UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934
May 16, 2006
Commission File Number: 001-09531
TELEFONICA, S.A.
(Translation of registrant's name into English)
GRAN VIA, 28
28013 MADRID, SPAIN
3491-459-3050
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
Form 20-F X Form 40-F
----- -----
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
Yes No X
----- -----
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Yes No X
----- -----
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes No X
----- -----
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): N/A
TELEFONICA, S.A.
This Form 6-K is incorporated by reference into the registration statement of
Telefonica, S.A. and Telefonica S.A.U. filed with the Securities and Exchange
Commission on April 12, 2006 (File No. 333-133251). In addition, this Form 6-K
amends and supercedes the Form 6-K filed with the Securities and Exchange
Commission on April 12, 2006, accepted at 16:09:15 (File No. 001-09531).
TABLE OF CONTENTS
ITEM DOCUMENT PAGE NUMBER
---- -------- -----------
1. Report of Independent Auditors A-1
2. Consolidated audited UK GAAP financial statements of O2
plc, reconciled to U.S. GAAP, for years ended March 31,
2004 and 2005 A-2
3. Consolidated unaudited interim IFRS financial statements of
O2 plc, reconciled to U.S. GAAP, for the six months ended
September 30, 2004 and 2005 B-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of O2 plc:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated profit and loss accounts, statements of total recognised gains and
losses, reconciliations of movements in shareholders' funds and cash flow
statements present fairly, in all material respects, the financial position of
O2 plc and its subsidiaries at 31 March 2005 and 31 March 2004, and the results
of their operations and their cash flows for the two years in the period ended
31 March 2005, in conformity with accounting principles which, as described in
note 1, are generally accepted in the United Kingdom. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in note 1 to the consolidated financial statements, O2 plc and its
subsidiaries changed its method of classifying own shares held through an
employee share ownership trust in 2005, in accordance with accounting principles
generally accepted in the United Kingdom. The change has been accounted for by
restating comparative information at 1 April 2003.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of consolidated profit and loss for each of the two years in the
period ended 31 March 2005 and the determination of shareholders' funds at 31
March 2005 and 31 March 2004 to the extent summarised in note 32 to the
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
London, England
11 April 2006
A-1
CONSOLIDATED AUDITED UK GAAP FINANCIAL STATEMENTS OF O2 PLC,
RECONCILED TO U.S. GAAP,
FOR YEARS ENDED MARCH 31, 2004 AND 2005
A-2
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
YEAR ENDED 31 MARCH
NOTE 2005 2004
----- ------ ------
Lm Lm
TURNOVER: GROUP AND SHARE OF JOINT VENTURES AND ASSOCIATES... 6,890 5,859
Group's share of associates and joint ventures turnover...... (207) (165)
------ ------
GROUP TURNOVER............................................... 2 6,683 5,694
Net operating expenses (including exceptional items)......... 3 (6,342) (5,536)
------ ------
GROUP OPERATING PROFIT....................................... 3, 4 341 158
Group's share of operating loss of joint ventures and
associates................................................. (3) --
------ ------
TOTAL OPERATING PROFIT....................................... 338 158
Costs of capital reorganisation.............................. 5 (20) --
Loss on sale of business - discontinued operation............ 5 -- (5)
Net interest payable and similar charges..................... 6 (9) (58)
------ ------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION................ 309 95
Tax on profit on ordinary activities......................... 7 (8) 71
------ ------
PROFIT FOR THE FINANCIAL YEAR................................ 20 301 166
Dividends.................................................... 8, 20 (196) --
------ ------
RETAINED PROFIT FOR THE YEAR................................. 105 166
====== ======
Basic earnings per share (pence) ............................ 9 3.5 1.9
====== ======
Diluted earnings per share (pence) .......................... 9 3.4 1.9
====== ======
All results in the year ended 31 March 2005 derive from continuing operations.
A-3
CONSOLIDATED BALANCE SHEETS
AS AT 31 MARCH
2004
NOTE 2005 AS RESTATED
---- ------ -----------
Lm Lm
FIXED ASSETS
Intangible assets ........................................ 10 7,045 7,354
Tangible assets .......................................... 11 4,449 3,996
Investments .............................................. 12 2 5
------ ------
11,496 11,355
------ ------
CURRENT ASSETS
Stocks ................................................... 87 84
Debtors .................................................. 13 1,060 943
Investments .............................................. 14 1,285 993
Cash at bank and in hand ................................. 41 23
------ ------
2,473 2,043
CREDITORS: amounts falling due within one year ........... 15 (2,031) (1,678)
------ ------
NET CURRENT ASSETS ....................................... 442 365
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES .................... 11,938 11,720
------ ------
CREDITORS: amounts falling due after more than one year .. 16 (1,403) (1,375)
PROVISIONS FOR LIABILITIES AND CHARGES ................... 18 (254) (251)
------ ------
NET ASSETS ............................................... 10,281 10,094
====== ======
CAPITAL AND RESERVES
Called up share capital .................................. 19 9 9
Share premium ............................................ 20 375 3
Other reserves ........................................... 20 2,913 11,074
Profit and loss account .................................. 20 6,984 (992)
------ ------
10,281 10,094
====== ======
CONSOLIDATED NET DEBT
AS AT 31 MARCH
NOTE 2005 2004
------ ------ ------
Lm Lm
Cash at bank and in hand ...................................... 41 23
Current asset investments ..................................... 14 1,285 993
------ ------
1,326 1,016
Euro medium-term notes (net of issue costs) ................... 16 (1,056) (1,012)
Loan notes .................................................... 15 (7) (8)
Obligations under finance leases and hire purchase contracts .. 17 (308) (325)
Other loans and borrowings .................................... 15, 16 (33) (37)
------ ------
NET DEBT ...................................................... (78) (366)
====== ======
A-4
CONSOLIDATED STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
YEAR ENDED 31 MARCH
NOTE 2005 2004
------ ---- ----
Lm Lm
PROFIT FOR THE FINANCIAL YEAR ........................... 301 166
Currency translation differences arising on foreign
currency net investments less translation
differences on debt designated as a hedge of
foreign currency net investments ..................... 20 68 (144)
Premium paid to shareholders electing for cash
alternative in capital reorganisation ................ 19,20 (15) --
--- ----
TOTAL RECOGNISED GAINS AND LOSSES RELATING TO THE YEAR .. 354 22
=== ====
RECONCILIATIONS OF GROUP OPERATING PROFIT TO OPERATING CASH FLOWS
YEAR ENDED 31 MARCH
2005 2004
----- -----
Lm Lm
Group operating profit ..................... 341 158
Depreciation and amortisation charges ...... 1,388 1,136
Loss on disposal of fixed assets ........... 2 5
Increase in stocks ......................... (2) (17)
Increase in debtors ........................ (84) (88)
Increase in creditors ...................... 98 142
Increase in provisions ..................... 12 55
----- -----
NET CASH INFLOW FROM OPERATING ACTIVITIES .. 1,755 1,391
===== =====
CONSOLIDATED CASH FLOW STATEMENTS
YEAR ENDED 31 MARCH
NOTE 2005 2004
---- ------ ------
Lm Lm
NET CASH INFLOW FROM OPERATING ACTIVITIES ........................ 1,755 1,391
Returns on investments and servicing of finance .................. 21 (43) (62)
Taxation ......................................................... 21 (15) (13)
Capital expenditure and financial investment ..................... 21 (1,348) (1,114)
Acquisitions and disposals ....................................... 21 (2) (6)
------ ------
CASH INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING .. 347 196
Management of liquid resources ................................... 21 (302) (191)
Financing ........................................................ 21 (27) (50)
------ ------
INCREASE/(DECREASE) IN CASH IN THE YEAR .......................... 22 18 (45)
====== ======
A-5
1. ACCOUNTING POLICIES
ACCOUNTING CONVENTIONS
The financial statements are prepared under the historical cost convention and
in accordance with applicable accounting standards and generally accepted
accounting principles in the United Kingdom (UK GAAP). These differ in certain
significant respects from accounting standards in the United States of America
and a reconciliation to generally accepted accounting principles in the United
States of America (US GAAP) is included in note 32 to the financial statements.
The financial statements include the results for O2 plc and its subsidiaries.
All principal subsidiary undertakings' financial years are coterminous with
those of O2 plc. On consolidation, all intercompany balances and transactions
have been eliminated.
Certain amounts relating to the 2004 financial year have been reclassified to
conform with the presentation adopted for the financial year ended 31 March
2005.
BASIS OF PREPARATION
CAPITAL REORGANISATION
O2 plc was incorporated on 10 December 2004 as part of the capital
reorganisation described in note 19. The purpose of the capital reorganisation
was to create distributable reserves in O2 plc to allow the implementation of
the Group's distribution policy.
On 14 March 2005, O2 plc was introduced as the new holding company of the mmO2
plc Group pursuant to a Scheme of Arrangement (the Scheme) under section 425 of
the Companies Act 1985, whereby O2 plc issued shares in return for the existing
shares in mmO2 plc. Subsequently, O2 plc effected a reduction in its share
capital to create distributable reserves. Shareholders were also offered the
opportunity to realise, for cash, their shareholding in mmO2 plc in a cost
effective manner. Subsequent to the year end, O2 plc also de-listed from the
NYSE and deregistered from the SEC.
The Directors consider that in substance the Scheme constituted two distinct
transactions being firstly, the insertion of the new holding company, O2 plc,
and secondly, a placing of shares on behalf of certain shareholders who elected
to receive the consideration for their shares in mmO2 plc in cash. The insertion
of a new holding company constitutes a group reconstruction as defined by FRS 6
"Acquisitions and mergers" and has been accounted for using merger accounting
principles. The premium paid to shareholders who elected to receive their
consideration in cash has been recognised as a deduction from the Group profit
and loss account reserve.
The consolidated financial statements for the year ended 31 March 2005 comprise
the results of O2 plc from incorporation to 31 March 2005 together with the
results of the O2 plc Group from the 14 March 2005 to the end of the financial
year and the results of the mmO2 Group from 1 April 2004 to 13 March 2005. The
comparative information presented is as previously published for the mmO2 plc
Group except where otherwise stated.
CHANGE IN ACCOUNTING POLICY
The Group has adopted the Urgent Issues Task Force (UITF) Abstract 38
"Accounting for ESOP trusts" in the year ended 31 March 2005, which requires
that a company's own shares held through an ESOP trust be shown as a deduction
from shareholders' funds until such time as the shares vest unconditionally.
Previously these shares were recorded at cost less amortisation charged to date
and shown as a fixed asset investment.
The comparative figures have been restated to reflect the adoption of UITF 38.
The aggregate impact on the previously reported figures is to reduce total
equity shareholders' funds at 1 April 2003 by L3 million (31 March 2004:
increase by L3 million). The adoption of UITF 38 has no effect on the profit and
loss account.
A-6
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. Estimates
are used when accounting for certain items such as provision for bad and
doubtful debtors, depreciation and amortisation, valuation of inventory,
pensions and other benefits, and asset impairment.
TURNOVER
Group turnover, which excludes value added tax and other sales taxes, comprises
the value of services provided, equipment sales and other revenue.
Mobile telecommunications service turnover includes turnover earned for usage of
the Group's wireless network for voice and data transmission by the Group's
customers, subscription fees and interconnect revenue. Post-pay customers are
billed in arrears based on usage and turnover is recognised when the service is
rendered. Turnover for pre-pay customers is recorded as deferred revenue prior
to commencement of services and is recognised as the pre-pay services are
rendered. Inbound roaming revenue, earned from other mobile operators whose
customers roam onto the O2 network, and outbound roaming revenue, earned from
the Group's customers roaming outside their domestic coverage area, are
recognised based upon usage. Subscription fees are recognised evenly throughout
the periods to which they relate.
Hardware turnover principally consists of revenue from the sale of wireless
mobile devices. The revenue and related expenses associated with the sale of
wireless handsets and accessories are recognised when the products are delivered
and accepted by the customer. Other sales include connection charges which are
deferred and recognised over the estimated customer relationship period.
Revenue is recognised on a gross basis where the Group's role is that of
principal in a transaction. The gross basis represents the gross value of the
billing to the customer after trade discounts, with any related costs being
charged to operating expenses. Where the Group acts as agent in a transaction,
the net revenue earned is recognised as turnover.
SUBSCRIBER ACQUISITION COSTS
Subscriber acquisition costs, which include the commission costs associated with
acquiring new subscribers and other incremental costs of customer acquisition,
are charged to the profit and loss account as incurred.
RESEARCH AND DEVELOPMENT
Expenditure on research and development is written off in the year in which it
is incurred.
ADVERTISING
Advertising costs are included in administrative expenses and are expensed as
incurred.
FOREIGN CURRENCIES
Transactions denominated in foreign currencies are translated at the exchange
rate on the day the transaction occurred or at the contracted forward rate of
exchange if hedged by a forward exchange contract or similar hedging
arrangement. Monetary assets and liabilities denominated in foreign currencies
are translated at the rates ruling at the balance sheet date or at the forward
rate of exchange if hedged.
A-7
Net assets of foreign subsidiary undertakings, including related goodwill, are
translated into sterling at the rates ruling at the balance sheet date. The
profit or loss and cash flows for the year of foreign subsidiary undertakings
are translated at the average rates of exchange for the year. Exchange
adjustments arising on the translation into sterling of the opening net assets
and profits or losses for the year retained by foreign subsidiary undertakings
are recognised in reserves and reported in the statement of total recognised
gains and losses. Exchange gains and losses arising on foreign currency net
borrowings used to hedge the Group's foreign currency net investments are also
recognised directly in reserves.
All other exchange gains or losses are dealt with in the profit and loss
account.
GOODWILL
Goodwill, arising from the purchase of subsidiary undertakings and interests in
joint ventures and associates, represents the excess of the fair value of the
purchase consideration over the fair value of the net assets acquired.
For all acquisitions arising on or after 1 April 1998, the goodwill arising is
capitalised as an intangible asset. The goodwill is amortised on a straight-line
basis from the time of acquisition over a period estimated by management to be
its useful economic life. The useful economic life is normally 20 years and is
subject to review if and when an event or change occurs which may affect the
asset life.
For acquisitions made before the adoption of FRS 10 "Goodwill and intangible
assets" on 1 April 1998, the goodwill arising was written off directly to
reserves. The goodwill written off directly to reserves will be charged to the
profit and loss account on the subsequent disposal of the business to which it
relates.
OTHER INTANGIBLE FIXED ASSETS
Licence fees paid to governments, which permit telecommunication activities to
be operated for defined periods, are capitalised at cost and are amortised from
the market launch of service to the end of the licence period on a straight-line
basis. Other licences are amortised over the period of the licence on a
straight-line basis. Other intangible assets are amortised over their useful
economic life on a straight-line basis.
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at historical cost less depreciation. The cost
of tangible fixed assets includes directly attributable incremental costs
incurred in their acquisition and installation.
Depreciation is provided on tangible fixed assets from the date they are brought
into use over their estimated useful lives on a straight-line basis, taking into
account any residual values. The lives assigned to tangible fixed assets are:
Freehold buildings........................ 40 years
Leasehold land and buildings.............. Unexpired portion of lease or 40 years,
whichever is the shorter
Network assets............................ 5 to 15 years
Computers, software and office equipment.. 2 to 6 years
Motor vehicles............................ 5 years
No depreciation is provided on freehold land or assets in course of
construction.
A-8
OTHER FIXED ASSET INVESTMENTS
Other investments held as fixed assets comprise equity shareholdings and other
interests and are stated at cost less provision for impairment.
JOINT VENTURES AND ASSOCIATES
Investments in joint ventures and associates are included in the consolidated
financial statements using the equity method of accounting. The profit and loss
account includes the Group's share of profits or losses of joint ventures and
associates. In instances in which the Group holds an interest in the net
liabilities of its joint ventures and associates, such interests are recognised
in creditors: amounts falling due within one year.
FIXED ASSET IMPAIRMENT
Goodwill and other intangible assets are reviewed for impairment at the end of
the first full financial year following acquisition and, together with tangible
fixed assets, in other periods if events or changes in circumstances indicate
that the carrying values may not be recoverable. Such events may include
continuing operating losses, technological obsolescence or significant adverse
changes in the business or the market in which the fixed asset is used.
The impairment review is performed by comparing the carrying value of the asset,
or group of assets, with their recoverable amount. For assets used in the
continuing operations of the Group the recoverable amount is the assets' value
in use which is estimated by calculating the present value of its future cash
flows. For assets to be disposed, the recoverable amount is the assets' net
realisable value. Impairment charges are recognised in the profit and loss
account to the extent that the carrying value exceeds the recoverable amount in
the period in which the impairment is identified.
STOCKS
Stocks comprise mainly handsets and are stated at the lower of cost and net
realisable value (which reflects the value to the business of the handset in the
hands of the subscriber) on a first-in, first-out basis, after provisions for
obsolescence.
DEBTORS
Debtors are stated at estimated net realisable value. Net realisable value is
the invoiced amount less provisions for bad and doubtful debtors. Provisions are
made specifically against debtors where there is evidence of a dispute or an
inability to pay. An additional provision is made based on an analysis of
balances by age, previous losses experienced and general economic conditions.
PROVISIONS
Provisions are recognised by the Group when three criteria are met: (i) the
Group has a constructive or legal obligation as a result of a past event; (ii)
if it is probable that a transfer of economic benefits will be required to
settle the obligation; and (iii) a reliable estimate of the obligation can be
made.
A provision is made for the present value of the cost of restoration of mast
sites at the date of acquisition of the site in accordance with FRS 12
"Provisions, contingent liabilities and contingent assets".
SHARE BASED PAYMENTS
The cost of awards to employees of shares or share options is recognised as an
operating expense over the period of the employees' performance to which the
award relates. The cost of the award is based on the difference between the
award or option exercise price and the market value of the shares at the date
A-9
of grant and is adjusted for the likelihood of performance criteria being
achieved. The profit and loss account charge is matched by a reserve recognised
within shareholders' funds for equity settled awards.
The Group has taken advantage of the exemption available under UITF 17 (revised)
"Employee share schemes" not to account for Inland Revenue approved
Save-As-You-Earn (SAYE) schemes.
The assets and liabilities of ESOP trusts are included in the accounts of the
sponsoring employer. Until such time as own shares vest unconditionally in
employees, the consideration paid for the shares is deducted from the profit and
loss account reserve.
POST-RETIREMENT BENEFITS
The Group operates a number of pension schemes as disclosed in note 31 to the
financial statements. All pension schemes are accounted for in accordance with
the provisions of Statement of Standard Accounting Practice (SSAP) 24
"Accounting for pension costs". The Group continues to apply the transitional
disclosure requirements set out in FRS 17 "Retirement benefits".
For funded and unfunded defined benefit schemes, the expected costs of providing
pensions and other post-retirement benefits, as calculated periodically by
professionally qualified independent actuaries, are charged to the profit and
loss account so as to spread the cost over the service lives of employees in the
schemes in such a way that the pension cost is a substantially level percentage
of current and expected future pensionable payroll. For the funded schemes, the
assets of the schemes are held separately from those of the principal employer.
For the unfunded schemes, no contributions are made by either employees or the
employer to a separate pension fund and a provision is recorded on the balance
sheet to recognise the cumulative accrued liability of the Group.
The Group also supports a number of defined contribution pension schemes where
the benefits are based on the level of contributions paid. Costs arising from
these schemes are charged to the profit and loss account in the period to which
they relate.
DEFERRED TAXATION
Deferred tax is provided in full on all timing differences which result in an
obligation at the balance sheet date to pay more tax, or a right to pay less
tax, at a future date, at rates expected to apply when they crystallise based on
current tax rates and law. Timing differences arise from the inclusion of items
of income and expenditure in taxation computations in periods different from
those in which they are included in the financial statements. Deferred tax
assets are recognised to the extent that it is regarded as more likely than not
that they will be recovered. Deferred tax assets and liabilities are not
discounted.
DEBT ISSUE COSTS
Debt instruments are stated at the amount of net proceeds received. Debt issue
costs are amortised over the term of the debt to ensure a constant rate of
charge.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used to manage the Group's exposure to
fluctuations in interest rates and foreign currency exchange rates. Interest
rate swaps, currency swaps and forward exchange contracts are accounted for as
hedges when they alter the risk profile of an existing underlying exposure of
the Group.
All derivative financial instruments held for hedging purposes are identified as
hedges of the underlying asset or liability from inception. To qualify as a
hedge the derivative must be established in accordance with specific guidelines
and must be effective on inception and throughout its life.
A-10
Forward exchange contracts, used to hedge net foreign currency investments in
overseas businesses, are translated at the closing rates of exchange. Net
realised and unrealised gains and losses arising on these hedging instruments
are recognised in the statement of total recognised gains and losses to offset
the translation gains or losses arising on the net investments being hedged.
Forward points (comprising the interest rate differential between the
currencies) inherent in forward exchange contracts are recognised in the profit
and loss account over the term of the contracts.
Interest rate differentials on interest rate swaps qualifying as hedges are
recognised by adjusting interest payable.
Other forward exchange contracts hedging transaction exposures are revalued at
the year end at the prevailing forward rate with net unrealised gains and losses
being matched to the underlying transactions being hedged.
LEASES AND HIRE PURCHASE CONTRACTS
Rentals under operating leases are charged to the profit and loss account in
equal annual amounts over the periods of the leases.
Assets held under finance leases and hire purchase contracts are capitalised at
the present value of the minimum lease payments on the inception of the leases
and depreciated over the shorter of the period of the lease and the estimated
useful economic lives of the assets. The finance charges are allocated over the
period of the lease in proportion to the capital amount outstanding and are
charged to the profit and loss account.
2. SEGMENTAL ANALYSIS
The Group's operations have been divided internally into two classes of
business, in line with the day-to-day managerial and budgetary control during
the year ended 31 March 2005:
1. the supply of mobile telecommunications services and products; and
2. other businesses, comprising O2 Airwave, a secure national radio
service business, and Manx Telecom, a fixed and mobile
telecommunications business in the Isle of Man.
In the year ended 31 March 2004, the Group undertook a restructuring of its
central functions and rationalised its property portfolio as described in note
5. For the year ended 31 March 2005 the activities of O2 Online and Products O2,
which were previously reported as the "mobile internet services" segment, are
reported within the segments in which they now reside. As the information is not
readily available, the comparatives have not been restated and these businesses
are reported separately in line with day-to-day managerial and budgetary control
at that time.
Businesses within the mobile telecommunications services segment mainly derive
their turnover from the calls made and received by their customers using mobile
telephones, from subscription fees charged to their contract customers and from
handset equipment sales. Mobile internet services generate revenue through
advertising, provision of content and applications and from e-commerce and
m-commerce activities.
Turnover is based on the country of invoice origination, which is not materially
different to turnover by destination. Central overheads and adjustments includes
central costs and other consolidation adjustments.
A-11
The segmental disclosures in respect of profit and loss account items are
presented below:
DEPRECIATION,
GROUP AMORTISATION AND TOTAL OPERATING
TURNOVER IMPAIRMENT(1) PROFIT/(LOSS)
-------- ---------------- ---------------
Lm Lm Lm
YEAR ENDED 31 MARCH 2005
CONTINUING OPERATIONS
Mobile telecommunications
UK .............................. 4,030 773 370
Germany ......................... 1,865 431 (92)
Ireland ......................... 585 117 106
----- ----- ---
TOTAL MOBILE TELECOMMUNICATIONS .... 6,480 1,321 384
Other businesses
UK .............................. 222 61 35
Central overheads and adjustments .. -- 6 (81)
Inter-segment eliminations ......... (19) -- --
----- ----- ---
GROUP TOTAL ........................ 6,683 1,388 338
===== ===== ===
YEAR ENDED 31 MARCH 2004
CONTINUING OPERATIONS
Mobile telecommunications
UK .............................. 3,451 638 346
Germany ......................... 1,508 295 (72)
Ireland ......................... 529 120 87
----- ----- ---
TOTAL MOBILE TELECOMMUNICATIONS .... 5,488 1,053 361
Mobile internet services
UK .............................. 140 42 (93)
Other businesses
UK .............................. 139 37 (13)
Central overheads and adjustments .. -- 3 (96)
Inter-segment eliminations ......... (121) -- --
----- ----- ---
5,646 1,135 159
DISCONTINUED OPERATION
Mobile telecommunications
The Netherlands ................. 48 1 (1)
----- ----- ---
GROUP TOTAL ........................ 5,694 1,136 158
===== ===== ===
----------
(1) In the years ended 31 March 2005 and 2004, depreciation includes a charge
of L6 million and L2 million respectively included within the exceptional
operating cost disclosed in note 5.
