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.
CONSOLIDATED REPORT
FIRST HALF 2005
Collective Person No. 503 215 058 Share Capital: Euro 1,166,485,050
Registered at the Conservatory of the Commercial Registry of Lisbon under No. 3602, Section 4
Avenida Fontes Pereira de Melo, 40, 1069-300 Lisboa
CONSOLIDATED REPORT
First Half 2005
Group Structure | 3 | |
Highlights | 4 | |
Business Performance | 8 | |
Financial Review | 8 | |
Operating Review | 23 | |
Employees | 37 | |
First Half Key Events and Recent Developments | 38 | |
Prospects for the Second Half | 41 | |
Consolidated Financial Statements | 43 | |
Report of Independent Auditors | 125 | |
Management Team | 129 | |
Additional Information to Shareholders | 136 |
2
Portugal Telecom | ||||||||
Wireline Business | 100.00% | PT Comunicações | ||||||
100.00% | PT Corporate | |||||||
100.00% | PT Prime | |||||||
100.00% | PT.COM | |||||||
Domestic Mobile Business | 100.00% | TMN | ||||||
100.00% | PT Wi-Fi | |||||||
Multimedia Business | 58.43% | PT Multimedia | 100.00% | TV Cabo | ||||
100.00% | Lusomundo Audiovisuais | |||||||
100.00% | Lusomundo Cinemas | |||||||
International Business | 50.00% | Vivo | 65.70% | Telesp Celular | ||||
65.70% | Global Telecom | |||||||
33.78% | Tele Centro Oeste | |||||||
68.33% | Celular CRT | |||||||
91.14% | Tele Sudeste | |||||||
50.59% | Tele Leste | |||||||
100.00% | PT Brasil | 100.00% | Primesys | |||||
59.96% | Mobitel | |||||||
32.18% | Médi Télécom | |||||||
40.00% | Cabo Verde Telecom | |||||||
51.00% | CST | |||||||
28.00% | CTM | |||||||
Instrumental Companies | 100.00% | PT Sistemas de Informação | ||||||
100.00% | PT Inovação | |||||||
100.00% | PT Pro | |||||||
100.00% | PT Compras | |||||||
100.00% | PT Contact | |||||||
78.12% | Previsão | |||||||
CONSOLIDATED REPORT - FIRST HALF 2005 | 3 |
CONSOLIDATED FINANCIAL DATA· |
Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Operating revenues | 3,024.2 | 2,881.2 | 5.0% | |||
Recurring operating costs, excluding D&A | 1,875.5 | 1,715.1 | 9.4% | |||
EBITDA (1) | 1,148.7 | 1,166.1 | (1.5%) | |||
Recurring operating income | 654.9 | 705.0 | (7.1%) | |||
Net income | 259.0 | 385.7 | (32.8%) | |||
Capex | 368.3 | 233.5 | 57.7% | |||
Capex as % of revenues (%) | 12.2 | 8.1 | 4.1pp | |||
EBITDA minus Capex | 780.5 | 932.6 | (16.3%) | |||
Net debt | 4,255.6 | 3,621.3 | 17.5% | |||
EBITDA margin (2) (%) | 38.0 | 40.5 | (2.5pp) | |||
Net debt / EBITDA (x) | 1.9 | 1.5 | 0.4x | |||
EBITDA / net interest (x) | 9.9 | 12.2 | (2.3x) | |||
(1) EBITDA = Recurring operating income + depreciation and amortisation. | ||||||
(2) EBITDA margin = EBITDA / operating revenues. |
Operating revenues increased by 5.0% y.o.y in the first half of 2005 to Euro 3,024 million, underpinned by the growth in Vivo and in PT Multimedia.
Operating revenues of the domestic businesses (wireline, TMN and PT Multimedia) decreased by 0.2% y.o.y in the first half of 2005, with the increase in PT Multimedia and TMN offsetting by Euro 25 million the decline in wireline revenues of Euro 29 million.
Domestic retail revenues (wireline, Pay-TV and broadband) increased by 0.7% y.o.y to Euro 916 million in the first half of 2005, with the strong growth in broadband and Pay-TV revenues more than compensating for the fall in wireline traffic revenues, which were negatively impacted by traffic volume declines and lower interconnection rates.
Wireline net retail revenues, calculated as wireline retail revenues less corresponding telecom costs, increased by 2.8% y.o.y in the first half of 2005 to Euro 582 million, as a result of the aggressive rollout of ADSL and new pricing plans.
EBITDA reached Euro 1,149 million in the first half of 2005, a decrease of 1.5% y.o.y, equivalent to an EBITDA margin of 38.0% .
EBITDA of the domestic businesses increased by 1.5% y.o.y in the first half of 2005, underpinned by a strong performance and margin improvement in the wireline and multimedia businesses.
4
Recurring operating income decreased by 7.1% y.o.y in the first half of 2005 to Euro 655 million, equivalent to a margin of 21.7% .
Net income totalled Euro 259 million in the first half of 2005 compared to Euro 386 million in the first half of 2004, representing a decrease of 32.8% y.o.y, primarily due to higher curtailment charges which reached Euro 97 million in the first half of 2005.
Capex increased by 57.7% y.o.y in the first half of 2005 to Euro 368 million, equivalent to 12.2% of operating revenues, as a result of higher spend on broadband and 3G in Portugal, the investment in a fifth transponder in the Pay-TV business, and network expansion and CDMA overlay investments at Vivo in Brazil.
EBITDA minus Capex decreased by 16.3% y.o.y to Euro 780 million in the first half of 2005, equivalent to 25.8% of operating revenues. Approximately 93% of PTs EBITDA minus Capex was generated by its domestic businesses (wireline, TMN and PT Multimedia).
Free cash flow decreased from Euro 392 million in the first half of 2004 to negative Euro 38 million in the first half of 2005, primarily as a result of an extraordinary contribution of Euro 300 million to fund post retirement healthcare obligations, the decrease in EBITDA minus Capex, and a higher investment in working capital mainly due to higher receivables.
Net debt amounted to Euro 4,256 million at the end of the first half of 2005, an increase of Euro 724 million from the end of 2004, primarily as a result of the dividends paid and the share buybacks made in the period, as well as the Euro 300 million extraordinary contribution made to fund post retirement healthcare obligations.
Disposals of financial investments during August 2005 will generate cash inflows of Euro 174 million regarding the sale of Lusomundo Serviços (which holds 80.91% of Lusomundo Media) to Controlinveste, and R$ 231 million regarding the sale of PrimeSys to Embratel. In addition, the disposal of PrimeSys, which has already been considered as a discontinued operation in the consolidated income statement for the first half of 2005, will result in a reduction in costs with operating leases, which in 2004 reached R$ 78 million.
PT issued Euro 2 billion of Eurobonds in the first half of 2005, Euro 1.5 billion on 24 March 2005, with maturities of 7 years (Euro 1 billion) and 12 years (Euro 500 million), and a further Euro 500 million on 16 June 2005, with a 20 year maturity, as part of its balance sheet refinancing. In February 2005, PT had also drawn Euro 250 million from two 10 year loans entered into with the European Investment Bank. In addition, the maturity of certain stand-by facilities totalling Euro 750 million was extended by two years. All these operations allowed PTs cost of debt (excluding Brazilian debt) to decrease to 4.2% and PTs debt maturity (excluding Brazilian debt) to increase to 9.5 years. Considering Brazilian debt, PTs
CONSOLIDATED REPORT - FIRST HALF 2005 | 5 |
consolidated cost of debt decreased to 5.9%, with the consolidated debt maturity being extended to 8.9 years.
Net exposure (assets minus liabilities) to Brazil amounted to R$ 7,703 million, or Euro 2,704 million at the Euro/Real exchange rate prevailing as at 30 June 2005. Assets denominated in Reais in PTs consolidated balance sheet as at 30 June 2005 represented approximately 35% of total assets and PTs share in Vivos net debt amounted to Euro 526 million as at 30 June 2005.
Pursuant to the announced 10% share buyback programme, PT cancelled 7% of its share capital at the end of 2004, reducing total share capital to Euro 1,166,485,050. Additionally, PT repurchased 37,628,550 PT shares, equivalent to 3.0% of the initial share capital prior to the 7.0% cancellation, thus completing the 10% share buyback announced in September 2003. In the shareholders meeting of April 2005, PT was granted authorisation to acquire an additional 10% of its share capital. PTs Board has committed to undertake a 3% share buyback, subject to market and financial conditions of the company.
6
OPERATING DATA | ||||||
1H05 | 1H04 | D 05/04 | ||||
Customer base ('000) | ||||||
Wireline | 4,445 | 4,282 | 3.8% | |||
Mobile | 33,554 | 28,386 | 18.2% | |||
Pay-TV | 1,465 | 1,487 | (1.5%) | |||
Broadband (retail ADSL + cable) | 833 | 529 | 57.3% | |||
Wireline | ||||||
Main lines ('000) | 4,445 | 4,282 | 3.8% | |||
PSTN/ISDN | 3,871 | 3,985 | (2.8%) | |||
Carrier pre-selection |
540 | 485 | 11.4% | |||
ADSL retail | 500 | 260 | 92.1% | |||
ADSL wholesale | 46 | 33 | 40.3% | |||
Unbundled local loops | 28 | 5 | n.m. | |||
Net additions ('000) | 68 | 56 | 20.5% | |||
PSTN/ISDN | (77) | (52) | 48.6% | |||
Carrier pre-selection |
55 | 46 | 19.6% | |||
ADSL retail | 120 | 99 | 20.8% | |||
ADSL wholesale | 5 | 5 | 2.9% | |||
Unbundled local loops | 19 | 3 | n.m. | |||
Pricing plans ('000) | 1,330 | 470 | 183.1% | |||
Total traffic (million of minutes) | 7,587 | 8,617 | (12.0%) | |||
ARPU (Euro) | 34.0 | 34.3 | (0.8%) | |||
Domestic mobile - TMN | ||||||
Customers ('000) | 5,108 | 4,872 | 4.8% | |||
Net additions ('000) | 54 | (15) | n.m. | |||
Total churn (%) | 23.2 | 26.0 | (2.8pp) | |||
MOU (minutes) | 119.5 | 119.2 | 0.2% | |||
ARPU (Euro) | 22.6 | 23.8 | (4.9%) | |||
Data as % of service revenues (%) | 10.9 | 9.3 | 1.6pp | |||
CCPU (1) (Euro) | 11.3 | 11.1 | 2.0% | |||
ARPU minus CCPU (Euro) | 11.4 | 12.8 | (10.9%) | |||
Brazilian mobile - Vivo | ||||||
Customers ('000) | 28,446 | 23,514 | 21.0% | |||
Market share in areas of operation (%) | 47.6 | 54.5 | (6.9pp) | |||
Net additions ('000) | 1,903 | 2,858 | (33.4%) | |||
MOU (minutes) | 80.1 | 91.7 | (12.6%) | |||
ARPU (R$) | 28.7 | 34.0 | (15.5%) | |||
Data as % of service revenues (%) | 5.8 | 4.1 | 1.7pp | |||
CCPU (1) (R$) | 17.5 | 18.3 | (4.2%) | |||
ARPU minus CCPU (R$) | 11.2 | 15.7 | (28.7%) | |||
Multimedia - PT Multimedia (2) | ||||||
Homes passed ('000) | 2,606 | 2,514 | 3.7% | |||
Bi-directional ('000) | 2,484 | 2,283 | 8.8% | |||
Pay-TV customers ('000) | 1,465 | 1,487 | (1.5%) | |||
Pay-TV net additions ('000) | 16 | 45 | (64.7%) | |||
Cable broadband accesses ('000) | 333 | 269 | 23.7% | |||
Cable broadband net additions ('000) | 27 | 39 | (29.3%) | |||
Pay-TV blended ARPU (Euro) | 27.6 | 25.0 | 10.3% | |||
(1) CCPU (cash cost per user) = Operating costs minus provisions, depreciation and amortisation and sales of equipment per user. |
||||||
(2) As a result of a database cleanup, following the migration to new CRM, provisioning and billing systems, the number of Pay-TV customers at the end of 1H05 and 2004 was 1,465 thousand and 1,449 thousand respectively. The adjusted number of cable broadband customers at the end of 1H05 and 2004 was 333 thousand and 305 thousand respectively. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 7 |
Business Performance
Financial ReviewThe following financial analysis should be read in conjunction with the consolidated financial statements and the notes included elsewhere in this report.
PTs audited financial results have been prepared in accordance with International Financial Reporting Standards (IFRS) as from 1 January 2005. Financial information for prior periods has been restated in accordance with IFRS for comparative purposes. Having announced the disposal of Lusomundo Serviços (PT Multimedias media business) and PrimeSys, these businesses were disclosed as discontinued operations in the consolidated income statements for the first half of 2005 and 2004, in accordance with IFRS rules.
During the first half of 2005, PTs reportable segments were the following:
Wireline | Retail [PT Comunicações and PT.COM] |
Wholesale [PT Comunicações] | |
Data and corporate [PT Prime] | |
Other wireline operations [PT Comunicações and 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] | |
Other multimedia operations [PT Multimedia and other] |
8
CONSOLIDATED INCOME STATEMENT | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Operating revenues | 3,024.2 | 2,881.2 | 5.0% | |||
Wireline | 1,035.0 | 1,064.4 | (2.8%) | |||
Domestic mobile - TMN | 694.7 | 689.8 | 0.7% | |||
Brazilian mobile - Vivo (1) | 896.5 | 764.1 | 17.3% | |||
Multimedia - PT Multimedia | 305.4 | 285.7 | 6.9% | |||
Other | 92.6 | 77.2 | 20.0% | |||
Recurring operating costs, excluding D&A | 1,875.5 | 1,715.1 | 9.4% | |||
Wages and salaries | 336.2 | 307.0 | 9.5% | |||
Post retirement benefits | 72.2 | 79.8 | (9.6%) | |||
Direct costs | 426.2 | 415.1 | 2.7% | |||
Costs of telecommunications | 291.2 | 291.4 | (0.1%) | |||
Programming costs | 62.5 | 57.4 | 9.0% | |||
Directories | 41.6 | 44.0 | (5.5%) | |||
Other | 30.9 | 22.4 | 38.3% | |||
Costs of products sold | 288.0 | 237.8 | 21.1% | |||
Marketing and publicity | 79.1 | 74.3 | 6.5% | |||
Support services | 97.8 | 82.4 | 18.6% | |||
Maintenance and repairs | 78.1 | 74.6 | 4.8% | |||
Supplies and external expenses | 356.3 | 313.5 | 13.7% | |||
Provisions | 40.1 | 58.6 | (31.6%) | |||
Taxes other than income taxes | 76.3 | 58.5 | 30.5% | |||
Other operating costs | 25.2 | 13.5 | 86.5% | |||
EBITDA | 1,148.7 | 1,166.1 | (1.5%) | |||
Depreciation and amortisation | 493.8 | 461.1 | 7.1% | |||
Recurring operating income | 654.9 | 705.0 | (7.1%) | |||
Other expenses (Income) | 105.7 | 18.7 | n.m. | |||
Work force reduction programme costs | 96.8 | 3.9 | n.m. | |||
Losses (gains) on disposal of fixed assets | 0.4 | 2.5 | (82.6%) | |||
Other non-recurring costs | 8.4 | 12.3 | (31.4%) | |||
Income before financials & income taxes | 549.3 | 686.3 | (20.0%) | |||
Financial expenses (income) | 103.7 | 66.6 | 55.7% | |||
Net interest expenses | 116.2 | 95.9 | 21.2% | |||
Net foreign currency losses (gains) | (35.9) | (0.5) | n.m. | |||
Net losses (gains) on financial assets | 22.0 | (51.1) | n.m. | |||
Equity in losses (earnings) of affiliates | (29.1) | (5.9) | n.m. | |||
Other financial expenses | 30.4 | 28.2 | 7.8% | |||
Income before income taxes | 445.6 | 619.8 | (28.1%) | |||
Provision for income taxes | (176.4) | (183.6) | (3.9%) | |||
Income from continued operations | 269.2 | 436.1 | (38.3%) | |||
Income from discontinued operations | 1.6 | (2.7) | n.m. | |||
Income applicable to minority interests | (11.8) | (47.8) | (75.3%) | |||
Consolidated net income | 259.0 | 385.7 | (32.8%) | |||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 9 |
Consolidated operating revenues increased by 5.0% y.o.y in the first half of 2005 to Euro 3,024 million, reflecting the higher contributions from Vivo, in part as a result of the Real appreciation during the period, and PT Multimedia.
CONTRIBUTION BY SEGMENT | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Wireline | 1,035.0 | 1,064.4 | (2.8%) | |||
Domestic mobile -TMN | 694.7 | 689.8 | 0.7% | |||
Brazilian mobile - Vivo (1) | 896.5 | 764.1 | 17.3% | |||
Multimedia - PT Multimedia | 305.4 | 285.7 | 6.9% | |||
Other | 92.6 | 77.2 | 20.0% | |||
Total operating revenues | 3,024.2 | 2,881.2 | 5.0% | |||
Domestic retail revenues | 915.9 | 909.4 | 0.7% | |||
Wireline | 670.2 | 685.3 | (2.2%) | |||
Pay-TV and cable Internet | 245.7 | 224.0 | 9.7% | |||
Average revenue per household (ARPH) | 41.8 | 41.5 | 0.7% | |||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
In the first half of 2005, operating revenues from the domestic businesses decreased by 0.2% y.o.y, with the increase in PT Multimedia and TMN offsetting the decrease in wireline. Revenues in the wireline business were down 2.8% y.o.y, in part as a result of the decrease in fixed to mobile termination rates, which impacted revenues by Euro 7 million.
In the first half of 2005, domestic retail revenues (wireline + pay-TV) increased by 0.7% y.o.y to Euro 916 million, with the average revenue per household (ARPH) amounting to Euro 41.8 per month. The aggressive rollout of broadband services and video products continue to change steadily the mix of the ARPH. In the first half of 2005, data and video revenues represented 12.9% and 21.7% of ARPH, respectively, as compared to 8.9% and 20.3% in the same period of last year. Wireline net retail revenues, calculated as wireline retail revenues less corresponding telecommunications costs, increased by 2.8% y.o.y in the first half of 2005 to Euro 582 million, reflecting the successful rollout of ADSL and new pricing plans.
The contribution to consolidated operating revenues from the mobile businesses rose by 2.2pp y.o.y to 52.6% in the first half of 2005, despite the negative impact of the strong adjustment in interconnection rates in Portugal, which fell to Euro 18.5 cents in July 2004 and Euro 14.0 cents in March 2005. Vivo represented 29.6% of consolidated operating revenues in the first half of 2005, an increase of 3.1pp over the same period of last year.
10
STANDALONE REVENUES BY SEGMENT | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Wireline | 1,116.1 | 1,144.6 | (2.5%) | |||
Domestic mobile - TMN | 748.1 | 765.7 | (2.3%) | |||
Brazilian mobile - Vivo (1) | 896.4 | 764.1 | 17.3% | |||
Multimedia - PT Multimedia | 305.8 | 285.9 | 7.0% | |||
Other and eliminations | (42.2) | (79.1) | (46.7%) | |||
Total operating revenues | 3,024.2 | 2,881.2 | 5.0% | |||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
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 rates during the period in analysis.
EBITDA
EBITDA decreased by 1.5% y.o.y in the first half of 2005 to Euro 1,149 million, equivalent to an EBITDA margin of 38.0%, as a result of the reduction in the EBITDA of the mobile businesses, TMN and Vivo.
EBITDA BY BUSINESS SEGMENT | Euro million |
|||||||
1H05 | 1H04 | D 05/04 | 1H05 | |||||
Margin | ||||||||
Wireline | 494.2 | 465.5 | 6.2% | 44.3 | ||||
Domestic mobile - TMN | 334.2 | 358.1 | (6.7%) | 44.7 | ||||
Brazilian mobile - Vivo (1) | 241.0 | 263.3 | (8.5%) | 26.9 | ||||
Multimedia - PT Multimedia | 94.8 | 86.2 | 10.0% | 31.0 | ||||
Other | (15.5) | (7.0) | 120.3% | n.m. | ||||
Total EBITDA | 1,148.7 | 1,166.1 | (1.5%) | 38.0 | ||||
EBITDA margin (%) | 38.0 | 40.5 | (2.5pp) | |||||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
In the first half of 2005, EBITDA of the domestic businesses increased by 1.5% y.o.y. Adjusting for the one-off impact of the Euro 23 million receivable from Angola Telecom, which was fully provisioned in previous years, EBITDA of the domestic businesses would have decreased by 1.1% y.o.y, as a result of the decrease in TMNs EBITDA which reflects the investment in the rollout of 3G and negative impact of lower fixed to mobile termination rates.
In the first half of 2005, the contribution of the wireline business to consolidated EBITDA increased by 3.1pp y.o.y to 43.0% . Excluding the impact of the receivable of Euro 23 million from Angola Telecom, the contribution to consolidated EBITDA from this business segment would have increased by 1.1pp to 41.0% .
CONSOLIDATED REPORT - FIRST HALF 2005 | 11 |
PT Multimedias contribution to consolidated EBITDA improved by 0.9pp y.o.y to 8.3% in the first half of 2005, underpinned by continued top line growth and margin expansion in the period.
The contribution to consolidated EBITDA from the mobile businesses decreased by 3.2pp y.o.y to 50.1% in the first half of 2005. The contribution of TMN to consolidated EBITDA decreased by 1.6pp y.o.y to 29.1% and Vivos contribution decreased by 1.6pp y.o.y to 21.0% . TMNs EBITDA and margin performance in the period reflects the investment in the rollout of 3G and the negative impact of lower fixed to mobile termination rates, while Vivos margin compression is explained by strong customer growth and continued intensification of competitive pressures.
Consolidated recurring operating costs
Consolidated recurring operating costs amounted to Euro 2,369 million, an increase of 8.9% y.o.y over the first half of 2004.
CONSOLIDATED RECURRING OPERATING COSTS (1) |
Euro million
|
|||||||
1H05 | 1H04 | D 05/04 | 1H05 | |||||
% Revenues | ||||||||
Wages and salaries | 336.2 | 307.0 | 9.5% | 11.1 | ||||
Post retirement benefits | 72.2 | 79.8 | (9.6%) | 2.4 | ||||
Direct costs | 426.2 | 415.1 | 2.7% | 14.1 | ||||
Costs of telecommunications | 291.2 | 291.4 | (0.1%) | 9.6 | ||||
Programming costs | 62.5 | 57.4 | 9.0% | 2.1 | ||||
Directories | 41.6 | 44.0 | (5.5%) | 1.4 | ||||
Other | 30.9 | 22.4 | 38.3% | 1.0 | ||||
Costs of products sold | 288.0 | 237.8 | 21.1% | 9.5 | ||||
Marketing and publicity | 79.1 | 74.3 | 6.5% | 2.6 | ||||
Support services | 97.8 | 82.4 | 18.6% | 3.2 | ||||
Supplies and external expenses | 356.3 | 313.5 | 13.7% | 11.8 | ||||
Provisions | 40.1 | 58.6 | (31.6%) | 1.3 | ||||
Other operating costs | 179.6 | 146.5 | 22.6% | 5.9 | ||||
Recurring operating costs, excluding D&A | 1,875.5 | 1,715.1 | 9.4% | 62.0 | ||||
Depreciation & amortisation | 493.8 | 461.1 | 7.1% | 16.3 | ||||
Total recurring operating costs | 2,369.3 | 2,176.1 | 8.9% | 78.3 | ||||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
Wages and salaries increased by 9.5% y.o.y to Euro 336 million in the first half of 2005 and represented 11.1% of consolidated operating revenues. The growth in this caption is mainly related to the operations in Brazil, which contributed with Euro 18 million to the growth in consolidated wages and salaries (Euro 7 million related to the Real appreciation during the period). At Vivo, wages and salaries in local currency decreased by 1.2% y.o.y in the first half of 2005, while at Dedic, PTs call centre operation in Brazil, wages and salaries increased from Euro 13 million in the first half of 2004 to Euro 24 million in the first half of 2005, primarily as a result of the incorporation of additional call centre employees.
12
Post retirement benefit costs (PRB) decreased by 9.6% y.o.y to Euro 72 million in the first half of 2005, and accounted for 2.4% of consolidated operating revenues. This decline is primarily due to the following: (1) a gain of Euro 10 million resulting from further changes in the method of calculating the pension of an employee upon retirement, which are now computed based on the average of the last three years of salary instead of the last year of salary; (2) a decrease of Euro 3 million in the net interest cost due to the combined effect of the contributions made to the funds and the increase in PBO resulting from further curtailments; and (3) an increase of Euro 4 million in the amortisation of actuarial losses due to the changes in actuarial assumptions made at the end of 2004.
Direct costs increased by 2.7% y.o.y to Euro 426 million in the first half of 2005. This cost item represented 14.1% of consolidated operating revenues. Telecommunications costs, which are the main component of direct costs, decreased by 0.1% y.o.y to Euro 291 million in the first half of 2005, mainly as a result of lower traffic volumes in the wireline business and the decrease in fixed-to-mobile and mobile-to-mobile interconnection rates in Portugal, which more than offset the increase of 38.9% y.o.y in telecommunications costs at Vivo related to higher traffic volumes. Telecommunications costs accounted for 9.6% of consolidated operating revenues. Programming costs increased by 9.0% y.o.y to Euro 63 million, primarily as a result of the launch of the digital offer in the Pay TV business aimed at promoting analogue to digital migration.
Costs of product sold grew by 21.1% y.o.y to Euro 288 million, primarily due to higher commercial activity at Vivo and TMN.
Marketing and publicity costs increased by 6.5% y.o.y in the first half of 2005 to Euro 79 million, reflecting higher advertising spend and promotional activities in the wireline business, TMN and Vivo.
Support services costs rose by 18.6% y.o.y in the first half of 2005 to Euro 98 million, mainly due to an increase in this cost item in the wireline business and Vivo, as a result of the outsourcing of certain additional functions and higher call centre costs related to increased commercial activity. This cost item represented 3.2% of consolidated operating revenues.
Supplies and external expenses increased by 13.7% y.o.y in the first half of 2005 to Euro 356 million, primarily as a result of the increase in commissions in the mobile businesses, TMN and Vivo, on the back of higher commercial activity. Supplies and external expenses accounted for 11.8% of consolidated operating revenues.
Provisions decreased by 31.6% y.o.y to Euro 40 million in the first half of 2005. The decrease in this caption is primarily due to: (1) a reversal of a bad debt provision for international traffic in Angola in the
CONSOLIDATED REPORT - FIRST HALF 2005 | 13 |
amount of Euro 23 million, in connection with a receivable from Angola Telecom that was fully provisioned in previous years; (2) a decrease of Euro 17 million in TMN, mainly due to the initial recognition in the first half of 2004 of a provision for loyalty programmes of Euro 12 million that compares to an increase of only Euro 2 million in this provision in the first half of 2005; (3) an increase of Euro 20 million in Vivo (Euro 8 million related to the Real appreciation), mainly due to a higher level of bad debts; and (4) an increase of Euro 2 million at PT Multimedia, also due to a higher level of bad debt. This cost item accounted for 1.3% of consolidated operating revenues.
Other operating costs increased by 22.6% y.o.y to Euro 180 million in the first half of 2005. This caption includes Euro 78 million of maintenance and repairs, Euro 76 million of taxes (which mainly include indirect taxes and spectrum fees) and Euro 25 million of other costs. The increase in this caption is primarily related to an increase in spectrum fees at Vivo of Euro 17 million (Euro 5 million related to the Real appreciation), mainly due to the increase in subscribers during the period.
Depreciation and amortisation costs rose by 7.1% y.o.y to Euro 494 million in the first half of 2005, due to the increase of Euro 31 million in the contribution of Vivo for the Groups D&A. This increase resulted mainly from the allocation of goodwill generated in the recent tender offer of TCO to an intangible asset related to the telecommunication licenses held by TCO, which is being amortised over the remaining period of those licences. This cost item accounted for 16.3% of consolidated operating revenues.
Net income
Net income amounted to Euro 259 million in the first half of 2005, a decrease of 32.8% y.o.y, primarily due to higher curtailments charges and negative changes in the fair value of certain derivative instruments in the first half of 2005.
Workforce reduction programme costs amounted to Euro 97 million in the first half of 2005 (Euro 4 million in the first half of 2004), as a result of the reduction of 406 employees in the wireline business. This curtailment cost item reflects primarily the following: (1) net present value of salaries to be paid to pre-retired employees up to retirement age; (2) net present value of future service costs for early retired and pre-retired employees; and (3) proportional recognition of actuarial gains and losses related to early retired and pre-retired employees.
Net interest expenses amounted to Euro 116 million in the first half of 2005 (Euro 45 million related to loans obtained by Vivo), as compared to Euro 96 million in the same period of last year (Euro 36 million related to loans obtained by Vivo). In the first half of 2005, net interest expenses related to the net debt
14
of PT excluding Brazil increased by 18.3% y.o.y to Euro 71 million, as a result of the increase in average net debt in the first half of 2005. In the first half of 2005, net interest expenses related to Vivos net debt increased by 25.4% y.o.y to Euro 46 million, as a result of: (1) the appreciation of the Real in the period (Euro 3 million); and (2) the increase in average net debt and in the average CDI during the first half of 2005. The net interest expenses in the first half of 2005 were equivalent to an average cost of debt, including debt in Brazil, of approximately 5.9% .
Net foreign currency gains increased to Euro 36 million in the first half of 2005 from Euro 0.5 million in the same period of last year, primarily as a result of the evolution of the Euro/Real exchange rate over the period.
Net losses on financial assets amounted to Euro 22 million in the first half of 2005, as compared to net gains of Euro 51 million in the first half of 2004. This caption includes mainly gains and losses on certain derivative contracts, namely: (1) equity swap contracts on PT Multimedia shares (net gains of Euro 0.2 million in the first half of 2005, as compared to Euro 46 million in the first half of 2004); and (2) cross currency derivatives related to Brazil that are not hedging any specific risk (net losses of Euro 20 million in the first half of 2005 against net gains of Euro 2 million in the first half of 2004).
Equity accounting in gains of affiliated companies amounted to Euro 29 million in the first half of 2005, compared to Euro 6 million in the same period of last year. This caption included mainly PTs share in the earnings of CTM in Macau, Unitel in Angola, and UOL in Brazil, totalling Euro 31 million. The improvement in this caption of Euro 23 million is primarily explained by the increase in the earnings of: (1) Unitel from Euro 6 million to Euro 14 million; (2) UOL from Euro 1 million to Euro 9 million; and (3) Médi Télécom from a negative Euro 7 million to a positive Euro 1 million.
Other financial expenses amounted to Euro 30 million in the first half of 2005, as compared to Euro 28 million in the first half of 2004. This caption includes various financial expenses including banking commissions and related taxes.
The provision for income taxes decreased to Euro 176 million in the first half of 2005, from Euro 184 million in the same period of last year. The effective tax rate increased from 29.6% to 39.6%, mainly as a result of the increase in net losses at certain Vivo subsidiaries during the period that did not generate the recognition of related tax assets. In the first half of 2005, this caption included a non-cash component amounting to Euro 129 million (Euro 124 million in the same period of last year) that was recorded as a reduction of deferred taxes related to tax losses carried forward in previous years.
Discontinued operations, in the first half of 2005, included PTs share in the earnings of Lusomundo Serviços and PrimeSys. The sale of Lusomundo Serviços was concluded on 25 August 2005, while the
CONSOLIDATED REPORT - FIRST HALF 2005 | 15 |
sale of PrimeSys, which was announced on 5 August 2005, is currently pending regulatory approval by the local telecom regulator.
Income applicable to minority interests decreased to Euro 12 million, from Euro 48 million in the same period last year, primarily as a result of the Euro 25 million decrease in the net income of Vivos subsidiaries.
Capex
Total capex increased by 57.7% y.o.y in the first half of 2005 to Euro 368 million, as a result of the capex increase across all businesses. Total capex was equivalent to 12.2% of consolidated operating revenues.
CAPEX BY BUSINESS SEGMENT | Euro million |
|||||||
1H05 | 1H04 | D 05/04 |
1H05 | |||||
% Revenues | ||||||||
Wireline | 96.5 | 84.2 | 14.6% | 8.6 | ||||
Domestic mobile - TMN | 47.7 | 35.4 | 34.6% | 6.4 | ||||
Brazilian mobile - Vivo (1) | 143.0 | 68.9 | 107.5% | 16.0 | ||||
Multimedia - PT Multimedia | 55.6 | 22.2 | 150.4% | 18.2 | ||||
Other | 25.5 | 22.7 | 12.3% | n.s. | ||||
Total capex | 368.3 | 233.5 | 57.7% | 12.2 | ||||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
Wireline capex in the first half of 2005 increased by 14.6% y.o.y to Euro 97 million, equivalent to a capex to sales ratio of 8.6% . This increase is primarily related to the strong growth in broadband.
TMNs capex increased by 34.6% y.o.y to Euro 48 million in the first half of 2005, equivalent to 6.4% of operating revenues. TMN spent approximately 70% of its network capex on 3G.
PTs share of Vivos capex increased from Euro 69 million in the first half of 2004 to Euro 143 million in the first half of 2005, which is equivalent to 16.0% of operating revenues. This increase is primarily explained by the investment in capacity expansion, CDMA overlay in the regions operated by CRT and TCO, and the rollout of 1xRTT and EV-DO.
In the first half of 2005, PT Multimedias capex increased by 150.4% y.o.y to Euro 56 million, equivalent to 18.2% of operating revenues, in part as a result of the investment of Euro 17 million corresponding to the discounted rents of a 12 year contract for a fifth transponder to be used in the Pay-TV business for its satellite and premium services.
16
Other capex increased by 12.3% y.o.y to Euro 25 million in the first half of 2005. This caption included mainly capex related to IT expenditures and the rollout of Corporate SAP across all of PTs businesses in order to improve efficiency in back-office processes. This caption also includes capex related to fully consolidated businesses not included in the main segments.
Cash flow
EBITDA minus Capex
EBITDA minus Capex totalled Euro 780 million in the first half of 2005, decreasing by 16.3% y.o.y, as a result of the decrease in TMN, Vivo and PT Multimedia. The domestic businesses, on a combined basis, accounted for approximately 93% of the total EBITDA minus Capex.
