recovered by Brasilcel's subsidiaries in more than one year. |
| (4) | This caption corresponds to direct costs related to contracts entered into with mobile clients. These costs are expensed during the period of the respective contracts. |
| (5) | This caption corresponds to expenses incurred in connection with certain loans obtained by the Company, which will be expensed during the maturity period of the respective loans. |
8. Inventories
This caption consists of:
| 2004 | 2003 | |||
| Merchandise | 182,979,978 | 108,321,329 | ||
| Raw materials and consumables | 19,514,308 | 15,700,420 | ||
| Work-in-process | 6,263,690 | 5,951,195 | ||
| Advances for purchases | 128,950 | 356,088 | ||
| 208,886,926 | 130,329,032 | |||
| Less: Provision for obsolete and slow moving inventories (Note 28) | (31,789,805) | (27,444,050) | ||
| 177,097,121 | 102,884,982 | |||
9. Prepaid Expenses and Other Current Assets
This caption consists of:
| 2004 | 2003 | |||
| Telephone directories | 47,208,585 | 50,674,110 | ||
| Mobile clients retention plans (1) | 32,439,005 | 32,093,416 | ||
| Advances for the acquisition of distribution rights | ||||
| for the exhibition of movies in Portugal | 14,435,959 | 12,756,002 | ||
| Rents | 6,544,606 | 6,071,809 | ||
| ICMS (2) | 6,469,692 | 6,025,514 | ||
| Interest paid in advance (3) | 5,255,592 | 7,288,011 | ||
| Advances to employees | 2,411,039 | 2,287,207 | ||
| Other | 38,882,439 | 23,045,820 | ||
| 153,646,917 | 140,241,889 | |||
| (1) | This caption includes certain expenses relating to client retention plans of TMN and Vivo which are expensed during the period of the respective contracts. |
| (2) | This caption corresponds to 50% of the deferred value added taxes by Brasilcel’s subsidiaries. |
| (3) | This caption corresponds to expenses incurred in connection with certain loans obtained by the Company, which will be expensed during the maturity period of the respective loans. |
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10. Investments, net
This caption consists of:
| 2004 | 2003 | |||
| Loans granted to associated companies and other companies (i) | 297,963,869 | 250,295,256 | ||
| Investments in associated companies (ii) | 108,122,553 | 157,988,308 | ||
| Investments in other companies: | ||||
| Banco Espirito Santo, SA. ("BES") | 55,300,000 | 55,300,000 | ||
| Intelsat | 13,127,252 | 13,127,252 | ||
| Grupo Media Capital, SGPS, S.A. ("Media Capital") (1) | 6,960,000 | - | ||
| Cypress Entertainment, Inc. (2) | 3,016,754 | 3,016,754 | ||
| INESC - Instituto de Engenharia de Sistemas e Computadores ("INESC") | 2,992,787 | 2,992,787 | ||
| Telefónica de España, S.A. | 2,156,034 | 2,156,034 | ||
| Tagusparque-Sociedade de Promoção e Desenvolvimento do | ||||
| Parque de Ciência e Tecnologia da Área de Lisboa, S.A. | 1,296,875 | 1,296,875 | ||
| New Skies Satellites, NV (3) | - | 4,674,500 | ||
| Eutelsat (3) | - | 3,055,710 | ||
| Other | 4,255,141 | 3,531,217 | ||
| Real estate investments | 54,248,363 | 30,194,199 | ||
| Advances for investments | 2,185,233 | 1,688,320 | ||
| Other long-term investments | 848,144 | 1,086,480 | ||
| 552,473,004 | 530,403,692 | |||
| Less: Amortization for investments | (25,835,340) | (12,195,806) | ||
| Less: Provision for investments (Note 28) | (94,024,988) | (70,128,694) | ||
| 432,612,676 | 448,079,192 | |||
| (1) | During 2004, Portugal Telecom acquired a 1.93% interest in Media Capital, for an amount of Euro 6,960,000 (Exhibit II). |
| (2) | The investment in this company is fully provided for. |
| (3) | These companies were sold in 2004. |
| (i) | Loans granted to associated companies and other companies are basically to finance its operations and to develop new businesses, and consist of: |
| 2004 | 2003 | |||
| UOL, Inc ("UOL") (1) | 77,989,260 | 84,108,607 | ||
| Sport TV Portugal, S.A. ("Sport TV") | 66,213,937 | 17,475,958 | ||
| Médi Telecom, S.A. ("Médi Telecom") | 64,442,408 | 64,699,898 | ||
| Sportinveste Multimédia, SGPS, S.A. ("Sportinvest") (2) | 35,318,668 | 29,318,668 | ||
| Idealyze, S.A. ("Idealyze") (3) | 29,420,510 | 31,728,959 | ||
| Web-Lab, SGPS, S.A. ("Web-Lab") | 6,684,761 | 4,886,562 | ||
| Marconi Suisse Telecommunications, S.A.R.L. ("Marconi Suisse") | 5,732,692 | 2,502,684 | ||
| INESC | 3,292,066 | 3,292,066 | ||
| Sportstat - Informação Desportiva Independente, Lda. ("Sportstat") | 1,610,068 | 1,610,068 | ||
| EJV - Plataforma de Comércio Electrónico, S.A. ("EJV") (4) | - | 5,422,112 | ||
| Other | 7,259,499 | 5,303,269 | ||
| 297,963,869 | 250,348,851 | |||
| (1) | This loan corresponds to 6,017,141 convertible bonds issued by UOL, which were subscribed for by the Company during 2002. As of December 31, 2004 there is a provision of Euro 39,371,875 to cover risks related with the recoverability of these bonds. In addition, there is a provision of Euro 18,432,125 regarding the Company’s share in the accumulated losses of |
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| UOL, as presented below in this Note. As a result, the company’s exposure to the investment in UOL amounts to approximatelly Euro 20 million as of December 31, 2004. | |
| (2) | This caption includes Euro 30,023,168 of additional paid-in capital contributions (Note 32.f)) and Euro 5,295,500 of shareholders loans granted to this affiliated company. |
| (3) | This loan is fully provided for. |
| (4) | This company was merged into PT.com during 2004. |
| (ii) | Investments in associated companies (with a positive equity position), accounted for by the equity method except where otherwise stated, consist of: |
| 2004 | 2003 | |||
| Unitel, S.A. ("Unitel") | 28,461,383 | 14,160,640 | ||
| CTM - Companhia de Telecomunicações de Macau, SARL ("CTM") | 27,965,749 | 31,509,064 | ||
| Warner Lusomundo Sogecable Cines de España, S.A. | 7,603,000 | 8,054,333 | ||
| Idealyze (1) | 7,417,741 | 7,417,741 | ||
| Banco Best, S.A. | 7,362,700 | 10,420,519 | ||
| Lisboa TV - Informação e Multimédia, S.A. | 5,572,558 | 4,631,845 | ||
| Páginas Amarelas, S.A. ("Páginas Amarelas") | 5,149,371 | 3,353,544 | ||
| Guiné Telecom - Companhia de Telecomunicações | ||||
| da Guiné-Bissau, SARL ("Guiné Telecom") (1) | 3,716,555 | 3,716,555 | ||
| Vasp - Sociedade de Transporte e Distribuição, Lda. ("Vasp") | 2,019,110 | 1,414,445 | ||
| Hungaro Digitel KFT (HDT) | 1,990,635 | 1,677,245 | ||
| Simarc - Promoções Imobiliárias, S.A. ("Simarc") (2) | - | 30,385,669 | ||
| Lusomundo - Sociedade de Investimentos Imobiliários, SGPS, S.A. (2) | - | 16,034,501 | ||
| Web-Lab (3) | - | 8,192,526 | ||
| Banco1.net, S.A. ("Banco1.net") (4) | - | 3,742,997 | ||
| Naveprinter, S.A. (2) | - | 3,111,239 | ||
| Previsão - Sociedade Gestora de Fundos de Pensões, S.A. ("Previsão") (5) | - | 1,531,864 | ||
| TPT-Telecomunicações Públicas de Timor, S.A. (2) | - | 1,316,726 | ||
| Other | 10,863,751 | 7,316,855 | ||
| 108,122,553 | 157,988,308 | |||
| (1) | As of December 31, 2004 the investments in these associated companies are not recorded by the equity method, as they are fully provided for. |
| (2) | These companies were fully consolidated as of December 31, 2004. |
| (3) | At the end of 2004, Portugal Telecom increased its interest in Web-Lab to 90% of its share capital (Exhibit II) and, as a result, the investment in this company in 2004 was recorded by the equity method of accounting. As of December 31, 2004 the investment in Web-Lab is recorded under ‘‘Provision for losses in affiliated companies’’, since it has a negative equity position. At December 31, 2003 this investment was fully provided for. |
| (4) | This company was sold during 2004 (Exhibit II). |
| (5) | During 2004, the Company increased its interest in Previsão to 78.12% of its share capital and, as a result, this company was fully consolidated as of December 31, 2004 (Exhibit II). |
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As described in Note 2.a), investments in associated companies with a negative equity position are recorded under ‘‘Provision for losses in affiliated companies’’. As of December 31, 2004 and 2003 this provision amounts to Euro 129,315,472 (Note 18) and is made up as follows:
| 2004 | 2003 | |||
| Sport TV | 43,945,196 | 28,544,528 | ||
| Médi Telecom | 38,225,006 | 33,240,081 | ||
| UOL | 18,432,125 | 22,048,099 | ||
| Web-Lab (1) | 14,864,355 | - | ||
| Marconi Suisse | 4,763,659 | 2,564,064 | ||
| TV Cabo Macau, S.A. | 2,551,594 | 1,205,689 | ||
| Tradecom International, N.V. | 1,968,387 | 1,259,761 | ||
| Sportstat | 1,439,496 | 1,405,945 | ||
| Other | 3,125,654 | 9,389,299 | ||
| 129,315,472 | 99,657,466 | |||
| (1) | As described above, the investment in Web-Lab was only recorded by the equity method of accounting starting January 1, 2004. |
During the years ended December 31, 2004, 2003 and 2002 equity accounting in earnings and losses of affiliated companies is made up as follows:
| 2004 | 2003 | 2002 | ||||
| Losses: | ||||||
| Médi Telecom | 5,553,004 | 24,923,719 | 55,508,346 | |||
| Banco Best | 3,094,000 | 3,502,000 | 3,630,865 | |||
| TV Cabo Macau | 1,538,934 | 2,168,055 | 2,691,976 | |||
| Sport TV | 834,032 | 5,053,730 | 7,163,244 | |||
| Tradecom International, N.V. | 738,913 | 1,554,947 | 4,295,880 | |||
| Global Telecom (1) | - | - | 88,641,563 | |||
| PrimeSys, S.A. (PrimeSys) (2) | - | - | 5,401,078 | |||
| Other | 5,047,735 | 7,452,613 | 18,863,184 | |||
| 16,806,618 | 44,655,064 | 186,196,136 | ||||
| Earnings: | ||||||
| Unitel | 16,820,236 | 6,457,074 | 3,597,925 | |||
| CTM | 11,379,327 | 13,080,811 | 14,468,022 | |||
| Mascom Wireless Proprietary Limited ("Mascom) (3) | 7,561,155 | - | - | |||
| Páginas Amarelas | 3,526,629 | 3,037,003 | 4,165,056 | |||
| UOL (4) | 1,735,353 | - | - | |||
| Other | 3,505,900 | 2,923,501 | 3,091,783 | |||
| 44,528,600 | 25,498,389 | 25,322,786 | ||||
| (27,721,982) | 19,156,675 | 160,873,350 | ||||
| (1) | Pursuant to the acquisition by TCP on December 27, 2002 of a controlling position in Global Telecom and the contribution of Portugal Telecom’s investments in Brazilian mobile telecommunications companies to Brasilcel, this company has been proportionally consolidated since January 1, 2003. |
| (2) | After July 1, 2002 this company has been fully consolidated. |
| (3) | During 2004, Mascom was excluded from full consolidation, as the investment in this subsidiary was in the process of being sold only pending regulatory approval from the Botswana authorities. This approval was granted in September 2004. During the first nine |
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| months of 2004, this company was consolidated by the equity method of accounting (Exhibit II). | |
| (4) | During 2004, Portugal Telecom increased its interest in UOL and, as result, the investment in this associated company was recorded by the equity method of accounting. |
11. Fixed Assets
This caption consists of:
| December 31, 2004 | ||||||
| Cost or restated values |
Accumulated Depreciation |
Net book value | ||||
| Land | 98,665,850 | 12,641,436 | 86,024,414 | |||
| Buildings and other constructions | 1,010,280,304 | 557,984,837 | 452,295,467 | |||
| Network installations and equipment | 5,740,339,452 | 3,868,504,823 | 1,871,834,629 | |||
| Switching equipment | 2,301,311,278 | 1,848,025,931 | 453,285,347 | |||
| Telephones, switchboards and other | 668,126,193 | 355,603,465 | 312,522,728 | |||
| Submarine cables | 261,013,291 | 119,655,532 | 141,357,759 | |||
| Satellite stations | 61,474,179 | 60,681,377 | 792,802 | |||
| Other telecommunications equipment | 1,039,721,278 | 752,222,391 | 287,498,887 | |||
| Other basic equipment | 189,643,394 | 106,283,438 | 83,359,956 | |||
| Transportation equipment | 62,619,195 | 37,397,694 | 25,221,501 | |||
| Tools and dies | 18,946,431 | 16,764,528 | 2,181,903 | |||
| Administrative equipment | 850,003,596 | 701,448,734 | 148,554,862 | |||
| Other tangible fixed assets | 69,103,113 | 54,187,820 | 14,915,293 | |||
| Construction in progress | 182,754,242 | - | 182,754,242 | |||
| Advances to suppliers of fixed assets | 260,486 | - | 260,486 | |||
| 12,554,262,282 | 8,491,402,006 | 4,062,860,276 | ||||
| December 31, 2003 | ||||||
| Cost or restated values |
Accumulated Depreciation |
Net book value | ||||
| Land | 95,394,159 | 13,203,045 | 82,191,114 | |||
| Buildings and other constructions | 892,553,549 | 484,404,549 | 408,149,000 | |||
| Network installations and equipment | 5,212,181,367 | 3,335,410,458 | 1,876,770,909 | |||
| Switching equipment | 2,283,107,233 | 1,734,293,826 | 548,813,407 | |||
| Telephones, switchboards and other | 847,422,769 | 493,501,942 | 353,920,827 | |||
| Submarine cables | 264,134,524 | 106,673,232 | 157,461,292 | |||
| Satellite stations | 61,686,679 | 60,199,100 | 1,487,579 | |||
| Other telecommunications equipment | 1,079,846,086 | 733,751,467 | 346,094,619 | |||
| Other basic equipment | 126,230,474 | 77,622,073 | 48,608,401 | |||
| Transportation equipment | 54,479,713 | 36,602,246 | 17,877,467 | |||
| Tools and dies | 18,563,005 | 16,390,291 | 2,172,714 | |||
| Administrative equipment | 862,152,069 | 661,311,307 | 200,840,762 | |||
| Other tangible fixed assets | 64,489,260 | 51,464,199 | 13,025,061 | |||
| Construction in progress | 209,991,608 | - | 209,991,608 | |||
| Advances to suppliers of fixed assets | 553,278 | - | 553,278 | |||
| 12,072,785,773 | 7,804,827,735 | 4,267,958,038 | ||||
2004 ANNUAL REPORT
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Fixed assets, net by geographic area are as follows:
| 2004 | 2003 | |||
| Domestic market | 3,078,752,942 | 3,269,888,319 | ||
| International market: | ||||
| Brazil | 918,071,511 | 887,590,706 | ||
| Other | 66,035,823 | 110,479,013 | ||
| 4,062,860,276 | 4,267,958,038 | |||
Submarine cables represent the Company's pro-rata share of the submarine cable circuits jointly constructed, operated, maintained and owned with other telecommunications operators located in other countries, based on the respective contracts and/or construction and maintenance agreements.
Depreciation charged to operations during the years ended December 31, 2004 and 2003 amounted Euro 818,888,679 and Euro 863,451,434, respectively.
As a result of technological enhancements and urban improvements, the Company retired some fixed assets in the years ended December 31, 2004 and 2003. The losses recorded as a result of those retirements amounted to Euro 3,631,366 and Euro 4,176,106, respectively (Note 26).
In previous years PT Comunicações, PT Prime, TV Cabo and TMN contracted cross border leases, which comprised the sale of certain telecommunications equipments to foreign entities for an amount of Euro 771,637,016. Simultaneously, those entities made leasing contracts of the equipment with special purpose entities, which made conditional sale agreements to sell the related equipments to PT Comunicações, PT Prime, TV Cabo and TMN, by an amount equivalent to the value of the initial sale. Group companies maintained the legal ownership of the those equipments, continuing to be able to sell or substitute any equipment. These transactions correspond to an operation of sale and lease back and, in accordance with Portuguese GAAP, the sale of the equipment was not recorded and the equipment continued to be recorded in the Company’s consolidated balance sheet.
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12. Intangible Assets
This caption consists of:
| December 31, 2004 | ||||||
| Accumulated | Net book | |||||
| Cost | Amortization | value | ||||
| Goodwill | 1,690,967,518 | 280,581,279 | 1,410,386,239 | |||
| Industrial property and other rights | 2,064,141,119 | 340,480,289 | 1,723,660,830 | |||
| Research and development costs | 82,461,046 | 55,359,084 | 27,101,962 | |||
| Incorporation expenses | 30,247,688 | 22,618,751 | 7,628,937 | |||
| Other intangible | 11,853,363 | 5,471,663 | 6,381,700 | |||
| In-progress intangibles | 37,695,235 | 37,695,235 | ||||
| Advances to suppliers of intangible assets | ||||||
| 3,917,365,969 | 704,511,066 | 3,212,854,903 | ||||
| December 31, 2003 | ||||||
| Accumulated | Net book | |||||
| Cost | Amortization | value | ||||
| Goodwill | 1,466,990,764 | 182,831,526 | 1,284,159,238 | |||
| Industrial property and other rights | 1,910,209,538 | 241,833,618 | 1,668,375,920 | |||
| Incorporation expenses | 86,048,875 | 76,341,814 | 9,707,061 | |||
| Research and development costs | 66,706,649 | 39,633,780 | 27,072,869 | |||
| Other intabgibles | 12,139,734 | 3,689,400 | 8,450,334 | |||
| In-progress intangibles | 152,356,963 | - | 152,356,963 | |||
| 3,694,452,523 | 544,330,138 | 3,150,122,385 | ||||
| (a) |
Euro 339,964,723 related to the acquisition of the ownership of the Basic Network from the Portuguese State. This amount corresponds to the difference between the amount paid in 2002 (Euro 365 million) and: (i) the concession rent of 2002 (Euro
16,604,413), which was still recorded in the income statement as a cost of the year 2002; and (ii) the gain obtained from a cross border lease operation (Euro 8,430,864) made in 2003 with equipment allocated to the basic network, as this gain was
considered in the determination of the value attributable to the basic network. |
| (b) |
Euro 992,058,080 related with 50% of the value allocated to the band A licenses owned by VIVO’s subsidiaries (Note 3.e)), and Euro 135,070,208 related to 50% of the cost of mobile telecommunications licenses obtained by Global Telecom and TCO
to operate in certain Brazilian states. |
| (c) |
Euro 99,759,579 related with a UMTS license obtained by TMN and an amount of Euro 33,333,333 paid to Oniway in connection with an agreement signed in 2002 between that company and the others three mobile operators in Portugal (including TMN). These intangibles were included in the caption ‘‘In-progress intangibles” as of December 31, 2003, but with the beginning of the UMTS operations in May 2004 they were transferred to the caption ‘‘Industrial property and
other rights’’. |
| (d) |
Euro 106,769,032 related with rental contracts of satellite capacity signed by TV Cabo in the second half of 2004, which have a maturity of 12 years and were considered as capital leases. |
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Intangible assets, net by geographic area are as follows:
| 2004 | 2003 | |||
| Domestic market | 1,376,701,844 | 1,319,887,830 | ||
| International market: | ||||
| Brazil | 1,832,838,693 | 1,827,700,956 | ||
| Other | 3,314,366 | 2,533,599 | ||
| 3,212,854,903 | 3,150,122,385 | |||
Amortization charged to operations, excluding amortization of goodwill, in the years ended December 31, 2004 and 2003 amounted to Euro 138,448,792 and Euro 90,526,958, respectively.
