UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM CB
TENDER OFFER/RIGHTS OFFERING NOTIFICATION FORM
Please place an X in the box(es) to designate the appropriate rule provision(s)
relied upon to file this Form:
Securities Act Rule 801 (Rights Offering) [_]
Securities Act Rule 802 (Exchange Offer) [_]
Exchange Act Rule 13e-4(h)(8) (Issuer Tender Offer) [_]
Exchange Act Rule 14d-1(c) (Third Party Tender Offer) [X]
Exchange Act Rule 14e-2(d) (Subject Company Response) [_]
Filed or submitted in paper if permitted by Regulation S-T Rule 101(b)(8) [_]
Terra Networks, S.A.
--------------------------------------------------------------------------------
(Name of Subject Company)
Terra Networks, Inc.
--------------------------------------------------------------------------------
(Translation of Subject Company's Name into English (if applicable))
Kingdom of Spain
--------------------------------------------------------------------------------
(Jurisdiction of Subject Company's Incorporation or Organization)
Telefonica, S.A.
--------------------------------------------------------------------------------
(Name of Person(s) Furnishing Form)
American Depository Shares CUSIP 88100W103/ISIN US88100W1036
Common Stock ISIN ES0178174019
--------------------------------------------------------------------------------
(CUSIP Number of Class of Securities (if applicable))
Antonio Alonso Ureba
Joaquin de Fuentes Bardaji
Telefonica, S.A.
Gran Via, 28. Planta 9
28001 Madrid
copies to:
Richard D. Pritz
Clifford Chance US LLP
200 Park Avenue
New York, New York 10166
--------------------------------------------------------------------------------
(Name, Address (including zip Code) and Telephone Number (including area code)
of Person(s) Authorized to Receive Notices and Communications on Behalf of
Person(s) Furnishing Form)
June 23, 2003
--------------------------------------------------------------------------------
(Date Tender Offer/Rights Offering Commenced)
PART I - INFORMATION SENT TO SECURITY HOLDERS
Item 1. Home Jurisdiction Documents.
Not Applicable.
Item 2. Informational Legends.
This offer is made for the securities of a foreign company. The offer is
subject to disclosure requirements of a foreign country that are different from
those of the United States. Financial Statements included in the document, if
any, have been prepared in accordance with foreign accounting standards that may
not be comparable to the financial statements of U.S. companies.
It may be difficult for you to enforce your rights and any claim you may
have arising under the U.S. federal securities laws because the offeror is
located in a foreign country and some or all of its officers and directors may
be residents of a foreign country. You may not be able to sue a foreign company
or its officers or directors in a foreign court for violations of U.S.
securities laws. It may be difficult to compel a foreign company and its
affiliates to subject themselves to a U.S. court's judgment.
PART II - INFORMATION NOT REQUIRED TO BE SENT TO SECURITY HOLDERS
The following exhibit is attached to this Form CB as Exhibit A:
Prospectus for the Take-Over Bid Launched by Telefonica, S.A. for Terra
Networks, S.A., authorized by the Comision Nacional del Mercado de Valores
of Spain on June 19, 2003 and dated June 18, 2003, which includes the
Announcement of the Offer as Annex 7.
PART III - CONSENT TO SERVICE OF PROCESS
On May 29, 2003, Telefonica filed with the Commission a written irrevocable
consent and power of attorney on Form F-X.
PART IV - SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
TELEFONICA, S.A.
By: /s/ ANTONIO ALONSO UREBA
-----------------------------------
Name: Antonio Alonso Ureba
Title: General Secretary and Secretary
to the Board of Directors
Date: June 20, 2003
EXHIBIT A
Translation - for information purposes only
PROSPECTUS FOR THE TAKE-OVER BID LAUNCHED BY
TELEFONICA, S.A.
FOR
TERRA NETWORKS S.A.
June 2003
(In accordance with the provisions of Spanish Securities Market Law 24/1988
dated 28 July and Spanish Royal Decree 1197/1991 dated 26 July governing
Take-over Bids)
Translation - for information purposes only
INDEX
CHAPTER I SUBJECTIVE ASPECTS OF THE BID............................................................... 6
I.1 Corporate name and registered address of the Target Company................................ 6
I.2 Corporate name, corporate object and registered address of the Bidder....................... 6
I.3 Composition and structure of the Bidder's group of Companies. Structure of the stakes held
in the share capital of the Target Company............................................................. 7
I.4 Persons responsible for the Prospectus...................................................... 14
I.5 Securities of the Target Company owned, either directly or indirectly, by the Bidder, by
companies in the Bidder's group, or by companies acting on behalf of or in concert with the Bidder, or
by the members of their management bodies, with an indication of the voting rights corresponding to
the securities and the date and price of the transactions carried out in the last twelve months....... 14
I.6 Bidder securities owned by the Target Company.............................................. 17
I.7 Agreements between the Bidder and the members of the Board of Directors of the Target
Company, or its stockholders. Privileges granted to Board members..................................... 17
I.8 Information regarding the activity and the economic/financial position of the Bidder and
its consolidated group, indicating its equity, turnover, total assets, debt and results, with express
reference to any qualification or relevant comments in the audit reports relating thereto............. 18
CHAPTER II OBJECTIVE COMPONENTS OF THE BID............................................................ 28
II.1 Securities covered by the Bid.............................................................. 28
II.2 Consideration offered for the shares....................................................... 29
II.3 Maximum shares covered by the Bid and minimum to be acquired in order for the Bid to be
effective............................................................................................ 29
a) Maximum.................................................................................... 29
b) Minimum.................................................................................... 29
c) Bidder's Commitments....................................................................... 30
II.4 Guarantees established by the Bidder for settlement of the Bid............................. 30
II.5 Financing of the Bid....................................................................... 30
II.6 Conditions which apply to the Bid.......................................................... 30
CHAPTER III........................................................................................... 31
FORMAL COMPONENTS OF THE BID.......................................................................... 31
- 2 -
Translation - for information purposes only
III.1 Acceptance period.......................................................................... 31
III.2 Formalities relating to the acceptance and manner and period for receipt of the
consideration......................................................................................... 31
III.2.1 Formalities related to the acceptance of the Bid........................................... 31
III.2.2 Settlement procedure and delivery of consideration for the Bid............................. 32
III.3 Acceptance and settlement expenses of the Bid.............................................. 32
III.4 Appointment of the Stockbrokers acting on behalf of the Bidder............................. 33
III.5 Formalities for the acceptance of the Bid in the case of TERRA shares represented by
American Depositary Shares ("ADSs")................................................................... 33
CHAPTER IV............................................................................................ 35
OTHER INFORMATION..................................................................................... 35
IV.1 Objective of the Bid and future activity of the Target Company............................. 35
Activity. Assets and Liabilities...................................................................... 36
Changes to the By-laws and management body............................................................ 37
Trading of the securities of the Target Company....................................................... 37
IV.2 Impact of this operation on the Bidder..................................................... 38
IV.3 Impact of competition law regulations...................................................... 39
IV.4 Administrative Authorisations.............................................................. 39
IV.5 Companies which have participated in the transaction....................................... 39
IV.6 Availability of the Prospectus............................................................. 40
LIST OF DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 1: Certificate from the Madrid Mercantile Registry confirming the
existence of the Bidder, and the Certificate from the Secretary
of the Board of Directors of TELEFONICA, confirming its current
By-laws.
Annex 2: Certificate of the resolution adopted by the Board of Directors
of TELEFONICA to launch the Bid and authorising the signature of
the Prospectus.
- 3 -
Translation - for information purposes only
Annex 3: Shares in TERRA, S.A. held by the members of the Board of
Directors of the Bidder and transactions carried out by these
members during the twelve months prior to the launching of this
Bid and up to the date of the present Prospectus.
Annex 4: Individual and consolidated annual accounts of the Bidder
corresponding to the financial year ended on 31 December 2002
(prepared by the Board of Directors, audited and approved by the
Ordinary General Stockholders' Meeting).
Annex 4 bis: The individual and consolidated financial statements of
TELEFONICA on 31 March 2003
Annex 5: Certificate of the freezing of the TERRA shares held by
TELEFONICA.
Annex 6: Documents verifying the guarantee securing payment of the
consideration under the Bid.
Annex 7: Standard form for the announcement of the Bid.
Annex 8: Letter regarding the publication of the Bid.
Annex 9: Letters of acceptance from the Stockbrokers acting on behalf of
the Bidder.
Annex 10: Copy of the notifications related to this Bid filed by TELEFONICA
before the competition authorities in the United States of
America and in Mexico.
- 4 -
Translation - for information purposes only
INTRODUCTION
The present Take-over Bid is launched in Spain and in the United States of
America. In the United States of America the Take-over Bid is addressed to the
holders of shares in TERRA NETWORKS, S.A. (hereinafter "TERRA") represented by
American Depositary Shares ("ADSs"), which are listed on the United States'
Nasdaq National Market.
On the date of the present Prospectus, the number of TERRA shares represented by
ADSs, according to information provided by TERRA, totals 58,703,234 shares, of
which, on 9 June 2003, 26,765,961 shares are subject to the Stock Option Plan
for employees of Lycos Inc., and 2,420,468 shares held by Lycos Inc. (company
controlled by TERRA) are included in TERRA's treasury stock, leaving a total of
29,516,805 shares. Each of the ADSs grants the right to receive one TERRA share.
In accordance with regulation 14d-1(c) of the Securities Exchange Act, when 10%
or less of the share capital, calculated in accordance with the provisions of
the aforementioned regulation, of a foreign company subject to a take-over Bid
is owned by stockholders resident in the United States of America, the bidder is
not obliged to present the documentation indicated in regulation 13-(e)-3, and
the only obligation is that the terms of the bid for the American stockholders
be the same as those applicable to the rest of the stockholders, including the
distribution of a translation of the documentation filed with the Spanish
Securities Market Commission to the American stockholders. This documentation
shall also be filed before the Securities and Exchange Commission (hereinafter
the "SEC") using a form CB, at the latest on the day after the documentation is
made available to the public in Spain.
As a result, given that the information held by Telefonica, S.A. (hereinafter,
"TELEFONICA") demonstrates that, in accordance with applicable rules, less than
10% of the TERRA shares are owned by residents in the United States of America,
TELEFONICA considers that this Take-over Bid is subject to the aforementioned
regulations.
On 29 May 2003, one day after the present Take-over Bid was announced in Spain
on 28 May 2003, the corresponding form CB was filed before the SEC attaching a
copy in English of the relevant fact and the press article published in Spain,
together with a form FX communicating the appointment of an agent for
notification purposes in the United States of America.
In addition, TELEFONICA, after the present Take-over Bid is authorised in Spain,
shall send English versions of the present Prospectus together with any
necessary complementary documentation to the holders of ADSs. Likewise, this
documentation shall be filed before the SEC using a form CB.
Finally, and with regard to the procedure for the holders of TERRA shares
represented by ADSs to accept the present Take-over Bid, please refer to section
III.5 of this Prospectus.
- 5 -
Translation - for information purposes only
CHAPTER I
SUBJECTIVE ASPECTS OF THE BID
I.1 Corporate name and registered address of the Target Company.
The Target Company of this Take-over Bid (hereinafter, the "Bid") is
TERRA NETWORKS, S.A. with registered address at Calle Nicaragua, no
54, Barcelona.
TERRA was incorporated on 4 December 1998, by means of a public deed
executed before Mr Jose Antonio Escartin Ipiens, Notary Public in
Madrid, under number 5.276 of his official records, and recorded at the
Madrid Mercantile Registry on 12 January 1999, in Tome 13.753, of
Section 8 of the Companies' Book, Folio 185, Sheet M-224499, first
entry. As a result of the Company transferring its registered address to
Barcelona, TERRA is currently recorded at the Barcelona Mercantile
Registry in Tome 32.874, General Section, Folio 129, Sheet B-217925.
TERRA's Fiscal Identification Number is A-82/196080.
On the date of the present Prospectus, the share capital of TERRA,
according to the public deed executed on 5 June 2003 before Ms Maria
Bescos Badia, Notary Public in Madrid, under number 535 of her official
records, and pending registration at the Mercantile Registry, amounts to
1,202,935,830 euros, consisting of 601,467,915 fully subscribed and
paid-up shares with a nominal value of two euros each, represented by
means of book entries and admitted for trading on the Securities Markets
of Madrid, Barcelona, Bilbao and Valencia through the Computer Assisted
Trading System (Continuous Market), and on the Nasdaq (National Market
of the United States of America). It should be borne in mind that the
share capital of TERRA before the aforementioned figure was
1,216,320,518 euros, represented by 608,160,259 shares, after which
TERRA redeemed 6,692,344 shares, thus leaving the current capital
figure. It is hereby established that all references to share capital in
the present Prospectus relate to the current share capital, whose
registration at the Mercantile Registry is being processed at the date
of this Prospectus.
I.2 Corporate name, corporate object and registered address of the Bidder.
The Bidder in this Bid is TELEFONICA, S.A. (hereinafter, "TELEFONICA"),
with registered address at Calle Gran Via, no 28, Madrid, with Fiscal
Identification Number (CIF) A-28/015865.
TELEFONICA was incorporated for an indefinite period of time on 19 April
1924, by means of a public deed executed before Mr Alejandro Rosello
Pastor, Notary of the Notarial Association of Madrid. TELEFONICA adapted
its By-laws to the current Spanish Companies' Law (Ley de Sociedades
Anonimas) by means of a deed executed on 10 July 1990 before Mr Miguel
Mestanza Fraguero, Notary Public in Madrid. The Bidder is recorded at
the Madrid Mercantile Registry in Tome 12.534, Folio 21, of Section 8 of
the Companies' Book, Sheet M-6164, entry number 1.359.
- 6 -
Translation - for information purposes only
The share capital of TELEFONICA totals 4,955,891,361 euros, consisting
of 4,955,891,361 fully subscribed and paid-up ordinary shares, each with
a nominal value of 1 euro, and represented by book entries. All the
shares into which the share capital of TELEFONICA is divided are
ordinary, belong to a single series, and grant identical rights and
obligations to the stockholders.
In accordance with Article 4 of its By-laws, the corporate object of
TELEFONICA is as follows:
. The provision and exploitation of any kind of public or private
telecommunications services and, to this end, the design,
installation, maintenance, refurbishment, improvement, acquisition,
transfer, interconnection, management, administration and any other
activity not included in the preceding list, with regard to any
type of current or future telecommunication networks, lines,
satellites, equipment, systems and technical infrastructures,
including the buildings housing the same.
. The provision and exploitation of any type of auxiliary or
associated services or those derived from telecommunications
services.
. The investigation and development, promotion and application of any
kind of principles, components, equipment and systems used directly
or indirectly for telecommunications.
. The manufacture or production and, in general, any other forms of
industrial activity related to telecommunications.
. The acquisition, transfer and, in general, any other forms of
commercial activity related to telecommunications.
The activities which comprise the corporate object described in the
preceding paragraphs may be carried out in Spain and overseas, either
directly, in full or in part by the Company, or indirectly by holding
shares or participations in companies or other legal entities having the
same or a similar corporate object.
In accordance with the Spanish National Classification of Economic
Activities (CNAE) the activities of TELEFONICA are included in sector
0762.
Attached hereto as Annex 1 is the Certificate from the Madrid Mercantile
Registry confirming the existence of the Bidder, and the Certificate
from the Secretary of the Board of Directors of TELEFONICA, confirming
the current By-laws on the date of the present Prospectus.
I.3 Composition and structure of the Bidder's group of Companies. Structure
of the stakes held in the share capital of the Target Company.
Composition and structure of the Bidder's group of Companies.
- 7 -
Translation - for information purposes only
The principal subgroups of dependent companies through which TELEFONICA
carries out its corporate object and the management of its business
areas or basic lines of activity are as follows:
- The fixed line telecommunications services and supplementary
services provided in national territory are centralised in Grupo
Telefonica de Espana.
- Worldwide wireless communications activities are centralised
internationally and nationally in Grupo Telefonica Moviles.
- Fixed line telecommunications services in Latin America are
conducted through Grupo Telefonica Internacional.
- With regard to activities carried out in the areas of media and
entertainment, Telefonica de Contenidos and its dependent companies
deal with the interests of the Group as a whole.
- The main activity of Grupo Telefonica Datacorp is the comprehensive
provision of corporate data transmission services.
- The provision of services, content and Internet access portals,
with special emphasis on residential clients and small businesses
(SOHO) is mainly carried out by Grupo Terra Lycos.
- Grupo Atento carries out call centers activities.
- Businesses involving the publishing, development and sale of
advertising in telephone directories are managed by Grupo
Telefonica Publicidad e Informacion.
- Grupo Emergia operates a submarine high-speed fibre optic cable and
provides broadband connectivity within Latin America and Europe,
and from Latin America to Europe and the United States of America.
The following general flowchart indicates the organisation and structure
of the Telefonica Group, including the principal dependent and
associated companies of TELEFONICA on 31 December 2002, grouped by lines
of business which, on the date of the present Prospectus, have not
experienced any significant changes. Furthermore, attached hereto as
Annex 4 are the individual and consolidated financial statements of the
Bidder corresponding to the financial year ended on 31 December 2002
which set forth in detail all its dependent companies.
In addition, TERRA has formed part of the consolidated TELEFONICA group
on a global basis since its incorporation.
- 8 -
Translation - for information purposes only
---------------
TELEFONICA S.A.
---------------
-------------------------------------------------------------------------------------------------------------------------------
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
TELEFONICA TELEFONICA TELEFONICA TELEFONICA TELEFONICA TERRA
DE ESPANA LATINOAMERICA MOVILES DATA CONTENIDOS LYCOS
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
Telefonica TELESP Telefonica Telefonica Lycos
Telecomunicaciones Moviles Data Antena 3 TV
Publicas (Brasil)
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
TELYCO TASA Brasilcel T. Data Terra
Brasil Onda Cero Espana
(Argentina) (Brasil)
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
Telefonica TDP T. Moviles T. Data ATCO Terra
Cable Argentina Brasil
(Peru) Mexico
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
Telefonica CTC Unifon
Soluciones T. Data Endemol Terra
Sectoriales (Chile) (Argentina) Peru Mexico
------------------- ---------------- ---------------- ----------------- --------------------- -----------------
---------------- ---------------- ----------------- --------------------- -----------------
TLD T. Moviles T. Data Telefonica Servicios Terra
Chile Audiovisuales USA
(Puerto Rico) Peru
---------------- ---------------- ----------------- --------------------- -----------------
CTI TES T. Deutschland Lola Films Terra
(Alemania) Argentina
(EE.UU) (El Salvador)
---------------- ---------------- ----------------- --------------------- -----------------
CANTV TCG T. Data Euro League Terra
(Venezuela) (Guatemala) Colombia Marketing Centroamerica
---------------- ---------------- ----------------- --------------------- -----------------
---------------- ----------------- --------------------- -----------------
Europa Via Digital Terra
T. Data Peru
Mexico
---------------- ----------------- --------------------- ----------------
---------------- --------------------- -----------------
Startel T. Data Hispasat Terra
(Chile) U.S.A. Chile
---------------- ----------------- --------------------- -----------------
T. Sistemas Terra
(Espana) Venezuela
----------------- -----------------
-------------- ---------------------- -------------
TPI ATENTO EMERGIA
-------------- ----------------------- -------------
TPI Espana A. Espana
----------------------
-------------- ----------------------
TPI Brasil A. Brasil
----------------------
-------------- ----------------------
Publiguias A. Chile
----------------------
-------------- ----------------------
A. Peru
-------------- ----------------------
TPI Peru A. Marruecos
----------------------
--------------
Telinver ----------------------
(Argentina) A. Centroamerica
-------------- ----------------------
A. Puerto Rico
----------------------
A. Japon
----------------------
A. Colombia
----------------------
A. Mexico
----------------------
A. Venezuela
----------------------
A. Argentica
----------------------
On the date of the present Prospectus and in accordance with the provisions of
Article 4 of Securities Market Law 24/1988 and Article 42 of the Spanish
Commercial Code, there are no individuals or legal entities which have direct or
indirect control over TELEFONICA.
The principal stockholders of TELEFONICA, according to available public
information, are as follows:
===================================
Total
-----------------------------------
Percentage(*) Shares
=============================-----------------------------------
BBVA(**) 5.52% 263,022,186
----------------------------------------------------------------
"La Caixa" (***) 3.6% -
================================================================
(*) Percentage held in TELEFONICA's share capital on the date
referred to in notes (**) and (***) below.
(**) According to the communication sent to the Spanish
Securities Market Commission ("CNMV") on 5 June 2002.
Furthermore, and according to information provided by this
company in its financial statements closed on 31 December
2002, the stake held in TELEFONICA on this date was 6.53%,
although the stake held on a permanent basis in the share
capital of TELEFONICA amounts to 5.28%.
(***) According to information provided by Caja de Ahorros y
Pensiones de Barcelona, ("La Caixa") on its web page,
which was updated on 16 January 2003.
Furthermore, according to the notification sent to the CNMV, on 8
January 2003 the financial institution, Chase Manhattan Nominees Ltd.,
held a stake in the share capital of TELEFONICA of 6.80%, as depositary
entity, such stake being held for and on behalf of its clients.
Finally, on 25 April 2003 the financial institution Citibank NA owned
234,898,920 shares, which comprised 4.74% of the share capital of
TELEFONICA on this date, according to the information available to
TELEFONICA. Said stake is held in accordance with the Depositary
Agreement executed between TELEFONICA and Citibank NA for and on behalf
of the holders of ADRs in order to issue and trade these securities on
the Nasdaq National Market. In accordance with the provisions of said
agreement, Citibank NA is obliged to exercise the voting and economic
rights corresponding thereto as holder of said shares in accordance
with instructions given to it by the holders of the ADRs under the
terms and conditions established in the Depositary Agreement.
- 10 -
Structure of the stakes held in the share capital of the Target Company.
The following general flowchart indicates the organisation and structure of
stakes held in the share capital of the Target Company on the date of the
present Prospectus.
- 11 -
TELEFONICA, S.A.
[CHART]
Total Acciones de Terra 601,467,915 shares
Participacion de Telefonica, S.A. 230,792,328 shares
Participacion CTC 2,984,986 shares
Participacion T. del Peru 2,238,739 shares
Participacion de Lycos Inc (autocartera) 2,420,468 shares
(1) Stock Option Plan for employees of LYCOS: 26,765,961 shares (on 9/06/2003)
(2) Stock OptionPlan for employees of TERRA: 13,980,406 shares
- 12 -
From its incorporation, TELEFONICA has promoted the appointment of the
majority of the members of the Board of Directors of TERRA, by voting in
favour of the same.
On the date of the present Prospectus, the Board of Directors of TERRA
is comprised of twelve (12) members, five (5) of which are "consejeros
dominicales" (i.e. directors that represent part of the company's share
capital) appointed at the recommendation of TELEFONICA, and two (2) are
executive directors. All the directors were appointed with the
favourable vote of TELEFONICA.
In this regard, and in accordance with the "Report on Efficient
Corporate Management 2002" attached to TERRA's 2002 Annual Report, the
directors of TELEFONICA listed below are "consejeros dominicales":
Directors (consejeros dominicales):
. Mr Enrique Used Aznar
. Mr Angel Vila Boix
. Telefonica Datacorp, S.A. (represented by Mr Antonio Viana-
Baptista)
. Mr Carlos Fernandez-Prida Mendez-Nunez
. On 25 March 2003, Mr Luis Alfonso Bustamante Bustamante was
appointed director (consejero dominical) of Telefonica.
TERRA's current Auditing and Control Committee (Comision de Auditoria y
Control) is structured as follows:
. Mr Luis Ramon Arrieta Durana
. Telefonica Datacorp, S.A. (represented by Mr Antonio Viana-
Baptista), (consejero dominical)
. Mr Enrique Used Aznar, (consejero dominical)
The current Committee for Appointments and Remuneration is structured as
follows:
. Mr Enrique Used Aznar, (consejero dominical)
. Mr Luis Ramon Arrieta Durana
. Mr Francisco Moreno de Alboran y de Vierna
Finally, Mr Joaquim Agut Bonsfills, Chairman of the Board of Directors
of TERRA, is Line Manager of the Telefonica Group, and Mr Edward M.
Philip, member of the Board of Directors of TERRA, is Director of Lycos
Inc.
As a result, due to the structure of TERRA's Board of Directors
described above, the TELEFONICA Group exercises control over TERRA in
accordance with the provisions of Article 4 of Securities Market Law
24/1988 and Article 42 of the
- 13 -
Spanish Commercial Code, forming part of the consolidated TELEFONICA
group on a global basis, as indicated in section I.3 above.
I.4 Persons responsible for the Prospectus.
The responsibility for the content of this prospectus (hereinafter, the
"Prospectus") is assumed by Mr Santiago Fernandez Valbuena, of legal
age, of Spanish nationality, and holder of Spanish Identity
Document/Fiscal Identification Number 05227862P, acting for and on
behalf of TELEFONICA, in his capacity as General Manager of Corporate
Finance, duly empowered by means of a resolution adopted by the Board of
Directors on 28 May 2003. Attached hereto as Annex 2 is the certificate
of the resolution adopted by the Board of Directors.
Mr Santiago Fernandez Valbuena declares that the details and information
contained in the present Prospectus are true and that no relevant detail
or information has been omitted, nor is any misleading information
included.
Pursuant to the provisions of the last paragraph of Article 92 of the
Spanish Securities Market Law, the recording of this Prospectus and the
annexed documentation at the Official Registries of the Spanish
Securities Market Commission ("CNMV") only implies the acknowledgement
that these documents contain all the information required by the current
regulations, and in no way shall it determine the responsibility of the
CNMV for any inaccuracies the documents may contain.
I.5 Securities of the Target Company owned, either directly or indirectly,
by the Bidder, by companies in the Bidder's group, or by companies
acting on behalf of or in concert with the Bidder, or by the members of
their management bodies, with an indication of the voting rights
corresponding to the securities and the date and price of the
transactions carried out in the last twelve months.
The Bidder is the direct owner of 230,792,328 shares in the share
capital of TERRA, S.A., representing 38.37% of its share capital.
Furthermore, the companies controlled by the Bidder, i.e. TELEFONICA DEL
PERU, S.A. and COMPANIA DE TELECOMUNICACIONES DE CHILE, S.A. own
2,238,739 and 2,984,986 shares respectively in the share capital of
TERRA. According to information obtained by TELEFONICA, these companies
have not carried out any transactions involving TERRA shares during the
twelve months prior to the launching of this Bid and up to the date of
the present Prospectus.
Furthermore, with regard to TERRA, and according to information provided
by said Company, it does not hold any of its own shares directly,
however it has a restricted reserve of 1,858 thousand euros
corresponding to a total of 2,420,468 own shares, held indirectly, on
the date of this Prospectus, through Lycos Inc., representing 0.402% of
the share capital of TERRA, with an average acquisition price of 0.81 US
Dollars per share.
According to information provided by the Target Company, Lycos Inc. has
not carried out any transactions with TERRA shares during the twelve
months prior to the launching of this Bid and up to the date of the
present Prospectus.
- 14 -
During the twelve months prior to the launching of this Take-over Bid
and up to the date of the present Prospectus, the Target Company,
according to information provided by the same, has carried out the
following transactions with its own shares:
------------------------------------------------------------------------
Date Type of operation Number of shares Average price per
share (in euros)
------------------------------------------------------------------------
19.2.2003 Acquisition (*) 6,692,344 11(***)
------------------------------------------------------------------------
2.4.2003 Redemption (**) 6,692,344 11
------------------------------------------------------------------------
(*) Purchase of shares deposited in Citibank NA to cover call
option rights under the Stock Option Plan for employees of
Lycos Inc. which had been cancelled.
(**) Redemption of own shares and decrease in share capital
pursuant to a resolution adopted by the General Stockholders'
Meeting held on 2 April 2003, contained in the public deed
executed on 5 June 2003 and pending registration at the
Mercantile Registry on the date hereof.
(***) By virtue of the agreement executed between TERRA and Citibank
NA to regulate any issues related to the TERRA Stock Option
Plans, TERRA may dispose of the shares held by Citibank NA at
the price of 11 euros per share.
During the twelve months prior to the launching of this Take-over Bid
and up to the date of the present Prospectus, the Bidder has only
carried out the following operations with shares of the Target Company:
-----------------------------------------------------------------------
Date Type of transaction Number of shares Average price per
share (in euros)
-----------------------------------------------------------------------
17.7.2002 Acquisition 50,000 6.81
-----------------------------------------------------------------------
19.7.2002 Acquisition 75,000 6.65
-----------------------------------------------------------------------
No members of the TELEFONICA Group other than those indicated in the
preceding paragraph, or other individuals or legal entities acting on
behalf of or in concert with TELEFONICA, have carried out transactions
with shares in TERRA during the twelve months prior to the launching of
this Bid and up to the date of the present Prospectus, nor do they own
any shares in TERRA on the date hereof.
Furthermore, on the date of this Prospectus, the members of the Board of
Directors of the Bidder own the shares in TERRA listed in Annex 3, which
also sets forth the transactions with shares in TERRA carried out by the
members of the Board of Directors of the Bidder during the twelve months
prior to the launching of this Bid and up to the date of the present
Prospectus, and they have not carried out any transactions other than
those indicated in said Annex.
- 15 -
According to information notified to the CNMV to be included in the
register for significant stakes, the stakes in the share capital of
TERRA held by members of its Board of Directors on the date of this
Prospectus are as follows:
---------------------------------------------------------------------------------
Director Direct Stake Indirect Stake
(no. of shares) (no. of shares)
---------------------------------------------------------------------------------
Joaquim Agut Bonsfills 10 0
---------------------------------------------------------------------------------
Luis Ramon Arrieta Durana 100 0
---------------------------------------------------------------------------------
Luis Badia Almirall(*) 1,000 0
---------------------------------------------------------------------------------
Luis Bassat Coen(*) 5 0
---------------------------------------------------------------------------------
Jose Alfonso Bustamante Bustamante(*) 9,405 0
---------------------------------------------------------------------------------
Robert J. Davis 518 0
---------------------------------------------------------------------------------
Carlos Fernandez-Prida Mendez-Nunez 0 0
---------------------------------------------------------------------------------
Francisco Moreno de Alboran y de Vierna 0 0
---------------------------------------------------------------------------------
Edward M. Philip 8,421 0
---------------------------------------------------------------------------------
Telefonica Datacorp. S.A. 0 0
---------------------------------------------------------------------------------
Angel Vila Boix 10 0
---------------------------------------------------------------------------------
Enrique Used Aznar (**) 105 2,500
---------------------------------------------------------------------------------
(*) Position with regard to shares in TERRA notified upon
their appointment as member of the Board of Directors of
TERRA.
(**) Indirect stake held through the company Review
Inversiones, SIMCAV, S.A. (which is 93.96% controlled).
Furthermore, according to information provided by the Target Company,
the only transactions with TERRA shares carried out by the members of
the Board of Directors of TERRA during the twelve months prior to the
launching of this Bid and up to the date of the present Prospectus, are
as follows:
-----------------------------------------------------------------------------
Date Director Type of transaction Number of Average price
shares per share (in
euros)
-----------------------------------------------------------------------------
4-3-2003 Edward M. Philip Transfer 1,075 N/A (*)
-----------------------------------------------------------------------------
(*) Transfer carried out for no consideration.
Finally, as regards the members of the Board of Directors of the
different companies of the TELEFONICA Group, other than TERRA and
TELEFONICA itself, the latter is not aware that these members own any
shares in TERRA or that they have carried out any
- 16 -
transactions with TERRA shares during the twelve months prior to the
launching of this Bid and up to the date of the present Prospectus.
I.6 Bidder securities owned by the Target Company.
TERRA does not own any shares issued by TELEFONICA.
Moreover, it should be taken into consideration that Mr Enrique Used
Aznar, member of the Board of Directors of the Target Company and of the
Bidder, owns, directly and indirectly, 37,438 shares in TELEFONICA.
I.7 Agreements between the Bidder and the members of the Board of Directors
of the Target Company, or its stockholders. Privileges granted to Board
members.
There are no agreements between the Bidder and the members of the Board
of Directors of TERRA, nor have any special privileges been granted to
said members by the Bidder.
However reference should be made to section I.3 of this Prospectus,
which contains a list of TERRA's directors (consejeros dominicales) or
executive directors appointed at the recommendation of TELEFONICA. In
addition, the following observations are made, as a result of the
following persons' membership on the Boards of Directors of the
Telefonica Group or due to management posts held in the Telefonica
Group:
- Mr Antonio Viana Baptista, representative of Telefonica Datacorp,
S.A. on the Board of Directors of TERRA, is Director of TELEFONICA,
Executive President of Telefonica Moviles, S.A., President of
Telefonica Moviles Espana, Director of TELESUDESTE CELULAR
PARTICIPACOES, S.A., Director of Telefonica Internacional, S.A.,
Substitute in CTC CHILE, Director on the Board of TELEFONICA DE
ARGENTINA, S.A., Director of TELECOMUNICACOES DE SAO PAULO, S.A.
TELESP, Member of TELEFONICA DATACORP, S.A., Sociedad Unipersonal
Espana and Director on the Board of EMERGIA HOLDING N.V. in The
Netherlands.
- Mr Enrique Used Aznar, member of the Board of Directors of TERRA,
is Director of TELEFONICA and Director of TELECOMUNICACOES DE SAO
PAULO, S.A. TELESP.
- Mr Angel Vila Boix, member of the Board of Directors of TERRA, is
General Manager of Corporate Development of TELEFONICA, S.A.
- Mr Joaquim Agut Bonsfills, Chairman of the Board of Directors of
TERRA, is Line Manager of the Telefonica Group.
- Mr Edward M. Philip, member of the Board of Directors of TERRA, is
director of Lycos Inc.
On 12 February 2003, TELEFONICA and TERRA signed a Strategic Alliance
Framework Agreement, which was duly notified by both companies as
relevant information. All the provisions contained in this Framework
Agreement remain in force, and no modifications which have any
relationship with the outcome of this Bid are envisaged. TELEFONICA and
TERRA have initiated the execution and implementation
- 17 -
of the Framework Agreement, having entered into the corresponding
agreements established in the Framework Agreement with TELEFONICA and
other companies in the group with registered offices in Spain and in
Latin America, including consultancy, agency, licence, publicity and
communication services agreements.
Furthermore, it is established that TELEFONICA has no agreements or
commitments with TERRA stockholders pursuant to which it has undertaken
to acquire shares at a price other than the one established in the Bid.
Finally, it is established that there are no agreements or commitments
for the stake held by TELEFONICA in TERRA through its subsidiaries, or
TERRA's treasury stock, to participate in this Bid.
I.8 Information regarding the activity and the economic/financial position
of the Bidder and its consolidated group, indicating its equity,
turnover, total assets, debt and results, with express reference to any
qualification or relevant comments in the audit reports relating
thereto.
TELEFONICA, its subsidiaries and investee companies form a group
comprised of companies that carry out their business activities
primarily in the telecommunications, media and entertainment sectors,
both in Spain and in other countries.
Bearing in mind that TELEFONICA is the parent company of a consolidated
group, the accounting information set forth below refers to TELEFONICA
on the one hand and its consolidated group on the other.
INFORMATION CORRESPONDING TO THE FINANCIAL YEAR ENDED ON 31 DECEMBER
2002
a) Individual information
The individual financial statements corresponding to the
financial year closed on 31 December 2002 (the latest closed
financial year) were drawn up by the Board of Directors and
audited by Deloitte & Touche Espana, S.L. (formerly Arthur
Andersen y Cia., S. Com.), with its registered address at calle
Raimundo Fernandez Villaverde, 65, Madrid, recorded at the
Official Registry of Auditors (Registro Oficial de Auditores de
Cuentas (ROAC)) under number S-0692. The financial statements
were approved by the Ordinary General Stockholders' Meeting of
TELEFONICA held on 11 April 2003.
Below, in millions of euros, are details of some of the main
entries in TELEFONICA's individual financial statements
corresponding to the 2001 and 2002 financial years.
- 18 -
TELEFONICA S.A.
BALANCE SHEETS, AS OF DECEMBER 31, 2002 AND 2001
Unit: millions of euros 2002 2001
----------------------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------------------
Fixed assets 43,809.33 37,859.67
----------------------------------------------------------------------------------
Deferred Charges 314.60 157.21
----------------------------------------------------------------------------------
Current assets 6,005.79 14,704.77
----------------------------------------------------------------------------------
TOTAL ASSETS 50,129.72 52,721.65
----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND LIABILITIES
----------------------------------------------------------------------------------
Stockholders' Equity 17,572.26 22,110.24
----------------------------------------------------------------------------------
Deferred Revenues 0.00 0.91
----------------------------------------------------------------------------------
Provisions for contingencies and expenses 138.75 149.40
----------------------------------------------------------------------------------
Long-term debt 23,899.79 18,737.42
----------------------------------------------------------------------------------
Current Liabilities 8,518.92 11,723.68
TOTAL STOCKHOLDERS' EQUITY LIABILITIES 50,129.72 52,721.65
----------------------------------------------------------------------------------
SIGNIFICANT VARIABLES OF THE STATEMENT OF
OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2002 AND 2001
-----------------------------------------------------------------
Unit: millions of euros-
2002 2001
-----------------------------------------------------------------
Net turnover 36.17 140.50
----------------------------------------------------------------
Income from ordinary activities 116.49 778.43
-----------------------------------------------------------------
Loss for the year (4,478.69) (354.18)
-----------------------------------------------------------------
Below is a transcript of the auditors' report of TELEFONICA's
individual financial statements for the 2002 financial year:
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS OF TELEFONICA
- 19 -
To the Stockholders of Telefonica, S.A.:
1. We have audited the financial statements of Telefonica, S.A.
comprising the balance sheet as of 31 December 2002 and the related
statements of operations and notes to financial statements for the
year ended. The preparation of these financial statements is the
responsibility of the Company's directors. Our responsibility is to
express an opinion on the financial statements taken as a whole,
based on our audit work performed in accordance with generally
accepted auditing standards, which require the examination, by
means of selective tests, of the documentation supporting the
financial statements and the evaluation of their presentation, of
the accounting principles applied and of the estimates made.
2. The financial statements for 2002 referred to above are presented
in compliance with current Spanish corporate law, despite the fact
that the operations of Telefonica, S.A. and the companies it
controls are managed on a consolidated basis. Accordingly, the
financial statements of Telefonica S.A., which acts basically as a
holding company, do not reflect the financial and net worth
variations resulting from application of consolidation methods to
these holdings or to the transactions carried out by the related
investees, some of which respond to the Group's overall strategy.
However, these variations are reflected in the Telefonica Group's
consolidated financial statements for 2002, on which we issued our
auditor's report dated February 16, 2003, which was qualified for
an uncertainty similar to that described in paragraph 4 below. The
effect of consolidation is disclosed in Note 4-d.
3. As required by Spanish corporate law, for comparison purposes
directors present, in addition to the 2002 figures for each item in
the balance sheet and statements of operations and of changes in
financial position, the figures for 2001. Our opinion refers only
to the 2002 financial statements. Our auditors' report dated March
14, 2002, on the 2001 financial statements contained an opinion
qualified for an uncertainty concerning the Telefonica Group's net
investment in Argentina, and in an emphasis paragraph we indicated
the intention of management to update and review, on a yearly
basis, the business plans of the Group companies that hold
third-generation wireless telephony (UMTS) licences and, where
appropriate, to make any value adjustments that might be required.
In view of the changes in 2002 in the assumptions on which the
aforementioned wireless telephony technology is not yet
commercially available, the directors of Telefonica Moviles, S.A.
announced their decision to temporarily discontinue and restructure
this company's business activities in Germany, Italy, Austria and
Switzerland and in 2002 they recorded the related write-down for
accounting purposes, as described in Note 7, which gave rise to a
charge, net of the related tax effect, of 1,062 million euros, to
the statement of operations of Telefonica, S.A.
- 20 -
4. Also, as a result of the depreciation of the Argentinean peso with
respect to the U.S. dollar and the euro in 2002, losses of 1,400
million euros were recorded in the statement of operations (see
Note 2). However, certain uncertainties remain regarding the effect
the evolution of certain economic measures will have on the normal
course of operations and on the financing thereof in Argentina
(mainly that relating to the establishment of the wireline
telephony rates). Accordingly, it is not yet possible to assess
whether there will be any additional effects for accounting
purposes on the Telefonica Group's net investment in the companies
located in Argentina, which, calculated as described in Note 2,
amounted to 1,637 million euros, as of December 31, 2002, a
substantial reduction with respect to the previous year.
5. In our opinion, except for the effects of any adjustment which
might be required if the final outcome of the uncertainty described
in paragraph 4 above were known, the financial statements for 2002
referred to above present, in all material respects, a true and
fair view of the net worth and financial position of Telefonica,
S.A. as of December 31, 2002 and of the results of its operations
and of the funds obtained and applied by it in the year then ended,
and contain the required information sufficient for their proper
interpretation and comprehension, in conformity with generally
accepted accounting principles and standards applied on a basis
consistent with that of the preceding year.
6. The accompanying management report for 2002 contains the
explanations which the directors consider appropriate about the
Company's situation, the evolution of its businesses and other
matters, but is not an integral part of the financial statements.
We have checked that the accounting information in the management
report is consistent with that contained in the financial
statements for 2002. Our work as auditors was confined to checking
the management report with the aforementioned scope, and did not
include a review of any information other than that drawn from the
Company's accounting records.
DELOITTE & TOUCHE ESPANA, S.L.
26 February 2003
b) Consolidated Information.
The consolidated financial statements corresponding to the financial
year ended on 31 December 2001 were audited by Arthur Andersen, with
registered address at calle Raimundo Fernandez Villaverde 65, Madrid and
recorded at the Official Registry of Auditors under number S0692.
The consolidated financial statements corresponding to the financial
year ended on 31 December 2002 were prepared by the Board of Directors
and audited by Deloitte & Touche Espana, S.L. These financial statements
were approved by the Ordinary General Stockholders' Meeting of
TELEFONICA held on 11 April 2003.
- 21 -
Below, in millions of euros, are details of some of the main entries of
the TELEFONICA Group's consolidated financial statements corresponding
to the 2001 and 2002 financial years.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
-----------------------------------------------------------------------------------
Unit: millions of euros 2002 2001
-----------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------
Due from Stockholders for Uncalled capital 292.49 370.10
-----------------------------------------------------------------------------------
Fixed assets and other non-current assets 50,008.83 63,975.75
-----------------------------------------------------------------------------------
Consolidation goodwill 6,364.02 9,128.94
-----------------------------------------------------------------------------------
Deferred Charges 802.28 710.94
-----------------------------------------------------------------------------------
Current assets 10,573.67 12,236.84
-----------------------------------------------------------------------------------
TOTAL ASSETS 68,041.29 86,422.57
-----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND LIABILITIES
-----------------------------------------------------------------------------------
Stockholders' Equity 16,996.00 25,861.62
-----------------------------------------------------------------------------------
Minority interests 5,612.93 7,433.55
-----------------------------------------------------------------------------------
Negative consolidation goodwill 11.36 7.95
-----------------------------------------------------------------------------------
Deferred Revenues 880.46 1,145.75
-----------------------------------------------------------------------------------
Provisions for contingencies and expenses 8,014.91 5,862.70
-----------------------------------------------------------------------------------
Long-term debt 21,726.15 27,692.41
-----------------------------------------------------------------------------------
Current debt 14,681.74 18,418.59
-----------------------------------------------------------------------------------
Short-term Provisions for contingencies and 117.74 0.00
expenses
-----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY LIABILITIES 68,041.29 86,422.57
-----------------------------------------------------------------------------------
SIGNIFICANT VARIABLES OF THE STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
------------------------------------------------------------------------------------
Unit: millions of euros 2002 2001
------------------------------------------------------------------------------------
Net turnover 28,411.30 31,052.60
------------------------------------------------------------------------------------
Income for ordinary activities 1,616.82 1,821.05
------------------------------------------------------------------------------------
- 22 -
------------------------------------------------------------------------
Income/Loss for the year (5,576.80) 2,106.81
------------------------------------------------------------------------
Below is a transcript of the auditors' report of TELEFONICA's consolidated
financial statements for the 2002 financial year
AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Stockholders of Telefonica, S.A.:
1. We have audited the consolidated financial statements of
Telefonica, S.A. and of the companies composing the
Telefonica Group (see Note 1) comprising the consolidated
balance sheet as of December 31, 2002 and the related
consolidated statement of operations and notes to
consolidated financial statements for the year then ended.
The preparation of these consolidated financial statements
is the responsibility of the Parent Company's directors. Our
responsibility is to express an opinion on the consolidated
financial statements taken as a whole based on our audit
work performed in accordance with generally accepted
auditing standards, which require examination, by means of
selective tests, of the documentation supporting the
consolidated financial statements and evaluation of their
presentation, of the accounting principles applied and of
the estimates made.
2. As required by Spanish corporate law, for comparison
purposes the directors present, in addition to the 2002
figures for each item in the consolidated balance sheet, and
consolidated statements of operations and of changes in
financial position, the figures for 2001. Our opinion refers
only to the 2002 financial statements. Our auditor's report
dated March 14, 2002, on the 2001 consolidated financial
statements contained an opinion qualified for an uncertainty
concerning the Telefonica Group's net investment in
Argentina, and in an emphasis paragraph we indicated the
intention of the management to update and review, on a
yearly basis, the business plans of the Group companies that
hold third-generation wireless telephony (UMTS) licences
and, where appropriate, to make any value adjustments that
might be required.
In view of the changes in 2002 in the assumptions on which
the aforementioned business plans were based, of the
findings of reports commissioned from third parties and of
the fact that the aforementioned wireless telephony
technology is not yet commercially available, the directors
of Telefonica Moviles, S.A. announced their decision to
temporarily discontinue and restructure this company's
business activities in Germany, Italy, Austria and
Switzerland and in 2002 they recorded the related write-down
for accounting purposes, as described in Note 1, which gave
rise to a charge, net of the related tax effect, of 4,958
million euros to the consolidated statement of operations of
Telefonica, S.A.
- 23 -
3. Also, as result of the depreciation of the Argentine peso
with respect to the U.S. dollar and the euro in 2002, losses
of 1,147 million euros and 355 million euros were recorded
under the consolidated "Stockholders Equity - Translation
Differences in Consolidation" caption and in the
consolidated statement of operations, respectively. However,
certain uncertainties remain regarding the effect that the
evolution of certain economic measures will have on the
normal course of operations and on the financing thereof in
Argentina (mainly that relating to the establishment of the
wireline telephony rates). Accordingly, it is not yet
possible to assess whether there will be any additional
effects for accounting purposes on the Telefonica Group's
net investment in these companies, which, calculated and
described in Note 1, amounted to 1,637 million euros as of
December 31, 2002, a substantial reduction with respect to
the previous year.
4. In our opinion, except for the effects of any adjustment
which might be required if the final outcome of the
uncertainty regarding the Group's net investment in the
companies located in Argentina described in paragraph 3
above were known, the consolidated financial statements for
2002 referred to above present, in all material respects, a
true and fair view of the net worth and financial position
of Telefonica, S.A. and of the companies composing the
Telefonica Group as of December 31, 2002, and of their
operations and of the funds obtained and applied by them in
the year then ended, and contain the required information,
sufficient for their proper interpretation and
comprehension, in conformity with generally accepted
accounting principles and standards applied on a basis
consistent with that of the preceding year.
5. The accompanying consolidated management report for 2002
contains the explanations which the directors of Telefonica
S.A. consider appropriate about the Group's situation, the
evolution of its businesses and other matters, but is not an
integral part of the consolidated financial statements. We
have checked that the accounting information in the
consolidated management report is consistent with that
contained in the consolidated financial statements for 2002.
Our work as auditors was confined to checking the
consolidated management report with the aforementioned
scope, and did not include a review of any information other
than that drawn from the accounting records of the
consolidated Companies.
DELOITTE & TOUCHE ESPANA, S.L
26 February 2003
Attached in the aforementioned Annex 4 are the individual and
consolidated financial statements of the Bidder corresponding to
the financial year ended on December 31, 2002 (prepared by the
Board of Directors and approved by the Ordinary General
Stockholders' Meeting).
INFORMATION CORRESPONDING TO THE FIRST QUARTER OF 2003
- 24 -
a) Individual Information
Below are details of the individual financial statements of
TELEFONICA corresponding to the first quarter of 2003 and 2002:
TELEFONICA S.A.
BALANCE SHEET AS OF MARCH 31
-----------------------------------------------------------------------------------
Unit: millions of euros 2003 2002
NON-AUDITED DATA
-----------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------
Fixed Assets 45,160.56 37,276.02
-----------------------------------------------------------------------------------
Deferred Charges 326.37 147.98
-----------------------------------------------------------------------------------
Current Assets 6,826.35 15,511.35
-----------------------------------------------------------------------------------
TOTAL ASSETS 52,313.28 52,935.35
-----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND LIABILITIES
-----------------------------------------------------------------------------------
Stockholders' Equity 17,985.56 21,425.42
-----------------------------------------------------------------------------------
Deferred Revenues 0.00 0.57
-----------------------------------------------------------------------------------
Provisions for contingencies and expenses 56.14 0.01
-----------------------------------------------------------------------------------
Long-term debt 25,570.52 18,986.76
-----------------------------------------------------------------------------------
Current Liabilities 8,701.06 12,522.55
-----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY LIABILITIES 52,313.28 52,935.35
-----------------------------------------------------------------------------------
- 25 -
SIGNIFICANT VARIABLES OF THE STATEMENTS OF OPERATIONS
------------------------------------------------------------------
Unit: millions de euros 2003 2002
NON-AUDITED DATA
------------------------------------------------------------------
Net turnover 9.5 12.85
------------------------------------------------------------------
Profit for the year 523.55 (684.81)
------------------------------------------------------------------
Income from ordinary activities (123.79) (26.41)
------------------------------------------------------------------
b) Consolidated Information
Below are details of the TELEFONICA Group's consolidated financial
statements corresponding to the first quarter of 2003 and 2002:
TELEFONICA GROUP
CONSOLIDATED BALANCE SHEET ON MARCH 31
-----------------------------------------------------------------------------------
Unit: millions of euros 2003 2002
NON-AUDITED DATA
-----------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------
Due from Stockholders for Uncalled capital 253.94 350.41
-----------------------------------------------------------------------------------
Fixed Assets and other non-current assets 48,641.19 62,140.89
-----------------------------------------------------------------------------------
Consolidation goodwill 6,455.66 8,769.23
-----------------------------------------------------------------------------------
Deferred Charges 790.02 690.37
-----------------------------------------------------------------------------------
Current Assets 11,591.95 13,719.17
-----------------------------------------------------------------------------------
TOTAL ASSETS 67,732.77 85,670.06
-----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND LIABILITIES
-----------------------------------------------------------------------------------
Stockholders' Equity 17,672.75 24,845.88
-----------------------------------------------------------------------------------
- 26 -
-----------------------------------------------------------------------------------
Minority Interests 5,691.09 7,351.89
-----------------------------------------------------------------------------------
Negative Consolidation goodwill 10.84 10.23
-----------------------------------------------------------------------------------
Deferred Revenues 915.99 1,340.93
-----------------------------------------------------------------------------------
Provisions for contingencies and expenses 7,758.19 5,720.80
-----------------------------------------------------------------------------------
Long-term debt 22,934.50 27,334.17
-----------------------------------------------------------------------------------
Current debt 12,479.33 19,052.19
-----------------------------------------------------------------------------------
Short-term Provisions for contingencies and 270.08 13.97
expenses
-----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY LIABILITIES 67,732.77 85,670.06
-----------------------------------------------------------------------------------
SIGNIFICANT VARIABLES OF THE STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------
Unit: millions de euros 2003 2002
NON-AUDITED DATA
------------------------------------------------------------------------------------
Net turnover 6,458.93 7,418.56
------------------------------------------------------------------------------------
Income for ordinary activities 858.45 55.13
------------------------------------------------------------------------------------
Income/Loss for the year 543.39 121.05
------------------------------------------------------------------------------------
Attached in Annex 4 bis of this Prospectus are the individual and consolidated
financial statements of the Bidder corresponding to March 31, 2003.
- 27 -
CHAPTER II
OBJECTIVE COMPONENTS OF THE BID
II.1 Securities covered by the Bid.
The present Bid is in respect of 100% of the shares of TERRA, which
amount to a total of 601,467,915 Shares.
Nevertheless, the TERRA shares which TELEFONICA owns directly, i.e.
230,792,328 shares, representing 38.37% of the share capital on the
date of this Prospectus, shall not be included in the Bid and have been
frozen until the date of publication of the Bid in the corresponding
Gazettes of Listed Securities. Attached as Annex 5 hereto is a
certificate of the freezing of the shares.
In accordance with the foregoing paragraphs, the object of the Bid is
to acquire 370,675,587 shares of TERRA, 61.63% of its share capital,
and which, together with the frozen shares, represent 100% of the
shares of the Target Company on the date of this Prospectus.
In relation to the shares to which the Bid applies, the following
considerations are highlighted:
(a) At the date of this Prospectus, there are a total of 13,980,406
shares (2.32% of the share capital) held by Banco Zaragozano and
the Caja de Ahorros y Pensiones de Barcelona (La Caixa) subject to
the Stock Option Plan for employees of TERRA, while, as indicated,
the number of shares subject to the Stock Option Plan for
employees of Lycos Inc., held by Citibank, was 26,765,961 shares
(4.45% of the share capital) on 9 June 2003.
(b) Among the shares to which the Bid applies are 2,238,739 shares
(0.37% of the share capital) owned by TELEFONICA DEL PERU, S.A.,
in which TELEFONICA has a 97.07% stake, and which are expected to
accept the Bid, unless TERRA exercises a right of first refusal
which it has on said shares. In relation to the 2,984,986 shares
(0.5% of the share capital) owned by COMPANIA DE
TELECOMUNICACIONES DE CHILE, S.A., in which TELEFONICA holds a
43.64% stake, the competent bodies of the same shall decide on the
acceptance of the Bid.
(c) Likewise, among the shares to which the Bid applies, there are
2,240,468 shares (0.40% of the share capital) underlying the
American Depositary Receipts owned by Lycos Inc., and which
comprise treasury stock of the Target Company. The Board of
Directors of TERRA shall decide whether these shares shall accept
or not the Bid, and TELEFONICA shall not give any instructions in
this regard to the Directors it has recommended.
TERRA has not issued bonds that are convertible into shares or other
similar instruments which may entitle the holder, directly or
indirectly, to subscribe or acquire shares. Neither has TERRA issued
non-voting shares, and all its shares belong to the
- 28 -
same class and confer identical rights. Consequently, there are no
other securities different from the shares to which this Bid is
addressed, in accordance with applicable regulations.
The shares covered by the Bid shall be transferred by the person
authorised to do so, free of liens and encumbrances or third party
rights, so that the title acquired by the Bidder is unchallengeable,
pursuant to the provisions established in Article 9 of the Spanish
Securities Market Law, including any voting and economic rights that
are inherent thereto at the time the Bid is launched.
The terms of the Bid are identical for all the shares to which it
applies.
II.2 Consideration offered for the shares.
The Bidder offers the stockholders of TERRA the amount of five point
twenty-five (5.25) Euros for each share of TERRA, which represents
262.5% of the nominal value of these shares.
II.3 Maximum shares covered by the Bid and minimum to be acquired in order
for the Bid to be effective.
a) Maximum
This Bid shall cover all the shares making up TERRA's share capital,
i.e. 601,467,915 shares. Nevertheless, and as mentioned above,
TELEFONICA has frozen 230,792,328 shares of TERRA (38.37% of the share
capital), which shall not be included in the Bid, and consequently, the
Bid effectively covers 370,675,587 shares, representing 61.63% of
TERRA's share capital.
b) Minimum
The effectiveness of the Bid is conditional upon TELEFONICA acquiring a
number of TERRA shares which, together with the 230,792,328 shares
(38.37% of the share capital) of the Target Company that it already
directly owns and which have been frozen until the result of the Bid is
published, enable at least 75% of the share capital -i.e., 451,100,937
shares- to be reached directly by the Bidder. Consequently, compliance
with said condition would entail acquiring a minimum of 220,308,609
shares in the Target Company (36.63% of the share capital).
Therefore, if as a consequence of this Bid, TELEFONICA were only to
reach the minimum number conditioning the same and the indirect stake
held through Telefonica de Peru, S.A. and Compania de
Telecomunicaciones de Chile, S.A. did not accept the Bid, the direct
and indirect stake of TELEFONICA in TERRA after the Bid would be 75.87%
of the share capital of TERRA, without including the aforementioned
treasury stock in said percentage.
The Bidder expressly reserves the right to waive the minimum number of
shares upon which the Bid is conditional, in accordance with section
II.6 and section III.2.2 of this Prospectus, without any decision
whatsoever having been taken in this regard at the date of the same.
- 29 -
c) Bidder's Commitments
The Bidder declares its commitment that, neither it, acting on its own
behalf or through an intermediary, nor any company of its group, shall
acquire shares, either directly or in a concerted manner, in the Target
Company by any means other than the Bid procedure from the time of the
presentation of the same until its end.
If the Bid is unsuccessful, the Bidder, the members of its management
body, its senior executive staff and any person acting in concert with
the same, may not launch another Take-over Bid until six months have
elapsed since the date of publication of the Bid's result, nor may they
acquire securities in said period which would require a bid to be
launched.
II.4 Guarantees established by the Bidder for settlement of the Bid.
In order to guarantee the payment of the consideration offered, the
Bidder has opened a cash account at Banco Bilbao Vizcaya Argentaria,
S.A. for a total of 1,946,046,832 Euros, an amount which has been
irrevocably assigned to the settlement of the Bid.
Annex 6 to this Prospectus includes a copy of the documents verifying
said guarantee, which covers the payment obligations that may bind the
Bidder as a result of the Bid.
II.5 Financing of the Bid.
TELEFONICA, S.A. shall use the funds deposited in Banco Bilbao Vizcaya
Argentaria S.A. mentioned in section II.4 above, to acquire the shares
of TERRA, in respect of which this Bid is directed. Said deposit has
been set up using cash surpluses of the Bidder, not having used for
these purposes available lines of credit. The net debt of TELEFONICA
shall be increased by the same amount by which its cash is reduced.
The Target Company will not incur any debt as a result of this Bid.
II.6 Conditions which apply to the Bid.
As explained in section II.3 of this Prospectus, the successful outcome
of the Bid is subject to the acquisition of a minimum of 220,308,609
shares (36.63%), which together with the 230,792,328 shares (38.37%) of
TERRA which TELEFONICA already owns directly, represent 75% of the
share capital of TERRA.
TELEFONICA hereby declares that the foregoing condition is the only one
that applies to this Bid, and that for the purposes of the provisions
of Article 15.II(g) of Royal Decree 1197/91, modified by Royal Decree
432/2003, dated 11 April, the successful outcome of the Bid is not
subject to any of the conditions foreseen in Article 21 of the
aforementioned Royal Decree.
- 30 -
CHAPTER III
FORMAL COMPONENTS OF THE BID
III.1 Acceptance period.
The acceptance period of this Bid shall be one month as from the date
of publication of the first Bid announcement, in accordance with
Article 18 of Royal Decree 1197/1991, dated 26 July (pursuant to which
such announcements must be published in the Official Gazette of the
Mercantile Registry, in the Gazettes of Securities Listed on the
Madrid, Barcelona, Bilbao and Valencia Securities Markets and in two
newspapers - one of them distributed nationally and the other widely
distributed in the place of the Target Company's registered address).
Attached as Annex 7 hereto is a standard form of announcement.
For these purposes, a month shall be counted from date to date. If the
first day of the term is not a business day for the purposes of the
Spanish Computer Assisted Trading System ("SIBE"), the acceptance
period shall begin on the next business day for SIBE purposes; and if
the last day of the term is not a business day, the acceptance period
shall be automatically extended until 24:00 hours on the next immediate
business day for SIBE purposes.
Pursuant to the provisions established in Article 19 of Royal Decree
1197/1991, as long as the two-month legal maximum is not exceeded, the
Bidder may extend the period of acceptance initially established with
the prior authorisation of the CNMV and after announcing the extension
in the same media in which the announcement of the Bid was published,
at least three days before the end of the initial period.
Attached as Annex 8 of this Prospectus is a letter regarding the
publication of the Bid.
III.2 Formalities relating to the acceptance and manner and period for
receipt of the consideration.
III.2.1 Formalities related to the acceptance of the Bid.
(i) Declarations of acceptance shall be unconditional and irrevocable,
and any which do not meet these requirements shall be deemed
invalid and shall not be admitted.
The addressees of the Bid who wish to declare their acceptance of
the same should do so by any official means to the Governing Body
of the Securities Markets of Madrid, Barcelona, Bilbao, Valencia,
within the period indicated through any attached entity which is a
member of the market and said attached entity shall be responsible
for the title and possession of the shares to which the
acceptances refer, as well as for the non-existence of any liens
or encumbrances or third-party rights which restrict the voting or
economic rights of such shares or the free transferability
thereof.
Each declaration of acceptance of the Bid made by a TERRA
stockholder before the corresponding Attached Entity shall include
all the identification details required under current law for this
type of transaction. Such declaration
- 31 -
of acceptance shall also include all the necessary details on
the title of the TERRA shares in order to formalise the
transfer thereof to the Bidder.
(ii) Each TERRA stockholder may require the Attached Entity, through
which it is processing its acceptance, to provide a receipt
proving that the acceptance was processed, in accordance with
applicable procedural rules.
(iii) Under no circumstances shall the Bidder accept securities of
which the registration references were subsequent to the last
day of the acceptance period of this Bid, i.e. the shares
offered for sale must have been purchased, at the latest, on
the last day of the acceptance period of the Bid.
III.2.2 Settlement procedure and delivery of consideration for the Bid.
Upon the expiry of the acceptance period established in this Prospectus
or of any period resulting from the extension or modification thereof,
as the case may be, the Governing Bodies of the Securities Markets of
Madrid, Barcelona, Bilbao and Valencia shall notify the CNMV, within a
maximum of five business days, of the total number of shares included
in the declarations of acceptance presented.
Once the CNMV knows the total acceptances, it shall notify the
Governing Bodies of the Securities Markets of Madrid, Barcelona, Bilbao
and Valencia, and TELEFONICA and TERRA, within three days, of the
positive or negative result of the Bid. The Governing Bodies shall
publish this result no later than the following day in the
corresponding Gazettes of Listed Securities. The publication date of
the result of the Bid shall be the date of the session to which said
Gazettes refer.
The acquisition of the shares shall be intervened and settled
indiscriminately by either BBVA BOLSA SV S.A. or INVERCAIXA VALORES,
S.V., S.A., who shall act on behalf of the Bidder in accordance with
the appointment set forth in section III.4 of this Prospectus.
The settlement and payment of the consideration offered shall be made
following the procedure established for this purpose by the Management
Company for the Registry, Clearing and Settlement of Securities
(IBERCLEAR); the trading date of the corresponding securities market
transaction shall refer to the date of publication of the result of the
Bid in the Gazettes of Securities Listed on the Securities Markets of
Madrid, Barcelona, Bilbao and Valencia.
Should the Bid not be accepted for the minimum established in section
II.3 of this Prospectus, the Bidder may waive said condition, acquiring
all the securities offered, although on the date of this Prospectus,
the Bidder has made no decision in this regard.
In the event that the minimum is not reached, TELEFONICA undertakes,
within 3 days of being informed of the result of the Bid by the CNMV,
to notify the CNMV of its decision whether or not to waive the minimum
limit conditioning the Bid. In any event, the aforementioned
notification shall be made public by the Bidder in the manner foreseen
in Article 18.1 of Royal Decree 1197/91, on the day after said
notification.
III.3 Acceptance and settlement expenses of the Bid.
- 32 -
The stockholders of TERRA who accept the Bid shall bear and pay the
corresponding fees of the seller for the intervention of a member of
the market in the transaction, the charges of the corresponding
Governing Bodies of the Securities Markets and the IBERCLEAR
settlement, as well as any other expense incurred by the seller
relating to the sale and purchase.
Expenses incurred by the purchaser shall be borne by the Bidder.
In the event that the Bid is unsuccessful, all expenses derived from
the acceptance and return of the documents confirming the ownership of
the securities which were provided by those who accepted the Bid, shall
be borne by TELEFONICA.
III.4 Appointment of the Stockbrokers acting on behalf of the Bidder.
The Bidder has appointed BBVA BOLSA, S.V., S.A., a company with
registered address at Gran Via 12, 48001 Bilbao, with Fiscal
Identification Number A-28/718112, and INVERCAIXA VALORES, S.V., S.A.,
a company with registered address at Avda. Diagonal, 621-629, 08028
Barcelona (Barcelona), with Fiscal Identification Number A-58/483124,
as the entities indiscriminately in charge of executing and settling
the share purchase transactions that may result from this Bid and which
are processed by the Governing Bodies of the Securities Markets of
Madrid, Barcelona, Bilbao and Valencia. Attached as Annex 9 hereto are
letters of acceptance from said companies.
III.5 Formalities for the acceptance of the Bid in the case of TERRA shares
represented by American Depositary Shares ("ADSs").
With regard to the acceptance of the Bid in the case of TERRA shares
represented by ADSs listed on the Nasdaq National Market, TELEFONICA
has appointed Citibank NA (hereinafter, "Citibank"), acting through its
office at 111 Wall Street, New York, New York 10005, USA, as Agent for
the Bid in the United States of America.
Any holder of ADSs wishing to accept the present Bid with the shares in
TERRA represented by its ADSs may contact Citibank NA directly,
attaching to its acceptance a certificate confirming ownership, or the
banks, brokers or trustees where the ADSs are deposited or, if
applicable, by means of the book entry system of The Depository Trust
Company ("DTC") if it has its ADSs registered with such company,
notifying that it intends to accept the present Bid within the periods
established to this end in the Prospectus. The agent bank shall send
more detailed instructions on this procedure directly to the holders of
ADSs.
For the purposes of Article 27 of Royal Decree 1197/1991 dated 26 July,
governing take-over bids, Citibank NA shall notify a member of the
Spanish market, immediately and, in any event, within a maximum of two
securities market working days from the end of the period for the
acceptance of the present Bid, of the total number of shares
represented by ADSs that have accepted the Bid, so that said member of
the market may inform the Governing Bodies of the Securities Markets
within said term, of the total number of shares included in the
declarations of acceptance presented.
Settlement and payment of the consideration offered will be carried out
in accordance with the provisions of section III.2.2 of this
Prospectus, whereby, once Citibank NA
- 33 -
receives the corresponding funds, it will pay the holders of the ADSs
the price of the consideration in US dollars at the Euro/US Dollar rate
of exchange applicable on the date Citibank NA receives the funds, less
any fees, taxes and expenses corresponding to the transaction, which
shall be listed in the aforementioned instructions to be sent to the
holders of the ADSs. These fees and expenses shall include the
acceptance and settlement expenses listed in section III.3 above and
the treatment of which is described in this section.
- 34 -
CHAPTER IV
OTHER INFORMATION
IV.1 Objective of the Bid and future activity of the Target Company.
TELEFONICA's objective in filing this Bid is to increase its holding in
TERRA, in order to obtain full control and to further integrate the two
companies, in accordance with the terms set out below.
On 12 February 2003, the two companies executed the Strategic Alliance
Framework Agreement (hereinafter, the "Framework Agreement"), a
long-term agreement designed for both companies to take advantage of:
TELEFONICA's capacity as a provider of connectivity and broadband and
narrowband access, and TERRA's capacity as an Internet portal,
aggregator, and provider and manager of Internet content and services,
in fixed telephony, so that both companies may capture the synergies
and savings generated by the Internet, a complex and ever-changing
business sector.
However, this business model could offer even greater potential for
TERRA and TELEFONICA if all aspects of the same are developed fully. To
this end, achieving the highest degree of integration of operations
permitted by the market and current regulations appears to be the best
strategy for overcoming as far as possible the main factors which
condition the evolution of the business model, which are basically as
follows:
. The flexibility and freedom in business needed both to boost
growth in demand and to improve positioning in the competitive
market.
. The efficiency of operations that the drastic decrease in the
margins of these products and services demands.
. The increase in investment required for development, due to the
technological complexity of the platforms and the capacity
requirements for access to and transmission of information.
. Growing customer demand for products and services that integrate
connectivity, Internet access, and value-added services and
content.
In an attempt to fulfil these conditions, the general plan for the
subsequent development of the business model would be based on the
following factors:
. The operation of TERRA as a specific line of business in order to
maximise the potential of its trademark and Internet capacities
(with particular emphasis on the residential and professional
segments), while streamlining its structural and management
resources;
- 35 -
. The integration of TERRA with the fixed telephony operators in
markets in which operators of the TELEFONICA Group have a
presence.
. Establishing TERRA as an integral part of the TELEFONICA Group's
online content offer;
. Bolstering the integrated offer of connectivity products and
services, Internet access and value-added content and services,
to customers of the TELEFONICA Group.
Given TELEFONICA's current holding in TERRA and the nature of the
factors which would permit the expansion of the new business model,
TELEFONICA considers it necessary to increase control over TERRA by
means of an increase of its stake, which shall enable an improved
development and growth in the Internet business of the TELEFONICA
Group, by bringing the interests of both companies closer together and
adequately integrating them into the value chain of the Internet
business. To do this, TELEFONICA has decided to direct the Bid at all
the shares of TERRA in order to obtain the highest percentage possible
of its share capital.
The development of the business model which TELEFONICA intends to boost
pursues a greater integration of TERRA with fixed telephony operators
and TELEFONICA Group data and with its corporate units that are
involved in the management and purchase of content, in the manner
described below.
Activity. Assets and Liabilities.
The Bidder has no plans regarding the assets of the Target Company
other than to use and, as the case may be, restructure those assets, at
any given time, in the manner which it deems most appropriate in order
for the Target Company to carry out its activities according to the
business model described in section IV.1 above.
Thus, with regard to the markets on which TELEFONICA is present through
fixed telephony operators, and as it increases its stake in TERRA, the
plan is to carry the integration further by increasing the level of
services provided by TELEFONICA to TERRA and the use of the TERRA
trademark when offering a range of portals in certain customer segments
and, if applicable, in Internet access. TELEFONICA shall boost its
range of services, portals and Internet content through TERRA's
trademark and capacities, together with the assets the Bidder has in
this sector. In the remaining markets, the possibility shall be
examined of offering additional telecommunications services on TERRA's
Internet portals, together with a greater centralisation of operations
management, combined with other mobile telephony business and
TELEFONICA Group data.
With respect to Lycos, TELEFONICA wishes that it be managed with the
highest level of flexibility and independence that is demanded by the
world's leading Internet market, i.e. the US market.
In relation to third party arrangements and agreements which TERRA
currently has in order to develop its range of contents and portals,
TELEFONICA intends to maintain them and to gradually analyse their
progress according to their results, degree of
- 36 -
complementarity and adequacy for the construction of its range of
portals and Internet services.
However, if in the future criteria regarding profitability and
generation of value for the stockholders of TERRA and, indirectly, of
TELEFONICA, render it advisable to expand, transfer, restructure, cease
or reduce any of the Target Company's activities or restrict the same
to certain geographic areas, the Bidder would proceed to analyse the
plan of action most appropriate for the assets relevant to such
activities, even if, at the date of this Prospectus, it has no
intention to do so.
At the date of this Prospectus, TELEFONICA has no plans to
significantly alter TERRA's level of debt, nor does it intend to modify
the figure of its share capital. Likewise, at the date of this
Prospectus, no substantial modification of TERRA's employment policy
are foreseen, notwithstanding the needs that may derive from the
materialisation of the synergies referred to in section IV.2 below.
TELEFONICA has not signed any agreement, nor has it assumed any
undertaking whatsoever, with respect to maintaining companies, lines of
business or assets within TERRA's company group.
Finally, TELEFONICA has no intention to carry out mergers, spin-offs,
transformations or transfers that may directly or indirectly affect
TERRA, companies belonging to its group, any of its lines of business,
or significant assets of TERRA, nor does it intend to transfer shares
of the Target Company to third parties after this Bid. Nevertheless, it
does not rule out that these alternatives may be considered in the
future.
In any case, it should be taken into account that the evolution of
rapidly changing Internet markets may lead to a change in some of the
aforementioned plans, which may advise the taking of decisions
different from those envisaged herein.
Changes to the By-laws and management body.
The Bidder does not intend to modify the By-laws of TERRA following the
settlement of this Bid.
If the Bid is successful, TELEFONICA intends to renew the Board of
Directors of TERRA, in order to increase its presence on the same in
accordance with the stake held after the Bid. In any case, pursuant to
current regulations and the recommendations that are generally accepted
in good government practice, TELEFONICA intends to maintain independent
directors on the Board of Directors, pursuant to the resulting
shareholding structure following the Bid under this Prospectus.
Trading of the securities of the Target Company.
The present Bid is not a take-over bid to de-list securities that are
traded on the securities market, and therefore, TELEFONICA does not
intend to bring about the de-listing of TERRA's shares as a result of
this Bid. Notwithstanding the foregoing, if as a result of this Bid,
the distribution of the shares of TERRA makes it impossible to ensure
- 37 -
adequate securities market frequency and liquidity, TELEFONICA
undertakes to adopt, within a term of 6 months following the end of the
Bid, any measures that are necessary to keep TERRA's shares on the
securities markets or to bring about the de-listing of the shares in
accordance with the applicable requirements, including the launching of
a de-listing take-over bid, as the case may be, in the aforementioned
period.
IV.2 Impact of this operation on the Bidder.
The acquisition of shares in TERRA will not affect the Bidder's
dividend policy. TELEFONICA intends to maintain its current dividend
policy based on expected cash flow generated by its operations.
At the price of the Bid, taking as a reference TERRA Group's financial
statements at 31 March 2003, reflecting the share capital decrease
registered in June, an additional goodwill in TELEFONICA of
approximately 72 million euros would be generated. This goodwill shall
be amortised over a term of ten years, at a rate of 7.2 million
euros/year, according to TELEFONICA's current accounting policy.
Assuming that the Bid is 100% accepted, the estimated impact of the
same on the consolidated results of the Bidder in the 2003 financial
year, and if the new stake acquired were consolidated for a period of 6
months, would amount to (50.3) million euros, an amount which includes
the proportional amortisation of the goodwill, financial results after
tax and the allocation of results of the acquired stake.
On the other hand, in the event of reaching the minimum number of
shares to which the Bid is subject, TERRA shall be obligatorily
integrated into TELEFONICA's consolidated fiscal group in the next
financial year, i.e. 2004. Consequently, as of that time, the tax base,
positive or negative, obtained by TERRA in each financial year, shall
be included in the consolidated tax base of the Group. In the same way,
the credits or other tax benefits accrued by TERRA shall be added to
and used by the consolidated tax group of which TELEFONICA is the
controlling company. This effect has been taken into account, among
others, for setting the 75% minimum limit referred to in section II.3b)
of this Prospectus.
However, the negative tax bases and tax credits generated to date by
the Target Company which have yet to be offset, may only be offset in
the consolidated tax base of the TELEFONICA Group up to the limit
permitted by the positive individual tax base generated by TERRA in
each financial year. In the event that, in the future, a corporate
operation affecting TERRA takes place (merger, spin-off, etc.) the
treatment of said tax bases and credits shall depend on the specific
operation which takes place.
Assuming that the Bid is 100% accepted, the consolidated debt ratio/1/
of the TELEFONICA Group, based on the financial statements at 31 March
2003, would be 47.6%, as opposed to 45.5% before the operation.
/1/ Debt ratio: Net debt / (Own resources + External stockholders + Income to
be distributed + Long-term debt with public administrations + Net debt)
Net Debt: Long-term creditors (not including debt with minority
stockholders) + Issues and debts with credit entities - Short-term and
Long-term financial investments - Cash.
- 38 -
As a result of integrating the businesses, making a joint effort in
markets where TELEFONICA is present and eliminating redundant functions
and competencies in its positioning, TELEFONICA expects to be able to
generate synergies with this operation; as regards income, by
repositioning the business in order to boost the growth of the
broadband market, increasing the Group's Internet market share,
increasing client income and margins; as regards expenses and
investment resources allocated to the business, by restructuring the
business and eliminating redundancies, streamlining its work centres
and saving on management and administration costs, integrating the
services and product development units, improving the efficiency of
content purchase and production and generating savings in marketing and
commercial campaigns. As a result of all the foregoing, TELEFONICA has
proposed the objective of generating an additional operating margin of
14.2 million euros in the final quarter of 2003, increasing this
objective to 268.9 million euros for the calculation of the 2003-2006
period, including said quarter.
IV.3 Impact of competition law regulations.
This Bid is not subject to Defence of Competition Law 16/1989, dated 17
July, nor (EEC) European Council Regulation 4064/87, dated 21 December
1989, as this Bid does not imply the existence of a concentration for
the purposes of the aforementioned regulations, given the situation
prior to the filing of this Bid, in which, for the purposes of
competition legislation, TELEFONICA controlled the Target Company. For
this reason, the Bidder has not notified the Bid to the Spanish and EU
competition authorities. However, TELEFONICA has informed the Spanish
competition authorities of this operation.
With respect to the US competition authorities, TELEFONICA does not
need their prior authorisation of the appropriate authorities to launch
the Bid; however, the operation was notified pursuant to the US
Hart-Scott-Rodino Act, which entails that the term established in said
Act must elapse - fifteen (15) days from the date of the notification -
before the Bid may be settled. This notification shall in no event
suspend the Bid under this Prospectus and was presented to the
competent authorities on 18 June 2003, with the document confirming
said notification attached as Annex 10 of this Prospectus.
Finally, the transaction was also notified, on 18 June 2003, to the
Mexican competition authorities, with the document confirming said
notification attached as Annex 10 of this Prospectus, and said
notification shall in no event suspend the present Bid.
The launch of this Bid does not require any additional authorisation in
competition matters in other countries which may suspend the Bid.
IV.4 Administrative Authorisations.
The acquisition by the Bidder of shares in TERRA as a result of this
Bid is not subject to any type of prior administrative authorisation.
IV.5 Companies which have participated in the transaction.
Morgan Stanley has acted as the financial advisor to the Board of
Directors of TELEFONICA in determining the consideration offered.
- 39 -
BBVA BOLSA S.V., S.A. (hereinafter "BBVA BOLSA") intervenes herein as
the company entrusted with the settlement of the Bid. BBVA BOLSA is a
subsidiary of BANCO BILBAO ARGENTARIA, S.A. (hereinafter "BBVA"), the
bank in which the deposit has been set up to guarantee settlement of
the Bid. Furthermore, BBVA holds shares in TELEFONICA and TERRA, and
has recommended four and one members, respectively, for the Board of
Directors of both companies; and is also a lender of TELEFONICA.
Finally, BBVA and TERRA hold joint stakes in the company Uno-e Bank.
INVERCAIXA VALORES S.V., S.A. (hereinafter "INVERCAIXA") was appointed
to intervene in the settlement of the Bid. INVERCAIXA is a subsidiary
of CAJA DE AHORROS Y PENSIONES DE BARCELONA, S.A. (hereinafter "La
Caixa"), a company which holds shares in TELEFONICA and TERRA, and has
recommended two of its Board members. La Caixa is also a lender of
TELEFONICA.
IV.6 Availability of the Prospectus.
Pursuant to the provisions of Article 18.3 of Royal Decree 1197/1991,
dated 26 July, this Prospectus and its supporting documentation shall
be made available to the public, and shall be deposited at the
Governing Bodies of the Securities Markets in Madrid, Barcelona, Bilbao
and Valencia; at the registered address of TELEFONICA (Calle Gran Via,
no 28, 28013, Madrid); at the registered address of TERRA (Calle
Nicaragua, no 54, 08029, Barcelona); at the registered address of
BBVA BOLSA S.V., S.A. (Gran Via 12, 48001, Bilbao); and at the
registered address of INVERCAIXA VALORES S.V., S.A. (Avda. Diagonal,
621-629, 08028, Barcelona) as from the day after the publication of the
first of the announcements concerning this Bid.
This Prospectus and the accompanying documentation may also be
consulted at the public registries of the CNMV in Madrid (Paseo de la
Castellana, 15) and at the Barcelona offices of the same (Paseo de
Gracia, 19) and on the web page of said body (in the latter case, only
the Prospectus shall be available).
In Madrid, on 18 June 2003
Mr Santiago Fernandez Valbuena
Managing Director of Corporate Finance of TELEFONICA, S.A.
- 40 -
LIST OF DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 1: Certificate from the Madrid Mercantile Registry confirming the
existence of the Bidder, and the Certificate from the Secretary
of the Board of Directors of TELEFONICA, confirming its current
By-laws.
Annex 2: Certificate of the resolution adopted by the Board of Directors
of TELEFONICA to launch the Bid and authorising the signature of
the Prospectus.
Annex 3: Shares in TERRA, S.A. held by the members of the Board of
Directors of the Bidder and transactions carried out by these
members during the twelve months prior to the launching of this
Bid and up to the date of the present Prospectus.
Annex 4: Individual and consolidated annual accounts of the Bidder
corresponding to the financial year ended on 31 December 2002
(prepared by the Board of Directors, audited and approved by the
Ordinary General Stockholders' Meeting).
Annex 4 bis: The individual and consolidated financial statements of
TELEFONICA on 31 March 2003
Annex 5: Certificate of the freezing of the TERRA shares held by
TELEFONICA.
Annex 6: Documents verifying the guarantee securing payment of the
consideration under the Bid.
Annex 7: Standard form for the announcement of the Bid.
Annex 8: Letter regarding the publication of the Bid.
Annex 9: Letters of acceptance from the Stockbrokers acting as Agents on
behalf of the Bidder.
Annex 10: Copy of the notifications filed before the competition
authorities in the United States of America and in Mexico.
- 41 -
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 1: Certificate from the Madrid Mercantile Registry confirming the
existence of the Bidder, and the Certificate from the Secretary
of the Board of Directors of TELEFONICA, confirming its current
By-laws.
Translation - for information purposes only
MERCANTILE REGISTRY OF MADRID
THE UNDERSIGNED MERCANTILE REGISTRAR OF MADRID
I HEREBY CERTIFY: THAT at the express request of Antonio Lucas Ayala Gonzalez,
holding Fiscal Identification number 50418274C, who has applied for a
certificate verifying the existence of the company "TELEFONICA, S.A."; I have
examined the books under my responsibility at this Registry, which state the
following:
ONE: That the entries made on sheet M-6164, pertaining to folio 1 of tome 308,
at this Mercantile Registry for the company "TELEFONICA, S.A.", do not state
that the same is in DISSOLUTION OR LIQUIDATION, and therefore the company
continues to EXIST according to the Registry.
In witness whereof, and as no entry exists in the books regarding any document
pending registration that refers to the company whose existence is certified
herein, I hereby issue the present and sign the same in MADRID, on the
twenty-first of March, two thousand and three.
THE REGISTRAR
(signature and stamp)
Recorded in the Certificate Book under entry number 3241/2003
Fees: ACCORDING TO INVOICE
Translation - for information purposes only
MERCANTILE REGISTRY OF MADRID 1896022
NOT TO BE USED
FOR CERTIFICATION
- 2 -
Translation - for information purposes only
(Telefonica logo)
Telefonica, S.A.
I, ANTONIO J. ALONSO UREBA, DIRECTOR AND SECRETARY OF THE BOARD OF DIRECTORS OF
"TELEFONICA, S.A."
HEREBY CERTIFY:
That the current version of the Company By-laws of "Telefonica, S.A." is that
which appears in the attached document, all pages of which contain the stamp of
the Board of Directors.
In witness whereof, I hereby issue this certificate in Madrid, on the
twenty-eighth of May, two thousand and three.
(signature)
- 3 -
ARTICLES OF ASSOCIATION
Articles of Association
Current Articles of Association
June 10th, 2003
ARTICLES OF ASSOCIATION
Summary
Index by Articles
Full text of the Articles of Association
ARTICLES OF ASSOCIATION
Table of Contents by Articles
ARTICLES OF ASSOCIATION
Shareholders' Meeting
Articles of Association
Part I
General provisions
Article 1 Corporate name
Article 2 Corporate term
Article 3 Registered offices and branches
Article 4 Authorized Activities
Part II
Share capital and shares
Article 5 Share capital
Article 6 Share system
Article 7 Capital calls
Article 8 Rights conferred upon members
Article 9 Joint ownership and real property rights
on shares
Article 10 Purchase of Treasury Stock
Article 11 Members to abide by Articles of Association
and by corporate resolutions
Part III
e Corporate bodies
Article 12 Definition of corporate bodies
FIRST SECTION ON THE GENERAL SHAREHOLDERS MEETING
Article 13 l Shareholders' Meeting
Article 14 Powers of the Shareholders' Meeting
Article 15 Annual and Extraordinary Meetings
Article 16 Shareholders' Meeting Notice of Shareholders' Meetings
Article 17 Attendance right
Article 18 Information to Shareholders
Article 19 Chairman to the meeting and list of attendees
Article 20 Discussion and balloting
Article 21 Adoption of resolutions
Article 22 Minutes of the meeting and recording
of resolutions
ARTICLES OF ASSOCIATION
SECOND SECTION MANAGEMENT OF THE COMPANY
Article 23 Corporate management structure
Article 24 Composition and appointment to the
Board of Directors
Article 25 Personal requirements to be
appointed to the Board
Article 26 Appointment to office
Article 27 Meetings, quorum and adoption
of resolutions by the Board
Article 28 Remuneration
Article 29 Legal representation of the Company
Article 30 Powers of the Board of Directors
Article 31 Executive Committee
Article 31 bis Audit and Control Committee
Article 32 On the Chairman
Article 33 The Company Secretary
Part IV
On the Annual Accounts, profits and dividends
Article 34 Financial year and presentation of
Annual Accounts
Article 35 Distribution of profit
Part V
Winding up and liquidation
Article 36 Winding-up events
Article 37 Liquidation of the company
ARTICLES OF ASSOCIATION
FULL TEXT OF THE ARTICLES OF ASSOCIATION
Part I
General Provisions
ARTICLES OF ASSOCIATION
Article 1
Corporate name
The name of the Company is "Telefonica, S.A." and it will be governed
by these Articles of Association and, as for those matters which are not
regulated hereunder, in accordance with the Spanish Companies Act (Ley de
Sociedades Anonimas) and any other applicable legal provisions.
Article 2
Corporate term
The Company has been incorporated for an indefinite period of time; its
operations started as of the date of its Memorandum of Incorporation and it will
only be wound up on such grounds and under such conditions as are provided for
under Article 36 of these Articles of Association.
Article 3
Registered offices and branches
1. The registered offices are located int Gran Via 28 (Madrid), and the Board
of Directors shall be entitled, to the extent allowed under the legal provisions
in force, to change said address within the limits of the municipality of
Madrid.
2. The Board of Directors shall also be entitled to resolve upon the opening,
closing and transfer of branches, agencies, delegations, premises and
representation offices, to such extent and in such places as it deems
convenient, whether in Spain or abroad.
Article 4
Authorised Activities
1. The authorised activities of the Company are the following:
a) Delivery and exploitation of any and all kinds of public and private
telecommunication services and, to such end, to design, install, preserve,
repair, improve, acquire, dispose of, connect, administrate, manage and
perform whatever other activities other than those mentioned hereinbefore,
with respect to all manner of current or future networks, lines,
satellites, equipment, technical systems and infrastructures, , including
the property wherein any of the above is located.
b) Provide and exploit all manner of ancillary or supplementary services,
as well as any other services related to communication activities.
c) Research and development, promotion and application of any and all
component principles, items of equipment and systems which are directly or
indirectly used in telecommunications.
d) Manufacturing, production and, generally, any and all forms of
industrial activities related to telecommunications.
e) Acquisition, disposal and, generally, any and all forms of commercial
activities related to telecommunications.
2. All the foregoing activities which comprise the corporate purpose of the
Company may be carried out both in Spain and abroad, and either in whole or in
part directly by the
ARTICLES OF ASSOCIATION
Company itself, or by means of the holding of shares or other interests in other
companies or corporate bodies which may have similar or like corporate objects.
ARTICLES OF ASSOCIATION
Part II
Share capital and shares
ARTICLES OF ASSOCIATION
Article 5
Share capitalShare Capital
1. The Share Capital of Telefonica amounts to 4,955,891,361 Euro represented
by 4,955,891,361 ordinary shares of the same series with a face value of f
1.00 Euro each, fully paid up.
2. The General Shareholders' Meeting, in accordance with such requirements
and within such limits as provided in the Company's Articles, may authorise
the Board of Directors to increase the share capital."
Article 6
Share system
1. The shares are represented by account entries, and are subject to the
securities' market legislation and other current legal provisions. 2. Any
change in the nature of the shares represented by means of account entries
shall be published - once the resolution thereon has been placed on record
pursuant to the provisions of the Spanish Companies Act and the Securities
and Exchange Market Act -,in the Official Gazette of the Commercial
Register and in one of the most widely distributed newspapers in Madrid.
3. The Company shall acknowledge as a shareholder any person who appears as such
in the corresponding records.
Article 7
Capital calls
1. Capital calls will have to be paid up with the term provided by the Board
of Directors in compliance with the legal provisions thereon.
2. Capital calls in arrears shall produce for the delinquent partner such
effects as are provided for under law. In the event of conveyance of shares
which are not fully-paid up the purchaser will be jointly and severally liable
with all previous conveyors for such amounts
Article 8
Rights conferred upon members
ARTICLES OF ASSOCIATION
1. All shares grant its legitimate holder the right to be a Member of the
Company vested with the rights established by law and in these Articles of
Association.
2. Under such conditions as are provided for under law and except as
otherwise provided thereunder, Members shall enjoy, at least, the following
rights:
a) The right to take part in the distribution of profit and in the net
worth of the Company following liquidation of same. .
b) Pre-emptive subscription right in the event of issue of new shares or
convertible debentures.
c) The right to attend and vote at General Shareholders' Meetings - under
such terms and conditions as are provided for under these Articles of
Association - and, when required, to challenge corporate resolutions.
d) The right to obtain such information as may be required in order to
ascertain the situation and condition of the Company.
3. Notwithstanding the above provisions, the Company shall be entitled to
issue non-voting shares, under such terms and conditions and within such limits
and other requirements as may be provided for under law.
Article 9
Joint ownership and real property rights on shares
1. Shares shall be indivisible. Joint owners of a share shall therefore
appoint one individual who is vested with the power to exercise their membership
rights, and shall be jointly liable to the Company for any and all liabilities
stemming from their shareholding. This rule shall also apply to all other forms
of joint ownership of rights on shares.
2. In the event of a beneficial interest on shares, the legal owner will
exercise all rights attached to being a Member of the Company,, but the
usufructuary shall be entitled, in any case, to collect any dividends that the
Company may pay during the term of the beneficial interest.
3. In the event of a pledge on shares, the owner thereof shall retain all
Member rights, and the pledgor shall be obliged to facilitate the exercise of
said rights.
Article 10
Purchase of Treasury Stock
The Company may only acquire its own shares in such a way, using such
funds and to such effects as are contemplated under the applicable laws in
force.
Article 11
Members to abide by Articles of Association
ARTICLES OF ASSOCIATION
and corporate resolutions
Title to any number of shares implies an unrestricted acceptance of, and
agreement to, the Articles of Association and the Regulations governing the
Company, as well as to the resolutions duly adopted by the General Shareholders'
Meeting, the Board of Directors or the Executive Committee, with respect to such
matters as fall within the scope of their respective powers.
ARTICLES OF ASSOCIATION
Part III
Corporate Bodies
ARTICLES OF ASSOCIATION
Article 12
Definition of the corporate bodies
The responsibility for the administration and management of the Company
shall lie, under such terms and conditions as are stated hereinafter, with the
following bodies:
a) The General Shareholders' Meeting
b) The Board of Directors
c) The Executive Committee, and
d) The Chairman and Chief Executive Officers who may be appointed by the
Board of Directors amongst its members.
FIRST SECTION
ON THE GENERAL SHAREHOLDERS MEETING
Article 13
General Shareholders' Meeting
1. The General Shareholders' Meeting is the main corporate body representing
the interests of all Members.
2. Members, at a General Shareholders' Meeting duly convened and held, shall
resolve, by a majority of votes, on all matters within the
Shareholders' Meeting.
3. All members, including the dissenting ones and those who have not taken
part in the Meeting, shall be bound by the resolutions adopted by the General
Shareholders' Meeting, provided further that a member may challenge the
resolutions passed thereat, in such cases and in such terms and conditions as
are provided by law.
Section 14
Powers of the shareholders meeting
The Shareholders' Meeting shall decide upon such matters as are vested on
it under the legal provisions in force or under these Articles of Association;
specifically, it shall resolve on the following matters:
1. Appointment and dismissal of the Directors.
2. Appointment of Auditors.
3. Ratification of corporate management and, approval, where applicable,
of the Annual Accounts for the previous year, and resolution on the
distribution of profit.
4. share capitalShare capital increases or reductions.
5. Issue of Debentures.
6. Amendment of the Articles of Association.
7. Winding up, merger, demerger or transformation of the Company.
8. Any other matters that the Board of Directors may decide to submit to
the Shareholders' Meeting.
ARTICLES OF ASSOCIATION
Article 15
Annual and Extraordinary Meetings
1. The Annual Shareholders' Meeting, previously convened to such effect,
shall be statutorily held within the first six months of each year, in order to
endorse corporate management, approve, where appropriate, the Annual Accounts
for the previous year and resolve on the distribution of profit. Resolutions may
also be adopted at this Meeting on any such other matters pertaining to the
competence of the General Shareholders' Meeting as set out in Article 14 above,
provided that the item in question appears in the Agenda and provided, further,
that . the quorum provided by law for the Meeting has been achieved.
2. Any Meetings other than those contemplated in the previous section shall
be deemed extraordinary and may be held at any time of the year when so resolved
by the Board of Directors think fit.
3. Also, an Extraordinary General Shareholders' Meeting shall be held at the
written request of a number of shareholders which hold, at least, five per cent
of the share capital, provided they indicate in their request the matters which
are to be dealt with. In this case, the Board of Directors shall convene a
Meeting to be held not later than thirty days after the date of the notarial
summons requesting them to hold the Meeting. The Board of Directors shall
prepare the Agenda, which is to include, at least, the matters indicated in the
summons.
4. General Meetings, either Annual or Extraordinary, when duly convened,
shall be deemed validly held in compliance with the statutory provisions
applicable from time to time, taking into consideration the matters included in
the Agenda.
Article 16
Convening the Shareholders' Meeting
1. The General Shareholders' Meeting shall be convened by means of an
announcement in the Official Gazette of the Commercial Register, as well as in a
widely distributed newspaper in Madrid, at least fifteen days prior to the date
recorded in the Notice of the Meeting.
2. The aforementioned announcement shall contain all such particulars as are
required by law in each case and, all notices will include the the day, place
and time of the Meeting in first call, as well as all matters to be discussed
thereat. The announcement may also include, where appropriate, the date on which
the Meeting is to be held in second call.
3. No matter which has not been included in the Agenda may be discussed at
the General Meetings.
Article 17
Attendance right
1. Every shareholder shall be entitled to attend the General
Shareholders' Meeting provided however that he holds a number of shares which
represent at least a nominal value of 300 euro, and provided further that said
shares have been entered in the member's name in the corresponding Account
Entries Ledger no less than five days before the date on which the General
Meeting is to be held, and provided, also, that each shareholder establishes
such circumstance by means of the corresponding attendance card, or else, by
producing a
ARTICLES OF ASSOCIATION
certificate issued by any Institution attached to the Securities Compensation
and Settlement Service, or by any other procedure contemplated under the legal
provisions in force.
Notwithstanding the above, any member who hold a lower number of shares
shall be allowed at any time to be represented at the Meeting by a proxy given
to another member entitled to attend the Meeting, and they may also group their
shares with those held by other Members until the minimum number of shares
required is attained, provided further that they shall have to appointed one
amongst them to act as their proxy. . Shares grouped will only be valid for each
Meeting and must be recorded in any written form.
2. Any member entitled to attend shall be allowed to delegate his or her
representation at the General Meeting upon another person, who need not be a
shareholder. This proxy shall be conferred on such terms and conditions as may
be required under law.
Both the Chairman and the Secretary to the General Shareholders' Meeting
shall enjoy full powers, in the maximum extent permitted under law, to decide
upon the validity of the proxy forms, and they shall only reject as invalid
those documents which lack the minimum requirements, always provided that this
situation cannot be remedied.
3. Directors must attend General Meetings unless an extenuating circumstance
concurs. The Board of Directors may also authorise managers, technicians and and
other persons involved in the running of the Company to be present thereat
Article 18
Information to Shareholders
1. Shareholders may request - either in writing, prior to the date of the
Meeting, or verbally, during the Meeting - such reports or clarifications as
they deem fit on the points included in the Agenda. The Board of Directors shall
be under the obligation to supply such items, except for those cases in which,
in the Chairman's opinion, the disclosure of such information would harm
corporate interests. This provision shall not apply when the request is
supported by a number of shareholders representing, at least, one fourth of the
share capital.
2. Shareholders' MeetingNotice of the Meeting will include the right of any
Member to obtain immediately from the Company and free of charge, at the
registered offices of the latter, a copy of such documents which are to
submitted to the General Meeting's approval, as well as the Auditors' Report.
3. Whenever any amendments to the Articles of Association are to be discussed
at the General Meeting, indication of this will be included in the Notice of the
Meeting, in addition to such particulars as are required under law, and also the
right of every shareholder to inspect at the registered office the full text of
the amendment proposed, the report thereon and request the delivery or the
remittance, free of charge, of said documents.
4. In the event of a share capital increase or reduction, the issuance of
convertible debentures, a corporate merger or demerger, such information as is
required under law will be supplied.
ARTICLES OF ASSOCIATION
Article 19
Chairman of the meeting and List of Attendees
1. The Chairman of the Board of Directors and, in his absence, a Vice
Chairman of the Board, in accordance with their seniority, shall preside over
the General Shareholders' Meeting and, in the event of vacancy, absence or
illness, the senior Director shall preside over the Meeting and, in case of
equal seniority, the most senior Director shall be the Chairman. The Secretary
of the Board of Directors shall act as the Secretary of the General
Shareholders' Meeting and, in his absence, an Assistant Secretary of the Board
shall perform those duties, in accordance with their seniority, and, in the
event that there is no Assistant Secretary available, the most junior Director
shall be the Secretary of the Shareholders' Meeting; if there are two junior
Directors, the younger one shall perform the task.
2. The members of the Board of Directors shall preside over the
Shareholders' Meeting.
3. Two shareholders may be appointed as scrutineers to the Meeting. The
shareholders present at the Meeting shall designate the scrutineers among the
five shareholders attending or represented at the Meeting who are entitled to
cast the greatest number of votes, and both the Chairman and the Secretary of
the Meeting shall be excluded from designation.
Once the Chairmanship of the Meeting has been set up, and prior to discussing
the Agenda, the List of Attendeees will be drawn up, , indicating therein the
capacity and representation vested upon each person, as well as the number of
shares held by him or her either in his own name or by proxy. At the end of the
List of Attendees, an indication shall be made of the number of shareholders
attending the Meeting in person or by proxy, and the number of shares they hold.
In accordance with the provisions of the Commercial Register Regulations, the
List of Attendees may be arecorded in a hard copy of in a computer system.
5. Once the roll of appearance has been drafted, the Chairman shall state
whether the requirements for the valid holding of the meeting have been
fulfilled or not. Any doubts or claims arising with respect thereto shall be
solved by the Secretary and the scrutineers. Next, where appropriate, the
Chairman will open the session.