A-12
The segmental disclosures in respect of balance sheet items are presented below:
NET OPERATING
CAPITAL TANGIBLE ASSETS/
EXPENDITURE(1) FIXED ASSETS (LIABILITIES)(2)
-------------- ------------ ----------------
Lm Lm Lm
YEAR ENDED AND AS AT 31 MARCH 2005
CONTINUING OPERATIONS
Mobile telecommunications
UK ............................... 637 2,210 5,744
Germany .......................... 388 1,229 3,203
Ireland .......................... 100 273 1,078
----- ----- ------
Total mobile telecommunications ..... 1,125 3,712 10,025
Other businesses
UK ............................... 228 735 656
Central assets and adjustments ...... 3 2 (190)
----- ----- ------
GROUP TOTAL ......................... 1,356 4,449 10,491
===== ===== ======
YEAR ENDED AND AS AT 31 MARCH 2004
CONTINUING OPERATIONS
Mobile telecommunications
UK ............................... 502 2,118 5,945
Germany .......................... 308 1,051 3,160
Ireland .......................... 52 233 1,086
----- ----- ------
Total mobile telecommunications ..... 862 3,402 10,191
Mobile internet services
UK ............................... 12 22 13
Other businesses
UK ............................... 252 568 450
Central assets and adjustments ...... 2 4 (62)
----- ----- ------
1,128 3,996 10,592
DISCONTINUED OPERATION
Mobile telecommunications
The Netherlands .................. 5 -- --
----- ----- ------
GROUP TOTAL ......................... 1,133 3,996 10,592
===== ===== ======
----------
(1) Capital expenditure comprises tangible fixed asset additions.
(2) Net operating assets/(liabilities) comprise tangible and intangible fixed
assets (including goodwill), stocks, debtors, creditors (excluding debt)
falling due within and after one year and provisions (excluding deferred
tax).
A-13
GROUP TURNOVER
2005 2004
----- -----
Lm Lm
CONTINUING OPERATIONS
Mobile telecommunications
Service turnover
UK ..................................... 3,627 3,183
Germany ................................ 1,687 1,347
Ireland ................................ 556 500
----- -----
TOTAL SERVICE TURNOVER .................... 5,870 5,030
----- -----
Equipment and other turnover
UK ..................................... 403 268
Germany ................................ 178 161
Ireland ................................ 29 29
----- -----
TOTAL EQUIPMENT AND OTHER TURNOVER ........ 610 458
----- -----
TOTAL MOBILE TELECOMMUNICATIONS TURNOVER .. 6,480 5,488
Mobile internet services
UK ..................................... -- 140
Other businesses
UK ..................................... 222 139
Less segmental eliminations ............... (19) (121)
----- -----
TOTAL CONTINUING OPERATIONS ............... 6,683 5,646
DISCONTINUED OPERATION
Mobile telecommunications
The Netherlands ........................ -- 48
----- -----
GROUP TURNOVER ............................ 6,683 5,694
===== =====
JOINT VENTURES AND ASSOCIATES
Total turnover for the year ended 31 March 2005 was L6,890 million (2004: L5,859
million) and included L196 million (2004: L165 million) representing the Group's
share of the turnover of its joint ventures and associates in the UK mobile
telecommunications business and L11 million (2004: nil) representing the Group's
share of the turnover of its joint venture in the German mobile
telecommunications business. The Group's share of the operating loss of its
joint ventures and associates was L3 million (2004: nil). The Group's interest
in the aggregate liabilities of its joint ventures and associates at 31 March
2005 was L1 million (2004: assets of L5 million).
A-14
3. NET OPERATING EXPENSES
CONTINUING DISCONTINUED
OPERATIONS OPERATION TOTAL
---------- ------------ ------
Lm Lm Lm
YEAR ENDED 31 MARCH 2005
Group turnover ................. 6,683 -- 6,683
Cost of sales .................. (3,799) -- (3,799)
------ --- ------
Gross profit ................... 2,884 -- 2,884
Administrative expenses ........ (2,543) -- (2,543)
------ --- ------
GROUP OPERATING PROFIT ......... 341 -- 341
====== === ======
YEAR ENDED 31 MARCH 2004
Group turnover ................. 5,646 48 5,694
Cost of sales .................. (3,291) (23) (3,314)
------ --- ------
Gross profit ................... 2,355 25 2,380
Administrative expenses ........ (2,196) (26) (2,222)
------ --- ------
GROUP OPERATING PROFIT/(LOSS) .. 159 (1) 158
====== === ======
Net operating expenses comprise cost of sales and administrative expenses
(including exceptional operating items) and total L6,342 million in 2005 (2004:
L5,536 million).
The sale of O2 Netherlands completed on 3 June 2003 in accordance with FRS 3
"Reporting financial performance", the results of O2 Netherlands for the year
ended 31 March 2004 have been classified as discontinued.
4. GROUP OPERATING PROFIT
Group operating profit is stated after charging/(crediting):
2005 2004
---- ----
Lm Lm
Depreciation of tangible assets:
Owned(1) ........................... 904 900
Held under hire purchase contracts.. 33 28
Amortisation od intangible fixed assets
(before impairment):
Goodwill ........................... 200 201
UMTS licences ...................... 169 --
Other .............................. 82 7
Rentals under operating leases:
Hire of plant and machinery ........ 12 10
Other operating leases ............. 154 158
Staff costs (note 30) ................. 613 548
Own work capitalized .................. (118) (106)
Loss on disposal of fixed assets ...... 2 5
Research and development costs ........ 8 10
----------
(1) Includes exceptional depreciation of L6 million in 2005 and L2 million in
2004.
In the year ended 31 March 2005 the Group incurred advertising costs of L227
million(2004: L224 millIon).
5. EXCEPTIONAL ITEMS
In the year ended 31 March 2005, the Group incurred an exceptional operating
charge of L45 million and an exceptional non-operating charge of L20 million.
The exceptional operating charge relates to the redeployment of resources within
O2 UK into customer facing areas and away from non-customer facing areas. This
is in line with O2 UK's strategy of delivering an enhanced customer experience
and increasing customer loyalty. The charge comprises redundancy and property
costs. No cash was expended in the year ended 31 March 2005. The exceptional
non-operating charge relates to the costs of the capital reorganisation
described in note 19. This charge gave rise to a cash outflow of L15 million in
the year.
In the year ended 31 March 2004, the Group incurred an exceptional charge of L75
million in respect of the restructuring of central functions and the resultant
rationalisation of the Group's property portfolio. This arose on the transfer of
O2 Online, Products O2 and certain other central functions to the Group's
operating businesses in the UK, Germany and Ireland and includes provisions
relating to redundancies and the termination of property leases. This charge
gave rise to a cash outflow of L17 million in that year.
A-15
On 14 April 2003, the Group announced that it had agreed the sale of its wholly
owned Dutch subsidiary, O2 Netherlands, to Greenfield Capital Partners, an
independent private equity and corporate finance group with existing interests
in the fixed telecoms sector, for E25 million cash. The sale was completed on 3
June 2003 and took the form of the sale of all the issued shares of O2
Netherlands. In the year ended 31 March 2003, the Group recognised a
non-operating exceptional provision for the loss on disposal of O2 Netherlands
of L1,364 million. This represented the impairment of the assets of O2
Netherlands, and goodwill relating to the original purchase of the stake in O2
Netherlands, down to their net recoverable amount which in this case was the
sale proceeds less the estimated direct costs of disposal. The total loss on
sale arising on completion was L1,369 million which, after utilisation of the
provision recognised in 2003, resulted in a non-operating exceptional loss of L5
million in the year ended 31 March 2004.
6. NET INTEREST PAYABLE AND SIMILAR CHARGES
2005 2004
---- ----
Lm Lm
Interest receivable and similar income:
Cash and current asset investment deposits ..... 33 17
Forward foreign exchange contracts (note 27) ... 24 --
Other .......................................... 6 3
Interest payable and similar charges:
Bank loans, overdrafts and other borrowings .... (8) (13)
Amortisation of debt issue costs ............... (8) (4)
Debentures ..................................... (57) (62)
--- ---
GROUP NET INTEREST PAYABLE ........................ (10) (59)
--- ---
SHARE OF JOINT VENTURES AND ASSOCIATES
Interest receivable and similar income ............ 1 1
--- ---
NET INTEREST PAYABLE .............................. (9) (58)
=== ===
7. TAX ON PROFIT ON ORDINARY ACTIVITIES
2005 2004
---- ----
Lm Lm
CURRENT TAX
Non-United Kingdom tax ............................................. (14) (13)
Adjustments in respect of prior periods ............................ 1 1
Tax on Group's share of results of joint ventures and associates ... (1) (1)
--- ---
TOTAL CURRENT TAX CHARGE ........................................... (14) (13)
--- ---
DEFERRED TAX
Origination and reversal of timing differences ..................... 1 86
Adjustments in respect of prior periods ............................ 5 (2)
TOTAL DEFERRED TAX CREDIT .......................................... 6 84
--- ---
TAX (CHARGE)/CREDIT ON PROFIT ON ORDINARY ACTIVITIES ............... (8) 71
=== ===
A-16
CURRENT TAX
In the year ended 31 March 2005, the profit on ordinary activities before
taxation was L309 million (2004: L95 million).
The tax assessed for each of the two financial years varied from the amount
computed by applying the corporation tax rate to profit or loss on ordinary
activities before taxation. The differences were attributable to the following
factors:
2005 2004
---- ----
Lm Lm
United Kingdom corporation tax on profit at 30% ............ (93) (29)
Non-deductible depreciation, amortisation and impairment ... (122) (78)
Non-deductible non-United Kingdom losses ................... 1 --
Non-United Kingdom tax rate differences .................... 35 16
Capital allowances in excess/(deficit) of depreciation ..... 31 (1)
Losses carried forward ..................................... -- (30)
Losses brought forward and utilised ........................ 134 138
Non-deductible losses on sale of discontinued operations ... -- (2)
Other timing differences and adjustments ................... (1) (28)
Prior year adjustments ..................................... 1 1
---- ---
CURRENT TAX CHARGE FOR YEAR ................................ (14) (13)
==== ===
The Group expects to be able to claim capital allowances in excess of
depreciation in future years which will affect future tax charges.
DEFERRED TAX
The deferred taxation credit arises as follows:
2005 2004
---- ----
Lm Lm
Excess capital allowances ................ 22 (15)
Other timing differences ................. (21) 101
Adjustments in respect of prior periods .. 5 (2)
--- ---
TOTAL DEFERRED TAX CREDIT ................ 6 84
=== ===
Other timing differences include the recognition of a deferred tax asset of L55
million in respect of UK tax losses carried forward owing to greater certainty
regarding the availability of future taxable profits.
Deferred tax assets in respect of certain other UK and German losses carried
forward and other timing differences totalling L5,185 million have not been
recognised due to insufficient certainty regarding the availability of
appropriate future taxable profits.
In each financial year presented no deferred tax has been recognised on
unremitted earnings of overseas subsidiaries.
8. DIVIDENDS
PENCE PER SHARE 2005
--------------- ----
Lm
Proposed final ... 2.25 196
==== ===
A-17
The final dividend of 2.25 pence per share was paid on 26 August 2005 to
shareholders on the register at the close of business on 5 August 2005.
9. EARNINGS PER SHARE
Earnings per share has been calculated by dividing the profit for the year by
the weighted average number of ordinary shares in issue during that year, as
follows:
2005 2004
----- -----
Profit for the financial year (L million) ......................... 301 166
===== =====
Weighted average number of ordinary shares in issue
during the year and used to calculate basic
earnings per share (number of shares, millions) ................ 8,681 8,671
Dilutive potential ordinary shares (number of shares, millions) ... 120 44
----- -----
Weighted average number of ordinary shares outstanding
and used to calculate diluted earnings per
share (number of shares, millions) ............................. 8,801 8,715
===== =====
BASIC EARNINGS PER SHARE (PENCE) .................................. 3.5 1.9
===== =====
DILUTED EARNINGS PER SHARE (PENCE) ................................ 3.4 1.9
===== =====
In accordance with the principles of merger accounting as applicable to group
reorganisations described in note 1, earnings per share has been calculated as
if O2 plc had in issue the share capital of mmO2 plc prior to 14 March 2005.
A-18
10. INTANGIBLE ASSETS
GOODWILL UMTS LICENCES OTHER TOTAL
-------- ------------- ----- -------
Lm Lm Lm Lm
COST
At 1 April 2003 ................. 10,673 10,489 66 21,228
Additions ....................... -- -- 85 85
Disposals ....................... -- (8) -- (8)
Sale of subsidiary undertaking .. (757) (484) -- (1,241)
Currency movements .............. (212) (200) -- (412)
------ ------ --- ------
At 31 March 2004 ................ 9,704 9,797 151 19,652
Additions ....................... -- -- 59 59
Currency movements .............. 178 164 1 343
------ ------ --- ------
AT 31 MARCH 2005 ................ 9,882 9,961 211 20,054
====== ====== === ======
AMORTISATION
At 1 April 2003 ................. 7,255 6,391 -- 13,646
Charge for the year ............. 201 -- 7 208
Disposals ....................... -- (7) -- (7)
Sale of subsidiary undertaking .. (757) (484) -- (1,241)
Currency movements .............. (184) (122) (2) (308)
------ ------ --- ------
At 31 March 2004 ................ 6,515 5,778 5 12,298
Charge for the year ............. 200 169 82 451
Currency movements .............. 156 103 1 260
------ ------ --- ------
AT 31 MARCH 2005 ................ 6,871 6,050 88 13,009
====== ====== === ======
NET BOOK VALUE
AT 31 MARCH 2005 ................ 3,011 3,911 123 7,045
====== ====== === ======
At 31 March 2004 ................ 3,189 4,019 146 7,354
====== ====== === ======
A-19
11. TANGIBLE ASSETS
LAND AND PLANT AND ASSETS IN COURSE OF
BUILDINGS EQUIPMENT CONSTRUCTION TOTAL
--------- --------- ------------------- -----
Lm Lm Lm Lm
COST
At 1 April 2003 ................. 325 6,245 658 7,228
Additions ....................... 4 285 844 1,133
Transfers ....................... 39 736 (775) --
Disposals ....................... (16) (191) -- (207)
Sale of subsidiary undertaking .. -- (514) (18) (532)
Currency movements .............. (3) (79) (1) (83)
--- ----- ---- -----
At 31 March 2004 ................ 349 6,482 708 7,539
Additions ....................... 5 562 789 1,356
Transfers ....................... 24 963 (987) --
Disposals ....................... (7) (194) -- (201)
Currency movements .............. 1 71 3 75
--- ----- ---- -----
AT 31 MARCH 2005 ................ 372 7,884 513 8,769
=== ===== ==== =====
DEPRECIATION
At 1 April 2003 ................. 124 3,211 18 3,353
Charge for the year(1) .......... 29 899 -- 928
Disposals ....................... (7) (190) -- (197)
Sale of subsidiary undertaking .. -- (479) (18) (497)
Currency movements .............. -- (44) -- (44)
--- ----- ---- -----
At 31 March 2004 ................ 146 3,397 -- 3,543
Charge for the year(1) .......... 40 897 -- 937
Disposals ....................... (7) (192) -- (199)
Currency movements .............. -- 39 -- 39
--- ----- ---- -----
AT 31 MARCH 2005 ................ 179 4,141 -- 4,320
=== ===== ==== =====
NET BOOK VALUE
AT 31 MARCH 2005 ................ 193 3,743 513 4,449
=== ===== ==== =====
At 31 March 2004 ................ 203 3,085 708 3,996
=== ===== ==== =====
----------
1 The charges for the years ended 31 March 2005 and 2004 include an
exceptional charge of L6 million and L2 million respectively relating to
the exceptional items described in note 5.
The net book value of land and buildings comprises:
2005 2004
---- ----
Lm Lm
Freehold ...................... 73 76
Long leases ................... 26 23
Short leases .................. 94 104
---- ----
Net book value ................ 193 203
==== ====
The net book value of assets
held under hire purchase
contracts comprises:
Cost .......................... 748 733
Accumulated depreciation ...... (401) (368)
---- ----
Net book value ................ 347 365
==== ====
A-20
12. FIXED ASSET INVESTMENTS
INTERESTS IN
JOINT VENTURES
AND ASSOCIATES OWN SHARES TOTAL
-------------- ---------- -----
Lm Lm Lm
COST
At 1 April 2003 .................. 93 6 99
Prior period adjustment
relating to UITF 38 (note 1) .. -- (6) (6)
--- --- ---
At 1 April 2003 (as restated) .... 93 -- 93
Additions ........................ 5 -- 5
--- --- ---
At 31 March 2004 ................. 98 -- 98
Additions ........................ 4 -- 4
--- --- ---
Dividend received from
associate ..................... (7) -- (7)
Loss retained for the year ....... (3) -- (3)
Reclassifications(1) ............. 3 -- 3
--- --- ---
AT 31 MARCH 2005 ................. 95 -- 95
=== === ===
INTERESTS IN
JOINT VENTURES
AND ASSOCIATES OWN SHARES TOTAL
-------------- ---------- -----
Lm Lm Lm
PROVISIONS
At 1 April 2003 ..................... 93 3 96
Prior period adjustment
relating to UITF 38 (note 1) ..... -- (3) (3)
--- --- ---
AT 1 APRIL 2003 (AS RESTATED),
31 MARCH 2004 AND 31 MARCH 2005 .. 93 -- 93
=== === ===
NET BOOK VALUE
AT 31 MARCH 2005 .................... 2 -- 2
=== === ===
At 31 March 2004 .................... 5 -- 5
=== === ===
----------
1 Represents the reclassification of the Group's interest in the net
liabilities of the Group's joint ventures and associates to creditors:
amounts falling due within one year.
A-21
13. DEBTORS
2005 2004
----- ----
Lm Lm
Trade debtors ... 578 508
Other debtors ... 93 25
Prepayments ..... 112 166
Accrued income .. 277 244
----- ---
1,060 943
===== ===
Trade debtors are stated after deducting L183 million as at 31 March 2005 for
doubtful debts (2004: L132 million). The amount charged to the Group's profit
and loss account for doubtful debts for the year ended 31 March 2005 was L56
million (2004: L59 million).
14. CURRENT ASSET INVESTMENTS
2005 2004
----- ----
Lm Lm
Money market deposits .. 953 631
Money market funds ..... 57 69
Other deposits ......... 275 293
----- ---
1,285 993
===== ===
Other deposits of L275 million (2004: L293 million) are funds held in trust to
meet the O2 UK hire purchase obligations disclosed in note 17. A further US$79
million (2004: US$102 million) in money market deposits is cash collateral for
the bank guarantees issued to cover specific risks under the same hire purchase
obligations.
15. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
2005 2004
----- -----
Lm Lm
Other loans (note 17) ................. 9 6
Loan notes (note 17) .................. 7 8
Obligations under finance leases and
hire purchase contracts (note 17) .. 40 40
Trade creditors ....................... 595 497
Corporation tax ....................... 7 9
Other taxation and social security .... 75 61
Other creditors ....................... 29 39
Accrued expenses ...................... 846 816
Deferred income ....................... 227 202
Dividend payable ...................... 196 --
----- -----
2,031 1,678
===== =====
16. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
2005 2004
----- -----
Lm Lm
Debentures (note 17) ..................................... 1,056 1,012
Other loans (note 17) .................................... 24 31
Obligations under finance leases and hire purchase
contracts (note 17) ................................... 268 285
Other creditors .......................................... 55 47
----- -----
1,403 1,375
===== =====
A-22
17. DEBENTURES AND OTHER BORROWINGS
2005 2004
----- -----
Lm Lm
ANALYSIS OF LOAN REPAYMENTS
Within one year or on demand ............................. 16 14
Between one and two years ................................ 690 7
Between two and five years ............................... 17 663
After five years ......................................... 373 373
----- -----
1,096 1,057
===== =====
In January 2002 mmO2 plc issued two debentures in the form of a E1,000
million 6.375% fixed rate bond and a L375 million 7.625% fixed rate bond
which have a five and ten-year term respectively. The debentures are recognised
at the amount of net proceeds received and after the effects of any related
hedging instruments. At 31 March 2005 the carrying value includes unamortised
issue costs of L4 million (2004: L5 million).
Loan notes of L132 million were issued by O2 UK between March 1999 and
April 2000 for the purchase of certain businesses. At 31 March 2005 loan notes
totalling L7 million (2004: L8 million) were outstanding and
repayable on demand.
OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS
2005 2004
---- ----
Lm Lm
Within one year........................................... 41 41
Between one and five years................................ 191 138
After five years.......................................... 166 254
--- ----
398 433
Less: finance charges allocated to future periods......... (90) (108)
--- ----
308 325
=== ====
Obligations under finance leases and hire purchase contracts are mainly in
respect of hire purchase agreements for plant and equipment. On 30 March 2001
and 9 April 2001 hire purchase financing contracts were signed between O2 UK and
a number of US leasing trusts. Under the contracts O2 UK sold and repurchased
material portions of its GSM radio and switching equipment. O2 UK has deposited
sufficient funds with a trust company to meet the future hire purchase
obligations. The deposit account is included in current asset investments. The
hire purchase agreement is for 16 years with an early buy out option after 12
years. In accordance with the Separation Agreement signed on demerger, BT plc
continues to guarantee all future hire purchase obligations of O2 UK which has
provided a counter indemnity to BT plc for this guarantee.
A-23
18. PROVISIONS FOR LIABILITIES AND CHARGES
DEFERRED OTHER
TAXATION RESTRUCTURING PROVISIONS TOTAL
-------- ------------- ---------- -----
Lm Lm Lm Lm
At 1 April 2003........................................... 221 -- 63 284
(Credit)/charge for the year.............................. (84) 75 9 --
Utilised in the year...................................... -- (21) (8) (29)
Other movements........................................... -- -- (4) (4)
--- --- --- ---
At 31 March 2004.......................................... 137 54 60 251
(Credit)/charge for the year.............................. (6) 39 (5) 28
Utilised in the year...................................... -- (24) (1) (25)
--- --- --- ---
AT 31 MARCH 2005.......................................... 131 69 54 254
=== === === ===
DEFERRED TAXATION
The elements of deferred taxation provided for in the financial statements are
as follows:
2005 2004
---- ----
Lm Lm
Accelerated capital allowances............................ 194 281
Other..................................................... 4 (22)
Unrelieved tax losses carried forward..................... (67) (122)
--- ----
TOTAL PROVISION FOR DEFERRED TAXATION..................... 131 137
=== ====
The restructuring provision arises in respect of the exceptional operating
charges recognised in the years ended 31 March 2005 and 31 March 2004 and
described in note 5. Other provisions includes L16 million (2004:
L26 million) in respect of mast site restoration costs and L18
million (2004: L16 million) in respect of unfunded pensions liabilities.
It also includes amounts provided for legal claims.
19. CALLED UP SHARE CAPITAL
2005 2005
---------------- ----
NUMBER OF SHARES Lm
AUTHORISED
Ordinary shares of 0.1 pence each............... 20,000,000,000 20
CALLED UP, ALLOTTED AND FULLY PAID
Ordinary shares of 0.1 pence each............... 8,704,068,599 9
============== ==
O2 plc was incorporated as a public limited company on 10 December 2004 with an
authorised share capital of L51,000, comprising 10,000 ordinary shares of
10 pence each and 50,000 redeemable preference shares of L1 each. Of these
shares, 2 ordinary shares of 10 pence each were taken up by the subscribers to
the memorandum of association. By ordinary resolution passed on 21 December
2004, 50,000 non-voting redeemable preference shares of L1 each were
issued and allotted at par. On 5 January 2005, a further 14 ordinary shares of
10 pence each were issued and allotted at par. By extraordinary general meeting
on 5 January 2005, the ordinary shares of 10 pence each were consolidated at a
ratio of 8 to 1 into ordinary shares of 80 pence each and the authorised share
capital was increased from L51,000 to L16,000,050,000 by the
creation of 19,999,998,750 additional ordinary shares of 80 pence each.