EBITDA minus CAPEX BY BUSINESS SEGMENT | Euro million |
|||||||
1H05 | 1H04 | D 05/04 | 1H05 | |||||
% Revenues | ||||||||
Wireline | 397.7 | 381.3 | 4.3% | 35.6 | ||||
Domestic mobile - TMN | 286.5 | 322.7 | (11.2%) | 38.3 | ||||
Brazilian mobile - Vivo (1) | 98.0 | 194.4 | (49.6%) | 10.9 | ||||
Multimedia - PT Multimedia | 39.2 | 64.0 | (38.7%) | 12.8 | ||||
Other | (41.0) | (29.7) | 37.9% |
n.m. | ||||
Total EBITDA minus Capex | 780.5 | 932.6 | (16.3%) | 25.8 | ||||
(1) Considering a Euro/Real average exchange rate of 3.3140 in 1H05 and 3.6446 in 1H04. |
Free cash flow
In the first half of 2005, operating cash flow decreased by 27.2% y.o.y to Euro 620 million, as a result of the decrease in EBITDA minus Capex and the higher investment in working capital, mainly related to higher receivables at Vivo and at the wireline business. Free cash flow decreased from Euro 392 million in the first half of 2004 to negative Euro 38 million in the first half of 2005, primarily due to the decline in operating cash flow and the extraordinary contribution of Euro 300 million to fund post retirement healthcare obligations.
CONSOLIDATED REPORT - FIRST HALF 2005 | 17 |
FREE CASH FLOW | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
EBITDA minus Capex | 780.5 | 932.6 | (16.3%) | |||
Non-cash items included in EBITDA: | ||||||
Post retirement benefit costs | 72.2 | 79.8 | (9.6%) | |||
Non-current provisions, tax provisions & other non-cash items | 23.4 | 6.7 | 251.3% | |||
Change in working capital | (255.8) | (167.5) | 52.7% | |||
Operating cash flow | 620.3 | 851.6 | (27.2%) | |||
Acquisition of financial investments | (10.5) | (55.5) | (81.1%) | |||
Disposals | 15.9 | 5.9 | 169.8% | |||
Interest paid | (138.3) | (179.5) | (23.0%) | |||
Payments related to post retirement benefits (1) | (483.0) | (168.5) | 186.7% | |||
Income taxes paid by certain subsidiaries | (24.1) | (34.8) | (30.8%) | |||
Other cash movements | (18.3) | (26.8) | (31.7%) | |||
Free cash flow | (37.9) | 392.4 | n.m. | |||
(1) In the first half of 2005, this caption included: (i) Euro 101 million of contributions to the pension fund; (ii) Euro 66 million related to payments of salaries to pre-retired and suspended employees; (iii) Euro 16 million related to payments to PT-ACS in connection with healthcare services provided to retired, pre-retired and suspended employees; and (iv) Euro 300 million related to an extraordinary contribution to fund post retirement healthcare obligations. |
Consolidated balance sheet
The gearing ratio [Net Debt / (Net Debt + Shareholders Equity)] increased to 55.3% as at 30 June 2005 from 53.7% at 31 December 2004, while the shareholders equity plus long term debt to total assets ratio increased to 58.8% from 50.9% over the same period. At the end of June 2005, the net debt to EBITDA ratio was 1.9 times and the EBITDA cover was 9.9 times.
The net exposure (assets minus liabilities) to Brazil amounted to R$ 7,703 million as at 30 June 2005 (Euro 2.704 million at the Euro/Real exchange rate prevailing as at 30 June 2005). The assets denominated in Brazilian Reais in the balance sheet as at 30 June 2005 amounted to Euro 5,344 million, equivalent to approximately 35% of total assets. Approximately 98% of the net exposure (assets minus liabilities) to Brazil is accounted for by the 50% stake in Vivo.
As at 30 June 2005, the accrued post retirement liability included the unfunded gap related to PTs post retirement obligations of Euro 1,975 million, less the net actuarial losses and other past service obligations of Euro 1,067 million, which were deferred in accordance with IFRS. In the first half of 2005, the accrued post retirement liability decreased by Euro 324 million to Euro 908 million, mainly as a result of: (1) the extraordinary contribution of Euro 300 million to fund post retirement healthcare obligations; (2) a contribution of Euro 101 million to the pension funds corresponding to the expected level of contributions in 2005, excluding the impact of further curtailments during the year; (3) Euro 66 million of salaries paid to pre-retired and suspended employees; and (4) Euro 16 million of payments related to healthcare services. These impacts were mostly offset by the post retirement benefit cost and
18
curtailment cost booked in the income statement, in the first half of 2005, in the amount of Euro 72 million and Euro 97 million respectively.
CONSOLIDATED BALANCE SHEET | Euro million |
|||
30 Jun 2005 | 31 Dec 2004 | |||
Current assets | 4,854.9 | 3,897.2 | ||
Cash and equivalents | 2,768.2 | 1,947.0 | ||
Accounts receivable, net | 1,572.0 | 1,415.4 | ||
Inventories, net | 187.8 | 175.1 | ||
Taxes receivable | 164.1 | 179.4 | ||
Prepaid expenses and other current assets | 162.9 | 180.3 | ||
Non-current assets | 9,955.8 | 9,682.4 | ||
Accounts receivable, net | 30.0 | 21.5 | ||
Prepaid expenses | 4.9 | 6.2 | ||
Taxes receivable | 100.1 | 62.6 | ||
Financial investments | 434.1 | 435.3 | ||
Intangible assets, net | 3,557.2 | 3,244.9 | ||
Tangible assets, net | 3,996.3 | 3,934.3 | ||
Deferred taxes | 1,002.1 | 1,125.3 | ||
Other non-current assets | 831.1 | 852.3 | ||
Assets of discontinued operations | 351.8 | 0.0 | ||
Total assets | 15,162.4 | 13,579.6 | ||
Current liabilities | 3,787.9 | 4,015.1 | ||
Short term debt | 1,556.1 | 1,615.8 | ||
Accounts payable | 1,018.7 | 1,264.8 | ||
Accrued expenses | 604.2 | 599.8 | ||
Deferred income | 232.3 | 225.5 | ||
Taxes payable | 194.5 | 173.6 | ||
Current provisions and other liabilities | 182.0 | 135.4 | ||
Non-current liabilities | 7,804.1 | 6,518.6 | ||
Medium and long term debt | 5,467.7 | 3,863.0 | ||
Accounts payable | 19.0 | 17.6 | ||
Taxes payable | 30.2 | 25.6 | ||
Deferred income | 17.3 | 15.6 | ||
Accrued post retirement liability | 908.2 | 1,232.1 | ||
Deferred taxes | 323.7 | 327.9 | ||
Non-current provisions and other liabilities | 1,037.9 | 1,036.9 | ||
Liabilities of discontinued operations | 126.4 | 0.0 | ||
Total liabilities | 11,718.3 | 10,533.7 | ||
Equity before minority interests | 2,733.5 | 2,478.3 | ||
Minority interests | 710.7 | 567.6 | ||
Total shareholders' equity | 3,444.2 | 3,045.9 | ||
Total liabilities and shareholders' equity | 15,162.4 | 13,579.6 | ||
CONSOLIDATED REPORT - FIRST HALF 2005 | 19 |
Consolidated net debt
Consolidated net debt as at 30 June 2005 amounted to Euro 4,256 million, an increase of Euro 724 million compared to year-end 2004, mainly as a result of: (1) the extraordinary contribution of Euro 300 million to fund post retirement healthcare obligations; (2) the contribution of Euro 101 million to the pension funds; (3) the outflows related to shareholder remuneration, including dividends and share buybacks, amounting to Euro 395 million and Euro 151 million respectively; and (4) the outflows regarding the payments made by PT Multimedia to minority shareholders regarding dividends (Euro 25 million) and share buybacks in connection with the exercise of warrants (Euro 59 million). Excluding the extraordinary contribution to fund post retirement healthcare obligations and the outflows regarding shareholder remuneration at PT and PT Multimedia, net debt would have decreased by Euro 206 million in the first half of 2005.
CHANGE IN NET DEBT | Euro million |
|
1H05 | ||
Net debt (initial balance) | 3,531.8 | |
Free cash flow | (37.9) | |
Discontinued operations (media segment + PrimeSys) | 39.3 | |
Gains on certain foreign currency derivatives used for hedging | (15.1) | |
Translation effects of US Dollar and Real denominated debt | (97.3) | |
Dividends paid by PT | (395.1) | |
Dividends paid by PT Multimedia | (24.5) | |
Reverse stock split at Vivo's listed subsidiaries | 16.8 | |
Acquisitions of treasury shares / Equity swaps | (150.9) | |
Warrants issued by PT Multimedia | (59.0) | |
Net debt (final balance) | 4,255.6 | |
Increase in net debt | 723.8 | |
Increase in net debt (%) | 20.5% | |
As at 30 June 2005, 77.8% of total debt was medium and long term, while 71.6% of total debt was at fixed rates. As at 30 June 2005, 85.6% of total debt was denominated in Euros, 2.0% in US Dollars and 12.4% in Brazilian Reais. At the end of the period, the only loans with rating triggers (if PT is downgraded to BBB+) were four EIB loans totalling Euro 400 million, including two loans of Euro 250 million drawn in February 2005. In addition, PT has fully underwritten and available commercial paper lines amounting to Euro 875 million, of which Euro 235 million had been drawn down as at 30 June 2005. PT also has stand-by facilities amounting to Euro 900 million, of which Euro 575 million had been drawn down as at 30 June 2005. The 50% share of Vivos net debt, consolidated by PT, amounted to Euro 526 million as at 30 June 2005. Most of Vivos net debt is either Real denominated or has been swapped into Reais.
20
CONSOLIDATED NET DEBT | Euro million |
|||||||
30 Jun 2005 | 31 Dec 2004 | Change | Change (%) | |||||
Short term | 1,556.1 | 1,615.8 | (59.8) | (3.7%) | ||||
Bank loans | 374.0 | 473.9 | (99.9) | (21.1%) | ||||
Bonds | 899.5 | 585.0 | 314.6 | 53.8% | ||||
Other loans | 249.0 | 338.0 | (88.9) | (26.3%) | ||||
Liability with equity swaps on own shares | 0.0 | 189.8 | (189.8) | n.s. | ||||
Financial leases | 33.6 | 29.2 | 4.3 | 14.7% | ||||
Medium and long term | 5,467.7 | 3,863.0 | 1,604.7 | 41.5% | ||||
Bank loans | 1,881.1 | 1,337.0 | 544.1 | 40.7% | ||||
Exchangeable bonds | 390.2 | 386.9 | 3.3 | 0.8% | ||||
Bonds | 2,951.4 | 1,848.2 | 1,103.2 | 59.7% | ||||
Other loans | 38.7 | 90.7 | (52.0) | (57.3%) | ||||
Financial leases | 206.3 | 200.2 | 6.2 | 3.1% | ||||
Total debt | 7,023.8 | 5,478.8 | 1,545.0 | 28.2% | ||||
Cash and equivalents | 2,768.2 | 1,947.0 | 821.2 | 42.2% | ||||
Net debt | 4,255.6 | 3,531.8 | 723.8 | 20.5% | ||||
PTs average cost of debt in the first half of 2005 was 5.9%, including loans obtained in Brazil and denominated in Reais. Excluding Brazilian debt, the average cost of debt in the first half of 2005 was 4.2% .
NET DEBT MATURITY PROFILE | Euro million |
|||
Maturity | Net debt | Notes | ||
2005 | (2,206.5) | Net cash position | ||
2006 | 1,541.9 | Includes a Euro 900 million Eurobond issued in February 2001 | ||
and a Euro 390 million Exchangeable Bond issued in December 2001 | ||||
2007 | 377.5 | |||
2008 | 260.4 | |||
2009 | 1,258.6 | Includes a Euro 880 million Eurobond issued in April 1999 | ||
2010 | 568.1 | |||
2011 | 101.3 | |||
2012 | 1,081.6 | Includes a Euro 1,000 million Eurobond issued in March 2005 | ||
2013 | 61.3 | |||
2014 and following | 1,211.4 | Includes a Euro 500 million Eurobond issued in March 2005 (matures in 2017) | ||
and a Euro 500 million Eurobond issued in June 2005 (matures in 2025) | ||||
Total | 4,255.6 | |||
On 24 March 2005, PT issued Euro 1.5 billion of Eurobond with maturities of 7 years (Euro 1 billion) and 12 years (Euro 500 million) and on 16 June 2005 issued a further Euro 500 million Eurobond with a 20 year maturity, as part of its balance sheet refinancing. In February 2005, PT had also drawn Euro 250 million from two 10-year loans entered into with the EIB in December 2004 and January 2005. In addition, the maturity of certain stand-by facilities totalling Euro 750 million was extended by an additional two years. As a consequence of all these operations, PTs debt maturity increased to 8.9 years. Excluding Brazilian debt, the debt maturity was extended to 9.5 years.
CONSOLIDATED REPORT - FIRST HALF 2005 | 21 |
DEBT RATINGS | ||||||
Current | Outlook | Last change | ||||
Standard & Poor's | A- | Stable | 6 Mai 2003 | |||
Moody's | A3 | Stable | 14 Jun 2002 | |||
Shareholders equity (excluding minority interest)
As at 30 June 2005, shareholders' equity excluding minority interest amounted to Euro 2,733 million, an increase of Euro 255 million since the end of last year, as a result mainly of: (1) the dividends paid in the period amounting to Euro 395 million; (2) the acquisition of treasury stock amounting to Euro 151 million, in line with the announced share buyback programme; (3) the impact for PT amounting to Euro 33 million of the treasury shares acquired by PT Multimedia from the minority shareholders that opted for the physical exercise of the warrants issued by PT Multimedia in May 2005; (4) the net income generated during the period of Euro 259 million; and (5) the impact of positive currency translation adjustments of Euro 582 million, mainly due to the appreciation of the Brazilian Real exchange rate against the Euro (Euro/R$ 3.6147 at year-end 2004 compared to Euro/R$ 2.8489 at the end of June 2005).
As at 15 September 2005, PT had 37,628,550 treasury shares, equivalent to 3.0% of share capital prior to the cancellation of the 7.0% treasury shares on 28 December 2004. PT has thus completed the 10% share buyback announced in September 2003.
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. Distributable reserves decreased from Euro 851 million as at year end 2004 to Euro 349 million at the end of June 2005, primarily as a result of: (1) Euro 395 million related to dividends paid; (2) Euro 340 million related to the acquisition of treasury shares through the exercise of equity swaps on PT shares (including Euro 151 million related to equity swaps contracted in the first half of 2005); (3) Euro 201 million related to 95% of the net income generated in the period under PGAAP of Euro 212 million; and (4) Euro 32 million related to the amount received by PT from PT Multimedia in connection with the financial exercise of the warrants issued by PT Multimedia in May 2005, which corresponds to an effective distribution of reserves. 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 Euro/Real exchange rate. Taking into account the level of PTs exposure to Brazil as at 30 June 2005, such a depreciation would only have a negative impact on distributable reserves if the Euro/Real exchange rate were to depreciate beyond 3.95.
22
Operating Review
Wireline
Operating revenues decreased by 2.5% y.o.y to Euro 1,116 million in the first half of 2005, as a result of the decrease in retail, wholesale and other wireline revenues. Excluding the impact of the decrease in fixed-to mobile interconnection rates, operating revenues would have decreased by 1.9% y.o.y. In effect, net revenues and net retail revenues, which adjust for corresponding telecom costs, increased by 2.5% and 2.8% respectively in the first half of 2005.
WIRELINE OPERATING REVENUES (1) | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Retail | 671.3 | 688.7 | (2.5%) | |||
Fixed charges | 343.1 | 330.3 | 3.9% | |||
Traffic | 249.8 | 303.5 | (17.7%) | |||
Domestic |
216.0 | 265.3 | (18.6%) | |||
International | 33.8 | 38.2 | (11.5%) | |||
ADSL retail | 70.7 | 41.2 | 71.5% | |||
ISP and other | 7.7 | 13.6 | (43.6%) | |||
Wholesale | 211.6 | 220.0 | (3.8%) | |||
Traffic | 106.7 | 120.9 | (11.7%) | |||
Leased lines | 84.9 | 77.4 | 9.7% | |||
Other | 20.0 | 21.7 | (7.9%) | |||
Data & corporate | 124.1 | 118.8 | 4.5% | |||
Data communications | 60.7 | 50.7 | 19.6% | |||
Leased lines | 16.4 | 25.6 | (36.0%) | |||
Network management & outsourcing | 11.5 | 8.4 | 36.3% | |||
Other | 35.6 | 34.0 | 4.5% | |||
Other wireline revenues | 109.1 | 117.1 | (6.8%) | |||
Other fixed line telephone services | 20.1 | 12.0 | 66.9% | |||
Other operating revenues | 9.5 | 19.9 | (52.1%) | |||
Sales of telecom equipment | 15.7 | 16.3 | (4.0%) | |||
Telephone directories | 61.4 | 65.8 | (6.7%) | |||
Portals | 2.4 | 3.0 | (20.9%) | |||
Total operating revenues | 1,116.1 | 1,144.6 | (2.5%) | |||
(1) Inclui transacções intragrupo. |
In terms of retail revenues, fixed charges increased by 3.9% to Euro 343 million in the first half of 2005, on the back of a higher contribution from pricing plans, which now account for 8.6% of fixed charges, and also the impact of the price increase of monthly fee in August last year that led to an average increase of 2.9%, more than offsetting the fall in the number of accesses. On the other hand, traffic revenues fell by 17.7% y.o.y as a result of the declining trend in traffic volumes and the reduction of fixed to mobile prices. ADSL Retail revenues posted a significant increase in the first half of 2005, amounting to Euro 71 million, up from Euro 41 million in the same period of last year. ISP dial-up revenues decreased by 43.6% y.o.y to Euro 8 million as a result of the aggressive rollout of broadband.
CONSOLIDATED REPORT - FIRST HALF 2005 | 23 |
The net effect of these trends was a decrease in retail revenues of 2.5% y.o.y in the first half of 2005 to Euro 671 million.
The competitive environment in the corporate segment remained challenging. Notwithstanding, through an increasingly integrated offer, PT won several new contracts over the period, with special emphasis for IT contracts, where PT is starting to make important inroads. Network management and outsourcing service revenues also had a positive performance, increasing by 36.3% y.o.y in the first half of 2005. Data services and Internet continued to perform strongly in the first half of 2005. Furthermore, there was a strong effort to improve the VAS offering, both in voice and data.
Wholesale revenues decreased by 3.8% y.o.y in the first half of 2005 to Euro 212 million, mainly as a result of the decrease in traffic revenues, which offset the growth in leased lines. The decrease in traffic revenues is explained by the decline in incoming international revenues, as a result of the reduction imposed by the regulator of I2M interconnection rates, in line with the adjustment in other interconnection rates (F2M and M2M), as well as the decline in international transit revenues. The increase in leased line revenues was underpinned by the increase in the number of leased lines provided to other telecom operators.
24
WIRELINE INCOME STATEMENT (1) | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Operating revenues | 1,116.1 | 1,144.6 | (2.5%) | |||
Services rendered | 1,090.8 | 1,108.3 | (1.6%) | |||
Sales | 15.7 | 16.3 | (4.0%) | |||
Other operating revenues | 9.5 | 19.9 | (52.1%) | |||
Recurring operating costs, excluding D&A | 621.8 | 679.1 | (8.4%) | |||
Wages and salaries (2) | 145.0 | 137.6 | 5.4% | |||
Post retirement benefits (PRB) | 72.1 | 79.7 | (9.6%) | |||
Direct costs | 196.9 | 243.0 | (19.0%) | |||
Costs of telecommunications | 154.4 | 199.2 | (22.5%) | |||
Directories | 41.5 | 44.0 | (5.6%) | |||
Other | 1.0 | (0.3) | n.m. | |||
Costs of products sold | 14.9 | 19.0 | (21.9%) | |||
Marketing and publicity | 23.3 | 15.5 | 49.7% | |||
Support services | 65.6 | 52.1 | 26.1% | |||
Supplies and external expenses | 72.6 | 66.1 | 9.9% | |||
Provisions | (15.7) | 7.0 | n.m. | |||
Other operating costs | 47.2 | 59.2 | (20.3%) | |||
EBITDA | 494.2 | 465.5 | 6.2% | |||
Depreciation and amortisation | 173.6 | 188.1 | (7.7%) | |||
Recurring operating income | 320.6 | 277.4 | 15.6% | |||
EBITDA margin | 44.3% | 40.7% | 3.6pp | |||
Capex | 96.5 | 84.2 | 14.6% | |||
Capex as % of revenues | 8.6% | 7.4% | 1.3pp | |||
EBITDA minus capex | 397.7 | 381.3 | 4.3% | |||
(1) Includes intragroup transactions. |
||||||
(2) The increase in this caption results primarily from the incorporation of PT Corporate in the wireline segment in the 1H05. Excluding this impact, wages and salaries of the wireline business would have increased by 2.3% y.o.y in the first half 2005, primarily due to a reduction in the level of own work capitalised during the period. |
EBITDA increased by 6.2% y.o.y in the first half of 2005 to Euro 494 million, primarily due to the reversal of a bad debt provision for international traffic in Angola in the amount of Euro 23 million. The improvement in margin resulted primarily from the ongoing cost rationalisation initiatives, the reduction in post retirement benefit costs (as discussed in the consolidated recurring operating costs section) and the effect of declining interconnection rates.
Capex amounted to Euro 97 million in the first half of 2005, an increase of 14.6% y.o.y and equivalent to 8.6% of operating revenues, in part as a result of the aggressive rollout of broadband. EBITDA minus Capex in the first half of 2005 amounted to Euro 398 million, an increase of 4.3% over the same period of last year and equivalent to 35.6% of operating revenues.
PT continued to lead the market in Portugal in terms of total minutes of outgoing traffic, number of access lines and ADSL lines, notwithstanding the significant increase in competition. This performance has been achieved as a result of the successful implementation of customer loyalty initiatives, based on product differentiation and innovation, competitive pricing offers, customer care and quality of service.
CONSOLIDATED REPORT - FIRST HALF 2005 | 25 |
WIRELINE OPERATING DATA | ||||||
1H05 | 1H04 | D 05/04 | ||||
Main lines ('000) | 4,445 | 4,282 | 3.8% | |||
PSTN/ISDN | 3,871 | 3,985 | (2.8%) | |||
Carrier pre-selection |
540 | 485 | 11.4% | |||
ADSL retail | 500 | 260 | 92.1% | |||
ADSL wholesale | 46 | 33 | 40.3% | |||
Unbundled local loops | 28 | 5 | n.m. | |||
Net additions ('000) | 68 | 56 | 20.5% | |||
PSTN/ISDN | (77) | (52) | 48.6% | |||
Carrier pre-selection |
55 | 46 | 19.6% | |||
ADSL retail | 120 | 99 | 20.8% | |||
ADSL wholesale | 5 | 5 | 2.9% | |||
Unbundled local loops | 19 | 3 | n.m. | |||
Pricing plans ('000) | 1,330 | 470 | 183.1% | |||
ARPU (Euro) | 34.0 | 34.3 | (0.8%) | |||
Subscription and voice | 29.7 | 31.1 | (4.4%) | |||
Data | 4.3 | 3.2 | 34.4% | |||
Call completion rate (%) | 99.8 | 99.8 | 0.0pp | |||
Faults per 100 access lines (no.) | 4.2 | 4.8 | (0.6pp) | |||
Total data communication accesses ('000) | 36 | 36 | 0.6% | |||
Corporate web capacity sold (mbps) | 8,732 | 4,330 | 101.7% | |||
Number of leased lines ('000) | 15.8 | 17.9 | (11.8%) | |||
Capacity (equivalent to 64 kbps) ('000) | 187 | 179 | 4.8% | |||
Digital (%) | 96.1 | 95.5 | 0.6pp | |||
Total main lines increased by 68 thousand in the first half of 2005, boosted by the high level of ADSL retail net additions that totalled 120 thousand in the period. Net disconnections of PSTN/ISDN lines totalled 77 thousand in the first half of 2005, as a result of rising competition and a weak macroeconomic environment. Total main lines in the wireline business reached 4,445 thousand at the end of the first half of 2005, of which 3,871 thousand were PSTN/ISDN, 500 thousand were ADSL retail, 46 thousand were ADSL wholesale and 28 thousand unbundled local loops.
As part of PTs strategy of enhancing the value of its broadband offer to its residential customers, PT upgraded its customers broadband speeds by a factor of four, with the standard product now offering speeds of up to 2mbps. In line with its objective of accelerating broadband penetration in Portugal and encouraging the use of the Internet, PT organised a nationwide contest - the Sapo Challenge - among all the schools in the country, which tested the childrens ability to use search and PTs portal and instant messaging service called Sapo.
The launch of PTs instant messaging service Sapo Messenger has also been a great success. The service leverages on the Sapo brand (the leading portal in Portugal), the ability to connect with other messengers available in the market (such as MSN and ICQ), send and receive SMS and a strong focus on local content. Sapo Messenger had approximately 150 thousand active users at the end of the first half
26
of 2005. The success of this service has paved the way for the introduction of softphone VoIP and Video services, based on the Sapo Messenger, already in the third quarter of 2005.
The growth in pricing plans remained strong, with net additions in the first half of 2005 reaching 383 thousand. The total number of pricing plans reached 1,330 thousand at the end of the first half of 2005, equivalent to a penetration of 36.5% of residential lines.
The fixed telephone service tariffs were updated and rebalanced as of August 2004, which resulted in an average line rental increase of 2.9% y.o.y in the first half of 2005 and average decreases of 20.7% and 27.9% in the cost of regional and domestic long call distance respectively.
Total ARPU (voice and data) decreased by 0.8% y.o.y in the first half of 2005 to Euro 34.0. Subscription and voice ARPU (PSTN/ISDN less dial-up Internet) decreased by 4.4% y.o.y to Euro 29.7, as a result of declining traffic revenues, and data ARPU (ADSL plus dial-up Internet) increased by 34.4% y.o.y to Euro 4.3, representing already 12.6% of total ARPU in the first half of 2005. ADSL ARPU was Euro 27.7 in the first half of 2005, which compares to Euro 33.8 in the same period of last year. The dilution in ADSL ARPU is explained by the increasing take-up of the prepaid product.
In the first half of 2005, interconnection rates decreased by 10.0% y.o.y for call termination and by 9.9% y.o.y for call origination.
PT remains the leading operator in the corporate data and integrated solutions market in Portugal. In this business segment, Internet capacity sales increased by 101.7% y.o.y in the first half of 2005, as a result of the expansion of ADSL. Total data communication accesses increased by 0.6% y.o.y in the first half of 2005. Leased lines capacity to end-users increased by 4.8% y.o.y in the first half of 2005, with leased line digital capacity reaching 96.1% of the total leased line capacity, an improvement of 0.6pp over the same period of last year.
CONSOLIDATED REPORT - FIRST HALF 2005 | 27 |
WIRELINE TRAFFIC BREAKDOWN | ||||||
1H05 | 1H04 | D 05/04 | ||||
Total traffic | 7,587 | 8,617 | (12.0%) | |||
Retail | 3,335 | 3,785 | (11.9%) | |||
F2F domestic | 2,270 | 2,614 | (13.1%) | |||
F2M | 427 | 468 | (8.8%) | |||
International | 197 | 181 | 8.8% | |||
Other | 441 | 521 | (15.5%) | |||
Wholesale | 4,252 | 4,832 | (12.0%) | |||
Internet | 1,043 | 1,838 | (43.2%) | |||
Total originated traffic in the fixed network | 5,479 | 6,616 | (17.2%) | |||
Originated MOU (minutes / month) | 233 | 275 | (15.4%) | |||
Retail MOU (minutes / month) | 165 | 180 | (8.5%) | |||
F2F domestic MOU (minutes / month) | 97 | 109 | (11.0%) | |||
Total traffic in the first half of 2005 fell by 12.0% y.o.y, on the back of the decline of 11.9% in retail traffic and 12.0% in wholesale traffic, which was strongly influenced by the 43.2% fall in dial-up Internet traffic as a result of the strong rollout of broadband. F2F domestic traffic fell by 13.1% y.o.y in the first half of 2005, as a result of the Sunday free traffic campaign held in the previous year. Excluding the impact of this free campaign in the first half of 2004, F2F domestic traffic would have fallen by 9.4% y.o.y in the first half of 2005. Retail MOU, which excludes carrier pre-selection lines, fell by 8.5% y.o.y in the first half of 2005 to 165 minutes, in part as a result of the Sunday free minutes campaign in the previous year. Excluding the impact of this campaign in 2004, retail MOU would have decreased by 6.2% y.o.y in the first half of 2005.
Domestic mobile - TMN
Operating revenues amounted to Euro 748 million in the first half of 2005, a decrease of 2.3% y.o.y, primarily as a result of the decline in service revenues, which fell by 2.1% y.o.y to Euro 687 million, reflecting the negative impact of the adjustment in interconnection rates. Customer revenues increased by 2.9% y.o.y to Euro 538 million, as a result of the increase of the customer base. Interconnection revenues fell by 16.7% y.o.y, on the back of the two cuts in interconnection rates, which occurred in July 2004 (to Euro 18.5 cents per minute) and March 2005 (to Euro 14.0 cents per minute), representing a reduction of approximately 27.5% in interconnection rates. Excluding the impact of lower interconnection rates, operating revenues would have increased by approximately 2% y.o.y. Revenues from handset sales remained broadly flat at Euro 59 million.
28
DOMESTIC MOBILE INCOME STATEMENT (1) | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Operating revenues | 748.1 | 765.7 | (2.3%) | |||
Services rendered | 687.2 | 701.8 | (2.1%) | |||
Billing | 537.6 | 522.3 | 2.9% | |||
Interconnection | 149.6 | 179.5 | (16.7%) | |||
Sales | 58.5 | 58.5 | 0.1% | |||
Other operating revenues | 2.4 | 5.4 | (55.4%) | |||
Recurring operating costs, excluding D&A | 413.9 | 407.6 | 1.5% | |||
Wages and salaries | 28.5 | 27.3 | 4.4% | |||
Direct costs | 155.3 | 151.0 | 2.8% | |||
Costs of telecommunications | 141.8 | 142.5 | (0.5%) | |||
Other | 13.5 | 8.5 | 57.5% | |||
Costs of products sold | 77.6 | 59.8 | 29.8% | |||
Marketing and publicity | 16.2 | 15.0 | 7.9% | |||
Support services | 9.0 | 11.9 | (24.4%) | |||
Supplies and external expenses | 85.5 | 83.8 | 2.0% | |||
Provisions | 8.9 | 26.4 | (66.4%) | |||
Other operating costs | 33.0 | 32.4 | 1.8% | |||
EBITDA | 334.2 | 358.1 | (6.7%) | |||
Depreciation and amortisation | 101.5 | 95.3 | 6.5% | |||
Recurring operating income | 232.7 | 262.8 | (11.5%) | |||
EBITDA margin | 44.7% | 46.8% | (2.1pp) | |||
Capex | 47.7 | 35.4 | 34.6% | |||
Capex as % of revenues | 6.4% | 4.6% | 1.7pp | |||
EBITDA minus capex | 286.5 | 322.7 | (11.2%) | |||
(1) Includes intragroup transactions. |
EBITDA amounted to Euro 334 million in the first half of 2005, a decrease of 6.7% y.o.y, primarily as a result of: (1) the strong reduction in termination rates; (2) higher subscriber acquisition and retention costs related to the rollout of 3G; and (3) an increase in other costs related to the rollout of the 3G network, namely higher leased lines costs. EBITDA margin in the first half of 2005 stood at 44.7%, with pre-SARC EBITDA margin improving by 0.8pp y.o.y to 53.6% in the first half of 2005.
Capex represented 6.4% of operating revenues, increasing by 34.6% y.o.y to Euro 48 million in the first half of 2005. Capex was primarily directed towards network capacity and coverage, including the rollout of 3G (70% of network capex), and improvements in quality of service and customer care. EBITDA minus Capex amounted to Euro 287 million, equivalent to 38.3% of operating revenues.
CONSOLIDATED REPORT - FIRST HALF 2005 | 29 |
DOMESTIC MOBILE OPERATING DATA | ||||||
1H05 | 1H04 | D 05/04 | ||||
Customers ('000) | 5,108 | 4,872 | 4.8% | |||
Net additions ('000) | 54 | (15) | n.m. | |||
Total churn (%) | 23.2 | 26.0 | (2.8pp) | |||
Data as % of service revenues (%) | 10.9 | 9.3 | 1.6pp | |||
ARPU (Euro) | 22.6 | 23.8 | (4.9%) | |||
Customer bill |
17.7 | 17.7 | (0.1%) | |||
Interconnection |
4.9 | 6.1 | (19.1%) | |||
MOU (minutes) | 119.5 | 119.2 | 0.2% | |||
ARPM (Euro cents) | 19.0 | 20.0 | (5.1%) | |||
SARC (Euro) | 64.1 | 47.5 | 34.9% | |||
CCPU (1) (Euro) | 11.3 | 11.1 | 2.0% | |||
ARPU minus CCPU (Euro) | 11.4 | 12.8 | (10.9%) | |||
(1) CCPU (cash cost per user) = Operating costs minus provisions, depreciation and amortisation, and sales of equipment per user. |
TMN had 5,108 thousand customers at the end of June 2005, an increase of 4.8% y.o.y. Net additions in the first half of 2005 reached 54 thousand. As a result of the ongoing postpaid migration campaigns, postpaid customers represented 66% of net additions in the first half of 2005. Postpaid customers increased by 11.0% y.o.y, with the weight of prepaid decreasing by 1.0pp to 82.9% of the total customer base. Churn decreased by 2.8pp y.o.y to 23.2% in the first half of 2005, with churn to competition being less than 5%, according to market research undertaken by TMN.