Article 20
Discussion and balloting
1. While presidingthe Meeting, the Chairman shall make sure that all
discussions follow thehe Agenda and shall clarify any doubts that may arise with
respect to the contents thereof; moreover, the Chairman shall give the floor as
he deems fit to those shareholders who ask therefor, and he shall also be
entitled to put an end to the discussion on any point when he thinks it has been
debated at length or that one speaker is hindering the development of the
discussion, or else, if the point is not included in the Agenda. The Chairman
shall decide upon the moment when the balloting on the proposals is to take
place, and shall also announce the results of the balloting.
ARTICLES OF ASSOCIATION
2. When needed, the balloting shall take place by show of hands, and
resolutions may also be adopted by general agreement of the shareholders,
without prejudice to the legal provisions in force with respect to the need to
state in the Minutes the position of the dissenting shareholders, if any.
Article 21
Adoption of resolutions
1. The General Meeting shall adopt resolutions by such majority of votes cast
by the shareholders - attending the Meeting in person or by proxy - in
compliance with the legal provisions thereon.
2. Each share present or represented at the Meeting shall be entitled to cast
one vote - except for those shares with no voting rights attached to them - in
accordance with the legal provisions in force.
Notwithstanding the provisions of the above paragraph, no shareholder
shall be allowed to cast a number of votes representing more than ten per cent
of the overall share capital entitled to voting rights which is outstanding at
any time, regardless of the number of shares he actually holds.
In ascertaining the maximum number of shares which each shareholder may
cast, only those shares owned by each shareholder shall be taken into account,
and the stock belonging to other shareholders who have named him as their proxy
shall not be taken into account, without prejudice to the aforementioned ten per
cent limit, which shall equally apply to every shareholder attending by proxy.
The limit set in the above paragraphs shall equally apply, both to the
maximum number of votes that may be cast - either jointly or individually - by
two or more corporate shareholders belonging to the same group of companies, and
to the maximum number of votes which may be cast by an individual or a corporate
body holding shares in theCompany, or by the organisation or the organisations
which are directly or indirectly controlled by that individual or corporate
body.
To the purposes of the previous paragraph, a Group of Companies and a
controlling interest will have the meaning provided by Section 4 of the current
Spanish Securities and Exchange Market Act (Ley del Mercado de Valores) Securi.
enacted on July 28, 1998.
Without prejudice to such restrictions to the voting rights described
above, all e shares represented at the Meeting shall be taken into account in
the determination of the required quorum to validly hold the Meeting; however,
in the casting of votes, those shares shall be subject to the 10 per cent limit
on the number of votes which may be cast, in accordance with the provisions of
this section.
Article 22
Minutes of the Meeting and Recording of Resolutions
ARTICLES OF ASSOCIATION
1. The discussions and resolutions of the General Meeting shall be recorded
in the Minutes, in which indication shall be made of, at least, all information
required by the Commercial Register Regulations and the Law. Followingt approval
of the Minutes as provided for by law, a transcription thereof shall be entered
in the Minutes' Book, which shall be signed by the Secretary with the
undersignature of the Chairman, or else, by the persons who have deputised for
the above officers at the Meeting.
2. When approved in accordance with the legal provisions in force, the
Minutes shall be binding as from the date of said approval.
3. Any verbatim or partial certifications as may be required in order to give
evidence of the resolutions passed at the General Shareholders' Meeting shall
be issued and signed by the Secretary, with the undersignature of the Chairman,
or failing them, by the persons who have deputised for the above officers s at
the Meeting.
4. The Directors may request from a Notary Public to place on record the
Minutes of the Meeting, and they are obliged to do so, at least five days prior
to the date of the Meeting, when such notarial certification is requested by a
number of shareholders representing no less than one per cent of the share
capital. The notarial fees shall be paid r by the Company. This notarial MInutes
shall be considered to be the Minutes of the Meeting.
5. Every shareholder shall be entitled to request and obtain at any time a
certification of the resolutions adopted at the General Meetings and of the
Minutes thereof.
SECOND PART
CORPORATE MANAGEMENT
Article 23
Management of the Company
1. The management of the Company shall be vested upon the Board of
Administrators and the Chairman thereof, the Executive Committee and, if needed,
upon one or more Managing Directors.
2. Each of the aforementioned bodies shall have such powers as are bestowed
upon it in these Articles of Association, in addition to such powers as are
provided for under law.
Article 24
Composition and Appointment to the Board of Directors
1. The Board of Directors shall consist of no less than five and no more than
twenty members, who are to be elected by the General Shareholders' Meeting.
2. The Directors shall be elected for a maximum term of five years. They may
be reelected for one or more further terms of equal maximum duration.
ARTICLES OF ASSOCIATION
3. The Board of Directors shall be entitled to provisionally fill any
vacancies that may occur therein; to such end, the Board may appoint in legal
form those persons who are to fill such vacancies until the next General
Shareholders' Meeting.
4. In case the legal provisions in force make it imperative that one or more
persons who have not been elected by the shareholders become members to the
Board of Directors, the number thereof shall not be included in the minimum and
maximum numbers as provided for in paragraph (1) above.
Article 25
Personal requirements to be appointed to the Board
1. To be appointed a Director of the Board , the candidate must have held at
least three years prior to their appointment, a number of shares in the Company
representing a nominal value of no less than 3,000 euros, which shares may not
be assigned as long as they remain.Directors of the Board.
The aforementioned requirements shall not apply with respect to those
persons that, at the time of their appointment to the Board, are either bound to
the Company by a professional or employmnet relationship, or are expressly
exempted from those requirements by the vote of no less than 85 per cent of the
Directors.
2. Only persons of legal age may be elected to the Board of Directors who are
not under any disqualifying circumstance provided by the current legislation in
force, namely, under National Act No 25/83, as of December 26th. 1983/1/, an
under Act No 7/84, as of March 14th. 1984, approved by the Assembly of the
Autonomous Community of Madrid/2/.
Article 26
Appointment to office
1. The Board of Directors shall elect amongst its members a Chairman and one
or more Vice Chairmen, upon which the Chairman may delegate his functions and
who shall deputise for the Chairman in case of absence or illness thereof.
Moreover, the Vice Chairmen shall have such powers and perform such functions as
the Board or its Chairman may bestow upon them.
2. The Board of Directors may delegate such functions as it deems fit on one
or more Directors, in accordance with the legal provisions in force.
3. The Board of Directors shall also provide for the staffing of such
corporate management posts as it deems necessary for the proper operation of the
Company; moreover, the Board shall appoint a corporate Secretary and such
Assistant Secretaries as it deems fit.
___________________
/1/ Later amended by Act No 9/1991, as of 22/3/1991; Act No 13/1995, as of
18/5/1995; and Act No 12/1995, as of 11/5/1995.
/2/ Later amended by Act No 14/1995, as of April 21st. 1995.
ARTICLES OF ASSOCIATION
4. Only those Directors who have been members of the Board for, at least, the
last three years previous to their appointment, may be elected as Chairman, Vice
Chairman, Chief Executive Officers or member of the Executive Committee.
However, said seniority in the Board shall not be required if the election takes
place with the votes of no less than 85 per cent of the members of the Board of
Directors.
Article 27
Meetings, setting up and adoption of resolutions at the Board
1. The Board of Directors shall regularly meet at the registered office at
least once a month, following notice duly served thereon.
2. The Board of Directors shall hold extraordinary meetings whenever its
Chairman - or the incumbent Chairman - resolves to hold a Meeting. It shall also
meet whenever no less than three Directors request a meeting.
3. Every Director shall be entitled to delegate his representation by proxy
on any other member of the Board, who shall then be empowered to attend,
participate and vote at the meeting indicated in the proxy.
4. In case a Director living in Madrid is unwarrantedly absent from four
consecutive meetings of the Board of Directors, this body may dismiss him and
appoint a temporary Director to fill his post, until this provisional
appointment is ratified at the next General Shareholders' Meeting.
5. The validity of the resolutions adopted by the Board shall be made
conditional upon attendance, either personally or by proxy, of more than one
half of the number of acting Directors; in case there is an odd number of
Directors, the number of Directors present at the meeting must be higher than
the number of absent ones in order to adopt valid resolutions.
6. In any and all cases, resolutions shall be adopted by a majority of votes
of Directors attending the meeting, either personally or by proxy, except for
those cases in which a greater majority is necessary under the legal provisions
in force.
7. A written ballot with no meeting shall be acceptable provided no Directors
contest this procedure.
8. The debates and the resolutions adopted by the Board of Directors shall be
recorded in the Minutes, which shall be signed by the Secretary with the
undersignature of the Chairman - or by the persons who have deputised for the
above officers at the meeting. The Minutes shall be recorded or transcribed into
a Book of Minutes, which need not be the same book as the one provided for with
respect to the General Shareholders' Meetings. In case a written ballot is
agreed with no previous meeting, both the adopted resolutions and the votes cast
in writing shall be indicated in the Minutes' Book.
Article 28 /3/
___________________
/3/ New draft to section as approved at the General Shareholders' Meeting of
Telefonica, S.A., held in Madrid, on the 11th. Day of April of the year 2003
ARTICLES OF ASSOCIATION
Remuneration
1. Directors' remuneration shall comprise a fixed set monthly remuneration
and allowances for attending meetings of the Board of Directors and its
Management or Consultative committees. The total remuneration paid by the
Company to all its Directors for the functions described above shall be that
agreed by the General Shareholders' Meeting, which remuneration shall remain in
force until the latter resolves that it be changed. The Board of Directors shall
determine the exact amount to be paid within that limit and how it is to be
divided between the various Directors.
2. Additionally and apart from such remuneration as is provided for under the
above paragraph 1, other remuneration systems may be created that may, either be
indexed to the listing value of the shares, or consist of the delivery of stock
or of stock options to the Directors. The application of said remuneration
systems must be authorized by the General Shareholders' Meeting, which shall
determine the stock value which is to be taken as the term of reference thereof,
the number of shares to be delivered to each Director, the exercise price of the
stock options, the term of such remuneration system and such other terms and
conditions as may be considered as fit.
3. Such remuneration systems as are provided for under the above paragraphs
and which shall stem from the appurtenance to the Board of Directors, shall be
deemed compatible with any and all other professional or work-based
compensations to which the Directors may be entitled in consideration of
whatever executive or advisory services which they may deliver to the Company,
other than such supervisory and joint decision - making functions o vested in
them as Directors, which functions shall be subject to the applicable legal
provisions in force.
4. To ensure the transparency of theeremuneration of Directors in such
capacityt, the Directors' Report shall specify the specific remuneration paid to
each Director for the office or position held at the Board and its committees
(Chairman, Vice-Chairman, Member). The remuneration of Chief Executive Officers
for duties other than those referred to in paragraph 1 of this article shall be
given in aggregate, but with a breakdown of the various items. r.
Article 29
Corporate representation
1. Representation of the Company at the Courts and out of the Courts, shall
lie with the Board of Directors, the Chairman thereof, the Executive Committee
and, if any, the Chief Executive Officers.
2. Both the Board of Directors and the Executive Committee shall perform
their representation functions acting collectively, as a single body. Every
resolution adopted by the Board of Directors or by the Executive Committee shall
be executed by its Chairman or by the Vice Chairman, or by the Director
appointed to such effect in the resolution, or the Secretary, any one of them
individually.
ARTICLES OF ASSOCIATION
3. The Chairman of the Board of Directors and the Chief Executive Officers
shall be entrusted with the representation of the Company individually.
Article 30
Powers of the Board of Directors
1. The Board of Directors shall be vested with full powers and authority to
rule, manage, govern, operate and represent the Company.
2. The Board of Directors shall be entitled to adopt resolutions on any and
all matters which are not vested by law or pursuant tof these Articles of
Association in the General Shareholders' Meeting.
3. Consequently, and without limitation, the Board of Directors shall have
the following powers:
1) Management of the Company, organization of departments and issue of
internal regulations - including technical ones - that it deems
appropriate.
2) Prepare tariff proposals for regulated services, as well as any
proposals to revise or modify said tariffs; and establish the prices of
non-regulated services and activities at its discretion.
3) Determine the overall organisation structure of the Company and, to
such end, set up such operating units as it deems fit, as well as
restructure or close down such units.
4) Approve the size of the labour force, engage, employ or appoint, and
dismiss or sever the employment of workers, regardless of their rank;
determine their salary and any ordinary or extraordinary remunerations or
fringe benefits; establish their lines of accountability and reporting;
and enter into collective wage agreements.
5) Determine the ordinary and extraordinary remuneration of the officers
of the Company
6) Grant aids, allowances and gifts.
7) Organise, manage and supervise the operations of the Company.
8) Deal, transact, settle and enter into contracts, agreements,
engagements and undertakings of whatever kinds, namely, those that may be
related to the setting up, acquisition, disposal, operation,
administration or sale of telecommunication facilities, including the
power to submit such matters as it seems fit to the judgement of
arbitrators at law or in equity; and acquire, dispose of, mortgage,
encumber, lease and sublease any and all kinds of property, rights and
licences; establish and withdraw guaranties; incorporate new companies and
other kinds of corporate bodies, as well as acquire shares in existing
ones; and generally, do such things and acts as may appear to inure for
the benefit of the corporate object of the Company.
9) Appoint such representatives, counsellors, advisors, attorneys,
consultants, agents and dealers as the Company may wish to employ; and
ascertain both their powers and their remuneration.
10) Request and obtain whatever patents, trademarks and other types of
industrial property, as well as all manner of copyrights, and acquire such
rights as may have previously been granted to other individuals or
corporate bodies.
ARTICLES OF ASSOCIATION
11) Decide upon and carry out such credit transactions as may appear to
contribute to foster the corporate object, as well as any and all acts and
things as may be required for the issuance, conversion, repayment,
redemption, conversion, sale or purchase, for the account of the Company,
of bonds, debentures, promissory notes and any other kinds of securities
or financial instruments; and to decide upon interest rates, underwriting
terms and conditions, redemption term, collaterals and all other terms and
conditions of the transactions; also, to decide upon the placement and
increase of the available funds.
12) Perform all such acts and things as may be required to ensure that
securities and other commercial instruments issued by the Company may be
listed at both domestic and foreign stock exchanges, as well as at any
other stock markets whenever it is deemed convenient.
13) Do any such acts and things as may be needed in order to perform the
issuance of shares, once the required approvals have been obtained, and
resolve on their payment terms.
14) Approve any and all withdrawals, transfers and disposals of any funds,
income and securities belonging to the Company.
15) Borrow money and open or close current and credit accounts, with or
without guarantees and under whatever terms and conditions.
16) Agree upon, create, acknowledge, qualify, accept, waive, postpone,
assign, subrogate and cancel mortgages, guarantees, pledges, leaseholds,
antichresis, easements and any and all other real property rights.
17) Draw, accept, endorse, guarantee, discount, negotiate and protest
bills of exchange, promissory notes, letters of credit, cheques and any
other payment instruments and commercial paper, as well as carry out any
and all sorts of banking transactions.
18) Approve such balance sheets, settlements, financial statements and
reports as are to be submitted to the General Shareholders' Meeting or to
any authority or agency.
19) Recommend to the General Shareholders' Meeting the amount of the final
dividends which are to be distributed, as well as decide upon the payment
of interim dividends.
20) Convene both ordinary and extraordinary General Shareholders' Meetings
and carry out the resolutions adopted thereat; and, to such end, enter,
execute and sign such documents and instruments as may be required, as
well as do whatever acts and things appear to contribute to said purpose.
21) Delegate and substitute its powers upon one or more Directors or
officials of the Company, as well as upon third parties, subject to the
requirements contained in the legal provisions in force.
22) Clarify any uncertainties that may arise with respect to the
construction of the Articles of Association and the powers vested in the
Board of Directors; and submit reports to the General Shareholders'
Meeting, so that the latter may resolve as necessary. The resolutions of
the Board in this respect, once all legal formalities have been complied
with, are deemed fully incorporated to these Articles of Association,
except as otherwise provided for by the General Shareholders' Meeting.
23) Discharge such responsibilities as the General Shareholders' Meeting
may lawfully vest in the Board.
ARTICLES OF ASSOCIATION
Article 31
The Executive Committee
1. Without prejudice to the legal provisions in force, the Board of Directors
may delegate its powers and authorities upon an Executive Committee, which shall
be made up by a minimum of three and a maximum of ten Directors and is to be
created and dissolved by resolutions of the Board of Directors.
2. Upon its creation, the aforementioned Committee shall enact its own rules
and procedures and shall meet on such dates and under such terms and conditions
as the Committee itself shall deem fit. The Chairman, Vice Chairmen and
Secretary, as well as the Assistant Secretaries, if any, to the Board of
Directors, shall perform identical functions in the Executive Committee.
3. Any vacancies that may take place in the aforementioned Committee shall be
filled, on a permanent basis, by the Board of Directors, and on a temporary
basis, by the Executive Committee itself, until the former body holds a
statutorily valid meeting.
4. The provisions pertaining to the Board of Directors under Article 27,
Paragraphs third to last inclusive shall apply, mutatis mutandi, to the
Executive Committee.
Article 31 bis
Audit and Control Committee
1. An Audit and Control Committee shall be set up within the Board of
Directors, comprising at least three and a maximum of five Directors
appointed by the Board of Directors. All members of that Committee must be
non-executive Directors.
2. The Chairman of the Audit and Control Committee shall be appointed by the
Committee itself from amongst its members, must be replaced every four
years, and may be re-elected on expiry of one year from ceasing to hold
office.
3. The Audit and Control Committee shall have at least the following powers
and duties:
(i) through its Chairman, to report to the Annual General Shareholders'
Meeting on any matters within the competence of the Committee raised by
shareholders at the Meeting.
(ii) to propose to the Board of Directors for submission to the General
Shareholders' Meeting appointment of the Auditor referred to in Section
204 of the Ley de Sociedades Anonimas and, where applicable, the terms on
which the Auditor is hired, extent of the Auditor's scope and revocation
or renewal of the Auditor's appointment.
(iii) to supervise internal auditing facilities;
(iv) to be acquainted with the financial reporting and internal monitoring
systems procedures; and
ARTICLES OF ASSOCIATION
(v) to liaise with the Auditor to receive information on any matters which
could jeopardise the Auditor's independence, and any other matters in
connection with the process of carrying out the auditing of accounts, and
to receive information and exchange with the Auditor the notifications
referred to in legislation on the auditing of accounts and in technical
auditing rules.
4. The Committee shall meet at least once everya quarter and whenever
appropriate, subject to notice of the meeting given by the Chairman, at
its own initiative or following a request by two of its members or of the
Management Committee.
5. A meeting of thee Audit and Control Committee is deemed validly held when
at least one half of its members, present or represented, are in
attendance, and shall pass its resolutions by a majority of those present.
In the case of a draw,, the Chairman shall have a casting vote.
6. The Board of Directors may develop further and complete foregoing rules in
its Regulations, in accordance with these Articles of Incorporation and
the applicable legal provisions.
Article 32
The Chairman
1. The Chairman of the Board of Directors shall preside over the Company and
over all the management and administration bodies thereof; and is also,
responsible for the execution of all resolutions passed by the Board itself or
by the Executive Committee, the representation of which shall be vested in the
Chairman of the Board with full powers and authority. Moreover, in case of
emergency, the Chairman shall be entitled to perform such acts and things as may
appear to him or her to inure for the benefit of the Company.
2. The Chairman of the Board of Directors shall perform, specifically, the
following functions:
1.- Represent the Company in its relationship, both with the Spanish
Government and with all Spanish, foreign and international agencies and
entities, as well as with all sorts of individuals and corporate bodies,
as may be required for the achievement of the corporate purpose and of
such other goals as may appear to be directly or indirectly related to
such object. To such end, the Chairman shall be the authorised signatory
for the Company and approve such reports, letters and writings as he or
she shall deem useful to such ends.
2.- Subject to the authority or approval by the Board of Directors or, as
the case may be, by the Executive Committee, represent the Company in the
execution of any and all deeds and agreements.
3.- Also, represent the Company either as a plaintiff or as a defendant,
complainant or co-litigant, or in any other quality or condition, in all
kinds of courts, tribunals and arbitration bodies or agencies; and, to
such end, he or she shall be entitled to grant such powers of attorney as
may be necessary to whatever lawyers, solicitors and agents as may be
necessary to represent the Company.
ARTICLES OF ASSOCIATION
4.- Convene and preside over ordinary and extraordinary General
Shareholders' Meetings, as well as over the meetings held by the Board of
Directors and the Executive Committee, whereat he or she shall lead the
discussions, see to the orderly development of the sessions and guarantee
that the resolutions passed are duly recorded.
5.- Execute, formalise and, when needed, notarise any and all resolutions
passed, within their respective authorities as described in these Articles
of Association, by the General Shareholders' Meeting, the Board of
Directors and the Executive Committee.
6.- Take, in the event of extraordinary circumstances which do not allow
for a Shareholders' Meeting or, as the case may be, a meeting of the Board
of Directors or the Executive Committee to be held, such steps as may be
required to protect the corporate interests and, to such effects,
immediately convene said corporate bodies in order to report to them as
provided for under the above paragraph.
7.- Recommend to the Board of Directors or, as the case may be, to the
Executive Committee, the adoption of such service provision arrangements
as may appear to be appropriate in order to improve the quality and
adequacy of the corporate services; also, recommend the adoption of such
general or specific steps that he or she may deem convenient in order to
achieve such goals.
8.- Decide upon the examination, performance or improvement of whatever
operations fall within the scope of the corporate object; and submit a
proposal therefor to the consideration of the Board of Directors or, as
the case may be, of the Executive Committee.
9.- Perform, either personally or through third parties of his or her
choice, the overall monitoring and supervision of any and all corporate
operations and services and, as a result thereof, take such steps as may
be deemed necessary for the avoidance of useless expenses, damages or
misuses.
10.- Approve, either personally or through such persons in which he or she
may delegate such powers, the appointment of all corporate officers,
managers and employees; otherwise, these persons may not step into office
nor obtain any remuneration from the Company.
11.- Take such steps as he or she may deem convenient for the proper
performance of services and adequate conduct of the employees, and, to
such end, impose such sanctions as may be needed and allowed under the
provisions of the internal regulations in force.
Article 33
The Company Secretary
ARTICLES OF ASSOCIATION
1. The Company Secretary shall be responsible for the safekeeping of the
Company Files, the Minutes' Books and whatever other papers, vouchers and
supporting documents may be of interest to the Company.
2. Besides, in the capacity of Secretary to the Board of Directors and to the
Executive Committee, he or she shall be responsible for the drafting of the
Minutes, both of the General Shareholders' Meetings and of the meetings of the
Board of Directors and the Executive Committee, which shall be signed by the
Corporate Secretary and undersigned by the Chairman. Moreover, the Corporate
Secretary shall have authority, subject to such legal provisions as may be
applicable in each case, to certify the Minutes and such other documents which
may require certification in order to achieve the corporate object or which are
required to be certified by any party entitled thereto.
ARTICLES OF ASSOCIATION
Part IV
On the Annual Accounts, profits
and dividends
ARTICLES OF ASSOCIATION
Article 34
Financial year and presentation of the Annual Accounts
1. The financial year commences on the first of January and ends on the
thirty-first of December of each year.
2. Within the three months following the closing of the financial year, the
Board of Directors shall establish, as provided for under the legal provisions
in force, the Annual Accounts, the Management Report, and the proposal for the
distribution of profit.
3. The Annual Accounts, which shall comprise the Balance Sheet, the Profit
and Loss Account and the Directors' Report, as well as the ManagemetReport,
shall be subject to verification as provided for under law and then submitted to
the General Shareholders' Meeting, which shall resolve on the distribution of
such profits as appear in the Balance Sheet approved.
4. The provisions of this section shall apply, mutatis mutandi, as the case
may be, to the consolidated Annual Accounts and the Consolidated Management
Report.
Article 35
Distribution of Profit
1. The General Meeting will decide on the distribution of Profit for the
Financial Year on the basis of the Balance Sheet approved
2. Once the items provided by Law or by these Articles have been provided
for, dividends may only be distributed against available profit for the year, or
against freely distributable reserves, provided further that the net book value
of the Company's equity does not fall below the share capital of the Company
after such distribution
3. The distribution of dividends to ordinary shareholders will be made pro
rata to the share capital paid up by them.
4. The General Meeting may resolve to distribute dividends, or issue a share
premium, in kind, provided that the assets or securities subject to distribution
are homogenous and are listed in an an official market at the time when such
distribution has been approved. This latter requirement shall also be understood
as satisfied when the Company provides adequate guaranties of liquidity.
The rule contained in the previous paragraph shall also apply to the return of
contributions in the event of a share capital reduction.
ARTICLES OF ASSOCIATION
Part V
Winding up and liquidation
ARTICLES OF ASSOCIATION
Article 36
Winding-up Events
The winding-up of the Company will take place following any of the events
contemplated under section 260 of the Spanish Companies Act (Ley de Sociedades
Anonimas).
Article 37
Liquidation of the Company
1. The members of the Board of Directors holding office at the time of the
winding up of the Company shall carry out the liquidation thereof, provided that
their number is not even; otherwise, all Directors will act as liquidators
except the Director most recently appointed to the Board.
2. In the liquidation of the Company, the Directors shall abide by the legal
provisions in force at that time.
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 2: Certificate of the resolution adopted by the Board of Directors
of TELEFONICA to launch the Bid and authorising the signature of
the Prospectus.
Translation - for information purposes only
MR ANTONIO JESUS ALONSO UREBA,
DIRECTOR-SECRETARY OF THE BOARD OF DIRECTORS OF TELEFONICA S.A.
HEREBY CERTIFIES
That at the meeting of the Board of Directors of the company validly held in
Madrid on 28 May 2003, called in advance in the manner established in the
company by-laws, with the following Directors present: Mr Cesar Alierta Izuel,
Mr Jose Antonio Fernandez Rivero, Mr Fernando Abril-Martorell Hernandez, Mr Jose
Fernando de Almansa Moreno-Barreda, Mr Jesus Maria Cadenato Matia, Mr Maximino
Carpio Garcia, Mr Carlos Colomer Casellas, Mr Alfonso Ferrari Herrero, Mr Jose
Fonollosa Garcia, Mr Gonzalo Hinojosa Fernandez de Angulo, Mr Miguel Horta e
Costa, Mr Pablo Isla Alvarez de Tejera, Mr Luis Lada Diaz, Mr Antonio Massanell
Lavilla, Mr Enrique Used Aznar, Mr Mario Eduardo Vazquez, Mr Antonio
Viana-Baptista and Mr Gregorio Villalabeitia Galarraga, and with the following
Director absent: Mr Isidro Faine Casas, who appointed the Chairman of the Board
as his representative, and with the presence of the Director Secretary, Mr
Antonio J. Alonso Ureba, who certifies, and as the quorum of attendance as set
forth in the by-laws was met, the following RESOLUTION was adopted with eighteen
favourable votes, the Directors Mr Used Aznar and Mr Viana Baptista being absent
for the discussion and vote on the same at the Chairman's request:
"To approve the launch of a Take-over Bid (the "Bid") over shares of the company
Terra Networks, S.A. (the "Target Company"), subject in Spain to the regulations
established in Royal Decree 1197/1991, dated 26 July, on the regime for
take-over bids and, if appropriate, as a bid in the United States of America
according to the provisions of its securities regulations, under the terms
described below:
1. The Bid shall encompass all shares of the Target Company admitted for
trading on the Computer Assisted Trading System (Continuous Market)
("Sistema de Interconexion Bursatil Espanol (Mercado Continuo)") and on
Nasdaq (the National Market in the United States).
However, and given that the shares of the Target Company owned directly by
TELEFONICA (230,792,328 shares) shall not accept the Bid and shall be
frozen until the results of the Bid are made public in the corresponding
Gazettes of Listed Securities, the Bid shall be directed at acquiring the
remaining shares comprising the share capital of the Target Company
(377,367,931 shares at the date this resolution was adopted).
2. The effectiveness of the Bid is conditional upon the acquisition by
TELEFONICA of a number of shares in TERRA which, together with the
230,792,328 shares of the Target Company it already owns and which have
been frozen, implies obtaining at least 75% of the share capital of TERRA
at the time of publishing the results of the Bid. At the date this
resolution was adopted, the fulfilment of said condition would imply
acquiring a minimum of 225,327,867 shares in the Target Company; the
foregoing is notwithstanding the right to waive, even during the settlement
stage of the Bid, the aforementioned condition consisting of the minimum
number of shares, pursuant to Article 24.2 of Royal Decree 1197/1991, dated
26 July.
Translation - for information purposes only
3. The consideration for the Bid shall be monetary, consisting of 5.25 euros
for each share in the Target Company, so that, if the Bid is accepted by
all the shares it is to encompass, the total consideration shall be
1,981,181,638 euros. The Board of Directors was aided in determining the
consideration offered by Morgan Stanley, as financial advisor.
4. Mr Cesar Alierta Izuel, Mr Fernando Abril-Martorell Hernandez, and Mr
Antonio J. Alonso Ureba, Executive Chairman of the Board of Directors,
Managing Director, and Director-Secretary of the Board of Directors,
respectively, and Mr Santiago Fernandez Valbuena, General Manager of
Corporate Finance, were expressly authorised so that any of them may
jointly and severally effect this resolution, carrying out any acts and
steps necessary or appropriate to do the same, being authorised to do the
following, for declarative purposes only:
a) To establish the terms and conditions of the Bid in all other aspects
as required, such as for example the acceptance period and any
possible extensions of the same, in the way they see fit in the best
interest of the Company.
b) To deal with communications and request any authorisations required in
relation to the Bid, to execute any public or private documents
required according to applicable law or appropriate for the successful
outcome of the resolution, and in general, to represent the Company
before any bodies or entities, whether public or private, Spanish or
foreign, such as the Spanish Securities Market Commission (CNMV) and,
if appropriate, the Securities Exchange Commission (SEC), which are
competent to deal with this matter, or before which it is required to
carry out any act.
c) To draft, amend, execute and record the Prospectus of the Bid at the
CNMV, as well as any other information memoranda, forms, reports or
opinions as required, and, if appropriate, form 13E-3 and other
documents relevant in the United States, and to make any subsequent
modifications or extensions as needed.
d) To designate the entity or entities that will act as a stockbroker or
brokerage firm on behalf of the Company, and to execute with the same
the appropriate agreements.
e) To publish the announcements referred to in Article 18 of Royal Decree
1197/1991, dated 26 July, and any others deemed relevant.
f) To exercise the right to waive the condition consisting of the minimum
number of shares, pursuant to Article 24.2 of Royal Decree 1197/1991,
dated 26 July.
g) To negotiate, and execute under the terms and conditions deemed
appropriate, with the broadest powers as in law are required, any acts
and agreements necessary in relation to the financing of the Bid,
including, for merely declarative purposes, any acts and agreements
regarding the bank guarantee established to secure the consideration
offered, and the granting of counter-guarantees of any type and
content.
- 2 -
Translation - for information purposes only
h) To freeze the shares of the Target Company owned by the Company.
5. Mr Cesar Alierta Izuel, Executive Chairman of the Board of Directors, and
Mr Fernando Abril-Martorell Hernandez, Managing Director, were expressly
authorised so that either of them may, jointly and severally, and in the
way they see fit in the best interest of the Company, modify the terms and
conditions of the Bid, including the consideration offered, or abandon the
same, in the manner and under the circumstances in which this may legally
be done, and in particular, in accordance with the regime of competing
bids".
In witness whereof, I issue the present certificate with the approval of the
Chairman, in Madrid, on 28 May 2003.
APPROVAL OF THE CHAIRMAN SECRETARY
Cesar Alierta Izuel Antonio J. Alonso Ureba
- 3 -
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 3: Shares in TERRA, S.A. held by the members of the Board of
Directors of the Bidder and transactions carried out by these
members during the twelve months prior to the launching of this
Bid and up to the date of the present Prospectus.
SHARES IN TERRA, S.A. OWNED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF THE
BIDDER AND TRANSACTIONS CARRIED OUT BY THESE MEMBERS DURING THE TWELVE
MONTHS PRIOR TO THE LAUNCHING OF THIS BID AND UP TO THE DATE OF THE PRESENT
PROSPECTUS
--------------------------------------------------------------------------------
Mr Cesar Alierta Izuel 76,000
--------------------------------------------------------------------------------
Mr Isidro Faine Casas 2,150
--------------------------------------------------------------------------------
Mr Jose Antonio Fernandez Rivero 0
--------------------------------------------------------------------------------
Mr Fernando Abril-Martorell Hernandez 150
--------------------------------------------------------------------------------
Mr Jose Fernando de Almansa Moreno-Barreda 0
--------------------------------------------------------------------------------
Mr Antonio Alonso Ureba 0
--------------------------------------------------------------------------------
Mr Jesus Maria Cadenato Matia 5*
--------------------------------------------------------------------------------
Mr Maximino Carpio Garcia 800
--------------------------------------------------------------------------------
Mr Carlos Colomer Casellas 0
--------------------------------------------------------------------------------
Mr Alfonso Ferrari Herrero 0
--------------------------------------------------------------------------------
Mr Jose Fonollosa Garcia 0
--------------------------------------------------------------------------------
Mr Gonzalo Hinojosa Fernandez de Angulo 0
--------------------------------------------------------------------------------
Mr Miguel Horta e Costa 250
--------------------------------------------------------------------------------
Mr Pablo Isla Alvarez de Tejera 0
--------------------------------------------------------------------------------
Mr Luis Lada Diaz 0
--------------------------------------------------------------------------------
Mr Antonio Massanell Lavilla 225
--------------------------------------------------------------------------------
Mr Enrique Used Aznar 2,605
--------------------------------------------------------------------------------
Mr Mario Eduardo Vazquez 0
--------------------------------------------------------------------------------
Mr Antonio Viana-Baptista 0
--------------------------------------------------------------------------------
Mr Gregorio Villalabeitia Galarraga 0
--------------------------------------------------------------------------------
* Acquired on 27 May 2003, in relation to his possible appointment by
co-optation as a member of the Board of Directors of Terra Networks, S.A.
The acquisition price of each share was 4.56 euros.
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 4: The individual and consolidated financial statements of the
Bidder corresponding to the financial year ended on 31 December
2002 (prepared by the Board of Directors, audited and approved by
the Ordinary General Stockholders' Meeting).
[LOGO]
TELEFONICA, S.A. AND COMPANIES COMPOSING
THE TELEFONICA GROUP
--------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS AND
MANAGEMENT REPORT FOR 2002
--------------------------------------------------------
[LOGO]
Translation of consolidated financial statements originally issued in Spanish
and prepared in accordance with generally accepted accounting principles in
Spain (see Note 25). In the event of a discrepancy, the Spanish-language version
prevails.
TELEFONICA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
-------------------------------------------------------------------------------------------
ASSETS (Millions of Euros) 2002 2001
-------------------------------------------------------------------------------------------
A) DUE FROM STOCKHOLDERS FOR UNCALLED CAPITAL 292.49 370.10
B) FIXED AND OTHER NONCURRENT ASSETS 50,008.83 63,975.75
I. Start-up expenses 496.48 730.45
-------------------------------------------------------------------------------------------
II. Intangible assets (Note 6) 7,629.57 16,959.14
-------------------------------------------------------------------------------------------
Research and development expenses 1,179.15 1,049.59
Administrative concessions 6,350.20 15,011.19
Rights on leased assets 84.40 137.69
Other intangible assets 4,321.83 4,087.57
Accumulated amortization and allowances (4,306.01) (3,326.90)
-------------------------------------------------------------------------------------------
III. Property, plant and equipment (Note 7) 27,099.65 36,606.09
-------------------------------------------------------------------------------------------
Land and structures 6,159.15 7,097.90
Plant and machinery 3,739.81 3,365.73
Telephone installations 53,758.90 62,975.46
Furniture, tools, etc 3,132.06 3,851.74
Construction in progress 986.15 3,034.89
Advances on property, plant and equipment 66.15 53.20
Installation materials 162.63 154.12
Accumulated depreciation and allowances (40,905.20) (43,926.95)
IV. Long-term investments (Note 8) 14,783.13 9,680.07
-------------------------------------------------------------------------------------------
Investments in associated companies 2,081.19 3,099.14
Other investments 932.03 870.78
Other loans 2,225.26 2,038.12
Long-term deposits and guarantees given 160.77 232.98
Taxes receivable (Note 18) 9,679.42 3,757.78
Allowances (295.54) (318.73)
C) CONSOLIDATION GOODWILL (Note 5) 6,364.02 9,128.94
D) DEFERRED CHARGES (Note 9) 802.28 710.94
E) CURRENT ASSETS 10,573.67 12,236.84
I. Due from stockholders for capital calls 0.00 2.25
-------------------------------------------------------------------------------------------
II. Inventories 449.83 754.10
-------------------------------------------------------------------------------------------
Inventories 498.64 785.10
Advances 14.81 22.49
Allowances (63.62) (53.49)
III. Accounts receivable 6,029.15 8,003.99
-------------------------------------------------------------------------------------------
Trade receivables (Note 10) 5,922.88 6,783.24
Receivable from associated companies 148.59 74.00
Sundry accounts receivable 657.05 866.31
Employee receivables 58.08 79.35
Taxes receivable (Note 18) 1,055.37 2,077.48
Allowance for bad debts (Note 10) (1,663.56) (1,692.89)
Allowance for sundry accounts receivable (149.26) (183.50)
IV. Short-term investments (Note 8) 3,031.67 2,306.53
-------------------------------------------------------------------------------------------
Loans to associated companies 303.53 278.51
Short-term investment securities 1,963.87 807.40
Other loans 770.05 1,222.90
Allowances (5.78) (2.28)
V. Short-term treasury stock (Note 11) 334.56 260.70
-------------------------------------------------------------------------------------------
VI. Cash 543.91 621.88
-------------------------------------------------------------------------------------------
VII. Accrual accounts 184.55 287.39
===========================================================================================
TOTAL ASSETS (A+B+C+D+E) 68,041.29 86,422.57
-------------------------------------------------------------------------------------------
The accompanying Notes 1 to 25 and Exhibits I to VI are an integral part of
these consolidated balance sheets.
-1-
[LOGO]
Translation of consolidated financial statements originally issued in Spanish
and prepared in accordance with generally accepted accounting principles in
Spain (see Note 25). In the event of a discrepancy, the Spanish-language version
prevails.
TELEFONICA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND LIABILITIES (Millions of Euros) 2002 2001
------------------------------------------------------------------------------------------------------------------------
A) STOCKHOLDERS' EQUITY (Note 11) 16,996.00 25,861.62
I. Capital stock 4,860.66 4,671.92
------------------------------------------------------------------------------------------------------------------------
II. Additional paid-in capital 11,670.02 11,670.02
------------------------------------------------------------------------------------------------------------------------
III. Revaluation reserves 2,870.90 3,059.64
------------------------------------------------------------------------------------------------------------------------
IV. Other reserves of the Parent Company 5,808.90 4,298.65
------------------------------------------------------------------------------------------------------------------------
Unrestricted reserves 4,816.37 3,379.98
Restricted reserves 992.53 918.67
V. Reserves at fully consolidated companies 4,402.65 3,773.35
------------------------------------------------------------------------------------------------------------------------
VI. Reserves at companies accounted for by the equity method (532.51) (440.48)
------------------------------------------------------------------------------------------------------------------------
VII. Translation differences in consolidation (6,507.82) (3,278.29)
------------------------------------------------------------------------------------------------------------------------
VIII. Income (Loss) for the year (5,576.80) 2,106.81
------------------------------------------------------------------------------------------------------------------------
Income (Loss) of the Parent Company and subsidiaries (10,844.53) 2,212.29
Income of associated companies (527.88) (376.49)
Loss attributable to minority interests (Note 12) 5,795.61 271.01
B) MINORITY INTERESTS (Note 12) 5,612.93 7,433.55
C) NEGATIVE CONSOLIDATION GOODWILL 11.36 7.95
D) DEFERRED REVENUES (Note 13) 880.46 1,145.75
E) PROVISIONS FOR CONTINGENCIES AND EXPENSES (Note 14) 8,014.91 5,862.70
F) LONG-TERM DEBT 21,726.15 27,692.41
I. Debentures, bonds and other marketable debt securities (Note 15) 12,969.22 14,460.86
------------------------------------------------------------------------------------------------------------------------
Nonconvertible debentures and bonds 12,351.50 14,380.86
Other marketable debt securities 617.72 80.00
II. Payable to credit institutions (Note 16) 6,912.94 8,079.08
------------------------------------------------------------------------------------------------------------------------
III. Payable to Group and associated companies - -
------------------------------------------------------------------------------------------------------------------------
IV. Other payables 206.68 3,602.8
------------------------------------------------------------------------------------------------------------------------
Other payables (Note 19) 179.05 3,541.28
Notes payable 27.63 61.52
V. Taxes payable (Note 18) 1,629.46 1,541.08
------------------------------------------------------------------------------------------------------------------------
VI. Uncalled capital payments payable 7.85 8.59
------------------------------------------------------------------------------------------------------------------------
G) CURRENT LIABILITIES 14,681.74 18,418.59
I. Debentures, bonds and other marketable debt securities (Note 15) 2,625.63 2,857.72
------------------------------------------------------------------------------------------------------------------------
Debentures 1,056.20 944.12
Other marketable debt securities 1,280.48 1,600.27
Interest on debentures and other securities 288.95 313.33
II. Payable to credit institutions 4,193.27 6,298.89
------------------------------------------------------------------------------------------------------------------------
Loans and other accounts payable (Note 16) 4,072.67 6,163.54
Accrued interest payable 120.60 135.35
III. Payable to associated companies 22.90 30.96
------------------------------------------------------------------------------------------------------------------------
IV. Trade accounts payable 5,113.15 5,231.44
------------------------------------------------------------------------------------------------------------------------
Advances received on orders 73.43 137.94
Accounts payable for purchases and services 5,014.13 5,058.77
Notes payable 25.59 34.73
V. Other nontrade payables 2,289.37 3,606.93
------------------------------------------------------------------------------------------------------------------------
Taxes payable (Note 18) 1,048.52 1,624.15
Other nontrade payables (Note 19) 1,240.85 1,982.78
VI. Accrual accounts 437.42 392.65
------------------------------------------------------------------------------------------------------------------------
H) SHORT-TERM PROVISIONS FOR CONTINGENCIES AND EXPENSES 117.74 -
(Note 14)
------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES
(A+B+C+D+E+F+G+H) 68,041.29 86,422.57
------------------------------------------------------------------------------------------------------------------------
The accompanying Notes 1 to 25 and Exhibits I to VI are an integral part of
these consolidated balance sheets.
-2-
[LOGO]
Translation of consolidated financial statements originally issued in Spanish
and prepared in accordance with generally accepted accounting principles in
Spain (see Note 25). In the event of a discrepancy, the Spanish-language version
prevails.
TELEFONICA GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001
------------------------------------------------------------------------------------------------------------------
DEBIT (Millions of Euros) 2002 2001
------------------------------------------------------------------------------------------------------------------
A) EXPENSES
Variation in inventories 49.22 109.58
Procurements 6,953.59 7,111.86
------------------------------------------------------------------------------------------------------------------
Purchases 2,978.44 3,197.71
Work performed by other companies 3,975.15 3,914.15
Personnel expenses (Note 20) 4,793.77 5,390.26
Depreciation and amortization expense 6,692.42 7,373.98
------------------------------------------------------------------------------------------------------------------
Property* plant and equipment (Note 7) 5,370.07 6,194.17
Intangible assets (Note 6) 1,132.25 1,023.48
Deferred charges 190.10 156.33
Variation in operating allowances 645.58 1,023.80
------------------------------------------------------------------------------------------------------------------
Variation in allowance for inventories 37.46 2.42
Variation in allowance for bad debts (Note 10) 555.64 992.53
Variation in other allowances 52.48 28.85
Other operating expenses 5,070.37 5,603.62
------------------------------------------------------------------------------------------------------------------
Outside services 4,564.61 4,945.49
Taxes other than income tax 412.10 588.82
Other operating expenses 93.66 69.31
I. OPERATING INCOME 5,031.75 5,430.28
Interest on payables to associated companies 0.10 0.01
Other interest on accounts payable and similar expenses (Note 20) 1,784.14 1,988.02
Amortization of deferred interest expenses 43.23 55.43
Variation in investment valuation allowances 99.63 21.46
Exchange losses (Note 20) 2,245.17 2,026.88
II. FINANCIAL INCOME - -
Share in losses of companies accounted for by the equity method 536.88 445.70
Amortization of consolidation goodwill (Note 5) 667.49 845.19
III. INCOME FROM ORDINARY ACTIVITIES 1,616.82 1,821.05
Variation in fixed asset and investment valuation allowances (Notes 7 and 8) 136.48 (599.56)
Losses on fixed assets (Note 20) 9,614.55 232.99
Losses on disposal of investments in consolidated companies (Note 8) 206.44 3.86
Extraordinary expenses and losses (Note 20) 6,735.04 1,317.01
IV. EXTRAORDINARY INCOME - 212.83
V. INCOME BEFORE TAXES - 2,033.88
Corporate income tax (Note 18) (3,340.59) (816.32)
Foreign taxes (Note 18) 111.94 1,014.40
VI. INCOME FOR THE YEAR - 1,835.80
Income attributed to minority interests (Note 12) 182.39 309.39
------------------------------------------------------------------------------------------------------------------
VII. INCOME FOR THE YEAR - 2,106.81
------------------------------------------------------------------------------------------------------------------
The accompanying Notes 1 to 25 and Exhibits I to VI are an integral part of
these consolidated statements of operations.
-3-
[LOGO]
Translation of consolidated financial statements originally issued in Spanish
and prepared in accordance with generally accepted accounting principles in
Spain (see Note 25). In the event of a discrepancy, the Spanish-language version
prevails.
TELEFONICA GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001
-----------------------------------------------------------------------------------------------------------
CREDIT (Millions of Euros) 2002 2001
-----------------------------------------------------------------------------------------------------------
B) REVENUES
Net sales and services (Note 20) 28,411.30 31,052.60
Variation in work-in-process 31.12 5.67
Capitalized expenses of Group work on fixed assets 496.71 730.37
Other operating revenues 297.57 254.74
-----------------------------------------------------------------------------------------------------------
Non-care and other current operating revenues 230.21 194.25
Subsidies 14.71 7.25
Overprovision for contingencies and expenses 52.65 53.24
I. OPERATING LOSS - -
Revenues from equity investments 17.43 21.29
-----------------------------------------------------------------------------------------------------------
Other companies 17.43 21.29
Revenues from other equity investments and loans (Note 20) 320.37 435.19
-----------------------------------------------------------------------------------------------------------
Associated companies 31.07 15.38
Other companies 289.30 419.81
Exchange gains (Note 20) 1,612.85 1,244.20
II. FINANCIAL LOSS 2,221.62 2,391.12
Share in the income of companies accounted for by the equity method 9.00 69.21
Reversal of negative consolidation differences 2.06 3.57
III. LOSS ON ORDINARY ACTIVITIES - -
Gains on fixed asset disposals 55.56 10.15
Gains on disposals of investments in consolidated companies (Note 8) 99.32 305.95
Capital subsidies (Note 13) 63.79 80.03
Extraordinary revenues (Note 20) 255.96 771.00
IV. EXTRAORDINARY LOSS 16,217.88 -
V. LOSS BEFORE TAXES 14,601.06 -
VI. CONSOLIDATED LOSS FOR THE YEAR 11,372.41 -
Loss attributed to minority interests (Note 12) 5,978.00 580.40
-----------------------------------------------------------------------------------------------------------
VII. LOSS FOR THE YEAR 5,576.80 -
-----------------------------------------------------------------------------------------------------------
The accompanying Notes 1 to 25 and Exhibits I to VI are an integral part of
these consolidated statements of operations.
-4-
[LOGO]
Translation of consolidated financial statements originally issued in
Spanish and prepared in accordance with generally accepted accounting principles
in Spain (see Note 25).
In the event of a discrepancy, the Spanish-language version prevails.
TELEFONICA, S.A. AND SUBSIDIARIES COMPOSING
THE TELEFONICA GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002
(1) INTRODUCTION AND GENERAL
INFORMATION
Telefonica Group companies
Telefonica, S.A. and its subsidiaries and investees make up an integrated
group of companies ("the Telefonica Group") operating mainly in the
telecommunications, media and entertainment industries.
The Parent Company of this Group is Telefonica, S.A. ("Telefonica"), a
corporation that was incorporated for an indefinite period of time on April
19, 1924. Its registered office is at calle Gran Via 28, Madrid (Spain).
Exhibit I hereto lists the subsidiaries, associated companies and investees
in which the Telefonica Group has direct or indirect holdings, their lines
of business, their location, their net worth and results at year-end, their
gross book value, their contribution to the reserves of the Consolidated
Group and the method by which they were consolidated.
Corporate structure of the Group
Telefonica's basic corporate purpose, per Article 4 of its bylaws, is the
provision of all manner of public and private telecommunications services,
and all manner of ancillary or supplementary telecommunications services or
the services derived therefrom. All the business activities that constitute
the corporate purpose may be performed either in Spain or abroad and may be
carried on either wholly or partially by the Company, or through
shareholdings or other equity interests in other companies or legal
entities with an identical or similar corporate purpose.
The main groups of subsidiaries through which Telefonica carries out its
corporate purpose and manages its business areas or basic lines of business
are as follows:
- The wireline telephony business and the related supplementary services
provided in Spain centered at the Telefonica de Espana Group.
- The cellular telephony business is centralized in Spain and abroad at
the Telefonica Moviles Group.
- The main business activity of the Telefonica Internacional Group is to
make and manage investments in the wireline telephony industry in the
Americas.
- Telefonica de Contenidos and its subsidiaries group together the
Group's interests in the media and entertainment area.
-5-
[LOGO]
- The main business activity of the Telefonica Datacorp Group is the
integral provision of data transmission services for companies.
- Services, content and portals for Internet access, focusing in
particular on residential customers and small businesses (SOHO), are
provided by the Terra Lycos Group.
- The Atento Group carries on the call center activity.
- The Telefonica Publicidad e Informacion Group handles the telephone
directory business.
- Also, the Emergia Group operates a high-speed fiber optic network with
connections within Latin America and Europe and from Latin America to
Europe and the U.S.
Certain business activities carried on by the Telefonica Group are
currently at the development or start-up phase. In order to be able to take
decisions regarding the investments made, management of the various Group
companies prepared the related business plans, approved by their
stockholders, the results of which enable the recoverability of the
investments made to be verified. Since these analyses and studies are based
on assumptions, variances may arise and, accordingly, they are analyzed
periodically in order to monitor the results obtained and, where
appropriate, to make any value adjustments that might be required (see Note
5 and the following section).
The business activities carried on by most of the Telefonica Group
companies are regulated by various pieces of legislation, under which
authorizations or licenses must be obtained in certain circumstances in
order to be able to provide the various services.
Also, certain business activities, such as wireline and wireless telephony,
are carried on under regulated rate and price systems.
The Group company Telefonica de Espana, S.A.U., which carries on its
business activities in a new regulatory and legislative framework as a
result of the deregulation of the telecommunications industry in Spain
initiated in 1987, is a special case.
One of the main problems of the ratemaking system applicable to this
company (determined through a resolution adopted by the Government Standing
Committee on Economic Affairs on April 19, 2001, and published pursuant to
a Ministerial Order dated May 10, 2001, modifying the Government Standing
Committee on Economic Affairs resolution dated July 27, 2000, and published
pursuant to a Ministerial Order dated July 31, 2000) is that derived from
the License Contract entered into with the Spanish State in 1991 in
relation to the guarantee to maintain the overall financial balance of the
license. Neither the rate imbalance due to the access shortfall nor the
interconnection rates for the period from the commencement of market
deregulation to the present date have yet been satisfactorily resolved.
The General Telecommunications Law establishes as a general principle that
operators may freely set their rates. Transitional Provision Four of the
Law provides that the Government Standing Committee on Economic Affairs,
acting on the basis of a report issued by the Telecommunications Market
Commission, may establish, on a transitional basis, maximum or minimum
fixed prices or the methods for establishing them, based on the actual cost
of providing the service and on the degree of competition among of
operators in the market for the various services.
-6-
[LOGO]
It also acknowledges the existence of the imbalance in the rates currently
in force and the need to rectify this, as well as the possibility of
compensating the dominant operator for the access shortfall that might
arise for it as a result of this imbalance.
It should be noted in this regard that Telefonica filed a complaint with
the European Commission against the Spanish State for its failure to comply
with EU legislation establishing the need to resolve the rate rebalancing
problem prior to the opening up of the market to free competition. On
January 29, 2001, the European Commission delivered a Reasoned Opinion
addressed to the Kingdom of Spain, in which it concluded that the Spanish
Government had failed to comply with Directives 90/388/EEC and 96/19/EEC by
not having authorized Telefonica de Espana to increase its monthly charges
sufficiently to cover costs and by not having provided sufficient
information to the Commission. At the end of December 2001 the European
Commission decided to refer the infringement proceeding brought against
Spain to the High Court of Justice in Luxembourg, which has not yet handed
down a decision.
Also, in November 1999 Telefonica, S.A. and Telefonica de Espana, S.A.
filed a claim with the Council of Ministers and the Ministry for
Development (now the Ministry of Science and Technology) requesting
economic compensation for the losses derived from the breakdown of the
financial equilibrium under the 1991 License Contract or, alternatively,
for the Government's failure to fulfill the rate rebalancing obligation.
This claim has not yet been resolved by the Government.
Also, in November 1999 Telefonica, S.A. and Telefonica de Espana, S.A.
filed a claim with the Spanish Council of Ministers and the Ministry for
Development (now the Ministry of Science and Technology) demanding economic
compensation for the loss suffered as a result of the failure to maintain
of the financial balance of the license contract or, alternatively, the
Government's breach of the obligation to restore the rate balance. The
Spanish authorities have not yet handed down a decision on this claim.
Salient events in the year
The Terra Lycos Group
The Internet business activity carried on by the Telefonica Group mainly
through the Terra Lycos Group has been evolving progressively to adapt to
the new circumstances. One of the most noteworthy aspects to be taken into
account when analyzing the growth and development of this business in 2002
is the adverse macroeconomic situation in the countries in which the Terra
Lycos Group is present. To the negative consequences of this situation for
these companies in terms of revenues must be added the additional negative
impact of the exchange rates of certain currencies on their income
statements. Added to this adverse macroeconomic scenario in 2002 was the
worsening in the crisis of online advertising and the Internet market. The
political and social instability being experienced by certain of the main
countries in which the Terra Lycos Group, fundamentally, is present is also
noteworthy. As regards the business model itself, in 2002 there was shift
towards a model based on access charges, pay content and customized
advertising.
At 2002 year-end the Parent Company carried out a study of the evolution of
business plans for the years from 2003 to 2006, and of the estimated
forecasts of the subsidiaries on the basis of growth up to 2012. In
addition, a specific study on the goodwill arising in the acquisition of
Lycos, Inc. was commissioned from a third party. The objective of these
analyses was to determine the recovery of the goodwill, capitalized tax
assets, and of other fixed assets in the consolidated balance sheet of the
Terra Lycos Group, on the basis of the
-7-
[LOGO]
estimated future value that each of the businesses and countries will
generate, in accordance with the accounting principle of prudence in
valuation.
As a result of these studies, as of December 31, 2002 consolidation
goodwill amounting to (Euro)856.65 million was written down and capitalized
tax credits amounting to (Euro)272.59 million were reversed in the
accompanying consolidated financial statements (see Notes 5 and 18).
Also, provisions for intangible assets and property, plant and equipment
amounting to (Euro)21.42 million and (Euro)32.14 million, respectively,
were recorded, and (Euro)56.62 million of start-up expenses were written
off.
The net impact of these effects and of the write-down of goodwill relating
to the agreements entered into by the Terra Lycos Group and Telefonica (see
Notes 5 and 23) on the consolidated statement of operations of the
Telefonica Group, after taking into account the tax effects and minority
interests, amounted to (Euro)401.33 million.
The UMTS wireless telephony business
In 2000 and 2001 certain Telefonica Moviles Group companies obtained
third-generation wireless telephony (UMTS) licenses in Spain, Germany,
Italy, Austria and Switzerland. Since the acquisition of these licenses,
Telefonica Moviles has launched various initiatives aimed at enhancing its
business plans, as a result of which the German operator Group 3G entered
into roaming and infrastructure sharing agreements with another operator in
Germany, thereby commencing operations as a GSM Virtual Wireless Network
Operator at the end of 2001.
However, since then significant technological changes and changes affecting
the market and its competitors have led Telefonica Moviles to review the
assumptions underlying the business plans of its investees in Germany,
Italy, Austria and Switzerland and to reconsider its short- and medium-term
strategy in these countries.
In view of the variances arising in the first six months of operations of
Group 3G with respect to the objectives set, the continuing delay in the
commercial availability of UMTS technology, the significant downward
revisions of the estimated demand for 3G services and the increased
penetration of European markets by already-established operators, making it
more difficult for new entrants to obtain a critical mass, Telefonica
Moviles decided (i) to put on hold its commercial activities in Germany and
(ii) to commission independent experts to assess the business plans of the
UMTS operators in Germany, Italy, Austria and Switzerland.
Based on the new assessments obtained, and to ensure that the investments
are correctly valued at all times, Telefonica Moviles decided to eliminate
the risk exposure in its books relating to the investments in Germany,
Austria and Switzerland. Regarding the investment in Italy, Telefonica
Moviles estimated the value of the UMTS license of Ipse 2000, S.p.A. at
(Euro)300 million (risk exposure of (Euro)138 million for the Telefonica
Group). In the first three countries the coverage requirements laid down in
the licenses might come into force earlier than in Italy and, accordingly,
in view of the delay in the commercial viability of the technology with
respect to the initial estimates, Telefonica Moviles, in accordance with
the accounting principle of prudence in valuation, wrote down these
investments for accounting purposes. In Italy the license terms and
conditions make it possible to implement business plans with lower
investments than in the other countries, since assignment of the right to
use the spectrum is envisaged. For these reasons, based on the business
plans analyzed to date, it should be possible to recover the remaining
value assigned to the license. Also, license awardees which were not
operating formerly in Italy
-8-
[LOGO]
received 5 mHz of additional spectrum for (Euro)827 million and could avail
themselves of a deferred payment arrangement. Ipse 2000 has requested the
return of this additional spectrum and the modification of the related
payment. The latter amount was included in the value of the license prior
to the write-down indicated below.
Telefonica Moviles is continuing to make every effort to obtain value from
the aforementioned investments and, although future revenues may be
obtained from the operation of these licenses, the Group, in view of the
current uncertainty, in accordance with the accounting principle of
prudence in valuation, recorded a net loss of (Euro)4,958.22 in the
consolidated financial statements of the Telefonica Groups as of December
31, 2002, which includes mainly asset write-downs, labor force
restructuring expenses and expenses relating to the termination of
contracts.
The detail, by caption, of the effect of the write-downs and restructuring
expenses arising from the decisions adopted on the 2002 consolidated
statement of operations and consolidated balance sheet of the Telefonica
Group is as follows:
----------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------
Losses on intangible assets (Note 6) 9,445.01
Losses on property, plant and equipment 81.18
Write-off of goodwill (Note 5) 61.22
Provisions for contingencies and expenses (*) (Note 20) 2,753.90
Income/Loss of companies accounted for by the equity method 34.39
Corporate income tax (Note 18) (2,837.16)
Loss attributed to minority interests (Note 12) (4,580.32)
----------------------------------------------------------------------------------
Total effect 4,958.22
----------------------------------------------------------------------------------
(*)Including (Euro)1,892.44 million relating to the investment of the
associated company Ipse 2000 since as of the date of preparation of
these consolidated financial statements this company had not recorded
the value adjustment to its assets. The remainder relates to the
absorption of losses of minority interests ((Euro)382.44 million - see
Exhibit IV) and to the assumption of various commitments based on the
decisions adopted.
Devaluation in Argentina
In view of its international presence, the Telefonica Group, like other
corporations, has been affected by the economic situation in Argentina
through the various Group companies operating there. As of December 31,
2002 and 2001, the Telefonica Group's exposure at the various Argentine
companies amounted to (Euro)968.12 million and (Euro)3,124.83 million,
respectively, including the related goodwill, intercompany financing and
the asset value assignable to those investments (after inclusion of the
losses of these companies before the related tax effect, which amounts to
(Euro)669.01 million and (Euro)457.5 in 2002 and 2001, respectively). The
most significant exposure as of December 31, 2002, related to Telefonica de
Argentina, S.A., amounting to (Euro)809.23 million ((Euro)2,128.68 million
in 2001) and Telefonica Moviles Argentina amounting to (Euro)112.53 million
((Euro)507.66 million in 2001). Also noteworthy in 2001 were the Telefonica
de Contenidos Group companies ((Euro)413.71 million).
As of December 31, 2001, there was no explicit Argentine peso/euro exchange
rate that could be taken as representative. Also, pursuant to an executive
decision, in early 2002 the Argentine peso was devalued with respect to the
euro, an event to which the market reacted subsequently.
-9-
[LOGO]
Taking into account Spanish accounting legislation, the express
communications from the Spanish Accounting and Audit Institute regarding
the way in which this devaluation should be treated at 2001 year-end and
the international accounting rulings in force, in preparing its
consolidated financial statements for 2001 the Telefonica Group used
peso/euro and peso/U.S. dollar exchange rates of ARP 1.5149/(Euro)1 and ARP
1.7/US$ 1 at year-end as the first representative exchange rates prevailing
in the market after December 31, 2001, following the aforementioned
devaluation. At 2002 year-end, with the normal currency exchange market
re-established, the exchange rate used was ARP 3.5341/(Euro)1 (ARP 3.37/US$
1). These exchange rates were used to include in the consolidated financial
statements the assets and liabilities of the Argentine subsidiaries and
associated companies and to assess the status of their assets as regards
their solvency, the value of their investments, their viability, the
recoverability of goodwill, etc.
In accordance with the foregoing, these consolidated financial statements
reflect an adverse impact on consolidated earnings and on the
"Stockholders' Equity - Translation Differences in Consolidation" caption
of (Euro)354.68 million and (Euro)1,147.09 million, respectively, in 2002
((Euro)369.00 million and (Euro)1,424.10 million, respectively, in 2001).
The matters still not resolved include the necessary renegotiation with the
Argentine Government of the future rates due to the effect of the
provisions of Law 25.561. Accordingly, although the book value of the fixed
assets was maintained on the basis of estimates based on the information
currently available, neither the results of the negotiations relating to
rate levels nor, therefore, the future sales revenues and net cash flows
can be predicted.
Given that the aforementioned circumstances had not occurred at the date of
preparation of these consolidated financial statements and that it is not
certain that they will occur, it was not possible to quantify their effect,
if any, on the consolidated financial statements as of December 31, 2002.
(2) BASIS OF PRESENTATION OF THE
CONSOLIDATED FINANCIAL
STATEMENTS
a) True and fair view
The accompanying consolidated financial statements of the Telefonica
Group were prepared from the accounting records of Telefonica, S.A.
and of each of the companies composing the Telefonica Group. The
respective individual financial statements were prepared in accordance
with the accounting principles and standards regulated in Spain by the
Commercial Code as implemented by the Spanish National Chart of
Accounts and in the applicable regulations in the different countries
in which the companies composing the Consolidated Group are located.
The accompanying consolidated financial statements are presented in
accordance with the regulations for the preparation of consolidated
financial statements, as approved by Royal Decree 1815/1991, and,
accordingly, they give a true and fair view of the net worth,
financial position, results of operations and funds obtained and
applied in 2002.
b) Accounting policies
The consolidation methods applied were as follows:
-10-
[LOGO]
- The companies over which effective control is exercised or in
relation to which the Company has entered into agreements with
the other stockholders were fully consolidated.
- The companies which are managed jointly with third parties were
proportionally consolidated.
- The companies in which there is significant influence but not
ownership of a majority of the voting rights in their governing
bodies or joint management with third parties are accounted for
by the equity method.
- The investees which are either not included in the foregoing
points or which, although included, do not have a material impact
on the consolidated financial statements, are carried at the
lower of cost or market.
In certain circumstances, at some of the Group's investees a qualified
majority of the voting rights may be required to adopt certain
resolutions, and this was taken into account when selecting the
consolidation method.
All material accounts and transactions between the consolidated
companies were eliminated in consolidation.
In the case of Group companies whose accounting and valuation methods
differed from those of Telefonica, adjustments were made in
consolidation in order to present the consolidated financial
statements on a uniform basis with the financial statements of the
Parent Company.
The margins included in the invoices issued by subsidiaries to other
Telefonica Group companies for capitalizable assets or services were
eliminated in consolidation.
The consolidated statement of operations includes the revenues and
expenses of the companies that are no longer in the Group up to the
date on which the related holding was sold or the company was
liquidated, and those of the new companies included in the Group from
the date on which the holding was acquired or the company was formed
through year-end.
The equity of minority interests in the net worth and results of the
fully consolidated subsidiaries is recorded under the "Minority
Interests" and "Income/Loss Attributed to Minority Interests"
captions, respectively (see Note 12).
In accordance with standard practice in Spain, the accompanying
consolidated financial statements do not include the tax effect, if
any, of transferring the reserves of the consolidated subsidiaries and
of the companies accounted for by the equity method to the Parent
Company's accounts, since it is considered that such reserves will be
used to finance these companies' operations and that those that may be
distributed would not give rise to a material additional tax cost.
c) Comparative information and changes
in the scope of consolidation
Comparative information
The figures in these consolidated financial statements and in the
consolidated management report are expressed in millions of euros
unless indicated otherwise.
-11-
[LOGO]
There were no changes in the structure of the consolidated balance sheet
and consolidated statement of operations with respect to those presented in
the previous year. Also, there were no changes in accounting principles
with respect to 2001 with a significant effect. However, as indicated in
Note 1, in 2002 significant accounting write-downs were made based on the
analyses performed.
Changes in the scope of consolidation
The main variations in the scope of consolidation in 2002 were as follows
(the full detail of all the variations in 2002 and 2001 is included in
Exhibit II):
2002
Telefonica
In March 2002, under the last part of the agreement entered into in the
previous year between Iberdrola, S.A. and Telefonica in relation to
Iberdrola's investments in Brazilian operators, Telefonica acquired a 3.38%
holding in Tele Leste Celular Participacoes, S.A. in exchange for 799,411
shares of Telefonica which had hitherto been held as treasury stock
earmarked for that purpose (see Note 11). Subsequently, in May 2002
Telefonica made nonmonetary contributions of this holding to Telefonica
Moviles (in exchange for 26,801,494 shares of Telefonica Moviles) in
addition to holdings of 7% in TBS Celular Participacoes, S.A., 7% in
Sudestecel Participacoes, S.A., 3.38% in Tele Leste Celular Participacoes,
S.A. and 62.02% in Iberoleste Participacoes, S.A. Also, Telefonica sold
0.66% of Celular Participacoes, S.A. for (Euro)11.54 million.
Following this transaction, the Telefonica Group's owned the following
direct and indirect holdings in these Brazilian companies: 40.91% in TBS
Celular Participacoes, S.A., 83.56% in Sudestecel Participacoes, S.A.,
27.71% in Tele Leste Celular Participacoes, S.A. and all the shares of
Iberoleste Participacoes, S.A. All these companies, and Celular CRT
Participacoes, S.A. were fully consolidated in the Telefonica Group's
consolidated financial statements (Tele Leste Celular Participacoes, S.A.
was accounted for by the equity method in the Telefonica Group's 2001
consolidated financial statements) through December 31, 2002, the date on
which their respective balance sheets were proportionally consolidated
through the joint venture Brasilcel, N.V., as indicated in the section on
Telefonica Moviles.
In January Telefonica, S.A. acquired 50,000 shares of Telefonica Moviles,
S.A. for (Euro)0.41 million. Following this acquisition and the
above-mentioned contributions, the Telefonica Group owns direct and
indirect holdings of 92.43% in Telefonica Moviles, S.A., which continues to
be fully consolidated in the Telefonica Group.
In 2002 Telefonica acquired 717,465 shares of the subsidiary Terra
Networks, S.A. for (Euro)5.53 million, bringing the Telefonica Group's
direct and indirect holding in this company, which continues to be fully
consolidated, to 38.58%.
In December Telefonica Capital, S.A., a wholly-owned subsidiary of
Telefonica, S.A., sold 28,736 shares of Fonditel, Entidad Gestora de Fondos
de Pensiones, S.A. for (Euro)6.14 million. Also, Telefonica, S.A's
wholly-owned subsidiary Seguros de Vida y Pensiones Antares, S.A., which
owned 9,881 shares of Fonditel, sold these shares to Telefonica Capital for
(Euro)2.11 million. As a result of these transactions, the Telefonica
Group's direct and indirect holding in Fonditel was reduced from 81% in
2001 to 70% in 2002. The company continues to be fully consolidated in the
Telefonica Group.
-12-
[LOGO]
In December, by virtue of its commitments to the Tyco Group, Telefonica,
S.A. acquired 17,872,341 shares of the Dutch company Emergia Holding, N.V.
for (Euro)47.09 million. The Telefonica Group thereby became the sole
stockholder of this company, which continues to be fully consolidated in
the Group.
Telefonica Datacorp Group
In January Telefonica DataCorp acquired all the shares of the German
company HighwayOne German for (Euro)1.38 million. Subsequently, as part of
the reorganization of the Telefonica Group by business line, Telefonica
Deutschland GmbH, a subsidiary of Telefonica Datacorp, was made the head of
this business in Germany following its merger with HighwayOne Germany, GmbH
and Mediaways GmbH. This company is fully consolidated in the Telefonica
Group.
On July 16, 2002, the holding in the Austrian company European Telecom
International, GmbH, a wholly-owned subsidiary of Telefonica Datacorp,
S.A.U., was sold, giving rise to a loss for the Telefonica Group of
(Euro)38.79 million. This company, which had been fully consolidated in
2001, was excluded from the consolidated group.
The Datacorp Group, through its subsidiary Telefonica Data de Brasil Ltd.,
subscribed to the capital increase carried out by Telefonica Data Brasil
Holding, S.A., contributing the loans previously granted amounting to 482.9
million reais, thereby increasing the Telefonica Group's holding in this
company from 87.48% to 93.98%.
The 34%-owned investee of Telefonica Datacorp, S.A., the Italian company
Atlanet, S.p.A, which through June 30, 2002, was fully consolidated, has
since that date been accounted for by the equity method because it no
longer fulfills the management control requirements for full consolidation.
Telefonica Moviles Group
In 2002, after contributing as consideration a total of 7,333,180 shares of
Telefonica Moviles and carrying out capital increases amounting to
(Euro)27.66 million, Telefonica Moviles became the owner of all the shares
of TES Holding, S.A. de C.V., Telca Gestion, S.A. de C.V., TCG Holding,
S.A., Telca Gestion Guatemala, S.A., Paging de Centroamerica, S.A. and
Telefonica de Centroamerica, S.L.
On September 10, 2002, having obtained authorizations from the various
Mexican authorities, Telefonica Moviles acquired a 65.23% holding in Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso) for (Euro)92,870 million.
Subsequently, in order to strengthen its net worth position, Pegaso carried
out a capital increase in which Telefonica Moviles, S.A. paid (Euro)211,454
thousand corresponding to its 65.23% holding. The agreements entered into
with the Pegaso Group contained a commitment to contribute the holdings of
the two companies in the Pegaso Group and in the northern Mexican companies
to a new Mexican company of which the two groups would be stockholders.
This transaction was implemented through the sale of their holdings to
Telefonica Moviles Mexico, followed by the conversion of the debt into
equity by the creditors, Telefonica Moviles has a holding of 92% in this
new Mexican company with a book value of (Euro)995.60 million.
On October 21, 2002, Telefonica Moviles, S.A. acquired from Portugal
Telecom SGPS, S.A. a 14.68% holding in Telesp Celular Participacoes, S.A.
for (Euro)200.31 million.
-13-
[LOGO]
On December 27, 2002, once Brazilian legislation had been complied with,
Telefonica Moviles, S.A. and PT Moveis Servicos de Telecomunicacoes, SGPS,
S.A. (PT Moveis) formed the joint venture Brasilcel, N.V., 50% owned by
each company, through the contribution of all the shares directly or
indirectly held by the two groups in the wireless communications companies
in Brazil, the detail being as follows:
------------------------------------------------------------------
% Contributed
------------------------------------------------------------------
Companies Telefonica PT Moveis Total
Contributed Moviles
------------------------------------------------------------------
Celular CRT 40.90% 7.58% 48.48%
Participacoes, S.A.
------------------------------------------------------------------
Tele Leste Celular 27.70% - 27.70%
Participacoes, S.A.
------------------------------------------------------------------
Tele Sudeste Celular 83.56% - 83.56%
Participacoes, S.A.
------------------------------------------------------------------
Telesp Celular 14.68% 50.44% 65.12%
Participacoes, S.A.
------------------------------------------------------------------
The value of the contribution to Brasilcel, N.V. of the wireless assets
owned by Telefonica Moviles, S.A. was (Euro)1,898 million. Its balance
sheet was proportionally consolidated in the consolidated financial
statements and the results for the whole year of the Brazilian companies
contributed by Telefonica Moviles were recorded in the consolidated
statement of operations when this transfer was made (on December 27, 2002).
Telefonica de Contenidos Group
In September all the shares of the Uniprex Onda Cero Group and of Cadena
Voz de Radiodifusion, S.A. owned by Telefonica de Contenidos, S.A. were
sold to the Antena 3 de Television Group, giving rise to gains of
(Euro)35.82 million. In 2002 the two companies, which in 2001 were fully
consolidated in the Telefonica Group, were included in the Antena 3 de
Television Group and accounted for by the equity method.
In April Telefonica de Contenidos sold 4.11% of its holding in Hispasat,
S.A., giving rise to gains of (Euro)26.10 million. Telefonica de
Contenidos, which owns a 13.23% holding in Hispasat, S.A., continues to
account for this company by the equity method in its consolidated financial
statements.
In June 2002 Telefonica de Contenidos sold its holding in Prime Argentina,
S.A., which owns the Azul Television channel, for US$ 12 million, giving
rise to a loss of (Euro)162.78 million. This company, which was accounted
for by the equity method in the Telefonica Group's consolidated financial
statements, has been excluded from consolidation.
T.P.I. Group
On February 11, 2002, Telefonica Publicidad e Informacion, S.A. acquired
all the shares of T.P.I. Peru, S.A.C., from Telefonica Internacional, S.A.
for (Euro)36.28 million. The Telefonica Group's effective holding in this
company, which continues to be fully consolidated, decreased from 97.07% to
59.90%.
-14-
[LOGO]
Terra Group
In August Terra Networks, S.A., through its wholly-owned U.S.
subsidiary Lycos, Inc., sold all its holding (44.82%) in Lycos Korea,
Inc., obtaining gains in consolidation of (Euro)10.62 million. Also,
in September, Lycos Inc. sold its minority holding in the Canadian
company Sympatico Lycos Inc., obtaining gains in consolidation of
(Euro)8.49 million. In December the Terra Group sold all its holding
in Lycos Japan, K.K., incurring a loss on the sale of (Euro)2.47
million. All these companies, which were accounted for by the equity
method in the Telefonica Group's consolidated financial statements,
have been excluded from the consolidated group.
(3) PROPOSED ALLOCATION OF THE LOSS
OF THE CONTROLLING COMPANY
The proposed allocation of 2002 loss that the Board of Directors of the
Parent Company will submit for approval by the Stockholders' Meeting is
that the loss, amounting to (Euro)4,478.69 million, be offset with a charge
to the following equity accounts:
---------------------------------------------------------
Millions of Euros
---------------------------------------------------------
Revaluation reserves 1,316.67
Voluntary reserves 1,645.80
Additional paid-in capital 1,516.22
---------------------------------------------------------
Total allocation 4,478.69
---------------------------------------------------------
(4) VALUATION STANDARDS
The main valuation methods used in preparing the 2002 consolidated
financial statements were as follows:
a) Consolidation goodwill
The accompanying consolidated balance sheets include consolidation
goodwill, net of amortization, arising from the positive difference in
consolidation between the amounts paid to acquire the shares of the
subsidiaries consolidated or accouted for by the equity method and
their underlying book values plus the unrealized gains allocable to
these companies' assets at the acquisition date.
The amortization periods are those for which the estimated income
attributable to the Group of the companies at which goodwill exists is
at least equal to the unamortized amount of the goodwill relating to
these companies. Generally speaking, the amortization period is 20
years (see Exhibit III).
Positive consolidation differences allocable to the assets of the
acquired company give rise to an increase in the related assets up to
the limit of their market value, once the related appraisal has been
performed.
b) Translation methods (year-end
exchange rate method)
The financial statements of the Group companies abroad were translated
to euros at the exchange rates ruling at year-end, except for:
1. Capital stock and reserves, which were translated at historical
exchange rates.
-15-
[LOGO]
2. Income statement accounts, which were translated at the average
exchange rates for the year.
The exchange difference arising from application of this method is
included under the "Stockholders' Equity - Translation Differences in
Consolidation" caption in the accompanying consolidated balance
sheets, net of the portion of said difference relating to minority
interests, which is recorded under the "Minority Interests" caption on
the liability side of the accompanying consolidated balance sheets.
The companies using accounting methods that include inflation
adjustments apply the accounting standards in force in their
respective countries, which consist of valuing monetary assets and
liabilities at face value and adjusting the historical cost of
nonmonetary assets and liabilities by the inflation from the date of
inclusion of the asset or liability in the company's balance sheet to
year-end. Therefore, the effect of the inflation for the year on the
monetary assets and liabilities is included in the statement of income
for the year under the "Exchange Losses" or "Exchange Gains" captions.
The amounts thus adjusted are translated to U.S. dollars at the
year-end exchange rates and the subsequent translation to euros is
made by the year-end exchange rate method described in paragraphs 1
and 2 above.
The accompanying consolidated financial statements do not include an
adjustment for inflation at the Argentine subsidiaries, although under
Argentine accounting regulations these companies are required to
record such an adjustment. The uniformity adjustment made is due to
the fact that as of December 31, 2002, the indicators established by
international accounting regulations in order to determine whether a
country can be considered to be highly inflationary for the purposes
of recording the adjustment for inflation were not being met.
Salaries, prices and interest rates, in particular, were not tied to
the CPI, and the cumulative three-year CPI increase is not close to
100%, due largely to the measures to control it taken by the
government.
c) Start-up expenses
Start-up expenses, which comprise mainly incorporation, capital
increase and preopening expenses and expenses relating to initial
public offerings, are recorded at cost and are amortized on a
straight-line basis over five years. In 2002, as indicated in Note 1
on the Internet businesses, in accordance with the accounting
principle of prudence in valuation, (Euro)56.62 million were written
off with a charge to extraordinary expenses (see Note 20)
d) Intangible assets
This caption in the accompanying consolidated balance sheets relates
mainly to the following items:
Research and development expenses
These relate to the costs incurred in developing new products to be
marketed or used for the Group's own network, which are generally
amortized by the straight-line method over three years from the date
of completion. Costs incurred in projects which are not viable for the
future are charged to the consolidated satement of operations for the
year in which this circumstance becomes known.
Rights on leased assets
The rights under financial lease contracts are recorded at the cost of
the related assets, and the total debt for lease payments plus the
amount of the purchase option are
-16-
[LOGO]
recorded as a liability. The difference between the two amounts, which
represents the interest expenses on the transaction, is recorded as a
deferred expense and is allocated to income each year by the interest
method. The rights under the existing contracts, which relate mainly
to computer hardware, are generally amortized on a straight-line basis
over five years, which coincides with the years of useful life of the
hardware.
Software licenses and developments
These items are recorded at cost and are amortized on a straight-line
basis over three years.
Administrative concessions
This caption relates to the acquisition cost of the licenses for the
provision of telephony services granted to the Group by various public
authorities, and to the value assigned to the licenses held by certain
companies at the time they were acquired by the Telefonica Group.
Amortization starts to be taken when commercial operation of these
licenses commences and continues to be taken over the term thereof
based on the estimated capacity to generate revenues in each period,
which normally coincides with the number of lines installed or the
average revenues per customer, depending on the type of services
provided under the license.
The acquisition cost includes the expenses incurred directly for
obtainment of these licenses and, in the case of the licenses to
operate the Universal Mobile Telecommunications System (UMTS) obtained
in Spain, Germany, Italy, Austria and Switzerland, the financial
expenses incurred from the granting of the license through June 30,
2002, since from that date, due to the circumstances discussed in Note
1, the Group decided not to capitalize any further expenses in this
connection.
As indicated in Notes 1 and 6, the Telefonica Group has taken certain
decisions regarding its future strategy in the UMTS business, as a
result of which it has significantly reduced the value of these
licenses based on expectations of how this business activity will
evolve in the future.
Other intangible assets
This caption includes, among other items, the costs incurred in
acquiring capacity and rights to use other operators' cables, mainly
underwater cables. These rights are amortized over the duration of the
rights acquired.
e) Property, plant and equipment
Property, plant and equipment is carried at cost revalued pursuant to
the applicable enabling legislation (see Note 7). If the regulations
applicable in a particular country so require, the property, plant and
equipment is valued at cost adjusted for inflation (see Note 4-b).
Cost includes external costs plus internal costs comprising warehouse
materials used, direct labor used in installation work and the
allocable portion of the indirect costs required for the related
investment. The latter two items are recorded as a revenue under the
"Capitalized Expenses of Group Work on Fixed Assets" caption.
The interest and other financial expenses incurred during the
construction of property, plant and equipment in connection with the
start-up of a new activity, when the
-17-
[LOGO]
construction period exceeds one year, and the exchange differences
arising over this period on long-term loans to finance these assets,
are generally not capitalized. No expenses were capitalized in this
connection in 2002. (Euro)18.27 million were capitalized in this
connection in 2001, mainly in relation to the construction of the
underwater cable in Latin America, a project that was completed in
2001.
The costs of expansion, modernization or improvements leading to
increased productivity, capacity or efficiency or to a lengthening of
the useful lives of the assets are capitalized.
Upkeep and maintenance expenses are expensed currently.
The Group records the necessary value adjustments to reduce the cost
of each item of property, plant and equipment to its market value at
each year-end, provided that the book value of the asset is not
recoverable through the generation of sufficient revenues to cover all
the costs and expenses, including depreciation.
An allowance must be recorded for lasting decline in value that is
deemed to be reversible. This allowance will be deducted in the
valuation of the asset in question; in this case the lower value will
not be maintained if the causes which prompted the value adjustment
have ceased to exist.
When the decline in value of the assets is irreversible and differs
from the result of systematic depreciation, the loss and the decline
in value of the related asset will be directly recorded.
The companies depreciate their property, plant and equipment by the
straight-line method at annual rates based on the years of estimated
useful life of the assets, calculated in accordance with technical
studies which are reviewed periodically based on technological
advances and the rate of dismantling, as follows:
-------------------------------------------------------------------
Years of
Estimated
Useful Life
-------------------------------------------------------------------
Buildings and structures 25 - 50
Plant and machinery 10 - 15
Telephone installations, networks and subscriber 5 - 25
equipment
Furniture, office equipment and other 2 - 10
-------------------------------------------------------------------
The increases in value resulting from revaluations are depreciated
over the years of residual useful life of the revalued assets.
f) Long- and short-term investments
Shareholdings which were not consolidated are recorded in the
consolidated balance sheet at the lower of cost or market.
The market value was determined as follows:
1. Listed securities:
The market value was taken to be the lower of average market
price in the last quarter or market price at year-end.
2. Unlisted securities and holdings in companies accounted for by
the equity method:
-18-
[LOGO]
The market value was taken to be the underlying book value at
year-end plus the unrealized gains disclosed at the time of the
acquisition and still existing at year-end.
Unrealized losses (cost higher than market value at year-end) are
recorded under the "Allowances" caption.
g) Deferred charges
This caption in the accompanying consolidated balance sheets includes
mainly the following items:
Supplementary pension payments to retired employees (shortfall)
These relate to the shortfall in the provisions recorded for the
commitments assumed by Telefonica de Espana to retired employees as of
June 30, 1992. Since then, the shortfall has been allocated to income
over 15 years by the straight-line method, in accordance with the
communication received from the Spanish Accounting and Audit Institute
(ICAC) dated March 1, 1993, at a rate of (Euro)61.59 million per year.
On November 1, 1997, coverage of these commitments was externalized,
and on November 1, 2002, they were adapted pursuant to Private
Insurance Law 30/1995 and Royal Decree 1588/1999 approving the
regulations on the instrumentation of employers' pension commitments
to employees and beneficiaries (see Notes 9 and 14).
Debt arrangement expenses
These relate to long-term debt arrangement expenses and issuance
premiums on debentures and bonds and preferred shares and are
amortized by the interest method on the basis of the principal amounts
outstanding.
Executive loyalty-building program
This caption relates to the unaccrued costs relating to the Telefonica
Group's Top and EN-SOP stock option plans (see Notes 9 and 20).
Interest on long-term promissory notes
This relates to the difference between the face value and the
effective value of the promissory notes issued at over one year. This
interest is charged to income by the interest method.
Interest on financial lease contracts
This relates to the interest expenses on financial lease contracts,
which are charged to income by the interest method (see Note 4-d).
Externalization of pension commitments
As a result of Telefonica de Espana's externalization of its pension
commitments pursuant to Private Insurance Law 30/1995, Law 50/1998 on
Tax, Administrative, Labor and Social Security measures, Royal Decree
1588/1999 enacting the regulations on the instrumentation of
employers' pension commitments to employees and beneficiaries, and
Additional Provision Twenty-Five of Law 14/2000 on Tax,
Administrative, Labor and Social Security measures for 2001, the
differences arising due to the change in the
-19-
[LOGO]
actuarial assumptions needed to externalize the aforementioned
commitments were recorded under the "Deferred Charges" caption (see
Note 9).
h) Inventories
Warehouse materials for installation in investment projects and
consumables and replacement parts are valued at the lower of weighted
average cost, adjusted by the effect of inflation in the countries
whose local legislation so requires (see Note 4-b), or market.
Obsolete, defective or slow-moving inventories have been reduced to
realizable value. The allowance for decline in value of inventories is
recorded on the basis of inventory age and turnover.
i) Treasury stock
Treasury stock is valued at the lower of cost, comprising the total
amount paid for acquisition, or market. Since these shares were
acquired without any prior resolution having been adopted by the
Stockholders' Meeting to reduce capital, they are assumed to be
intended for subsequent sale or, alternatively, for a possible capital
reduction, and, accordingly, market value is taken to be the lowest of
average official market price in the last quarter of the year,
year-end market price, or the related underlying book value. A
provision was recorded with a charge to the consolidated statement of
operations for the difference between the acquisition cost and the
lower of the year-end market price or the average market price in the
last quarter, and with a charge to reserves for the difference between
the aforementioned market value and the related underlying book value.
j) Capital subsidies
Capital subsidies are valued at the amount granted and are allocated
to income on a straight-line basis over a maximum period of ten years,
which does not differ materially from the estimated useful life of the
subsidized assets.
Most of the aforementioned subsidies were granted to Telefonica de
Espana and the conditions under which the subsidies were granted are
being met (see Note 13).
k) Foreign currency transactions
Fixed-income securities and receivables and payables denominated in
foreign currencies are translated to euros at the exchange rates
ruling at the transaction date, and are adjusted at year-end to the
exchange rates then prevailing.
Exchange differences arising on adjustment of foreign currency
fixed-income securities and receivables and payables to year-end
exchange rates are classified by currency and due date, and for this
purpose currencies which, although different, are officially
convertible are grouped together.
The positive net differences in each group of currencies are recorded
under the "Deferred Revenues" caption on the liability side of the
consolidated balance sheet, unless exchange losses in a given group
have been charged to income in prior years, in which case the net
positive differences are credited to period income up to the limit of
the negative net differences charged to income in prior years.
The positive differences deferred in prior years are credited to
income in the year in which the related accounts receivable and
payable fall due or are repaid early, or as
-20-
[LOGO]
negative exchange differences for the same or a higher amount are
recognized in each homogeneous group.
Exchange gains or losses arising from specific-purpose financing of
foreign currency investments in investee companies to hedge the
exchange risk to which these investments are exposed are recorded
under the "Translation Differences in Consolidation" caption in the
consolidated balance sheet.
These transactions are deemed to be hedging transactions when they
meet certain requirements, most notably that the foreign currency in
which the financing is denominated is the same as, or largely matches,
the functional currency of the investment and of the flows generated
by it, and that the timing of recognition of the anticipated revenues
from dividends and management fees matches the loan repayment
schedule.
l) Pension and other commitments to employees
At year-end the Group records in the consolidated balance sheet the
provisions required to cover the accrued liability for the existing
commitments that have not been externalized, based on actuarial
calculations using an appropriate discount rate. The liabilities
recorded under "Preretirements, Social Security Expenses and Voluntary
Severances" were calculated individually and discounted to present
value at a rate of 4%.
The Group's main commitments in this connection are detailed in Note
14.
m) Technical reserves
This caption relates mainly to the net level premium reserves, which
represent the amount by which the present value of life insurance,
pension and reinsurance commitments exceed the net premiums to be paid
by the policyholders to the subsidiaries Seguros de Vida y Pensiones
Antares, S.A. and Casiopea Reaseguradora, S.A. These reserves are
credited when the commitments covered are paid.
n) Accounts payable
Accounts payable are recorded at repayment value, except for
zero-coupon debenture and bond issues, which are recorded in the
consolidated balance sheet at issue value plus the related accrued
interest (see Note 15).
o) Derivatives
Transactions whose purpose and effect is to eliminate or significantly
reduce exchange, interest rate or market risks on asset and liability
positions or on other transactions are treated as hedging
transactions. The gains or losses arising during the life of these
derivatives are accrued and taken to the income statement
symmetrically to the gains or losses on the hedged asset (see Note
17).
Transactions which, exceptionally, were not assigned to hedge risks,
are not treated as hedging transactions. In transactions of this kind,
the differences in market price are recorded for accounting purposes
when the transactions are canceled or finally settled. However, if
potential losses are anticipated at year-end, the related provision is
recorded with a charge to the consolidated statement of operations.
Similarly, transactions aimed at reducing the exchange risk relating
to the income contributed by Latin American subsidiaries are not
treated as hedging transactions.
-21-
[LOGO]
p) Corporate income tax and other taxes
These captions in the consolidated statements of operations include
all the debits and credits arising from Spanish corporate income tax
and similar taxes applicable to the Group companies abroad.
The expense for corporate income tax of each year is calculated on the
basis of book income before taxes, increased or decreased, as
appropriate, by the permanent differences from taxable income, defined
as those arising between taxable income and book income before taxes
that are not reversed in subsequent periods.
Tax relief and tax credits, excluding tax withholdings and
prepayments, are deducted from the corporate income tax charge in the
year in which they are definitively taken, except in the case of
investment tax credits earned since 1996, which, at the time when they
are taken, are deferred over the average life of the assets which gave
rise to them.
Also, pursuant to an ICAC resolution dated March 15, 2002, the
Telefonica Group recorded the tax assets relating to the tax relief
and tax credits not yet taken for tax purposes regarding which there
is no doubt, in accordance with the accounting principle of prudence
in valuation, that they can be deducted in the future (see Note 18).
The difference between the accrued tax expense and the tax paid is due
to the above-mentioned deferral, to capitalized tax credits not yet
taken and to revenue and expense recognition timing differences giving
rise to deferred tax assets and liabilities, provided that they have a
certain reversal period (see Note 18).
q) Recognition of revenues and expenses
Revenues and expenses are recognized on an accrual basis, i.e. when
the actual flow of the related goods and services occurs, regardless
of when the resulting monetary or financial flow arises.
The revenues from telephony and other services are recognized on an
accrual basis. Unbilled revenues from the beginning of the billing
cycle to the end of each month are estimated or recorded as soon as
they are known. The differences between the estimated revenues and
those subsequently billed are not material and are recognized in the
following period. In accordance with the accounting principle of
prudence, only realized income is recorded at year-end, whereas
foreseeable contingencies and losses, including possible losses, are
recorded as soon as they become known (see Notes 10 and 20).
-22-
[LOGO]
(5) CONSOLIDATION GOODWILL
The variations in the "Consolidation Goodwill" caption and in the related
accumulated amortization in 2002 and 2001 were as follows:
-----------------------------------------------------
Millions of Euros
-----------------------------------------------------
Balance at 12/31/00 7,714.80
-----------------------------------------------------
Additions 3,018.72
Amortization (845.19)
Write-offs (249.00)
Net retirements (461.93)
Net transfers 161.89
Translation differences (210.35)
-----------------------------------------------------
Balance at 12/31/01 9,128.94
-----------------------------------------------------
Additions 1,121.54
Amortization (667.49)
Write-offs (2,259.81)
Net retirements (277.64)
Net transfers (236.94)
Translation differences (444.58)
-----------------------------------------------------
Balance at 12/31/02 6,364.02
-----------------------------------------------------
The goodwill arising on the acquisition of companies abroad is translated
to euros at the exchange rates prevailing at the time the goodwill arises,
except for goodwill arising on the acquisition of companies by foreign
companies, which is recorded in local currency and is affected by exchange
rate fluctuations. The resulting differences are recorded under the
"Translation Differences in Consolidation" caption.
Per the estimates and projections available to the directors, the projected
income attributable to the Group that will be earned by the companies at
which goodwill had arisen at year-end is at least equal to the unamortized
balance of the related goodwill in the related periods.
The detail of the balances of the goodwill and the related accumulated
amortization at each company, and of the variations therein is shown in
Exhibit III.
Based on these estimates and projections, in 2001 (Euro)249 million of
goodwill relating to the investment in Mediaways, GmbH was written off, and
this amount is recorded under the "Extraordinary Expenses and Losses"
caption in the accompanying consolidated statement of operations (see Note
20).
In 2002 the existing estimates and projections were once again reviewed,
and (Euro)2,259.81 million of goodwill was written off in accordance with
the accounting principle of prudence in valuation, based on the analyses
made both in-house and by third parties of the projected cash flows for the
coming years (see Note 20). The goodwill written off included most notably
(Euro)856.66 million relating to the investment in the Terra Lycos Group
(see Note 1), (Euro)530.00 million relating to the investment in Mediaways,
GmbH, (Euro)154.47 million relating to the investment in I.O. Box,
(Euro)173.38 million relating to the investment in Pearson Plc.,
(Euro)59.14 million relating to the investment in Atlanet, S.p.A. (see Note
1) and (Euro)49.65 million relating to the investment in Emergia, N.V.
The goodwill written off by the Terra Lycos Group also included the
retirement of (Euro)256.67 million under the agreement entered into on May
16, 2000, by Lycos Inc., Terra Networks, S.A., Telefonica, S.A. and
Bertelsmann, AG, which was subsequently amended by a new contract whereby
Telefonica, S.A. replaces Bertelsman AG. In 2001 (Euro)400 million of
-23-
[LOGO]
goodwill arising in the acquisition of Lycos, Inc. were allocated to this
contract, which, as mentioned, was modified. Accordingly, the signing of
the new contract is the logical result, on the one hand, of the changes
which have taken place in the Internet businesses, particularly as a result
of the development of broadband, and, on the other, of the need to adapt
the range of products and services envisaged to the specific needs of the
Telefonica Group in the markets in which it is present. This certain
creation of value for the Terra Lycos Group, as reflected in a study
carried out by a third party, was written off in the accompanying
consolidated financial statements since it was generated in the context of
the Telefonica Group.
2002
The main additions to consolidation goodwill in 2002, related to the
following companies:
--------------------------------------------------------------
Millions of Euros
--------------------------------------------------------------
Telefonica Moviles Mexico Group 598.44
Brasilcel, N.V. Group 268.69
Endemol Group 89.98
Telefonica Centroamerica Guatemala 41.40
Emergia, N.V. 49.65
Other companies 73.38
--------------------------------------------------------------
Total 1,121.54
--------------------------------------------------------------
2001
The main additions to consolidation goodwill in 2001, related to the
following companies:
-----------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------
Mediaways, GmbH 1,474.66
Endemol Group 268.61
Data Brasil Group 233.55
Grupo Corporativo del Norte, S.A. 230.51
Celular de Telefonia, S.A. de C.V. 137.86
Investees of G. Corporativo del Norte, S.A. 135.14
and other companies acquired
Uno-e Bank, S.A. 130.25
Telefonica Moviles, S.A. 113.21
Portugal Telecom, S.A. 76.00
Other companies 218.93
-----------------------------------------------------------------
Total 3,018.72
-----------------------------------------------------------------
In 2002 there were no significant retirements of goodwill due to sales of
holdings. However, due to changes in the consolidation method (see Note
2-c) there was a 50% reduction ((Euro)243.65 million) in the goodwill
relating to the wireless operators in Brazil following the joint venture
agreement with Portugal Telecom, S.G.P.S., S.A. leading to the formation of
Brasilcel, which was proportionally consolidated at 2002 year-end.
Notable in 2001 was the retirement amounting to (Euro)265.38 million due to
the sale of the investment in Cablevision, S.A.
-24-
[LOGO]
(6) INTANGIBLE ASSETS
The detail of the balances of the intangible asset accounts and of the
variations therein in 2002 and 2001 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------------------------
Inclusion Exclusion
Balance at Retire- of of Translation Balance at
12/31/01 Additions ments Companies Companies Differences Transfers 12/31/02
------------------------------------------------------------------------------------------------------------------------------------
Cost:
Research and development expenses 1,049.59 94.42 (0.08) - - (0.64) 35.86 1,179.15
Administrative concessions 15,011.19 177.72 (9,423.12) 1,053.78 (443.57) (246.47) 220.67 6,350.20
Rights on leased assets 137.69 10.40 (3.76) - - (20.96) (38.97) 84.40
Software licenses and developments 2,309.13 423.40 (61.84) 127.24 (49.20) (175.38) 557.84 3,131.19
Other intangible assets 1,778.44 400.64 (119.32) 9.02 (1.49) (145.40) (731.25) 1,190.64
------------------------------------------------------------------------------------------------------------------------------------
Total intangible assets, gross 20,286.04 1,106.58 (9,608.12) 1,190.04 (494.26) (588.85) 44.15 11,935.58
------------------------------------------------------------------------------------------------------------------------------------
Accumulated amortization:
Research and development expenses 862.72 146.01 (0.08) - - (0.64) (2.06) 1,005.95
Administrative concessions 745.22 240.03 (3.49) 97.85 (31.20) (30.56) (23.88) 993.97
Rights on leased assets 61.00 20.88 (4.92) - - (5.27) (41.77) 29.92
Software licenses and developments 1,133.94 603.45 (47.06) 53.43 (16.00) (65.94) 105.32 1,767.14
Other intangible assets 504.37 123.71 (44.24) 0.43 (0.14) (61.76) (53.67) 468.70
------------------------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 3,307.25 1,134.08 (99.79) 151.71 (47.34) (164.17) (16.06) 4,265.68
------------------------------------------------------------------------------------------------------------------------------------
Allowances for decline in value 19.65 27.56 (4.78) 2.68 - (6.60) 1.82 40.33
------------------------------------------------------------------------------------------------------------------------------------
Intangible assets, net 16,959.14 (55.06) (9,503.55) 1,035.65 (446.92) (418.08) 58.39 7,629.57
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------
Inclusion Exclusion
Balance at Retire- of of Translation Balance at
12/31/00 Additions ments Companies Companies Differences Transfers 12/31/01
------------------------------------------------------------------------------------------------------------------------------------
Cost:
Research and development expenses 1,108.16 170.79 (6.62) - - 3.64 (226.38) 1,049.59
Administrative concessions 17,855.95 472.82 (35.22) 80.14 (33.84) (157.03) (3,171.63) 15,011.19
Rights on leased assets 150.81 27.76 (10.28) - - (4.09) (26.51) 137.69
Software licenses and developments 1,666.79 606.44 (16.09) 21.07 (8.38) (0.96) 40.26 2,309.13
Other intangible assets 1,238.45 372.28 (89.56) 50.71 (8.01) (44.61) 259.18 1,778.44
------------------------------------------------------------------------------------------------------------------------------------
Total intangible assets, gross 22,020.16 1,650.09 (157.77) 151.92 (50.23) (203.05) (3,125.08) 20,286.04
------------------------------------------------------------------------------------------------------------------------------------
Accumulated amortization:
Research and development expenses 717.72 174.63 (4.70) - - 1.40 (26.33) 862.72
Administrative concessions 507.44 247.67 (5.73) 21.26 (18.84) (5.49) (1.09) 745.22
Rights on leased assets 56.27 15.88 (2.93) - - (1.61) (6.61) 61.00
Software licenses and developments 740.93 402.90 (4.31) 4.55 (3.02) 1.02 (8.13) 1,133.94
Other intangible assets 302.90 188.40 (41.53) 41.59 (13.31) (17.23) 43.55 504.37
------------------------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 2,325.26 1,029.48 (59.20) 67.40 (35.17) (21.91) 1.39 3,307.25
------------------------------------------------------------------------------------------------------------------------------------
Allowances for decline in value 1.80 25.29 (0.31) - - (7.13) - 19.65
------------------------------------------------------------------------------------------------------------------------------------
Intangible assets, net 19,693.10 595.32 (98.26) 84.52 (15.06) (174.01) (3,126.47) 16,959.14
------------------------------------------------------------------------------------------------------------------------------------
The inclusions and exclusions of companies in 2002 include the effect of
proportionally consolidating the joint venture Brasilcel, N.V. (see Note
2-c), which affected the net inclusions and exclusions by (Euro)754.48
million and (Euro)446.90 million, respectively. Also, the inclusion of
Pegaso gave rise to net inclusions of (Euro)274.13 million.