On 14 March 2005, pursuant to a Court approved scheme of arrangement under
section 425 of the Companies Act 1985, the Company purchased mmO2 plc (mmO2) for
share consideration. Certain mmO2 shareholders, holding 299,500,644 ordinary
shares of mmO2 plc, elected to receive the consideration for their shares in
mmO2 in cash. All other shareholders, holding 8,403,362,095 ordinary shares of
0.1 pence each in mmO2, received the same number of new ordinary shares of 80
pence each in the Company as they previously held in mmO2. In order to fund the
cash consideration the Company issued and allotted 299,500,644 ordinary shares
in the Company via a placement with investors on the London Stock Exchange's
market for listed securities on 17 March 2005. This placement raised
L374,375,805. The remaining cash consideration of L14,975,032,
representing a premium of five pence per share owing to shareholders electing to
receive the cash, was funded by the Group.
Further, on 14 March 2005, the two 80 pence ordinary shares arising on the share
consolidation on 5 January 2005 were transferred to the Company at par value and
were cancelled in accordance with sections 146(1)(b) and 146(2)(a) of the
Companies Act 1985.
On 16 March 2005, the share capital of the Company was reduced by cancelling
paid up share capital to the extent of 79.9 pence on each issued ordinary share
and reducing the nominal value of each such share from 80 pence to 0.1 pence;
and reducing the nominal value of each unissued ordinary share of 80 pence to
0.1 pence. This created distributable reserves of L6,714,286,314.
On 17 March 2005, 50,000 L1 redeemable preference shares were redeemed at
par.
During the period from 1 April 2004 to 13 March 2005 mmO2 issued 28.2 million
ordinary shares of 0.1 pence each for a total cash consideration of L23.4
million. Since the Court approved capital reduction on 14 March 2005, the
Company has issued 1.2 million ordinary shares of 0.1 pence each for a total
cash consideration of L0.9 million. All proceeds received during the year
arose on the exercise of employee (including Director) share options. Details of
the share option and share award schemes operated by the Group are described in
note 30.
During the year ended 31 March 2004, mmO2 issued 4,508,141 ordinary shares of
0.1 pence each for a total cash consideration of L3,129,203.
A-24
20. RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
CALLED UP PROFIT AND TOTAL SHAREHOLDERS'
SHARE CAPITAL SHARE PREMIUM OTHER RESERVES LOSS ACCOUNT FUNDS
------------- ------------- -------------- ------------ -------------------
Lm Lm Lm Lm Lm
At 1 April 2003 as previously reported 9 -- 12,087 (2,030) 10,066
Prior period adjustment relating to UITF 38
(note 1) .................................. -- -- -- (3) (3)
----- --- ------ ----- ------
At 1 April 2003 (as restated) ................ 9 -- 12,087 (2,033) 10,063
Retained profit for the year ................. -- -- -- 166 166
Shares issued on share scheme exercises ...... -- 3 -- -- 3
Share schemes charge for the year ............ -- -- -- 6 6
Transfer from profit and loss account ........ -- -- (1,013) 1,013 --
Currency translation differences ............. -- -- -- (144) (144)
----- --- ------ ----- ------
AT 31 MARCH 2004 (as restated) ............... 9 3 11,074 (992) 10,094
Profit for the financial year ................ -- -- -- 301 301
Dividends .................................... -- -- -- (196) (196)
Purchase of mmO2 plc ordinary shares ......... -- -- -- (1) (1)
Shares issued on share scheme exercises ...... -- 24 -- -- 24
Share schemes charge for the year ............ -- -- -- 6 6
Issue of shares in exchange for shares in
mmO2 plc(1) .................................. 6,714 (26) (7,062) (15) (389)
Placing of O2 plc shares on 17
March 2005(1) ............................. -- 374 -- -- 374
Court approved capital reduction(1) .......... (6,714) -- -- 6,714 --
Transfer from profit and loss account ........ -- -- (1,099) 1,099 --
Currency translation differences ............. -- -- -- 68 68
----- --- ----- ----- ------
AT 31 MARCH 2005 ............................. 9 375 2,913 6,984 10,281
===== === ===== ===== ======
----------
(1) Transaction arising during capital reorganisation described in note 19.
Other reserves originally arose on the Group's demerger from British
Telecommunications plc (BT). They relate to the difference between the carrying
value of the Group held by BT prior to demerger (representing BT's investments
and funding in the Group) and amounts settled with BT on demerger to acquire the
assets and liabilities of the Group. The merger difference arising in the year
ended 31 March 2005 during the capital reorganisation has been offset against
these other reserves.
Aggregate goodwill as at 31 March 2005 in respect of acquisitions completed
prior to 1 April 1998 of L15 million (2004: L15 million) has been written off
against reserves in accordance with the accounting policy existing prior to the
adoption of FRS 10 "Goodwill and intangible assets".
DISCLOSURES UNDER UITF 38
The O2 plc Share Ownership Trust (the "Trust") was established in 2001 to
encourage and facilitate the holding and distribution of shares and other
benefits for certain Group employees. The shares are conditionally gifted to
employees under certain share award plans and held in the Trust.
2005 2004
---- ----
Number of shares held(1) (number of shares, million) ... 1.0 2.7
Market value of shares held(2) (L million) ............. 1 3
--- ---
Profit and loss account reserve reduction in relation
to own shares (L million) ........................... 1 2
=== ===
----------
(1) Shares which have not vested unconditionally to employees at the end of the
year.
(2) Based on respective year end share prices.
A-25
21. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENTS
2005 2004
------ ------
Lm Lm
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received ............................................ 28 16
Settlement of cross-currency swaps ........................... 22 --
Dividend received from associate ............................. 7 --
Interest paid ................................................ (68) (78)
Settlement of forward foreign exchange contracts (note 27) ... 32 --
------ ------
(43) (62)
====== ======
TAXATION
Non-United Kingdom corporation tax paid ...................... (15) (13)
====== ======
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets ............................ (1,287) (1,035)
Purchase of intangible fixed assets .......................... (60) (85)
Purchase of own shares ....................................... (1) --
Sale of tangible fixed assets ................................ -- 6
------ ------
(1,348) (1,114)
====== ======
ACQUISITIONS AND DISPOSALS
Deferred consideration arising on purchase of
subsidiary undertakings ................................... -- (8)
Sale of subsidiary undertakings (2004:
disposed net of L10 million cash) ......................... -- 7
Investment in joint venture .................................. (2) (5)
------ ------
(2) (6)
====== ======
MANAGEMENT OF LIQUID RESOURCES
Increase in money market deposits and money
market funds .............................................. (302) (191)
====== ======
FINANCING
Issue of ordinary share capital .............................. 24 3
Premium paid to mmO2 shareholders in capital
reorganisation (note 19) .................................. (15) --
Costs of capital reorganisation (note 19) .................... (15) --
Loan repayments .............................................. (21) (53)
------ ------
(27) (50)
====== ======
22. ANALYSIS OF NET DEBT
OBLIGATIONS UNDER
DEBT DUE FINANCE LEASES
CASH AT BANK CURRENT ASSET DEBT DUE WITHIN ONE AND HIRE PURCHASE
AND IN HAND INVESTMENTS AFTER ONE YEAR YEAR CONTRACTS NET DEBT
------------ ------------- -------------- ---------- ----------------- --------
Lm Lm Lm Lm Lm Lm
At 1 April 2003 .............. 68 848 (1,048) (27) (390) (549)
Cash flow .................... (45) 191 -- 14 39 199
Non-cash changes ............. -- (46) 5 (1) 26 (16)
--- ----- ------ --- ---- ---
At 31 March 2004 ............. 23 993 (1,043) (14) (325) (366)
Cash flow .................... 18 302 -- 8 13 341
Non-cash changes ............. -- (10) (37) (10) 4 (53)
--- ----- ------ --- ---- ---
AT 31 MARCH 2005 ............. 41 1,285 (1,080) (16) (308) (78)
=== ===== ====== === ==== ===
RECONCILIATIONS OF NET CASH FLOW TO MOVEMENTS IN NET DEBT
2005 2004
---- ----
Lm Lm
Increase/(decrease) in cash in the year .......................... 18 (45)
Management of liquid resources ................................... 302 191
Cash outflow from decrease in debt ............................... 21 53
--- ----
Change in net debt resulting from cash flows ..................... 341 199
Other non-cash movements ......................................... (53) (16)
--- ----
Decrease in net debt in the year ................................. 288 183
Net debt at beginning of year .................................... (366) (549)
--- ----
NET DEBT AT END OF YEAR .......................................... (78) (366)
=== ====
Non-cash changes relate principally to the inception of new finance leases,
interest accrued thereon and foreign exchange gains and losses arising in
relation to items of net debt held in foreign currencies.
A-26
23. ACQUISITIONS
In February 2001, Telenor exercised a put option to sell its remaining 49.5 per
cent. interest in O2 Ireland to the Group and this transaction was completed in
April 2001, following approval by the regulator.
The total consideration for this stake was L877 million including expenses
resulting in additional goodwill of L884 million. The consideration included
US$49 million payable to the former Managing Director for his 2 per cent. stake
in the non-voting shares of O2 Ireland, of which the last tranche of L8 million
was paid during the year ended 31 March 2004.
24. FINANCIAL COMMITMENTS AND CONTINGENT LIABILITIES
OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS
Future gross finance lease and hire purchase payments payable by the Group as at
31 March 2005 are as follows:
Payable in the year ending 31 March: Lm
---
2006 ..................................................................... 41
2007 ..................................................................... 34
2008 ..................................................................... 31
2009 ..................................................................... 43
2010 ..................................................................... 83
Thereafter ............................................................... 166
---
TOTAL FUTURE GROSS FINANCE LEASE AND HIRE PURCHASE PAYMENTS .............. 398
===
A-27
Future gross finance lease and hire purchase payments payable by the Group as at
31 March 2005 are as follows:
Payable in the year ending 31 March: Lm
---
2006 ..................................................................... 41
2007 ..................................................................... 34
2008 ..................................................................... 31
2009 ..................................................................... 43
2010 ..................................................................... 83
Thereafter ............................................................... 166
---
TOTAL FUTURE GROSS FINANCE LEASE AND HIRE PURCHASE PAYMENTS .............. 398
===
Future gross finance lease and hire purchase payments payable by the Group as at
31 March 2004 are as follows:
Payable in the year ending 31 March: Lm
---
2005 ..................................................................... 41
2006 ..................................................................... 36
2007 ..................................................................... 29
2008 ..................................................................... 29
2009 ..................................................................... 44
Thereafter ............................................................... 254
---
Total future gross finance lease and hire purchase payments .............. 433
===
Finance lease and hire purchase commitments are mainly in respect of hire
purchase agreements for plant and equipment. Full details of these leases are
provided in note 17.
OTHER COMMITMENTS
2005 2004
---- ----
Lm Lm
Contracts placed for capital expenditure not provided
in the accounts ............................................... 414 353
Contracts placed for non-capital expenditure not provided
in the accounts ............................................... 112 113
--- ---
TOTAL OTHER COMMITMENTS .......................................... 526 466
=== ===
OPERATING LEASE COMMITMENTS
At 31 March the Group was committed to making the following payments during the
next year in respect of operating leases:
2005 2004
----------------- -----------------
LAND AND LAND AND
BUILDINGS OTHER BUILDINGS OTHER
--------- ----- --------- -----
Lm Lm Lm Lm
LEASES WHICH EXPIRE
Within one year............. 4 5 2 1
Between one and five years.. 33 10 31 12
After five years ........... 146 7 148 --
--- --- --- ---
183 22 181 13
=== === === ===
A-28
Future minimum operating lease payments due by the Group as at 31 March 2005 are
as follows:
Lm
-----
Payable in the year ending 31 March:
2006........................................... 205
2007........................................... 185
2008........................................... 173
2009........................................... 162
2010........................................... 146
Thereafter..................................... 1,060
-----
TOTAL FUTURE MINIMUM OPERATING LEASE PAYMENTS.. 1,931
=====
Future minimum operating lease payments due by the Group as at 31 March 2004 are
as follows:
Lm
-----
Payable in the year ending 31 March:
2005........................................... 194
2006........................................... 185
2007........................................... 179
2008........................................... 160
2009........................................... 148
Thereafter .................................... 981
-----
TOTAL FUTURE MINIMUM OPERATING LEASE PAYMENTS.. 1,847
=====
mmO2 plc has provided a guarantee of all liabilities of Airwave O2 Limited under
its contracts with the Police Information Technology Organisation (PITO) and the
police force customers.
In each financial year presented, other than those detailed in note 17, the
Group has no contingent liabilities or guarantees on which material losses are
expected. The Group has insurance cover to certain limits for major risks on
property and major claims in connection with legal liabilities arising in the
course of its operations.
In each financial year presented, the Group did not believe there were any
pending legal proceedings which would have a material adverse effect on the
financial position or results of operations of the Group.
25. RELATED PARTY DISCLOSURES
In each financial year presented, the Group entered into transactions with
related parties as follows:
2005 2004
---- ----
Lm Lm
TURNOVER
The Link Stores Limited........ 22 39
Tesco Mobile Limited........... 12 3
PURCHASES
The Link Stores Limited........ (33) (47)
Tchibo Mobilfunk GmbH & Co KG.. (4) --
--- ---
TOTAL NET TRANSACTIONS......... (3) (5)
=== ===
During the year ended 31 March 2005, the Group provided partly paid equity
totalling L4 million to its joint venture, Tchibo Mobilfunk. The balance
outstanding at 31 March 2005 was L2 million.
During the year ended 31 march 2005, the group provided a combination of loans
and partly paid equity totalling L3 million (2004: L6 million) to its joint
venture, Tesco Mobile Limited. The loan balance outstanding at 31 march 2005 was
l2 million (2004: L3 million). The group also provided other services to Tesco
Mobile Limited with a value of L7 million (2004: L3 million) and equipment and
other services to Tchibo Mobilfunk with a value of L15 million. at 31 March
2005, Tchibo Mobilfunk owed l6 million to the group. All transactions were at
arm's length rates.
Directors' emoluments are disclosed in note 29.
A-29
26. PRINCIPAL SUBSIDIARY UNDERTAKINGS AND ASSOCIATES
The Directors consider that disclosing full particulars of all subsidiary
undertakings would lead to a statement of excessive length. The principal
operating subsidiary undertakings are detailed below, all of which are included
in the Group financial statements.
COUNTRY OF PORTION OF
INCORPORATION AND ORDINARY
NAME OPERATION ACTIVITY SHARES HELD %
---- ----------------- -------- -------------
mmO2 plc............................. England and Wales Intermediate holding company 100
O2 Holdings Limited(1)............... England and Wales Intermediate holding company 100
O2 (UK) Limited...................... England and Wales Mobile cellular telephone system provider 100
and operator
O2 (Germany) GmbH & Co. OHG.......... Germany Mobile cellular telephone system provider 100
and operator
O2 Communications (Ireland) Limited.. Ireland Mobile cellular telephone system provider 100
and operator
Airwave O2 Limited(2)................ England and Wales Secure digital radio service for public 100
safety organisations
Manx Telecom Limited................. Isle of Man Telecommunication services supplier 100
----------
1 O2 Limited changed its name to O2 Holdings Limited on 10 December 2004.
2 Airwave mmO2 Limited changed its name to Airwave O2 Limited on 14 March
2005.
The shares held in mmO2 plc are held directly by O2 plc. The shares in O2
Holdings Limited are held directly by mmO2 plc. The shares of the other
operating companies are held by O2 Holdings Limited or its wholly owned
subsidiaries. The accounting reference date of the principal operating
subsidiary undertakings is 31 March. As a consequence of the acquistion
of the Group by Telefonica as disclosed in the subsequent events section in
note 32, the by accounting reference date of the principal operating subsidiary
undertakings has changed, or will be changed, to 31 January.
The Group also owns a 50 per cent. stake in two joint ventures, Tesco Mobile
Limited and Tchibo Mobilfunk GmbH & Co KG, and a 40 per cent. stake in an
associate, The Link Stores Limited. Tesco Mobile Limited supplies mobile
electronic communications and related services to consumers and is incorporated
in England and Wales and operates throughout the United Kingdom. The accounting
reference date of Tesco Mobile Limited is 28 February. Tchibo Mobilfunk is a
telecommunications equipment retailer and is incorporated and operates in
Germany. The Link Stores Limited is a telecommunications equipment retailer
which is incorporated and operates in England and Wales. The accounting
reference date of The Link Stores Limited is 30 April.
During the year ended 31 March 2004 the Group sold its entire interest in O2
Netherlands as disclosed in note 5.
27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
TREASURY MANAGEMENT AND POLICIES
Treasury is operated as a centralised service for the Group. The role of
treasury is to identify, monitor and manage financial risk within the framework
of Board approved policies and delegated authorities. Treasury is not permitted
to add to the financial risks inherent in the business and may not undertake
speculative activity.
The principal financial risks of the Group in each of the financial years
presented were:
BANKING COVENANTS
It was the Group's policy to fully fund its business plan by access to the debt
capital markets and other sources of funding. Borrowing is centralised and there
are no material local facilities. The Group is committed to maintaining the key
financial ratios as set out in the covenants relating to the multi-currency
revolving credit facility, of Group EBITDA to interest and net debt to Group
EBITDA.
FOREIGN EXCHANGE MANAGEMENT
The policy of the Group was to hedge (primarily by the use of foreign currency
forward contracts) identified foreign exchange flows, although the level of
transaction risk exposure is low due to the fact that cash flows are primarily
domestic in each Group company. The policy of the Group regarding foreign
exchange translation risk is to manage material risk on the translation of
foreign currency assets and liabilities into pounds sterling primarily through
natural offsets and the use of currency debt, cross-currency and foreign
exchange swaps. In line with the development of positive cash flows in our
overseas businesses and as visibility of the future financial profile of the
Group becomes clearer, the Board anticipates increasing the level of hedging of
the Group's overseas assets through the redenomination of existing debt and the
use of cross-currency and foreign exchange swaps.
INTEREST RATE MANAGEMENT
The debt level within the Group was a key determinant of the impact of interest
rates. It is the Group's policy to fix or protect expected interest flows where
Group profits or key financial ratios would be materially at risk from interest
rate movements. Treasury maintains the proportion of fixed rate debt within a
Board approved range of 25 to 75 per cent. by the issuance of fixed rate debt
and the use of derivative instruments (primarily interest rate swaps).
CREDIT RISK MANAGEMENT
It was the Group's policy to mitigate credit risk to financial counter-parties
through the application of strict counter-party limits. Counter-party limits are
based on credit ratings issued by the main credit rating agencies and
outstanding transactions are weighted according to potential risk to the Group.
Counter-party limits are reviewed on a regular basis by Treasury.
OFF BALANCE SHEET ARRANGEMENTS
The Group did not participate in, or secure financing for, any unconsolidated
special purpose entities in any of the financial years presented.
DISCLOSURES
Short-term debtors and creditors, where permitted by FRS 13 "Derivatives and
Other Financial Instruments: Disclosures", have been excluded from the following
disclosures, which are after taking account of interest rate and currency swaps
where applicable.
A-30
The Group holds or issues financial instruments principally to finance its
operations, for the temporary investment of short-term funds and to manage
currency and interest rate risks arising from its operations.
The Group uses derivative financial instruments to manage its exposure to market
risks such as changes in interest rates and foreign exchange rates. The
objective is to match the profile and characteristics of Group funding of equity
and debt to that of the assets funded and to mitigate foreign exchange risk
under the guidelines approved by the Board of Directors in accordance with the
Group's treasury policy.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book and fair values of the Groups financial assets and financial
liabilities at 31 March are:
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
2005 2005 2004 2004
------ ------ ------ ------
Lm Lm Lm Lm
LIABILITIES
Debentures................... (1,060) (1,146) (1,042) (1,135)
Hire purchase contracts...... (308) (319) (325) (334)
Loan notes................... (7) (7) (8) (8)
Other loans and borrowings... (33) (33) (37) (37)
------ ------ ------ ------
TOTAL FINANCIAL LIABILITIES.. (1,408) (1,505) (1,412) (1,514)
====== ====== ====== ======
ASSETS
Hire purchase contracts...... 275 298 293 315
Short-term deposits.......... 953 953 631 631
Money market funds........... 57 57 69 69
Cash at bank and in hand..... 41 41 23 23
------ ------ ------ ------
TOTAL FINANCIAL ASSETS....... 1,326 1,349 1,016 1,038
====== ====== ====== ======
Derivative financial instruments held to manage the interest rate and currency
profile of the Group are as follows:
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
2005 2005 2004 2004
----- ----- ----- -----
Lm Lm Lm Lm
Interest rate swaps................. -- 24 -- 17
Cross-currency swaps................ -- -- 25 44
Forward foreign exchange contracts.. 24 25 4 4
--- --- --- ---
24 49 29 65
=== === === ===
FAIR VALUE
Fair value is the amount at which a financial instrument could be exchanged in
an arm's length transaction between informed and willing parties, other than in
a forced or liquidation sale. Book values are stated before deducting any
unamortised issue costs, which are disclosed in note 17.
The fair value of interest rate swaps, currency swaps and forward foreign
exchange contracts is based on the market price of comparable instruments where
available or, if not available, by the discounting of future cash flows to net
present values using appropriate interest and currency rates.
The fair value of short-term deposits, money market funds, cash at bank and
short-term borrowings approximates to the book carrying value due to the
short-term or on demand maturity of these instruments. For long-term borrowings
the fair value of the sterling and Euro denominated bonds have been estimated
using quoted market prices.
A-31
HEDGING ACTIVITIES
Under the Group's accounting policy detailed in note 1 to the financial
statements, certain gains and losses on derivative instruments used for hedging
are not recognised in the financial statements. The gains and losses are as
follows:
GAINS
-----
Lm
UNRECOGNISED GAINS ON HEDGES AT 1 APRIL 2003 .......................... 31
===
Of which:
Gains expected to be recognised in 2003-04 ............................ 7
Gains expected to be recognised in 2004-05 or later ................... 24
===
Unrecognised gains at 1 April 2003 .................................... 31
Gains arising in previous years that were recognised in the year ...... (1)
---
Gains arising in previous years that were not recognised in the year .. 30
Gains arising in the year that were not recognised in the year ........ 6
---
UNRECOGNISED GAINS ON HEDGES AT 31 MARCH 2004 ......................... 36
===
Of which:
Gains expected to be recognised in 2005-06 or later ................... 36
===
Unrecognised gains at 1 April 2004 .................................... 36
Losses arising in the year that were not recognised in the year ....... (11)
---
UNRECOGNISED GAINS ON HEDGES AT 31 MARCH 2005 ......................... 25
===
Of which:
Gains expected to be recognised in the year ended 31 March 2006 ....... 1
Gains expected to be recognised after 31 March 2006 ................... 24
===
CURRENCY EXPOSURES
At 31 March 2005, the net foreign currency exposure comprising of monetary
assets and liabilities of the Group that are not denominated in the functional
currency of the individual Group company was L7 million (2004: L4 million)
denominated primarily in US$.
FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
The Group does not trade in financial instruments.
A-32
FINANCIAL ASSETS
Financial assets consist of sterling and Euro denominated cash at bank,
short-term money market deposits and investments in a AAA-rated money market
fund. Money market deposits have a maturity profile between overnight and three
months and earn interest at market rates. Investments in the money market fund
can be called on either a same day or next day basis and yield income or
interest on the basis of performance of the underlying assets measured against
one-week and three-month LIBOR/EURIBOR benchmarks.