Data services accounted for 10.9% of service revenues in the first half of 2005, an improvement of 1.6pp over the previous year, underpinned by the growth of non-SMS data that already accounted for 18.9% of data revenues in the period. The number of SMS messages in the first half of 2005 amounted to 718 million, corresponding to approximately 49 messages per month per active SMS user. The number of active SMS users reached 47.0% of total customers. The take-up of I9 (mobile multimedia portal) progressed well over the quarter, with I9 customers reaching more than 630 thousand at the end of June 2005. Games, ringing tones, sports and video downloads constitute the top daily access subjects per user. As at 30 June 2005, TMN had 398 thousand active MMS customers.
As at 30 June 2005, TMN had over 100 thousand 3G customers. The rollout of 3G is progressing well both from a product portfolio and network rollout point of view. UMTS geographical coverage currently stands at 12%, which is equivalent to 60% of population coverage.
Minutes of usage (MOU) remained broadly flat at 119.5 minutes in the first half of 2005, when compared to the same period of last year, although MOU in the first half of 2004 was positively impacted by the one-off effect of the Euro 2004 championship event.
ARPU in the first half of 2005 was Euro 22.6, a decrease of 4.9% y.o.y, on the back of a strong reduction in interconnection rates. Customer ARPU remained broadly flat in the first half of 2005, as a result of a
30
higher data usage, which was compensated by the traffic promotions aimed at stimulating on-net traffic, and the one-off positive impact of the Euro 2004 in second quarter of 2004. The 19.1% y.o.y decline in the interconnection ARPU was primarily due to the two interconnection rate cuts that occurred over the last 12 months.
Brazilian mobile - Vivo
In the first half of 2005, Vivos operating revenues, stated in Brazilian Reais and in accordance with IFRS, increased by 6.7% y.o.y to R$ 5,941 million, reflecting primarily the increase of service revenues of 2.2% y.o.y, and the increase of 50.5% y.o.y from sales of equipment.
BRAZILIAN MOBILE INCOME STATEMENT (1) | R$ million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Operating revenues | 5,941.5 | 5,569.8 | 6.7% | |||
Services rendered | 5,173.3 | 5,061.9 | 2.2% | |||
Sales | 616.0 | 409.3 | 50.5% | |||
Other operating revenues | 152.2 | 98.6 | 54.3% | |||
Recurring operating costs, excluding D&A | 4,344.1 | 3,650.3 | 19.0% | |||
Wages and salaries | 308.6 | 312.5 | (1.2%) | |||
Direct costs (including costs of telecomunications) | 638.8 | 503.0 | 27.0% | |||
Costs of products sold | 1,249.4 | 1,163.2 | 7.4% | |||
Marketing and publicity | 212.1 | 209.1 | 1.4% | |||
Support services | 356.8 | 295.8 | 20.6% | |||
Supplies and external expenses | 765.4 | 665.6 | 15.0% | |||
Provisions | 278.6 | 160.8 | 73.3% | |||
Other operating costs | 534.4 | 340.4 | 57.0% | |||
EBITDA | 1,597.4 | 1,919.5 | (16.8%) | |||
Depreciation and amortisation | 1,130.0 | 1,013.0 | 11.5% | |||
Recurring operating income | 467.4 | 906.5 | (48.4%) | |||
EBITDA margin | 26.9% | 34.5% | (7.6pp) | |||
Capex | 947.8 | 502.3 | 88.7% | |||
Capex as % of revenues | 16.0% | 9.0% | 6.9pp | |||
EBITDA minus capex | 649.6 | 1,417.2 | (54.2%) | |||
(1) Information prepared in accordance with IFRS. |
EBITDA decreased by 16.8% y.o.y to R$ 1,597 million in the first half of 2005. EBITDA margin decreased by 7.6pp y.o.y to 26.9% in the first half, reflecting higher subscriber acquisition and retention costs as a result of increased competition and strong customer growth.
Capex rose to R$ 948 million in the first half of 2005, equivalent to 16.0% of revenues, primarily as a result of capacity expansion, CDMA overlay in the regions operated by CRT and TCO, and the rollout of 1xRTT and EV-DO. Over 60% of the capex in the first half of 2005 was related to 1xRTT and EV-DO. EBITDA minus Capex decreased by 54.2% y.o.y to R$ 650 million in the first half of 2005, as a result of the decrease in EBITDA and pick-up in capex.
CONSOLIDATED REPORT - FIRST HALF 2005 | 31 |
BRAZILIAN MOBILE OPERATING DATA (1) | ||||||
1H05 | 1H04 | D 05/04 | ||||
Customers ('000) | 28,446 | 23,514 | 21.0% | |||
Market share in areas of operation (%) | 47.6 | 54.5 | (6.9pp) | |||
Net additions ('000) | 1,903 | 2,858 | (33.4%) | |||
Total churn (%) | 20.3 | 21.8 | (1.6pp) | |||
SARC (R$) | 175.3 | 133.8 | 31.1% | |||
MOU (minutes) | 80.1 | 91.7 | (12.6%) | |||
ARPU (R$) | 28.7 | 34.0 | (15.5%) | |||
Data as % of service revenues (%) | 5.8 | 4.1 | 1.7pp | |||
CCPU (2) (R$) | 17.5 | 18.3 | (4.2%) | |||
ARPU minus CCPU (R$) | 11.2 | 15.7 | (28.7%) | |||
(1) Operating data calculated using Brazilian GAAP. |
||||||
(2) CCPU (cash cost per user) = Operating costs minus provisions, depreciation and amortisation, and sales of equipment per user. |
Vivo had 28,446 thousand customers at the end of June 2005, an increase of 21.0% y.o.y. Vivo added 1,903 thousand customers in the first half of 2005. Vivos market share at the end of June 2005 was 47.6% in its areas of operation and 37.7% in the whole of Brazil. Total churn decreased by 1.6pp y.o.y to 20.3%, reflecting the success of loyalty programmes introduced during 2004 and the notoriety of the Vivo brand. Subscriber acquisition and retention costs (SARC) increased by 31.1% to R$175 as a result of the higher subsidisation in the quarter related to the strong commercial activity around Mothers Day and St. Valentines Day.
Although growth in the Brazilian mobile market has been mainly in the prepaid segment, Vivo continues to actively target and retain postpaid customers, which represented almost 17.1% of the additions in the first half of 2005, against less than 1.5% in the first half of 2004. Prepaid customers accounted for 80.6% of the total customer base at the end of June 2005.
Data as a percentage of total service revenues was 5.8% in the first half of 2005, compared to 4.1% in the same period of last year. Approximately 29% of data revenues is derived from non-SMS data, such as downloads, Internet access and others. The number of downloads in the half reached an average of 1,030 thousand per month, as Vivo has been actively marketing 3G data services, supported on 1xRTT and EV-DO.
Vivos blended MOU dropped by 12.6% y.o.y in the first half of 2005 to 80.1 minutes, due to the changing mix of the customer base towards prepaid and the negative evolution of incoming traffic, particularly in prepaid that was impacted by tariff rebalancing and the increase in fixed-to-mobile termination prices (V-UM). Postpaid MOU increased by 1.8% y.o.y in the first half of 2005, underpinned by a strong increase in outgoing MOU.
32
Vivos blended ARPU was R$ 28.7 in the first half of 2005, a decrease of 15.5% over the same period of last year, primarily as a result of the changing mix of the customer base towards prepaid, the decrease in incoming traffic, and the impact of the repositioning of postpaid pricing plans (right planning).
Multimedia - PT Multimedia
After 10 years of operations, the Pay-TV business undertook a database cleanup of inactive and bad debt customers in the first half of 2005, totalling 143 thousand customers (8.8% of the customer base), following the migration to new CRM, billing and provisioning systems. Revenues were adjusted accordingly. It is likely that with ongoing initiatives in this area, further adjustments may be carried out in the next two quarters.
PT Multimedias reported operating revenues increased by 7.0% y.o.y to Euro 306 million in the first half of 2005, underpinned by an increase in Pay-TV and cable Internet revenues, which benefited from continued customer growth and the increase in broadband penetration. Audiovisuals revenues fell by 18.7% y.o.y in the first half of 2005 as a result of lower cinema attendance rates.
MULTIMEDIA INCOME STATEMENT (1) | Euro million |
|||||
1H05 | 1H04 | D 05/04 | ||||
Operating revenues | 305.8 | 285.9 | 7.0% | |||
Pay-TV and cable Internet | 271.1 | 243.4 | 11.4% | |||
Audiovisuals | 34.4 | 42.3 | (18.7%) | |||
Other | 0.3 | 0.1 | 140.7% | |||
Recurring operating costs, excluding D&A | 211.0 | 199.7 | 5.7% | |||
Wages and salaries | 21.2 | 20.9 | 1.0% | |||
Direct costs | 97.3 | 89.1 | 9.2% | |||
Programming costs |
67.1 | 60.1 | 11.7% | |||
Costs of telecommunications | 15.6 | 13.3 | 17.8% | |||
Other | 14.6 | 15.8 | (7.9%) | |||
Costs of products sold | 8.1 | 7.1 | 15.3% | |||
Marketing and publicity | 9.0 | 11.7 | (23.4%) | |||
Support services | 19.3 | 17.0 | 13.8% | |||
Supplies and external expenses | 41.6 | 42.1 | (1.2%) | |||
Provisions | 3.9 | 2.0 | 96.8% | |||
Other operating costs | 10.7 | 9.8 | 9.2% | |||
EBITDA | 94.8 | 86.2 | 10.0% | |||
Depreciation and amortisation | 28.3 | 24.8 | 14.0% | |||
Recurring operating income | 66.5 | 61.4 | 8.4% | |||
EBITDA margin | 31.0% | 30.2% | 0.9pp | |||
Capex | 55.6 | 22.2 | 150.4% | |||
Capex as % of revenues | 18.2% | 7.8% | 10.4pp | |||
EBITDA minus capex | 39.2 | 64.0 | (38.7%) | |||
(1) Includes intragroup transactions. |
PT Multimedias reported EBITDA increased by 10.0% y.o.y in the first half of 2005 to Euro 95 million, and EBITDA margin was 31.0% . The underlying annual growth in EBITDA in the first half of 2005 resulted from the growth in basic and broadband customers, as well as the improvement in ARPU.
CONSOLIDATED REPORT - FIRST HALF 2005 | 33 |
In the first half of 2005, PT Multimedias capex increased to Euro 56 million, equivalent to 18.2% of revenues, primarily as a result of the investment of Euro 17 million in satellite capacity of a fifth transponder. In addition, the capex of the first half of 2005 included investments in set top boxes, in IT and in the network. EBITDA minus Capex amounted to Euro 39 million in the first half of 2005, equivalent to 12.8% of operating revenues.
PAY-TV AND CABLE INTERNET OPERATING DATA (1) | ||||||
1H05 | 1H04 | 05/04 | ||||
Homes passed ('000) | 2,606 | 2,514 | 3.7% | |||
Bi-directional (broadband enabled) | 2,484 | 2,283 | 8.8% | |||
Pay-TV customers (2) (3) ('000) | 1,465 | 1,487 | (1.5%) | |||
Cable | 1,076 | 1,123 | (4.2%) | |||
DTH | 389 | 364 | 6.8% | |||
Pay-TV net additions ('000) | 16 | 45 | (64.7%) | |||
Penetration rate of cable (%) | 41.3 | 44.7 | (3.4pp) | |||
Premium subscriptions (3) ('000) | 786 | 876 | (10.2%) | |||
Pay to basic ratio (%) | 53.6 | 58.9 | (5.2pp) | |||
Cable broadband accesses ('000) | 333 | 269 | 23.7% | |||
Cable broadband net additions ('000) | 27 | 39 | (29.3%) | |||
Blended ARPU (Euro) | 27.6 | 25.0 | 10.3% | |||
(1) As a result of a database cleanup, following the migration to new CRM, provisioning and billing systems, the number of Pay-TV customers at the end of 1H05 and 2004 was 1,465 thousand and 1,449 thousand respectively. The adjusted number of cable broadband customers at the end of 1H05 and 2004 was 333 thousand and 305 thousand respectively.
(2) These figures are related to the total number of Pay-TV basic service customers. PT Multimedia's Pay-TV business offers several basic packages, based on different technologies, and directed to different market segments (residential, real estate and hotels), with a distinct geographic scope (mainland Portugal and the Azores and Madeira islands) and with a variable number of channels. (3) These figures include products in temporary promotions, such as the "Try and Buy" promotion. |
Homes passed totalled 2,606 thousand at the end of June 2005, of which 95.3% were bi-directional and therefore broadband enabled. Pay-TV customers increased by 16 thousand in the first half of 2005, totalling 1,465 thousand at the end June 2005, of which 1,076 thousand were cable and 389 thousand were DTH.
The number of premium subscriptions decreased by 10.2% y.o.y to 786 thousand at the end of June 2005, corresponding to a pay to basic ratio of 53.6%, reflecting the weak macroeconomic environment. In the first half of 2005, the Pay-TV business continued the digitalisation programme, with the total digital set top boxes reaching more than 380 thousand at the end of June 2005.
In May 2005, PT Multimedia introduced the digital TV service, Funtastic Life. With 60 channels, the service reinforced the content offer of entertainment, movies, documentaries, sports, kids and music. The Pay-TV business also launched a new premium movie channel, Lusomundo Happy.
34
Broadband customers rose by 23.7% y.o.y in the first half of 2005, reaching 333 thousand customers at the end of June 2005. Approximately 27 thousand Netcabo customers were added in the first half of 2005, post database cleanup, while the penetration of the Internet service among cable TV subscribers increased to 30.9% at the end of June 2005, which compares with 23.9% in a previous year. In May 2005, PT Multimedia multiplied by a factor of four the speed of its broadband products and introduced for the first time speeds of up to 8mbps.
Blended ARPU of the Pay-TV and cable Internet business was Euro 27.6 in the first half of 2005, equivalent to an increase of 10.3% y.o.y, and reflecting the higher penetration of broadband services and the increase in Pay-TV prices.
Other international investments
In the first half of 2005, Médi Télécom revenues grew by 25.0% y.o.y to MAD 2,046 million, while EBITDA increased by 9.8% y.o.y to MAD 785 million. The total customer base increased by 60.6% y.o.y to 3,450 thousand, with net additions in the first half totalling 516 thousand. MOU decreased by 13.0% y.o.y in the first half of 2005, reaching 59.5 minutes. ARPU totalled MAD 105.7 in the first half of 2005, a decrease of 20.1% over the same period of last year, due to the increase in the subscriber base and the changing mix of the customer base towards prepaid.
FINANCIAL HIGHLIGHTS IN 1H05 (1) (2) | Local currency - million | |||||||||||||||
Currency | Average FX | Stake | Revenues | y.o.y. | EBITDA | y.o.y. | EBITDA | |||||||||
1H05 | margin | |||||||||||||||
Médi Télécom | MAD | 11.1 | 32.18% | 2,046 | 25.0% | 785 | 9.8% | 38.4% | ||||||||
Unitel | USD | 1.3 | 25.00% | 189 | 113.1% | 134 | 118.4% | 70.7% | ||||||||
CTM | MOP | 10.3 | 28.00% | 913 | 13.6% | 390 | 13.2% | 42.7% | ||||||||
CVT | CVE | 110.3 | 40.00% | 2,831 | 2.2% | 1,690 | 1.8% | 59.7% | ||||||||
CST | STD | 13,003.0 | 51.00% | 50,688 | 10.8% | 16,107 | 8.6% | 31.8% | ||||||||
(1) All information in local GAAP. |
||||||||||||||||
(2) Figures account for 100% of the company. PT has management contracts in Médi Télécom, CVT and Unitel. |
Unitels revenues and EBITDA grew by 113.1% and 118.4% y.o.y respectively in the first half of 2005, underpinned by a strong growth in the subscriber base. Net additions totalled 206 thousand in the first half of 2005, with the total customer base reaching 794 thousand at the end of the period, an increase of 189.3% y.o.y. Unitels MOU decreased by 22.2% y.o.y in the first half of 2005 to 186 minutes, due to the increase in the customer base. ARPU totalled USD 47.2 in the first half of 2005, a decrease of 16.1%, primarily as a result of the strong growth in the customer base.
CTMs revenues increased by 13.6% y.o.y to MOP 913 million in the first half of 2005, as a result of the increase in the customer base of the mobile and broadband divisions. EBITDA improved 13.2% y.o.y, reflecting the top line growth. In the mobile division, CTMs ARPU reached MOP 221.7 in the first half of
CONSOLIDATED REPORT - FIRST HALF 2005 | 35 |
2005, a decrease of 8.1% y.o.y, primarily as a result of higher competitive pressures and the growth in the prepaid segment.
In Cabo Verde, CVTs revenues and EBITDA increased approximately 2% y.o.y. In the wireline division, main lines fell by 1.8% y.o.y in the first half of 2005, to 72 thousand, while in the mobile division increased by 35.8% y.o.y to 71 thousand. MOU reached 79.5 minutes, an increase of 5.1% y.o.y in the first half of 2005. ARPU in the first half of 2005, was CVE 2,290, a decrease of 8.6% y.o.y on the back of a strong growth in the customer base.
In São Tomé e Príncipe, CSTs revenues increased by 10.8% y.o.y to STD 50,688 million in the first half of 2005, with the EBITDA improving by 8.6% y.o.y to STD 16,107 million. In the mobile division, CST added 1,378 customers in the first half of 2005, bringing the total number of customers to 9,123 at the end of the period. MOU decreased by 12.0% y.o.y in the first half of 2005, reaching 85.4 minutes, as a result of the growth in the subscriber base. ARPU was STD 372 thousand in the first half of 2005, an increase of 0.6% over the same period of last year.
36
Employees
At the end of June 2005, total staff totalled 31,003 employees, of which 44.1% were employed in Portugal. In the wireline business, the ratio of fixed lines per employee improved by 13.3% y.o.y to 538 lines reflecting the ongoing workforce rationalisation programme, while in TMN the ratio of mobile cards per employee rose by 0.9% to 4,422 cards. At the end of June 2005, the total number of staff employed by Vivo decreased by 14.3% y.o.y to 6,032 employees, with the ratio of mobile cards per employee increasing 41.2% y.o.y to 4,716 cards.
NUMBER OF EMPLOYEES AND PRODUCTIVITY RATIOS | ||||||||
1H05 | 1H04 | y.o.y | 05/04 | |||||
Wireline | 8,257 | 9,012 | (755) | (8.4%) | ||||
Domestic mobile - TMN) | 1,155 | 1,112 | 43 | 3.9% | ||||
Brazilian mobile - Vivo (1) | 3,016 | 3,521 | (505) | (14.3%) | ||||
Multimedia - PT Multimedia | 1,324 | 2,598 | (1,274) | (49.0%) | ||||
Other (2) | 17,251 | 12,194 | 5,057 | 41.5% | ||||
Total group employees | 31,003 | 28,437 | 2,567 | 9.0% | ||||
Domestic market | 13,680 | 15,314 | (1,634) | (10.7%) | ||||
International market (2) | 17,323 | 13,123 | 4,201 | 32.0% | ||||
Fixed lines per employee | 538 | 475 | 63 | 13.3% | ||||
Mobile cards per employee | ||||||||
TMN | 4,422 | 4,381 | 41 | 0.9% | ||||
Vivo | 4,716 | 3,340 | 1,376 | 41.2% | ||||
(1) The number of employees in the Brazilian mobile business corresponds to 50% of the employees of Vivo. (2) The increase in this caption results primarily from the insourcing of additional call centre employees at Dedic, PT's call centre business in Brazil. As at 30 June 2005, Dedic had a total of 13,345 employees. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 37 |
Shareholder remuneration | ||
> | On 17 March 2005, PT announced that its Executive Committee had decided that, in connection to the possible issuance of put warrants over PT Multimedia shares, related to the 10% share buyback programme announced by PT Multimedia on 28 December 2004, PT had irrevocably renounced to the right to physically settle such warrants. Furthermore it had decided that PT will opt for the financial settlement of the PT Multimedia warrants under the final terms and conditions approved by the Board of Directors of PT Multimedia. | |
> | In the shareholders meeting of April 2005, PT was granted authorisation to acquire an additional 10% of its share capital. PTs Board has committed to undertake an additional 3% share buyback, subject to market and financial conditions of the company. | |
> | On 9 May 2005, further to the announced share buyback programme, PT acquired, through the exercise of equity swaps, a total of 37,628,550 PT shares, thus completing the 10% share buy back announced in September 2003. | |
> | On 27 May 2005, PT paid a cash dividend of Euro 0.35 per share. |
Regulation | ||
> | On 2 March 2005, the telecom regulator in Portugal published its final deliberation on mobile termination rates for the next two years, completing the market 16 analysis. As a result, fixed-to- mobile and mobile-to-mobile rates fell to Euro 0.14 per minute on 7 March 2005, reaching Euro 0.11 per minute by October 2006, following successive quarterly cuts. By the fourth quarter of 2006, the interconnection rate for a fixed-to-mobile and mobile-to-mobile call will be the same for all three mobile operators - Euro 0.11 per minute. |
New services | ||
> | On 19 May 2005, PT Multimedia launched its digitalisation plans aimed at achieving one million digital set top boxes at the end of 2006. | |
> | On 1 June 2005, TMN announced its plan for a more aggressive rollout of 3G services in Portugal, in line with its strategic objective of reinforcing its leading position in the Portuguese mobile market. | |
> | On 7 July 2005, PT announced the launch of VoIP softphone services in Portugal. The product was developed in conjunction with Jabber, in Denver, Xten, in Vancouver, which developed VoIP software for Vonage and Yahoo!, and Critical Software, in Portugal. The service is available to all PT customers |
38
using the groups instant messenger service SAPO Messenger. Following this launch, SAPO Messenger customers can use free PC-to-PC VoIP and video services, making it one of the instant messenger services that integrate the highest number of communication functionalities available today in the market. | ||
Debt | ||
> | On 24 March 2005, PT announced the launch of a Euro 1.5 billion Eurobond issue with maturities of 7 and 12 year and on 16 June 2005 PT issued an additional Euro 500 million Eurobond with a maturity of 20 years. The proceeds will be used to pay the Eurobond maturing in February 2006, to fund the acceleration of 3G rollout in Portugal, to fund post retirement healthcare obligations related to additional staff curtailment, and to provide PT with additional financial flexibility, by reducing the use of commercial paper and standby lines. | |
International Investments | ||
> | On 5 January 2005, TCP successfully completed a capital increase of approximately R$2,054 million, which comprised the rights issue of R$2,000 million and the subscription in kind equivalent to tax credits related to year 2003 in the amount of R$53.89 million. The proceeds of the rights issue were used to repay a bridge loan related to the TCO tender offer and to repay other short-term debt. With this capital increase the controlling shareholders increased their economic interest in TCP from 65.12% to 65.70%, through the ownership of 524,712 million common shares (94.90% of TCPs total common shares) and of 515,084 million preferred shares (50.02% of TCPs total preferred shares). | |
> | On 7 June 2005, PT announced the creation of Africa PT, which aggregates all of PTs businesses in Africa. | |
> | On 28 July 2005, PT announced the creation of Asia PT, which aggregates all of PTs businesses in Asia. | |
Assets Disposals | ||
> | On 28 February 2005, PT announced the sale by PT Multimedia of Lusomundo Serviços, SGPS, S.A., including its 80.91% shareholding in Lusomundo Media, through the execution of a promissory sale and purchase agreement with Controlinveste. The sale is conditional upon the non-opposition of the Portuguese Competition Authority, following a binding opinion of the Portuguese Media Authority. The transaction assumes an enterprise value of Euro 300.4 million for 100% of Lusomundo Serviços and 100% of all of its subsidiaries. On 10 August 2005, the Competition Authority has notified Controlinveste of its decision not to oppose to the acquisition of Lusomundo Serviços, including |
CONSOLIDATED REPORT - FIRST HALF 2005 | 39 |
80.91% of Lusomundo Media. As a consequence, on 25 August 2005, PT Multimedia executed the sale of Lusomundo Serviços to Controlinveste, which resulted in a cash in of Euro 174 million for PT. | ||
> | On 5 August 2005, PT reached an agreement with Embratel to sell its 100% stake in PrimeSys in Brazil for a total consideration of R$ 231 million, equivalent to Euro 81 million, adjusted for the Brazilian Interbank rate (CDI) up to the closing of the transaction, which is pending approval by the local telecommunications regulator. In 2004, PrimeSys operating revenues and EBITDA amounted to R$ 253 million and R$ 35 million respectively. The impact for PT of PrimeSys costs with operating leases amounted to R$ 78 million. | |
Board of Directors | ||
> | On 28 July 2005, PT announced that Mr. Fernando Ulrich resigned as non-executive member of the companys Board of Directors, following the sale by Banco BPI of its holding in PTs share capital. Banco BPIs funds own 0.63% of PTs share capital. |
40
Prospects for the Second Half
PT will continue to focus on exploring the growth potential of its existing asset portfolio, namely its integrated telecommunication and multimedia operations in Portugal, its mobile business in Brazil, and the others international businesses of the group. The increase in the competitive and regulatory pressures, as well as the maturity of certain businesses, will require a constant focus on improving the operating efficiency across the company.
Wireline
The aggressive rollout of broadband and the promotion of new pricing plans in the residential segment, as well as an increasingly integrated and value added offer in the corporate segment, should minimise the negative impact of the decline in revenues related to the traditional line loss and the higher pricing pressure. Regulatory decisions on fixed-to-mobile interconnection rates, local loop unbundling prices and the introduction of WLR, among others, may also have a negative impact in the wireline business. In order to preserve operating margins and cash flow generation, the wireline business will proceed with its cost rationalisation efforts, underpinned by a staff redundancy programme that should lead to continued headcount reduction.
Mobile
The development of 3G services, as well as the rollout of a new brand for the low cost segment, will continue to be the key strategic initiatives of the domestic mobile business in 2005. 3G coverage will continue to be expanded, while the launch of new services and applications based on 3G should result in an increase in the number of customers using this technology. The higher subscriber acquisition and retention costs (SARC) related to the 3G rollout, as well as the significant reduction on interconnection rates, imposed by the regulator, should have a negative impact on EBITDA.
The Brazilian mobile market should continue to be characterised by strong growth and a challenging competitive environment. Vivo intends to continue to consolidate its leading position in the market, focusing on the retention of value customers and simultaneously exploring the growth opportunities of the market. Operating margins will continue to be negatively impacted by the competitive environment and strong customer growth. The ongoing rollout of 1xRTT and the launch of EV-DO in new coverage areas should reinforce the companys positioning as the leading data services operator in Brazil.
CONSOLIDATED REPORT - FIRST HALF 2005 | 41 |
Multimedia
The multimedia business plans to continue to take advantage of the significant growth potential that the Pay-TV market in Portugal still offers, through the growth of the customer base and the upselling of its services to existent customers. To that
end, the focus on digital services as a means of improving the offer and enhancing customer segmentation should be an important strategic initiative. The rollout of digital services, should, however, results in higher commercial and programming
costs. PT Multimedia plans to step up its efforts in terms of quality of service and customer care, leveraging on important investments made during 2004. The strong push in broadband should continue to be an important lever for the increase in ARPU.
Financials
PT intends to preserve its solid financial structure, 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.
The Board of Directors
42
CONSOLIDATED REPORT - FIRST HALF 2005 | 43 |
PORTUGAL TELECOM,SGPS, S.A.
CONSOLIDATED STATEMENTS OF PROFIT AND LOSS
FOR THE SIX MONTHS PERIODS ENDED JUNE 30, 2005 AND 2004
(Amounts stated in Euros)
Notes | 2005 | 2004 | ||||
Continued Operations: | ||||||
Operating Revenues: | ||||||
Services rendered | 6 | 2,800,351,373 | 2,693,245,247 | |||
Sales | 6 | 182,118,344 | 150,813,440 | |||
Other operating revenues | 6 | 41,747,058 | 37,092,361 | |||
Total operating revenues | 3,024,216,775 | 2,881,151,048 | ||||
Recurring operating costs: | ||||||
Wages and salaries | 8 | 336,176,409 | 307,022,684 | |||
Post retirement benefits | 9 | 72,175,500 | 79,797,410 | |||
Direct costs | 10 | 426,214,085 | 423,262,580 | |||
Depreciation and amortization | 30 and 31 | 493,788,165 | 461,055,876 | |||
Costs of products sold | 288,003,703 | 237,828,852 | ||||
Marketing and publicity | 79,145,743 | 74,307,195 | ||||
Support services | 97,805,946 | 82,432,572 | ||||
Maintenance and repairs | 78,121,811 | 66,396,602 | ||||
Supplies and external services | 11 | 356,325,397 | 313,456,933 | |||
Provisions and adjustments | 36 | 40,060,271 | 58,586,605 | |||
Taxes | 76,317,154 | 58,492,363 | ||||
Other operating costs | 25,160,749 | 13,490,535 | ||||
Total recurring operating costs | 2,369,294,933 | 2,176,130,207 | ||||
Recurring operating income | 654,921,842 | 705,020,841 | ||||
Work force reduction program costs | 9 | 96,793,283 | 3,906,487 | |||
Losses on disposals of fixed assets, net | 427,902 | 2,464,280 | ||||
Other costs | 13 | 8,436,746 | 12,301,823 | |||
Income before financials results, income taxes and minority interests | 549,263,911 | 686,348,251 | ||||
Interests, net | 116,242,038 | 95,879,542 | ||||
Net foreign currency exchange losses/(gains) | (35,915,007) | (483,984) | ||||
Losses/(gains) on financial assets, net | 14 | 22,031,125 | (51,058,058) | |||
Equity in earnings of affiliated companies, net | 28 | (29,070,951) | (5,909,785) | |||
Other financial expenses/(income), net | 15 | 30,367,775 | 28,160,844 | |||
Income before income taxes and minority interests | 445,608,931 | 619,759,692 | ||||
Provision for income taxes | 16 | (176,378,971) | (183,617,696) | |||
Net income from continued operations, before minority interests | 269,229,960 | 436,141,996 | ||||
Discontinued Operations: | ||||||
Net income from disontinued operations, before minority interests | 17 | 1,581,617 | (2,661,526) | |||
Net income before minority interests | 270,811,577 | 433,480,470 | ||||
Loss / (income) applicable to minority interests | 18 | (11,827,758) | (47,806,587) | |||
Net income | 258,983,819 | 385,673,883 | ||||
Earnings per share: | ||||||
Basic | 20 | 0.22 | 0.31 | |||
Diluted | 20 | 0.22 | 0.31 |
44
PORTUGAL TELECOM, SGPS, S.A.
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
(Amounts stated in Euros)
Notes | June 30, 2005 | December 31, 2004 | ||||
Assets | ||||||
Current Assets: | ||||||
Cash and cash equivalents | 21 | 2,768,175,675 | 1,946,960,215 | |||
Accounts receivable - trade | 22 | 1,353,716,592 | 1,208,257,008 | |||
Accounts receivable - other | 23 | 218,264,024 | 207,158,578 | |||
Inventories, net | 24 | 187,802,770 | 175,148,608 | |||
Tax receivable | 25 | 164,060,510 | 179,384,595 | |||
Prepaid expenses | 26 | 136,510,455 | 115,832,166 | |||
Other current assets | 27 | 26,360,133 | 64,504,173 | |||
Total current assets | 4,854,890,159 | 3,897,245,343 | ||||
Non-Current Assets: | ||||||
Accounts receivable - trade | 2,166,942 | 749,446 | ||||
Accounts receivable - other | 23 | 27,853,061 | 20,710,269 | |||
Tax receivable | 25 | 100,121,128 | 62,623,744 | |||
Prepaid expenses | 4,864,695 | 6,189,030 | ||||
Investments in group companies | 28 | 335,423,770 | 320,566,693 | |||
Other investments | 29 | 98,670,937 | 114,714,126 | |||
Intangible assets | 30 | 3,557,175,720 | 3,244,925,988 | |||
Tangible assets | 31 | 3,996,336,488 | 3,934,265,391 | |||
Deferred taxes | 16 | 1,002,060,656 | 1,125,311,763 | |||
Other non-current assets | 27 | 831,100,462 | 852,304,243 | |||
Total non-current assets | 9,955,773,859 | 9,682,360,693 | ||||
Total assets from continued operations | 14,810,664,018 | 13,579,606,036 | ||||
Assets from discontinued operations | 17 | 351,775,835 | - | |||
Total assets | 15,162,439,853 | 13,579,606,036 | ||||
Liabilities | ||||||
Current Liabilities: | ||||||
Short term debt | 32 | 1,556,060,475 | 1,615,842,444 | |||
Accounts payable - trade | 695,486,417 | 719,626,030 | ||||
Accounts payable - other | 33 | 323,262,179 | 545,173,723 | |||
Accrued expenses | 34 | 604,213,048 | 599,848,022 | |||
Deferred income | 35 | 232,304,139 | 225,526,344 | |||
Tax payable | 25 | 194,510,526 | 173,592,442 | |||
Current provisions | 36 | 139,225,069 | 118,270,621 | |||
Other current liabilities | 37 | 42,798,927 | 17,178,693 | |||
Total current liabilities | 3,787,860,780 | 4,015,058,319 | ||||
Non-Current Liabilities: | ||||||
Medium and Long-Term Debt | 32 | 5,467,710,136 | 3,862,962,069 | |||
Accounts payable - other | 19,029,227 | 17,643,139 | ||||
Tax payable | 25 | 30,222,782 | 25,634,200 | |||
Deferred income | 17,278,416 | 15,551,195 | ||||
Non-current provisions | 36 | 137,553,868 | 132,150,110 | |||
Accrued post-retirement liability | 9 | 908,218,281 | 1,232,115,384 | |||
Deferred taxes | 16 | 323,746,947 | 327,856,407 | |||
Other non-current liabilities | 37 | 900,314,929 | 904,710,955 | |||
Total non-current liabilities | 7,804,074,586 | 6,518,623,459 | ||||
Total liabilities from continued operations | 11,591,935,366 | 10,533,681,778 | ||||
Liabilities from discontinued operations | 17 | 126,354,280 | - | |||
Total liabilities | 11,718,289,646 | 10,533,681,778 | ||||
Shareholder's equity | ||||||
Share capital | 38 | 1,166,485,050 | 1,166,485,050 | |||
Capital issued premium | 38 | 91,704,891 | 91,704,891 | |||
Own shares | 38 | (340,455,888) | (189,751,440) | |||
Legal reserve | 38 | 179,229,361 | 154,225,075 | |||
Other reserves | 38 | 531,583,147 | 604,129,146 | |||
Cumulative foreign currency translation adjustments | 38 | 603,272,747 | 21,156,626 | |||
Retained earnings | 242,654,226 | 53,255,156 | ||||
Net income | 258,983,819 | 577,090,780 | ||||
Equity before minority interests | 2,733,457,353 | 2,478,295,284 | ||||
Minority interests | 18 | 710,692,854 | 567,628,974 | |||
Total equity | 3,444,150,207 | 3,045,924,258 | ||||
Total liabilities and shareholder's equity | 15,162,439,853 | 13,579,606,036 | ||||
CONSOLIDATED REPORT - FIRST HALF 2005 | 45 |
PORTUGAL TELECOM, SGPS, S.A.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY BEFORE MINORITY INTERESTS FOR THE
YEAR ENDED DECEMBER 31, 2004 AND FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2005
(amounts stated in Euro)
Share capital |
Capital issued premium |
Own shares |
Legal reserve |
Other reserves |
Cumulative foreign currency translation adjustments |
Retained earnings and net income | Total equity before minority intersts | |||||||||
Balance as at 31 December 2003 according with | ||||||||||||||||
Portuguese GAAP | 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 | 2.940.826.925 | ||||||||
Adjustments to conform with IFRS as at 1 January 2004 (Note 45) | - | - | (207.023.028) | - | 129.105.207 | 2.261.577.622 | (2.503.643.720) | (319.983.919) | ||||||||
Balance as at 1 January 2004 according with IFRS | 1.254.285.000 | 91.704.891 | (417.063.090) | 144.184.287 | 1.982.974.439 | - | (435.242.521) | 2.620.843.006 | ||||||||
Acquisition of treasury shares (i) | - | - | (463.641.367) | - | - | - | - | (463.641.367) | ||||||||
Cancellation of treasury shares (Note 38) | (87.799.950) | - | 690.953.017 | - | (603.153.067) | - | - | - | ||||||||
Dividends paid | - | - | - | - | (76.724.707) | - | (190.774.979) | (267.499.686) | ||||||||
Earnings allocated to the legal reserve | - | - | - | 10.040.788 | - | - | (10.040.788) | - | ||||||||
Foreign currency translation adjustments | - | - | - | - | - | 21.156.626 | - | 21.156.626 | ||||||||
Other adjustments (ii) | - | - | - | - | (698.967.519) | - | 689.313.444 | (9.654.075) | ||||||||
Net income - 2004 | - | - | - | - | - | - | 577.090.780 | 577.090.780 | ||||||||
Balance as at 31 December 2004 | 1.166.485.050 | 91.704.891 | (189.751.440) | 154.225.075 | 604.129.146 | 21.156.626 | 630.345.936 | 2.478.295.284 | ||||||||
Acquisition of treasury shares (i) | - | - | (150.704.448) | - | - | - | - | (150.704.448) | ||||||||
Dividends paid | - | - | - | - | - | - | (395.085.000) | (395.085.000) | ||||||||
Earnings allocated to the legal reserve | - | - | - | 25.004.286 | - | - | (25.004.286) | - | ||||||||
Foreign currency translation adjustments | - | - | - | - | - | 582.116.121 | - | 582.116.121 | ||||||||
Other adjustments (ii) | - | - | - | - | (72.545.999) | - | 32.397.576 | (40.148.423) | ||||||||
Net income for the six months period ended June 30, 2005 | - | - | - | - | - | - | 258.983.819 | 258.983.819 | ||||||||
Balance as at 30 June 2005 | 1.166.485.050 | 91.704.891 | (340.455.888) | 179.229.361 | 531.583.147 | 603.272.747 | 501.638.045 | 2.733.457.353 | ||||||||
The accompanying notes form an integral part of these financial statements.