The "Administrative Concessions" caption includes mainly the following
items :
- Licenses for the provision of UMTS services in Spain, Germany and
Austria acquired in 2000 and the addition in 2001 of the license
granted in Switzerland. As indicated in Note 1, the "Retirements"
column for 2002 includes (Euro)9,445.01 relating to the effect of the
value adjustments required in intangible asset captions, including the
financial costs capitalized to date. The amount capitalized in 2002
includes (Euro)96.64 million relating to the financing obtained by
Telefonica and Telefonica Moviles and (Euro)68.05 million relating to
the financing granted by other stockholders of the companies that hold
UMTS licenses ((Euro)271.39 million and (Euro)236.39 million,
respectively, in 2001). The
-25-
[LOGO]
"Transfers" column for 2001 includes the effect of accounting for Ipse
2000, which holds the UMTS license in Italy, by the equity method (see
Note 2-c).
- A 25-year concession granted by the Peruvian State to Telefonica del
Peru, S.A.A. when this company was acquired in April 1994 by
Telefonica Internacional.
- Licenses to operate wireline and wireless communications services of
the companies awarded in the privatization in July 1998 of the
Telebras system (Telesp, Tele Sudeste and Tele Leste) and the
inclusion of Telesp Celular in 2002. A portion of the price paid for
these companies was assigned as an addition to the value of these
assets when they were acquired. The term of these licenses is 27
years.
- 25-year DCS 1800 MHz licenses recorded at the amount paid to the
Spanish Government plus the amount set aside to defray the costs
relating to the radio spectrum cleaning process required for the
implementation and development of these licenses.
- Licenses for the provision of the Personal Communications Service in
Argentina, which are being amortized over 20 years.
The projections that the directors have regarding business performance and
the income to be generated by these concessions are at least equal to the
unamortized balance thereof.
(7) PROPERTY, PLANT AND EQUIPMENT
The detail of the balances of property, plant and equipment accounts, of
the related accumulated depreciation and of the variations therein in 2002
and 2001 are as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------
Inclusion Exclusion
Balance at Retire- of of Translation Balance at
12/31/01 Additions ments Companies Companies Differences Transfers 12/31/02
------------------------------------------------------------------------------------------------------------------------------------
Cost:
Land and structures 7,097.90 33.19 (82.23) 43.13 (19.11) (1,073.88) 160.15 6,159.15
Plant and machinery 3,365.73 51.51 (76.38) 49.84 (25.28) (644.61) 1,019.00 3,739.81
Telephone installations 62,975.46 298.60 (1,015.08) 1,371.18 (512.54) (11,355.68) 1,996.96 53,758.90
Furniture, tools, etc. 3,851.74 162.99 (304.73) 146.12 (48.63) (700.23) 24.80 3.132.06
----------------------------------------------------------------------------------------------
Total property, plant and equipment
in service 77,290.83 546.29 (1,478.42) 1,610.27 (605.56) (13,774.40) 3,200.91 66,789.92
Construction in progress 3,034.89 2,159.47 (57.83) 43.52 (39.42) (777.66) (3,376.82) 986.15
Advances on property, plant and
equipment 53.20 22.30 (2.78) 2.96 (0.17) (7.70) (1.66) 66.15
Installation materials 154.12 91.59 (16.42) - - (47.52) (19.14) 162.63
----------------------------------------------------------------------------------------------
Property, plant and equipment, gross 80,533.04 2,819.65 (1,555.45) 1,656.75 (645.15) (14,607.28) (196.71) 68,004.85
----------------------------------------------------------------------------------------------
Accumulated depreciation:
Structures 2,332.44 214.76 (28.94) 8.32 (2.34) (296.93) (107.18) 2,120.13
Plant and machinery 1,196.20 524.78 (87.54) 10.98 (12.51) (240.74) 149.70 1,540.87
Telephone installations 37,976.28 4,176.61 (921.32) 447.30 (267.26) (6,469.24) 275.15 35,217.52
Furniture, tools, etc. 2,327.03 453.67 (251.41) 58.88 (22.20) (393.01) (231.65) 1.941.31
------------------------------------------------------------------------------------------------------------------------------------
Total accumulated depreciation 43,831.95 5,369.82 (1,289.21) 525.48 (304.31) (7,399.92) 86.02 40,819.83
------------------------------------------------------------------------------------------------------------------------------------
Allowances for decline in value 95.00 51.94 (52.60) 0.53 - (8.63) (0.87) 85.37
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 36,606.09 (2,602.11) (213.64) 1,130.74 (340.84) (7,198.73) (281.86) 27,099.65
------------------------------------------------------------------------------------------------------------------------------------
-26-
[LOGO]
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------
Inclusion Exclusion
Balance at Retire- of of Translation Balance at
12/31/00 Additions ments Companies Companies Differences Transfers 12/31/01
------------------------------------------------------------------------------------------------------------------------------------
Cost:
Land and structures 7,203.17 117.58 (11.65) 38.40 (1.48) (475.87) 227.75 7,097.90
Plant and machinery 1,729.40 301.54 (44.08) 93.75 (19.53) (43.11) 1,347.76 3,365.73
Telephone installations 62,140.40 1,931.93 (1,250.94) 677.09 (41.95) (4,599.51) 4,118.44 62,975.46
Furniture, tools, etc 3,498.37 580.25 (214.90) 145.52 (40.22) (276.58) 159.30 3,851.74
----------------------------------------------------------------------------------------------
Total property, plant and
equipment in service 74,571.34 2,931.30 (1,521.57) 954.76 (103.18) (5,395.07) 5,853.25 77,290.83
Construction in progress 5,669.76 3,551.30 (186.61) 67.35 (53.03) (213.14) (5,800.74) 3,034.89
Advances on property, plant and
equipment 53.02 9.90 (9.96) 20.23 (20.68) (13.27) 13.96 53.20
Installation materials 351.24 278.30 (42.17) 0.32 (6.53) (159.41) (267.63) 154.12
----------------------------------------------------------------------------------------------
Property, plant and equipment, gross 80,645.36 6,770.80 (1,760.31) 1,042.66 (183.42) (5,780.89) (201.16) 80,533.04
----------------------------------------------------------------------------------------------
Accumulated depreciation:
Structures 2,147.42 236.59 (5.13) 15.45 65.78 (145.60) 17.93 2,332.44
Plant and machinery 1,012.04 231.96 (24.08) 40.87 (22.45) (56.32) 14.18 1,196.20
Telephone installations 35,974.46 5,210.54 (1,100.10) 201.15 30.88 (2,488.49) 147.84 37,976.28
Furniture, tools, etc 2,074.89 548.01 (103.11) 88.43 (50.13) (196.97) (34.09) 2,327.03
------------------------------------------------------------------------------------------------------------------------------------
Total accumulated depreciation 41,208.81 6,227.10 (1,232.42) 345.90 24.08 (2,887.38) 145.86 43,831.95
------------------------------------------------------------------------------------------------------------------------------------
Allowances for decline in value 714.62 24.95 (669.25) - (0.91) (9.26) 34.85 95.00
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 38,721.93 518.75 141.36 696.76 (206.59) (2,884.25) (381.87) 36,606.09
------------------------------------------------------------------------------------------------------------------------------------
The inclusions and exclusions of companies in 2002 include the effect of
proportionally consolidating the joint venture Brasilcel, N.V. (see Note
2-c), which affected the net inclusions and exclusions by (Euro)492.80
million and (Euro)340.75 million, respectively. Also, the inclusion of
Pegaso gave rise to net inclusions of (Euro)625.50 million.
The retirements from "Telephone Installations" relate mainly to the
dismantling of telephony plant (see Note 20) with a gross cost of
(Euro)1,010.54 million in 2002.
Noteworthy in both 2002 and 2001 were the investments made by Group
companies, mainly in wireline telephony both in Spain and Latin America and
in wireless telephony, which represent most of the additions to and related
subsequent transfers from the "Construction in Progress" caption.
The "Translation Differences" column includes both the effect of the
variation in exchange rates on the beginning balances and the monetary
adjustment applied by certain companies to their balances to adjust for
inflation, in accordance with the accounting practices in their respective
countries. The effect of exchange rates on the period variations is
included in the appropriate column for each variation. As indicated in
Notes 1 and 4-b, the effect of the devaluation of the Argentine peso and
the performance of the Brazilian real in both years should be noted.
As of December 31, 2002, the following items had been fully depreciated:
-----------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------
Buildings and structures 162.65
Plant, machinery and tools 728.09
Telephone installations 15,198.67
Other property, plant and equipment 996.47
-----------------------------------------------------------------
Total 17,085.88
-----------------------------------------------------------------
-27-
[LOGO]
Telefonica de Espana's fixed assets used to provide services currently
regulated by a concession cannot be mortgaged without prior administrative
authorization.
The Telefonica Group companies have taken out insurance policies to
reasonably cover the possible risks to which their property, plant and
equipment used in operations are subject. These policies include certain
franchises for local and domestic long-distance networks and subscriber
equipment.
On December 31, 1996, Telefonica de Espana revalued its property, plant and
equipment pursuant to Royal Decree-Law 7/1996. The Company had previously
revalued its assets pursuant to the enabling legislation specifically
applicable to Telefonica de Espana. The net increase in value resulting
from these revaluations is being depreciated over the tax periods in the
remaining useful lives of the revalued assets. The effect of this
depreciation on the accompanying consolidated statement of operations is
not material.
The detail, as of December 31, 2002, of the property, plant and equipment
owned by consolidated Group companies located abroad is as follows:
------------------------------------------------------
Millions
of Euros
------------------------------------------------------
Cost 27,179.93
Accumulated depreciation (13,424.89)
------------------------------------------------------
Total 13,755.04
------------------------------------------------------
Allowances for decline in value
The telecommunications market in Spain became fully deregulated on December
1, 1998. In 1999 certain regulatory measures were adopted, the main
consequence of which was to accelerate the opening up to competition of the
basic telephony service in Spain. These measures include most notably the
approval of reductions in the regulated rates for local, long-distance and
wireline-to-wireless services, although, per Group management estimates,
the envisaged increase in monthly charges will not enable the effects of
the current rate imbalance to be eliminated at medium term. Also approved
on the same date were significant reductions in regulated circuit lease
prices, to which must be added the entry into force in 2000 of obligatory
operator pre-selection and number portability. In July 1999 the general
application of the prices and conditions of the Reference Interconnection
Offer (RIO), of particular relevance to wireless operators, came into
force. Lastly, measures were taken to bring forward the introduction of
competition in the local loop through application of ADSL technology and
the immediate award of radio spectrum licenses for use in the local loop
(LMDS technology).
The Group has analyzed the impact at Telefonica de Espana of these measures
on the recoverability of the value of certain assets, the investment in
which was made in the past taking into account the prevailing regulatory
framework, and above all, in fulfillment of the obligations for the
provision of the universal service provided for in the State Contract
entered into in 1991. As a result, in 1999 the Company recorded a provision
of (Euro)1,322.56 million with a charge to extraordinary expenses.
In subsequent years the related allowance was revalued and reversed as the
estimated losses were allocated to the consolidated statement of
operations, after including in the consolidated financial statements the
losses arising as a result of the difference between the revenues, expenses
and depreciation relating to these assets. Accordingly, (Euro)36.83 million
and (Euro)668.41 million were reversed in 2002 and 2001, respectively, and
these amounts were
-28-
[LOGO]
recorded under the "Variations in Fixed Asset and Control Portfolio
Allowances". As of December 31, 2002, the allowance amounted to (Euro)3.44
million.
(8) LONG-TERM INVESTMENTS
The detail of the balances of the long-term investments and of the related
investment valuation allowances as of December 31, 2002 and 2001, and of
the variations therein in the years then ended, is as follows:
------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------------------------------------------------------
Investments in
Associated Other Guarantees and Taxes Receivable
Companies Investments Other Loans Deposits Given (Note 18) Allowances Total
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/00 2,301.63 1,382.91 1,594.09 35.84 2,666.11 (84.07) 7,896.51
------------------------------------------------------------------------------------------------------------------------------
Additions 353.70 30.43 656.70 273.24 1,582.81 (68.85) 2,828.03
Sale of companies (365.65) (10.54) (145.87) (19.60) (423.83) 2.07 (963.42)
Inclusion of companies 8.63 - 34.11 0.10 9.23 - 52.07
Exclusion of companies (2.43) (50.14) (25.60) (0.02) (39.79) 0.52 (117.46)
Translation differences (6.70) (3.40) (104.80) 0.85 (98.43) 9.96 (202.52)
Losses (376.50) - - - - - (376.50)
Dividends (48.27) - - - - - (48.27)
Transfers 1,234.73 (478.48) 29.49 (57.43) 61.68 (178.36) 611.63
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/01 3,099.14 870.78 2,038.12 232.98 3,757.78 (318.73) 9,680.07
------------------------------------------------------------------------------------------------------------------------------
Additions 169.84 2.36 687.81 136.77 6,919.83 (75.29) 7,841.32
Sale of companies (10.38) (18.09) (292.45) (227.24) (978.06) 17.63 (1,508.59)
Inclusion of companies 0.40 - 236.18 2.29 17.21 - 256.08
Exclusion of companies (4.72) - (48.11) (1.45) (34.90) 0.45 (88.73)
Translation differences (295.91) (30.32) 27.75 (10.34) (265.65) 13.12 (561.35)
Losses (527.88) - - - - - (527.88)
Dividends (58.16) - - - - - (58.16)
Transfers (291.14) 107.30 (424.04) 27.76 263.21 67.28 (249.63)
------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/02 2,081.19 932.03 2,225.26 160.77 9,679.42 (295.54) 14,783.13
------------------------------------------------------------------------------------------------------------------------------
The additions to and retirements from the "Investments in Associated
Companies" and "Other Investments" accounts reflect the amount of the
investments detailed in the variations in the consolidated Group as of
December 31, 2002 and 2001, described in Exhibit II. The transfers of
associated companies in 2001 relate mainly to Ipse 2000, which holds the
Italian UMTS license (see Note 2-c).
The "Other Loans" caption includes the investment of the net level premium
reserves of the Group's insurance companies, mainly in government
debentures, government debt securities and long-term deposits amounting to
(Euro)823.44 million and (Euro)743.55 million as of December 31, 2002 and
2001, respectively, which earn average returns of between 4.52% and 5.30%
(2.98% in the case of money market assets). The "Short-Term Investments -
Short-Term Investment Securities" caption in the consolidated balance sheet
as of December 31, 2002, includes (Euro)405.90 million ((Euro)117.71
million in 2001) recorded to cover commitments, which are accounted for as
"Technical Reserves" (see Note 14).
As of December 31, 2002, the Telefonica Group had granted long-term loans
totaling (Euro)811.76 million to the associated company DTS Distribuidora
de Television Digital, S.A. (Via Digital), and this amount is recorded
under the "Other Loans" caption. Also, the short-term "Accounts Receivable
- Receivable from Associated Companies" caption included balances
receivable totaling (Euro)45.50 million relating to loans and trade
accounts receivable.
The "Taxes Receivable" caption includes the long-term deferred tax assets,
which are grouped together under the "Long-Term Investments" caption on the
asset side of the
-29-
[LOGO]
consolidated balance sheet in accordance with an ICAC Resolution on
Valuation Standard 16 of the Spanish National Chart of Accounts, and the
tax credits taken in the year (see Note 18).
In 2002 the Telefonica Group sold the following investments in various
companies with the results detailed below:
-------------------------------------------------------------------------------
Percentage of Millions of Euros
Capital Stock --------------------
Sold Gain (Loss)
-------------------------------------------------------------------------------
Subsidiaries and associated companies:
European Telecom International, GmbH 100% (38.79)
Uniprex Onda Cero Group 100% 35.82
Hispasat, S.A. 4.11% 26.10
Azul Television 100% (162.78)
Sonda Group 25% (1.62)
Lycos Korea 44.82% 10.62
Sympatico Lycos 27% 8.49
Other 15.04
-------------------------------------------------------------------------------
Net loss (107.12)
-------------------------------------------------------------------------------
The Group and associated companies listed on stock markets are as follows:
- Telefonica, S.A.
- Telefonica Moviles, S.A.
- Telefonica Publicidad e Informacion, S.A.
- Terra Networks, S.A.
- Lycos Europe, N.V.
- Amper, S.A.
- Compania de Telecomunicaciones de Chile, S.A.
- Telefonica de Argentina, S.A.
- Telefonica del Peru, S.A.A.
- Compania Anonima Nacional de Telefonos de Venezuela, C.A. (CANTV)
- Portugal Telecom, S.A.
- Telecomunicacoes de Sao Paulo, S.A. (Telesp)
- Tele Sudeste Celular Participacoes, S.A.
- Telesp Celular Participacoes, S.A.
- Tele Leste Celular Participacoes, S.A.
- Celular CRT Participacoes, S.A.
- Pearson P.L.C.
- Infonet Services Corporation.
- Telefonica Moviles El Salvador, S.A. de C.V.
- Telefonica Data Brasil Holding, S.A.
- CTC Transmisiones Regionales, S.A. (CTC Mundo)
- Fastibex, S.A.
- Telefonica Moviles Argentina, S.A.
-30-
[LOGO]
- Telefonica Holding de Argentina, S.A.
- Telefonica Data Argentina, S.A.
- Telefonica Data Peru, S.A.A.
- Telefonica Moviles Peru Holding, S.A.A.
Short-term investments
This caption in the accompanying consolidated balance sheet as of December
31, 2002, includes basically the following items:
- The investment in short-term assets of cash surpluses arising at
Telefonica, which amounted to ((Euro)1,274.37 million ((Euro)11.40
million in 2001), and the investments made with the net level premium
reserves of the Group's insurance companies, which amounted to
((Euro)448.90 million ((Euro)276.23 million in 2001).
- The short-term investments of the Terra Lycos Group recorded under the
"Short-Term Investment Securities" caption, which amounted to ((Euro)
367.79 million ((Euro)591.59 million in 2001).
- The investments relating to the Telefonica Internacional Group recorded
under the "Other Loans" caption, which amounted to ((Euro)493.46 million
((Euro) 706.99 million in 2001).
(9) DEFERRED CHARGES
The breakdown of the balance of this caption and the amortization schedule
are as follows:
----------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------
Maturity Balance at Balance at
-----------------------------------------------------------------------------------------------------
Subsequent 12/31/02 12/31/01
2003 2004 2005 2006 2007 Years
-----------------------------------------------------------------------------------------
Supplementary pension payments
to retired employees 63.52 63.43 61.59 61.59 30.79 - 280.92 338.73
(shortfall) (Notes 4-g and 14)
Debt arrangement expenses 5.36 38.97 33.65 24.44 17.95 99.90 220.27 119.30
Executive loyalty-building 14.62 0.93 - - - - 15.55 23.89
program (Notes 4-g and 20)
Interest on long-term promissory 7.31 7.00 7.01 7.05 7.13 23.29 58.79 69.34
notes
Interest on financial lease 2.15 1.45 0.63 0.47 0.49 7.71 12.90 13.56
contracts
Externalization of commitments
(Note 4-g) 12.60 11.76 10.44 8.91 7.47 18.64 69.82 -
Other deferred charges 37.45 25.68 16.12 10.48 8.40 45.90 144.03 146.12
-----------------------------------------------------------------------------------------------------------------------------------
Total 143.01 149.22 129.44 112.94 72.23 195.44 802.28 710.94
-----------------------------------------------------------------------------------------------------------------------------------
-31-
[LOGO]
(10) TRADE RECEIVABLES
The detail of the balances of this caption as of December 31, 2002 and
2001, is as follows:
-------------------------------------------------------------------
Millions of Euros
-----------------------------
Balance at Balance at
12/31/02 12/31/01
-------------------------------------------------------------------
Trade receivables billed 3,607.81 3,005.49
Doubtful trade receivables 773.53 1,606.11
Other receivables 45.73 47.16
-----------------------------
Services billed 4,427.07 4,658.76
Unbilled services 1,495.81 2,124.48
-----------------------------
Trade receivables 5,922.88 6,783.24
-----------------------------
Allowance for bad debts (1,663.56) (1,692.89)
-----------------------------
Net total 4,259.32 5,090.35
-------------------------------------------------------------------
The "Unbilled Services" account includes the connection, monthly and
meter service charges not yet billed by the Group operators. This
amount arises because these companies' subscriber billing schedules do
not coincide with December 31 (see Note 4-q).
The balance of the public-sector trade receivables in the countries in
which the Group operates amounted to (Euro)352.86 million as of
December 31, 2002 ((Euro)410.16 million as of December 31, 2001).
In 2002 provisions totaling (Euro)555.64 million were recorded to the
allowance for bad debts.
(11) STOCKHOLDERS' EQUITY
The detail of the balances of equity accounts and of the variations
therein in 2002 and 2001 is as follows:
------------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------------------------------
Balance Distribution Balance Distribution Balance
at of 2000 Other Capital at of 2001 Other Capital at
12/31/00 Income Variations Increase 12/31/01 Income Variations Increase 12/31/02
------------------------------------------------------------------------------------------------------------------------------------
Capital stock 4,340.71 - - 331.21 4,671.92 - - 188.74 4,860.66
Additional paid-in capital 10,987.99 - - 682.03 11,670.02 - - - 11,670.02
Revaluation reserves 3,235.66 - - (176.02) 3,059.64 - - (188.74) 2,870.90
Unrestricted reserves 3,787.48 (57.11) (350.39) - 3,379.98 329.65 1,106.74 - 4,816.37
Reserve for treasury stock 198.19 - 62.51 - 260.70 - 73.86 - 334.56
Other restricted reserves 657.97 - - - 657.97 - - - 657.97
Consolidation reserves 1,200.25 2,561.92 (429.30) - 3,332.87 1,777.16 (1,239.89) - 3,870.14
Translation differences in (982.51) - (2,295.78) - (3,278.29) - (3,229.53) - (6,507.82)
consolidation
Income (Loss) for the year 2,504.81 (2,504.81) 2,106.81 - 2,106.81 (2,106.81) (5,576.80) - (5,576.80)
------------------------------------------------------------------------------------------------------------------------------------
Total 25,930.55 - (906.15) 837.22 25,861.62 - (8,865.62) - 16,996.00
------------------------------------------------------------------------------------------------------------------------------------
The "Other Variations" column for 2002 relating to the "Unrestricted
Reserves" and "Consolidation Reserves" accounts relates mainly to the
dividends paid to the Parent Company by its subsidiaries.
a) Capital stock
As of December 31, 2002, Telefonica, S.A.'s capital stock
amounted to (Euro)4,860,661,286 and consisted of 4,860,661,286
fully paid common shares of a single series and of (Euro)1 par
value each, all recorded by the book-entry system traded on the
Spanish computerized trading system ("Continuous Market") (in the
selective "Ibex
-32-
[LOGO]
35" Index), on the four Spanish Stock Exchanges (Madrid, Barcelona,
Valencia and Bilbao) and on the New York, London, Paris, Frankfurt, Tokyo,
Buenos Aires, Sao Paulo and Lima Stock Exchanges.
Pursuant to Royal Decree 8/1997, the prior administrative authorization
system applies to certain corporate resolutions that might be adopted by
Telefonica, S.A., Telefonica Moviles, S.A. and Telefonica de Espana, S.A.,
and to certain others which may give entitlement to the direct or indirect
acquisition, including third-party trusts or interposed third parties, of
shares or certain assets of Telefonica, S.A., Telefonica Moviles, S.A. or
Telefonica de Espana, S.A. The administrative authorization system will
remain in force for ten years from February 18, 1997.
On June 15, 2001, the Stockholders' Meeting authorized the Board of
Directors to increase the Company's capital, at one or several times within
a maximum period of five years from that date, under the terms provided by
Article 153.1 b) of the Spanish Corporations Law (authorized capital) up to
a maximum of (Euro)2,274,677,655, by issuing for this purpose the related
new common shares, be they redeemable or of any other type permitted by the
Law, with a fixed or variable premium, with or without preemptive
subscription right and, in all cases, with disbursements for the new shares
issued in the form of monetary contributions. As of December 31, 2002, the
Board of Directors had not made use of this authorization.
Also on June 15, 2001, the Stockholders' Meeting approved two successive
capital increases with a charge to unrestricted reserves, each for an
amount equal to 2% of the subscribed and paid-in capital stock, which were
carried out in the first few months of 2002, as indicated below.
In addition, on June 15, 2001, the Stockholders' Meeting resolved to
empower the Board of Directors to issue, within a maximum period of five
years, at one or several times, fixed-income securities convertible into or
exchangeable for Company shares, up to a maximum amount of (Euro)2,000
million or an equal amount in another currency, and to increase capital by
the amount required to cater for such conversion requests as might be made.
As of December 31, 2002, the Board of Directors had not made use of these
powers.
Furthermore, on April 12, 2002, the Stockholders' Meeting resolved to
approve two successive capital increases with a charge to unrestricted
reserves, each for an amount equal to 2% of the subscribed and paid-in
capital stock, through two successive issues of new shares that will be
assigned totally free of charge to the Company's stockholders at a ratio of
one new share for every 50 shares held by them, and empowered the Board of
Directors accordingly to execute the resolution in question within one year
from the date on which it was adopted. Before December 31, 2002, the Board
of Directors resolved to carry out the first of the two aforementioned
capital increases, for a par value of (Euro)97,213,225, in January and
February 2003 (see Note 23).
Also on April 12, 2002, the Stockholders' Meeting resolved to issue
fixed-income securities convertible into new Company shares and/or
exchangeable for existing shares of the Company or of any of the Group
companies, with disapplication of the preemptive subscription right, for a
total maximum amount of (Euro)2,000 million or an equal amount in another
currency, and to increase capital by the amount required to cater for such
conversion requests as might be made. It also granted the Board of
Directors the necessary powers to implement the resolution adopted by the
Stockholders' Meeting and to determine the features of the issue and
capital increase not specified by the latter, including the express power
to refrain from implementing,
-33-
[LOGO]
or to only partially implement, this resolution. As of December 31,
2002, the Board of Directors had not made use of these powers to
implement this resolution.
In addition, on April 12, 2002, the Stockholders' Meeting resolved to
increase capital by (Euro)2,180,809 through the issuance of new common
shares with additional paid-in capital of (Euro)11.61 per share to
cater for the needs derived from the establishment of a stock option
plan for the employees of the Endemol Group. It also granted the Board
of Directors the necessary powers to implement the capital increase
resolution, including the express power to refrain from implementing
the resolution. In a resolution dated December 18, 2002, the Board of
Directors expressly decided not to implement the aforementioned
resolution to increase capital, and opted to cover the stock option
plan referred to above by a means other than through a capital
increase with the issuance of new shares (i.e., through the prior
acquisition of Telefonica shares on the stock market).
Also on April 12, 2002, the Stockholders' Meeting authorized the Board
of Directors to derivatively acquire treasury stock, for
consideration, up to the limits and pursuant to the terms and
conditions established by the Stockholders' Meeting, within a maximum
period of 18 months from that date. However, it established that in no
case could the par value of the shares acquired, added to that of the
treasury stock already held by Telefonica, S.A. and any of its
controlled subsidiaries, exceed 5% of the capital stock of Telefonica.
As of December 31, 2002 and 2001, the Telefonica Group companies held
the following shares of the Parent Company, Telefonica, S.A.:
--------------------------------------------------------------------------------------------------------------------
Number of Shares Cost per Share (*) Market Value %
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Treasury stock at 12/31/02 91,631,076 8.53 (Euro) 781.61 1.88516
--------------------------------------------------------------------------------------------------------------------
Treasury stock at 12/31/01 45,440,901 14.22 (Euro) 646.17 0.97264
(*) Lower of the market value of the treasury stock at year-end or the average
market price in the last quarter. As indicated in Note 4-i, a drop in the
market value of the shares would lead to the recording of additional
provisions with a charge to consolidated income, but would not affect the
total amount of consolidated equity.
In 2002 the Company acquired for consideration 55,169,765 shares of
treasury stock and 1,819,821 shares were assigned to it in the capital
increases at no charge to stockholders. Also, 799,411 shares were used
to acquire holdings in certain Brazilian companies from Iberdrola,
S.A. (see Note 2-c), and 10,000,000 shares were sold, giving rise to a
loss of (Euro)1.79 million. The average acquisition cost of the shares
of treasury stock as of December 31, 2002 and 2001, was (Euro)11.65
and (Euro)14.85 per share, respectively.
The consolidated balance sheets as of December 31, 2002 and 2001,
include the acquisition cost of the shares of treasury stock
((Euro)1,067.94 million and (Euro)674.73 million, respectively) net of
allowances of (Euro)733.38 million and (Euro)414.03 million,
respectively, the provisions to which were recorded, in accordance
with current accounting regulations (see Note 4-i), with a charge to
the consolidated statement of operations in respect of the market
value of these shares ((Euro)286.33 million and (Euro)26.29 million as
of December 31, 2002 and 2001, respectively) and with a charge to
unrestricted reserves in respect of the amount by which the market
value exceeds the underlying book value ((Euro)447.05 million and
(Euro)387.74 million in 2002 and 2001, respectively). The provision
recorded with a charge to the 2002 consolidated statement of
operations amounted to (Euro)288.09 million (see Note 20).
-34-
[LOGO]
The Company has recorded the related restricted reserve for the amount of
these shares of treasury stock. Also, in 2002 and 2001 it recorded
provisions of (Euro)59.29 million and (Euro)387.74 million, respectively,
with a charge to the "Unrestricted Reserves" caption on the asset side of
the accompanying consolidated balance sheets to reflect the underlying book
value of the treasury stock (see Note 4-i).
Variations in capital stock and additional paid-in capital in 2002
The variations in 2002 in the "Capital Stock" and "Additional Paid-in
Capital" captions were as follows:
---------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------
Date of Number Additional
Share Issue of Shares Capital Stock Paid in Capital
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 4,671,915,885 4,671.92 11,670.02
---------------------------------------------------------------------------------------------------------
Capital increase at no cost to stockholders 02/13/02 93,438,317 93.44 -
Capital increase at no cost to stockholders 04/12/02 95,307,084 95.30 -
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 4,860,661,286 4,860.66 11,670.02
--------------------------------------------- ----------------------------------------------
The capital increases carried out and formalized in 2002 were as follows:
. On February 13, 2002, the notarial deed of formalization and execution
of a capital increase at Telefonica, S.A. was executed. This capital
increase, for a par value of (Euro)93,438,317, was carried out with a
charge to unrestricted reserves through the issuance of an equal number
of new common shares of the Company, of (Euro)1 par value each, which
were assigned to the Company's stockholders free of charge at a ratio of
one new share for every 50 shares held by them.
Following registration of the aforementioned public deed at the
Mercantile Registry, the new shares were admitted to listing on official
markets from February 26, 2002.
. On April 12, 2002, the notarial deed of formalization and execution of a
further capital increase at Telefonica, S.A. was executed. This capital
increase, for a par value of (Euro)95,307,084, was carried out with a
charge to unrestricted reserves through the issuance of an equal number
of new common shares of the Company, of (Euro)1 par value each, which
were assigned to the Company's stockholders free of charge at a ratio of
one new share for every 50 shares held by them.
Following registration of the aforementioned public deed at the
Mercantile Registry, the new shares were admitted to listing on official
markets from April 30, 2002.
As a result of these two capital increases with a charge to unrestricted
reserves, the capital stock of Telefonica, S.A. amounted to
(Euro)4,860,661,286. This figure remained unchanged through December 31,
2002.
-35-
[LOGO]
Variations in capital stock and additional paid-in capital in 2001
The variations in 2001 in the "Capital Stock" and "Additional Paid-in
Capital" captions were as follows:
---------------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------
Date of Number Additional
Share Issue of Shares Capital Stock Paid-in Capital
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 4,340,710,735 4,340.71 10,987.99
---------------------------------------------------------------------------------------------------------
Capital increase at no cost to stockholders 01/25/01 86,814,214 86.82 -
TIES program 02/14/01 1,123,072 1.13 4.49
TIES program 02/20/01 31,504,244 31.51 126.02
Capital increase at no cost to stockholders 04/03/01 89,203,045 89.20 -
Acquisition of wireless business in Mexico
from Motorola 06/19/01 122,560,575 122.55 551.52
---------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 4,671,915,885 4,671.92 11,670.02
--------------------------------------------- ------------------------------------------------
The capital increases carried out and formalized in 2001 were as follows:
. In January 2001 the first of the two capital increases of Telefonica,
S.A. approved by the Stockholders' Meeting on April 7, 2000, and which
the Board of Directors agreed to implement on December 20, 2000, was
carried out with a charge to unrestricted reserves. Under the capital
increase, 86,814,214 common shares of the Company of (Euro)1 par value
each were issued, thereby increasing the capital stock by
(Euro)86,814,214. The new shares issued were assigned to the
stockholders free of charge at a ratio of 1 new share for every 50
shares already held by them.
The capital increase was executed in a public deed and registered at the
Mercantile Registry on January 25, 2001, and the new shares were
admitted to listing on the official markets from February 2, 2001.
. A first capital increase at Telefonica, S.A., for a par value of
(Euro)1,123,072, through the issuance of the same number of new common
shares of the Company, of the same class and series and carrying the
same rights as the outstanding shares, and with additional paid-in
capital of (Euro)4 per share, was executed in a public deed on February
14, 2001. The new shares were fully subscribed and paid, through a
monetary contribution, by the employees of several Telefonica Group
companies who decided to participate in the stock option plan known as
the TIES Program aimed at Group employees (see Note 20).
Following registration of the aforementioned capital increase deed at
the Mercantile Registry, the new shares were admitted to listing on
official markets from February 16, 2001.
. On February 20, 2001, the notarial deed of formalization and execution
of a second capital increase at Telefonica, S.A. was executed. This
capital increase, for a par value of (Euro)31,504,244, was carried out
through the issuance of an equal number of common shares of the same
class and series and carrying the same rights as the outstanding shares
of the Company and with additional paid-in capital of (Euro)4 per share.
The new shares were fully subscribed and paid, through a monetary
contribution, by Banco Bilbao Vizcaya Argentaria, S.A. (50%) and Caja de
Ahorros y Pensiones de Barcelona "La Caixa" (50%) as the agent banks of
the aforementioned TIES program (see Note 20).
-36-
[LOGO]
Following registration at the Mercantile Registry of the public deed for
this second capital increase covering the TIES Program, the new shares
thus issued were admitted to listing on official markets from March 1,
2001.
. In March 2001 the second of the capital increases at Telefonica, S.A.
approved by the Stockholders' Meeting on April 7, 2000, and which the
Board of Directors agreed to implement on January 24, 2001, was carried
out with a charge to unrestricted reserves. Under the capital increase,
89,203,045 common shares of the Company of (Euro)1 par value each were
issued, thereby increasing the capital stock by (Euro)89,203,045. The
new shares issued were assigned to the stockholders free of charge at a
ratio of 1 new share for every 50 shares already held by them.
The capital increase was executed in a public deed on March 30, 2001,
and registered at the Mercantile Registry on April 3, 2001, and the new
shares were admitted to listing on the official markets from April 9,
2001.
. On June 18, 2001, the notarial deed of formalization and execution of
the capital increase at Telefonica, S.A. approved by the Company's
Stockholders' Meeting on June 15, 2001, was executed. Capital was
increased through the issuance of 122,560,575 common shares of the
Company of (Euro)1 par value each, of the same series and carrying the
same rights as the outstanding shares of the Company and with additional
paid-in capital of (Euro)4.50 per share; these shares were subscribed
and their par value and additional paid-in capital were paid in full
through a nonmonetary contribution to Telefonica, S.A. of various
Mexican companies owned by the Motorola Group, which entailed the direct
or indirect acquisition by Telefonica, S.A. of all the shares of
Telefonica Celular del Norte, S.A. de C.V., Celular de Telefonia, S.A.
de C.V. and Baja Celular Mejicana, S.A. de C.V., and of holdings of 90%
in Movitel del Noroeste, S.A. de C.V., Moviservicios, S.A. de C.V. and
Movicelular, S.A. de C.V. (see Exhibit II).
The number of issued shares subscribed and paid by the persons or
entities that transferred the aforementioned Mexican cellular companies
was determined by applying the following variables defined by
Telefonica, S.A.'s Stockholders' Meeting and Board of Directors' Meeting
on June 15, 2001.
- Value of the contributed assets for the purpose of their exchange for
shares of Telefonica: (Euro)2,173,742,973.96. This amount is the
result of applying the U.S. dollar/euro exchange rate of US$
0.8492/(Euro)1 prevailing on June 14, 2001, to the amount of US$
1,857,300,000 (initial valuation), less US$ 14,123,000 (debt
adjustment), plus US$ 2,765,533.49 (interest accrued through the
exchange transaction date).
- Value of the Telefonica shares to be exchanged: (Euro)17.6355 each,
i.e. an amount equal to the average market price of the Company's
shares in the 20 trading sessions prior to the date on which the
Stockholders' Meeting which approved the capital increase was held
(June 15, 2001).
- Cash disbursement: (Euro)12,325,950.35, equal to 10% of the result of
dividing the value of the assets by the value of each Telefonica
share.
The aforementioned public deed of capital increase stated that, solely
for the purpose of evidencing the full payment of the capital increase
and the additional paid-in capital, pursuant to Article 133.1 of the
Mercantile Registry Regulations, regardless of the criteria used to
determine the exchange ratio, a total value of
-37-
[LOGO]
(Euro)674,083,162.50 was attributed to the nonmonetary contribution,
which is lower than that established by the independent appraiser
appointed by the Madrid Mercantile Registry, and is also lower than that
used as a reference for setting the exchange ratio.
This capital increase was registered at the Madrid Mercantile Registry
on June 19, 2001, and the new shares issued were admitted to listing on
official markets from June 25, 2001.
b) Legal reserve
Under the revised Corporations Law, 10% of income for each year must be
transferred to the legal reserve until the balance of this reserve reaches
at least 20% of capital stock. The legal reserve can be used to increase
capital provided that the remaining reserve balance does not fall below 10%
of the increased capital stock amount. Otherwise, until the legal reserve
exceeds 20% of capital stock, it can only be used to offset losses,
provided that sufficient other reserves are not available for this purpose.
c) Revaluation reserves
The balance of the "Revaluation Reserves" caption arose as a result of
revaluations made from 1946 to 1987 and of the revaluation made pursuant to
Royal Decree-Law 7/1996.
The detail as of December 31, 2002 and 2001, of the balances of the
revaluation reserves, which amounted to (Euro)2,870.90 million and
(Euro)3,059.64 million, respectively, and of the variations therein in 2002
and 2001, is as follows:
------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------
Revaluations made from 1946 to 1987 4,478.76
Revaluation made pursuant to Royal Decree-Law 7/1996 1,357.40
Amounts used:
Capital increases from 1977 to 1986 (447.68)
Transfer to provisions in 1982 (113.16)
Single tax on revaluation, Royal Decree-Law 7/1996 (40.72)
Other variations from 1981 to 1986 (15.45)
Amount used in 1998 (1,795.07)
1999 capital increase (188.42)
------------------------------------------------------------------------
Balance at 12/31/00 3,235.66
------------------------------------------------------------------------
Capital increase on January 25, 2001 (86.82)
Capital increase on April 3, 2001 (89.20)
------------------------------------------------------------------------
Balance at 12/31/01 3,059.64
------------------------------------------------------------------------
Capital increase on February 13, 2002 (93.44)
Capital increase on April 12, 2002 (95.30)
Balance at 12/31/02 2,870.90
------------------------------------------------------------------------
The balance of the "Revaluation Reserve Royal Decree-Law 7/1996" account
can be used, free of tax, to offset recorded losses which might arise in
the future, and to increase capital stock. From January 1, 2007 (ten years
from the date of the balance sheet reflecting the revaluations), the
balance of this account can be taken to unrestricted reserves, provided
that the monetary surplus has been realized. The surplus will be deemed to
have been realized in respect of the portion on which depreciation has been
taken for accounting purposes or when the revalued assets have been
transferred or retired from the accounting records.
-38-
[LOGO]
d) Consolidation reserves
The detail of the consolidation reserves as of December 31, 2002, and of
the variations therein in 2002 is as follows:
--------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------
Balance at Balance at
12/31/01 Increase Decrease 12/31/02
--------------------------------------------------------------------------------------------------------
Fully consolidated companies 3,773.35 3,217.16 (2,587.86) 4,402.65
Companies accounted for by the equity method (440.48) 69.26 (161.29) (532.51)
--------------------------------------------------------------------------------------------------------
Total 3,332.87 3,286.42 (2,749.15) 3,870.14
--------------------------------------------------------------------------------------------------------
The detail of the consolidation reserve as of December 31, 2001, and of the
variations therein in 2001 is as follows:
-------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------
Balance at Balance at
12/31/00 Increase Decrease 12/31/01
-------------------------------------------------------------------------------------------------------
Fully consolidated companies 1,045.78 4,727.86 (2,000.29) 3,773.35
Companies accounted for by the equity method 154.47 313.75 (908.70) (440.48)
-------------------------------------------------------------------------------------------------------
Total 1,200.25 5,041.61 (2,908.99) 3,332.87
-------------------------------------------------------------------------------------------------------
The variations shown in the foregoing tables relate mainly to prior years'
retained earnings (increases) and to dividends paid and losses incurred by
the companies (decreases).
The detail of the contribution made by the Group companies to the
consolidated reserves is shown in Exhibit I.
e) Translation differences in consolidation
The translation differences relate mainly to the effect of exchange rate
fluctuations on the net assets of the companies located abroad after
elimination of intercompany transactions and balances (see Note 4-b). This
caption also includes the exchange differences resulting from
specific-purpose foreign-currency financing transactions relating to
investments in investees and which hedge the exchange risk on these
investments.
The detail of the contribution made by the Group companies to the
translation differences in consolidation is shown in Exhibit I.
-39-
[LOGO]
(12) MINORITY INTERESTS
This caption relates to the share of minority stockholders in the equity
and income/loss for the year of the fully consolidated Group companies. The
variations in 2002 and 2001 in the balances of this caption in the
consolidated balance sheets were as follows:
---------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------
Balance at 12/31/00 9,329.80
---------------------------------------------------------------------
Capital contribution and inclusion of companies 215.55
Loss for the year (271.01)
Variation in translation differences (215.49)
Other variations (1,130.20)
Capital reduction and exclusion of companies (373.23)
Dividend paid (121.87)
---------------------------------------------------------------------
Balance at 12/31/01 7,433.55
---------------------------------------------------------------------
Capital contribution and inclusion of companies 3,325.65
Preferred share issue 2,000.00
Loss for the year (5,795.61)
Variation in translation differences (990.51)
Other variations (142.70)
Capital reduction and exclusion of companies (108.33)
Dividend paid (109.12)
---------------------------------------------------------------------
Balance at 12/31/02 5,612.93
---------------------------------------------------------------------
The detail of the balances of this caption and of the variations relating
to the main Group companies is shown in Exhibit IV.
The capital contributions and inclusions of companies in 2002 relate mainly
to the conversion of debt to equity at Group 3G UMTS Holding GmbH, which
gave rise to an increase of (Euro)3,051.36 million in the liability
relating to minority interests (see Note 19).
The balance of the "Preferred Share Issue" account relates to the share
issue launched by the Telefonica subsidiary Telefonica Finance USA, LLC for
(Euro)2,000 million in December 2002.
The features of this share issue were as follows:
- Dividend: variable and non-cumulative:
- Through December 30, 2012, the dividend will be 3-month Euribor
with a maximum of 7% APR and a minimum of 4.25% APR; and
- From that date on, 3-month Euribor plus a spread of 4% APR.
- Dividend payment:
- dividends will be paid quarterly in arrears.
- payment of dividends is conditional upon the Telefonica Group
having reported consolidated net income.
- Term: perpetual, with the option for the issuer of total or partial
early redemption, from December 30, 2012, and at face value, of the
shares issued.
- Remuneration: preferred, non-cumulative dividends, conditional upon
the obtainment of consolidated income or upon the payment of dividends
on common shares.
- Guarantee: irrevocable joint and several Telefonica, S.A. guarantee.
- Voting rights: none
-40-
[LOGO]
The balance of the "Loss for the Year" account in 2002 includes most
notably the losses amounting to (Euro)874.38 million and (Euro)4,580.32
million incurred in the year by the Terra Lycos Group and the Telefonica
Moviles Group, respectively, and attributed to the minority stockholders of
these groups (see Note 1).
(13) DEFERRED REVENUES
The detail of the balances of this caption in the accompanying consolidated
balance sheets and of the variations therein in 2002 and 2001 is as
follows:
----------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------------
Accrual of
Capital Exchange Investment
Subsidies Gains Tax Credit (Note 18) Other Total
----------------------------------------------------------------------------------------------------------
Balance at 12/31/00 368.25 4.23 160.83 908.70 1,442.01
----------------------------------------------------------------------------------------------------------
Additions 12.88 60.85 0.05 231.15 304.93
Transfers and other variations 0.01 (0.51) 4.67 (3.19) 0.98
Allocation to income (80.03) (63.02) (63.63) (395.49) (602.17)
----------------------------------------------------------------------------------------------------------
Balance at 12/31/01 301.11 1.55 101.92 741.17 1,145.75
----------------------------------------------------------------------------------------------------------
Additions 0.96 36.51 91.88 99.73 229.08
Transfers and other variations (0.21) 4.71 (0.65) (201.50) (197.65)
Allocation to income (63.79) (39.31) (36.09) (157.53) (296.72)
----------------------------------------------------------------------------------------------------------
Balance at 12/31/02 238.07 3.46 157.06 481.87 880.46
----------------------------------------------------------------------------------------------------------
The "Other" caption includes (Euro)143.80 million and (Euro)225.00 million
as of December 31, 2002 and 2001, respectively, relating to the revenue to
be collected in the five years following 1999 for the future deduction at
Telesp of amortization of goodwill, which is tax deductible at that
company.
The "Other" caption in the foregoing table also includes (Euro)186.41
million and (Euro)318.69 million as of December 31, 2002 and 2001,
respectively, as a result of the negotiations between certain Brazilian
subsidiaries and their employees, which disclosed the possibility of
allocating to income over the remaining years of working life of the
employees covered by the new pension plan the amounts provisioned in
previous years under the terms and conditions then prevailing. The
revaluation of the terms existing at 2002 and 2001 year-end in connection
with these employees led to the allocation in 2001 of (Euro)172.16 million
to the "Extraordinary Revenues" caption in the consolidated statement of
operations (see Note 20).
This caption also includes (Euro)101.45 million as of December 31, 2002,
relating to the amounts collected by Telefonica de Espana and Emergia from
other operators for the use of underwater cable systems.
Capital subsidies
The detail of the capital subsidies not yet allocated to income is as
follows:
-41-
[LOGO]
----------------------------
Millions of Euros
---------------------------------------------------------------------------------
Grantor 12/31/02 12/31/01
---------------------------------------------------------------------------------
Official agencies, autonomous community governments,
provincial and municipal governments and other 49.58 70.42
EU-
STAR Programme 4.19 10.39
ERDF Programme 6.57 10.56
IRTA Programme 0.70 2.34
ERDF 94/95 Operating Programme 169.99 199.96
Other 7.04 7.44
---------------------------------------------------------------------------------
Total 238.07 301.11
---------------------------------------------------------------------------------
(14) PROVISIONS FOR CONTINGENCIES AND
EXPENSES
The detail of the balances of the provisions for contingencies and
expenses and of the variations therein in 2002 and 2001 is as follows:
---------------------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------------------------------
Balance at Amounts Incl. of Balance at Amounts Incl. of
12/31/00 Provisions Used Companies Other 12/31/01 Provisions Used Companies
---------------------------------------------------------------------------------------------------------------------------------
Provision for supplementary
pension payments to retired
employees (Note 9) 382.05 23.52 (108.03) - - 297.54 15.89 (0.43) -
Group insurance 101.55 10.48 (0.95) - - 111.08 12.04 (1.40) -
Provision for preretirement,
social security expenses and
voluntary severance 4,000.21 220.91 (731.80) - - 3,489.32 222.41 (428.76) -
Technical reserves (Note 4-m) 892.12 61.55 - - - 953.67 17.24 (258.34) -
Provision for pension funds of
other companies 235.96 19.89 (4.03) 0.05 (70.00) 181.87 22.54 (28.33) -
UMTS provision - - - - - - 2,371.46 (72.49) -
Other provisions 1,275.91 174.63 (589.90) (0.01) (31.41) 829.22 348.93 (73.78) 60.46
---------------------------------------------------------------------------------------------------------------------------------
Total 6,887.80 510.98 (1,434.71) 0.04 (101.41) 5,862.70 3,010.51 (863.53) 60.46
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------
------------------------
Transfer Balance at
and Other 12/31/02
---------------------------------------------------------------
Provision for supplementary
pension payments to retired
employees (Note 9) (313.00) -
Group insurance (112.68) 9.04
Provision for preretirement,
social security expenses and
voluntary severance (2,148.95) 1,134.02
Technical reserves (Note 4-m) 2,574.68 3,287.25
Provision for pension funds of
other companies (53.98) 122.10
UMTS provision - 2,298.97
Other provisions (1.30) 1,163.53
---------------------------------------------------------------
Total (55.23) 8,014.91
---------------------------------------------------------------
The main provisions and commitments to employees recorded under this
caption in the accompanying consolidated balance sheets are as
follows:
Supplementary pension payments to employees who retired before June
30, 1992
On July 8, 1992, Telefonica reached an agreement with its employees
whereby it recognized supplementary pension payments for employees who
had retired as of June 30, 1992, equal to the difference between the
pension payable by the social security system and that which would be
paid to them by ITP. Once the aforementioned supplementary pension
payments have been quantified, they become fixed, lifelong and
non-updateable. 60% of the payments are transferable to the surviving
spouse recognized as such as of June 30, 1992, and to underage
children.
In accordance with an actuarial study conducted by Telefonica,
applying GRM-F80 tables and an assumed interest rate of 8%, as of June
30, 1992, the discounted present value of the commitments amounted to
(Euro)793.49 million, and this amount was recorded under the
"Provisions for Contingencies and Expenses" caption. Through that
date, the Company had recorded provisions totaling (Euro)86.28 million
in this connection. The resulting underprovision ((Euro)707.21
million) was recorded under the "Deferred Charges" caption and has
been allocated to income since that date by the straight-line method
over 15 years, the estimated average remaining life of the retired
employees (1992-2007). Subsequently, in 1996 and 1997, the assumed
interest rate was reduced to 6.3% and the necessary provision
-42-
[LOGO]
was recalculated accordingly. As of December 31, 2002, the amount yet to be
charged to income was (Euro)277.14 million ((Euro)338.73 million in 2001)
(see Note 9).
In accordance with Private Insurance Law 30/1995, on November 1, 1997,
these commitments were externalized through an insurance policy (which was
adapted before November 16, 2002, pursuant to Private Insurance Law
30/1995, Law 50/1998 on Tax, Administrative, Labor and Social Security
measures and Royal Decree 1588/1999 enacting the regulations on the
instrumentation of employers' pension commitments to employees and
beneficiaries) taken out with the Group company Seguros de Vida y Pensiones
Antares, S.A.
Group life insurance (internal allowance for survivorship benefits)
Serving employees who did not join the pension plan continue to be entitled
to receive survivorship benefits at the age of 65. Telefonica de Espana has
recorded a provision to cover these commitments, based on the actuarial
calculations made under the following assumptions: GRM/F-95 mortality table
and an assumed interest rate of 4%. Most of these commitments were
externalized in 2002. As of December 31, 2002 and 2001, this provision
amounted to (Euro)9.04 million and (Euro)111.08 million, respectively.
Provisions for preretirements, early retirements, social security expenses
and voluntary severances of Telefonica de Espana employees
In order to adapt to the competitive environment, in prior years Telefonica
implemented preretirement, early retirement and technology renewal plans in
order to adapt its cost structure to the new environment and took certain
strategic decisions relating to its sizing and organization policy.
Against this backdrop, as a result of the agreements reached individually
with the Telefonica de Espana employees, a total of 11,273 and 6,062
employees left the company in 1999 and 2000, respectively.
In 2001 provisions of (Euro)220.91 million for adjusting to present value
were recorded, and payments totaling (Euro)731.80 million were made.
Accordingly, the provision for preretirements and early retirements
recorded as of December 31, 2001, covered all the obligations assumed in
this connection.
In November 2002 the Company's preretirement and early retirement
commitments to employees under labor force reduction plans were
externalized through a policy taken out with Antares. This caption
continues to include the liabilities relating to severances of Telefonica
de Espana employees and to the Special Social Security Agreement, the main
features of which are explained in Note 4-l.
-43-
[LOGO]
Technical reserves
This caption includes the reserves recorded by the Group's insurance
companies. As indicated in various sections of these notes to consolidated
financial statements, in November 2002, pursuant to prevailing legislation,
various of Telefonica de Espana's commitments to its employees were
externalized to the Group company Seguros de Vida y Pensiones Antares, S.A.
The "Transfers" column in the "Provisions for Contingencies and Expenses"
table shown above includes the effect of transferring these Telefonica de
Espana commitments and obligations to the insurance company's accounts. As
of December 31, 2002, the main items and amounts included under the
"Technical Reserves" caption were as follows:
-------------------------------------------------------------------------
Millions of Euros
-------------------------------------------------------------------------
Supplementary pension payments for retired personnel 579.05
Group life insurance 125.62
Preretirements and early retirements 2,407.67
Other technical reserves 174.91
-------------------------------------------------------------------------
Total 3,287.25
-------------------------------------------------------------------------
The companies that still have these commitments calculated the amounts to
be provisioned at 2002 year-end using actuarial assumptions pursuant to
current legislation, including most notably the ERM/F-2000 mortality tables
and a floating interest rate of between 2.80% and 4% for the most
significant figures, based on the related hire dates.
Provision for the pension funds of other companies
The subsidiary Telecomunicacoes de Sao Paulo, S.A. (Telesp) has had various
pension plan and medical insurance commitments to its employees since 2000,
the year in which these commitments were negotiated and converted into
defined-contribution plans. Substantially all of this company's serving
employees availed themselves of these plans. As of December 31, 2002, the
provision recorded in this connection amounted to (Euro)74.12 million.
As of December 31, 2002, this caption also included an amount of
(Euro)36.83 million relating to Telefonica de Argentina, S.A.'s commitments
to its employees.
The variations in the "Other" column in 2002 and 2001 relate mainly to
translation differences.
UMTS provisions
As indicated in Note 1 in relation to the value adjustments performed on
UMTS licenses, this caption includes most notably a provision of
(Euro)2,371.46 million. As of December 31, 2002, the balance of this
caption, net of the amounts used in the year, was (Euro)2,298.97 million.
Other provisions
The balance of this caption as of December 31, 2002, includes various
provisions recorded by the Telefonica Group companies, including most
notably (Euro)120.01 million from the Telefonica Internacional subgroup
relating to provisions for severance costs for the employees' years of
service at the respective companies, in accordance with the legislation
applicable in each country or with the contractual agreements entered into
((Euro)272.00 million
-44-
[LOGO]
as of December 31, 2001), and (Euro)158.40 million from Telefonica de
Espana relating to the accrued amount of long-service bonuses paid to
personnel after 25 years of service ((Euro)141.54 million in 2001).
Also, certain Group companies, mainly those forming part of the Endemol
Group, when investing in other companies make payment of part of the agreed
price conditional upon compliance by the acquired company with some related
future goal, in most cases increased revenues, the obtainment of income,
etc. Since a part of the acquisition price is therefore not fixed, each
year the necessary estimates are made to evaluate the possible liabilities
inherent to these transactions. As of December 31, 2002, the amounts
provisioned in this connection, (Euro)202.48 million and (Euro)38.59
million, were recorded under the long-term "Provisions for Contingencies
and Expenses" and "Short-Term Provisions for Contingencies and Expenses"
captions, respectively.
Lastly, the provisions and the amounts used recorded in 2002 and 2001 under
the "Other Provisions" caption include, inter alia, the provisions recorded
(or used) by the Group companies to cover the risks inherent to the
realization of certain assets, the contingencies deriving from their
respective business activities and the risks arising from commitments
acquired in other transactions.
(15) DEBENTURES, BONDS AND OTHER
MARKETABLE DEBT SECURITIES
The variations in the years ended December 31, 2002 and 2001, in the
balances relating to debentures, bonds and other marketable debt securities
were as follows:
------------------------------------------------------------------------------------------
Issues
--------------------------------------------------
Non- Promissory
Non- convertible Notes and
Convertible Foreign Commercial
Euro Currency Paper Total
------------------------------------------------------------------------------------------
Balance at 12/31/00 4,836.02 10,104.97 451.53 15,392.52
------------------------------------------------------------------------------------------
New issues 2,189.52 1,600.51 3,754.31 7,544.34
Redemptions, conversions and exchanges (1,131.86) (1,995.04) (2,486.20) (5,613.10)
Inclusion of companies - 16.25 - 16.25
Adjustments and other variations 119.21 (414.60) (39.37) (334.76)
------------------------------------------------------------------------------------------
Balance at 12/31/01 6,012.89 9,312.09 1,680.27 17,005.25
------------------------------------------------------------------------------------------
New issues 230.00 53.98 3,777.64 4,061.62
Redemptions, conversions and exchanges (152.24) (807.54) (4,014.59) (4,974.37)
Inclusion of companies - - 637.81 637.81
Adjustments and other variations 70.85 (1,312.30) (182.96) (1,424.41)
------------------------------------------------------------------------------------------
Balance at 12/31/02 6,161.50 7,246.23 1,898.17 15,305.90
------------------------------------------------------------------------------------------
Maturity:
Long term 5,911.48 6,440.02 617.72 12,969.22
Short term 250.00 806.20 1,280.48 2,336.68
Unmatured accrued interest 288.95 - - 288.95
------------------------------------------------------------------------------------------
The main issues in 2002 were as follows:
--------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
--------------------------------------------------------------------------------------------------------
Note 04/11/02 100 Euros 2003 4.08% (discount)
Note 04/19/02 50 Euros 2005 (a)
FRN 06/18/02 80 Euros 2004 Floating Eonia + 0.30%
--------------------------------------------------------------------------------------------------------
(a) Structured issue with a final interest rate of 3-month Euribor + 0.40%.
-45-
[LOGO]
The main issues in 2001 were as follows:
------------------------------------------------------------------------------------------------------
Face Value
Date (Millions) Currency Maturity Interest Rate
------------------------------------------------------------------------------------------------------
Notes 07/09/01 30,000 Yen 2003 Floating Libor (0.22%)
Notes 07/12/01 22,000 Yen 2002 0.15%
Notes 09/12/01 50,000 Yen 2002 0.04%
Notes 10/30/01 2,000 Euros Tranches (a) -
Notes 08/20/01 150 Euros 2003 Floating Eonia (0.26%)
Notes 07/25/01 39.5 Euros 2004 4.91%
------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
(a) Amount Maturity Interest Rate
----------------------------------------------------------------------------------------------
Tranche 1 (Euro)1,000 million 2004 Floating 3-month Euribor + (0.70%)
Tranche 2 (Euro)1,000 million 2006 5.13%
----------------------------------------------------------------------------------------------
The debentures and bonds are shown in greater detail in Exhibit V.
Corporate promissory notes
The features of the main corporate promissory note issue program as of
December 31, 2002, are as follows:
------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------
Limit Euros
------------------------
Outstanding Addressed to: Face Value Method of Sale
------------------------------------------------------------------------------------------------------
1,000 Monthly auctions
2,000 Participating entities -----------------------------------------------------
1,000,000 Specific transactions
------------------------------------------------------------------------------------------------------
Commercial paper
The features of Telefonica Europe, BV's commercial paper issue program are
as follows:
------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------
Limit Addressed to: Face Value Method of Sale
Outstanding
------------------------------------------------------------------------------------------------------
US$ 500,000 Specific transactions
-----------------------------------------------------
(Euro)500,000 Specific transactions
2,000 Investors -----------------------------------------------------
(Yen)100,000,000 Specific transactions
-----------------------------------------------------
(Pound)100,000 Specific transactions
------------------------------------------------------------------------------------------------------
Also, as of December 31, 2002, Telefonica del Peru, S.A.A. had a commercial
paper issue program with a maximum limit outstanding of US$ 180 million.
The commercial paper relating to this issue was sold in specific
transactions.
(16) PAYABLE TO CREDIT INSTITUTIONS
The detail of the accounts payable to credit institutions is as follows:
----------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------------
Balance at 12/31/02 Balance at 12/31/01
-----------------------------------------------------------------------------
Short Long Short Long
Term Term Total Term Term Total
----------------------------------------------------------------------------------------------------------------
Corporate promissory notes 7.09 106.56 113.65 7.23 113.65 120.88
Loans and credits 2,198.44 3,569.39 5,767.83 4,254.85 3,307.05 7,561.90
Foreign currency loans 1,867.14 3,236.99 5,104.13 1,901.46 4,658.38 6,559.84
----------------------------------------------------------------------------------------------------------------
Total 4,072.67 6,912.94 10,985.61 6,163.54 8,079.08 14,242.62
----------------------------------------------------------------------------------------------------------------
-46-
(LOGO)
As of December 31, 2002, the average interest rates on the corporate promissory
notes, loans and credits and foreign currency loans were 13.52%, 3.46% and
2.12%, respectively. These percentages do not include the effect of the hedging
transactions performed by the Group.
The most significant financial transactions in 2002 and 2001 were as follows:
--------------------------------------------------------------------------------
Amount
(Millions) Currency Date Maturity
--------------------------------------------------------------------------------
BBK loan 100.00 Euro 03/26/02 03/26/04
Drawdown of syndicated loan
(Tranche B) 1,500.00 Euro 08/27/02 08/27/03
Citibank loan 128.00 U.S. Dollar 03/20/01 12/21/01
BBVA loan 115.00 U.S. Dollar 12/21/01 07/02/06
BBVA loan 105.00 U.S. Dollar 03/20/01 11/21/02
--------------------------------------------------------------------------------
The main repayments made in 2002 and 2001 were as follows:
--------------------------------------------------------------------
Amount
(Millions) Currency Date
--------------------------------------------------------------------
Drawdown of syndicated loan
(Tranche A) 1,915.43 Euro 08/27/02
Qualcomm loan 433.96 U.S. Dollar 11/10/02
BBVA loan 103.44 U.S. Dollar 11/21/02
Citibank loan 127.40 U.S. Dollar 12/21/01
Citibank loan 100.00 U.S. Dollar 12/28/01
--------------------------------------------------------------------
The claimability of certain financing arranged by various Telefonica Group
companies may be subject to compliance with certain financial covenants. All the
covenants were being complied with at the date of preparation of these
consolidated financial statements.
The scheduled maturities for repayment of the debt as of December 31, 2002, were
as follows:
------------------------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------
2003 2004 2005 2006 2007 Subsequent Total
Years
------------------------------------------------------------------------------------------------------------
Corporate promissory notes 7.09 6.92 6.74 6.57 6.37 79.96 113.65
Loans and credits 2,198.44 1,159.41 917.05 1,029.90 195.22 267.81 5,767.83
Foreign currency loans 1,867.14 1,339.18 625.64 324.68 189.48 758.01 5,104.13
------------------------------------------------------------------------------------------------------------
Total 4,072.67 2,505.51 1,549.43 1,361.15 391.07 1,105.78 10,985.61
------------------------------------------------------------------------------------------------------------
As of December 31, 2002, the Telefonica Group had financing sources of various
types exceeding (Euro)8,000 million and the possibility of negotiating the
maturity dates of various of the existing financing commitments and,
accordingly, any need of the Group arising from its short-term commitments is
adequately covered.
-47-
(LOGO)
Foreign currency loans
The detail of the foreign-currency loans as of December 31, 2002 and 2001, is as
follows:
----------------------------------------------------------------------------------------------
Outstanding Balance (in Millions)
----------------------------------------------------
Foreign Currency Euros
----------------------------------------------------
Currency 12/31/02 12/31/01 12/31/02 12/31/01
----------------------------------------------------------------------------------------------
U.S. dollars 4,657 4,860 4,441.36 5,454.30
Brazilian reais 512 - 138.15 -
Swiss francs 11 21 7.35 14.50
Argentine pesos 54 48 15.34 31.67
Bolivares 10,684 4,227 7.34 6.25
Yen 40,644 18,629 326.75 158.99
UF 206 129,144 27.35 221.36
New soles 315 583 85.45 189.75
Colones - 3,077 - 1.52
Swaps - - - 366.72
Pounds sterling 25 19 38.34 31.77
Mexican pesos - 571 - 70.14
Other currencies - - 16.70 12.87
----------------------------------------------------------------------------------------------
Total for the Group 5,104.13 6,559.84
------------------------------------------ -------------------------
(17) DERIVATIVES
In 2002 the Group continued to use derivatives both to limit interest rate
and exchange risks on unhedged positions and to adapt its debt structure to
market conditions.
As of December 31, 2002, the total outstanding balance of hedging
transactions arranged to eliminate balance sheet exposure to interest rate
and exchange risks was (Euro)36,909.02 million ((Euro)39,430.49 million as
of December 31, 2001), of which (Euro)18,431.37 million related to interest
rate risk and (Euro)18,100.61 million to exchange risk ((Euro)18,444.25
million and (Euro)20,537.39 million as of December 31, 2001, respectively)
(see Exhibit VI).
Most of the derivatives transactions are assigned directly to individual
asset or liability positions on the consolidated balance sheet. Also, there
is a transaction portfolio hedging other financial risks of the Group. The
net financial expense incurred in 2002 in relation to these transactions
amounted to (Euro)141.50 million.
(18) TAX MATTERS
Pursuant to a Ministerial Order dated December 27, 1989, since 1990
Telefonica, S.A. has filed consolidated tax returns with certain Group
companies. 67 companies formed the consolidated tax group in 2002.
Deferred tax assets and liabilities
The detail as of December 31, 2002 and 2001, of the Telefonica Group's
deferred tax assets and liabilities, and of the variations therein in 2002
and 2001, is as follows:
-48-
(LOGO)
----------------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------------------------------------------
Deferred and Other Tax
Assets Deferred Tax Liabilities
--------------------------------------------------------------
Short Long Short Long Intercompany
Term Term Term Term Long Term
----------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 152.68 2,666.11 3.36 1,334.57 54.85
--------------------------------------------------------------
Reversal (100.32) (423.83) (4.70) (622.49) (2.75)
Arising in the year 224.85 1,582.81 241.51 525.65 6.37
Net international variations - (98.43) - - -
Inclusion/Exclusion of companies and other (1.94) 31.12 - 244.72 0.16
--------------------------------------------------------------
Balance at December 31, 2001 275.27 3,757.78 240.17 1,482.45 58.63
Reversal (213.86) (995.88) (189.00) (150.80) (1.67)
Arising in the year 238.43 6,576.84 90.87 367.55 8.05
Net international variations 15.03 (120.89) - (186.48) -
Inclusion/Exclusion of companies and other (4.77) 118.58 (10.48) 71.35 (19.62)
----------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 310.10 9,336.43 131.56 1,584.07 45.39
----------------------------------------------------------------------------------------------------------
The balance of the "Long-Term Investments - Taxes Receivable" caption,
which amounts to (Euro)9,679.42 million (see Note 8), includes, in addition
to the deferred and other tax assets shown in the foregoing table, an
amount of (Euro)342.99 million relating to tax credits recorded as
indicated below.
The deferred intercompany taxes relate to the differences arising from the
elimination of unrealized gains on intercompany transactions, plus the
cumulative differences between the net tax payable reported in the
Telefonica Group's consolidated corporate income tax return and the sum of
the net tax charges per the individual corporate income tax returns of the
Telefonica Group companies.
In 2001 the income that qualified for tax deferral due to reinvestment in
prior years was reversed, since the Group availed itself of a new tax
credit for reinvestment of extraordinary income pursuant to Transitional
Provision Three of Law 24/2001 on Tax, Administrative, Labor and Social
Security Measures, which increased the Group's taxable income by
(Euro)1,359.72 million.
Taxes payable and taxes receivable
The detail of the "Other Nontrade Payables - Taxes Payable" and "Accounts
Receivable - Taxes Receivable" captions as of December 31, 2002 and 2001,
is as follows:
---------------------------------------------------------------------------------------------
Millions of Euros
--------------------------
Balance at Balance at
12/31/02 12/31/01
---------------------------------------------------------------------------------------------
Taxes payable:
Personal income tax withholdings 106.77 96.00
VAT and Canary Islands general indirect tax 241.73 160.26
Corporate income tax 38.98 113.97
Accrued social security taxes 177.28 155.38
Deferred tax liabilities 131.56 240.17
Foreign taxes 331.71 825.34
Other 20.49 33.03
--------------------------------------------------------------------------------------------
Total 1,048.52 1,624.15
---------------------------------------------------------------------------------------------
-49-
[LOGO]
----------------------------------------------------------------------------------------
Millions of Euros
-------------------------
Balance at Balance at
12/31/02 12/31/01
----------------------------------------------------------------------------------------
Taxes receivable:
Withholdings at source from income from movable capital 11.13 3.49
Installment payments on individual income tax returns 6.04 25.23
Foreign withholding tax 296.63 155.75
Corporate income tax refundable 109.50 66.63
Taxes, surcharges and other payments recoverable 31.69 42.28
Deferred tax assets 310.10 275.27
VAT and Canary Islands general indirect tax 52.28 116.16
VAT deductible 107.97 70.66
Foreign taxes 130.03 1,322.01
----------------------------------------------------------------------------------------
Total 1,055.37 2,077.48
----------------------------------------------------------------------------------------
Reconciliation of the income/loss per books to the tax base for
corporate income tax purposes and determination of the tax
expense/revenue
The reconciliation of the income/loss per books to the tax base for
corporate income tax purposes as of December 31, 2002 and 2001, and the
determination of the corporate income tax expense/revenue and the net
tax payable/refundable for the two years are as follows:
---------------------------------------------------------------------------------------------
Millions of Euros
---------------------------
2002 2001
---------------------------------------------------------------------------------------------
Income (Loss) per books (14,601.06) 2,033.88
Permanent differences (1,880.14) (3,980.06)
Timing differences 2,169.86 2,079.40
---------------------------------------------------------------------------------------------
Tax base (14,311.34) 133.22
---------------------------------------------------------------------------------------------
Gross tax payable (5,008.97) 46.63
Tax credits and tax relief (409.41) (278.79)
Unrecorded tax assets 485.82 -
---------------------------------------------------------------------------------------------
Corporate income tax payable (receivable) (4,932.56) (232.16)
---------------------------------------------------------------------------------------------
Tax effect of timing differences and deferred revenues (705.70) (719.66)
Consolidation adjustments 2,299.66 139.68
Spanish corporate income tax expense (3,338.60) (812.14)
Recognition of deferred tax liabilities in consolidation (1.99) (4.18)
Accrued foreign taxes and other 111.94 1,014.40
---------------------------------------------------------------------------------------------
Total income tax (3,228.65) 198.08
---------------------------------------------------------------------------------------------
The Spanish corporate income tax expense includes a revenue of
(Euro)2,837.16 million relating to tax assets that arose as a result of
the value adjustments made on the UMTS licenses (see Note 1).
The permanent differences arose mainly from the results obtained by the
companies located abroad, the amortization of consolidation goodwill
(see Note 5) and the results attributable to associated companies.
The main timing differences in 2002 arose from the investment valuation
allowances recorded by the individual companies for the amounts yet to
be allocated to income in connection with their equity investments.
Noteworthy in 2001 was the inclusion in the tax
-50-
[LOGO]
base of gains on fixed asset disposals which qualified for reinvestment
deferral in prior years, and the allowance for decline in value of tangible
fixed assets.
The "Consolidation Adjustments" account includes the eliminations made to
adjust the consolidated income tax expense to the transactions reflected in
the consolidated statement of operations. These eliminations relate
basically to the tax effect recognized in the individual financial
statements in connection with the provision to the investment valuation
allowance eliminated in consolidation.
In 2001 the tax Group took tax credits totaling (Euro)371.99 million. In
2002, although no tax credits were taken since the tax Group incurred a tax
loss, an asset of (Euro)342.99 million was recorded pursuant to the
resolution of the Spanish Accounting and Audit Institute (ICAC) dated March
15, 2002 (see Note 4-p). The amount of the tax credits taken by the other
non-tax Group companies in 2002 was not material.
As of December 31, 2002, the Telefonica tax group had (Euro)599.78 million
((Euro)567.95 million in 2001) of unused tax credits, relating mainly to
1999 ((Euro)131.33 million), 2000 ((Euro)144.47 million), 2001
((Euro)246.45 million) and 2002 ((Euro)77.53 million). The aforementioned
amount includes (Euro)342.99 million of tax credits recorded under the
"Long-Term Investments - Taxes Receivable" caption. These tax credits,
which were reflected for accounting purposes as indicated in the preceding
paragraph, relate basically to tax credits for investments in fixed assets
and R&D expenses. Of this amount, (Euro)254.89 million were recorded as a
revenue under the "Corporate Income Tax" caption and the remaining
(Euro)88.10 million are recorded under the "Deferred Revenues" caption (see
Note 13).
The tax losses available for carryforward in Spain at the main Group
companies total (Euro)16,911.80 million, of which (Euro)14,410.74 million
and (Euro)1,212.80 million were incurred in 2002 and 2001, respectively,
and the remainder relates mainly to 2000. These tax losses can be offset
within 15 years. (Euro)14,537.63 million of these tax losses were
capitalized, giving rise to a tax asset of (Euro)5,088.17 million, which
was recorded under the "Long-Term Investments - Taxes Receivable" caption.
Also, Telefonica Moviles, S.A. is assessing the possibility of making a
negative adjustment of (Euro)2,137.24 million in its corporate income tax
settlement arising as a result of the transfer in 2002 of certain holdings
acquired in prior years the market value of which differed from the book
value at which they were recorded (underlying book value) because the
Company availed itself of Article 159 of the Corporations Law. As of the
date of preparation of these consolidated financial statements, no
accounting effects in relation to these holdings had been considered.
As indicated in Note 1 and based on an analysis of its future earnings
expectations, in 2002 the Terra Networks Group, in accordance with the
accounting principle of prudence in valuation, did not record the tax
assets relating to the 2002 losses, and partially wrote off the tax assets
recorded for prior years. The effect on the accompanying consolidated
statement of operations, an expense of (Euro)272.59 million, was recorded
under the "Corporate Income Tax" caption. This amount was calculated taking
into account the reversal of deferred tax liabilities recorded in prior
years that was performed to avoid the duplication of tax assets. Noteworthy
in this connection is the fact that once the effect of the losses
attributed to minority interests is taken into account, this expense does
not have a material effect on the Telefonica Group's consolidated net loss
for 2002.
On September 25, 2002, tax audits commenced at several of the companies
included in tax Group 24/90 of which Telefonica, S.A. is the parent
company. The taxes subject to review are corporate income tax (for the
years from 1998 to 2000) and VAT and tax withholdings
-51-
[LOGO]
and prepayments relating to personal income tax, tax on income from movable
capital, property tax and nonresident income tax (1998 to 2001). No
material liabilities are expected to arise as a result of the reviews
currently being performed by the tax inspection authorities.
The years open for review by the tax inspection authorities for the main
applicable taxes vary from one consolidated company to another, based on
each country's tax legislation, taking into account their respective
statute-of-limitations periods. In Spain, as a result of the tax review
currently in progress, the tax Group has the following years open for
review: the years since 2002 for tax withholdings and prepayments relating
to personal income tax, tax on income from movable capital, property tax,
nonresident income tax and VAT; and the years since 2001 for corporate
income tax.
The variations in the accrual of the investment tax credits are shown in
Note 13.
(19) LONG-TERM DEBT - OTHER PAYABLES AND
CURRENT LIABILITIES - OTHER NONTRADE
PAYABLES
The "Long-Term Debt - Other Payables" caption, which is nonfinancial,
included (Euro)2,983.53 million as of December 31, 2001, relating to
accounts payable by certain Group companies to their other stockholders for
the acquisition of UMTS licenses. These accounts payable and the interest
accrued thereon were capitalized in 2002 (see Note 12).
The detail of the balances of the "Current Liabilities - Other Nontrade
Payables" caption in the consolidated balance sheets as of December 31,
2002 and 2001, is as follows:
---------------------------------------------------------------------------------
Millions of Euros
---------------------------
Balance at Balance at
12/31/02 12/31/01
---------------------------------------------------------------------------------
Accrued expenses payable 101.75 767.08
Group company dividends payable 54.09 68.48
Exchange of telephone service with other operators 78.97 44.31
Guarantees and deposits 159.25 55.57
Compensation payable 322.79 294.57
Other nonfinancial nontrade payables 524.00 752.77
----------------------------------------------------------------------------------
Total 1,240.85 1,982.78
----------------------------------------------------------------------------------
-52-
[LOGO]
(20) REVENUES AND EXPENSES
Sales and services
The detail, by business line, of net sales and services is as follows:
----------------------------------------------------------------------------------------
Millions of Euros
---------------------------
12/31/02 12/31/01
----------------------------------------------------------------------------------------
Wireline telephony business in Spain 10,272.11 10,220.37
Atento business 571.09 643.87
Telefonica Internacional business 6,954.14 10,137.37
Terra Networks business 599.95 689.96
Moviles business 9,449.34 8,729.95
Data business 1,731.41 1,849.69
Admira business 1,076.16 1,403.07
Directorios business 550.46 619.54
Instrumentality companies and other 650.40 826.33
----------------------------------------------------------------------------------------
Group revenues before intercompany sales 31,855.06 35,120.15
----------------------------------------------------------------------------------------
Intercompany sales (3,443.76) (4,067.55)
----------------------------------------------------------------------------------------
Total revenues from Group operations 28,411.30 31,052.60
----------------------------------------------------------------------------------------
Personnel expenses
The detail of the personnel expenses is as follows:
------------------------------------------------------------------------------------
Millions of Euros
-------------------------
12/31/02 12/31/01
------------------------------------------------------------------------------------
Compensation 3,561.57 3,958.37
Provisions to the pension allowance and other
commitments to employees 121.26 103.32
Accrual for the cost of the loyalty-building programs tied
to share market price 16.97 14.29
Employee welfare expenses and other 1,093.97 1,314.28
------------------------------------------------------------------------------------
Total 4,793.77 5,390.26
------------------------------------------------------------------------------------
Inclusion in the general social security system
Since January 1, 1992, Telefonica de Espana and its employees, who were
formerly covered by a company employee welfare system, have been
contributing to the general social security system. As a result of the
inclusion of serving employees in the social security system, Telefonica de
Espana must make additional contributions to the social security system
until the year 2016, based on the serving employees' effective contribution
bases applicable at any time. These contributions consist of the payment of
2.2% of the base salary, and the related amount is recorded under the
"Personnel Expenses - Employee Welfare Expenses and Other" caption.
(Euro)27.23 million were recorded in this connection in 2002 ((Euro)26.09
million in 2001).
Supplementary pension plan for employees
Various Telefonica Group companies have arranged a defined-contribution
pension plan pursuant to Pension Plans and Funds Law 8/1987. Under this
plan, contributions of between 6.87% and 4.50% of the participating
employees' regulatory base salary (based on each employee's respective hire
date and the company in question) are made to the plan. The
-53-
[LOGO]
obligatory contribution of the participant is generally a minimum of 2.2%
of the employee's regulatory base salary. The system used is an individual
and financial capitalization system.
As of December 31, 2002, 65,817 Group employees were covered by the pension
plans managed by the subsidiary Fonditel Entidad Gestora de Fondos de
Pensiones, S.A. The contributions made by the various companies in 2002
amounted to (Euro)97.68 million.
Number of employees
---------------------------------------------------------------------------------------------
12/31/02 12/31/01
------------------------------------------------------
Average Year-End Average Year-End
---------------------------------------------------------------------------------------------
Telefonica, S.A. 769 799 680 727
Telefonica de Espana Group 42,356 42,162 42,627 42,425
Telefonica Moviles Group 14,153 13,694 13,857 14,677
Telefonica Internacional Group 28,715 25,673 32,983 30,425
Telefonica Data Group 4,609 4,331 4,674 4,952
Directorios Group 2,839 2,752 2,774 2,815
Telefonica de Contenidos Group 5,712 5,574 6,623 6,698
Atento Group 49,496 49,432 47,465 49,940
Terra Group 2,762 2,455 3,133 2,907
Katalyx Group 209 197 287 220
Emergia Group 147 136 134 156
Other 5,737 5,640 5,792 5,585
---------------------------------------------------------------------------------------------
Total 157,504 152,845 161,029 161,527
---------------------------------------------------------------------------------------------
The figures in the foregoing table relate to the consolidated companies.
Also, the Group company Telefonica de Espana has filed various appeals for
judicial review against the Government in connection with the monetary
claim amounting to approximately (Euro)80 million relating healthcare
services provided in 1999, 2000 and 2001. The claim for 2002 will be
initiated once the accounts of the related entity cooperating with the
Spanish National Social Security Institute have been closed.
Compensation systems tied to share market price
Telefonica, S.A. currently has in place two compensation systems tied to
the market price of its shares. One of these systems (the TOP Plan) is
aimed exclusively at executive personnel of Telefonica, S.A. and of several
of its subsidiaries in Spain and abroad, including the executive directors
of Telefonica, S.A., while the other (the TIES Program) is aimed at all the
personnel of Telefonica, S.A. and its Spanish and foreign subsidiaries.
Both systems were approved by the Stockholders' Meeting held on April 7,
2000.
The subsidiaries Telefonica Moviles S.A., Telefonica Publicidad e
Informacion, S.A. and Terra Networks, S.A. have also established their own
compensation systems tied to the market price of their respective shares.
Lastly, there is a program of options on Telefonica, S.A. shares targeted
at the employees of Endemol (the EN-SOP Program).
Following is a detailed account of each of these two plans:
-54-
[LOGO]
a) TOP Plan relating to options on Telefonica, S.A. shares targeted at
executives of Telefonica Group companies
At its meeting on May 26, 1999, Telefonica, S.A.'s Board of Directors
approved a compensation system tied to the market price of Telefonica,
S.A.'s shares (the "TOP Plan"), through the grant of options on the
Company's shares. The term of this plan is four years and three months
from the launch date (June 28, 1999).
The implementation of the Plan and the exercise and sale of the related
stock option rights were approved by the aforementioned Stockholders'
Meeting of Telefonica, S.A. on April 7, 2000.
The approval and implementation of this incentive Plan were notified to
the Spanish National Securities Market Commission (CNMV) and published
in the Complete Prospectus, which was verified and registered in the
CNMV's Official Register on June 29, 1999; in the Continued Prospectus,
which was verified and registered on June 23, 2000; and in the Specific
Prospectus on the compensation systems tied to the market price of
Telefonica, S.A. shares in force prior to January 1, 2000, which was
verified and registered in the CNMV's Official Register on April 18,
2000. This prospectus included a clear description of the main features
of the program and of the procedures for the assignment, exercise and
settlement of the options.
Also, the CNMV was notified in due time and form of the assignment of
options derived from this compensation system to executive directors,
general managers and persons of a similar rank of Telefonica, S.A.
The TOP Plan, which is targeted at approximately 500 beneficiary
executives of several Telefonica Group companies, consists of the grant
to each beneficiary covered thereby of ten 10 type-A options and ten
type-B options on Telefonica, S.A. shares for every Telefonica, S.A.
share assigned by each beneficiary to the Plan and which the
beneficiaries must keep throughout the term of the Plan. The
beneficiaries may exercise the stock option rights from the second year
of the term of the Plan onwards at a rate of one-third of the total
number of type-A options and one-third of the type-B options in
arrears, i.e. in three equal portions in the second, third and fourth
year of the Plan; the Company reserves the right to settle the Plan at
each of the aforementioned maturity dates by paying the beneficiaries
the result of the settlement in the form of shares or in cash. One
share equals one option.
At the launch date, the exercise price of the options granted was as
follows: for the type-A options, the exercise price was established on
the basis of the market price of the shares when the compensation
system was introduced ((Euro)46.18 per share); whereas the exercise
price for the type-B options was set at the same price plus 50%
((Euro)69.27 per share). These figures related to the par value of the
Telefonica, S.A. shares when the Plan was launched and, accordingly,
prior to the three-way share split, consisting of three new shares for
every old share, carried out in July 1999. Therefore, following this
split and taking into account the antidilution clauses in the Plan, the
type-A and type-B option exercise prices were (Euro)15.09 and
(Euro)22.63 as of December 31, 2000, respectively; (Euro)14.50 and
(Euro)21.75 as of December 31, 2001, respectively; and (Euro)13.94 and
(Euro)20.91 as of December 31, 2002, respectively.
Originally 411 Telefonica Group executives were the beneficiaries of
the TOP Plan (including four executive directors and nine general
managers and persons of a similar rank). Consequently, although
initially the TOP Plan was only partially awarded, it was established
that if all the executives (approximately 500) targeted by the Plan had
-55-
[LOGO]
availed themselves of it, the total number of shares assigned to the
Plan would have been 270,237 and, consequently, the total number of
options granted would have been 5,404,740, prior to the aforementioned
three-way share split carried out in July 1999.
Clearly, the TOP Plan provided for the possibility of assigning new
options at dates subsequent to that on which it was introduced,
particularly to cater for the needs which were disclosed as a result of
the executive compensation policies and of new executive hirings. This
possibility was expressly approved by the Stockholders' Meeting of
Telefonica, S.A. in a resolution adopted on June 15, 2001.
In October 2000 and February and April 2001 new options were assigned
under the TOP Plan to a further three executive directors and to
executives who had joined the Group after the launch of the Plan, or
who, as a result of promotion, held positions of responsibility which
carry a higher level of option assignments than that at which they
joined the Plan.
The new option assignments made in October 2000 and February and April
2001 (which were expressly ratified through a resolution adopted by the
Stockholders' Meeting of Telefonica, S.A. on June 15, 2001) did not
entail an extension of the TOP Plan, but rather in order to make these
assignments, the remaining options that had been held by the Company
throughout the term of the Plan were used. Accordingly, the terms and
conditions of the options assigned on the aforementioned dates are the
same as those of the TOP Plan, except for the exercise price thereof.
In the case of the type-A options the exercise price was set at the
Telefonica, S.A. share market price when the new assignments were
approved by the competent corporate governing body.
Also, on June 15, 2001, the Stockholders' Meeting of Telefonica, S.A.
empowered the Board of Directors to make, within the total volume of
options under the TOP Plan, additional assignments of options to
executive directors and general managers and persons of a similar rank,
provided that the maximum number of options to be assigned to each
director or senior executive did not exceed 175,000 type-A options or
175,000 type-B options. In no case could the exercise price for the
type-A options be lower than the market price of the Company shares
when the options were granted, and in no case could the exercise price
of the type-B options be lower than that amount increased by a
percentage of between 25% and 50%.
On December 31, 2001 (taking into account the fact that by that date
the Board of Directors had not exercised the powers granted to it, as
mentioned above, by the Stockholders' Meeting on June 15, 2001), there
were 453 beneficiaries of the TOP Plan (including five executive
directors of Telefonica, S.A. and ten general managers or persons of
similar rank), who held a total of 14,966,640 purchase options on
Telefonica, S.A. shares.
Subsequently, because, effective January 2, 2002, certain beneficiaries
of the TOP Plan who work for subsidiaries of Telefonica Moviles, S.A.
were included under the latter's stock option plan known as the MOS
Program, which was set up after the TOP Plan, which led to their
automatic exclusion from the latter Plan because of the total
incompatibility of the two Plans, the number of beneficiaries of the
TOP Plan and the number of options assigned thereunder was
significantly reduced. Therefore, as of that date (January 2, 2002)
there were 335 beneficiaries of the TOP Plan (including four executive
directors of Telefonica, S.A. and ten general managers or persons of
similar rank), who held a total of 12,158,820 purchase options on
Telefonica, S.A. shares.
-56-
[LOGO]
In January 2002 the Board of Directors, exercising the powers granted
to it by the aforementioned Stockholders' Meeting on June 15, 2001,
resolved to assign options under the TOP Plan to several Telefonica
Group executives, for which purpose unassigned options included within
the total volume of options initially approved for the Plan were used.
The beneficiaries of this assignment included three general managers or
persons of similar rank.
At year-end 2002, there were 324 beneficiaries (participants) of the
TOP Plan, who held a total of 13,066,516 purchase options on
Telefonica, S.A. shares. These TOP Plan beneficiaries (participants)
included 4 executive directors of Telefonica, S.A. and 13 general
managers and persons of similar rank.
In order to cover the risks and economic obligations derived from the
TOP Plan, the Group arranged hedging contracts with BBV and Argentaria,
at a maximum total cost for the Telefonica Group of (Euro)72.12
million. (Euro)13.70 million of this cost have not yet been taken to
income (see Note 9).
b) Telefonica, S.A. stock option plan targeted at all the employees of
certain Telefonica Group companies ("TIES Program")
On February 23, 2000, the Board of Directors of Telefonica, S.A.
approved the establishment of a new compensation system tied to the
market price of the Company's shares, with the grant of options on
Company shares, known as the TIES Program. This Program is aimed at all
the employees of Telefonica, S.A. and its Spanish and foreign
subsidiaries who meet the requirements established in the rules
governing the Program and who are not participating in any other
similar stock or stock option plan.
The aim of the TIES Program is identical to those achieved by other
similar programs implemented in the past by Telefonica, S.A. or its
subsidiaries and is broadly similar to programs which have been
introduced in several European countries and in the U.S. Its main
purpose is to introduce a system of global incentives and to reward the
past and future services of all the employees of Telefonica, S.A. and
its subsidiaries in the coming years. The TIES Program will basically
motivate all its beneficiaries by giving them access to Telefonica,
S.A. shares under highly favorable terms and conditions.
In order to achieve the purposes of the Program, on April 7, 2000, the
Stockholders' meeting of Telefonica, S.A. approved two capital
increases with disapplication of preemptive subscription rights, for a
par value of (Euro)1,197,880 and (Euro)31,504,244, respectively,
through the issuance of 1,197,880 and 31,504,244 new shares,
respectively, of (Euro)1 par value each, with additional paid-in
capital of 400% of the par value.
Telefonica, S.A. duly registered separate prospectuses for the
aforementioned capital increases, which were verified by the Spanish
National Securities Market Commission (CNMV) on November 16, 2000 and
February 16, 2001, respectively. It was clearly explained therein which
options could be exercised in each tranche, and the procedures for
exercising and settling these options.
The main features of the TIES Program are as follows:
1. Number of shares offered for initial acquisition by the
beneficiaries: 1,197,880.
2. Issue price: (Euro)5.
3. Maximum no. of shares under option assigned to beneficiaries:
31,504,244. This
-57-
[LOGO]
figure, which is the maximum amount necessary to cover the total
rights carried by the shares initially assigned, also includes a
reserve for new beneficiaries of the Program equal to 4.5% of the
initial beneficiaries.
4. Method of assignment of shares under option: depends on the
appreciation of Telefonica, S.A. shares with respect to an initial
reference value to be set by the Board of Directors and on the
number of shares of Telefonica, S.A. initially acquired. The
initial reference value was set at (Euro)20.5 per share.
5. Exercise price: (Euro)5.
At its meeting on June 28, 2000, the Board of Directors of Telefonica,
S.A. resolved to commence implementation of the TIES Program (the
features and general terms of which had been established on February
23, 2000, by the Board of Directors' Meeting that approved the creation
of the Program), and established the requirements to be met by the
employees of the subsidiaries of Telefonica, S.A. in order to become
beneficiaries of the TIES Program.
Subsequently, on November 29, 2000, the Board of Directors of
Telefonica, S.A. adapted to the date on which the Program was
ultimately launched the conditions and requirements to be met by the
employees of the companies participating in the Program in order to
become beneficiaries of the Program and the reference value initially
set.
On February 14, 2001, the notarial deed of formalization and execution
of the first capital increase at Telefonica indicated above was
executed. The par value of the capital was increased by
(Euro)1,123,072, through the issuance of an equal number of common
shares with additional paid-in capital of (Euro)4 per share. The new
shares were fully subscribed and paid, through a monetary contribution,
by the beneficiaries of the TIES Program.
On February 20, 2001, the notarial deed of formalization and execution
of the second capital increase to cater for the TIES Program was
executed. The par value of the capital was increased by
(Euro)31,504,244, through the issuance of an equal number of common
shares with additional paid-in capital of (Euro)4 per share. The new
shares were fully subscribed and paid, through a monetary contribution,
by BBVA (50%) and La Caixa (50%).
On December 31, 2002, 75,842 persons were participating in the TIES
program, who held a total of 29,956,042 purchase options on Telefonica,
S.A. shares.
c) Telefonica Moviles, S.A. stock option plan ("MOS Program")
On October 26, 2000, the Special Stockholders' Meeting of Telefonica
Moviles, S.A. authorized the establishment of a corporate stock option
plan for the executives and employees of Telefonica Moviles, S.A. and
its subsidiaries and, in order to facilitate coverage of the Company's
obligations to the beneficiaries of the plan, resolved to increase the
capital stock of Telefonica Moviles, S.A. by (Euro)11,400,000 through
the issuance of 22,800,000 shares of (Euro)0.50 par value each.
Subsequently, on June 1, 2001, the Stockholders' Meeting of Telefonica
Moviles, S.A. approved the introduction of certain modifications and
clarifications of the stock option plan with a view to making it more
attractive and a more efficient mechanism for the motivation and
loyalty-building of its beneficiaries.
-58-
[LOGO]
Lastly, on September 21, 2001, the Board of Directors of Telefonica
Moviles S.A. resolved to develop and establish, in conformity with the
aforementioned resolutions of the Stockholders' Meetings on October 26,
2000 and June 1, 2001, the terms and conditions of the stock option
plan. The main features of this plan are as follows:
1. The plan is open to all the executive directors, executives
(including general managers or similar) and employees who on
December 1, 2001, were working for companies in which Telefonica
Moviles directly or indirectly, during the term of the plan (i) has
a holding with voting rights of over 50%, or (ii) has the right to
appoint over 50% of the members of the Board of Directors.
Without prejudice to the above, the MOS Program envisages the
possibility of awarding new options at dates subsequent to its
initial implementation.
2. There are three types of option:
. Type-A options, with an exercise price of (Euro)11.
. Type-B options, with an exercise price of (Euro)16.5.
. Type-C options, with an exercise price of (Euro)7.235.
Each beneficiary of the Program will receive an equal number of
type-A and type-B options and a number of type-C options equal to
the sum of the type-A and type-B options received.
3. The executive directors and executives who are beneficiaries of the
MOS Program must place a deposit on one share of Telefonica Moviles
for every 20 options assigned to them.
4. Each option, regardless of type, will entitle its holder to receive
one share of Telefonica Moviles, S.A.
5. The options may be exercised at a rate of one-third each year from
the day after the day on which two, three and four years have
elapsed since the date on which the options were granted (January
2, 2002).
6. At the exercise date, the options may be settled, at the
beneficiary's request, either (i) through delivery of shares of
Telefonica Moviles, S.A., once the beneficiary has paid the option
exercise price, or (ii) through cash differences.
The first phase of the plan commenced on January 2, 2002. On June 1,
2002, the second phase of the plan commenced and included the
Telefonica Moviles Group companies and new employees who fulfilled the
requirements envisaged in the plan. The total number of beneficiaries
of the MOS Program is currently 12,379. Of these beneficiaries, one is
an executive director of Telefonica Moviles, S.A. and eight are general
managers or similar executives.
In order to provide coverage for the MOS Program, on September 21,
2001, the Board of Directors resolved to carry out the capital increase
approved by the Stockholders' Meeting on October 26, 2000, through the
issuance of 21,445,962 shares of (Euro)0.50 par value each, which were
subsequently subscribed and paid by BBVA (50%) and La Caixa (50%).
On September 27, 2001, Telefonica Moviles, S.A., on the one hand, and
BBVA and La Caixa, on the other, entered into the related share
subscription and purchase option contracts under which the two
aforementioned financial institutions granted Telefonica Moviles, S.A.
a purchase option on each of the shares subscribed in order to enable
-59-
[LOGO]
Telefonica Moviles, S.A. to meet its commitments to the beneficiaries
of the MOS Program, as described earlier.
The implementation of this Telefonica Moviles, S.A. stock option plan
(the MOS Program) and the capital increase at Telefonica Moviles, S.A.
to provide coverage for the Program were notified to the CNMV and
published in the Abridged Prospectus, which was verified and registered
in the CNMV's Official Register on November 2, 2001
d) Telefonica Publicidad e Informacion, S.A. stock option plan (TPI)
Telefonica Publicidad e Informacion, S.A. (TPI) has set up a stock
option plan on TPI shares targeted at TPI executives and employees who,
provided they meet the preestablished requirements, wish to participate
in and be beneficiaries of the plan. A given number of TPI shares must
be bought by the executives and employees for their own account on the
market and must be held for the whole term of the plan.
The TPI stock option plan consists of granting to each beneficiary
thereof 15 options to purchase shares of Telefonica Publicidad e
Informacion, S.A. for every share assigned to the plan. The stock
option plan had been partially assigned as of December 31, 2002.
Of the total number of TPI stock options issued, and taking into
account that split of TPI's shares on June 19, 2000 (7,212,147 shares
representing approximately 2% of the total capital stock), as of
December 31, 2002, 4,697,400 options had been assigned.
The beneficiaries may exercise the rights under the plan from the first
half of November 2001 at a rate of one-third each year in arrears from
the following year (2001, 2002 and 2003), except in the case of one
executive hired in April 2001, for whom the exercise periods, like
those of the plan currently in force, will be counted from the related
option contract date and, accordingly, the first third can be exercised
in September 2003.
As is customary in compensation systems of this nature, the stock
option plan was made subject to the generally applicable antidilution
and other contractual clauses. Accordingly, as indicated above, the
plan was modified as a result of the three-way split of the company's
shares authorized by the Stockholders' Meeting on April 17, 2000, and
carried out in June 2000.
On April 28, 1999, the Stockholders' Meeting of TPI approved a capital
increase of (Euro)120,202.454, through the issuance of new shares,
exclusively to create and provide coverage for a stock option plan for
company executives.