Goodwill, net of accumulated amortization, is related with the acquisition of the following investments:
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| 2004 | 2003 | |||
| VIVO (1) | 610,920,846 | 463,143,545 | ||
| Wireline business: | ||||
| PT.com (ISP and Portals businesses) | 153,950,736 | 162,624,017 | ||
| PT Comunicações (international carrier business) | 68,758,535 | 75,634,389 | ||
| PT Prime (Data & Corporate business) | 30,435,654 | 32,126,523 | ||
| Other | 293,341 | 1,003,014 | ||
| 253,438,266 | 271,387,943 | |||
| PT Multimedia: | ||||
| Pay TV and Cable Internet (2) | 187,965,579 | 176,647,950 | ||
| Audiovisuals: | ||||
| Lusomundo Audiovisuais, S.A. ("Lusomundo Audiovisuais") | 62,717,816 | 66,577,374 | ||
| Lusomundo Cinemas, S.A. ("Lusomundo Cinemas") | 36,606,543 | 38,751,006 | ||
| Media: | ||||
| Lusomundo Serviços, SGPS, S.A. ("Lusomundo Serviços") | 85,293,080 | 90,541,885 | ||
| Global Notícias - Publicações, S.A. ("Global Notícias") | 13,064,974 | 14,694,252 | ||
| Lusomundo Media, SGPS, S.A. ("Lusomundo Media") | 7,618,540 | 8,041,793 | ||
| Ocasião - Edições Periódicas, S.A. | 4,946,105 | - | ||
| Rádio Press - Comunicação e Radiodifusão, S.A. ("Rádio Press") | 1,729,289 | 1,930,245 | ||
| Vasp - Sociedade de Transporte e Distribuição, S.A. ("Vasp") | 1,226,475 | 1,717,064 | ||
| Other | 2,035,915 | 1,054,055 | ||
| 403,204,316 | 399,955,624 | |||
| Other businesses: | ||||
| Páginas Amarelas, S.A. ("Páginas Amarelas") | 79,287,531 | 83,754,434 | ||
| Unitel, S.A. ("Unitel") | 21,567,869 | 26,217,691 | ||
| PrimeSys | 20,302,243 | 23,363,425 | ||
| PT Sistemas de Informação, S.A. ("PT SI") | 6,473,516 | 8,931,685 | ||
| Cabo Verde Telecom, S.A. ("Cabo Verde Telecom") | 7,012,058 | 7,404,891 | ||
| Web-Lab, SGPS, S.A. | 8,179,594 | - | ||
| 142,822,811 | 149,672,126 | |||
| 1,410,386,239 | 1,284,159,238 | |||
| (1) |
The increase in this caption is primarily related with the goodwill generated in the acquisitions of further investments in Brasilcel’s subsidiaries (Exhibit II). |
| (2) |
This caption also includes the goodwill generated in the acquisition of a further investment of 16.67% in the share capital of Sport TV made during 2004, amounting to Euro 22,126,657 (Exhibit II). |
Goodwill is amortized on a straight line basis during the following periods (Note 3.e)):
| Company | Period |
| Brasilcel’s subsidiaries | Period expected to recover the investment (20 years). |
| PT.com | Period expected to recover the investment (20 years). |
| PT Comunicações (international carrier business) | Period expected to recover the investment (20 years). |
| PT Prime | Period expected to recover the investment (20 years). |
2004 ANNUAL REPORT
121
| PT Multimedia and subsidiaries | Period expected to recover the investment (20 years). |
| Páginas Amarelas | Period expected to recover the investment (20 years). |
| Unitel | Period remaining to the end of the license on the date of acquisition of the investment (9 years). |
| PrimeSys | Period expected to recover the investment (10 years). |
| Cabo Verde Telecom | Period remaining to the end of the concession on the date of acquisition of the investment (19 years). |
| Other | Period expected to recover the investment (maximum 20 years). |
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Amortization of goodwill in the years ended December 31, 2004, 2003 and 2002 was as follows:
| 2004 | 2003 | 2002 | ||||
| VIVO | 38,634,938 | 53,076,620 | 48,731,785 | |||
| Wireline business: | ||||||
| PT.com | 8,673,281 | 8,673,281 | 8,974,176 | |||
| PT Comunicações (international carrier business) | 6,875,854 | 6,875,854 | 6,875,854 | |||
| PT Prime | 1,690,870 | 1,690,870 | - | |||
| Other | 276,863 | 796,233 | 941,404 | |||
| 17,516,868 | 18,036,238 | 16,791,434 | ||||
| PT Multimedia: | ||||||
| Pay TV and Cable Internet | 10,809,028 | 9,979,276 | 8,381,315 | |||
| Audiovisuals: | ||||||
| Lusomundo Audiovisuais | 3,859,558 | 2,894,668 | - | |||
| Lusomundo Cinemas | 2,144,463 | 1,305,066 | - | |||
| Media: | ||||||
| Lusomundo Serviços | 5,248,805 | 3,936,604 | - | |||
| Global Notícias | 1,629,279 | 1,625,420 | 1,625,420 | |||
| Vasp | 490,590 | 490,590 | - | |||
| Lusomundo Media | 423,252 | 423,252 | - | |||
| Rádio Press | 200,957 | 200,957 | 201,037 | |||
| Lusomundo SGPS (1) | - | 2,668,172 | 29 394 937 | |||
| Other | 400,066 | 500,591 | 704,661 | |||
| 25,205,998 | 24,024,596 | 40,307,370 | ||||
| Other businesses: | ||||||
| Páginas Amarelas | 4,466,903 | 4,466,903 | 413,942 | |||
| Unitel | 4,369,670 | 4,369,670 | 4,369,670 | |||
| PrimeSys | 3,363,978 | 3,509,738 | 15,661,906 | |||
| PT SI | 1,616,252 | 1,616,252 | - | |||
| Other | 1,947,882 | 1,512,753 | 16,633,331 | |||
| 15,764,685 | 15,475,316 | 37,078,849 | ||||
| 97,122,489 | 110,612,770 | 142,909,438 | ||||
| (1) | As a result of the corporate restructuring of Lusomundo, made in the second quarter of 2003, the goodwill related with this investment was transferred to Lusomundo Audiovisuais, Lusomundo Cinemas and Lusomundo Serviços. |
The Company, supported on the business plans of the subsidiary and associated companies mentioned above, believes that the carrying value of the financial investments on the above mentioned companies (including goodwill, net of accumulated amortization and provisions for impairments), is lower than its fair value.
2004 ANNUAL REPORT123
13. Loans
This caption consists of:
| December 31, 2004 | December 31, 2003 | |||||||
| Short-term | Long-term | Short-term | Long-term | |||||
| Exchangeable bonds (a) | - | 390,335,000 | 450,485,000 | 440,335,000 | ||||
| Bonds (b) | 584,950,000 | 1,848,162,033 | 124,699,474 | 2,669,141,209 | ||||
| Bank loans (c): | ||||||||
| External market loans | 452,179,951 | 1,329,321,190 | 284,700,985 | 1,356,219,875 | ||||
| Domestic market loans | 7,100,357 | 7,712,975 | 6,583,720 | 7,373,996 | ||||
| Overdrafts | 14,647,937 | - | 2,545,597 | |||||
| Others loans | ||||||||
| Commercial Paper (d) | 318,808,486 | 8,950,000 | 285,487,967 | 10,900,000 | ||||
| External market loans (e) | 19,156,806 | 81,737,245 | 36,575,981 | 71,643,923 | ||||
| 1,396,843,537 | 3,666,218,443 | 1,191,078,724 | 4,555,614,003 | |||||
As of December 31, 2004 the medium and long-term portion of the loans is repayable as follows:
| 2006 | 1,524,528,265 | |
| 2007 | 458,444,296 | |
| 2008 | 507,138,776 | |
| 2009 | 959,027,456 | |
| 2010 and following years | 217,079,650 | |
| 3,666,218,443 | ||
(a) Exchangeable bonds
On June 7, 1999 PT Finance issued exchangeable bonds totalling Euro 509,435,000, convertible into Portugal Telecom shares, as follows:
- Number of exchangeable bonds: 101,887;
- Exchange price: Euro 10,515 per share (as a result of the stock split and the share capital increases occurred up to December 31, 2001);
- Nominal value: Euro 5,000;
- Maturity: June 7, 2004; and
- Fixed interest rate: 1.5% per annum, paid quarterly at the end of each period.
Up to December 31, 2003 the Company had converted 76 of these exchangeable bonds into 35,431 shares of Portugal Telecom and unwinded 11,710 of these exchangeable bonds, with a notional value of Euro 58,950,000. As of June 7, 2004 the remaining exchangeable bonds amounting to Euro 450,485,000 were repaid.
On December 6, 2001 PT Finance issued exchangeable bonds totalling Euro 550,000,000, convertible into Portugal Telecom shares, as follows:
- Number of exchangeable bonds: 110,000;
- Exchange price: Euro 12.3985 per share;
- Nominal value: Euro 5,000;
- Maturity: December 6, 2006; and
- Fixed interest rate: 2% per annum, paid quarterly at the end of each period.
On December 2003 and October 2004 the Company unwinded, respectively, 21,933 of these exchangeable bonds, with a notional value of Euro 109,665,000, and 10,000 of these exchangeable bonds with a notional value of Euro 50,000,000. As of December 31, 2004 the notional value of these exchangeable bonds outstanding amounts to Euro 390,335,000.
(b) BondsOn April 7, 1999 PT Finance issued notes totaling Euro 1,000,000,000, under a Global Medium Term Note (‘‘GMTN’’) program, with an annual fixed interest rate of 4.625% . These notes mature in 10 years. In November 2004, the Company cancelled the bonds from this program held as marketable securities with a notional value of Euro 120,500,000.
On February 21, 2001 PT Finance issued notes totaling Euro 1,000,000,000, under a second GMTN program, with an annual fixed interest rate of 5.75% . These notes mature in five years. In the second half of 2004, the Company cancelled the bonds from this program held as marketable securities with a notional value of Euro 100,500,000.
On November 16, 2001 PT Finance issued notes totaling Euro 600,000,000, under a Floating Rate Note program, at a floating interest rate corresponding to the three months Euribor plus a 0.75% spread. These notes mature in three years and three months. In November, 2004 the Company cancelled the bonds from this program held as marketable securities with a notional value of Euro 15,050,000.
On August 1, 2003, TCP obtained a bond amounting to BRL 500 million, with a maturity of five years and bearing an annual interest rate corresponding to 104.4% of the CDI.
On November 17, 2004 Portugal Telecom repaid the PT/97 bond amounting to Euro 124,699,474.
As of December 31, 2004 and 2003 bank loans are denominated in the following currencies:
| 2004 | 2003 | |||||||
| In the currency | In the currency | |||||||
| of the loan | Euro | of the loan | Euro | |||||
| Euro | 1,240,722,309 | 1,240,722,309 | 1,219,645,650 | 1,219,645,650 | ||||
| U.S. Dollars | 55,817,405 | 40,978,933 | 41,858,799 | 33,142,358 | ||||
| Brazilian Reais | 1,907,815,568 | 527,793,612 | 1,367,019,988 | 373,033,888 | ||||
| Other | 1,467,556 | 31,602,277 | ||||||
| 1,810,962,410 | 1,657,424,173 | |||||||
As of December 31, 2004 and 2003, the guarantees given by third parties on behalf of the Company, in connection with these loans, were as follows:
| 2004 | 2003 | |||
| - European Investment Bank loans guaranteed from Portuguese banks | 257,406,112 | 301,402,179 | ||
2004 ANNUAL REPORT
125
| - Guarantee from the Portuguese State to Kreditanstalt Für Wiederaufbau | 9,127,071 | 10,585,276 |
During 2003, the Company obtained a Multicurrency Revolving Credit Facility amounting to Euro 500,000,000, with a maturity of two years. On February 17, 2004, the maturity of this Facility was renegotiated, being 50% of the loan payable in 2007 and the remaining in 2008.
In 2004, Portugal Telecom and PT Finance, obtained three other Multicurrency Revolving Credit Facilities totaling Euro 400,000,000, in the following dates and with the following maturities and amounts:
- In June 24, 2004, with an amount of Euro 150,000,000 and a maturity of four years;
- In October 18, 2004, with an amount of Euro 100,000,000 and a maturity of three years;
- In October 22, 2004, with an amount of Euro 150,000,000 and a maturity of three years and six months.
As of December 31, 2004, the Group has used an amount of Euro 75,000,000 in connection with these facilities.
On December 10, 2004 the Company signed a contract for a new loan with the European Investment Bank (‘‘EIB’’) amounting to Euro 150 million with a maturity as of December 15, 2014. This contract allows an additional financing of Euro 100 million. As of December 31, 2004, the Company had not yet used any funding from this contract.
As of December 31, 2004 and 2003, bank loans bear interest at annual interest rates, equivalent to loans denominated in Euros, that vary between:
| 2004 | 2003 | |||
| Maximum | 4.9% | 4.9% | ||
| Minimum | 2.02% | 2.08% | ||
(d) Commercial paper
As of December 31, 2004 this caption relates basically to commercial paper programmes issued by the following Group companies:
| Portugal Telecom (i) | 312,858,486 | |
| Lusomundo | 14,900,000 | |
| 327,758,486 | ||
| (i) | Short term commercial paper programme issued in 2002, amounting to a total of Euro 875,000,000. As of December 31, 2004, the Company was using an amount of Euro 312,858,486, which matured in January 2005 and bears interest at an annual rate of 2.34% . |
(e) Other loans - external market
As of December 31, 2004 other loans comprise basically 50% of the loans obtained by VIVO from BNDES (the Brazilian Development Bank) amounting to Euro 82,150,010 at
126
the Euro/Real exchange rate prevailing at year-end. These loans will be repaid from 2005 until 2011.
(f) CovenantsAs of December 31, 2004, the Company had several covenants related with its indebtedness, which have been fully complied. As of that date, main covenants are as follows:
-
Credit rating
If at any time, the long term credit rating assigned by the rating agencies to Portugal Telecom is reduced to BBB+/Baa1, then Portugal Telecom must present a guarantee acceptable by the EIB. This covenant is applied to certain EIB loans totaling Euro 300 million, of which Euro 150 million were being used as of December 31, 2004.
The Facility obtained in October 18, 2004, amounting to Euro 100,000,000, establishes that Portugal Telecom must have a minimum rating of at least BBB- /Baa3.
-
Control/Disposal of subsidiaries
Portugal Telecom must, directly or indirectly, maintain majority ownership and control of each material subsidiary. Material subsidiaries are those companies whose total assets are equal or exceed 10% of total consolidated assets or whose total revenues are also equal or exceed 10% of total consolidated revenues. This covenant is applied to the Facility of Euro 500 million and to certain EIB loans totaling Euro 762 million, of which Euro 612 million were used as of December 31, 2004.
-
Financial ratios
The legal documentation regarding the Facility of Euro 500 million states that the consolidated ratio Net Debt/EBITDA, should not be higher than 4.5. The two Facilities obtained in October 2004, totaling Euro 250 million, state that the consolidated ratio Net Debt/EBITDA, should not be higher than 3.5, although in one of these Facilities this is only applicable if the rating from Portugal Telecom is reduced. In addition, the conditions (spread and maturity) applicable to the Facility of Euro 500 million and to the Facility of Euro 150 million obtained in June 2004 may be changed if the consolidated ratio Net Debt/EBITDA is higher than, respectively, 2.5 and 2.25. As of December 31, 2004 this ratio stood at 1.34.
In addition, the Global Medium Term Notes, the Exchangeable Bonds, the Facility of Euro 500 million and the Facilities totalling Euro 400 million include certain restrictions to pledge the Company’s consolidated assets, in order to secure any loan or obligation to third parties.
14. Accounts Payable Other - Third Parties
This caption consists of:
2004 ANNUAL REPORT127
| 2004 | 2003 | |||
| Accounts payable to fixed assets suppliers | 336,486,029 | 237,393,030 | ||
| Taxes payable in foreign countries (1) | 93,907,101 | 75,635,262 | ||
| Advances received for the sale of certain | ||||
| accounts receivable from the Portuguese State (Note 33.c)) | 26,392,172 | 27,399,604 | ||
| accounts payable to employees | 16,477,092 | 15,226,927 | ||
| Advances received from customers | 5,651,760 | 4,412,361 | ||
| Contributions to PT - ACS (Note 3.g)) | 3,444,945 | 12,270,401 | ||
| Contributions payable to the pension funds (2) | - | 2,342,959 | ||
| Other (3) | 83,720,238 | 160,326,723 | ||
| 566,079,337 | 535,007,267 | |||
| (1) | This caption includes primarily 50% of the taxes payable by VIVO, including income taxes and indirect taxes. As of December 31, 2004 the taxes payable by VIVO amount to Euro 78,783,194. |
| (2) | As of December 31, 2003 this amount includes: Euro 4,672,376 (Note 30.1) related to contributions payable by PT Comunicações to the pensions funds, net of Euro 2,329,417 related with payments on account made throughout the year on behalf of Caixa Marconi. |
| (3) | As of December 31, 2004 this caption included: (i) Euro 13,390,533 related to 50% of the management fees due to Telefónica Móviles by certain Brasilcel’s subsidiaries; (ii) Euro 8,391,439 related with commissions payable to agents; and (iii) Euro 7,547,000 related with 50% of the amount due by TCP in relation with the acquisition of TCO. |
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15. Accrued Expenses
This caption consists of:
| 2004 | 2003 | |||
| General and administrative expenses | 233,682,857 | 163,585,775 | ||
| Interest expense | 155,511,043 | 176,139,490 | ||
| Vacation pay and bonuses | 120,849,761 | 109,396,438 | ||
| Discounts to clients (1) | 36,987,839 | 58,818,100 | ||
| Commissions | 18,609,545 | 18,770,926 | ||
| Contribution to PT-ACS | 4,908,757 | 6,841,810 | ||
| Interest on unpaid taxes (Note 32.a)) | 1,116,083 | 1,157,276 | ||
| Other (2) | 66,844,507 | 54,684,798 | ||
| 638,510,392 | 589,394,613 | |||
| (1) | This caption comprises discounts to clients related to sole volume discount, granted to the major fixed live clients. These discounts are accounted as a reduction of the related revenues. |
| (2) | As of December 31, 2004 this caption includes an accrual of approximately Euro 41 million corresponding to the fair value of certain cross-currency swaps which are not hedging any specific risk, asset or liability (Note 3.p)). |
| 16. Taxes Payable | ||||
| This caption consists of: | ||||
| 2004 | 2003 | |||
| Value added tax | 60,996,378 | 78,545,853 | ||
| Social Security contributions | 10,863,432 | 11,830,966 | ||
| Personnel income tax withholdings | 10,594,555 | 9,590,122 | ||
| City tax | 62,909 | 1,069,902 | ||
| Income taxes, net of payments on account (i) | - | 1,621,852 | ||
| Other | 295,168 | 266,906 | ||
| 82,812,442 | 102,925,601 | |||
| (i) | As of December 31, 2004 and 2003, net income taxes receivable is made up as follows: |
| 2004 | 2003 | |||
| Income taxes receivable (Note 7) | 2,671,827 | 3,232,311 | ||
| Income taxes payable | - | (1,621,852) | ||
| Net income tax receivable | 2,671,827 | 1,610,459 | ||
| 2004 | 2003 | |||
| Payments on account | 5,086,990 | 2,966,267 | ||
| Witholding income taxes | 4,106,310 | 533,438 | ||
| Current income taxes | (8,882,069) | (4,853,827) | ||
| Other | 2,360,596 | 2,964,581 | ||
| Net income tax receivable | 2,671,827 | 1,610,459 | ||
2004 ANNUAL REPORT
129
Reconciliation between current income taxes in the Company’s balance sheet as of December 31, 2004 and 2003 and the current income tax expense for the years then ended is as follows:
| 2004 | 2003 | |||
| Current income taxes in the balance sheet | 8,882,069 | 4,853,827 | ||
| Taxes losses carryforward used in the year (Note 29) | 237,178,778 | 250,752,473 | ||
| Foreign income taxes payable by subsidiaries | 38,305,380 | 39,551,056 | ||
| Provision for legal actions related with income taxes (Note 28) | 4,717,540 | - | ||
| Other | 1,538,014 | (344,004) | ||
| Total Income tax expense-current | 290,621,781 | 294,813,352 | ||
The current income tax expense was recorded in the following captions:
| 2004 | 2003 | |||
| Income statement (Note 29) | 289,300,465 | 287,122,537 | ||
| Shareholders' equity: | ||||
| Cumulative foreign currency translation adjustments (Note 3.o)) | 1,812,409 | 6,108,630 | ||
| Other reserves (Note 3.o)) | (491,093) | 1,582,185 | ||
| 290,621,781 | 294,813,352 | |||
17. Deferred Income
This caption consists of:
| 2004 | 2003 | |||
| Advance billing (1) | 141,944,699 | 113,190,687 | ||
| Investment subsidies (Note 3.k)) | 9,953,460 | 14,537,473 | ||
| Financial instruments (2) | 8,328,285 | 22,006,110 | ||
| Telephone directories | 2,151,118 | 2,118,787 | ||
| Other | 75,107,083 | 60,560,438 | ||
| 237,484,645 | 212,413,495 | |||
| (1) | As of December 31, 2004 this caption included Euro 110,390,994 related mainly with pre-paid minutes of traffic in mobile networks, not used by customers from TMN and VIVO (Note 3.q)). |
| (2) | As of December 31, 2004 this caption relates to 50% of the net premium obtained in connection with the equity derivatives over PT Multimedia shares contracted with Banco Espírito Santo Group (Note 31). As of December 31, 2003 this caption included upfront fees received in connection with the restructuring of interest rate swap contracts, that are recognized in income during the maturity period of those contracts. |
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18. Other Non-Current Liabilities
1. Provision For Other Risks and Costs
| This caption consists of (Note 28): | ||||
| 2004 | 2003 | |||
| Provision for legal actions (a) | 67,825,144 | 14,927,504 | ||
| Provision for taxes (b) | 51,138,186 | 43,451,561 | ||
| Provision for fixed assets (Note 3.d)) | 50,403,228 | 43,278,576 | ||
| Other provisions for risks and costs (c) | 291,509,751 | 259,722,025 | ||
| 460,876,309 | 361,379,666 | |||
| (a) |
The provision for legal actions is to cover potential liabilities arising from legal actions against the Company for which the final outcome as of December 31, 2004 was not yet settled. The amount of the provision is based on information obtained
from the Company’s legal counsel. During 2004, this provision was increased by approximately Euro 47 million as a result of new judicial and arbitrage processes presented against the Company. |
| (b) |
The provision for taxes is to cover potential tax liabilities and was estimated based on information obtained from the Company's legal counsel and tax consultants. As of December 31, 2004 its detail by subsidiary, is the following: |
| VIVO | 27,982,100 | |
| Portugal Telecom (Note 32.a)) | 13,975,284 | |
| PT Comunicações (Note 32.a)) | 1,963,893 | |
| Other | 7,216,909 | |
| 51,138,186 | ||
The provisions recorded by VIVO are basically related to indirect taxes in Brazil (ICMS), which legality under Brazilian Constitution is being challenged by Brasilcel’s subsidiaries.