(i) | Under the 10 % share buyback program, announced in September 2003, Portugal Telecom acquired treasury shares and entered in equity swap contracts on own shares. Under IFRS, those equity swaps were recognized as a financial liability at inception date (Note 38.3). | |
(ii) | In 2004, the adjustment made to other reserves and retained earnings includes basically 720 million euros related to reserves distributed by PT Comunicações and TMN to Portugal Telecom and 34,695,049 euros representing the difference between the 2003 results of subsidiary and affiliated companies considered in the preparation of the Companys consolidated financial statements, and the dividends distributed by those entities during 2004. In the first half of 2005, the adjustment made to other reserves and retained earnings includes basically 33 million euros related with the impact on Portugal Telecoms shareholders equity of the acquisition of treasury shares (from minority shareholders) by PT Multimédia under the issuance of put warrant. |
46
PORTUGAL TELECOM, SGPS, S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS PERIODS ENDED JUNE 30, 2005 AND 2004
(amounts stated in Euro)
Notes | 2005 | 2004 | ||||
OPERATING ACTIVITIES | ||||||
Collections from clients | 3,421,185,406 | 3,229,875,959 | ||||
Payments to suppliers | (1,748,242,712) | (1,571,918,860) | ||||
Payments to employees | (376,668,681) | (303,586,900) | ||||
Cash flow from operations | 1,296,274,013 | 1,354,370,199 | ||||
Payments relating to income taxes | (23,859,234) | (34,984,647) | ||||
Payments relating to post retirement benefits | 9 | (482,493,737) | (167,542,787) | |||
Other payments relating to operating activities, net | (266,355,105) | (31,962,630) | ||||
Cash flow from operating activities (1) | 523,565,937 | 1,119,880,135 | ||||
INVESTING ACTIVITIES | ||||||
Cash receipts resulting from: | ||||||
Financial investments | 41.a) | 17,885,420 | 11,174,087 | |||
Tangible assets | 3,895,002 | 3,571,155 | ||||
Intangible assets | - | 77,215 | ||||
Subsidies for investments | 368,364 | 2,791,062 | ||||
Interest and related income | 110,112,722 | 136,876,864 | ||||
Dividends | 41.b) | 11,372,853 | 10,128,324 | |||
Other | 809,581 | 484,629 | ||||
144,443,942 | 165,103,336 | |||||
Payments resulting from: | ||||||
Financial investments | 41.c) | (13,084,161) | (50,525,512) | |||
Tangible assets | (366,662,483) | (282,231,111) | ||||
Intangible assets | (18,765,924) | (6,137,809) | ||||
Advance for the acquisition of a financial investment | (1,895,470) | - | ||||
Other investments | (6,234,947) | (32,807,704) | ||||
(406,642,985) | (371,702,136) | |||||
Cash flow from investing activities (2) | (262,199,043) | (206,598,800) | ||||
FINANCING ACTIVITES | ||||||
Cash receipts resulting from: | ||||||
Loans obtained | 41.d) | 18,986,633,575 | 8,157,437,909 | |||
Increases in share capital and paid-in surplus | - | 215,071 | ||||
Subsidies | 1,014,743 | 212,432 | ||||
Other | 20,777,251 | 10,178,705 | ||||
19,008,425,569 | 8,168,044,117 | |||||
Payments resulting from: | ||||||
Loans repaid | 41.e) | (17,409,453,436) | (8,464,658,883) | |||
Lease rentals (principal) | (8,924,262) | (3,699,366) | ||||
Interest and related expenses | (252,969,660) | (315,723,448) | ||||
Dividends | 41.f) | (429,216,627) | (278,550,715) | |||
Acquisition of treasury shares | 38.3 | (340,455,888) | (238,451,159) | |||
Other | 41.g) | (87,033,923) | (3,127,461) | |||
(18,528,053,795) | (9,304,211,032) | |||||
Cash flow from financing activities (3) | 480,371,774 | (1,136,166,915) | ||||
Change in cash and cash equivalents (4)=(1)+(2)+(3) | 741,738,668 | (222,885,580) | ||||
Effect of exchange differences | 85,633,214 | 7,298,045 | ||||
Cash and cash equivalents at the beginning of the period | 41.h) | 1,940,778,999 | 2,503,977,532 | |||
Cash and cash equivalents at the end of the period | 41.h) | 2,768,150,881 | 2,288,389,997 | |||
0 | 0 |
The accompanying notes form na integral part of these financial statements.
CONSOLIDATED REPORT - FIRST HALF 2005 | 47 |
1. Introduction
a) Parent company
Portugal Telecom, SGPS, S.A. (formerly Portugal Telecom, S.A., Portugal Telecom) and subsidiaries (Group or Portugal Telecom Group), are engaged in rendering a comprehensive range of telecommunication and multimedia services in Portugal and other countries, including Brazil.
Portugal Telecom was incorporated on 23 June 1994, under Decree-Law 122/94, as a result of the merger, effective 1 January 1994, of Telecom Portugal, S.A. (Telecom Portugal), Telefones de Lisboa e Porto (TLP), S.A. (TLP) and Teledifusora de Portugal, S.A. (TDP). On 12 December 2000 Portugal Telecom, S.A. changed its denominations to Portugal Telecom, SGPS, S.A., and became the holding company of the Group.
As a result of the privatization process, between 1 June 1995 and 4 December 2000, Portugal Telecom s share capital is mainly owned by private shareholders. On 30 June 2005 Portuguese State and controlled entities owned 6.81% of the total ordinary shares and 500 category A Shares, which have special voting rights (Note 38.1) .
The shares of Portugal Telecom are traded on the Euronext Lisbon Stock Exchange and on the New York Stock Exchange.
b) Corporate purpose
Portugal Telecom Group is engaged in rendering a comprehensive range of telecommunication and multimedia services in Portugal and other countries, including Brazil.
In Portugal fixed line services are rendered by PT Comunicações, S.A. (PT Comunicações), 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 fifteen years. On 11 December 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 rendered through PT Prime - Soluções Empresariais de Telecomunicações e Sistemas, S.A. ("PT Prime"), which is also an Internet Service Provider ("ISP") for large clients.
ISP services for residential clients are rendered through PT.com Comunicações Interactivas, S.A. (PT.com), which also provides services relating to the conception, design and exhibit of publicity and information space on Internet portals.
Mobile services in Portugal are rendered by TMN - Telecomunicações Móveis Nacionais, S.A. ("TMN"), under a GSM license granted by the Portuguese State in 1990 and a UMTS license obtained in 19 December 2000.
PT Multimédia Serviços de Telecomunicações e Multimédia, SGPS, S.A. (PT Multimédia) is the Groups sub-holding for multimedia operations. Through its subsidiary TV Cabo Portugal, S.A. ("TV Cabo"), PT Multimédia renders cable and satellite television in mainland Portugal, Madeira and Azores. PT Multimédia also renders other multimedia services in Portugal, namely the editing and selling of DVD and movies through Lusomundo Audiovisuais, S.A. (Lusomundo Audiovisuais), the distribution
48
and exhibition of movies through Lusomundo Cinemas, S.A. (Lusomundo Cinemas) and the publishing of large circulation newspaper and the edition of radio programs, through Lusomundo Media, SGPS, S.A. (Lusomundo Media). Lusomundo Media operations were disposed during August 2005 (Note 44), therefore its assets, liabilities and results were presented in the consolidated financial statements under the caption Discontinued operations (Note 17).
In Brazil, the Group renders mobile telecommunication services through Brasilcel N.V. (Brasilcel or Vivo), a joint-venture incorporated in 2002 by Portugal Telecom (through PT Móveis, SGPS, S.A. PT Móveis) and Telefónica´s Group (through Telefónica Móviles, S.A.) to joint the mobile operations of each group. 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 Telest Celular, S.A.), Bahia (through Telebahia Celular, S.A.), Sergipe (through Telegirpe Celular, S.A.), Rio Grande do Sul (through Celular CRT, S.A. (Celular CRT)), and eleven states in the Midwestern and Northern regions of Brazil (through Tele Centro Oeste Celular Participações, S.A. and subsidiaries -TCO). Telesp Celular, Global Telecom, and TCO are controlled by the sub-holding Telesp Celular Participações, S.A. (TCP), Telerj Celular and Telest Celular are controlled by the sub-holding Tele Sudeste Celular Participações, S.A. (Telesudeste), and Telebahia Celular and Telergipe Celular are controlled by the sub-holding Tele Leste Celular Partipições, S.A (Teleleste).
2. Basis of presentation
Consolidated financial statements are presented in Euros, which is the currency of the majority of the Portugal Telecoms operations. Financial statements of foreign subsidiaries are translated to Euros according to accounting principals described in note 3.q)).
Consolidated financial statements of Portugal Telecom are prepared under International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB), and adopted by the European Union, and all interpretations of the International Financial Reporting Interpretation Commitee (IFRIC), which were in place as of the date of approval of these financial statements. All changes to accounting principals and policies adopted by Portugal Telecom, have been made in accordance with IFRS 1 - First-time Adoption of International Financial Reporting Standards (Note 45), therefore the transition date was 1 January 2004.
The impact of adopting IFRS as at 1 January 2004, totaled to a negative amount of 319,983,919 euros (Note 45.2) and was recognized in shareholders equity as required by IFRS 1.
IFRIC is currently in a project to review IFRS. As of the date of these consolidated financial statements is not possible to estimate the impact of any change proposed by IFRIC, under the above mentioned project, to current standards and interpretations.
The reconciliation between shareholders equity as at 1 January and 31 December 2004 and the net income for the periods ended 30 June and 31 December 2004, prepared under generally accepted accounting principals in Portugal (PGAAP) and IFRS are presented in Note 45.
Consolidated financial statements were prepared assuming the continuity of the operations, based on accounting records of all subsidiaries (Exhibit I).
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reported periods (Note 3).
CONSOLIDATED REPORT - FIRST HALF 2005 | 49 |
a) Consolidation principles
Controlled entities
Portugal Telecom has fully consolidated the financial statements of all controlled entities. Control is achieved where the Group has the majority of the voting rights or has the power to govern the financial and operating policies of an entity. In any case where the group does not have the majority of the voting rights, but in substance controls the entity, the financial statements of the entity are fully consolidated. See exhibit I.1.
The interest of any third party in the shareholders equity and net income of fully consolidated companies is presented separately in the consolidated balance sheet and consolidated income statement, under the caption Minority interests (Note 18).
Losses applicable to the minority in excess of the minoritys interest in the subsidiarys equity are allocated against the interest of the Group, except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Any future gains reported by the subsidiary are allocated against the interest of the Group, until the excess losses recognized by the Group are covered.
From 1 January 2004, contingent assets, liabilities and contingent liabilities of an acquired subsidiary are measured at fair value at acquisition date. Any excess amount to the identifiable net assets is recognized as goodwill. If the acquisition cost is lower than the fair value of identifiable net assets acquired, the difference is recognized as a gain in the net income for the period the acquisition occurs. Minority interests are presented proportionally to the fair value of identifiable net assets.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of the acquisition or up to the effective date of disposal, as appropriate.
All intra-group transactions, balances, income and expenses are eliminated on consolidation process. Gains obtained in intragroup transactions are also eliminated on consolidation process.
Where necessary, adjustments are made to the financial statements of subsidiaries to adjust their accounting policies in line with those adopted by the Group.
Interests in joint ventures
Portugal Telecom has proportionally consolidated the financial statements of jointly controlled entities beginning on the date the join control is effective. Under this method, assets, liabilities, income and expenses of the entity is added, on a proportional basis, to the correspondent consolidated caption. Financial investments are classified as join controlled entities if the joint control agreement clearly demonstrates the existence of a joint control.
All transactions and balances with the jointly controlled entities are eliminated to the extent of the Groups interest in the joint venture.
Jointly controlled entities are presented in exhibit I.3.
Investments in associates
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy of the entity, but not control or joint control over those policies.
Financial investments on associated companies are accounted for the equity method (Exhibit I.2). Under the equity method, investments in associated companies are carried in the consolidated balance sheet at cost, adjusted periodically for the Groups share in the results of the associated company, against gains or losses on financial assets (Note 28), and other changes in net assets acquired. In addition, financial investments are adjusted for any impairment losses that may occur.
50
Losses in associated companies in excess to the cost of acquisition are not recognized, except where the Group has assumed any commitment to cover those losses.
Any excess to the cost of acquisition over the Groups share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the carrying amount of the investment and is assessed periodically for impairment as part of the investment. If the acquisition cost is lower than the fair value of identifiable net assets, the difference is recognized as a gain in the net income for the period the acquisition occurs.
Dividends received from associated companies are recognized as a reduction to the financial investment amount.
Profits and losses in transactions with associated companies are eliminated to the extent of the Groups interest in the associate, against the correspondent financial investment amount.
Non-current assets held for sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when: (1) the sale is highly probable and the asset is available for immediate sale in its present condition; (2) management assumed a commitment to the sale; and (3) the sale is expected to be completed within one year. Non-current assets and disposal group classified as held for sale are measured at the lower of the assets previous carrying amount and the fair value less costs to sell.
Goodwill
Goodwill represents the excess of the cost of acquisition over the Groups interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognized at the date of acquisition, in accordance IFRS 3. Pursuant the exception of IFRS 1, the Group used the provisions of IFRS 3 only for acquisition occurred after 1 January 2004. Goodwill related to acquisition made up to 1 January 2004, were recorded at their carrying amount as of that date and were subject to annual impairment tests thereafter.
Goodwill related to foreign investments is carried at the reporting currency of the investment, being translated to Euros at the exchange rate of the balance sheet date. Exchange gains or losses are recognized under the caption Cumulative foreign currency translation adjustments.
Goodwill is recognized under the caption Intangible assets (Note 30) and is not amortized. Goodwill is tested, on an annual basis, for impairment losses, which are recognized in the net income for the period they occur and can not be reversed in a subsequent period.
On disposal of a subsidiary, jointly control entity or associated companies, the goodwill allocated to that investment is included in the determination of the profit or loss on disposal.
b) Changes in the consolidated Group
During the first half of 2005, there were no significant change in the consolidated Group, except for those referred in Note 17.
CONSOLIDATED REPORT - FIRST HALF 2005 | 51 |
3. Summary of Significant Accounting Policies, Judgments and Estimates
a) Current classification
Assets to be realized and liabilities to be settled within one year from the date of the balance sheet are classified as current.
b) Inventories
Inventories are stated at average acquisition cost. An adjustment to the inventories carrying value is recognized when the net realizable value is lower than the average cost, through the net income of the period the loss occurs, under the caption Cost of products sold. Usually those losses are related to technological obsolescence and lower acquisition costs.
c) Tangible assets
Tangible assets are stated at acquisition or production cost, net of accumulated depreciation, accumulated impairment losses, if any, and investment subsidies. Acquisition cost includes: (1) the amount paid to acquire the asset; (2) direct expenses related with the acquisition process; (2) estimate of dismantling or removal of the assets (Note 2.g) and 36). Under the exception of IFRS 1, revaluation of tangible assets made in accordance with Portuguese legislation, prior to 1 January 2004, were not adjusted and were included as the deemed cost of the asset for IFRS purposes.
Tangible assets are depreciated on a straight line basis from the month they get in service or get concluded, during its expected useful live. The amount of the asset to be depreciated is deducted by any residual value. The depreciation rates correspond to the following estimated average useful lives:
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 telecommunication equipment | 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 |
Estimated losses resulting from the replacement of equipments before the end of their useful lives, are recognized as a deduction to the correspondent assets value. The cost of recurring maintenance and repairs is charged to net income as incurred. Costs associated to significant renewals and betterments are capitalized, if any future economic benefits are expected and those benefits could be reliably measured. Depreciation periods correspond to the period of the expected benefits.
When an asset is considered as available for sale, their carrying amount is classified to non-current assets and stop being depreciated.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the assets and is recognized in net income under the caption Gains and losses on disposal of fixed assets
52
d) Intangible assets
Intangible assets are stated at acquisition cost, net of accumulated depreciation and accumulated impairment losses, if any. Intangible assets are recognized only if any future economic benefits are expected and those benefits could be reliably measured.
Intangible assets includes basically goodwill (Note 2.a)), telecommunication licenses and related rights and software licenses.
Internally-generated intangible assets, namely research and development expenditure are recognized in net income when incurred. Development expenditure could be recognized initially as an intangible asset, if the company demonstrates the ability to complete the project and put in use or available for sale the asset.
Intangible assets, excepted goodwill, are depreciated on a straight-line basis from the month they get in use, during the following periods:
Telecommunication licenses: | ||
Band A and Band B held by Vivo | Period of the license | |
Property of the Basic Network held by PT Comunicações | Period of the concession (until 2025) | |
UMTS owned by TMN | Period of the license (until 2015) | |
Lease Rights | Period of the agreement (12 years) | |
Software licenses | 3 6 | |
Other intangible assets | 3 - 8 |
e) Investment property
Investment property includes basically buildings and land held to earn rentals and/or capital appreciation, and not for use in the normal course of the business (exploration, service render or sale).
Investment property is stated at its acquisition cost added by transaction costs and deducted by accumulated depreciation and accumulated impairment losses, if any. Expenditures incurred (maintenance, repairs, insurance and real state taxes) and any income obtain are recognized in net income of the period.
f) Impairment of tangible and intangible assets, excluding goodwill
The Group assesses annually, at balance sheet date, its tangible and intangible assets for impairment losses. This assessment is also made if any event or change resulting in an indication of impairment is detected. In case of any such indication, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.
Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Mainly cash-generating units identified in the Group correspond to the wireline, mobile and multimedia businesses in Portugal and mobile in Brazil. Recoverable amount is the higher of fair value less cost to sell and value in use. In assessing fair value less cost to sell, should be considered the amount received from an independent entity, deducted by direct cost related with the sale. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset.
If the recoverable amount of an asset is estimated to be less than its carrying amount, an impairment loss is recognized immediately in net income, under the caption Depreciation and amortization, and a detail of the impairment loss is provided.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior periods. A reversal of an impairment loss is recognized immediately in net income, under the caption Other operating revenues.
CONSOLIDATED REPORT - FIRST HALF 2005 | 53 |
g) Provisions and contingent liabilities
Provisions are recognized when the Group has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Provisions for restructuring are only recognized if a detail and formal plan exists and if the plan is communicated to related parties. Provisions for dismantling and removal costs are recognized from the day the assets are in use and if a reliable estimate of the obligation is possible (Note 36). The amount of the provision is discounted; being the corresponding effect of time recognized in net income, under the caption financial costs.
Provisions are updated on balance sheet date, considering the best estimates of the Group.
Where any of the above mentioned criteria does not exist, or is not accomplished, the Group discloses the event as a contingent liability, unless the cash out flow is not probable.
h) Pension benefits
Under a defined benefit plan, PT Comunicações and PT SI are responsible to pay to a group of employees a pension or a pension supplement. In order to fund those obligations, some pension funds were incorporated by PT Comunicações (Note 9.1. ).
The amount of the Groups liabilities with respect to pension and pension supplements is estimated based on actuarial valuations prepared annually by an independent actuary, using the Projected Unit Credit Method. Actuarial gains and losses that are in excess of the higher of present benefit obligation and fair value of the assets, are recognized in the net income on a straight-line basis during the average expected working live of active employees.
Prior year service gains or losses related to vested rights are recognized when occurred, otherwise are recognized on a straight-line basis until they become vested, usually the retirement date.
Accrued post retirement liabilities stated in the balance sheet corresponds to the net value of the present benefit obligation, the fair value of plan assets, actuarial gains or losses and unrecognized prior years service gains or losses.
Contributions made by the Group to define contribution post retirement benefit plans are recognized in net income when incurred.
i) Post retirement health care benefits
Under a defined benefit plan, PT Comunicações and PT SI are responsible to pay, after retirement date, health care expenses to a group of employees and relatives family. Health care plan is managed by Portugal Telecom Associação de Cuidados de Saúde (PT-ACS). In 2004 was incorporated PT Prestações Mandatária de Aquisição e Gestão de Bens, S.A. (PT Prestações), which manages autonomous funds to finance these obligations (Note 9.2. ).
The amount of the Groups liabilities with respect these benefits is estimated based on actuarial valuations prepared annually by an independent actuary, using the Projected Unit Credit Method. Actuarial gains and losses that are in excess of the higher of present benefit obligation and fair value of the assets, are recognized in the net income on a straight-line basis during the average expected working live of active employees.
Prior year service gains or losses related to vested rights are recognized when occurred, otherwise are recognized on a straight-line basis until they become vested, usually the retirement date.
Accrued post retirement liabilities stated in the balance sheet corresponds to the net value of the present benefit obligation, the fair value of plan assets, actuarial gains or losses and unrecognized prior years service gains or losses.
54
The group is also responsible for a defined contribution plan related with health care expenses during service time. The contributions to the mentioned plan are recognized in net income when incurred.
j) Pre-retirement, early retirement and suspended employees
The Group recognizes a liability for the payment of salaries up to the date of retirement and for pensions, pension supplements and health care expenses after that date, in relation to all employees that are under a suspended contract agreement that have pre-retired or early retired. This liability is recognized in the net income under the caption Work force reduction program when the Group singed the suspended contracts, or allows for pre-retirement or early retirement (Note 9).
k) Grants and subsidies
Grants and subsidies from the Portuguese Government and from the European Union are recognized at fair value when the receivable is probable and the company can comply with all requirements of the subsidys program.
Grants and subsidies to training and other operating activities are recognized in net income when the related expenses are recognized.
Grants and subsidies to acquire fixed assets are deducted to the carrying amount of the related assets.
l) Financial instruments
Financial assets and financial liabilities are recognized on the Groups balance sheet when the Group becomes a party to the contractual provisions of the instrument.
(i) Trade receivables
Trade receivables do not have any implicit interest and are presented at nominal value, net of allowances for estimated irrecoverable amounts.
(ii) Investments
Financial investments, excluding controlled and associated entities, are classified as: (i) held to maturity, (ii) held for trading and (iii) available for sale.
Held to maturity investments are classified as non-current assets, except for those the maturity date occurs within the next 12 months period as of balance sheet date. This caption includes all investments with defined maturity and if the Group intends to holds them until that date. Held for trading investments are classified as current assets and available for sale investments are classified as non-current assets.
All acquisitions and disposals of these investments are recognized on the date of the agreement or contract is signed, independently of the settlement date. Investments are initially recognized by their acquisition cost, including any transactions expenses.
Subsequent to the initial recognition, held for trading investments are measured at fair value through the net income and available for sale investments are measure at fair value, excluding expense for selling, through equity. Available for sale investments not listed in any active market and if it is not possible to estimate a reliable fair value, are recognized at acquisition cost, net of any impairment losses.
On disposed of or impairment of an available for sale investment, accumulated changes in the fair value of the investment previously recognized in equity are transferred to net income.
Held to maturity investments are recognized at acquisition cost, net of any impairment losses.
CONSOLIDATED REPORT - FIRST HALF 2005 | 55 |
(iii) Financial liabilities and equity investments
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Equity instruments issued by the Group are recognized based on the proceeds, net of any transaction cost.
Convertible loan notes issued by Portugal Telecom are recognized as compound instruments, comprising the following elements: (i) the present value of the debt, estimated using the prevailing market interest rate for similar non-convertible debt and recorded under debt liability; and (ii) the fair value of the embedded option for the holder to convert the loan note into equity, recorded under equity. As of balance sheet date, the debt component is recognized at amortized cost.
(iv) Bank loans
Bank loans are recognized as a liability based on the proceeds, net of any transaction cost. Interest cost, computed based on the effective interest rate, including premiums payable, are recognized when incurred under the same caption of the principal (if not paid during the same period).
(v) Trade payables
Trade payables are recognized at nominal value, which is substantially similar to the fair value.
(vi) Derivative financial instruments and hedge accounting
The Groups activities expose is primarily to financial risks of changes in foreign exchange rates and interest rates, therefore the Groups policy to contract derivative financial instrument is based on hedging those risks. The contract of any free stand derivative is subject to an extensive analysis and board approval.
Derivative financial instruments are initially measured at fair value on the contract date, and are remeasured to fair value at subsequent reporting dates.
Hedge Accounting
The provisions and requirements of IAS 39 should be met in order to recognize hedge accounting.
Changes in fair value of derivative financial instruments classified as fair value hedge are recognized in net income of the period, as well as the changes in the value of the covered asset or liability.
The efficient portion of changes in fair value of derivative financial instruments classified as cash flow hedge is recognized directly in shareholders equity, under Other reserves and the inefficient portion is recognized in net income. When changes in the value of the covered asset or liability are recognized in net income, the corresponding amount of the derivative financial instrument previously recognized under Other reserves is transferred to net income.
The efficient portion of changes in fair value of derivative financial instruments entered to cover foreign currency financial investments, is recognized in shareholders equity under the caption Cumulative foreign currency translation adjustments and the inefficient portion is recognized in net income. If the hedging instrument is not a derivative, changes in fair value are recognized in equity, under the caption Cumulative foreign currency translation adjustments.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting under the provisions of IAS 39.
56
Changes in fair value of derivative financial instruments that, in accordance with internally policies, were contracted to economically hedge any asset or liability, but do not comply with the provisions and requirements of IAS 39 to be accounted for as hedge, are recognized in net income.
(vii) Treasury shares
Treasury shares are recognized in shareholders equity, under the caption Treasury shares, at acquisition cost and gains or losses obtained in the sale are recorded under Other reserves.
Equity swaps on own shares entered by Portugal Telecom, are recognized as a financial liability, being accounted as an acquisition of treasury shares on the inception date of the contract.
(viii) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
In the consolidated cash flow statement, cash and cash deposits also includes overdrafts recognized under the caption Short term debt.
(ix) Qualified Technological Equipment transactions
The Group entered in Qualified Technological Equipment transaction (QTE), where some telecommunication equipment was sold to certain foreign entities. Simultaneously, those entities made leasing contracts of the equipment with special purpose entities, which made conditional sale agreements to sell the related equipments to the Group. The Group maintained the legal ownership of those equipments.
These transactions correspond to an operation of sale and lease back and the equipment continued to be recorded in the Groups consolidated balance sheet. The Group obtained the majority of the economic benefits of the special purpose entities, therefore the financial statements of those entities were fully consolidated. Consolidated non-current assets includes an amount equivalent to the sale amount of the equipments and non-current liabilities includes the future payment rents under the leasing contract (Note 27). As of balance sheet date those amounts are measured at fair value.
Up-front fees received from this transaction are recognized on a straight-line basis during the correspondent period of the contracts.
m) Own work capitalized
Certain internal costs (materials, work force and transportation) incurred to build or produce tangible assets could be capitalized if
:
- assets are identifiable;
- assets will generate future economic benefits;
- expenses with development are
reliable measured.
The amounts capitalized are deducted to the correspondent nature of the cost incurred and no margin in recognized. When any of the above mentioned criteria is not met, the expense is recognized in net income.
Financial costs are not capitalized and expenses incurred during investigation are recognized in net income when incurred.
CONSOLIDATED REPORT - FIRST HALF 2005 | 57 |
n) Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risk and rewards of ownership to the lessee. All other leases are classified as operating leases. The classification of leases depends on the substance of the operation and not on the term sheet of the contract.
Assets acquired under leases and the corresponding liability to the lessor, are accounted for the finance method, in accordance with the lease payment plan. Interest included in the rents and the depreciation of the assets is recognized in net income in period they occur.
Under operating leases, rents are recognized on a straight-line basis during the period of the lease.
o) Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax. Income tax is recognized in accordance with IAS 12.
Portugal Telecom and PT Multimédia 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 and PT Multimédia, are taxed individually based on their respective taxable income, at the applicable tax rates.
The tax currently payable is based on taxable profit for the year and the deferred tax is based on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is charged to net income, except when it relates to items charged or credited directly to shareholders equity, in which case the deferred tax is also recognized directly in shareholders equity.
p) Revenue recognition
Revenues from fixed line telecommunications are recognized by their gross amount when services are rendered. 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 and accrued at the end of the month. Differences between accrued amounts and the actual unbilled revenues, which have not been significant, are recognized in the following period.
Fees from international telecommunications services are remitted to operators in the country in which calls are terminated based on traffic records of the country of origin and rates established in agreements between the telecommunication 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.
Revenues from telephone line rentals are recognized as an operating lease in the period to which they apply, under the caption Other operating revenues.
Revenues from ISP services result essentially from monthly subscription fees and telephone traffic when the service is used by customers. These revenues are recognized when the service is rendered.
58
Advertising revenues from telephone directories and related costs are recognized in the period in which the directories are effective.
Revenues from mobile telephony services result essentially from the use of the wireless network, by customers or other operators. The moment in which revenues are recognized and the correspondent caption are as follows:
Nature of the revenue | Caption | Moment of recognition | ||
Use of the network | Services rendered | In the month the service is rendered | ||
Interconnection fees | Services rendered | In the month the service is rendered | ||
Roaming | Services rendered | In the month the service is rendered | ||
Pre-paid cards | Services rendered | When the service is rendered | ||
Terminal equipment | Sales | When the sale occurs |
Revenues from subscription cable and satellite television result essentially from and are recognized as follows: (i) monthly subscription fees for the use of the service are recognized in the period the service is rendered; (ii) advertising placed in the cable television channels are recognized in the period the advertising in inserted; (iii) rental of equipment is recognized in the period it is rented; and (iv) sale of equipment is recognized at the moment of sale.
Revenues from bundling services or products are allocated to each one of its components and are recognized separately in accordance with the methodology adopted to each one of those components.
Subscriber acquisition costs (SACs) in wireline, mobile and pay-Tv and internet businesses are recognized when incurred. The Group did not adopt the possibility to recognize those expenses as an intangible asset.
Programming costs are determined based on the number of subscriptions and are recognized when incurred.
Revenues from the exhibition of films results from the sale of cinema tickets and revenues from the distribution of films result from the sale to other cinema operators of distribution rights acquired by Lusomundo Audiovisuais. These revenues are recognized in the period of the exhibition or in the period of the sale of the rights.
In each balance sheet date, trade receivables are adjusted for irrecoverable amounts against net income of the period, under the caption Provisions and adjustments.
All other expenses and costs are recognized when incurred, on an accrued basis, independently of the billing, receipt or payment moment.
q) 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 prevailing at such date. The resulting gains or losses on foreign exchange transactions are recognized in net income, except for unrealized exchange differences in long-term intra-group balances, representing an extension of the related investment and where settlement is not expected in the foreseeable future, which are recognized in shareholders equity, under the caption Cumulative foreign currency translation adjustments, Exchange differences on non-monetary items are recognized in shareholders equity.