All the new shares were subscribed and paid in full through a monetary
contribution by Caja de Ahorros y Pensiones de Barcelona (La Caixa),
the Agent Bank for the plan, which for this purpose had entered into a
contract with TPI under which the former granted the latter an
irrevocable purchase option right on the new shares issued (2,404,049
new shares, which were converted into 7,212,147 shares following the
aforementioned share split subsequently carried out).
At its meeting on June 22, 1999, the Appointments and Compensation
Committee made the first proposal for the assignment of options to
executives, which was approved by the Board of Directors at its meeting
on July 8, 1999. Subsequently, the Board of Directors, at its meeting
on December 22, 1999, assigned or offered new
-60-
[LOGO]
options to executives. From that date, with the same expiration date,
the exercise price was set at the market price on the date on which the
related resolution was adopted.
On April 17, 2000, the Stockholders' Meeting, in accordance with
current legislation, approved the execution, the exercise in the
envisaged periods and the sale of the stock option rights under this
compensation system, and empowered the Company's Board of Directors to
assign, at the proposal of the Appointments and Compensation Committee,
the options on shares not yet assigned to the employees and executives
who formed or were going to form part of TPI. It empowered the Board of
Directors to establish the terms and conditions it deemed fit relating
to the exercise of the options and, specifically, to extend the
exercise period and increase the purchase price of the shares.
Exercising the powers granted by the aforementioned Stockholders'
Meeting, on April 17, June 9 and 29, August 30 and November 13, 2000
and April 26 and June 2, 2001, the Board of Directors assigned new
stock options to executives and employees.
Worthy of special mention is the fact that subsequently, on April 26,
2001, the Board of Directors, exercising the powers granted by the
Stockholders' Meeting on April 17, 2000, decided to extend the stock
option plan to all TPI employees who met the preestablished
requirements. The plan was extended in accordance with the periods,
terms and conditions of the plan in force, and the exercise price was
set at (Euro)5.
On June 2, 2001, the Stockholders' Meeting ratified, in the terms in
which it was performed, the assignment of options carried out to
implement the plan after the Stockholders' Meeting on April 17, 2000,
and, specifically, with respect to the persons who have the status of
executive director and senior executive, as provided for in Additional
Provision Fifteen of the Securities Market Law.
Also, on June 2, 2001, the Stockholders' Meeting resolved to empower
Board of Directors to assign, in order to implement and develop the
stock option plan in force, at the proposal of the Appointments and
Compensation Committee, up to the limit of the total number of options
under the plan, additional options to executive directors and senior
executives, under the following terms and conditions:
- Number of options to be delivered: a maximum of 450,000 options
will be delivered to each executive director or senior executive.
- Option exercise price: the option exercise price will be the lower
of the closing market price of the Telefonica Publicidad e
Informacion, S.A. shares on the day on which the options are
granted or the weighted average market value of the Telefonica
Publicidad e Informacion, S.A. shares on the 20 calendar days
immediately preceding the day on which the options are granted.
- Term: the options will have a term of four years from the date on
which they are granted and can be exercised partially at the same
rate as that envisaged in the stock option plan in force.
As of December 31, 2002, 828 persons were participating in the plan,
one of whom is a director of the company (the Executive Chairman) and
six are general managers or similar.
-61-
[LOGO]
e) Terra Networks, S.A. stock option plan
The Terra Networks, S.A. stock option plan was approved by the
Stockholders' Meeting on October 1, 1999, and implemented by Board of
Directors' resolutions adopted on October 18, 1999, and December 1,
1999.
The Plan provides, through the exercise of the stock options by their
holders, for the ownership by the employees and executives of the Terra
Group companies of a portion of the capital of Terra Networks, S.A. up
to a maximum of 14,000,000 shares.
On October 5, 1999, Banco Zaragozano, S.A., Caja de Ahorros y Pensiones
de Barcelona and Terra Networks, S.A. entered into a contract under
which these entities granted to Terra Networks, S.A. an irrevocable
purchase option on 14,000,000 issued shares, which may be exercised at
any time prior to April 30, 2004, to cover the stock option plan
approved.
The approval and implementation of this compensation system were
notified to the CNMV and were made public through the complete
information memorandum verified and registered in the CNMV Official
Register on October 29, 1999, and in the Prospectus presented to the
Securities and Exchange Commission (SEC) in the U.S.
On December 1, 1999 and June 8, 2000, the Board of Directors, pursuant
to the powers granted to it by the Stockholders' Meeting, implemented
the first phase of the plan by granting options to employees of the
Terra Group. The main features of these options are as follows:
1. Each of the stock options under the plan entitles the holder to
acquire one share of Terra Networks, S.A. at an exercise price of
(Euro)11.81 per share.
2. Duration of four years and three months, and the options may be
exercised at a rate of one-third of those granted each year from
the second year onwards.
3. The exercise of the options is conditional upon the beneficiary
remaining a Terra Group employee.
In 2001 the Board of Directors implemented the second phase of the
Terra Networks, S.A. stock option plan, which was approved by the
Stockholders' Meeting on June 8, 2000, and launched pursuant to a
resolution adopted by the Board of Directors on December 22, 2000,
through the assignment of options to executives and employees who were
already beneficiaries of the stock option plan, in addition to the
assignment of options to new employees who had joined the Group.
The main features established by the Board of Directors for this
assignment were as follows:
1. Each of the stock options under the Plan entitles the holder to
acquire one share of Terra Networks, S.A. at an exercise price of
(Euro)19.78 per share.
2. The duration of the Plan was modified by a resolution adopted by
the Stockholders' Meeting on June 8, 2000, and was set at six years
with a two-year grace period. The options can be exercised at a
rate of one-quarter of those granted each year from the third year
through the sixth year.
The exercise of the options is conditional upon the beneficiary
remaining a Terra Group employee.
-62-
[LOGO]
3. Options were granted to one executive director and four general
managers and persons of a similar category, and this was duly
notified to the CNMV on December 29, 2000.
On February 21, 2001, the Board of Directors resolved to modify the
resolution adopted on December 22, 2000, in respect of the duration and
method of accrual of the stock options. Accordingly, the period for the
exercise of the options assigned was set at five years, and the options
may be exercised at a rate of one-quarter each year from the end of the
first year.
In 2001, at the recommendation of the Appointments and Compensation
Committee, the Board of Directors approved, each quarter (specifically
at its meetings on May 10, July 25 and November 6) the assignment of
options to new company employees, and set the exercise price at the
market price of the shares during the related quarter and with the same
terms and conditions as regards exercise period and duration as those
envisaged for the second phase of the plan.
On June 7, 2001, the Stockholders' Meeting of Terra Networks, S.A.
resolved to partially modify the resolution relating to the stock
option plan which was ratified and approved by the Stockholders'
Meeting on June 8, 2000, as regards the extension of the stock option
plan to executives and directors, and extended the option exercise
period to ten years from that in which they were granted, stipulating
that a portion of the options could be exercised each year during this
period. As of December 31, 2001, the Board of Directors had not yet
extended the option exercise period.
In 2002, at the recommendation of the Appointments and Compensation
Committee, the Board of Directors approved, each quarter (specifically
at its meetings on January 30, July 25 and September 26), the
assignment of options to new Company employees, and set the exercise
price at the market price of the shares during the related quarter and
with the same terms and conditions as regards exercise period and
duration as those envisaged for the second phase of the plan. In
addition, on February 25, 2002, the assignment of further options was
approved by the Board of Directors.
In June 2002 it was decided to confine assignments of options to new
hires, and that options could be assigned from that date onwards to
professional categories 1 and 2.
As of December 31, 2002, options on 8,900,502 shares had been assigned
to Group employees, executives and directors, of which 1,870,221 relate
to the first phase of the plan and the remainder to the second phase.
The average stock option exercise price is (Euro)13.82.
As of December 31, 2002, the Company's executives and directors held
1,365,215 stock options under the Terra Networks, S.A. stock option
plan, the average exercise price of which is (Euro)16.77.
f) Terra Networks, S.A. stock option plan resulting from the acquisition
of the stock option plans of Lycos, Inc.
Under the agreements entered into for the acquisition of Lycos, it was
agreed to exchange options on the shares of Lycos, Inc. for options on
the shares of Terra Networks, S.A.
On June 8, 2000, the Stockholders' Meeting of Terra Networks, S.A.
resolved to acquire the stock option plans of Lycos, Inc., provided
that the two companies merged.
-63-
[LOGO]
On October 25, 2000, the Board of Directors of Terra Networks, S.A.
approved (i) the exchange of options on Lycos, Inc. shares existing
prior to the conclusion of the transaction for options on Terra
Networks, S.A. shares; (ii) the transfer to Citibank NA (Agent Bank) of
all the options on Lycos, Inc. shares for their early exercise; and
(iii) the entering into of a contract between Terra Networks, S.A. and
the Agent Bank in connection with the new Terra Networks, S.A. stock
option plan.
As a result of the exercise of the options on Lycos, Inc. shares by the
Agent Bank, the latter subscribed to 29,088,488 shares of Lycos, Inc.
which, pursuant to the resolutions adopted by the Stockholders' Meeting
of Lycos Inc. on October 27, 2000, were converted into 29,088,488
shares of Lycos Virginia, Inc. and contributed in the exchange,
together with the other shares of Lycos Virginia, Inc. As a result of
the exchange of Lycos, Inc. stock options for Terra Networks, S.A.
stock options, the employees, executives and directors of Lycos
Virginia, Inc. received purchase options on 62,540,249 shares of Terra
Networks, S.A. owned by the Agent Bank.
On June 7, 2001, the Stockholders' Meeting of Terra Networks, S.A.
resolved to partially modify the resolution relating to the stock
option plan, which was ratified and approved by the Stockholders'
Meeting on June 8, 2000, as regards the obligations arising from the
assumption of the Lycos Virginia, Inc. stock options by Terra Networks,
S.A., following the exchange of shares between the latter and Lycos
Virginia, Inc., which may be covered with Terra Networks, S.A. shares
held by Citibank, NA, as a result of the exchange of Lycos Virginia,
Inc. shares, held by Citibank, NA to cover the stock options of the
employees and executives of Lycos Virginia, Inc.
As of December 31, 2002, the employees, executives and directors of
Lycos had exercised 14,823,990 options, and 27,918,329 options had been
committed at an average exercise price of US$ 19.15.
As of December 31, 2002, the directors and executives of Lycos held
stock option rights on 9,090,776 options, derived from the Lycos stock
option plans set up prior to the acquisition of Lycos by Terra. The
average exercise price of the stock options granted to executives and
directors derived from the Lycos plan is US$ 17.91.
The directors hold 8,267,026 options on Terra Networks, S.A. shares
derived from the Lycos, Inc. plans, the average exercise price of which
is US$ 19.49, with the price fluctuating between a minimum of US$ 6.28
and a maximum of US$ 30.41.
g) Telefonica, S.A. stock option plan aimed at executives of Endemol
("EN-SOP Program").
In order to fulfill the commitments assumed by Telefonica, S.A. in the
acquisition of the Dutch company Endemol (in mid-2000), and in order to
establish a competitive compensation system similar to that in place at
other companies in the industry in which Endemol operates, on April 25,
2001, the Standing Committee of the Board of Directors of Telefonica,
S.A. approved the establishment of a Telefonica, S.A. stock option plan
targeted at the employees of Endemol Entertainment N.V. (Endemol) and
its subsidiaries (Endemol Group), known as the EN-SOP Program.
This Program consists of the grant to the beneficiaries (all the
Endemol Group's permanent employees on January 1, 2001, who are not
participating in another similar stock or stock option plan), effective
January 1, 2001, 2002, 2003 and 2004, of a variable number (based on
the various wage and functional categories) of purchase
-64-
[LOGO]
options on Telefonica, S.A. shares. The duration of the options will be
four years from the grant date, and the options may be exercised at a
rate of one-half each year three and four years after the related grant
date.
The total number of options to be delivered each year will be
determined by dividing (Euro)27,500,000 by the annual reference value
of the Telefonica, S.A. shares, which will be taken to be the
arithmetic mean of the closing prices of the Telefonica, S.A. shares on
the Spanish Continuous Market for the last five trading days prior to
that on which the Board of Directors of Telefonica, S.A. hold the
Meeting calling the Annual Stockholders' Meeting.
The option exercise price will be the related annual reference value,
and the exercise terms will be the customary terms in programs of this
nature. The beneficiaries must remain uninterruptedly permanent
employees of Endemol until the options are exercised, without prejudice
to the regulation of cases of early settlement of the options in
certain cases in which the employment relationship is interrupted prior
to the exercise of the options.
The options may be settled through the acquisition by the beneficiary
of the underlying shares or, alternatively, in the form of shares or
cash.
In order to cover each annual grant of options, it was provided that
Telefonica: (i) would increase capital by the amount necessary to cater
for the delivery of the shares derived from the exercise of the options
by the beneficiaries or, alternatively, (ii) would acquire on the
market the related purchase options on Telefonica, S.A. shares.
Accordingly, in order to cover the annual grant of options in 2001, on
June 15, 2001, the Stockholders' Meeting of Telefonica, S.A. approved a
capital increase at Telefonica, S.A. of (Euro)1,425,624, through the
issuance of an equal number of common shares with additional paid-in
capital of (Euro)18.2898 per share, and granted the necessary powers to
the Board of Directors to carry out the capital increase, with express
powers, where appropriate, to not carry it out.
As a result of the significant change in stock market conditions in the
second half of 2001, on September 26, 2001, the Board of Directors
decided not to implement the aforementioned capital increase approved
by the Stockholders' Meeting, and decided that, instead of the capital
increase, the annual grant of options for 2001 under the EN-SOP Program
would be covered through the acquisition on the market of purchase
options on Telefonica, S.A. shares.
Under the EN-SOP Program, in 2001 1,281,040 purchase options on
Telefonica, S.A. shares were delivered to the employees of the Endemol
Group (with the distribution agreed on by the Appointments and
Compensation Committee of the Board of Directors of Telefonica, S.A.,
the governing body responsible for this as established when the
resolution to set up this Program was adopted), at an exercise price of
(Euro)19.2898 per share (annual reference value). As of December 31,
2001, 976 persons were participating in the Program.
With respect to the application of the EN-SOP Program in 2002, in order
to cover the annual grant of options in 2002, on April 12, 2002, the
Stockholders' Meeting of Telefonica, S.A. approved a capital increase
at Telefonica, S.A. of (Euro)2,180,809 euros, through the issuance of
an equal number of common shares with additional paid-in capital of
(Euro)11.61 per share, and granted the necessary powers to the Board of
Directors to carry out the capital increase, with express powers, where
appropriate, to not carry it out.
-65-
[LOGO]
As in 2001, on December 18, 2002, the Board of Directors decided not to
implement the aforementioned capital increase approved by the
Stockholders' Meeting, and decided that, instead of the capital increase,
the annual grant of options for 2002 under the EN-SOP Program would be
covered, where necessary, with Telefonica, S.A. shares previously
acquired in the securities market.
Under the EN-SOP Program, in 2002 1,933,504 purchase options on
Telefonica, S.A. shares were delivered to the employees of the Endemol
Group at an exercise price of (Euro)12.61 per share (annual reference
value). 977 persons are participating in the Program.
Other interest on accounts payable and similar expenses and revenues from other
equity investments and loans
The detail of the "Other Interest on Accounts Payable and Similar Expenses" and
"Revenues from Other Equity Investments and Loans" captions is as follows:
-------------------------------------------------------------------
Millions of Euros
----------------------
12/31/02 12/31/01
------------------------------------------------------------------
Debentures, bonds and other marketable debt
securities 1,060.64 933.50
Loans and credits 659.66 692.44
Other 63.84 362.08
------------------------------------------------------------------
Total other financial expenses 1,784.14 1,988.02
------------------------------------------------------------------
Associated companies 31.07 15.38
Other companies 289.30 419.81
------------------------------------------------------------------
Total other financial revenues 320.37 435.19
------------------------------------------------------------------
Exchange differences
The detail of the exchange gains/losses allocated to the consolidated statements
of operations is as follows:
-------------------------------------------------------------------
Millions of Euros
----------------------
12/31/02 12/31/01
------------------------------------------------------------------
Exchange losses (2,245.17) (2,026.88)
Exchange gains 1,612.85 1,244.20
------------------------------------------------------------------
Exchange differences (632.32) (782.68)
------------------------------------------------------------------
Of these total exchange differences, the most significant amount relates to the
variation in the debt denominated in foreign currency at the Argentine
companies, as a result of the currency devaluation which took place in
Argentina. Accordingly, exchange differences were recorded which led to a net
negative impact of (Euro)528.87 million in 2002 and of (Euro)528.76 million in
2001 (see Note 1).
Extraordinary revenues
The detail of the extraordinary revenues is as follows:
-66-
[LOGO]
---------------------------------------------------------------------------------------------------
Millions of Euros
--------------------------
12/31/02 12/31/01
---------------------------------------------------------------------------------------------------
Prior years' revenues 15.66 65.74
Indemnity payments for breach of contract 31.76 63.07
Insurance settlement consortium 0.87 14.04
Corporate restructuring of the wireless business in Brazil 49.10 -
Allocation of deferred revenues to income (Note 13) - 172.16
Provisions for treasury stock (Note 11) - 106.87
Other extraordinary revenues earned in the year 158.57 349.12
-------------------------
255.96 771.00
-------------------------------------------------------------------------------------------------
The "Other Extraordinary Revenues" caption includes the extraordinary
revenues earned by all the Group companies, the amounts of which taken
individually were not material.
Extraordinary expenses and losses
-------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------
12/31/02 12/31/01
-------------------------------------------------------------------------------------------------
Provision for contingencies 31.29 50.67
Extraordinary provisions for preretirements (Note 14) 395.01 460.97
Write-off of goodwill (Note 5) 2,259.81 249.00
Provisions for treasury stock (Note 11) 288.09 -
Fraud suffered and court claims 4.51 98.56
Fines, penalties and litigation 107.01 27.33
Write-off of start-up expenses (Note 4-c) 56.62 -
UMTS license value adjustments (Note 1) 2,753.90 -
Other extraordinary expenses 838.80 430.48
-------------------------------------------------------------------------------------------------
6,735.04 1,317.01
-------------------------------------------------------------------------------------------------
The "Other Extraordinary Expenses" caption includes extraordinary
expenses of a very diverse nature incurred by numerous Telefonica Group
companies.
Losses on fixed assets
This caption includes most notably the losses recorded relating to UMTS
license value adjustments, amounting to (Euro)9,526.19 million (see Note
1).
This caption also includes net amounts of (Euro)15.49 million and
(Euro)62.24 million as of December 31, 2002 and 2001, respectively,
recorded as a result of the dismantling of Telefonica de Espana's plant
for network digitalization (see Note 7).
(21) DIRECTORS' COMPENSATION AND OTHER BENEFITS
The compensation of the directors of Telefonica, S.A. consists of a fixed
monthly payment and of attendance fees for attending the Board of
Directors advisory committee meetings. Also, the executive directors
receive compensation for the executive duties discharged by them.
In 2002 the members of the Board of Directors of Telefonica, S.A. earned
(Euro)11,907,088.40 ((Euro)3,312,042.31 fixed monthly payment, including
the payments received for their membership on other company Boards within
the Telefonica Group; (Euro)76,416.29 of
-67-
[LOGO]
attendance fees for attending the Board of Directors advisory committee
meetings; (Euro)8,405,975.34 of salaries and variable compensation of the
executive directors; (Euro)69,537.84 of compensation in kind paid to the
executive directors, which include life insurance premiums; and (Euro)43,116.62
of contributions paid by the Company, as promoter and for executive directors,
to pension plans).
The breakdown of the compensation and benefits received by the directors in 2002
is as follows:
a. Board of Directors: annual amount of the fixed payment received by each
director (in euros):
---------------------------------------------------------------
Position 2002
---------------------------------------------------------------
Chairman 90,151.82
---------------------------------------------------------------
Deputy Chairmen 150,253.03
---------------------------------------------------------------
Directors (1):
Executive directors 90,151.82
Nominee directors 90,151.82
Independent directors 90,151.82
---------------------------------------------------------------
(1) Two independent executive directors, one of whom left the Board in
December 2002, receive an additional annual payment of
(Euro)60,101.21 each, because their experience and work in
relation to Latin America is of special interest to the Company.
b. Standing Committee: annual amount of the fixed payment received by each
director (in euros):
--------------------------------------------------------------
Position 2002
--------------------------------------------------------------
Chairman 60,101.21
--------------------------------------------------------------
Deputy Chairman 60,101.21
--------------------------------------------------------------
Directors 60,101.21
--------------------------------------------------------------
The directors do not receive any attendance fees for attending meetings of the
Board of Directors or of the Standing Committee.
c. Other committees of the Board of Directors: total annual amounts for
attending meetings of the advisory committees of the Board of Directors,
received by all the directors.
-68-
[LOGO]
----------------------------------------------------------------------------------------
Committee 2002
----------------------------------------------------------------------------------------
Audit and Control Attendance fee per meeting: (Euro)858.61
4 directors Number of meetings: 8
Total received: (Euro)24,041.08
----------------------------------------------------------------------------------------
Appointments and Compensation and Best Attendance fee per meeting: (Euro)858.61
Practice Corporate Governance
4 directors Number of meetings: 8
Total received: (Euro)26,616.91
----------------------------------------------------------------------------------------
Human Resources and Corporate Attendance fee per meeting: (Euro)858.61
Reputation Number of meetings: 3
4 directors Total received: (Euro)10,303.32
----------------------------------------------------------------------------------------
Regulation Attendance fee per meeting: (Euro)858.61
4 directors Number of meetings: 4
Total received: (Euro)11,161.93
----------------------------------------------------------------------------------------
Service Quality and Commercial Service Attendance fee per meeting: (Euro)858.61
4 directors Number of meetings: 2
Total received: (Euro)4,293.05
----------------------------------------------------------------------------------------
d. Executive directors: total amounts (in euros) received by the
executive directors taken as a whole for the items indicated
below:
-----------------------------------------------------------
2002
-----------------------------------------------------------
Salaries 4,096,718.56
-----------------------------------------------------------
Variable compensation 4,309,256.78
-----------------------------------------------------------
Compensation in kind 69,537.84
-----------------------------------------------------------
Contributions to pension plans 43,116.62
-----------------------------------------------------------
The executive directors Cesar Alierta Izuel, Fernando Abril-Martorell
Hernandez, Antonio J. Alonso Ureba and Antonio Viana-Baptista, in their
capacity as directors of the Telefonica Group, are beneficiaries of the
compensation plan linked to the share market price of the shares of
Telefonica, S.A. targeted at the Telefonica Group's executives (the "TOP
Plan") discussed in Note 20; the cost for Telefonica of the
aforementioned compensation plan, with respect to the executive directors
participating in the plan, amounted to (Euro)1.2 million in 2002 and
(Euro)1.26 million in 2001.
Additional notes:
a) The nonexecutive directors do not receive any compensation in the
form of pensions or life insurance, and they do not participate in
the compensation plans linked to share market price.
b) In 2002 the Company did not grant any advances, loans or credits
to the directors.
(22) Other information
a) Litigation
Telefonica, S.A. and its Group companies are party to numerous lawsuits
which are currently in progress in the law courts and the arbitration
courts of the various countries in which the Telefonica Group is present.
These lawsuits cover substantially all areas of law.
However, Telefonica, S.A. considers it reasonably certain that any
adverse outcome of these lawsuits will not materially affect the Group's
economic and financial position or solvency. These lawsuits include most
notably the following:
-69-
[LOGO]
1. A court proceeding contesting the resolutions adopted by the Special
Stockholders' Meeting of Telefonica, S.A. on February 4, 2000.
The stockholder Javier Sotos Garcia, who owns 300 shares of the Company,
has filed a complaint contesting the resolutions adopted by the Special
Stockholders' Meeting on February 4, 2000, based on the purported
contravention of the rules regulating the holding of the Meeting and on
the purported contravention of the rules for disapplication of preemptive
rights of subscription in capital increases.
The Company is convinced that the outcome of the aforementioned court
proceeding will be wholly satisfactory for the Company and, since there
has been no court decision in this connection, the complaint filed does
not in any way signify holding in abeyance the implementation of the
corporate resolutions approved by the Stockholders' Meeting and contested
in that court proceeding.
2. A court proceeding contesting certain resolutions adopted by the Annual
Stockholders' Meeting of Telefonica, S.A. on June 15, 2001.
The aforementioned stockholder, Javier Sotos Garcia, has also filed a
complaint contesting some of the resolutions adopted by the Company's
Annual Stockholders' Meeting on June 15, 2001.
By filing this new complaint contesting the corporate resolutions, the
objective of Javier Sotos Garcia is to have the resolutions adopted by
the Stockholders' Meeting in relation to the following items on the
Agenda set aside by the Court: item I (approval of the 2000 financial
statements and of the conduct of business by the Board of Directors in
that year); item X (capital increase for the acquisition of the shares of
various Mexican cellphone companies owned by Motorola); and item XII
(capital increase to cover the Company's stock option plan for Endemol
employees).
The aforementioned proceeding is based on the purported contravention of
the contesting stockholder's right to information and on the purported
contravention of the legal rules for disapplication of preemptive rights
of subscription in capital increases.
The Company is convinced that the outcome of the aforementioned court
proceeding will also be wholly satisfactory for the Company.
Also, it should be noted that the complaint filed against the
aforementioned resolutions adopted by the Stockholders' Meeting on June
15, 2001, does not in any way signify holding in abeyance the possible
implementation of those resolutions.
3. Complaint filed by IDT against Telefonica, S.A., Terra Networks, S.A. and
Lycos, Inc.
International Discount Telecommunications Corporation (IDT) filed a
complaint with the State Courts of New Jersey (U.S.) against Telefonica,
S.A., Terra Networks, S.A., Terra Networks U.S.A., Inc., and Lycos, Inc.,
seeking the payment of damages amounting to approximately US$ 6,600
million.
This complaint is based on the purported breach of the joint venture
agreement entered into between IDT and Terra in October 1999, on
purported nonperformance of the obligations deriving from the agreement
to terminate the aforementioned agreement, on purported fraud and
contravention of the legislation regulating the issuance of securities
(Federal Securities Exchange Act), and on purported fraudulent
concealment of information.
-70-
[LOGO]
After the complaint had been filed, IDT modified its complaint by
eliminating all express references to a claim for damages of a specific
amount, since this contravenes the U.S. legislation applicable to the
claim. Accordingly, the lawsuit is for an unspecified amount, without
prejudice to the possibility of the damages being specified and quantified
in the course of the proceeding.
In May 2002 the State Courts of New Jersey decided to dismiss counts X and
XI of the complaint, relating to the purported breach of the joint venture
agreement.
Recently IDT added a new claim to the "second modified complaint" alleging
the liability of Telefonica, as a control person, for the alleged fraud
against Terra in its negotiations with IDT, which culminated in the
termination agreement. Telefonica has filed objections to this claim, which
are being considered by the Court.
Legal counsel for the defendants consider that the defendants have a sound
defense with respect to the complaint filed against them and, accordingly,
Telefonica is convinced that the outcome of the aforementioned lawsuit
resulting from the complaint filed by IDT will not be unsatisfactory for
Telefonica or for Terra and that, if it were, the economic and financial
impact on the Telefonica Group should not be material.
4. Notice of arbitration filed by IDT against Telefonica Internacional, S.A.
International Discount Telecommunications Corporation (IDT) filed a notice
of arbitration against Telefonica Internacional, S.A. (Sole-Stockholder
Company) at the American Arbitration Association (AAA).
The notice of arbitration is based on the purported breach of a memorandum
of understanding entered into by IDT and Telefonica Internacional on August
11, 1999. IDT is seeking in its statement of claim damages by reason of the
breach of not less than US$ 2,000 million, as well as the performance of
the aforementioned memorandum of understanding.
In turn, Telefonica Internacional, S.A. (Sole-Stockholder Company) filed a
counterclaim against IDT for damages amounting to US$ 3,500 million.
Telefonica, S.A. is convinced that the outcome of the arbitral proceeding
resulting from the notice of arbitration filed will not be unsatisfactory
for Telefonica Internacional and that, if it were, the economic and
financial impact on the Telefonica Group should not be material.
5. Preliminary proceedings conducted by Central Examining Court no. 1 of the
Audiencia Nacional (National Appellate Court).
Central Examining Court no. 1 of the National Appellate Court is
conducting preliminary proceedings in relation to charges pressed in
October 2000 by Juan Francisco Franco Otegui against certain ex-directors
of Telefonica, S.A., and against the partner of the Company's audit firm,
in relation to certain conduct and corporate resolutions alleged by Mr.
Otegui to be acts constituting corporate offenses. To these preliminary
proceedings was joined an investigation by the Special Public Prosecutor's
Office for Combatting Corruption-Related Financial Crime in relation to the
acquisition by Telefonica of the Dutch company Endemol.
-71-
[LOGO]
6. Sistemas e Instalaciones de Telecomunicacion, S.A.U. (Sintel).
As a result of the voluntary bankruptcy proceeding being conducted at
Madrid Court of First Instance no. 42, case number 417/2001, which is
the continuation of the petition for Chapter 11-type insolvency filed by
the director of Sintel on June 8, 2000, two criminal proceedings have
commenced which affect Telefonica, S.A.
Under the bankruptcy order, inter alia, the effects of the bankruptcy
were backdated to June 8, 1998. As a result of the backdated effects of
the bankruptcy pursuant to the order, the related bodies sent Telefonica
a payment demand for (Euro)22.87 million, which represents the total
amount paid for Sintel, since they consider null and void as a matter of
law the involvement of Sintel in the contract dated December 30, 1998,
in which a debt of (Euro)21.35 million was recognized due to the sale of
the shares of Sintel to Mastec Internacional, S.A. and the amounts paid
by Sintel, which in the aforementioned contract appeared as a joint and
several guarantor of the fulfillment of these payment obligations.
Telefonica filed an ancillary complaint in which it proposes that the
effects of the bankruptcy be backdated to a date closer to that of the
bankruptcy order, so that the contract dated December 30, 1998, is not
affected. The representatives of the employees filed a counterclaim
proposing that the effects of the bankruptcy be backdated to the date of
the sale of the Sintel shares (April 1996).
The two criminal proceedings which commenced recently are as follows:
Expedited proceeding 273/2001, in relation to which, on September 24,
2002, Telefonica, S.A. and Telefonica de Espana, S.A. appeared before
Central Examining Court no. 1 filing a civil suit as parties suffering
loss, against the directors of Sintel and of Mastec Internacional, S.A.
Leave was given for them to appear as parties to the proceeding.
Preliminary proceeding 362/2002, which was commenced on October 23,
2002, by the Central Examining Court for a possible offense of
extortion. This proceeding arises from the preceding one, concerns the
possible commission of an offense of extortion in the assumption by
Sintel of joint and several liability with Mastec for the obligation to
pay the related sale price.
b) Commitments
Agreements with Portugal Telecom (Brazil)
On January 23, 2001, Telefonica, S.A. and its subsidiary Telefonica Moviles,
S.A., on the one hand, and Portugal Telecom SGPS, S.A. and its subsidiary PT
Moveis, SGPS, S.A., on the other, entered into an agreement in order to group
together all the wireless telephony businesses in Brazil and, accordingly,
they undertook to contribute all their wireless telephony assets in Brazil to
a joint venture, which, subject to the obtainment of the necessary regulatory
authorizations, would be a subsidiary of the two groups, and in which they
would each have a 50% ownership interest. Also, under the terms of this
agreement, the two parties expressed their interest in increasing their
reciprocal ownership interests, subject to compliance with the applicable
regulatory and bylaw conditions.
On October 17, 2002, Telefonica Moviles, S.A., on the one hand, and Portugal
Telecom SGPS, S.A. and its subsidiary PT Moveis SGPS, S.A., on the other,
entered into the definitive agreements (Stockholders' Agreement and
Subscription Agreement) that
-72-
[LOGO]
implement the aforementioned agreement signed in January 2001. On
December 27, 2002 (after having obtained the necessary authorizations),
the two groups' holdings in their respective Brazilian wireless
telephony operators were contributed to a Dutch joint venture, Brasilcel
N.V., in accordance with the provisions of the aforementioned
Subscription Agreement.
In accordance with the aforementioned definitive agreements, Telefonica
Moviles, S.A. and the Portugal Telecom Group will have the same voting
rights at Brasilcel, N.V. This equality in voting rights will cease to
exist if, as a result of capital increases at Brasilcel, N.V., the
percentage of ownership of either of the parties falls below 40% during
an uninterrupted period of six months. In this event, if the group with
the reduced interest were the Portugal Telecom Group, it would be
entitled to sell to Telefonica Moviles, S.A., which would be obliged to
buy (directly or through another company), all of Portugal Telecom's
ownership interest in Brasilcel N.V. This right expires on December 31,
2007. The price for the acquisition of the Portugal Telecom Group's
holding in Brasilcel, N.V. would be calculated on the basis of an
independent appraisal (in the terms provided for in the definitive
agreements) performed by investment banks, selected using the procedure
established in these agreements. Subject to certain conditions, the
payment could be made, at Telefonica Moviles' choice, in (i) cash, (ii)
Telefonica Moviles S.A. shares and/or Telefonica, S.A. shares, or (iii)
a combination of the two. This sale option would be exercisable in the
12 months subsequent to the end of the aforementioned six-month period,
provided that the Portugal Telecom Group had not increased its ownership
interest to 50% of the total capital stock of Brasilcel N.V.
Also, in accordance with the definitive agreements, the Portugal Telecom
Group will be entitled to sell to Telefonica Moviles, S.A., which will
be obliged to buy, its holding in Brasilcel, N.V. should there be a
change in control at Telefonica, S.A., Telefonica Moviles, S.A. or any
other subsidiary of the latter that held a direct or indirect ownership
interest in Brasilcel N.V. Similarly, Telefonica Moviles, S.A. will be
entitled to sell to the Portugal Telecom Group, which will be obliged to
buy, its holding in Brasicel, N.V. if there is a change of control at
Portugal Telecom SGPS, S.A., PT Moveis SGPS, S.A or any other subsidiary
of either company that held a direct or indirect ownership interest in
Brasilcel N.V. The price will be determined on the basis of an
independent appraisal (in the terms provided for in the definitive
agreements) performed by investment banks, selected using the procedure
established in these agreements. The related payment could be made, at
the choice of the group exercising the sale option, in cash or in shares
of the wireless telephony operators contributed by the related party,
making up the difference, if any, in cash.
Agreements for the acquisition of Pegaso (Mexico)
In accordance with the agreements entered into by Telefonica Moviles,
S.A. on April 26, 2002, with Sprint, Leap Wireless, Qualcomm and other
financial investors, the acquisition by Telefonica Moviles, S.A. of 65%
of the capital stock of the Mexican company Pegaso Telecomunicaciones,
S.A. de C.V. (Pegaso) was definitively concluded on September 10, 2002.
Also, in compliance with the agreements adopted on that date Telefonica
Moviles, S.A. and the Burillo Group, which owns 35% of the remaining
capital stock of Pegaso, all the shares of Pegaso were contributed to a
company formed for this purpose called Telefonica Moviles Mexico, S.A.
de C.V. Telefonica Moviles, S.A. also contributed to this new company
the companies which it owned in the northern Mexico. After these
contributions, Telefonica Moviles, S.A. had a 92% holding in the new
company.
-73-
[LOGO]
Under the agreements entered into, the Burillo Group has certain mechanisms with
which it can cease to be a stockholder, instrumented through an option to sell
its holding in Telefonica Moviles Mexico, S.A. de C.V. The Burillo Group can
exercise its sale option in 2007 or 2008, or, if its holding in the company
falls below 50% of its original ownership interest, on the date on which such
decrease occurs. If the Burillo Group did not exercise its sale option,
Telefonica Moviles could exercise its purchase option on the shares of the
company owned by the Burillo Group. In this case, the purchase price for the
shares will be determined on the basis of a valuation of the company on the date
on which the rights were exercised. The agreements entered into envisage that a
portion of the purchase price will be paid in cash, the amount of which will
depend upon the Burillo Group's original investment in the company, to which
interest will be added and from which any cash distribution received by the
Burillo Group will be deducted. The remaining portion of the purchase price, if
any, will be paid, at Telefonica Moviles' choice, in cash, in shares of
Telefonica Moviles or a combination of the two.
Also, under the shareholders agreement entered into the Burillo Group has
certain rights to veto agreements on the conversion of shares from one class to
another, declarations of bankruptcy or Chapter 11-type insolvency proceedings,
dissolution or liquidation, bylaw amendments which adversely affect the rights
of the Burillo Group and mergers or corporate reorganizations which do not
afford the Burillo Group the opportunity to maintain a given percentage of
ownership.
Guarantees provided for Ipse 2000 (Italy)
The Telefonica Group has provided for the Italian company Ipse 2000 S.p.A. (the
awardee of an UMTS license in Italy), in which it owns a holding indirectly
through Telefonica Moviles, S.A. and Telefonica DataCorp, S.A., Sole-Stockholder
Company, guarantees securing financial transactions, mainly to secure its
financing commitments relating to the accounts payable to the Italian State due
to the acquisition of the license amounting to (Euro)636.36 million.
Telefonica DataCorp. Guarantee provided for Atlanet (Italy)
Telefonica DataCorp, S.A., Sole-Stockholder Company, a subsidiary of Telefonica,
S.A., owns 34% of the shares of the Italian company Atlanet S.p.A. The assets of
Atlanet S.p.A. include most notably its 12% holding in the capital stock of Ipse
2000, a consortium which holds an UMTS license in Italy.
Atlanet S.p.A. has arranged various credit transactions with Banco di Roma
consisting of credit lines amounting to (Euro)191.56 million, which are secured
by the stockholders of Atlanet S.p.A. in proportion to their ownership interest
in this company. Telefonica DataCorp, S.A., Sole-Stockholder Company has
guaranteed 34% of this amount (i.e. (Euro)65.133 million).
Telefonica Internacional (Puerto Rico)
1. On December 22, 1992, Telefonica International Holding B.V., which owns
14.9% of the shares of the Puerto Rican company Telecomunicaciones
Ultramarinas de Puerto Rico (TUPR), entered into a stockholders agreement
with the Puerto Rico Telephone Authority (PRTA) to acquire, through a
reciprocal purchase-sale option, the shares representing the remaining
85.1% of the capital stock of TUPR.
On May 21, 1999, Telefonica International Holding B.V. announced its
intention to exercise this purchase option; however, the purchase
transaction was never carried out.
-74-
[LOGO]
On April 4, 2002, PRTA exercised its sale option, and notified Telefonica
Internacional Holding B.V. of its decision to sell 85.1% of TUPR for a
price, subject to a due diligence review, of US$ 24.9 million.
2. On February 4, 2000, Telefonica Larga Distancia de Puerto Rico (TLD) and
ClearCom, L.P. entered into a joint venture agreement to carry on the
cellular telephony business in Puerto Rico through a new company (Newcomm).
Under this agreement, which was subsequently modified, TLD was granted an
option to acquire a 50.1% holding in Newcomm, by converting promissory
notes into shares representing 49.9% of Newcomm's capital stock and
entering into a share purchase agreement for shares representing the
remaining 0.2%.
In line with the process of reorganization by line of business carried out
by the Telefonica Group, TLD and Telefonica Moviles, S.A. have agreed that
the rights which the aforementioned agreement confers on the Telefonica
Group will be transferred to Telefonica Moviles, S.A., and the related
documents have already been prepared for presentation to the Federal
Communications Commission (FCC), so that FCC can approve the transfer of
licenses and the acquisition of a controlling interest in the company by
Telefonica Moviles, S.A.
Telefonica CTC Chile-Sonda
On September 26, 2002, Telefonica CTC Chile, S.A. granted a shareholder of Sonda
S.A., Inversiones Santa Isabel Limitada, a purchase option to be exercised
between July 26 and August 5, 2005, on 35% of the capital of the aforementioned
company, currently owned by Telefonica CTC Chile; the exercise of this option
can be brought forward to between July 26 and July 31, 2003 and 2004. The price
will be determined in accordance with the process stipulated in the related
contract, and will be paid in cash.
Atento
Within the framework of the strategic agreement entered into on February 11,
2000, by BBVA and Telefonica, on December 4, 2001, the two entities signed an
agreement establishing the procedure and conditions for the integration in
Atento, a Telefonica Group subsidiary, of the BBVA Group's Spanish and
international call center business.
The transaction agreed on consists of: (i) the initial contribution by
Telefonica S.A. of all its call center business (now carried on by Atento
Holding Inc.) to a newly-formed subsidiary (Atento N.V.); and (ii) the
subsequent inclusion of the BBVA Group in the stockholder structure of Atento
N.V. through various monetary and nonmonetary contributions of all the shares of
the Spanish companies Procesos Operativos, S.A. and Leader Line, S.A. These
contributions will entail the transfer to Atento of all the BBVA Group's Spanish
and international call center business and the subscription by BBVA of up to 9%
of the capital stock of Atento N.V.
The transaction also envisages the signing of various specific agreements for
the provision to the BBVA Group by Atento of call center services in Spain and
Portugal and in ten Latin American countries, for most of which contracts have
already been signed. BBVA's ownership interest in Atento N.V. may be adjusted on
the basis of whether these agreements are actually entered into and the volume
of business actually contributed by the BBVA Group to Atento.
Atento N.V. was incorporated on May 13, 2002. All Telefonica, S.A.'s call center
business was contributed to it on that date. The contributions by the BBVA Group
under the terms
-75-
[LOGO]
of the agreement discussed in this section had not yet been made as of that
date, although this will foreseeably take place in the first quarter of 2003.
Commitments relating to Via Digital
1. Telefonica has provided to third parties, including other stockholders
of DTS Distribuidora de Television Digital, S.A. (Via Digital),
guarantees of the liquidity of the investments made which grant the
beneficiaries a sale option and Telefonica a purchase option, which
can be exercised if certain conditions are met, including that
relating to the statutory limitations of percentage of ownership of
the capital stock. The total price of this purchase option would
amount to approximately (Euro)143 million.
2. The agreements entered into by Sogecable, S.A., Telefonica, S.A. and
Telefonica de Contenidos, S.A. Sole-Stockholder company for the merger
of Via Digital into Sogecable are described in Note 23.
3. The agreement referred to in the previous point establishes the
commitment of Telefonica de Contenidos, S.A., Sole-Stockholder Company
to Sogecable, S.A. to offer it or another Telefonica Group company the
possibility of acquiring the rights which DTS Distribuidora de
Television Digital, S.A. (Via Digital) currently holds on the Soccer
World Cup in Germany in 2006. In this regard, management of Via
Digital plans to start offering the aforementioned rights to other
operators in the market with a view to obtaining an optimum price for
them. In accordance with the accounting principle of prudence in
valuation a provision of (Euro)19.6 million was recorded in this
connection with a charge to the accompanying consolidated statement of
operations.
Commitment of Telefonica de Contenidos with respect to Euroleague
Marketing, S.L.
Under a framework contract dated August 24, 2000 (amended on November 17,
2001), regulating the exploitation of economic rights (including mainly
audiovisual, sponsorship and Internet rights, licenses, etc.) on the
European basketball competition, the "Euroleague", Telefonica de
Contenidos, S.A. (Sole-Stockholder Company), a subsidiary of Telefonica,
S.A., has a commitment to pay Euroleague Marketing, S.L., a company in
which Telefonica de Contenidos, S.A. (Sole-Stockholder Company) owns a 70%
holding, the difference between the revenues obtained by Euroleague
Marketing, S.L. from the exploitation of the aforementioned rights and a
maximum of US$ 25 million for the 2002/2003 season (a maximum of US$ 20
million for the remaining two seasons).
Commitments of Telefonica de Contenidos in relation to Audiovisual Sport
Telefonica de Contenidos, S.A. (Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., has provided a guarantee, to secure payment of (Euro)74.5
million relating to 40% of the outstanding balance of the syndicated loan,
originally amounting to (Euro)300.51 million, granted by several financial
institutions to Audiovisual Sport, S.L., a 40%-owned investee of Gestora de
Medios Audiovisuales Futbol, S.L., that is a subsidiary of Telefonica de
Contenidos, S.A.
Also, it should be noted that the agreements relating to the merger of Via
Digital and Sogecable provide for a commitment to acquire the 40% holding
that Telefonica de Contenidos, S.A. Sole-Stockholder company owns in
Audiovisual Sport, S.L.
-76-
[LOGO]
Purchase and sale commitments relating to the shares of Uno e-Bank owned by
Terra
Note 23 ("Subsequent Events") details various purchase and sale commitments
relating to the shares of Uno e-Bank, S.A. owned by Terra Networks, S.A.
included in a contract between the latter and Banco Bilbao Vizcaya
Argentaria, S.A. (BBVA) dated January 10, 2003.
Other commitments in the form of performance bonds for concessions or licenses
1. Telefonica de Espana, S.A. (Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., has provided counter-guarantees for 43 guarantees
provided by Banco Santander Central Hispano and by the insurance company
Zurich totaling approximately (Euro)100.9 million, relating to definitive
guarantees provided by Telefonica Cable, S.A. (Sole-Stockholder Company), a
subsidiary of Telefonica de Espana, S.A. (Sole-Stockholder Company), in
relation to 43 concession contracts with the Spanish State for the
provision of cable telecommunications services in 43 franchise areas.
These guarantees ensure performance by the concession-holder company of the
obligations assumed under the concession contracts, in particular in
relation to coverage of the services and the timetable for their
implementation. The aforementioned guarantees were maintained after the
concession deeds were converted into 19 individual B1-type licenses.
Through a Telecommunications Market Commission Resolution dated January 7,
2003, it was decided to propose to the Ministry of Science and Technology
that 90% of the amount of the final guarantees provided by Telefonica
Cable, S.A. (Sole-Stockholder Company) for the formalization of the
aforementioned 43 contracts be reimbursed. The Ministry of Science and
Technology has given notification of the commencement of the related
cancellation proceeding, which must be completed within three months.
2. Telefonica Moviles, S.A., a subsidiary of Telefonica, S.A., has provided
certain financial guarantees to the Spanish State amounting to (Euro)1,100
million, in relation to the grant to Telefonica Moviles Espana, S.A.
(Sole-Stockholder Company) of a UMTS services license in Spain. These
guarantees ensure fulfillment of the commitments assumed by the company
awarded the license in relation to network deployment, job creation,
investments, etc.
As of January 20, 2003, the guarantees amounted to (Euro)721 million, since
(Euro)379 million were released as a result of fulfillment of certain of
the objectives set. The release of a further (Euro)90 million has been
requested, for which the Ministry of Science and Technology has yet to
verify that the related commitments have been met.
Also, Telefonica Moviles Espana began conversations with the aforementioned
Ministry, which have given rise to the commencement of an administrative
proceeding, with a view to changing the current systems of guarantees,
replacing all the guarantees in force by one or several guarantees, the
overall amount of which, per the proposed resolution prepared by the
Ministry, would not exceed (Euro)203 million. These new guarantees would
also secure all the commitments assumed in relation to the UMTS license
and, accordingly, the guarantees would have to be provided again should
they be totally or partially executed due to
-77-
[LOGO]
failure to fulfill any of the commitments that they are securing. A
Ministerial Order to regulate this administrative proceeding is
pending approval.
3. In 1999 Telefonica de Argentina, S.A. provided guarantees to the
Government of the Republic of Argentina for the fulfillment of
obligations assumed by Telefonica Comunicaciones Personales, S.A.
arising from the obtainment of its PCS licenses, amounting to US$ 22.5
million individually and to US$ 45 million on a joint and several
basis with the other operator, Telecom. These guarantees are still in
force, pending verification by the Argentine National Communications
Commission of the fulfillment of the obligations secured by these
guarantees.
The contingencies arising from the commitments described above were
evaluated when the consolidated financial statements as of December 31,
2002, were prepared, and the provisions recorded with respect to the
commitments taken as a whole are not representative.
c) Environmental matters
The Telefonica Group, through its investees, and in line with its
environmental policy, has been undertaking various activities and projects
relating to environmental matters. In 2002 it incurred expenses and made
investments for scantly material amounts which were recorded in the
consolidated statement of operations and the consolidated balance sheet,
respectively.
As regards the current systems implemented by the Group to reduce the
environmental impact of its plant, systems were brought into service for,
inter alia, reducing emissions into the atmosphere, treating and recycling
water, measuring effluents, reducing noise and vibrations, etc. The cost of
these items was included in the cost of the plant in which they are
located.
As regards possible environmental contingencies, there are sufficient
internal control mechanisms which are periodically supervised, either
in-house or by prestigious outside firms. No significant contingencies have
been disclosed in this connection.
d) Fees paid to auditors
The fees paid in 2002 to the various member firms of the Deloitte & Touche
international organization, to which Deloitte & Touche Espana, S.L., the
auditors of the Telefonica Group in 2002, belongs, amounted to (Euro)15.92
million.
The detail of the foregoing amount is as follows:
------------------
Millions of Euros
---------------------------------------------------------------------------
Audit of financial statements 6.94
Other audit services 2.90
Work additional to or other than audit services 6.08
---------------------------------------------------------------------------
Total 15.92
---------------------------------------------------------------------------
The fees paid to other auditors in 2002 amounted to (Euro)12.51 million,
the detail being as follows:
-78-
[LOGO]
--------------------------------------------------------------------------------
---------------------
Millions of Euros
--------------------------------------------------------------------------------
Audit of financial statements 1.95
Other audit services 0.42
Work additional to or other than audit services 10.14
--------------------------------------------------------------------------------
Total 12.51
--------------------------------------------------------------------------------
These fees include the amounts paid in connection with the fully
consolidated Spanish and foreign Telefonica Group companies.
(23) subsequent events
Capital increase in progress with a charge to reserves
February 2003 saw the first of the Company's two capital increases with a
charge to unrestricted reserves, approved by the Stockholders' Meeting on
April 12, 2002, and which the Board of Directors resolved to carry out at
its Meeting on December 18, 2002.
The capital increase was carried out through the issuance of 97,213,225 new
common shares of the Company of (Euro)1 par value each, thereby increasing
the capital stock by (Euro)97,213,225 to (Euro)4,957,874.511. These new
shares were assigned free of charge to the stockholders in the proportion
of one new share for every 50 shares already owned.
The deed of capital increase was executed on February 12, 2003, and
registered at the Mercantile Registry on February 18, 2002.
Also, on February 12, 2003, the Standing Committee of the Board of
Directors of Telefonica, S.A., making use of the powers granted to it by
the Board of Directors on January 29, 2003, resolved to carry out the
second capital increase with a charge to unrestricted reserves approved by
the Stockholders' Meeting on April 12, 2002, through the issuance of
99,157,490 new common shares of the Company, of the same series and
carrying the same rights as the outstanding shares, of (Euro)1 par value
each, which will be assigned free of charge to the stockholders in the
proportion of one new share for every 50 shares already owned.
The period for the assignment free of charge of the shares relating to the
second capital increase is scheduled to commence in the second half of
March 2003, and the new shares will foreseeably be admitted to official
listing in mid-April 2003.
Merger of Via Digital with Sogecable
On May 8, 2002, Sogecable S.A. and Telefonica S.A. (the latter through its
subsidiary Telefonica de Contenidos S.A. - Sole-Stockholder Company) -
entered into an agreement relating to the merger of DTS Distribuidora de
Television Digital, S.A. (Via Digital) with Sogecable.
The transaction was ratified by the Board of Directors of Telefonica de
Contenidos S.A. (Sole-Stockholder Company) and Sogecable S.A. in May 2002,
subject to the authorization of the relevant public authorities, which was
granted on November 29, 2002, through the adoption by the Council of
Ministers of certain resolutions authorizing the merger provided that
certain conditions were met.
-79-
[LOGO]
On January 29, 2003, Sogecable S.A., Telefonica, S.A. and Telefonica de
Contenidos S.A. (Sole-Stockholder Company) entered into an agreement
whereby they deemed the contract terms established for the merger of
Sogecable and Via Digital to have been fully met. Also, Telefonica de
Contenidos S.A. (Sole-Stockholder Company) and Sogecable S.A. agreed on the
related detailed action plans and deadlines for the instrumentation of the
conditions imposed by the Government in the aforementioned Council of
Ministers resolutions. Through these plans, Telefonica de Contenidos S.A.
(Sole-Stockholder Company) and Sogecable S.A. accepted the conditions
established by the Government; however, they filed appeals for judicial
review against certain of the conditions (obligation to distribute
channels, joint marketing of commercial packages, price caps and
prohibition of strategic alliances).
The terms under which the transaction will be carried out in accordance
with the agreements dated May 8, 2002 and January 29, 2003, are as follows:
- The transaction will be carried out through a capital increase at
Sogecable, S.A. targeted at the stockholders of Via Digital, who will
be able to contribute their Via Digital shares.
- If all the shareholders of Via Digital subscribe to the capital
increase, the percentages of ownership of Sogecable, S.A. after the
capital increase will be 77% in the case of the present stockholders
of Sogecable and 23% in the case of the present stockholders of Via
Digital.
- After the exchange has been carried out, the Telefonica Group will
have an ownership interest in the capital stock of Sogecable, S.A.
equal to that of its two stockholders Prisa and Groupe Canal + after
the dilution arising from the share exchange, which, if all the
capital stock of Via Digital is exchanged, would represent 16.38% of
the capital stock of Sogecable, S.A. With this ownership interest,
Telefonica would not exercise such voting rights carried by the shares
received in the exchange as might exceed the aforementioned
percentage.
- Telefonica has stated that its present strategic plans envisage that
the aforementioned ownership interest will not be disposed of for at
least three years from the date of the exchange.
- The representation of Telefonica, Prisa and Groupe Canal + on the
Board of Directors of Sogecable, S.A. will be consistent with their
respective ownership interests, and each of the aforementioned three
entities will appoint five directors. The Chairman of the Board of
Directors will be chosen from among the five directors appointed by
Telefonica.
- Prisa and Groupe Canal + will maintain their present shareholders'
agreement, to which Telefonica will not be a party.
- Each of the three major stockholders will grant a ten-year
participating loan of (Euro)50 million earning interest at 11%.
- Sogecable, S.A. will offer its shareholders the possibility of
participating in a nine-year subordinated debt security issue of
(Euro)175 million, the subscription of which will be underwritten by
Telefonica, bearing interest at 10.28%. The remuneration for the
subscribers will include the issuance of warrants equal, overall, to
1% of the capital stock of Sogecable, S.A.
-80-
[LOGO]
- The debt of Via Digital and of Sogecable, S.A. as of April 30, 2003,
must not exceed (Euro)425 million and (Euro)705 million, respectively.
Strategic alliance between Telefonica, Terra and Bertelsmann
On February 12, 2003, Telefonica and Terra Networks, S.A. entered into a
Framework Strategic Alliance Agreement to replace the Strategic Agreement
dated May 16, 2000, to which Bertelsmann was also a party (whereby, in the
framework of the acquisition of Lycos by Terra, Telefonica, S.A. undertook
to commission from Terra, the portion of the advertising services committed
by Bertelsmann that the latter did not commission from Terra, up to a
maximum amount of US$ 675 million).
Additionally, on February 12, 2003, Telefonica, Terra, Lycos and
Bertelsmann, entered into a preferential interest agreement which will
enable them to continue to explore opportunities for the mutual provision
of communications, development and content services in the on-line market.
The term of the Framework Strategic Alliance Agreement is six years, ending
on December 31, 2008. The agreement is automatically renewable for one-year
periods unless it is expressly terminated by the parties.
The main features of this Framework Strategic Alliance Agreement are
summarized as follows:
1. Strengthening of the Terra Lycos Group as:
- The exclusive provider of essential portal elements, including
brand image, and aggregator of the broad and narrow band Internet
content and services targeted at the residential, SOHO and, when
so agreed, SME market segments, for the Telefonica Group
Companies' connectivity and ISP services.
- Preferential provider of audit, consulting, management and
maintenance services for the country portals of the Telefonica
Group companies.
- Exclusive provider of Telefonica Group employee on-line training
services.
- Preferential provider of on-line integral marketing services with
the Telefonica Group companies.
2. Guaranteed minimum volume of acquisitions of Terra Lycos Group on-line
advertising space by Telefonica Group companies.
3. Exclusive acquisition of connectivity and wholesale Internet access
services by Terra Lycos Group companies from Telefonica Group
companies under the legally permitted most-favored-customer
conditions.
4. Outsourcing by Terra Lycos Group companies to Telefonica Group
companies of all or part of the services and/or operation of the
Internet access elements for the provision of ISP services to its
residential, SOHO and, when so agreed, SME customers under the legally
permitted most-favored-customer conditions.
5. Exclusive acquisition by Terra Lycos Group companies from Telefonica
Group companies of the advanced broad and narrow band network and
platform services required to construct the range of services to be
offered to residential, SOHO and,
-81-
[LOGO]
when so agreed, SME customers under the legally permitted
most-favored-customer conditions.
The Framework Strategic Alliance Agreement guarantees the generation for
the Terra Lycos Group of a minimum annual value throughout the term of the
Agreement of (Euro)78.5 million. This amount is the difference between the
revenues arising from the services provided under the aforementioned
Framework Strategic Alliance Agreement and the costs and investments
directly associated therewith.
Terra Networks, S.A.-BBVA (Uno-e Bank, S.A.)
On May 15, 2002, Terra Networks, S.A. (Terra) and Banco Bilbao Vizcaya
Argentaria, S.A. (BBVA) entered into a memorandum of understanding to
integrate the consumer finance lines of business of Finanzia Banco de
Credito, S.A. (a subsidiary of BBVA) and Uno-e Bank, S.A. The agreement
relating to this integration was subject to a legal, financial and business
review, and to the obtainment of the relevant internal and administrative
authorizations. When the integration takes place, Terra's ownership
interest in Uno-e Bank, S.A. will be 33% and that of the BBVA Group will be
67%.
On that same date (May 15, 2002), BBVA and Terra entered into an agreement
in which they established the following liquidity mechanisms (purchase and
sale options) relating to the Uno-e Bank, S.A. shares owned by Terra:
- Terra has the right to sell to BBVA, and BBVA is obliged to acquire,
Terra's holding in Uno-e Bank, S.A. between May 15, 2004 and May 15,
2006, at the higher of the following prices: (i) the market value as
determined by an investment bank; and (ii) the price paid by Terra to
acquire its ownership interest ((Euro)189.4 million).
- BBVA has the right to acquire from Terra, and Terra is obliged to
sell, Terra's holding in Uno-e Bank, S.A. between May 15, 2004 and May
15, 2006, at the higher of the following prices: (i) the market value
as determined by an investment bank; and (ii) the price paid by Terra
to acquire its ownership interest ((Euro)189.4 million), plus annual
interest at a rate of 4.70%.
- If a definitive agreement were reached regarding the aforementioned
integration of the consumer finance lines of business of Finanzia
Banco de Credito, S.A. and Uno-e Bank, S.A., the liquidity mechanisms
would be modified. BBVA would lose its right of purchase and Terra
would retain its right of sale, but only at the market value as
determined by an investment bank.
On January 10, 2003, Terra and BBVA entered into an agreement to integrate
the consumer finance lines of business of Finanzia Banco de Credito, S.A.
and Uno-e Bank, S.A. in terms that were more in keeping with their
respective interests and those of Uno-e Bank, S.A. than those provided for
in the memorandum of understanding dated May 15, 2002. Accordingly, the
memorandum of understanding was rendered null and void, and the definitive
agreement was made conditional upon obtainment of the relevant internal and
administrative authorizations, which must be secured prior to June 30,
2003, as a condition for the formalization and performance of the
integration. After the integration takes place, Terra's ownership interest
in Uno-e Bank, S.A. will be 33% and that of the BBVA Group will be 67%.
On that same date (January 10, 2003), BBVA and Terra entered into a
liquidity agreement that will replace that dated May 15, 2002, once the
aforementioned integration has taken place. This agreement establishes the
following liquidity mechanism (sale option) relating
-82-
[LOGO]
to the Uno-e Bank, S.A. shares owned by Terra: Terra has the right to sell
to BBVA, and BBVA is obliged to acquire, Terra's holding in Uno-e Bank,
S.A. between April 1, 2005 and September 30, 2007, at market value,
established as the higher of the two following values: (i) that determined
by an investment bank; and (ii) that obtained by multiplying the income
after taxes of Uno-e Bank, S.A. by the PER of BBVA, multiplied by the
percentage of the ownership interest held by Terra that it is intended to
sell as of that date.
Also, the exercise price of the aforementioned option may not be lower than
(Euro)148.5 million if Uno-e Bank, S.A. does not achieve the net ordinary
revenue and pre-tax income targets set for 2005 and 2006.
Acquisition of shares of Antena 3 de Television, S.A.
In 1997 and 2000 Telefonica provided guarantees to the entity that is now
Banco Santander Central Hispano, S.A. to ensure the liquidity and value of
the investments made by it in Antena 3 de Television, S.A. To execute these
agreements, in 1999 Telefonica Media, S.A. (Sole-Stockholder Company) (now
Telefonica de Contenidos, S.A. - Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., acquired shares representing 7.1395% of the capital stock
of Antena 3 de Television, S.A. Additional acquisitions have yet to be
formalized and the guarantee on certain of the shares has yet to be
executed.
On January 7, 2003, as a result of a change in the legal conditions
applicable to the ownership of shares of television concession-holder
companies, Telefonica, S.A. and its subsidiary Telefonica de Contenidos,
S.A. (Sole-Stockholder Company) exercised vis a vis Banco Santander Central
Hispano, S.A. purchase options on 17,365,125 and 2,167,500 shares of Antena
3 de Television, S.A., which, taken as a whole, represent 11.719% of the
capital stock of Antena 3 de Television, S.A. The shares were to be
acquired by the Telefonica, S.A. subsidiary Corporacion Admira Media, S.A.
(Sole-Stockholder Company).
After the related procedural formalities had been carried out, on February
5, 2003, the transfer of the aforementioned shares was formalized, and,
accordingly, as of that date, the guarantees provided to Banco Santander
Central Hispano, S.A. were fully executed and fulfilled. The resulting
percentage of ownership was 59.24%.
Acquisition of Tele Centro Oeste Celular Participacoes (TCO)
In January 2003 Brasilcel N.V., owned 50% by Telefonica Moviles, S.A. and
50% by Portugal Telecom Moveis, S.A., the joint venture created by these
companies to manage and develop their cellular telephony business in
Brazil, entered into an agreement to acquire, through the subsidiary Telesp
Celular Participacoes, S.A., from the Brazilian company Fixcel 61.10% of
the common shares with voting rights of Tele Centro Oeste Celular
Participacoes, S.A. (TCO) representing 20.37% of the latter's total capital
stock. The formalization of this acquisition is subject to the satisfactory
conclusion of the due diligence review in progress at present and to the
obtainment of the pertinent administrative authorizations.
If this acquisition is concluded, pursuant to current stock market
legislation in Brazil, a tender offer will be launched for the TCO's common
shares held by the other stockholders. Subsequently, TCO's shares will be
exchanged for preferred shares of Telesp Celular Participacoes, S.A., which
will give the latter company the opportunity to own all the shares of TCO.
-83-
[LOGO]
Restructuring of the debt of Telefonica Comunicaciones Personales
(Argentina)
In January 2003 Telefonica Comunicaciones Personales, S.A., a subsidiary of
Telefonica Moviles, S.A. in Argentina, entered into agreements with various
Ericsson Group Companies to refinance its debt of US$ 130 million to the
Ercisson Group.
Also, Telefonica Comunicaciones Personales refinanced its intercompany debt
of US$ 630 million to Telefonica Moviles, S.A.
Telefonica Europe, B.V. bond issue
On February 6, 2003, Telefonica Europe B.V. launched two long-term bond
issues underwritten by Telefonica S.A. The first issue, which matures on
February 14, 2013, has a face value of (Euro)1,500 million and an annual
coupon of 5.125%. The second issue, with a face value of (Euro)500 million,
matures on February 14, 2033, and has an annual coupon of 5.875%.
-84-
[LOGO]
(24) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
-------------------------------------------------------------------------------------------------------------------------------
APPLICATION OF FUNDS 12/31/02 12/31/01 SOURCE OF FUNDS 12/31/02 12/31/01
-------------------------------------------------------------------------------------------------------------------------------
Funds applied in operations - - Funds obtained from operations 8,819.49 11,615.74
Start-up and debt arrangement expenses 468.96 783.10
Fixed asset additions Stockholder contributions
a) Intangible assets 1,106.58 1,650.09 a) Capital increase - 32.64
b) Property, plant and equipment 2,819.65 6,770.80 b) Additional paid-in capital - 130.51
c) Long-term investments 2,116.26 2,923.82 c) Minority interests 5,294.95 158.18
Deferred tax assets 92.04 1,582.81
Deferred tax liabilities - 655.03 Deferred revenues 229.09 -
Dividends 108.63 121.87
Deferred revenues - 21.73 Long-term deferred tax liabilities 436.61 -
Long-term debt 1,762.92 8,781.66
Repayment or transfer of long-term debt 6,746.65 6,153.88 Fixed asset disposals
a) Intangible assets 39.21 90.13
Allowances 863.53 888.73 b) Property, plant and equipment 296.34 401.17
c) Long-term investments 784.16 1,080.11
Transfer to short term of long-term
loans 403.05
Decrease in working capital due to Increase in working capital due to
disposal of equity investments 1,060.54 disposal of equity investments - 158.90
Decrease in working capital due to Increase in working capital due to
inclusion of subsidiaries - 216.21 inclusion of subsidiaries 495.50 -
Variation in working capital due to Variation in working capital due to
translation differences 714.95 - translation differences 493.70
-------------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDS APPLIED 16,158.01 21,768.07 TOTAL FUNDS OBTAINED 18,461.32 22,942.74
-------------------------------------------------------------------------------------------------------------------------------
FUNDS OBTAINED IN EXCESS OF FUNDS FUNDS APPLIED IN EXCESS OF FUNDS -
APPLIED 2,303.31 1,174.67 OBTAINED
(INCREASE IN WORKING CAPITAL) (DECREASE IN WORKING CAPITAL)
-------------------------------------------------------------------------------------------------------------------------------
18,461.32 22,942.74 18,461.32 22,942.74
----------------------- -----------------------
VARIATIONS IN WORKING CAPITAL
-------------------------------------------------------------------------------------------------------------------------------
INCREASE IN WORKING CAPITAL 12/31/02 12/31/01 DECREASE IN WORKING CAPITAL 12/31/02 12/31/01
-------------------------------------------------------------------------------------------------------------------------------
Due from stockholders for capital calls - 2.25 Due from stockholders for capital calls 2.25 -
Inventories - - Inventories 304.26 37.41
Accounts receivable - - Accounts receivable 1,974.86 934.35
Accounts payable 3,663.88 5,576.42 Accounts payable - -
Short-term investments 1,146.39 - Short-term investments - 3,311.28
Cash - - Cash 77.97 143.74
Accrual accounts - 22.78 Accrual accounts 147.62 -
-------------------------------------------------------------------------------------------------------------------------------
TOTAL 4,810.27 5,601.45 TOTAL 2,506.96 4,426.78
-------------------------------------------------------------------------------------------------------------------------------
VARIATION IN WORKING CAPITAL - VARIATION IN WORKING CAPITAL 2,303.31 1,174.67
-------------------------------------------------------------------------------------------------------------------------------
4,810.27 5,601.45 4,810.27 5,601.45
-------------------- ---------------------
-85-
[LOGO]
The reconciliation of the balances of the consolidated statements of
operations to the funds obtained from operations is as follows:
---------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------
12/31/02 12/31/01
---------------------------------------------------------------------------------------------
Income (Loss) (5,576.80) 2,106.81
Loss attributable to minority interests (5,795.61) (271.01)
Income of associated companies 527.88 376.49
-----------------------------
(10,844.53) 2,212.29
--------------------------------------------------------------- -----------------------------
Add:
---------------------------------------------------------------
Dividends of companies accounted for by the equity method 58.16 8.52
Depreciation and amortization expense 6,692.42 7,373.98
Provisions for property, plant and equipment 37.88 24.95
Amortization of debt arrangement expenses 43.23 55.43
Amortization of consolidation goodwill 665.43 841.62
Amortization of other deferred charges 240.98 55.42
Write-down of consolidation goodwill 2,259.81 249.00
Investment valuation provisions 117.63 68.85
Exchange differences (316.72) 313.60
Undepreciated plant dismantled 33.85 62.24
Provisions for inventory adjustment 23.32 9.24
Period provisions 3,281.40 428.36
Provisions to technical reserves of insurance companies 17.24 61.55
Deferred interest 5.10 291.77
Deferred tax liabilities and other - 1,479.55
Property, plant and equipment and intangible assets 9,597.77 164.91
Financial provision and supplementary pension payments to
retired employees 61.62 61.59
Losses on disposal of consolidated companies 209.25 -
---------------------------------------------------------------
Less:
---------------------------------------------------------------
Gain on disposal of property, plant and equipment and
intangible assets 16.28 29.29
Capital subsidies 63.79 80.03
Nonrefundable third-party contributions - 53.15
Long-term deferred tax assets and liabilities 3,228.65 -
Gain on disposal of consolidated companies 101.78 302.09
Fixed asset allowances used 36.83 668.41
Other allowances used 17.02 1,026.91
Other - (12.75)
-------------------------------------------------------------------------------------------
Funds obtained from operations 8,719.49 11,615.74
-------------------------------------------------------------------------------------------
(25) Explanation added for translation to English
These consolidated financial statements are presented on the basis of
accounting principles generally accepted in Spain. Certain accounting
practices applied by the Group that conform with generally accepted
accounting principles in Spain may not conform with generally accepted
accounting principles in other countries.
-86-
[LOGO]
EXHIBIT I.
Contribution of the Group companies to reserves and translation
differences
The contribution of the Group companies to consolidated reserves and
translation differences as of December 31, 2002 and 2001, was as follows:
---------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------
12/31/02 12/31/01
----------------------------------------------------------------
To To Translation To To Translation
Empresas Reserves Differences Reserves Differences
---------------------------------------------------------------------------------------------------------------
Fonditel 26,22 - 20,94 -
Atento Group (229,62) (7,42) (94,06) 19,10
Casiopea Group 62,53 - 45,33 0,79
Comet Group (6,58) - (6,16) -
Telefonica DataCorp Group (527,68) (221,41) (65,58) (49,02)
Telefonica de Espana Group 295,80 (0,02) 102,21 (0,01)
Telefonica Internacional Group 1.537,61 (4.315,82) 906,52 (2.703,90)
Telefonica Contenidos Group (1.262,99) (248,38) (875,13) (188,23)
Telefonica Publicidad e Informacion Group 74,28 (44,73) 47,73 (1,18)
Telefonica Moviles Group 4.612,68 (985,06) 3.597,32 (354,80)
Terra Networks Group (559,65) (129,29) (355,71) (45,90)
Venturini Group (0,62) - (0,84) -
Inmobiliaria Telefonica (0,76) - (0,29) -
Playa de Madrid 0,74 - 0,34 -
Taetel 11,23 - 10,81 -
Telefonica Europe B.V. 5,38 - 3,76 0,02
Telfisa 3,44 - 1,37 -
Tidsa 33,94 - 32,17 -
Urbana Iberica 0,56 - 0,55 -
Katalyx Group (99,72) (5,98) (69,54) (0,93)
Emergia Group (127,18) (41,49) 7,73 (5,21)
Telefonica and other 20.306,04 (508,22) 19.145,79 50,98
-------------------------------------------------------------------------------------------------------------
Total Telefonica Group 24.155,65 (6.507,82) 22.455,26 (3.278,29)
-------------------------------------------------------------------------------------------------------------
Intercompany fixed asset transactions 64,31 - (94,08) -
-------------------------------------------------------------------------------------------------------------
Total contribution 24.219,96 (6.507,82) 22.361,18 (3.278,29)
-------------------------------------------------------------------------------------------------------------
-87-
[LOGO]
EXHIBIT II
The variations in the scope of consolidation in the years ended December 31,
2002 and 2001, were as follows:
2002
The variations in the scope of consolidation in the year ended December 31,
2002, were as follows:
Telefonica
In March 2002, under the last part of the agreement entered into between
Telefonica, S.A. and Iberdrola, S.A. for the acquisition by the Company of all
the holdings which the Iberdrola Group owned in the Brazilian operators in which
the two companies are direct or indirect stockholders, Telefonica, S.A. acquired
a 3.38% holding in Tele Leste Celular Participacoes, S.A. in exchange for
799,411 of its own shares.
Following completion of the acquisition by Telefonica, S.A. of the
aforementioned holdings owned by the Iberdrola Group, in May 2002 Telefonica,
S.A. contributed to its subsidiary Telefonica Moviles, S.A. the shares owned by
it of the following Brazilian companies, which accounted for 7% of the capital
stock of TBS Celular Participacoes, S.A. and Sudestecel Participacoes, S.A., in
addition to holdings of 3.38% in Tele Leste Celular Participacoes, S.A. and of
62.02% in Iberoleste Participacoes, S.A. In exchange, Telefonica received all
the news shares issued (26,801,494 new shares of (Euro)0.5 par value each) by
the subsidiary in the two capital increases carried out in that month. Also in
relation to the Iberdrola Group's investments, Telefonica sold to its subsidiary
Telefonica Moviles, S.A. 0.66% of the capital stock of Celular CRT
Participacoes, S.A. for (Euro)11.54 million.
Following this transaction, the Telefonica Group's owned the following direct
and indirect holdings in these Brazilian companies: 40.91% in TBS Celular
Participacoes, S.A., 83.56% in Sudestecel Participacoes, S.A., 27.71% in Tele
Leste Celular Participacoes, S.A. and all the shares of Iberoleste
Participacoes, S.A. All these companies and Celular CRT Participacoes, S.A. were
fully consolidated in the Telefonica Group's consolidated financial statements
(Tele Leste Celular Participacoes, S.A. was accounted for by the equity method
in the Telefonica Group's 2001 consolidated financial statements) through
December 31, 2002, the date on which their respective balance sheets were
proportionally consolidated through the joint venture Brasilcel, N.V. (see
section on Telefonica Moviles).
Telefonica, S.A. sold to Telefonica Internacional, S.A. 64,673 common shares of
Telecomunicacoes de Sao Paulo, S.A., 189,278.445 "quotas" of SP Telecomunicacoes
Holding, Ltda. and 2,669,724,381 common shares and 834,622,796 preferred shares
of Telefonica Data Brasil Holding, S.A., which it had acquired in 2001 from the
Iberdrola Group for its book value. All these companies continue to be fully
consolidated in the Telefonica Group's consolidated financial statements.
In January Telefonica, S.A. acquired 50,000 shares of Endemol Enterteinment
Holding, N.V. (Endemol) for (Euro)2 million. Following this acquisition, the
Telefonica Group owns a holding of 99.47% in Endemol, which continues to be
fully consolidated in the Telefonica Group's consolidated financial statements.
In January Telefonica, S.A. acquired 50,000 shares of Telefonica Moviles, S.A.
for (Euro)0.41 million. Following this acquisition and the above-mentioned
contributions, the Telefonica Group owns direct and indirect holdings of 92.43%
in Telefonica Moviles, S.A., which continues to be fully consolidated in the
Telefonica Group.
-116-
[LOGO]
In February Telefonica, S.A. participated in the incorporation of the Brazilian
company Telefonica Factoring do Brasil, S.A. and subscribed and paid 40% of this
company's capital stock for (Euro)0.96 million. This company is accounted for by
the equity method in the Telefonica Group's consolidated financial statements.
In January Zeleris Espana, S.A. (formerly Telefonica Servicios de Distribucion,
S.A.), a wholly-owned subsidiary of Telefonica, S.A., increased capital by
(Euro)1.92 million, which was subscribed and paid in full by the Parent Company.
Subsequently, in June Zeleris Soluciones Integrales, S.L., a wholly-owned
subsidiary of Telefonica, S.A., increased capital by (Euro)0.82 million, which
was subscribed and paid in full by Telefonica, S.A. through the nonmonetary
contribution of Zeleris Espana, S.A. Both companies continue to be fully
consolidated in the Telefonica Group's consolidated financial statements.
In 2002 Telefonica acquired 717,465 shares of the subsidiary Terra Networks,
S.A. for (Euro)5.53 million, bringing the Telefonica Group's direct and indirect
holding in this company, which continues to be fully consolidated, to 38.58%.
On May 31, 2002, the Dutch company Atento N.V. was incorporated through the
nonmonetary contribution of all the shares of the U.S. company Atento Holding
Inc. The new company, which is a wholly-owned investee of Telefonica, S.A., was
fully consolidated in the Telefonica Group.
In 2002 the following subsidiaries were fully consolidated for the first time in
the Telefonica Group:
- Telefonica Gestion de Servicios Compartidos, S.A. de C.V. (Mexico)
- Telefonica Gestion de Servicios Compartidos, S.A.C. (Peru)
- Telefonica Gestao de Servicos Compartilhados do Brasil, Ltda. (Brazil)
- Telefonica Gestion de Servicios Compartidos, S.A. (Argentina)
In January Telefonica, S.A. incorporated the wholly-owned subsidiary Telefonica
Capital, S.A. and paid this company's initial capital stock ((Euro)6 million) in
full. Subsequently, Telefonica Capital increased capital by (Euro)1 million with
additional paid-in capital of (Euro)38.01 million, all of which was subscribed
and paid by its sole stockholder Telefonica, S.A. through the nonmonetary
contribution of 201,682 shares of Fonditel, Entidad Gestora de Fondos de
Pensiones, S.A. representing 77.22% of this company's capital stock. Telefonica
Capital, S.A. was fully consolidated in the Telefonica Group's consolidated
financial statements.
In December Telefonica Capital, S.A., a wholly-owned subsidiary of Telefonica,
S.A., sold 28,736 shares of Fonditel, Entidad Gestora de Fondos de Pensiones,
S.A. for (Euro)6.14 million. Also, Telefonica, S.A.'s wholly-owned subsidiary
Seguros de Vida y Pensiones Antares, S.A., which owned 9,881 shares of Fonditel,
sold these shares to Telefonica Capital for (Euro)2.11 million. As a result of
these transactions, the Telefonica Group's direct and indirect holding in
Fonditel decreased from 81% in 2001 to 70% in 2002. The company continues to be
fully consolidated in the Telefonica Group.
In December Telefonica acquired from its Luxembourg subsidiary Casiopea
Reaseguradora, S.A. 110,000 shares of Seguros de Vida y Pensiones Antares, S.A.
for (Euro)59.63 million. Following this transaction, the Telefonica Group
continues to own all the capital stock of this company, which continues to be
fully consolidated in the Telefonica Group.
-117-
[LOGO]
In November Telefonica, S.A. acquired Gran Via Media, S.L. from its wholly-owned
subsidiary Telefonica de Contenidos, S.A. Gran Via Media, S.L. changed its
corporate name to Lotca Servicios Integrales, S.L. In December Lotca increased
capital by 16,920 shares of (Euro)1 par value each, which the Telefonica Group
subscribed in full through a nonmonetary contribution. Lotca was fully
consolidated for the first time in the Telefonica Group.
In December, by virtue of its agreements with the Tyco Group, Telefonica, S.A.
acquired 17,872,341 shares of the Dutch company Emergia Holding, N.V. for
(Euro)47.09 million. The Telefonica Group thereby became the sole stockholder of
this company, which continues to be fully consolidated in the Telefonica Group's
consolidated financial statements.
The Uruguayan company Emergia, S.A. increased capital in December by US$ 500
million. Telefonica subscribed and paid the capital increase in full by
converting loans to this company into capital. Following this transaction, the
Telefonica Group directly or indirectly owns all the shares of this Uruguayan
company, which continues to be fully consolidated in the Telefonica Group's
consolidated financial statements.
Grupo Admira Media, S.A. and Telefonica Internet, S.A., both of which are
wholly-owned subsidiaries of Telefonica, S.A., changed their corporate names in
2002 to Telefonica de Contenidos, S.A. and Corporacion Admira Media, S.A.,
respectively.
In 2002 the U.S. company Katalyx, Inc. increased capital by US$ 124 million,
which Telefonica, S.A. subscribed in full and paid through the conversion of
loans to this company into capital. As a result of this transaction, Telefonica
b2b Inc., the former sole stockholder of Katalyx, Inc., had a 0.1% holding, with
Telefonica owning the remaining 99.9% of the capital stock of Katalyx, Inc.,
which continues to be fully consolidated in the Telefonica Group's consolidated
financial statements.
In 2002 Telefonica Europe, B.V., a wholly-owned investee of Telefonica, S.A.,
formed Telefonica Finance USA, L.L.C., which issued preferred shares amounting
to (Euro)2,000 million. As a result, as of December 31, 2002, the Telefonica
Group had a 0.01% holding in and held all the voting rights at Telefonica
Finance USA, L.L.C.
Telefonica Datacorp Group
In January Telefonica DataCorp, S.A. acquired all the shares of the German
company HighwayOne Germany, GmbH for (Euro)1.38 million. Subsequently, the
German company increased capital by (Euro)2.57 million with additional paid-in
capital of (Euro)634.5 million, which was subscribed and paid in full by the
Telefonica Group. As part of the reorganization of the Telefonica Group by
business line, HighwayOne Germany, GmbH acquired for their market price from
Telefonica all the shares of MediaWays, GmbH and subsequently merged with this
company. Lastly, the German company changed its corporate name to Telefonica
Deutchland, which was fully consolidated in the Telefonica Group.
In July 2002 the holding in the Austrian company European Telecom International,
GmbH, a wholly-owned subsidiary of Telefonica Datacorp, S.A.U., was sold, giving
rise to a loss for the Telefonica Group of (Euro)38.79 million. This company,
which had been fully consolidated in 2001, was excluded from the scope of
consolidation of the Telefonica Group.
The Uruguayan company Telefonica Data Uruguay, S.A., which was fully
consolidated in 2001, was sold in November, giving rise to a loss of (Euro)2.28
million. Accordingly, it was excluded from the scope of consolidation of the
Telefonica Group.
-118-
[LOGO]
Also, in September Telefonica Datacorp, S.A. acquired all the shares of
Telefonica Data Mexico, S.A. de C.V. held by its minority stockholders for
(Euro)5.16 million. Following this transaction, Telefonica Datacorp owned all
the shares of Telefonica Data Mexico, S.A. de C.V., which continues to be fully
consolidated in the Telefonica Group.
The Datacorp Group, through its subsidiary Telefonica Data de Brasil Ltd.,
subscribed to the capital increase carried out by Telefonica Data Brasil
Holding, S.A., contributing the loans previously granted amounting to 482,9
million reais, thereby increasing the Telefonica Group's holding in this company
from 87.48% to 93.98%.
The 34%-owned investee of Telefonica Datacorp, S.p.A., the Italian company
Atlanet, S.A., which through June 30, 2002, had been fully consolidated, has
since that date been accounted for by the equity method because it no longer
fulfills the management control requirements for full consolidation.
On July 2, 2002, Telefonica Data Espana, S.A., a wholly-owned investee of
Telefonica Datacorp, S.A., sold 24% of the holding owned by it in Gestion del
Conocimiento, S.A., giving rise to a gain of (Euro)58 thousand. This company,
which had been accounted for in the consolidated financial statements of the
Telefonica Group, was excluded from consolidation.
Also, in July 2002 Telefonica Data Espana, S.A. acquired a 33.33% holding in
Servicios On Line para Usuarios Multiples, S.A. (Solium) for (Euro)0.7 million.
This company is accounted for by the equity method in the consolidated financial
statements of the Telefonica Group.
In November 2002 the Telefonica Datacorp Group acquired 15% of the capital stock
of Agencia de Certificacion Electronica, S.A. for (Euro)3. As a result of this
acquisition, the Telefonica Group became the sole stockholder of this company,
which continues to be fully consolidated in the Telefonica Group's consolidated
financial statements.
Telefonica de Espana Group
In 2002 Telefonica Cable, S.A., a wholly-owned subsidiary of Telefonica de
Espana, S.A., made the following acquisitions:
- 22% of the capital stock of Telefonica Cable Extremadura, S.A.
- 10% of the capital stock of Telefonica Cable Catalunya, S.A.
- 10% of the capital stock of Telefonica Cable Madrid, S.A.
- 11% of the capital stock of Telefonica Cable Navarra, S.A.
- 15% of the capital stock of Telefonica Cable Galicia, S.A.
- 27% of the capital stock of Telefonica Cable Andalucia, S.A.
- 49% of the capital stock of Sociedad General de Cablevision Canarias,
S.A.
- 49% of the capital stock of Telefonica Cable Castilla y Leon, S.A.
Following these acquisitions Telefonica Cable, S.A., the parent company of all
these companies, owned all the companies' shares, except in the case of
Telefonica Cable Extremadura, S.A., in which
-119-
[LOGO]
it has a 83% holding, and Telefonica Cable Galicia, S.A. in which its new
percentage of ownership is 85%. (Euro)5.82 million were disbursed for these
investments. All these companies continue to be fully consolidated in the
Telefonica Group.
In December Iniciativa de Mercados Interactivos, S.A. (I.M.I.) absorbed Adquira
Spain, S.L., following which the Telefonica de Espana Group controlled 20% of
the absorbing company's capital. I.M.I., which changed its corporate name to
Adquira Spain, S.A., is accounted for by the equity method in the Telefonica
Group's consolidated financial statements.
Telefonica de Espana, S.A.U. and Telefonica Moviles Espana, S.A.U. have formed
two joint ventures called "Telefonica de Espana, S.A.U. - Telefonica Moviles
Espana, S.A.U., Union Temporal de Empresas, Ley 18/1982 de 26 de mayo y Ley
12/1991, de 29 de abril" and "Telefonica de Espana, S.A.U. - Telefonica Moviles
Espana, S.A.U., Union Temporal de Empresas II, Ley 18/1982 de 26 de mayo y Ley
12/1991, de 29 de abril", both with an initial endowment fund of (Euro)3,006,
which was paid in proportion to the two companies' respective ownership
interests, i.e. 90% in the case of Telefonica de Espana and 10% in the case of
Telefonica Moviles Espana for both joint ventures.
In April the wholly-owned subsidiary Telefonica Soluciones Sectoriales sold its
holdings in the associated companies Madrid 112, S.A. (24.5%) and Fitex, S.A.
(30.93%), giving rise to gains of (Euro)115 thousand and (Euro)30 thousand,
respectively. These companies, which had been accounted for by the equity method
in the Telefonica Group's consolidated financial statements, were excluded from
consolidation.
Telefonica Moviles Group
On January 10, 2002, Telefonica Moviles acquired one-third of the shares of each
of the following companies owned by Mesotel de Costa Rica, S.A. (Mesotel): TES
Holding, S.A. de C.V., Telca Gestion, S.A. de C.V., TCG Holdings, S.A., Telca
Gestion Guatemala, S.A., Paging de Centroamerica, S.A. and Telefonica de
Centroamerica, S.L. (except for the holdings in Telefonica de Centroamerica
Guatemala, S.A. - one share - and Tele-Escucha, S.A. - two shares -, which it
acquired in full). As consideration, Mesotel received 7,333,180 existing shares
of Telefonica Moviles.
Also, on July 22, 2002, Telefonica Moviles carried out a capital increase agreed
upon by its Stockholders' Meeting on April 4, 2002, for a total amount (par
value plus additional paid-in capital) of (Euro)27.66 million. Mesotel paid
these new shares in full through the contribution of the shares of the following
companies held by it: TES Holding, S.A. de C.V., Telca Gestion, S.A. de C.V.,
TCG Holdings, S.A., Telca Gestion Guatemala, S.A., Paging de Centroamerica, S.A.
and Telefonica de Centroamerica, S.L. Following this capital increase,
Telefonica Moviles, S.A. owned all the shares of each of these companies.
In April 2002 Tele Sudeste Celular Participacoes, S.A. and Celular CRT
Participacoes, S.A. carried out capital increases that were subscribed by
Telefonica Moviles, S.A.
On September 10, 2002, Telefonica Moviles acquired a 65.23% holding in Pegaso
PCS (Mexico) for (Euro)92.87 million. Subsequently, in order to strengthen its
net worth position, Pegaso carried out a capital increase in which Telefonica
Moviles, S.A. paid (Euro)211.45 million corresponding to its 65.23% holding. The
agreements entered into with Burillo contained a commitment to contribute the
holdings of the two companies in the Pegaso Group and in the northern Mexican
companies to a new Mexican company of which the two groups would be
stockholders. This transaction was implemented through the sale of their
holdings to Telefonica Moviles Mexico, followed by the conversion of the debt
into equity by the creditors. Telefonica Moviles has a holding of 92% in this
new holding company.
-120-
[LOGO]
On October 21, 2002, Telefonica Moviles, S.A. acquired from Portugal Telecom
SGPS, S.A. a 14.68% holding in Telesp Celular Participacoes, S.A. for
(Euro)200.31 million.
On December 27, 2002, once Brazilian legislation had been complied with,
Telefonica Moviles, S.A. and PT Moveis Servicos de Telecomunicacoes, SGPS, S.A.
(PT Moveis) formed the joint venture Brasilcel, N.V., 50% owned by each company,
through the contribution of all the shares directly or indirectly held by the
two groups in the wireless communications companies in Brazil, the detail being
as follows:
-------------------------------------------------------------------
Companies % Contributed
Contributed -----------------------------------------
Telefonica PT Moveis Total
Moviles
-------------------------------------------------------------------
Celular CRT
Participacoes, S.A. 40.90% 7.58% 48.48%3
-------------------------------------------------------------------
Tele Leste Celular 27.70% - 27.70%
Participacoes, S.A.
-------------------------------------------------------------------
Tele Sudeste Celular 83.56% - 83.56%
Participacoes, S.A.
-------------------------------------------------------------------
Telesp Celular 14.68% 50.44% 65.12%
Participacoes, S.A.
-------------------------------------------------------------------
The value of the contribution to Brasilcel, N.V. of the wireless assets owned by
Telefonica Moviles, S.A. was (Euro)1,898 million. Its balance sheet was
proportionally consolidated in the consolidated financial statements and the
results for the whole year of the Brazilian companies contributed by Telefonica
Moviles were recorded in the consolidated statement of operations when this
transfer was made (on December 27, 2002).
Telefonica de Contenidos Group
In September all the shares of the Uniprex Onda Cero Group and of Cadena Voz de
Radiodifusion, S.A. owned by Telefonica de Contenidos, S.A. were sold to the
Antena 3 de Television Group, giving rise to gains of (Euro)35.82 million. In
2002 the two companies, which in 2001 had been fully consolidated in the
Telefonica Group, were included in the Antena 3 de Television Group and
accounted for by the equity method.
In 2002 Mediapark, S.A. carried out a capital increase not subscribed by
Telefonica de Contenidos. Therefore, since its holding in this company was
reduced to 7.40%, the holding was recorded in the Telefonica Group's
consolidated financial statements as of December 31, 2002, as a minority
investment.
In April Telefonica de Contenidos sold 4.11% of its holding in Hispasat, S.A.,
giving rise to gains of (Euro)26.10 million. Telefonica de Contenidos, which
owns a 13.23% holding in Hispasat, S.A., continues to account for this company
by the equity method in its consolidated financial statements.
In June 2002 Telefonica de Contenidos sold its holding in Prime Argentina, S.A.,
which owns the Azul Television channel, for US$ 12 million, giving rise to a
loss of (Euro)162.78 million. This company, which was accounted for by the
equity method in the Telefonica Group's consolidated financial statements, was
excluded from consolidation.
-121-
[LOGO]
Telefonica Internacional Group
In September 2002 the Telefonica Internacional Group sold a 25% holding in the
Chilean Group Sonda, S.A. for US$ 38 million, giving rise to a loss in
consolidation of (Euro)1.62 million. This sale reduced the Telefonica
Internacional Group's ownership interest in Sonda to 35% (this holding is
subject to certain commitments detailed in Note 22). This company, which had
been fully consolidated, was accounted for by the equity method from September
2002 onwards.
T.P.I. Group
On February 11, 2002, Telefonica Publicidad e Informacion, S.A. acquired all the
shares of T.P.I. Peru, S.A.C., from Telefonica Internacional, S.A. for
(Euro)36.28 million. The Telefonica Group's effective holding in this company,
which continues to be fully consolidated, decreased from 97.07% to 59.90%.
In December Iniciativa de Mercados Interactivos, S.A. (I.M.I.) absorbed Adquira
Spain, S.L., following which the T.P.I. Group controlled 20% of the absorbing
company's capital. I.M.I., which changed its corporate name to Adquira Spain,
S.A., is accounted for by the equity method in the Telefonica Group's
consolidated financial statements.
In December Publiguias Holding, S.A., a wholly-owned subsidiary of the
Telefonica Publicidad e Informacion Group, participated in the incorporation of
Urge Chile, S.A. by subscribing and paying 59.94 Chilean pesos relating to
99.99% of this company's capital stock. Urge Chile, S.A. was fully consolidated
in the Telefonica Group's consolidated financial statements.
In July Telefonica Publicidad e Informacion, S.A., the parent company of the
Group, acquired a 9.33% holding in the Spanish company Goodman Business Press,
S.A. for (Euro)0.98 million. As a result of this acquisition, the parent company
controls all the capital of this company, which continues to be fully
consolidated in the Telefonica Group.
Katalyx Group
In April the wholly-owned subsidiary Adquira, Inc. sold one-half of its 50%
holding in Adquira Mexico, Ltd. for a gain of (Euro)0.37 million. This company
which had been fully consolidated, is currently accounted for by the equity
method in the Telefonica Group's consolidated financial statements.
On October 30, 2002, Katalyx Espana, S.L. acquired a 49% holding in Soluciones
Tecnologicas para la Alimentacion, S.L., as consideration for which it
contributed all the shares of Katalyx Food Espana, S.L. Soluciones Tecnologicas
para la Alimentacion, S.L. is accounted for by the equity method in the
Telefonica Group's consolidated financial statements.
Atento Group
In May Atento Holding Inc. carried out capital increases at companies that were
already investees for an overall amount of (Euro)39.69 million. Atento Holding
Inc. now owns all the shares of the companies in Central America, Puerto Rico,
Italy, Venezuela and Mexico, and has a 99.998% holding in the company in
Morocco. All these companies continue to be fully consolidated in the Telefonica
Group's consolidated financial statements.
-122-
[LOGO]
Terra Group
In July 2002 Emplaza, S.A. increased capital by (Euro)1,421 thousand. In this
capital increase, Terra Networks, S.A. acquired the shares required to increase
it holding in this company from 50% to the current 80%. This company, which had
been accounted for by the equity method in the Telefonica Group's consolidated
financial statements, is now fully consolidated.
In 2002 One Travel.com, Inc. increased capital by (Euro)4 million. In this
capital increase, Terra Networks, S.A. acquired the shares required to increase
it holding in this company from 27.8% to the current 39.6%, and disbursed US$
2.02 million in this connection. This company continues to be accounted for by
the equity method in the Telefonica Group's consolidated financial statements.
In August Terra Networks, S.A., through its wholly-owned U.S. subsidiary Lycos,
Inc., sold all its holding (44.82%) in Lycos Korea, Inc., obtaining gains in
consolidation of (Euro)10.62 million. Also, in September, Lycos, Inc. sold its
minority holding in the Canadian company Sympatico Lycos, obtaining gains in
consolidation of (Euro)8.49 million. In December the Terra Group sold all its
holding in Lycos Japan, K.K., incurring a loss on the sale of (Euro)2.47
million. All these companies, which had been accounted for by the equity method
in the Telefonica Group's consolidated financial statements, were excluded from
the scope of consolidation.
2001
Telefonica
As part of the plan to restructure the Telefonica Group by business line,
Telefonica Moviles, S.A., Telefonica Datacorp, S.A. and Telefonica
Internacional, S.A. carried out various capital increases in 2001. As
consideration for these capital increases, Telefonica, S.A. made a nonmonetary
contribution of the shares which it directly owned of the capital stock of
Telefonica de Argentina, S.A., Telefonica del Peru, S.A.A. and Telecomunicacoes
de Sao Paulo, S.A. (TELESP).
- On January 25, 2001, Telefonica Moviles, S.A. carried out one of the
capital increases authorized by the Stockholders' Meeting on October 26,
2000, for (Euro)87,432 thousand. Telefonica, S.A. paid the new shares in
full through the contribution of shares of the Argentine company
Telefonica de Argentina, S.A. (TASA) representing 15.09% of its capital
stock. At 2001 year-end Telefonica Moviles owned 97.93% of the capital
stock of Telefonica Moviles Argentina, S.A. which in turn owned all the
shares of Telefonica Comunicaciones Personales, S.A. Also, as authorized
by the aforementioned Stockholders' Meeting, on March 7, 2001, capital
was increased by (Euro)32,970 thousand, and shares representing a 16.45%
holding in Telefonica del Peru, S.A.A. were received, increasing the
ownership interest in Telefonica Moviles Peru Holding, S.A.A., the sole
stockholder of Telefonica Moviles, S.A.C., to 97.97%.
- On March 7, 2001, Telefonica Intercontinental, S.A. (which was absorbed
in 2001 by Telefonica Moviles Espana, S.A.) received official
notification of the grant of the UMTS license in Switzerland for a period
of 15 years at a cost of (Euro)32,508 thousand. The company which holds
the license, 3G Mobile AG, was fully consolidated.
- Telefonica Datacorp, S.A. received shares of the capital stock of
Telefonica Argentina and Telefonica Peru, representing holdings of 97.92%
in the Argentine company Advance, S.A. and of 93.22% in the Peruvian
company Telefonica Data Peru, S.A.A., as well as the assets and
liabilities assigned to the data business owned by Telefonica de
Argentina and Telefonica del Peru.
-123-
[LOGO]
- Telefonica Internacional, S.A., received shares of the capital stock of
Telefonica de Argentina and Telefonica del Peru determined on the basis of
the value of the wireline telephony and supplementary assets and
liabilities owned by Telefonica de Argentina and Telefonica del Peru.
- Telefonica Internacional, S.A., received 306,211,253,813 shares
representing 61.96% of the capital stock of the Brazilian company Telesp.
These contributions did not change the scope of consolidation with respect to
the previous year.
Telefonica, S.A. acquired 4,713,015 shares of Terra Networks, S.A. for
(Euro)53.96 million. As a result of these purchases, the Telefonica Group
increased its percentage of ownership in Terra Networks, S.A. to 37.63%. The
company continues to be fully consolidated in the consolidated financial
statements of the Telefonica Group.
In January 2001, pursuant to an agreement entered into in May 2000, Telefonica,
S.A. acquired all the shares of Mediaways, GmbH Internet Services for
(Euro)1,473.08 million from the German company Bertelsmann, A.G. The company was
fully consolidated in the Telefonica Group. Also, in December 2001 Telefonica,
S.A. subscribed to a capital increase carried out by this company for (Euro)62.5
million.
In 2001 Telefonica, S.A. acquired a total of 8,289,305 shares of Telefonica
Moviles, S.A. for (Euro)68.68 million, giving it a 92.70% holding in this
company. The company continues to be fully consolidated in the Telefonica
Group's consolidated financial statements.
In February Telefonica, S.A. incorporated the wholly-owned subsidiary Telefonica
Gestion de Servicios Compartidos, S.A., and paid in full the initial capital of
this company ((Euro)0.06 million). In December Telefonica Gestion de Servicios
Compartidos, S.A. increased its capital by (Euro)2 million which was fully
subscribed and paid by its parent company. The company was fully consolidated in
the Telefonica Group's consolidated financial statements.