| (c) | As of December 31, 2004, the detail of this caption is as follows: |
| Provision for losses in affiliated companies (Note 10) | 129,315,472 | |
| Provision for restructuring of TV Cabo (i) | 68,350,766 | |
| Other provisions (ii) | 93,843,513 | |
| 291,509,751 | ||
| (i) | This provision is to cover costs with the retirement of the analogue network. During 2004, the provision was increased by Euro 26,250,000 (Note 27). |
| (ii) | This caption includes a provision for potential impairments in the audiovisuals business amounting to Euro 40,000,000 (Note 27). |
2004 ANNUAL REPORT
131
2. Other Non-Current Liabilities
This caption consists of:
| 2004 | 2003 | |||
| Accounts payable to fixed assets suppliers | 121,489,388 | 19,154,800 | ||
| Deferred income - investment subsidies (Note 3.k)) | 31,208,019 | 38,744,052 | ||
| Taxes payable in foreign countries (1) | 25,634,200 | 24,943,234 | ||
| Other | 30,437,227 | 61,929,247 | ||
| 208,768,834 | 144,771,333 | |||
| (1) | This caption relates to 50% of the ICMS payable by Global Telecom to the Brazilian state of Paraná, which resulted from a tax benefit obtained. |
19. Minority Interests
During the year ended December 31, 2004 the movement in minority interests was as follows:
| Opening balance | Acquisitions and disposals |
Income / (loss) | Changes in the consolidation perimeter |
Dividends | Currency translation adjustments |
Other | Closing balance | |||||||||
| Brasilcel (1) | 419,201,233 | (115,229,615) | 43,014,109 | - | (30,156,059) | 7,260,395 | 408,831 | 324,498,894 | ||||||||
| PT Multimédia (2) | 166,169,910 | - | 46,723,131 | - | (5,327,366) | (72,523) | (53,251) | 207,439,901 | ||||||||
| Cabo Verde Telecom | 28,772,842 | - | 7,165,483 | - | (5,273,610) | - | 167,335 | 30,832,050 | ||||||||
| Mascom(3) | 16,682,849 | (16,682,849) | - | - | - | - | - | - | ||||||||
| Cabo TV Madeirense, S.A. | 5,155,415 | - | 1,445,421 | - | (539,400) | - | - | 6,061,436 | ||||||||
| Timor Telecom, S.A. | - | - | 828,850 | 1,716,566 | - | (262,851) | - | 2,282,565 | ||||||||
| Cabo TV Açoreana, S.A. | 1,872,300 | - | 502,535 | - | (349,197) | - | - | 2,025,638 | ||||||||
| CST - Companhia Santomense | ||||||||||||||||
| de Telecomunicações, SARL | 1,438,850 | - | 355,784 | - | (33,385) | (232,066) | (57,367) | 1,471,816 | ||||||||
| Kenya Postel Directories, Ltd. | 1,127,747 | - | 234,808 | - | (369,088) | (96,281) | (11,182) | ,886,004 | ||||||||
| LTM - Listas Telefónicas de Moçambique, Lda. | 1,299,359 | - | 544,595 | - | (527,288) | 161,588 | 19,314 | 1,497,568 | ||||||||
| Empresa Gráfica Funchalense, S.A. | 1,080,177 | - | - | (1,080,177) | - | - | - | - | ||||||||
| Previsão | - | - | 27,821 | 1,029,851 | - | - | - | 1,057,672 | ||||||||
| Lusomundo Media | 494,440 | - | 114,872 | - | - | - | 296,207 | 905,519 | ||||||||
| Naveprinter | - | 713,787 | 3,842 | - | - | - | - | 717,629 | ||||||||
| Grafilme - Sociedade Impressora de Legendas, S.A. | 577,237 | - | 173,987 | - | (88,880) | - | - | 662,344 | ||||||||
| Telecomunicações Públicas de Timor, S.A. | - | - | 193,450 | 424,942 | - | (62,970) | - | 555,422 | ||||||||
| Other | 95,609 | - | 240,376 | 41,440 | (225,368) | (22,225) | 341 | 130,173 | ||||||||
| 643,967,968 | (131,198,677) | 101,569,064 | 2,132,622 | (42,889,641) | 6,673,067 | 770,228 | 581,024,631 | |||||||||
Income applicable to minority interests in the periods ended December 31, 2004, 2003 and 2002 were as follows:
| 2004 | 2003 | 2002 | ||||
| PT Multimédia (2) | 46,723,131 | 13,036,880 | (61,406,838) | |||
| Brasilcel (1) | 43,014,109 | 51,527,882 | - | |||
| Cabo Verde Telecom | 7,165,483 | 7,405,816 | 7,055,199 | |||
| Cabo TV Madeirense | 1,445,421 | 1,072,541 | 890,458 | |||
| Mascom (3) | - | 6,484,585 | 4,532,724 | |||
| TCP (4) | - | - | (23,313,734) | |||
| Other | 3,220,920 | (302,774) | (2,378,473) | |||
| 101,569,064 | 79,224,930 | (74,620,664) | ||||
| (1) | The minority interests in Brasilcel correspond to 50% of the interests of minority shareholders of Brasilcel’s subsidiaries in their corresponding amounts of shareholders’ equity and net income. |
| (2) | The minority interests in PT Multimedia correspond to the interests of minority shareholders in their equity and net income, considering the application of the equity method of accounting to their subsidiaries. |
| (3) | During 2004, Mascom was excluded from the consolidation as the financial investment in this subsidiary was in the process of being sold, only pending regulatory approval from the Botswana authorities (Note 10). |
132
| (4) | As mentioned in Note 1, this subsidiary was incorporated in Brasilcel as of December 27, 2002. |
20. Share Capital and Reserves
On December 28, 2004 Portugal Telecom cancelled 87,799,950 treasury shares, with a nominal value of one Euro each, that were held, following a decision taken in the Annual General Meeting of April 2, 2004 regarding an announced share buyback. As a result, the Company’s share capital was reduced from Euro 1,254,285,000 to Euro 1,166,485,050.
As of December 31, 2004 Portugal Telecom's fully subscribed and paid share capital amounted to Euro 1,166,485,050 and is represented by 1,166,485,050 shares, with a nominal value of one Euro each, and with the following distribution:
- 1,166,484,550 ordinary shares;
- 500 Class A shares.
All the Class A shares are held by the Portuguese State.
In accordance with Portugal Telecom’s Articles of Associates, the Class A shares have special voting rights as follows:
- Election of one third of the Directors, including the Chairman of the Board of Directors;
- Authorization to require distributions to all shareholders of dividends in excess of 40% of Portugal Telecom’s net income;
- Capital increases and other changes in Portugal Telecom’s Articles of Association;
- Issuance of bonds and other securities;
- Authorization for a shareholder operating in an area which is in competition with Portugal Telecom to held more than 10% of the ordinary shares;
- Ammending the general objectives, the strategy or the policies of Portugal Telecom; and
- Defining investment policies of Portugal Telecom, including authorizing acquisitions and disposals.
As a result of the privatization of Portugal Telecom, initiated in June 1, 1995 and concluded on December 4, 2000, the interest of the Portuguese Government in the Company's share capital as December 31, 2004 was 6.79%, including the 500 Class A shares indicated above.
Capital issued premium
This caption results from premiums generated in capital increases made by Portugal Telecom. According to Portuguese law, applicable to companies listed in stock exchanges under the supervision of Comissão do Mercado de Valores Mobiliários (the Portuguese stock exchange regulator), these amounts can only be used to increase share capital or to cover for accumulated losses (even before the use of other reserves). This amount can not be used to pay dividends or to acquire treasury shares.
Legal reserve
2004 ANNUAL REPORT133
Portuguese law provides that at least 5% of each year’s profits must be appropriated to a legal reserve until this reserve equals the minimum requirement of 20% of share capital. This reserve is not available for distribution to shareholders but may be capitalized or used to absorb losses, once all other reserves and retained earnings have been exhausted.
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Equity Available for Distribution
Pursuant to Portuguese legislation, the amount of shareholders’ equity available for distribution is determined based on the standalone financial statements of the Company. During 2004, the movements in the Company’s shareholders’ equity, on a standalone basis, were as follows:
| Opening Balance |
Application of Net Income and Other Reserves |
Equity adjustments |
Aquisition of treasury shares |
Cancellation of share capital |
Other | Closing Balance | ||||||||
| Share capital | 1,254,285,000 | - | - | - | (87,799,950) | - | 1,166,485,050 | |||||||
| Capital issued premium | 91,704,891 | - | - | - | - | - | 91,704,891 | |||||||
| Treasury shares | (210,040,062) | - | - | (480,912,955) | 690,953,017 | - | - | |||||||
| Equity adjustments in | 995,031,540 | - | (666,892,260) | - | - | 328,139,280 | ||||||||
| affiliated companies | ||||||||||||||
| Non-distributable reserves: | - | |||||||||||||
| Legal | 144,184,287 | 10,040,788 | - | - | - | 154,225,075 | ||||||||
| Treasury shares | 210,040,062 | - | - | 480,912,955 | (690,953,017) | - | - | |||||||
| Cancellation of treasury shares | - | - | - | - | 87,799,950 | - | 87,799,950 | |||||||
| Distributable reserves: | - | |||||||||||||
| Free reserves | 254,853,267 | (76,724,707) | - | (172,284,916) | - | - | 5,843,644 | |||||||
| Retained earnings | (39,403,169) | 39,403,169 | 685,304,951 | (308,628,039) | - | (6,220,610) | 370,456,302 | |||||||
| Net income | 240,218,936 | (240,218,936) | - | - | - | 500,085,704 | 500,085,704 | |||||||
| 2,940,874,752 | (267,499,686) | 18,412,691 | (480,912,955) | - | 493,865,094 | 2,704,739,896 | ||||||||
Pursuant to the Annual General Meeting of April 2, 2004, net income for 2003, amounting to Euro 240,218,936, was applied as follows:
| Dividends | 190,774,979 | |
| Retained earnings | 39,403,169 | |
| Legal reserve | 10,040,788 | |
| 240,218,936 | ||
The Annual General Meeting of April 2, 2004 also approved an additional distribution to shareholders, in the form of dividends, of free reserves amounting to Euro 76,724,707 and a distribution of PT shares to employees amounting to Euro 6,220,610.
The net increase in the caption ‘‘Equity adjustments in affiliated companies’’ includes an amount of approximately Euro 22 million related with currency translations adjustments generated during 2004.
According to Portuguese legislation, a non-distributable reserve should be set-up to cover for any treasury shares acquired by an amount equivalent to the acquisition value of such shares. This reserve will be freed up upon the sale or cancellation of such treasury shares. However, Portuguese law also establishes that upon cancellation of such treasury shares a non-distributable reserve should be set-up corresponding to the nominal value of such shares.
2004 ANNUAL REPORT135
Portuguese legislation establishes that the amount of equity available for distribution to shareholders is determined by the lower of the following amounts:
| a) | Distributable reserves (95% of Net Income + Retained Earnings + Free Reserves); |
| b) | Total shareholders’ equity less the sum of share capital, capital issued premium, treasury shares and non-distributable reserves. |
As of December 31, 2004 the amount of equity available for distribution to shareholders amounts to Euro 851 million.
21. Operating Revenues
This caption consists of:
| 2004 | 2003 | 2002 | ||||
| Wireline business (Note 34.2)(1) | 2,123,830,033 | 2,138,054,627 | 2,273,636,769 | |||
| Services rendered | 1,957,089,460 | 1,965,212,406 | 2,099,712,574 | |||
| Directories | 129,735,137 | 136,089,291 | 139,139,288 | |||
| Sales | 37,005,436 | 36,752,930 | 34,784,907 | |||
| Domestic Mobile - TMN (Note 34.3) | 1,444,293,249 | 1,346,740,297 | 1,266,647,997 | |||
| Services rendered | 1,300,371,237 | 1,213,221,073 | 1,132,761,033 | |||
| Sales | 143,922,012 | 133,519,224 | 133,886,964 | |||
| Brazilian Mobile - VIVO (Note 34.4) (2) | 1,502,984,689 | 1,361,513,763 | 1,217,622,274 | |||
| Services rendered | 1,183,397,482 | 1,093,778,637 | 1,048,632,419 | |||
| Sales | 319,587,207 | 267,735,126 | 168,989,855 | |||
| PT Multimédia (Note 34.5) (1) | 728,973,662 | 683,478,362 | 621,901,893 | |||
| Services rendered | 616,240,929 | 544,080,630 | 475,777,581 | |||
| Sales | 112,732,733 | 139,397,732 | 146,124,312 | |||
| Other businesses | 222,772,338 | 246,324,526 | 202,224,187 | |||
| Services rendered | 219,032,268 | 240,176,667 | 193,962,225 | |||
| Directories | 31,236 | 20,532 | 17,520 | |||
| Sales | 3,708,834 | 6,127,327 | 8,244,442 | |||
| 6,022,853,971 | 5,776,111,575 | 5,582,033,120 | ||||
| a) |
As a result of changes occurred in the composition of these business segments (Note 34.1), the amounts related to year 2002 were adjusted accordingly. PT.com’s results were included in the wireline business segment and excluded from the PT Multimedia business segment. |
| b) |
Since the contribution to Brasilcel of Portugal Telecom’s investment in TCP occurred on December 27, 2002 the amounts for the year ended December 31, 2002 include 100% of TCP’s operating revenues and the amounts for the years 2003 and 2004 include 50% of the consolidated operating revenues of VIVO. |
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22. Wages and Salaries
This caption consists of:
| 2004 | 2003 | 2002 | ||||
| Salaries | 620,674,846 | 585,494,416 | 581,537,670 | |||
| Employee Benefits | 97,381,015 | 86,188,097 | 74,672,734 | |||
| Social Charges | 17,461,279 | 20,367,531 | 19,331,095 | |||
| Insurance | 2,835,384 | 3,327,329 | 3,164,379 | |||
| Other | 7,814,127 | 10,525,105 | 16,069,489 | |||
| 746,166,651 | 705,902,478 | 694,775,367 | ||||
23. Costs of Telecommunications
This caption consists of:
| 2004 | 2003 | 2002 | ||||
| Interconnection charges - mobile / mobile | 142,473,045 | 167,587,697 | 176,195,727 | |||
| Interconnection charges - fixed / mobile | 110,512,681 | 127,385,114 | 151,446,742 | |||
| International telecommunications operators | 86,074,482 | 72,051,122 | 83,384,871 | |||
| Rental of telecommunications circuits | 63,415,789 | 68,328,380 | 54,278,630 | |||
| Roaming | 34,982,988 | 31,623,077 | 33,585,706 | |||
| Interconnection charges - mobile / fixed | 33,335,774 | 44,348,594 | 42,525,551 | |||
| Satellite charges | 5,382,288 | 9,384,808 | 9,390,213 | |||
| Other costs of telecommunications services | 76,074,380 | 66,436,266 | 72,131,224 | |||
| 552,251,427 | 587,145,058 | 622,938,664 | ||||
24. General and Administrative Expenses
This caption consists of:
| 2004 | 2003 | 2002 | ||||
| Specialized work and subcontracts | 562,464,040 | 493,846,049 | 495,187,549 | |||
| Commissions | 162,934,980 | 138,692,906 | 104,505,101 | |||
| Rents | 95,440,593 | 92,947,784 | 103,471,276 | |||
| Electricity | 50,251,740 | 44,879,402 | 46,832,747 | |||
| Communication expenses | 30,346,276 | 32,615,448 | 38,601,976 | |||
| Travel and entertainment | 22,773,144 | 20,071,589 | 16,534,541 | |||
| Security expenses | 11,734,179 | 10,510,399 | 9,350,331 | |||
| Insurance | 10,347,046 | 10,249,331 | 10,297,929 | |||
| Fuel and gas | 8,248,030 | 7,466,295 | 7,154,280 | |||
| Other general and administrative expenses | 121,402,429 | 115,246,614 | 93,626,193 | |||
| 1,075,942,457 | 966,525,817 | 925,561,923 | ||||
2004 ANNUAL REPORT
137
25. Other net financing expenses/(income)
This caption consists of:
| 2004 | 2003 | 2002 | ||||
| Bank comissions and expenses | 19,328,565 | 27,868,829 | 68,877,740 | |||
| Increases in provisions for other risks and costs (Note 28) (1) | 10,422,355 | 7,664,225 | 47,206,380 | |||
| Financial discounts, net | 5,704,466 | 2,463,886 | 4,866,436 | |||
| Gains on investments | (1,521,043) | (1,292,259) | (1,143,322) | |||
| Decreases in provisions for other risks and costs (Note 28) (2) | (13,024,673) | (156,770,873) | (15,746,172) | |||
| Other net financial expenses/(income) (3) | (8,415,564) | 24,693,950 | 7,675,123 | |||
| 12,494,106 | (95,372,242) | 111,736,185 | ||||
| (1) |
In 2004 this caption included primarily Euro 7,929,153 related with the increase in the provision for investments. |
| (2) |
In 2004 this caption included primarily Euro 11,305,603 related with the decrease in the provision for risks related with financial instruments, as a result of the cancellation of the corresponding instruments (equity swaps on own shares). In 2003
this caption included: (i) Euro 82,498,690 related with equity swaps; and (ii) Euro 74,272,183 related with financial instruments contracted by VIVO, which as of December 31, 2002 were recorded as investments net of provisions and as of December 31,
2003 were recorded at fair value in the caption ‘‘Short term investments’’. |
| (3) |
In 2004 this caption included primarily: (i) a gain amounting to Euro 33,416,640 related to a cancellation of an equity swap over PT Multimedia shares; and (ii) 50% of the taxes paid by Brasilcel’s subsidiaries amounting to Euro 13,264,646
related with financial revenues. |
26. Net losses/(gains) on sales and disposals of fixed assets, net
| This caption consists of: | ||||||
| 2004 | 2003 | 2002 | ||||
| Losses on sales and disposals of fixed assets | 15,394,469 | 9,890,091 | 9,033,216 | |||
| Losses on the retirement of fixed assets (Note 11) | 3,631,366 | 4,176,106 | 4,274,208 | |||
| Gains on sales and disposals of fixed assets (1) | (6,888,934) | (45,746,591) | (17,565,682) | |||
| Other | (125,174) | 3,050,103 | 291,664 | |||
| 12,011,727 | (28,630,291) | (3,966,594) | ||||
| (1) |
In 2003, this caption included basically a gain obtained by PT Comunicações on the sale of a building to the Pension Funds. |
138
27. Non-recurring items
This caption consists of:
| 2004 | 2003 | 2002 | ||||
| Increases in provisions for other risks and costs (Note 28) (1) | 34,348,329 | 62,710,282 | - | |||
| Losses/(Gains) on disposals of investments, net: | ||||||
| Disposals of investment in Mascom (2) | (24,764,670) | - | - | |||
| Disposals of Telefónica shares | - | - | (30,519,163) | |||
| Disposals of investment in Deltapress | - | - | (5,098,510) | |||
| Donations | 9,766,443 | 15,613,110 | 2,518,643 | |||
| Provision to adjust assets and liabilities in TMN | - | - | 50,915,335 | |||
| Other (3) | 68,069,040 | (25,538,920) | 20,806,320 | |||
| 87,419,142 | 52,784,472 | 38,622,625 | ||||
| (1) | In 2004 this caption included Euro 26,250,000 related to a provision recorded by TV Cabo in connection with the dismantling of the analogue premium service and the implementation of a digital offer (Note 18). In 2003 this caption includes Euro 57,130,000 related to a provision to cover estimated losses resulting from the restructuring of certain activities of TV Cabo, including unrealizable assets and unrecorded liabilities. |
| (2) | In September 2004 the sale of the investment in Mascom was completed following regulatory approval. As a result, a gain of Euro 24,764,670 was recorded related with this transaction (Exhibit II). |
| (3) | In 2004 this caption includes: (i) Euro 40,000,000 related with a provision for potential impairments in the audiovisuals business (Note 18); and (ii) Euro 10 million related with the
cost of several initiatives implemented by PT Comunicações during 2004 related with an agreement entered into with a consumer protection association (Note 32.c). |
28. Movement in the Provisions
During 2004 the movement in the provision accounts was as follows:
| Opening | Other | Closing | ||||||||
| balance | Increases | Reductions | movements | balance | ||||||
| Provision for marketable securities | 19,066 | - | ( 19 066) | - | - | |||||
| Provision for doubtful accounts receivable (Notes 6 and 7) | 409,729,904 | 71,374,970 | (13,980,389) | (82,849,828) | 384,274,657 | |||||
| Provision for inventories (Note 8) | 27,444,050 | 7,976,558 | (2,481,476) | (1,149,327) | 31,789,805 | |||||
| Provision for investments (Note 10) | 70,128,694 | 7,929,153 | (1,700,005) | 17,667,146 | 94,024,988 | |||||
| Provision for other risks and costs (Note 18): | ||||||||||
| Legal actions | 14,927,504 | 47,097,555 | (552,668) | 6,352,753 | 67,825,144 | |||||
| Taxes | 43,451,561 | 7,600,865 | (3,339,521) | 3,425,281 | 51,138,186 | |||||
| Fixed assets | 43,278,576 | 16,481,519 | (8,349,130) | (1,007,737) | 50,403,228 | |||||
| Other | 259,722,025 | 107,832,021 | (37,696,823) | (38,347,472) | 291,509,751 | |||||
| 868,701,380 | 266,292,641 | (68,119,078) | (95,909,184) | 970,965,759 | ||||||
2004 ANNUAL REPORT
139
(i) The increases occurred during 2004 in these provision accounts were recorded as follows:
| Provisions for doubtful receivables, inventories and other | 146,340,064 | |
| Depreciation and amortization | 56,481,519 | |
| Non-recurring items (Note 27) | 34,348,329 | |
| Other net financing expenses (Note 25) | 10,422,355 | |
| Equity in losses of affiliated companies | 10,181,917 | |
| Provision for income taxes (Note 16) | 4,717,540 | |
| Taxes and other than income taxes | 1,300,917 | |
| Other non-operating expenses/(revenues), net | 2,500,000 | |
| 266,292,641 | ||
(ii) The reductions occurred during 2004 in these provision accounts were recorded in the following profit and loss captions:
| Depreciation and amortization | 22,050,581 | |
| Provisions for doubtful receivables, inventories and other | 17,445,464 | |
| Other net financing expenses (Note 25) | 13,024,673 | |
| Non-recurring items | 7,136,680 | |
| Taxes and other than income taxes | 3,339,522 | |
| Subsidies | 2,905,293 | |
| Equity in earnings of affiliated companies | 1,735,353 | |
| Wages and salaries | 481,512 | |
| 68,119,078 | ||
In the profit and loss statement for the year ended December 31, 2004, the caption ‘‘Provisions for doubtful receivables, inventories and other’’ includes the following items:
| Increases in these provisions | 146,340,064 | |
| Direct write-off of accounts receivables | 46,273,015 | |
| Decreases in these provisions | (17,445,464) | |
| Collections from accounts receivables which were previously written-off | (3,436,285) | |
| 171,731,330 | ||
Other movements in provisions account balances include basically the direct use of provisions, the inclusion and exclusion of companies from the consolidation perimeter and currency translation adjustments relating to provisions recorded by foreign subsidiaries.