The financial statements of subsidiaries operating in other countries are translated to Euros, using the following exchange rates:
CONSOLIDATED REPORT - FIRST HALF 2005 | 59 |
The effect of translation differences is recognized in shareholders equity, under the caption Cumulative foreign currency translation adjustments.
The Group adopted the exception of IFRS 1 relating to cumulative translation adjustments as of 1 January 2004 and transferred this amount from Cumulative foreign currency adjustments to Retained earnings. From 1 January 2004 the Group recognizes all translations adjustments in shareholders equity and therefore only those amounts will be transferred to net income upon the disposed of related investments.
r) Borrowing costs
Borrowing costs related to loans are recognized in net income when incurred. The Group does not capitalize any borrowing costs related with loans to finance the acquisition, construction or production of any asset.
s) Cash flows statement
Cash flows statement is prepared under IAS 7, using the direct method. The Group classifies all highly liquid investments purchased with original maturity of three months or less as cash and cash equivalent. Cash and cash equivalent item presented in the cash flows statement also includes a negative amount related with overdrafts, classified in the balance sheet under Short-term debt.
Cash flows are classified in the cash flows statements according three main categories, in accordance with their nature: (1) operating activities; (2) investing activities; and (3) financing activities. Cash flows from operating activities include collections from customers, payments to suppliers, payments to personnel, payments related with post retirement benefits and other collections and payments related with operating activities. Cash flows from investing activities include the acquisitions and disposals of investments in associated companies and purchase and sale of property, plant and equipment. Cash flows from financing activities include borrowing and repayments of debt, acquisition and sale of treasury shares and payments of dividends to shareholders.
t) Subsequent events
Events occurred after the balance sheet date that could influence the value of any asset or liability as of that date, are considered when preparing the financial statements for the period. As such, those events are disclosed in the notes to the financial statements, if material.
Critical judgments and estimates
In preparing the financial statements and accounting estimates herein, management has made use of its better knowledge of past and present events and used certain assumptions in relation to future events. The most significant accounting estimates reflected in the consolidated financial statements as at 30 June 2005 are as follows:
60
Estimates used are based on the best information available during the preparation of consolidated financial statements, although future events, not controlled by the company nor foreseeable by the company, could occur and have an impact on the estimates. Changes to the estimates used by the management that occur after the date of these consolidated financial statements, are recognized in net income, in accordance with IAS 8, using a prospective methodology.
The main estimates used by the management are included in the correspondent notes to the financial statements.
4. Changes in accounting policies, estimates and errors
During the six months period ended June 30, 2005 did not occurred any changes in the accounting policies used by the Group, when compared to those ones used in preparing the financial statements of 2004 and also any material error related with previous periods were recognized.
As of the date of these financial statements, accounting rules issued by IASB and IFRIC applicable after June 30, 2005 are as follows:
CONSOLIDATED REPORT - FIRST HALF 2005 | 61 |
The Group did not adopt the standards and interpretations mentioned above and does not anticipate a material impact of their adoption.
5. Exchange rates used to translated foreign currency financial statements
As at 30 June 2005, assets and liabilities denominated in foreign currencies were translated to Euros using the following exchange rates disclosure by the Bank of Portugal:
Currency | Code | Rate | Currency | Code | Rate | |||||
Danish Krone | DKK | 7.4515 | Swiss Franc | CHF | 1.5499 | |||||
Norwegian Krone | NOK | 7.9155 | Angolan Kwanza | AOA | 107.3905 | |||||
Swedisk Krone | SEK | 9.4259 | British Pound | GBP | 0.6742 | |||||
Moroccan Dirham | MAD | 10.9596 | Mozambique Metical | MZM | 29,637 | |||||
São Tomé Dobra | STD | 12,122.06 | Macau Pataca | MOP | 9.681 | |||||
Australian Dollar | AUD | 1.5885 | Argentine Peso | ARS | 3.501 | |||||
US Dollar | USD | 1.2092 | Botswana Pula | BWP | 6.604 | |||||
Canadian Dollar | CAD | 1.4900 | South African Rand | ZAR | 8.0254 | |||||
Hong Kong Dollar | HKD | 9.3990 | Brazilian Real | BRL | 2.8489 | |||||
Cape Verde Escudo | CVE | 110.265 | Kenyan Shilling | KES | 92.0806 | |||||
Hungarian Forint | HUF | 274.24 | Ugandan Shilling | UGX | 2,100.99 | |||||
CFA Franc | XOF | 655.957 | Japonese Yen | JPY | 133.95 |
During the first half of 2005, profit and loss statements of foreign currency subsidiaries were translated to Euros using the following exchange rates:
Currency | Code | Rate | Currency | Code | Rate | |||||
Moroccan Dirham | MAD | 11.0715 | Mozambique Metical | MZM | 26,703.8 | |||||
US Dollar | USD | 1.2855 | Macau Pataca | MOP | 10.3225 | |||||
São Tomé Dobra | STD | 13,002.7 | Argentine Peso | ARS | 3.7177 | |||||
Cape Verde Escudo | CVE | 110.265 | Botswana Pula | BWP | 6.1262 | |||||
Hungarian Forint | HUF | 247.36 | Brazilian Real | BRL | 3.314 | |||||
CFA Franc | XOF | 655.957 | Kenyan Shilling | KES | 97.3845 | |||||
Swiss Franc | CHF | 1.5463 | Ugandan Shilling | UGX | 2,217.98 | |||||
Angolan Kwanza | AOA | 112.6864 |
62
6. Operating Revenues
Consolidated operating revenues for reportable segments, in the first half of 2005 and 2004 are presented below:
2005 | 2004 | |||
Wireline businesses (Note 7.a)) | 1,035,013,690 | 1,064,367,952 | ||
Services rendered | 1,013,966,129 | 1,036,802,651 | ||
Sales | 15,626,530 | 16,082,638 | ||
Other operating revenues | 5,421,031 | 11,482,663 | ||
Domestic Mobile - TMN (Note 7.b)) | 694,691,775 | 689,751,044 | ||
Services rendered | 635,685,149 | 628,057,873 | ||
Sales | 56,573,198 | 56,431,852 | ||
Other operating revenues | 2,433,428 | 5,261,319 | ||
Brazilian Mobile - Vivo (Note 7.c)) | 896,522,277 | 764,112,163 | ||
Services rendered | 780,520,296 | 694,428,521 | ||
Sales | 92,936,347 | 56,148,759 | ||
Other operating revenues | 23,065,634 | 13,534,883 | ||
PT Multimédia (Note 7.d)) | 305,350,699 | 285,708,768 | ||
Services rendered | 281,478,018 | 260,746,617 | ||
Sales | 15,951,194 | 20,617,550 | ||
Other operating revenues | 7,921,487 | 4,344,601 | ||
Other businesses | 92,638,334 | 77,211,121 | ||
Services rendered | 88,701,781 | 73,209,585 | ||
Sales | 1,031,075 | 1,532,641 | ||
Other operating revenues | 2,905,478 | 2,468,895 | ||
3,024,216,775 | 2,881,151,048 | |||
Consolidated operating revenues in the first half of 2005 and 2004 by geographic areas, are as follows:
2005 | 2004 | |||
Portugal | 2,025,163,341 | 2,031,423,703 | ||
Brazil | 960,607,167 | 810,755,823 | ||
Other countries | 38,446,267 | 38,971,522 | ||
3,024,216,775 | 2,881,151,048 | |||
CONSOLIDATED REPORT - FIRST HALF 2005 | 63 |
7. Segment Reporting
The Company identified the following reportable segments:
Wireline Business (1) | Retail |
Wholesale | |
Data and corporate | |
Other | |
Domestic Mobile | TMN |
Brazilian Mobile | Vivo |
Multimedia Businesses(2) | Pay TV and Cable Internet |
Distribution and cinematographic exhibition | |
Other | |
(1) Wireline services are mainly rendered by PT Comunicações, PT Prime and PT.com. (2) Multimedia services are mainly rendered by TV Cabo Portugal, PT Conteúdos, Lusomundo Audiovisuais and Lusomundo Cinemas. |
Profit and loss statements for each reportable segment, for the first half of 2005 and 2004, are presented below:
64
a) Wireline business | ||||
2005 | 2004 | |||
Operating revenues: | ||||
Services rendered - external customers | 1,013,966,129 | 1,036,802,651 | ||
Services rendered - inter group revenues | 76,864,391 | 71,531,902 | ||
Sales - external customers | 15,626,530 | 16,082,638 | ||
Sales - inter group sales | 47,658 | 240,116 | ||
Other operating revenues - external customers | 5,421,031 | 11,482,663 | ||
Other operating revenues - inter group sales | 4,127,948 | 8,442,602 | ||
Total operating revenues | 1,116,053,687 | 1,144,582,572 | ||
Recurring operating costs: | ||||
Wages and salaries | 145,021,873 | 137,579,472 | ||
Post retirement benefits | 72,069,000 | 79,680,000 | ||
Direct costs | 196,864,551 | 242,955,126 | ||
Depreciation and amortization | 173,630,933 | 188,086,719 | ||
Costs of products sold | 14,872,792 | 19,037,915 | ||
Marketing and publicity | 23,266,958 | 15,542,782 | ||
Support services | 65,616,348 | 52,053,025 | ||
Maintenance and repairs | 38,848,741 | 44,346,162 | ||
Supplies and external services | 72,620,917 | 66,065,179 | ||
Provisions and adjustments | (15,665,065) | 6,972,897 | ||
Taxes | 3,415,177 | 3,716,248 | ||
Other net operating costs | 4,912,096 | 11,145,669 | ||
Total recurring operating costs | 795,474,321 | 867,181,194 | ||
Recurring operating income | 320,579,366 | 277,401,378 | ||
Work force reduction program costs | 96,793,283 | 3,906,487 | ||
Losses on disposals of fixed assets, net | (36,769) | 878,691 | ||
Other costs | 1,431,992 | 4,659,705 | ||
Income before financial items and income taxes | 222,390,860 | 267,956,495 | ||
Interests, net | (4,722,561) | 7,799,716 | ||
Net foreign currency exchange losses/(gains) | (1,512,119) | (999,113) | ||
Losses/(Gains) on financial assets | (1,644,499) | 138,742 | ||
Equity in earnings of affiliated companies, net | (8,855) | (197,348) | ||
Other financial expenses/(income), net | 1,482,892 | 4,914,149 | ||
Income before income tax | 228,796,002 | 256,300,349 | ||
Provision for income taxes | (63,458,996) | (68,434,513) | ||
Net income | 165,337,006 | 187,865,836 | ||
Total assets and liabilities of this segment as at 30 June 2005 and 31 December 2004 are as follows:
2005 | 2004 | |||
Assets | 3,822,813,704 | 3,945,048,520 | ||
Liabilities | 2,190,044,645 | 2,240,062,004 |
Capital expenditures in tangible and intangible assets for this reportable segment for the first half of 2005 and 2004 were 96.5 million euros and 84.2 million euros, respectively.
As at 30 June 2005, the total employees in wireline business totaled 8,257 employees.
CONSOLIDATED REPORT - FIRST HALF 2005 | 65 |
b) Domestic Mobile TMN | ||||
2005 | 2004 | |||
Operating revenues: | ||||
Services rendered - external customers | 635,685,149 | 628,057,873 | ||
Services rendered - inter group revenues | 51,488,961 | 73,747,928 | ||
Sales - external customers | 56,573,198 | 56,431,852 | ||
Sales - inter group sales | 1,946,530 | 2,040,745 | ||
Other operating revenues - external customers | 2,433,428 | 5,261,319 | ||
Other operating revenues - inter group sales | (3,052) | 183,400 | ||
Total operating revenues | 748,124,214 | 765,723,117 | ||
Recurring operating costs: | ||||
Wages and salaries | 28,496,771 | 27,307,766 | ||
Direct costs | 155,269,008 | 151,011,647 | ||
Depreciation and amortization | 101,515,898 | 95,318,977 | ||
Costs of products sold | 77,619,240 | 59,819,497 | ||
Marketing and publicity | 16,190,699 | 14,999,260 | ||
Support services | 8,983,801 | 5,907,611 | ||
Maintenance and repairs | 16,171,749 | 16,692,188 | ||
Supplies and external services | 85,497,107 | 89,757,417 | ||
Provisions and adjustments | 8,856,438 | 26,397,051 | ||
Taxes | 15,014,450 | 15,294,560 | ||
Other net operating costs | 1,809,853 | 423,311 | ||
Total recurring operating costs | 515,425,014 | 502,929,285 | ||
Recurring operating income | 232,699,200 | 262,793,832 | ||
Losses on disposals of fixed assets, net | 749,927 | 716,203 | ||
Other costs | 711,998 | (83,278) | ||
Income before financial results and income taxes | 231,237,275 | 262,160,907 | ||
Interests, net | (89,234) | (1,277,325) | ||
Net foreign currency exchange losses/(gains) | (300,958) | (216,090) | ||
Equity in earnings of affiliated companies, net | 361 | 160 | ||
Other financial expenses/(income), net | 464,814 | 481,962 | ||
Income before income tax | 231,162,292 | 263,172,200 | ||
Provision for income taxes | (63,250,031) | (71,401,539) | ||
Net income | 167,912,261 | 191,770,661 | ||
Total assets and liabilities of this segment as at 30 June 2005 and 31 December 2004 are as follows:
2005 | 2004 | |||
Assets | 1,624,412,809 | 1,416,976,548 | ||
Liabilities | 712,747,196 | 741,654,165 |
Capital expenditures in tangible and intangible assets for this reportable segment for the first half of 2005 and 2004 were 47.7 million euros and 35.4 million euros, respectively.
As at 30 June 2005, the total employees in this segment totaled 1,155 employees.
66
c) Brazilian Mobile | ||||
2005 | 2004 | |||
Operating revenues: | ||||
Services rendered - external customers | 780,520,296 | 694,428,521 | ||
Services rendered - inter group revenues | - | 3,466 | ||
Sales - external customers | 92,936,347 | 56,148,759 | ||
Other operating revenues - external customers | 23,065,634 | 13,534,883 | ||
Other operating revenues - inter group sales | (102,831) | (2,846) | ||
Total operating revenues | 896,419,446 | 764,112,783 | ||
Recurring operating costs: | ||||
Wages and salaries | 46,566,369 | 42,866,985 | ||
Direct costs | 96,386,017 | 77,171,913 | ||
Depreciation and amortization | 170,484,361 | 138,978,390 | ||
Costs of products sold | 188,496,015 | 159,573,488 | ||
Marketing and publicity | 31,997,119 | 28,685,380 | ||
Support services | 53,827,893 | 31,101,048 | ||
Maintenance and repairs | 10,930,211 | 1,489,360 | ||
Supplies and external services | 115,486,519 | 100,788,545 | ||
Provisions and adjustments for doubtful receivables and other | 42,028,634 | 22,055,716 | ||
Taxes | 51,782,526 | 34,544,309 | ||
Other net operating costs | 17,908,555 | 2,500,506 | ||
Total recurring operating costs | 825,894,219 | 639,755,640 | ||
Recurring operating income | 70,525,227 | 124,357,143 | ||
Losses on disposals of fixed assets, net | (366,814) | 678,064 | ||
Other costs | 2,231,794 | 1,241,271 | ||
Income before financial results, income taxes and minority interests | 68,660,247 | 122,437,808 | ||
Interests, net | 45,447,198 | 36,255,365 | ||
Net foreign currency exchange losses/(gains) | (9,804,916) | 8,767,057 | ||
Losses/(Gains) on financial assets | 30,031,932 | 8,424,354 | ||
Other financial expenses/(income), net | 11,582,095 | 14,961,425 | ||
Income before income tax | (8,596,062) | 54,029,608 | ||
Provision for income taxes | (39,252,320) | (39,628,474) | ||
Net income before minority interests | (47,848,382) | 14,401,134 | ||
Loss/(Income) applicable to minority interests | (550,649) | (26,071,129) | ||
Net income | (48,399,031) | (11,669,995) | ||
Total assets and liabilities of this segment as at 30 June 2005 and 31 December 2004 are as follows: | ||||
2005 |
2004 | |||
Assets | 4,959,825,849 |
3,999,900,349 | ||
Liabilities | 1,809,415,880 |
1,562,762,795 |
Capital expenditures in tangible and intangible assets for this reportable segment for the first half of 2005 and 2004 were 143.0 million euros and 68.9 million euros, respectively.
As at 30 June 2005, the total employees in this segment totaled 3,016 employees.
CONSOLIDATED REPORT - FIRST HALF 2005 | 67 |
d) PT Multimédia | ||||
2005 |
2004 | |||
Continued Operations: | ||||
Operating revenues: | ||||
Services rendered - external customers | 281,478,018 | 260,746,617 | ||
Services rendered - inter group revenues | 257,460 | 389,235 | ||
Sales - external customers | 15,951,194 | 20,617,550 | ||
Sales - inter group sales (i) | 138,616 | (186,097) | ||
Other operating revenues - external customers | 7,921,487 | 4,344,601 | ||
Other operating revenues - inter group sales (ii) | 63,267 | (45,455) | ||
Total operating revenues | 305,810,042 | 285,866,451 | ||
Recurring operating costs: | ||||
Wages and salaries | 21,153,256 | 20,947,286 | ||
Direct costs | 97,295,837 | 89,137,755 | ||
Depreciation and amortization | 28,295,994 | 24,810,884 | ||
Costs of products sold | 8,140,586 | 7,060,756 | ||
Marketing and publicity | 8,959,251 | 11,701,919 | ||
Support services | 19,344,535 | 17,002,888 | ||
Maintenance and repairs | 10,608,700 | 6,574,083 | ||
Supplies and external services | 41,572,615 | 42,093,568 | ||
Provisions and adjustments | 3,884,878 | 1,974,330 | ||
Taxes (ii) | (124,164) | 1,228,071 | ||
Other net operating costs | 170,354 | 1,957,027 | ||
Total recurring operating costs |
239,301,842 | 224,488,567 | ||
Recurring operating income | 66,508,200 | 61,377,884 | ||
Losses on disposals of fixed assets, net | (48,779) | (48,484) | ||
Other costs | 49,606 | 4,410,011 | ||
Income before financial results, income taxes and minority interests | 66,507,373 | 57,016,357 | ||
Interests, net | 2,385,899 | 468,918 | ||
Net foreign currency exchange losses/(gains) | 572,677 | 601,109 | ||
Equity in earnings of affiliated companies, net | (417,454) | 1,716,980 | ||
Other financial expenses/(income), net | (1,643,183) | 101,449 | ||
Income before income tax and minority interests | 65,610,171 | 55,128,155 | ||
Provision for income taxes | (17,486,824) | (16,904,145) | ||
Net income from continued operations, before minority interests | 48,123,347 | 38,224,010 | ||
Descontinued Operations: | ||||
Net income from descontinued operations, before minority interests | (3,958,301) | 114,034 | ||
Net income before minority interests | 44,165,046 | 38,338,044 | ||
Loss / (income) applicable to minority interests | (138,247) | (1,088,341) | ||
Net income | 44,026,799 | 37,249,703 | ||
(i) | In the first half of 2004, this caption was negative as a result of accrued discounts with Groups companies. |
(ii) | In the first half of 2005, this caption was negative as a result of VAT recovered from credit notes. |
68
Total assets and liabilities of this segment as at 30 June 2005 and 31 December 2004 are as follows: | ||||
2005 |
2004 | |||
Assets | 1,030,844,172 | 1,089,945,254 | ||
Liabilities | 650,063,260 | 579,252,787 |
Capital expenditures in tangible and intangible assets for this reportable segment for the first half of 2005 and 2004 were 55.6 million euro and 26.1 million euros, respectively.
As at 30 June 2005, the total employees in this segment totaled 1,324 employees.
The net income for this reportable segment does not include minority interests, which as at 30 June 2005 and 2004 amounted to 19,320,987 euros and 16,103,443 euros, respectively. The caption Minority interests presented in the net income of the reportable segment corresponds to the minority interest of PT Multimédia subsidiaries.
e) Reconciliation of operating revenues, net income and assets
e1) Operating Revenues
As at 30 June 2005 and 2004, the reconciliation between operating revenues of reportable segments and consolidated operating revenues, is as follows:
2005 |
2004 | |||
Total relating to reportable segments | 3,066,407,389 | 2,960,284,923 | ||
Total relating to other operations | 228,189,176 | 170,447,491 | ||
Elimination of intragroup revenues | (270,379,790) | (249,581,366) | ||
3,024,216,775 | 2,881,151,048 | |||
e2) Net Income
For the first half of 2005 and 2004, the reconciliation between net income of reportable segments and consolidated net income, is as follows:
2005 |
2004 | |||
Total relating to reportable segments | 328,877,035 | 405,216,205 | ||
Total relating to other operations | (18,783,376) | 10,187,652 | ||
Other items: | ||||
Financial expenses related with loans obtained at holding level | (78,072,416) | (79,110,484) | ||
Gains/(Losses) on financial assets | (20,641,601) | 57,520,361 | ||
Equity accounting in losses of affiliated companies, net | 31,596,684 | 6,569,982 | ||
Tax effect | 27,146,355 | 5,937,284 | ||
Minority interests not included on reportable segments | (11,138,862) | (20,647,117) | ||
258,983,819 | 385,673,883 | |||
CONSOLIDATED REPORT - FIRST HALF 2005 | 69 |
e3) Total assets
As at 30 June 2005 and 31 December 2004, the reconciliation between assets of reportable segments and consolidated assets, is as follows:
2005 |
2004 |
|||
Total assets relating to reportable segments | 11,437,896,534 | 10,451,870,671 | ||
Total assets relating to other operations | 2,795,436,314 | 2,192,160,260 | ||
Goodwill | 576,565,603 | 601,755,149 | ||
Investments in group companies and other investments | 352,541,402 | 333,819,956 | ||
15,162,439,853 | 13,579,606,036 | |||
2005 |
2004 | |||
Salaries | 271,984,716 | 255,117,061 | ||
Employee Benefits | 48,217,831 | 46,734,047 | ||
Insurance | 1,477,451 | 1,335,160 | ||
Other | 14,496,411 | 3,836,416 | ||
336,176,409 | 307,022,684 | |||
9. Post Retirement Benefits
9.1. Pension Benefits
As referred to in Note 3.h) PT Comunicações is responsible 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 employees of Telecom Portugal hired by CTT prior to May 14, 1992, or who were retired on that date, are entitled to a 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) | The retired and active employees who were formerly employees of TLP and who were hired prior to 23 June 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 80% 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 employees of TDP hired prior to 23 June 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 80% 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) | 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). |
70
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. |
PT SI employees who were transferred from PT Comunicações and Marconi and were covered by pension plans of those companies are entitled to a pension supplement.
The actuarial valuations for these plans as at 31 December 2004, prepared by an independent actuary, used the projected unit credit method and considered the following actuarial assumptions and rates:
Rate of return on pension fund assets | 6,0% | |
Pension liabilities discount rate | 5,75% | |
Salaries liabilities discount rate | 4,0% | |
Salary growth rate | 3,0% | |
Pension growth rate | 2,0% | |
Inflation rate | 2,0% | |
Actuarial method | Projected Unit Credit |
The rate of return on pension fund assets was estimated based on historical information of the return on portfolio assets, the expected portfolio in future years (defined in accordance with the expected maturity of the liabilities) and certain financial market performance indicators usually considered on market analysis.
The demographic assumptions considered on this actuarial study were as follows:
Mortality table:
Employees (whilst in active service): | |
Males | AM (92) |
Females | AF (92) |
Pensioners and employees who have taken early : | |
Males | PA (90)m less 3 years |
Females | PA (90)f less 3 years |
Disability table: Swiss Reinsurance Company
Turnover of employees: Nil
Based on this study, the benefit obligation and the fair value of pension funds as at 31 December 2004 is as follows:
Projected benefit obligation ("PBO"): | ||
Retired, pre-retired and suspended employees | 1,901,125,000 | |
Salaries and gratuiries to pre-retires and suspended employees | 986,385,800 | |
Active employees | 695,787,000 | |
Lusomundo Media (i) | 9,081,000 | |
3,592,378,800 | ||
Plan assets at fair value | (1,972,620,000) | |
Projected benefit obligation, in excess of plan assets | 1,619,758,800 | |
(i) | The benefits of Lusomundo Medias employees are recorded in the balance sheet as at 30 June 2005 as discontinued operations (Note 17). |
CONSOLIDATED REPORT - FIRST HALF 2005 | 71 |
As at 31 December 2004 the plan assets portfolio are as follows:
Amount |
% | |||
Equities | 681,516,951 | 34.5% | ||
Bonds | 671,112,135 | 34.0% | ||
Property | 259,565,035 | 13.2% | ||
Real estate investment funds | 54,654,566 | 2.8% | ||
Cash, treasury bills, short-term stocks and net current assets | 305,771,313 | 15.5% | ||
1,972,620,000 | 100.0% | |||
Of the total investments in property, approximately 83% were leased to the Group.
As at 31 December 2004 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:
Projected benefit obligation, in excess of plan assets | 1,619,758,800 | |
Actuarial losses, net (i) | (971,310,944) | |
Prior service cost | 1,772,000 | |
Pension Liabillities | 650,219,856 | |
(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. |
The pension liabilities were recorded in the consolidated balance sheet as at 31 December 2004 in non-current liabilities under the caption Post retirement liability.
A summary of the components of the net periodic pension cost for the six months periods ended 30 June 2005 and 2004 is presented below:
2005 |
2004 | |||
Service cost | 9,943,500 | 9,429,410 | ||
Interest cost | 96,878,000 | 86,579,000 | ||
Expected return on plan assets | (60,336,500) |
(55,600,000) | ||
Net amortization of deferrals | 11,310,500 | 18,015,500 | ||
Sub-total | 57,795,500 | 58,423,910 | ||
Curtailment costs related to early retirements, pre-retirements | 86,143,108 | 2,786,060 | ||
and suspended contracts | ||||
Net periodic pension cost | 143,938,608 | 61,209,970 | ||
The contributions made to the pension funds and payments of salaries to pre-retired and suspended employees in the six months periods ended 30 June 2005 and 2004 were as follows:
2005 | 2004 | |||
Contributions to pension funds: | ||||
Employers' contributions | 100,867,616 | 92,835,000 | ||
Plan participants' contributions | 4,493,414 | 4,641,000 | ||
105,361,030 | 97,476,000 | |||
Payments of salaries to pre-retires and suspended employees | 66,017,118 | 61,463,598 | ||
72
9.2. Health Care Benefits
As referred to in Note 3.i) PT Comunicações is responsible for the payment of post retirement health care benefits to certain active employees, suspended employees, pre-retired employees, retired employees and their eligible relatives.
This plan includes all employees hired until 31 December 2003 and 1 February 1998 by PT Comunicações and Marconi, respectively. Certain employees of PT SI who were transferred from PT Comunicações are also covered by this health care benefits plan.
The following parties contribute to fund this health care plan:
The actuarial valuations for these plans prepared by an independent actuary, as at 31 December 2004, used the projected unit credit method and considered the following assumptions and rates:
Health care cost trend rate: | ||
Next 5 years | 3,5% | |
Years thereafter | 3,0% | |
Rate of return on fund assets | 6,0% | |
Discount Rate | 5,75% | |
Salary growth rate | 3,0% | |
Inflation rate | 2,0% |
The rate of return on fund assets was estimated based on historical information of the return on portfolio assets, the expected portfolio in future years (defined in accordance with the expected maturity of the liabilities) and certain financial market performance indicators usually considered on market analysis.
The demographic assumptions considered on this actuarial study were as follows:
Mortality table:
Employees (whilst in active service): | |
Males | AM (92) |
Females | AF (92) |
Pensioners and employees who have taken early : | |
Males | PA (90)m less 3 years |
Females | PA (90)f less 3 years |
Based on this study, the accumulated post retirement health care benefit obligation as at 31 December 2004 was 701,797,100 euros. The reconciliation between the post retirement health care obligations and the liability recorded in the balance sheet as of that date is presented below:
Accumulated health care benefit obligation | 701,797,100 | |
Actuarial losses, net (i) | (123,234,572) | |
Prior year service gain | 3,333,000 | |
Post retirement health liability | 581,895,528 | |
CONSOLIDATED REPORT - FIRST HALF 2005 | 73 |
(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 the first half of 2005, the Group incorporated an autonomous fund to cover the liabilities with post retirement health care benefits and made an initial contribution of 300,000,000 euros. This autonomous fund is managed by PT Prestações in accordance with an investment policy defined by the Group and consistent with the maturity and risk of the liabilities.
A summary of the components of the net periodic post retirement health care cost for the six months periods ended 30 June 2005 and 2004 is presented below:
2,005 |
2,004 | |||
Service cost | 2,585,500 | 2,550,000 | ||
Interest cost | 19,404,000 | 18,411,500 | ||
Expected return on assets | (9,000,000) | - | ||
Net amortization of deferrals | 1,390,500 | 412,000 | ||
14,380,000 | 21,373,500 | |||
Curtailment cost related to early retirements, | ||||
pre-retirements and suspended contracts |
9,124,378 | 172,966 | ||
Net periodic post retirement health care costs | 23,504,378 | 21,546,466 | ||
During the first half of 2005, the contribution made to PT-ACS, net of the contributions from the SNS amounted to 15,609,003 euros.
9.3. Balance sheet captions
The movements occurred during the first half of 2005 in the accrued post retirement liability, was as follows:
Change in |
||||||||||||
December 31, |
Consolidation |
Net Periodic |
Curtailment |
Payments/ |
June 30, | |||||||
2004 |
Perimetrer |
Cost |
Cost |
Contributions |
2005 | |||||||
Pension benefits | 650,219,856 | (8,846,352) | 57,795,500 | 86,143,108 | (166,884,734) | 618,427,378 | ||||||
Other employee benefits | 581,895,528 | - | 14,380,000 | 9,124,378 | (315,609,003) | 289,790,903 | ||||||
1,232,115,384 | (8,846,352) | 72,175,500 | 95,267,486 | (482,493,737) | 908,218,281 | |||||||
74
9.4. Profit and loss captions
During the six months periods ended 30 June 2005 and 2004, post retirement benefit costs were recorded under the captions Net periodic pension cost and Work force reduction program cost, as follows:
2005 |
2004 | |||
Net Periodic Pension Cost: | ||||
Post retirement benefits: |
||||
Pension benefits | 57,795,500 | 58,423,910 | ||
Health care benefits | 14,380,000 | 21,373,500 | ||
72,175,500 | 79,797,410 | |||
Work Force Reduction Program Costs: | ||||
Curtailments: | ||||
Pension benefits | 86,143,108 | 2,786,060 | ||
Health care benefits | 9,124,378 | 172,966 | ||
95,267,486 | 2,959,026 | |||
Termination payments | 1,525,797 | 947,461 | ||
96,793,283 | 3,906,487 | |||
10.Direct Costs
During the six months periods ended 30 June 2005 and 2004, this caption consists of:
2005 |
2004 | |||
Traffic costs and capacity | 291,180,621 | 294,910,741 | ||
Programming costs | 62,506,318 | 57,362,707 | ||
Directories | 41,607,233 | 44,024,978 | ||
Other direct costs | 30,919,913 | 26,964,154 | ||
426,214,085 | 423,262,580 | |||
2005 |
2004 | |||
Comissions | 118,605,890 | 87,216,583 | ||
Specialized work | 86,590,652 | 68,043,599 | ||
Rentals (Note 12) | 32,248,539 | 27,180,705 | ||
Electricity | 28,387,207 | 23,793,115 | ||
Communication | 14,851,167 | 15,164,086 | ||
Installation and dismonting client's equipment | 12,705,349 | 5,894,332 | ||
Travelling | 8,074,534 | 7,525,832 | ||
Surveillance and security | 6,224,039 | 5,203,206 | ||
Consultancy fees | 5,753,082 | 3,370,879 | ||
Insurance | 5,121,481 | 5,052,640 | ||
Other supplies and external services | 37,763,457 | 65,011,956 | ||
356,325,397 | 313,456,933 | |||
CONSOLIDATED REPORT - FIRST HALF 2005 | 75 |
12.Operating Lease
During the six months periods ended 30 June 2005 and 2004 operating lease costs were recognized as follows:
2005 |
2004 | |||
Direct costs | 42,104,263 | 39,673,595 | ||
Supplies and external services | 32,248,540 | 27,180,706 | ||
74,352,803 | 66,854,301 | |||
13.Other Costs
During the six months periods ended 30 June 2005 and 2004, this caption consists of:
2005 |
2004 | |||
Donations | 4,478,321 | 1,636,097 | ||
Other (i) | 3,958,425 | 10,665,726 | ||
8,436,746 | 12,301,823 | |||
(i) |
In the first half of 2004, this caption relates to an agreement signed between PT Comunicações and DECO because of the amounts charged by PT Comunicações as activation fees, which had a cost of Euro 10 million (Note
43.1). |
2005 |
2004 | |||
Derivatives financial instruments (i) | 19,956,875 | (48,839,607) | ||
Other | 2,074,250 | (2,218,451) | ||
22,031,125 | (51,058,058) | |||
(i) |
During the six months period 2005, this caption includes: (1) 32,293,224 euros related with negative changes on the fair value of derivative financial instruments classified as available for trading (Note 39); and (2) 12,337,049 euros related with
gains obtained on equity swaps on PT Multimédias shares, owned by Portugal Telecom. |
15.Other Financial Expenses/(Gains), net
During the six months periods ended 30 June 2005 and 2004, this caption consists of:
2005 |
2004 | |||
Bank comissions and expenses | 13,914,986 | 8,314,469 | ||
Taxes related with financial income (i) | 5,627,037 | 11,324,501 | ||
Financial discounts, net | 2,910,409 | 2,800,303 | ||
Other | 7,915,343 | 5,721,571 | ||
30,367,775 | 28,160,844 | |||
(i) | This caption includes mainly 50% of taxes on financial income obtained by Brasilcels subsidiaries, in Brazil. |
76
16.Income Taxes
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 and PT Multimédia adopted the tax consolidation regime, which includes both companies and all 90% or more owned Portuguese subsidiaries that comply with the provision of article 63º of Corporate Income Tax Law.