In June Telefonica, S.A. increased capital by 122,560,575 shares of (Euro)1 par
value each and additional paid-in capital of (Euro)4.5 per share. As
consideration for this capital increase, Telefonica received as a nonmonetary
contribution from Motorola certain investments in the wireless business in
Mexico: all the shares of Corporacion Integral de Comunicacion, S.A. de C.V.;
all the shares of Grupo Corporativo del Norte, S.A.; 79% of the capital stock of
Telefonia Celular del Norte, S.A. de C.V. (the remaining 21% was contributed
indirectly through the acquisition of all the shares of Corporacion Integral de
Comunicacion, S.A. de C.V.); 73.81% of the capital stock of Celular de
Telefonia, S.A. de C.V. (the remaining 26.19% was contributed indirectly through
the acquisition of all the shares of Grupo Corporativo del Norte, S.A. de C.V.);
all the shares of Baja Celular Mexicana, S.A. de C.V.; 0.00001% of the capital
stock of Baja Celular Servicios Compartidos, S.A. de C.V. (the remaining
99.99999% was contributed indirectly through the acquisition of all the shares
of Baja Celular Mexicana, S.A. de C.V.); 0.00001% of the capital stock of
Tamcel, S.A. de C.V. (the remaining 99.99999% was contributed indirectly through
the acquisition of all the shares of Baja Celular Mexicana, S.A. de C.V.); 22%
of the capital stock of Movitel del Noroeste, S.A. de C.V. (a further 68% was
contributed indirectly through the acquisition of all the shares of Tamcel, S.A.
de C.V.); 22% of the capital stock of Moviservicios, S.A. de C.V. (a further 68%
was contributed indirectly through the acquisition of all the shares of Tamcel,
S.A. de C.V.) and 22% of the capital stock of Movicelular, S.A. de C.V. (a
further 68% was contributed indirectly through the acquisition of all the shares
of Tamcel, S.A. de C.V.). Additionally, to supplement this transaction,
Telefonica contributed (Euro)12.33 million in cash. These holdings were
contributed in July to Telefonica Moviles, S.A., which increased capital by 203
million shares which were fully subscribed by Telefonica, S.A. The market value
of the holdings acquired on the date of the transaction was (Euro)2,173.74
million. The companies were fully consolidated in the Telefonica Group.
-124-
[LOGO]
In August, Telefonica acquired 51,987 shares in Endemol Enterteinment Holding,
N.V. (Endemol), for (Euro)2.06 million, a transaction which generated
consolidation goodwill of (Euro)1.86 million. This transaction increased the
Telefonica Group's holding in Endemol to 99.35%. The company continued to be
fully consolidated in the consolidated financial statements of the Telefonica
Group.
In September, Telefonica, S.A. acquired 114,500 shares of the subsidiary
Telefonica Publicidad e Informacion, S.A. (T.P.I.) for (Euro)0.36 million, a
transaction which generated consolidation goodwill of (Euro)0.32 million. This
transaction increased Telefonica's holding in T.P.I. to 59.9%. The company
continued to be fully consolidated in the consolidated financial statements of
the Telefonica Group.
Telefonica, S.A. and Iberdrola, S.A. entered into an agreement whereby the
Company acquired all the holdings which the Iberdrola Group owned in the
Brazilian operators in which the two companies were direct or indirect
stockholders. These holdings were acquired by Telefonica, S.A. in exchange for
its own shares at the following exchange ratios:
.. Holding of 3.48% in the capital stock of SP Telecomunicacoes Holding, S.A.,
the majority stockholder of Telecomunicacoes de Sao Paulo, S.A. (Telesp),
for 6,638,157 shares of Telefonica, S.A.
.. Holding of 7% in the capital stock of TBS Celular Participacoes, S.A., the
majority stockholder of Celular CRT Participacoes, S.A., for 1,493,902
shares of Telefonica, S.A.
.. Holding of 7% in the capital stock of Sudestecel Participacoes, S.A., the
majority stockholder of Tele Sudeste Celular Participacoes, S.A., for
3,693,775 shares of Telefonica, S.A.
.. Holding of 62.02% in the capital stock of Iberoleste Participacoes, S.A.,
the majority stockholder of Tele Leste Celular Participacoes, S.A., for
6,526,736 shares of Telefonica, S.A.
.. Holding of 0.66% in the capital stock of Celular CRT Participacoes, S.A.
for 634,541 shares of Telefonica, S.A.
Also, within the framework of this agreement, the exchange of 3.38% of the
capital stock of Tele Leste Celular Participacoes, S.A. for 783,736 shares of
Telefonica, S.A. was not carried out pending obtainment of the prior regulatory
authorizations. As indicated above, this exchange took place in 2002.
Telefonica, S.A. paid (Euro)248.05 million to fully subscribe the capital
increase carried out by its wholly-owned investee Telefonica Datacorp, S.A.U.,
pursuant to the agreement entered into by the Telefonica Group and the Brazilian
bank Banco Itau for the provision of services to the bank based on the
management of its corporate telecommunications network.
Telefonica Publicidad e Informacion
Goodman Business Press, S.A., which was acquired in 2000, was fully consolidated
in the Telefonica Group in 2001.
As a result, Goodman Business Press, S.A.'s wholly-owned investee Cernet, a
company which engages in the design of web pages, was also fully consolidated in
2001. Buildnet, S.A., in which Telefonica Publicidad e Informacion, S.A. had a
holding of 46.35% and Goodman had a holding of 51.24%, was fully consolidated in
2001 (in 2000 it had been accounted for by the equity method).
-125-
[LOGO]
Terra Networks Group
Terra Networks, S.A. participated in the incorporation of the Spanish company
Azeler Automocion, S.A. with initial capital of (Pounds)8.41 million, 50 %
subscribed and paid by Terra Networks, S.A. The company was accounted for by the
equity method in the Telefonica Group's consolidated financial statements.
Also, in 2001 Terra Networks incorporated and became the sole stockholder of
Terra Networks Financial Services USA Llc. and Terra Networks Caribe, for which
it disbursed (Euro)2.12 million and (Euro)1.29 million, respectively. The two
companies were fully consolidated in the Telefonica Group's consolidated
financial statements in 2001.
In order to restructure the holdings in Spain of its associated companies, Terra
Networks, S.A. formed Terra Networks Asociadas, S.L. with initial capital stock
of (Euro)3,005, fully subscribed and paid by Terra Networks, S.A.
Also, Terra Networks, S.A. incorporated and acquired a 50% stake in Iniciativas
Residenciales en Internet, S.A. ("ATREA", a real estate portal). The initial
investment was (Euro)1,205 thousand. The company was recorded in the Telefonica
Group's consolidated financial statements at cost.
Inversis Valores y Bolsa, Sociedad de Valores S.A. (formerly Electronic Trading
System Valores, S.A.) was sold for (Euro)4.5 thousand. The company, which had
been recorded at cost in the Group's consolidated financial statements, was
excluded from consolidation.
Maptel Networks, S.A.U. which had been recorded at cost in 2000, was fully
consolidated in the Telefonica Group's consolidated financial statements in
2001.
Pursuant to the agreements entered into with Banco Bilbao Vizcaya Argentaria,
S.A. (BBVA) in August 2001, Terra Networks, S.A. acquired a 49% holding in Uno-e
Bank, S.A. for a disbursement of (Euro)160.43 million. This transaction gave
rise to goodwill amounting to (Euro)130.25 million in the consolidated financial
statements of the Telefonica Group. This company was accounted for by the equity
method in the Telefonica Group's consolidated financial statements.
Telefonica Internacional Group
In 2001 Telefonica Internacional, S.A. sold its 35.86% holding in the Argentine
company Cablevision, S.A., giving rise to a capital gain of (Euro)255.92
million. The investee was excluded from the Telefonica Group's scope of
consolidation.
Telefonica Internacional, S.A. acquired an additional holding of 10% in
Telefonica Peru Holding, S.A. for (Euro)227.34 million, giving rise to
consolidation goodwill of (Euro)46.27 million. As a result of this acquisition,
Telefonica Internacional became the sole stockholder of this company, which
continued to be fully consolidated in the Telefonica Group's consolidated
financial statements.
In 2001, following the requisite authorization by the regulatory body Anatel,
the sale to Telefonica Internacional, S.A. of shares of Sao Paulo
Telecomunicacoes Holding, S.A., which owned the shares of Telesp Participacoes,
S.A., under a sale option executed by BBVA in December 2000, was concluded. This
transaction increased the ownership interest in SPT Holding by 0.5292%, and a
disbursement of (Euro)80.10 million was made in this connection. This company
continued to be fully consolidated in the Telefonica Group.
The ownership interests of the parent company Telefonica Internacional, S.A. in
the subsidiaries Telefonica de Peru, Telefonica de Argentina, Telesp and CEI
Citicorps Holdings were increased as a
-126-
[LOGO]
result of the aforementioned contributions of shareholdings by Telefonica, S.A.
Capital was reduced at Telefonica Holding Argentina, S.A. through the
reimbursement of contributions to the other stockholders in order to give
Telefonica Internacional, S.A. a 99.96% holding in this company.
Telefonica Moviles Group
Since October 1, 2001, Ipse 2000 S.p.A. has been accounted for by the equity
method in the consolidated financial statements. Under Article 11.2.b of Royal
Decree 1815/1991 approving the regulations for the preparation of consolidated
financial statements, this method is the most appropriate, because since October
1, 2001, certain difficulties have been progressively disclosed which, in
practice, have substantially affected the Telefonica Group's effective control
over the management of Ipse 2000 S.p.A.
The Spanish company MoviPay International, S.A., in which Telefonica Moviles had
a 38% ownership interest and which had been recorded at cost in the Telefonica
Moviles Group's 2000 consolidated financial statements, was accounted for by the
equity method in 2001.
Telefonica de Contenidos Group
In January 2001 the Endemol Group acquired the remaining 50% of the capital of
Endemol France for (Euro)159.3 million. As a result of this acquisition, the
Endemol Group became the sole stockholder of this company, which was fully
consolidated in the Telefonica Group's consolidated financial statements in
2001.
In 2001 T. de Contenidos sold 15,740 shares representing 5.40% of the capital
stock of Hispasat, S.A., giving rise to a gain of (Euro)35.17 million. As of
December 31, 2001, T. de Contenidos had a 17.34% holding in that company.
T. de Contenidos acquired Antena 3 de TV shares from minority stockholders for
(Euro)1.79 million, increasing its holding to 47.51%. This company continued to
be accounted for by the equity method in the Telefonica Group's consolidated
financial statements.
In April T. de Contenidos, S.A. acquired all the shares of Famosos, Artistas,
Musicos y Actores, S.A. (FAMA), which had formerly been owned by Antena 3 de
Television, S.A. The total cost of the transaction amounted to (Euro)6.21
million and consolidation goodwill totaling (Euro)3.25 million was generated. In
2001 the company was fully consolidated in the Telefonica Group.
Capital was increased by (Euro)11.12 million at Rodven. This company was
proportionally consolidated in the Telefonica Group in 2001.
In September 2001 T. de Contenidos, S.A. acquired a 47.5% holding in Tick Tack
Ticket, S.A. for (Euro)6.01 million. This transaction gave rise to consolidation
goodwill of (Euro)4.15 million for the Telefonica Group. The company was
accounted for by the equity method in 2001.
Telefonica Datacorp Group
On January 16, 2001, Telefonica Data Mexico (formerly Optel) increased capital
by 16,992,251 shares, all of which were acquired by Telefonica Data Holding. On
March 6 capital was increased by 16,743,904 shares, of which 5,228,385 were
acquired by Telefonica Data Holding and 11,515,519 by T. Datacorp. Following
these capital increases the capital of Telefonica Data Mexico amounted to MXP
241,738,667.8 and the stockholder structure was as follows:
T. Data Holding Mexico: 45.66%.
-127-
[LOGO]
T. Data Holding: 11.88%.
T. Datacorp: 37.11%.
The Spanish company Telefonica Data Caribe, S.A., a wholly-owned investee of the
Telefonica DataCorp Group, participated in the incorporation of Telefonica Data
Cuba, by subscribing to 50% of the capital stock for (Euro)0.1 million. The
company was recorded in the Telefonica Group's consolidated financial statements
at cost.
Telefonica de Espana Group
In March 2001 all the shares of Telefonica Sistemas de Informacion Geografica,
S.A., a wholly-owned investee of Telefonica de Espana, S.A.U., were sold to
Telecomunicaciones Sistemas de Ingenieria de Productos, S.A.U., S.A. for
(Euro)1.38 million, giving rise to a gain of (Euro)5.02 million in the
Telefonica Group's consolidated financial statements. This company, which had
been fully consolidated in the Telefonica Group's consolidated financial
statements, was excluded from consolidation.
In August 2001 Telyco Maroc S.A., in which Telyco S.A.U. had a holding of
53.988%, was incorporated with an initial capital stock of MAD 6 million
((Euro)0.601 million). This company's corporate purpose is the promotion,
marketing and distribution in Morocco of equipment, systems and, in general, all
manner of products relating to telecommunications.
Atento Group
In June 2001 Atento Chile, S.A. increased capital by 3,338,287 shares of 1,000
Chilean pesos each, which were fully subscribed by the Chilean companies
Compania de Telecomunicaciones de Chile, S.A. (CTC), a company in which the
Telefonica Group has an indirect holding of 43.643%, consisting of 3,049,998
shares, and which is fully consolidated in the consolidated financial statements
of the Telefonica Group; Compania de Telefonos de Chile Transmisiones
Regionales, S.A. (52,732 shares); Telefonica Empresas CTC Chile, S.A. (106,474
shares) and Sociedad Impresora y Comercial Publiguias, S.A. (129,083 shares).
Following this transaction, the Atento Group reduced its holding in Atento Chile
from 99.99% to approximately 70%. As a result, the remaining non-Group companies
had an ownership interest of 29.99% in the capital stock of this company. Atento
Chile continued to be fully consolidated in the Telefonica Group.
Emergia Group
In December 2001 the subsidiary Emergia Holding, N.V. incorporated Emergia
Hispana, S.A. with capital stock of (Euro)60,000, which was fully subscribed and
paid by its parent company. The company was fully consolidated in the Telefonica
Group.
-128-
[LOGO]
EXHIBIT III
CONSOLIDATION GOODWILL
The detail of the balance of the consolidation goodwill and of the
related accumulated amortization as of December 31, 2002 and 2001, and of
the variations therein in 2002 and 2001 is as follows:
---------------------------------------------------------------------------------------------------------------------------------
Consolidation goodwill Millions of Euros
-------------------------------------------------------------------------------------
Balance at Translation Balance at
12/31/01 Additions Retirements Transfers Differences 12/31/02
---------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) 148.98 - (13.28) (18.12) (20.51) 97.07
T. de Argentina and subsidiaries (Argentina) 594.50 - (4.78) 2.96 (11.17) 581.51
T. Peru Holding (Peru) 49.04 - - 1.37 - 50.41
Telefonica del Peru (Peru) 281.26 - - - - 281.26
Telefonica Multimedia, S.A.C. (Peru) 10.82 - - - (1.65) 9.17
Telefonica Moviles Chile, S.A. (Chile) 325.54 - - - (58.09) 267.45
Telesp Participacoes (Brazil) 103.01 - - 3.51 - 106.52
Cti (U.S.A.) 15.64 - (14.08) - - 1.56
Cointel (Argentina) 484.29 - - - - 484.29
Goodman (Spain) 7.96 0.11 - 0.22 - 8.29
Telefonica Internacional (Spain) 281.66 - - - - 281.66
Telefonica Moviles (Spain) 113.21 12.63 - - - 125.84
T. Data Espana (Spain) 154.96 - - - - 154.96
Atlanet S.p.A. (Italy) 65.39 - - (65.39) - -
T. Data Brasil (Brazil) 220.68 - - - (92.90) 127.78
Mediaways (Germany) 1,225.66 - (530.00) (6.55) - 689.11
Telefonica Deutschland GmbH (Germany) - 10.82 - - - 10.82
Fieldy Group (Netherlands) 35.84 - (20.49) - (7.26) 8.09
Endemol (Netherlands) 826.20 6.84 - - - 833.04
Endemol Group (Netherlands) 311.23 89.98 (18.73) - (3.36) 379.12
Atco Group (Argentina) 338.43 - (32.47) 189.29 (118.01) 377.24
Telefonica Media Argentina (Argentina) 18.81 - (1.83) 9.72 - 26.70
Atento Peru (Peru) 7.58 - - (0.11) (1.71) 5.76
Atento Brasil (Brazil) 157.44 - - - (24.78) 132.66
Terra Brasil Holding (Brazil) 234.91 - - - (2.41) 232.50
Ordenamiento de Links Especializados, S.L. 12.25 - (5.43) - - 6.82
Terra Networks Mexico (Mexico) 266.26 - (129.47) 0.75 - 137.54
Terra Chile Holding (Chile) 25.05 - - - - 25.05
Terra Networks Argentina (Argentina) 12.06 - (2.33) - - 9.73
Terra Networks Venezuela (Venezuela) 4.49 - (2.86) - - 1.63
Ifigenia Plus (Spain) 11.17 - - - - 11.17
Terra Networks Colombia (Colombia) 21.53 - (14.67) - - 6.86
Lycos (U.S.A.) 884.37 - (574.88) - - 309.49
Lycos companies (U.S.A.) 727.05 - (383.45) 39.08 (96.13) 286.55
Bumeran (Spain) 8.13 0.28 (4.09) - - 4.32
Terra Networks, S.A. (Spain) 17.78 (0.58) - - - 17.20
Emergia Holding, N.V. (Netherlands) 2.30 49.65 (49.65) - - 2.30
Tele Sudeste Celular (Brazil) 174.40 - (60.43) (113.97) - -
Tele Leste Celular (Brazil) - 8.26 (6.41) (1.85) - -
Crt Celular (Brazil) 353.08 0.54 (176.81) (176.81) - -
T.Centroamerica Guatemala (Guatemala) 10.02 41.40 - - (0.53) 50.89
Telefonica El Salvador (El Salvador) 64.72 19.82 - - (9.08) 75.46
Corporativo Del Norte (Mexico) 230.51 0.70 (18.50) (212.71) - -
Corporativo Integral Comunicacion (Mexico) 137.86 0.02 (11.03) (126.85) - -
Brasicel and subsidiaries (Brazil) - 268.69 - 243.65 - 512.34
Moviles Mexico and subsidiaries (Mexico) 140.40 598.44 - 342.19 (43.87) 1,037.16
I.O.Box (Finland) 233.45 - (154.47) (3.25) - 75.73
Other companies 31.31 5.59 (8.91) 0.30 - 28.29
---------------------------------------------------------------------------------------------------------------------------------
9,381.23 1,113.19 (2,239.05) 107.43 (491.46) 7,871.34
-------------------------------------------------------------------------------------
-129-
[LOGO]
-----------------------------------------------------------------------------------------------------------------------------
Consolidation goodwill Millions of Euros
---------------------------------------------------------------------------------
Balance at Translation Balance at
12/31/01 Additions Retirements Transfers Differences 12/31/02
-----------------------------------------------------------------------------------------------------------------------------
Companies accounted for by the equity
method:
Venworld (Venezuela) 134.21 - - - - 134.21
Mercador (Brazil) 11.12 - (6.50) - - 4.62
Portugal Telecom (Portugal) 274.12 - - (55.25) - 218.87
Torneos y Competencias (Argentina) 45.10 - (33.92) - - 11.18
Amper (Spain) 5.59 - - - - 5.59
Dts Da Tv Digital (Spain) 88.11 - - - - 88.11
Antena 3 (Spain) 209.48 - - - - 209.48
Pearson (United Kingdom) 479.70 - (173.38) (13.33) - 292.99
Tick Tack Ticket (Spain) 4.15 - (3.63) - - 0.52
Patagonik (Argentina) 7.31 - - - - 7.31
Lideres Enterteiment Group (U.S.A.) 20.19 - (18.18) - - 2.01
Atlanet (Italy) - - (59.14) 65.40 - 6.26
Uno-e Bank (Spain) 130.25 - - - - 130.25
One Travel (U.S.A.) 14.12 3.25 - - - 17.37
Meditel (Brazil) - 5.10 - - - 5.10
Andalucia Digital Multimedia (Spain) 6.13 - - - - 6.13
Other companies 203.82 - (40.07) (96.86) (5.11) 61.78
---------------------------------------------------------------------------------
Total 1,633.40 8.35 (334.82) (100.04) (5.11) 1,201.78
-----------------------------------------------------------------------------------------------------------------------------
Total goodwill 11,014.63 1,121.54 (2,573.87) 7.39 (496.57) 9,073.12
-----------------------------------------------------------------------------------------------------------------------------
-130-
[LOGO]
----------------------------------------------------------------------------------------------------------------------
Amortization of consolidation goodwill Millions of Euros
------------------------------------------------------------------------------
Balance at Translation Balance at
12/31/01 Additions Retirements Transfers Differences 12/31/02
----------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) 55.75 8.68 (3.29) (7.82) (4.62) 48.70
T. de Argentina and subsidiaries
(Argentina) 35.35 29.56 - 0.47 (4.13) 61.25
T. Peru Holding (Peru) 2.11 2.50 - - - 4.61
Telefonica del Peru (Peru) 27.44 14.23 - - - 41.67
Telefonica Multimedia, S.A.C. (Peru) 3.56 1.00 - - (0.64) 3.92
Telefonica Moviles Chile, S.A. (Chile) 66.14 14.54 - - (7.58) 73.10
Telesp Participacoes (Brazil) 9.46 5.43 - - - 14.89
Cti (U.S.A.) 0.78 0.78 - - - 1.56
Cointel (Argentina) 167.13 21.67 - - - 188.80
Goodman (Spain) 0.42 0.42 - 0.22 - 1.06
Telefonica Internacional (Spain) 58.44 14.02 - - - 72.46
Telefonica Moviles (Spain) 3.97 6.03 - - - 10.00
T. Data Espana (Spain) 107.25 2.98 - - - 110.23
Atlanet S.p.A. (Italy) 4.63 - - (4.63) - -
T. Data Brasil (Brazil) 5.43 8.30 - - 0.09 13.82
Mediaways (Germany) 73.66 48.81 - (1.76) - 120.71
Telefonica Deutchland GmbH (Germany) - 0.50 - - - 0.50
Fieldy Group (Netherlands) 1.44 0.57 - - - 2.01
Endemol (Netherlands) 58.43 42.00 - - - 100.43
Endemol Group (Netherlands) 16.80 20.51 - (0.36) - 36.95
Atco Group (Argentina) 87.29 7.11 - 223.06 - 317.46
Telefonica Media Argentina (Argentina) 26.32 1.43 - (24.04) - 3.71
Atento Peru (Peru) 0.97 0.34 - (0.17) (0.20) 0.94
Atento Brasil (Brazil) 14.47 7.42 - (0.66) (2.37) 18.86
Terra Brasil Holding (Brazil) 102.13 18.84 - - - 120.97
Ordenamiento de Links Especializados,
S.L. 5.95 0.87 - - - 6.82
Terra Networks Mexico (Mexico) 116.40 20.37 - 0.77 - 137.54
Terra Chile Holding (Chile) 11.38 2.19 - - - 13.57
Terra Networks Argentina (Argentina) 9.39 0.34 - - - 9.73
Terra Networks Venezuela (Venezuela) 1.24 0.39 - - - 1.63
Ifigenia Plus (Spain) 2.74 0.99 - - - 3.73
Terra Networks Colombia (Colombia) 4.93 1.93 - - - 6.86
Lycos (U.S.A.) 123.88 120.59 - - - 244.47
Lycos companies (U.S.A.) 162.29 70.60 - 39.07 (19.05) 252.91
Bumeran (Spain) 3.63 0.69 - - - 4.32
Terra Networks, S.A. (Spain) 11.31 0.74 - - - 12.05
Emergia Holding, N.V. (Netherlands) 0.06 0.12 - - - 0.18
Tele Sudeste Celular (Brazil) 8.17 6.52 (7.22) (7.47) - -
Tele Leste Celular (Brazil) - 0.56 (0.43) (0.13) - -
Crt Celular (Brazil) 22.32 20.28 (21.30) (21.30) - -
T. Centroamerica Guatemala (Guatemala) 1.22 2.51 - - (0.16) 3.57
Telefonica El Salvador (El Salvador) 7.97 4.04 - - (1.45) 10.56
Corporativo Del Norte (Mexico) 5.76 8.67 (1.15) (13.28) - -
Corporativo Integral Comunicacion
(Mexico) 3.44 5.17 (0.69) (7.92) - -
Brasicel and subsidiaries (Brazil) - - - 28.95 - 28.95
Moviles Mexico and subsidiaries
(Mexico) 61.29 19.55 - 21.37 (13.27) 88.94
I.O.Box (Finland) 57.06 18.67 - - - 75.73
Other companies 13.45 7.34 (0.02) 1.23 - 22.00
------------------------------------------------------------------------------------------------------------------
1,563.25 590.80 (34.10) 225.60 (53.38) 2,292.17
----------------------------------------------------------------------------
[LOGO]
--------------------------------------------------------------------------------------------------------------------
Amortization of consolidation goodwill Millions of Euros
----------------------------------------------------------------------------
Balance at Translation Balance at
12/31/01 Additions Retirements Transfers Differences 12/31/02
--------------------------------------------------------------------------------------------------------------------
Companies accounted for by the equity
method:
Venworld (Venezuela) 97.04 4.13 - - - 101.17
Mercador (Brazil) 1.12 1.05 - - 1.39 3.56
Portugal Telecom (Portugal) 44.79 8.10 - - - 52.89
Torneos y Competencias (Argentina) 8.93 2.26 - (0.01) - 11.18
Amper (Spain) 0.94 0.28 - - - 1.22
Dts Da Tv Digital (Spain) 12.24 4.40 - - - 16.64
Antena 3 (Spain) 39.49 10.36 - (0.01) - 49.84
Pearson (United Kingdom) 60.06 21.65 - 0.01 - 81.72
Tick Tack Ticket (Spain) 0.10 0.41 - 0.01 - 0.52
Patagonik (Argentina) 0.74 0.36 - - - 1.10
Lideres Enterteiment Group (U.S.A.) 1.01 1.01 - (0.01) - 2.01
Atlanet (Italy) - 1.63 - 4.63 - 6.26
Uno-e Bank (Spain) 4.34 13.03 - - - 17.37
One Travel (U.S.A.) 2.08 1.50 - - - 3.58
Meditel (Brazil) - - - - - -
Andalucia Digital Multimedia (Spain) 0.62 5.51 - - - 6.13
Other companies 48.94 1.01 (2.32) 14.11 - 61.74
----------------------------------------------------------------------------
322.44 76.69 (2.32) 18.73 1.39 416.93
--------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 1,885.69 667.49 (36.42) 244.33 (51.99) 2,709.10
--------------------------------------------------------------------------------------------------------------------
Unamortized consolidation goodwill 9,128.94 454.05 (2,537.45) (236.94) (444.58) 6,364.02
--------------------------------------------------------------------------------------------------------------------
-132-
[LOGO]
--------------------------------------------------------------------------------------------------------------------------------
Consolidation goodwill Millions of Euros
----------------------------------------------------------------------------
Balance at Translation Balance at
12/31/00 Additions Retirements Transfers Differences 12/31/01
--------------------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) and subsidiaries 33.10 - - - - 33.10
T. de Argentina and subsidiaries (Argentina) 38.50 1.55 (8.86) - (10.87) 20.32
T. Peru Holding (Peru) 2.77 46.27 - - - 49.04
Telefonica del Peru (Peru) 204.32 76.94 - - - 281.26
Telesp Participacoes (Brazil) 96.05 8.22 - (1.26) - 103.01
Cei Citicorp Group (Argentina) 571.91 - - 2.27 - 574.18
Cti (U.S.A.) - 15.64 - - - 15.64
Instacom (Chile) 9.51 - - - (0.42) 9.09
Startel (Chile) 340.69 - - - (15.15) 325.54
Sonda (Chile) 50.11 - - 0.16 (2.12) 48.15
Sonda companies (Chile) 10.49 - - 3.07 1.71 15.27
Cointel (Argentina) 484.29 - - - - 484.29
Telefonica Multimedia (Peru) 10.22 - - - 0.60 10.82
Vtr (Chile) 37.47 - - - (1.66) 35.81
Goodman - 7.96 - - - 7.96
Telefonica Internacional 281.66 - - - - 281.66
Telefonica Moviles - 113.21 - - - 113.21
T. Data Espana 154.96 - - - - 154.96
Atlanet (Italy) 68.55 - (3.16) - - 65.39
Telefonica Data Mexico 15.70 - - - - 15.70
T. Data Brasil - 233.55 - - (12.87) 220.68
Mediaways - 1,474.66 (249.00) - - 1,225.66
Uniprex 84.64 - - (84.64) - -
Fieldy Group - 36.18 - - (0.34) 35.84
Endemol 802.27 23.93 - - - 826.20
Endemol Group 71.45 244.68 (6.11) - 1.21 311.23
Atco Group (Argentina) 450.54 17.26 - - (129.37) 338.43
Telefonica Media Argentina 18.81 - - - - 18.81
Atento Peru 6.96 - - - 0.62 7.58
Atento Brasil 149.30 - - - 8.14 157.44
Terra Brasil Holding 219.47 - - - - 219.47
Ole 12.25 - - - - 12.25
Terra Networks Mexico 214.42 - - 51.84 - 266.26
Infosel (Mexico) 49.98 - - (49.98) - -
Terra Chile Holding (Chile) 25.05 - - - - 25.05
Terra Networks Argentina 12.06 - - - - 12.06
Terra Networks Usa 9.63 - - - - 9.63
Ifigenia Plus 11.17 - - - - 11.17
Terra Networks Colombia 21.53 - - - - 21.53
Lycos 964.01 11.05 (150.16) 840.64 (54.12) 1,611.42
Lycos companies 881.99 - - (881.99) - -
Bumeran 5.78 2.35 - - - 8.13
Terra Brasil Holding subsidiaries (Brazil) 18.08 - (4.48) - 1.84 15.44
Terra Networks 10.03 7.75 - - - 17.78
Telesudeste Celular 117.05 - (0.02) 57.37 - 174.40
Crt Celular 285.96 - - 67.12 - 353.08
T. Centroamerica Guatemala 9.91 - - (0.01) 0.12 10.02
Subsidiaries of T.E.S. Holding 61.35 - - - 3.37 64.72
Moviles Mexico - 10.30 - 135.14 (5.04) 140.40
Corporativo Del Norte - 230.51 - - - 230.51
Celular de Telefonia - 137.86 - - - 137.86
I.O.Box 233.45 - - - - 233.45
Other companies 66.62 8.92 (1.39) 3.95 0.07 78.17
--------------------------------------------------------------------------------------------------------------------------------
7,224.06 2,708.79 (423.18) 143.68 (214.28) 9,439.07
--------------------------------------------------------------------------------------------------------------------------------
-133-
[LOGO]
---------------------------------------------------------------------------------------------------------------------------------
Consolidation goodwill Millions of Euros
--------------------------------------------------------------------------------
Balance at Translation Balance at
12/31/00 Additions Retirements Transfers Differences 12/31/01
---------------------------------------------------------------------------------------------------------------------------------
Companies accounted for by the equity method:
Venworld (Venezuela) 134.21 - - - - 134.21
Cablevision (Argentina) 265.38 - (265.38) - - -
Mercador (Brazil) - - - 11.12 - 11.12
Portugal Telecom 198.12 76.00 - - - 274.12
Torneos y Competencias 45.10 - - - - 45.10
Azul Television (Acisa Group) 17.36 - - - (5.73) 11.63
Dts Da Tv Digital 88.11 - - - - 88.11
Antena 3 208.19 1.29 - - - 209.48
Pearson 524.00 - (44.30) - - 479.70
Media Park 38.16 1.89 - - - 40.05
Patagonik (Argentina) 7.31 - - - - 7.31
Lideres Usa (Rodven) - - - 20.19 - 20.19
Uno-e Bank - 130.25 - - - 130.25
One Travel 14.12 - - - - 14.12
Andalucia Digital Multimedia 6.13 - - - - 6.13
Other companies 26.27 100.50 (3.25) 40.38 (1.99) 161.91
--------------------------------------------------------------------------------
1,572.46 309.93 (312.93) 71.69 (7.72) 1,633.43
---------------------------------------------------------------------------------------------------------------------------------
Total goodwill 8,796.52 3,018.72 (736.11) 215.37 (222,00) 11,072.50
---------------------------------------------------------------------------------------------------------------------------------
-134-
[LOGO]
----------------------------------------------------------------------------------------------------------------------
Amortization of consolidation goodwill Millions of Euros
------------------------------------------------------------------------------
Balance at Translation Balance at
12/31/00 Additions Retirements Transfers Differences 12/31/01
----------------------------------------------------------------------------------------------------------------------
Fully consolidated companies:
C.T.C. (Chile) and subsidiaries 27.57 0.67 - - - 28.24
T. De Argentina and subsidiaries
(Argentina) 9.02 3.56 (2.29) 0.53 (4.18) 6.64
T. Peru Holding (Peru) 1.20 0.91 - - - 2.11
Telefonica del Peru (Peru) 9.69 17.75 - - - 27.44
Telesp Participacoes (Brazil) 7.31 2.15 - - - 9.46
Cei Citicorp Group (Argentina) - 28.71 - - - 28.71
Cti (U.S.A.) - 0.78 - - - 0.78
Instacom (Chile) 6.15 3.20 - - (0.26) 9.09
Startel (Chile) 52.22 16.23 - - (2.31) 66.14
Sonda (Chile) 4.87 3.26 - 0.20 (0.20) 8.13
Sonda companies (Chile) 2.64 1.14 - (0.09) (0.14) 3.55
Cointel (Argentina) 145.46 21.67 - - - 167.13
Telefonica Multimedia (Peru) 2.45 0.97 - - 0.14 3.56
Vtr (Chile) 4.21 1.78 - - (0.18) 5.81
Goodman - 0.42 - - - 0.42
Telefonica Internacional 44.42 14.02 - - - 58.44
Telefonica Moviles - 3.97 - - - 3.97
T. Data Espana 104.26 2.98 - 0.01 - 107.25
Atlanet (Italy) 1.20 3.43 - - - 4.63
Telefonica Data Mexico 0.47 15.23 - (0.01) - 15.69
T. Data Brasil - 5.45 - (0.02) - 5.43
Mediaways - 73.65 - 0.01 - 73.66
Uniprex 6.27 4.23 (10.50) - - -
Fieldy Group - 1.44 - - - 1.44
Endemol 16.71 41.72 - - - 58.43
Endemol Group 1.23 15.57 - - - 16.80
Atco Group (Argentina) 87.29 - - - - 87.29
Telefonica Media Argentina 0.86 25.46 - - - 26.32
Atento Peru 0.55 0.37 - - 0.05 0.97
Atento Brasil 6.26 7.84 - - 0.37 14.47
Terra Brasil Holding 65.77 30.18 - - - 95.95
Ole 4.29 1.66 - - - 5.95
Terra Networks Mexico 46.69 58.33 - 11.38 - 116.40
Infosel (Mexico) 11.66 - - (11.66) - -
Terra Chile Holding (Chile) 7.20 4.18 - - - 11.38
Terra Networks Argentina 2.93 6.47 - (0.01) - 9.39
Terra Networks Usa 0.80 8.83 - - - 9.63
Ifigenia Plus 1.12 1.62 - - - 2.74
Terra Networks Colombia 1.80 3.13 - - - 4.93
Lycos 32.14 254.03 - - - 286.17
Lycos companies 41.34 - - (41.34) - -
Bumeran - 3.64 - (0.01) - 3.63
Terra Brasil Holding subsidiaries 3.60 3.01 - (0.01) (0.42) 6.18
(Brazil)
Terra Networks 10.03 1.28 - - - 11.31
Telesudeste Celular 1.59 6.33 - 0.25 - 8.17
Crt Celular 4.22 18.10 - - - 22.32
T. Centroamerica Guatemala 0.60 0.60 - - 0.02 1.22
Subsidiaries of T.E.S. Holding 3.01 4.39 - - 0.57 7.97
Moviles Mexico - 4.38 - 59.23 (2.32) 61.29
Corporativo del Norte - 5.76 - - - 5.76
Celular de Telefonia - 3.44 - - - 3.44
I.O.Box 23.34 33.72 - - - 57.06
Other companies 45.47 3.11 - (0.41) 0.02 48.19
----------------------------------------------------------------------------------------------------------------------
849.91 774.75 (12.79) 18.05 (8.84) 1,621.08
----------------------------------------------------------------------------------------------------------------------
-135-
[LOGO]
----------------------------------------------------------------------------------------------------------------------
Amortization of consolidation goodwill Millions of Euros
------------------------------------------------------------------------------
Balance at Translation Balance at
12/31/00 Additions Retirements Transfers Differences 12/31/01
----------------------------------------------------------------------------------------------------------------------
Companies accounted for by the equity
method:
Venworld (Venezuela) 92.91 4.13 - - - 97.04
Cablevision (Argentina) 12.33 - (12.33) - - -
Mercador (Brazil) - 1.11 - - 0.01 1.12
Portugal Telecom 31.17 13.62 - - - 44.79
Torneos y Competencias 6.67 2.36 - - - 9.03
Azul Television (Acisa Group) 1.24 0.94 - - - 2.18
Dts Da Tv Digital 7.83 4.41 - - - 12.24
Antena 3 29.16 10.33 - - - 39.49
Pearson 39.40 20.66 - - - 60.06
Media Park 0.96 2.05 - - - 3.01
Patagonik (Argentina) 0.37 0.37 - - - 0.74
Lideres Usa (Rodven) - 1.01 - - - 1.01
Uno-e Bank - 4.34 - - - 4.34
One Travel - 2.08 - - - 2.08
Andalucia Digital Multimedia 0.31 0.31 - - - 0.62
Other companies 9.46 2.72 (0.06) 35.43 (2.82) 44.73
------------------------------------------------------------------------------
213.81 70.44 (12.39) 35.43 (2.81) 322.48
----------------------------------------------------------------------------------------------------------------------
Total accumulated amortization 1,081.72 845.19 (25.18) 53.48 (11.65) 1,943.56
----------------------------------------------------------------------------------------------------------------------
Unamortized consolidation goodwill 7,714.80 2,173.53 (710.93) 161.89 (210.35) 9,128.94
----------------------------------------------------------------------------------------------------------------------
-136-
[LOGO]
EXHIBIT IV
MINORITY INTERESTS
This caption relates to the equity of minority stockholders in the net worth and
results for the year of the fully consolidated Group companies.
As of December 31, 2002, the balance of this caption comprised the holdings of
minority stockholders in the following companies:
-----------------------------------------------------------------------------------------------------------------------
Millions of Euros
------------------------------------------------------------------------------
Variation in Balance
% of Translation Income % of at
Company Ownership Net Worth Differences (Loss) Ownership 12/31/02
-----------------------------------------------------------------------------------------------------------------------
Terra Networks, S.A. 61.42% 3,399.38 (211.32) (1,233.85) - 1,954.21
C.T.C., S.A. 56.36% 726.03 69.11 3.05 - 798.19
Fonditel Entidad Gestora de Fondos de
Pensiones, S.A. 30.00% 8.22 - 2.02 - 10.24
Impresora y Comercial Publiguias, S.A. 49.00% 15.78 (4.49) 5.00 - 16.29
Telefonica Argentina S.A. 1.97% 14.99 1.87 (18.71) - (1.85)
Telefonica del Peru, S.A. 1.98% 36.54 (18.29) 0.24 - 18.49
Telefonica Larga Distancia, Inc. 2.00% 1.92 0.01 (0.10) - 1.83
Telefonica Publicidad e Informacion, 40.10% 42.03 (1.95) 30.17 - 70.25
S.A.
Telesp Participacoes, S.A. 12.58% 446.74 (12.75) 47.13 - 481.12
Telefonica Moviles, S.A. 7.57% 606.66 (85.79) (281.94) - 238.93
Group 3G UMTS Holding, GmbH (Note 1) 42.80% 3,941.68 - (4,324.12) - (382.44)
Telefonica Moviles Argentina, S.A. 2.07% 3.13 (7.92) (6.93) - (11.72)
Telefonica Finance USA 99.99% 2,000.00 - - - 2,000.00
Brasilcel (Participaciones) 50.00% 216.00 - - 36.05 252.05
Telefonica Moviles Mexico, S.A. 8.00% 149.94 (3.05) (13.64) - 133.25
Emergia Holding N.V. 0.00% - - (11.70) 11.70 -
Other companies 36.13 (9.76) 7.77 (0.05) 34.09
----------------------------------------- ----------------------------------------------------------------
Total 11,645.17 (284.33) (5,795.61) 47.70 5,612.93
------------------------------------------------------------------------------------------------------------------------
-137-
[LOGO]
As of December 31, 2001, the balance of this caption comprised the holdings of
minority stockholders in the following companies:
--------------------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------
Variation in Balance
% of Translation Income % of at
Company Ownership Net Worth Differences (Loss) Ownership 12/31/01
--------------------------------------------------------------------------------------------------------------
C.R.T. Celular Participacoes, S.A. 59.58% 147.56 (17.89) 25.83 - 155.50
C.T.C., S.A. 56.36% 567.38 523.48 3.13 - 1,093.99
Terra Networks Espana, S.A. 62.37% 3,937.29 (76.08) (353.42) (67.13) 3,440.66
Fonditel, S.A. 19.00% 7.48 - 1.46 - 8.94
Lola Films, S.A. 30.01% 5.14 - (3.56) - 1.58
Publiguias, S.A. 49.00% 9.52 (0.39) 5.64 - 14.77
Telefonica de Argentina, S.A. 1.96% 88.02 (64.78) 0.74 - 23.98
Telefonica del Peru, S.A. 2.93% 27.15 (4.02) (1.66) - 21.47
TES Holding, S.A. de C.V. 49.00% 53.55 3.02 (18.27) - 38.30
Telefonica Larga Distancia, Inc. 2.00% 2.50 (1.11) 0.09 - 1.48
Telefonica Publicidad e Informacion, 40.10% 31.27 (0.91) 25.75 - 56.11
S.A.
Telesp Participacoes 13.28% 310.51 438.76 125.06 - 874.33
Tele Sudeste Celular Participacoes, 16.84% 96.64 (11.77) 17.97 - 102.84
S.A.
Telefonica Moviles 7.30% 542.50 (27.16) 64.39 (58.54) 521.19
Group 3G UMTS Holding, GmbH 42.80% 912.10 - (21.78) - 890.32
IPSE 2000 - 4.20 (0.01) (4.19) - -
Atlanet 66.00% 191.42 - (54.55) - 136.87
Endemol 0.65% 12.80 - 3.06 - 15.86
Telefonica Moviles Argentina, S.A. 2.07% 9.36 0.48 (14.41) - (4.57)
T.C.G. Holding, S.A. 49.00% 26.85 (2.28) (26.70) - (2.13)
Movitel del Noroeste, S.A. de C.V. 10.00% 7.10 (0.29) (0.71) - 6.10
Emergia Holding N.V. 6.01% 23.61 (0.33) (11.26) - 12.02
Other companies 60.65 (3.09) (33.62) - 23.94
---------------------------------------- ----------------------------------------------------------
Total 7,074.60 755.63 (271.01) (125.67) 7,433.55
--------------------------------------------------------------------------------------------------------------
-138-
[LOGO]
Variations in minority interests
The variations in minority interests in 2002, were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Capital
Contributions Income Variation
and Inclusion (Loss) in Acquisitions Balance
Balance at of for the Translation Other and Capital Dividends at
Company 12/31/01 Companies Year Differences Variations Reductions Paid 12/31/02
-----------------------------------------------------------------------------------------------------------------------------------
Celular C.R.T Participacoes, S.A. 155.50 - 32.06 (81.81) (105.75) - - -
C.T.C., S.A. 1,093.99 - 3.05 (229.30) (67.74) - (1.81) 798.19
Terra Networks, S.A. 3,440.66 - (1,233.85) (136.40) (29.50) (86.70) - 1,954.21
Fonditel 8.94 - 2.02 - (0.72) - - 10.24
Lola Films, S.A. 1.58 5.40 (2.61) - (1.13) - - 3.24
Impresora y Comercial Publiguias,
S.A. 14.77 - 5.00 (3.82) 0.34 - - 16.29
Telefonica de Argentina, S.A. 23.98 - (18.71) (7.66) 0.54 - - (1.85)
Telefonica del Peru, S.A. 21.47 - 0.24 (2.89) (0.33) - - 18.49
Telefonica del Salvador, S.A. 38.30 - (4.38) (2.45) (27.23) - - 4.24
Telefonica Larga Distancia Inc. 1.48 - (0.10) 0.45 (0.00) - - 1.83
Telefonica Publicidad e
Informacion, S.A. 56.11 - 30.17 (1.04) (0.22) - (14.77) 70.25
Telesp Participacoes, S.A. 874.33 - 47.13 (348.84) (0.01) - (91.49) 481.12
Tele Sudeste Celular
participacoes, S.A. 102.84 - 5.65 (47.78) (59.93) - - 0.78
Telefonica Moviles, S.A. 521.19 18.50 (281.94) (56.72) 37.90 - - 238.93
Group 3G UMTS Holding, GmbH
(Note 1) 890.32 3,051.36 (4,324.12) - - - - (382.44)
Tele Leste Celular Participacoes,
S.A. - - (1.65) (49.10) 50.75 - - -
Atlanet, S.p.a. 136.87 - (33.48) - (99.79) - - 3.60
Endemol Entertainment Holding,
N.V. 15.86 0.33 4.07 (0.38) (0.04) (17.31) (0.56) 1.97
Telefonica Moviles Argentina,
S.A. (4.57) - (6.93) (0.22) - - - (11.72)
Telefonica Centroamerica
Guatemala, S.A. (2.13) - (3.46) 1.00 4.71 - - 0.12
Movitel del Noroeste, S.A. 6.10 - (0.25) (0.81) (5.34) - - (0.30)
Emergia Holding N.V. 12.02 - (11.70) (0.36) 0.04 - - -
Telefonica Finance USA - 2,000.00 - - - - - 2,000.00
Telefonica Moviles Mexico, S.A. - 166.13 (13.64) (19.24) - - - 133.25
Brasilcel (Participaciones) - 82.92 - - 169.13 - - 252.05
Other companies 23.94 1.01 11.82 (3.14) (8.38) (4.32) (0.49) 20.44
-----------------------------------------------------------------------------------------------------------------------------------
Total 7,433.55 5,325.65 (5,795.61) (990.51) (142.70) (108.33) (109.12) 5,612.93
-----------------------------------------------------------------------------------------------------------------------------------
The variations in minority interests in 2001 were as follows:
-139-
[LOGO]
-----------------------------------------------------------------------------------------------------------------------------------
Capital
Contributions Income Variation
and Inclusion (Loss) in Balance
Balance at of for the Translation Other Dividends at
Company 12/31/00 Companies Year Differences Variations Acquisitions Paid 12/31/01
----------------------------------------------------------------------------------------------------------------------------------
Celular C.R.T. Participacoes,
S.A. 164.32 - 25.83 (17.89) (9.71) - (7.05) 155.50
C.T.C. Chile, S.A. 1,113.59 - 3.13 (14.49) (1.99) - (6.25) 1,093.99
Terra Networks, S.A. 3,843.10 - (353.42) (3.32) (45.70) - - 3,440.66
Fonditel 7.90 - 1.46 - - - (0.42) 8.94
Lola Films, S.A. 5.21 - (3.56) - (0.07) - - 1.58
Impresora y Comercial Publiguias,
S.A. 9.75 - 5.64 (0.67) 0.05 - - 14.77
Telefonica de Argentina, S.A. 10.89 - 0.74 (77.74) 96.93 - (6.84) 23.98
Telefonica del Peru Holding 164.89 - - 6.64 (1.93) (169.60) - -
Telefonica del Peru, S.A. 41.08 - (1.66) (48.44) 35.53 - (5.04) 21.47
Telefonica del Salvador, S.A. 52.20 - (18.27) 3.02 1.35 - - 38.30
Telefonica Larga Distancia, Inc. 1.32 - 0.09 0.08 (0.01) - - 1.48
Telefonica Publicidad e
Informacion, S.A. 46.91 - 25.75 (0.52) 1.11 - (17.14) 56.11
Telesp Participacoes, S.A. 913.69 - 125.06 (23.75) (66.22) - (74.45) 874.33
Tele Sudeste Celular
Participacoes, S.A. 107.87 - 17.97 (11.77) (6.94) - (4.29) 102.84
Telefonica Moviles, S.A. 397.59 107.96 64.39 (21.05) (27.70) - - 521.19
CEI 203.68 - - - - (203.68) - -
Group 3G UMTS Holding, GmbH 905.73 - (21.78) - 6.37 - - 890.32
IPSE 2000 1,169.99 - (4.19) (0.01) (1,165.79) - - -
Atlanet, S.p.a. 117.37 74.06 (54.55) - (0.01) - - 136.87
Endemol Entertaiment Holding,
N.V. 13.63 - 3.06 (0.25) (0.19) - (0.39) 15.86
Telefonica Moviles Argentina,
S.A. - 12.00 (14.41) (2.03) (0.13) - - (4.57)
Telefonica Centroamerica
Guatemala, S.A. (1.28) - (26.70) (2.28) 28.13 - - (2.13)
Movitel del Noroeste, S.A. - 7.10 (0.71) (0.29) - - - 6.10
Emergia Holding N.V. 23.94 - (11.26) (0.66) - - - 12.02
Other companies 16.43 14.43 (33.62) (0.07) 26.72 0.05 - 23.94
-----------------------------------------------------------------------------------------------------------------------------------
Total 9,329.80 215.55 (271.01) (215.49) (1,130.20) (373.23) (121.87)
-----------------------------------------------------------------------------------------------------------------------------------
-140-
[LOGO]
EXHIBIT V
Debentures and bonds
The detail of the debentures and bonds outstanding as of December 31, 2002,
and of the main features thereof is as follows (in millions of euros):
------------------------------------------------------------------------------------------------------------------------------------
Maturing in
Telefonica and -------------------------------------------------------------------
instrumentality Interest Subsequent
companies Currency Rate % 2003 2004 2005 2006 2007 Years Total
------------------------------------------------------------------------------------------------------------------------------------
Debentures and bonds:
FEBRUARY 1990 SERIES B Euros 12.60 - - 8.22 - - - 8.22
FEBRUARY 1990 SERIES C Euros 12.60 - - - - - 3.76 3.76
FEBRUARY 1990 SERIES E Euros 12.85 - - 59.19 - - - 59.19
FEBRUARY 1990 SERIES F Euros 12.58 - - - - - 6.43 6.43
DECEMBER 1990 Euros 13.58 - - 554.55 - - - 554.55
OCTOBER 2004 C Euros 8.25 - 69.24 - - - - 69.24
APRIL 1999 Euros 4.50 - - - - 500.00 500.00
JUNE 1999 Euros 4.45 - - - - - 300.00 300.00
JULY 1999 zero-coupon Euros 6.37 - - - - - 37.11 37.11
MARCH 2000 Euros 3.51 - - - - - 50.00 50.00
APRIL 2000 Euros 5.63 - - - - 500.00 - 500.00
-------------------------- ----------------------------------------------------------------------------
Debentures subtotal: - 69.24 621.96 - 500.00 897.30 2,088.50
-------------------------- ----------------------------------------------------------------------------
EMTN ISSUE Euros Libor+0.07 - 74.82 - - - - 74.82
EMTN ISSUE USD 6.37 476.78 - - - - - 476.78
MARCH 1998 Euros 4.84 - - - - - 420.71 420.71
EMTN ISSUE JPY 1.23 - 49.84 - - - - 49.84
GLOBAL BOND USD 7.35 - - 1,191.96 - - - 1,191.96
GLOBAL BOND USD 7.75 - - - - - 2,383.89 2,383.89
GLOBAL BOND USD 8.25 - - - - - 1,191.96 1,191.96
GLOBAL BOND Euros 6.13 - - 1,000.00 - - - 1,000.00
EMTN ISSUE JPY Libor+0.22 241.18 - - - - - 241.18
EMTN ISSUE Euros 4.90 - 39.50 - - - - 39.50
EMTN ISSUE Euros Eonia+0.26 150.00 - - - - - 150.00
EMTN ISSUE Euros Euribor+0.70 - 1,000.00 - - - - 1,000.00
EMTN ISSUE Euros 5.12 - - - 1,000.00 - - 1,000.00
EMTN ISSUE Euros 4.08 100.00 - - - - - 100.00
EMTN ISSUE Euros 0.15 - - 50.00 - - - 50.00
EMTN ISSUE Euros Eonia+0.30 - 80.00 - - - - 80.00
------------------------------------------------------------------------------------------------------------------------------------
Bonds subtotal 967.96 1,244.16 2,241.96 1,000.00 - 3,996.56 9,450.64
-------------------------- ----------------------------------------------------------------------------
Total issues: 967.96 1,313.40 2,863.92 1,000.00 500.00 4,893.86 11,539.14
==========================------------------------------============================================================================
Foreign operators Maturing in
------------------------------------------------------------------------------------------------------------
Debentures and bonds Interest Subsequent
Currency Rate % 2002 2003 2004 2005 2006 Years Total
------------------------------------------------------------------------------------------------------------------------------------
Yankee Bonds USD 7.63 - - - 191.15 - - 191.15
Yankee Bonds USD 8.38 - - - 191.15 - - 191.15
Eurobonds Euros 5.38 - 157.94 - - - - 157.94
Series E UF 6.00 3.49 - - - - - 3.49
Series F UF 6.00 1.59 1.59 1.59 1.59 1.59 13.52 21.47
Series I UF 5.50 2.78 2.78 2.78 2.78 2.78 20.88 34.78
Series K 1998 UF 6.75 - 0.17 0.84 1.52 2.19 84.37 89.09
-------------------------- ----------------------------------------------------------------------------
CTC CHILE: 7.86 162.48 5.21 388.19 6.56 118.77 689.07
-------------------------- ----------------------------------------------------------------------------
Bonds 1/st/ Program T.
Peru (1) N.Sol VAC+6.94 - - - 28.93 - - 28.93
Bonds 1/st/ Program T.
Peru (2) N.Sol VAC+7.00 - - - - - 12.59 12.59
Bonds 1/st/ Program T.
Peru (4) USD 8.13 34.00 - - - - - 34.00
Bonds 1/st/ Program T.
Peru (6) N.Sol 12.69 13.56 - - - - - 13.56
Bonds 1/st/ Program T.
Peru (7) N.Sol 12.63 17.90 - - - - - 17.90
Bonds 2/nd/ Program T.
Peru (2) N.Sol 7.50 14.92 - - - - - 14.92
Bonds 2/nd/ Program T.
Peru (3) N.Sol VAC+6.19 - - - 27.44 - - 27.44
Bonds 2/nd/ Program T.
Peru (4) N.Sol 6.38 - 4.55 - - - - 4.55
Bonds 2/nd/ Program T.
Peru (5) N.Sol VAC+6.25 - - - - 3.33 - 3.33
Bonds 2/nd/ Program T.
Peru (6) N.Sol 7.75 - 2.57 - - - - 2.57
Bonds 2/nd/ Program T.
Peru (7) USD 4.38 - - 33.37 - - - 33.37
Bonds 2/nd/ Program T.
Peru (7-Series B) USD 4.00 - - 9.54 - - - 9.54
-------------------------- -------------------------------------------------------------------------------
Telefonica del Peru: 80.38 7.12 42.91 56.37 3.33 12.59 202.70
-------------------------- -------------------------------------------------------------------------------
Marketable debentures USD 11.88 - 286.07 - - - - 286.07
Marketable debentures USD 9.13 - - - - - 351.39 351.39
Marketable debentures USD 9.88 - - - 68.06 - - 68.06
-------------------------- -------------------------------------------------------------------------------
TASA - 286.07 - 68.06 351.39 705.52
-------------------------- -------------------------------------------------------------------------------
Marketable debentures USD 9.75 - - - - 7.20 - 7.20
-------------------------- -------------------------------------------------------------------------------
CEI - - - - 7.20 - 7.20
-------------------------- -------------------------------------------------------------------------------
Series A 1997 USD 8.85 - 214.55 - - - - 214.55
Series B 1997 USD 10.38 - 49.52 - - - - 49.52
-------------------------- -------------------------------------------------------------------------------
Cointel - 264.07 - - - - 264.07
------------------------------------------------------------------------------------------------------------------------------------
Total issues: 88.24 719.74 48.12 512.62 17.09 482.75 1,868.56
-------------------------- -----------------------------------------------------------------------------------
Total Group issues: 1,056.20 2,033.14 2,912.04 1,512.62 517.09 5,376.61 13,407.70
-------------------------- -----------------------------------------------------------------------------------
-141-
[LOGO]
The detail of the maturities and redemption values of the zero-coupon bonds and
debentures as of December 31, 2002, is as follows (in millions of euros):
---------------------------------------------------------------------------------------------------------------
Zero-coupon Debentures and
Bonds (Issue value + Accrued
Interest at 12/31/02) Redemption Date Redemption Rate Book Value Redemption Value
---------------------------------------------------------------------------------------------------------------
DEBENTURES
FEBRUARY-90 SERIES E 02/26/05 613.338% 59.19 76.79
FEBRUARY-90 SERIES F 02/26/10 1,069.470% 6.43 15.04
DECEMBER-90 12/28/05 675.000% 554.55 811.37
JULY-99 07/21/29 637.638% 37.11 191.29
---------------------------------------------------------------------------------------------------------------
Total issues 657.28 1,094.49
---------------------------------------------------------------------------------------------------------------
-142-
[LOGO]
EXHIBIT VI
The detail, by type of derivative, of the notional values of the derivatives
arranged by the Group as of December 31, 2002, is as follows:
-------------------------------------------------------------------------------------------------------------------------
Millions
-------------------------------------------------------------------
Type of Risk Equivalent Group Receives Group Pays
-----------------------------------------------------
Euro Value Value Currency Value Currency
-------------------------------------------------------------------------------------------------------------------------
Euro interest rate swaps 5,025.36
-from fixed to floating 1,348.92 1,348.92 EUR 1,348.92 EUR
-from floating to fixed 2,713.11 2,713.11 EUR 2,713.11 EUR
-from floating to floating 963.33 962.95 EUR 963.33 EUR
Cross-currency swaps 8,493.29
-from fixed to floating 2,472.85
USD/USD 2,462.10 2,582.00 USD 2,582.00 USD
BRL/BRL 10.75 39.85 BRL 39.85 BRL
-from floating to fixed 5,520.53
USD/USD 5,363.15 5,624.33 USD 5,624.33 USD
GBP/GBP 122.98 80.00 GBP 80.00 GBP
MXN/MXN 34.40 372.00 MXN 372.00 MXN
- from floating to floating 499.91
USD/USD 476.78 500.00 USD 500.00 USD
BRL/BRL 23.13 85.70 BRL 85.70 BRL
Exchange rate swaps 16,096.81
- from fixed to fixed 687.23
EUR/USD 193.28 194.39 EUR 202.69 USD
JPY/USD 80.64 8,816.00 JPY 84.57 USD
USD/EUR 70.61 65.00 USD 70.61 EUR
USD/JPY 132.29 136.00 USD 16,456.00 JPY
USD/BRL 116.97 180.00 USD 433.43 BRL
BRL/USD 93.44 363.28 BRL 98.00 USD
- from fixed to floating 1,794.67
EUR/USD 101.08 100.00 EUR 106.00 USD
JPY/EUR 113.90 12,400.00 JPY 113.90 EUR
JPY/USD 129.68 16,456.00 JPY 136.00 USD
JPY/BRL 77.99 14,275.02 JPY 289.00 BRL
USD/EUR 119.58 109.00 USD 119.58 EUR
USD/BRL 1,252.42 1,720.72 USD 4,640.69 BRL
- from floating to fixed 1,791.40
EUR/JPY 49.84 56.95 EUR 6,200.00 JPY
EUR/BRL 77.77 96.99 EUR 288.17 BRL
EUR/MAD 32.70 33.76 EUR 349.09 MAD
USD/EUR 1,357.18 1,247.73 USD 1,357.18 EUR
USD/BRL 39.84 57.00 USD 147.62 BRL
USD/PEN 81.14 85.00 USD 299.09 PEN
USD/MXN 41.64 45.00 USD 450.33 MXN
BRL/USD 111.29 427.17 BRL 116.70 USD
- from floating to floating 11,823.51
EUR/USD 5,955.34 6,025.88 EUR 6,245.36 USD
EUR/GBP 384.32 387.08 EUR 250.00 GBP
JPY/EUR 282.00 30,000.00 JPY 282.00 EUR
USD/EUR 4,865.52 4,560.34 USD 4,865.52 EUR
USD/MXN 336.33 362.50 USD 3,637.33 MXN
Forwards 1,591.84
USD/EUR 38.67 37.61 USD 38.67 EUR
EUR/USD 61.95 65.37 EUR 64.97 USD
USD/CLP 39.46 41.26 USD 29,737.41 CLP
USD/UFC 1,005.61 1,119.40 USD 45.26 UFC
USD/PEN 446.14 451.83 USD 1,644.57 PEN
-------------------------------------------------------------------------------------------------------------------------
Subtotal 31,207.30
------------------------------------------------------------------
-143-
[LOGO]
-----------------------------------------------------------------------------------------------
Notional amounts of structured products with options Euros Notional Amounts
-----------------------------------------------------------------------------------------------
Interest rate options 4,912.72
-Caps & Floors 3,705.14
US DOLLAR 1,695.40 1,777.96 USD
EURO CURRENCY 2,009.74 2,009.74 EUR
-Swaptions 1,128.25
US DOLLAR 1,048.92 1,100.00 USD
EURO CURRENCY 79.33 79.33 EUR
- Interest rate options 79.33 79.33 EUR
Exchange rate options 411.96
EUR/BRL 15.73 16.50 USD
USD/MXN 286.07 300.00 USD
BRL/USD 32.39 120.00 BRL
BRL/EUR 77.77 288.17 BRL
Equity swaps 377.05
-----------------------------------------------------------------------------------------------
Subtotal 5,701.73
--------------------------------------------------------------------
Total 36,909.02
--------------------------------------------------------------------
The detail, by type of derivative, of the notional values of the derivatives
arranged by the Group as of December 31, 2001, is as follows:
---------------------------------------------------------------------------------------------------------------------------
Millions
-------------------------------------------------------------------
Type of Risk Equivalent Group Receives Group Pays
------------------------------------------------------
Euro Value Value Currency Value Currency
---------------------------------------------------------------------------------------------------------------------------
Euro interest rate swaps 4,375.76
-from fixed to floating 1,071.32 1,071.32 EUR 1,071.32 EUR
-from floating to fixed 2,239.22 2,239.22 EUR 2,239.22 EUR
-from floating to floating 1,065.22 1,064.73 EUR 1,065.22 EUR
Cross-currency swap 7,374.11
-from fixed to floating 3,579.12
BRL/BRL 236.47 497.31 BRL 497.31 BRL
USD/USD 3,342.65 2,990.00 USD 2,990.00 USD
-from floating to fixed 3,236.08 2,895.00 USD 2,895.00 USD
-from floating to floating 558.91 500.00 USD 500.00 USD
Cross-currency swap 15,913.72
-from fixed to fixed 2,293.01
EUR/USD 124.29 95.69 EUR 111.18 USD
EUR/GBP 128.77 121.49 EUR 80.00 GBP
EUR/MAD 3.34 33.76 EUR 349.09 MAD
JPY/USD 262.21 25,698.50 JPY 234.57 USD
USD/EUR 1,467.85 1,356.52 USD 1,467.85 EUR
USD/JPY 306.55 286.00 USD 33,338.50 JPY
-from fixed to floating 3,261.32
EUR/USD 118.49 100.00 EUR 106.00 USD
USD/EUR 173.12 157.16 USD 173.12 EUR
JPY/EUR 725.53 78,200.00 JPY 725.53 EUR
JPY/BRL 152.03 15,293.75 JPY 319.73 BRL
JPY/USD 152.02 16,456.00 JPY 136.00 USD
USD/BRL 1,940.13 1,717.88 USD 4,080.28 BRL
-from floating to fixed 207.29 466.34 BRL 185.45 USD
-from floating to floating 10,152.10
EUR/USD 6,294.28 5,096.01 EUR 5,630.86 USD
EUR/GBP 273.64 265.59 EUR 170.00 GBP
JPY/EUR 282.00 30,000.00 JPY 282.00 EUR
USD/EUR 3,302.18 3,013.23 USD 3,302.18 EUR
Forwards 3,055.61
USD/ARS 401.74 342.50 USD 359.40 ARS
USD/PEN 561.64 463.83 USD 1,731.42 PEN
USD/CLD 61.57 50.00 USD 36,072.00 CLP
USD/EUR 680.02 637.01 USD 680.02 EUR
USD/UFC 1,350.64 1,262.80 USD 48.65 UFC
---------------------------------------------------------------------------------------------------------------------------
Subtotal 30,719.20
---------------------------------------------------------------------
-144-
Telefonica
------------------------------------------------------------------------------------------
Notional amounts of structured products with options Euros Notional Amounts
------------------------------------------------------------------------------------------
Interest rate options 6,694.38
-Caps & Floors 3,949.21
US DOLLAR 3,392.58 3,035.00 USD
EURO CURRENCY 556.63 556.63 EUR
-Swaptions 2,665.84
US DOLLAR 2,403.31 2,150.00 USD
EURO CURRENCY 262.53 262.53 EUR
-Interest rate options 79.33 79.33 EUR
Exchange rate options 1,568.06
EUR/BRL 21.00 21.00 EUR
USD/ARS 723.79 647.50 USD
USD/BRL 725.46 649.00 USD
USD/CLP 89.43 80.00 USD
USD/MXN 8.38 7.50 USD
Equity swaps 448.85 448.85 EUR
------------------------------------------------------------------------------------------
Subtotal 8,711.29
-----------------------------------------------------------------
Total 39,430.49
-----------------------------------------------------------------
The detail, by maturity, of the hedging transactions arranged as of December 31,
2002, is as follows:
----------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------
Underlying Instrument Up to 1 to 3 3 to 5 Over
Hedged Amount 1 Year Years Years 5 Years
----------------------------------------------------------------------------------------------------------
With Underlying Instrument
----------------------------------------------------------------------------------------------------------
Promissory notes
Loans 23,409.96 5,850.00 12,229.59 2,583.20 2,747.17
In national currency 12,163.29 1,656.69 6,248.78 2.181,57 2,076.25
In foreign currencies 11,246.67 4,193.31 5,980.81 401.63 670.92
MTN debentures and bonds 9,574.61 5,305.94 2,931.18 138.27 1,199.22
In national currency 509.74 - 149.64 - 360.10
In foreign currencies 9,064.87 5,305.94 2,781.54 138.27 839.12
----------------------------------------------------------------------------------------------------------
Liability 3,547.40 1,160.59 715.17 - 1,671.64
Swaps 491.17 81.14 238.39 - 171.64
Exchange rate options 125.89 125.8 - - -
Interest rate options 2,930.34 953.5 476.78 - 1,500.00
Forward transactions - - - - -
Shares 377.05 377.05 - - -
----------------------------------------------------------------------------------------------------------
Total 36,909.02 12,693.58 15,875.94 2,721.47 5,618.03
----------------------------------------------------------------------------------------------------------
The detail, by maturity, of the hedging transactions arranged as of December 31,
2001, is as follows:
-145-
[LOGO]
------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------
Underlying Instrument Up to 1 to 3 3 to 5 Over
Hedged Amount 1 Year Years Years 5 Years
------------------------------------------------------------------------------------------
With Underlying Instrument
------------------------------------------------------------------------------------------
Promissory notes - - - - -
Loans 14,041.63 4,438.78 6,459.06 756.90 2,386.89
In national currency 5,044.04 206.18 1,883.40 662.10 2,292.36
In foreign currencies 8,997.59 4,232.60 4,575.66 94.80 94.53
MTN debentures and bonds 18,577.08 5,168.36 7,634.22 2,209.40 3,565.10
In national currency 5,016.50 958.42 2,248.95 864.61 944.52
In foreign currencies 13,560.58 4,209.94 5,385.27 1,344.79 2,620.58
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Liability 6,362.93 4,648.00 1,338.32 16.51 360.10
Swaps 1,108.73 482.64 609.58 16.51 -
Exchange rate options 1,568.06 1,568.06 - - -
Interest rate options 1,210.55 121.71 728.74 - 360.10
Forward transactions 2,475.59 2,475.59 - - -
Shares 448.85 448.85
------------------------------------------------------------------------------------------
Total 39,430.49 14,703.99 15,431.60 2,982.81 6,312.09
------------------------------------------------------------------------------------------
-146-
[LOGO]
Translation of a report originally issued in Spanish. In the event
of a discrepancy, the Spanish-language version prevails.
MANAGEMENT REPORT OF THE TELEFONICA GROUP
2002
Initial summary
In 2002 the Telefonica Group obtained sound operating results which were
nevertheless adversely affected by exchange rate trends, leading to falls of
8.5% and 8.4% in operating revenues and EBITDA /(1)/, respectively. Disregarding
the exchange rate effect, these two items would have increased by 6.1% and 6.2%,
respectively. The net losses are a result of the write-downs made in the year in
order to reflect the actual value of the Group's assets, including most notably
the value adjustments made to the UMTS licenses and the write-offs of goodwill
made by the Terra Lycos Group.
The Telefonica Group's operations in 2002 were carried out against the backdrop
of the general slowdown of economic growth, the adverse evolution of exchange
rates and the current uncertainty overshadowing the Latin American markets in
which it is present, all of which were compounded by the widespread increase in
competitive and regulatory pressure.
In view of this situation, Telefonica adapted its management priorities by
focusing on the development and profitability of its traditional business
activities, using its customer base to harness the potential for natural growth,
simplifying its organization based on customer segments and optimizing its
investments, in a quest to achieve profitable growth and enhanced cash flow.
In 2002 Telefonica continued to seek additional business opportunities through
the development of new higher value-added products and services, including most
notably its firm commitment to broadband, wireless telephone data services and
the corporate solutions area. It also stepped up its presence in the cellular
telephony business with the expansion in Brazil and Mexico.
Also worthy of note was the drive to contain costs and investments at the Group
companies in order to enhance operating efficiency and the returns on their
operations by optimizing the use of resources and generating more cash flow.
Organization by line of business
In 2002 the Telefonica Group continued its organization by line of business,
each of which is headed by a subsidiary: wireline telephony in Spain (Telefonica
de Espana), wireless telephony in Latin America (Telefonica Latinoamerica),
wireless telephony (Telefonica Moviles), data (Telefonica Data), media and
content (Admira), Internet (Terra Lycos), directories (TPI), call centers
(Atento) and capacity (Emergia). Telefonica S.A. heads the Group and gives it
cohesion by identifying synergies, centralizing the management of financial
resources and purchases and developing horizontal initiatives aimed at reducing
costs and expenditure, such as T-Gestiona to concentrate support activities and
for the standardization of processes and systems, Inmobiliaria Telefonica to
optimize the Group's real estate assets and Zeleris to manage the logistics line
of business by reducing the cost base in relation to assets and inventories
Noteworthy was the creation of a business unit, Telefonica International
Wholesale Services (TIWS), which manages the business activities carried on by
Emergia and the international units of the Group's wireline telephony operators
and the international wholesale voice, IP, data and capacity
(1) EBITDA: Operating Income before Depreciation and Amortization
-147-
[LOGO]
services and the network supporting them, whose aim it is to become a leading
wholesale telecommunications operator worldwide.
In addition, as part of a strategy aimed at harnessing new business
opportunities, in the second quarter of 2002 Telefonica Soluciones, made up of
Telefonica Sistemas, Katalyx, Art Media and Telefonica Mobile Solutions, was
created to group together all the Group's consulting and business solutions
activities and concentrate its systems and customer consulting activities. The
functional and operating consolidation of the four companies, aimed at
minimizing overheads, obtaining business synergies and improving the company's
positioning in the market, is currently under way.
In May 2002 the Board of Directors of the Admira Group decided to spin it off
into two separate business lines: a media division, "Corporacion Admira Media",
and a division grouping together all the investments in content and pay TV,
"Telefonica de Contenidos". At year-end the spin-off had not been formally
completed.
The comments on the conduct of business included in this report deal with the
Telefonica Group's financial performance by business line and are based on the
assumption that each of these business lines participates in the companies owned
by the Group in the related business, whether or not the investment has been
transferred, even if Telefonica, S.A. ultimately intends to transfer it in the
future.
It should be noted that the assumptions on which the comments on each business
line are based do not in any case alter the total results obtained by the
Telefonica Group.
International expansion.
Telefonica continues to consolidate its presence in Latin America, and is
setting its sights firmly on the region despite the current economic situation.
Telefonica shares the experts' positive long-term expectations and is seeking to
make its investments within a predictable and stable regulatory framework
favorable to the sustainable development of networks and services and to
obtaining an adequate return on the investments. Noteworthy in the year were the
Group's transactions in Brazil and Mexico.
Since December Moviles Brasilcel, the joint venture 50% owned each by Telefonica
and Portugal Telecom set up to reinforce the Groups' wireless business in
Brazil, which will group together all the assets of the two groups in the
wireless telephony business in Brazil, has been included in the Group. This
joint venture had a customer base of 13.7 million at year-end. Anatel approved
its formation on December 10, 2002.
In 2003, continuing the process of expansion, Brasilcel entered into an
agreement with the Brazilian company Fixcel for the acquisition of a controlling
interest in the Brazilian wireless telephony operator Tele Centro Oeste (TCO).
This transaction will consolidate the Moviles Group's leadership and competitive
capacity in the Brazilian market, capturing over 16.8 million customers. Tele
Centro Oeste is present in eleven Brazilian states and in Brasilia.
Also in Brazil, in April Anatel granted Telefonica a license for the operation
of domestic and international long-distance telephony traffic, thanks to the
early meeting of the targets relating to the provision of a universal telephony
service which were set following the privatization of the industry in July 1998.
This license will also make it possible to provide local telephony services
outside the concession area (Sao Paulo), thereby enabling it to operate
nationwide.
Turning to Mexico, in September a 65% stake was acquired in the Mexican wireless
telephony Pegaso, which was included in Telefonica Moviles Mexico, the company
resulting from the acquisition in July 2001 of assets of Motorola, which groups
together the northern Mexican operators
-148-
[LOGO]
Bajacel, Movitel, Norcel and Cedetel. Telefonica Moviles controls 92% of the
capital of this new entity, and the former stockholders of the Pegaso Group own
the remaining 8%.
This transaction has enabled Telefonica Moviles to operate throught Mexico, a
market with over 100 million inhabitants, and to obtain immediate access to
Mexico City which, with 20 million inhabitants, is the most attractive market in
the country.
Outside Latin America, noteworthy was the redefinition of Telefonica's
objectives in Germany, Austria, Italy and Switzerland, in view of the delay in
the availability of UMTS technology and the need to review the business model in
view of the market situation in these countries, in which Telefonica has been
awarded third-generation licenses. In this context, Telefonica Moviles
considered that the company's soundest strategic option was to reduce its risk
exposure in these markets by maximizing the generation of cash flow at short
term and maintaining a sound financial structure. Accordingly, Telefonica
Moviles reviewed the value of the assets in these countries reflected in its
balance sheet and in 2002 recorded significant extraordinary provisions to write
down these assets and to reflect the related restructuring expenses.
As regards the data business, in 2002 Telefonica Data placed particular emphasis
on enhancing the efficiency and profitability of its operations. Accordingly,
the Telefonica Data Group's presence in the countries in which the scale
achieved was not sufficient to achieve a return on future investments was
reviewed. Thus, in mid-2002 ETI (the subsidiary in Austria) was sold and at
year-end the sale of Data Uruguay was concluded. From July 2002 Atlanet (the
subsidiary in Italy) was accounted for by the equity method. Also, at the end of
2002 Telefonica decided to merge Mediaways and Highway One (a company acquired
in January 2002 to reinforce the broadband strategy), creating a new ISP,
Telefonica Deutschland, which will rank second in the German market.
Regulatory environment
The most significant regulatory development in the European Union in 2002 was
the publication in the Official Journal of the European Communities, on April
24, 2002, of four directives (the Framework, Authorization, Access and
Interconnection and Universal Service Directives), which establish a new
European regulatory framework for telecommunications and trigger the process of
transformation and adaptation of the whole of the regulatory legislation of the
EU member states.
In Spain, as a result of this new framework legislation, amendment of the
General Telecommunications Law has commenced and is expected to be completed in
the first half of 2003.
In the wireline telephony area, 2002 saw the entry into force of the rate
changes envisaged in the price cap, thanks to which the rate imbalance is being
redressed, through increases in the monthly subscription charges and reductions
in the rates for long-distance (provincial, interprovincial and international)
calls. In the 2003 price cap, although the downward pressure on prices present
in former years persists, the subscription charge is excluded from the price
cap, thereby increasing it. Regarding the Universal Service, it should be noted
that the Financing Fund has not yet been set up, and, accordingly, Telefonica de
Espana must continue to bear the cost of providing the related services, which
will foreseeably be increased in the future as a result of inclusion therein of
the Internet functional access service.
Also noteworthy in 2002 in the wireline telephony area were the changes in the
Subscriber Loop and Reference Interconnection Offer services provided by
Telefonica de Espana.
Noteworthy in the wireless telephony area was the reduction with respect to 2001
in the fees payable by Telefonica Moviles Espana (TME) to reserve use of the
radio spectrum. By a resolution of the regulator, there was a 17.13% reduction
in call termination charges in the TME network. Other
-149-
[LOGO]
notable developments were the commencement by TME of deployment of its
third-generation (UMTS) network and the partial cancelation of the guarantees
relating to the start-up of this network, as a result of which TME will be able
to recover them.
In Latin America, the economic situation in Argentina, in particular the
pesification and rate freezing measures, significantly affected the regulation
of telecommunications in this country.
Particularly significant in Brazil was the commencement, due to a ruling by the
regulator (ANATEL), of the extension of the Concession Agreement expiring on
December 31, 2005, although Telefonica must express its interest in extending it
before June 30, 2003. Also notable was the approval by ANATEL of the transfer of
assets of the wireless companies in Brazil from Telefonica Moviles and Portugal
Telecom to the joint venture formed by the two companies.
In Chile, in March 2002 CTC-Chile filed a claim against the Chilean state
alleging the unlawful nature of the Rate Decree in 1999. Also significant was
the approval by the regulator of the discount plans for high-consumption users
and the commencement of the process of definition and discussion of the
conceptual framework for the setting of the 2004-2009 rates. In December 2002
the Free Trade Treaty between the U.S. and Chile, containing a chapter on
telecommunications which might lead to alterations of the regulatory framework,
came into force.
In Peru, there are social and political pressures at work for the removal of the
basic monthly subscription charge, although negotiations are under way with the
executive authorities to reduce this charge by bringing forward the price cap
profitability indices.
Lastly, salient events in Spain in 2002 include the debate, which is still
continuing, regarding the possibility of more flexible management of the
spectrum, enabling wireless operators to retail it, the loosening of the UMTS
license coverage obligations, and the putting on hold of Telefonica Moviles'
UMTS projects in Europe (Germany, Austria, Italy and Switzerland).
Share performance and significant variables
For the third consecutive year, telecommuications shares performed poorly on the
stock markets, in a climate of uncertainty and investor aversion to risk on the
main international stock exchanges, with share prices plunging to their lowest
levels for several years. Telefonica's share prices were also influenced by the
crisis in Latin America, which explains their poor performance in the year with
respect to the European industry (-41.0% compared with -38.8%). As of December
31, 2002, Telefonica was tenth in the world ranking of telecommunications
companies and its stock market capitalization stood at (Euro)41,461 million,
At 2002 year-end Telefonica's customers numbered 84.7 million, including those
of all the subsidiaries of Brasilcel, the joint venture owned with Portugal
Telecom in Brazil, up 15.1% on 2001. Wireless customers amounted to 41.4
million, almost half the total customers managed by the Group. For the first
time Latin America made the largest contribution to total customers (50.9%,
while Spain had 47.2%). The Telefonica Group's ADSL connections amounted to 1.4
million at year-end, an increase of almost 800,000 customers with respect to the
previous year, testifying to Telefonica's commitment to broadband.
-150-
(LOGO)
Information on lines of business
Wireline telephony in Spain
At year-end the Telefonica Group's operating revenues in Spain amounted to
(Euro)10,272.1 million, up 0.5% on the previous year. Despite the scant growth
of the market and the strict regulatory framework, the drive to develop the
Internet and broadband business, which grew by 41.6%, enabled growth in terms of
both revenues and in EBITDA. The revenues from the Group's traditional business,
which represent 79% of the revenues of the operator, fell by 1.3%, due both to
the loss in market share in the direct and indirect access area and to the
impact of the price reductions as a result of the price cap. These two factors
were partially offset by the rise in the BTS subscriber charge, enabling
significant progress in redressing the rate imbalance.
The Telefonica de Espana Group's operating expenses increased by 2.9%, due
mainly to the increase in procurement expenses as a result of the rise in
wireline-wireline interconnection expenses, which was partly offset by the
containment of commercial expenses and outsourcing. Telefonica de Espana's
year-end headcount was down by 0.5% to 40,659, giving a productivity ratio of
511.7 lines/employee.
At year-end the Telefonica de Espana Group's EBITDA stood at 4,517.2 million, an
increase of 0.2% with respect to 2001. There was a significant reduction in the
allowance for bad debts due to the successful application of the control
measures applied.
The estimated volume of minutes of usage sold totaled 144,204 million, an
increase of 3.8%, due to the 20.5% increase in incoming traffic due mainly to
the interconnection traffic of the wireline operators. Outgoing traffic totaled
97,171 million minutes, including most notably provincial and wireline-wireless
traffic, which grew by 15.9% and 4.7%, respectively. Average consumption in
terms of minutes per line and day totaled 22.24, an increase of 5.3% with
respect to 2001.
Equivalent lines in service amounted to 20.8 million. Noteworthy was the strong
performance of the Integrated Services Digital Network basic accesses, with
year-on-year growth of 8.1%, and the ADSL service (growth of 154.7%) and the
negative growth of the Basic Telephony Service (BTS) (-619,309 lines), a
decrease of 3.9% with respect to the previous year.
In 2002 Telefonica de Espana continued to develop the Internet and broadband
business and to focus on the deployment of ADSL. At year-end 606,417 of the
957,204 customers of this service in Spain were retail ADSL customers. In
November the average maximum daily installations numbered 4,316 lines per day.
Wireline telephony in Latin America
Telefonica Latinoamerica's operating revenues amounted to (Euro)6,954.1 million
at 2002 year-end, a year-on-year decrease of 31.4% caused by the negative impact
of the exchange rates of the local currencies, in particular the Brazilian real
and the Argentine peso. In constant terms, revenues grew by 0.6% due to the
11.4% increase in revenues at Telesp as a result of the 5.8% increase in average
plant, the 8.3% rate increase in the local basket in July and the launch of new
long-distance services. Conversely, TASA's revenues fell by 12.3% as a result of
the economic situation in Argentina. The revenues of CTC and TdP also fell
slightly, due mainly to the drop in their long-distance revenues and by the
contraction of the market and the increase in competition, respectively.
Operating expenses rose by 3.0% in constant terms to (Euro)3,664.8 million. This
rise is attributable to the increase in procurements, due mainly to the increase
in interconnection (11.8% in constant terms) and outside services. Mention
should be made of the fall in personnel expenses (9.7% in constant terms)
-151-
[LOGO]
due to the 15.6% reduction in the headcount (4,752 employees), partly due to the
change in the method of consolidation of Sonda, which was accounted for by the
equity method in 2002.
In addition, there was a decrease in the allowance for bad debts.
Telefonica Latinoamerica's EBITDA was (Euro)3,346.7 million at year-end, a
decrease of 35.2% due to the impact of exchange rates. In constant terms the
decrease would be 3.4%.
2002 was marked by uncertainty in the macroeconomic environment, despite which
the businesses in Latin America were consolidated and the free cash flow /(2)/
generated increased as a result of the adaptation of corporate policy to the new
market conditions, based on stringent cost containment and the harnessing of
synergies between operators.
The number of lines managed directly fell slightly by 0.9% to (Euro)21.4 million
attributable mainly to Telesp, the economic crisis in Argentina and the
retirement of lines with bad debt problems at CTC. Telefonica continued to focus
on ADSL Internet and broadband business which exceeded 450,000 customers at
year-end, an increase of 85% with respect to the customer base in the previous
year.
All the operators implemented labor force reduction plans in the year in order
to adapt their headcounts to the new market situation. However, in Peru the
Constitutional Court ordered TdP to re-hire certain of its employees initially
affected by its labor force reduction plan, and the Argentine government froze
the labor force reduction plan launched by TASA in view of the crisis.
Following the early fulfillment of targets in September 2001, Telesp started
providing lnternational Long-Distance services in May and inter-state Domestic
Long-Distance services in June in Sao Paulo.
Despite the delay in the launch of these services, the company amply exceeded
projections and ended the year with shares of 83% of the intrastate Domestic
Long-Distance market, 36% of the interstate Domestic Long-Distance market and
32% of the lnternational Long-Distance market. Notable also was the expansion of
broadband, as a result of which the company increased its customer base by 68%
to over 330,000. Financial expenses decreased as a result of the fall in
interest rates despite the growth in average debt due to the substantial
investments made in 2001.
Due to the economic situation in Argentina, TASA was obliged to adopt strict
cost control measures as well as measures to manage bad debts (launch of new
products, debt financing plans, etc.) which partially offset the negative effect
of the fall in demand and the facts that rates were not revised. Noteworthy in
this connection was the maintenance of a stable level of EBITDA in the second
half of the year, accompanied by a reduction in operating expenses, thereby
offsetting the effect on these expenses of the dollarization and inflation.
TASA's accounts were negatively impacted by the devaluation of the peso, which
generated negative exchange differences and led to higher financial expenses.
In September CTC sold a 25% holding in Sonda, bringing its total holding to 35%
and, accordingly, this company is now accounted for by the equity method. A
strike in July, by approximately 70% of the labor force, had an adverse impact
on sales and this, compounded by the sluggishness of the long-distance market
(particularly the domestic market), led to a slight fall in revenues in the
year. In addition, in the last months of the year CTC focused on eliminating
lines with bad debt problems which did not generate revenues. With regard to
expenditure, strict control of investments in property,
/(2)/ Free Cash-Flow: EBITDA - Property, Plant and Equipment and Intangible
Assets - Financial Income without Monetary Correction - Corporate Income Tax
-152-
[LOGO]
plant and equipment and intangible assets made it possible to increase the cash
flow level (with the exception of Sonda) with respect to the previous year.
Telefonica del Peru consolidated its leadership in the local market by
increasing the number of wireline telephony lines by 5.4%. Its growth was based
on public telephony and by prepaid and consumption control products, which
represent 36% of the plant and cover the needs of the less affluent sectors of
the population, and also reduce bad debts. However, there was a significant
reduction in the long-distance business following the commencement in April of
the call preselection system through any operator. Cash flow was sufficient to
reduce the financial debt, and this, combined with the lower interest rates, had
a positive impact on the operator's earnings.
Cellular telephony
The Telefonica Group's wireless telephony business reported operating revenues
of (Euro)9,449.3 million, up 8.2% on the previous year. Spain's contribution
accounted for 72% and Latin America's for 28% of this amount, a decrease with
respect to the previous year due to the impact in the year of the devaluation of
the Argentine peso and the decline in value of the Brazilian real.
Operating expenses amounted to (Euro)5,600.3 million, up 6.7% on 2001, due
mainly to the increase in procurements and personnel expenses. The growth in
procurements was due largely to the entry into force of the New Centralized
Model for Handset Sales launched in December 2001 and to the changes in the
consolidated group following the acquisition of the Mexican operators and Pegaso
and the full consolidation of Teleleste.
EBITDA increased by 12% from (Euro)3,418 million in 2001 to (Euro)3,830 million
in 2002. EBITDA as a percentage of operating revenues increased to 40.5% in 2002
compared with 39.2% in 2001. Operations in Spain represent 91% of the EBITDA
from the wireless business in 2002, up 24% on the previous year. The EBITDA from
the operations in Latin America accounted for 18% in 2002. Without the impact of
exchange rates, Latin America would have contributed 23% of consolidated EBITDA
in 2002.
The following matters deserve to be highlighted in the area of international
expansion:
.. Redefinition of the short- and medium-term objectives of Telefonica Moviles
in Europe in view of the delay in the availability of UMTS technology and
the need to re-assess the business model bearing in mind the situation of
the market in Germany, Italy, Austria and Switzerland, where the company
had been awarded third-generation licenses. Consequently, Telefonica
Moviles reviewed the value of the assets in its balance sheet and recorded
significant extraordinary provisions in the year to write down assets in
the aforementioned countries and to cover restructuring expenses.
.. The formation by Telefonica Moviles and Portugal Telecom of Brasilcel, a
joint venture 50% owned by each company, which groups together the two
groups' wireless telephony assets in Brazil. The new company was launched
in December 2002 with a customer base of 13.74 million.
.. Subsequently, in 2003, Brasilcel entered into an agreement with the
Brazilian company Fixcel to acquire a controlling interest in Tele Centro
Oeste (TCO), a Brazilian wireless telephony operator. Estimates at the end
of 2002 indicate that the joint venture will consolidate its leadership
position and competitive capacity in the Brazilian market, and will have
over 16.8 million customers and a market share of over 50%. The resulting
entity will have 11 million customers more than the second largest operator
in Brazil.
-153-
[LOGO]
.. The acquisition of a 65% holding in the Mexican wireless telephony operator
Pegaso PCS. The subsequent merger of the four Telefonica Moviles operators
in northern Mexico with Pegaso PCS resulted in a new combined entity owned
92% by Telefonica Moviles and 8% by Pegaso. Thanks to this transaction
Telefonica Moviles has reinforced its position in the second largest Latin
American market and holds nationwide licenses in a country of over 100
million inhabitants and high growth potential given the fact that only 20%
of the population currently have access to wireless telephony.
In operating terms, at year-end the group had 41.4 million customers (including
those of the joint venture with Portugal Telecom), compared with 29.8 million at
2001 year-end. It should also be pointed out that in 2002 Pegaso's customer base
was included in that of the Telefonica Moviles Group.
Telefonica Moviles maintained a strong competitive position in all the regions
in which it operates, despite the growing competition, as a result of the
customer loyalty-building policies implemented by the various operators.
Noteworthy in this connection was the positive trend in Telefonica Moviles
Espana's market share, which remained stable with respect to the preceding year,
making it a point of reference for the operators established in the various
European markets.
Telefonica Moviles Espana further confirmed its determination to spearhead
technological innovation by launching the Multimedia Paging service in Spain,
which can be used to send color photos and combined voice, sound and text
messages. In this connection, in 2002 TME deployed its UMTS network in 21
Spanish cities and entered into numerous agreements with leading companies in
the industry (suppliers, technology partners and content providers).
Mention should be made of the growing use of data services at all the Group's
operators. In this connection, the performance of the Spanish operator merits
particular attention, with over 6.6 million e-motion users and 8,400 million
short messages in 2002 (up 35% on the previous year).
Data
The Telefonica Data Group's operating revenues amounted to 1,731.4 million in
2002, down 6.4% on the previous year. Revenues were adversely affected mainly by
Latin American exchange rates and changes in the consolidated group due to the
exclusion of ETI, Atlanet and Uruguay. Had exchange rates remained constant,
revenues would have grown by 5.5% due to the strong performance of the Spanish
subsidiary and the expansion of the business in Brazil.
Operating expenses fell by 15.6% due to cost containment and the efficiency
drive implemented in 2002, due mainly to the decrease in procurements, the
renegotiation with the wireline telephony operators as a result of which circuit
costs were reduced, and the drop in outside service expenses.
Thanks to the drive to enhance profitability, the Group's EBITDA amounted to
(Euro)169.9 million compared with (Euro)23.6 million in 2001. The EBITDA /(3)/
margin (9.8%) represented an increase of 8.5 percentage points with respect to
the same figure in the previous year. This improvement was due mainly to the
positive results obtained in Spain, Brazil and Argentina as a result of the cost
containment policies implemented, and to the lower losses of T.DataCorp thanks
to the greater efficiency of the International Network and the containment of
the holding company's expenses.
As mentioned earlier, in 2002 the Telefonica Data Group placed special emphases
on enhancing the
/(3)/ EBITDA margin: % (EBITDA / Operating Revenues)
-154-
[LOGO]
efficiency and profitability of its operations.
Along these lines, the Telefonica Data Group's presence in countries in which
the scale achieved was not sufficient to achieve a return on future investments
was reviewed. Accordingly, in mid-2002 ETI (the subsidiary in Austria) was sold,
while the sale of Data Uruguay was concluded at the end of the year. In July
2002 Atlanet (the subsidiary in Italy) was accounted for by the equity method.
Also as part of this profitability strategy, several of the Group subsidiaries
were reorganized. In the U.S., the business was refocused on marketing the
services of the Data Internet Center in Miami. In Mexico the Group focused on
seeking synergies with other Group lines and identifying joint commercial
actions with the U.S.
Following the acquisition of MediaWays at the beginning of 2001, HighwayOne was
acquired in order to boost the Group's presence in the German data market,
thereby supplementing the strategy based on the development of broadband and the
provision of integral communications solutions using IP Network for companies.
At the end of 2001 the two companies were merged to form Telefonica Deutschland,
which is the second largest ISP in Germany after Deutsche Telekom.
In order to enhance operating efficiency, mechanisms were introduced to ensure a
more rational use of resources to increase returns and reduce cash requirements.
These measures include most notably the reorganization of the investment control
process, the retirement of network assets and the postponement of projects which
are less high-priority.
In order to lay the groundwork for a future growth in revenues, the Group's
business capacity was reinforced in terms of the higher value added services
offered by it, based on broadband and the DataCenter services (the eBA concept).
The Group also enhanced customer services by creating new posts such as Service
Managers, who provide pre-sale and after-sale technical support.
Media and content
2002 saw the reorganization of the Telefonica Group's Media business. On May 30,
2002, the Board of Directors of the Admira Group decided to spin this group off
into two separate business lines: a media division, "Corporacion Admira Media",
and a division grouping together all the group's investments in content and pay
TV, "Telefonica de Contenidos".
Corporacion Admira Media groups together the investments in Antena 3, which owns
all the shares of Onda Cero, the Atco group in Argentina (Telefe y Radio
Continental) and the holding in the Pearson Group. The holdings owned by
Telefonica de Contenidos include most notably Endemol and Via Digital in
addition to the other assets of the former Admira. At 2002 year-end the spin-off
had not been formally completed and, accordingly, the results of the two
divisions were published jointly.
The consolidated revenues of the Admira Group (Corporacion Admira Media +
Telefonica de Contenidos) in 2002 stood at (Euro)1.076,2 million, 23.3% down on
the previous year. This fall in revenues was mainly at ATCO, due to the effect
of the crisis in Argentina and the devaluation of the peso. Other contributing
factors were Onda Cero, which in 2002 was accounted for by the equity method,
and Endemol due to the crisis in its traditional European markets.
The Admira Group obtained consolidated EBITDA of (Euro)114.5 million, down 24.9%
on 2001, although the consolidated EBITDA margin remained unchanged at 11%.
Key events in the year included the sale of Azul Television (the third free to
air Argentine television network) to the HFS Group, which took place in
mid-2002. This sale was made in order to comply
-155-
[LOGO]
with Argentine legislation, which bars any one corporate group from owning
stakes in more than one television network, and under which the Telefonica Group
had until December 31, 2002, to dispose of one of the two networks owned by it
in Argentina.
May 2002 saw the announcement of Telefonica's agreement with Sogecable for the
merger of their digital platforms, Canal Satelite Digital and Via Digital. The
transaction will be implemented through a capital increase at Sogecable, to be
subscribed by the present stockholders of Via Digital, and the contribution of
Via Digital to Sogecable. Also envisaged is the acquisition by Sogecable of the
Admira Group's 40% holding in AVS, which holds the audivisual rights on soccer
in Spain. This merger forms part of the pay-TV concentration process in other
neighboring countries.
On November 29, 2002, the Spanish Government approved the merger subject to
compliance with 24 general conditions and 14 conditions relating to exploitation
of soccer rights. On January 29, 2003, Sogecable and Telefonica decided to go
ahead with the merger. However, an appeal was filed with the Supreme Court
requesting the annulment of some of these conditions. Under the final agreement,
Telefonica may have a higher stake in the capital than the other two major
stockholders, the Prisa Group and Groupe Canal +, which will own holdings of
16.38% each once the transaction has been completed. However, Telefonica will
waive its voting rights in relation to the portion of its holding that exceeds
the individual percentage of ownership of each of the other two stockholders.
In September 2002 the Admira Group's holdings in Uniprex (Onda Cero Radio) and
Radio Voz were sold to Antena 3 de Television, effective January 1, 2003. On
January 7, 2003, the Telefonica Group exercised its purchase option on an
additional 11.72% of the capital stock of Antena 3 owned by Banco Santander
Central Hispano.
It should be noticed that in 2002 business in Argentina was affected by the
economic recession and the devaluation of the peso, which negatively impacted
sales and the results contributed to the consolidated financial statements.
It should also be pointed out that the advertising market continues to be
sluggish and is highly sensitive to the general slowdown of economic growth
registered in the year. This factor influenced first the free to air television
and radio business and, subsequently, the audiovisual content production
business, due to the effect on the free to air television and radio business of
the reduction of revenues from their main source.
Internet
In 2002 Terra Lycos obtained (Euro)600 million of operating revenues, of which
over half related to the media business and the remainder to the access
business.
The year posed the biggest challenge yet for the Terra Lycos Group in terms of
maintaining the position achieved in previous years as one of the world's
leading Internet companies. This was due mainly to the negative macroeconomic
situation in the countries in which the company operated in the year, compounded
by the worsening in the crisis of online advertising and the Internet market.
However, thanks to the cost containment drive negative EBITDA of (Euro)141.7
million was obtained, an improvement of 45% with respect to 2001.
At 2002 year-end the Terra Lycos had over 4.1 million Internet access customers
(4.7% fewer than in 2001 due to the drop in dial-up customers and in free access
customers following the discontinuation of the service in Brazil in 2001 and in
Mexico in 2002), of which 69% related to Spain and 21% to Brazil. If new pay
access and media services, OBP (Open, Basic, Premium) and CSP
-156-
[LOGO]
(Communication Service Provider) are included, Terra has 5.9 million customers
(29% of customers relate to these services, generating 13% of total revenues).
The Terra Lycos Group is present in 42 countries following the divestments in
the year from Lycos Korea and Lycos Japan.
Noteworthy at the organizational level was the creation of a new business unit,
Global Operations, which groups together under the responsibility of a single
person the functions that were already global and includes the units involved in
the conception, development and production of platforms, products and services.
With profitability as its prime objetive, Terra Lycos' key strategy is the shift
away from free value added services and products towards a differentiated and
quality range of products enabling it to charge its customers for services and
content through the implementation of the OBP model and the CSP communication
strategy aimed at providing users, no matter where they are located and what
equipment they use, with better services offering enhanced communications.
Also, within the access business area, in 2002 Terra Lycos once again maintained
its firm commitment to broadband, on which it first focused in 2001, centered
mainly on ADSL in Latin America and Spain. The Group ended the year with over
375,000 ADSL customers in Spain and Latin America, 62% more than at 2001
year-end.
In the media business, Terra Lycos concentrated on the provision of integral
marketing services which, together with the sale of online advertising, allows
it to strengthen its relationship with customers and to harness the full
potential of the company's sales force while enabling advertisers to access a
highly segmented audience and to exploit the Internet to the full as an
advertising medium.
In this connection, a salient feature was the implementation of the CheckM8
media technology to enable higher-impact advertising, and the acquisition in
October 2002 of GetRelevant, an online provider of direct marketing services
which signifies the addition of a powerful product package to Terra Lycos' range
of services. Another significant development was the creation of Lycos
Enterprise Services in May 2002, which extended the Terra Group's business
activities to new business sectors or units to which it can now offer resources
for hosting, navigation and functionalities for commercial websites.
Also, in 2002 Terra Lycos entered into important strategic and commercial
alliances, notably with Foxsports (an alliance for the joint creation of a
sports channel), MovieTickets (an agreement for the creation of a ticket
reservation web page) and the BBVA Group (to launch a secure e-commerce system
on the Internet).