140
Portugal Telecom and its subsidiaries located in Portugal are subject to Corporate Income Tax ("IRC") at a rate of 25% which can be increased up to 10% through a municipal tax. Portugal Telecom, PT Multimedia and Lusomundo Media adopted the tax consolidation regime. The provision for income taxes is determined on the basis of the estimated taxable income for all companies covered by this regime (all 90% or more owned Portuguese subsidiaries). The remaining group companies, not covered by the tax consolidation regimes of Portugal Telecom, PT Multimedia and Lusomundo Media, are taxed individually based on their respective taxable income, at the applicable tax rates.
In accordance with Portuguese tax legislation, corporate tax returns are subject to review and adjustment by the tax authorities during four years following their filing (five years for social security, being ten years for the contributions made up to the year ended December 31, 2001). Management believes that any adjustment, which may result from such reviews or inspections, would not have a material impact on the consolidated financial statements as of December 31, 2004, except for the situations described in Note 32.a) where provisions or accruals have been recorded. Under prevailing Portuguese tax regulations, tax losses may be carried forward for up to six years.
Deferred TaxesThe movement in deferred taxes (Note 3.o)) during the 2004 is as follows:
| Increase/(Decrease) | ||||||||||||
| Taxes | Foreign currency | |||||||||||
| Opening | Payable | translation | Other | Closing | ||||||||
| Balance | Net income | (Note 16) | adjustments | adjustments | Balance | |||||||
| Deferred tax assets | ||||||||||||
| Provisions | 415,955,871 | 24,892,065 | - | 279,975 | (17,883) | 441,110,028 | ||||||
| Tax losses carryforward (i) | 651,863,830 | 116,577,636 | (237,178,778) | 626,645 | 4,573,115 | 536,462,448 | ||||||
| Financial instruments | 10,815,788 | 4,570,582 | - | - | - | 15,386,370 | ||||||
| Additional contribution to pension funds | 36,436,390 | (700,972) | - | - | - | 35,735,418 | ||||||
| Other (ii) | 216,540,935 | (52,085,288) | - | 2,556,532 | 70,083,156 | 237,095,335 | ||||||
| 1,331,612,814 | 93,254,023 | (237,178,778) | 3,463,152 | 74,638,388 | 1,265,789,599 | |||||||
| Deferred tax liabilities | ||||||||||||
| Revaluation of fixed assets (Note 3.d)) | 24,567,396 | (3,864,335) | - | - | 65 927 | 20,768,988 | ||||||
| Gains on disposals of investments | 286,457,914 | (13,597,146) | - | - | - | 272,860,768 | ||||||
| Distributable reserves of subsidiaries | ||||||||||||
| in foreign countries | 13,353,094 | 540,360 | - | - | - | 13,893,454 | ||||||
| Other | 9,147,176 | - | - | - | - | 9,147,176 | ||||||
| 333,525,580 | (16,921,121) | - | - | 65,927 | 316,670,386 | |||||||
| 110,175,144 | (237,178,778) | 3,463,152 | 74,572,461 | |||||||||
| (i) | Other adjustments in this caption include basically deductions to income taxes obtained by certain group companies included in the tax consolidation regime of Portugal Telecom, since those amounts can only be recovered after the total use of the existing tax losses carryforward. |
| (ii) | As of December 31, 2004 this caption included Euro 197,809,182 related with tax benefits obtained from a corporate restructuring in Brazil made by certain subsidiaries of Brasilcel. During 2004, TCO also completed its corporate restructuring, resulting in an increase of ‘‘Deferred tax assets’’ by Euro 69 million and a decrease of the same amount in the goodwill generated with this acquisition. |
2004 ANNUAL REPORT
141
Deferred taxes recorded in the balance sheets as of December 31, 2004 and 2003 were classified as follows:
| 2004 | 2003 | |||||||
| Assets | Liabilities | Assets | Liabilities | |||||
| Current | 773,811,063 | 27,944,032 | 748,141,425 | 32,793,924 | ||||
| Non-current | 491,978,536 | 288,726,354 | 583,471,389 | 300,731,656 | ||||
| 1,265,789,599 | 316,670,386 | 1,331,612,814 | 333,525,580 | |||||
The reconciliation of the income tax provision for the year ended December 31, 2004 calculated at the statutory Portuguese income tax rate and the effective income tax rate, is as follows:
| Income before income taxes | 780,819,780 | |
| Statutory tax rate (including municipal taxes at a 10% standard) | 27,50% | |
| 214,725,440 | ||
| Permanent differences (a) | 42,845,103 | |
| Differences in tax rates (b) | 2,944,924 | |
| Initial recognition of deferred tax assets related | ||
| with tax losses carryforward from previous years ( c) | (104,487,722) | |
| Valuation allowance for certain tax losses carryforward | 34,957,108 | |
| Reduction of deferred tax liabilities related with | ||
| deferred taxation on the disposal of certain investments (d) | (12,610,960) | |
| Other | 751,428 | |
| Income taxes in the profit and loss statement | 179,125,321 | |
| Efective tax rate | 22,94% | |
| The income tax for the year, is as follows: | ||
| Income tax-current (Note 16) | 289,300,465 | |
| Deferred taxes | (110,175,144) | |
| 179,125,321 | ||
| (a) This amount relates to the following: | ||
| Goodwill amortization (Note 12) | 97,122,489 | |
| Provisions (i) | 54,830,468 | |
| Amortization of Band A licenses (ii) | 33,309,382 | |
| Equity accounting in gains of affiliated companies, net (Note 10) | (27,721,982) | |
| Other | (1,739,982) | |
| 155,800,375 | ||
| Tax effect | 27,50% | |
| 42,845,103 | ||
| (i) | This caption includes basically a provision recorded in 2004 amounting to Euro 40,000,000 to cover estimated losses in the audiovisuals business, which is not deductible for tax purposes (Note 18). |
| (ii) | The amortization of Band A licenses held by Brasilcel's subsidiaries is not tax deductible because these intangibles result from the allocation of goodwill generated in the acquisition of those companies. |
(b) This amount relates to the impact of the different municipal tax rates applicable to the different group companies in Portugal and with the differences between the statutory tax rate in Portugal and the income tax rates applicable to foreign subsidiaries.
142
(c) This amount refers to the initial recognition of deferred tax assets related with tax losses from previous years in PT Multimedia, since only in 2004 was obtained evidence that these losses can be realised.
(d) This amount relates to the adoption by the Company of the voluntary taxation regime for certain gains on the disposal of investments obtained in previous years, which taxation was deferred due to the adoption at the time of the reinvestment regime.
30. Post Retirement Benefits
1. Pension Benefits
As referred to in Note 3.f), PT Comunicações, PT SI and Global Notícias (former Jornal de Notícias and Diário de Notícias) are liable for the payment of pensions, supplemental pension benefits to suspended employees and other gratuities to retired and active employees. These liabilities, which are estimated based on actuarial valuations prepared by an independent actuary, are as follows:
a) Former Telecom Portugal employees - Former employees of Telecom Portugal hired by CTT prior to May 14, 1992, or who were retired on that date, are entitled to a Company provided pension benefit. Employees hired after that date are covered by the general Portuguese State social security system. Suspended employees are also entitled to receive a benefit payment equal to 100% of salary prior to leaving service (increased in some cases).
b) Former TLP employees - The retired and active employees who were formerly employees of TLP and who were hired prior to June 23, 1994 are entitled to a pension supplement, which complements the pension paid by the Portuguese State social security system. Pre-retired employees are also entitled to receive benefit payments (equal to 25% to 100% of their present salaries) until they reach the Portuguese State social security retirement age. After this date these former employees become entitled to the pension supplement. Suspended employees are also entitled to receive a benefit payment equal to 100% of salary prior to leaving service (increased in some cases).
c) Former TDP employees - Former employees of TDP hired prior to June 23, 1994 are entitled to a pension supplement, which complements the pension paid by the Portuguese State social security system. Pre-retired employees are also entitled to receive benefit payments (equal to 25% to 100% of their present salaries) until they reach the Portuguese State social security retirement age. Suspended employees are also entitled to receive a benefit payment equal to 100% of salary prior to leaving service (increased in some cases).
d) Former Employees of Marconi - The former employees of Marconi hired prior to February 1, 1998 are entitled to a pension benefit from Caixa and two different supplemental pension benefits (Marconi Fundo de Melhoria and Marconi Complementary Fund). Employees hired after that date are not entitled to these benefits, as they are covered by the general Portuguese State social security system.
e) On retirement PT Comunicações pays a lump sum gratuity of a fixed amount which depends on the length of service completed by the employee.
2004 ANNUAL REPORT143
f) Former Employees of Jornal de Notícias and Diário de Notícias - Employees of Jornal de Notícias, hired prior to November 16, 1994 and of Diário de Notícias, hired prior to December 29, 1979, are entitled to a pension supplement, which complements the pension paid by the Portuguese State social security system.
g) Employees of PT SI - who were transferred from PT Comunicações and Marconi and were covered by pension plans of those companies are entitled to a pension supplement.
144
The actuarial valuations for these plans as of December 31, 2004, prepared by an independent actuary, used the projected unit credit method and considered the following actuarial assumptions and rates:
| 2004 | 2003 | |||
| Rate of return on pension fund assets | 6.00% | 6.00% | ||
| Pension liabilities’ discount rate | 5.75% | 6.00% | ||
| Salaries liabilities’ discount rate | 4.00% | 4.00% | ||
| Salary growth rate | 3.00% | 3.00% | ||
| Pension growth rate (*) | 2.00% | 2.00% | ||
| Inflation rate | 2.00% | 2.00% | ||
| Mortality table: | ||||
| Employees (whilst in active service): | AM 92 - males |
AM 92 - males | ||
AF 92 - females |
AF 92 - females | |||
| Pensioners and employees who have taken | PA (90) m less |
PA (90) m less | ||
| early retirement: | 3 years males |
2 years males | ||
PA (90) f less |
PA (90) f less | |||
3 years females |
2 years females |
Turnover of employees: Nil
| (*) | Except for Diário de Notícias and Marconi Fundo de Melhoria, where there is no pension growth rate. |
The following table sets out the funded status of the PT Comunicações, PT SI and Global Notícias plans as of December 31, 2004 and 2003:
| 2004 | 2003 | |||
| Projected benefit obligation ("PBO"): | ||||
| Retired, pre-retired and suspended employees | 1,905,319,000 | 1,846,468,000 | ||
| Salaries and gratuiries to pre-retired and suspended employees | 986,385,800 | 841,232,000 | ||
| Active employees | 700,674,000 | 670,020,000 | ||
| 3,592,378,800 | 3,357,720,000 | |||
| Plan assets at fair value | (1,972,620,000) | (1,828,066,000) | ||
| Projected benefit obligation, in excess of plan assets | 1,619,758,800 | 1,529,654,000 | ||
| As of December 31, 2004 and 2003 the plan assets are as follows: | ||||
| 2004 | 2003 | |||
| Equities | 681,516,951 | 615,829,914 | ||
| Bonds | 671,112,135 | 649,868,442 | ||
| Property | 259,565,035 | 259,371,373 | ||
| Real estate investment funds | 54,654,566 | 75,160,719 | ||
| Cash, treasury bills, short-term stocks and net current assets | 305,771,313 | 227,835,552 | ||
| 1,972,620,000 | 1,828,066,000 | |||
2004 ANNUAL REPORT
145
As of December 31, 2004 and 2003 the reconciliation between the projected benefit obligation in excess of plan assets and the liability recorded in the consolidated balance sheet as of that dates is presented below:
| 2004 | 2003 | |||
| Projected benefit obligation, in excess of plan assets | 1,619,758,800 | 1,529,654,000 | ||
| Actuarial losses, net (i) | (884,263,944) | (769,090,982) | ||
| Transition obligation (ii) | (24,737,000) | (26,519,596) | ||
| Prior service cost | 1,772,000 | 1,466,730 | ||
| Pension Liabilities | 712,529,856 | 735,510,152 | ||
| (i) | Actuarial losses, net result basically from: (a) the lower actual return on fund assets as compared with the expected return on fund assets; (b) the change in some actuarial assumptions; and (c) the higher salary growth rates and higher increase in pensions and pre-retired salaries, than the long term assumptions considered in the
actuarial studies. These actuarial gains and losses will be amortized over an average period of 14 years which corresponds to the estimated average working life of active employees. During 2004 and 2003, the movements in actuarial gains and losses
were as follows: |
| 2004 | 2003 | |||
| Beginning balance | (769,090,982) | (726,002,450) | ||
| Actuarial gains and (losses) arising in the period : | ||||
| PBO related | (222,949,962) | (144,596,532) | ||
| Plan assets related | 36,355,000 | 38,635,000 | ||
| Am ortization of the period | ||||
| Regular | 68,587,000 | 58,114,000 | ||
| Curtailm ent related | 2,835,000 | 4,759,000 | ||
| Ending balance | (884,263,944) | (769,090,982) | ||
Actuarial losses from 2004 are basically related with the change in the discount rate of pension liabilities from 6% to 5.75% and the increase in mortality tables.
| (ii) | The transition obligation results from the first time recognition of post retirement benefits, in 1993. This amount will be amortized over the estimated average working life of active employees at that date, which was estimated to be 18 years.
In 2004, the amortization of the transition obligation amounts to Euro 1,785,000. |
The pension liabilities of PT Comunicações, PT SI and Global Notícias were recorded in the consolidated balance sheet as of December 31, 2004 and 2003, in the following captions:
| 2004 | 2003 | |||
| Accrued post retirement liability (Note 30.3) | 712,529,856 | 730,837,776 | ||
| Accounts payable other - Third parties (Note 14 and 30.3) | - | 4,672,376 | ||
| 712,529,856 | 735,510,152 | |||
A summary of the components of the net periodic pension cost for the years ended December 31, 2004 and 2003 is presented below:
146
| 2004 | 2003 | |||
| Service cost | 18,617,000 | 20,618,000 | ||
| Interest cost | 176,485,000 | 182,188,000 | ||
| Expected return on plan assets | (111,127,000) | (98,369,000) | ||
| Net amortization of deferrals | 5,205,969 | 60,516,000 | ||
| Sub-total (Note 30.4) | 89,180,969 | 164,953,000 | ||
| Curtailment costs related to early retirements, | ||||
| pre-retirements and suspended contracts (Note 30.4) | 153,315,800 | 268,032,000 | ||
| Net periodic pension cost | 242,496,769 | 432,985,000 | ||
Curtailment costs were recorded in the caption "Work Force Reduction Program Costs".
The contributions made to the pension funds and payments of salaries to pre-retired and suspended employees in the years ended December 31, 2004 and 2003 were as follows:
| 2004 | 2003 | |||
| Contributions to pension funds: | ||||
| Employers' contributions | 125,737,000 | 153,461,330 | ||
| Plan participants' contributions | 10,991,000 | 11,032,603 | ||
| 136,728,000 | 164,493,933 | |||
| Payments of salaries to pre-retired and suspended employees (Note 30.3) | 143,056,984 | 146,747,706 | ||
Employers’ contributions include Euro 121.2 million (Note 30.3), which was recorded as a decrease in the accrued post retirement liability, and Euro 4.5 million which corresponds to the payment of an amount due to the pension funds at the end of 2003. Payments to pre-retired and suspended employees were recorded as a decrease in the accrued post retirement liability (Note 30.3) .
As of December 31, 2004 the accrued post retirement liabilities relating to the defined benefit plans of the subsidiaries of Brasilcel amounted to Euro 1,265,772 (Note 30.3) .
2. Other Employee BenefitsAs referred to in Note 3.g), PT Comunicações and PT SI are liable for the payment of post retirement health care benefits to employees and their eligible relatives.