SHORT-TERM
DEPOSITS AND
CASH AT BANK HIRE PURCHASE MONEY MARKET
AND IN HAND RELATED ASSETS FUNDS TOTAL
------------ -------------- ------------ -----
Lm Lm Lm Lm
CURRENCY
Sterling .......... 7 -- 711 718
Euro .............. 24 -- 257 281
Other ............. 10 275 42 327
--- --- ----- -----
AT 31 MARCH 2005 .. 41 275 1,010 1,326
=== === ===== =====
CURRENCY
Sterling .......... (3) -- 461 458
Euro .............. 22 -- 184 206
Other ............. 4 293 55 352
--- --- ----- -----
AT 31 MARCH 2004 .. 23 293 700 1,016
=== === ===== =====
At 31 March 2005, the Group had no fixed rate financial assets (2004: nil).
FINANCIAL LIABILITIES
NON-INTEREST FIXED RATE FINANCIAL
BEARING FIXED RATE FLOATING RATE FIXED RATE FINANCIAL LIABILITIES WEIGHTED
FINANCIAL FINANCIAL FINANCIAL LIABILITIES WEIGHTED AVERAGE PERIOD FOR
LIABILITIES LIABILITIES LIABILITIES TOTAL AVERAGE INTEREST RATE WHICH RATE IS FIXED
------------ ----------- ------------- ----- --------------------- --------------------
Lm Lm Lm Lm % (YEARS)
CURRENCY
Sterling .......... -- 427 7 434 7.3% 6.3
Euro .............. 2 -- 686 688 -- --
Other ............. -- 286 -- 286 7.4% 5.5
--- --- --- ----- --- ---
AT 31 MARCH 2005 .. 2 713 693 1,408 7.3% 6.0
=== === === ===== === ===
CURRENCY
Sterling .......... -- 431 570 1,001 7.3% 7.2
Euro .............. -- -- 80 80 -- --
Other ............. -- 306 -- 306 7.4% 6.1
--- --- --- ----- --- ---
AT 31 MARCH 2004 .. -- 737 650 1,387 7.3% 6.7
=== === === ===== === ===
The cash flows of the Group's overseas businesses, O2 Germany and O2 Ireland,
and the improved visibility of the future financial profile of the Group, has
resulted in a decision to increase the level of hedging of our overseas assets.
This was achieved through the redenomination of the Group's existing Euro
borrowings and through the use of E1,800 million of forward foreign exchange
contracts, which commenced in June 2004.
The ongoing effect of the hedge implementation is that the Euro borrowings
totalling E1,000 million, which are a component of net debt, are exposed to
foreign exchange rate fluctuations, and the interest charge is impacted by the
forward foreign exchange contracts which have reduced the current year net
interest charge by L24 million. Additionally, the foreign exchange gains or
losses, arising on the retranslation of the Euro borrowings and on the forward
foreign exchange contracts, are recognised in the statement of total recognised
gains and losses as they hedge certain assets of the overseas businesses.
A-33
The Group has E1,000 million of Euro borrowings that are classified as floating
rate at 31 March 2005 (2004: E500 million). The Group had E500 million of cross
currency interest rate swaps, which classified E500 million of Euro borrowings
as floating rate in sterling for the year ended 31 March 2004. The
cross-currency element was cancelled during the year ended 31 March 2005
realising a one-off cash inflow of L22 million which, when combined with the
revaluation of the relevant Euro denominated debt at that time, had no material
impact on net debt.
Floating rate financial liabilities bear interest rates, based on relevant
EURIBOR equivalents, which are fixed in advance for periods of six months.
BORROWING FACILITIES
At 31 March 2005, the Group had an undrawn committed floating rate syndicated
facility totalling L1,000 million, which matures in 2009. This facility incurs
commitment fees at market rates. At 31 March 2005, all conditions precedent had
been met.
At 31 March 2004, the Group had an undrawn 364-day bilateral facility of L100
million expiring within one year. If the facility is not renewed for a further
period by the bank at its expiry, it can be drawn and then repaid in September
2006, otherwise it lapses. The Group also had a facility of L1,725 million
expiring in more than two years, being the five-year tranche of the RCF, which
was due to mature in September 2006 but was renegotiated and reduced in the year
ended 31 March 2005. All facilities incur commitment fees at market rates.
A-34
28. AUDITORS' REMUNERATION
The aggregate fees paid to auditors during the year for audit and other services
are analysed below:
2005 2004
----- -----
L000 L000
Audit services:
UK ..................................................... 665 600
Other countries ........................................ 370 400
----- -----
TOTAL STATUTORY AUDIT FEES ............................. 1,035 1,000
Audit-related regulatory reporting ..................... 32 32
Sarbanes-Oxley compliance reporting .................... 279 --
International Financial Reporting Standards reporting .. 150 --
----- -----
TOTAL AUDIT AND AUDIT-RELATED FEES ..................... 1,496 1,032
===== =====
Non-audit fees
Other assurance services ............................... 869 339
Tax compliance ......................................... 180 166
Tax advisory ........................................... 338 280
----- -----
TOTAL NON-AUDIT FEES 1,387 785
===== =====
Other non-audit assurance services includes fees totalling L630,000 in respect
of the capital reorganisation described in note 19. Non-audit fees arising in
the UK were L991,000 (2004: L498,000).
29. DIRECTORS' EMOLUMENTS
The emoluments of the Directors and the benefits received under long-term
incentive plans were, in summary, as follows:
2005 2004
----- -----
L000 L000
Salaries ............................. 2,336 2,405
Performance related bonus ............ 1,925 2,265
Other benefits ....................... 172 249
----- -----
4,433 4,919
Payments to non-executive Directors .. 325 399
----- -----
TOTAL EMOLUMENTS ..................... 4,758 5,318
===== =====
During the year ended 31 March 2005, three Directors (2004: three) accrued
retirement benefits under a defined benefit pension plan.
Gains arising during the year ended 31 March 2005 on the exercise of share
options were L1,214,442, and on the vesting of long-term incentive plans were
L1,399,955 (2004: share options nil, long-term incentive plans L146,717).
A-35
DIRECTORS' REMUNERATION (EXCLUDING PENSION ARRANGEMENTS) FOR THE YEAR ENDED 31 MARCH:
BENEFITS EXCLUDING
SALARY AND FEES(1) ANNUAL BONUS PENSIONS(2) SALARY/FEES AS
--------------------- ----------------- --------------------- TOTAL TOTAL AT 1 JUNE
2005 2004 2005 2004 2005 2004 2005(3) 2004(4) 2005
------- ------- ------- ------- ------ ------- --------- --------- ---------------
L L L L L L L L L
Current directors(18)
D Arculus 280,847(5) 48,000 -- -- 16,787 -- 297,634 48,000 355,000
P Erskine(6) 665,833 607,500 568,404 564,200 35,241 40,602 1,269,478 1,212,302 725,000
D Finch 425,000 395,833 430,000 364,000 28,222 24,705 883,222 784,538(7) 460,000
R Groger(8) 439,992 399,211 534,847 499,896 25,146 20,543 999,985 919,650 473,134
D McGlade(16) 414,167 372,500 391,980 462,000 24,162 100,047 830,309 934,547 --
D Chance 48,000 48,000 -- -- -- -- 48,000 48,000 61,250
S Hodge(9) 66,667 55,000 -- -- -- -- 66,667 55,000 100,000
R Lamprecht(10) -- -- -- -- -- -- -- 50,000
P Lupo(11) 30,856 -- -- -- -- -- 30,856 -- 65,000
K O'Donovan(10) -- -- -- -- -- -- -- 57,500
A Sukawaty(12) 87,000 100,000 -- -- -- -- 87,000 100,000 61,250
Former Directors(18)
D Varney(13) 113,844 350,000 -- -- 42,911(14) 36,125 156,755 386,125 --
N Kroes(15) 20,833 50,000 -- -- -- -- 20,833 50,000 --
I Meakins(16) 50,000 50,000 -- -- -- -- 50,000 50,000 --
P Myners(17) 17,290 48,000 -- -- -- -- 17,290 48,000 --
K Thexton -- 279,508 -- 374,691 -- 27,288 -- -- --
----------
1 Salaries and fees are reviewed each year.
2 Benefits include car provision or cash allowance, healthcare, financial
planning, dental care, home security and life cover.
3 Certain Directors received pension supplements for the year ended 31 March
2005. Details of these payments can be found in the section Pension
Provisions below.
4 Total aggregate remuneration for 2004 excludes long-term incentive gains
which were included in the report for the year ended 31 March 2004.
5 Includes aggregate fees earned as a non-executive Director and Chairman
designate for the period 1 April 2004 to 28 July 2004.
6 Highest paid Director.
7 Excludes L146,717 gains from long-term incentives which were included
in the report for the year ended 31 March 2004.
8 Rudolf Groger's remuneration has been converted from Euro to Sterling at an
exchange rate of L1 = E1.45836. (2004: L1=E1.4403).
9 Appointed as Deputy Chairman of the Company on 1 January 2005.
10 Appointed on 30 March 2005.
11 Appointed on 10 August 2004.
12 Andrew Sukawaty stepped down as Deputy Chairman of the Company on 31
December 2004 but remains on the Board.
13 Retired at the conclusion of the Company's AGM on 28 July 2004.
14 In addition to the benefits listed in Note 2, David Varney received a
payment for outstanding holiday entitlement.
15 Resigned from the Board on 31 August 2004.
16 Resigned from the Board on 30 March 2005.
17 Resigned from the Board on 10 August 2004.
18 As at 31 March 2005.
On 1 September 2005 Judy Gibbons was appointed as a non-executive Director.
On 23 January 2006, following the acquisition of O2 by Telefonica, Sir David
Arculus stepped down as Chairman; Peter Erskine was appointed Chairman; David
Chance, Judy Gibbons, Stephen Hodge, Rudolf Lamprecht, Patrick Lupo and Kathleen
O'Donovan stepped down as non-executive Directors; Matthew Key, Danuta Gray,
Jaime Smith and Sohail Qadri were appointed as executive directors; and Cesar
Alierta, Julio Linares and Antonio Viana-Baptista were appointed as
non-executive Directors.
A-36
AGGREGATE REMUNERATION PAID TO THE SENIOR MANAGEMENT TEAM
The aggregate remuneration of the Senior Management Team for services in all
capacities during the 2005 financial year was L2.6 million (2004:
L2.4 million). In addition, loans outstanding to senior officers of the
Company as at 31 March 2005 were L119,643 (2004: L141,071).
PENSION PROVISIONS
The table below includes the information required in relation to defined benefit
schemes under the UKLA Listing Rules and Schedule 7A of the Companies Act 1985.
INCREASE IN
ACCRUED TRANSFER VALUE
TRANSFER VALUE REAL INCREASE PENSION OF REAL INCREASE INCREASE IN
TOTAL ACCRUED OF ACCRUED IN ACCRUED DURING YEAR IN ACCRUED BENEFIT TRANSFER VALUE
PENSION(1) - BENEFIT(2,3)- PENSION (INCLUDING (LESS DIRECTORS' LESS DIRECTORS' DIRECTORS'
AT 31 MARCH AT 31 MARCH DURING YEAR INFLATION) CONTRIBUTIONS)(2,3) CONTRIBUTIONS CONTRIBUTIONS
------------- -------------- ------------- ----------- ------------------- --------------- -------------
2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004
---- ---- ----- ----- ---- ---- ---- ---- ---- ---- ----- ----- ---- ----
L000 L000 L000 L000 L000 L000 L000 L000 L000 L000 L000 L000 L000 L000
Peter Erskine
O2 Pension Plan.. 41 37 490 407 3 3 4 4 25 20 68 68 15 15
Unfunded Plan.... 246 203 4,161 3,124 36 39 43 43 606 598 1,037 969 -- --
--- --- ----- ----- --- --- --- --- --- --- ----- ----- --- ---
Total............... 287 240 4,651 3,531 39 42 47 47 631 618 1,105 1,037 15 15
--- --- ----- ----- --- --- --- --- --- --- ----- ----- --- ---
David Finch......... 12 9 114 72 3 3 3 4 31 27 42 32 -- --
--- --- ----- ----- --- --- --- --- --- --- ----- ----- --- ---
Rudolf
Groger(4,5)...... 93 69 2,281 1,540 23 35 24 35 545 744 741 858 -- --
--- --- ----- ----- --- --- --- --- --- --- ----- ----- --- ---
1 The accrued annual pension represents the maximum defined benefit liability
for O2. The amounts will be reduced by any retained benefits from previous
employment.
2 The transfer values have been calculated on the basis of actuarial advice.
The transfer values of the Inland Revenue approved benefits have been
calculated in accordance with Actuarial Guidance Note GN11 using the
assumptions adopted by the O2 Pension Plan Actuary. The unapproved element
of pension benefits has been valued using assumptions appropriate to the
FRS 17 accounting standard, which are consistent with GN11 principles. The
increase in transfer values has been caused by each executive Director's
increase in salary and length of service.
3 These figures represent liabilities of the Company and the O2 Pension Plan,
not sums paid or due to the individual.
4 Rudolf Groger became an executive Director on 1 April 2003. Therefore, no
figures are shown for the year prior to this date.
5 Rudolf Groger's pension has been converted from Euro to sterling at an
exchange rate of E1: L0.6803 (2004: E1 L0.6943).
For the year ended 31 March 2005, David Arculus received employer's
contributions of L16,482 (L28,254 per annum) into his personal
pension arrangements. Under arrangements to provide David Finch with
supplementary benefits in respect of earnings above the statutory earnings cap
for the year ended 31 March 2005, L89,250 (2004: L83,125) was paid
to a defined contribution Funded Unapproved Retirement Benefit Scheme (FURBS)
and L48,875 (2004: L45,521) was paid as a cash supplement.
In the year ended 31 March 2005, David McGlade and Kent Thexton received a cash
allowance of L117,833 and nil respectively (2004: L74,500 and
L66,000 respectively) in lieu of pension benefits.
A-37
SHARE PRICE
The closing market price of O2 shares at 31 March 2005 was 119.25p (31 March
2004: 100.5p) and the range from 1 April 2004 to that date was 84.25p to 131.25p
(1 April 2003 to 31 March 2004: 45.75p to 112p).
BENEFICIAL INTERESTS IN ORDINARY SHARES
The beneficial interests of the Directors and their immediate families in O2
ordinary shares of 0.1p each as at 31 March are set out in the table below.
AS AT AS AT
31 MARCH 2005 31 MARCH 2004
------------- -------------
David Varney(1,2).... -- 279,554(3)
Peter Erskine(1,2)... 965,910 537,027
David Finch(1,2)..... 1,028,768 812,816
David McGlade ....... 670,986 335,496(4)
Rudolf Groger ....... 63,944 --
Andrew Sukawaty ..... 83,576 83,576
David Arculus ....... 338,281 24,078
David Chance ........ 15,029 15,029
Stephen Hodge ....... 91,914 91,914
Neelie Kroes ........ -- 59,890
Ian Meakins ......... -- 33,599
Paul Myners ......... -- 261,401
Patrick Lupo ........ 73,048 --
----------
1 Between 1 April 2005 and 10 January 2006, Peter Erskine and David Finch
each acquired 1,013 additional Ordinary Shares.
2 Includes shares held by the trustee of the O2 Share Ownership Plan.
3 Includes 1,000 shares in the form of 100 O2 American Depositary Shares
(ADSs) (1 ADS = 10 Ordinary Shares).
4 Includes 4,130 shares in the form of 413 O2 American Depositary Shares
(ADSs) (1 ADS = 10 Ordinary Shares).
LONG-TERM INCENTIVES
The Remuneration Committee ("the Committee") believes that long-term incentives
should form a key part of the executive remuneration package, and that
executives should look to the performance-related elements of the package to
achieve superior reward. The Committee believes it is important to adapt the
incentive arrangements offered each year to support the Group's strategic
objectives. This is achieved through a flexible portfolio of long-term
incentives, which the Committee actively reviews to ensure that incentives
remain appropriate to the needs of the business.
The Portfolio is the primary vehicle for aligning the interests of key employees
and executive Directors with those of shareholders. It comprises four elements:
- performance shares;
- deferred equity shares;
- share options; and
- restricted shares.
All employees of the O2 Group, including executive Directors, are eligible to be
invited to participate in long-term incentives, at the discretion of the
Committee. The Committee determines the appropriate performance targets, and
reviews the extent to which they have been met. Awards and options are not
pensionable.
A-38
The Portfolio provides a range of plans that can be tailored to meet the needs
of the Group. Other than in exceptional circumstances, executives will only be
made an award under one plan in any year. In the year ended 31 March 2005, only
the deferred equity shares element of the portfolio was operated for executive
directors (2004: performance shares only).
Performance under the long-term incentives is measured by Total Shareholder
Return (TSR). TSR compares the net return of a shareholder in O2 (share price
growth and assumed reinvestment of any dividends) with that of a shareholder in
each of a group of comparator companies.
VESTING UNDER THE O2 EXECUTIVE SHARE PORTFOLIO AS A RESULT OF TELEFONICA OFFER
As a result of the offer from Telefonica as discussed in the subsequent events
section in note 32, vesting levels for conditional share awards under the PSP
and the DEIP (which are performance-related) required the exercise of discretion
by the Remuneration Committee of O2 in relation to the offer. Aside from a small
number of Performance Share Awards granted in July 2005 based on O2 Germany
performance, awards were subject to O2's relative Total Shareholder Return
performance which, over the period from each grant date to 31 December 2005, was
such as to place the Company at first or second in the comparator group.
The Remuneration Committee of O2 considered the excellent performance to date
against all of the measures and other relevant factors, and reached an
indicative decision (which was confirmed on 23 January 2006, the date on which
the Telefonica offer became unconditional (the Unconditional Date)) that:
- awards made in 2003 and 2004 would vest in full, and the O2 Shares
under those awards would be released immediately; and
- awards made in 2005 will vest in full, but the offer proceeds for
those O2 Shares would only be released on the first anniversary of the
Unconditional Date subject to the participant (i) not having given
notice to resign their employment, and (ii) not having been dismissed
for cause in accordance with their service contract, in both cases
prior to such first anniversary.
Sir David Arculus held a conditional share award over 292,397 O2 Shares, granted
under the RSP, which would have normally vested in July 2007 provided he built
up a personal holding of 350,877 O2 Shares by 29 July 2005 (which he had done).
The terms of the award provided that, where Sir David becomes a director of an
acquiring company following a change of control of O2, the award would be rolled
over into an equivalent number of shares in the acquiring company and will vest
in July 2007 provided he retained an equivalent coinvestment. The Remuneration
Committee of O2 concluded that the above consequences would be inappropriate in
the context of the current proposals (notably, Sir David's proposed
non-executive directorship of Telefonica, and a cash offer for O2) and that the
award should vest in respect of the full number of O2 Shares on the
Unconditional Date.
In accordance with the terms of each arrangement, O2 Deferred Shares awarded in
July 2005, and Deferred Awards made under the DEIP in July 2004, neither of
which have performance conditions other than continuous employment, vested in
full as a result of the change of control.
SHARE OPTION PLAN
There were no awards of share options under the Share Option Plan in the year
ended 31 March 2005. The vesting of options previously granted is subject to the
Company's relative TSR performance against the constituents of the FTSE 100
index (at the date of grant) over a three-year period as set out below.
TSR RANKING % OF OPTIONS EXERCISABLE
----------- ------------------------
Below median.............. 0%
Median.................... 50%
Upper quartile (top 25%).. 100%
A-39
Vesting occurs on a straight line basis between median and upper quartile
performance.
If the performance goal is not satisfied in full on the first performance test,
it can be retested on the fourth and fifth anniversaries of grant, extending the
length of the performance period at each test.
Should options be granted in the future, the Group will have regard to best
practice at the time on retesting and performance conditions.
In July 2005, options granted in 2002/03 became exercisable in full as a result
of O2's TSR ranking of 1st in the relevant comparator group at the first
performance test.
In addition, TSR performance was re-tested in respect of the remaining 26% of
options granted in 2001/02 and as a result of O2's TSR performance being above
upper quartile, the 26% also became exercisable from November 2005.
YEAR ENDED 31 MARCH 2005
The table below shows the options which remained outstanding under the Share
Option Plan held by Directors during the year ended 31 March 2005.
OPTIONS
GRANTED
DURING
THE
YEAR
ENDED PRICE ON
NUMBER AT 1 31 MARCH NUMBER AT 31 EXERCISE DATE OF DATE
PLAN GRANT DATE APRIL 2004 2005 EXERCISED LAPSED MARCH 2005 PRICE EXERCISE EXERCISABLE
----------- ----------- ----------- -------- ---------- ------- ------------ -------- -------- ---------------
D Varney... Executive 23 November 1,724,137 -- (1,275,860) -- 448,277 87p -- 23 November
share 2001(1,2) 2004-28 July
option plan 2005
25 July 3,260,869 -- -- -- 3,260,869 46p -- 28 July
2002(1,4) 2005-18 October
2005
P Erskine.. Executive 23 November 1,724,137 -- -- -- 1,724,137 87p -- 23 November
share 2001(2) 2004-22
option plan November 2011
25 July 3,554,347 -- -- -- 3,554,347 46p -- 25 July
2002(4) 2005-24 July
2012
D Finch.... Executive 23 November 1,206,896 -- -- -- 1,206,896 87p 123p 23 November
share 2001(2) 2004-22
option plan November 2011
25 July 2,445,652 -- -- -- 2,445,652 46p -- 25 July
2002(4) 2005-24 July
2012
R Groger... Executive 23 November 625,168 -- (462,624) -- 162,544 87p 126p 23 November
share 2001(2) 2004-22
option plan November 2011
25 July 1,763,373 -- -- -- 1,763,373 46p -- 25 July
2002(4) 2005-24 July
2012
D McGlade.. Executive 23 November 122,059 -- (90,323) (31,736) $11.873 114p --
share 2001(23)
option plan
25 July 2,184,782 -- -- -- 2,184,782 46p -- 25 July
2002(4,5) 2005-31 March
2006
----------
1 On retiring as Chairman of the Company on 28 July 2004, the Committee
permitted David Varney to retain his options for the maximum periods
referred to above. The exercisability of these options is dependent on the
applicable performance targets being met.
2 For options granted in the year ended 31 March 2002 (i.e. 23 November
2001), the first performance test took place in November 2004. TSR
performance from 19 November 2001 (the start of the performance period) to
18 November 2004 placed the Company at 31st position within the comparator
group and resulted in 74 per cent. of share options becoming exercisable.
Performance will be tested in respect of the unexercisable portion of the
option on 18 November 2005. Should the remaining portion of the option not
be exercisable at that time, a final retest will occur on 18 November 2006.
In the case of David McGlade who resigned from the Board on 31 March 2005,
the balance of his option outstanding lapsed in full.
3 The options granted to David McGlade on 23 November 2001 were in the form
of ADSs (one ADS = 10 O2 shares) at $11.873 per ADS. The value realisable
from shares acquired on exercise is the difference between the price on the
date of exercise and the option price. David McGlade converted his option
over ADSs to ordinary shares on exercise and made a gain of L576,622.
The sterling-dollar exchange rate on 7 March 2005 was L1= $1.9114.
4 For options granted in the year ended 31 March 2003 (i.e. 25 July 2002),
the first performance test is expected to be July 2005. TSR performance
from 18 July 2002 (the start of the performance period) to 31 March 2005
placed the Company at first position within the comparator group.
5 On resigning as a Director of O2 plc on 31 March 2005, the Committee
permitted David McGlade to retain his options for the maximum periods
referred to in the final column above. The exercisability of these options
is dependent on the applicable performance targets being met.
A-40
YEAR ENDED 31 MARCH 2004
The table below shows the options which remained outstanding under the Share
Option Plan held by Directors during the year ended 31 March 2004.