Directories
Sustained growth in all business areas, combined with the sound position of TPI
Espana, enabled significantly higher earnings to be achieved in this area in
2002.
Publishing products continue to represent the company's main source of revenue;
however, the highest percentage growth corresponded to products relating to new
technologies, even though these still represent a small percentage of total
revenues. Operating revenues fell by 11.2% with respect to the previous year's
pro forma revenues (including those of Telinver, the Group's telephone directory
subsidiary in Argentina), due to the impact on earnings in Brazil of the loss of
the contract with the publishing house Listel and the publication of a reduced
edition of Telesp's "LTOG" telephone
-157-
[LOGO]
directories rather than the full edition published in 2001) and in Argentina of
the economic situation and the exchange rate.
Thanks to the cost containment policy implemented, 2002 EBITDA was (Euro)150.9
million, representing growth of 19.6%. Spain contributed 89% of the Group's
EBITDA and the remainder came from the Latin American companies.
TPI's straegy is based on three large areas of action aimed at meeting customer
requirements while maximizing the creation of value for stockholders.
- The consolidation of Publicidad e Informacion as a global group. In 2002 the
company reinforced its position in the Spanish- and Portuguese-speaking
telephone directory markets, increasing its market share in the mature market
in Spain, cutting down on the investment in advertising and strengthening its
presence in the Brazilian market. Also, in line with the strategy of grouping
together the Group's businesses by business line first implemented in 2001,
Telefonica Publicidad e Informacion Peru, S.A.C (initially part of Telefonica
del Peru) was included in the TPI Group's consolidated financial statements
in 2002.
- Diversification of revenue sources. While continuing to focus on the
company's main business, TPI is devoting significant material and human
resources to the development of new revenue sources, such as the launch of
pocket telephone directories in Spain, the marketing of MMS advertising or
the use of multimedia proximity searching.
- Increased profitability. The continued drive to rationalize expenses and
maximize returns constitutes one of the main pillars of management and
enables synergies to be harnessed, for example through joint purchasing of
services and supplies, the implementation of new developments and the
transfer of best practices between Group companies.
Call centers
At 2002 year-end the Atento Group's operating revenues stood at (Euro)571.1
million, a reduction of 11% with respect to 2001, due mainly to exchange rate
trends. Spain and Brazil continued to account for the highest proportion of
revenues. The percentage contribution of non-Group customers to total revenues
continued to increase, as did diversification in different industries, with the
consumption, financial and government sectors accounting for a higher proportion
of revenues with respect to the previous year.
Atento continued to focus on providing higher value added services, combining
these with automation and delocation of services as an alternative for
increasing margins.
The Atento Group's operating expenses fell by 12.6% due mainly to the control of
operating costs and overheads.
The Atento Group's EBITDA stood at (Euro)54.3 million at year-end, representing
growth of 1% with respect to 2001, principally due to the improved profit
margins in Mexico, Morocco and Venezuela and the control of operating costs and
overheads during the year.
Atento carries on its business activity through contact centers and multichannel
platforms (telephone, fax, Internet), offering its customers a broad range of
services from customer service, sales and collection management to more
sophisticated products such as the design, implementation and monitoring of
loyalty-building, research and market/customer segmentation programs.
-158-
[LOGO]
Atento provides services to over 500 companies which, apart from the Telefonica
Group, include multinationals and corporations mainly in the financial services,
telecommunications, consumption and government sectors.
In 2002 the company continued to consolidate its presence as a leading contact
center service provider for the Spanish- and Portuguese-speaking markets. Atento
has achieved its objectives through a management policy aimed at the development
of long-term strategic relationships with the leading customers in each
industry, at operating excellence geared to achieving best practices in the
industry and at cost reduction.
At year-end Atento had a network of over 50 call centers with over 27,000
positions.
Capacity
Emergia, which is part of Telefonica International Wholesale Services (TIWS),
offers city-to-city, door-to-door connectivity in Latin America and Europe and
from Latin America to the U.S. and Europe through its fiber optic network.
This business unit, which also comprises the international units of Telefonica
DataCorp, Telefonica de Espana, Telesp, Telefonica de Argentina, Telefonica del
Peru and CTC Mundo, was created with the aim of becoming a leading wholesale
operator in the world.
TWS's drive to coordinate the Group's wholesale businesses in 2002 led to an
increase in its volume of business with operators, enhanced operating efficiency
due to the rationalization of assets and a reduction in investments and cash
outflows due to the exchange of products and services with customers and/or
competitors.
Following the completion in 2001 of the installation of the 25,000 km fiber
optic land and underwater ring, Emergia has positioned itself as the only
operator in Latin America with a fully operational high-speed fiber optic
network.
In 2002 Emergia managed to position itself in the market as a stable and solvent
broadband provider in a difficult competitive environment, strengthening its
commercial links with a growing customer base and providing the Telefonica Group
with an international broadband infrastructure at extremely competitive prices.
Earnings
Consolidated loss
When analyzing the year-on-year variations, it should be noted that they are
affected by the changes in the scope of consolidation the most significant of
which were as follows: the inclusion in 2001 of the Mexican wireless operators,
and in 2002 the inclusion of Teleleste (for the whole year) and Pegaso (from
September 2002) and the exclusion of Onda Cero (from January 2002), Sonda (from
September 2002) and Atlanet (from July 2002), which were accounted for by the
equity method.
Operating revenues fell by 8.5%, mainly due to the negative impact of exchange
rates. However, there was a substantial cost control drive in the year in the
face of the poor performance of revenues. Disregarding the exchange rate effect,
operating expenses grew by 4.9% (compared with a 9% fall in real terms) and
revenues rose by 6.1%, giving rise to a 6.2% increase in EBITDA (compared with a
fall of 8.4% in real terms).
-159-
[LOGO]
Also noteworthy in the year was the cutback in investment in the various
business lines by 53.4% with respect to 2001.
The performance of the aggregates with the greatest bearing on consolidated
results for the year is summarized as follows:
Operating revenues amounted to (Euro)28,411.3 million in 2002, down 8.5% on
2001, due mainly to the adverse effect on Telefonica Latinoamerica of exchange
rates and the economic situation in Latin America. The Group's wireless
telephony business made the biggest contribution to growth, followed by
Telefonica de Espana, while revenues from the other business lines were down on
the previous year. Disregarding the adverse effect of excharge rates, the
Group's revenues grew by 6.1%.
There was a year-on-year drop of 9% in operating expenses, due to the
containment of these expenses in all the business lines and to the evolution of
exchange rates. Noteworthy was the increase in expenses at Telefonica Moviles
and Telefonica de Espana in line with their revenues growth. Disregarding the
exchange rate effect, there was a 4.9% increase in expenses.
The depreciation and amortization expense fell by 9.2% in 2002, as compared with
the 5.9% increase in 2001, due to the impact of exchange rates and the drop in
the volume of investment in the year.
The losses of associated companies increased as a result of the losses incurred
by the companies in which the Telefonica Moviles ((Euro)159.5 million),
Telefonica Contenidos ((Euro)191.3 million) and Terra Lycos ((Euro)148.9
million) Groups have minority holdings.
Amortization of consolidation goodwill decreased by 21% to (Euro)667.5 million,
due to the extension of the period of amortization of the goodwill relating to
Terra Lycos to ten years and to the write-down of the goodwill relating to
Mediaways in 2001 and mid-2002.
The extraordinary expenses related mainly to the write-down of the UMTS
businesses in Europe (Moviles and Data) and the other write-downs made by the
Group in the year (Terra, Mediaways, Iobox, etc.).
The Telefonica Group reported a consolidated net loss for the year of
(Euro)5,576.8 million, as compared with the consolidated net income of
(Euro)2,106.8 million obtained in 2001.
Revenues
Operating revenues amounted to (Euro)29,236.7 million in 2002, down 8.8% on the
previous year.
Revenues from operations, which represented over 97% of the total and amounted
to (Euro)28,411.3 million, decreased by 8.5%, while capitalized in-house work on
fixed assets decreased due to the cutback in investment and other operating
revenues (which were marginal) rose by 16.8%.
The main contributions to consolidated revenues were made by the Telefonica de
Espana Group (33%), the wireless line of business (28%) and Telefonica
Latinoamerica (24%).
Telefonica de Espana's operating revenues remained steady with respect to 2001
at (Euro)9,831.9 million. If Telefonica de Espana's subsidiaries are taken into
account, the operating revenues amount to (Euro)10,272.1 million, a year-on-year
increase of 0.5%, due to the strong performance of Telyco as a result of the
growth of its business activity in the wireless market and the development of
its subsidiary Telyco Maroc.
-160-
[LOGO]
The operating revenues of the wireless business amounted to (Euro)9,449.3
million, up 8.2% with respect to those reflected in the 2001 pro forma
consolidated financial statements.
The operating revenues of the Spanish wireless operator amounted to (Euro)6,770
million, up 18% on 2001. Despite rising competition, Telefonica Moviles Espana
remains the market leader with an estimated market share of 55%, and in 2002 it
accounted for more than 40% of the net market growth in customer numbers.
As of December 31, 2002, the financial statements of Pegaso PCS were included
effective September 10.
Turning to the Latin American wireless operators, consolidated operating
revenues amounted to (Euro)6,954.1, a decrease of 31.4% with respect to 2001.
This decrease was attributable to the devaluation of all the currencies, in
particular the Argentine peso and Brazilian real, since in constant terms
revenues grew by 0.6%.
Telesp made the largest contribution to revenues in 2002, accounting for 53% of
the total as compared with 44% in 2001. The Brazilian operator ended the year
with an increase in revenues of 11.4% in local currency, reporting revenues of
(Euro)12.5 million from lines in service (0.9% down on the previous year) with a
slight fall in the segments yielding lower revenues. Telefonica de Argentina's
revenues fell by 12.3% in local currency, and its plant in service fell by 3% to
4.4 million lines, due to the economic recession. The Chilean wireline operator
ended the year with a drop in revenues of 1.1% in local currency and 2.7 million
lines in service, representing a decrease of 1.3%, due to the retirement of
lines with bad debt problems that were not generating revenues for the company.
The Peruvian operator reported a 0.2% fall in revenues in local currency, but
its plant in service rose by 5.4% to 1.8 million lines, with a steady increase
in the relative weight of prepaid lines.
The Telefonica Data Group's operating revenues fell by 6.4% in 2002 to
(Euro)1,731.4 million, impacted mainly by exchange rates in Latin America and
the changes in the scope of consolidation.
Expenses
Operating expenses, including procurements, outside services, personnel expenses
and taxes other than income tax, amounted to (Euro)16,773.3 million, a
year-on-year decrease of 7.6%. This decrease was principally due to exchange
rate trends. Disregarding this effect, expenses rose by 5.7%.
The wireless telephony business, Telefonica de Espana and Telefonica
Latinoamerica are, in that order, the lines of business which account for the
greatest relative amount of the Group's expenses, representing 72% of the total
expenses.
There was an across-the-board reduction in expenses with respect to 2001 due to
cost containment measures and the increase in operating efficiency at the Group
companies and to exchange rates. The only two lines with an increase in expenses
with respect to the previous year were the wireless telephony business and
Telefonica de Espana, although the increases were in line with their revenue
growth.
The increase in the expenses of the wireless telephony business was partially
due to the New Centralized Model for Handset Sales and by the changes in the
scope of consolidation following the acquisition of the Mexican operators and
Pegaso and the full consolidation of Teleleste.
The increase in Telefonica de Espana's expenses was mainly attributable to the
increase in interconnection and personnel expenses.
-161-
[LOGO]
Operating expenses continue to comprise mainly interconnection expenses,
particularly at the wireline operators, commercial and marketing expenses
relating to wireless telephony customer loyalty-building policies and personnel
expenses.
The growth in Telefonica de Espana's interconnection expenses was due to the
increase in wireline-wireline traffic associated with the traffic to intelligent
networks of other operators. Notable among the Latin American wireline
operators, disregarding the exchange rate effect, was Telesp, whose
interconnection expenses increased due to the increase in average plant in
service (which led to a higher volume of traffic), the increase in the
interconnection rates imposed by Anatel in February 2002 and the launch of the
new Interstate Long-Distance and International Long-Distance businesses.
The commercial and marketing expenses of the wireless operators were down on
2001 due to the across-the-board policy of cost containment and, in particular,
to Telefonica Moviles Espana's strategy of giving priority to loyalty-building
rather than capturing new customers.
The Group's personnel expenses fell by 11.1% with respect to the previous year.
As of December 31, 2002, the Telefonica Group had 152,845 employees, 5.4% fewer
than at 2001 year-end. Atento, Telefonica de Espana and Telefonica Latinoamerica
had the most employees.
2002 saw various restructuring processes and labor force reduction plans,
chiefly affecting Telefonica Latinoamerica and the wireless telephony business.
In Telefonica Latinoamerica, the restructuring plans were mainly prompted by the
difficult economic situation in the region, while in the wireless telephony
business the chief cause was the freezing of the business activities of the
European operators, the adaptation of the labor forces of the Brazilian
operators to the structure of the joint venture and the restructuring of the
business in Mexico.
The other operating expenses include most notably the provision for bad debts,
which decreased significantly in 2002 due to the greater control of bad debts in
both Spain and Latin America. At Telefonica de Espana the decrease was affected
by the higher provisions recorded in 2001 by public telephony companies, while
in Latin America it was due to the improved quality of the customer roster and
to the control measures implemented to reduce bad debts relating to prepaid
products and consumption control.
EBITDA and EBITDA margin
In 2002 EBITDA amounted to (Euro)11,724.2 million, a decrease of 8.4%, as
compared with the growth of 7.4% in the previous year, due mainly to the impact
of exchange rates. Disregarding the exchange rate effect, Ebitda increased by
6.2%.
There was a growth in EBITDA at Telefonica Moviles, Telefonica de Espana,
Telefonica Data, Telefonica Publicidad e Informacion and Atento and a reduction
in losses at Terra Lycos, Emergia and Katalyx, which however did not offset the
negative impact of the performance of Latinoamerica due to the adverse effect of
exchange rates, and of Admira Media.
The EBITDA margin was 41.3% in 2002, 0.1 percentage points higher than in 2001.
The year-on-year fall in the margin of the Latin American wireline business and
at Telefonica de Espana and Admira Media was offset by the growth in the other
businesses.
The Group's operating income, which stood at (Euro)5,031.8 million, was down
7.3% on the 2001 year-end figure. However, this decrease is less than the
decrease in EBITDA due to the reduction in the depreciation and amortization
expense, which fell by 9.2% compared with the increase of 5.9% in the previous
year, due mainly to exchange rate charges.
-162-
(LOGO)
Investment activity
In 2002 the Telefonica Group recorded intangible asset and property, plant and
equipment additions of (Euro)3,926.2 million, 53.4% less than in 2001. This
decrease was mainly due to the investment rationalization and containment drive
implemented in all the lines in 2002. Mention should be made of the significant
fall in the investments of Telefonica Latinoamerica thanks to the drive in
Brazil in 2001 aimed at meeting targets. The fall is also affected by the severe
depreciation of all the Latin American currencies, particularly the Brazilian
real and the Argentine peso.
In 2002 Telefonica de Espana continued to refocus its investments on shifting
the company towards broadband and new businesses without overlooking the needs
of the traditional business.
Investment in wireless telephony was down by 50.7%, due principally to the
freezing of the business activities in July 2002 of the European companies as a
result of the delay in the implementation of UMTS technology and the fall in
investments in Spain and Latin America.
In 2002 and 2001 substantial investments were made in the construction of SAM-1,
Emergia's fiber optic ring interconnecting the main Latin American cities.
Investments in property, plant and equipment totaled (Euro)2,819.65 million in
2002, down 58.4% from 2001, due to the across-the-board curtailment of
investments by Group companies.
Investments in intangible assets totaled (Euro)1,106,6 million in 2002, a drop
of 32.9% with respect to 2001.
Long-term investments fell by 26% to (Euro)921.5 million, due to the reduction
in the acquisition of holdings in associated companies and other shareholdings.
R&D
In 2002 Telefonica Group continued to be firmly commited to its research and
development policy as the main pillar with which to achieve a competitive edge
and foster technological innovation. Many of these activities were channeled
through the international research and development center Telefonica I+D, a
benchmark innovative company which made an important contribution in 2002 by
developing the strategies defined by the Telefonica Group's business lines.
The projects undertaken by the Telefonica Group in 2002 focused on profitable
innovation, process efficiency, the creation of new sources of revenues,
customer satisfaction, geographical expansion and technological leadership. The
R&D activities, in particular, were incorporated into Telefonica's strategy
aimed at creating value through broadband communications and services and IP
networks.
At the same time, projects were carried out to promote the Information Society
and new services were prepared which will use the UMTS capacities and the
capacities of the new wireless handsets. Work was also carried out to ensure
early identification of the emerging technologies which may have an important
impact on Telefonica's business lines, and these technologies were tried out
with new services, applications and platform prototypes.
R&D activities made an important contribution to the Telefonica Group's
intellectual property portfolio and, consequently, to the reduction of the
technological deficit in Spain.
Research and development expenses capitalized due to their future contribution
to Group income amounted to (Euro)94.4 million in 2002, as compared with
(Euro)170,8 million in 2001.
-163-
(LOGO)
Other salient matters
In July Telefonica Moviles and NTT DoCoMo announced an agreement for the launch
in Spain of i-mode, the world's most popular wireless Internet service, in the
first half of 2003. The two companies have entered into a license agreement
under which NTT DoCoMo will make available to Telefonica Moviles Espana the
necessary patents, know-how and technology to offer the i-mode service through
its GPRS network. In addition, together they will forge a technological and
business alliance encompassing all areas of wireless communications.
Financial earnings
Net financial expenses totaled (Euro)2,221.6 million in 2001, (Euro)528.8
million of which were due to the impact of the devaluation of the Argentine
peso. Without this effect, financial earnings for 2002 amounted to (Euro)1,692.8
million, 9% down on the comparable figures for 2001 (1,862.3 million). This
decrease was due mainly to the reduction in average net indebtedness and in the
average cost thereof.
In 2002 the Group's net indebtedness (4) fell by 12% with respect to 2001 thanks
to the cash flows generated and the strengthening of the euro with respect to
the dollar and the Latin American currencies. This reduction was achieved
despite the inclusion of new companies in consolidation in 2002 as a result of
the investments made in the year.
Financing
The Telefonica Group's net debt decreased by (Euro)6,408.5 million from
(Euro)28,941.6 million at 2001 year-end to (Euro)22,533.1 million at the end of
2002. This reduction was attributable to the operating cash flow of (Euro)4,546
million generated by the Group, the (Euro)3,044 million decrease in the value of
the non-euro debt due to the appreciaton of the euro against the U.S. dollar and
the Latin American currencies and the preferred share issue launched in December
2002 amounting to (Euro)2,000 million. This debt reduction was offset by the
financial investments of (Euro)1,564 million made in the period and by the
(Euro)1,618 million increase in debt due to the variations in the scope of
consolidation and other circumstances.
The principal financing transactions in 2002 were as follows:
On February 13, 2002, the first capital increase with a charge to unrestricted
reserves authorized by Telefonica's Stockholders' Meeting on June 15, 2001, was
carried out. Capital was increased by (Euro)93,438,317 through the issuance of
93,438,317 new shares, which were assigned to the Company's stockholders at a
ratio of one new share for every 50 shares held by them.
On April 12, 2002, the second capital increase with a charge to unrestricted
reserves authorized by Telefonica's Stockholders' Meeting on June 15, 2001, was
carried out. Capital was increased by (Euro)95,307,084 through the issuance of
95,307,084 new shares, which were assigned to the Company's stockholders at a
ratio of one new share for every 50 shares held by them.
On April 12, 2002, Teleonica's Stockholders' Meeting resolved to carry out three
capital increases, two with a charge to unrestricted reserves to remunerate
stockholders and the third to cater for the compensation scheme tied to the
market value of Telefonica, S.A. shares targeted at Endemol Group employees (on
December 18, 2002, the Board of Directors of Telefonica, pursuant to the powers
/(4)/ Net Debt: Long-Term Debt (excluding accounts payable to minority
interests) + Debentures, Bonds and Other Marketable Debt Securities and Payables
to Credit Institutions - Short-Term and Long-Term Investments - Cash.
-164-
(LOGO)
granted to it, ultimately decided to not implement the last of these
resolutions, and opted for a different means of covering the stock options).
On April 19, 2002, Telefonica Europe BV issued (underwritten by Telefonica S.A.)
a structured bond under the EMTN program for (Euro)50 million. This bond matures
on April 19, 2005, and bears interest tied to Euribor plus a spread of 40 basis
points.
On June 18, 2002, Telefonica Europe BV issued (underwritten by
Telefonica S.A.) a bond under the EMTN program with a face value of (Euro)80
million. This bond matures on June 18, 2004, and bears interest tied to EONIA
plus a spread of 0.30%.
On April 11, 2001, Telefonica Europe BV issued (underwritten by Telefonica S.A.)
a bond under the EMTN program with a face value of (Euro)100 million, issued at
a discount at an annual discount rate of 4.0807% and maturing on April 11, 2003.
Lastly, on December 30, 2002, Telefonica Finance USA LLC, a wholly-owned
subisidary of Telefonica Europe B.V., issued preferred shares totaling
(Euro)2,000 million (underwritten by Telefonica S.A.). This amount was lent in
full to Telefonica Europe B.V. through a ten-year loan.
Rating agencies
On December 2, 2002, the rating agency Moody's reduced Telefonica's credit
rating to A3, with a stable outlook, and on August 9, 2002, the rating agency
Fitch-IBCA reduced Telefonica's credit rating from A+ to A, with a stable
outlook.
Lastly, on February 5, 2002, the rating agency Standard & Poors confirmed
Telefonica's credit rating as A, with a stable outlook.
Events subsequent to December 31, 2002
Note 23 to the financial statements describes the salient events which have
occurred since December 31, 2002. The most significant are as follows:
Capital increase in progress with a charge to reserves
February 2003 saw the first of the Company's two capital increases with a charge
to unrestricted reserves approved by the Stockholders' Meeting on April 12,
2002, which the Board of Directors resolved to carry out at its Meeting on
December 18, 2002.
The capital increase was carried out through the issuance of 97,213,225 new
common shares of the Company of (Euro)1 par value each, thereby increasing the
capital stock by (Euro)97,213,225 to (Euro)4,957,874.511. These new shares were
assigned free of charge to the stockholders in the proportion of one new share
for every 50 shares already owned.
The deed of capital increase was executed on February 12, 2003, and registered
at the Mercantile Registry on February 18, 2002.
Also, on February 12, 2003, the Standing Committee of the Board of Directors of
Telefonica, S.A., making use of the powers granted to it by the Board of
Directors on January 29, 2003, resolved to carry out the second capital increase
with a charge to unrestricted reserves approved by the Stockholders' Meeting on
April 12, 2002, through the issuance of 99,157,490 new common shares of the
Company, of the same series and carrying the same rights as the outstanding
shares, of (Euro)1 par
-165-
(LOGO)
value each, which will be assigned free of charge to the stockholders in the
proportion of one new share for every 50 shares already owned.
The period for the assignment free of charge of the shares relating to the
second capital increase is scheduled to commence in the second half of March
2003, and the new shares will foreseeably be admitted to official listing in
mid-April 2003.
Merger of Via Digital with Sogecable
On May 8, 2002, Sogecable S.A. and Telefonica S.A. (the latter through its
subsidiary Telefonica de Contenidos S.A. - Sole-Stockholder Company) entered
into an agreement relating to the merger of DTS Distribuidora de Television
Digital, S.A. (Via Digital) with Sogecable.
The transaction was ratified by the Board of Directors of Telefonica de
Contenidos S.A. (Sole-Stockholder Company) and Sogecable S.A. in May 2002,
subject to the authorization of the relevant public authorities, which was
granted on November 29, 2002, through the adoption by the Council of Ministers
of certain resolutions authorizing the merger provided that certain conditions
were met.
On January 29, 2003, Sogecable S.A., Telefonica, S.A. and Telefonica de
Contenidos S.A. (Sole-Stockholder Company) entered into an agreement whereby
they deemed the contract terms established for the merger of Sogecable and Via
Digital to have been fully met. Also, Telefonica de Contenidos S.A.
(Sole-Stockholder Company) and Sogecable S.A. agreed on the related detailed
action plans and deadlines for the instrumentation of the conditions imposed by
the Government in the aforementioned Council of Ministers resolutions. Through
these plans, Telefonica de Contenidos S.A. (Sole-Stockholder Company) and
Sogecable S.A. accepted the conditions established by the Government; however,
they filed appeals for judicial review against certain of the conditions
(obligation to distribute channels, joint marketing of commercial packages,
price caps and prohibition of strategic alliances).
The terms under which the transaction will be carried out in accordance with the
agreements dated May 8, 2002 and January 29, 2003, are as follows:
- The transaction will be carried out through a capital increase at
Sogecable, S.A. targeted at the stockholders of Via Digital, who will be
able to contribute their Via Digital shares.
- If all the shareholders of Via Digital subscribe to the capital increase,
the percentages of ownership of Sogecable, S.A. after the capital increase
will be 77% in the case of the present stockholders of Sogecable and 23% in
the case of the present stockholders of Via Digital.
- After the exchange has been carried out, the Telefonica Group will have an
ownership interest in the capital stock of Sogecable, S.A. equal to that of
its two stockholders Prisa and Groupe Canal + after the dilution arising
from the share exchange, which, if all the capital stock of Via Digital is
exchanged, would represent 16.38% of the capital stock of Sogecable, S.A.
With this ownership interest, Telefonica would not exercise such voting
rights carried by the shares received in the exchange as might exceed the
aforementioned percentage.
- Telefonica has stated that its present strategic plans envisage that the
aforementioned ownership interest will not be disposed of for at least
three years from the date of the exchange.
- The representation of Telefonica, Prisa and Groupe Canal + on the Board of
Directors of Sogecable, S.A. will be consistent with their respective
ownership interests, and each of the
-166-
(LOGO)
aforementioned three entities will appoint five directors. The Chairman of
the Board of Directors will be chosen from among the five directors
appointed by Telefonica.
- Prisa and Groupe Canal + will maintain their present shareholders'
agreement, to which Telefonica will not be a party.
- Each of the three major stockholders will grant a ten-year participating
loan of (Euro)50 million earning interest at 11%.
- Sogecable, S.A. will offer its shareholders the possibility of
participating in a nine-year subordinated debt security issue of (Euro)175
million, the subscription of which will be underwritten by Telefonica,
bearing interest at 10.28%. The remuneration for the subscribers will
include the issuance of warrants equal, overall, to 1% of the capital stock
of Sogecable, S.A.
- The debt of Via Digital and of Sogecable, S.A. as of April 30, 2003, must
not exceed(Euro)425 million and(Euro)705 million, respectively.
Strategic alliance between Telefonica, Terra and Bertelsmann
On February 12, 2003, Telefonica and Terra Networks, S.A. entered into a
Framework Strategic Alliance Agreement to replace the Strategic Agreement dated
May 16, 2000, to which Bertelsmann was also a party (whereby, in the framework
of the acquisition of Lycos by Terra, Telefonica, S.A. undertook to commission
from Terra, the portion of the advertising services committed by Bertelsmann
that the latter did not commission from Terra, up to a maximum amount of US$ 675
million).
Additionally, on February 12, 2003, Telefonica, Terra, Lycos and Bertelsmann,
entered into a preferential interest agreement which will enable them to
continue to explore opportunities for the mutual provision of communications,
development and content services in the on-line market.
The term of the Framework Strategic Alliance Agreement is six years, ending on
December 31, 2008. The Agreement is automatically renewable for one-year periods
unless it is expressly terminated by the parties.
The main features of this Framework Strategic Alliance Agreement are summarized
as follows:
1. Strengthening of the Terra Lycos Group as:
- The exclusive provider of essential portal elements, including brand
image, and aggregator of the broad and narrow band Internet content and
services targeted at the residential, SOHO and, when so agreed, SME
market segments, for the Telefonica Group companies' connectivity and
ISP services.
- Preferential provider of audit, consulting, management and maintenance
services for the country portals of the Telefonica Group companies.
- Exclusive provider of Telefonica Group employee on-line training
services.
- Preferential provider of on-line integral marketing services for the
Telefonica Group companies.
-167-
[LOGO]
2. Guaranteed minimum volume of acquisitions of Terra Lycos Group on-line
advertising space by Telefonica Group companies.
3. Exclusive acquisition of connectivity and wholesale Internet access services
by Terra Lycos Group companies from Telefonica Group companies under the
legally permitted most-favored-customer conditions.
4. Outsourcing by Terra Lycos Group companies to Telefonica Group companies of
all or part of the services and/or operation of the Internet access elements
for the provision of ISP services to its residential, SOHO and, when so
agreed, SME customers under the legally permitted most-favored-customer
conditions.
5. Exclusive acquisition by Terra Lycos Group companies from Telefonica Group
companies of the advanced broad and narrow band network and platform services
required to construct the range of services to be offered to residential,
SOHO and, when so agreed, SME customers under the legally permitted
most-favored-customer conditions.
The Framework Strategic Alliance Agreement guarantees the generation for the
Terra Lycos Group of a minimum annual value throughout the term of the Agreement
of (Euro)78.5 million. This amount is the difference between the revenues
arising from the services provided under the aforementioned Framework Strategic
Alliance Agreement and the costs and investments directly associated therewith.
Terra Networks, S.A.-BBVA (Uno-e Bank, S.A.)
On May 15, 2002, Terra Networks, S.A. (Terra) and Banco Bilbao Vizcaya
Argentaria, S.A. (BBVA) entered into a memorandum of understanding to integrate
the consumer finance lines of business of Finanzia Banco de Credito, S.A. (a
subsidiary of BBVA) and Uno-e Bank, S.A. The agreement relating to this
integration was subject to a legal, financial and business review, and to the
obtainment of the relevant internal and administrative authorizations. When the
integration takes place, Terra's ownership interest in Uno-e Bank, S.A. will be
33% and that of the BBVA Group will be 67%.
On that same date (May 15, 2002), BBVA and Terra entered into an agreement in
which they established the following liquidity mechanisms (purchase and sale
options) relating to the Uno-e Bank, S.A. shares owned by Terra:
- Terra has the right to sell to BBVA, and BBVA is obliged to acquire, Terra's
holding in Uno-e Bank, S.A. between May 15, 2004 and May 15, 2006, at the
higher of the following prices: (i) the market value as determined by an
investment bank; and (ii) the price paid by Terra to acquire its ownership
interest ((Euro)189.4 million).
- BBVA has the right to acquire from Terra, and Terra is obliged to sell,
Terra's holding in Uno-e Bank, S.A. between May 15, 2004 and May 15, 2006, at
the higher of the following prices: (i) the market value as determined by an
investment bank; and (ii) the price paid by Terra to acquire its ownership
interest ((Euro)189.4 million), plus annual interest at a rate of 4.70%.
- If a definitive agreement were reached regarding the aforementioned
integration of the consumer finance lines of business of Finanzia Banco de
Credito, S.A. and Uno-e Bank, S.A., the liquidity mechanisms would be
modified. BBVA would lose its right of purchase and Terra would retain its
right of sale, but only at the market value as determined by an investment
bank.
On January 10, 2003, Terra and BBVA entered into an agreement to integrate the
consumer finance lines of business of Finanzia Banco de Credito, S.A. and Uno-e
Bank, S.A. in terms that were more in
-168-
[LOGO]
keeping with their respective interests and those of Uno-e Bank, S.A. than those
provided for in the memorandum of understanding dated May 15, 2002. Accordingly,
the memorandum of understanding was rendered null and void, and the definitive
agreement was made conditional upon obtainment of the relevant internal and
administrative authorizations, which must be secured prior to June 30, 2003, as
a condition for the formalization and performance of the integration. After the
integration takes place, Terra's ownership interest in Uno-e Bank, S.A. will be
33% and that of the BBVA Group will be 67%.
On that same date (January 10, 2003), BBVA and Terra entered into a liquidity
agreement that will replace that dated May 15, 2002, once the aforementioned
integration has taken place. This agreement establishes the following liquidity
mechanism (sale option) relating to the Uno-e Bank, S.A. shares owned by Terra:
Terra has the right to sell to BBVA, and BBVA is obliged to acquire, Terra's
holding in Uno-e Bank, S.A. between April 1, 2005 and September 30, 2007, at
market value, established as the higher of the two following values: (i) that
determined by an investment bank; and (ii) that obtained by multiplying the
income after taxes of Uno-e Bank, S.A. by the PER of BBVA, multiplied by the
percentage of the ownership interest held by Terra that it is intended to sell
as of that date.
Also, the exercise price of the aforementioned option may not be lower than
(Euro)148.5 million if Uno-e Bank, S.A. does not achieve the net ordinary
revenue and pre-tax income targets set for 2005 and 2006.
Acquisition of shares of Antena 3 de Television, S.A.
In 1997 and 2000 Telefonica provided guarantees to the entity that is now Banco
Santander Central Hispano, S.A. to ensure the liquidity and value of the
investments made by it in Antena 3 de Television, S.A. To execute these
agreements, in 1999 Telefonica Media, S.A. (Sole-Stockholder Company) (now
Telefonica de Contenidos, S.A. - Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., acquired shares representing 7.1395% of the capital stock of
Antena 3 de Television, S.A. Additional acquisitions have yet to be formalized
and the guarantee on certain of the shares has yet to be executed.
On January 7, 2003, as a result of a change in the legal conditions applicable
to the ownership of shares of television concession-holder companies,
Telefonica, S.A. and its subsidiary Telefonica de Contenidos, S.A.
(Sole-Stockholder Company) exercised vis-a-vis Banco Santander Central Hispano,
S.A. purchase options on 17,365,125 and 2,167,500 shares of Antena 3 de
Television, S.A., which, taken as a whole, represent 11.719% of the capital
stock of Antena 3 de Television, S.A. The shares were to be acquired by the
Telefonica, S.A. subsidiary Corporacion Admira Media, S.A. (Sole-Stockholder
Company).
After the related procedural formalities had been carried out, on February 5,
2003, the transfer of the aforementioned shares was formalized, and,
accordingly, as of that date, the guarantees provided to Banco Santander Central
Hispano, S.A. were fully executed and fulfilled. The resulting ownership
interest was 59.24%.
Acquisition of Tele Centro Oeste Celular Participacoes (TCO)
In January 2003 Brasilcel N.V., owned 50% by Telefonica Moviles, S.A. and 50% by
Portugal Telecom Moveis, S.A., the joint venture created by these companies to
manage and develop their cellular telephony business in Brazil, entered into an
agreement to acquire, through its subsidiary Telesp Celular Participacoes, S.A.,
from the Brazilian company Fixcel 61.10% of the common shares with voting rights
of Tele Centro Oeste Celular Participacoes, S.A. (TCO) representing 20.37% of
the
-169-
[LOGO]
latter's total capital stock. The formalization of this acquisition is subject
to the satisfactory conclusion of the due diligence review currently in progress
and to the obtainment of the pertinent administrative authorizations.
If this acquisition is concluded, pursuant to current stock market legislation
in Brazil, a tender offer will be launched for the TCO's common shares held by
the other stockholders. Subsequently, TCO's shares will be exchanged for
preferred shares of Telesp Celular Participacoes, S.A., which will give the
latter company the opportunity to own all the shares of TCO.
Restructuring of the debt of Telefonica Comunicaciones Personales (Argentina)
In January 2003 Telefonica Comunicaciones Personales, S.A., a subsidiary of
Telefonica Moviles, S.A. in Argentina, entered into agreements with various
Ericsson Group Companies to refinance its debt of US$ 130 million to the
Ercisson Group.
Also, Telefonica Comunicaciones Personales refinanced its intercompany debt of
US$ 630 million to Telefonica Moviles, S.A.
Telefonica Europe, B.V. bond issue
On February 6, 2003, Telefonica Europe B.V. launched two long-term bond issues
underwritten by Telefonica S.A. The first issue, which matures on February 14,
2013, has a face value of (Euro)1,500 million and an annual coupon of 5.125%.
The second issue, with a face value of (Euro)500 million, matures on February
14, 2033, and has an annual coupon of 5.875%.
Treasury Stock
At the beginning of 2002 Telefonica held treasury stock representing 0.97264% of
capital stock, i.e. 45,440,901 shares with a book value of (Euro)14.85, giving a
total of (Euro)674.73 million and a par value of (Euro)45.44 million
In 2002 the Company acquired for consideration 55,169,765 shares of treasury
stock (representing 1.135% of capital stock and with a par value of (Euro)55.17
million) at an average price of (Euro)9.49 per share, and 1,819,821 shares were
assigned to it in the capital increases at no cost to the stockholders. Also,
799,411 shares (representing 0.016% % of capital stock and with a par value of
(Euro)0.80 million) were used to acquire from Iberdrola, S.A. holdings in
Brazilian telephony companies, and 10,000,000 shares (representing 0.2057% of
capital stock and with a par value of (Euro)10.00 million) were sold for an
average price of (Euro)8.67 per share, giving rise to a loss of (Euro)1.79
million.
As a result of these transactions, 91,631,076 shares (1.88516% of capital stock)
of treasury stock were held at year-end, acquired at an average price of
(Euro)11.65, giving a total of (Euro)1,067.94 million and a par value of
(Euro)91.63. As indicated in Note 4-i, pursuant to current accounting
legislation, these shares of treasury stock were valued at their underlying book
value and, consequently, a provision of (Euro)733.38 million was recorded.
-170-
[LOGO] Telefonica
TELEFONICA, S.A.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS AND MANAGEMENT
REPORT FOR 2002
--------------------------------------------------------------------------------
[LOGO] Telefonica
--------------------------------------------------------------------------------
Translation of financial statements originally issued in Spanish and prepared in
accordance with generally accepted accounting principles in Spain (see Note 21).
In the event of a discrepancy, the Spanish-language version prevails.
TELEFONICA, S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2002 and 2001
-----------------------------------------------------------------------------------------------
ASSETS (Millions of Euros) 2002 2001
-----------------------------------------------------------------------------------------------
A) FIXED AND OTHER NONCURRENT ASSETS 43,809.33 37,859.67
I. Start-up expenses 61.66 102.24
II. Intangible assets (Note 5) 38.82 37.22
Computer software 52.20 36.87
Other intangible assets 10.84 10.13
Accumulated amortization (24.22) (9.78)
III. Property, plant and equipment (Note 6) 22.38 21.31
Land and structures 0.81 0.81
Furniture, tools, etc. 24.35 21.71
Accumulated depreciation (2.78) (1.21)
IV. Long-term investments (Note 7) 43,686.47 37,698.90
Investments in Group companies 22,806.83 22,665.24
Investments in associated companies 408.83 407.86
Other investments 565.65 565.72
Loans to Group and associated companies 22,261.11 16,416.46
Other loans 111.60 0.38
Long-term deposits and guarantees given 86.50 9.81
Taxes receivable (Note 14.2) 4,932.90 435.28
Allowances (7,486.95) (2,801.85)
B) DEFERRED CHARGES (Note 8) 314.60 157.21
C) CURRENT ASSETS 6,005.79 14,704.77
I. Accounts receivable 159.44 662.53
Trade receivables 11.88 14.60
Receivable from Group companies (Note 16.8) 111.97 234.30
Receivable from associated companies 1.62 2.02
Sundry accounts receivable 3.35 333.36
Employee receivables 1.25 0.82
Taxes receivable (Note 14.2) 45.41 84.71
Allowance for bad debts (16.04) (7.28)
II. Short-term investments 5,472.83 13,592.49
Loans to Group and associated companies (Note 7.3) 4,141.22 13,581.07
Short-term investment securities (Note 7.6) 1,331.61 11.42
III. Short-term treasury stock (Note 9) 334.56 260.70
IV. Cash 24.37 178.93
V. Accrual accounts 14.59 10.12
-----------------------------------------------------------------------------------------------
TOTAL ASSETS 50,129.72 52,721.65
-----------------------------------------------------------------------------------------------
The accompanying Notes 1 to 21 and Exhibit I are an integral part of these
balance sheets.
1
[LOGO] Telefonica
--------------------------------------------------------------------------------
Translation of financial statements originally issued in Spanish and prepared in
accordance with generally accepted accounting principles in Spain (see Note 21).
In the event of a discrepancy, the Spanish-language version prevails.
TELEFONICA, S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2002 and 2001
-----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY AND LIABILITIES
(Millions of Euros) 2002 2001
-----------------------------------------------------------------------------------------------
A) STOCKHOLDERS' EQUITY (Note 9) 17,572.26 22,110.24
I. Capital stock 4,860.66 4,671.92
II. Additional paid-in-capital 11,670.02 11,670.02
III. Revaluation reserves 2,881.94 3,070.68
IV. Reserves 2,638.33 3,051.80
Legal reserve 652.57 652.57
Reserve for treasury stock 334.56 260.70
Other reserves 1,651.20 2,138.53
V. Loss for the year (4,478.69) (354.18)
B) DEFERRED REVENUES -- 0.91
C) PROVISIONS FOR CONTINGENCIES AND EXPENSES
(Note 16.7) 138.75 149.40
D) LONG-TERM DEBT 23,899.79 18,737.42
Debentures, bonds and other marketable debt securities (Note 10) 2,509.21 2,479.30
Nonconvertible debentures and bonds 2,509.21 2,433.29
Other marketable debt securities -- 46.01
II. Payable to credit institutions (Note 11) 3,509.89 4,845.16
III. Payable to Group and associated companies (Note 12) 17,679.63 11,350.98
IV. Other payables 21.22 15.67
V. Taxes payable (Note 14.2) 34.71 46.26
VI. Uncalled capital payments payable 145.13 0.05
Group companies (Note 7.4) 145.13 0.05
E) CURRENT LIABILITIES 8,518.92 11,723.68
Debentures, bonds and other marketable debt securities (Note 10) 754.13 752.51
Debentures -- 116.09
Other marketable debt securities 699.34 578.80
Interest on debentures and other securities 54.79 57.62
II. Payable to credit institutions 1,736.36 2,662.13
Loans and other accounts payable (Note 11) 1,702.47 2,640.01
Accrued interest payable 33.89 22.12
III. Payable to Group and associated companies (Note 12) 5,885.29 8,025.91
IV. Trade accounts payable 70.50 123.41
Accounts payable for purchases and services 70.50 123.41
V. Other nontrade payables 72.32 151.02
Taxes payable (Note 14.2) 12.16 147.80
Other nontrade payables (Note 15) 60.16 3.22
VI. Accrual accounts 0.32 8.70
-----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES 50,129.72 52,721.65
-----------------------------------------------------------------------------------------------
The accompanying Notes 1 to 21 and Exhibit I are an integral part of these
balance sheets.
2
[LOGO] Telefonica
--------------------------------------------------------------------------------
Translation of financial statements originally issued in Spanish and prepared in
accordance with generally accepted accounting principles in Spain (see Note 21).
In the event of a discrepancy, the Spanish-language version prevails.
TELEFONICA, S.A.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001
-----------------------------------------------------------------------------------------
DEBIT (Millions of Euros) 2002 2001
-----------------------------------------------------------------------------------------
A) EXPENSES
Personnel expenses (Note 16.2) 90.06 80.23
Depreciation and amortization expense 57.09 48.56
Property, plant and equipment (Note 6) 1.57 0.83
Intangible assets (Note 5) 14.44 7.15
Deferred charges 41.08 40.58
Other operating expenses 241.56 246.62
Outside services provided by Group companies (Note 16.8) 46.73 40.06
Outside services 176.59 155.18
Taxes other than income tax 9.49 2.04
Other current operating expenses 8.75 49.34
I. OPERATING INCOME -- --
Interest on accounts payable to Group companies (Notes
16.4 and 16.8) 900.23 836.53
Other interest on accounts payable and similar expenses (Note
16.4) 480.44 550.82
Variation in short-term investment valuation allowances 80.99 28.80
Amortization of deferred charges 22.07 34.35
Exchange losses (Note 16.5) 1,598.87 429.17
II. FINANCIAL INCOME 405.05 960.85
III. INCOME FROM ORDINARY ACTIVITIES 116.49 778.43
Variation in investment valuation allowances (Note 7.1) 5,484.78 1,384.38
Extraordinary expenses and losses (Note 16.7) 400.72 126.97
IV. EXTRAORDINARY INCOME -- --
V. INCOME BEFORE TAXES -- --
Corporate income tax accrued in Spain (Note 14) (1,292.67) (327.36)
Foreign taxes (Note 14) 5.06 62.45
VI. INCOME FOR THE YEAR -- --
-----------------------------------------------------------------------------------------
The accompanying Notes 1 to 21 and Exhibit I are an integral part of these
statements of operations.
3
[LOGO] Telefonica
--------------------------------------------------------------------------------
Translation of financial statements originally issued in Spanish and prepared in
accordance with generally accepted accounting principles in Spain (see Note 21).
In the event of a discrepancy, the Spanish-language version prevails.
TELEFONICA, S.A.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001
---------------------------------------------------------------------------------------
CREDIT (Millions of Euros) 2002 2001
---------------------------------------------------------------------------------------
B) REVENUES
Net sales to Group companies (Note 16.1) 36.17 140.50
Other operating revenues 63.98 52.49
Non-core and other current operating revenues 63.98 52.49
I. OPERATING LOSS 288.56 182.42
Revenues from equity investments 902.20 1,128.47
Group companies (Note 16.8) 881.96 1,114.82
Associated companies 5.79 0.02
Other companies 14.45 13.63
Revenues from other equity investments and loans (Note 16.4) 1,314.23 1,324.02
Group companies (Note 16.8) 1,285.82 1,254.88
Associated companies -- 0.32
Other companies 28.41 68.82
Exchange gains (Note 16.5) 1,271.22 388.03
II. FINANCIAL LOSS -- --
III. LOSS ON ORDINARY ACTIVITIES -- --
Gains on fixed asset disposals 1.17 0.01
Extraordinary revenues (Note 16.6) 1.54 113.82
IV. EXTRAORDINARY LOSS 5,882.79 1,397.52
V. LOSS BEFORE TAXES 5,766.30 619.09
VI. LOSS FOR THE YEAR 4,478.69 354.18
---------------------------------------------------------------------------------------
The accompanying Notes 1 to 21 and Exhibit I are an integral part of these
statements of operations.
4
[LOGO] Telefonica
--------------------------------------------------------------------------------
Translation of financial statements originally issued in Spanish and prepared
in accordance with generally accepted accounting principles
in Spain (see Note 21).
In the event of a discrepancy, the Spanish-language version prevails.
TELEFONICA, S.A.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002
(1) INTRODUCTION AND GENERAL INFORMATION
Telefonica, S.A. ("Telefonica" or "the Company") was incorporated for an
indefinite period of time on April 19, 1924, under the corporate name of
Compania Telefonica Nacional de Espana, S.A., and it adopted its present
name in April 1998.
The Company's registered office is at calle Gran Via 28, Madrid (Spain),
and its employer identification number is A-28/015865.
Telefonica's corporate purpose, per Article 4 of its bylaws, is the
provision and operation of all manner of telecommunications services
(including ancillary or supplementary telecommunications services or the
services derived therefrom); research and development, the promotion and
application of all manner of telecommunications components, equipment and
systems; the manufacture, production and, in general, all other types of
industrial activity relating to telecommunications; and the acquisition,
sale and, in general, all other types of commercial activity relating to
telecommunications.
As also stipulated in Article 4 of its bylaws, all the business activities
that constitute the corporate purpose described above may be performed
either in Spain or abroad and may be carried on either wholly or partially
by the Company, or through shareholdings or other equity interests in other
companies or legal entities with an identical or similar corporate purpose.
In keeping with the foregoing, after the organizational restructuring
process carried out in recent years, Telefonica is now the parent company
of a Group of companies which operate mainly in the telecommunications,
media and entertainment industries, providing a wide range of services on
the international stage.
The Company is taxed under the general tax regime established by the
Spanish government, the autonomous community governments and local
governments, and files consolidated tax returns with most of the Spanish
subsidiaries in its Group under the consolidated tax regime applicable to
corporate groups.
5
[LOGO] Telefonica
--------------------------------------------------------------------------------
(2) BASIS OF PRESENTATION
True and fair view
The accompanying financial statements were prepared from Telefonica's
accounting records by the Company's directors in accordance with the
accounting principles and standards contained in the Commercial Code as
implemented by the Spanish National Chart of Accounts and, accordingly,
give a true and fair view of the net worth, financial position and results
of operations and of the funds obtained and applied in 2002.
The financial statements for 2002 will be submitted for approval by the
Stockholders' Meeting and it is considered that they will be approved
without any changes. The financial statements for 2001 were approved by the
Stockholders' Meeting on April 12, 2002.
Comparative information
There were no significant changes in the structure of the balance sheet and
statement of operations with respect to those for the previous year. Also,
no changes in accounting principles with respect to 2001 with a material
effect were made. However, as indicated in Note 7, provisions were recorded
in 2002 for the losses incurred by investees. These provisions are deemed
to be necessary on the basis of the analyses performed.
Similarly, no significant events took place preventing the comparison of
the figures for 2002 with those for 2001.
The figures in these financial statements and in the management report are
expressed in millions of euros unless indicated otherwise.
Devaluation in Argentina
In view of its international presence, the Telefonica Group, like other
corporations, has been affected by the economic situation in Argentina
through the various Group companies operating there. As of December 31,
2002 and 2001, Telefonica S.A.'s exposure through direct or indirect equity
investments in the various Argentine companies amounted to (euro)968.12
million and (euro)3,124.83 million, respectively, including intercompany
financing and the value assignable to these investments (considering the
losses incurred by these subsidiaries before the related tax effect, which
amounted to (euro)669.01 million and (euro)457.15 million in 2002 and 2001,
respectively).
As of December 31, 2001, there was no explicit Argentine peso/euro exchange
rate that could be taken as representative. Also, pursuant to an executive
decision, in early 2002 the Argentine peso was devalued with respect to the
euro, an event to which the market reacted subsequently.
Taking into account Spanish accounting legislation, the express
communications from the Spanish Accounting and Audit Institute (ICAC)
regarding the way in which this devaluation should be treated at 2001
year-end and the international accounting rulings in force, in preparing
its financial statements for 2001 Telefonica S.A. used peso/euro and
peso/U.S. dollar exchange rates of ARP 1.5149/(euro)l and ARP 1.7/US$ 1 at
year-end as the first representative exchange rates prevailing in the
market after December 31, 2001, following the aforementioned devaluation.
At 2002 year-end, with the normal currency exchange market re-established,
the exchange rate used was ARP
6
[LOGO] Telefonica
--------------------------------------------------------------------------------
3.5341/(euro)l (ARP 3.37/US$ 1). In accordance with the foregoing, these
financial statements reflect an adverse impact on earnings due to the
valuation allowance recorded for the investments in question, which
amounted to (euro)1,400.03 million and (euro)305.07 million as of December
31, 2002 and 2001. respectively (see Note 7.1).
The matters still not resolved include the necessary renegotiation with the
Argentine Government of the future rates due to the effect of the
provisions of Law 25.561. Accordingly, although the book value of the
operating fixed assets was maintained on the basis of estimates based on
the information currently available, neither the results of the
negotiations relating to rate levels nor, therefore, the future sales
revenues and net cash flows can be predicted.
Given that the aforementioned circumstances had not occurred at the date of
preparation of these financial statements and that it is not certain that
they will occur, it was not possible to quantify their effect, if any, on
the financial statements as of December 31, 2002.
(3) PROPOSED ALLOCATION OF LOSS
The directors propose that the loss for 2002 be offset with a charge to the
following equity accounts in the balance sheet:
---------------------------------------
Millions
of Euros
---------------------------------------
Loss for the year (4,478.69)
Allocation to:
Revaluation reserves 1,316.67
Voluntary reserves 1,645.80
Additional paid-in capital 1,516.22
---------------------------------------
(4) VALUATION STANDARDS
The main valuation methods used in preparing the 2002 and 2001 financial
statements were as follows:
a) Start-up expenses
Start-up expenses, which comprise incorporation and capital increase
expenses, are recorded at cost and are amortized on a straight-line
basis over five years.
b) Intangible assets
Intangible assets include mainly software licenses, which are recorded
at cost and are amortized on a straight-line basis over three years.
c) Property, plant and equipment
Property, plant and equipment is carried at cost.
7
[LOGO] Telefonica
--------------------------------------------------------------------------------
The costs of expansion, modernization or improvements leading to
increased productivity, capacity or efficiency or to a lengthening of
the useful lives of the assets are capitalized.
Upkeep and maintenance expenses are expensed currently.
Property, plant and equipment is depreciated by the straight-line
method at annual rates based on the following years of estimated
useful life:
---------------------------------------------------
Years of
Estimated
Useful Life
---------------------------------------------------
Buildings 33-40
Plant and machinery 12
Furniture, office equipment and other 4-10
---------------------------------------------------
d) Long-term investments
Investments in marketable securities are recorded as follows:
1. Listed securities (excluding shares of Group or associated
companies).
At the lower of cost or market value. The market value was taken
to be the lower of average market price in the last quarter or
market price at year-end.
2. Investments in Group and associated companies.
At the lower of acquisition cost or underlying book value of the
holdings, adjusted by the amount of the unrealized gains
disclosed at the time of the acquisition and still existing at
the date of subsequent valuation.
3. Unlisted securities.
At cost, reduced, if appropriate, to their underlying book value
by the required investment valuation allowances, adjusted, where
appropriate, by the amount of the unrealized gains disclosed at
the time of the acquisition and still existing at the date of
subsequent valuation.
Unrealized losses (cost higher than market value) are recorded in the
"Allowances" account (see Notes 7 and 16.7).
Dividends are recorded as a revenue as soon as their distribution is
approved, and gains or losses on the sale of holdings are recorded as
revenues or expenses in the year in which they are realized.
The Company has prepared separate consolidated financial statements.
In 2002 the effect of consolidation, with respect to the accompanying
individual financial statements, was to increase (decrease) the
following balances by the amounts shown:
8
[LOGO] Telefonica
--------------------------------------------------------------------------------
-----------------------------------------
Millions of Euros
-----------------------------------------
Assets 17,911-57
Stockholders' equity (576.26)
Net sales 28,375.13
Loss for the year (1,098.11)
-----------------------------------------
e) Deferred charges
This caption includes the following items:
. Interest on long-term promissory notes
This relates to the difference between the face value and the
effective value of the promissory notes issued at over one year.
This interest is charged to income by the interest method.
. Debt arrangement expenses
These relate to long-term debt arrangement expenses and issuance
premiums on debentures and bonds and are amortized by the
interest method on the basis of the principal amounts
outstanding.
. Executive loyalty-building program costs
This caption relates to the unaccrued costs relating to
Telefonica's stock option plan (the TOP Plan, see Notes 8 and
16.3).
f) Treasury stock
Treasury stock is valued at the lower of cost, comprising the total
amount paid for the shares, or market. Since these shares were
acquired without any prior resolution having been adopted by the
Stockholders' Meeting to reduce capital, they are assumed to be
intended for subsequent sale or, alternatively, for a possible capital
reduction, and, accordingly, market value is taken to be the lowest of
average official market price in the last quarter of the year,
year-end market price, or the related underlying book value. The
Company recorded a provision with a charge to the statement of
operations for the difference between the acquisition cost and the
lower of the year-end market price or the average market price in the
last quarter, and with a charge to reserves for the difference between
the aforementioned market value and the related underlying book value.
g) Foreign currency transactions
Fixed-income securities and receivables and payables denominated in
foreign currencies are translated to euros at the exchange rates
ruling at the transaction date, and are adjusted at year-end to the
exchange rates then prevailing.
Exchange differences arising on adjustment of foreign currency
fixed-income securities and receivables and payables to year-end
exchange rates are classified by currency and due date, and for this
purpose currencies which, although different, are officially
convertible are grouped together.
9
[LOGO] Telefonica
--------------------------------------------------------------------------------
The positive net differences in each group of currencies are recorded
under the "Deferred Revenues" caption on the liability side of the
balance sheet, unless exchange losses in a given group have been
charged to income in prior years, in which case the net positive
differences are credited to period income up to the limit of the
negative net differences charged to income in prior years.
The positive differences deferred in prior years are credited to
income in the year in which the related accounts receivable and
payable fall due or are repaid early, or as negative exchange
differences for the same or a higher amount are recognized in each
homogeneous group.
h) Pension and other commitments to employees
Telefonica has entered into an agreement with its employees, the most
salient features of which are as follows:
. Occupational pension plan pursuant to Pension Plans and Funds Law
8/1987, Royal Decree 1307/1988 implementing the aforementioned
Law and Royal Decree 1589/1999 amending the aforementioned
Pension Plan regulations.
. Defined contribution of 4.51% of the participating employees'
regulatory salary. The defined contributions of employees
transferred to Telefonica from other Group companies at which
these defined contributions were different (6.87% in the case of
Telefonica de Espana) will be maintained.
. Obligatory contribution by the participant of a minimum of 2.2%
of his/her regulatory salary.
. Individual and financial capitalization systems.
This fund has been externalized in the Fonditel B pension fund managed
by the subsidiary Fonditel Entidad Gestora de Fondos de Pensiones,
S.A.
As of December 31, 2002 and 2001, 746 and 682 employees, respectively,
were included in the plan and the cost for the Company amounted to
(euro)2.27 million and (euro)2.01 million in 2002 and 2001,
respectively (see Note 16.2).
i) Accounts payable
Accounts payable are recorded at repayment value, except in the case
of zero-coupon debenture and bond issues, which are recorded in the
balance sheet at issue value plus the related accrued interest (see
Note 10.3).
j) Derivatives
Transactions whose purpose and effect is to eliminate or significantly
reduce exchange, interest rate or market risks on asset and liability
positions or on other transactions are treated as hedging
transactions. The gains or losses arising during the life of these
derivatives are accrued and taken to the income statement
symmetrically to the gains or losses on the hedged asset.
10
[LOGO] Telefonica
--------------------------------------------------------------------------------
Transactions that, exceptionally, were not assigned to hedge risks,
are not treated as hedging transactions. In transactions of this kind,
which can arise as a result of risk hedges at Group companies, the
differences in market price are recorded for accounting purposes when
the transactions are canceled or finally settled. However, if
potential losses are anticipated at year-end, the related provision is
recorded with a charge to the statement of operations.
k) Corporate income tax
The expense for corporate income tax of each year is calculated on the
basis of book income before taxes, increased or decreased, as
appropriate, by the permanent differences from taxable income. Tax
relief and tax credits, excluding tax withholdings and prepayments,
are deducted from the corporate income tax charge in the year in which
they are definitively taken, except in the case of investment tax
credits earned since 1996 which, at the time when they are taken, are
deferred over the average life of the assets which gave rise to them.
The difference between the accrued expense and the tax paid is due to
the above-mentioned deferral and to revenue and expense recognition
timing differences giving rise to deferred tax assets and liabilities
(see Note 14).
Also, pursuant to an ICAC resolution dated March 15, 2002, Telefonica
S.A. recorded the tax assets relating to the tax relief and tax
credits (mainly the tax credits arising pursuant to Transitional
Provision Three of Law 24/2001) not yet taken for tax purposes and
regarding which there is no doubt, in accordance with the accounting
principle of prudence in valuation, that they can be deducted in the
future. The balance recorded under the "Corporate Income Tax Incurred
in Spain" caption amounted to (euro)85.61 million (see Note 14.3).
l) Recognition of revenues and expenses
Revenues and expenses are recognized on an accrual basis, i.e. when
the actual flow of the related goods and services occurs, regardless
of when the resulting monetary or financial flow arises.
In accordance with the accounting principle of prudence, only realized
income is recorded at year-end, whereas foreseeable contingencies and
losses, including possible losses, are recorded as soon as they become
known (see Note 16).
(5) INTANGIBLE ASSETS
The detail of the balances of intangible asset accounts, of the related
accumulated amortization and of the variations therein in 2002 and 2001 is
as follows:
11
[LOGO] Telefonica
--------------------------------------------------------------------------------
---------------------------------------------------------
Millions of Euros
-----------------------------
Other
Computer Intangible
Software Assets Total
---------------------------------------------------------
Cost:
Balance at 12/31/00 18.45 5.30 23.75
Additions 25.91 3.63 29.54
Retirements (5.03) (1.26) (6.29)
Transfers (2.46) 2.46 --
Balance at 12/31/01 36.87 10.13 47.00
Additions 15.33 3.24 18.57
Retirements -- (2.53) (2.53)
Balance at 12/31/02 52.20 10.84 63.04
Accumulated amortization:
Balance at 12/31/00 1.66 0.97 2.63
Additions 6.53 0.62 7.15
Balance at 12/31/01 8.19 1.59 9.78
Additions 13.45 0.99 14.44
Balance at 12/31/02 21.64 2.58 24.22
---------------------------------------------------------
Intangible assets, net 30.56 8.26 38.82
---------------------------------------------------------
(6) PROPERTY, PLANT AND EQUIPMENT
6.1 The detail of the balances of property, plant and equipment accounts,
of the related accumulated depreciation and of the variations therein
in 2002 is as follows:
----------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------
Balance at Balance at
12/31/01 Additions Retirements Transfers 12/31/02
----------------------------------------------------------------------------------------------------
Cost:
Land and structures 0.81 -- -- -- 0.81
Furniture, tools, etc. 21.71 3.67 (1.17) 0.14 24.35
----------------------------------------------------------------------------------------------------
Property, plant and equipment, gross 22.52 3.67 (1.17) 0.14 25.16
----------------------------------------------------------------------------------------------------
Accumulated depreciation:
Land and structures 0.14 0.02 -- -- 0.16
Furniture, tools, etc. 1.07 1.55 -- -- 2.62
----------------------------------------------------------------------------------------------------
Total accumulated depreciation 1.21 1.57 -- -- 2.78
----------------------------------------------------------------------------------------------------
Property, plant and equipment, net 21.31 2.10 (1.17) 0.14 22.38
----------------------------------------------------------------------------------------------------
12
[LOGO] Telefonica
--------------------------------------------------------------------------------
The detail of the balances of property, plant and equipment, of the related
accumulated depreciation and of the variations therein in 2001 is as
follows:
----------------------------------------------------------------------------------------------------
Millions of Euros
----------------------------------------------------------------------------------------------------
Balance at Balance at
12/31/00 Additions Retirements Transfers 12/31/01
----------------------------------------------------------------------------------------------------
Cost:
Land and structures 0.91 -- -- (0.10) 0.81
Furniture, tools, etc. 17.70 6.43 (2.52) 0.10 21.71
----------------------------------------------------------------------------------------------------
Property, plant and equipment, gross 18.61 6.43 (2.52) -- 22.52
----------------------------------------------------------------------------------------------------
Accumulated depreciation:
Land and structures 0.16 0.02 -- (0.04) 0.14
Furniture, tools, etc. 0.22 0.81 -- 0.04 1.07
----------------------------------------------------------------------------------------------------
Total accumulated depreciation 0.38 0.83 -- -- 1.21
----------------------------------------------------------------------------------------------------
Property, plant and equipment, net 18.23 5.60 (2.52) -- 21.31
----------------------------------------------------------------------------------------------------
As of December 31, 2002, there were no fully depreciated items.
Telefonica, S.A. has taken out insurance policies to cover the possible
risks to which its property, plant and equipment is subject.
(7) LONG-TERM INVESTMENTS
7.1 The detail of the balances of the long-term investments, of the
related investment valuation allowances and of the variations therein
in 2001 and 2002 is as follows:
a) Variations in long-term investments:
-----------------------------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------
Balance at Retire- Balance at
12/31/00 Additions ments Transfers 12/31/01
-----------------------------------------------------------------------------------------------
Investments in Group companies 19,695.82 2,969.42 -- -- 22,665.24
Investments in associated companies 406.90 0.96 -- -- 407.86
Other investments 563.34 2.46 (0.08) -- 565.72
Loans to Group and associated
companies 14,659.81 3,381.93 (30.51) (1,594.77) 16,416.46
Other loans -- 0.47 (0.09) -- 0.38
Deposits and guarantees given 1.07 8.75 (0.01) -- 9.81
Taxes receivable (Note 14.2) 35.04 400.24 -- -- 435.28
-----------------------------------------------------------------------------------------------
Total 35,361.98 6,764.23 (30.69) (1,594.77) 40,500.75
-----------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------------
Retire- Balance at
Additions ments Transfers 12/31/02
------------------------------------------------------------------------------------
Investments in Group companies 963.89 (1,661.72) 839.42 22,806.83
Investments in associated companies 0.97 -- -- 408.83
Other investments -- (0.07) -- 565.65
Loans to Group and associated
companies 4,178.30 (824.90) 2,491.25 22,261.11
Other loans -- -- 111.22 111.60
Deposits and guarantees given 97.56 (20.87) -- 86.50
Taxes receivable (Note 14.2) 4,669.66 (36.06) (135.98) 4,932.90
------------------------------------------------------------------------------------
Total 9,910.38 (2,543.62) 3,305.91 51,173.42
------------------------------------------------------------------------------------
13
[LOGO] Telefonica
--------------------------------------------------------------------------------
b) Variations in the long-term investment valuation allowances:
Millions of Euros
-----------------------------------------------------
Balance at Retire- Balance at
12/31/00 Additions ments Transfers 12/31/01
-----------------------------------------------------
Investments in Group companies 1,410.76 1,382.99 -- -- 2,793.75
Investments in associated
companies 0.70 1.39 -- -- 2.09
Other investments 6.01 -- -- -- 6.01
--------------------------------------------------------------------------------------
Total investment valuation
allowances 1,417.47 1,384.38 -- -- 2,801.85
--------------------------------------------------------------------------------------
Total investments, net 33,944.51 5,379.85 (30.69) (1,594.77) 37,698.90
--------------------------------------------------------------------------------------
Millions of Euros
-------------------------------------------
Retire- Balance at
Additions ments Transfers 12/31/02
-------------------------------------------
Investments in Group companies 5,419.48 (901.08) 101.40 7,413.55
Investments in associated
companies 65.30 -- -- 67.39
Other investments -- -- -- 6.01
----------------------------------------------------------------------------
Total investment valuation
allowances 5,484.78 (901.08) 101.40 7,486.95
----------------------------------------------------------------------------
Total investments, net 4,425.60 1,642.54 3,204.51 43,686.47
----------------------------------------------------------------------------
The provisions recorded in 2002 related mainly to the investments in Grupo
Telefonica Internacional ((euro)2,272.97 million), Terra Networks, S.A.
((euro)867.32 million), Telefonica de Contenidos, S.A., formerly Grupo
Admira Media, S.A. ((euro)625.86 million), MediaWays Germany GmbH
((euro)574.22 million), Telefonica DataCorp, S.A. ((euro)387.72 million)
and Telefonica Moviles ((euro)283.32 million). These provisions were
recorded to value the investments at their underlying book value,
considering, where appropriate, any unrealized gains disclosed (see Note
4-d).
In 2002 various Telefonica Group companies in which Telefonica, S.A. has a
direct or indirect ownership interest reassessed the recoverability of
certain assets associated with the third-generation wireless telephony
(UMTS) licenses and recorded the resulting value adjustments in their
financial statements. The effect of these value adjustments at Telefonica,
S.A. was (euro)1,061.82 million, and this amount was recorded under the
"Variation in Investment Valuation Allowances" caption ((euro)1,005.67
million) and the "Other Extraordinary Expenses" caption ((euro)56.15
million) (see Note 16.7).
In addition, the effect of devaluation in Argentina was to increase the
provisions recorded in the year by (euro)1,400.03 million ((euro)305.07
million in 2001) (see Note 2).
The provisions recorded in 2001 related mainly to the investments in
Telefonica de Contenidos, S.A. ((euro)395.19 million), Terra Networks, S.A.
((euro)212.09 million), Telefonica Datacorp, S.A. ((euro)165.10 million),
Emergia, N.V. ((euro)152.76 million) and Atento Delaware, Inc.
((euro)116.15 million).
The retirements related to shareholdings sold or contributed in the year,
mainly the investment in Mediaways Germany, GmbH, which was sold to the
Telefonica Data Group for its net book value at the date of the sale.
7.2 The detail of the subsidiaries, associated companies and investees is
shown in Exhibit I.
7.3 The detail of loans to Group and associated companies is as follows:
14
[LOGO] Telefonica
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------
2002 2001
-----------------------------------------------
Company Long Term Short Term Long Term Short Term
------------------------------------------------------------------------------------------
Telefonica Internacional, S.A. 7,096.30 1,024.68 4,966.55 3,054.93
Telefonica Moviles Espana, S.A. 0.19 32.42 32.87 1,551.51
Telefonica Data Espana, S.A. -- 43.48 -- 51.54
Telefonica Publicidad e Informacion, S.A. 33.83 44.85 48.65 0.13
Telefonica Empresas Brasil, S.A. -- -- -- 59.36
Corporacion Admira Media, S.A. 27.46 0.04 666.06 1,129.50
Inmobiliaria Telefonica, S.L. 13.62 28.23 17.70 40.29
Telefonica de Espana, S.A.U. 7,244.28 1,098.27 7,941.79 929.99
Telefonica Cable, S.A. -- 56.05 -- 51.11
Telefonica de Contenidos, S.A. 1,088.70 920.87 -- --
Atento Brasil, S.A. -- -- -- 56.53
Atento USA Inc. -- 17.40 0.02 20.51
Portugal Telecom, S.A. 21.00 -- 21.00 --
Telefonica Moviles, S.A. 5,544.13 546.41 1,132.31 5,714.10
Telefonica Datacorp, S.A.U. 581.70 39.60 362.79 212.81
Comunnicapital Inversiones, S.A.U. 75.36 -- 70.51 9.26
Katalyx, Inc. -- -- -- 137.43
Atento Argentina, S.A. -- 2.25 -- 24.99
Atento Maroc, S.A. -- 10.81 -- 13.92
Emergia S.A. 357.58 187.95 1,058.08 62.61
Atento Delaware 136.88 26.97 78.55 17.47
Atento Mexico -- 10.71 -- 15.00
T. B2B Licencing Inc. 16.09 0.88 16.09 --
Mediaways GmbH -- -- -- 12.01
Atento Centroamecrica -- -- -- 12.93
G.M.A.F., S.L. -- 15.36 -- 10.48
Telesp -- 0.57 -- 306.87
Euroleague Marketing 22.89 -- -- --
Other 1.10 33.42 3.49 85.79
------------------------------------------------------------------------------------------
Total 22,261.11 4,141.22 16,416.46 13,581.07
------------------------------------------------------------------------------------------
The information on the loans to Group and associated companies is as
follows
. The financing granted to Telefonica de Espana, S.A.U. consists mainly
of a loan which, arising in the unbundling process, had an outstanding
balance of (euro)6,975.21 million as of December 31, 2002, of which
(euro)6,277.70 million mature at long term and (euro)697.51 million at
short term. This loan earns interest at 6.8%.
. The loans to Telefonica Internacional, S.A. consist mainly of the
following:
A long-term interest-free participating loan of (euro)3,305.57 million
repayable in 12 equal quarterly installments from September 30, 2005 to
June 30, 2008.
A participating loan of (euro)1,414.26 million repayable in 12 quarterly
installments from June 30, 2001, which may be postponed at the decision of
the borrower up to a maximum limit of December 30, 2006. The interest is
established on the basis of the company's net income, and it can only be
repaid early if capital is increased by the same amount.
A multicurrency credit line of US$ 1,962 million with floating interest
tied to Libor or Euribor plus 0.35% depending on whether it is drawn down
in a foreign currency or euros, respectively. To date Telefonica
Internacional, S.A. has drawn down US$ 858 million against this credit
line.
The loans totaling approximately (euro)2,100 million used to refinance and
restructure the debt of Telefonica Internacional, S.A. These loans earn
interest at a floating rate.
15
[LOGO] Telefonica
--------------------------------------------------------------------------------
. Loan of US$ 1,100 million to Emergia S.A., maturing in 2005 and
earning interest tied to three-month Libor plus a spread. As a result
of the repayments made and the conversion of debt to equity at this
company (see Note 7.4-d) in 2002, the outstanding balance of this loan
was reduced to US$ 525 million as of December 31, 2002.
. The loans to Telefonica Moviles, S.A. comprise mainly the following:
Long-term credit lines, against which a total of (euro)3,253.37
million have been drawn down. These credit lines, each of which
comprises a fixed-interest tranche and a floating-interest tranche,
were recorded at short term at 2001 year-end and were renegotiated in
2002.
Financing for an amount equal to (euro)1,404 million provided to
Telefonica Moviles, S.A. to enable it to make its investments in
Mexico, Puerto Rico and Brasil. This financing earns interest at a
market rate tied to Euribor or Libor plus a spread.
. The loans granted to Telefonica de Contenidos, S.A.U. include most
notably two long-term credit facilities of (euro)500 million
and (euro)237 million which had been fully drawn down as of December
31, 2002. These credit facilities earn interest at a market rate tied
to Euribor plus a spread.
7.4 The detail of the equity investments sold and purchased by Telefonica
is as follows:
a) Acquisitions of equity interests and capital increases:
2002
------------------------------------------------------------
Subsidiaries Millions of Euros
------------------------------------------------------------
Seguros de Vida y Pensiones Antares, S.A. 204.70
HighWay One Germany GmbH 637.07
Emergia Holding, N.V. 47.09
Terra Networks, S.A. 5.53
Telefonica de Contenidos, S.A. 5.99
Lotca, Servicios Integrales, S.L. 16.92
Tele Leste Celular Participacoes 13.59
Telefonica Capital, S.A. 6.00
Other 27.00
------------------------------------------------------------
963.89
------------------------------------------------------------
16
[LOGO] Telefonica
--------------------------------------------------------------------------------
The main additions in 2002 were as follows.
In 2002 Telefonica, S.A. subscribed in full the capital increase of
(euro)637.07 million at HighWay One Germany GmbH, thereby increasing
its ownership interest in this company to 99%. As part of the
reorganization of the Telefonica Group by business line currently
being implemented, in December 2002 this shareholding was transferred
to Telefonica Data Corp, S.A. for its net book value.
In March 2002, under the last part of the agreement entered into
between Telefonica, S.A. and Iberdrola, S.A. for the acquisition by
the Company of all the holdings which the Iberdrola Group owned in the
Brazilian operators in which the two companies are direct or indirect
stockholders, Telefonica, S.A. acquired a 3.38% holding in Tele Leste
Celular Participacoes, S.A. in exchange for 799,411 Telefonica, S.A.
shares hitherto held as treasury stock (see Note 9-a). This holding
was subsequently contributed to Telefonica Moviles, S.A. at its book
value.
In 2002 Telefonica S.A. acquired 717,465 shares of the subsidiary
Terra Networks, S.A. for (euro)5.53 million, increasing the Telefonica
Group's direct and indirect holding in this company to 38.58%.
In January Telefonica, S.A. incorporated the wholly-owned subsidiary
Telefonica Capital, S.A. and paid this company's initial capital stock
((euro)6 million) in full. Subsequently, Telefonica Capital increased
capital by (euro)1 million with additional paid-in capital
of (euro)38.01 million, all of which was subscribed and paid by its
sole stockholder Telefonica, S.A. through the nonmonetary contribution
of 201,682 shares of Fonditel, Entidad Gestora de Fondos de Pensiones,
S.A. representing 77.22% of this company's capital stock.
In September Telefonica, S.A. subscribed to (euro)32.69 million of the
capital increase carried out at Seguros de Vida y Pensiones Antares,
S.A. through the increase in the par value of this company's shares.
As of December 31, 2002, the amount subscribed had not been paid.
Additionally, in December Telefonica, S.A. acquired from its
Luxembourg subsidiary Casiopea Reaseguradora, S.A. 110,000 shares of
Seguros de Vida y Pensiones Antares, S.A. for a total amount of
(euro)172.01 million. The Company disbursed (euro)59.63 million in
this transaction and recorded the outstanding amount of (euro)112.38
million relating to the last capital increase at Seguros de Vida y
Pensiones Antares, S.A. as capital payments payable. As a result of
this transaction, Telefonica owns 142,000 shares of Seguros de Vida y
Pensiones Antares, S.A. representing 94.67% of its capital stock.
In December, by virtue of its agreements with the Tyco Group,
Telefonica, S.A. acquired 17,872,341 shares of the Dutch company
Emergia Holding, N.V. for (euro)47.09 million. As a result of this
transaction, Telefonica owns, directly or indirectly, all the shares
of this company.
In November Telefonica, S.A. acquired all 3,010 shares of Gran Via
Media, S.L. from its wholly-owned subsidiary Telefonica de Contenidos,
S.A. Gran Via Media, S.L. changed its corporate name to Lotca
Servicios Integrales, S.L. In December Lotca increased capital by
16,920,000 shares of (euro)1 par value each, which the Telefonica
Internacional Group subscribed in full through a nonmonetary
contribution. These shares were subsequently
17
[LOGO] Telefonica
--------------------------------------------------------------------------------
acquired by Telefonica, S.A. for (euro)16,920,000. As of December 31,
2002, this company was wholly owned by Telefonica, S.A.
Grupo Admira Media, S.A. and Telefonica Internet, S.A., both of which
are wholly-owned subsidiaries of Telefonica, S.A., changed their
corporate names in 2002 to Telefonica de Contenidos, S.A. and
Corporacion Admira Media, S.A., respectively. Also, Corporacion Admira
Media, S.A. increased capital by (euro)5.99 million, which Telefonica,
S.A. subscribed in full.
2001
----------------------------------------------------------------------
Subsidiaries Millions of Euros
----------------------------------------------------------------------
Mediaways GmbH 1,535.58
Telefonica Datacorp, S.A.U. 248.06
Telefonica Moviles, S.A. 68.68
Terra Networks, S.A. 53.96
Baja Celular Mejicana, S.A. de C.V. 206.98
Celular de Telefonia, S.A. de C.V. 224.94
Telefonia Celular del Norte, S.A. de C.V. 117.76
Grupo Corporativo del Norte, S.A. 79.79
Corporacion Integral de Comunicacion, S.A. de C.V. 31.29
Movitel del Noroeste, S.A. de C.V. 25.64
Sao Paulo Telecomunicacoes Holding, S.A. 115.13
Iberoleste Participacoes, S.A. 113.20
Sudestecel Participacoes, S.A. 64.06
Celular CRT Participacoes, S.A. 11.00
Other 73.35
----------------------------------------------------------------------
2,969.42
----------------------------------------------------------------------
The main additions in 2001 were as follows:
On January 31, 2001, pursuant to an agreement entered into in May
2000, Telefonica, S.A. acquired all the shares of Mediaways GmbH
Internet Services for (euro)1,473.08 million from the German company
Bertelsmann AG. Also, in December 2001 Telefonica, S.A. subscribed to
a capital increase carried out by this company for (euro)62.5 million.
In June 2001 the Company increased capital by 122,560,575 shares
of (euro)1 par value each and additional paid-in capital of (euro)4.5
per share. As consideration for this capital increase, Telefonica
received as a nonmonetary contribution from Motorola certain
investments in the wireless business in Mexico: all the shares of
Corporacion Integral de Comunicacion. S.A. de C.V.; all the shares of
Grupo Corporativo del Norte, S.A.; 79% of the capital stock of
Telefonia Celular del Norte, S.A. de C.V. (the remaining 21% was
contributed indirectly through the acquisition of all the shares of
Corporacion Integral de Comunicacion, S.A. de C.V.); 73.81% of the
capital stock of Celular de Telefonia, S.A. de C.V. (the remaining
26.19% was contributed indirectly through the acquisition of all the
shares of Grupo Corporativo del Norte, S.A. de C.V.); all the shares
of Baja Celular Mexicana, S.A. de C.V.: 0.00001% of the capital stock
of Baja Celular Servicios Compartidos, S.A. de C.V.
18
[LOGO] Telefonica
--------------------------------------------------------------------------------
(the remaining 99.99999% was contributed indirectly through the
acquisition of all the shares of Baja Celular Mexicana, S.A. de C.V.);
0.00001% of the capital stock of Tamcel, S.A. de C.V. (the remaining
99.99999% was contributed indirectly through the acquisition of all
the shares of Baja Celular Mexicana, S.A. de C.V.); 22% of the capital
stock of Movitel del Noroeste, S.A. de C.V. (a further 68% was
contributed indirectly through the acquisition of all the shares of
Tamcel, S.A. de C.V.); 22% of the capital stock of Moviservicios, S.A.
de C.V. (a further 68% was contributed indirectly through the
acquisition of all the shares of Tamcel, S.A. de C.V.) and 22% of the
capital stock of Movicelular, S.A. de C.V. (a further 68% was
contributed indirectly through the acquisition of all the shares of
Tamcel, S.A. de C.V.). Additionally, to supplement this transaction,
Telefonica contributed (euro)12.33 million in cash. The market value
of the holdings acquired as of the transaction date was (euro)2,173.74
million. These holdings were contributed in July to Telefonica
Moviles, S.A., which increased capital by 203 million shares which
were fully subscribed by Telefonica, S.A.
In 2001 Telefonica, S.A. acquired 8,289,305 shares of Telefonica
Moviles, S.A. for (euro)68.68 million. As of December 31, 2001, the
Company had a direct and indirect holding of 92.70% in Telefonica
Moviles, S.A.
Telefonica, S.A. acquired 4,713,015 shares of Terra Networks, S.A. for
(euro)53.96 million. Following these acquisitions, Telefonica had a
direct and indirect holding of 37.63% in Terra Networks, S.A. as of
December 31, 2001.
Telefonica, S.A. and Iberdrola, S.A. entered into an agreement whereby
the Company acquired all the holdings which the Iberdrola Group owned
in the Brazilian operators in which the two companies were direct or
indirect stockholders. These holdings were acquired by Telefonica,
S.A. in exchange for its own shares at the following exchange ratios:
. Holding of 3.48% in the capital stock of Sao Paulo
Telecomunicacoes Holding, S.A., the majority stockholder of
Telecomunicacoes de Sao Paulo, S.A. (Telesp), for 6,638,157
shares of Telefonica, S.A.
. Holding of 7% in the capital stock of TBS Celular Participacoes,
S.A., the majority stockholder of Celular CRT Participacoes,
S.A., for 1,493,902 shares of Telefonica, S.A.
. Holding of 7% in the capital stock of Sudestecel Participacoes,
S.A., the majority stockholder of Tele Sudeste Celular
Participacoes, S.A., for 3,693,775 shares of Telefonica, S.A.
. Holding of 62.02% in the capital stock of Iberoleste
Participacoes, S.A., the majority stockholder of Tele Leste
Celular Participacoes, S.A., for 6,526,736 shares of Telefonica,
S.A.
. Holding of 0.66% in the capital stock of Celular CRT
Participacoes, S.A. for 634,541 shares of Telefonica, S.A.
19
[LOGO] Telefonica
--------------------------------------------------------------------------------
Also, the exchange of 3.38% of the capital stock of Tele Leste Celular
Participacoes, S.A. for 783,736 shares of Telefonica, S.A. (799,411
shares following the capital increase carried out at no cost to
stockholders on February 19, 2002) envisaged within the framework of
this agreement had not yet been carried out pending obtainment of the
prior regulatory authorizations. As indicated above, this exchange
took place in 2002.
Telefonica, S.A. paid (euro)248.06 million to fully subscribe the
capital increase carried out by its wholly-owned investee Telefonica
Datacorp, S.A.U., pursuant to the agreement entered into by the
Telefonica Group and the Brazilian bank Banco Itau for the provision
of services to the bank in connection with the management of its
corporate telecommunications network.
b) Disposal of investments:
2002
--------------------------------------------------------
Gross
Subsidiaries Book Value
--------------------------------------------------------
MediaWays GmbH 1,535.58
Sao Paulo Telecomunicacoes Holding, S.A. 113.94
Telefonica Data Brasil Holding, S.A. 1.19
CRT Celular Participacoes, S.A. 11.01
--------------------------------------------------------
1,661.72
--------------------------------------------------------
Telefonica, S.A. sold all the shares owned by it of MediaWays GmbH to
HighWay One Germany GmbH for (euro)634.50 million, the net value of
the holding at the date of the sale.
SP Telecomunicacoes Holding, S.A., the majority stockholder of
Telecomunicacoes de Sao Paulo, S.A. (Telesp), reduced capital in 2002
by assigning to Telefonica, S.A. 3,504,347,177 shares of the Brazilian
company Telefonica Data Brasil Holding. These shares, together with
the 189,278,445 shares of SP Telecomunicacoes Holding, S.A. owned by
Telefonica, S.A., were sold to the Telefonica Internacional Group at
their book value.
In 2002 Telefonica, S.A. sold to Telefonica Moviles, S.A. the 0.66%
holding in Celular CRT Participacoes, S.A. acquired by it under the
agreements entered into with Iberdrola, S.A. in 2001. This transaction
was carried out at the book value of the holding.
2001
In 2001 there were no significant disposals of investments in Group,
associated or other companies.
c) Nonmonetary contributions of holdings to Group companies.
20
[LOGO] Telefonica
--------------------------------------------------------------------------------
2002
Continuing with the restructuring process initiated by the Company in prior
years to group together its interests by line of business, in 2002 and 2001
capital increases were carried out at certain Group companies through
nonmonetary contributions of shares of other companies, as explained in
section 7.5. The detail of these contributions is as follows.
---------------------------------------------------------------------------
Company Millions of Euros
---------------------------------------------------------------------------
Retirements:
Fonditel Entidad Gestora de Fondos de Pensiones, S.A. (12.12)
High Way One GmbH. (637.07)
Zeleris Espana, S.A. (3.91)
TBS Celular Participacoes, S.A. (25.91)
Sudestecel Participacoes, S.A. (64.06)
Tele Sudestecel Participacoes, S.A. (0.01)
Iberoleste Participacoes, S.A. (113.19)
Tele Leste Celular Participacoes, S.A. (13.59)
Atento Holding, Inc. (282.71)
---------------------------------------------------------------------------
(1,152.57)
---------------------------------------------------------------------------
Additions:
Telefonica Capital, S.A. 12.12
Telefonica Datacorp, S.A. 637.07
Zeleris Soluciones Integrales, S.L. 3.91
Telefonica Moviles, S.A. 216.76
Atento Holding, N.V. 282.71
---------------------------------------------------------------------------
1,152.57
---------------------------------------------------------------------------
2001
---------------------------------------------------------------------------
Company Millions of Euros
---------------------------------------------------------------------------
Retirements:
Telecomunicacoes Sao Paulo, S.A. (4,475.40)
Telefonica de Argentina, S.A. (1,462.52)
CEI Citicorp Holding, S.A. (1,000.68)
Telefonica del Peru, S.A.A. (745.01)
Celular de Telefonia, S.A. de C.V. (224.94)
Baja Celular Mejicana, S.A. de C.V. (206.98)
Telefonia Celular del Norte, S.A. de C.V. (117.76)
Grupo Corporativo del Norte, S.A. (79.79)
Corporation Integral de Comunicacion, S.A. de C.V. (31.29)
Movitel del Noroeste, S.A. de C.V. (25.64)
---------------------------------------------------------------------------
(8,370.01)
---------------------------------------------------------------------------
Additions:
Telefonica International, S.A. 6,839.61
Telefonica Moviles, S.A. 1,415.85
Telefonica Datacorp, S.A. 114.55
---------------------------------------------------------------------------
8,370.01
---------------------------------------------------------------------------
The value for tax purposes of these additions may differ from that
recorded for accounting purposes as a result of the application of the
values for tax purposes at which the holdings
21
[LOGO] Telefonica
--------------------------------------------------------------------------------
contributed had been carried, which are disclosed, where appropriate,
in the accompanying financial statements and in those for previous
years.
d) Transfers due to conversion of loans into equity
2002
In December Telefonica Datacorp, S.A. increased capital through the
issuance of 200 million new shares of (euro)1 par value each, which
were subscribed in full by Telefonica, S.A. through the conversion of
a(euro)200.00 million loan into equity.
The Uruguayan company Emergia, S.A. increased capital in December by
US$ 500 million. Telefonica subscribed and paid the capital increase
in full by converting loans to this company into equity. As a result
of this transaction, Telefonica now has a 99.17% holding in the
Uruguayan company.
7.5 Following is a detail of the transactions carried out in 2002 and 2001
that qualified for taxation under the tax neutrality regime provided
for by Chapter VIII of Title VIII of Corporate Income Tax Law 43/1995
(Articles 97.5 or 108). The transactions performed prior to 2001 are
duly detailed in prior years' financial statements.
2002
. Capital increase of(euro)39.01 million, including additional
paid-in capital, authorized by the Stockholders' Meeting carried
out on November 27, 2002, by Telefonica Capital, S.A. as
consideration for shares representing 77.22% of the capital stock
of the Spanish company Fonditel Entidad Gestora de Fondos de
Pensiones, S.A., with a net book value of(euro)12.12 million.
. Capital increase authorized by the Special Stockholders' Meeting
carried out on December 23, 2002, by Telefonica Datacorp, S.A. as
consideration for shares representing 99% of the capital stock of
the German company HighwayOne Germany GmbH.
. Capital increase carried out by Atento N.V. as consideration for
all the shares of the U.S. company Atento Holding Inc.
. Capital increase of(euro)821,763.71 carried out by Zeleris
Soluciones Integrales, S.L. as consideration for all the shares
of the Spanish company Zeleris Espana, S.A.
This transaction was carried out under the tax neutrality regime
provided for share exchanges in Article 97 of Chapter VIII of
Title VIII of Corporate Income Tax Law 43/1995.
. Capital increase authorized by the Stockholders' Meeting of
Telefonica Moviles, S.A. carried out on May 23, 2002, for a par
value of(euro)6,998,086.3 and additional paid-in capital
of(euro)106,197,586.22 as consideration for shares of the
Brazilian company Iberoleste Participacoes, S.A.
22
[LOGO] Telefonica
--------------------------------------------------------------------------------
This transaction was carried out under the tax neutrality regime
provided for nonmonetary contributions in Article 108 of Chapter
VIII of Title VIII of Corporate Income Tax Law 43/1995.
. Capital increase authorized by the Stockholders' Meeting of
Telefonica Moviles, S.A. carried out on May 27, 2002, for a par
value of(euro)6,402,660.5 and additional paid-in capital of
(euro)97,161,858.50 as consideration for shares of the Brazilian
companies TBS Celular Participacoes, S.A., Sudestecel
Participacoes, S.A., Tele Leste Celular Participacoes, S.A. and
Tele Sudeste Celular Participacoes, S.A.
This transaction was carried out under the tax neutrality regime
provided for nonmonetary contributions in Article 108 of Chapter
VIII of Title VIII of Corporate Income Tax Law 43/1995.
2001
. Capital increase authorized by the Stockholders' Meeting carried
out on June 18, 2001, by Telefonica, S.A. as consideration for
all the shares of the Mexican companies Telefonia Celular del
Norte, S.A. de C.V., Celular de Telefonia, S.A. de C.V. and Baja
Celular Mexicana, S.A. de C.V. and for 90% holdings in the
Mexican companies Movitel del Noroeste, S.A. de C.V.,
Moviservicios, S.A. de C.V. and Movicelular, S.A. de C.V.
. Capital increase authorized by the Special Stockholders' Meeting
carried out on February 2, 2001, by Telefonica Internacional,
S.A. for a par value of (euro)4,259,293,130.20, as consideration
for shares of Telecomunicacoes de Sao Paulo, S.A. (TELESP).
. Capital increase authorized by the Special Stockholders' Meeting
carried out on February 21, 2001, by Telefonica Internacional,
S.A. for a par value of (euro)547,060,009.60 as consideration for
shares of Telefonica del Peru, S.A.A.
. Capital increase authorized by the Special Stockholders' Meeting
carried out on January 26, 2001, by Telefonica Internacional,
S.A. for a par value of (euro)861,165,627.90 as consideration for
shares of Telefonica de Argentina, S.A.
. Capital increase authorized by the Special Stockholders' Meeting
carried out on May 8, 2001, by Telefonica Internacional, S.A. for
a par value of(euro)998,898,300.40 as consideration for shares of
Telefonica Holding Argentina, S.A. (formerly CEI Citicorp
Holding, S.A.).
. Capital increase authorized by the Special Stockholders' Meeting
of Telefonica Moviles, S.A. on October 26, 2000, for a par value
of(euro)87,431,682, through the issuance of 174,863,364 shares of
Telefonica Moviles, S.A. as consideration for shares of
Telefonica de Argentina, S.A., carried out on January 25, 2001.
. Capital increase authorized by the Special Stockholders' Meeting
of Telefonica Moviles, S.A. on October 26, 2000, for a par value
of(euro)32,969,782, through the issuance of 65,939,564 shares of
Telefonica Moviles, S.A. as consideration for shares of
Telefonica del Peru, S.A.A., carried out on March 7, 2001.
23
[LOGO] Telefonica
--------------------------------------------------------------------------------
. Capital increase authorized by the Special Stockholders' Meeting
of Telefonica Moviles, S.A. on October 30, 2000, for a par value
of(euro)101,680,173, through the issuance of 203,360,346 common
shares of Telefonica Moviles, S.A. of(euro)0.50 par value each,
as consideration for the shares of the aforementioned Mexican
companies, carried out on July 5, 2001.
. Capital increase authorized by the Special Stockholders' Meeting
carried out on February 21, 2001, by Telefonica Datacorp, S.A. as
consideration for shares representing 1.177% of the capital stock
of the Peruvian company Telefonica del Peru, S.A.A.
. Capital increase authorized by the Special Stockholders' Meeting
carried out on January 26, 2001, by Telefonica Datacorp, S.A. as
consideration for shares representing 2.967% of the capital stock
of the Argentine company Telefonica de Argentina, S.A.
7.6 Short-term investment securities
In 2002 this caption included mainly placements of temporary cash
surpluses in short-term investments.
(8) DEFERRED CHARGES
The breakdown of the balance of this caption as of December 31, 2002, and
the related amortization schedule are as follows:
-----------------------------------------------------------------------------------------------------------------------
Maturity
--------------------------------------------------
Subsequent Balance at Balance at
2003 2004 2005 2006 2007 Years 12/31/02 12/31/01
-----------------------------------------------------------------------------------------------------------------------
Interest on long-term promissory notes 7.32 7.00 7.00 7.05 7.13 23.29 58.79 69.33
Debt arrangement expenses 34.95 31.89 27.18 19.01 17.59 77.20 207.82 76.06
Executive loyalty-building program costs
(Notes 4-e and 16.3) 4.73 -- -- -- -- -- 4.73 11.82
Other deferred charges 4.88 4.26 4.27 4.27 4.27 21.3l 43.26 --
-----------------------------------------------------------------------------------------------------------------------
Total 51.88 43.15 38.45 30.33 28.99 121.80 314.60 157.21
-----------------------------------------------------------------------------------------------------------------------
The increase in capitalized debt arrangement expenses is due mainly to the
loans obtained in 2002 from Telefonica Europe BV (see Note 12.2).
(9) STOCKHOLDERS' EQUITY
The detail of the balances of equity accounts and of the variations therein
in 2001 and 2002 is as follows:
24
[LOGO] Telefonica
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Balance
at Allocation Capital Other Balance at Allocation Capital Other Balance at
12/31/00 of Loss Increase Variations 12/31/01 of Loss Increase Variations 12/31/02
----------------------------------------------------------------------------------------------------------------------------
Capital stock 4,340.71 -- 331.21 -- 4,671.92 -- 188.74 -- 4,860.66
Additional paid-in
capital 10,987.99 -- 682.03 -- 11,670.02 -- -- -- 11,670.02
Revaluation reserves 3,246.70 -- (176.02) -- 3,070.68 -- (188.74) -- 2,881.94
Legal reserve 652.57 -- -- -- 652.57 -- -- -- 652.57
Voluntary reserves 2,704.28 (120.90) -- (450.25) 2,133.13 (354.18) -- (133.15) 1,645.80
Reserve for treasury
stock 198.19 -- -- 62.51 260.70 -- -- 73.86 334.56
Other restricted
reserves 5.40 -- -- -- 5.40 -- -- 5.40
Loss for the year (120.90) 120.90 -- (354.18) (354.18) 354.18 -- (4,478.69) (4,478.69)
----------------------------------------------------------------------------------------------------------------------------
Total 22,014.94 -- 837.22 (741.92) 22,110,24 -- -- (4,537,98) 17,572.26
----------------------------------------------------------------------------------------------------------------------------
a) Capital stock and additional paid-in capital
As of December 31, 2002, Telefonica, S.A.'s capital stock amounted to
(euro)4,860,661,286 and consisted of 4,860,661,286 fully paid common
shares of a single series and of (euro)1 par value each, all recorded
by the book-entry system and traded on the Spanish computerized
trading system ("Continuous Market") (in the selective "Ibex 35"
Index), on the four Spanish Stock Exchanges (Madrid, Barcelona,
Valencia and Bilbao) and on the New York, London, Paris, Frankfurt,
Tokyo, Buenos Aires, Sao Paulo and Lima Stock Exchanges.
Pursuant to Royal Decree 8/1997, the prior administrative
authorization system applies to certain corporate resolutions that
might be adopted by Telefonica, S.A., Telefonica Moviles, S.A. and
Telefonica de Espana, S.A.U., and to certain others which may give
entitlement to the direct or indirect acquisition, including
third-party trusts or interposed third parties, of shares or certain
assets of Telefonica, S.A., Telefonica Moviles, S.A. or Telefonica de
Espana, S.A.U. The administrative authorization system will remain in
force for ten years from February 18, 1997.
On June 15, 2001, the Stockholders' Meeting of Telefonica, S.A.
authorized the Board of Directors to increase the Company's capital,
at one or several times within a maximum period of five years from
that date, under the terms provided by Article 153.1 b) of the Spanish
Corporations Law (authorized capital) up to a maximum of
(euro)2,274,677,655, by issuing for this purpose the related new
common shares, be they redeemable or of any other type permitted by
the Law, with a fixed or variable premium, with or without preemptive
subscription right and, in all cases, with disbursements for the new
shares issued in the form of monetary contributions. As of December
31, 2002, the Board of Directors had not made use of this
authorization.
Also, on June 15, 2001, the Stockholders' Meeting approved two
successive capital increases with a charge to unrestricted reserves,
each for an amount equal to 2% of the subscribed and paid-in capital
stock, through two successive issues of new shares that will be
assigned free of charge to the Company's stockholders at a ratio of
one new share for every 50 shares held by them, and empowered the
Board of Directors accordingly to execute the resolution in question
within one year from the date on which it was adopted. These two
capital increases were carried out in the first few months of 2002, as
indicated below.
25
[LOGO] Telefonica
--------------------------------------------------------------------------------
In addition, on June 15, 2001, the Stockholders' Meeting resolved to
empower the Board of Directors to issue, within a maximum period of
five years, at one or several times, fixed-income securities
convertible into or exchangeable for Company shares, up to a maximum
amount of (euro)2,000 million or an equal amount in another currency,
and to increase capital by the amount required to cater for such
conversion requests as might be made. As of December 31, 2002, the
Board of Directors had not made use of these powers.
Furthermore, on April 12, 2002, the Stockholders' Meeting resolved to
approve two successive capital increases with a charge to unrestricted
reserves, each for an amount equal to 2% of the subscribed and paid-in
capital stock, through two successive issues of new shares that will
be assigned totally free of charge to the Company's stockholders at a
ratio of one new share for every 50 shares held by them, and empowered
the Board of Directors accordingly to execute the resolution in
question within one year from the date on which it was adopted. Before
December 31, 2002, the Board of Directors resolved to carry out the
first of the two aforementioned capital increases, for a par value of
(euro)97,213,225, in January and February 2003 (see Note 19).