The actuarial valuations for these plans prepared by an independent actuary, as of December 31, 2004, used the projected unit credit method and considered the following assumptions and rates:
| Health care cost trend rate: | 2004 | 2003 | ||
| Next 6 years | 3.50% | 3.50% | ||
| Years thereafter | 3.00% | 3.00% | ||
| Discount rate | 5.75% | 6.00% | ||
| Inflation rate | 3.00% | 3.00% | ||
| Salary growth rate | 2.00% | 2.00% | ||
| Mortality table: | ||||
| Employees (whilst in active service): | AM 92 - males |
AM 92 - males | ||
AF 92 - females |
AF 92 - females | |||
| Pensioners and employees who have | PA (90) m less 3 |
PA (90) m less |
2004 ANNUAL REPORT
147
| taken early retirement: | years males |
2 years males |
||
PA (90) f less 3 |
PA (90) f less |
|||
years females |
2 years females |
Disability table: Swiss Reinsurance Company
Turnover of employees: Nil
Based on this study, the accumulated post retirement health care benefit obligation of PT Comunicações and PT SI as of December 31, 2004 and 2003 was Euro 701,797,100 and Euro 688,763,000, respectively. The reconciliation between the post retirement health care obligations and the liability recorded in the balance sheet at December 31, 2004 and 2003 is presented below:
| 2004 | 2003 | |||
| Accumulated health care benefit obligation | 701,797,100 | 688,763,000 | ||
| Actuarial losses, net (i) | (108,483,572) | (120,927,369) | ||
| Transition obligation (ii) | (40,669,000) | (46,273,802) | ||
| Prior year service gain | 3,333,000 | 3,540,000 | ||
| Post retirement health care liability | 555,977,528 | 525,101,829 | ||
| (i) |
Actuarial losses, net result basically from the difference between the actual and expected healthcare costs and higher inflation rates than the long-term assumptions considered in the actuarial studies. These actuarial gains and losses will be
amortized over 14 years, which corresponds to the estimated average working life of active employees. During 2004 and 2003 the movements in the caption ‘‘Actuarial losses, net’’ were as follows: |
| 2004 | 2003 | |||
| Beginning balance | (120,927,369) | (112,772,283) | ||
| Act uarial gains/ (losses), net arising in t he period : | ||||
| PBO relat ed | 8,772,797 | (14,707,086) | ||
| Am ort izat ion of t he period | ||||
| Regular | 3,302,000 | 6,036,000 | ||
| Curt ailm ent relat ed | 369,000 | 516,000 | ||
| Ending balance | (108,483,572) | (120,927,369) | ||
| (ii) |
The transition obligation results from the first time recognition of other employee benefits, in 1997. This amount will be amortized over the estimated average working life of active employees at that date, which was estimated to be 18 years.
The costs related with the amortization of the transition obligation were recorded in the caption ‘‘Post retirement benefits’’ (Euro 4,207,000) and in the caption ‘‘Work force reduction program costs’’ (Euro
1,399,000). |
A summary of the components of the net periodic post retirement health care cost for the years ended December 31, 2004 and 2003, is presented below:
| 2004 | 2003 | |||
| Service cost | 5,061,000 | 5,628,000 | ||
| Interest cost | 36,935,000 | 38,131,000 | ||
| Net amortization of deferrals | 7,335,000 | 10,649,000 | ||
| Sub-total (Note 30.4) | 49,331,000 | 54,408,000 | ||
| Curtailment costs related to early retirements, | ||||
| pre-retirements and suspended contracts (Note 30.4) | 11,120,100 | 27,363,000 | ||
| Net periodic post retirement health care costs | 60,451,100 | 81,771,000 | ||
Curtailment costs were recorded in the caption "Work Force Reduction Program Costs".
During 2004, the contribution made to PT-ACS, net of the contributions from the SNS (Note 3.g)), amounted to Euro 29,777,489 and were recorded as a reduction to the accrued post retirement liability (Note 30.3) .
As of December 31, 2004, the accrued post retirement health care liabilities include Euro 95,088 relating to healthcare liabilities of Brasilcel’s subsidiaries (Note 30.3) .
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3. Balance sheet captions
Accrued Post Retirement Liability
This caption consists of:
| 2004 | 2003 | |||
| Accrued Post Retirement Liability: | ||||
| Pension benefits (Note 30.1) | 713,795,628 | 730,872,244 | ||
| Other employee benefits (Note 30.2) | 556,072,616 | 525,166,751 | ||
| 1,269,868,244 | 1,256,038,995 | |||
| Accounts Payable (Note 30.1) | - | 4,672,376 | ||
| 1,269,868,244 | 1,260,711,371 | |||
The net increase in the accrued post retirement liabilities during the year of 2004 amounted to Euro 13,829,249, as follows:
| Pension | Other employee | |||||
| benefits | benefits | Total | ||||
| Post retirement benefits (Note 30.4) | 89,180,969 | 49,331,000 | 138,511,969 | |||
| Work force reduction program costs (Note 30.4) | 156,719,526 | 11,120,100 | 167,839,626 | |||
| Payments to pre-retired and suspended employees (Note 30.1) | (143,056,984) | - | (143,056,984) | |||
| Contributions to pension funds and PT ACS (Note 30.1) | (121,242,343) | (29,777,489) | (151,019,832) | |||
| Changes in consolidation | 288,000 | - | 288,000 | |||
| Currency translation adjustments | 130 | 245 | 375 | |||
| Other adjustments | 1,034,086 | 232,009 | 1,266,095 | |||
| (17,076,616) | 30,905,865 | 13,829,249 | ||||
| 4. Profit and loss captions | ||||||
| 2004 | 2003 | |||||
| Net Periodic Pension Cost: | ||||||
| Post retirement benefits: | ||||||
| Pension benefits (Notes 30.1 and 30.3) | 89,180,969 | 168,493,045 | ||||
| Other employee benefits (Notes 30.2 and 30.3) | 49,331,000 | 54,449,134 | ||||
| 138,511,969 | 222,942,179 | |||||
| Work force reduction program costs: | ||||||
| Extraordinary post retirement benefits (curtailment): | ||||||
| Pension benefits (Note 30.1) | 153,315,800 | 268,032,000 | ||||
| Other employee benefits (Note 30.2) | 11,120,100 | 27,363,000 | ||||
| 164,435,900 | 295,395,000 | |||||
| Additional cost related to 2004 curtailment (Note 30.3) | 3,403,726 | - | ||||
| Termination payments | 2,999,220 | 13,678,485 | ||||
| Additional cost related to 2002 curtailment | - | 7,077,591 | ||||
| Decrease in provisions to restructuring | - | (2,066,374) | ||||
| 170,838,846 | 314,084,702 | |||||
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31. Financial instruments and risk management
Derivative financial instruments are basically used by the Company to manage interest rate and exchange rate exposure.
The contracting of financial instruments is made after careful analysis of the risks and rewards of these instruments based on information obtained from different financial institutions. These operations are subject to authorization from Portugal Telecom’s Executive Committee and are permanently monitored through an analysis of the financial markets and the positions held by the Company. The fair-value of these derivatives is assessed several times during the year to determine the economic and financial implications of their cancellation.
Interest rate exposure
Interest rate swaps were contracted by Portugal Telecom in order to diversify interest rate exposure or to take advantage of the possibility of converting from variable rates to fixed rates. During 2004, certain financial instruments reached its maturity which, together with the anticipated cancellation of others, resulted in a reduction of the notional of interest rate swaps. As of December 31, 2004 the notional of these interest rate swaps amounted to approximately Euro 472 million with an average maturity of 6.8 years.
During 2004, VIVO contracted interest rate swaps in Brazilian Reais, which as of December 31, 2004 amounted to BRL1,601 million with an average maturity of 3 days.
Exchange rate and interest rate exposureCross currency swaps were contracted primarily to reduce exposure to exchange rate and interest rate risks. As of December 31, 2004 the Company had a cross currency swaps from U.S. Dollars to Euros, with a notional of approximately Euro 74 million and an average maturity of 6.8 years.
Pursuant the cancellation of the interest rate component of certain cross currency swaps, as of December 31, 2004 Portugal Telecom had contracted foreign exchange options and forwards of Euros to U.S. Dollars, with a notional of Euro 200 million and an average maturity of 4.3 years.
Additionally, Portugal Telecom had contracted forwards of Euros to U.S. Dollars in order to cover the risk associated to future cash flow payments. As of December 31, 2004, those contracts had a notional of Euro 12 million and had an average maturity of 6 months.
As of December 31, 2004 VIVO had cross currency swaps to cover accounts payable denominated in U.S. Dollars and Japanese Yens (JPY) with a notional of USD 878 million and JPY 6,827 million and an average maturity of 1.2 years and 8 months, respectively.
As of December 31, 2004 VIVO had also contracted: (i) other cross currency swaps (U.S. Dollars/Brazilian Reais) with a notional of USD 418 million and an average maturity of 1.4 years; and (ii) cross currency swaps (Euros/Brazilian Reais) with a notional of Euro 25 million and an average maturity of 2 months.
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Equity derivatives
As of 31 December 2004 Portugal Telecom had contracted the following equityderivatives:
| (a) | Own shares | |
| In order to facilitate the completion of the share buyback program, Portugal Telecom contracted to ABN Amro and Citibank equity swaps over 21,551,006 own shares, representing 1.72% of the share capital prior to the cancellation in December 2004 of the 7% treasury shares held. Considering the difference between the exercise price of those derivatives (ranging from Euro 7.14 to Euro 8.99 per share) and PT’s stock price at 31 December 2004, Portugal Telecom did not record any provision to cover estimated losses with these equity swaps. These contracts had maturities ranging from 2 to 12 months. | ||
| (b) | PT Multimedia shares | |
| In order to increase its exposure to PT Multimedia, Portugal Telecom contracted with Santander Group equity swaps over 15,287,545 PT Multimedia shares, representing 9.7% of its share capital, as follows: | ||
| (i) 9,187,545 shares, with an exercise price of Euro 17.74 and a maturity of 17 months; and | ||
| (ii) 6,100,000 shares, with an exercise price of Euro 14.10 and a maturity of 5 months. | ||
Additionally, during 2004 Portugal Telecom contracted with Banco Espírito Santo Group equity derivatives which consist of options to acquire shares of PT Multimedia, representing 5% of its share capital. These options are as follows:
| (i) | Portugal Telecom acquired from Banco Espírito Santo de Investimento, S.A. (‘‘BESI’’) a call option over 6.063 million shares of PT Multimedia shares with a strike price of Euro 26.513 at maturity (31 December 2005). Portugal Telecom can exercise this option at any time and BESI can choose between physical or financial settlement (the latter has a 15% discount over the strike price). At the same time, BESI acquired from Portugal Telecom a call option over the same number of shares of PT Multimedia with a strike price of Euro 16, which only offers the possibility of financial settlement. This call option can only be exercised if the stock price of PT Multimedia is above the strike of the call option acquired by Portugal Telecom, being the exercise of the option automatic in the case that Portugal Telecom exercises its call option. |
| (ii) | Portugal Telecom receives from Banco Espírito Santo a call option over 1.5 million PT Multimedia shares with a strike of Euro 23 at maturity (31 December 2005). Portugal Telecom can exercise this option at any time and Banco Espírito Santo can choose between physical or financial settlement (the latter has a 20% discount on the strike price). |
As a result of these contracts, Portugal Telecom will receive from BESI an aggregate premium of Euro 16.657 million, corresponding to the difference between the acquisition prices of the options referred above, with 50% of this amount payable in 31 December 2004 and the remaining 50% on the exercise date of the option acquired by BESI or, if that option is not exercised, in 31 December 2005. This premium can only be claimed if BESI receives a premium in connection to any options contracted with these third parties to hedge BESI’s position regarding the
154
call options acquired and sold to PT over 6.063 million shares of PT Multimedia as referred above. In addition, BESI must clearly demonstrate to Portugal Telecom that these hedging options were contracted with third parties and that there was a default event on the payment of the corresponding premium. Given that BESI will celebrate with third parties an option contract that would permit it to obtain the hedging of the position assumed on the contract referred above, Portugal Telecom and BESI agreed that the latter has the right to reduce the options included in the contract to 3.469 million shares, with the proportional decreases in prices and fees, if those entities do not comply with its contractual obligations. However, BESI committed to develop all efforts to guarantee that those entities will assume its obligations. The amount payable at the end of 2004, amounting to Euro 8,328,285 was recorded under the caption ‘‘Deferred income’’ (Note 17).
Fair value of financial instrumentsAs of December 31, 2004 and 2003 the carrying value and fair value of financial instruments are as follows (amounts in millions of Euros):
| 2004 | 2003 | 2002 | ||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||
| Financial instruments to manage the risks of: | ||||||||||||
| Interest rate (Note 3.p)) | 1.3 | (22.0) | (8.5) | (61.9) | 1.1 | (66.2) | ||||||
| Interest rate and exchange rate (Note 3.p)) | (67.7) | (63.5) | 80.5 | 99.5 | 162.0 | 75.5 | ||||||
| Total | (66.4) | (85.5) | 72.0 | 37.6 | 163.1 | 9.3 | ||||||
| Equity Swaps: | ||||||||||||
| Own shares | (0.6) | 6.0 | (24.4) | 3.4 | (42.6) | (40.2) | ||||||
| PT Multimédia shares | (1.4) | 43.8 | (3.9) | 15.5 | (68.5) | (69.1) | ||||||
| Total | (2.0) | 49.8 | (28.3) | 18.9 | (111.1) | (109.3) | ||||||
32. CONTINGENCIES AND COMMITMENTS
a) Tax contingencies
As of December 31, 2004 the Company is subject to certain tax contingencies. The Company’s management, based on information obtained from the Company’s legal counsel, does not expect that the resolution of these matters will have a material adverse effect on the Company’s financial position or results of operations. These contingencies, which have not been provided for as of December 31, 2004 are as follows:
- The tax returns of the former TLP for the years 1990 to 1993, the former TP for the year 1993 and the former Marconi and PT for the years 1997 to 1999, were reviewed by the tax authorities, resulting in additional income tax assessments amounting to Euro 28,008,616. Portugal Telecom decided to contest these assessments, based upon the opinion of its lawyers whose consensus is that the outcome will be in Portugal Telecom’s favour.
- Portugal Telecom is challenging the assessments made by the Municipal Councils of Porto and Lisbon relating to the usage of public rights-of-way for its telecommunications infrastructure, which as of December 31, 2004 were as follows:
| Municipal Council of Oporto | 1,235,533 | |
| Municipal Council of Lisbon | 102,553 | |
| 1,338,086 | ||
Pursuant to the New Basic Law (Law 91/97) operators of basic telecommunications networks, such as Portugal Telecom, are exempt from municipal taxes and rights-of-
2004 ANNUAL REPORT155
way and other fees with respect to access to and installation and usage of their telecommunications networks in connection with their obligations under their concession from the Portuguese Government, such as the Concession. The Portuguese Government has stated that the New Basic Law confirms the exemption under Article 29 of the Concession, which was established by the decree law authorizing the Concession.
Additionally, there are the following situations which are fully provided for:
| 1. | Due to additional assessments related with the 1999 and 2000 income tax returns of Portugal Telecom, SGPS, S.A., an accrual amounting to Euro 13,975,284 has been recorded and included in the provision for other risks and costs (Note 18). |
| 2. | Due to additional assessments related with the 1999 and 2000 income tax returns of PT Comunicações and related with the benefit from the tax credit from the investment, an accrual amounting to Euro 1,963,893 has been recorded and included in the provision for other risks and costs (Note 18). |
| 3. | In relation to the 1997, 1998 and 1999 tax returns, in the case that the positions taken by Portugal Telecom are considered to be inadequate, taxes have been paid or accruals have been recorded, which as of December 31, 2004 amounted to Euro 1,116,083 (Note 15). |
b) Other actions
The activity of Portugal Telecom is regularly subject to investigations by ANACOM, the European Commission and the Competitor Authority, in connection with the review of the application of the related laws and regulations in its business practices. As of 31 December 2004 the Competition Authority is conducting an investigation related with the alleged use of predatory prices between PT Comunicações and PT Prime, price discrimination in the wireline business (wholesale and retail) and reductions in margins. Portugal Telecom might have to pay fines and penalties if, as a result of the investigations, it is considered guilty. Portugal Telecom considers that, based on information obtained from its lawyers, the final outcome of these legal actions will not have a material impact in the Company’s financial position as of December 31, 2004.
c) Claims by a consumer protection association
The introduction by Portugal Telecom of new prices for fixed telephone services as from February 1998, which were subsequently approved by ICP - Instituto de Comunicações de Portugal (currently ANACOM - Autoridade Nacional de Comunicações -‘‘ANACOM’’) and by Direcção Geral de Concorrência e Preços has caused several legal actions from DECO - Associação de Defesa do Consumidor (“ DECO” ). From a financial standpoint, the most relevant is the inhibiting action submitted in September 1999, in which it is demanded that ANACOM abstain from approving the prices for 1999 and that Portugal Telecom be forbidden from applying them. In the first instance the Court decided that the new prices were illegal and condemned Portugal Telecom to refund the amounts charged in 1999 as activation fees and publish the decision. Portugal Telecom did not accept the decision, considering it illegal, and through PT Comunicações submitted several appeals against this decision to superior courts, which maintained the decision of the first instance Court. In October 2003 PT Comunicações was notified by the Supreme Court that its appeal was denied and that it should refund the amounts
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charged in 1999 as activation fess. However, in March 2004 PT Comunicações and DECO signed an agreement facilitating an alternative solution to the refund of the amounts charged in 1999 as activation fees. This agreement comprises several initiatives implemented by PT Comunicações during 2004, which had a cost of Euro 10 million (Note 27) that was recorded as a other non-operating expense. As a result of this agreement, DECO removed all legal actions against PT Comunicações on this subject matter.
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d) Guarantees
As of December 31, 2004 the Company has given guarantees and comfort letters to third parties, as follows:
| Bank guarantees given to Portuguese courts for outstanding litigation | 9,036,548 | |
| Bank guarantees given to other entities: | ||
| By PT Comunicações (1) | 18,287,518 | |
| By PT Multimédia and subsidiaries (2) | 9,332,897 | |
| By TMN to ANACOM | 3,162,539 | |
| Other bank guarantees | 1,540,519 | |
| 32,323,473 | ||
| Comfort letters and other bank garantees (3): | ||
| Sport TV | 89,518,512 | |
| Warner Lusomundo España | 13,333,333 | |
| TV Cabo Macau | 7,341,605 | |
| Vasp | 5,588,875 | |
| Other | 911,378 | |
| 116,693,703 | ||
| (1) | These guarantees were given by PT Comunicações to the Portuguese Tax Authorities,
in respect of the tax contingencies discussed in Note 32.a). |
| (2) | These guarantees were given by PT Multimedia, to Alta Autoridade para a
Comunicação Social (the Portuguese media regulator), in connection
with the broadcasting of television shows. |
| (3) | These comfort letters were issued by the Group in order to guarantee loans obtained by associated companies. On September 1, 2004 PT Multimedia and PPTV - Publicidade de Portugal e Televisão, S.A.
(the other shareholder of Sport TV, together with PT Conteúdos) granted to Sport TV, a guarantee amounting to Euro 70 million,
to cover a loan obtained by this company to acquire the rights to broadcast the games of the Portuguese football league
for the seasons from 2004-2005 to 2007-2008. |
e) Purchase commitments
As of December 31, 2004, the Company had assumed commitments for the purchase of basic equipment amounting to approximately Euro 79.2 million.
f) Financial commitments- In October 2000, Médi Telecom entered into medium and long term loan contracts totalling Euro 1,000,000,000 with a consortium led by International Finance Corporation and the banks ABN Amro and Sociéte Générale. The loans have an average term of 8 years and serve to refinance the short term loan obtained to finance the acquisition of the mobile telecommunications license for Morocco in August 1999 and to cover the investment relating to the installation and development of the GSM network.
Under the provisions of the contracts, Médi Telecom is required to attain certain financial performance levels. In accordance with the financing operation, the major shareholders of Médi Telecom, Portugal Telecom, through PT Móveis (32.18%), Telefónica Intercontinental, S.A. (32.18%) and Banque Marrocaine du Commerce Exterieur (18.06%), signed a Shareholders Support Deed, under which they are committed to make future capital contributions to Médi Telecom (in the form of capital or shareholders’ loans), if this is necessary to cover possible shortfalls in the agreed financial targets. As a result of loans already granted to Médi Telecom by PT Móveis and Telefónica Intercontinental, the maximum amount of this
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liability, as of December 31, 2004, is limited to an additional maximum of Euro 84,000,000 and ends as soon as Médi Telecom reaches a Net Debt/EBITDA ratio of less than 3.0 during four consecutive quarters.
- Portugal Telecom signed a Shareholders’ Agreement with the other shareholders of Sportinveste, in which Portugal Telecom committed to give additional paid in capital contributions up to a maximum of Euro 40,000,000. As of December 31, 2004 Portugal Telecom had already granted additional paid in capital contributions to Sportinveste amounting to Euro 30,023,168 (Note 10).
33. Transactions with Related Entities
a) Concession Agreement
On February 15, 1995, through Decree Law 40/95, the Portuguese Government granted Portugal Telecom the exclusive right to provide infrastructure and leased circuit services as well as fixed telephone, telex and telegraphy services in Portugal. These rights were granted for an initial period of 30 years and can be renewed for successive minimum periods of 15 years. The above referred exclusive rights remained in force up to the date that the Portuguese Government liberalized the telecommunications industry. This Decree Law and the subsequent Concession Contract dated March 20, 1995 (the "Concessions Contract") establish the administrative and operational obligations of Portugal Telecom, the basic service prices framework, and the rent payable to the Portuguese State.
On September 9, 2000, through Decree Law 219/2000, the Portuguese Government approved the transfer of Portugal Telecom's position in the Concession Agreement to PT Comunicações and established the conditions for the related transfer of assets, liabilities, rights and obligations from Portugal Telecom to PT Comunicações.