In accordance with Portuguese tax legislation, corporate tax 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 31 December 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 at 30 June 2005, except for the situations where provisions have been recognized (Note 36).
a) Deferred taxes
As at 30 June 2005 and 31 December 2004, the Group recognized deferred tax assets and liabilities, with the following nature and movements during the first half of 2005:
Taxes |
Changes in the |
Foreign currency |
||||||||||||
December 31, |
payable |
consolidation |
translation |
|||||||||||
2004 |
Net income |
(Note 25) |
perimeter |
adjustments |
Other (i) |
June 30, 2005 | ||||||||
Deferred tax assets | ||||||||||||||
Provisions | 469,032,065 | 11,915,418 | - | (8,236,285) | 8,146,268 | (428,801) | 480,428,665 | |||||||
Tax losses carryforward | 536,577,997 | 4,883,349 | (129,178,269) | (9,103,859) | 14,637,013 | 3,307,115 | 421,123,346 | |||||||
Financial instruments | 21,823,860 | (4,562,701) | - | - | - | 2,392,044 | 19,653,203 | |||||||
Additional contribution to pension funds | 35,735,418 | (4,104,546) | - | - | - | - | 31,630,872 | |||||||
Other | 62,142,423 | (21,326,747) | - | (170,971) | 8,900,634 | (320,769) | 49,224,570 | |||||||
1,125,311,763 | (13,195,227) | (129,178,269) | (17,511,115) | 31,683,915 | 4,949,589 | 1,002,060,656 | ||||||||
Deferred tax liabilities | ||||||||||||||
Revaluation of fixed assets | 20,768,988 | (1,020,964) | - | (2,235,362) | - | - | 17,512,662 | |||||||
Gains on disposals of investments | 274,143,925 | (244,560) | - | (585,265) | - | - | 273,314,100 | |||||||
Other | 32,943,494 | (23,309) | - | - | - | - | 32,920,185 | |||||||
327,856,407 | (1,288,833) | - | (2,820,627) | - | - | 323,746,947 | ||||||||
(11,906,394) | (129,178,269) | (14,690,488) | 31,683,915 | 4,949,589 | ||||||||||
(i) | Under the caption Financial instruments and Other, this column includes a positive amount of 2,392,044 euros and a negative amount of 65,608 euros related with the tax effect on changes in the fair value of derivative financial instruments classified as hedge accounting and investments available for sale, respectively. |
Deferred tax assets are recognized to the extent future taxable income is expected to occur. This assessment was based on managements business plans, which are periodically reviewed.
Under the Portuguese legislation tax losses carryforward could be used to offset future taxable income for a six years period. As at 30 June 2005 and 31 December 2004, tax losses carryforward of Portuguese subsidiaries mature as follows:
2005 |
2004 | |||
2005 | - | 3,259,000 | ||
2006 | 103,141,631 | 189,507,000 | ||
2007 | 5,684,000 | 5,684,000 | ||
2008 | 1,021,124,218 | 1,423,949,928 | ||
2009 | 317,019,000 | 317,019,000 | ||
2010 | 937,000 | 937,000 | ||
1,447,905,849 | 1,940,355,928 | |||
As at 30 June 2005 and considering managements businesses plans, the Group did not recognized deferred tax assets related with approximately 276 million euros of tax losses.
CONSOLIDATED REPORT - FIRST HALF 2005 | 77 |
b) Reconciliation of income tax provision
During the six months periods ended 30 June 2005 and 2004, the reconciliation between the nominal and effective income tax rate, is as follows:
2005 | 2004 | |||
Income before taxes | 445,608,931 | 619,759,692 | ||
Statutory tax rate (including municipal taxes at a 10% standard) | 27.5% | 27.5% | ||
122,542,456 | 170,433,915 | |||
Valluation allowance for certain tax losses carryforward | 25,620,640 | 9,546,327 | ||
Warrants | 7,623,987 | - | ||
Permanent differences | 5,634,788 | 6,655,171 | ||
Difference in tax rates | 2,804,055 | 5,264,030 | ||
Reduction of deferred tax liabilities related with deferred taxation on the | ||||
disposal of certain investments | - | (12,610,960) | ||
Other | 12,153,045 | 4,329,213 | ||
176,378,971 | 183,617,696 | |||
The income tax for the year is as follows: | ||||
Income tax-current (Note 25) | 164,472,577 | 172,451,593 | ||
Deferred taxes | 11,906,394 | 11,166,103 | ||
176,378,971 | 183,617,696 | |||
These sales will not generate any losses that should be recognized as at 30 June 2005.
78As at 30 June 2004 and 2005, net income for discontinued operations was disclosed in the consolidated financial statements under the caption Discontinued operations and its details is as follows:
2005 |
2004 | |||
Operating revenues | 117,623,283 | 110,209,669 | ||
Recurring operating costs | 119,006,872 | 112,032,344 | ||
Recurring operating income | (1,383,589) | (1,822,675) | ||
Losses / (gains) on sales disposals of fixed assets and other items | (4,456,813) | 61,467 | ||
Income before financial results and income taxes | 3,073,224 | (1,884,142) | ||
Interest and other financial expenses, net | 954,963 | 1,222,400 | ||
Income before income taxes | 2,118,261 | (3,106,542) | ||
Provision for income taxes | (536,644) | 445,016 | ||
Net income | 1,581,617 | (2,661,526) | ||
As at 30 June 2005, assets and liabilities of discontinued operations were disclosed in the consolidated balance sheet under the captions Assets from discontinued operations and Liabilities from discontinued operations, respectively, and its details is as follows:
2005 | ||
Current assets | 71,419,635 | |
Investments in group companies and other investments | 14,826,626 | |
Intangible assets | 165,246,230 | |
Tangible assets | 81,209,550 | |
Deferred taxes | 17,249,424 | |
Other non-current assets | 1,824,370 | |
Total assets | 351,775,835 | |
Current liabilities | 95,717,784 | |
Accrued post-retirement liability | 8,014,866 | |
Deferred taxes | 2,819,227 | |
Other non-current liabilities | 19,802,403 | |
Total liabilities | 126,354,280 | |
Total net assets | 225,421,555 | |
As at 30 June 2005 and 2004, cash flows from discontinued operations were disclosed in the consolidated cash flows statements under the caption Discontinued operations (Note 41.i)), and includes the following captions:
2005 |
2004 | |||
Operating activities | 1,921,542 | 5,122,629 | ||
Investing activities | (5,101,363) | (14,966,353) | ||
Financing activities | 730,482 | (957,067) | ||
Change in cash and cash equivalents | (2,449,339) | (10,800,791) | ||
Effect of exchange differences | (4,152,866) | (128,844) | ||
Cash and cash equivalents at the beginning of the period | (8,466,721) | 12,069,703 | ||
Cash and cash equivalents at the end of the period | (15,068,926) | 1,140,068 |
CONSOLIDATED REPORT - FIRST HALF 2005 | 79 |
18.Minority interests
During the six months periods ended 30 June 2005 and 2004, the movements in minority interests were as follows:
Acquisition, sales |
Currency |
|||||||||||||
and share capital |
translation |
|||||||||||||
January 1, 2005 |
increases |
Income / (loss) |
Dividends |
adjustments |
Other |
June 30, 2005 | ||||||||
Brasilcel (i) | 305,770,785 | 95,242,840 | 550,649 | - | 107,950,659 | (261,292) | 509,253,641 | |||||||
PT Multimédia (ii) (a) | 212,124,711 | - | 5,373,153 | (32,797,646) | 75,750 | (31,154,661) | 153,621,307 | |||||||
Cabo Verde Telecom | 30,728,281 | - | 4,178,890 | (5,370,263) | - | 119,952 | 29,656,860 | |||||||
Cabo TV Madeirense | 6,056,156 | - | 885,623 | (1,376,400) | - | - | 5,565,379 | |||||||
Timor Telecom | 2,258,891 | (201,581) | 722,354 | - | 333,640 | - | 3,113,304 | |||||||
Cabo TV Açoreana | 2,019,394 | - | 368,571 | (477,343) | - | - | 1,910,622 | |||||||
CST | 1,466,715 | - | 212,889 | (67,181) | 212,566 | (76,563) | 1,748,426 | |||||||
Kénya Postel Directories | 886,003 | (89,380) | 71,700 | (226,377) | 148,928 | - | 790,874 | |||||||
LTM | 1,482,547 | - | 323,963 | (453,646) | (249,572) | - | 1,103,292 | |||||||
Previsão | 1,053,501 | - | 12,634 | (22,131) | - | (286) | 1,043,718 | |||||||
Grafilme | 662,344 | - | 49,772 | (44,441) | - | - | 667,675 | |||||||
TPT | 555,422 | - | 115,314 | - | 117,244 | 12,615 | 800,595 | |||||||
Other | 2,564,224 | - | (1,037,754) | (49,588) | 32,977 | (92,698) | 1,417,161 | |||||||
567,628,974 | 94,951,879 | 11,827,758 | (40,885,016) | 108,622,192 | (31,452,933) | 710,692,854 | ||||||||
(a) | The column Other includes an amount of 22 million euros related with the proportion of minority interest on the warrants issued by PT Multimédia. |
January 1, 2004 under Portuguese GAAP |
IFRS effect as of January 1, 2004 |
January 1, 2004 under IFRS |
Acquisition, sales and share capital increases |
Income / (loss) |
Changes in consolidation perimeter |
Dividends |
Currency translation adjustments |
Other |
June 30, 2004 | |||||||||||
Brasilcel (i) | 419,201,233 | (13,347,017) | 405,854,216 | (17,835,378) | 26,071,129 | - | (17,361,126) | (13,732,487) | 3,404,021 | 386,400,375 | ||||||||||
PT Multimédia (ii) | 166,169,910 | (550,830) | 165,619,080 | - | 15,623,916 | - | (5,327,366) | (31,041) | 293,455 | 176,178,044 | ||||||||||
Cabo Verde Telecom | 28,772,842 | - | 28,772,842 | - | 3,458,301 | - | (5,273,610) | - | 163,922 | 27,121,455 | ||||||||||
Mascom | 16,682,849 | - | 16,682,849 | - | - | (16,682,849) | - | - | - | - | ||||||||||
Cabo TV Madeirense | 5,155,415 | (9,612) | 5,145,803 | - | 700,916 | - | (539,400) | - | 9,564 | 5,316,883 | ||||||||||
Timor Telecom | - | - | - | - | 628,220 | 1,716,567 | - | - | - | 2,344,787 | ||||||||||
Cabo TV Açoreana | 1,872,300 | (48) | 1,872,252 | - | 219,198 | - | (349,197) | - | (9,564) | 1,732,689 | ||||||||||
CST | 1,438,850 | - | 1,438,850 | - | 204,472 | - | (33,385) | (34,236) | (57,367) | 1,518,334 | ||||||||||
Kénya Postel Directories | 1,127,747 | - | 1,127,747 | - | 282,385 | - | (369,088) | (6,907) | (11,183) | 1,022,954 | ||||||||||
LTM | 1,299,359 | - | 1,299,359 | - | 251,748 | - | (527,288) | 44,611 | (2,652) | 1,065,778 | ||||||||||
Previsão | 1,080,177 | - | 1,080,177 | - | (120,471) | - | - | - | (50,326) | 909,380 | ||||||||||
Lusomundo Media | - | - | - | - | (96,277) | 1,029,851 | - | - | (226,353) | 707,221 | ||||||||||
Grafilme | 577,237 | - | 577,237 | - | 115,778 | - | (88,880) | - | - | 604,135 | ||||||||||
TPT | - | - | - | - | 154,865 | 424,942 | - | - | - | 579,807 | ||||||||||
Other | 590,049 | (37,810) | 552,239 | - | 312,407 | - | (225,368) | 5,002 | 1,384,688 | 2,028,968 | ||||||||||
643,967,968 | (13,945,317) | 630,022,651 | (17,835,378) | 47,806,587 | (13,511,489) | (30,094,708) | (13,755,058) | 4,898,205 | 607,530,810 | |||||||||||
Income applicable to minority interests in the six months periods ended 30 June 2005 and 2004 were as follows:
2005 | 2004 | |||
Brasilcel (i) | 550,649 | 26,071,129 | ||
PT Multimédia (ii) | 5,373,153 | 15,623,916 | ||
Cabo Verde Telecom | 4,178,890 | 3,458,301 | ||
Cabo TV Madeirense | 885,623 | 700,916 | ||
Timor Telecom | 722,354 | 628,220 | ||
Cabo TV Açoreana | 368,571 | 219,198 | ||
CST | 212,889 | 204,472 | ||
Kénya Postel Directories | 71,700 | 282,385 | ||
LTM | 323,963 | 251,748 | ||
Previsão | 12,634 | (120,471) | ||
Grafilme | 49,772 | 115,778 | ||
TPT | 115,314 | 154,865 | ||
Other | (1,037,754) | 216,130 | ||
11,827,758 | 47,806,587 | |||
(i) |
The minority interests in Brasilcel correspond to 50% of the interests of minority shareholders of Brasilcels subsidiaries in their corresponding amounts of shareholders equity and net income. The increase in minority interests occurred
during the first half of 2005 is related with the capital increase of Telesp Celular Participações. |
(ii) |
The minority interests in PT Multimédia correspond to the interest of minority shareholders in their equity and net income, considering the application of the equity method of accounting for their subsidiaries. For consolidation purposes,
part of the cost related with the warrants issued by PT Multimédia during the first half of 2005, was reclassified from shareholders equity to net income of that subsidiary, in order to eliminate the gain recognized by Portugal Telecom
in the net income. |
19.Dividends
The Annual General Meeting on 29 April 2005 approved the proposal of the Board of Directors to distribute a 35 cents dividend per share relating to the net income of 2004, equivalent to a total dividend of 395,085,000 euros.
20.Net Income per Share
Basic and diluted net income per share for the six months periods ended 30 June 2005 and 2004 were computed as follows:
2005 | 2004 | |||||
Net income considered in the computation of basic | ||||||
earnings per share |
(1) | 258,983,819 | 385,673,883 | |||
Financial costs related with exchangeable bonds (net of tax) | 2,806,669 | 2,934,006 | ||||
Net income considered in the computation of diluted | ||||||
earnings per share |
(2) | 261,790,488 | 388,607,889 | |||
Weighted average common shares outstanding in the period | (3) | 1,156,298,315 | 1,228,458,112 | |||
Effect ot the exchangeable bonds | 31,482,438 | 31,482,438 | ||||
(4) | 1,187,780,753 | 1,259,940,550 | ||||
Basic earnings per share | (1)/(3) | 0.22 | 0.31 | |||
Diluted earnings per share | (2)/(4) | 0.22 | 0.31 |
CONSOLIDATED REPORT - FIRST HALF 2005 | 81 |
21.Cash and cash equivalents
As at 30 June 2005 and 31 December 2004, this caption consists of:
December 31, | ||||
June 30, 2005 |
2004 | |||
Cash and cash equivalents | 482,758,282 | 441,188,958 | ||
Short term treasury applications: | ||||
Fixed rate bonds | 724,274,681 | 548,583,498 | ||
Other short term investments (i) | 1,561,142,712 | 957,187,759 | ||
2,768,175,675 | 1,946,960,215 | |||
(i) | As at 30 June 2005 and 31 December 2004 this caption included 44,129,869 euros and 39,828,143 euros (Note 39), respectively, related with the fair value of derivative financial instruments contracted by Brasilcels subsidiaries, which currently are not covering any specific risk. |
22.Accounts Receivable - Trade
As at 30 June 2005 and 31 December 2004, this caption consists of:
December 31, | ||||
June 30, 2005 |
2004 |
|||
Current accounts receivable - trade: | ||||
Accounts receivable from customers | 1,219,231,898 | 1,077,290,670 | ||
Doubtful accounts receivable | 214,384,420 | 260,755,168 | ||
Unbilled revenues | 184,615,467 | 192,230,090 | ||
Other | 661,272 | 2,473,903 | ||
1,618,893,057 | 1,532,749,831 | |||
Adjustments for doubtful accounts receivable - trade (Note 36) | (318,151,774) | (364,802,804) | ||
1,300,741,283 | 1,167,947,027 | |||
Advances to suppliers | 52,975,309 | 40,309,981 | ||
1,353,716,592 | 1,208,257,008 | |||
23.Accounts Receivable - Other
As at 30 June 2005 and 31 December 2004, this caption consists of:
December 31, | ||||
June 30, 2005 | 2004 |
|||
Current accounts receivable - other: | ||||
Discounts given to retired Portuguese citizens (i) | 61,722,064 | 47,597,244 | ||
Receivables from affiliated companies | 61,800,840 | 31,532,707 | ||
Contributions from SNS (Note 9.2)) | 29,360,036 | 20,786,447 | ||
Other | 81,788,632 | 123,115,191 | ||
234,671,572 | 223,031,589 | |||
Adjustments for other accounts receivable (Note 36) | (16,407,548) | (15,873,011) | ||
218,264,024 | 207,158,578 | |||
Other non-current accounts receivable | 29,881,606 | 24,309,110 | ||
Adjusments for other non-current accounts receivable (Note 36) | (2,028,545) | (3,598,841) | ||
27,853,061 | 20,710,269 | |||
(i) | This caption corresponds to discounts given to certain eligible retired Portuguese citizens, which will be reimbursed by the Portuguese State, under the Decree-Law 20-C/86. Up to 31 December 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 be paid directly by the Portuguese State, which committed to include the corresponding expense in the Annual State Budget, as stated by Decree-Law 18/2003. As at 30 June 2005 and 31 December 2004 the account receivable from the Portuguese State regarding discounts to retired Portuguese citizens is made up as follows:
June 30, 2005 | December 31, 2004 | |||
Discounts given in 2003 | 26,392,172 | 26,392,172 | ||
Discounts given in 2004 (a) | 25,164,752 | 21,205,072 | ||
Discounts given in 2005 | 10,165,140 | - | ||
61,722,064 | 47,597,244 | |||
(a) The change occurred in the 2004s amounts is related with VAT, that was recognized when PT Comunicações billed the Portuguese State in 2005. |
As at 30 June 2005, PT Comunicações had signed agreements with a financial institution relating to the sale of the accounts receivable balances regarding the discounts given in 2003 and 2004, amounting to 51,556,924 euros. PT Comunicações received cash advances of those amounts, minus the related expenses inherent in these transactions. These advances were recorded under the caption Accounts payable other (Note 33). All expenses related to these transactions were recorded in net income.
24.Inventories
As at 30 June 2005 and 31 December 2004, this caption consists of:
December 31, | ||||
June 30, 2005 | 2004 | |||
Merchandise | 196,538,557 | 182,979,978 | ||
Raw materials and consumables | 17,697,302 | 19,505,405 | ||
Work in progress | 7,543,705 | 6,263,689 | ||
Advances for purchases | 41,185 | 137,854 | ||
221,820,749 | 208,886,926 | |||
Adjustments for obsolete and slow moving inventories (Note 36) | (34,017,979) | (33,738,318) | ||
187,802,770 | 175,148,608 | |||
CONSOLIDATED REPORT - FIRST HALF 2005 | 83 |
25.Taxes Receivable and Payable
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||||||
Receivable | Payable | Receivable | Payable | |||||
Current taxes: | ||||||||
Operation in Portugal: | ||||||||
Value added tax | 20,204,624 | 67,959,590 | 20,420,342 | 59,589,334 | ||||
Social Security Contributions | - | 10,623,114 | - | 10,863,432 | ||||
Personnel income tax witholdings | - | 10,070,249 | - | 9,483,731 | ||||
Income taxes | 2,502,499 | - | 2,671,828 | - | ||||
Other | 1,541,715 | 1,092,057 | 2,613,263 | 358,076 | ||||
24,248,838 | 89,745,010 | 25,705,433 | 80,294,573 | |||||
Taxes in foreign countries | 139,811,672 | 104,765,516 | 153,679,162 | 93,297,869 | ||||
164,060,510 | 194,510,526 | 179,384,595 | 173,592,442 | |||||
Non-current taxes: | ||||||||
Taxes in foreign countries | 100,121,128 | 30,222,782 | 62,623,744 | 25,634,200 | ||||
As at 30 June 2005 and 31 December 2004, the captions Taxes in foreign countries, included mainly 50% of taxes receivable and payable by Brasilcels subsidiaries, as follows:
June 30, 2005 | December 31, 2004 | |||||||
Receivable | Payable | Receivable | Payable | |||||
Current taxes: | ||||||||
Income taxes | 50,688,869 | 22,893,852 | 48,271,008 | 20,854,816 | ||||
Indirect taxes | 73,445,685 | 74,653,730 | 66,324,463 | 57,920,437 | ||||
Other | 15,677,118 | 7,217,934 | 39,083,691 | 14,522,616 | ||||
139,811,672 | 104,765,516 | 153,679,162 | 93,297,869 | |||||
Non-current taxes: | ||||||||
Income taxes | 65,676,790 | - | 48,297,567 | - | ||||
Indirect Taxes | 34,444,338 | 30,222,782 | 14,326,177 | 25,634,200 | ||||
100,121,128 | 30,222,782 | 62,623,744 | 25,634,200 | |||||
As at 30 June 2005 and 31 December 2005, the caption Income taxes from operations in Portugal is made up as follows:
June 30, 2005 | December 31, 2004 | |||
Current income taxes in the balance sheet (i) | (2,287,486) | (8,882,069) | ||
Third parties witholding income taxes | (5,212,963) | - | ||
Payments on account | 1,973,469 | 5,086,990 | ||
Witholding income taxes | 2,552,036 | 4,106,310 | ||
Income taxes | 5,477,443 | 2,360,597 | ||
Net income tax receivable | 2,502,499 | 2,671,828 | ||
84
(i) |
Reconciliation between current income taxes in the Companys balance sheet as at 30 June 2005 and 31 December 2004 and the current income tax expense for the periods then ended, is as follows: |
June 30, 2005 | December 31, 2004 | |||
Current income taxes in the balance sheet | 2,287,486 | 8,882,069 | ||
Taxes losses carryforward used in the year (Note 16) | 129,178,269 | 237,860,507 | ||
Foreign income taxes payable by subsidiaries | 35,757,368 | 38,305,380 | ||
Other | 170,210 | 2,513,898 | ||
167,393,333 | 287,561,854 | |||
The current income tax expense was recorded in the following captions: | ||||
June 30, 2005 | December 31, 2004 | |||
Income statement (Note 16) | 164,472,577 | 286,240,538 | ||
Cumulative foreign currency translation adjustments (Note 38.5) | 2,920,756 | 1,321,316 | ||
167,393,333 | 287,561,854 | |||
26.Prepaid Expenses
As at 30 June 2005 and 31 December 2004, this caption consists of:
December 31, | ||||
June 30, 2005 | 2004 | |||
Taxes and income taxes (i) | 35,174,105 | - | ||
Telephone directories | 31,832,007 | 47,208,585 | ||
Sales of equipment (ii) | 16,074,700 | 19,610,304 | ||
Marketing and publicity | 9,138,168 | 12,909,373 | ||
Maintenance and repairs | 6,328,012 | 12,227,583 | ||
Rents | 6,078,462 | 6,544,606 | ||
Interest paid in advance | 3,238,299 | 3,394,788 | ||
Advances paid to employees | 2,842,173 | 2,411,039 | ||
Other | 25,804,529 | 11,525,888 | ||
136,510,455 | 115,832,166 | |||
(i) |
Brasilcels operating subsidiaries paid an annual fee for each new client acquired during the previous year. This fee is paid in the beginning of the year and is recognized in net income on a straight-line basis during the following 12 months
up to December. |
(ii) |
Sales of mobile phones of Brasilcels operating subsidiaries are recognized when the final client activates the equipment. Therefore the negative margin, as well as indirect tax (ICMS) are deferred upon the recognition of the sale. |
27.Other Current and Non-Current Assets
As at 30 June 2005 and 31 December 2004, the caption Other current assets includes basically: (i) 14,889,554 euros and 31,226,238 euros, respectively, relating to the fair value of certain derivatives on PT Multimédia shares (Note 39); and (ii) 8,328,285 euros and 16,656,570 euros, respectively, relating to premiums to be received by Portugal Telecom of certain derivatives on PT Multimédia shares (Note 39).
As at 30 June 2005 and 31 December 2004, the caption Other non-current assets includes 816,894,630 euros and 840,525,884 euros, respectively, related with accounts receivables from QTE transactions (Notes 3.l.ix) and 37).
CONSOLIDATED REPORT - FIRST HALF 2005 | 85 |
28.Investments in Group Companies
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
Investments in group companies | 2,384,719 | 4,037,761 | ||
Investments in associated companies | 108,979,602 | 93,745,190 | ||
Goodwill net of impairment losses | 110,523,359 | 112,207,743 | ||
Loans granted to associated companies and other companies | 111,783,889 | 108,390,766 | ||
Advances for investments | 1,752,201 | 2,185,233 | ||
335,423,770 | 320,566,693 | |||
As at 30 June 2005 and 31 December 2004, the caption Investment in group companies consists of:
June 30, 2005 | December 31, 2004 | |||
Guiné Telecom , SARL (i) | 3,716,555 | 3,716,555 | ||
Regiforum | 844,825 | 818,953 | ||
Marconi France (ii) | - | 1,644,171 | ||
Other | 1,539,894 | 1,574,637 | ||
6,101,274 | 7,754,316 | |||
Adjustments for investments in group companies (Note 36) | (3,716,555) | (3,716,555) | ||
2,384,719 | 4,037,761 | |||
(i) | The investment in this company is fully provided for. |
(ii) | This investment was disposed of during the first half of 2005. |
As at 30 June 2005 and 31 December 2004, the caption Investment in associated companies consists of:
June 30, 2005 | December 31, 2004 | |||
Unitel, S.A. ("Unitel") | 45,253,422 | 28,461,383 | ||
CTM - Companhia de Telecomunicações de Macau, SARL ("CTM") | 34,491,351 | 27,965,749 | ||
Banco Best, S.A. | 8,236,929 | 7,362,700 | ||
Idealyse (i) | 7,417,741 | 7,417,741 | ||
Warner Lusomundo Sogecable de Espanha, S.A. | 6,907,333 | 7,603,000 | ||
Lisboa TV - Informação e Multimédia, S.A. | 5,320,724 | 5,572,558 | ||
INESC - Instituto de Engenharia de Sistemas e Computadores (i) | 2,992,788 | 2,992,787 | ||
Páginas Amarelas, S.A. ("Páginas Amarelas") | 2,064,887 | 5,149,371 | ||
Hungaro Digitel KFT | 1,978,556 | 1,990,635 | ||
Octal | 1,168,725 | 1,299,387 | ||
Vasp - Sociedade de Transporte e Distribuição, Lda | - | 2,019,110 | ||
Other | 3,557,679 | 6,321,298 | ||
119,390,135 | 104,155,719 | |||
Adjustments for investments in associated companies (Note 36) | (10,410,533) | (10,410,529) | ||
108,979,602 | 93,745,190 | |||
(i) | The investments in these companies are fully provided for. |
(ii) | This investment is held by Lusomundo Serviços and was included under the caption Assets from discontinued operations (Note 17). |
86
As at 30 June 2005 and 31 December 2004, the caption Goodwill, net of impairment losses consists of:
June 30, 2005 | December 31, 2004 | |||
Páginas Amarelas | 83,754,434 | 83,754,434 | ||
Unitel | 24,397,325 | 24,116,843 | ||
Other | 2,371,600 | 4,336,466 | ||
110,523,359 | 112,207,743 | |||
During the first half of 2005 and the year 2004 were not recognized any impairment losses on the above mentioned carrying values of goodwill.
Loans granted to associate companies and other companies are basically to finance its operations and to develop new businesses. As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
UOL | 87,850,786 | 77,989,260 | ||
Medi Telecom | 68,803,334 | 64,442,408 | ||
Sport TV | 66,213,937 | 66,213,937 | ||
Sportinveste (i) | 35,318,668 | 35,318,668 | ||
Idealyse (ii) | 33,140,652 | 29,420,510 | ||
Web-Lab | 6,814,119 | 6,684,761 | ||
Marconi Suisse | 5,732,692 | 5,732,692 | ||
PT Telecom Brasil | 3,382,557 | 3,002,855 | ||
INESC (ii) | 3,292,066 | 3,292,066 | ||
Other | 1,245,548 | 5,292,292 | ||
311,794,359 | 297,389,449 | |||
Adjustments for loans granted to associated companies and other companies (Note 36) | (88,710,752) | (75,508,310) | ||
Adjustments related with the equity accounting on financial investments (Note 36) (iii) | (111,299,718) | (113,490,373) | ||
111,783,889 | 108,390,766 | |||
(i) | This caption includes 30,023,168 euros (Note 40) of additional paid-in capital contributions and 5,295,500 euros of shareholders loans granted to this affiliated company. |
(ii) |
These loans are fully provided for. |
(iii) |
This caption corresponds to accumulated losses resulting form the equity method of accounting in excess to initial investment, which were allocated to the others components of the investment in the affiliated companies (Note 2.a)), and consists
of: |
June 30, 2005 | December 31, 2004 | |||
Sport TV | 43,395,764 | 43,945,296 | ||
Medi Telecom | 38,120,838 | 38,225,006 | ||
UOL | 16,394,951 | 18,432,125 | ||
Web-Lab | 6,814,119 | 6,684,791 | ||
Marconi Suisse | 5,110,198 | 4,763,659 | ||
Other | 1,463,848 | 1,439,496 | ||
111,299,718 | 113,490,373 | |||
If accumulated losses resulting from the equity method of accounting exceed the total investment amount a provision is recorded, if needed (Note 36).
CONSOLIDATED REPORT - FIRST HALF 2005 | 87 |
During the six months periods ended 30 June 2005 and 31 December 2004, gains and losses on associated companies consist of:
2005 | 2004 | |||
Equity accounting in earnings / (losses) of affiliated companies | ||||
Unitel | 14,046,514 | 6,186,627 | ||
UOL | 8,777,547 | 1,167,625 | ||
CTM, SA | 7,700,902 | 5,388,954 | ||
Tradecom Internacional | 1,181,406 | - | ||
Medi Telecom | 1,000,781 | (7,393,016) | ||
Lisboa TV | 655,028 | 290,170 | ||
Sport TV | 549,432 | (1,947,794) | ||
Mascom Wireless | - | 5,432,192 | ||
Other | (3,046,316) | (4,910,817) | ||
30,865,294 | 4,213,941 | |||
Gains / (losses) on sale of financial investments | (1,794,343) | 1,695,844 | ||
29,070,951 | 5,909,785 | |||
29.Other investments
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
Investments available for sale | 68,605,250 | 68,366,677 | ||
Investment property | 23,472,085 | 28,413,023 | ||
Other | 6,593,602 | 17,934,426 | ||
98,670,937 | 114,714,126 | |||
The fair value of financial investments available for sale was determined based on their listed price, and the change in the fair value was recognized in shareholders equity, under the caption Other reserves. As at 30 June 2005 and 31 de December 2004, the detail and the movement of the fair value, is as follows:
Change in | ||||||
fair value (Note | ||||||
December 31, 2004 | 38.4) | June 30, 2005 | ||||
Banco Espírito Santo | 55,860,000 | (1,722,000) | 54,138,000 | |||
Grupo Media Capital | 8,720,000 | 2,048,000 | 10,768,000 | |||
Telefónica, S.A | 3,786,677 | (87,427) | 3,699,250 | |||
68,366,677 | 238,573 | 68,605,250 | ||||
The caption Investment property includes mainly land and buildings owned by PT Comunicações, which are not affected to its operating activities. These assets are recognized at acquisition cost net of accumulated amortization and impairment losses, if any. PT Comunicações assesses periodically those assets and recognizes impairment losses in net income as appropriate. PT Comunicações essentially receives rents from lease contracts, which during the six months periods ended 2005 and 2004 amounted to 158,981 euros and 44,633 euros, respectively. During the six months periods ended 30 June 2005 and 2004, amortization costs amounted to 460,502 euros and 220,522 euros, and no impairment losses were recognized.
The changes occurred in this caption mainly results from transfers of assets allocated in the period to PT Comunicações operations and 1,003,063 euros related to assets owned by the Media business that was classified as discontinued (Note 17).
88
As at 30 June 2005 and 31 December 2004, other financial investments recognized at acquisition cost net of impairment losses, if any, consists of:
June 30, 2005 | December 31, 2004 | |||
Cypress | 3,016,754 | 3,016,754 | ||
Tagusparque, S.A. | 1,296,875 | 1,296,875 | ||
Seguradora internacional | 704,448 | 704,448 | ||
Vortal | 687,514 | - | ||
Intelsat (i) | - | 13,127,252 | ||
Outras empresas | 5,594,493 | 4,178,561 | ||
11,300,084 | 22,323,890 | |||
Adjustments for other investments (Note 36) | (4,706,482) | (4,389,464) | ||
6,593,602 | 17,934,426 | |||
(i) | This investment was disposed of during the first half of 2005. |
30.Intangible Assets
During the first half 2005 the movements occurred in intangible assets were as follows:
Changes in the | Foreign currency | |||||||||||
Opening | consolidation | translation | Closing | |||||||||
balance | perimeter | Increases | adjustments | Other | balance | |||||||
Cost: | ||||||||||||
Industrial property and other rights | 2,425,540,563 | (28,521,414) | 42,067,425 | 449,654,489 | 34,210,899 | 2,922,951,962 | ||||||
Other intangible assets | 13,649,626 | (133,728) | 1,516,597 | 1,190,749 | (1,856,067) | 14,367,177 | ||||||
Intangibles assets in-progress | 33,807,036 | - | 17,041,382 | 11,097,965 | (30,818,887) | 31,127,496 | ||||||
Goodwill | 1,222,855,000 | (150,232,517) | - | 148,249,914 | (1,116,886) | 1,219,755,511 | ||||||
3,695,852,225 | (178,887,659) | 60,625,404 | 610,193,117 | 419,059 | 4,188,202,146 | |||||||
- | ||||||||||||
Accumulated depreciation: | ||||||||||||
Industrial property and other rights | 445,454,574 | (11,695,842) | 100,111,798 | 91,048,227 | (279,372) | 624,639,385 | ||||||
Other intangible assets | 5,471,663 | - | 864,383 | 437,372 | (386,377) | 6,387,041 | ||||||
450,926,237 | (11,695,842) | 100,976,181 | 91,485,599 | (665,749) | 631,026,426 | |||||||
3,244,925,988 | (167,191,817) | (40,350,777) | 518,707,518 | 1,084,808 | 3,557,175,720 | |||||||
The changes in the consolidation perimeter are mainly due to the transfer of the intangible assets of the Media and PrimeSys businesses, to the caption of Discontinued operations (Note 17).