OPTIONS
GRANTED
DURING THE
NUMBER AT YEAR ENDED NUMBER AT
1 APRIL 31 MARCH 31 MARCH EXERCISE
PLAN GRANT DATE 2003 2004 EXERCISED LAPSED 2004 PRICE DATE EXERCISABLE
--------------- ---------------- --------- ---------- --------- ------ ---------- -------- -------------------
D Varney... Executive share 23 November 2001 1,724,137 -- -- -- 1,724,137 87p 23 November 2004-22
option plan November 2011
25 July 2002 3,260,869 -- -- -- 3,260,869 46p 25 July 2005-
24 July 2012
P Erskine.. Executive share 23 November 2001 1,724,137 -- -- -- 1,724,137 87p 23 November 2004-22
option plan November 2011
25 July 2002 3,554,347 -- -- -- 3,554,347 46p 25 July 2005-
24 July 2012
D Finch.... Executive share 23 November 2001 1,206,896 -- -- -- 1,206,896 87p 23 November 2004-22
option plan November 2011
25 July 2002 2,445,652 -- -- -- 2,445,652 46p 25 July 2005-
24 July 2012
R Groger... Executive share 23 November 2001 625,168 -- -- -- 625,168 87p 23 November 2004-22
option plan November 2011
25 July 2002 1,763,373 -- -- -- 1,763,373 46p 25 July 2005-
24 July 2012
D McGlade.. Executive share 23 November 122,059 -- -- -- 122,059 $11.873 23 November 2004-
option plan 2001(1) 22 November 2011
25 July 2002 2,184,782 -- -- -- 2,184,782 46p 25 July 2005-
24 July 2012
----------
1 The options granted to David McGlade on 23 November 2001 were in the form
of ADSs (one ADS = 10 O2 shares) at $11.873 per ADS.
DEFERRED EQUITY INCENTIVE PLAN
The Committee operated the Deferred Equity Incentive Plan as the primary form of
long-term incentive for executive Directors in the year ended 31 March 2005.
A-41
AWARD
- During 2004/05, each of the executive Directors received a Deferred
Award and Performance Uplift. Details of these awards can be found
below.
- The Deferred Award is an entitlement to shares equal in value to half
of the annual bonus earned in respect of the preceding financial year
(i.e. 2003/04). Vesting is subject to continued employment, but no
further corporate performance condition.
- Vesting of the Performance Uplift is subject to the Company's relative
TSR performance against a comparator group over a fixed three year
period as set out below.
% PERFORMANCE UPLIFT
TSR RANKING VESTS
----------- --------------------
Below median............... 0%
Median..................... 30%
Upper quintile (top 20%)... 100%
Vesting occurs on a straight line basis between median and quintile performance.
- The comparator group consists of the constituents of the FTSEurofirst
300 Telecoms Service Index at the time the award is made.
- Awards will only vest to the extent that the Committee is satisfied
that the Company's TSR performance is a genuine reflection of the
Company's underlying financial performance over the period. There are
no retesting opportunities.
The table below shows the number of deferred equity shares awarded to executive
Directors during the year ended 31 March 2005.
GRANTED DURING THE YEAR ENDED 31 MARCH 2005
-------------------------------------------------------------------------------------------------------------
NUMBER OF
NUMBER OF PERFORMANCE TOTAL
NUMBER AT 1 DEFERRED UPLIFT NUMBER NUMBER AT 31 VESTING
DATE OF AWARD APRIL 2004 AWARD SHARES SHARES OF SHARES VESTED LAPSED MARCH 2005 DATE
------------- ----------- ------------ ----------- --------- ------ -------- ------------ -----------
Peter Erskine...... 29 July 04 -- 329,941 659,883 989,824 -- -- 989,824 29 July 07
David Finch........ 29 July 04 -- 212,865 425,730 638,595 -- -- 638,595 29 July 07
Rudolf Groger...... 29 July 04 -- 282,105 564,210 846,315 -- -- 846,315 29 July 07
David McGlade(1)... 29 July 04 -- 270,175 540,350 810,525 -- (810,525) -- --
----------
1 David McGlade left the Company on 31 March 2005 and his award over deferred
equity shares lapsed in full.
PERFORMANCE SHARE PLAN
There were no awards of performance shares under the Performance Share Plan to
Directors in the year ended 31 March 2005.
AWARD
- During 2003/04, each of the executive Directors was made an award of
Performance Shares equal to 120 per cent. of salary. Details of these
awards are included in the table on page 114.
A-42
PERFORMANCE MEASURES
- Vesting is subject to the Company's relative TSR performance against a
comparator group over a fixed three-year period as set out below:
% PERFORMANCE
O2 TSR RANKING SHARES VEST
-------------- ------------
Below median ....................... 0%
Median ............................. 30%
Upper quartile (top 25 per cent.) .. 100%
Vesting occurs on a straight line basis between median and maximum performance.
- The comparator group consists of the constituents of the FTSEuroFirst
300 Telecoms Service Index at the time the award is made.
- Awards will only vest to the extent that the Committee is satisfied
that the Company's TSR performance is a genuine reflection of the
Company's underlying financial performance over the period. There are
no retesting opportunities.
The table below shows the number of performance shares which remained
outstanding to executive Directors as at 31 March 2005.
GRANTED
DURING THE
YEAR ENDED
NUMBER AT 1 31 MARCH NUMBER AT 31
GRANT DATE APRIL 2004 2005 VESTED LAPSED MARCH 2005 VESTING DATE
------------ ------------ ---------- ------ -------- ------------ ------------
Peter Erskine ...... 31 July 2003 1,403,773 -- -- -- 1,403,773 31 July 2006
David Finch ........ 31 July 2003 905,660 -- -- -- 905,660 31 July 2006
Rudolf Groger ...... 31 July 2003 859,245 -- -- -- 859,245 31 July 2006
David McGlade(1) ... 31 July 2003 815,094 -- -- (815,014) -- --
----------
1 David McGlade left the company on 31 March 2005 and his award over
performance shares lapsed in full.
ALL-EMPLOYEE SHARE SCHEMES
Executive Directors are eligible to participate in the Group's all-employee
share schemes on the same terms as other eligible employees. There are no
performance conditions attached to these schemes and both operate within
specific tax legislation:
- the O2 Sharesave Plan, under which the Directors can grant options to
all employees across the business to acquire shares at an exercise
price set at a discount of up to 20 per cent. to the market value of a
share at the time of invitation.
- the O2 Share Ownership Plan, under which the Directors can award
shares to UK employees on a variety of tax-favoured terms.
A-43
SHARESAVE OPTIONS
YEAR ENDED 31 MARCH 2005
The table below shows the sharesave options over O2 ordinary shares held by
Directors during the year 31 March 2005.
NUMBER
NUMBER AT PRICE ON
AT 1 APRIL 31 MARCH EXERCISE DATE OF
GRANT DATE 2004 GRANTED EXERCISED LAPSED 2005 PRICE EXERCISE DATE EXERCISABLE
----------- ---------- ------- --------- ------- -------- -------- -------- -----------------------
Peter Erskine ...... 21 Dec 2001 12,978 -- (12,978) -- -- 73.2p 123.5p 14 Feb 2005-13 Aug 2005
17 Dec 2004 -- 18,040 -- -- 18,040 91.6p -- 1 Feb 2010-31 Jul 2010
David Finch ........ 21 Dec 2001 12,978 -- (12,978) -- -- 73.2p 123.5p 14 Feb 2005-13 Aug 2005
17 Dec 2004 -- 10,343 -- -- 10,343 91.6p -- 1 Feb 2008-31 Jul 2008
David McGlade(1) ... 20 Dec 2002 21,477 -- -- (21,477) -- 44p -- --
David Varney(2) .... 21 Dec 2001 12,978 -- -- (12,978) -- 73.2p -- --
----------
1 David McGlade resigned from the Board on 31 March 2005 and his sharesave
options lapsed in full.
2 David Varney resigned from the Board on 28 July 2004 and his sharesave
options lapsed in full.
YEAR ENDED 31 MARCH 2004
The table below shows the sharesave options over O2 ordinary shares held by
Directors during the year ended 31 March 2004.
NUMBER AT
GRANT AND NUMBER AT EXERCISE
GRANT DATE AT 1 APRIL 2003 EXERCISED LAPSED 31 MARCH 2004 PRICE DATE EXERCISABLE
---------------- --------------- --------- ------ ------------- -------- -------------------------------
David Varney ....... 21 December 2001 12,978 -- -- 12,978 73.2p 14 February 2005-13 August 2005
Peter Erskine ...... 21 December 2001 12,978 -- -- 12,978 73.2p 14 February 2005-13 August 2005
David Finch ........ 21 December 2001 12,978 -- -- 12,978 73.2p 14 February 2005-13 August 2005
David McGlade ...... 20 December 2002 21,477 -- -- 21,477 44p 13 February 2006-12 August 2006
No options lapsed or were exercised in the year ended 31 March 2004.
A-44
RESTRICTED SHARES
YEAR ENDED 31 MARCH 2005
The table below shows the number of restricted shares which remained outstanding
to Directors during the year ended 31 March 2005.
PRICE
MARKET PRICE AWARDED DURING ON DATE
ON DATE OF NUMBER AT 1 THE YEAR ENDED NUMBER AT 31 VESTING/ OF
GRANT DATE AWARD APRIL 2004 31 MARCH 2005 VESTED LAPSED MARCH 2005 LAPSE DATE VESTING
---------- ------------ ----------- -------------- -------- -------- ------------ ---------- --------
David Arculus(1) ... 29/07/04 85.5p -- 292,397 -- -- 292,397 29/07/07 --
Peter Erskine(2) ... 23/11/01 -- 575,815 -- (575,815) -- -- 23/11/04 115.50p
David Finch(2,3) ... 23/11/01 -- 201,536 -- (201,536) -- -- 23/11/04 116.25p
Rudolf Groger(2) ... 23/11/01 -- 156,592 -- -- (156,592) -- 23/11/04 --
David
McGlade(2,4,5) .. 23/11/01 -- 38,579 -- (33,549) (5,030) -- 23/11/04 $ 21.61
----------
1 David Arculus was granted a restricted share award over 292,397 shares
(with a market value of 85.5p at the time of grant) with effect from 29
July 2004. This represents an amendment to the original award terms
involving a reduction in the number of shares under award and the removal
of a corporate performance condition to which the original award was
subject. The restricted share award was intended to vest on 29 July 2007
provided Mr Arculus had built up a personal shareholding of 350,877 shares
by 28 July 2005 and remained with the Company until the vesting date.
2 Restricted share awards were granted on terms that they will only vest on
the third anniversary of grant, if a significant personal shareholding in
the Company equal to the number of shares under award is built within 18
months of grant and retained until the vesting date as well as remaining in
employment with the Group. The awards vest on a pro-rata basis if the
participant builds up a lower personal investment.
3 The personal shareholding requirement for David Finch was equal to
one-third of the shares under award at 23 November 2001.
4 The restricted share award granted to David McGlade on 23 November 2001
was in the form of ADSs (one O2 ADS= 10 ordinary shares).
5 The sterling-dollar exchange rate on the date of vesting was L1 =$1.8688.
YEAR ENDED 31 MARCH 2004
The table below shows the number of restricted shares awarded to executive
Directors under the operation of the Portfolio.
NUMBER
AT 1 NUMBER AT
APRIL 31 MARCH
GRANT DATE 2003(1) VESTED LAPSED 2004 VESTING DATE
---------------- ------- -------- ------ --------- ----------------
Peter Erskine(2) ... 23 November 2001 575,815 -- -- 575,815 23 November 2004
David Finch(3) ..... 23 November 2001 403,071 (201,535) -- 201,536 23 November 2004
Rudolf Groger ...... 23 November 2001 156,592 -- -- 156,592 23 November 2004
David McGlade ...... 23 November 2001 385,790 -- -- 385,790 23 November 2004
----------
1 Restricted share awards were granted to a small group of senior executives
(including executive Directors) shortly after demerger. Most awards were
granted on terms that they will normally only vest on the third anniversary
of grant if the participant builds up a significant personal shareholding
in the Company within 18 months of grant and retains this until the vesting
date as well as remaining in employment with the O2 Group until this time.
The awards vest on a pro rata basis if the participant builds up a lower
personal investment.
As at 31 March 2004 both Peter Erskine and David Finch had met their
shareholding requirement, and are required to maintain that shareholding
until the third anniversary of award in order for their restricted share
awards to vest in full.
2 Vesting is subject to the satisfaction of a personal shareholding
requirement as set out in note 1. The personal shareholding requirement for
Peter Erskine is equal to the number of shares under award.
3 Vesting is subject to the satisfaction of a personal shareholding
requirement. The personal shareholding requirement for David Finch is equal
to one-third of the shares under award. The market price of an O2 share on
the grant date was 87p. Under the terms of David Finch's Restricted Share
Plan award, 201,535 shares vested on 23 November 2002 at 54.25p and 201,535
shares vested on 23 November 2003 at 72.8p being the market value of a
share at those dates. In relation to the awards which vested on 23 November
2002 and 23 November 2003, David Finch received L109,333 and L146,717 on
these two dates respectively.
BT LEGACY SHARE AWARDS
Peter Erskine had the following O2 shares under award from BT Legacy Share
Awards. Following demerger, these awards were adjusted to relate solely to O2
shares, and any performance measure has been translated into a measure of O2
performance from demerger to the end of the performance period.
BT BT BT BT
EXECUTIVE EXECUTIVE INCENTIVE DEFERRED
SHARE PLAN SHARE PLAN SHARE PLAN BONUS
YEAR OF AWARD 1998(1) 1999(2) 2000(3) PLAN(4) 2001
------------- ---------- ---------- ---------- ------------
Number of O2 shares at 1 April 2003 .... 154,057 144,198 312,750 127,656
Vested ................................. -- -- -- --
Lapsed ................................. (154,057) -- (312,750) --
-------- -------- -------- --------
Number of O2 shares at 31 March 2004 ... -- 144,198 -- 127,656
Vested ................................. -- -- -- (127,656)
Lapsed ................................. -- (144,198) -- --
-------- -------- -------- --------
Number of O2 shares at 31 March 2005 ... -- -- -- --
======== ======== ======== ========
----------
1 The performance period for the 1998 BT Executive Share Plan ended on 31
March 2003. The performance condition was not met and as a result 154,057
shares lapsed in August 2003 following the year ended 31 March 2003.
2 The performance period for the 1999 BT Executive Share Plan ended on 31
March 2004. The performance condition was not met and as a result 144,198
shares lapsed in August 2004.
3 The performance period for the 2000 BT Incentive Share Plan ended on 31
March 2003. The performance condition was not met and as a result 312,750
shares lapsed in August 2003 following the year ended 31 March 2003.
4 The vesting of shares awarded under the BT Deferred Bonus Plan was subject
only to the continued employment of the Director with the Company.
A-45
LEGACY OPTION PLAN
Subsisting options over BT shares granted under BT executive share option plans
were replaced with options over O2 shares, granted under the O2 Legacy Option
Plan, for those participants now employed by O2. The replacement options were
granted on the same terms and are exercisable between the same dates as the
options for which they were exchanged.
There are no performance conditions relating to the vesting of these options
other than continued employment with the O2 Group. This reflects the terms of
the underlying BT Option plan. The legacy options will be satisfied using new
issue shares, and options granted under this plan do not count towards the
dilution limits established for O2 share option plans. No further options will
be granted under this plan.
YEAR ENDED 31 MARCH 2005
The table below shows options over BT shares held by David Varney and David
McGlade prior to demerger as at 31 March 2005.
NUMBER AT NUMBER AT PRICE ON
1 APRIL 31 MARCH OPTION DATE OF
GRANT DATE 2004 EXERCISED LAPSED 2005 PRICE EXERCISE DATE EXERCISABLE
-------------- --------- --------- ------ --------- ------- -------- -----------------------
David McGlade(1) ... 1 October 2000 113,440 (113,440) -- -- $23.243 126p 1 Oct 2001-30 Sept 2006
David Varney ....... 22 June 2001 491,272 (491,272) -- -- 101.7p 114p 2004-28 July 2005
----------
1 David McGlade's legacy options were awarded in the form of ADSs (one O2 ADS
= 10 ordinary shares) and on exercise the ADSs were converted into ordinary
shares. David McGlade made a gain of L48,893. The sterling-dollar exchange
rate on 7 March 2005 was L1 = $1.9114.
YEAR ENDED 31 MARCH 2004
The table below shows options over BT shares held by David Varney and David
McGlade prior to demerger as at 31 March 2004.
OPTIONS
GRANTED
NUMBER DURING THE NUMBER
AT 1 APRIL YEAR ENDED AT 31 MARCH EXERCISE DATE
PLAN GRANT DATE 2003 31 MARCH 2004 EXERCISED LAPSED 2004 PRICE EXERCISABLE
---- -------------- ---------- ------------- --------- ------ ----------- -------- ------------------
D Varney ... 22 June 2001 491,272(1) -- -- -- 491,272 101.7p 2004-2011
1 October 2001-
D McGlade .. 1 October 2000 113,440(1) -- -- -- 113,440 $23.243 30 September 2010
----------
1 The options were regranted over O2 shares on 20 December 2001. David
McGlade's legacy options were awarded in the form of ADSs (one ADS = 10 O2
shares) at $23.243 per ADS, and vest in three equal annual tranches on the
first, second and third anniversaries of grant.
NON-BENEFICIAL INTERESTS
At 31 March 2005, all executive Directors had a non-beneficial interest in
956,316 O2 ordinary shares (2004: 1,858,232) and nil O2 American Depositary
Shares (2004: 81,573) held in trust by Hill Samuel Offshore Trust Company
Limited as trustee of the O2 Restricted Share Plan, O2 Performance Share Plan,
and O2 Deferred Equity Incentive Plan.
At 31 March 2004, Peter Erskine had a non-beneficial interest in 893,175 O2
ordinary shares held in trust by Ilford Trustees Limited as trustee of the BT
Executive Share Plan and BT Deferred Bonus Plan.
A-46
30. EMPLOYEES
2005 2004
NO. NO.
------ ------
Average number of full time employee equivalents
(including executive Directors) by class of business:
Mobile telecommunications ................................. 13,005 11,133
Mobile internet services .................................. -- 301
Other businesses .......................................... 906 913
------ ------
TOTAL EMPLOYEES ........................................... 13,911 12,347
====== ======
Average number of full time employee equivalents
(including executive Directors) by geographic area:
UK ........................................................ 8,709 7,328
Germany ................................................... 3,675 3,494
Other ..................................................... 1,527 1,525
------ ------
TOTAL EMPLOYEES ........................................... 13,911 12,347
====== ======
The costs incurred in respect of these employees were:
2005 2004
---- ----
Lm Lm
Wages and salaries ............... 514 456
Social security costs ............ 64 58
Employee share ownership scheme .. 9 8
Pension costs (note 31) .......... 26 26
--- ---
TOTAL STAFF COSTS ................ 613 548
=== ===
At 31 March 2005, the Group employed 14,914 (2004: 12,905) full time employee
equivalents.
The Group operates a number of employee incentive schemes including a sharesave
plan, a share ownership plan and various executive and employee option schemes.
As a result of the capital reorganisation described in note 19, on 14 March 2005
all mmO2 plc options and awards outstanding at that date were replaced by
options and awards over O2 plc shares.
The share option plans operated by the Group are:
O2 SHARESAVE PLAN
The O2 Sharesave Plan is a savings related share option scheme available to all
UK, Isle of Man and Irish employees. The scheme enables employees to acquire
shares in O2 plc at an agreed price through monthly savings at the end of a
three-year or five-year SAYE contract. A sharesave scheme also operates in
Germany.
O2 EXECUTIVE SHARE OPTION PLAN
Executive Share Options have been granted to certain employees of the Group on
terms such that they usually become exercisable on the third anniversary of
grant subject to the achievement of certain performance criteria. If these
criteria are not met on the third anniversary of grant, they are retested on the
fourth and fifth anniversaries. All such options have an exercise price equal to
the market value at grant date and have a life of ten years. In the year ended
31 March 2005, no options were granted to employees under this plan (2004: nil).
A-47
O2 LEGACY OPTION PLAN
Options over BT shares granted under BT Executive Share Option Plans were
replaced with options over O2 shares, granted under the Legacy Option Plan, for
those participants now employed by O2. The replacement options were granted on
the same terms, and are exercisable between the same dates, as the options for
which they were exchanged. The exercise price of these options equals the market
value as at original grant date. Options are normally exercisable up until the
tenth anniversary of the date of the original grant.
Options outstanding under the O2 Sharesave Plan, O2 Executive Share Option Plan
and O2 Legacy Option Plan as at 31 March, together with their exercise prices
and vesting periods, are as follows:
OPTIONS OUTSTANDING OVER ORDINARY OPTIONS EXERCISABLE
SHARES OVER ORDINARY SHARES
-------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES (m) LIFE (YEARS) PRICE (L) (m) PRICE (L)
------------------------ ----------- ------------ --------- ----------- ---------
AS AT 31 MARCH 2005
L0.44................. 32 1 0.44 -- --
L0.46................. 70 7 0.46 -- --
L0.48................. 1 8 0.48 -- --
L0.54................. 13 2 0.54 -- --
L0.64-0.69............ 4 7 0.68 3 0.69
L0.73................. 3 1 0.73 1 0.73
L0.87................. 18 7 0.87 9 0.87
L0.92................. 9 3 0.92 -- --
L1.16-1.93............ 1 6 1.61 1 1.61
--- --- ---- --- ----
151 5 0.55 14 0.83
=== === ==== === ====
AS AT 31 MARCH 2004
L0.44................. 35 2 0.44 -- --
L0.46................. 68 8 0.46 -- --
L0.48-0.49............ 1 9 0.48 -- --
L0.54................. 14 3 0.54 -- --
L0.64-0.69............ 7 8 0.67 4 0.69
L0.73-0.82............ 6 1 0.73 -- --
L0.87................. 35 8 0.87 3 0.87
L1.02-1.93............ 2 7 1.27 2 1.28
--- --- ---- --- ----
168 6 0.58 9 0.83
=== === ==== === ====
A-48
Options granted, exercised and lapsed during the three years ended 31 March 2005
under these share option plans were as follows:
OPTIONS OVER ORDINARY SHARES OPTIONS OVER ADSS
ORDINARY SHARES ADS(1)
------------------------------------- -----------------------
SAVINGS- WEIGHTED- WEIGHTED-
RELATED AVERAGE AVERAGE
SHARE OTHER SHARE EXERCISE OTHER SHARE EXERCISE
OPTIONS (m) OPTIONS (m) PRICE (L) OPTIONS (m) PRICE (L)
----------- ----------- --------- ----------- ---------
Balance at 1 April 2003 .. 45 138 0.60 3 1.49
Granted .................. 15 -- 0.54 -- --
Lapsed ................... (5) (23) (0.76) (1) (1.69)
Exercised ................ -- (4) (0.70) -- --
--- --- ----- --- -----
Balance at 31 March 2004 . 55 111 0.57 2 0.93
Granted .................. 9 -- 0.92 -- --
OPTIONS OVER ORDINARY SHARES OPTIONS OVER ADSS
ORDINARY SHARES ADS(1)
------------------------------------- -----------------------
SAVINGS- WEIGHTED- WEIGHTED-
RELATED AVERAGE AVERAGE
SHARE OTHER SHARE EXERCISE OTHER SHARE EXERCISE
OPTIONS (m) OPTIONS (m) PRICE (L) OPTIONS (m) PRICE (L)
----------- ----------- --------- ----------- ---------
Lapsed.................... (4) -- 0.60 (1) 0.82
Exercised................. (3) (17) 0.77 (1) 0.63
--- --- ---- --- ----
BALANCE AT 31 MARCH 2005.. 57 94 0.55 -- --
=== === ==== === ====
----------
(1) Share options over American Depositary Shares (ADSs) have exercise prices
termed in US Dollars. For purposes of disclosure, these options' exercise
prices have been translated into sterling at the year end exchange rate. As
each ADS represents ten ordinary shares, the number of options and exercise
prices have been adjusted by this ratio to reflect the options on a like
for like basis. As a consequence of the implementation of the capital
reorganisation in March 2005, the mmO2 ADS programme was terminated, and
all ADSs have been converted into either O2 plc ordinary shares or cash.