On December 11, 2002, according to the terms of the Modifying Agreement to the Concession Contract, PT Comunicações acquired the ownership of the Basic Network and, as a result, the concession rent was terminated together with the reversibility principle that was previously applicable to concession assets.
b) Discounts to retired Portuguese citizens
In accordance with Decree Law 20-C/86, certain eligible retired Portuguese citizens are entitled to a discount on the telephone tariff, which is reimbursed to PT Comunicações by the Portuguese State. Up to December 31, 2001 this receivable balance was to be offset against the concession rent payable to the Portuguese State. As a result of the acquisition of the Basic Network at the end of 2002 and the related Modifying Agreement to the Concession Contract, this receivable balance should now be paid directly by the Portuguese State, which committed to include the corresponding expense in the Annual State Budget of incoming years, as stated by Decree Law 18/2003. As of December 31, 2004 the account receivable balance from the Portuguese State regarding discounts to retired Portuguese citizens amounts to Euro 47,597,244 (Note 7) and is made up as follows:
| Discounts given in 2003 (Note 14) | 26,392,172 | |
| Discounts given in 2004 | 21,205,072 | |
| 47,597,244 | ||
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During 2004, PT Comunicações had signed agreements with a financial institution relating to the sale of the accounts receivable balances regarding the discounts given in 2002 and 2003. PT Comunicações received cash advances of those amounts, less the related expenses inherent in these transactions, and recorded accounts payable to this financial institution totalling Euro 53,791,776. In August 2004, the Portuguese State paid Euro 27,399,604, related with the discounts given in 2002. All expenses related with these transactions were recorded in the profit and loss statement.
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| 34. | Disclosures about Segments of the Company and Related Information |
| 34.1 | General |
The basis used by management to identify the reportable segments was a combination of the following factors:
| (i) | Differences in products and services; |
| (ii) | Differences in regulatory environments; and |
| (iii) | Geographic areas. |
These segments are consistent with the way management currently analyses its businesses.
The Company identified the following reportable segments:
| Wireline Business | Retail | |
| (1) | Wholesale | |
| Data and Corporate | ||
| Other | ||
| Domestic Mobile | TMN (2) | |
| Brazilian Mobile | VIVO (3) | |
| Multimedia | Pay TV and Cable Internet - TV Cabo, PT Conteúdos and Primum TV | |
| Businesses | Audiovisuals - Lusomundo Audiovisuais and Lusomundo Cinemas | |
| (PT Multimedia) | Media - Lusomundo Serviços and Lusomundo Media | |
| Other Multimedia Operations - PT Multimedia and other sub-holdings | ||
| (1) | The wireline business includes several services which are provided mainly by PT Comunicações, PT Prime and PT.com. |
| (2) | This business segment derives its revenues from mobile telecommunication services in Portugal. |
| (3) | This business segment derives its revenues from mobile telecommunication services in Brazil, provided by Brasilcel’ subsidiaries in several States of Brazil (Note 1). |
Transactions between segments are accounted for in the same manner as transactions with external parties.
The summarized results for each reportable segment do not include some extraordinary items as capital gains or losses from the sale/exchange of financial assets and are presented before consideration of the minority interests at Group level. The minority interests considered in each reportable segment are only related to the direct interests of minority shareholders of subsidiaries of the sub-holdings for each reportable segment.
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34.2. Wireline Business
Summarized profit and loss statements for this reportable segment, for the years ended December 31, 2004, 2003 and 2002 are presented below:
| 2004 | 2003 | 2002 | ||||
| Services rendered - external customers (Note 21) | 2,086,824,597 | 2,101,301,697 | 2,238,851,862 | |||
| Services rendered - intersegment revenues | 141,873,589 | 149,583,769 | 167,112,101 | |||
| Sales of merchandise and products - external customers (Note 21) | 37,005,436 | 36,752,930 | 34,784,907 | |||
| Sales of merchandise and products - inter segment sales | 605,158 | 225,361 | 329,109 | |||
| Operating revenues | 2,266,308,780 | 2,287,863,757 | 2,441,077,979 | |||
| Wages and salaries | (294,984,700) | (314,596,639) | (350,923,455) | |||
| Post-Retirement benefits | (137,777,495) | (219,938,209) | (180,873,048) | |||
| Costs of telecommunications | (383,783,838) | (428,914,406) | (496,813,900) | |||
| Depreciation and amortization | (381,249,683) | (404,339,250) | (431,653,191) | |||
| Own work capitalized | 28,012,029 | 36,141,884 | 64,817,575 | |||
| Costs of products sold | (37,873,306) | (45,842,620) | (32,206,438) | |||
| Marketing and publicity | (44,554,892) | (26,598,019) | (29,238,089) | |||
| Concession rent | - | - | 16,604,413 | |||
| General and administrative expenses | (270,062,380) | (211,729,896) | (225,969,200) | |||
| Other net operating income | (222,867,253) | (169,128,124) | (221,047,435) | |||
| Operating costs and expenses | (1,745,141,518) | (1,784,945,279) | (1,887,302,768) | |||
| Operating income | 521,167,262 | 502,918,478 | 553,775,211 | |||
| Interest and related expenses | (34,495,972) | (47,651,404) | (42,676,538) | |||
| Goodwill amortization | (7,152,717) | (7,152,717) | (7,679,221) | |||
| Interest and related income | 16,094,994 | 11,890,237 | 21,969,307 | |||
| Gains/(losses) on sales and disposals of fixed assets | (158,372) | 41,067,614 | 10,759,611 | |||
| Equity in losses of affiliated companies | (970,469) | (1,077,261) | (2,374,945) | |||
| Work force reduction program costs | (169,558,740) | (311,263,761) | (49,313,318) | |||
| Other net non-operating income/(expenses) | (6,630,168) | (5,127,044) | 694,630 | |||
| Extraordinary items | 2,534,729 | (16,698,573) | (487,818) | |||
| Income before income tax | 320,830,547 | 166,905,569 | 484,666,919 | |||
| Provision for income taxes | (88,829,879) | (137,646,453) | (162,826,053) | |||
| Income applicable to minority interests | - | (63,774) | (23,055) | |||
| Net income | 232,000,668 | 29,195,342 | 321,817,811 | |||
Net income of this segment for years ended December 31, 2004, 2003 and 2002 was affected by curtailment costs of Euro 169,558,740, Euro 311,263,761 and Euro 49,313,318, respectively.
Capital expenditures for this reportable segment for the years ended December 31, 2004, 2003 and 2002 were approximately Euro 206.4 million, Euro 165.3 million and Euro 604.6 million (including Euro 348,4 million related with the acquisition of the Basic Network), respectively. Total assets as of December 31, 2004 and 2003 were approximately Euro 3,976.8 million and Euro 3,969.0 million, respectively.
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Summarized profit and loss statements for this reportable segment, for the years ended December 31, 2004, 2003 and 2002 are presented below:
| 2004 | 2003 | 2002 | ||||
| Services rendered - external customers (Note 21) | 1,300,371,237 | 1,213,221,073 | 1,132,761,033 | |||
| Services rendered - intersegment revenues | 139,782,376 | 170,853,927 | 199,947,958 | |||
| Sales of merchandise and products - external customers (Note 21) | 143,922,012 | 133,519,224 | 133,886,964 | |||
| Sales of merchandise and products - inter segment sales | 4,190,499 | 5,001,030 | 8,155,430 | |||
| Operating revenues | 1,588,266,124 | 1,522,595,254 | 1,474,751,385 | |||
| Wages and salaries | (56,269,494) | (59,188,048) | (48,503,874) | |||
| Costs of telecommunications | (296,614,686) | (295,485,140) | (325,280,447) | |||
| Depreciation and amortization | (200,874,938) | (189,900,617) | (174,935,873) | |||
| Own work capitalized | 1,583,645 | 4,448,129 | 5,239,064 | |||
| Costs of products sold | (170,866,479) | (154,749,178) | (167,983,520) | |||
| Marketing and publicity | (28,492,459) | (26,260,516) | (20,058,815) | |||
| General and administrative expenses | (198,612,849) | (210,773,711) | (194,412,360) | |||
| Other net operating income | (92,295,823) | (90,723,844) | (100,537,618) | |||
| Operating costs and expenses | (1,042,443,083) | (1,022,632,925) | (1,026,473,443) | |||
| Operating income | 545,823,041 | 499,962,329 | 448,277,942 | |||
| Interest and related expenses | (9,855,549) | (19,938,321) | (13,672,071) | |||
| Interest and related income | 2,728,721 | 4,377,768 | 4,102,884 | |||
| Gains/(losses) on sales and disposals of fixed assets | (8,246,778) | (3,924,613) | (9,474,681) | |||
| Other net non-operating income/(expenses) | (996,684) | (2,567,885) | 9,578,881 | |||
| Extraordinary items | - | - | (50,915,335) | |||
| Income before income tax | 529,452,751 | 477,909,278 | 387,897,620 | |||
| Provision for income taxes | (143,305,228) | (159,643,314) | (128,132,791) | |||
| Net income | 386,147,523 | 318,265,964 | 259,764,829 | |||
Capital expenditures for this reportable segment for the years ended December 31, 2004, 2003 and 2002 were approximately Euro 158.8 million, Euro 168.5 million and Euro 282.7 million, respectively, and total assets as of December 31, 2004 and 2003 were approximately Euro 1,464.2 million and Euro 1,335.6, respectively.
2004 ANNUAL REPORT163
34.4. Brazilian Mobile
Summarized profit and loss statements for this reportable segment, for the years ended December 31, 2004, 2003 and 2002 are presented below:
| 2004 | 2003 | 2002 | ||||
| Services rendered - external customers (Note 21) | 1,183,397,482 | 1,093,778,637 | 1,048,632,419 | |||
| Services rendered - intersegment revenues | (7,750) | 24,134 | 438,283 | |||
| Sales of merchandise and products - external customers (Note 21) | 319,587,207 | 267,735,126 | 168,989,855 | |||
| Operating revenues | 1,502,976,939 | 1,361,537,897 | 1,218,060,557 | |||
| Wages and salaries | (93,145,897) | (75,242,602) | (60,175,996) | |||
| Costs of telecommunications | (87,746,166) | (114,184,193) | (109,159,918) | |||
| Depreciation and amortization | (267,833,258) | (254,003,543) | (236,719,658) | |||
| Costs of products sold | (371,185,077) | (293,220,874) | (197,576,814) | |||
| Marketing and publicity | (68,269,102) | (50,479,600) | (28,810,396) | |||
| General and administrative expenses | (292,406,297) | (252,152,645) | (224,044,955) | |||
| Other net operating income | (93,879,883) | (67,555,012) | (85,607,551) | |||
| Operating costs and expenses | (1,274,465,680) | (1,106,838,469) | (942,095,288) | |||
| Operating income | 228,511,259 | 254,699,428 | 275,965,269 | |||
| Interest and related expenses | (214,182,985) | (219,227,392) | (212,600,748) | |||
| Goodwill amortization | (38,634,938) | (53,076,620) | (9,254,776) | |||
| Interest and related income | 79,941,276 | 152,176,165 | 45,334,794 | |||
| Gains/(losses) on sales and disposals of fixed assets | (1,842,721) | (4,743,592) | 3,660,724 | |||
| Equity in losses of affiliated companies | - | - | (88,641,563) | |||
| Other net non-operating income/(expenses) | (4,615,832) | (2,808,208) | 125,011 | |||
| Income before income tax | 49,176,059 | 127,019,781 | 14,588,711 | |||
| Provision for income taxes | (65,352,452) | (85,374,043) | (48,856,903) | |||
| Income applicable to minority interests | (43,014,109) | (51,527,882) | - | |||
| Net income/(loss) | (59,190,502) | (9,882,144) | (34,268,192) | |||
Net income of this reportable segment for the years ended December 31, 2004 and 2003 correspond to 50% of the net income of
Brasilcel, and for the year ended December 31, 2002, net income correspond to Telesp Celular Participações
results.
Capital expenditures for 50% of VIVO for the years ended December 31, 2004 and 2003 were approximately Euro 264.5 million and Euro
164.6 million, respectively and 50 % of the total assets of Brasilcel as of December 31, 2004 and 2003 amounted to
Euro 4,044.6 million and Euro 3,742.4 million, respectively. In the year ended December 31, 2002 TCP’s capital expenditures
were approximately Euro 88.2 million.
Summarized profit and loss statements for this reportable segment, for the years ended December 31, 2004, 2003 and 2002 are presented below:
| 2004 | 2003 | 2002 | ||||
| Services rendered - external customers (Note 21) | 616,240,929 | 544,080,630 | 475,777,581 | |||
| Services rendered - intersegment revenues | 817,860 | 786,529 | 856,400 | |||
| Sales of merchandise and products - external customers (Note 21) | 112,732,733 | 139,397,732 | 146,124,312 | |||
| Sales of merchandise and products - inter segment sales | 2,524 | 57,584 | - | |||
| Operating revenues | 729,794,046 | 684,322,475 | 622,758,293 | |||
| Wages and salaries | (86,726,376) | (83,786,203) | (86,009,282) | |||
| Post-Retirement benefits | (,558,863) | (1,139,803) | (1,277,171) | |||
| Costs of telecommunications | (26,783,807) | (25,165,051) | (25,189,171) | |||
| Depreciation and amortization | (58,610,282) | (62,989,542) | (73,090,945) | |||
| Own work capitalized | 997,851 | 982,100 | 2,068,135 | |||
| Costs of products sold | (25,657,733) | (59,060,297) | (66,624,370) | |||
| Marketing and publicity | (39,567,851) | (30,217,909) | (27,764,974) | |||
| General and administrative expenses | (312,025,311) | (306,572,517) | (296,912,833) | |||
| Other net operating income | (47,897,598) | (44,682,459) | (41,874,813) | |||
| Operating costs and expenses | (596,829,970) | (612,631,681) | (616,675,424) | |||
| Operating income | 132,964,076 | 71,690,794 | 6,082,869 | |||
| Interest and related expenses | (7,936,890) | (11,493,537) | (4,055,399) | |||
| Goodwill amortization | (14,803,469) | (13,622,067) | (38,766,281) | |||
| Interest and related income | 1,249,283 | 6,529,136 | 3,176,197 | |||
| Gains/(losses) on sales and disposals of fixed assets | (994,830) | (3,883,337) | (934,853) | |||
| Equity in earnings/(losses) of affiliated companies | 988,135 | (6,287,657) | (12,166,472) | |||
| Work force reduction program costs | (565,893) | - | (5,721,601) | |||
| Other net non-operating income/(expenses) | (3278,264) | (6,869,410) | (9,965,493) | |||
| Extraordinary items | (77,563,309) | (61,667,538) | 3,610,051 | |||
| Income before income tax | 30,058,839 | (25,603,616) | (58,740,982) | |||
| Income taxes | 82,615,694 | 55,758,667 | 4,284,446 | |||
| Income applicable to minority interests | (2,304,550) | 948,063 | 2,388,427 | |||
| Net income/(loss) | 110,369,983 | 31,103,114 | (52,068,109) | |||
The net income for this reportable segment for the year ended December 31, 2004 was affected by: (i) a provision recorded by TV Cabo amounting to Euro 26,250,000 in connection with the dismantling of the analogue premium service and the implementation of a digital offer (Note 18); (ii) extraordinary costs amounting to Euro 40,000,000 related with provisions to cover estimated losses in the audiovisuals business (Note 18); and (iii) the initial recognition of deferred tax assets related with tax losses from previous years, since only in 2004 was obtained evidence that these tax losses can be realized.
Capital expenditures for this reportable segment for the years ended December 31, 2004, 2003 and 2002 were approximately Euro 80.5 million, Euro 57.4 million and Euro 78.9 million, respectively, and total assets as of December 31, 2004 and 2003 amounted to Euro 1,145.7 million and Euro 900.7 million, respectively.
2004 ANNUAL REPORT165
34.6. Reconciliation of Operating Revenues and Net Income
a) Operating revenues
| 2004 | 2003 | 2002 | ||||
| Total relating to reportable segments | 6,087,345,889 | 5,856,319,383 | 5,756,648,214 | |||
| Total relating to other segments | 440,823,444 | 404,819,337 | 346,042,109 | |||
| Elimination of intragroup revenues | (505,315,362) | (485,027,145) | (520,657,203) | |||
| 6,022,853,971 | 5,776,111,575 | 5,582,033,120 | ||||
b) Net income
| 2004 | 2003 | 2002 | ||||
| Total relating to reportable segments | 669,327,672 | 368,682,276 | 495,246,339 | |||
| Total relating to other segments | 16,677,009 | 29,476,170 | 33,530,955 | |||
| Other items: | ||||||
| Financial expenses related with loans obtained at group level | (178,784,093) | (165,325,475) | (178,756,687) | |||
| Exchange (Losses)/Gains with derivative instruments | (12,334,906) | (17,303,832) | 147,846,301 | |||
| Goodwill amortization at group level | (36,531,365) | (36,761,366) | (94,651,546) | |||
| Equity accounting in losses of affiliated companies, net | 27,704,179 | (11,791,756) | (57,690,370) | |||
| Provisions for finantial instruments | 11,305,603 | 82,498,690 | (26,830,171) | |||
| Effect of change in tax rate | - | (56,118,907) | - | |||
| Adjustment of income tax | 49,448,684 | 60,267,671 | 14,467,910 | |||
| Minority interests not included on reportable segments | (46,687,388) | (13,388,170) | 57,893,067 | |||
| 500,125,395 | 240,235,301 | 391,055,798 | ||||
c) Total assets
| 2004 | 2003 | |||
| Total assets relating to reportable segments | 10,631,070,000 | 9,947,546,169 | ||
| Total assets relating to other segments | 1,522,226,513 | 2,694,094,182 | ||
| Goodwill | 501,764,481 | 529,986,996 | ||
| Investments in associated companies | 308,348,166 | 386,187,913 | ||
| 12,963,409,160 | 13,557,815,260 | |||
166
The following significant events occurred after 31 December 2004:
On 5 January 2005 TCP successfully completed the capital increase of approximately BRL 2,054 million, which comprised the rights issue of BRL 2,000 million and the subscription in kind equivalent to the tax credits related to year 2003 in the amount of BRL 53.89 million. The proceeds of the rights issue were used to repay a bridge loan related to the TCO tender offer and to repay other short-term debt. With this capital increase the controlling shareholders increased the economic interest in TCP from 65.12% to 65.70%, through the ownership of 524,712 million common shares (94.90% of TCP’s total common shares) and of 515,084 million preferred shares (50.02% of TCP’s total preferred shares).
On 28 February 2005 PT announced the sale by its subsidiary PT Multimedia of its financial investement in Lusomundo Serviços, including its 80.91% shareholding in Lusomundo Media, through the execution of a promissory sale and purchase agreement with Controlinveste for a total consideration of Euro 173.8 million. With a view to simplifying the acquisition, prior to closing, PT will sell its 5.94% direct stake in Lusomundo Media to PT Multimedia, for a total consideration of Euro 10.1 million.
As describe in Note 31, Portugal Telecom held at 31 December 2004 equity swap contracts over own shares representing 1.72% of its share capital prior to the cancellation in December 2004 of the 7% treasury shares held. These equity swaps were contracted in connection to the 10% share buyback programme announced in 2003. In 2005, as of the date of this Annual Report, Portugal Telecom had contracted additional equity swaps over 16,077,544 own shares (at an average price of Euro 9.39 per share), to facilitate completion of the remaining 1.28% of this 10% share buyback progarmme. The average price of the completed 10% share buyback programme was Euro 8.22 per share.