As at 30 June 2005, the caption Industrial property and other rights includes basically the following items:
(a) |
339,964,723 euros 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 (365 million euros) and: (i) the concession rent of 2002
(16,604,413 euros), 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 (8,430,864 euros) made in 2003 with equipment allocated to the basic network, as this
gain was considered in the determination of the fair value attributable to the basic network.; |
(b) |
1,617,829,695 euros related with 50% of the value allocated to the band A licenses owned by VIVOs subsidiaries; |
(c) |
171,377,824 euros related to 50% of the cost of mobile telecommunications licenses obtained by Global Telecom and TCO to operate in certain Brazilian states; |
(d) |
99,759,579 euros related with a UMTS license obtained by TMN and an amount of 33,333,333 euros paid to OniWay in connection with an agreement signed in 2002 between that company and the others three mobile operators in Portugal (including TMN); |
(e) |
123,531,938 euros related with rental contracts of satellite capacity signed by TV Cabo, which have a maturity of 12 years and were considered as capital leases; |
(f) |
448,449,620 euros related with software licenses; |
CONSOLIDATED REPORT - FIRST HALF 2005 | 89 |
(h) | 22,126,657 euros related to the allocation of the acquisition price of Sport TV to the fair value of the contract celebrated between this company and PPTV Publicidade de Portugal e Televisão, S.A. (PPTV the other shareholder of Sport TV together with PT Conteúdos) to acquire the rights to broadcast the games of the Portuguese football league for the seasons from 2004-2005 to 2007-2008. |
As referred to in Note 3.d), intangible assets are periodically subject to impairment tests and during this period no impairment losses were recognized.
As at 30 June 2005 and 31 December 2004, the goodwill related with subsidiaries was as follows:
2005 | 2004 | |||
Vivo | 677,950,279 | 535,416,048 | ||
Wireline businesses: | ||||
PT.com | 162,624,017 | 162,624,017 | ||
PT Comunicações (International carrier business) | 75,634,389 | 75,634,389 | ||
PT Prime (Data & Corporate business) | 31,985,617 | 32,126,523 | ||
Other | 128,599 | 128,599 | ||
270,372,622 | 270,513,528 | |||
PT Multimédia: | ||||
Pay TV and Cable Internet (i) | 253,794,361 | 253,794,361 | ||
Media business (ii) | - | 122,128,558 | ||
253,794,361 | 375,922,919 | |||
Other businesses: | ||||
PrimeSys, S.A. ("PrimeSys") (ii) | - | 23,666,222 | ||
PT SI | 8,510,688 | 8,645,376 | ||
Cabo Verde Telecom, S.A. ("Cabo Verde Telecom") | 9,127,561 | 8,690,907 | ||
17,638,249 | 41,002,505 | |||
1,219,755,511 | 1,222,855,000 | |||
(i) |
As result of the impairment test made in 31 December 2004 to the goodwill of the audiovisual business, which is included in the Pay TV and Cable Internet segment, was recognized an impairment loss of 28.000.000 euros in net income. The fair value
was computed based on discounted cash flows of Lusomundo Audiovisuais and Lusomundo Cinemas. |
(ii) |
As at 30 June 2005 these businesses were classified as discontinued operations and were transferred to the caption Assets from discontinued operations and Liabilities from discontinued operations respectively. |
90
31.Tangible Assets
During the first half 2005 the movements occurred in tangible assets were as follows:
Changes in the | Foreign currency | |||||||||||
Opening | consolidation | translation | Closing | |||||||||
balance | perimeter | Increases | adjustments | Other | balance | |||||||
Cost: | ||||||||||||
Land | 98,487,608 | (19,241,345) | 26,019 | 2,410,817 | (489,734) | 81,193,365 | ||||||
Buildings and other constructions | 1,064,180,220 | (70,856,739) | 5,340,228 | 10,847,336 | (100,237,740) | 909,273,305 | ||||||
Basic equipment | 10,155,337,989 | (134,795,883) | 131,481,058 | 488,170,636 | 148,955,571 | 10,789,149,371 | ||||||
Transportation equipment | 62,619,102 | (2,635,415) | 6,919,397 | 809,690 | (3,568,134) | 64,144,640 | ||||||
Tools and dies | 18,946,431 | (493,129) | 138,127 | 794,511 | 233,448 | 19,619,388 | ||||||
Administrative equipment | 850,001,564 | (8,087,574) | 28,862,156 | 24,649,713 | (3,654,313) | 891,771,546 | ||||||
Other tangible assets | 69,092,264 | (6,546,046) | 1,770,201 | 147,632 | (1,664,335) | 62,799,716 | ||||||
Tangibles assets in-progress | 182,754,242 | (295,330) | 136,133,787 | 40,584,315 | (171,867,554) | 187,309,460 | ||||||
Advances to suppliers of assets | 260,486 | (26,088) | - | 22,533 | 4,657 | 261,588 | ||||||
12,501,679,906 | (242,977,549) | 310,670,973 | 568,437,183 | (132,288,134) | 13,005,522,379 | |||||||
Accumulated depreciation: | ||||||||||||
Land | 12,641,436 | (11,825) | (135,808) | - | 523,111 | 13,016,914 | ||||||
Buildings and other constructions | 586,426,169 | (57,052,040) | 20,771,296 | 2,323,742 | (61,171,818) | 491,297,349 | ||||||
Basic equipment | 7,108,144,905 | (95,862,652) | 329,861,080 | 307,200,270 | 977,559 | 7,650,321,162 | ||||||
Transportation equipment | 37,397,694 | (1,620,159) | 5,462,405 | 469,914 | (3,102,959) | 38,606,895 | ||||||
Tools and dies | 16,764,528 | (214,779) | 225,157 | 400,934 | 197,555 | 17,373,395 | ||||||
Administrative equipment | 701,448,735 | (5,874,321) | 35,374,414 | 13,523,832 | (8,196,912) | 736,275,748 | ||||||
Other tangible assets | 104,591,048 | (2,042,548) | 1,253,440 | 1,830,913 | (43,338,425) | 62,294,428 | ||||||
8,567,414,515 | (162,678,324) | 392,811,984 | 325,749,605 | (114,111,889) | 9,009,185,891 | |||||||
3,934,265,391 | (80,299,225) | (82,141,011) | 242,687,578 | (18,176,245) | 3,996,336,488 | |||||||
The changes in the consolidation perimeter are mainly due to the transfer of the tangible assets of the Media and PrimeSys businesses, to the caption of Assets from discontinued operations (Note 17).
.
Regarding tangible assets, should be mention the following situations:
(a) |
105,577,070 euros of tangible assets of wireline business installed in third parties buildings and properties, and 165,001,158 euros of basic equipment of Pay-TV business installed in third parties property; |
(b) |
23,213,848 euros of PT Comunicações tangible assets were not recorded under the company name; |
(c) |
1,443,218,277 euros of PT Comunicações assets are affected to the concession, under the terms of nº 5 of Decree-Law 40/95 of the Modifying Agreement of the Concession; |
(d) |
25,818,381 euros of tangible assets from PT Comunicações are located in other countries which the more relevant are the representation in the submarine cable consortium. |
(e) |
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. 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 those equipments, continuing to be able to sell or substitute any equipment. These transactions correspond to an operation of sale and lease back and, accordingly the sale of the equipment was not recorded and the equipment continued to be recorded in the Companys consolidated balance sheet. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 91 |
32.Loans
This caption consists of:
June 30, 2005 | December 31, 2004 | |||||||
Short-term | Long-term | Short-term | Long-term | |||||
Exchangeable bonds (i) | - | 390,178,914 | - | 386,920,030 | ||||
Bonds (ii) | 899,500,000 | 2,951,392,751 | 584,950,000 | 1,848,162,033 | ||||
Bank loans (iii): | ||||||||
External market loans | 371,709,592 | 1,876,061,474 | 452,179,951 | 1,329,321,190 | ||||
Domestic market loans | 2,254,303 | 5,030,813 | 7,100,357 | 7,712,975 | ||||
Overdrafts | 24,794 | - | 14,647,937 | - | ||||
Other loans | ||||||||
Comercial Paper (iv) | 234,865,843 | - | 318,808,486 | 8,950,000 | ||||
External market loans (v) | 14,152,997 | 38,723,035 | 19,156,806 | 81,737,245 | ||||
Equity swaps on | ||||||||
treasury shares (liabilities) (Note 38.3) | - | - | 189,751,440 | - | ||||
Leasings | 33,552,946 | 206,323,149 | 29,247,467 | 200,158,596 | ||||
1,556,060,475 | 5,467,710,136 | 1,615,842,444 | 3,862,962,069 | |||||
(i) |
In December 6, 2001 PT Finance issued exchangeable bonds totaling 550,000,000 euros, convertible into Portugal Telecom shares, as follows: |
|
| Number of exchangeable bonds: 110,000; | |
| Exchange price: 12.3985 euro per share; | |
| Nominal value: 5,000 euro; | |
| 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 unwounded, respectively, 21,933 of these exchangeable bonds, with a notional value of 109,665,000 euros, and 10,000 of these exchangeable bonds with a notional value of 50,000,000 euros. As at 30 June
2005 the notional value of these exchangeable bonds outstanding amounts to 390,335,000 euros. |
||
In accordance with IAS 32, the exchangeable bonds represent financial instruments. When the exchangeable bonds were issued, the fair value of the conversion option is recognized directly in shareholders equity. |
||
(ii) |
On April 7, 1999 PT Finance issued notes totaling 1,000,000,000 euros, under the 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 held as marketable securities with a notional value of 120,500,000 euros. As at 30 June 2005 the notional value of these bonds outstanding amounts to 879,500,000 euros. |
|
On February 21, 2001 PT Finance issued notes totaling 1,000,000,000 euros, under the GMTN program, with an annual fixed interest rate of 5.75%. These notes mature in five years. In November 2004, the Company cancelled the bonds held as marketable
securities with a notional value of 100,500,000 euros. As at 30 June 2005 the notional value of these bonds outstanding amounts to 899,500,000 euros. |
||
On November 16, 2001 PT Finance issued floating rate notes totaling 600,000,000 euros, under GMTN 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 notes from this program held as marketable securities with a notional value of 15,050,000 euros. On February 16, 2005, the outstanding amount was fully repaid. |
||
On August 1, 2003, TCP issued a bond amounting to 500 million brazilian reais (equivalent to 87,753,168 euros), with a maturity of five years and bearing an annual interest rate corresponding to 104.4% of the CDI. |
||
92
In the first half of 2005, PTI Finance BV issued three new Eurobonds under the GMTN program, with the following amounts and maturities:
(iii) | As at 30 June 2005 and 31 December 2004 bank loans are denominated in the following currencies: |
June 30, 2005 | December 31, 2004 | |||||||
the loan | Euro | the loan | Euro | |||||
Euro | 1,428,461,365 | 1,428,461,365 | 1,240,722,309 | 1,240,722,309 | ||||
US Dollar | 97,197,963 | 80,382,040 | 55,817,405 | 40,978,933 | ||||
Brazilian Real | 2,121,687,842 | 744,739,318 | 1,907,815,568 | 527,793,612 | ||||
Other | 1,498,253 | 1,467,556 | ||||||
2,255,080,976 | 1,810,962,410 | |||||||
As at 30 June 2005 and 31 December 2004 the guarantees given by third parties on behalf of the Company, in connection with these loans, were as follows:
30 June 2005 | 31 December | |||
2004 | ||||
- European Investment Bank loans backed by guaranteed from Portuguese banks | 234.656.657 | 257.406.112 | ||
- Guarantee from the Portuguese State to Kreditanstalt Für Wiederaufbau | 8.397.969 | 9.127. 071 |
During 2003, the Company entered into a Multicurrency Revolving Credit Facility amounting to Euro 500,000,000, with a maturity of 2 years, with renegotiation on option. On 2005, the maturity of this Facility was renegotiated, being 50% of the loan payable in 2009 and the remaining in 2010.
In 2004, Portugal Telecom and PT Finance obtained three other Multicurrency Revolving Credit Facilities totaling 400,000,000 euros, as follows:
As at 30 June 2005 the Group has used an amount of 75,000,000 euros in connection with these facilities.
On December 10, 2004 and January 25, 2005 the Company entered into two new loan agreements with the European Investment Bank (EIB) amounting to a total of 250 million euros with a maturity as of December 15, 2014. As at 30 June 2005, the Company was using the total amount from these loans.
CONSOLIDATED REPORT - FIRST HALF 2005 | 93 |
As at 30 June 2005 and 31 December 2004, bank loans bear interest at annual interest rates, equivalent to loans denominated in Euros, which vary between:
June 30, 2005 | December 31, 2004 | |||
Maximum | 4.90% | 4.90% | ||
Minimum | 2.13% | 2.02% |
(iv) |
Short term commercial paper program issued in 2002, amounting to a total of 875,000,000 euros. As at 30 June 2005, the Company was using an amount of 234,865,843 euros, which matured in July 2005 and bears interest at an annual rate of 2.15%. |
(v) |
As at 30 June 2005 other loans comprise basically 50% of the loans obtained by VIVO from BNDES (the Brazilian Development Bank) amounting to 34,471,623 euros at the Euro/Real exchange rate prevailing at year-end. |
(vi) |
As at 30 June 2005, long term bank loans, matures on the following years: |
Second half of 2006 | 540,837,983 | |
2007 | 379,558,590 | |
2008 | 256,656,834 | |
2009 | 1,259,505,261 | |
First half of 2010 | 350,249,915 | |
Second half of 2010 and following years | 2,680,901,553 | |
5,467,710,136 | ||
(vii) | As at 30 June 2005, 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 European Investment Bank (EIB). This covenant is applied to certain EIB loans totaling 400 million euros, of which 150 million euros were being used as at 30 June 2005. | ||
| Control and 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 500 million euros and to certain EIB loans totaling 830 million euros, of which 612 million euros were used as at 30 June 2004. | ||
| Financial ratios | |
The legal documentation regarding the Facility of 500 million euros states that the consolidated ratio Net Debt/EBITDA, should not be higher than 4.5. The two Facilities obtained in October 2004, totaling 250 million euros, 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 500 million euros and to the Facility of 150 million euros obtained in June 2004 may be changed if the consolidated ratio Net Debt/EBITDA is higher than, respectively, 2.5 and 2.25. As at 30 June 2005 this ratio stood at 1.85. | ||
94
In addition, the Global Medium Term Notes, the Exchangeable Bonds, the Facility of 500 million euros and the Facilities totaling 400 million euros include certain restrictions to pledge the Companys consolidated assets, in order to secure any loan or obligation to third parties.
33.Accounts Payable - Other
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
Third parties: | ||||
Fixed assets suppliers | 207,499,412 | 313,229,948 | ||
Accounts payable to employees | 8,786,015 | 16,477,092 | ||
Other (i) | 87,953,971 | 111,289,599 | ||
Affiliates (Note 42): | ||||
Minority shareholders of TCP (ii) | - | 92,721,133 | ||
Telefónica Móviles, S.A. | 9,139,241 | 9,139,241 | ||
Other | 9,883,540 | 2,316,710 | ||
323,262,179 | 545,173,723 | |||
(i) |
This caption includes 51,556,924 euros related with advances received from a financial institution as a result of the sale of accounts receivables from the Portuguese State related with discounts given to retired citizens. (Note 23). |
(ii) |
This amount is related with the capital increase process of TCP, which has begun in 2004 but was formally completed in 2005. The proceeds from minority interest until 31 December 2004 were recorded under this caption. As of the completion of this
transaction in 2005, this amount was reclassified to Minority interests in the consolidated balance sheet (Note 18). |
34.Accrued Expenses
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
General administrative expenses | 229,197,279 | 234,010,983 | ||
Interest expense (i) | 171,201,123 | 157,094,702 | ||
Vacation pay and bonuses | 129,964,280 | 120,849,761 | ||
Discounts to clients | 38,584,688 | 36,987,839 | ||
Commissions | 17,673,651 | 18,609,545 | ||
Other | 17,592,027 | 32,295,192 | ||
604,213,048 | 599,848,022 | |||
(i) |
This caption includes 64,867,384 euros related with the fair value of the interest component of derivative financial instruments contracted by Vivo (Note 39), and the remaining is related with interests not yet paid. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 95 |
35.Deferred Income
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
Advance billing | 177,453,249 | 155,284,180 | ||
Other (i) | 54,850,890 | 70,242,164 | ||
232,304,139 | 225,526,344 | |||
(i) |
As at 30 June 2005, this caption includes: (1) 15,974,403 euros related with interest vested of UOLs debentures, which will be recognized when received; (2) 8,328,285 euros related with certain derivatives financial instruments on PT
Multimédia shares (Note 39). |
36.Provisions and Adjustments
During the first half of 2005 the movements in this caption was as follows:
Changes in the | Foreign currency | |||||||||||||
Opening | consolidation | translation | Other | Ending | ||||||||||
balance | perimeter | Increases | Decreases | adjustments | movements | balance | ||||||||
Adjustments: | ||||||||||||||
Provision for doubtful accounts receivable (Note 22 and 23) | 384,274,656 | (10,306,550) | 64,993,432 | (30,080,847) | 14,355,482 | (86,648,306) | 336,587,867 | |||||||
Provision for inventories (Note 24) | 33,738,318 | (11,736,143) | 11,942,807 | (1,450,428) | 2,231,965 | (708,540) | 34,017,979 | |||||||
Provision for investments (Note 28 and 29) | 207,515,231 | - | 4,220,392 | (10,327,760) | 3,838,692 | 13,597,485 | 218,844,040 | |||||||
625,528,205 | (22,042,693) | 81,156,631 | (41,859,035) | 20,426,139 | (73,759,361) | 589,449,886 | ||||||||
Provision for other risk and costs | ||||||||||||||
Legal actions (Note 43) | 83,464,327 | (908,579) | 7,872,581 | (5,602,161) | 4,875,102 | 1,532,018 | 91,233,288 | |||||||
Taxes | 63,564,078 | (3,343,758) | 1,310,027 | (148,906) | 8,484,798 | 1,756,025 | 71,622,264 | |||||||
Other | 103,392,326 | (9,572,201) | 10,577,543 | (848,463) | 3,568,398 | 6,805,782 | 113,923,385 | |||||||
250,420,731 | (13,824,538) | 19,760,151 | (6,599,530) | 16,928,298 | 10,093,825 | 276,778,937 | ||||||||
875,948,936 | (35,867,231) | 100,916,782 | (48,458,565) | 37,354,437 | (63,665,536) | 866,228,823 | ||||||||
The increase in these captions was recognized in net income as follows: | ||
Provisions and adjustments | 78,061,727 | |
Costs of products sold | 11,942,807 | |
Equity in earnings of affiliated companies, net | 4,409,073 | |
Other costs | 1,413,775 | |
Other financial expenses/(income), net | 3,720,143 | |
Taxes | 1,310,027 | |
Wages and salaries | 59,230 | |
100,916,782 | ||
The decrease in these captions was recognized in net income as follows: | ||
Provisions and adjustments | (36,234,882) | |
Equity in earnings of affiliated companies, net | (10,624,348) | |
Costs of products sold | (1,450,428) | |
Taxes | (148,907) | |
(48,458,565) | ||
The caption Provisions and adjustments under the profit and loss statement consists of: | ||
Increases in provisions and adjustments | 78,061,727 | |
Decreases in provisions and adjustments | (36,234,882) | |
Direct write-off of accounts receivables | 2,085,260 | |
Collections from accounts receivable which were previously written-off | (3,851,834) | |
40,060,271 | ||
96
The amount in the column Other movements under the caption Provision for doubtful accounts receivable relates basically with the write-off of balances previously fully provided for.
The provision for taxes relates with tax probable contingencies, estimated based on internal information and external tax advisors.
As at 30 June 2005, the caption Provision was classified in the balance sheet in accordance with the expected settlement date, as follows:
Current provision |
||
Legal actions | 55,265,212 | |
Taxes | 52,882,572 | |
Other | 31,077,285 | |
139,225,069 | ||
Non-current provision | ||
Legal actions | 35,968,076 | |
Taxes | 18,739,692 | |
Other | 82,846,100 | |
137,553,868 | ||
276,778,937 | ||
As at 30 June 2005, the caption Other provisions, consist of: | ||
Asset retirement obligation (Note 2,g)) | 32,827,656 | |
Customer retention programs (i) | 27,718,934 | |
Retirement of the analogue network (ii) | 26,307,138 | |
Provision for losses in affiliated companies (iii) | 7,218,979 | |
Other | 19,850,678 | |
113,923,385 | ||
(i) |
The provision for customer retention program was recognized by TMN to settle future liabilities with this program and was computed based on present catalogue costs and estimated usage levels. |
(ii) |
This provision is to cover costs related with the approved plan for replacement of the analogue network by a digital network. |
(iii) |
This provision relates with accumulated losses resulting from the equity method of accounting exceeding the total invested amount (Notes 2.a) and 28), as follows: |
TV Cabo Macau | 3,363,771 | |
Directel Uganda | 1,053,354 | |
Sgpice | 1,166,902 | |
Others | 1,634,952 | |
7,218,979 | ||
37.Other Current and Non-Current Liabilities
As at 30 June 2005 and 31 December 2004, this caption consists of:
June 30, 2005 | December 31, 2004 | |||
Other current liabilities: | ||||
Dividends payable (i) | 23,373,043 | 16,569,461 | ||
Other (ii) | 19,425,884 | 609,232 | ||
42,798,927 | 17,178,693 | |||
(i) | This caption is related with unpaid dividends distributed by Brasilcels subsidiaries. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 97 |
(ii) |
As at 30 June 2005, this caption is related mainly with unpaid acquired shares under the reverse stock split done by some of Brasilcels subsidiaries during the first half of 2005. Under this transaction, old shares were grouped and exchanged
for new shares with a higher nominal value. During this operation not all the old shares were exchanged, therefore the company sold the exceeding unchanged new shares and received the proceeds, although shareholders of old shares have the right to
ask the company the correspondent amount of their shares. |
As at 30 June 2005 and 31 December 2004, the caption Other non-current liabilities includes: (i) 816,894,630 euros and 840,525,884 euros, respectively, related with amounts payable under the QTE transactions (Notes 3.l.ix) and 27); and (ii) 70,927,201 euros (Note 39) and 62,803,551 euros, respectively, related with the fair value of certain derivative financial instruments.
38.Shareholders equity
38.1. Share Capital
On 28 December 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 2 April 2004 regarding an announced share buyback. As a result, the companys share capital was reduced from 1,254,285,000 euros to 1,166,485,050 euros. As at 30 June 2005 Portugal Telecoms fully subscribed and paid share capital amounted to 1,166,485,050 euros and is represented by 1,166,485,050 shares, with a nominal value of one euro each, and with the following distribution:
All the class A shares are held by the Portuguese State.
In accordance with Portugal Telecoms Articles of Associates, the class A shares has special voting rights as follows:
38.2. 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.
98
38.3. Treasury Shares
During the first half of 2005, the movement in this caption was as follows:
Number of | Nominal | Premium and | ||||||
shares | value | discount | Value | |||||
Balance as at 1 January 2004 | 55,400,357 | 55,400,357 | 361,662,733 | 417,063,090 | ||||
Acquisitions | 53,950,599 | 53,950,599 | 409,690,768 | 463,641,367 | ||||
Cancellation | (87,799,950) | (87,799,950) | (603,153,067) | (690,953,017) | ||||
Balance as at 31 December 2004 | 21,551,006 | 21,551,006 | 168,200,434 | 189,751,440 | ||||
Acquisitions | 16,077,544 | 16,077,544 | 134,626,904 | 150,704,448 | ||||
Balance as at 30 June 2005 | 37,628,550 | 37,628,550 | 302,827,338 | 340,455,888 | ||||
Treasury shares as at 31 December 2004 corresponds to equity swaps contracted by Portugal Telecom upon that date, which under IAS 32 are recognized as an effective acquisition of treasury shares, generating a financial liability (Note 32). Those equity swaps were settled during the first half of 2005 and the liability was settled.
38.4. Reserves
Legal Reserve
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.
Other reserves
During the first half of 2005, the movement in this caption was as follows:
Fair value adjustement recognized in equity | ||||||||||
Free reserves |
Reserves for treasury shares | Hedge accounting (Note 39) | Available investments for sale | Total | ||||||
Balance as at 1 January 2004 | 339,424,500 | 277,551,390 | (15,710,960) | 2,864,216 | 604,129,146 | |||||
Attributed reserves by PT Multimedia (i) | (32,416,865) | - | - | - | (32,416,865) | |||||
Acquisitions of treasury shares by PT Multimedia | (32,956,277) | - | - | - | (32,956,277) | |||||
Acquisitions of treasury shares (Note 38.3) | (150,704,448) | 150,704,448 | - | - | - | |||||
Fair value adjustments to financial instruments | - | - | - | - | - | |||||
and available assets for sale (Note 29) | - | - | (8,698,342) | 238,573 | (8,459,769) | |||||
Tax effect (Note 16) | - | - | 2,392,044 | (65,608) | 2,326,436 | |||||
Other | (1,039,524) | - | - | - | (1,039,524) | |||||
122,307,386 | 428,255,838 | (22,017,258) | 3,037,181 | 531,583,147 | ||||||
(i) |
This amount is related with the distribution of reserves made by PT Multimédia under the warrants program and was transferred to retained earnings. |
The reserve for treasury shares includes 340,455,888 euros related with treasury shares as at 30 June 2005 and 87,799,950 euros related with the recognition of a non-distributable reserve for shares cancelled. This reserve has the same legal regime as the legal reserve.
CONSOLIDATED REPORT - FIRST HALF 2005 | 99 |
38.5. Cumulative Currency Foreign Translation Adjustments
This caption includes the accumulated effect of translating the financial statements of foreign currency subsidiaries and associates to euros, exchange differences on loans denominated in foreign currency made to finance foreign investments, as well as changes in the fair value of certain derivatives financial instruments classified as hedge accounting. During the first quarter of 2005 was recognized also the tax effect of exchange differences on the above mentioned loans, amounting to a negative amount of 2,920,756 euros (Note 25).
39.Derivative Financial Instruments
Derivative financial instruments are basically used by the Company to manage interest rate and exchange rate exposure.
The contracting of these 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 Telecoms 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
As at 30 June 2005, the interest rate swaps contracted by Portugal Telecom amounted to approximately 699 million euros with an average maturity of 7.6 years.
Exchange Rate and Interest Rate Exposure
Cross currency swaps were contracted primarily to reduce exposure to exchange rate and interest rate risks. As at 30 June 2005 the Company had cross currency swaps from U.S. Dollars to Euros, with a notional of approximately Euro 74 million and an average maturity of 6.4 years.
Pursuant the cancellation of the interest rate component of certain cross currency swaps, as of 30 June 2005 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 3.8 years.
Additionally, PT Multimédia had also contracted forwards of Euros to U.S. Dollars in order to cover the risk associated to future cash flow payments. As of 30 June 2005, those contracts had a notional of Euro 6 million and had an average maturity of 3 months.
Vivo had contracted derivative financial instruments primarily to reduce exposure to exchange rate risk of debt in U.S. Dollars and in Japanese Yens (JPY). As at 30 June 2005, Vivo had contracted cross currency swaps with a notional of US$ 1,040 million and JPY 5,867 million and an average maturity of 1.1 years and 1,8 years, respectively. According with IAS 39, these financial instruments were classified fair value hedge derivatives and therefore the change in its fair value is recorded in the caption Net foreign currency exchange losses / (gains).
As at 30 June 2005, Brasilcels subsidiaries had also contracted other (i) cross currency swaps (U.S. Dollars/Brazilian Reais) with a notional of US$ 462 million and an average maturity of 1.5 years, and (ii) cross currency swaps (Euros/Brazilian Reais) with a notional of 15 million euros and an average maturity of 6 months.
100
Equity derivatives
As at 30 June 2005, in order to increase its exposure to PT Multimédia, Portugal Telecom had contracted with Santander Group equity swaps over 30,575,090 shares of PT Multimédia, representing 9.9% of its share capital, as follows:
(i) | 18,375,090 shares, with an strike price of 8.87 euros and a maturity of 10 months; and |
(ii) | 12,200,000 shares, with an strike price of 7.05 euros and a maturity of 10 months. |
Additionally, in 2004 Portugal Telecom contracted with Banco Espírito Santo Group equity derivatives which consist of options that allow the Company to receive 16.6 million euros, and also allows Portugal Telecom to acquire shares of PT Multimédia, representing 5% of its share capital. The options included in this transaction are as follows:
(i) |
Portugal Telecom acquired from Banco Espírito Santo de Investimento, S.A. (BESI) a call option over 12,126 thousand shares of PT Multimédia shares with a strike price of euros at maturity (31 December 2005). Portugal
Telecom can exercise this option at any time and BESI can choose between physical or financial settlement with the latter having a 15% penalty on the spot. Simultaneously, BESI acquired from Portugal Telecom a call option over the same number of
shares of PT Multimédia with a strike price of 8 euros, which considers the possibility of financial settlement only. This call option can only be exercised if the stock price of PT Multimédia 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 contracted with Banco Espírito Santo a call option over 3 million shares of PT Multimédia with a strike of 11.5 euros 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, with the latter having a 20% discount on the strike. |
As a result of these contracts, Portugal Telecom will receive from Banco Espírito Santo a premium of 16.6 million euros, corresponding to the difference between the acquisitions prices of the options referred above. Portugal Telecom has already received 50% of this amount during the first half of 2005, and remaining 50% will be received in the exercise date of the option acquired by BESI or, if that option is not exercised, in 31 December 2005.
The payment of the amount mentioned above can only be required if the price of the option s that BESI will contract with third parties is paid to BESI in order to obtain the financial hedging of its position on the call and put options over 12.126 million shares of PT Multimédia. Additionally, BESI must prove to Portugal Telecom that such options were contracted and that the payment of such option was not made.
As BESI intends to contract with third parties options that allows it to obtain the hedging of its position in the contract, it was agreed that BESI has the right to reduce the object of the options included in the contract to 6.938 million shares, with the proportional reductions of strikes and fees, if those third parties will not comply with its contractual obligations with BESI, although BESI should develop all efforts to guarantee that those entities will not fail with its obligations.