Also, on April 12, 2002, the Stockholders' Meeting resolved to issue
fixed-income securities convertible into new Company shares and/or
exchangeable for existing shares of the Company or of any of the Group
companies, with disapplication of the preemptive subscription right,
for a total maximum amount of (euro)2,000 million or an equal amount
in another currency, and to increase capital by the amount required to
cater for such conversion requests as might be made. It also granted
the Board of Directors the necessary powers to implement the
resolution adopted by the Stockholders' Meeting and to determine the
features of the issue and capital increase not specified by the
latter, including the express power to refrain from implementing, or
to only partially implement, this resolution. As of December 31, 2002,
the Board of Directors had not made use of these powers to implement
this resolution.
In addition, on April 12, 2002, the Stockholders' Meeting resolved to
increase capital by (euro)2,180,809 through the issuance of new common
shares with additional paid-in capital of (euro)11.61 per share to
cater for the needs derived from the establishment of a stock option
plan for the employees of the Endemol Group. It also granted the Board
of Directors the necessary powers to implement the capital increase
resolution, including the express power to refrain from implementing
the resolution. In a resolution dated December 18, 2002, the Board of
Directors expressly decided not to implement the aforementioned
resolution to increase capital, and opted to cover the stock option
plan referred to above by a means other than through a capital
increase with the issuance of new shares (i.e., through the prior
acquisition of Telefonica shares on the stock market).
Also, on April 12, 2002, the Stockholders' Meeting authorized the
Board of Directors to derivatively acquire treasury stock, for
consideration, up to the limits and pursuant to the terms and
conditions established by the Stockholders' Meeting, within a maximum
period of 18 months from that date. However, it established that in no
case could the par value of the shares acquired, added to that of the
treasury stock already held by Telefonica, S.A. and any of its
controlled subsidiaries, exceed 5% of the capital stock of Telefonica.
26
[LOGO] Telefonica
--------------------------------------------------------------------------------
As of December 31, 2002 and 2001, Telefonica S.A. held the following
shares of treasury stock:
-------------------------------------------------------------------------------------
Market
Number of Shares Cost per Share (*) Value %
-------------------------------------------------------------------------------------
Treasury stock at 12/31/02 91,631,076 8.53(euro) 781.61 1.88516
-------------------------------------------------------------------------------------
Treasury stock at 12/31/01 45,440,901 14.22(euro) 646.17 0.97264
-------------------------------------------------------------------------------------
(*) Lower of the market value of the treasury stock at year-end or the average
market price in the last quarter. As indicated in Note 4-f, a drop in the
market value of the shares would lead to the recording of additional
provisions with a charge to income, but would not affect the total amount
of equity.
In 2002 the Company acquired for consideration 55,169,765 shares of
treasury stock and 1,819,821 shares were assigned to it in the capital
increases at no charge to stockholders. Also, 799,411 shares were used
to acquire holdings in certain Brazilian companies from Iberdrola,
S.A. (see Note 7.4-a), and 10,000,000 shares were sold, giving rise to
a loss of (euro)1.79 million. The average acquisition cost of the
shares of treasury stock as of December 31, 2002 and 2001, was
(euro)11.65 and (euro)14.85 per share, respectively.
The balance sheets as of December 31, 2002 and 2001, include the
acquisition cost of the shares of treasury stock ((euro)1,067.94
million and (euro)674.73 million, respectively) net of allowances of
(euro)733.38 million and (euro)414.03 million, respectively, the
provisions to which were recorded, in accordance with current
accounting regulations (see Note 4-f), with a charge to the statement
of operations in respect of the market value of these shares
((euro)286.33 million and (euro)26.29 million in 2002 and 2001,
respectively) and with a charge to unrestricted reserves in respect of
the amount by which the market value exceeds the underlying book value
((euro)447.05 million and (euro)387.74 million in 2002 and 2001,
respectively). The provision recorded with a charge to the 2002
statement of operations amounted to (euro)288.09 million (see Notes
16.6 and 16.7).
The Company has recorded the related restricted reserve for the amount
of these shares of treasury stock. Also, in 2002 and 2001 it recorded
provisions of (euro)59.29 million and (euro)387.74 million,
respectively, with a charge to the "Unrestricted Reserves" caption on
the asset side of the accompanying balance sheet to reflect the
underlying book value of the treasury stock (see Note 4-f).
Variations in capital stock and additional paid-in capital in 2002
The variations in 2002 in the "Capital Stock" and "Additional Paid-in
Capital" captions were as follows:
----------------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------
Number Additional
Issue Date of Shares Capital Stock Paid-in Capital
----------------------------------------------------------------------------------------------------------
Balance at 12/31/01 4,671,915,885 4,671.92 11,670.02
----------------------------------------------------------------------------------------------------------
Capital increase at no cost to stockholders 02/13/02 93,438,317 93.44 --
Capital increase at no cost to stockholders 04/12/02 95,307,084 95.30 --
----------------------------------------------------------------------------------------------------------
Balance at 12/31/02 4,860,661,286 4,860.66 11,670.02
----------------------------------------------------------------------------------------------------------
27
[LOGO] Telefonica
--------------------------------------------------------------------------------
The capital increases carried out and formalized in 2002 were as
follows:
. On February 13, 2002, the notarial deed of formalization and execution
of a capital increase at Telefonica, S.A. was executed. This capital
increase, for a par value of(euro)93,438,317, was carried out with a
charge to unrestricted reserves through the issuance of an equal
number of new common shares of the Company, of(euro)1 par value each,
which were assigned to the Company's stockholders free of charge at a
ratio of one new share for every 50 shares held by them.
Following registration of the aforementioned public deed at the
Mercantile Registry, the new shares were admitted to listing on
official markets from February 26, 2002.
. On April 12, 2002, the notarial deed of formalization and execution of
a further capital increase at Telefonica, S.A. was executed. This
capital increase, for a par value of(euro)95,307,084, was carried out
with a charge to unrestricted reserves through the issuance of an
equal number of new common shares of the Company, of(euro)1 par value
each, which were assigned to the Company's stockholders free of charge
at a ratio of one new share for every 50 shares held by them.
Following registration of the aforementioned public deed at the
Mercantile Registry, the new shares were admitted to listing on
official markets from April 30, 2002.
As a result of these two capital increases with a charge to unrestricted
reserves, the capital stock of Telefonica, S.A. amounted to
(euro)4,860,661,286. This figure remained unchanged through December 31,
2002.
Variations in capital stock and additional paid-in capital in 2001
The variations in 2001 in the "Capital Stock" and "Additional Paid-in
Capital" captions were as follows:
----------------------------------------------------------------------------------------------------------
Millions of Euros
-------------------------------
Number Additional
Issue Date of Shares Capital Stock Paid-in Capital
----------------------------------------------------------------------------------------------------------
Balance at 12/31/00 4,340,710,735 4,340.71 10,987.99
----------------------------------------------------------------------------------------------------------
Capital increase at no cost to stockholders 01/25/01 86,814,214 86.82 --
TIES program 02/14/01 1,123,072 1.13 4.49
TIES program 02/20/01 31,504,244 31.51 126.02
Capital increase at no cost to stockholders 04/03/01 89,203,045 89.20 --
Acquisition of wireless business in Mexico
from Motorola 06/19/01 122,560,575 122.55 551.52
----------------------------------------------------------------------------------------------------------
Balance at 12/31/01 4,671,915,885 4,671.92 11,670.02
----------------------------------------------------------------------------------------------------------
The capital increases carried out and formalized in 2001 were as follows:
. In January 2001 the first of the two capital increases of Telefonica,
S.A. approved by the Stockholders' Meeting on April 7, 2000, and which
the Board of Directors agreed to implement on December 20, 2000, was
carried out with a charge to unrestricted reserves. Under the capital
increase, 86,814,214 common shares of the Company of(euro)1 par value
each were issued, thereby increasing the capital stock
by(euro)86,814,214. The new shares issued were assigned to the
stockholders free of charge at a ratio of 1 new share for every 50
shares already held by them.
28
[LOGO] Telefonica
--------------------------------------------------------------------------------
The capital increase was executed in a public deed and registered at
the Mercantile Registry on January 25, 2001, and the new shares were
admitted to listing on the official markets from February 2, 2001.
. A first capital increase at Telefonica, S.A., for a par value of
(euro)1,123,072, through the issuance of the same number of new common
shares of the Company, of the same class and series and carrying the
same rights as the outstanding shares, and with additional paid-in
capital of (euro)4 per share, was executed in a public deed on
February 14, 2001. The new shares were fully subscribed and paid,
through a monetary contribution, by the employees of several
Telefonica Group companies who decided to participate in the stock
option plan known as the TIES Program aimed at Group employees (see
Note 16.3).
Following registration of the aforementioned capital increase deed at
the Mercantile Registry, the new shares were admitted to listing on
official markets from February 16, 2001.
. On February 20, 2001, the notarial deed of formalization and execution
of a second capital increase at Telefonica, S.A. was executed. This
capital increase, for a par value of (euro)31,504,244, was carried out
through the issuance of an equal number of common shares of the same
class and series and carrying the same rights as the outstanding
shares of the Company and with additional paid-in capital of (euro)4
per share. The new shares were fully subscribed and paid, through a
monetary contribution, by Banco Bilbao Vizcaya Argentaria. S.A. (50%)
and Caja de Ahorros y Pensiones de Barcelona "La Caixa" (50%) as the
agent banks of the aforementioned TIES program (see Note 16.3).
Following registration at the Mercantile Registry of the public deed
for this second capital increase covering the TIES Program, the new
shares thus issued were admitted to listing on official markets from
March 1, 2001.
. In March 2001 the second of the capital increases at Telefonica, S.A.
approved by the Stockholders' Meeting on April 7, 2000, and which the
Board of Directors agreed to implement on January 24, 2001, was
carried out with a charge to unrestricted reserves. Under the capital
increase, 89,203,045 common shares of the Company of (euro)1 par value
each were issued, thereby increasing the capital stock by
(euro)89,203,045. The new shares issued were assigned to the
stockholders free of charge at a ratio of 1 new share for every 50
shares already held by them.
The capital increase was executed in a public deed on March 30, 2001,
and registered at the Mercantile Registry on April 2, 2001, and the
new shares were admitted to listing on the official markets from April
9, 2001.
. On June 18, 2001, the notarial deed of formalization and execution of
the capital increase at Telefonica, S.A. approved by the Company's
Stockholders' Meeting on June 15, 2001, was executed. Capital was
increased through the issuance of 122,560,575 common shares of the
Company of (euro)1 par value each, of the same series and carrying the
same rights as the outstanding shares of the Company and with
additional paid-in capital of (euro)4.50 per share; these shares were
subscribed and their par value and additional paid-in capital were
paid in full through a nonmonetary contribution to Telefonica, S.A. of
various Mexican companies owned by the Motorola Group, which entailed
the direct or indirect acquisition
29
[LOGO] Telefonica
--------------------------------------------------------------------------------
by Telefonica, S.A. of all the shares of Telefonica Celular del Norte,
S.A. de C.V., Celular de Telefonia, S.A. de C.V. and Baja Celular
Mejicana, S.A. de C.V., and of holdings of 90% in Movitel del
Noroeste, S.A. de C.V., Moviservicios, S.A. de C.V. and Movicelular,
S.A. de C.V. (see Note 7).
The number of issued shares subscribed and paid by the persons or
entities that transferred the aforementioned Mexican cellular
companies was determined by applying the following variables defined
by Telefonica, S.A.'s Stockholders' Meeting and Board of Directors'
Meeting on June 15, 2001.
. Value of the contributed assets for the purpose of their exchange
for shares of Telefonica: (euro)2,173,742,973.96. This amount is
the result of applying the U.S. dollar/euro exchange rate of US$
0.8492/(euro)1 prevailing on June 14, 2001, to the amount of US$
1,857,300,000 (initial valuation), less US$ 14,123,000 (debt
adjustment), plus US$ 2,765,533.49 (interest accrued through the
exchange transaction date).
. Value of the Telefonica shares to be exchanged: (euro)17.6355
each, i.e. an amount equal to the average market price of the
Company's shares in the 20 trading sessions prior to the date on
which the Stockholders' Meeting which approved the capital
increase was held (June 15, 2001).
. Cash disbursement: (euro)12,325,950.35, equal to 10% of the
result of dividing the value of the assets by the value of each
Telefonica share.
The aforementioned public deed of capital increase stated that, solely
for the purpose of evidencing the full payment of the capital increase
and the additional paid-in capital, pursuant to Article 133.1 of the
Mercantile Registry Regulations, regardless of the criteria used to
determine the exchange ratio, a total value of (euro)674,083,162.50
was attributed to the nonmonetary contribution, which is lower than
that established by the independent appraiser appointed by the Madrid
Mercantile Registry, and is also lower than that used as a reference
for setting the exchange ratio.
This capital increase was registered at the Madrid Mercantile Registry
on June 19, 2001, and the new shares issued were admitted to listing
on official markets from June 25, 2001.
b) Legal reserve
Under the revised Corporations Law, 10% of income for each year must
be transferred to the legal reserve until the balance of this reserve
reaches at least 20% of capital stock. The legal reserve can be used
to increase capital provided that the remaining reserve balance does
not fall below 10% of the increased capital stock amount. Otherwise,
until the legal reserve exceeds 20% of capital stock, it can only be
used to offset losses, provided that sufficient other reserves are not
available for this purpose.
c) Revaluation reserves
The balance of the "Revaluation Reserves" caption arose as a result of
revaluations made from 1946 to 1987 and of the revaluation made
pursuant to Royal Decree-Law 7/1996.
30
[LOGO] Telefonica
--------------------------------------------------------------------------------
The detail of the variations in this caption in 2002 and 2001 is as
follows:
---------------------------------------------------
Millions of Euros
---------------------------------------------------
Balance at 12/31/00 3,246.70
---------------------------------------------------
Capital increase on January 25 (86.82)
Capital increase on April 3 (89.20)
---------------------------------------------------
Balance at 12/31/01 3,070.68
---------------------------------------------------
Capital increase on February 19 (93.44)
Capital increase on April 22 (95.30)
---------------------------------------------------
Balance at 12/31/02 2,881.94
---------------------------------------------------
The balance of the "Revaluation Reserve Royal Decree-Law 7/1996"
account can be used, free of tax, to offset recorded losses which
might arise in the future, and to increase capital stock. From January
1, 2007 (ten years from the date of the balance sheet reflecting the
revaluations), the balance of this account can be taken to
unrestricted reserves, provided that the monetary surplus has been
realized. The surplus will be deemed to have been realized in respect
of the portion on which depreciation has been taken for accounting
purposes or when the revalued assets have been transferred or retired
from the accounting records.
(10) DEBENTURES, BONDS AND OTHER MARKETABLE DEBT SECURITIES
10.1 The balances as of December 31, 2002 and 2001, of the debentures,
bonds and corporate promissory notes, and the variations therein in
the years then ended, were as follows:
---------------------------------------------------------------------------
Millions of Euros
---------------------------------------------------------------------------
Nonconvertible Corporate
Euro Debentures Promissory
and Bonds Notes Total
---------------------------------------------------------------------------
Balance at 12/31/00 3,562.14 386.56 3,948.70
---------------------------------------------------------------------------
New issues -- 1,385.01 1,385.01
Redemptions (1,131.86) (1,146.77) (2,278.63)
Adjustments and other variations 119.10 -- 119.10
---------------------------------------------------------------------------
Balance at 12/31/01 2,549.38 624.81 3,174.19
---------------------------------------------------------------------------
New issues -- 1,403.17 1,403.17
Redemptions (116.09) (1,328.64) (1,444.73)
Adjustments and other variations 75.92 -- 75.92
---------------------------------------------------------------------------
Balance at 12/31/02 2,509.21 699.34 3,208.55
---------------------------------------------------------------------------
Maturity:
Long term 2,509.21 -- 2,509.21
Short term -- 699.34 699.34
---------------------------------------------------------------------------
Unmatured accrued interest 54.79 -- 54.79
---------------------------------------------------------------------------
31
[LOGO] Telefonica
--------------------------------------------------------------------------------
10.2 The detail of the debentures and bonds outstanding as of December 31,
2002, and of their main features, is as follows:
--------------------------------------------------------------------------------------------------------------------
Maturity
Type of ----------------------------------------------------- Subsequent
Debentures and Bonds Interest Interest Rate 2003 2004 2005 2006 2007 Years TOTAL
--------------------------------------------------------------------------------------------------------------------
DEBENTURES
FEBRUARY 1990 SERIES B FIXED 12.6000 -- -- 8.22 -- -- -- 8.22
FEBRUARY 1990 SERIES C FIXED 12.6000 -- -- -- -- -- 3.76 3.76
FEBRUARY 1990 SERIES E ZERO COUPON 12.8532 -- -- 59.19 -- -- -- 59.19
FEBRUARY 1990 SERIES F ZERO COUPON 12.5793 -- -- -- -- -- 6.43 6.43
DECEMBER 1990 ZERO COUPON 13.5761 -- -- 554.55 -- -- -- 554.55
OCTOBER 04 FIXED 8.2500 -- 69.24 -- -- -- -- 69.24
APRIL 99 FIXED 4.5000 -- -- -- -- -- 500.00 500.00
JUNE 99 FLOATING 4.4530 -- -- -- -- -- 300.00 300.00
JULY 21, 99 ZERO COUPON 6.3700 -- -- -- -- -- 37.11 37.11
MARCH 2, 00 FLOATING 3.5063 -- -- -- -- -- 50.00 50.00
APRIL 00 FIXED 5.6250 -- -- -- -- 500.00 -- 500.00
BONDS
MARCH 98 FIXED 4.8414 -- -- -- -- -- 420.71 420.71
--------------------------------------------------------------------------------------------------------------------
Total Issues -- 69.24 621.96 -- 500.00 1,318.01 2,509.21
--------------------------------------------------------------------------------------------------------------------
10.3 The zero-coupon debentures and bonds are included in the balance sheet
at issue value plus the related accrued interest.
The detail of the maturities and redemption values of these debentures
and bonds is as follows:
---------------------------------------------------------------------
Redemption Redemption Current Redemption
Issue Date Rate (%) Value Value
---------------------------------------------------------------------
DEBENTURES
FEBRUARY-90 SERIES E 02/26/05 613.338% 59.19 76.79
FEBRUARY-90 SERIES F 02/26/10 1,069.479% 6.43 15.04
DECEMBER 90 12/28/05 675.000% 554.55 811.37
JULY 99 07/21/29 637.638% 37.11 191.29
---------------------------------------------------------------------
Total 657.28 1.094.49
---------------------------------------------------------------------
10.4 Debenture issues in 2002 and 2001
No debenture issues were launched in 2002 and 2001.
32
[LOGO] Telefonica
--------------------------------------------------------------------------------
10.5 As of December 31, 2002, there was a seried promissory note issue
program outstanding, as follows:
-----------------------------------------------------------------------------------------------------------------
Amount
(Millions of Euros) Method of Placement Face Value Maturity Placement
-----------------------------------------------------------------------------------------------------------------
Through auctions (euro)1,000 3, 6, 12, 18 and 25 Competitive auctions at
months least once a month
2,000 -------------------------------------------------------------------------------------------
Customized, intermediated (euro)1,000,000 30 to 750 days Specific transactions
by participating entities
-----------------------------------------------------------------------------------------------------------------
10.6 The average interest rate on outstanding debentures and bonds was
6.81% in 2002 (7.11% in 2001), and the average interest rate on
corporate promissory notes was 3.465% in 2002 (4.34% in 2001).
(11) PAYABLE TO CREDIT INSTITUTIONS
11.1 The detail of the balances of this caption as of December 31, 2002 and
2001, is as follows:
------------------------------------------------------------------------------------------------------------
Millions of Euros
Average ---------------------------------------------------------------------
Interest Rate 2002 2001
------------------------------------------------------------------------------------------------------------
2002 2001 Short Term Long Term Total Short Term Long Term Total
------------------------------------------------------------------------------------------------------------
Promissory notes 13.52 13.52 7.09 106.56 113.65 7.23 113.65 120.88
Loans and credits 3.49 4.42 1,561.04 2,873.05 4,434.09 2,498.61 4,575.23 7,073.84
Foreign currency
loans and credits 1.76 3.76 134.34 530.28 664.62 134.17 156.28 290.45
------------------------------------------------------------------------------------------------------------
Total 1,702.47 3,509.89 5,212.36 2,640.01 4,845.16 7,485.17
------------------------------------------------------------------------------------------------------------
11.2 These balances mature as follows:
-------------------------------------------------------------------------------------------------------
Maturity
--------------------------------------------------------------------------
Subsequent Balance at
2003 2004 2005 2006 2007 Years 12/31/02
-------------------------------------------------------------------------------------------------------
Promissory notes 7.09 6.92 6.74 6.57 6.37 79.96 113.65
Loans and credits 1,561.04 860.04 829.21 949.55 112.55 121.70 4,434.09
Foreign currency loans and
credits 134.34 355.86 114.03 60.39 -- -- 664.62
-------------------------------------------------------------------------------------------------------
Total 1,702.47 1,222.82 949.98 1,016.51 118.92 201.66 5,212.36
-------------------------------------------------------------------------------------------------------
11.3 The "Loans and Credits" account includes a syndicated loan of
(euro)1,200 million arranged by the Company in 1999 with 38 financial
institutions. This loan has a term to maturity of 5 or 7 years, chosen
by each lending institution, and it will be repaid at one time on
maturity of each tranche. The loan bears interest at a floating rate
tied to Euribor.
On August 29, 2000, the Company arranged a syndicated renewable credit
line for a maximum amount of (euro)8,000 million, divided into two
tranches: the first of up to (euro)6,000 million or the equivalent
thereof in other currencies at 364 days (renewed through 2003)
33
[LOGO] Telefonica
--------------------------------------------------------------------------------
and bearing interest tied to Euribor or Libor; and the second of up to
(euro)2,000 million or the equivalent thereof in other currencies at
three years and bearing interest tied to Euribor or Libor. As of
December 31, 2002, (euro)1,145.04 million had been drawn down against
this credit line.
In December 2001 a loan of US$ 115 million maturing in July 2006 was
arranged with BBVA.
In relation to the issue of 42 bearer promissory notes made with La
Estrella, S.A. de Seguros and maturing on February 15, 2001, which
carried a commitment to issue new promissory notes, on February 15,
2001, Telefonica, S.A. issued 74 bearer promissory notes with a par
value of (euro)126.29 million and maturing in February 2011.
11.4 Credit facilities available
The loans and credits accounts reflect only the amounts drawn down.
As of December 31, 2002, the undrawn credit facility balances amounted
to (euro)4,528.00, which sufficiently covers the financing needs
arising from short-term commitments.
The claimability of certain financing arranged by Telefonica may be subject
to compliance with certain financial covenants. All the covenants were
being complied with at the date of preparation of these financial
statements.
(12) PAYABLE TO GROUP AND ASSOCIATED COMPANIES
12.1 The detail of this caption as of December 31, 2002 and 2001, is as
follows:
-----------------------------------------------------------------------------------------------------------------
Millions of Euros
-----------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------
Long Term Short Term Total Long Term Short Term Total
-----------------------------------------------------------------------------------------------------------------
Loans 12,238.53 5,662.07 17,900.60 9,221.69 7,923.12 17,144.81
Accounts payable to Group companies for
purchases and services -- 217.01 217.01 -- 79.88 79.88
Accounts payable to subsidiaries due to
taxation on a consolidated basis 5,441.10 6.21 5,447.31 2,129.29 22.91 2,152.20
-----------------------------------------------------------------------------------------------------------------
Total 17,679.63 5,885.29 23,564.92 11,350.98 8,025.91 19,376.89
-----------------------------------------------------------------------------------------------------------------
12.2 The main loans obtained in 2002 and 2001 were as follows:
a) Loans from Telefonica Europe, BV of (Y)30,000 million (maturing
in 2003) and of (Y)50,000 million and (Y)22,000 million (maturing
in 2002).
34
[LOGO] Telefonica
--------------------------------------------------------------------------------
b) Also, in 2002 and 2001 Telefonica Europe, BV granted the
following loans to the Company:
------------------------------------
Year
------------------------------------
Grant Maturity Millions of Euros
------------------------------------
2001 2003 150.00
2001 2004 34.30
2001 2004 1,000.00
2001 2006 1,000.00
2002 2004 80.00
2002 2005 50.00
2002 2003 96.02
2002 2012 2,000.00
------------------------------------
The financing arranged in 2002 includes as an associated cost the
commissions or premiums which are charged to the statement of
operations in the period in which the financing is arranged (see Note
8).
These loans bear interest at market rates (Euribor plus a spread). The
average interest rate in 2002 was 4.83%.
12.3 The detail of the short-term accounts payable to Group companies for
purchases and services is as follows:
------------------------------------------------------
Millions of Euros
-----------------
2002 2001
------------------------------------------------------
Telefonica de Espana, S.A.U. 84.93 66.83
Telefonica de Contenidos, S.A. 6.49 --
Telefonica Internacional, S.A. 56.04 --
Telefonica Moviles, S.A. 56.83 --
Telefonica Holding Argentina, S.A. 7.35 --
Other 5.37 13.05
------------------------------------------------------
Total 217.01 79.88
------------------------------------------------------
12.4 The long-term balance of the "Accounts Payable to Subsidiaries Due to
Taxation on a Consolidated Basis" account includes basically the
accounts payable to these companies for their contribution of tax
losses to the tax group headed by Telefonica, S.A. The short-term
balance relates mainly to corporate income tax installment payments
made by the Group companies through Telefonica.
35
[LOGO] Telefonica
--------------------------------------------------------------------------------
(13) DERIVATIVES
In 2002 the Company continued to use derivatives both to limit interest
rate and exchange risks on unhedged positions and to adapt its debt
structure to market conditions.
As of December 31, 2002, the total outstanding balance of hedging
transactions arranged to eliminate balance sheet exposure to interest and
rate exchange risks was (euro)38,717.54 million ((euro)34,277.07 million as
of December 31, 2001), of which (euro)18,973.30 million related to interest
rate risk and (euro)19,367.19 million to exchange risk ((euro)13,487.58
million and (euro)20,340.64 million, respectively, as of December 31,
2001).
It should be noted that as of December 31, 2002, Telefonica had arranged
swaps with financial institutions amounting to (euro)8,553.30 million and
(euro)12,069.69 million ((euro)1,419.15 million and (euro)7,796.73 million
as of December 31, 2001) to hedge interest rate and exchange risks,
respectively, for Group companies. The balancing entries for these
transactions were hedging transactions with identical conditions and
maturities arranged with Group companies, and, accordingly, the
transactions do not involve any risk for Telefonica.
Most of the derivatives transactions are assigned directly to individual
asset or liability positions on the balance sheet. Also, there is a
transaction portfolio hedging other financial risks of the Company. The net
financial expense incurred in 2002 in relation to these transactions
amounted to (euro)81.90 million.
36
[LOGO] Telefonica
--------------------------------------------------------------------------------
13.1 The detail of the portfolio by type of derivative as of December 31,
2002, is as follows:
-----------------------------------------------------------------------------------
Millions
--------------------------------------------------------
2002
--------------------------------------------------------
Telefonica Receives Telefonica Pays
Equivalent -------------------------------------------
Type of Risk Euro Value Value Currency Value Currency
-----------------------------------------------------------------------------------
Euro interest rate swaps 5,390.62
-----------------------------------------------------------------------------------
Fixed to floating 1,714.18 1,714.18 EUR 1,714.18 EUR
Floating to fixed 2,713.11 2,713.11 EUR 2,713.11 EUR
Floating to floating 963.33 962.95 EUR 963.33 EUR
-----------------------------------------------------------------------------------
Cross currency swaps 10,944.10
-----------------------------------------------------------------------------------
Fixed to floating 6,310.84
USD/USD 6,276.44 6,582.10 USD 6,582.10 USD
MXN/MXN 34.40 372.00 MXN 372.00 MXN
Floating to fixed 4,633.26
USD/USD 4,475.88 4,693.85 USD 4,693.85 USD
GBP/GBP 122.98 80.00 GBP 80.00 GBP
MXN/MXN 34.40 372.00 MXN 372.00 MXN
-----------------------------------------------------------------------------------
Exchange rate swaps 19,221.60
-----------------------------------------------------------------------------------
Fixed to fixed 702.52
USD/EUR 70.61 65.00 USD 70.61 EUR
GBP/EUR 121.49 80.00 GBP 121.49 EUR
USD/JPY 132.29 136.00 USD 16,456.00 JPY
JPY/USD 129.68 16,456.00 JPY 136.00 USD
USD/BRL 100.65 155.00 USD 372.93 BRL
BRL/USD 147.80 372.93 BRL 155.00 USD
Fixed to floating 511.85
EUR/USD 50.73 58.41 EUR 53.20 USD
USD/EUR 119.58 109.00 USD 119.58 EUR
JPY/EUR 113.90 12,400.00 JPY 113.90 EUR
BRL/EUR 96.99 288.17 BRL 96.99 EUR
BRL/USD 40.05 108.77 BRL 42.00 USD
PEN/USD 47.68 176.13 PEN 50.00 USD
MXN/USD 42.91 450.33 MXN 45.00 USD
Floating to fixed 1,603.57
EUR/JPY 49.84 56.95 EUR 6,200.00 JPY
EUR/BRL 77.77 96.99 EUR 288.17 BRL
USD/EUR 1,357.18 1,247.73 USD 1,357.18 EUR
USD/BRL 29.35 42.00 USD 108.77 BRL
USD/PEN 47.78 50.00 USD 176.13 PEN
USD/MXN 41.64 45.00 USD 450.33 MXN
Floating to floating 16,403.67
EUR/USD 6,025.93 6,229.20 EUR 6,319.40 USD
USD/EUR 8,949.64 8,753.25 USD 8,949.64 EUR
EUR/GBP 384.32 387.08 EUR 250.00 GBP
GBP/EUR 265.59 170.00 GBP 265.59 EUR
JPY/EUR 282.00 30,000.00 JPY 282.00 EUR
USD/MXN 245.87 262.50 USD 2,659.03 MXN
MXN/USD 250.31 2,659.03 MXN 262.50 USD
-----------------------------------------------------------------------------------
Forward transactions 145.59
-----------------------------------------------------------------------------------
USD/EUR 38.67 37.61 USD 38.67 EUR
EUR/USD 102.51 111.14 EUR 107.50 USD
USD/CLP 2.26 2.26 USD 1,700.00 CLP
CLP/USD 2.16 1,700.00 CLP 2.26 USD
-----------------------------------------------------------------------------------
Subtotal 35,701.91
-------------------------------------
37
[LOGO] Telefonica
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Notional amounts of structured products
with options Euros Notional Value
--------------------------------------------------------------------------
Interest rate options 2,638.58
--------------------------------------------------------------------------
Caps & Floors 2,050.81
USD 190.71 200.00 USD
EUR 1,860.10 1,860.10 EUR
Swaptions 508.44
USD 429.10 450.00 USD
EUR 79.33 79.33 EUR
Interest rate options 79.33 79.33 EUR
--------------------------------------------------------------------------
Equity swaps 377.05
--------------------------------------------------------------------------
Subtotal 3,015.63
--------------------------------------------------------
TOTAL 38,717.54
--------------------------------------------------------
38
[LOGO] Telefonica
--------------------------------------------------------------------------------
13.2 The detail of the portfolio by type of derivative as of December 31,
2001, is as follows:
--------------------------------------------------------------------------------------------------
Millions
--------------------------------------------------------
2001
--------------------------------------------------------
Telefonica Receives Telefonica Pays
Equivalent -------------------------------------------
Type of risk Euro Value Value Currency Value Currency
--------------------------------------------------------------------------------------------------
Euro interest rate swaps in euros 4,950.97
--------------------------------------------------------------------------------------------------
Fixed to floating 1,462.30 1,462.30 Euro 1,462.30 Euro
Floating to fixed 2,424.45 2,424.45 Euro 2,424.45 Euro
Floating to floating 1,064.22 1,064.73 Euro 1,064.22 Euro
--------------------------------------------------------------------------------------------------
Cross currency interest rate swaps 6,371.56
--------------------------------------------------------------------------------------------------
Fixed to floating 4,247.71 3,800.00 USD 3,800.00 USD
Floating to fixed 2,123.85 1,900.00 USD 1,900.00 USD
--------------------------------------------------------------------------------------------------
Exchange rate swaps 17,788.10
--------------------------------------------------------------------------------------------------
Fixed to fixed 3,437.44
EUR/GBP 128.77 121.49 EUR 80.00 GBP
GBP/EUR 121.49 80.00 GBP 121.49 EUR
USD/EUR 1,467.85 1,356.52 USD 1,467.85 EUR
EUR/USD 1,425.80 1,379.55 EUR 1,275.52 USD
JPY/USD 152.02 16,456.00 JPY 136.00 USD
USD/JPY 141.51 136.00 USD 16,456.00 JPY
Fixed to floating 898.65
USD/EUR 173.12 157.16 USD 173.12 EUR
JPY/EUR 725.53 78,200.00 JPY 725.53 EUR
Floating to floating 13,452.01
EUR/USD 5,835.36 4,980.32 EUR 5,220.31 USD
EUR/GBP 273.64 265.59 EUR 170.00 GBP
GBP/EUR 265.59 170.00 GBP 265.59 EUR
JPY/EUR 282.01 30,000.00 JPY 282.00 EUR
USD/EUR 6,795.41 6,853.69 USD 6,795.41 EUR
--------------------------------------------------------------------------------------------------
Forward transactions 2,552.55
--------------------------------------------------------------------------------------------------
EUR/USD 1,142.61 1,073.39 EUR 1,023.00 USD
USD/EUR 1,409.94 1,275.00 USD 1,409.94 EUR
--------------------------------------------------------------------------------------------------
Subtotal 31,663.18
-------------------------------------------------------
--------------------------------------------------------------------
Notional amounts of structured products
with options Euros Notional
--------------------------------------------------------------------
Interest rate options 2,165.05
--------------------------------------------------------------------
Caps & Floors 705.37
USD 223.56 200.00 USD
EUR 481.81 481.81 EUR
Swaptions 1,380.35
USD 1,117.82 1,000.00 USD
EUR 262.53 262.53 EUR
Interest rate options 79.33 79.33 EUR
--------------------------------------------------------------------
Equity swaps 448.85 448.85 EUR
--------------------------------------------------------------------
Subtotal 2,613.90
---------------------------------------------------
Total 34,277.08
---------------------------------------------------
39
[LOGO] Telefonica
--------------------------------------------------------------------------------
The detail, by maturity, of the hedging transactions in 2002 and 2001 is as
follows:
------------------------------------------------------------------------------------
2002
-------------------------------------------------------
Underlying Up to 1 to 3 3 to 5 Over 5
Instrument Hedged Amount 1 Year Years Years Years
------------------------------------------------------------------------------------
With Underlying Instrument
------------------------------------------------------------------------------------
Loans 25,438.85 3,535.94 15,667.99 3,678.96 2,555.96
Euro 12,312.63 1,601.07 6,641.76 2,270.85 1,798.95
Foreign currency 13,126.22 1,934.87 9,026.23 1,408.11 757.01
MTN debentures and bonds 11,353.86 7,115.63 2,752.94 114.43 1,370.86
Euro 410.83 50.73 -- -- 360.10
Foreign currency 10,943.03 7,064.90 2,752.94 114.43 1,010.76
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Liabilities 1,547.78 47.78 -- -- 1,500.00
Swaps 47.78 47.78 -- -- --
Interest rate options 1,500.00 -- -- -- 1,500.00
Forward transactions -- -- -- -- --
Shares 377.05 377.05 -- -- --
------------------------------------------------------------------------------------
Total 38,717.54 11,076.40 18,420.93 3,793.39 5,426.82
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
2001
-------------------------------------------------------
Underlying Up to 1 to 3 3 to 5 Over 5
Instrument Hedged Amount 1 Year Years Years Years
------------------------------------------------------------------------------------
With Underlying Instrument
------------------------------------------------------------------------------------
Loans 17,596.76 8,047.59 5,663.48 1,593.33 2,292.36
Euro 11,897.45 5,253.00 2,812.30 1,539.79 2,292.36
Foreign currency 5,699.31 2,794.59 2,851.18 53.54 --
MTN debentures and bonds 14,905.69 4,750.56 6,338.34 464.29 3,352.5
Euro 4,487.23 1,977.10 1,000.00 391.78 1,118.35
Foreign currency 10,418.46 2,773.46 5,338.34 72.51 2,234.15
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Liabilities 1,325.78 907.29 58.39 0.00 360.10
Swaps 289.54 231.15 58.39 -- --
Exchange rate options 481.81 121.71 -- -- 360.10
Interest rate options 554.43 554.43 -- -- --
Forward transactions 448.85 448.85 -- -- --
------------------------------------------------------------------------------------
Total 34,277.08 14,154.29 12,060.21 2,057.62 6,004.96
------------------------------------------------------------------------------------
40
[LOGO] Telefonica
--------------------------------------------------------------------------------
(14) TAX MATTERS
14.1 Deferred tax assets and liabilities
The detail as of December 31, 2002 and 2001, of Telefonica's deferred
tax assets and liabilities, and of the variations therein in 2002 and
2001, is as follows:
-------------------------------------------------------------------------------------
Deferred Tax Deferred Tax Intercompany Deferred
Assets Liabilities Tax Liabilities/(Assets)
------------------------------------------------------
Long Term Long Term Long Term
-------------------------------------------------------------------------------------
Balance at December 31, 2000 35.04 312.45 8.48
-------------------------------------------------------------------------------------
Reversal -- (312.32) --
Arising in the year 55.99 3.74 33.91
-------------------------------------------------------------------------------------
Balance at December 31, 2001 91.03 3.87 42.39
-------------------------------------------------------------------------------------
Reversal (36.06) -- --
Arising in the year 20.22 -- 4.78
Other variations (16.01) (3.87) (12.46)
-------------------------------------------------------------------------------------
Balance at December 31, 2002 59.18 -- 34.71
-------------------------------------------------------------------------------------
Telefonica's deferred tax assets relate mainly to employee
long-service bonuses, and to accounting provisions recorded for
investments in companies with negative underlying book values.
The deferred tax liabilities reversed in 2001 relate mainly to timing
differences due to the reinvestment of extraordinary gains.
14.2 Taxes payable and taxes receivable
The detail of the "Taxes Payable" and "Taxes Receivable" captions as
of December 31, 2002 and 2001, is as follows:
------------------------------------------------------------------------------------
Millions of Euros
-----------------------
Balance at Balance at
12/31/02 12/31/01
------------------------------------------------------------------------------------
Taxes payable:
Long-term taxes payable: 34.71 46.26
Deferred tax liabilities 34.71 46.26
Short-term taxes payable: 12.16 147.80
Personal income tax withholdings 1.05 4.83
VAT 7.51 3.80
Withholdings from income from movable capital and other 2.32 0.02
Corporate income tax:
Individual tax -- 137.66
Accrued social security taxes 1.28 1.49
------------------------------------------------------------------------------------
Total 46.87 194.06
------------------------------------------------------------------------------------
41
[LOGO] Telefonica
--------------------------------------------------------------------------------
---------------------------------------------------------------------------
Millions of Euros
-----------------------
Balance at Balance at
12/31/02 12/31/01
---------------------------------------------------------------------------
Taxes receivable:
Long-term taxes receivable (Note 7): 4,932.90 435.28
Deferred tax assets 59.18 91.03
Long-term tax loss carryforwards 4,873.72 344.25
Short-term taxes receivable: 45.41 84.71
Corporate income tax prepayments:
Withholdings 6.27 3.62
Corporate income tax refundable 2.67 54.57
Taxes recoverable and other 0.11 --
VAT and Canary Islands general indirect tax 36.36 26.52
---------------------------------------------------------------------------
Total 4,978.31 519.99
---------------------------------------------------------------------------
The increase in the balance of the "Long-Term Tax Loss Carryforwards"
caption relates to the tax loss reported at year-end by the tax group
headed by Telefonica.
14.3 Reconciliation of the loss per books to the tax base and determination
of the corporate income tax revenue and net tax refundable.
The corporate income tax revenue and the net tax refundable for 2002
and 2001 are as follows.
------------------------------------------------------------------------------------
Millions of Euros
-------------------
2002 2001
------------------------------------------------------------------------------------
Loss before taxes per books (5,766.30) (619.09)
Permanent differences 2,747.13 (315.28)
Timing differences:
Arising in the year 57.78 103.41
Arising in prior years (103.04) 886.28
Tax base (3,064.43) 55.32
Gross tax payable (1,072.55) 19.36
Tax credits capitalized pursuant to ICAC resolution (Note 4-k) (85.61) --
Other tax credits and tax relief (152.25) --
Corporate income tax payable (receivable) (1,310.41) 19.36
Timing differences 15.84 (346.38)
Corporate income tax accrued in Spain (1,284.57) (327.02)
Foreign taxes 5.06 62.45
Other 1.90 (0.34)
Total income tax (1,287.61) (264.91)
------------------------------------------------------------------------------------
The tax credits recorded were taken basically for reinvestment of
gains and for double taxation.
The permanent differences relate mainly to the investment valuation
provisions recorded by the Group companies included in the
consolidated corporate income tax group in order to avoid duplication,
since these companies have recorded the tax asset in their own
individual financial statements, to dividends received from tax group
or foreign companies taxed at source and to nondeductible provisions.
42
[LOGO] Telefonica
--------------------------------------------------------------------------------
The detail of the adjustments for timing differences in 2002 is as
follows:
-----------------------------------------------------
Millions of
Euros
-----------------------------------------------------
Timing differences arising in the year:
Long-service bonuses 7.09
Investment valuation provisions (52.35)
-----------------------------------------------------
Total (45.26)
-----------------------------------------------------
In 2001 all the deferred income ((euro)886.28 million) was reversed,
in accordance with Transitional Provision Three of Law 24/2001 on tax,
administrative, labor and social security measures.
The taxes incurred abroad relate mainly to the corporate income tax
borne by the permanent establishment in Argentina.
14.4 On September 25, 2002, tax audits commenced at several of the
companies included in tax group 24/90 of which Telefonica, S.A. is the
parent company. The taxes subject to review are corporate income tax
(for the years from 1998 to 2001) and VAT and tax withholdings and
prepayments relating to personal income tax, tax on income from
movable capital, property tax and nonresident income tax (1998 to
2001). No material liabilities are expected to arise as a result of
the reviews currently being performed by the tax inspection
authorities
(15) OTHER NONTRADE PAYABLES
The balance of this caption relates mainly to compensation payable and to
other payables relating to fixed asset purchases.
(16) REVENUES AND EXPENSES
16.1 Operating revenues
The revenues from sales and services in 2002 and 2001 related to sales
to Group companies and, principally, to the management contract with
Telefonica de Argentina, S.A.
In November 1990 Telefonica and Telefonica Argentina, S.A. entered
into a management contract expiring in 2003 regulating the counseling
services rendered by Telefonica and the price thereof. The revenues
received in this connection in 2002 and 2001 amounted to (euro)29.90
million and (euro)140.50 million, respectively, and these amounts are
recorded under the "Net Sales to Group Companies" caption in the
accompanying statements of operations.
16.2 Personnel expenses
The detail of the personnel expenses is as follows:
43
[LOGO] Telefonica
--------------------------------------------------------------------------------
--------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------
Compensation, incentive schemes, etc. 74.81 68.79
Pension plans (Note 4-h) 2.27 2.01
Employee welfare expenses and other 12.98 9.43
--------------------------------------------------------------------
Total 90.06 80.23
--------------------------------------------------------------------
The "Compensation, Incentive Schemes, etc." caption includes the
period expense for 2002 and 2001 relating to the Telefonica stock
option plan (TOP) allocable to Company personnel, amounting to
(euro)7.09 million in both years.
16.3 Average number of employees
------------------------------------------------------------------
Category 2002 2001
------------------------------------------------------------------
University graduates and other line personnel 574 514
Junior college graduates and technicians (draftsmen) 7 6
Supervisors and data processing assistants 160 136
Operators 21 18
Building and services personnel 7 6
------------------------------------------------------------------
Total 769 680
------------------------------------------------------------------
The total number of employees as of December 31, 2002, was 799 (727 in
2001).
Compensation systems tied to share market price
Telefonica currently has in place two compensation systems tied to the
market price of its shares, one of which (the TOP Plan) is aimed
exclusively at executive personnel, including the executive directors
of Telefonica, while the other (the TIES Program) is aimed at all the
personnel of Telefonica and its Spanish and foreign subsidiaries. Both
systems were approved by the Stockholders' Meeting held on April 7,
2000.
Following is a detailed account of each of these two plans:
a) TOP Plan
At its meeting on May 26, 1999, Telefonica, S.A.'s Board of Directors
approved a compensation system tied to the market price of the
Company's shares (the "TOP Plan"), through the grant of options on the
Company's shares. The term of this plan is four years and three months
from the launch date (June 28, 1999).
The implementation of the Plan and the exercise and sale of the
related stock option rights were approved by the aforementioned
Stockholders' Meeting of Telefonica, S.A. on April 7, 2000.
The approval and implementation of this incentive Plan were notified
to the Spanish National Securities Market Commission (CNMV) and
published in the Complete Prospectus, which was verified and
registered in the CNMV's Official Register on June 29, 1999; in the
Continued Prospectus, which was verified and registered on June 23,
2000; and in the Specific Prospectus on the compensation systems tied
to the market price of Telefonica, S.A. shares in force prior to
January 1, 2000, which was verified and registered in the CNMV's
Official
44
[LOGO] Telefonica
--------------------------------------------------------------------------------
Register on April 18, 2000. This prospectus included a clear
description of the main features of the program and of the procedures
for the assignment, exercise and settlement of the options.
Also, the CNMV was notified in due time and form of the assignment of
options derived from this compensation system to executive directors,
general managers and persons of a similar rank of Telefonica, S.A.
The TOP Plan, which is targeted at approximately 500 beneficiary
executives of several Telefonica Group companies, consists of the
grant to each beneficiary covered thereby of ten 10 type-A options and
ten type-B options on Telefonica, S.A. shares for every Telefonica,
S.A. share assigned by each beneficiary to the Plan and which the
beneficiaries must keep throughout the term of the Plan. The
beneficiaries may exercise the stock option rights from the second
year of the term of the Plan onwards at a rate of one-third of the
total number of type-A options and one-third of the type-B options in
arrears, i.e. in three equal portions in the second, third and fourth
year of the Plan; the Company reserves the right to settle the Plan at
each of the aforementioned maturity dates by paying the beneficiaries
the result of the settlement in the form of shares or in cash. One
share equals one option.
At the launch date, the exercise price of the options granted was as
follows: for the type-A options, the exercise price was established on
the basis of the market price of the shares when the compensation
system was introduced ((euro)46.18 per share); whereas the exercise
price for the type-B options was set at the same price plus 50%
((euro)69.27 per share). These figures related to the par value of the
Telefonica, S.A. shares when the Plan was launched and, accordingly,
prior to the three-way share split, consisting of three new shares for
every old share, carried out in July 1999. Therefore, following this
split and taking into account the antidilution clauses in the Plan,
the type-A and type-B option exercise prices were (euro)15.09 and
(euro)22.63 as of December 31, 2000, respectively; (euro)14.50 and
(euro)21.75 as of December 31, 2001, respectively; and (euro)13.94 and
(euro)20.91 as of December 31, 2002, respectively.
Originally 411 Telefonica Group executives were the beneficiaries of
the TOP Plan (including four executive directors and nine general
managers and persons of a similar rank). Consequently, although
initially the TOP Plan was only partially awarded, it was established
that if all the executives (approximately 500) targeted by the Plan
had availed themselves of it, the total number of shares assigned to
the Plan would have been 270,237 and, consequently, the total number
of options granted would have been 5,404,740, prior to the
aforementioned three-way share split carried out in July 1999.
Clearly, the TOP Plan provided for the possibility of assigning new
options at dates subsequent to that on which it was introduced,
particularly to cater for the needs which were disclosed as a result
of the executive compensation policies and of new executive hirings.
This possibility was expressly approved by the Stockholders' Meeting
of Telefonica, S.A. in a resolution adopted on June 15, 2001.
In October 2000 and February and April 2001 new options were assigned
under the TOP Plan to a further three executive directors and to
executives who had joined the Group after the launch of the Plan, or
who, as a result of promotion, held positions of responsibility which
carried a higher level of option assignments than that at which they
joined the Plan.
45
[LOGO] Telefonica
--------------------------------------------------------------------------------
The new option assignments made in October 2000 and February and April
2001 (which were expressly ratified through a resolution adopted by
the Stockholders' Meeting of Telefonica, S.A. on June 15, 2001) did
not entail an extension of the TOP Plan, but rather in order to make
these assignments, the remaining options that had been held by the
Company throughout the term of the Plan were used. Accordingly, the
terms and conditions of the options assigned on the aforementioned
dates are the same as those of the TOP Plan, except for the exercise
price thereof. In the case of the type-A options the exercise price
was set at the Telefonica, S.A. share market price when the new
assignments were approved by the competent corporate governing body.
Also, on June 15, 2001, the Stockholders' Meeting of Telefonica, S.A.
empowered the Board of Directors to make, within the total volume of
options under the TOP Plan, additional assignments of options to
executive directors and general managers and persons of a similar
rank, provided that the maximum number of options to be assigned to
each director or senior executive did not exceed 175,000 type-A
options or 175,000 type-B options. In no case could the exercise price
for the type-A options be lower than the market price of the Company
shares when the options were granted, and in no case could the
exercise price of the type-B options be lower than that amount
increased by a percentage of between 25% and 50%.
On December 31, 2001 (taking into account the fact that by that date
the Board of Directors had not exercised the powers granted to it, as
mentioned above, by the Stockholders' Meeting on June 15, 2001), there
were 453 beneficiaries of the TOP Plan (including five executive
directors of Telefonica, S.A. and ten general managers or persons of
similar rank), who held a total of 14,966,640 purchase options on
Telefonica, S.A. shares.
Subsequently, because, effective January 2, 2002, certain
beneficiaries of the TOP Plan who work for subsidiaries of Telefonica
Moviles, S.A. were included under the latter's stock option plan known
as the MOS Program, which was set up after the TOP Plan, which led to
their automatic exclusion from the latter Plan because of the total
incompatibility of the two Plans, the number of beneficiaries of the
TOP Plan and the number of options assigned thereunder was
significantly reduced. Therefore, as of that date (January 2, 2002)
there were 335 beneficiaries of the TOP Plan (including four executive
directors of Telefonica, S.A. and ten general managers or persons of
similar rank), who held a total of 12,158,820 purchase options on
Telefonica, S.A. shares.
In January 2002 the Board of Directors, exercising the powers granted
to it by the aforementioned Stockholders' Meeting on June 15, 2001,
resolved to assign options under the TOP Plan to several Telefonica
Group executives, for which purpose unassigned options included within
the total volume of options initially approved for the Plan were used.
The beneficiaries of this assignment included three general managers
or persons of similar rank.
At 2002 year-end, there were 324 beneficiaries (participants) of the
TOP Plan, who held a total of 13,066,516 purchase options on
Telefonica, S.A. shares. These TOP Plan beneficiaries (participants)
included 4 executive directors of Telefonica, S.A. and 13 general
managers and persons of similar rank.
In order to cover the risks and economic obligations derived from the
TOP Plan, the Group arranged hedging contracts with BBV and
Argentaria, at a maximum total cost for the Telefonica Group of
(euro)72.12 million. (euro)13.70 million of this cost have not yet
been taken to income (see Note 8).
46
[Logo] Telefonica
--------------------------------------------------------------------------------
b) TIES Program
On February 23, 2000, the Board of Directors of Telefonica, S.A.
approved the establishment of a new compensation system tied to the
market price of the Company's shares, with the grant of options on
Company shares, known as the TIES Program. This Program is aimed at
all the employees of Telefonica, S.A. and its Spanish and foreign
subsidiaries who meet the requirements established in the rules
governing the Program and who are not participating in any other
similar stock or stock option plan.
The aim of the TIES Program is identical to those achieved by other
similar programs implemented in the past by Telefonica, S.A. or its
subsidiaries and is broadly similar to programs which have been
introduced in several European countries and in the U.S. Its main
purpose is to introduce a system of global incentives and to reward
the past and future services of all the employees of Telefonica, S.A.
and its subsidiaries in the coming years. The TIES Program will
basically motivate all its beneficiaries by giving them access to
Telefonica, S.A. shares under highly favorable terms and conditions.
In order to achieve the purposes of the Program, on April 7, 2000, the
Stockholders' meeting of Telefonica, S.A. approved two capital
increases with disapplication of prepreemptive subscription rights,
for a par value of (euro)1,197,880 and (euro)31,504,244, respectively,
through the issuance of 1,197,880 and 31,504,244 new shares,
respectively, of (euro)1 par value each, with additional paid-in
capital of 400% of the par value.
The main features of the TIES Program are as follows:
1. Number of shares offered for initial acquisition by the
beneficiaries: 1,197,880.
2. Issue price: (euro)5.
3. Maximum no. of shares under option assigned to beneficiaries:
31,504,244. This figure, which is the maximum amount necessary to
cover the total rights carried by the shares initially assigned,
also includes a reserve for new beneficiaries of the Program
equal to 4.5% of the initial beneficiaries.
4. Method of assignment of shares under option: depends on the
appreciation of Telefonica, S.A. shares with respect to an
initial reference value to be set by the Board of Directors and
on the number of shares of Telefonica, S.A. initially acquired.
The initial reference value is set at (euro)20.5 per share.
5. Exercise price: (euro)5.
At its meeting on June 28, 2000, the Board of Directors of Telefonica,
S.A. resolved to commence implementation of the TIES Program (the
features and general terms of which had been established on February
23, 2000, by the Board of Directors' Meeting that approved the
creation of the Program), and established the requirements to be met
by the employees of the subsidiaries of Telefonica, S.A. in order to
become beneficiaries of the TIES Program.
47
[Logo] Telefonica
--------------------------------------------------------------------------------
Subsequently, on November 29, 2000, the Board of Directors of
Telefonica, S.A. adapted to the date on which the Program was
ultimately launched the conditions and requirements to be met by the
employees of the companies participating in the Program in order to
become beneficiaries of the Program and the reference value initially
set.
On February 14, 2001, the notarial deed of formalization and execution
of the first capital increase at Telefonica indicated above was
executed. The par value of the capital was increased by
(euro)1,123,072, through the issuance of an equal number of common
shares with additional paid-in capital of (euro)4 per share. The new
shares were fully subscribed and paid, through a monetary
contribution, by the beneficiaries of the TIES Program.
On February 20, 2001, the notarial deed of formalization and execution
of the second capital increase at Telefonica to cater for the TIES
Program was executed. The par value of the capital was increased by
(euro)31,504,244, through the issuance of an equal number of common
shares with additional paid-in capital of (euro)4 per share. The new
shares were fully subscribed and paid, through a monetary
contribution, by BBVA (50%) and La Caixa (50%).
On December 31, 2002, 75,842 persons were participating in the TIES
program, who held a total of 29,956,042 purchase options on
Telefonica, S.A. shares. As of that date, 550 Telefonica, S.A.
employees were participating in the Plan.
16.4 Other interest on accounts payable and similar expenses and revenues
from other equity investments and loans
The detail of these captions is as follows:
-----------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------
Debentures, bonds and other marketable debt securities 213.69 267.96
Euro loans and credits 763.63 751.07
Foreign currency loans 403.35 368.32
-----------------------------------------------------------------------------
Total interest on accounts payable and
similar expenses 1,380.67 1,387.35
-----------------------------------------------------------------------------
Interest on loans to subsidiaries and associated
companies 1,191.29 1,255.20
Interest on financial investments in euros 18.20 62.46
Interest on financial investments in foreign currencies 0.19 0.47
Revenues from financial derivatives 104.55 5.89
-----------------------------------------------------------------------------
Total revenues from other equity investments and loans 1,314.23 1,324.02
-----------------------------------------------------------------------------
(euro)900.23 million and (euro)836.53 million of the expenses related
to interest on accounts payable to Group companies in 2002 and 2001,
respectively (see Note 16.8).
16.5 Exchange differences
The detail of the exchange losses charged to income is as follows:
48
[Logo] Telefonica
--------------------------------------------------------------------------------
-----------------------------------------------------------------
2002 2001
-----------------------------------------------------------------
Repayment of loans maturing in the year 122.46 39.77
Potential losses in 2002 and subsequent years 502.17 242.45
Recurring operations and derivatives 974.24 146.95
-----------------------------------------------------------------
Total 1,598.87 429.17
-----------------------------------------------------------------
The detail of exchange gains credited to income is as follows:
-----------------------------------------------------------
2002 2001
-----------------------------------------------------------
Repayment of loans maturing in the year 21.23 --
Adjustment of loans -- 175.10
Adjustment of foreign loans 1,013.88 --
Recurring operations and derivatives 236.11 212.93
-----------------------------------------------------------
Total 1,271.22 388.03
-----------------------------------------------------------
The increase in exchange gains and exchange losses in 2002 with
respect to 2001 is due basically to the significant fluctuations in
the US$/euro exchange rate, offset by the effect of hedges arranged
for this purpose.
16.6 Extraordinary revenues
The "Extraordinary Revenues" caption in the accompanying statement of
operations relates to nonrecurring revenues obtained by the Company
that were not material in 2002. As of December 31, 2001, it included
(euro)106.87 million relating to the decrease in the allowance for
treasury stock, as indicated in Note 4-f.
16.7 Extraordinary expenses
The detail of the extraordinary expenses is as follows:
-------------------------------------------------------
2002 2001
-------------------------------------------------------
Prior years' losses 6.21 --
Provision for treasury stock (Note 9) 288.09 --
Other extraordinary expenses 106.42 126.97
-------------------------------------------------------
Total 400.72 126.97
-------------------------------------------------------
The "Other Extraordinary Expenses" account includes most notably the
provisions of (euro)34.62 million and (euro)74.45 million recorded by
the Company in 2002 and 2001, respectively, to cover the underlying
book value of certain investees, which was negative as of December 31.
These provisions are recorded under the "Provisions for Contingencies
and Expenses" caption in the accompanying balance sheet.
Additionally, it includes (euro)56.15 million relating to the
guarantees provided by Telefonica, S.A. arising from third-generation
wireless telephony (UMTS) licenses (Note 7.1).
49
[LOGO] Telefonica
--------------------------------------------------------------------------------
16.8 Transactions with Group companies
Telefonica's main transactions in 2002 and 2001 with Group companies
were as follows:
----------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------
Dividends received 881.96 1,114.82
Accrued interest 1,285.82 1,254.88
Financial expenses (Note 16.4) (900.23) (836.53)
Acquisitions of goods and services from the Telefonica Group (45.24) (33.25)
Telefonica de Argentina management fee transferred to
Telefonica de Espana (1.49) (6.81)
----------------------------------------------------------------------------------
The dividends received in 2002 include most notably the dividend of
(euro)855.54 million paid by Telefonica de Espana, S.A.U. and that of
(euro)22.06 million paid by Telefonica Publicidad e Informacion, S.A.
Those received in 2001 included most notably that of (euro)820.58
million paid by Telefonica de Espana, S.A., that of (euro)25.59
million paid by Telefonica Publicidad e Informacion, S.A. and that of
(euro)265.92 million paid by Telesp Participacoes, S.A.
The accrued interest in 2002 includes most notably that relating to
Telefonica de Espana, S.A.U. ((euro)516.50 million), Telefonica
Moviles, S.A. ((euro)302.29 million), Telefonica Internacional
((euro)222.99 million), Telefonica de Contenidos, S.A. ((euro)91.83
million) and Emergia, S.A. ((euro)59.73 million). The accrued interest
in 2001 included most notably that relating to Telefonica de Espana,
S.A.U. ((euro)557.22 million), Telefonica Moviles, S.A. ((euro)304.68
million), Telefonica Internacional ((euro)142.76 million), Telefonica
de Contenidos, S.A. ((euro)72.56 million) and Emergia S.A.
((euro)75.15 million).
(17) DIRECTORS' COMPENSATION AND OTHER BENEFITS
The compensation of the directors of Telefonica, S.A. consists of a fixed
monthly payment and of attendance fees for attending the Board of Directors
advisory committee meetings. Also, the executive directors receive
compensation for the executive duties discharged by them.
In 2002 the members of the Board of Directors of Telefonica, S.A. earned
(euro)11,907,088.40 ((euro)3,312,042.31 fixed monthly payment, including
the payments received for their membership on other company Boards within
the Telefonica Group; (euro)76,416.29 of attendance fees for attending the
Board of Directors advisory committee meetings; (euro)8,405,975.34 of
salaries and variable compensation of the executive directors;
(euro)69,537.84 of compensation in kind paid to the executive directors,
which include life insurance premiums; and (euro)43,116.62 of contributions
paid by the Company, as promoter and for executive directors, to pension
plans).
50
[LOGO] Telefonica
--------------------------------------------------------------------------------
The breakdown of the compensation and benefits received by the directors in
2002 is as follows:
1. Board of Directors: annual amount of the fixed payment received by
each director (in euros):
----------------------------------
Position 2002
----------------------------------
Chairman 90,151.82
----------------------------------
Deputy Chairmen 150,253.03
----------------------------------
Directors (1):
Executive directors 90,151.82
Nominee directors 90,151.82
Independent directors 90,151.82
----------------------------------
(1) Two independent directors, one of whom left the Board in December
2002, receive an additional annual payment of (euro)60,101.21
each, because their experience and work in relation to Latin
America is of special interest to the Company.
2. Standing Committee: annual amount of the fixed payment received by
each director (in euros):
---------------------------
Position 2002
---------------------------
Chairman 60,101.21
---------------------------
Deputy Chairman 60,101.21
---------------------------
Directors 60,101.21
---------------------------
The directors do not receive any attendance fees for attending meetings of
the Board of Directors or of the Standing Committee.
3. Other committees of the Board of Directors: total annual amounts for
attending meetings of the advisory committees of the Board of
Directors, received by all the directors.
---------------------------------------------------------------------------------
Committee 2002
---------------------------------------------------------------------------------
Audit and Control Attendance fee per meeting: (euro)858.61
4 directors Number of meetings: 8
Total received: (euro)24,041.08
---------------------------------------------------------------------------------
Appointments and Compensation and Best Attendance fee per meeting: (euro)858.61
Practice Corporate Governance
4 directors Number of meetings: 8
Total received: (euro)26,616.91
---------------------------------------------------------------------------------
Human Resources and Corporate Attendance fee per meeting: (euro)858.61
Reputation Number of meetings: 3
4 directors Total received: (euro)10,303.32
---------------------------------------------------------------------------------
Regulation Attendance fee per meeting: (euro)858.61
4 Directors Number of meetings: 4
Total received: (euro)11,161.93
---------------------------------------------------------------------------------
Service Quality and Commercial Service Attendance fee per meeting: (euro)858.61
4 Directors Number of meetings: 2
Total received: (euro)4,293.05
---------------------------------------------------------------------------------
4. Executive directors: total amounts (in euros) received by the
executive directors taken as a whole for the items indicated below:
51
[LOGO] Telefonica
--------------------------------------------------------------------------------
---------------------------------------------
2002
---------------------------------------------
Salaries 4,096,718.56
---------------------------------------------
Variable compensation 4,309,256.78
---------------------------------------------
Compensation in kind 69,537.84
---------------------------------------------
Contributions to pension plans 43,116.62
---------------------------------------------
The executive directors Cesar Alierta Izuel, Fernando Abril-Martorell
Hernandez, Antonio J. Alonso Ureba and Antonio Viana-Baptista, in their
capacity as directors of the Telefonica Group, are beneficiaries of the
compensation plan linked to the share market price of the shares of
Telefonica, S.A. targeted at the Telefonica Group's executives (the "TOP
Plan") discussed in Note 16.3; the cost for Telefonica of the
aforementioned compensation plan, with respect to the executive directors
participating in the plan, amounted to (euro)1.2 million in 2002 and
(euro)1.26 million in 2001.
Additional notes:
a) The nonexecutive directors do not receive any compensation in the form
of pensions or life insurance, and they do not participate in the
compensation plans linked to share market price.
b) In 2002 the Company did not grant any advances, loans or credits to
the directors.
(18) OTHER INFORMATION
Financial guarantees
----------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------
Guarantees provided for financial transactions 14,292.94 13,722.65
----------------------------------------------------------------------
The "Guarantees Provided for Financial Transactions" account relates mainly
to guarantees provided by Telefonica to third parties to secure the
transactions of its subsidiaries and investees, mainly Telefonica Europe,
B.V.
No significant losses are expected to arise for the Company in connection
with these commitments.
The amount indicated for guarantees provided by Telefonica S.A. includes
most notably the guarantee provided to certain credit institutions to cover
the obligations of Ipse 2000, S.p.A. arising from the deferral of payment
for the third-generation wireless telephony license in Italy. These
guarantees are in turn counterguaranteed by the Group's subsidiaries that
own the investment in Ipse 2000, S.p.A.
52
[LOGO] Telefonica
--------------------------------------------------------------------------------
Litigation
Telefonica. S.A. and its Group companies are party to numerous lawsuits
which are currently in progress in the law courts and the arbitration
courts of the various countries in which the Telefonica Group is present.
These lawsuits cover substantially all areas of law.
However, Telefonica, S.A. considers it reasonably certain that any adverse
outcome of these lawsuits will not materially affect the Group's economic
and financial position or solvency. These lawsuits include most notably the
following:
1. A court proceeding contesting the resolutions adopted by the
Special Stockholders' Meeting of Telefonica, S.A. on February 4,
2000.
The stockholder Javier Sotos Garcia, who owns 300 shares of the
Company, has filed a complaint contesting the resolutions adopted
by the Special Stockholders' Meeting on February 4, 2000, based
on the purported contravention of the rules regulating the
holding of the Meeting and on the purported contravention of the
rules for disapplication of preemptive rights of subscription in
capital increases.
The Company is convinced that the outcome of the aforementioned
court proceeding will be wholly satisfactory for the Company and,
since there has been no court decision in this connection, the
complaint filed does not in any way signify holding in abeyance
the implementation of the corporate resolutions approved by the
Stockholders' Meeting and contested in that court proceeding.
2. A court proceeding contesting certain resolutions adopted by the
Annual Stockholders' Meeting of Telefonica, S.A. on June 15,
2001.
The aforementioned stockholder, Javier Sotos Garcia, has also
filed a complaint contesting some of the resolutions adopted by
the Company's Annual Stockholders' Meeting on June 15, 2001.
By filing this new complaint contesting the corporate
resolutions, the objective of Javier Sotos Garcia is to have the
resolutions adopted by the Stockholders' Meeting in relation to
the following items on the Agenda set aside by the Court: item I
(approval of the 2000 financial statements and of the conduct of
business by the Board of Directors in that year); item X (capital
increase for the acquisition of the shares of various Mexican
cellphone companies owned by Motorola); and item XII (capital
increase to cover the Company's stock option plan for Endemol
employees).
The aforementioned proceeding is based on the purported
contravention of the contesting stockholder's right to
information and on the purported contravention of the legal rules
for disapplication of preemptive rights of subscription in
capital increases.
The Company is convinced that the outcome of the aforementioned
court proceeding will also be wholly satisfactory for the
Company.
53
[LOGO] Telefonica
--------------------------------------------------------------------------------
Also, it should be noted that the complaint filed against the
aforementioned resolutions adopted by the Stockholders' Meeting
on June 15, 2001, does not in any way signify holding in abeyance
the possible implementation of those resolutions.
3. Complaint filed by IDT against Telefonica, S.A., Terra Networks,
S.A. and Lycos, Inc.
International Discount Telecommunications Corporation (IDT) filed
a complaint with the State Courts of New Jersey (U.S.) against
Telefonica, S.A., Terra Networks, S.A., Terra Networks U.S.A.,
Inc., and Lycos, Inc., seeking the payment of damages amounting
to approximately US$ 6,600 million.
This complaint is based on the purported breach of the joint
venture agreement entered into between IDT and Terra in October
1999, on purported nonperformance of the obligations deriving
from the agreement to terminate the aforementioned agreement, on
purported fraud and contravention of the legislation regulating
the issuance of securities (Federal Securities Exchange Act), and
on purported fraudulent concealment of information.
After the complaint had been filed, IDT modified its complaint by
eliminating all express references to a claim for damages of a
specific amount, since this contravenes the U.S. legislation
applicable to the claim. Accordingly, the lawsuit is for an
unspecified amount, without prejudice to the possibility of the
damages being specified and quantified in the course of the
proceeding.
In May 2002 the State Courts of New Jersey decided to dismiss
counts X and XI of the complaint, relating to the purported
breach of the joint venture agreement.
Recently IDT added a new claim to the "second modified complaint"
alleging the liability of Telefonica, as a control person, for
the alleged fraud against Terra in its negotiations with IDT,
which culminated in the termination agreement. Telefonica has
filed objections to this claim, which are being considered by the
Court.
Legal counsel for the defendants consider that the defendants
have a sound defense with respect to the complaint filed against
them and, accordingly, Telefonica is convinced that the outcome
of the aforementioned lawsuit resulting from the complaint filed
by IDT will not be unsatisfactory for Telefonica or for Terra and
that, if it were, the economic and financial impact on the
Telefonica Group should not be material.
4. Notice of arbitration filed by IDT against Telefonica
Internacional, S.A.
International Discount Telecommunications Corporation (IDT) filed
a notice of arbitration against Telefonica Internacional, S.A.
(Sole-Stockholder Company) at the American Arbitration
Association (AAA).
The notice of arbitration is based on the purported breach of a
memorandum of understanding entered into by IDT and Telefonica
International on August 11, 1999. IDT is seeking in its statement
of claim damages by reason of the breach of not less than US$
2,000 million, as well as the performance of the aforementioned
memorandum of understanding.
54
[LOGO] Telefonica
--------------------------------------------------------------------------------
In turn, Telefonica International, S.A. (Sole-Stockholder
Company) filed a counterclaim against IDT for damages amounting
to US$ 3,500 million.
Telefonica, S.A. is convinced that the outcome of the arbitral
proceeding resulting from the notice of arbitration filed will
not be unsatisfactory for Telefonica Internacional and that, if
it were, the economic and financial impact on the Telefonica
Group should not be material.
5. Preliminary proceedings conducted by Central Examining Court no.
1 of the Audiencia Nacional (National Appellate Court).
Central Examining Court no. 1 of the National Appellate Court is
conducting preliminary proceedings in relation to charges pressed
in October 2000 by Juan Francisco Franco Otegui against certain
ex-directors of Telefonica, S.A., and against the partner of the
Company's audit firm, in relation to certain conduct and
corporate resolutions alleged by Mr. Otegui to be acts
constituting corporate offenses. To these preliminary proceedings
was joined an investigation by the Special Public Prosecutor's
Office for Combatting Corruption-Related Financial Crime in
relation to the acquisition by Telefonica of the Dutch company
Endemol.
6. Sistemas e Instalaciones de Telecomunicacion, S.A.U. (Sintel).
As a result of the voluntary bankruptcy proceeding being
conducted at Madrid Court of First Instance no. 42, case number
417/2001, which is the continuation of the petition for Chapter
11-type insolvency filed by the director of Sintel on June 8,
2000, two criminal proceedings have commenced which affect
Telefonica, S.A.
Under the bankruptcy order, inter alia, the effects of the
bankruptcy were backdated to June 8, 1998. As a result of the
backdated effects of the bankruptcy pursuant to the order, the
related bodies sent Telefonica a payment demand for (euro)22.87
million, which represents the total amount paid for Sintel, since
they consider null and void as a matter of law the involvement of
Sintel in the contract dated December 30, 1998, in which a debt
of (euro)21.35 million was recognized due to the sale of the
shares of Sintel to Mastec Internacional, S.A. and the amounts
paid by Sintel, which in the aforementioned contract appeared as
a joint and several guarantor of the fulfillment of these payment
obligations.
Telefonica filed an ancillary complaint in which it proposes that
the effects of the bankruptcy be backdated to a date closer to
that of the bankruptcy order, so that the contract dated December
30, 1998, is not affected. The representatives of the employees
filed a counterclaim proposing that the effects of the bankruptcy
be backdated to the date of the sale of the Sintel shares (April
1996).
The two criminal proceedings which commenced recently are as
follows:
Expedited proceeding 273/2001, in relation to which, on September
24, 2002, Telefonica, S.A. and Telefonica de Espana, S.A.
appeared before Central Examining Court no. 1 filing a civil suit
as parties suffering loss, against the directors of Sintel and of
Mastec Internacional, S.A. Leave was given for them to appear as
parties to the proceeding.
55
[LOGO] Telefonica
--------------------------------------------------------------------------------
Preliminary proceeding 362/2002, which was commenced on October
23, 2002, by the Central Examining Court for a possible offense
of extortion. This proceeding arises from the preceding one,
concerns the possible commission of an offense of extortion in
the assumption by Sintel of joint and several liability with
Mastec for the obligation to pay the related sale price.
Commitments
Agreements with Portugal Telecom (Brazil)
On January 23, 2001, Telefonica, S.A. and its subsidiary Telefonica
Moviles, S.A., on the one hand, and Portugal Telecom SGPS, S.A. and
its subsidiary PT Moveis, SGPS, S.A., on the other, entered into an
agreement in order to group together all the wireless telephony
businesses in Brazil and, accordingly, they undertook to contribute
all their wireless telephony assets in Brazil to a joint venture,
which, subject to the obtainment of the necessary regulatory
authorizations, would be a subsidiary of the two groups, and in which
they would each have a 50% ownership interest. Also, under the terms
of this agreement, the two parties expressed their interest in
increasing their reciprocal ownership interests, subject to compliance
with the applicable regulatory and bylaw conditions.
On October 17, 2002, Telefonica Moviles, S.A., on the one hand, and
Portugal Telecom SGPS, S.A. and its subsidiary PT Moveis SGPS, S.A.,
on the other, entered into the definitive agreements (Stockholders'
Agreement and Subscription Agreement) that implement the
aforementioned agreement signed in January 2001. On December 27, 2002
(after having obtained the necessary authorizations), the two groups'
holdings in their respective Brazilian wireless telephony operators
were contributed to a Dutch joint venture, Brasilcel N.V., in
accordance with the provisions of the aforementioned Subscription
Agreement.
In accordance with the aforementioned definitive agreements,
Telefonica Moviles, S.A. and the Portugal Telecom Group will have the
same voting rights at Brasilcel, N.V. This equality in voting rights
will cease to exist if, as a result of capital increases at Brasilcel,
N.V., the percentage of ownership of either of the parties falls below
40% during an uninterrupted period of six months. In this event, if
the group with the reduced interest were the Portugal Telecom Group,
it would be entitled to sell to Telefonica Moviles, S.A., which would
be obliged to buy (directly or through another company), all of
Portugal Telecom's ownership interest in Brasilcel N.V. This right
expires on December 31, 2007. The price for the acquisition of the
Portugal Telecom Group's holding in Brasilcel, N.V. would be
calculated on the basis of an independent appraisal (in the terms
provided for in the definitive agreements) performed by investment
banks, selected using the procedure established in these agreements.
Subject to certain conditions, the payment could be made, at
Telefonica Moviles' choice, in (i) cash, (ii) Telefonica Moviles S.A.
shares and/or Telefonica, S.A. shares, or (iii) a combination of the
two. This sale option would be exercisable in the 12 months subsequent
to the end of the aforementioned six-month period, provided that the
Portugal Telecom Group had not increased its ownership interest to 50%
of the total capital stock of Brasilcel N.V.
Also, in accordance with the definitive agreements, the Portugal
Telecom Group will be entitled to sell to Telefonica Moviles, S.A.,
which will be obliged to buy, its holding in Brasilcel, N.V. should
there be a change in control at Telefonica, S.A., Telefonica Moviles,
S.A. or any other subsidiary of the latter that held a direct or
indirect ownership interest in
56
[LOGO] Telefonica
--------------------------------------------------------------------------------
Brasilcel N.V. Similarly, Telefonica Moviles, S.A. will be entitled to
sell to the Portugal Telecom Group, which will be obliged to buy, its
holding in Brasicel, N.V. if there is a change of control at Portugal
Telecom SGPS, S.A., PT Moveis SGPS, S.A or any other subsidiary of
either company that held a direct or indirect ownership interest in
Brasilcel N.V. The price will be determined on the basis of an
independent appraisal (in the terms provided for in the definitive
agreements) performed by investment banks, selected using the
procedure established in these agreements. The related payment could
be made, at the choice of the group exercising the sale option, in
cash or in shares of the wireless telephony operators contributed by
the related party, making up the difference, if any, in cash.
Agreements for the acquisition of Pegaso (Mexico)
In accordance with the agreements entered into by Telefonica Moviles,
S.A. on April 26, 2002, with Sprint, Leap Wireless, Qualcomm and other
financial investors, the acquisition by Telefonica Moviles, S.A. of
65% of the capital stock of the Mexican company Pegaso
Telecomunicaciones, S.A. de C.V. (Pegaso) was definitively concluded
on September 10, 2002.
Also, in compliance with the agreements adopted on that date
Telefonica Moviles, S.A. and the Burillo Group, which owns 35% of the
remaining capital stock of Pegaso, all the shares of Pegaso were
contributed to a company formed for this purpose called Telefonica
Moviles Mexico, S.A. de C.V. Telefonica Moviles, S.A. also contributed
to this new company the companies which it owned in the northern
Mexico. After these contributions, Telefonica Moviles, S.A. had a 92%
holding in the new company.
Under the agreements entered into, the Burillo Group has certain
mechanisms with which it can cease to be a stockholder, instrumented
through an option to sell its holding in Telefonica Moviles Mexico,
S.A. de C.V. The Burillo Group can exercise its sale option in 2007 or
2008, or, if its holding in the company falls below 50% of its
original ownership interest, on the date on which such decrease
occurs. If the Burillo Group did not exercise its sale option,
Telefonica Moviles could exercise its purchase option on the shares of
the company owned by the Burillo Group. In this case, the purchase
price for the shares will be determined on the basis of a valuation of
the company on the date on which the rights were exercised. The
agreements entered into envisage that a portion of the purchase price
will be paid in cash, the amount of which will depend upon the Burillo
Group's original investment in the company, to which interest will be
added and from which any cash distribution received by the Burillo
Group will be deducted. The remaining portion of the purchase price,
if any, will be paid, at Telefonica Moviles' choice, in cash, in
shares of Telefonica Moviles or a combination of the two.
Also, under the shareholders agreement entered into the Burillo Group
has certain rights to veto agreements on the conversion of shares from
one class to another, declarations of bankruptcy or Chapter 11-type
insolvency proceedings, dissolution or liquidation, bylaw amendments
which adversely affect the rights of the Burillo Group and mergers or
corporate reorganizations which do not afford the Burillo Group the
opportunity to maintain a given percentage of ownership.
57
[LOGO] Telefonica
--------------------------------------------------------------------------------
Telefonica International (Puerto Rico)
1. On December 22, 1992, Telefonica International Holding B.V., which
owns 14.9% of the shares of the Puerto Rican company
Telecomunicaciones Ultramarinas de Puerto Rico (TUPR), entered into a
stockholders agreement with the Puerto Rico Telephone Authority (PRTA)
to acquire, through a reciprocal purchase-sale option, the shares
representing the remaining 85.1% of the capital stock of TUPR.
On May 21, 1999, Telefonica International Holding B.V. announced its
intention to exercise this purchase option; however, the purchase
transaction was never carried out.
On April 4, 2002, PRTA exercised its sale option, and notified
Telefonica Internacional Holding B.V. of its decision to sell 85.1% of
TUPR for a price, subject to a due diligence review, of US$ 24.9
million.
The due diligence review has not yet been completed, mainly because
the information which should be supplied by ATPR has not been
received.
2. On February 4, 2000, Telefonica Larga Distancia de Puerto Rico (TLD)
and ClearCom, L.P. entered into a joint venture agreement to carry on
the cellular telephony business in Puerto Rico through a new company
(Newcomm). Under this agreement, which was subsequently modified, TLD
was granted an option to acquire a 50.1% holding in Newcomm, by
converting promissory notes into shares representing 49.9% of
Newcomm's capital stock and entering into a share purchase agreement
for shares representing the remaining 0.2%.
In line with the process of reorganization by line of business carried
out by the Telefonica Group, TLD and Telefonica Moviles, S.A. have
agreed that the rights which the aforementioned agreement confers on
the Telefonica Group will be transferred to Telefonica Moviles, S.A.,
and the related documents have already been prepared for presentation
to the Federal Communications Commission (FCC), so that FCC can
approve the transfer of licenses and the acquisition of a controlling
interest in the company by Telefonica Moviles, S.A.
Telefonica CTC Chile-Sonda
On September 26, 2002, Telefonica CTC Chile, S.A. granted a
shareholder of Sonda S.A., Inversiones Santa Isabel Limitada, a
purchase option to be exercised between July 26 and August 5, 2005, on
35% of the capital of the aforementioned company, currently owned by
Telefonica CTC Chile; the exercise of this option can be brought
forward to between July 26 and July 31, 2003 and 2004. The price will
be determined in accordance with the process stipulated in the related
contract, and will be paid in cash.
Atento
Within the framework of the strategic agreement entered into on
February 11, 2000, by BBVA and Telefonica, on December 4, 2001, the
two entities signed an agreement establishing the procedure and
conditions for the integration in Atento, a Telefonica Group
subsidiary, of the BBVA Group's Spanish and international call center
business.
58
[LOGO] Telefonica
--------------------------------------------------------------------------------
The transaction agreed on consists of: (i) the initial contribution by
Telefonica S.A. of all its call center business (now carried on by
Atento Holding Inc.) to a newly-formed subsidiary (Atento N.V.); and
(ii) the subsequent inclusion of the BBVA Group in the stockholder
structure of Atento N.V. through various monetary and nonmonetary
contributions of all the shares of the Spanish companies Procesos
Operativos, S.A. and Leader Line, S.A. These contributions will entail
the transfer to Atento of all the BBVA Group's Spanish and
international call center business and the subscription by BBVA of up
to 9% of the capital stock of Atento N.V.
The transaction also envisages the signing of various specific
agreements for the provision to the BBVA Group by Atento of call
center services in Spain and Portugal and in ten Latin American
countries, for most of which contracts have already been signed.
BBVA's ownership interest in Atento N.V. may be adjusted on the basis
of whether these agreements are actually entered into and the volume
of business actually contributed by the BBVA Group to Atento.
Atento N.V. was incorporated on May 13, 2002. All Telefonica, S.A.'s
call center business was contributed to it on that date. The
contributions by the BBVA Group under the terms of the agreement
discussed in this section had not yet been made as of that date,
although this will foreseeably take place in the first quarter of
2003.
Commitments relating to Via Digital
1. Telefonica has provided to third parties, including other stockholders
of DTS Distribuidora de Television Digital, S.A. (Via Digital),
guarantees of the liquidity of the investments made which grant the
beneficiaries a sale option and Telefonica, S.A. a purchase option,
which can be exercised if certain conditions are met, including that
relating to the statutory limitations of percentage of ownership of
the capital stock. The total price of this purchase option would
amount to approximately (euro)143 million.
2. The agreements entered into by Sogecable, S.A., Telefonica, S.A. and
Telefonica de Contenidos, S.A. (Sole-Stockholder Company) for the
merger of Via Digital into Sogecable are described in Note 19.
3. The agreement referred to in the previous point establishes the
commitment of Telefonica de Contenidos, S.A. (Sole-Stockholder
Company) to Sogecable, S.A. to offer it or another Telefonica Group
company the possibility of acquiring the rights which DTS
Distribuidora de Television Digital, S.A. (Via Digital) currently
holds on the Soccer World Cup in Germany in 2006. In this regard,
management of Via Digital plans to start offering the aforementioned
rights to other operators in the market with a view to obtaining an
optimum price for them. In accordance with the accounting principle of
prudence in valuation, a provision of (euro)19.6 million was recorded
in this connection with a charge to the accompanying statement of
operations.
Commitment of Telefonica de Contenidos with respect to Euroleague
Marketing, S.L.
Under a framework contract dated August 24, 2000 (amended on November
17, 2001), regulating the exploitation of economic rights (including
mainly audiovisual, sponsorship and Internet rights, licenses, etc.)
on the European basketball competition, the "Euroleague", Telefonica
de Contenidos, S.A. (Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., has a commitment to pay Euroleague Marketing, S.L.,
a company in which Telefonica de
59
[LOGO] Telefonica
--------------------------------------------------------------------------------
Contenidos, S.A. (Sole-Stockholder Company) owns a 70% holding, the
difference between the revenues obtained by Euroleague Marketing, S.L.
from the exploitation of the aforementioned rights and a maximum of
US$ 25 million for the 2002/2003 season (a maximum of US$ 20 million
for the remaining two seasons).
Commitments of Telefonica de Contenidos in relation to Audiovisual
Sport
Telefonica de Contenidos, S.A. (Sole-Stockholder Company), a
subsidiary of Telefonica, S.A., has provided a guarantee, to secure
payment of(euro)74.5 million relating to 40% of the outstanding
balance of the syndicated loan, originally amounting to (euro)300.51
million, granted by several financial institutions to Audiovisual
Sport, S.L., a 40%-owned investee of Gestora de Medios Audiovisuales
Futbol, S.L., which is a subsidiary of Telefonica de Contenidos, S.A.
Also, it should be noted that the agreements relating to the merger of
Via Digital and Sogecable provide for a commitment to acquire the 40%
holding that Telefonica de Contenidos, S.A. (Sole-Stockholder Company)
owns in Audiovisual Sport, S.L.
Commitment relating to Endemol shares
As indicated in Note 9-a, the Company has a stock option plan with the
employees of Endemol involving shares of Telefonica, S.A. (the EN-SOP
Program). Under this plan in 2001 a total of 1,281,040 options were
granted at an exercise price of (euro)19.2898 per share. In 2002
1,933,504 options were granted at an exercise price of (euro)12.61 per
share.
Other commitments in the form of performance bonds for concessions or
licenses
1. Telefonica de Espana, S.A. (Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., has provided counter-guarantees for 43 guarantees
provided by Banco Santander Central Hispano and by the insurance
company Zurich totaling approximately (euro)100.9 million, relating to
definitive guarantees provided by Telefonica Cable, S.A.
(Sole-Stockholder Company), a subsidiary of Telefonica de Espana, S.A.
(Sole-Stockholder Company), in relation to 43 concession contracts
with the Spanish State for the provision of cable telecommunications
services in 43 franchise areas.
These guarantees ensure performance by the concession-holder company
of the obligations assumed under the concession contracts, in
particular in relation to coverage of the services and the timetable
for their implementation. The aforementioned guarantees were
maintained after the concession deeds were converted into 19
individual B1-type licenses.
Through a Telecommunications Market Commission Resolution dated
January 7, 2003, it was decided to propose to the Ministry of Science
and Technology that 90% of the amount of the final guarantees provided
by Telefonica Cable, S.A. (Sole-Stockholder Company) for the
formalization of the aforementioned 43 contracts be reimbursed. The
Ministry of Science and Technology has given notification of the
commencement of the related cancellation proceeding, which must be
completed within three months.
2. Telefonica Moviles, S.A., a subsidiary of Telefonica, S.A., has
provided certain financial guarantees to the Spanish State amounting
to (euro)1,100 million, in relation to the grant to Telefonica Moviles
Espana, S.A. (Sole-Stockholder Company) of a UMTS services license in
60
[LOGO] Telefonica
--------------------------------------------------------------------------------
Spain. These guarantees ensure fulfillment of the commitments assumed
by the company awarded the license in relation to network deployment,
job creation, investments, etc.
As of January 20, 2003, the guarantees amounted to (euro)721 million,
since (euro)379 million were released as a result of fulfillment of
certain of the objectives set. The release of a further (euro)90
million has been requested, for which the Ministry of Science and
Technology has yet to verify that the related commitments have been
met.
Also, Telefonica Moviles Espana began conversations with the
aforementioned Ministry, which have given rise to the commencement of
an administrative proceeding, with a view to changing the current
systems of guarantees, replacing all the guarantees in force by one or
several guarantees, the overall amount of which, per the proposed
resolution prepared by the Ministry, would not exceed (euro)203
million. These new guarantees would also secure all the commitments
assumed in relation to the UMTS license and, accordingly, the
guarantees would have to be provided again should they be totally or
partially executed due to failure to fulfill any of the commitments
that they are securing. A Ministerial Order to regulate this
administrative proceeding is pending approval.
3. In 1999 Telefonica de Argentina, S.A. provided guarantees to the
Government of the Republic of Argentina for the fulfillment of
obligations assumed by Telefonica Comunicaciones Personales, S.A.
arising from the obtainment of its PCS licenses, amounting to US$ 22.5
million individually and to US$ 45 million on a joint and several
basis with the other operator, Telecom. These guarantees are still in
force, pending verification by the Argentine National Communications
Commission of the fulfillment of the obligations secured by these
guarantees.
The contingencies arising from the guaranties, lawsuits and commitments
described above were evaluated when the financial statements as of December
31, 2002, were prepared, and the provisions recorded with respect to the
commitments taken as a whole are not representative. Also, these
commitments are not expected to give rise to additional material
contingencies.
Fees paid to auditors
The fees paid in 2002 to Deloitte&Touche Espana, S.L., the auditors of
Telefonica, S.A., amounted to(euro)1.92 million.
The detail of the foregoing amount is as follows:
-----------------
Millions of Euros
--------------------------------------------------------------------
Audit of financial statements 0.41
Other audit services 0.84
Work additional to or other than audit services 0.67
--------------------------------------------------------------------
TOTAL 1.92
--------------------------------------------------------------------
Environmental matters
Telefonica, S.A., as head of the Telefonica Group, engages in activities
relating to the ownership of shares and the provision of financing and
corporate counseling to various Group companies. In
61
[LOGO] Telefonica
--------------------------------------------------------------------------------
view of the business activities in which the Company engages, it does not
have any liability, expenses, assets, or provisions and contingencies of an
environmental nature that might be material with respect to its net worth,
financial position and results of operations. Accordingly, specific
disclosures relating to environmental issues are not included in these
notes to 2002 financial statements.
(19) SUBSEQUENT EVENTS
Capital increase in progress with a charge to reserves
February 2003 saw the first of the Company's two capital increases with a
charge to unrestricted reserves approved by the Stockholders' Meeting on
April 12, 2002, which the Board of Directors resolved to carry out at its
Meeting on December 18, 2002.
The capital increase was carried out through the issuance of 97,213,225 new
common shares of the Company of (euro)1 par value each, thereby increasing
the capital stock by (euro)97,213,225 to (euro)4,957,874.511. These new
shares were assigned free of charge to the stockholders in the proportion
of one new share for every 50 shares already owned.
The deed of capital increase was executed on February 12, 2003, and
registered at the Mercantile Registry on February 18, 2002.
Also, on February 12, 2003, the Standing Committee of the Board of
Directors of Telefonica, S.A., making use of the powers granted to it by
the Board of Directors on January 29, 2003, resolved to carry out the
second capital increase with a charge to unrestricted reserves approved by
the Stockholders' Meeting on April 12, 2002, through the issuance of
99,157,490 new common shares of the Company, of the same series and
carrying the same rights as the outstanding shares, of (euro)1 par value
each, which will be assigned free of charge to the stockholders in the
proportion of one new share for every 50 shares already owned.
The period for the assignment free of charge of the shares relating to the
second capital increase is scheduled to commence in the second half of
March 2003, and the new shares will foreseeably be admitted to official
listing in mid-April 2003.
Merger of Via Digital with Sogecable
On May 8, 2002, Sogecable S.A. and Telefonica S.A. (the latter through its
subsidiary Telefonica de Contenidos S.A. - Sole-Stockholder Company)
entered into an agreement relating to the merger of DTS Distribuidora de
Television Digital, S.A. (Via Digital) with Sogecable.
The transaction was ratified by the Board of Directors of Telefonica de
Contenidos S.A. (SoleStockholder Company) and Sogecable S.A. in May 2002,
subject to the authorization of the relevant public authorities, which was
granted on November 29, 2002, through the adoption by the Council of
Ministers of certain resolutions authorizing the merger provided that
certain conditions were met.
On January 29, 2003, Sogecable S.A., Telefonica, S.A. and Telefonica de
Contenidos S.A. (SoleStockholder Company) entered into an agreement whereby
they deemed the contract terms
62
[LOGO] Telefonica
--------------------------------------------------------------------------------
established for the merger of Sogecable and Via Digital to have been fully
met. Also, Telefonica de Contenidos S.A. (Sole-Stockholder Company) and
Sogecable S.A. agreed on the related detailed action plans and deadlines
for the instrumentation of the conditions imposed by the Government in the
aforementioned Council of Ministers resolutions. Through these plans,
Telefonica de Contenidos S.A. (Sole-Stockholder Company) and Sogecable S.A.
accepted the conditions established by the Government; however, they filed
appeals for judicial review against certain of the conditions (obligation
to distribute channels, joint marketing of commercial packages, price caps
and prohibition of strategic alliances).
The terms under which the transaction will be carried out in accordance
with the agreements dated May 8, 2002 and January 29, 2003, are as follows:
. The transaction will be carried out through a capital increase at
Sogecable, S.A. targeted at the stockholders of Via Digital, who will
be able to contribute their Via Digital shares.
. If all the shareholders of Via Digital subscribe to the
capital increase, the percentages of ownership of Sogecable,
S.A. after the capital increase will be 77% in the case of
the present stockholders of Sogecable and 23% in the case of
the present stockholders of Via Digital.
. After the exchange has been carried out, the Telefonica
Group will have an ownership interest in the capital stock
of Sogecable, S.A. equal to that of its two stockholders
Prisa and Groupe Canal + after the dilution arising from the
share exchange, which, if all the capital stock of Via
Digital is exchanged, would represent 16.38% of the capital
stock of Sogecable, S.A. With this ownership interest,
Telefonica would not exercise such voting rights carried by
the shares received in the exchange as might exceed the
aforementioned percentage.
. Telefonica has stated that its present strategic plans
envisage that the aforementioned ownership interest will not
be disposed of for at least three years from the date of the
exchange.
. The representation of Telefonica, Prisa and Groupe Canal +
on the Board of Directors of Sogecable, S.A. will be
consistent with their respective ownership interests, and
each of the aforementioned three entities will appoint five
directors. The Chairman of the Board of Directors will be
chosen from among the five directors appointed by
Telefonica.
. Prisa and Groupe Canal + will maintain their present
shareholders' agreement, to which Telefonica will not be a
party.
. Each of the three major stockholders will grant a ten-year
participating loan of (euro)50 million earning interest at
11%.
. Sogecable, S.A. will offer its shareholders the possibility
of participating in a nineyear subordinated debt security
issue of (euro)175 million, the subscription of which will
be underwritten by Telefonica, bearing interest at 10.28%.
The remuneration for the subscribers will include the
issuance of warrants equal, overall, to 1% of the capital
stock of Sogecable, S.A.
63
[LOGO] Telefonica
--------------------------------------------------------------------------------
. The debt of Via Digital and of Sogecable, S.A. as of April
30, 2003, must not exceed (euro)425 million and (euro)705
million, respectively.
Strategic alliance between Telefonica, Terra and Bertelsmann
On February 12, 2003, Telefonica and Terra Networks, S.A. (Terra-Lycos)
entered into a Framework Strategic Alliance Agreement to replace the
Strategic Agreement dated May 16, 2000, to which Bertelsmann AG was also a
party (whereby, in the framework of the acquisition of Lycos, Inc. by Terra
Networks, S.A., Telefonica, S.A. undertook to commission from Terra-Lycos,
the portion of the advertising services committed by Bertelsmann that the
latter did not commission from Terra Networks, S.A., up to a maximum amount
of US$ 675 million).
Additionally, on February 12, 2003, Telefonica S.A., Terra Networks, S.A.
and Bertelsmann AG entered into a preferential interest agreement which
will enable them to continue to explore opportunities for the mutual
provision of communications, development and content services in the
on-line market.
The term of the Framework Strategic Alliance Agreement entered into on
February 12, 2003, is six years, ending on December 31, 2008. The Agreement
is automatically renewable for one-year periods unless it is expressly
terminated by the parties.
The main features of this Framework Strategic Alliance Agreement are
summarized as follows:
1. Strengthening of the Terra Lycos Group as:
. The exclusive provider of essential portal elements, including
brand image, and aggregator of the broad and narrow band Internet
content and services targeted at the residential, SOHO and, when
so agreed, SME market segments, for the Telefonica Group
Companies' connectivity and ISP services.
. Preferential provider of audit, consulting, management and
maintenance services for the country portals of the Telefonica
Group companies.
. Exclusive provider of Telefonica Group employee on-line training
services.
. Preferential provider of on-line integral marketing services with
the Telefonica Group companies.
2. Guaranteed minimum volume of acquisitions of Terra Lycos Group on-line
advertising space by Telefonica Group companies.
3. Exclusive acquisition of connectivity and wholesale Internet access
services by Terra Lycos Group companies from Telefonica Group
companies under the legally permitted most-favored-customer
conditions.
4. Outsourcing by Terra Lycos Group companies to Telefonica Group
companies of all or part of the services and/or operation of the
Internet access elements for the provision of ISP services to its
residential, SOHO and, when so agreed, SME customers under the legally
permitted most-favored-customer conditions.
64
[LOGO] Telefonica
--------------------------------------------------------------------------------
5. Exclusive acquisition by Terra Lycos Group companies from Telefonica
Group companies of the advanced broad and narrow band network and
platform services required to construct the range of services to be
offered to residential, SOHO and, when so agreed, SME customers under
the legally permitted most-favored-customer conditions.
The Framework Strategic Alliance Agreement guarantees the generation for
the Terra Lycos Group of a minimum annual value throughout the term of the
Agreement of (euro)78.5 million, as reflected in a study carried out by a
third party. This amount is the difference between the revenues arising
from the services provided under the aforementioned Framework Strategic
Alliance Agreement and the costs and investments directly associated
therewith.
Acquisition of shares of Antena 3 de Television, S.A.
In 1997 and 2000 Telefonica provided guarantees to the entity that is now
Banco Santander Central Hispano, S.A. to ensure the liquidity and value of
the investments made by it in Antena 3 de Television, S.A. To execute these
agreements, in 1999 Telefonica Media, S.A. (Sole-Stockholder Company) (now
Telefonica de Contenidos, S.A. - Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., acquired shares representing 7.1395% of the capital stock
of Antena 3 de Television, S.A. Additional acquisitions have yet to be
formalized and the guarantee on certain of the shares has yet to be
executed.
On January 7, 2003, as a result of a change in the legal conditions
applicable to the ownership of shares of television concession-holder
companies, Telefonica, S.A. and its subsidiary Telefonica de Contenidos,
S.A. (Sole-Stockholder Company) exercised vis a vis Banco Santander Central
Hispano, S.A. purchase options on 17,365,125 and 2,167,500 shares of Antena
3 de Television, S.A., which, taken as a whole, represent 11.719% of the
capital stock of Antena 3 de Television, S.A. The shares were to be
acquired by the Telefonica, S.A. subsidiary Corporacion Admira Media, S.A.
(Sole-Stockholder Company).
After the related procedural formalities had been carried out, on February
5, 2003, the transfer of the aforementioned shares was formalized, and,
accordingly, as of that date, the guarantees provided to Banco Santander
Central Hispano, S.A. were fully executed and fulfilled. The resulting
ownership interest of the Telefonica Group was 59.24%.
Telefonica Europe, B.V. bond issue
On February 6, 2003, Telefonica Europe B.V. launched two long-term bond
issues underwritten by Telefonica S.A. The first issue, which matures on
February 14, 2013, has a face value of (euro)1,500 million and an annual
coupon of 5.125%. The second issue, with a face value of (euro)500 million,
matures on February 14, 2033, and has an annual coupon of 5.875%.