2004 ANNUAL REPORT167
Exhibit I - Details of Subsidiary, Affiliated and Investee Companies as of December 31, 2004
1. Companies included in the consolidation
The following companies were included in the consolidation as of December 31, 2004 and 2003:
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Portugal Telecom (parent company) | Lisbon | Holding company. | |||
| (Note 1) | |||||
| Lusomundo Media | 44.18% | 44.23% | |||
| Açormedia - Comunicação Multimedia e | Ponta | Providing services on edition of | (90%) | ||
| Edição de Publicações, S.A. | Delgada | publications, audiovisual | |||
| (‘‘Açormedia’’) | communication, multimedia | ||||
| services and edition of books. | |||||
| Cabo TV Açoreana, S.A. | Ponta | Distribution of television | TV Cabo Portugal | 48.24% | 48.24% |
| Delgada | signals by cable and satellite | (83.82%) | |||
| in the Azores area. | |||||
| Cabo TV Madeirense, S.A. | Funchal | Distribution of television | TV Cabo Portugal | 39.71% | 39.71% |
| signals by cable and satellite | (69%) | ||||
| in the Madeira area. | |||||
| PT Ventures (40%) | 40.00% | 40.00% | |||
| Cabo Verde Telecom, S.A. | Praia | Fixed and mobile | |||
| telecommunications services in | |||||
| Cabo Verde. | |||||
| Clipanúncios - Serviços de Gestão | Lisbon | Electronic management of | - | - | 49.15% |
| de Informação, S.A. (a) | advertisements and services in | ||||
| the electronic commerce area. | |||||
| Contact Cabo Verde - Telemarketing | Praia | Call and contact center services. | PT Contact (100%) | 100.00% | - |
| e Serviços de Informação, S.A. (b) | |||||
| CST - Companhia Santomense de | São Tomé | Fixed and mobile | PT Comunicações | 51.00% | 51.00% |
| Telecomunicações, S.A.R.L. | telecommunication services in | (51%) | |||
| São Tomé e Príncipe. | |||||
| Directel - Listas Telefónicas | Lisbon | Publication of telephone | PT Ventures (100%) | 100.00% | 100.00% |
| Internacionais, Lda. (‘‘Directel’’) | directories and operation of | ||||
| related data bases. | |||||
| Directel Cabo Verde - Serviços de | Praia | Publication of telephone | Directel (60%) | 76.00% | 76.00% |
| Comunicação, Lda. | directories and operation of | Cabo Verde | |||
| related databases in Cabo Verde | Telecom (40%) | ||||
| Directel Macau - Listas | Macau | Publication of telephone | Directel (75%) | 80.00% | 80.00% |
| Telefónicas, Lda. | directories and operation of | PT Ásia (5%) | |||
| related databases in Macau. | |||||
| Elta - Empresa de Listas | Luanda | Publication of telephone | Directel (55%) | 55.00% | 55.00% |
| Telefónicas de Angola, Lda. | directories. | ||||
| Empracine - Empresa Promotora de | Lisbon | Developing activities on movies | Lusomundo SII | 57.48% | - |
| Actividades Cinematográficas, Lda. | exhibition. | (100%) | |||
| (b) | |||||
| Empresa Gráfica Funchalense, S.A. | Lisbon | Services provider of graphic art | - | - | 28.78% |
| (c) | namely typography, lithography, | ||||
| plasticizing, book binding, | |||||
| photocomposition and offset. | |||||
| Global Notícias Publicações, S.A. | Oporto | Newspaper edition and | Lusomundo Media | 48.95% | 49.01% |
| publication. | (99.72%) | ||||
| Grafilme - Sociedade Impressora de | Lisbon | Providing services on | Lusomundo | 31.98% | 31.98% |
| Legendas, Lda. | audiovisual subtitling. | Audiovisuais | |||
| (55.56%) | |||||
| 90.00% | 90.00% | ||||
| Infonet Portugal - Serviços de | Lisbon | Commercialization of value added | PT Prime (90%) | ||
| Valor Acrescentado, Lda. | products and services in the | ||||
| area of information and | |||||
| communication by computer | |||||
| through access to the Infonet | |||||
| world network. | |||||
168
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Jornal do Fundão Editora, Lda. | Fundão | Newspaper edition and | Lusomundo Media | 25.20% | 25.24% |
| publication. | |||||
| Kenya Postel Directories, Ltd. | Nairobi | Production, editing and | Directel (55%) | 55.00% | 55.00% |
| distribution of telephone | |||||
| directories and other | |||||
| publications. | |||||
| LTM - Listas Telefónicas de | Maputo | Management, editing, operation | Directel (50%) | 50.00% | 50.00% |
| Moçambique, Lda. | and commercialization of | ||||
| listings of subscribers and | |||||
| classified telecommunications | |||||
| directories. | |||||
| Lusomundo Audiovisuais, S.A. | Lisbon | Import, commercialization, | PT Multimedia | 57.56% | 57.56% |
| distribution and production of | (100%) | ||||
| audiovisual products. | |||||
| Lusomundo Cinemas, S.A. | Lisbon | Cinema exhibition. | PT Multimedia | 57.56% | 57.56% |
| (100%) | |||||
| Lusomundo Editores, S.A. | Lisbon | Movies distribution. | PT Multimedia | 57.56% | 57.56% |
| (100%) | |||||
| Lusomundo España, SL (‘‘Lusomundo | Madrid | Management of investments | PT Multimedia | 57.56% | 57.56% |
| Espana’’) | relating to activities in Spain | (100%) | |||
| in the audiovisuals business. | |||||
| Lusomundo - Sociedade Investimentos | Lisbon | Management of Real Estate. | PT Multimedia | 57.48% | - |
| Imobiliários, SGPS, S.A. | (99.87%) | ||||
| (‘‘Lusomundo SII’’) (b) | |||||
| Lusomundo Imobiliária 2, S.A. (b) | Lisbon | Management of Real Estate. | Lusomundo SII | 57.37% | - |
| (99.80%) | |||||
| Lusomundo Media | Lisbon | Management of investments. | Lusomundo | 49.09% | 49.09% |
| Serviços | |||||
| (74.97%) | |||||
| Portugal Telecom | |||||
| (5.94%) | |||||
| Lusomundo Moçambique, Lda. | Maputo | Cinema exhibition. | Lusomundo Cinemas | 57.56% | 57.56% |
| (100.00%) | |||||
| Lusomundo Serviços | Lisbon | Management of investments. | PT Multimedia | 57.56% | 57.56% |
| (100%) | |||||
| Lusomundo.net - Comércio | Lisbon | Providing multimedia and | - | - | 57.56% |
| Electrónico e Informática, Lda.(a) | telecommunications services. | ||||
| Mascom Wireless Botswana | Botswana | Provision of mobile | - | - | 50.01% |
| (Proprietary) Limited ("Mascom") | telecommunications services in | ||||
| (d) | Botswana. | ||||
| Mobitel, S.A. | São Paulo | Call center services. | PT Brasil | 56.96% | 56.96% |
| (56.96%) | |||||
| Naveprinter - Indústria Gráfica do | Oporto | Providing services on publishing | Global Notícias | 44.53% | - |
| Norte, S.A. (e) | and graphic art. | (90.97%) | |||
| Notícias Direct - Distribuição ao | Lisbon | Home delivery of publications | Lusomundo Serviços | 57.56% | 57.56% |
| Domicílio, Lda. | and other services. | (100%) | |||
| Ocasião - Edições Periódicas, Lda. | Almada | Newspaper edition and | Global Notícias | 48.95% | - |
| (‘‘Ocasião’’) (e) | publication. | (99.98%) Lusomundo | |||
| Media (0.02%) | |||||
| Platoforma - Empresa de Trabalho | Lisbon | Supply of temporary labour to | - | - | 100.00% |
| Temporário, Lda. ("Platoforma") (d) | third parties, personnel | ||||
| selection and professional | |||||
| training. | |||||
| Portugal Telecom Ásia, Lda. ("PT | Macau | Promotion and marketing of | Portugal Telecom | 99.96% | 99.96% |
| Ásia") | telecommunications services. | (95.92%) | |||
| PT Comunicações | |||||
| (4.04%) | |||||
2004 ANNUAL REPORT
169
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Portugal Telecom Brasil, S.A. ("PT | São Paulo | Management of investments. | Portugal Telecom | 100.00% | 100.00% |
| Brasil") | (99.95%) | ||||
| PT Comunicações | |||||
| (0.05%) | |||||
| Portugal Telecom Inovação, S.A. | Aveiro | Innovation, research, | Portugal Telecom | 100.00% | 100.00% |
| (‘‘PT Inovação’’) | development and integration of | (100%) | |||
| telecommunications services and | |||||
| engineering solutions and | |||||
| training services in | |||||
| telecommunications. | |||||
| Portugal Telecom Inovação Brasil, | São Paulo | Development of information | PT Inovação(100%) | 100.00% | 100.00% |
| Ltda. | technologies and | ||||
| telecommunications services. | |||||
| Portugal Telecom Internacional | Amsterdam | Obtaining financing for the | Portugal Telecom | 100.00% | 100.00% |
| Finance B.V | group in international markets. | (100%) | |||
| Premium TV Portugal, S.A. | Lisbon | Development and promotion of | PT Conteúdos | 57.56% | 57.56% |
| "pay-TV" and multimedia | (100%) | ||||
| services, including licensing of | |||||
| TV programs. | |||||
| Previsão - Sociedade Gestora de | Lisbon | Pension fund management. | Portugal Telecom | 78.12% | - |
| Fundos de Pensões, S.A. | (78.12%) | ||||
| (‘‘Previsão’’) (e) | |||||
| PrimeSys, Soluções Empresariais, | São Paulo | Provision of services in the | PT Brasil (100%) | 100.00% | 100.00% |
| S.A. | areas of information technology | ||||
| and telecommunications. | |||||
| PT Acessos de Internet Wi-Fi, S.A. | Lisbon | Provides wireless Internet | Portugal Telecom | 100.00% | - |
| (b) | access services. | (100%) | |||
| PT Comunicações, S.A. (‘‘PT | Lisbon | Establishment, management and | Portugal Telecom | 100.00% | 100.00% |
| Comunicações’’) | operation of telecommunications | (100%) | |||
| infrastructures and provision of | |||||
| public telecommunication | |||||
| services and telebroadcasting | |||||
| services. | |||||
| PT Compras - Serviços de Consultoria | Lisbon | Providing consultant and | Portugal Telecom | 100.00% | 100.00% |
| e Negociação, S.A. | negotiation services related | (100%) | |||
| with the buying process. | |||||
| PT Contact - Telemarketing e | Lisbon | Production, promotion and sale | PT Comunicações | 100.00% | 100.00% |
| Serviços de Informação, S.A. ("PT | of information systems, | (100%) | |||
| Contact") | including information products | ||||
| and services and related | |||||
| technical assistance. | |||||
| PT Conteúdos - Actividade de | Lisbon | Production and sale of | PT Televisão por | 57.56% | 57.56% |
| Televisão e de Produção de | television programs and | Cabo (100%) | |||
| Conteúdos, S.A. (former TV Cabo | advertising management. | ||||
| Audiovisuais) | |||||
| PT Corporate | Lisbon | Providing all services available | Portugal Telecom | 100.00% | 100.00% |
| in the Group, in the fixed line | (100%) | ||||
| and mobile telecommunications | |||||
| and information systems. | |||||
| PT Investimentos Internacionais, | Lisbon | Business advisory board service | Portugal Telecom | 100% | - |
| S.A. (‘‘PT II’’) (f) | installment, consultation, | (100%) | |||
| administration and business | |||||
| management. Elaboration of | |||||
| projects and economic studies | |||||
| and manage investments. | |||||
| PT Meios - Serviços de Publicidade e | Lisbon | Purchase, sale and exchange of | Portugal Telecom | 100% | 100% |
| Marketing, S.A. | space advertising, analysis of | (100%) | |||
| marketing investment projects. | |||||
| PT Móveis, SGPS, S.A. (‘‘PT | Lisbon | Management of investments in the | TMN (100%) | 100.00% | 100.00% |
| Móveis’’) | mobile business. | ||||
| PT Multimedia - Serviços de | Lisbon | Management of investments in the | Portugal Telecom | 57.56% | 57.56% |
| Telecomunicações e Multimedia, | multimedia business. | (57.56%) | |||
| SGPS, S.A. | |||||
| PT Multimedia.com Brasil, Ltda. | São Paulo | Management of investments. | PT Brasil (100%) | 100.00% | 100.00% |
| (‘‘PTM.com Brasil’’) | |||||
170
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| PT Prime, SGPS, S.A. (Prime SGPS) | Lisbon | Management of investments, under | Portugal Telecom | 100.00% | 100.00% |
| the business areas of corporate | (100%) | ||||
| market and large customers. | |||||
| PT Prime - Soluções Empresariais de | Lisbon | Provision of development and | Portugal Telecom | 100% | 100% |
| Telecomunicações e Sistemas, S.A. | consultancy services in the | (100%) | |||
| areas of electronic commerce, | |||||
| contents and information | |||||
| technology. | |||||
| PT Prime Tradecom - Soluções | Lisbon | Provision of development and | Prime SGPS (66%) | 66.00% | 66.00% |
| Empresariais de Comércio | consultancy services in the | ||||
| Electrónico, S.A. ("Tradecom’’) (g) | areas of electronic commerce, | ||||
| contents and information | |||||
| technology. | |||||
| PT Pro, Serviços Administrativos e | Lisbon | Shared services center. | Portugal Telecom | 100.00% | 100.00% |
| de Gestão Partilhados, S.A. | (100%) | ||||
| PT Sistemas de Informação, S.A. | Oeiras | Provision of IT systems and | Portugal Telecom | 100.00% | 100.00% |
| (‘‘PT SI’’) | services. | (99.8%) | |||
| PT Comunicações | |||||
| (0.1%) | |||||
| TMN (0.1%) | |||||
| PT Televisão por Cabo, SGPS, S.A. | Lisboa | Management of investments in | PT Multimedia | 57.56% | - |
| (h) | television by cable market. | (100%) | |||
| PT Ventures, SGPS, S.A. (‘‘PT | Lisbon | Management of investments in | Portugal Telecom | 100.00% | 100.00% |
| Ventures’’) | international markets. | (100%) | |||
| PT.com - Comunicações | Lisbon | Services rendered development | Portugal Telecom | 100.00% | 100.00% |
| Interactivas, S.A. (i) | and sale of communication | (100%) | |||
| product services, information | |||||
| and multimedia services. | |||||
| Rádio Notícias - Produções e | Lisbon | Developing activities on | Lusomundo Media | 40.58% | 40.63% |
| Publicidade, S.A. (‘‘Rádio | production of radio broadcast | (67.71%) | |||
| Notícias’’) | programs, including publicity | Global Notícias | |||
| products. | (15%) | ||||
| Rádio Press - Comunicação e | Oporto | Activities on radio | Rádio Noticias | 40.58% | 40.63% |
| Radiodifusão, Lda. | broadcasting, edition and | (100%) | |||
| commercialization of records, | |||||
| and other kind of audiovisual | |||||
| material. | |||||
| RJN - Rádio Jornal do Norte, Lda. | Oporto | Developing activities on | Rádio Noticias | 40.58% | 40.63% |
| production of radio broadcast | (100%) | ||||
| programs, including publicity | |||||
| products. | |||||
| Saber e Lazer - Informática e | Lisbon | Information management and | - | - | 100.00% |
| Comunicação, S.A. ("Saber e | development of software | ||||
| Lazer")(j) | products. | ||||
| Simarc - Promoções Imobiliárias, | Lisbon | Administration of real estate | Portugal Telecom | 100.00% | - |
| S.A. (b) | assets, real estate investment | (100%) | |||
| consultancy, management of | |||||
| property developments, purchase | |||||
| and sale of real estate. | |||||
| Telemática - Consultores de | Lisbon | Supply of computer equipment, | PT Contact (100%) | 100.00% | 100.00% |
| Telecomunicações | training and installations. | ||||
| e Informática, Lda. | |||||
| Telepac II - Comunicações | Lisbon | Services rendered development | - | - | 100.00% |
| Interactivas, S.A.(j) | and sale of telecommunications | ||||
| product services, information | |||||
| and multimedia services. | |||||
| Timor Telecom, S.A. (b) | Timor | Provider of telecommunications | TPT (50.10%) | 38.15% | - |
| services in Timor | |||||
| TMN - Telecomunicações Móveis | Lisbon | Provision of mobile | Portugal Telecom | 100.00% | 100.00% |
| Nacionais, S.A. | telecommunications services and | (100%) | |||
| the establishment, management | |||||
| and operation of | |||||
| telecommunications networks. | |||||
| Tradecom, SGPS, S.A. ("Tradecom | Lisbon | Management of investments. | - | - | 100.00% |
| SGPS") (g) | |||||
| TSF - Rádio Jornal de Lisboa, Lda. | Lisbon | Radio broadcasting including | Rádio Noticias | 40.58% | 40.63% |
| production of programs and | (100%) | ||||
| publicity products. | |||||
2004 ANNUAL REPORT
171
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| TPT - Telecomunicações Publicas de | Lisbon | Purchase, sale and services | PT Ventures | 76.14% | - |
| Timor, S.A. (‘‘TPT’’) (b) | rendering of telecommunications | (75.16%) | |||
| products and information | PT Ásia (0.98%) | ||||
| technologies in Timor | |||||
| TV Cabo Portugal, S.A. | Lisbon | Distribution of television by | PT Televisão por | 57.56% | 57.56% |
| cable, conception, realization, | Cabo (100%) | ||||
| production and broadcasting of | |||||
| television programs, operation of | |||||
| telecommunications services. | |||||
| Warner Lusomundo Sociedade Ibérica | Lisbon | Management of entertainment | - | - | 57.56% |
| de Cinemas, Lda. (k) | activities. | ||||
| (a) |
These companies were liquidated in 2004. |
| (b) |
These companies were fully consolidated due to their materiality for the presentation of the consolidated financial statements. |
| (c) |
This company was excluded from consolidation as of December 31, 2004. |
| (d) |
These companies were sold during 2004. |
| (e) |
Portugal Telecom acquired or increased its participation in these companies during 2004. |
| (f) |
This company was incorporated at March 31, 2004 as result of the reorganization of the international businesses. |
| (g) |
In 2004, the company Tradecom SGPS was merged into PT Prime SGPS and, as result, all the participations of Tradecom SGPS were
incorporated into PT Prime SGPS. |
| (h) |
During the second half of 2004, GSF - Gestão de Serviços Financeiros, Lda was renamed to ‘‘PT
Televisão por Cabo, SGPS, S.A.’’ and changed its activity. |
| (i) |
As of May 7, 2004 this company changed its name from ‘‘PT Multimedia.Com SGPS, S.A.’’ to the one it is
using currently. |
| (j) |
As of December 2004, these companies were merged into PT.com |
| (k) |
During the second half of 2004 this company was merged into Lusomundo Cinemas. |
These subsidiaries were included in the consolidation by the full consolidation method based on the provisions of line a), item 1, article 1 of Decree-law 238/91 of July 2 (majority of voting rights) except for Cabo Verde Telecom, which was consolidated based on line c), item 1, article 1 of that Decree-Law (dominant influence based on shareholders’ agreements or similar contracts).