SHARE AWARD PLANS
The share award plans operated by the Group are:
O2 RESTRICTED SHARE PLAN
Restricted share awards have been granted to a small group of senior executives
on terms that they will normally only vest on the third anniversary of grant if
the participant builds up a predetermined personal shareholding in the Group and
remains in employment with the Group. The weighted average market value at grant
date of the 2 million shares granted under this plan in the year ended 31 March
2005 was L0.88. No shares were granted under this plan in the years ended 31
March 2004 and 31 March 2003.
O2 PERFORMANCE SHARE PLAN
Performance related share awards were granted to certain senior employees during
the year ended 31 March 2005 and 31 March 2004. These awards will vest on the
third anniversary of grant if O2 plc meets certain performance criteria, and the
participant remains in employment with the Group. The weighted average market
value at grant date of the 12 million (2004: 26.4 million) shares granted under
this plan in the year ended 31 March 2005 was L0.88 (2004: L0.53).
O2 DEFERRED EQUITY INCENTIVE PLAN (DEIP)
Participants in the DEIP receive share awards that include a deferred element
and a performance element. The deferred element generally vests three years
after grant subject to continued employment with the Group. The performance
element is subject to the long-term performance of the Group and continued
employment with the Group. DEIP awards have been granted to a small group of
senior executives during the year ended 31 March 2005. The weighted average
market value at grant date of the 8 million shares in the year ended 31 March
2005 was L0.88.
31. PENSION COSTS
The Group operates a number of pension schemes in its businesses. All the
Group's pension schemes are provided through either defined benefit or defined
contribution arrangements. Defined benefit schemes generally provide pensions
based on the employee's length of service and their final pensionable salary.
Defined contribution schemes offer employees individual funds which are
converted into pension benefits on retirement. The assets of the schemes are
held independently of the Group's finances.
A-49
THE O2 PENSION PLAN
The O2 Pension Plan (O2 PP) provides the pension benefits for the majority of UK
employees and is divided into defined contribution and defined benefit sections.
DEFINED CONTRIBUTION SECTION
Prior to 1 July 2002, the Group participated in the BT Retirement Plan (BTRP), a
defined contribution scheme established by BT. Members of the BTRP could elect
to transfer their funds under management into the new O2 Plan (defined
contribution section) on its inception. These funds were transferred on 14 March
2003.
DEFINED BENEFIT SECTION
Following the Group's demerger from BT and until 30 June 2002, the Group was a
participating employer in the BT Pension Scheme (BTPS), a funded defined benefit
pension scheme. While participating the Group paid to the BTPS a predetermined
percentage of the pensionable payroll costs of those Group employees who were
members of the scheme. These costs have been charged in the period to which they
relate. Details of the financial position of the BTPS and further information
regarding the scheme are contained in the financial statements of BT Group plc.
On 1 July 2002 the O2 PP was established for employees in the United Kingdom by
the Group. Any active member of the BTPS employed by the Group could join a
defined benefit section of, and elect to transfer their past service liability
from the BTPS to, the new plan. The vast majority of those eligible to transfer
elected to do so. The benefits of all deferred and pensioner members at 30 June
2002 remain in the BTPS. A share of the assets of the BTPS, determined on the
basis of the past service liabilities of the members electing to transfer their
benefits to the new plan, were transferred to the O2 PP on 17 March 2003.
From 1 July 2002, the Group has been the principal employer of the O2 PP. The
pension costs have been assessed in accordance with the advice of a qualified
independent actuary using the projected unit method and taking assets at market
value. The defined benefits sections of the O2 PP are closed to new entrants and
therefore the current service cost is likely to increase as the members approach
retirement.
ACTUARIAL VALUATION
A full actuarial valuation of the defined benefit sections of the O2 PP was
undertaken at 30 September 2005 by a professionally qualified independent
actuary using the projected unit method. The purpose of this valuation was to
design a future funding plan to ensure that contributions to the plan are
sufficient to meet future liabilities. As at 30 September 2005 the assets of the
O2 PP had a market value of L407 million and were sufficient to cover 83 per
cent of the benefits accrued to members at that date on the ongoing funding
measure. As a result of the valuation, the Group has increased the employer's
regular contribution rate from 13.1 to 20.1 per cent of pensionable salaries
with effect from 30 September 2005. The employee's contribution rate remains at
6 per cent of pensionable salary. In December 2005 a one off cash contribution
of L81 million was paid into the O2 PP to fund the deficit.
The main actuarial assumptions used in the valuation were as follows:
%
---------
Nominal rate of increase in salaries 4.90
Nominal rate of increase of pensions in payment 2.70-2.90
Investment return pre retirement 7.00
Investment return post retirement 5.50
Inflation assumption 2.90
A-50
OTHER GROUP PENSION PLANS
The Group operates several other defined benefit pension schemes. In the Isle of
Man benefits are provided by a funded defined benefit pension scheme that is
closed to new entrants. The Group also operates unfunded defined benefit schemes
in the UK and in Germany. A provision, determined in accordance with SSAP 24, is
recorded on the balance sheet to recognise the cumulative accrued liability for
the unfunded schemes as disclosed in note 18.
Until May 2001 the O2 Germany main scheme was unfunded. This scheme has been
changed to a funded arrangement with payments being made to provide for
previously unfunded liabilities over the period to the active members'
retirements. The vast majority of members of the O2 Germany main scheme are now
accruing benefits under an insured arrangement. The other defined benefit
schemes in Germany are unfunded.
The Group operates defined contribution schemes in Germany, Ireland and the Isle
of Man. The assets of these defined contribution arrangements are held
separately from those of the Group in independently administered funds.
The assets and liabilities of the O2 Netherlands pension scheme were included in
the disposal of O2 Netherlands to Greenfield Capital Partners.
DISCLOSURES UNDER SSAP 24
The total cost charged to the profit and loss account for all the Group's
pension schemes is as follows:
2005 2004
---- ----
Lm Lm
O2 Pension Plan cost........... 16 16
Other defined benefit schemes.. 3 3
Defined contribution schemes... 7 7
--- ---
26 26
=== ===
Within the total cost analysed above, the regular cost is L23 million (2004: L24
million).
The Group has recognised an asset of L5 million (2004: nil) representing the
excess of cumulative funding over the accumulated pension cost on the O2 PP and
amounts totalling a net liability of L16 million (2004: L15 million)
representing the excess of cumulative pension cost over accumulated funding on
other schemes.
At 31 March 2004, using SSAP 24, a deficit of L12 million existed in the mmO2
PP. This difference between the assets and liabilities was amortised over the
expected future working lives of the active membership, of 13 years, using the
straight line method and is included in the cost.
A-51
As at 30 June 2003, the assets of the O2 PP were sufficient to cover 95 per cent
of the benefit: accrued to members based on the SSAP 24 accounting basis, which
is used to calculate the pension charge recognised in the profit and loss
account.
The number of members in each of the Group's main pension schemes is as follows:
2005 2005 2004 2004
ACTIVE TOTAL ACTIVE TOTAL
NO. NO. NO. NO.
------ ------ ------ -----
O2 PP..................... 5,113 6,133 4,014 4,596
O2 Germany schemes ....... 3,148 3,267 2,996 3,008
Isle of Man scheme ....... 273 448 281 437
O2 Ireland scheme ........ 996 1,481 918 1,112
UK unfunded arrangement .. 13 23 15 23
----- ------ ----- -----
9,543 11,352 8,224 9,176
===== ====== ===== =====
The principal assumptions used to determine the pension cost under SSAP 24 for
the defined benefit section of the O2 PP for the years presented were:
2005 2004
--------- ---------
% %
Nominal rate of increase in salaries.............. 3.75-4.25 3.75-4.25
Nominal rate of increase of pensions in payment .. 2.50 2.50
Investment return pre retirement ................. 7.50 7.50
Investment return post retirement ................ 5.70 5.70
Inflation assumption ............................. 2.50 2.50
========= =========
The assumptions for the other defined benefit schemes around the Group are
consistent with those used for the O2 PP.
DISCLOSURES UNDER FRS 17 "RETIREMENT BENEFITS"
In accordance with the transitional arrangements of FRS 17 "Retirement
benefits", certain information regarding the Group's pension arrangements are
disclosed below.
The actuarial valuation of the O2 PP as at 30 June 2003 has been updated to 31
March 2005 by an independent qualified actuary in accordance with the
transitional arrangements of FRS 17. In accordance with FRS 17, the defined
benefit liabilities have been measured using the projected unit method. Plan
assets are stated at their market value.
The main assumptions adopted for the O2 PP under FRS 17 are as follows:
2005 2004
O2 PP O2 PP
--------- ---------
% %
Nominal rate of increase in salaries .......................... 4.15-4.65 4.05-4.55
Nominal rate of increase of pensions in payment................
- Pension increases with inflation ............................ 2.90 2.80
- Pension increases with inflation limited to 5 per cent. p.a.. 2.70 2.60
Discount rate ................................................. 5.50 5.70
Inflation assumption........................................... 2.90 2.80
Expected long-term return for
- Equities..................................................... 7.70 7.80
- UK Government bonds ......................................... 4.70 4.70
- Other bonds ................................................. 5.50 5.70
- Other........................................................ 4.70 4.60
========= =========
The assumptions, adopted for FRS 17 purposes, for the other defined benefit
schemes around the Group are consistent with those used for the O2 PP.
A-52
The assets and liabilities of the defined benefit pension schemes are:
2005 2004
2005 OTHER 2004 OTHER
O2 PP SCHEMES O2 PP SCHEMES
----- ------- ----- -------
Lm Lm Lm Lm
Fair value of assets comprises:
- Equities .................... 306 13 245 12
- UK Government bonds ......... 17 7 14 6
- Other bonds.................. 16 2 14 2
- Other ....................... 4 2 5 1
---- --- ---- ---
Fair value of assets .......... 343 24 278 21
Present value of liabilities .. (444) (51) (362) (42)
---- --- ---- ---
Deficit ....................... (101) (27) (84) (21)
Related deferred tax asset .... 30 8 25 6
---- --- ---- ---
NET PENSION LIABILITY.......... (71) (19) (59) (15)
==== === ==== ===
The following table sets out the amounts which would be charged to the profit
and loss account and statement of total recognised gains and losses in
accordance with the requirements of FRS 17 for the Group's defined benefit
plans:
YEAR ENDED YEAR ENDED
31 MARCH 2005 31 MARCH 2004
--------------------- ---------------------
O2 PP OTHER SCHEMES O2 PP OTHER SCHEMES
----- ------------- ----- -------------
Lm Lm Lm Lm
Analysis of the amount charged to operating
profit:
Current service cost (employers') ........... 20 2 16 2
Curtailment and settlement'(1) .............. (3) -- -- (2)
Vested past service cost(2) ................. 5 -- 2 --
--- --- --- ---
TOTAL OPERATING CHARGE ...................... 22 2 18 --
--- --- --- ---
Analysis of the amount credited/ (charged) to
net interest:
Expected return on pension plan assets ...... 22 1 15 1
Interest on pension plan liabilities ........ (22) (2) (16) (2)
--- --- --- ---
NET RETURN .................................. -- (1) (1) (1)
--- --- --- ---
Analysis of the amount recognised in the
statement of total recognised gains and
losses:
Actual return less expected return on pension
plan assets(3) ........................... 17 1 39 2
Experience gains and losses arising on plan
liabilities .............................. -- (1) 6 (1)
Changes in assumptions underlying the present
value of plan liabilities ................ (33) (4) (57) (4)
--- --- --- ---
ACTUARIAL LOSS RECOGNISED IN THE STATEMENT OF
TOTAL RECOGNISED GAINS AND LOSSES ........ (16) (4) (12) (3)
=== === === ===
----------
(1) In the year ended 31 March 2004 arises in respect of the disposal of O2
Netherlands.
(2) Including a restructuring charge of L2 million in the year ended 31 March
2004 which has been included in the exceptional charge for the year
(3) Excluding the returns of assets of the Group's defined contribution
arrangements which do not affect the balance sheet liability.
A-53
OTHER
O2 PP SCHEMES
----- -------
Lm Lm
MOVEMENT IN DEFICIT DURING THE YEAR
Deficit in plan at 1 April 2003 .......... (71) (18)
Total current service cost(1) ............ (24) (3)
Total contributions(1) ................... 26 2
Curtailment and settlement gain .......... -- 2
Vested past service costs ................ (2) --
Other finance cost ....................... (1) (1)
Actuarial loss recognised in the statement
of total recognised gains and losses .. (12) (3)
---- ---
DEFICIT IN PLAN AT 31 MARCH 2004 ......... (84) (21)
Total current service cost ............... (27) (3)
Total contributions ...................... 28 2
Curtailment and settlement gain .......... 3 --
Vested past service costs ................ (5) --
Other finance cost ....................... -- (1)
Actuarial loss recognised in the statement
of total recognised gains and losses .. (16) (4)
---- ---
DEFICIT IN PLAN AT 31 MARCH 2005 ......... (101) (27)
==== ===
----------
(1) Includes L2 million in respect of restructuring costs disclosed in note 5.
YEAR ENDED YEAR ENDED
31 MARCH 2005 31 MARCH 2004
--------------------- ---------------------
O2 PP OTHER SCHEMES O2 PP OTHER SCHEMES
----- ------------- ----- -------------
Lm Lm Lm Lm
HISTORY OF EXPERIENCE GAINS AND LOSSES
Difference between the expected and actual return on
plan assets:
Amount - gain ................................... 17 1 39 2
Percentage of plan assets ....................... 5% 3% 14% 11%
=== === === ===
Experience gains and losses on plan liabilities:
Amount-gain/(loss) .............................. -- (1) 6 (2)
Percentage of the present value of plan
liabilities .................................. -- (1)% 2% (4)%
=== === === ===
Total amount recognised in statement of total
recognised gains and losses:
Amount - loss ................................... (16) (4) (12) (3)
Percentage of the present value of plan
liabilities .................................. (4)% (7)% (3)% (8)%
=== === === ===
The Group has applied the transitional provisions of FRS 17. The analysis of the
profit and loss account that would have arisen had FRS 17 been fully implemented
is as follows:
2005 2004
----- ------
Lm Lm
Profit and loss account ........................................... 6,984 (992)
Amounts recognised under SSAP 24 .................................. 11 15
Pension deficit under FRS 17 (net of related deferred tax asset) .. (90) (74)
----- ------
PROFIT AND LOSS ACCOUNT INCLUDING PENSION DEFICIT.................. 6,905 (1,051)
===== ======
A-54
32. RECONCILIATION FROM UK GAAP TO US GAAP AND SUPPLEMENTARY INFORMATION
The Group's financial statements are prepared in accordance with accounting
principles generally accepted in the United Kingdom. Note 1 to the financial
statements provides additional information on the basis of preparation of the
Group's financial statements. UK GAAP differs in certain material respects from
US GAAP. The following notes, disclosures and tables set out the key differences
between US and UK GAAP.
The following tables summarise the significant adjustments between net profit
and shareholders' funds from that reported under UK GAAP to that which would
have been reported had US GAAP been applied.
2005 2004
NOTE Lm Lm
---- ---- ----
NET PROFIT/(LOSS)
Net profit under UK GAAP 301 166
Adjustment for:
Capitalisation of interest, net of related depreciation (a) (101) (77)
Licence impairment (b) -- --
Fixed asset impairment on discontinued operation (b) -- --
Amortisation of goodwill (b) 200 201
Amortisation of UMTS licences and other intangible assets (b) (299) (37)
Employee stock compensation (c) (40) (26)
Restructuring costs (e) 30 19
Fair value of derivative financial instruments (f) (11) 5
Long-term licence creditors (g) (1) (1)
Loss on disposal of O2 Netherlands (h) -- (6)
Asset retirement obligations (i) (4) (8)
Deferred tax on US GAAP adjustments (j) (92) (56)
Pension liability (k) (16) --
---- ---
Net (loss)/profit as adjusted for US GAAP (33) 180
---- ---
Basic and diluted (loss)/earnings per share, as adjusted for
US GAAP (pence) (m) (0.4) 2.1
2005 2004
NOTE Lm Lm
---- ------ ------
SHAREHOLDERS' FUNDS
Shareholders' funds under UK GAAP as restated(1) 10,281 10,094
Adjustment for:
Capitalisation of interest, net of related depreciation (a) 703 804
Goodwill impairment (b) 435 435
Licence impairment (b) 5,899 5,899
Amortisation of goodwill and intangible assets (b) 134 233
Employee stock compensation (c) (70) (30)
Other employee compensation expense (d) (11) (11)
Restructuring costs (e) 49 19
Fair value of derivative financial instruments (f) 25 36
Long-term licence creditors (g) (3) (2)
Asset retirement obligations (i) (12) (8)
Deferred tax on US GAAP adjustments (j) (426) (334)
Pension liability (k) (58) (40)
Foreign exchange (l) (32) (152)
Dividends payable (n) 196 --
------ ------
Shareholders' funds as adjusted for US GAAP 17,110 16,943
====== ======
----------
(1) In 2004 shareholders' funds under UK GAAP have been restated on the
adoption of UITF 38 "Accounting for ESOP trusts" as disclosed in note 1.
A-55
DISCONTINUED OPERATION
On 3 June 2003 the Group completed the sale of O2 Netherlands, its wholly owned
Dutch subsidiary, to Greenfield Capital Partners for E25 million in cash.
Note 2 and note 3 to the financial statements disclose the results of O2
Netherlands as a discontinued operation for the year ended 31 March 2004 under
UK GAAP. There were no discontinued operations in the year ended 31 March 2005.
The US GAAP net profit/(loss) analysed between continuing operations and
discontinued operations is as follows:
2004
----
Lm
Net profit/(loss) adjusted for US GAAP comprises:
Continuing operations 192
Discontinued operation (12)
----
Net profit as adjusted for US GAAP 180
====
Basic and diluted earnings/(loss) per share, in pence,
comprises:
Continuing operations 2.2
Discontinued operation (0.1)
----
Basic and diluted earnings per share, as adjusted for
US GAAP (pence) 2.1
====
The following are the main differences between UK GAAP and US GAAP which are
relevant to the Group's financial statements.
(a) Capitalisation of interest
Under UK GAAP, the Group does not capitalise interest in its financial
statements. To comply with US GAAP, the estimated amount of interest incurred
whilst constructing major capital projects is included in fixed assets and
depreciated over the lives of the related assets. This includes capitalisation
of interest incurred on funding UMTS licences for the period up to the market
launch of the related services. As at 31 March 2005, under US GAAP, gross
capitalised interest of L1,385 million (2004: L1,324 million) was subject to
depreciation over periods of five to 20 years.
(b) Goodwill and other intangible and tangible assets
Under UK GAAP, goodwill arising on the acquisition of subsidiary undertakings,
joint ventures and associates completed prior to 1 April 1998 by the Group was
written off against shareholders' funds. The goodwill is reflected in the net
income in the period of disposal, as part of the calculation of the gain or loss
on divestment, to the extent it has not already been recognised in the profit
and loss account. Goodwill arising on acquisitions completed on or after 1 April
1998 is recognised as an intangible asset in the balance sheet and is amortised
over its useful life. Under US GAAP, such goodwill has always been held as an
intangible asset in the balance sheet and until 31 March 2002 was previously
amortised over its useful life with only the unamortised portion being included
in any gain or loss on divestment.
From 1 April 2002, in accordance with Statement of Financial Accounting Standard
(SFAS) No. 142 "Goodwill and Other Intangible Assets", such intangible fixed
assets are no longer amortised on an annual basis and are reviewed for
impairment annually, or sooner should a triggering event occur.
Those intangible and tangible fixed assets with definite useful lives continue
to be amortised over their useful life, with impairment reviews being carried
out when triggering events occur. Such definite lived intangible assets are
tested for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". In considering whether a
triggering event has occurred under SFAS No. 142 and SFAS No. 144, the Group
looks for the existence of facts and circumstances, either internal or external,
which indicate that the carrying value of the asset may not be recovered.
Certain intangible fixed assets recognised under the US GAAP purchase accounting
rules are subsumed within goodwill under UK GAAP. Under US GAAP, these
separately identified intangible assets are valued and amortised over their
useful lives. These include customer bases and internally developed software.
Under US GAAP the carrying value of UMTS licences in O2 Germany and O2 UK is
significantly higher than under UK GAAP owing to the impairment of these assets
in the year ended 31 March 2003 being significantly lower under US GAAP.
Accordingly, amortisation charges for these licences, which has commenced during
the current year, is higher under US GAAP.
YEAR ENDED 31 MARCH 2005 AND 31 MARCH 2004
In the years ended 31 March 2005 and 2004, the Group has not identified any
triggering events which would indicate that an impairment review should be
undertaken in respect of definite-lived tangible and intangible fixed assets. In
accordance with SFAS No. 142 the Group's indefinite-lived goodwill was tested
A-56
for impairment at 31 March 2005 and 2004. These impairment reviews indicated
that no impairment of goodwill had arisen.
The changes in the carrying amount of goodwill for the segments and in total for
the years ended 31 March 2005 and 31 March 2004 are as follows:
MOBILE
TELECOMMUNICATIONS
------------------ OTHER
UK GERMANY IRELAND BUSINESS TOTAL
----- -------- ------- -------- ------
Lm Lm Lm Lm Lm
At 1 April 2003 2,411 731 548 5 3,695
Foreign exchange and other movements -- (24) (17) (5) (46)
At 31 March 2004 2,411 707 531 -- 3,649
Foreign exchange and other movements -- 19 15 -- 34
----- --- --- --- -----
AT 31 MARCH 2005 2,411 726 546 -- 3,683
===== === === === =====
The following table analyses definite lived intangible assets for US GAAP
purposes at March 31, 2005 and 2004:
GROSS NET GROSS NET
BOOK ACCUMULATED BOOK BOOK ACCUMULATED BOOK
VALUE AMORTISATION VALUE VALUE AMORTISATION VALUE
2005 2005 2005 2004 2004 2004
------ ------------ ------ ------ ------------ ------
Lm Lm Lm Lm Lm Lm
Licences 10,336 (545) 9,791 10,052 (23) 10,029
Other intangible assets 501 (361) 140 499 (329) 170
------ ---- ----- ------ ---- ------
10,837 (906) 9,931 10,551 (352) 10,199
====== ==== ===== ====== ==== ======
Under US GAAP the Group recorded impairment charges of L409 million and L1,475
million for the year ended 31 March 2003 to reduce the carrying value of the
goodwill that arose on the acquisitions of O2 UK and O2 Ireland respectively.
Under UK GAAP the Group recorded an impairment charge of L8,300 million against
the intangible assets of O2 UK, O2 Germany and O2 Ireland, of which L2,401
million related to the impairment of goodwill and L5,899 million related to the
impairment of long-lived assets. The difference between the impairment charges
under UK and US GAAP is a result of the requirement under US GAAP to initially
test the carrying value of long-lived assets using undiscounted cash flows and
the difference in methodology used in calculating the impairment of goodwill.
As a result of the disposal of O2 Netherlands, the carrying values of the net
assets of O2 Netherlands were written down to their net realisable amount, being
the sale proceeds less direct costs of disposal. This resulted in an impairment
charge of L1,424 million being recognised in the profit and loss account for the
year ended 31 March 2003 of which L684 million related to goodwill and L740
million related to long-lived assets. The difference between the impairment
charge recorded under US GAAP and UK GAAP (under which a provision of L1,364
million was recognised) in respect of O2 Netherlands is due to the different
carrying values of the net assets under each GAAP.
(c) Employee stock compensation
The Group operates a number of share option and share award plans for its
Directors and employees. Full details are included in note 29 to the financial
statements.
Under UK GAAP, share options and share awards granted over the Company's
ordinary shares are accounted for using the intrinsic value method, with the
difference between the share price of the shares at grant date and the exercise
price charged to the profit and loss account over the service period. Under US
GAAP, the Group accounts for share options and share awards in accordance with
the requirements of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees".
A-57
APB No. 25 requires the use of an intrinsic value method which differs to the UK
GAAP accounting treatment based on whether the options and share awards are
considered fixed or variable. Under APB No. 25 the cost of compensation for
fixed awards (being awards under which both the exercise price and the number of
shares is fixed) is determined at the date the award becomes fixed, based on the
difference between the fair value of the shares under award and the exercise
price. The compensation cost is expensed over the vesting period. Until the plan
is fixed (including performance conditions are met), it is considered a variable
plan and compensation cost is measured as the difference between the market
price at the period end and the exercise price based on the number of awards
expected to vest.