CONSOLIDATED REPORT - FIRST HALF 2005 | 101 |
Hedging financial instruments
Following IFRS adoption, Portugal Telecom Group make an analysis to its financial instruments in order to identify which ones comply with IAS 39 to be classified as hedging instruments or held for trading. As at June 30 2005 and 31 December 2004, the following financial instruments were classified as hedging derivatives (amounts in millions of euros):
June 30, 2005 | ||||||||
Nominal | Average | |||||||
Company | Value | Operation | maturity (years) | Economic goal | ||||
Cash flow hedge: | ||||||||
Portugal Telecom | 350.5 | Interest rate swaps EUR | 8.2 | Eliminates interest rate exposure | ||||
Portugal Telecom | 310.7 | Interest rate swaps EUR | 7.4 | Eliminates interest rate exposure | ||||
Fair value hedge: | ||||||||
Portugal Telecom | 69.8 | Cross currency swaps EUR/USD | 6.5 | Eliminates exchange rate exposure | ||||
Vivo | 859.9 | Cross currency swaps USD/BRL | 1.2 | Eliminates exchange rate exposure | ||||
Vivo | 42.0 | Cross currency swaps JPY/BRL | 1.8 | Eliminates exchange rate exposure | ||||
31 December, 2004 | ||||||||
Nominal | Average | |||||||
Company | value | Operation | maturity (years) | Economic goal | ||||
Cash flow hedge: | ||||||||
Portugal Telecom | 116.8 | Interest rate swaps EUR | 5.4 | Eliminates interest rate exposure | ||||
Portugal Telecom | 310.7 | Interest rate swaps EUR | 7.9 | Eliminates interest rate exposure | ||||
Fair value hedge: | ||||||||
Portugal Telecom | 69.8 | Cross currency swaps EUR/USD | 7.0 | Eliminates exchange rate exposure | ||||
Vivo | 644.9 | Cross currency swaps USD/BRL | 1.3 | Eliminates exchange rate exposure | ||||
Vivo | 48.9 | Cross currency swaps JPY/BRL | 0.6 | Eliminates exchange rate exposure | ||||
Vivo | 442.9 | Interest rate swaps EUR | 0.0 | Eliminates interest rate exposure |
Financial instruments held for trading
As at 30 June 2005 and 31 December 2004, Portugal Telecom had contracted the following financial instruments which, according with IAS 39, are classified as held for trading derivatives (amounts in million of euros):
June 30, 2005 | ||||||||
Nominal | Average | |||||||
Company | Value | Operation | maturity (years) | Economic goal | ||||
Portugal Telecom | 37.7 | Interest rate swaps EUR | 2.6 | Restructuring of previous derivative financial | ||||
instruments | ||||||||
Portugal Telecom | 200.0 | EUR Call / USD Put | 3.8 | Restructuring of previous derivative financial | ||||
instruments | ||||||||
PTMultimédia | 5.7 | Forwards EUR/USD | 0.2 | Eliminates exchange rate exposure | ||||
Cabo Verde Telecom | 4.0 | Cross currency swaps EUR/USD | 4.5 | Eliminates exchange rate and interest rate exposure | ||||
Portugal Telecom | 249.0 | Equity swaps on PT Multimédia shares | 0.8 | Increase its exposure to PT Multimedia | ||||
Portugal Telecom | 98.2 | Options on PT Multimédia shares | 0.5 | Increase its exposure to PT Multimedia | ||||
Vivo | 382.1 | Cross currency swaps USD/BRL | 1.2 | Eliminates exchange rate exposure | ||||
Vivo | 15.4 | Cross currency swaps EUR/BRL | 0.5 | Eliminates exchange rate exposure | ||||
31 December, 2004 | ||||||||
Nominal | Average | |||||||
Company | value | Operation | maturity (years) | Economic goal | ||||
Portugal Telecom | 44.0 | Swaps de taxa de juro em EUR | 3.0 | Restructuring of previous derivative financial | ||||
instruments | ||||||||
Portugal Telecom | 200.0 | EUR Call / USD Put | 4.3 | Restructuring of previous derivative financial | ||||
instruments | ||||||||
PTMultimédia | 11.5 | Forwards EUR/USD | 0.5 | Eliminates exchange rate exposure | ||||
Cabo Verde Telecom | 4.5 | Cross currency swaps EUR/USD | 4.9 | Eliminates exchange rate exposure | ||||
Portugal Telecom | 249.0 | Equity swaps on PT Multimédia shares | 1.0 | Increase its exposure to PT Multimedia | ||||
Portugal Telecom | 98.2 | Options on PT Multimédia shares | 1.0 | Increase its exposure to PT Multimedia | ||||
Vivo | 306.6 | Cross currency swaps USD/BRL | 1.3 | Eliminates exchange rate exposure | ||||
Vivo | 25.1 | Cross currency swaps EUR/BRL | 0.2 | Eliminates exchange rate exposure |
102
Fair value of financial instruments
The movement in the fair value of derivatives in the first half of 2005 was as follows:
Fair value adjustment | Foreign currency translation adjustments |
||||||||||||
Opening | Reserves | Closing | |||||||||||
balance | Income | (Note 38.4) | Increase | Decrease | balance | ||||||||
Assets derivatives | |||||||||||||
Equity swaps over PT Multimédia shares | 31.2 | (16.3) | - | - | - | - | 14.9 | ||||||
Exchange rate | 39.8 | (30.0) | - | - | 17.5 | 16.8 | 44.1 | ||||||
71.0 | (46.3) | - | - | 17.5 | 16.8 | 59.0 | |||||||
Liabilities derivatives | |||||||||||||
Hedge accounting | |||||||||||||
Interest rate and exchange rate | (60.6) | (94.8) | - | - | 37.6 | (27.5) | (145.3) | ||||||
Interest rate | (21.7) | - | (8.6) | (7.8) | - | - | (38.1) | ||||||
Derivatives held for trading: | |||||||||||||
Interest rate | (0.3) | (1.6) | - | - | - | - | (1.9) | ||||||
Exchange rate | (40.7) | 9.8 | - | - | - | - | (30.9) | ||||||
Options to acquire shares of PT Multimédia | (12.6) | 4.2 | - | - | - | - | (8.4) | ||||||
(135.9) | (82.4) | (8.6) | (7.8) | 37.6 | (27.5) | (224.6) | |||||||
(64.9) | (128.7) | (8.6) | (7.8) | 55.1 | (10.7) | (165.6) | |||||||
The change in the fair value in the first half of 2005 was recorded in the profit and loss statement as follows:
Losses / | ||||||||
Net foreign | (gains) on | |||||||
currency | financial | |||||||
exchange | assets | |||||||
Interest net | losses/(gains) | (Note 14) | Total | |||||
Assets derivatives | ||||||||
Equity swaps over PT Multimédia shares | - | - | (16.3) | (16.3) | ||||
Exchange rate | - | - | (30.0) | (30.0) | ||||
Liabilities derivatives | ||||||||
Hedge accounting | ||||||||
Interest rate and exchange rate | (38.4) | (56.4) | - | (94.8) | ||||
Interest rate | - | - | - | - | ||||
Options to acquire shares of PT Multimédia | - | - | 4.2 | 4.2 | ||||
Derivatives held for trading: | ||||||||
Interest rate | (1.6) | - | - | (1.6) | ||||
Exchange rate | - | - | 9.8 | 9.8 | ||||
(40.0) | (56.4) | (32.3) | (128.7) | |||||
CONSOLIDATED REPORT - FIRST HALF 2005 | 103 |
As at 30 June 2005, derivatives are recorded in the balance sheet as follows:
Cash and | Other | Other non- | |||||||||||
cash | current | Accrued | Deferred | current | |||||||||
equivalents | assets | expenses | income | liabilities | Closing | ||||||||
(Note 21) | (Note 27) | Debt | (Note 35) | (Note 35) | (Note 37) | balance | |||||||
Assets derivatives | |||||||||||||
Equity swaps over PT Multimédia shares | - | 14.9 | - | - | - | - | 14.9 | ||||||
Exchange rate | 44.1 | - | - | - | - | - | 44.1 | ||||||
44.1 | 14.9 | - | - | - | - | 59.0 | |||||||
Liabilities derivatives | |||||||||||||
Hedge accounting | |||||||||||||
Interest rate and exchange rate | - | - | (80.4) | (64.9) | - | - | (145.3) | ||||||
Interest rate | - | - | - | - | - | (38.1) | (38.1) | ||||||
Options to acquire shares of PT Multimédia | - | - | - | - | (8.4) | - | (8.4) | ||||||
Derivatives held for trading: | |||||||||||||
Interest rate | - | - | - | - | - | (1.9) | (1.9) | ||||||
Exchange rate | - | - | - | - | - | (30.9) | (30.9) | ||||||
- | - | (80.4) | (64.9) | (8.4) | (70.9) | (224.6) | |||||||
44.1 | 14.9 | (80.4) | (64.9) | (8.4) | (70.9) | (165.6) | |||||||
40.Guarantees and Financial commitments
As at 30 June 2005 and 31 December 2004, the Company has given guarantees and comfort letters to third parties, as follows:
June 30, 2005 | December 31, 2004 | |||
Bank guarantees given to Portuguese courts for outstanding litigation | 6,023,556 | 9,036,548 | ||
Bank guarantees given to other entities | ||||
By PT Comunicações | 10,590,693 | 18,287,518 | ||
By PT Multimédia | 11,820,236 | 9,332,897 | ||
By TMN | 3,190,352 | 3,162,539 | ||
By PT Prime, S.A. | 3,462,670 | 1,436,260 | ||
Other bank guarantees | 104,259 | 104,259 | ||
29,168,210 | 32,323,473 | |||
Comfort letters given to other entities | ||||
Sport TV | 85,275,370 | 89,518,512 | ||
Warner Lusomundo España | 12,200,000 | 13,333,333 | ||
TV Cabo Macau | 8,269,931 | 7,341,605 | ||
Vasp | 5,588,875 | 5,588,875 | ||
Other | 644,422 | 911,378 | ||
111,978,598 | 116,693,703 | |||
Guarantees given by PT Comunicações were presented to Portuguese Tax Authorities in respect of the tax contingencies discussed in Note 16. Guarantees given by PT Multimédia were presented to Alta Autoridade para a Comunicação Social (the Portuguese media regulator), in connection with the broadcasting of television shows. Guarantees given by TMN were presented to Anacom and are related to TMNs obligations following the UMTS licenses acquired in December 2000.
Comfort letters were issued by the Group in order to guarantee loans obtained by associated companies. On September 1, 2004 PT Multimédia and PPTV granted to Sport TV, a guarantee amounting up 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.
As at 30 June 2005, the Company had also assumed the following financial commitments, besides the ones already recorded in its financial statements:
(a) |
In October 2000, Médi Telecom entered into medium and long term loan contracts totalling 1,000,000,000 euros 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 |
104
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 at 30 June 2005, the maximum amount of this liability is limited to an additional amount of 168
million euros, of which 50 million euros are related to the repayment of debt and ends as soon as Médi Telecom reaches a Net Debt/EBITDA ratio of less than 2.0. |
|
(b) |
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 40,000,000 euros. As at 30 June 2005 Portugal
Telecom had already granted additional paid in capital contributions to Sportinveste amounting to 30,023,168 euros (Note 28). |
(c) | As at 30 June 2005, the Company had assumed commitments for the purchase of basic equipment amounting to approximately 94.4 million euros. |
41.Cash Flows Statement
The consolidated Cash Flow Statement has been prepared in accordance with IAS 7. Significant transactions are summarized below:
(a) Cash receipts resulting from financial investments were as follows:
Disposed of / investments in companies : | ||
Intelsat | 15,055,553 | |
Marconi France | 837,680 | |
15,893,233 | ||
Loans given: | ||
Vortal | 242,187 | |
Lusomundo serviços | 1,750,000 | |
1,992,187 | ||
17,885,420 | ||
(b) Cash receipts resulting from dividends were as follows: | ||||
CTM | 5,034,862 | |||
Páginas Amarelas | 3,526,280 | |||
BES | 1,545,600 | |||
Lisboa TV | 906,861 | |||
Othes | 359,250 | |||
11,372,853 | ||||
CONSOLIDATED REPORT - FIRST HALF 2005 | 105 |
(d) Payments resulting from financial investments were as follows:
Investments acquisition | ||
TCO (i) | 9,287,563 | |
Distodo | 1,200,000 | |
10,487,563 | ||
Payments resulting from given loans: | ||
Lusomundo Serviços | 1,750,000 | |
Others | 846,598 | |
2,596,598 | ||
13,084,161 | ||
(i) | Corresponds to the liquidation of the remaining value in debt relates to acquisition in TCO in 2003. |
(d) | As at 30 June 2005 the cash receipts resulting from loans obtained includes 2,000,000,000 euros related to Eurobonds issued by PTI Finance BV in the first half of 2005 (Note 32). The outstanding amount relates to comercial paper and other bank loans. |
(e) | In the first half of 2005 payments resulting from loans obtained, includes 584,950,000 euros related to the amortization of the floating rate notes issued by PT Finance BV on December 16, 2001 (Note 32). The outstanding amount relates to commercial paper and other bank loans. |
(f) | As at 30 June 2005 the payments resulting from dividends were from the follows companies: |
Portugal Telecom (Note 38) | 395,085,000 | |
PT Multimédia | 24,478,010 | |
Brasilcel's subsidiaries | 3,834,188 | |
Cabo Verde Telecom | 3,503,903 | |
Others | 2,315,526 | |
429,216,627 | ||
(g) | In the fisrt half of 2005, the caption Other payments resulting from financing activities includes 59,033,605 euros related with payment to the minority interests of PT Multimédia under the warrants program. | ||
(h) | The reconciliation between the amount recorded in balance sheet as cash and cash equivalents and the amount recorded in cash flow statement in the ended of the first half of 2005, were as follows: | ||
C ash and cash equivalents (Note 21) | 2.768.175.675 | ||
B ank overdrafts (Note 32) | (24.794) | ||
2.768.150.881 | |||
The reconciliation between the amount recorded in balance sheet as cash and cash equivalents as at 31 December, 2004 | |||
and the amount recorded as opening balance in cash flow statement in the first half of 2005, were as follows: | |||
Cash and cash equivalents (Note 21) | 1,946,960,215 | ||
Bank overdrafts (Note 32) | (14,647,937) | ||
Cash and cash equivalents excluding discontinued operations | 1,932,312,278 | ||
Cash and cash equivalents of discontinued operations | 8,466,721 | ||
1,940,778,999 | |||
106
42.Related Parties
Balances and transactions between Portugal Telecom and subsidiaries were eliminated under the consolidation process, therefore were not disclosed herein. The terms and contractual conditions in agreements entered by Portugal Telecom and subsidiaries are similar to those ones applicable to other independent entities in similar transactions.
Some of the major shareholders of Portugal Telecom are financial institutions and in the ordinary course of the business, Portugal Telecom entered in some transaction with those entities. The terms and contractual conditions in agreements entered by Portugal Telecom and those related parties are similar to those ones applicable to other independent entities in similar transactions. Under the above mentioned agreements, Portugal Telecom rendered telecommunication services and those financial institutions rendered financial consultancy and insurance.
In addition, as at 30 June 2005, Portugal Telecom entered in the following agreements: (i) Portugal Telecom and Group BES entered in certain derivative financial instruments on PT Multimédias shares (Note 39); and (ii) Portugal Telecom, Group BES and Group CGD entered in an agreement to develop e-commerce activities.
Under the incorporation of Brasilcel, Portugal Telecom and Telefónica entered in a strategic agreement, which allows Portugal Telecom to acquire 1.5% of Telefónicas share capital, and allows Telefónica to acquire 10% of Portugal Telecoms share capital. As at 30 June 2005, Telefónica held 9.64% of Portugal Telecoms share capital.
Portugal Telecom entered in a Shareholders Agreement with Telefónica to manage Vivo and entered in certain international traffic agreements, which have substantially the same conditions of all other similar agreements entered with independent parties.
As at 30 June 2005 and 2004, the remuneration of Board Members and related committees, is as follows:
2005 | 2004 | |||||||
Fixed | Variable | Fixed | Variable | |||||
Executive board menbers | 1,652,711 | 4,184,129 | 1,591,571 | 3,176,378 | ||||
Non-executive board menbers | 1,082,674 | 398,489 | 912,362 | 662,372 | ||||
Fiscal Committe | 25,167 | - | 24,514 | - | ||||
General Meeting's board | 2,483 | - | 2,920 | - | ||||
2,763,036 | 4,582,618 | 2,531,367 | 3,838,750 | |||||
43. Legal claims
43.1. 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 ICPInstituto de Comunicações de Portugal (currently ANACOMAutoridade Nacional de Comunicações"ANACOM") and by Direcção Geral de Concorrência e Preços has caused several legal actions from DECOAssociação 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 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
CONSOLIDATED REPORT - FIRST HALF 2005 | 107 |
Comunicações during 2004, which had a cost of Euro 10 million (note 13) that was recorded as another non-operating expense. As a result of this agreement, DECO removed all legal actions against PT Comunicações on this subject matter.
43.2. Regulatory authority
Portugal Telecoms current operations are subject to regular investigations and inspections, generally conducted by ANACOM, by the European Commission and by the Portuguese Competition Authority, within the framework of a policy of compliance with the rules and regulations applicable to the PT Group. At the moment, ongoing investigations are being conducted by the Portuguese Competition Authority into alleged abusive practices, such as predatory pricing, margin squeezes and discriminatory practices. In the event Portugal Telecom is indicted for the non compliance with the applicable laws and regulations, under the relevant legislation fines and penalties could be imposed. Until this moment, PT Comunicações has twice been accused of allegedly denying access to the ducts in which the basic telecommunications network is installed. In response to these accusations, PT Comunicações held that, despite the fact that it has provided and is still providing the majority of the operators access to its ducts in a non discriminatory manner, according to its responsibilities of managing the said infra-structures, it considers that, given the circumstances, competition law should not prevent PT Comunicações from reserving the ducts to itself, in accordance with the conditions set in the telecommunications regulatory framework. PT Comunicações hopes that the Competition Authority arrives at the same conclusion once it concludes the ongoing investigations. Although the possibility of the application of penalties can not be excluded in this case and in other cases, this would occur for the first time, and Portugal Telecom believes that, based on the information advanced by its lawyers, as a matter of principle, these cases shall not have a significant material impact on its financial statements consolidated as at 30 June 2005.
43.3. Other claims and legal actions
Probable claims and legal actions
As at 30 June 2005, there were several claims and legal actions against Groups companies, which, in accordance with our internal services and external advisors, settlement is considered to be probable. For those claims and legal actions, the Group recognized provisions (Note 36) to cover the probable future out flow, with the following nature:
Civil claim (i) | 58,735,937 | |
Labor claim | 8,786,757 | |
Administrative claim (ii) | 20,558,929 | |
Others | 3,151,664 | |
91,233,288 | ||
(i) | These claims results mainly from unilateral unwind of agreements with suppliers. |
(ii) | This caption includes mainly a claim against TCO related with the privatization of Telebrás in 1998. |
Possible claims and legal actions
As at 30 June 2005, there were several claims and legal actions against Groups companies that, in accordance with our internal services and external advisors, settlement is considered to be possible. The nature of those claims and legal actions is as follows:
Civil claim (i) | 96,180,604 | |
Labor claim | 9,302,860 | |
Others | 2,652,915 | |
108,136,379 | ||
(i) | This caption includes mainly indemnities of: 1) 63,646,731 euros related with changes in licensing terms of new TV channels demanded by TVI-Televisão Independente.S.A.; and 2) 15,000,000 euros related with the abuse of dominant position. |
108
44. Subsequent events
The following significant events occurred after 30 June 2005:
On 28 February 2005, PT Multimédia entered in an agreement with Controlinveste to sell its financial investment in Lusomundo Serviços, by a total amount of 173.8 million euros. In additional, Lusomundo Serviços would acquire the 5.94% investment in Lusomundo Media held by Portugal Telecom, by a total amount of 10.1 million euros. On 26 August 2005 and after the Competition Authority approval, PT Multimedia executed the sale of Lusomundo Serviços to Controlinveste.
On 5 August 2005, the Group reached an agreement with Embratel to sell its 100% stake in PrimeSys in Brazil for a total consideration of R$ 231 million, equivalent to Euro 81 million, adjusted for the Brazilian Interbank rate (CDI) up to the closing of the transaction, which is pending approval by the local telecommunications regulator.
45.Application of International Financial Reporting Standards
Portugal Telecom has adopted International Financial Reporting Standards (IFRS) in 2005 and in accordance with IFRS 1 First-Time Adoption of International Financial Reporting Standards has used 1 January 2004 to compute all transition adjustments using the retrospective method, excluding some exceptions permitted by IFRS 1. Before the adoption of IFRS, PTs financial statements were prepared in accordance with Portuguese Generally Accepted Accounting Principals (PGAAP).
45.1. Main differences between IFRS and PGAAP
45.1.1. Dismantling and removal obligations
Under IFRS, the acquisition cost of tangible assets should include the net present value of any future dismantling or removal liabilities, if its value could be reliably estimated and the cash out flow is likely. Under PGAAP, those liabilities should be recognized when the cost is incurred.
45.1.2. Sale and Lease Back transactions
PT has entered into Qualified Technological Equipment Transactions over certain of its telecommunications equipments and into sale and lease back transactions over certain of its buildings, and received up-front fees to enter in those transactions. Under IFRS, all gains obtained with the sale of the equipment should be recognized over the lease period, the assets should not be derecognized of the balance sheet and all special purpose vehicles (SPV) should be consolidated by the entities that substantially obtained all the economic benefits of the transaction. Under PGAAP, gains were recognized in net income when obtained, for certain transactions the assets were derecognized of the balance sheet and the SPVs were not consolidated.
45.1.3. Post retirement benefits
Under IFRS, and considering the provisions of IFRS 1 regarding post retirement benefits, PT has adopted the following accounting procedures: (1) the use of the 10% corridor to recognise in the net actuarial gains and losses; and (2) the amortisation of the transition obligation over a period of five years. Under PGAAP, all actuarial gains and losses and transition obligation were amortized over the net income during the average working life of employees.
CONSOLIDATED REPORT - FIRST HALF 2005 | 109 |
45.1.4. Profit sharing and bonus plans
Under IFRS, the costs incurred with profit sharing plans, including the deliver of PT shares to employees, is recognised at fair value in the income statement when the obligation is assumed. Under PGAAP, this cost is recognised directly in shareholders equity when the distribution of shares occurs.
45.1.5. Provisions for restructuring
Under IFRS, provisions for restructuring can only be recognized when certain criteria established by IAS 37 are met, namely the existence of a plan approved by management, the ability to reasonably measure the obligation and the likelihood of a cash outflow, among others. Under PGAAP, the recognition of provision is subject to a less stringent criteria.
45.1.6. Amortization of goodwill
Under IFRS, goodwill recognized in the acquisition of financial investments is not amortized, being subject to periodic impairment tests. Under PGAAP, goodwill is amortized through income, although being also subject to periodic impairment tests. IFRS 1 established that transition data for the application of this rule should be applied only after 1 January 2004.
45.1.7. Amortization of telecommunication licenses
Under IFRS, telecommunication licenses are amortized on a straight line basis during its useful life. Under PGAAP it is permitted the use of different amortization methodologies, in line with the expected benefits obtained from the use of the license.
45.1.8. Purchase price allocation
Under IFRS, the purchase price should be allocated to the fair value of the assets and liabilities acquired, to unrecognized intangible assets, and the remaining portion to goodwill. Under PGAAP, the excess amount of the proportional net assets acquired does not need to be allocated to unrecognized intangible assets, and usually is allocated to goodwill. PT used the exception of IRFS 1, and has only applied this rule to business combinations entered after 1 January 2004.
45.1.9. Start-up expenses and research and development
Under IFRS, start-up expenses are recognized when incurred. Under PGAAP, star-up expenses are recognized as an intangible asset and are amortized on a straight line basis.
Under IFRS, expenses related to the research phase should be recognized when incurred, and development expenses can be recognized as an intangible, if any future benefit is expected, and amortized on a straight line basis during the period benefits are expected to occur. Under PGAAP, research and development expenses are recognized as an intangible asset and are amortized on a straight line basis, if any future benefit is expected to occur.
45.1.10. Deferred costs
Under IFRS, deferred costs related to training, marketing and publicity and maintenance and repairs are recognized when incurred. Under PGAAP, these costs can be recognized as an intangible asset and amortized on a straight line basis, if any future benefit is expected to occur.
45.1.11. Subscriber Acquisition Costs (SACs)
Under IFRS, SACs can be recognized in net income when incurred or alternatively they be recognized as an intangible asset and amortized over the expected life of the customer, if it is possible to allocate the SACss to each customer. PT opted to recognize SACs when incurred, which differs from its previous PGAAP policy of deferring SACs.
110
45.1.12. Financial instruments
Under IFRS, financial instruments are measured at fair value with the change in the fair value being recognized either in net income or shareholders equity, depending on the possibility of applying hedge accounting according to the rules of IAS 39. Under PGAAP, changes in the fair value of financial instruments that are clearly identified as held for sale are recognized in the income statement.
45.1.13. Equity swaps on own shares
Under IFRS, equity swaps on own shares contracted by PT comply with the requirements of IAS 39 to be recognized as a liability related with the acquisition of treasury shares. Under PGAAP, a provision is recognized in the income statement, if the fair value of the equity swaps is negative.
45.1.14. Exchangeable bonds
Under IFRS, exchangeable bonds are initially recognized in two components: (1) the present value of the liability; and (2) the market value of the exchange option in shareholders equity. The liability is subsequently measured at amortised cost. Under PGAAP, exchangeable bonds are recognized as a liability until the maturity date.
45.1.15. Revenue recognition
Under IFRS, revenues from the sale of certain bundling products/services should be splited between all of its components, and recognized in accordance with the criteria defined for each component. Under PGAAP, revenues from bundling products/services are recognized when the sale of those bundled products/services occurs.
45.1.16. Financial investments (available for sale)
Under IFRS, financial investments classified as available for sale should be measured at fair value and the change in fair value recognized in shareholders equity; on the disposal of the investment, all accumulated changes in the fair value should be allocated to net income. Under PGAAP, the financial investments are recognized at the lower of acquisition cost or market value, with the related adjustments being recorded in the income statement.
45.1.17. Reclassifications
Under IFRS, certain reclassifications were made to the financial statements under PGAAP. The major reclassifications were as follows:
CONSOLIDATED REPORT - FIRST HALF 2005 | 111 |
45.2. Impacts
The reconciliation between PGAAP and IFRS of the shareholders equity as of January 1 and December 31, 2004, net of minority interests and taxes, is as follows:
January 1, 2004 | December 31, 2004 | |||
Equity before minority interests according | ||||
with Portuguese GAAP | 2,940,826,925 | 2,704,777,172 | ||
Asset retirement obligation (1) | (18,810,533) | (20,298,381) | ||
Sale and lease back transactions (2) | (36,059,681) | (37,652,646) | ||
Post retirement benefits (3) | 12,098,075 | 26,384,200 | ||
Provisions for restructuring (5) | 6,245,570 | 4,240,757 | ||
Goodwill amortization (6) | - | 84,596,658 | ||
Concession licenses amortization (7) | (43,528,929) | (58,019,701) | ||
Purchase accounting (8) | - | (796,006) | ||
Start-up and research and development expenses (9) | (25,667,366) | (24,116,358) | ||
Deferred costs (10) | (7,749,026) | (5,429,050) | ||
Subscriber acquisition costs (11) | (24,175,458) | (18,378,479) | ||
Financial instruments (12) | 16,004,606 | 12,942,833 | ||
Equity swaps on own shares (13) | (198,826,466) | (189,751,440) | ||
Exchangeable bonds (14) | 7,414,034 | 3,414,970 | ||
Revenue recognition (15) | (6,928,745) | (6,483,461) | ||
Available for sale securities (16) | - | 2,864,216 | ||
(319,983,919) | (226,481,888) | |||
Equity before minority interests according | ||||
with IFRS | 2,620,843,006 | 2,478,295,284 | ||
The reconciliation between PGAAP and IFRS of the net income for the six months period ended June 30, 2004 and the year ended December 31, 2004, net of minority interests and taxes, is as follows:
June 30, 2004 | December 31, 2004 | |||
Net income according with Portuguese GAAP | 322,520,807 | 500,125,395 | ||
Asset retirement obligation (1) | (636,656) | (1,487,848) | ||
Sale and lease back transactions (2) | (796,482) | (1,592,965) | ||
Post retirement benefits (3) | 10,715,616 | 14,286,125 | ||
Distribuições de acções a empregados (4) | - | (4,509,942) | ||
Provisions for restructuring (5) | (1,232,084) | (2,004,813) | ||
Goodwill amortization (6) | 42,936,083 | 88,480,054 | ||
Concession licenses amortization (7) | (9,177,068) | (17,882,350) | ||
Purchase accounting (8) | (398,003) | (796,006) | ||
Start-up and research and development expenses (9) | (3,194,794) | 1,551,008 | ||
Deferred costs (10) | 125,113 | 2,383,631 | ||
Subscriber acquisition costs (11) | 5,061,327 | 5,796,979 | ||
Financial instruments (12) | 27,421,313 | 4,491,854 | ||
Equity swaps on own shares (13) | (7,082,457) | (8,196,562) | ||
Exchangeable bonds (14) | (1,349,745) | (3,999,064) | ||
Revenue recognition (15) | 760,913 | 445,284 | ||
Net income according with IFRS | 385,673,883 | 577,090,780 | ||
112
The reconciliation between PGAAP and IFRS of balance sheet as of January 1 and December 31, 2004, is as follows:
January 1, 2004 | January 1, 2004 | ||||
(POC) | IFRS Adjustments | (IFRS) | |||
Assets | |||||
Current assets | 5,039,658,452 | (743,787,240) | 4,295,871,212 | ||
Investments in group companies | 390,623,158 | (83,834,708) | 306,788,450 | ||
Other investments | 167,428,159 | - | 167,428,159 | ||
Intangible assets | 3,040,150,260 | (135,233,343) | 2,904,916,917 | ||
Tangible assets | 4,267,958,038 | (67,672,410) | 4,200,285,628 | ||
Deferred taxes | 583,471,389 | 776,683,328 | 1,360,154,717 | ||
Other non-current assets | 68,525,804 | 942,155,349 | 1,010,681,153 | ||
Total assets | 13,557,815,260 | 688,310,976 | 14,246,126,236 | ||
Liabilities | |||||
Current liabilities | 3,354,484,714 | 171,424,016 | 3,525,908,730 | ||
Accrued post-retirement liability | 1,256,038,995 | (16,687,000) | 1,239,351,995 | ||
Deferred taxes | 300,731,656 | 38,125,000 | 338,856,656 | ||
Other non-current liabilities | 5,061,765,002 | 829,378,196 | 5,891,143,198 | ||
Total liabilities | 9,973,020,367 | 1,022,240,212 | 10,995,260,579 | ||
Shareholder's equity | |||||
Equity before minority interests | 2,940,826,925 | (319,983,919) | 2,620,843,006 | ||
Minority interests (Note 18) | 643,967,968 | (13,945,317) | 630,022,651 | ||
Total shareholder's equity | 3,584,794,893 | (333,929,236) | 3,250,865,657 | ||
Total liabilities and shareholder's equity | 13,557,815,260 | 688,310,976 | 14,246,126,236 | ||
December 31, 2004 | December 31, 2004 | ||||
(POC) | IFRS Adjustments | (IFRS) | |||
Assets | |||||
Current assets | 4,667,050,200 | (769,804,857) | 3,897,245,343 | ||
Investments in group companies | 321,849,193 | (1,282,500) | 320,566,693 | ||
Other investments | 110,763,483 | 3,950,643 | 114,714,126 | ||
Intangible assets | 4,062,860,276 | (817,934,288) | 3,244,925,988 | ||
Tangible assets | 3,212,854,903 | 721,410,488 | 3,934,265,391 | ||
Deferred taxes | 491,978,536 | 633,333,227 | 1,125,311,763 | ||
Other non-current assets | 96,052,569 | 846,524,163 | 942,576,732 | ||
Total assets | 12,963,409,160 | 616,196,876 | 13,579,606,036 | ||
Liabilities | |||||
Current liabilities | 3,783,149,173 | 231,909,146 | 4,015,058,319 | ||
Accrued post-retirement liability | 1,269,868,244 | (37,752,860) | 1,232,115,384 | ||
Deferred taxes | 288,726,354 | 39,130,053 | 327,856,407 | ||
Other non-current liabilities | 4,335,863,586 | 622,788,082 | 4,958,651,668 | ||
Total liabilities | 9,677,607,357 | 856,074,421 | 10,533,681,778 | ||
Shareholder's equity | |||||
Equity before minority interests | 2,704,777,172 | (226,481,888) | 2,478,295,284 | ||
Minority interests (Note 18) | 581,024,631 | (13,395,657) | 567,628,974 | ||
Total shareholder's equity | 3,285,801,803 | (239,877,545) | 3,045,924,258 | ||
Total liabilities and shareholder's equity | 12,963,409,160 | 616,196,876 | 13,579,606,036 | ||
CONSOLIDATED REPORT - FIRST HALF 2005 | 113 |
EXHIBIT I
I.1. | Subsidiaries Companies | |
I.2. | Associeted Companies | |
I.3. | Companies Consolidated by the Proportional Method |
114
Exhibit I Details of Subsidiary, Affiliated and Investee Companies as at 30 June 2005 and 2004
1. Subsidiaries Companies
The following companies were included in the consolidation as at 30 June 2005 and 31 December 2004:
Company | Head office | Activity | Percentage of ownership | |||||||
30 June 2005 | 2004 | |||||||||
Direct | Total | Total | ||||||||
Portugal Telecom (parent company) | Lisbon | Holding company. | ||||||||
(Note 1) | ||||||||||
Academia Global, Ltda. (a) | São Paulo | Development and | PTM.com Brasil | 100.00% |
100.00% |
|||||
commercialization of technological | (100%) | |||||||||
goods and services in the areas of | ||||||||||
education and professional training, including support services. |
||||||||||
Açormedia - Comunicação Multimedia e | Ponta | Providing services on edition of | Lusomundo Media | 44.77% |
44.18% |
|||||
Edição de Publicações, S.A. (Açormedia) (b) |
Delgada | publications, audiovisual communication, multimedia services and edition of books. |
(90%) | |||||||
Cabo TV Açoreana, S.A. | Ponta | Distribution of television signals by | TV Cabo Portugal | 48.98% |
48.24% | |||||
Delgada | cable and satellite in the Azores | (83.82%) | ||||||||
area. | ||||||||||
Cabo TV Madeirense, S.A. | Funchal | Distribution of television signals by | TV Cabo Portugal | 40.32% |
39.71% | |||||
cable and satellite in the Madeira | (69%) | |||||||||
area. | ||||||||||
PT Ventures (40%) | 40.00% |
40.00% | ||||||||
Cabo Verde Telecom, S.A. | Praia | Fixed and mobile | ||||||||
telecommunications services in | ||||||||||
Cabo Verde. | ||||||||||
Canal 20 TV, S.A. | Madrid | Distribution of TV products. | PT Multimedia | 29.22% |
28.78% | |||||
(50%) | ||||||||||
Contact Cabo Verde Telemarketing e | Praia | Call and contact center services. | PT Contact (100%) | 100.00% |
100.00% | |||||
Serviços de Informação, S.A. | ||||||||||
CST Companhia Santomense de | São Tomé | Fixed and mobile | PT Comunicações | 51.00% |
51.00% | |||||
Telecomunicações, S.A.R.L. | telecommunication services in São | (51%) | ||||||||
Tomé e Príncipe. | ||||||||||
Directel - Listas Telefónicas | Lisbon | Publication of telephone directories | PT Ventures (100%) | 100.00% |
100.00% | |||||
Internacionais, Lda. (Directel) | and operation of related data bases. | |||||||||
Directel Cabo Verde Serviços de | Praia | Publication of telephone directories | Directel (60%) | 76.00% |
76.00% | |||||
Comunicação, Lda. | and operation of related databases | Cabo Verde | ||||||||
in Cabo Verde | Telecom (40%) | |||||||||
Directel Macau Listas Telefónicas, | Macau | Publication of telephone directories | Directel (75%) | 80.00% |
80.00% | |||||
Lda. | and operation of related databases | PT Ásia (5%) | ||||||||
in Macau. | ||||||||||
Directel Uganda Telephone | Uganda | Publication of telephone directories. | Directel (90%) | 90.00% |
90.00% | |||||
Directories, Limited (a) | ||||||||||
DirectMedia Ásia, Lda. | Hong | Publishing of B2B directories. | Directel (99%) | 100.00% |
100.00% | |||||
Kong | PT Ásia (1%) | |||||||||
Elta - Empresa de Listas Telefónicas de | Luanda | Publication of telephone directories. | Directel (55%) | 55.00% |
55.00% | |||||
Angola, Lda. |
CONSOLIDATED REPORT - FIRST HALF 2005 | 115 |
Percentage of ownership | ||||||||||
Company |
Head |
Activity | 30 June 2005 |
2004 | ||||||
office |
Direct | Total |
Total | |||||||
Empracine - Empresa Promotora de Actividades Cinematográficas, Lda. |
Lisbon | Developing activities on movies exhibition. |
Lusomundo SII | 58.36% |
57.48% | |||||
(100%) | ||||||||||
Empresa Cine Mourense, Lda. (a) | Moura | Cinema exhibition. | PT Multimedia | 58.12% |
57.25% | |||||
(99.46%) | ||||||||||
Empresa de Recreios Artísticos, Lda. | Lisbon | Cinema exhibition. | Lusomundo SII | 53.65% |
52.85% | |||||
(ERA) (a) | (87.90%) | |||||||||
PT Multimedia |