172
2. Companies excluded from the consolidation
The following companies were excluded from the consolidation as of December 31, 2004 and 2003:
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| A Tentativa (Empresa Cinematográfica), | Lisbon | Cinema exhibition. | - | - | 47.00% |
| S.A. (a) | |||||
| Academia Global, Ltda. (b) | São Paulo | Development and | PTM.com Brasil | 100.00% | 100.00% |
| commercialization of | (100%) | ||||
| technological goods and | |||||
| services in the areas of | |||||
| education and professional | |||||
| training, including support | |||||
| services. | |||||
| Canal 20 TV, S.A. (b) | Madrid | Distribution of TV products. | PT Multimedia | 28.78% | 28.78% |
| (50%) | |||||
| Cine Esplanada Ideal Olhanense, Lda. | Olhão | Cinema exhibition. | - | - | 57.56% |
| (a) | |||||
| Cinerg - Sociedade Madeirense de | Funchal | Cinema exhibition. | - | - | 57.48% |
| Cinemas, Lda. (a) | |||||
| Contact Cabo Verde - Telemarketing e | Praia | Call and contact center | - | - | 100.00% |
| Serviços de Informação, S.A. (c) | services. | ||||
| DirectMedia Ásia, Lda. (b) | Hong Kong | Publishing of B2B directories. | Directel (99%) | 100.00% | 100.00% |
| PT Ásia (1%) | |||||
| Directel Uganda - Telephone | Uganda | Publication of telephone | Directel (90%) | 90.00% | 90.00% |
| Directories, Limited (d) | directories. | ||||
| EJV - Plataforma de Comércio | Lisbon | Creation and management of | - | - | 100% |
| Electrónico, S.A. (e) | electronic commerce platforms | ||||
| for goods and services | |||||
| Empracine - Empresa Promotora de | Lisbon | Cinema exhibition. | - | - | 57.48% |
| Actividades Cinematográficas, Lda. (c) | |||||
| Empresa Cine Mourense, Lda. (f) | Moura | Cinema exhibition. | PT Multimedia | 57.25% | 57.25% |
| (99.46%) | |||||
| Empresa de Recreios Artísticos, Lda. | Lisbon | Cinema exhibition. | Lusomundo SII | 52.85% | 52.85% |
| (‘‘ERA’’) (b) | (87.90%) | ||||
| PT Multimedia | |||||
| (4.03%) | |||||
| Empresa Teatro Sá da Bandeira, Lda. (a) | Santarém | Management and promotion of | - | - | 34.53% |
| public events. | |||||
| Foliver - Serviços de Telecomunicações | Lisbon | Production and multimedia | - | - | 74.88% |
| e Transferência de Informação, S.A. (e) | edition of information about | ||||
| the wine market. | |||||
| Grande Reportagem - Sociedade Editora, | Lisbon | Edition, commercialization, | Lusomundo Media | 49.09% | 49.15% |
| Lda. (b) | distribution and import/export | (100%) | |||
| of both periodical and non- | |||||
| periodical publications. | |||||
| Guinetel, S.A. (b) | Bissau | Provision of public | PT II (55%) | 55% | - |
| telecommunications services. | |||||
| Guiné Telecom - Companhia de | Bissau | Provision of public | PT Comunicações | 51.14% | 51.14% |
| Telecomunicações da Guiné-Bissau, | telecommunications services. | (51.14%) | |||
| S.A.R.L. (g) | |||||
| GSF - Gestão e Serviços Financeiros, | Lisbon | Supply of financial services, | - | - | 57.48% |
| Lda. (h) | management of investments and | ||||
| economical studies. | |||||
| Hotel Video - Prestação de Serviços, | Lisbon | Establishment of video systems | PT Multimedia | 34.53% | 34.53% |
| Lda. (b) | on Hotels and similar spaces. | (60%) | |||
| Janela Digital - Informativo e | Caldas da | Development of IT solutions to | PT.com (50%) | 50.00% | 50.00% |
| Telecomunicações, Lda ("Janela | Rainha | the real state market. | |||
| Digital") (b) | |||||
2004 ANNUAL REPORT
173
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Lusocine - Sociedade Exibidora de | V.R.S. | Developing activities on movies | - | - | 57.56% |
| Filmes, Lda. (a) | António | exhibition. | |||
| Lusomundo - Sociedade Investimentos | Lisbon | Management of real estate assets. | - | - | 57.48% |
| Imobiliários, SGPS, S.A. (‘‘Lusomundo | |||||
| SII’’) (c) | |||||
| Lusomundo Imobiliária 2, S.A. (c) | Lisbon | Management of real estate assets. | - | - | 57.37% |
| Marconi France Telecommunications SAS | Paris | Provision of telecommunications | PT Comunicações | 100.00% | 100.00% |
| (b) | services. | (100%) | |||
| Marconi Luxembourg Telecommunications, | Luxembourg | Provision of telecommunications | - | - | 100.00% |
| S.A.R.L. (a) | services. | ||||
| Marconi Sprint - Serviços de | Lisbon | Commercialization of data and | PT Ventures | 51.00% | 51.00% |
| Comunicação, Lda. (d) | voice transmission | (51%) | |||
| telecommunications services. | |||||
| Marconi Suisse Telecommunications, | Lausanne | Provision of telecommunications | PT Comunicações | 100.00% | 100.00% |
| S.A.R.L (b) | services. | (100%) | |||
| Motormédia - Comércio, Publicidade e | Lisbon | Services rendered in connection | PT.com (100%) | 100% | 74.90% |
| Serviços Multimedia, S.A. (b) | with advertising, commercial and | ||||
| multimedia services in connection | |||||
| with the commercialization of a | |||||
| site dedicated to the car sector. | |||||
| Portugal Telecom Argentina, S.A. (b) | Buenos | Provision of telecommunications | Portugal Telecom | 50.01% | 50.01% |
| Aires | services. | (10.01%) | |||
| PT Ventures | |||||
| (40%) | |||||
| Portugal Telecom Europa, S.P.R.L. ("PT | Brussels | Technical and commercial | Portugal Telecom | 98.67% | 98.67% |
| Europa") (b) | management consultancy in the | (98.67%) | |||
| communication area with respect to | |||||
| the European market and community | |||||
| matters. | |||||
| Portugal Telecom North América, Inc. | Washington | Promotion and marketing of | Portugal Telecom | 100.00% | 100.00% |
| (f) | products, preparation of projects, | (100%) | |||
| studies and assessments, and the | |||||
| development of investment projects | |||||
| in the telecommunications area. | |||||
| PT Acessos de Internet Wi-Fi, S.A. (c) | Lisbon | Provide wireless internet access | - | - | 100% |
| services. | |||||
| PT Prestações Mandatária de Aquisições e | Lisbon | Acquisition and management of | PT Comunicações | 100% | - |
| Gestão de Bens, S.A. (‘‘PT | assets. | (100%) | |||
| Prestações’’) (i) | |||||
| PT Multimedia.com Participações, S.A. | São | Management of investments. | PT.Com (100%) | 100.00% | 100.00% |
| (b) | Paulo | ||||
| PT Multimedia - Serviços de Apoio à | Lisbon | Providing management support | PT Multimedia | 57.56% | 57.56% |
| Gestão , S.A. (b) | services. | (100%) | |||
| Rádio Canal Aberto, Lda. (b) | Ponta | Radio broadcasting and | Açormedia (76%) | 35.34% | 35.39% |
| Delgada | communication activities. | Rádio Comercial | |||
| Açores (4%) | |||||
| Radio Comercial dos Açores, Lda. (b) | Ponta | Radio broadcasting and | Açormedia (100%) | 44.18% | 44.23% |
| Delgada | communication activities. | ||||
| Regiforum - Empreendimentos Comerciais | Lisbon | Operation of the Forum Telecom | PT Comunicações | 100.00% | 100.00% |
| e Culturais, Lda. (j) | building, having for that purpose | (100%) | |||
| a contract transferring the | |||||
| operation of the building to | |||||
| Portugal Telecom. | |||||
| Simarc - Promoções Imobiliárias, S.A. | Lisbon | Administration of real estate | - | - | 100% |
| (c) | assets, real estate investment | ||||
| consultancy, management of | |||||
| property developments, purchase | |||||
| and sale of real estate. | |||||
| Sociedade Teatral Bejense, S.A. (a) | Lisbon | Cinema exhibition. | - | - | 48.74% |
174
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Sportstat - Informação Desportiva | Lisbon | Collection, processing, consultant | PT.Com (99.98%) | 99.98% | 99.98% |
| Independente, S.A. (b) | providing, production, promotion | ||||
| and sale of statistical data and | |||||
| information. | |||||
| Sport Notícias - Organizações | Oporto | Organization of sport events. | - | - | 49.01% |
| Desportivas, Lda. (a) | |||||
| Superemprego - Sistemas de Informação | Lisbon | Management and collection of | PT.com (63.75%) | 63.75% | 63.75% |
| para Gestão de Recursos Humanos, S.A. | information about the labor | ||||
| (b) | market. | ||||
| Teat Flower Trading Ltd. (h) | British | International Business Trading | PT Comunicações | 100.00% | 100.00% |
| Virgin | Company. | (100%) | |||
| Island | |||||
| Techlab - Electrónico, Lda. (h) | São | Provision of mobile aeronautical | PT Brasil (100%) | 100.00% | 100.00% |
| Paulo | services. | ||||
| Timor Telecom, S.A. (c) | Timor | Operation of the public | TPT (50.10%) | - | 39.16% |
| telecommunication services in | |||||
| Timor | |||||
| TPT - Telecomunicações Publicas de | Lisbon | Purchase, sale and services | PT Ventures | - | 78.15% |
| Timor, S.A. (c) | rendening of telecommunications | (75.16%) | |||
| products and information | |||||
| technologies in Timor | |||||
| PT Ásia (0.98%) | |||||
| VoxPop - Música Interactiva, S.A. (d) | Lisbon | Provision of services and | PT.com (99.99%) | - | 74.9% |
| establishment, development and | |||||
| operation of an interactive | |||||
| channel dedicated to music and | |||||
| commercialization of related | |||||
| goods. | |||||
| (a) |
These companies were liquidated during 2004. |
| (b) |
These companies were excluded from consolidation due to their immateriality (item 1, article 4 of Decree-law 238/91 of 2 July). |
| (c) |
As of December 31, 2004 these companies were fully consolidated. |
| (d) |
As of December 31, 2004 these companies were in liquidation process. |
| (e) |
This company was merged into PT.Com. |
| (f) |
These companies had no activity at the moment. |
| (g) |
Given the political and economical situation of Guine Bissau, this company was excluded from the consolidation in 1998 and a
provision in the amount of the investment has been recorded. |
| (h) |
During the second half of 2004, GSF - Gestão de Serviços Financeiros, Lda was renamed to “ PT
Televisão por Cabo, SGPS, S.A.’’ and changed its activity. |
| (i) |
This company was incorporated in 30 March 2004. |
| (j) |
This company was consolidated by the equity method, because the nature of its business is not related with the group’s (item
4, article 4 of Decree-Law 238/91 of 2 July). |
2004 ANNUAL REPORT
175
3. Associated Companies
The associated companies as of December 31, 2004 and 2003 are as follows:
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| 24 Horas Inc. | Newark | Edition of publications. | Global Notícias | 24.96% | 24.99% |
| (51%) | |||||
| Banco 1.net, S.A. (a) | São Paulo | Developing activities providing | - | - | 31.50% |
| internet financial services. | |||||
| BEST - Banco Electrónico de Serviços | Lisbon | Provision of e.banking | PT .com (34%) | 34.00% | 34.00% |
| Total, S.A. (‘‘Banco Best’’) | services. | ||||
| CTM - Companhia de Telecomunicações de | Macau | Provision of public | PT Comunicações | 28.00% | 28.00% |
| Macau, S.A.R.L. | telecommunications services, in | (3%) | |||
| Macau. | PT Ventures (25%) | ||||
| Distodo - Distribuição e Logística, | Lisbon | Stocking, sale and distribution | Lusomundo Serviços | 28.78% | 28.78% |
| Lda. | of audiovisual material. | (50%) | |||
| Diverfun - Centros de Recreio, Lda. | Lisbon | Establishment and management of | PT Multimedia | 57.56% | 28.78% |
| (‘‘Diverfun’’) | entertainment spaces. | (100%) | |||
| Empresa do Diário de Notícias, Lda. | Funchal | Publications production and | Lusomundo Media | 19.64% | 19.66% |
| commercialization. | (40%) | ||||
| Empresa Gráfica Funchalense, S.A. | Lisbon | Services provider of graphic art | Lusomundo Serviços | 28.78 | 28.78% |
| namely typography, lithography, | (50%) | ||||
| plasticizing, book binding, | |||||
| photocomposition and offset. | |||||
| Hungaro Digitel KFT | Budapeste | Provision of telecommunications | PT Ventures | 44.62% | 44.62% |
| services. | (44.62%) | ||||
| Idealyze, S.A. | São Paulo | Production and | PT.com (33.33%) | 33.33% | 33.33% |
| commercialization of internet | |||||
| products. | |||||
| Infordesporto - Informática e | Lisbon | Commercialization of value | - | - | 50.00% |
| Desporto, S.A. (b) | added products and services in | ||||
| the area of information and | |||||
| communication by computer | |||||
| through access to the Infonet | |||||
| world network. | |||||
| Lisboa TV - Informação e Multimedia, | Lisbon | Television operations, notably | PT Conteúdos (40%) | 23.02% | 23.02% |
| S.A. | production and | ||||
| commercialization of programs | |||||
| and publicity. | |||||
| Lusa - Agência de Notícias de | Lisbon | News agency. | Lusomundo Serviços | 13.44% | 13.44% |
| Portugal, S.A. | (23.35%) | ||||
| Médi Telecom | Casablanca | Provision of mobile services in | PT Móveis (32.18%) | 32.18% | 32.18% |
| Morocco. | |||||
| Multicert - Serviços de Certificação | Lisbon | Supply of electronic | PT Prime (20%) | 20.00% | 20.00% |
| Electrónica, S.A. | certification services. | ||||
| Multitel - Serviços de | Luanda | Provision of data | PT Ventures (35%) | 35.00% | 35.00% |
| Telecomunicações, Lda. | communications services and | ||||
| digital information | |||||
| communication services, in | |||||
| Angola. | |||||
| Mundifun - Centros de Recreio, Lda. | Lisbon | Establishment and management of | Diverfun (66.66%) | 37.70% | 19.19% |
| entertainment spaces. | |||||
| Naveprinter - Indústria Gráfica do | Oporto | Providing services on | - | - | 18.85% |
| Norte, S.A. (c) | publishing and graphic art. | ||||
176
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Octal TV, SA. | Lisbon | Development, commercialization, | PT Multimedia(20%) | 11.51% | 11.51% |
| training and consultancy in | |||||
| systems for interactive and | |||||
| broad band television. | |||||
| Páginas Amarelas, S.A. ("Páginas | Lisbon | Production, editing and | Portugal Telecom | 25.00% | 25.00% |
| Amarelas") | distribution of telephone | (24.88%) | |||
| directories and publications. | PT Prime (0.125%) | ||||
| Previsão - Sociedade Gestora de Fundos | Lisbon | Pension fund management. | - | - | 31.56% |
| de Pensões, S.A. (‘‘Previsão’’) (d) | |||||
| SGPICE - Sociedade de Gestão de | Lisbon | Developing activities providing | PT Comunicações | 28.61% | 28.61% |
| Portais de Internet e Consultoria de | global products and services for | (11.11%) | |||
| Empresas, S.A. | internet support. | PT Multimedia | |||
| (11.11%) | |||||
| Prime SGPS (11.11%) | |||||
| Sport TV Portugal, S.A. | Lisbon | Conception, production, | PT Conteúdos | 28.78% | 19.18% |
| realization and | (50.00%) | ||||
| commercialization of sports | |||||
| programs for telebroadcasting, | |||||
| purchase and resale of the | |||||
| rights to broadcast sports | |||||
| programs for television and | |||||
| provision of publicity services | |||||
| Sportinvest Multimedia, SGPS, S.A. | Lisbon | Management of investments. | Portugal Telecom | 50.00% | 50.00% |
| (50%) | |||||
| Tele Larm Portugal - Transmissão de | Lisbon | Provision of transmission, | PT Prime (50%) | 50.00% | 50.00% |
| Sinais, S.A. | services, supervision of alarms, | ||||
| telemeasurement, telecontrol and | |||||
| data exchange services. | |||||
| Teledata de Moçambique, Lda. | Maputo | Operation and commercialization | PT Ventures (50%) | 50.00% | 50.00% |
| of public data | |||||
| telecommunications services and | |||||
| other telematic services. | |||||
| Telesat - Satellite Communications, | Macau | Operation of land based | PT Ventures (18.52%) | 22.22% | 24.44% |
| Limited | satellite stations, | PT Ásia (3.7%) | |||
| commercialization of private | |||||
| telecommunications network | |||||
| services. | |||||
| Tradecom Brasil S/A (e) | São Paulo | Development services of | Prime SGPS (20%) | 20.00% | - |
| electronic commerce in Latin | |||||
| America. | |||||
| Tradecom International N.V. | Rotterdam | Development services of | Prime SGPS (20%) | 20.00% | 20.00% |
| electronic commerce in Latin | |||||
| America. | |||||
| 74.98% | 74.98% | ||||
| TV Cabo Macau, S.A. | Macau | Distribution of television and | PT Ventures (35%) | ||
| audio signals, installation and | PT Ásia (40%) | ||||
| operation of a public | |||||
| telecommunications system and | |||||
| provision of video services, in | |||||
| Macau. | |||||
| TV Lab - Serviços e Equipamentos | Lisbon | Developing digital tv | PT.com (50%) | 50.00% | 50.00% |
| Interactivos, S.A. | interactive solutions. | ||||
| UOL, Inc. | São Paulo | Provides Internet services and | PT Brasil(28.11%) | 28.41% | 17.94% |
| produces Internet contents. | PTM.com | ||||
| Participações | |||||
| (0.30%) | |||||
| Unitel | Luanda | Mobile telecommunications | PT Ventures (25%) | 25.00% | 25.00% |
| services, in Angola. | |||||
| Vasp - Sociedade de Transporte e | Sintra | Providing distribution services | Lusomundo Serviços | 19.19% | 19.19% |
| Distribuições, Lda.(‘‘Vasp’’) | of publications and other | (33.33%) | |||
| products. | PT Multimedia | ||||
| (0.01%) | |||||
| Warner Cines de España, S.A. | Madrid | Management of entertainment | Lusomundo España | 19.19% | 19.19% |
| activities. | (33.33%) | ||||
| Web-Lab, SGPS, S.A. | Lisbon | Management of investments. | Portugal Telecom | 90.00% | 36.26% |
| (90%) | |||||
| Wisdown Tele Vision - Serviços e | Lisbon | Development of services and | PT .com (50%) | 50.00% | 50.00% |
| Produtos de Televisão, Lda. | products related with new | ||||
| technology in the TV market. | |||||
| (a) | This company was sold during 2004. |
| (b) | This company was liquidated during 2004. |
| (c) | During the second half of 2004, Global Notícias increased is participation in this company to 90,97% and, as a result, the company was fully consolidated as of December 31, 2004. |
| (d) | During the first half of 2004, Portugal Telecom increased its participation in Previsão to 78.12% and, as a result, the company was fully consolidated as of December 31, 2004. |
2004 ANNUAL REPORT
177
| (e) | This participation was acquired in 2004. |
178
4. Companies consolidated by the proportional method
| Company | Head office | Activity | Percentage of ownership | ||
| 2004 | 2003 | ||||
| Direct | Total | Total | |||
| Avista (a) | São | Management of investments. | Brasilcel (100%) | 50.00% | - |
| Paulo | |||||
| Brasilcel, N.V. | Amsterdan | Mobile telecommunications | PT Móveis (50.00%) | 50.00% | 50.00% |
| services and establishment | |||||
| management and exploration | |||||
| of telecommunications | |||||
| network, in Brasil. | |||||
| Celular CRT Participações, S.A. | Porto | Management of investments. | TBS (28.04%) | 34.16% | 25.30% |
| (‘‘Celular CRT Participações’’) | Alegre | Brasilcel (24.45%) | |||
| Avista (15.84%) | |||||
| Global Telecom, S.A. | Coritiba | Mobile cellular services | TCP (100%) | 32.56% | 32.56% |
| operator. | |||||
| Iberoleste Participações, S.A. | São | Management of investments. | - | - | 50.00% |
| (‘‘Iberoleste’’) (b) | Paulo | ||||
| Intertelecom, Ltda (‘‘Intertelecom’’)(c) | São | Management of investments. | - | - | 50.00% |
| Paulo | |||||
| Portelcom Fixa, S.A. (‘‘Portelcom | São | Management of investments. | - | - | 50.00% |
| Fixa’’)(b) | Paulo | ||||
| Portelcom Participações, S.A. | São | Management of investments. | Brasilcel | 50.00% | 50.00% |
| (‘‘Portelcom’’) | Paulo | (60.15%) | |||
| Ptelecom Brasil | |||||
| (39.85%) | |||||
| Ptelecom Brasil, S.A. (‘‘Ptelecom’’) | São | Management of investments. | Brasilcel (100%) | 50.00% | 50.00% |
| Paulo | |||||
| Sudeste Celular Participações, S.A. | São | Management of investments. | Brasilcel (100%) | 50.00% | 44.75% |
| (‘‘Sudeste Celular’’) | Paulo | ||||
| Tagilo Participações, Lda. (‘‘Tagilo’’) | São | Management of investments. | Brasilcel (100.%) | 50.00% | 50.00% |
| Paulo | |||||
| TBS Celular Participações, S.A. | São Paulo | Management of investments. | Brasilcel | 48.13% | 48.13% |
| (‘‘TBS’’) | (73.27%); | ||||
| Sudeste | |||||
| Celular(22.99%) | |||||
| Tele Sudeste Celular Participações, S.A. | Rio de | Mobile cellular services | Brasilcel | 45.44% | 41.94% |
| (‘‘Tele Sudeste’’) | Janeiro | operator. | (51.61%) | ||
| Sudeste (24.27%) | |||||
| Tagilo (10.80%) | |||||
| Avista (4.207%) | |||||
| Tele Leste Celular Participações, S.A. | Baia | Mobile cellular services | Avista (22.73%) | 25.29% | 13.85% |
| (‘‘Tele Leste’’) | operator. | Sudestecel (22.08%) | |||
| Brasilcel (3.37%) | |||||
| Tagilo (2.41%) | |||||
| Telesp Celular Participações, S.A. | São | Management of investments. | Brasilcel (57.26%) | 32.56% | 32.56% |
| (‘‘TCP’’) | Paulo | Portelcom (7.86%) | |||
| Telesp Celular, S.A. (‘‘Telesp Celular’’) | São | Mobile cellular services | TCP (100%) | 32.56% | 32.56% |
| Paulo | operator. | ||||
| Tele Centro Oeste Celular Participações, | Brasilia | Mobile cellular services | TCP (51.42%) | 16.74% | 9.40% |
| S.A. (‘‘TCO’’) | operator. | ||||
| (a) |
In October 2004, a new holding company, Avista, was created with the purpose of acquiring additional interests in Brasilcel’s
subsidiaries. This company has a share capital of Reais 616 million, which was fully subscribed and paid by
Brasilcel. |
| (b) |
In the end of 2004, these companies were merged into Sudeste Celular Participações. |
| (c) |
In the end of 2004, this company was merged into Ptelecom Brasil. |
2004 ANNUAL REPORT
179
Exhibit II - Changes in the Group in 2004
The following main changes in the composition of the companies included in the consolidation occurred during 2004, are as follows:
a) AcquisitionsDuring 2004, Portugal Telecom acquired in the stock market 1,600,000 shares of Media Capital, corresponding to 1.93% of its share capital, for an the amount of Euro 6,960,000 (Note 10).
During 2004, PT Conteúdos acquired 250,000 shares of Sport TV, equivalent to 16.67% of its share capital, for an amount of Euro 16.3 million. This acquisition generated a goodwill amounting to Euro 22,126,657 (Note 12) and increased the ownership of PT Conteúdos in the share capital of Sport TV to 50%.
During 2004, Portugal Telecom acquired 325,920 shares of P