Share options have been granted under the O2 Sharesave Plan at a 20 per cent
discount to the market price of the date of grant. The Sharesave Plan falls
outside the scope of the intrinsic value methodology under UK GAAP. Under US
GAAP, a plan is considered compensatory when the discount to market price is in
excess of 15 per cent. Compensation cost is recognised for the difference
between the exercise price of the share options granted and the quoted market
price of the shares at the measurement date and is recognised over the vesting
period of the options. During the year ended 31 March 2003 Sharesave options
were granted at a lower exercise price than previous awards. The Group has
applied the guidance in FASB Emerging Issues Task Force (EITF) 00-23 such that
an offer to enter into a new Sharesave Plan at a lower price than a previous
award requires variable accounting to commence for all existing higher priced
awards when the offer is made. Variable accounting continues until the awards
are exercised, are forfeited or expire unexercised.
Additionally, under US GAAP, provision for employee payroll taxes on employee
stock compensation is recognised on the exercise date. Under UK GAAP, provision
is made for payroll taxes on shares that are expected to be exercised and spread
over the service period.
(d) Other employee compensation expense
Under UK GAAP, certain amounts paid to former owners of purchased companies who
are also employees are included as part of the acquisition cost of these
companies. Under US GAAP, where payment of those amounts is based on achievement
of certain performance goals, they qualify as employee compensation expense and
are recognised in the financial statements when the performance goals are met.
(e) Restructuring costs
In 2005 and 2004 the Group has recognised reorganisation and restructuring
charges related to employee termination benefits and real estate closures. For
the year ended 31 March 2005, this related to the redeployment of resources
within O2 UK into customer facing areas and away from non-customer facing areas.
The charge comprises redundancy and property costs.
For the year ended 31 March 2004 the restructuring involved the transfer of O2
Online, Products O2 and certain other central functions to the operating
businesses in the UK, Germany and Ireland, and includes provisions relating to
redundancies and the termination of property leases.
Under US GAAP, site closure costs can only be recognised for the period after
cessation of operations at that site. Employee termination benefits paid to
employees that are required to render service beyond their minimum retention
period are accrued over their remaining service period. Employee termination
benefits can also only be recognised if amongst other things the terms of the
benefit arrangement are known in sufficient detail to enable employees to
determine the type and amounts of benefits that they will receive. Under UK GAAP
the provision may be recognised at the time of managements' commitment,
communication and reasonable estimate of the associated cost. Accordingly,
adjustments have been made to eliminate the UK GAAP provisions for restructuring
that do not meet the US GAAP criteria.
A-58
(f) Derivative financial instruments
Under UK GAAP certain derivative financial instruments qualify for hedge
accounting, but do not qualify for hedge accounting under US GAAP. As a result,
the movement in the fair value of these instruments is recognised in the profit
and loss account.
(g) Long-term licence creditors
In the year ended 31 March 2003, O2 Ireland purchased a UMTS "B" licence. The
total licence fee was E114 million with payments phased over 15 years. Under US
GAAP the asset cost has been recorded at the discounted present value of the
payments and a corresponding creditor established. Over the 15-year period an
interest cost will be expensed to recognise the full E114 million due. Under UK
GAAP the asset and creditor are recognised at their undiscounted value.
(h) Loss on disposal of O2 Netherlands
The carrying value of O2 Netherlands under US GAAP exceeded the carrying value
under UK GAAP, owing to the recognition of capitalised interest costs in
relation to fixed assets. Accordingly the loss on disposal in 2004 under US GAAP
is L6 million higher than under UK GAAP.
(i) Asset retirement obligations
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires the Group
to record the fair value of a liability for an asset retirement obligation (ARO)
in the period in which it is incurred and capitalise the amount as part of the
book value of the long-lived asset. Over time the liability is accreted to its
present value and the capitalised cost is depreciated over the useful life of
the related asset. For US GAAP purposes the Group adopted this new pronouncement
with effect from 1 April 2003.
The Group has certain legal obligations related to network infrastructure,
principally mast sites, which fall within the scope of SFAS No. 143. These legal
obligations may include obligations to restore the leased site to its original
condition at the termination of the lease. Under UK GAAP the Group follows the
requirements of FRS 12 "Provisions, contingent liabilities and contingent
assets" and a provision is made for the present value of the cost of restoration
of mast sites at the date of acquisition. Under US GAAP an expected cash flow
approach to the measurement of the fair value of the ARO is used, which
considers the costs a third party would incur in performing the tasks necessary
for it to retire the asset. The different methods used in calculating the ARO
under US GAAP and UK GAAP result in an additional charge of L4 million for
the year ended 31 March 2005 (2004: L8 million, including an accumulative
adjustment of L4 million which represents the adjustment required for 2003
and prior periods).
(j) Deferred tax on US GAAP adjustments
As at 31 March 2005, the adjustment of L426 million (2004: L334 million)
reconciling shareholders' funds under UK GAAP to those under US GAAP principally
relates to the tax effect of US GAAP adjustments. This comprises an adjustment
to increase non-current assets by L633 million (2004: L822 million) and increase
long-term liabilities by L1,059 million (2004: L1,156 million).
(k) Pension liability
Under UK GAAP all pension schemes are accounted for in accordance with the
provisions of Statement of Standard Accounting Practice (SSAP) 24 "Accounting
for pension costs". The expected costs of providing pensions, as calculated
periodically by professionally qualified independent actuaries, are charged to
the profit and loss account so as to spread the cost over the service lives of
employees in the schemes.
A-59
Under US GAAP, the pension cost for the period is calculated at the start of the
financial period using a different valuation to that used under UK GAAP. This
gives a current service cost, an interest charge (being the unwinding of the
discount rate on the fund's liabilities for the year) and an expected return on
assets for the year, which are all charged or credited to the profit and loss
account. The cumulative amounts arising from changes in the assumptions used for
the actuarial valuation at the commencement of the year and those at the end of
the year, any differences between the actual return and the expected return on
the plan's assets and any experience gains or losses, are amortised through the
profit and loss account over the average remaining service lives of the
employees.
A minimum liability of L2 million (2004: L2 million), based on
accrued obligations, has been recognised in other comprehensive income under US
GAAP whereas under UK GAAP this balance is not recognised.
(l) Foreign exchange
The Group carries a significant portion of its net assets in Euros. The foreign
exchange adjustment reflects the retranslation of US GAAP adjustments which are
Euro denominated and have been recognised in other comprehensive income under US
GAAP.
(m) Earnings per share
The Group's potentially dilutive share options were anti-dilutive for the year
ended 31 March 2005 as the Group was loss making under US GAAP. In accordance
with US GAAP, anti-dilutive options are not included in the calculation of
weighted average shares used in computing the diluted loss per share. In the
year ended 31 March 2004 dilutive shares have been included but the impact of
including them in the calculation is not material and therefore basic and
diluted earnings per share is the same.
(n) Dividends payable
Under UK GAAP, cash dividends proposed after the year end are treated as an
adjusting event where they relate to the previous financial period. Under US
GAAP, cash dividends proposed after the end of a financial period are not
reflected in that year's financial statements. The dividend proposed for the 31
March 2005 financial year end was proposed after 31 March 2005 and has therefore
been reversed for US GAAP purposes.
CAPITAL REORGANISATION
On 14 March 2005 O2 plc was introduced as the new holding company of the mmO2
plc Group pursuant to a Scheme of Arrangement (the Scheme) under section 425 of
the Companies Act 1985, whereby O2 plc issued shares in return for the existing
shares in mmO2 plc. Details of the Scheme are provided in note 19.
Under UK GAAP the insertion of a new holding company constitutes a group
reconstruction as defined by Financial Reporting Standard (FRS) 6 "Acquisition
and mergers" and has been accounted for using merger accounting principles.
Under US GAAP merger accounting is not permitted. The different method of
accounting for the capital reorganisation under US GAAP results in different
classifications of amounts within equity compared with UK GAAP, although total
equity remains unchanged.
A-60
SUBSEQUENT EVENTS
On 31 October 2005, the Boards of Telefonica, S.A. ("Telefonica") and O2 jointly
announced that they had agreed the terms of a recommended cash offer to be made
on behalf of Telefonica for the entire issued and to be issued share capital of
O2 (the "Telefonica Offer"). Shareholders were offered L2 or a Loan Note
Alternative for every one O2 Share which they held in the Company. The
Telefonica Offer was declared wholly unconditional on 23 January 2006 at which
time Telefonica became the Company's ultimate holding company. As a consequence
of the acquisition, in the period ended 31 January 2006, the Group has
recognised exceptional costs totally L187 million which comprised
additional depreciation and amortisation related to a review of the useful lives
of certain of its tangible fixed assets and provisions against certain
irrecoverable debts, and incurred costs as a consequence of the transaction of
L 133 million.
GROUP CASH FLOW STATEMENTS
Under UK GAAP, the Group cash flow statement is presented in accordance with FRS
1 (Revised) "Cash flow statements". The statements prepared under FRS 1
(Revised) present substantially the same information as that required under SFAS
No. 95 "Statement of Cash Flows". The main presentational differences are
described below.
The US GAAP cash flow statement reports changes in cash and cash equivalents,
which includes short-term highly liquid investments with original maturities of
three months or less. Under UK GAAP the cash balance includes only cash at bank
and other cash balances. Under US reporting three categories of cash flows are
reported: operating activities (including tax and interest), investing
activities (including capital expenditure and disposals) and financing
activities. Under FRS 1 (Revised), there are four additional categories. Cash
flows are presented for operating activities, returns on investments and
servicing of finance, taxation, capital expenditure and financial investments,
acquisitions and disposals, dividends paid and management of liquid resources
and financing. Cash flows under FRS 1 (Revised) in respect of interest received,
interest paid and taxation would be included within operating activities under
SFAS No. 95.
The following statements summarise the combined cash flow statements as if they
had been presented in accordance with US GAAP, and include the adjustments that
reconcile cash and cash equivalents under US GAAP to cash at bank and in hand
reported under UK GAAP.
2005 2004
Lm Lm
------ -------
Net cash provided by operating activities 1,697 1,316
Net cash used in investing activities (1,350) (1,120)
Net cash used by financing activities (27) (50)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 320 146
Exchange movement on cash and cash equivalents 8 16
Cash and cash equivalents under US GAAP at the
beginning of the year 723 561
------ ------
CASH AND CASH EQUIVALENTS UNDER US GAAP AT THE
END OF THE YEAR 1,051 723
Short-term investments (1,010) (700)
------ ------
CASH AT BANK AND IN HAND UNDER UK GAAP AT THE END OF THE YEAR 41 23
====== ======
ADDITIONAL US GAAP DISCLOSURES
INVESTMENTS
Under UK GAAP, the Group accounts for joint venture and associate investments
using the equity method of accounting. The profit and loss account includes the
Group's share of the operating profit or loss, interest income or expense and
A-61
attributable taxation of those companies. The balance sheet shows the Group's
share of the assets and liabilities of those companies and attributed goodwill.
Under US GAAP, these investments would be accounted for using the net equity
method. The profit and loss account would include on one line an item with the
Group's share of the loss of L3 million (2004: nil). There is no difference in
the balance sheet classifications under US GAAP.
EXCEPTIONAL ITEMS
Under UK GAAP exceptional costs totalling L45 million have been recognised
(2004: L75 million). Under US GAAP these would not be considered
exceptional items and would be classified within net operating expenses.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United Kingdom and the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities to the date of the financial statements and the reported amounts of
revenue and expenses during the period. Actual results could differ from those
estimates.
RECENT US GAAP ACCOUNTING PRONOUNCEMENTS
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004): SHARE-BASED
PAYMENT
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognised over the period during which an employee is required to provide
services in exchange for the award - the requisite service period (usually the
vesting period). SFAS 123R applies to all awards granted after the required
effective date, December 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005 and
therefore we will apply this standard for US GAAP purposes in our the fiscal
year beginning January 1, 2006. The Company does not anticipate that adoption of
this Standard will have a material effect on its financial position, results of
operations, or cash flows.
SAB NO. 107: SHARED BASED PAYMENT
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating
to the FASB accounting standard for stock options and other share-based
payments. The interpretations in SAB No. 107, "Share-Based Payment," (SAB 107)
express views of the SEC Staff regarding the application of SFAS No. 123
(revised 2004), "Share-Based Payment "(Statement 123R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123R and certain SEC rules and regulations, as well as provides the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash flows.
A-62
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 151: INVENTORY COSTS - AN
AMENDMENT OF ARB NO. 43, CHAPTER 4
On November 24, 2004, the FASB issued SFAS No. 151, "Inventory Cost, a revision
of ARB No. 43, Chapter 4". The amendments to SFAS No. 151 aim to improve
financial information, stating that the expenses of inactive facilities,
transportation costs, manipulation costs and scrap material costs should be
recorded in the statement of operation as expenses of the period. The
application of fixed cost to inventories should be based on the normal capacity
of the production facilities. SFAS No. 151 will be applicable to valuation of
Inventories for inventory costs incurred during fiscal years beginning after
June 15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after the date this Statement is issued. The
Company does not anticipate that the adoption of SFAS No. 151 will have a
material impact on its financial position, cash flows or results of operations.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 153: EXCHANGES OF NON-MONETARY
ASSETS - AN AMENDMENT OF APB OPINION NO. 29
On December 16, 2004, the FASB issued SFAS N0.153, "Exchanges of Non-monetary
Assets - an amendment of APB Opinion No. 29", which amends Accounting Principles
Board Opinion No. 29 "Accounting for non-monetary Transactions". This amendment
is based on the idea that exchange transactions should be valued in accordance
with the value of the exchanged assets. The exception made for similar
non-monetary productive assets is eliminated and substituted by a more extensive
exception related to non-monetary assets with a non-commercial consideration.
APB No. 29 stated that the exchange transaction of a productive asset for a
similar one should be recorded at the book value of the exchanged asset.
SAS No. 153 will be applicable for non-monetary asset exchange transactions
occurring in fiscal periods beginning after June 15, 2005. The Company does not
anticipate that the adoption of SFAS No. 153 will have a material impact on its
financial position, cash flows or results of operations.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 154: ACCOUNTING CHANGES AND
ERROR CORRECTIONS - A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3
On May, 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change.
SFAS No. 154 shall be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date the Statement is issued. The Company does not
anticipate that the adoption of SFAS No. 154 will have a material impact on its
financial position, cash flows or results of operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 155 ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140
On February 2006 the FASB issued this Statement that amends FASB Statements No.
133, Accounting for Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement resolves issues addressed in Statement 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets."
This Statement permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement 133, establishes a requirement to
evaluate interests in securitised financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This Statement is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year that begins
A-63
after September 15, 2006. Earlier adoption is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued financial
statements, including financial statements for any interim period for that
fiscal year. The Company does not anticipate that the adoption of this new
statement at the required effective date will have a significant effect in its
results of operations, financial position or cash flows.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 156 ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS AN AMENDMENT OF FASB STATEMENT NO. 140
On March 2006 the FASB issued this Statement that amends FASB Statements No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for separately
recognised servicing assets and servicing liabilities. The new Statement should
be adopted as of the beginning of the first fiscal year that begins after
September 15, 2006. The Company does not anticipate that the adoption of this
new statement at the required effective date will have a significant effect in
its results of operations, financial position or cash flows.
THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS
On November 2, 2005, the FASB issued Financial Staff Position ("FSP") FAS 115-1
and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," which nullifies certain requirements of
Emerging Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" and
supersedes EITF Abstracts Topic No. D-44, "Recognition of Other-Than-Temporary
Impairment Upon the Planned Sale of a Security whose Cost Exceeds Fair Value."
The guidance in this FSP will be applied to reporting periods beginning after
December 15, 2005. The Company does not expect that the adoption of this
guidance will have a material effect on its financial position, results of
operations or cash flows.
DETERMINING THE AMORTIZATION PERIOD FOR LEASEHOLD IMPROVEMENTS PURCHASED AFTER
LEASE INCEPTION OR ACQUIRED IN A BUSINESS COMBINATION
At the June 15 and 16 EITF meeting, and further modified at the September 15,
2005 meeting, the EITF discussed Issue 05-6, "Determining the Amortization
Period for Leasehold Improvements Purchased after Lease Inception or Acquired in
a Business Combination," ("EITF 05-6"), and concluded on the appropriate
amortisation periods for leasehold improvements either acquired in a business
combination or which were not pre-existing and were placed in service
significantly after, and not contemplated at, the beginning of the lease term.
This Issue is effective for leasehold improvements (that are within the scope of
this Issue) that are purchased or acquired in reporting periods beginning after
June 29, 2005. The Company does not anticipate that the adoption of EITF 05-6
will have a material effect on its financial position, results of operations or
cash flows.
A-64
CONSOLIDATED UNAUDITED INTERIM IFRS FINANCIAL STATEMENTS OF O2 PLC,
RECONCILED TO US GAAP,
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2005
B-1
CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED 30 SEPTEMBER (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED 30 ENDED 30
SEPTEMBER SEPTEMBER
2005 2004
NOTE Lm Lm
---- ---------- ----------
REVENUE 2 3,615 3,227
Cost of sales (2,073) (1,786)
------ ------
GROSS PROFIT 1,542 1,441
Administrative expenses (1,197) (1,091)
------ ------
OPERATING PROFIT 2 345 350
Share of result of joint ventures and associates -- (4)
Financial income 3 44 26
Financial expense 3 (32) (33)
------ ------
PROFIT BEFORE TAXATION 357 339
Taxation 4 (7) (3)
------ ------
PROFIT FOR THE PERIOD ATTRIBUTABLE TO EQUITY SHAREHOLDERS 350 336
====== ======
Basic earnings per share (pence) 6 4.0 3.9
====== ======
Diluted earnings per share (pence) 6 4.0 3.8
====== ======
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
SIX MONTHS ENDED 30 SEPTEMBER (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED 30 ENDED 30
SEPTEMBER SEPTEMBER
2005 2004
NOTE Lm Lm
---- ---------- ----------
Exchange differences on translation of foreign operations (28) 125
Net investment hedges 15 (54)
Deferred tax on amounts recognised in reserves 39 --
--- ---
NET INCOME RECOGNISED DIRECTLY IN RESERVES 26 71
Profit for the period attributable to equity shareholders 350 336
--- ---
TOTAL RECOGNISED INCOME RELATING TO THE PERIOD 8 376 407
=== ===
B-2
CONSOLIDATED BALANCE SHEET
AS AT 30 SEPTEMBER (UNAUDITED)
30 30 31
SEPTEMBER SEPTEMBER MARCH
2005 2004 2005
NOTE Lm Lm Lm
---- --------- --------- --------
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 4,038 3,645 3,843
Goodwill 3,207 3,212 3,211
Other intangible assets 4,429 4,757 4,627
Derivative financial instruments 17 23 21
Investments in joint ventures and associates -- 4 2
------ ------ ------
11,691 11,641 11,704
------ ------ ------
CURRENT ASSETS
Inventory 106 108 87
Trade and other receivables 1,085 1,119 1,029
Derivative financial instruments 28 25 28
Other financial assets 348 350 317
Cash and cash equivalents 1,206 843 1,009
------ ------ ------
2,773 2,445 2,470
------ ------ ------
CURRENT LIABILITIES
Borrowings (94) (105) (71)
Derivative financial instruments -- (24) --
Trade and other payables (1,879) (1,799) (1,766)
Current tax liabilities (15) (12) (7)
Provisions (5) (17) (9)
------ ------ ------
(1,993) (1,957) (1,853)
------ ------ ------
NET CURRENT ASSETS 780 488 617
------ ------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES 12,471 12,129 12,321
------ ------ ------
NON-CURRENT LIABILITIES
Borrowings (1,385) (1,399) (1,370)
Retirement benefit obligations (125) (105) (126)
Trade and other payables (45) (37) (45)
Deferred tax liabilities (447) (492) (489)
Provisions (60) (50) (96)
------ ------ ------
(2,062) (2,083) (2,126)
------ ------ ------
NET ASSETS 10,409 10,046 10,195
====== ====== ======
EQUITY
Ordinary share capital 8 9 9 9
Share premium 8 405 4 375
Other reserves 8 2,548 10,511 2,912
Retained earnings 8 7,447 (478) 6,899
------ ------ ------
TOTAL EQUITY 10,409 10,046 10,195
====== ====== ======
B-3
CONSOLIDATED CASH FLOW STATEMENT
SIX MONTHS ENDED 30 SEPTEMBER (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 2005 30 SEPTEMBER 2004
NOTE Lm Lm
---- ----------------- -----------------
OPERATING PROFIT 345 350
Depreciation and amortisation charges 630 500
Loss on disposal of non-current assets 2 --
Increase in inventory (19) (23)
Increase in trade and other receivables (58) (169)
Increase in trade and other payables 114 154
Decrease in provisions (41) (28)
Income taxes paid (2) (4)
Other non-cash movements 7 3
----- ---
Net cash from operating activities 978 783
Net cash used in investing activities (650) (616)
Net cash (used in)/from financing activities (132) 1
----- ---
Net increase in cash and cash equivalents 196 168
Cash and cash equivalents at start of period 1,009 668
Exchange gains on cash and cash equivalents 1 7
----- ---
CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,206 843
===== ===
CONSOLIDATED NET DEBT
AS AT 30 SEPTEMBER (UNAUDITED)
30 SEPTEMBER 2005 30 SEPTEMBER 2004 31 MARCH 2005
NOTE Lm Lm Lm
---- ----------------- ----------------- -------------
Cash and cash equivalents 7 1,206 843 1,009
Other financial assets 7 348 350 317
------ ------ ------
1,554 1,193 1,326
Euro medium-term notes (net of issue costs) 7 (1,070) (1,080) (1,078)
Non-current derivative financial instruments 7 17 23 21
Obligations under finance leases and hire
purchase contracts 7 (329) (333) (308)
Other loans and borrowings 7 (31) (40) (40)
------ ------ ------
NET CASH/(DEBT) 141 (237) (79)
====== ====== ======
B-4
1. BASIS OF PREPARATION
INTERIM STATEMENT
These financial statements are the unaudited interim financial statements (the
"interim statement") of the O2 plc Group ("the Group") and do not constitute
statutory financial statements within the meaning of Section 240 of the
Companies Act 1985. The interim statement for the six months ended 30 September
2005 was approved by the Directors on 13 November 2005.
The Group is required, under European Union Regulation No. 1606/2002, to adopt
International Financial Reporting Standards ("IFRS") as its primary basis of
accounting for periods commencing on or after 1 January 2005 in place of UK
Generally Accepted Accounting Principles ("UK GAAP"). O2 plc and its
subsidiaries have changed their accounting reference date from 31 March to 31
January and accordingly the Group's first set of IFRS financial statements will
be for the ten month period ended 31 January 2006. Up to and including 31
March 2005, the Group has prepared and presented its financial statements in
accordance with UK GAAP.
Accordingly, this interim statement has been prepared on the basis of and
in accordance with the accounting policies described below. The Group will adopt
"IFRS as adopted by the European Commission for use in the European Union" ("EU
GAAP") for the first time in its financial statements for the ten month period
ended 31 January 2006, which will include comparative financial statements for
the year ended 31 March 2005. IFRS 1 "First-time Adoption of International
Financial Reporting Standards" requires that an entity develop accounting
policies based on the standards and related interpretations effective at the
reporting date of its first annual IFRS financial statements. IFRS 1 also
requires that those policies be applied as of the date of transition to IFRS
and throughout all periods presented in the first IFRS financial statements.
The comparative figures included in this interim statement in respect of the six
months ended 30 September 2004 have been restated to reflect the adoption of
IFRS.