65
[LOGO] Telefonica
--------------------------------------------------------------------------------
(20) STATEMENTS OF CHANGES IN FINANCIAL POSITION
-------------------------------------------------------------------
APPLICATION OF FUNDS 2002 2001
-------------------------------------------------------------------
- Funds applied in operations -- --
- Start-up and debt arrangement expenses 187.04 86.08
- Fixed asset additions:
a) Intangible assets 18.57 29.54
b) Property, plant and equipment 3.67 6.43
c) Long-term investments 8,452.53 6,090.16
- Long-term deferred tax liabilities 11.55 274.96
- Deferred revenues 0.91 16.12
- Transfer to long -term of short term loans 3,438.55 --
-------------------------------------------------------------------
TOTAL FUNDS APPLIED 12,112.82 6,503.29
-------------------------------------------------------------------
FUNDS OBTAINED IN EXCESS OF FUNDS APPLIED -- --
(INCREASE IN WORKING CAPITAL)
-------------------------------------------------------------------
12,112.82 6,503.29
-------------------------------------------------------------------
-------------------------------------------------------------------
SOURCE OF FUNDS 2002 2001
-------------------------------------------------------------------
- Funds obtained from operations 182.42 1,168.35
- Capital increase -- 163.15
- Deferred tax assets -- --
- Long-term deferred tax liabilities -- --
- Long-term debt 5,136.29 3,490.15
- Fixed asset disposals:
a) Intangible assets 2.53 6.29
b) Property, plant and equipment 2.20 2.52
c) Long-term investments 1,642.54 30.51
- Transfer to short term of loans to Group
companies -- 1,594.77
-------------------------------------------------------------------
TOTAL FUNDS OBTAINED 6,965.98 6,455.74
-------------------------------------------------------------------
FUNDS APPLIED IN EXCESS OF FUNDS OBTAINED 5,146.84 47.55
(DECREASE IN WORKING CAPITAL)
-------------------------------------------------------------------
12,112.82 6,503.29
-------------------------------------------------------------------
66
[LOGO] Telefonica
--------------------------------------------------------------------------------
VARIATIONS IN WORKING CAPITAL
-------------------------------------------------
INCREASE IN WORKING CAPITAL 2002 2001
-------------------------------------------------
Short-term investments -- 851.78
Treasury stock 421.24 556.81
Cash -- 135.52
Accrual accounts 4.47 --
Accounts payable 3,204.76 --
-------------------------------------------------
TOTAL 3,630.47 1,544.11
-------------------------------------------------
VARIATION IN WORKING
CAPITAL 5,146.84 47.55
-------------------------------------------------
8,777.31 1,591.66
-------------------
-------------------------------------------------
DECREASE IN WORKING CAPITAL 2002 2001
-------------------------------------------------
Accounts receivable 503.09 166.10
Short-term investments 8,119.66 --
Cash 154.56 --
Accounts payable -- 1,416.35
Accrual accounts -- 9.21
-------------------------------------------------
TOTAL 8,777.31 1,591.66
-------------------
VARIATION IN WORKING
CAPITAL -- --
-------------------------------------------------
8,777.31 1,591.66
-------------------
The reconciliation of the balances of the statements of operations to the
funds obtained from operations is as follows:
-----------------------------------------------------------------
Millions of Euros
--------------------
2002 2001
-----------------------------------------------------------------
Loss (4,478.69) (354.18)
-----------------------------------------------------------------
Add:
Depreciation and amortization expense 57.09 48.56
Amortization of debt arrangement expenses 22.07 34.35
Investment valuation provisions 5,484.78 1,384.38
Period provisions 378.86 48.16
Amortization of executive loyalty-building 7.09 7.09
expenses
Less:
Gain on disposal of long-term investments 1.17 0.01
Exchange gains 1,287.61 --
-----------------------------------------------------------------
Funds obtained from operations 182.42 1,168.35
-----------------------------------------------------------------
67
[LOGO] Telefonica
--------------------------------------------------------------------------------
(21) EXPLANATION ADDED FOR TRANSLATION TO ENGLISH
These financial statements are presented on the basis of accounting
principles generally accepted in Spain. Certain accounting practices
applied by the Company that conform with generally accepted accounting
principles in Spain may not conform with generally accepted accounting
principles in other countries.
68
[LOGO] Telefonica
--------------------------------------------------------------------------------
EXHIBIT I
Detail of subsidiaries, associated companies and investees as of December
31, 2002
69
[LOGO] Telefonica
--------------------------------------------------------------------------------
MANAGEMENT REPORT
TELEFONICA, S.A.
2002
74
[LOGO] Telefonica
--------------------------------------------------------------------------------
Translation of a report originally issued in Spanish. In the event
of a discrepancy, the Spanish-language version prevails.
Organizational structure of the Telefonica Group
In 2002 the Telefonica Group continued its organization by line of business,
each of which is headed by a subsidiary: wireline telephony in Spain (Telefonica
de Espana), wireless telephony in Latin America (Telefonica Latinoamerica),
wireless telephony (Telefonica Moviles), data (Telefonica Data), media and
content (Telefonica de Contenidos), Internet (Terra Lycos), directories (TPI),
call centers (Atento) and capacity (Emergia). Telefonica S.A. heads the Group
and gives it cohesion by identifying synergies, centralizing the management of
financial resources and purchases and developing horizontal initiatives aimed at
reducing costs and expenditure, such as t-gestiona to concentrate support
activities and for the standardization of processes and systems, Inmobiliaria
Telefonica to optimize the Group's real estate assets and Zeleris to manage the
logistics line of business by reducing the cost base in relation to assets and
inventories.
Noteworthy was the creation of a business unit, Telefonica International
Wholesale Services (TIWS), which manages the business activities carried on by
Emergia and the international units of the Group's wireline telephony operators
and the international wholesale voice, IP, data and capacity services and the
network supporting them, whose aim it is to become a leading wholesale
telecommunications operator worldwide.
In addition, in order to concentrate all the Group's consulting and business
solution activities, Telefonica Soluciones, initially made up of the four
companies that engaged in these business activities (Telefonica Sistemas,
Katalyx, Art Media and Telefonica Mobile Solutions) was created in 2002.
In May 2002 the Board of Directors of the Admira Group decided to spin it off
into two separate business lines: a media division, "Corporacion Admira Media",
and a division grouping together all the investments in content and pay TV,
"Telefonica de Contenidos". At year-end the spin-off had not been formally
completed.
In this structure, Telefonica, S.A. is the Corporate Center heading the Group
whose main mission is to seek synergies and lend cohesion to the Group.
Earnings
In 2002 the Company incurred a loss of (euro)4,478.69 million, as compared with
the loss of (euro)354.18 million reported in 2001.
The most salient events reflected in the 2002 statement of operations are as
follows:
.. An operating loss of (euro)288.56 million, 58.2% greater than in 2001, as a
result of the 48.1% reduction in revenues and a 3.54% increase in expenses.
The decrease in revenues related mainly to the effect of the devaluation of
the Argentine peso on the management contract with Telefonica de Argentina,
S. A.
.. Financial income of (euro)405.05 million, 57.84% lower than that obtained
in 2001, due mainly to the effect of the exchange differences recorded in
the statement of operations.
-75-
[LOGO] Telefonica
--------------------------------------------------------------------------------
.. The combination of the two aforementioned effects gave rise to income from
ordinary activities of (euro)116.498 million in 2001, a figure which was
lower than the (euro)778.43 million reported in 2001.
.. The Company incurred an extraordinary loss of (euro)5,882.79 million in
2002, as compared with the extraordinary loss of (euro)1,397.52 million in
2001. This difference was due to the investment valuation provisions of
(euro)5,484.78 million recorded for subsidiaries in 2002, as compared with
the (euro)1,384.38 million recorded in 2001.
Investments
The most significant investments made by Telefonica, S.A. in 2002 were as
follows:
.. Acquisition of 99% of the shares of HighwayOne, GmbH for(euro)637.07
million.
.. In 2002 Telefonica, S.A. subscribed to (euro)32.69 million of the capital
increase carried out at Seguros de Vida y Pensiones Antares, S.A. through
the increase in the par value of this company's shares. As of December 31,
2002, the amount thus subscribed had not been paid. Additionally, in
December Telefonica, S.A. acquired from its Luxembourg subsidiary Casiopea
Reaseguradora, S.A. 110,000 shares of Seguros de Vida y Pensiones Antares,
S.A. for a total amount of (euro)172.01 million through the disbursement
of (euro)59.63 million. The remaining amount (euro)112,38 million has not
yet been paid). Following this transaction, Telefonica owns 142,000 shares
of Seguros de Vida y Pensiones Antares, S.A. representing 94.67% of its
capital stock.
Financing
The principal financing transactions in 2002 were as follows:
On February 13, 2002, the first capital increase with a charge to unrestricted
reserves authorized by Telefonica's Stockholders' Meeting on June 15, 2001, was
carried out. Capital was increased by (euro)93,438,317 through the issuance of
93,438,317 new shares, which were assigned to the Company's stockholders at a
ratio of one new share for every 50 shares held by them.
On April 12, 2002, the second capital increase with a charge to unrestricted
reserves authorized by Telefonica's Stockholders' Meeting on June 15, 2001, was
carried out. Capital was increased by (euro)95,307,084 through the issuance of
95,307,084 new shares, which were assigned to the Company's stockholders at a
ratio of one new share for every 50 shares held by them.
On April 12, 2002, Telefonica's Stockholders' Meeting resolved to carry out
three capital increases, two with a charge to unrestricted reserves to
remunerate stockholders and the third to cater for the compensation scheme tied
to the market value of Telefonica, S.A. shares targeted at Endemol Group
employees (on December 18, 2002, the Board of Directors of Telefonica, pursuant
to the powers granted to it, ultimately decided not to implement the last of
these resolutions, and opted for a different means of covering the stock
options).
On April 19, 2002, Telefonica Europe BV issued (underwritten by Telefonica S.A.)
a structured bond under the EMTN program for (euro)50 million. This bond matures
on April 19, 2005, and bears interest tied to Euribor plus a spread of 40 basis
points.
-76-
[LOGO] Telefonica
--------------------------------------------------------------------------------
On June 18, 2002, Telefonica Europe BV issued (underwritten by Telefonica S.A.)
a bond under the EMTN program with a face value of (euro)80 million. This bond
matures on June 18, 2004, and bears interest tied to EONIA plus a spread of
0.30%.
On July 11, 2001, Telefonica Europe BV issued (underwritten by Telefonica S.A.)
a bond under the EMTN program with a face value of (euro)100 million, issued at
a discount at an annual discount rate of 4.0807% and maturing on April 11, 2003.
Lastly, on December 30, 2002, Telefonica Finance USA LLC, a wholly-owned
subsidiary of Telefonica Europe B.V., issued preferred shares totaling
(euro)2,000 million (underwritten by Telefonica S.A.). This amount was lent in
full to Telefonica Europe B.V. through a ten-year loan.
Treasury stock
At the beginning of 2002 Telefonica held treasury stock representing 0.97264% of
capital stock, i.e. 45,440,901 shares with a book value of (euro)14.85, giving a
total of (euro)674.73 million and a par value of (euro)45.44 million.
In 2002 the Company acquired for consideration 55,169,765 shares of treasury
stock (representing 1.135% of capital stock and with a par value of (euro)55.17
million) at an average price of (euro)9.49 per share, and 1,819,821 shares were
assigned to it in the capital increases at no cost to the stockholders. Also,
799,411 shares (representing 0.016% % of capital stock and with a par value of
(euro)0.80 million) were used to acquire from Iberdrola, S.A. holdings in
Brazilian telephony companies, and 10,000,000 shares (representing 0.2057% of
capital stock and with a par value of (euro)10.00 million) were sold for an
average price of (euro)8.67 per share, giving rise to a loss of (euro)1.79
million.
As a result of these transactions, 91,631,076 shares (1.88516% of capital stock)
of treasury stock were held at year-end, acquired at an average price of
(euro)11.65, giving a total of (euro)1,067.94 million and a par value of
(euro)91.63. As indicated in Note 4-i, pursuant to current accounting
legislation, these shares of treasury stock were valued at their underlying book
value and, consequently, a provision of (euro)733.38 million was recorded.
Subsequent events
The most significant events which have occurred since year-end are as follows:
Capital increase in progress with a charge to reserves
February 2003 saw the first of the Company's two capital increases with a charge
to unrestricted reserves, approved by the Stockholders' Meeting on April 12,
2002, and which the Board of Directors resolved to carry out at its Meeting on
December 18, 2002.
The capital increase was carried out through the issuance of 97,213,225 new
common shares of the Company of (euro)1 par value each, thereby increasing the
capital stock by (euro)97,213,225 to (euro)4,957,874.511. These new shares were
assigned free of charge to the stockholders in the proportion of one new share
for every 50 shares already owned.
The deed of capital increase was executed on February 12, 2003, and registered
at the Mercantile Registry on February 18, 2002.
-77-
[LOGO] Telefonica
--------------------------------------------------------------------------------
Also, on February 12, 2003, the Standing Committee of the Board of Directors of
Telefonica, S.A., making use of the powers granted to it by the Board of
Directors on January 29, 2003, resolved to carry out the second capital increase
with a charge to unrestricted reserves approved by the Stockholders' Meeting on
April 12, 2002, through the issuance of 99,157,490 new common shares of the
Company, of the same series and carrying the same rights as the outstanding
shares, of (euro)1 par value each, which will be assigned free of charge to the
stockholders in the proportion of one new share for every 50 shares already
owned.
The period for the assignment free of charge of the shares relating to the
second capital increase is scheduled to commence in the second half of March
2003, and the new shares will foreseeably be admitted to official listing in
mid-April 2003.
Merger of Via Digital with Sogecable
On May 8, 2002, Sogecable S.A. and Telefonica S.A. (the latter through its
subsidiary Telefonica de Contenidos S.A. - Sole-Stockholder Company) entered
into an agreement relating to the merger of DTS Distribuidora de Television
Digital, S.A. (Via Digital) with Sogecable.
The transaction was ratified by the Board of Directors of Telefonica de
Contenidos S.A. (Sole-Stockholder Company) and Sogecable S.A. in May 2002,
subject to the authorization of the relevant public authorities, which was
granted on November 29, 2002, through the adoption by the Council of Ministers
of certain resolutions authorizing the merger provided that certain conditions
were met.
On January 29, 2003, Sogecable S.A., Telefonica, S.A. and Telefonica de
Contenidos S.A. (Sole-Stockholder Company) entered into an agreement whereby
they deemed contract terms established for the merger of Sogecable and Via
Digital to have been fully met. Also, Telefonica de Contenidos S.A.
(Sole-Stockholder Company) and Sogecable S.A. agreed on the related detailed
action plans and deadlines for the instrumentation of the conditions imposed by
the Government in the aforementioned Council of Ministers resolutions. Through
these plans, Telefonica de Contenidos S.A. (Sole-Stockholder Company) and
Sogecable S.A. accepted the conditions established by the Government; however,
they filed appeals for judicial review against certain of the conditions
(obligation to distribute channels, joint marketing of commercial packages,
price caps and prohibition of strategic alliances).
The terms under which the transaction will be carried out in accordance with the
agreements dated May 8, 2002 and January 29, 2003, are as follows:
.. The transaction will be carried out through a capital increase at
Sogecable, S.A. targeted at the stockholders of Via Digital, who will be
able to contribute their Via Digital shares.
. If all the shareholders of Via Digital subscribe to the capital
increase, the percentages of ownership of Sogecable, S.A. after
the capital increase will be 77% in the case of the present
stockholders of Sogecable and 23% in the case of the present
stockholders of Via Digital.
. After the exchange has been carried out, the Telefonica Group
will have an ownership interest in the capital stock of
Sogecable, S.A. equal to that of its two stockholders Prisa and
Groupe Canal + after the dilution arising from the share
exchange, which, if all the capital stock of Via Digital is
exchanged, would
-78-
[LOGO] Telefonica
--------------------------------------------------------------------------------
represent 16.38% of the capital stock of Sogecable, S.A. With
this ownership interest, Telefonica would not exercise such
voting rights carried by the shares received in the exchange as
might exceed the aforementioned percentage.
. Telefonica has stated that its present strategic plans envisage
that the aforementioned ownership interest will not be disposed
of for at least three years from the date of the exchange.
. The representation of Telefonica, Prisa and Groupe Canal + on the
Board of Directors of Sogecable, S.A. will be consistent with
their respective ownership interests, and each of the
aforementioned three entities will appoint five directors. The
Chairman of the Board of Directors will be chosen from among the
five directors appointed by Telefonica.
. Prisa and Groupe Canal + will maintain their present
shareholders' agreement, to which Telefonica will not be a party.
. Each of the three major stockholders will grant a ten-year
participating loan of (euro)50 million earning interest at 11%.
. Sogecable, S.A. will offer its shareholders the possibility of
participating in a nine-year subordinated debt security issue of
(euro)175 million, the subscription of which will be underwritten
by Telefonica, bearing interest at 10.28%. The remuneration for
the subscribers will include the issuance of warrants equal,
overall, to 1% of the capital stock of Sogecable, S.A.
. The debt of Via Digital and of Sogecable, S.A. as of April 30,
2003, must not exceed (euro)425 million and (euro)705 million,
respectively.
Strategic alliance between Telefonica, Terra and Bertelsmann
On February 12, 2003, Telefonica and Terra Networks, S.A. (Terra Lycos) entered
into a Framework Strategic Alliance Agreement to replace the Strategic Agreement
dated May 16, 2000, to which Bertelsmann AG was also a party (whereby, in the
framework of the acquisition of Lycos, Inc. by Terra Networks, S.A., Telefonica,
S.A. undertook to commission from Terra-Lycos, the portion of the advertising
services committed by Bertelsmann that the latter did not commission from
Terra-Lycos, up to a maximum amount of US$ 675 million).
Additionally, on February 12, 2003, Telefonica, S.A., Terra Networks, S.A. and
Bertelsmann AG entered into a preferential interest agreement which will enable
them to continue to explore opportunities for the mutual provision of
communications, development and content services in the on-line market.
The term of the Framework Strategic Alliance Agreement entered into on February
12, 2003, is six years, ending on December 31, 2008. The Agreement is
automatically renewable for one-year periods unless it is expressly terminated
by the parties.
The main features of this Framework Strategic Alliance Agreement are summarized
as follows:
1. Strengthening of the Terra-Lycos Group as:
-79-
[LOGO] Telefonica
--------------------------------------------------------------------------------
. The exclusive provider of essential portal elements, including brand
image, and aggregator of the broad and narrow band Internet content
and services targeted at the residential, SOHO and, when so agreed,
SME market segments, for the Telefonica Group companies' connectivity
and ISP services.
. Preferential provider of audit, consulting, management and maintenance
services for the country portals of the Telefonica Group companies.
. Exclusive provider of Telefonica Group employee on-line training
services.
. Preferential provider of on-line integral marketing services with the
Telefonica Group companies.
2. Guaranteed minimum volume of acquisitions of Terra Lycos Group on-line
advertising space by Telefonica Group companies.
3. Exclusive acquisition of connectivity and wholesale Internet access
services by Terra Lycos Group companies from Telefonica Group companies
under the legally permitted most-favored-customer conditions.
4. Outsourcing by Terra Lycos Group companies to Telefonica Group companies of
all or part of the services and/or operation of the Internet access
elements for the provision of ISP services to its residential, SOHO and,
when so agreed, SME customers under the legally permitted
most-favored-customer conditions.
5. Exclusive acquisition by Terra-Lycos Group companies from Telefonica Group
companies of the advanced broad and narrow band network and platform
services required to construct the range of services to be offered to
residential, SOHO and, when so agreed, SME customers under the legally
permitted most-favored-customer conditions.
The Framework Strategic Alliance Agreement guarantees the generation for the
Terra Lycos Group of a minimum annual value throughout the term of the Agreement
of (euro)78.5 million. This amount is the difference between the revenues
arising from the services provided under the aforementioned Framework Strategic
Alliance Agreement and the costs and investments directly associated therewith.
Acquisition of shares of Antena 3 de Television, S.A.
In 1997 and 2000 Telefonica provided guarantees to the entity that is now Banco
Santander Central Hispano, S.A. to ensure the liquidity and value of the
investments made by it in Antena 3 de Television, S.A. To execute these
agreements, in 1999 Telefonica Media, S.A. (Sole-Stockholder Company) (now
Telefonica de Contenidos, S.A. - Sole-Stockholder Company), a subsidiary of
Telefonica, S.A., acquired shares representing 7.1395% of the capital stock of
Antena 3 de Television, S.A. Additional acquisitions have yet to be formalized
and the guarantee on certain of the shares has yet to be executed.
On January 7, 2003, as a result of a change in the legal conditions applicable
to the ownership of shares of television concession-holder companies,
Telefonica, S.A. and its subsidiary Telefonica de Contenidos, S.A.
(Sole-Stockholder Company) exercised vis-a-vis Banco Santander Central Hispano,
S.A. purchase options on 17,365,125 and 2,167,500 shares of Antena 3 de
Television, S.A., which, taken as a whole, represent 11.719% of the capital
stock of Antena 3 de Television,
-80-
[LOGO] Telefonica
--------------------------------------------------------------------------------
S.A. The shares were to be acquired by the Telefonica, S.A. subsidiary
Corporacion Admira Media, S.A. (Sole-Stockholder Company).
After the related procedural formalities had been carried out, on February 5,
2003, the transfer of the aforementioned shares was formalized, and,
accordingly, as of that date, the guarantees provided to Banco Santander Central
Hispano, S.A. were fully executed and fulfilled. The resulting percentage of
ownership was 59.24%.
Telefonica Europe, B. V. bond issue
On February 6, 2003, Telefonica Europe B.V. launched two long-term bond issues
underwritten by Telefonica S.A. The first issue, which matures on February 14,
2013, has a face value of (euro)1,500 million and an annual coupon of 5.125%.
The second issue, with a face value of (euro)500 million, matures on February
14, 2033, and has an annual coupon of 5.875%.
-81-
[LOGO] Telefonica
--------------------------------------------------------------------------------
-82-
[LOGO] Telefonica
--------------------------------------------------------------------------------
-83-
Telefonica, S.A.
Auditors' Report
Financial Statement for the Year Ended
December 31 2002, and Management
Report
[LETTERHEAD OF DELOITTE & TOUCHE)
Deloitte
& Touche
AUDITORS' REPORT ON FINANCIAL STATEMENTS
Translation of a report originally issued in Spanish based on our work performed
in accordance with generally accepted auditing standard in Spain and of
financial statements originally issued in Spanish and prepared in accordance
with generally accepted accounting principles in Spain (see Note 21). In the
event of a discrepancy, the Spanish-language version prevails.
To the Stockholders of Telefonica, S.A.:
1. We have audited the financial statements of Telefonica, S.A. comprising the
balance sheet as of December 31, 2002, and the related statement of
operations and notes to financial statements for the year then ended. The
preparation of these financial statements is the responsibility of the
Company's directors. Our responsibility is to express an opinion on the
financial statements taken as a whole based on our audit work performed in
accordance with generally accepted auditing standards, which require
examination, by means of selective tests, of the documentation supporting the
financial statements and evaluation of their presentation, of the accounting
principles applied and of the estimates made.
2. The financial statements for 2002 referred to above are presented in
compliance with current Spanish corporate law, despite the fact that the
operations of Telefonica, S.A. and of the companies it controls are managed
on a consolidated basis. Accordingly, the financial statements of
Telefonica, S.A., which acts basically as a holding company, do not reflect
the financial and net worth variations resulting from application of
consolidation methods to these holdings or to the transactions carried out by
the related investees, some of which respond to the Group's overall strategy.
However, these variations are reflected in the Telefonica Group's
consolidated financial statements for 2002, on which we issued our auditors'
report dated February 16, 2003, which was qualified for an uncertainty
similar to that described in paragraph 4 below. The effect of consolidation
is disclosed in Note 4-d.
3. As required by Spanish corporate law, for comparison purposes the directors
present, in addition to the 2002 figures for each item in the balance sheet
and statements of operations and of changes in financial position, the
figures for 2001. Our opinion refers only to the 2002 financial statements.
Our auditors' report dated March 14, 2002, on the 2001 financial statements
contained an opinion qualified for an uncertainty concerning the Telefonica
Group's net investment in Argentina, and in an emphasis paragraph we
indicated the intention of management to update and review, on a yearly
basis, the business plans of the Group companies that hold third-generation
wireless telephony (UMTS) licenses and, where appropriate, to make any value
adjustments that might be required.
In view of the changes in 2002 in the assumptions on which the aforementioned
business plans were based, of the findings of reports commissioned from third
parties and of the fact that the aforementioned wireless telephony technology
is not yet commercially available, the directors of Telefonica Moviles, S.A.
announced their decision to temporarily discontinue and restructure this
company's business activities in Germany, Italy, Austria and Switzerland, and
in 2002 they recorded the related write-down for accounting purposes, as
described in Note 7, which gave rise to a charge, net of the related tax
effect of (Euro)1,062 million, to the statement of operations of Telefonica,
S.A.
4. Also, as a result of the depreciation of the Argentine peso with respect to
the U.S. dollar and the euro in 2002, losses of (Euro)1,400 million were
recorded in the statement of operations (see Note 2). However, certain
uncertainties remain regarding the effect that the evolution of certain
economic measures will have on the normal course of operations and on the
financing thereof in Argentina (mainly that relating to the establishment of
the wireline telephony rates). Accordingly, it is not yet possible to assess
whether there will be any additional effects for accounting purposes on the
Telefonica Group's net investment in the companies located in Argentina,
which, calculated as described in Note 2, amounted to (Euro)1,637 million as
of December 31, 2002, a substantial reduction with respect to the previous
year.
5. In our opinion, except for the effects of any adjustment which might be
required if the final outcome of the uncertainty described in paragraph 4
above were known, the financial statements for 2002 referred to above
present, in all material respects, a true and fair view of the net worth and
financial position of Telefonica, S.A. as of December 31, 2002, and of the
results of its operations and of the funds obtained and applied by it in the
year then ended, and contain the required information, sufficient for their
proper interpretation and comprehension, in conformity with generally
accepted accounting principles and standards applied on a basis consistent
with that of the preceding year.
6. The accompanying management report for 2002 contains the explanations which
the directors consider appropriate about the Company's situation, the
evolution of its business and other matters, but is not an integral part of
the financial statements. We have checked that the accounting information in
the management report is consistent with that contained in the financial
statements for 2002. Our work as auditors was confined to checking the
management report with the aforementioned scope, and did not include a
review of any information other than that drawn from the Company's
accounting records.
DELOITTE & TOUCHE ESPANA, S.L,
Inserita en el R.O.A.C. no S0692
/s/ Eduardo Sanz Hernandez
Eduardo Sanz Hernandez
Socio
February 26, 2003
Telefonica, S.A.
Auditors' Report
Consolidated Financial Statement for the
Year Ended December 31,2002, and
consolidated Management Report
[LETTERHEAD OF DELOITTE & TOUCHE]
Deloitte
& Touche
AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
Translation of a report originally issued in Spanish based on our work performed
in accordance with generally accepted auditing standards in Spain and of
consolidated financial statements originally issued in Spain and prepared in
accordance with generally accepted accounting principles in Spain (see Note 25).
In the event of a discrepancy, the Spanish-language version prevails.
To the Stockholders of Telefonica, S.A.:
1. We have audited the consolidated financial statements of Telefonica, S.A.
and of the companies composing the Telefonica Group (see Note 1) comprising
the consolidated balance sheet as of December 31, 2002, and the related
consolidated statement of operations and notes to consolidated financial
statements for the year then ended. The preparation of these consolidated
financial statements is the responsibility of the Parent Company's
directors. Our responsibility is to express an opinion on the consolidated
financial statements taken as a whole based on our audit work performed in
accordance with generally accepted auditing standards, which require
examination, by means of selective tests, of the documentation supporting
the consolidated financial statements and evaluation of their presentation,
of the accounting principles applied and of the estimates made.
2. As required by Spanish corporate law, for comparison purposes the directors
present, in addition to the 2002 figures for each item in the consolidated
balance sheet and consolidated statements of operations and of changes in
financial position, the figures for 2001. Our opinion refers only to the
2002 financial statements. Our auditors' report dated March 14, 2002, on
the 2001 consolidated financial statements contained an opinion qualified
for an uncertainty concerning the Telefonica Group's net investment in
Argentina, and in an emphasis paragraph we indicated the intention of
management to update and review, on a yearly basis, the business plans of
the Group companies that hold third-generation wireless telephony (UMTS)
licenses and, where appropriate, to make any value adjustments that might
be required.
In view of the changes in 2002 in the assumptions on which the
aforementioned business plans were based, of the findings of reports
commissioned from third parties and of the fact that the aforementioned
wireless telephony technology is not yet commercially available, the
directors of Telefonica Moviles, S.A. announced their decision to
temporarily discontinue and restructure this company's business activities
in Germany, Italy, Austria and Switzerland, and in 2002 they recorded the
related write-down for accounting purposes, as described in Note 1, which
gave rise to a charge, net of the related tax effect, of (Euro)4,958
million, to the consolidated statement of operations of Telefonica, S.A.
3. Also, as a result of the depreciation of the Argentine peso with respect to
the U.S. dollar and the euro in 2002, losses of (Euro)1,147 million and
(Euro)355 million were recorded under the consolidated "Stockholders' Equity
- Translation Differences in Consolidation" caption and in the consolidated
statement of operations, respectively. However, certain uncertainties remain
regarding the effect that the evolution of certain economic measures will
have on the normal course of operations and on the financing thereof in
Argentina (mainly that relating to the establishment of the wireline
telephony rates). Accordingly, it is not yet possible to assess whether
there will be any additional effects for accounting purposes on the
Telefonica Group's net investment in these companies, which, calculated as
described in Note 1, amounted to (Euro)1,637 million as of December 31,
2002, a substantial reduction with respect to the previous year.
4. In our opinion, except for the effects of any adjustment which might be
required if the final outcome of the uncertainty regarding the Group's net
investment in the companies located in Argentina described in paragraph 3
above were known, the consolidated financial statements for 2002 referred to
above present, in all material respects, a true and fair view of the net
worth and financial position of Telefonica, S.A. and of the companies
composing the Telefonica Group as of December 31, 2002, and of the results
of their operations and of the funds obtained and applied by them in the
year then ended, and contain the required information, sufficient for their
proper interpretation and comprehension, in conformity with generally
accepted accounting principles and standards applied on a basis consistent
with that of the preceding year.
5. The accompanying consolidated management report for 2002 contains the
explanations which the directors of Telefonica, S.A. consider appropriate
about the Group's situation, the evolution of its business and other
matters, but is not an integral part of the consolidated financial
statements. We have checked that the accounting information in the
consolidated management report is consistent with that contained in the
consolidated financial statements for 2002. Our work as auditors was
confined to checking the consolidated management report with the
aforementioned scope, and did not include a review of any information other
than that drawn from the accounting records of the consolidated Companies.
DELOITTE & TOUCHE ESPANA, S.L.
Inserita en el R.O.A.C. no S0692
/s/ Eduardo Sanz Hernandez
Eduardo Sanz Hernandez
Socio
February 26, 2003
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 4 bis: The individual and consolidated financial statements of
TELEFONICA corresponding to 31 March 2003.
--------------------------------------------------------------------------------
TELEFONICA, S.A.
BALANCE SHEETS AT 31 MARCH
UNAUDITED INFORMATION MILLIONS OF EUROS
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
ASSETS 2003 2002
B) FIXED ASSETS 45,160.56 37,276.02
I. Start-up expenses 51.39 92.00
II. Intangible assets 34.47 34.21
III. Tangible assets 23.39 21.30
IV. Financial assets 45,051.31 37,128.51
D) DEFERRED CHARGES 326.37 147.98
E) CURRENT ASSETS 6,826.35 15,511.35
III. Debtors 113.94 557.71
IV. Short-term investments 6,278.11 14,680.34
V. Short-term treasury stock 380.06 231.47
VI. Cash 28.75 29.46
VII. Prepayments 25.49 12.37
TOTAL ASSETS 52,313.28 52,935.35
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
LIABILITIES 2003 2002
A) EQUITY 17,985.56 21,425.42
D) DEFERRED REVENUE 0.00 0.57
E) PROVISIONS FOR CONTINGENCIES AND EXPENSES 56.14 0.01
F) LONG-TERM CREDITORS 25,570.52 18,986.80
I. Issues 2,529.43 2,452.15
II. Long-term debts with credit entities 3,152.54 5,036.36
III. Long-term debts with group and associated companies 19,690.71 11,434.27
IV. Other long-term creditors 18.00 15.66
V. Debts with Public Administrations 34,71 48.31
VI. Uncalled capital payments payable 145.13 0.05
G) SHORT-TERM CREDITORS 8,701.06 12,522.55
1. Issues 733.03 817.44
II. Short-term debts with credit entities 1,019.10 2,830.21
III. Short-term debts with group and associated companies 6,863.61 8,600.22
IV. Commercial creditors 28.23 112.18
V. Short-term non-commercial debts 55.80 160.07
VI. Prepayments 1.29 2.43
TOTAL LIABILITIES 52,313.28 52,935.35
-----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TELEFONICA, S.A.
STATEMENTS OF OPERATIONS AT 31 MARCH MILLIONS OF EUROS
UNAUDITED INFORMATION
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
DEBIT 2003 2002
A) EXPENSES
Procurement 4.51 -
Personnel expenses 31.27 20.19
Depreciation and amortisation of fixed assets 15.13 13.90
Variations in operating allowances 2.72 -
Other operating expenses 41.90 30.70
I. OPERATING INCOME - -
II. FINANCIAL INCOME - 24.76
III. INCOME FROM ORDINARY ACTIVITIES - -
IV. EXTRAORDINARY INCOME 550.95 -
V. INCOME BEFORE TAXES 427.16 -
Corporate income tax (96.39) (296.28)
VI. INCOME FOR THE YEAR 523.55 -
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
CREDIT 2003 2002
B) REVENUES
Net sales and provision of services 9.50 12.86
Other operating revenues 7.43 0.76
I. OPERATING LOSS 78.60 51.17
II. FINANCIAL LOSS 45.19 -
III. LOSS ON ORDINARY ACTIVITIES 123.79 26.41
IV. EXTRAORDINARY LOSS - 954.68
V. LOSS BEFORE TAXES - 981.09
VI. LOSS FOR THE YEAR - 684.81
-----------------------------------------------------------------------------------------------------------
-2-
--------------------------------------------------------------------------------
TELEFONICA GROUP
CONSOLIDATED BALANCE SHEETS AT 31 MARCH MILLIONS OF EUROS
UNAUDITED INFORMATION
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
ASSETS 2003 2002
A) SHAREHOLDERS- UNCALLED PAYMENTS 253.94 350.41
B) FIXED ASSETS 48,641.19 62,140.89
I. Start-up expenses 465.95 725.81
II. Intangible assets 7,519.04 17,100.34
III. Tangible assets 26,330.17 34,987.66
IV. Financial assets 14,326.04 9,327.08
C) CONSOLIDATION GOODWILL 6,455.66 8,769.23
D) DEFERRED CHARGES 790.02 690.37
E) CURRENT ASSETS 11,591.95 13,719.17
I. Shareholders - called payments 0.00 0.56
II. Inventories 694.38 839.49
III. Debtors 5,808.45 8,753.39
IV. Short-term investments 3,511.68 2,961.26
V. Short-term treasury stock 380.06 231.47
VI. Cash 948.77 651.69
VII. Prepayments 248.62 281.31
TOTAL ASSETS 67,732.77 85,670.06
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
LIABILITIES 2003 2002
A) EQUITY 17,672.75 24,845.88
B) EXTERNAL SHAREHOLDERS 5,691.09 7,351.89
C) NEGATIVE CONSOLIDATION DIFFERENCES 10.84 10.23
D) DEFERRED REVENUE 915.99 1,340.93
E) PROVISIONS FOR CONTINGENCIES AND EXPENSES 7.758,19 5.720,80
F) LONG-TERM CREDITORS 22,934.50 27,334.17
I. Issues 14,727.78 14,537.05
II. Long-term debts with credit entities 6,342.23 8,033.94
III. Long-term debts with group and associated companies 0.00 16.56
IV. Other long-term creditors 344.89 3,325.30
V. Debts with Public Administrations 1,511.63 1,412.68
VI. Uncalled capital payments payable 7.98 8.64
-----------------------------------------------------------------------------------------------------------
-3-
-----------------------------------------------------------------------------------------------------------
G) SHORT-TERM CREDITORS 12,479.33 19,052.19
I. Issues 2,034.76 2,975.96
II. Short-term debts with credit entities 2,978.46 6,506.82
III. Short-term debts with group and associated companies 33.66 20.29
IV. Commercial creditors 4,693.33 6,003.91
V. Short-term non-commercial debts 2,250.54 2,986.63
VI. Allowances for other operations 44.41 33.08
VI. Prepayments 444.17 525.49
H. SHORT-TERM PROVISIONS FOR CONTINGENCIES AND EXPENSES 270.08 13.97
TOTAL LIABILITIES 67,732.77 85,670.06
-----------------------------------------------------------------------------------------------------------
-4-
--------------------------------------------------------------------------------
TELEFONICA GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
AT 31 MARCH MILLIONS OF EUROS
UNAUDITED INFORMATION
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
DEBIT 2003 2002
A) EXPENSES
Reduction of Inventories 57.76 (63.44)
Procurement 1,381.42 1,838.33
Personnel expenses 1,165.99 1,272.96
Depreciation and amortisation of fixed assets 1,560.93 1,836.64
Variations in operating allowances 110.24 185.72
Other operating expenses 1,107.02 1,318.93
I. OPERATING INCOME 1,258.13 1,208.04
II. FINANCIAL INCOME - -
Share in losses of companies accounted for by the equity 50.56 126.79
method
Amortisation of consolidation goodwill 103.49 170.76
III. INCOME FROM ORDINARY ACTIVITIES 858.45 55.13
IV. EXTRAORDINARY INCOME - -
V. INCOME BEFORE TAXES 826.95 -
Corporate income tax 263.76 (179.13)
VI. INCOME FOR THE YEAR 563.19 36.10
Income attributed to external shareholders 19.80 -
VII. INCOME FOR THE YEAR 543.39 121.05
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
CREDIT 2003 2002
B) REVENUES
Net sales and provision of services 6,458.93 7,418.56
Variations in work-in-progress 0.19 (36.21)
Expenses of Group work on fixed assets 102.00 138.59
Other operating revenues 80.38 76.24
I. OPERATING LOSS - -
II. FINANCIAL LOSS 246.22 856.14
Reversal of negative consolidation differences 0.59 0.78
III. LOSS ON ORDINARY ACTIVITIES - -
-5-
IV. EXTRAORDINARY LOSS 31.50 198.16
V. LOSS BEFORE TAXES - 143.03
VI. LOSS FOR THE YEAR - -
Losses attributed to the external shareholders - 84.95
VII. LOSS FOR THE YEAR - -
-----------------------------------------------------------------------------------------------------------
-6-
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 5: Certificate of the freezing of the TERRA shares held by
TELEFONICA.
Translation - for information purposes only
BBVA Transactions
CERTIFICATE TO FREEZE SECURITIES NO. 20030528001
Banco Bilbao Vizcaya Argentaria S.A., with address for these purposes at Paseo
de la Castellana, 81, Madrid, represented by Mr Jose Joaquin Vadillo and Mr Jose
Ignacio Diaz, in their capacity as attorneys
HEREBY CERTIFIES
ONE: That TELEFONICA, S.A. is the owner of the following shares
issued by TERRA NETWORKS, S.A. and deposited at BANCO BILBAO
VIZCAYA ARGENTARIA, S.A.
Number of Shares Registry Reference
221,975,676 See Annex 1
8,816,652 See Annex 2
TWO: That it has received irrevocable instructions from TELEFONICA,
S.A. to freeze the aforementioned shares during the processing
and settlement of the Take-over Bid for TERRA NETWORKS, S.A.
launched by TELEFONICA, S.A.
THREE: That, as a result, Banco Bilbao Vizcaya Argentaria, S.A., in
its capacity as entity responsible for entering the shares
into the accounting records and holding said shares in
deposit, undertakes, on the instructions of the owner, to
freeze the shares during the processing and settlement of the
Take-over Bid for TERRA NETWORKS, S.A., which TELEFONICA, S.A.
is going to file before the Spanish Securities Market
Commission, to provide sufficient guarantee, in the opinion of
said Commission, of the depositor's commitment not to transfer
said securities.
In witness whereof, this certificate is issued in Madrid on 28 May 2003.
[Stamps and signatures of Mr Jose Joaquin Vadillo and Mr Jose Ignacio Diaz,
attorneys of BBVA]
Translation - for information purposes only
Transactions
ANNEX 1
899102161000231 186,595,575
800101860022175 23,324,448
800101860010045 5,984,795
800101860010053 6,106,858
-2-
Translation - for information purposes only
Transactions
ANNEX 2
900122150034292 2,815
900122050051211 21,054
900122050052099 495
900122050051220 28,402
900122050051181 2,000
900122050051165 42,623
900122050051173 2,950
900122050052064 86,948
900122050051190 1,932
900122050051203 9,183
900122050052072 1,120
900122050052081 103,295
900122062054879 2,216
900122062054895 3,433
900122062054950 3,758
900122062054909 222,912
900122062054917 50,000
900122062054925 122,876
900122062054933 3,818
900122062054771 1,000
900122062054780 37,393
900122062054798 42,326
900122062054801 645
900122062054810 8,189
900122062054941 1,042
900122062054828 1,960
900122062054976 9,300
900122062054836 28,060
900122062054844 427
900122062054968 3,521
-3-
Translation - for information purposes only
900122062054861 20,000
900122150034233 9,145
900122150034004 19,259
900122150033962 10,000
900122150034128 50
900122150034217 15,855
900122150034306 20,000
900122150033971 10,000
900122150034276 50,000
900122150034292 11,197
900122150034187 49,547
90012250034101 10,000
900122150034012 60,000
900122150034284 40,000
900122150034136 136,216
900122150034080 50,000
900122150034209 40,000
900122150034098 82,096
900122150034071 31,913
900122150034268 55,395
900122150034250 5,988
900122150034225 35,000
900122150034161 25,000
900122150034110 11,638
900122150033954 10,000
900122150033989 10,000
900122150034195 10,000
900122150034152 55,000
900122150034055 55,000
900122150034179 5,000
900122150034021 10,000
900122150033997 10,741
900122150034241 10,000
-4-
Translation - for information purposes only
900122150034039 2,000
900122150034047 11,163
900122150034063 6,087
900122150034144 3,895
900122162070987 20,000
900122162063646 60,907
900122162077451 4,670
900122162070782 29,093
900122162067676 10,000
900122162079704 45,330
900122250026726 9,533
900122250026734 30,000
900122250026742 10,000
900122250026751 10,000
900122250026653 71,476
900122250026611 10,000
900122250026858 10,000
900122250026645 22,960
900122250026696 20,000
900122250026840 194,151
900122250026637 1,620
900122250026777 20,000
900122250026769 20,000
900122250026688 140,000
900122250026629 12,000
900122250026670 75,506
900122250026661 66,791
900122250026807 25,000
900122250026815 26,734
900122250026891 125,000
900122250026785 20,000
900122250026882 39,668
900122250026874 27,000
-5-
Translation - for information purposes only
900122250026866 198,391
900122250026793 13,763
900122250026823 16,398
900122250026700 2,000
900122250026831 17,305
900122250026602 40,000
900122250026718 88,000
900122261486389 6,041
900122261486249 2,000
900122261485943 1,959
900122750054815 40,130
900122750054921 504
900122750054939 11,572
900122750054793 38,098
900122750054823 45,720
900122750054947 56,055
900122750054831 21,297
900122750054955 64,675
900122750054874 5,000
900122750054866 10,000
900122750054882 2,000
900122750054963 25,459
900122750054807 17,556
900122750054971 74,826
900122750054858 30,000
900122750054980 88,924
900122750054998 1,200
900122750055005 18,100
900122750055013 62,712
901010250034291 4,738
901010350023504 7,000
901010350023512 25,000
901010361609161 40
-6-
Translation - for information purposes only
901010361609276 8,310
901010361611173 3,000
901010450051378 35,000
901010550049214 12,722
901010550049222 24,700
901010550049192 309
901010550049206 43,910
901010550049184 25,300
901010550049249 18,231
901010550049231 26,090
901010950038688 27,112
901010950038700 267
901010950038696 2,000
901010950038670 50,000
901011050034772 1,000
901011050034764 21,000
901011050034896 5,000
901011050034900 3,436
901011050034861 4,000
901011050034853 2,564
901011050034756 23,000
901011050034748 12,000
901011050034918 4,000
901011050034926 3,000
901011050034845 1,000
901011050034730 18,000
901011050034659 9,321
901011050034667 2,000
901011050034934 3,000
901011050034705 5,120
901011050034675 1,000
901011050034870 7,000
901011050034683 6,880
-7-
Translation - for information purposes only
901011050034691 14,679
901011050034888 5,000
901011050034799 2,123
901011050034802 1,000
901011050034811 5,000
901011050034829 12,500
901011050034837 14,500
901011050034713 5,000
901011050034721 5,000
901011050034781 6,877
901011150037264 27,221
901011150037337 19,600
901011150037272 70,000
901011150037329 30,000
901011150037311 3,000
901011150037302 5,000
901011150037281 25,000
901011150037434 30,000
901011150037426 5,000
901011150037418 3,040
901011150037299 30,000
901011150037400 14,280
901011150037396 60,000
901011150037388 13,000
901011150037370 3,000
901011150037361 5,000
901011150037353 20,000
901011150037345 12,680
901011150037248 16,450
901011150037256 20,000
901011650039573 20,000
901011650039581 30,000
901011650039565 10,000
-8-
Translation - for information purposes only
901011662092828 10,000
900122750055013 582,268
901010250034291 262
900122750054769 8,344
900122750054840 5,000
900122750054777 23,217
900122750054785 61,049
900122750054912 2,800
900122750054904 15,000
900122750054891 55,000
900122750055170 33,493
900122750055188 5,000
900122750055048 25,000
900122750055196 18,000
900122750055200 13,125
900122750055218 859
900122750055030 27,500
900122750055226 63,648
900122750055234 4,875
900122750055242 4,388
900122750055153 23,975
900122750055285 15,000
900122750055293 5,000
900122750055307 2,825
900122750055099 15,000
900122750055315 10,000
900122750055323 6,675
900122750055331 10,030
900122750055340 15,000
900122750055358 5,000
900122750055366 46,858
900122750055374 10,000
900122750055072 30,000
-9-
Translation - for information purposes only
900122750055102 10,000
900122750055021 17,658
900122750055111 10,000
900122750055137 7,137
900122750055081 10,000
900122750055129 10,070
900122750055145 17,342
900122750055251 15,000
900122750055064 5,000
900122750055269 14,930
900122750055277 15,500
900122750055056 10,000
900122750055161 53,612
900122762099881 10,000
900122850048634 9,780
900122850048626 35,000
900122850048596 10,000
900122850048669 29,791
900122850048618 10,000
900122850048570 20,000
900122850048723 93,506
900122850048588 44,964
900122850048707 10,000
900122850048677 21,895
900122850048715 1,852
900122850048693 8,148
900122850048642 10,220
900122850048600 6,494
900122850048561 20,000
900122850048685 78,105
900122850048651 209
900122861759320 10,000
900122950048381 5
-10-
Translation - for information purposes only
900122950048411 9,995
900122950048399 777
900122950048402 812,749
900122962320248 31,000
901010250034398 5,000
901010250034371 4,408
901010250034363 5,314
901010250034355 5,000
901010250034347 3,000
901010250034339 3,000
901010250034321 6,000
901010250034401 2,000
901010250034428 3,485
901010250034258 5,000
901010250034436 7,848
901010250034312 18,000
901010250034304 3,000
901010250034380 1,278
901010250034240 2,000
901010250034495 12,572
901010250034410 10,000
901010250034444 4,750
901010250034266 8,000
901010250034274 7,000
901010250034452 5,000
901010250034461 27,765
901010250034282 3,000
901010250034479 2,000
901010250034487 9,000
901010250034517 3,000
901010250034509 1,428
901091150048995 220,000
901091250079766 465
-11-
Translation - for information purposes only
901091250079774 36,558
901091250079782 30,000
901091250079791 5,000
901091250079804 12,977
901091250079812 1,409
902040561953974 30,000
902040561953753 28,759
902040561955055 19,000
902040561955012 12,000
902040561953818 11,000
902040561953931 18,000
902040861395621 116,200
902040861395680 11,500
902040861395965 110,875
902040861396007 1,207
902040861396040 32,293
902040861396147 11,750
902040861396244 15,000
902040861396309 24,881
902040961085785 30,725
902040961085866 12,290
902040961085904 36,135
902040961085980 21,550
902040961086102 23,100
902040961086145 26,200
902071761542165 22,750
902071761542335 20,250
902071761542246 7,000
902071961237162 5,000
902071961237367 33,000
902071961237324 17,000
902071961237243 10,000
902071961237227 10,000
-12-
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 6: Documents verifying the guarantee securing payment of the
consideration under the Bid.
(Telefonica logo)
SANTIAGO FERNANDEZ VALBUENA
Corporate Finance Managing Director
TELEFONICA, S.A.
Mr. Jose Maria Abril
Corporate Banking Managing Director
BANCO BILBAO VIZCAYA ARGENTARIA, S.A.
Po de la Castellana, 81
28046 Madrid
Madrid, 9 June 2003
Dear Sirs,
We hereby confirm that Telefonica, S.A. owns a deposit for the amount of
1,946,046,832 euros in current account number 0182 3994 09 0201501336 opened
with you with the title TANGO.
It is hereby established that, pursuant to the terms of the Prospectus presented
by Telefonica, S.A. to the Spanish Securities Market Commission ("Comision
Nacional del Mercado de Valores"), the amount deposited corresponds to the
maximum overall amount that Telefonica, S.A. would pay in the event that all the
shares of TERRA NETWORKS, S.A. to which the take-over bid applies (370,675,587
shares) accept the bid. These 370,675,587 shares and the 230,792,328 shares
owned by Telefonica, S.A. which have been frozen by Banco Bilbao Vizcaya
Argentaria, S.A. represent 100% of the shares of TERRA NETWORKS, S.A.
It is also established that this letter substitutes and renders null and void
the letter which was sent to you on 28 May 2003, which confirmed the setting up
by Telefonica, S.A., on the same date, of a deposit for an amount of
1,981,181,638 euros. The reason for said substitution is the fact that on 5 June
2003 TERRA NETWORKS, S.A. carried out a capital decrease in which 6,692,344
shares of the company were redeemed, thus reducing by the same number the
maximum number of shares of TERRA NETWORKS, S.A. which may accept the bid, and
consequently reducing the maximum overall amount which Telefonica, S.A. would
pay in the event that all of the shares to which the bid applies accepted the
bid.
Likewise, we confirm that on today's date we have requested from BBVA BOLSA S.V.
S.A. and Invercaixa, S.V., S.A. that they instruct you to release the
aforementioned deposit in our favour in the amount of 35,134,806 euros, with
value date 16 June 2003.
The deposit established in the aforementioned account shall remain at the
disposal of BBVA BOLSA, S.V., S.A. and INVERCAIXA VALORES, S.V., S.A., and we
have granted an irrevocable mandate to these financial institutions so that the
amount deposited is used exclusively for the settlement of the transactions to
acquire the shares of TERRA NETWORKS, S.A. which may be carried out as a result
of the settlement of the take-over bid for TERRA NETWORKS, S.A. presented by
Telefonica, S.A.
We confirm that Telefonica, S.A. may not make account drawdowns and that,
likewise, and substituting any clause or general condition related to the
opening and drawdown of the aforementioned account, our understanding is that
Banco Bilbao Vizcaya Argentaria, S.A. shall only allow drawdowns on the balance
of the account in the event that, (i) the applications for drawdowns are signed
by a representative of BBVA BOLSA, S.V., S.A. or INVERCAIXA VALORES, S.V., S.A.,
(ii) that said representative proves that he/she has sufficient powers of
attorney to act on behalf of BBVA BOLSA, S.V., S.A. or INVERCAIXA VALORES, S.V.,
S.A. and, (iii), that each application for a drawdown specifies that the amount
requested shall be used exclusively to settle acquisition transactions for
shares of TERRA NETWORKS, S.A. carried out as a result of the settlement of the
take-over bid presented by Telefonica, S.A.
The provisions of the foregoing paragraph shall remain in force until the
Spanish Securities Market Commission has declared that the process for the
settlement of the aforementioned take-over bid has concluded to its full
satisfaction or, otherwise, until the bid is withdrawn, cancelled or declared
null and void.
Likewise, we have requested that BBVA BOLSA, S.V., S.A. and INVERCAIXA VALORES,
S.V., S.A. confirm to you their acceptance of the mandate.
Finally, we indicate that the deposit shall under no circumstances be used by
the owner or by the aforementioned stockbrokers for ends other than those
indicated in the foregoing paragraphs.
Finally, we would be very grateful if you could issue a certificate as soon as
possible, certifying the setting up of the deposit and the regime governing the
same. Yours faithfully,
[illegible signature]
Santiago Fernandez Valbuena
Corporate Finance Managing Director
Telefonica, S.A.
Accepted and agreed
[illegible signature]
Banco Bilbao Vizcaya Argentaria, S.A.
-2-
(Telefonica logo)
Santiago Fernandez Valbuena
Managing Director of Corporate Finance
Telefonica, S.A.
Mr Manuel Menendez
President
INVERCAIXA SOCIEDAD DE VALORES, S.A.
Avda. Diagonal, 621-629
08028 Barcelona
Madrid, 9 June 2003
Dear Sirs
We refer to our letter dated 28 May 2003 in which we confirmed that a cash
deposit was made at Banco Bilbao Vizcaya Argentaria, S.A. in the amount of
1,981,181,638 euros to the individual account labelled TANGO, number 0182 3994
09 0201501336, opened by Telefonica, S.A. and for which we granted your entity
an irrevocable mandate to use said deposit.
By means of the present we request that your entity and BBVA Bolsa, S.V., S.A.
confirm in writing to Banco Bilbao Vizcaya Argentaria, S.A. that it may proceed
to release in our favour (according to the instructions regarding the
destination of the same to be provided by Telefonica, S.A. and with transaction
date 16 June 2003) the amount of 35,134,806 euros of said deposit, so that the
deposit amount now becomes 1,946,046,832 euros.
The reason for said release and reduction of the deposit is the share capital
decrease carried out by TERRA NETWORKS, S.A. on 5 June 2003 in which it redeemed
6,692,344 shares, having therefore reduced by the same number the maximum number
of shares of TERRA NETWORKS, S.A. that may accept the bid, and having therefore
reduced the maximum overall amount that Telefonica, S.A. would pay in the event
that all the shares encompassed by the take-over bid were to accept the bid.
Furthermore, we request that you sign and return to us the attached letter,
which shall replace and render null and void the letter of acceptance of your
mandate dated 28 May 2003 and in which the deposit amount has been changed.
We ask that you notify us and Banco Bilbao Vizcaya Argentaria, S.A. immediately
of your acceptance of the present requests.
Yours faithfully
(signature)
Gran Via, 28 - planta 9 - 28013 Madrid Tel: 91-584-0024
(Telefonica logo)
Santiago Fernandez Valbuena
Managing Director of Corporate Finance
Telefonica, S.A.
Mr Jose Barreiro
President
BBVA BOLSA, S.V., S.A.
Gran Via, 12
48001 Bilbao
Madrid, 9 June 2003
Dear Sirs
We refer to our letter dated 28 May 2003 in which we confirmed that a cash
deposit was made at Banco Bilbao Vizcaya Argentaria, S.A. in the amount of
1,981,181,638 euros to the individual account labelled TANGO, number 0182 3994
09 0201501336, opened by Telefonica, S.A. and for which we granted your entity
an irrevocable mandate to use said deposit.
By means of the present we request that your entity and Invercaixa Sociedad de
Valores, S.A. confirm in writing to Banco Bilbao Vizcaya Argentaria, S.A. that
it may proceed to release in our favour (according to the instructions regarding
the destination of the same to be provided by Telefonica, S.A. and with
transaction date 16 June 2003) the amount of 35,134,806 euros of said deposit,
so that the deposit amount now becomes 1,946,046,832 euros.
The reason for said release and reduction of the deposit is the share capital
decrease carried out by TERRA NETWORKS, S.A. on 5 June 2003 in which it redeemed
6,692,344 shares, having therefore reduced by the same number the maximum number
of shares of TERRA NETWORKS, S.A. that may accept the bid, and having therefore
reduced the maximum overall amount that Telefonica, S.A. would pay in the event
that all the shares encompassed by the take-over bid were to accept the bid.
Furthermore, we request that you sign and return to us the attached letter,
which shall replace and render null and void the letter of acceptance of your
mandate dated 28 May 2003 and in which the deposit amount has been changed.
We ask that you notify us and Banco Bilbao Vizcaya Argentaria, S.A. immediately
of your acceptance of the present requests.
Yours faithfully
(signature)
Gran Via, 28 - planta 9 - 28013 Madrid Tel: 91-584-0024
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 7: Standard form for the announcement of the Bid.
Model announcement of the Bid
TAKE-OVER BID FOR
TERRA NETWORKS, S.A.
LAUNCHED BY TELEFONICA, S.A.
On June 19, 2003, THE SPANISH SECURITIES MARKET COMMISSION (hereinafter,
"CNMV"), authorised the launching, by TELEFONICA, S.A. (hereinafter, the
"BIDDER" or "TELEFONICA"), of a Take-over Bid (the "Bid") for TERRA NETWORKS,
S.A. (hereinafter the "TARGET COMPANY" or "TERRA").
The Bid shall be governed by Spain's Securities Market Law 24/1998, dated July
28, 1998, by Royal Decree 1197/1991, dated July 26, 1991, and other applicable
legislation, and shall be carried out according to the following:
TERMS
INTRODUCTION
The present Bid is launched in Spain and in the United States of America. In the
United States of America the Bid is addressed to the holders of shares in TERRA
represented by American Depositary Shares ("ADSs"), which are listed on the
United States' Nasdaq National Market.
On the filing date of the Prospectus corresponding to the Bid, the number of
TERRA shares represented by ADSs, according to information provided by TERRA,
totaled 58,703,234 shares, of which, on June 9, 2003, 26,765,961 shares were
subject to the Stock Option Plan for employees of Lycos Inc. (a company
controlled by TERRA), and 2,420,468 shares held by Lycos Inc. were included in
TERRA's treasury stock, leaving a total of 29,516,805 shares. Each of the ADSs
grants the holder the right to receive one TERRA share.
In accordance with Rule 14d-1(c) under the Securities Exchange Act of 1934, when
10% or less of the outstanding shares, calculated in accordance with the
provisions of the aforementioned rule, of a foreign company subject to a
take-over bid are owned by stockholders resident in the United States of
America, the BIDDER is not obliged to present documentation otherwise required
in Rule 13(e)3, and the only obligation is that the terms of the bid for the
American stockholders be the same as those applicable to the rest of the
stockholders, including the distribution of a translation of the documentation
filed with the Spanish Securities Market Commission to the American
stockholders. This documentation shall also be furnished to the Securities and
Exchange Commission (hereinafter the "SEC") using a Form CB, at the latest on
the day after the documentation is made available to the public in Spain.
As a result, given that the information held by TELEFONICA demonstrates that, in
accordance with applicable rules, less than 10% of the TERRA shares are owned by
residents of the
United States of America, TELEFONICA considers that this Bid is subject to the
aforementioned regulations.
On May 29, 2003, one day after the present Bid was announced in Spain on May 28,
2003, the corresponding Form CB was filed with the SEC by attaching a copy in
English of the relevant facts and the press article published in Spain, together
with a Form FX communicating the appointment of an agent for service of process
in the United States of America.
In addition, TELEFONICA, after the present Bid is authorised in Spain, shall
send English versions of the Prospectus together with any necessary
complementary documentation to the holders of ADSs. Likewise, this documentation
shall be filed with the SEC using a Form CB.
Finally, and with regard to the procedure for the holders of TERRA shares
represented by ADSs to accept the present Bid, please refer to section III.5.
I. SUBJECTIVE ELEMENTS OF THE BID
The target company of this Bid is TERRA, with a registered address at Calle
Nicaragua n(degree) 54, Barcelona, and holding Fiscal Identification Code
A-82/196080.
The bidder is TELEFONICA, with a registered address in Madrid, Gran Via
n(degree) 28, and holding Fiscal Identification Code number A-28/015865.
On May 28, 2003, the Board of Directors of the BIDDER adopted the necessary
resolutions to launch the present Bid. TELEFONICA directly owns 230,792,328
shares in the share capital of TERRA, representing 38.37% thereof.
Likewise, Telefonica del Peru, S.A. and Compania de Telecomunicaciones de Chile,
S.A., companies controlled by the BIDDER, hold, respectively, 2,238,739 (0.37%)
and 2,984,986 (0.50%) shares of TERRA.
Furthermore, according to information provided by TERRA, TERRA does not hold any
of its own shares directly, however it has a restricted reserve of Euros
1,858,000 corresponding to a total of 2,420,468 shares, held indirectly, on the
date of this announcement, through Lycos Inc., representing 0.402% of the share
capital of TERRA.
TELEFONICA exercises control over TERRA in accordance with the provisions of
Article 4 of the Securities Market Law 24/1988 and Article 42 of the Spanish
Commercial Code, as indicated in the Prospectus of the Bid.
II. OBJECTIVE ELEMENTS OF THE BID
II.1. Securities covered by the Bid.
The Bid covers 100% of the shares of TERRA, that is, 601,467,915 shares
with a nominal value of Euros 2.00 each.
However, the shares of TERRA which TELEFONICA directly owns, i.e.
230,792,328 shares, which represent 38.37% of its share capital, shall not
be included in the Bid
-2-
and have been frozen until the date of publication of the result of the
Bid in the corresponding Gazettes of Listed Securities.
Pursuant to the foregoing, the aim of the Bid is to acquire 370,675,587
shares of TERRA (61.63% of its share capital) which, together with the
frozen shares, amount to 100% of the shares of the TARGET COMPANY.
The stockholders to which the Bid is addressed include: (a) the indirect
stake held by TELEFONICA through Telefonica del Peru, S.A. (0.37% of the
share capital) and Compania de Telecomunicaciones de Chile, S.A. (0.5% of
the share capital); (b) the treasury stock of TERRA held by Lycos Inc.
(0.40%); and (c) TERRA shares subject to the Stock Option Plans for
employees of TERRA and Lycos Inc. (6.77%).
The shares covered by the Bid shall be transferred by the person
authorised to do so, free of liens and encumbrances or third party
rights, so that the BIDDER acquires full title pursuant to the provisions
established in Article 9 of the Spanish Securities Market Law, including
any voting and economic rights that are inherent thereto at the time the
Bid is launched.
The terms of the Bid are identical for all shares to which this Bid is
addressed.
II.2. Consideration offered for the securities.
The BIDDER offers the stockholders of TERRA the amount of Euros 5.25 for
each share of TERRA. Consideration shall be paid in cash.
II.3. Maximum number of shares covered by the Bid and minimum number to be
acquired in order for the Bid to be effective.
a) Maximum
This Bid shall cover all the shares making up TERRA's share capital, i.e.
601,467,915 shares. Nevertheless, and as mentioned above, TELEFONICA has
frozen 230,792,328 shares of TERRA (38.37%) which shall not accept the
Bid and, consequently, the Bid effectively covers 370,675,587 shares,
representing 61.63% of TERRA's share capital.
b) Minimum
The effectiveness of the Bid is conditional upon TELEFONICA acquiring a
number of TERRA shares which, together with the 230,792,328 shares
(38.37%) of the TARGET COMPANY that it already directly owns and which
have been frozen until the result of the Bid is published, enable at
least 75% of the share capital, i.e. 451,100,937 shares, to be directly
acquired by the BIDDER. Consequently, compliance with said condition
would entail acquiring a minimum of 220,308,609 shares of the TARGET
COMPANY (36.63%).
Therefore, if as a result of the present Bid, TELEFONICA only reached the
minimum percentage to which the Bid is subject and the indirect stake
held through Telefonica de
-3-
Peru, S.A. and Compania de Telecomunicaciones de Chile, S.A. were not
covered by the Bid, TELEFONICA's direct and indirect stake in TERRA after
the Bid would then be 75.87% of the share capital of TERRA, without
counting the aforementioned treasury stock.
The BIDDER expressly reserves the right to waive the minimum number of
shares to which the Bid is subject, without any decision whatsoever
having been adopted in this regard at the date of the Prospectus.
c) BIDDER's Commitments
The BIDDER declares its commitment that, neither it, acting on its own
behalf or through an intermediary, nor any company of its group, shall
acquire shares, either directly or in a concerted manner, in the TARGET
COMPANY by any means other than the Bid procedure from the time it was
announced on May 28, 2003 until its end.
If the Bid is unsuccessful, the BIDDER, the members of its management
body, its senior executive staff and any person acting in concert with
the same, may not launch another take-over bid until six months have
elapsed since the date of publication of the Bid's result, nor may they
acquire securities in said period which would require a bid to be
launched.
II.4. Guarantees established by the BIDDER for settlement of the Bid.
In order to guarantee the payment of the consideration offered, the
BIDDER has opened a cash account at Banco Bilbao Vizcaya Argentaria, S.A.
for a total of Euros 1,946,046,832, an amount which has been irrevocably
attached to the settlement of the Bid.
II.5. Financing of the Bid.
TELEFONICA shall use the funds deposited in Banco Bilbao Vizcaya
Argentaria, S.A., referred to in section II.4 above, to acquire the
shares of TERRA to which this Bid is addressed. Said deposit was
established with excess treasury from the BIDDER, without using any
available credit facilities to do so. TELEFONICA's net debt shall be
increased by the same amount in which its treasury is decreased.
The TARGET COMPANY will not incur any debt as a result of this Bid.
III. FORMAL ELEMENTS OF THE BID
III.1. Acceptance period.
The acceptance period of the present Bid shall be one month as from the
date of publication of the first of the announcements of the Bid,
pursuant to the provisions established in Article 18 of Royal Decree
1197/1991 dated July 26, 1991 (said announcements, according to this
Article, shall be published in the Official Gazette of the Mercantile
Registry, in the Gazettes of Listed Securities of the Securities Markets
of Madrid, Barcelona, Bilbao and Valencia, and in two newspapers, one of
them
-4-
distributed nationally and the other widely distributed in the place of
the TARGET COMPANY's registered address).
For these purposes, a month shall be counted from date to date. If the
first day of the term is not a business day for the purposes of the
Spanish Computer Assisted Trading System ("SIBE"), the acceptance
period shall begin on the next business day for SIBE purposes; and if
the last day of the term is not a business day, the acceptance period
shall be automatically extended until midnight on the next immediate
business day for SIBE purposes.
Pursuant to the provisions established in Article 19 of Royal Decree
1197/1991, as long as the two-month legal maximum is not exceeded, the
BIDDER may extend the period of acceptance initially established with
the prior authorisation of the CNMV and shall announce the extension in
the same media in which the announcement of the Bid was published, at
least three days before the end of the initial acceptance period.
III.2. Formalities relating to the acceptance and manner and term in which the
consideration shall be received.
III.2.1. Formalities related to the acceptance of the Bid.
(i) Declarations of acceptance of the Bid shall be unconditional and
irrevocable, and any tenders which do not meet these
requirements shall be deemed invalid and shall not be accepted.
Holders who wish to declare their acceptance of the Bid should
do so by any official means to the Governing Body of the
Securities Markets of Madrid, Barcelona, Bilbao, Valencia,
within the period indicated through any entity which is a member
of the market and said entity shall be responsible for the title
and possession of the shares to which the acceptances refer, as
well as for the non-existence of any liens or encumbrances or
third-party rights which restrict the voting or economic rights
of such shares or the free transferability thereof.
Each declaration of acceptance of the Bid made by a TERRA
stockholder before the corresponding entity shall include all
the identification details required under current law for this
type of transaction. Such declaration of acceptance shall also
include all the necessary details on the title of the TERRA
shares in order to formalise the transfer thereof to the BIDDER.
(ii) Each TERRA stockholder may require the entity, through which it
is processing its acceptance, to provide a receipt proving that
the acceptance was processed, in accordance with applicable
procedural rules.
(iii) Under no circumstances shall the BIDDER accept securities of
which the registration references were subsequent to the last
day of the acceptance period of this Bid, i.e. the shares
offered for sale must have been purchased, at the latest, on the
last day of the acceptance period of the Bid.
-5-
III.2.2. Settlement procedure and delivery of consideration for the Bid.
Upon the Bid expiration, or of any period resulting from the extension
or modification thereof, as the case may be, the Governing Bodies of
the Securities Markets of Madrid, Barcelona, Bilbao and Valencia shall
notify the CNMV, within a maximum of five business days, of the total
number of shares included in the declarations of acceptance presented.
Once the CNMV knows the total number of acceptances, it shall notify
the Governing Bodies of the Securities Markets of Madrid, Barcelona,
Bilbao and Valencia, and TELEFONICA and TERRA, within three days, of
the positive or negative result of the Bid. The Governing Bodies shall
publish this result no later than the following day in the
corresponding Gazettes of Listed Securities. The publication date of
the result of the Bid shall be the date of the session to which said
Gazettes refer.
The acquisition of the shares shall be settled by either BBVA BOLSA SV
S.A. or INVERCAIXA VALORES, S.V., S.A., who shall act on behalf of the
BIDDER in accordance with the appointment set forth in section III.4
below.
The settlement and payment of the consideration offered shall be made
following the procedure established for this purpose by the Management
Company for the Registry, Clearing and Settlement of Securities
(IBERCLEAR); the trading date of the corresponding securities market
transaction shall refer to the date of publication of the result of the
Bid in the Gazettes of Securities Listed on the Securities Markets of
Madrid, Barcelona, Bilbao and Valencia.
Should the BIDDER not acquire the minimum established in section II.3,
the BIDDER may waive said condition, acquiring all the securities
offered, although on the date of the Prospectus, the BIDDER has made no
decision in this regard.
In the event that the minimum is not reached, TELEFONICA undertakes,
within 3 days of being informed of the result of the Bid by the CNMV,
to notify the CNMV of its decision whether or not to waive the minimum
limit conditioning the Bid. In any event, the aforementioned
notification shall be made public by the BIDDER in the manner foreseen
in Article 18.1 of Royal Decree 1197/91, on the day after said
notification.
III.3. Acceptance and settlement expenses of the Bid.
The stockholders of TERRA who accept the Bid shall bear and pay the
corresponding fees for the participation of a stockbroker in the
transaction, the charges of the corresponding Governing Bodies of the
Securities Markets and the IBERCLEAR settlement, as well as any other
expense incurred by the seller relating to the sale and purchase.
Expenses incurred by TELEFONICA shall be borne by the BIDDER.
-6-
In the event that the Bid is unsuccessful, all expenses derived from
the acceptance and return of the documents confirming the ownership of
the securities which were provided by those who accepted the Bid, shall
be borne by TELEFONICA.
III.4. Appointment of the Stockbrokers acting on behalf of the BIDDER.
The BIDDER has appointed BBVA BOLSA, S.V., S.A., with a registered
address at Gran Via 12, 48001 Bilbao, holding Fiscal Identification
Code number A-28/718112, and INVERCAIXA VALORES, S.V., S.A., with a
registered address at Avenida Diagonal, 621-629, 08028 Barcelona,
holding Fiscal Identification Code number A-58/483124 as the entities
in charge of settling the share purchase transactions that may result
from this Bid and which are processed by the Governing Bodies of the
Securities Markets of Madrid, Barcelona, Bilbao and Valencia.
III.5. Formalities for the acceptance of the Bid in the case of TERRA shares
represented by American Depositary Shares ("ADSs").
With regard to the acceptance of the Bid in the case of TERRA shares
represented by ADSs listed on the Nasdaq National Market, TELEFONICA
has appointed Citibank N.A. (hereinafter, "Citibank"), acting through
its office at 111 Wall Street, New York, New York 10005, USA, as Agent
for the Bid in the United States of America.
Any holder of ADSs wishing to accept the present Bid with the shares in
TERRA represented by its ADSs may contact Citibank directly, attaching
to its acceptance a certificate confirming ownership, or the banks,
brokers or trustees where the ADSs are deposited or, if applicable, by
means of the book-entry system of The Depository Trust Company ("DTC")
if it has its ADSs registered with such company, notifying that it
intends to accept the present Bid within the periods established to
this end in the Prospectus. Citibank shall send more detailed
instructions on this procedure directly to the holders of ADSs.
For the purposes of Article 27 of Royal Decree 1197/1991 dated July 26,
1991, governing take-over bids, Citibank shall notify a member of the
Spanish market, immediately and, in any event, within a maximum of two
securities market working days from the end of the period for the
acceptance of the present Bid, of the total number of shares
represented by ADSs that have accepted the Bid, so that said member of
the market may inform the Governing Bodies of the Securities Markets
within said term, of the total number of shares included in the
declarations of acceptance presented.
Settlement and payment of the consideration offered will be carried out
in accordance with the provisions of section III.2.2 above, whereby,
once Citibank receives the corresponding funds in Euros, it will pay
the holders of the ADSs the price of the consideration in U.S. dollars
at the applicable Euro/U.S. Dollar rate of exchange available at that
time in the open market, less any fees, taxes and expenses
corresponding to the transaction, which shall be listed in the
aforementioned instructions to be sent to the holders of the ADSs.
These fees and expenses shall
-7-
include the acceptance and settlement expenses listed in section III.3
above and the treatment of which is described in this section.
IV. OTHER INFORMATION
IV.1. Objective of the Bid and future activity of the TARGET COMPANY.
TELEFONICA's objective in filing this Bid is to increase its holding in
TERRA, in order to obtain full control and to further integrate the two
companies, in accordance with the terms set out below.
On February 12, 2003, the two companies executed a Strategic Alliance
Framework Agreement (hereinafter, the "Framework Agreement"), a
long-term agreement designed for both companies to take advantage of
TELEFONICA's capacity as a provider of connectivity and broadband and
narrowband access, and TERRA's capacity as an Internet portal,
aggregator, provider and manager of Internet content and services, in
fixed telephony, so that both companies may capture the synergies and
savings generated by the Internet, a complex and ever-changing business
sector.
However, this business model could offer even greater potential for
TERRA and TELEFONICA if all aspects of the same are developed fully. To
this end, achieving the highest degree of integration of operations
permitted by the market and current regulations appears to be the best
strategy for overcoming as far as possible the main factors which
condition the evolution of the business model, which are basically as
follows:
. The flexibility and freedom in business needed both to boost growth
in demand and to improve positioning in the competitive market.
. The efficiency of operations that the drastic decrease in the
margins of these products and services demands.
. The increase in investment required for development, due to the
technological complexity of the platforms and the capacity
requirements for access to and transmission of information.
. Growing customer demand for products and services that integrate
connectivity, Internet access, and value-added services and
content.
In an attempt to fulfil these conditions, the general plan for the
subsequent development of the business model would be based on the
following factors:
. The operation of TERRA as a specific line of business in order to
maximise the potential of its trademark and Internet capacities
(with particular emphasis on the residential and professional
segments), while streamlining its structural and management
resources;
. The integration of TERRA with the fixed telephony operators in
markets in which operators of the TELEFONICA Group have a presence;
-8-
. Establishing TERRA as the unit integrating the TELEFONICA Group's
online content offer; and
. Bolstering the integrated offer of connectivity products and services,
Internet access and value-added content and services, to customers of
the TELEFONICA Group.
Given TELEFONICA's current holding in TERRA and the nature of the factors
which would permit the expansion of the new business model, TELEFONICA
believes it is necessary for it to increase its control over TERRA by
increasing its stake therein, which shall enable an improved development
and growth in the Internet business of the TELEFONICA Group, by bringing
the interests of both companies closer together and adequately integrating
them into the value chain of the Internet business. To do this, TELEFONICA
has decided to direct the Bid at all the shares of TERRA in order to obtain
the highest percentage possible of its share capital.
The development of the business model which TELEFONICA intends to boost
pursues a greater integration of TERRA with fixed telephony operators and
TELEFONICA Group data and with its corporate units that are involved in the
management and purchase of content, in the manner described below.
Activity; Assets and Liabilities.
The BIDDER has no plans regarding the assets of the TARGET COMPANY other
than to use and, as the case may be, restructure those assets, at any given
time, in the manner which it deems most appropriate in order for the TARGET
COMPANY to carry out its activities according to the business model
described in section IV.1 above.
Thus, with regard to the markets on which TELEFONICA is present through
fixed telephony operators, and as it increases its stake in TERRA,
TELEFONICA's plan is to carry the integration further by increasing the
level of services provided by TELEFONICA to TERRA and the use of the TERRA
trademark as such when offering the portals in certain customer segments
and, if applicable, in Internet access. TELEFONICA shall boost its range of
services, portals and Internet content through TERRA's trademark and
capacities, together with the assets the BIDDER has in this sector. In the
remaining markets, the possibility shall be examined of offering additional
telecommunications services on TERRA's Internet portals, together with a
greater centralisation of operations management, combined with other mobile
telephony business and TELEFONICA Group data.
With respect to Lycos, TELEFONICA wishes that it be managed with the
highest level of flexibility and independence that is demanded by the
world's leading Internet market, i.e. the US market.
In relation to third party arrangements and agreements which TERRA
currently has in order to develop its range of contents and portals,
TELEFONICA intends to maintain them and to gradually analyse their progress
according to their results, degree of
-9-
complementarity and adequacy for the construction of its range of
portals and Internet services.
However, if the future criteria regarding profitability and generation
of value for the stockholders of TERRA and, indirectly, of TELEFONICA,
render it advisable to expand, transfer, restructure, cease or reduce
any of the TARGET COMPANY's activities or restrict the same to certain
geographic areas, the BIDDER would proceed to analyse the plan of
action appropriate for the assets relevant to such activities without
there being an intention whatsoever in this regard at the date of the
Prospectus.
At the date of the Prospectus, TELEFONICA has no plans to
significantly alter TERRA's level of debt or to modify its share
capital figure. Likewise, at the date of the Prospectus, no
substantial modification is envisaged of TERRA's employment policy,
except as derived from the materialisation of the synergies referred
to in section IV.2 below.
TELEFONICA has not signed any agreement, nor has it assumed any
undertaking whatsoever, with respect to maintaining any company, line
of business or asset within TERRA's company group.
Finally, TELEFONICA has no plans to carry out any merger, spin-off,
transformation or transfer which may directly or indirectly affect
TERRA, the companies of its group, or any of its lines of business, or
significant assets of TERRA, or to transfer the shares of the TARGET
COMPANY to third parties after this Bid. Nevertheless, the possibility
remains of these alternatives being considered in the future.
In any case, it should be taken into account that the evolution of
rapidly changing Internet markets may lead to a change in some of the
aforementioned plans, which may advise the taking of decisions
different from those envisaged herein.
Changes to the By-laws and management body.
The BIDDER does not intend to modify the By-laws of TERRA after this
Bid.
If the Bid is successful, TELEFONICA intends to renew the Board of
Directors of TERRA, in order to increase its presence on the same
according to the shareholding acquired after the Bid. In any case,
pursuant to current regulations and the recommendations that are
generally accepted in good government practice, TELEFONICA intends to
maintain independent directors on the Board of Directors, according to
the resulting shareholding structure following the Bid under the
Prospectus.
Trading of the securities of the TARGET COMPANY.
Given that the present Bid is not a de-listing bid, TELEFONICA does
not intend to apply for the de-listing of TERRA's shares through this
Bid. Notwithstanding the foregoing, if as a result of the present Bid
the distribution of TERRA shares does not
-10-
allow adequate trading frequency and liquidity, TELEFONICA undertakes
to adopt, within a term of 6 months following the end of the Bid, any
measures that are necessary to maintain the listing of the TERRA
shares or to apply for their de-listing in compliance with any
applicable requirements including, as the case may be, the launching
of a de-listing take-over bid in the aforementioned term.
IV.2. Impact of this operation on the BIDDER
The acquisition of shares in TERRA will not affect the BIDDER's
dividend policy. TELEFONICA intends to maintain its current dividend
policy based on expected cash flow generated by its operations.
The price of the Bid, taking as a reference TERRA's consolidated group
financial statements at March 31, 2003, adjusted with the share
capital decrease registered in June, shall generate an additional
goodwill in TELEFONICA of approximately Euros 72 million. This
goodwill shall be amortised over a term of ten years, at a rate of
Euros 7.2 million per year, according to TELEFONICA's current
accounting policy. Assuming that the Bid is 100% accepted, the
estimated negative impact of the same on the consolidated results of
the BIDDER in the 2003 financial year, and if the new stake acquired
were consolidated for a period of 6 months, would amount to Euros 50.3
million, an amount which includes the proportional amortisation of the
goodwill, financial results after tax and the allocation of results of
the acquired stake.
On the other hand, in the event of reaching the minimum number of
shares to which the Bid is subject, TERRA shall be necessarily
integrated into TELEFONICA's consolidated fiscal group in the next
financial year, i.e. in 2004. Consequently, as from that time, the
positive or negative taxable base obtained by TERRA in each financial
year shall be integrated into the Group's consolidated tax base.
Likewise, any credits or other tax benefits accrued by TERRA shall be
added and used by the consolidated fiscal group of which TELEFONICA is
the controlling company. This impact, amongst others, has been taken
into account to establish the minimum 75% limit referred to in section
II.3.b) above.
However, the negative taxable bases and tax benefits generated to date
by the TARGET COMPANY, pending offset, may only be offset in the
consolidated tax base of the TELEFONICA Group up to the maximum
allowed by the individual positive tax base generated by TERRA itself
in each financial year. In the event that any corporate operation were
carried out in the future which affected TERRA (merger, spin-off or
others), the treatment of said bases and tax benefits shall depend on
the specific operation eventually carried out.
Assuming that the Bid is 100% accepted, the consolidated debt ratio/1/
of the TELEFONICA Group, based on the financial statements at March
31, 2003, would be 47.6%, as opposed to 45.5% before the operation.
/1/ Debt ratio: Net debt / (Own resources + External stockholders + Income to be
distributed + Long-term debt with public administrations + Net debt).
Net debt: Long-term creditors (excluding minority stockholder debt) + Issues and
bank debt - Long-term and short-term financial investments - Treasury.
-11-
Translation-for information purposes only
As a result of integrating the businesses, making a joint effort in
markets where TELEFONICA is present and eliminating redundant
functions and competencies in its positioning, TELEFONICA expects to
be able to generate synergies with this operation; as regards income,
by repositioning the business in order to boost the growth of the
broadband market, increasing the Group's Internet market share,
increasing customer income and margins; as regards expenses and
investment resources allocated to the business, by restructuring the
business and eliminating redundancies, streamlining its work centres
and saving on management and administration costs, integrating the
services and product development units, improving the efficiency of
content purchase and production and generating savings in marketing
and commercial campaigns. As a result of all the foregoing, TELEFONICA
expects to generate an additional operating margin of Euros 14.2
million in the final quarter of 2003, increasing this forecast to
Euros 268.9 million for the period 2003-2006, including said quarter.
IV.3. Availability of the Prospectus.
Pursuant to the provisions of Article 18.3 of Royal Decree 1197/1991,
dated July 26, 1991 the Prospectus and its supporting documentation
has been made available to the interested parties, and was deposited
at the Governing Bodies of the Securities Markets in Madrid,
Barcelona, Bilbao and Valencia; at the registered address of
TELEFONICA (Calle Gran Via, n(degrees)28, 28013, Madrid); at the
registered address of TERRA (Calle Nicaragua, n(degrees)54, 08029,
Barcelona); at the registered address of BBVA BOLSA S.V., S.A. (Gran
Via 12, 48001, Bilbao); and at the registered address of INVERCAIXA
VALORES S.V., S.A. (Avda. Diagonal, 621-629, 08028, Barcelona), on the
day after the publication of the first of the announcements concerning
this Bid.
Furthermore, the Prospectus and its supporting documentation may be
consulted in the public records of the CNMV in Madrid (Paseo de la
Castellana 15) and at its representative office in Barcelona (Paseo de
Gracia 19), as well as on the CNMV website (in the latter case, only
the Prospectus shall be available).
In Madrid, on June 18, 2003
TELEFONICA, S.A.
-12-
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 8: Letter regarding the publication of the Bid.
Translation - for information purposes only
SPANISH SECURITIES MARKET COMMISSION
Paseo de la Castellana, 15
Madrid
Madrid, 18 June 2003
Dear Sirs
Regarding the take-over bid for the shares of TERRA NETWORKS, S.A. filed by
TELEFONICA, S.A. on 28 May 2003, we hereby inform you that the sole announcement
to be made in relation with said operation shall consist of the publication of
the announcements referred to in Article 18 of Royal Decree 1197/91, dated 26
July, within the periods indicated in the same. In addition, it is envisaged
that a translation of the announcement published in Spain shall be published in
a newspaper distributed nationally in the United States. There is no intention
to make any other announcement or publication of any kind regarding this bid.
Notwithstanding the foregoing, in the event that the decision is made to make
any additional announcement or publication, the contents of the same would first
be communicated to the Spanish Securities Market Commission with sufficient
notice.
Yours faithfully
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 9: Letters of acceptance from the Stockbrokers acting on behalf of the
Bidder.
InverCaixa
InverCaixa Valores, S.V., S.A.
Maria de Molina, 6
28006 Madrid - Spain
Tel: 915576900
Fax: 915576947
E-mail: atruan@invercaixa.es
Antonio Truan
General Manager
Mr Santiago Fernandez Valbuena
Managing Director of Corporate Finance
Telefonica, S.A.
Gran Via, 28
28013 Madrid
Madrid, 16 June 2003
Dear Sirs
We refer to our letter dated 28 May 2003 in which we accepted the irrevocable
mandate to use the deposit made into account number 0182 3994 09 0201501336 in
the name of Telefonica, S.A. in Banco Bilbao Vizcaya Argentaria, S.A. Said
deposit was established in order to cover the settlement of the acceptances
received from the owners of shares of Terra Networks S.A. as a result of the
take-over bid launched for said company by Telefonica, S.A.
We also refer to your letter dated 9 June 2003, in which you informed us of the
capital reduction of Terra Networks, S.A. which was executed on 5 June 2003 last
and in which you request that we confirm to Banco Bilbao Vizcaya Argentaria,
S.A. that said entity can release the amount of 35,134,806 euros in your favour,
thus leaving the deposit with a total of 1,946,046,832 euros. We have carried
out said confirmation in the terms of the letter which is attached to the
present one.
Consequently, we hereby substitute and render null and void our letter of 28 May
2003, confirming for the corresponding purposes that Invercaixa Valores, S.V.,
S.A. has been appointed by Telefonica, S.A. together with BBVA Bolsa, Sociedad
de Valores, S.A. as an entity responsible for the intervention and settlement of
the acquisition transactions for the shares of Terra Networks, S.A., on the
securities markets of Madrid, Barcelona, Bilbao and Valencia and accepting said
appointment for the purposes foreseen in the Prospectus of said bid and in the
legislation currently in force.
Yours faithfully
[illegible signature]
BBVA Bolsa Isabel Bermejo Rodriguez
Managing Director
Banco Bilbao Vizcaya Argentaria, S.A.
Da. Nuria Alonso
Alcala, no 16
28014 Madrid
Madrid, 16 June 2003
Dear Sirs
Telefonica, S.A. is the owner of a cash deposit made at your entity in the
amount of 1,981,181,638 euros, in an individual account labelled TANGO, number
0182 3994 09 0201501336.
Telefonica, S.A. has granted an irrevocable mandate in order for InverCaixa
Valores, S.V., S.A. and BBVA Bolsa, S.V., S.A. to be the only entities that may
have access to said deposit so that the amount of the same is used exclusively
to pay the corresponding settlements in relation to the Take-over Bid launched
by Telefonica, S.A. over 100% of the shares of Terra Networks, S.A.
On 5 June 2003, Terra Networks, S.A., as indicated to us by Telefonica, S.A. in
a document dated 9 June 2003, proceeded to reduce its share capital by 6,692,344
shares. As a result, the deposit made of 1,981,181,638 euros exceeds by
35,134,806 euros the maximum amount to be paid, if appropriate, to the
shareholders accepting the Bid. Therefore, and based on the aforementioned
declaration regarding the execution of the share capital decrease of Terra
Networks, S.A., we hereby request that Banco Bilbao Vizcaya Argentaria, S.A.
proceed, if appropriate, to release and reduce the aforementioned deposit in
favour of Telefonica, S.A. (according to the instructions regarding the
destination of the same to be provided by Telefonica, S.A.) in the amount of
35,134,806 euros, so that the deposit amount now becomes 1,946,046,832 euros.
Therefore, the amount available to BBVA Bolsa, S.V., S.A., if appropriate, for
payment to the shareholders accepting the Bid shall be reduced to 1,946,046,832
euros.
Yours faithfully
(signature)
c.c. Mr Santiago Fernandez Valbuena
Directorate General for Corporate Finance, Telefonica, S.A.
Gran Via, no 28
28013 Madrid
DOCUMENTS ANNEXED TO THE PROSPECTUS CORRESPONDING TO
THE TAKE-OVER BID FOR TERRA NETWORKS S.A.
Annex 10: Copy of the notifications filed before the competition authorities
in the United States of America and in Mexico
C L I F F O R D CLIFFORD CHANCE US LLP
C H A N C E THE WILLIAM P ROGERS BUILDING
2001 K STREET NW
WASHINGTON DC 20008 1001
TEL +1 202 912 5000
FAX +1 202 912 6000
www.cliffordchance.com
John M. Sipple, Jr.
Counsel
DIRECT TELEPHONE (202) 912-5157
DIRECT FACSIMILE (202) 912-6162
June 18, 2003
BY HAND
DIRECTOR OF OPERATIONS
Antitrust Division
U.S. Department of Justice
601 D Street, N.W.
Room #10-013
Washington, D.C. 20530
Re: Proposed Cash Tender Offer by Telefonica, S.A. for All of the
Outstanding Ordinary Shares of Terra Networks, S.A.
Dear Sir or Madam:
On behalf of Telefonica, S.A. ("Telefonica"), we are forwarding three signed and
duly executed Notification and Report Forms ("HSR Form") and one set of
documentary attachments with respect to the proposed cash tender offer by
Telefonica for all of the outstanding ordinary shares of Terra Networks, S.A.
Telefonica is the acquiring person in this transaction.
If I can be of assistance in your review of the proposed transaction, please do
not hesitate to call me at (202) 912-5157. Kindly acknowledge receipt of the
enclosed materials by time-stamping the enclosed copies of this letter and
Telefonica's HSR Form.
Sincerely,
/s/ John M. Sipple, Jr.
John M. Sipple, Jr.
Enclosures
TRANSACTION NUMBER ASSIGNED [_][_][_][_][_][_][_][_]
------------------------------------------------------------------------------------------------------------------------------------
16 C.F.R. Part 803 - Appendix Approved by OMB
3084-0005
NOTIFICATION AND REPORT FORM FOR CERTAIN MERGERS AND ACQUISITIONS Expires 08/31/02
------------------------------------------------------------------------------------------------------------------------------------
THE INFORMATION REQUIRED TO BE SUPPLIED ON THESE ANSWER SHEETS IS SPECIFIED IN THE INSTRUCTIONS
> Attach the Affidavit required by (S) 803.5 to this page.
------------------------------------------------------------------------------------------------------------------------------------
FEE INFORMATION TAXPAYER IDENTIFICATION NUMBER ________________________________________
or SOCIAL SECURITY NUMBER of payer ____________________________________
AMOUNT PAID $280,000 (acquiring person (and payer if different from acquiring person))
----------------
In cases where your filing fee would be higher if CHECK ATTACHED [_] MONEY ORDER ATTACHED [_]
based on acquisition price or where the acquisition WIRE TRANSFER [X] CONFIRMATION NO. ______________________________
price is undetermined to the extent that it may FROM: NAME OF INSTITUTION 2792070100184818 or 890288
straddle a filing fee threshold, attach an --------------------------
explanation of how you determined the appropriate NAME OF PAYER (If different from PERSON FILING)
fee (acquiring persons only).
Attachment Number _______________________
------------------------------------------------------------------------------------------------------------------------------------
IS THIS A CORRECTIVE FILING? [_] YES [X] NO
------------------------------------------------------------------------------------------------------------------------------------
IS THIS ACQUISITION SUBJECT TO FOREIGN FILING REQUIREMENTS? [X] YES [_] NO
If YES, list jurisdictions: Mexico
------------------------------------------------------------------------------------------------------------------------------------
IS THIS ACQUISITION A CASH TENDER OFFER? [X] YES [_] NO BANKRUPTCY? [_] YES [X] NO
------------------------------------------------------------------------------------------------------------------------------------
DO YOU REQUEST EARLY TERMINATION OF THE WAITING PERIOD? (Grants of early termination are published in the Federal Register AND
[X] YES [_] NO on the FTC web site www.ftc.gov)
------------------------------------------------------------------------------------------------------------------------------------
ITEM 1 - PERSON FILING
l(a) NAME and HEADQUARTERS ADDRESS Telefonica, S.A.
of PERSON FILING Gran Via 28
28013 Madrid, Spain
------------------------------------------------------------------------------------------------------------------------------------
1(b) PERSON FILING NOTIFICATION IS
[X] an acquiring person [_] an acquired person [_] both
------------------------------------------------------------------------------------------------------------------------------------
l(c) PUT AN "X" IN THE APPROPRIATE BOX TO DESCRIBE PERSON FILING NOTIFICATION
[X] Corporation [_] Partnership [_] Other (Specify) _________________________________________________
------------------------------------------------------------------------------------------------------------------------------------
1(d) DATA FURNISHED BY
[X] calendar year [_] fiscal year (specify period) _____________________ (month/year) to _________________(month/year)
------------------------------------------------------------------------------------------------------------------------------------
THIS FORM IS REQUIRED BY LAW and must be filed separately by each person which,
by reason of a merger, consolidation or acquisition, is subject to (S)7A of the
Clayton Act, 15 U.S.C. (S)18a, as added by Section 201 of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, Pub. L. No. 94-435, 90 Stat. 1390, and rules
promulgated thereunder (hereinafter referred to as "the rules" or by section
number). The statute and rules are set forth in the Federal Register at 43 FR
33450; the rules may also be found at 16 CFR Parts 801-03. Failure to file this
Notification and Report Form, and to observe the required waiting period before
consummating the acquisition in accordance with the applicable provisions of 15
U.S.C. (S)18a and the rules, subjects any "person," as defined in the rules, or
any individuals responsible for noncompliance, to liability for a penalty of not
more than $11,000 for each day during which such person is in violation of 15
U.S.C. (S)18a.
All information and documentary material filed in or with this Form is
confidential. It is exempt from disclosure under the Freedom of Information Act,
and may be made public only in an administrative or judicial proceeding, or
disclosed to Congress or to a duly authorized committee or subcommittee of
Congress.
Filing - Complete and return two copies (with one original affidavit and
certification and one set of documentary attachments) of this Notification and
Report Form to: Premerger Notification Office, Bureau of Competition, Room 303,
Federal Trade Commission, 600 Pennsylvania Avenue, N.W., Washington, DC 20580.
Three copies (with one set of documentary attachments) should be sent to:
Director of Operations and Merger Enforcement, Antitrust Division, Department
of Justice, Patrick Henry Building, 601 D Street, N.W., Room #100l3, Washington,
D.C 20530. (For FEDEX airbills to the Department of Justice, do not use the
20530 zip code; use zip code 20004.)
DISCLOSURE NOTICE - Public reporting burden for this report is estimated to vary
from 8 to 160 hours per response, with an average of 39 hours per response,
including time for reviewing instructions, searching existing data sources,
gathering and maintaining the data needed, and completing and reviewing the
collection of information. Send comments regarding the burden estimate or any
other aspect of this report, including suggestions for reducing this burden to:
Premerger Notification Office Office of information and
H-303 Regulatory Affairs,
Federal Trade Commission Office of Management and Budget
Washington, DC 20580 Washington, DC 20503
1 of 15
H.Comision Federal de Competencia
PRESENTE
Atencion: Sres. Dr. Fernando Sanchez Ugarte
Lic. Luis A Prado Robles
Dr. Alvaro Sanchez Gonzalez
Asunto: Se notifica concentracion
Francisco de Paula Carral Puccio y Jeronimo Marcos Gerard Rivero, en
representacion de TELEFONICA MOVILES MEXICO, S.A. DE C.V., personalidad que se
acreditamos mediante copia certificada del poder que se adjunta al presente
excrito como Anexo 1, senalando como domicilio para oir y recibir todo tipo de
notificaciones el ubicado en Bosque de Alisos No. 47-B Despacho 101, Bosques de
las Lomas, 05120 Mexico, Distrito Federal (telefono 5259-5353), autorizando para
tales efectos, asi como para presentar y recoger toda clase de documentos,
indistintamente a los licenciados Javier Martinez del Campo Lanz, Manuel Romano
Mijares, Ignacio Gomez Morin, Jose Estandia Fernandez, Jesus Gabriel Altamirano
Cano, a las licenciadas, Ana Maria Fernandez Rionda, Pilar Olmedo Martell y
Maria del Mar Herrerias Sordo y a los senores Jose Matero Garcia Contreras y
Federico Coronado Guerra, respetuosamente comparecemos y exponemos:
Con fundamento en los articulos 16,20 y 21 de la Ley Federal de Competencia
Economica (la "Ley"), asi como en los articulos 17, 18, 19 y 20 de su Reglamento
(el "Reglamento") por medio del presente escrito respetuosamente notificamos a
esa H. Comision la concentracion descrita en el presente y le solicitamos emitir
resolucion favorable respecto de la misma.
A. Descripcion General de la Operacion.
Telefonica, S.A. ("Telefonica"), una compania de nacionalidad espanola,
pretende adquirir, mediante oferta publica de adquisicion de acciones a
realizarse en Espana y los Estados Unidos de America, hasta 370'675,587 acciones
que equivalen al 61.63% del capital social de Terra Netwoks, S.A. ("Terra") una
compania tambien de nacionalidad espanola (en lo sucesivo la "Transaccion"). En
principio, se contempla que la Transaccion se concluya el 23 de julio de 2003.
Telefonica ya es actualmente titular de 230'792,328 acciones, que equivalen al
38.37% del capital social de Terra, por lo que con la adquisicion a que se
refiere el parrafo anterior, Telefonica podria llegar a ser titular de hasta
601'467,915 acciones, equivalentes al 1OO% del capital social de Terrra.
La efectividad de la oferta esta condicionada a la adquisicion por Telefonica de
un numero de acciones de Terra que, junto con las 230'792,328 acciones de Terra
de que ya es directamente propietaria Telefonica, suponga alcanzar de forma
directa por esta como minimo el 75% del
[LETTERHEAD OF CLIFFORD CHANCE]
June 18, 2003
BY HAND
PREMERGER NOTIFlCATION OFFICE
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Room 303
Washington, D.C. 20580
Re: Proposed Cash Tender Offer by Telefonica, S.A. for All of the
Outstanding Ordinary Shares of Terra Networks, S.A.
Dear Sir or Madam:
On behalf of Telefonica, S.A. ("Telefonica"), we are forwarding two signed and
duly executed Notification and Report Forms ("HSR Form") and one set of
documentary attachments with respect to the proposed cash tender offer by
Telefonica for all of the outstanding ordinary shares of Terra Networks, S.A.
Telefonica is the acquiring person in this transaction and its HSR filing is
being submitted with copies of the original, executed certification and
affidavit. The originals will be submitted as soon as they are received.
Telefonica has paid the $280,000 HSR filing fee by electronic wire transfer.
If I can be of assistance in your review of the proposed transaction, please do
not hesitate to call me at (202) 912-5157. Kindly acknowledge receipt of the
enclosed materials by time-stamping the enclosed copies of this letter and
Telefonica HSR Form.
Sincerely,
/s/ John M. Sipple, Jr.
John M. Sipple, Jr.
Enclosures