The interim statement has been prepared in accordance with those IFRS
Standards and IFRIC Interpretations issued and effective at the time of
preparing this interim statement and has been prepared in accordance with
IAS 34 "Interim Financial Reporting" and the accounting policies described
below. The amendment to IAS 19 "Employee Benefits - Actuarial Gains and
Losses, Group Plans and Disclosures", which the Group has elected to apply,
has now been endorsed by the EU. In addition, the EU has adopted an amended
version of IAS 39 "Financial Instruments: Recognition and Measurement" which
excludes certain requirements arising on the fair value option for financial
liabilities and certain aspects of hedge accounting. The sections excluded from
the EU endorsed version of IAS 39 are not relevant to the Group.
CAPITAL REORGANISATION
O2 plc was incorporated on 10 December 2004 as part of the Group's capital
reorganisation undertaken during the year ended 31 March 2005. The purpose of
the capital reorganisation was to create distributable reserves in O2 plc to
allow the implementation of the Group's distribution policy. On 14 March 2005 O2
plc was introduced as the new holding company of the O2 Group pursuant to a
Scheme of Arrangement (the Scheme) under section 425 of the Companies Act 1985,
whereby O2 plc issued shares in return for the existing shares in mmO2 plc.
Subsequently, O2 plc effected a reduction in its share capital to create
distributable reserves. Subsequently, O2 plc also de-listed from the NYSE and
deregistered from the SEC.
PRESENTATION OF INTERIM STATEMENT
Items of income or expense which require separate disclosure, owing to their
size or incidence, are disclosed as "exceptional items" on the face of the
income statement, as the Group believes such presentation is relevant to an
understanding of financial performance.
The Group defines "net debt" as its cash and cash equivalents and other
financial assets and current and non-current borrowings together with the fair
value of related derivatives, excluding liabilities relating to accrued interest
on borrowings.
ACCOUNTING POLICIES
IFRS 1 TRANSITION EXEMPTIONS
IFRS 1 "First time adoption of International Financial Reporting Standards"
prescribes how the Group should apply IFRS for the first time in preparing its
consolidated financial statements. In general, the accounting policies expected
to be adopted by the Group at 31 January 2006 should be applied retrospectively
in preparing the transition balance sheet at 1 April 2004 and in all subsequent
periods.
IFRS 1 contains certain exemptions from the requirement to fully adopt IFRS in
the opening balance sheet. The Group has applied the relevant exemptions as
follows:
B-5
IFRS 3 - BUSINESS The Group has elected not to apply IFRS 3
COMBINATIONS retrospectively to business combinations occurring
prior to the transition to IFRS on 1 April 2004.
Accordingly the carrying value of the Group's
goodwill under IFRS is L3,189 million, being the UK
GAAP carrying value at 1 April 2004.
IAS 16 - FAIR VALUE OR The Group has elected to continue to recognise all
REVALUATION AS DEEMED COST property, plant and equipment ("PPE") at its
historic UK GAAP carrying value and not to measure
any item of PPE at fair value at 1 April 2004.
IAS 19 - EMPLOYEE BENEFITS The Group has elected to recognise all cumulative
actuarial gains and losses as at 1 April 2004 on
the consolidated balance sheet.
IAS 21 - CUMULATIVE The Group will retain all existing translation
TRANSLATION DIFFERENCES differences arising on its foreign operations in
reserves rather than utilise the exemption to set
these translation differences to zero on transition
to IFRS.
IAS 32 AND IAS 39 - The Group has applied IAS 39 from transition on 1
FINANCIAL INSTRUMENTS April 2004 and has not taken advantage of the
exemption to apply IAS 39 from 1 April 2005.
IFRS 2 - SHARE-BASED The Group has elected not to apply IFRS 2 to
PAYMENT TRANSACTIONS share-based payments granted prior to 7 November
2002. The Group has not accounted for share-based
payments granted prior to that date.
TRANSITION DATE
The Group's transition date, being the beginning of the earliest period for
which full comparative information is presented in accordance with IFRS, is 1
April 2004 in accordance with IFRS 1.
SELECTED ACCOUNTING POLICIES
The accounting policies of the Group under IFRS, which differ to those applied
under UK GAAP and are applied in the preparation of the consolidated IFRS
interim statement, are set out below. The IFRS accounting policies have been
applied consistently to all periods presented and in preparing an opening IFRS
balance sheet at 1 April 2004 for the purposes of the transition to IFRS.
The consolidated IFRS interim statement has been prepared under the historical
cost convention, as modified by the revaluation of financial assets and
financial liabilities (including derivative instruments) at fair value through
the income statement.
GOODWILL
Goodwill, arising from the purchase of subsidiary undertakings, represents the
excess of the cost of acquisition over the fair value of the Group's share of
the net identifiable assets and liabilities acquired at the date of acquisition.
Goodwill is tested annually for impairment and carried at cost less accumulated
impairment losses. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
B-6
IMPAIRMENT OF ASSETS
Assets that have an indefinite useful life are not subject to amortisation and
are tested annually for impairment. Assets that are subject to amortisation are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset's fair
value less costs to sell and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash flows (cash-generating units).
OTHER INTANGIBLE ASSETS
Software
Non-current assets which incorporate both tangible and intangible elements are
assessed to determine whether they should be classed as an intangible fixed
asset or as property, plant and equipment. The treatment is determined by an
assessment of which element is more significant.
EMPLOYEE BENEFITS
Pension obligations
The Group operates both defined benefit and defined contribution plans. A
defined benefit plan is a pension plan that sets the amount of pension benefit
that an employee will receive on retirement, usually dependent on one or more
factors such as age, years of service and compensation. A defined contribution
plan is a pension plan under which the Group pays fixed contributions on behalf
of employees and under which there is no legal or constructive obligation to pay
further contributions for employees' service in the current and prior periods.
The liability recognised in the balance sheet in respect of defined benefit
pension plans is the present value of the defined benefit obligation at the
balance sheet date less the fair value of plan assets. The defined benefit
obligation is calculated annually by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating
to the terms of the related pension liability.
In accordance with IAS 19 "Employee benefits", on transition to IFRS the Group
has elected to recognise the full assets and liabilities of its defined benefit
pension schemes on the consolidated balance sheet. Thereafter, the Group has
elected to recognise actuarial gains and losses in full in the statement of
recognised income and expense in the period in which they arise.
For defined contribution plans, the Group pays contributions to publicly or
privately administered pension insurance plans on a mandatory, contractual or
voluntary basis. The Group has no further payment obligations once the
contributions have been paid. The contributions are recognised as employee
benefit expense when they are due. Prepaid contributions are recognised as an
asset to the extent that a cash refund or a reduction in the future payments is
available.
Share-based payments
The Group has accounted for share awards and share options granted since 7
November 2002 using fair values. The fair values have been calculated using a
Black-Scholes valuation adjusted for the expected effect of performance
conditions.
The Group recognises an expense for share based payments based on the fair value
of the service rendered by the employee in return for the share awards or share
options. The fair value is calculated at the grant date and excludes the impact
of non-market conditions. Instead, the expense is adjusted for the effect of
non-market conditions at each reporting date through the number of share awards
or share options expected to be exercisable. The effect of market conditions is
included in the fair value at the date of grant and is recognised as an expense
irrespective of whether the market condition is satisfied.
B-7
DEFERRED TAXATION
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements. However, if
the deferred income tax arises from initial recognition of an asset or liability
in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit nor loss, it is not
accounted for. Deferred income tax is determined using tax rates (and laws) that
have been enacted or substantively enacted by the balance sheet date and are
expected to apply when the related deferred income tax asset is realised or the
deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that
future taxable profit will be available against which the temporary differences
can be utilised.
Deferred income tax is provided on temporary differences arising on investments
in subsidiaries and associates, except where the timing of the reversal of the
temporary difference is controlled by the Group and it is probable that the
temporary difference will not reverse in the foreseeable future.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original maturities of
three months or less, and bank overdrafts. Bank overdrafts are shown within
borrowings in current liabilities on the balance sheet.
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivatives are initially recognised at fair value on the date the derivative
contract is entered into and are subsequently re-measured at their fair value at
each reporting date. The method of recognising the resulting gain or loss
depends on whether the derivative is designated as a hedging instrument, and if
so, the nature of the item being hedged. The Group designates certain
derivatives as either:
(1) hedges of the fair value of recognised assets or liabilities (fair
value hedge);
(2) hedges of highly probable forecast transactions (cash flow hedges); or
(3) hedges of net investments in foreign operations.
The Group documents at the inception of the transaction the relationship between
hedging instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in equity. The gain or
loss relating to the ineffective portion is recognised immediately in the income
statement.
Amounts accumulated in equity are recycled in the income statement in the
periods when the hedged item will affect profit or loss. When a hedging
instrument expires or is sold, or when a hedge no longer meets the criteria for
hedge accounting, any cumulative gain or loss existing in equity at that time
remains in equity and is recognised when the forecast transaction is ultimately
recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in equity is
immediately transferred to the income statement.
Hedges of net investments in foreign operations
Any gain or loss on the hedging instrument, which is used to hedge a net
investment in a foreign operation, relating to the effective portion of the
hedge is recognised in equity; the gain or loss relating to the ineffective
portion is recognised immediately in the income statement. The ineffective
portion relates to the forward points (comprising the interest rate differential
between the currencies) excluded from the effectiveness testing which is
completed on a spot to spot basis.
B-8
Gains and losses accumulated in equity are included in the income statement when
the foreign operation is disposed of.
Derivatives which are not designated as hedges
Derivative financial instrument which are used as economic hedges of foreign
exchange exposures on recognised monetary assets or liabilities are not
designated as hedges. In these circumstances, hedge accounting is not applied
and gains or losses arising on the hedging instruments are recognised in the
income statement and offset the movement in value of the monetary asset or
liability.
2. SEGMENTAL ANALYSIS
The Group operates two business segments:
1. the supply of mobile telecommunications services and products; and
2. other businesses, comprising O2 Airwave, a terrestrial trunked radio
business, and Manx Telecom, the fixed and mobile telecommunications
business in the Isle of Man.
The Group's business segments are managed on a country-by-country basis. Mobile
telecommunication services and products are provided by the Group's subsidiaries
in the UK, Germany and Ireland. The other businesses operate in the UK and the
Isle of Man.
DEFINITIONS
Revenue is recorded according to the country in which the customer is located.
Segment results include items directly attributable to a segment as well as
those that can be allocated on a reasonable basis. Unallocated items comprise
mainly interest bearing loans, borrowings, corporate assets and expenses.
Inter-segment pricing is determined on an arm's length basis.
SEGMENT REPORTING
SIX MONTHS ENDED 30 SEPTEMBER 2005
---------------------------------------
MOBILE OTHER
TELECOMMUNICATIONS BUSINESSES TOTAL
Lm Lm Lm
------------------ ---------- -----
UK 2,097 131 2,228
GERMANY 1,079 -- 1,079
IRELAND 323 -- 323
ELIMINATIONS (15) -- (15)
----- --- -----
REVENUE 3,484 131 3,615
===== === =====
SIX MONTHS ENDED 30 SEPTEMBER 2004
---------------------------------------
Lm Lm Lm
------------------ ---------- -----
UK 1,979 101 2,080
Germany 877 - 877
Ireland 280 - 280
Eliminations (10) - (10)
----- --- -----
Revenue 3,126 101 3,227
===== === =====
B-9
SIX MONTHS ENDED 30 SEPTEMBER 2005
---------------------------------------------------
MOBILE OTHER CENTRAL
TELECOMMUNICATIONS BUSINESSES RESOURCES TOTAL
Lm Lm Lm Lm
------------------ ---------- --------- -----
UK 287 17 (42) 262
GERMANY (3) -- -- (3)
IRELAND 86 -- -- 86
--- --- --- ---
OPERATING PROFIT/(LOSS) 370 17 (42) 345
=== === === ===
SIX MONTHS ENDED 30 SEPTEMBER 2004
---------------------------------------------------
Lm Lm Lm Lm
------------------ ---------- --------- -----
UK 341 10 (40) 311
Germany (35) -- -- (35)
Ireland 74 -- -- 74
--- --- --- ---
Operating profit/(loss) 380 10 (40) 350
=== === === ===
3. NET FINANCIAL INCOME/(EXPENSE)
SIX MONTHS SIX MONTHS
ENDED ENDED
30 SEPTEMBER 30 SEPTEMBER
2005 2004
Lm Lm
------------ ------------
Financial income
Interest income on cash, cash equivalents
and other financial assets 26 14
Forward foreign exchange contracts 18 8
Other financial income -- 4
--- ---
TOTAL FINANCIAL INCOME 44 26
--- ---
Financial expense
Interest payable on euro medium-term notes (37) (37)
Gains on fair value hedges 8 9
Other financial costs (3) (5)
--- ---
TOTAL FINANCIAL EXPENSE (32) (33)
--- ---
NET FINANCIAL INCOME/(EXPENSE) 12 (7)
=== ===
4. TAXATION
SIX MONTHS SIX MONTHS
ENDED ENDED
30 SEPTEMBER 30 SEPTEMBER
2005 2004
Lm Lm
------------ ------------
United Kingdom - deferred tax -- (5)
Overseas - current tax 10 7
- deferred tax (3) 1
--- ---
TAXATION 7 3
=== ===
5. DIVIDENDS
PENCE PER
SHARE Lm
--------- ---
Final paid - year ended 31 March 2005 2.25 197
---- ---
Interim proposed - ten months ended 31 January 2006 1.54 135
==== ===
The final dividend for the year ended 31 March 2005 of 2.25 pence per share was
paid on 26 August 2005 to shareholders on the register at the close of business
on 5 August 2005.
The interim dividend for the ten months ended 31 January 2006 of 1.54 pence per
share has not been recognised in the interim statement, and was paid on 2
December 2005 to shareholders on the register at the close of business on 11
November 2005.
B-10
6. EARNINGS PER SHARE
Earnings per share has been calculated for all periods by dividing the profit
for the period by the weighted average number of ordinary shares in issue during
that period, as follows:
SIX MONTHS SIX MONTHS
ENDED ENDED
30 SEPTEMBER 30 SEPTEMBER
2005 2004
------------ ------------
Profit for the period attributable to equity shareholders (Lm) 350 336
===== =====
Basic weighted average share capital (number of shares, million) 8,723 8,672
Dilutive potential ordinary shares (number of shares, million) 104 83
----- -----
Diluted weighted average share capital (number of shares, million) 8,827 8,755
===== =====
BASIC EARNINGS PER SHARE (PENCE) 4.0 3.9
===== =====
DILUTED EARNINGS PER SHARE (PENCE) 4.0 3.8
===== =====
In accordance with the basis of preparation described in note 1, earnings per
share have been calculated as if O2 plc had in issue the share capital of mmO2
plc prior to 14 March 2005.
7. ANALYSIS OF NET DEBT
AT OTHER AT 30
1 APRIL CASH NON-CASH SEPTEMBER
2005 FLOW MOVEMENTS 2005
------- ---- --------- ---------
Lm Lm Lm Lm
Cash and cash equivalents 1,009 196 1 1,206
Other financial assets 317 -- 31 348
------ --- --- ------
1,326 196 32 1,554
Euro medium-term notes (net of issue costs) (1,078) -- 8 (1,070)
Non-current derivative financial instruments 21 -- (4) 17
Obligations under finance leases and hire purchase contracts (308) 6 (27) (329)
Other loans and borrowings (40) 9 -- (31)
------ --- --- ------
(79) 211 9 141
====== === === ======
B-11
8. CONSOLIDATED RECONCILIATION OF CHANGES IN EQUITY
ORDINARY
SHARE SHARE OTHER RETAINED TOTAL
CAPITAL PREMIUM RESERVES EARNINGS EQUITY
-------- ---------- -------- ---------- ------
Lm Lm Lm Lm Lm
At 1 April 2004 as previously reported under UK GAAP 9 3 11,074 (992) 10,094
Adjustments arising on the adoption of IFRS -- -- (2) (456) (458)
------ --- ------ ----- ------
AT 1 APRIL 2004 AS RESTATED FOR THE ADOPTION OF IFRS 9 3 11,072 (1,448) 9,636
Total recognised income relating to the period -- -- -- 407 407
Transfer from profit and loss account -- -- (561) 561 --
Transactions related to share schemes -- 1 -- 2 3
------ --- ------ ----- ------
AT 30 SEPTEMBER 2004 9 4 10,511 (478) 10,046
Total recognised income relating to the period -- -- -- 135 135
Transfer from profit and loss account -- -- (538) 538 --
Transactions related to share schemes -- 23 -- 5 28
Issue of shares in exchange for shares in mmO2 plc(1) 6,714 (26) (7,062) (15) (389)
----------
(1) Transaction arising during the capital reorganisation described in note 1.
Placing of O2 plc shares on 17 March 2005(1) -- 374 -- -- 374
Court approved capital reduction(1) (6,714) -- -- 6,714 --
Transfers from cash flow hedge reserve -- -- 1 -- 1
------ --- ------ ----- ------
AT 31 MARCH 2005 9 375 2,912 6,899 10,195
Total recognised income relating to the period -- -- -- 376 376
Dividends -- -- -- (197) (197)
Transfer from profit and loss account -- -- (364) 364 --
Transactions related to share schemes -- 30 -- 5 35
------ --- ------ ----- ------
AT 30 SEPTEMBER 2005 9 405 2,548 7,447 10,409
====== === ====== ===== ======
(1) Transaction arising during the capital reorganisation described in note 1.
9. RECONCILIATION FROM IFRS TO US GAAP AND SUPPLEMENTARY INFORMATION
IFRS is different in certain material respects from United States Generally
Accepted Accounting Principles ("US GAAP"). The following notes, disclosures and
tables set out these key differences.
NET PROFIT AND TOTAL EQUITY RECONCILIATION
The following tables summarise the significant adjustments between net profit
and total equity from that reported under IFRS to that which would have been
reported had US GAAP been applied.
SIX MONTHS SIX MONTHS
ENDED ENDED
30 SEPTEMBER 30 SEPTEMBER
NET PROFIT NOTE 2005 Lm 2004 Lm
---------- ---- ------------ ------------
NET PROFIT UNDER IFRS 350 336
Adjustment for:
Capitalisation of interest, net of related depreciation (a) (80) (49)
Amortisation of UMTS licences and other intangible assets (b) (186) (103)
Employee stock compensation (c) (40) (13)
Restructuring costs (e) (25) (2)
Fair value of derivative financial instruments (f) (8) (14)
Asset retirement obligations (g) (4) (1)
Pension obligations (h) (3) --
Deferred tax on US GAAP adjustments (i) (217) (82)
--- ---- ----
NET PROFIT AS ADJUSTED FOR US GAAP (213) 72
--- ---- ----
Basic and diluted earnings per share, as adjusted for US GAAP (pence) (k) (2.4) 0.8
=== ==== ====
30 SEPTEMBER 30 SEPTEMBER
TOTAL EQUITY NOTE 2005 Lm 2004 Lm
------------ ---- ------------ ------------
TOTAL EQUITY UNDER IFRS AS RESTATED 10,409 10,046
Adjustment for:
Capitalisation of interest, net of related depreciation (a) 623 755
Goodwill impairment (b) 435 435
Licence impairment (b) 5,899 5,899
Amortisation of UMTS licences and other intangible assets (b) (251) 130
Other employee compensation expense (d) (11) (11)
Restructuring costs (e) 24 17
Fair value of derivative financial instruments (f) 17 22
Asset retirement obligations (g) (16) (10)
Pension obligations (h) 53 44
Deferred tax (i) 358 358
Deferred tax on US GAAP adjustments (i) (608) (393)
Foreign exchange (j) (65) (62)
--- ------ ------
TOTAL EQUITY AS ADJUSTED FOR US GAAP 16,867 17,230
=== ====== ======
DESCRIPTION OF DIFFERENCES BETWEEN IFRS AND US GAAP
B-12
The main differences between IFRS and US GAAP which are relevant to the Group's
interim financial statements are described below.
(A) CAPITALISATION OF INTEREST
Under IFRS, the Group does not capitalise interest in its financial statements.
To comply with US GAAP, the estimated amount of incremental interest incurred
whilst constructing major capital projects is included in fixed assets and
depreciated over the lives of the related assets. This includes capitalisation
of interest incurred on funding UMTS licences for the period up to the market
launch of the related services. Under US GAAP, at 30 September 2005 gross
capitalised interest of L1,386 million (2004: L1,354 million) was subject to
depreciation over periods of five to 20 years. For the six months ended 30
September 2005, L1 million of interest was capitalised and depreciation
totalling L81 million was charged. For the six months ended 30 September 2004,
L30 million of interest was capitalised and depreciation totalling L79 million
was charged.
(B) GOODWILL AND OTHER INTANGIBLE AND TANGIBLE ASSETS
Prior to the adoption of IFRS, goodwill arising on acquisitions before 1998
accounted for under the purchase method was eliminated against equity. Goodwill
arising on acquisitions between 1998 and 31 March 2004 was capitalised and
amortised over its useful life. Under IFRS, from 1 April 2004, goodwill arising
on acquisitions not is not amortised and instead is allocated to cash generating
units and assessed for impairment at least annually. The goodwill is reflected
in net income in the period of disposal of the business to which it relates, as
part of the calculation of the gain or loss on divestment, to the extent it has
not already been recognised in the income statement.
Under US GAAP, such goodwill has always been held as an intangible asset in the
balance sheet and until 31 March 2002 was amortised over its useful life with
only the unamortised portion being included in any gain or loss on divestment.
From 1 April 2002, in accordance with Statement of Financial Accounting Standard
(SFAS) No. 142 "Goodwill and Other Intangible Assets", such intangible fixed
assets are no longer amortised on an annual basis and are reviewed for
impairment annually, or sooner should a triggering event occur.
Those intangible and tangible fixed assets with definite useful lives continue
to be amortised over their useful life, with impairment reviews being carried
out when triggering events occur. Such definite lived intangible assets are
tested for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". In considering whether a
triggering event has occurred under SFAS No. 142 and SFAS No. 144, the Group
looks for the existence of facts and circumstances, either internal or external,
which indicate that the carrying value of the asset may not be recovered.
Certain intangible fixed assets recognised under the US GAAP purchase accounting
rules are subsumed within goodwill under IFRS. Under US GAAP, these separately
identified intangible assets are valued and amortised over their useful lives.
These include customer bases and internally developed software.
Under US GAAP the carrying value of UMTS licences in O2 Germany and O2 UK is
significantly higher than under IFRS (and the predecessor accounting rules under
UK GAAP) owing to the impairment of these assets recognised in the year ended 31
March 2003 under UK GAAP being significantly lower under US GAAP. The
amortisation of O2 Germany's UMTS licence commenced during the period ended 30
September 2004 and O2 UK commenced during the second half of the year ended 31
March 2005. Accordingly the amortisation charge for UMTS licences for the six
months ended 30 September 2004 and 2005 is higher under US GAAP.
SIX MONTHS ENDED 30 SEPTEMBER 2005 AND 30 SEPTEMBER 2004
In the years ended 31 March 2005 and 2004, the Group has not identified any
triggering events which would indicate that an impairment review should be
undertaken in respect of definite-lived tangible and intangible fixed assets. In
accordance with SFAS No. 142 the Group's indefinite-lived goodwill was tested
for impairment at 31 March 2005 and 2004. These impairment reviews indicated
that no impairment of goodwill had arisen. Additional consideration has been
given to whether any additional factors have arisen during the periods ended 30
September 2005 and 30 September 2004 which may change this conclusion and none
have been identified.
B-13
The changes in the carrying amount of goodwill for the segments and in total for
the periods ended 30 September 2005 and 30 September 2004 are as follows:
MOBILE TELECOMMUNICATIONS
-------------------------
UK Germany Ireland TOTAL
----- ------- ------- -----
Lm Lm Lm Lm
At 1 April 2004 2,411 707 531 3,649
Foreign exchange and other movements -- 20 15 35
----- --- --- -----
AT 30 SEPTEMBER 2004 2,411 727 546 3,684
===== === === =====
At 1 April 2005 2,411 726 546 3,683
Foreign exchange and other movements -- (4) (4) (8)
----- --- --- -----
AT 30 SEPTEMBER 2005 2,411 722 542 3,675
===== === === =====
AT 30 SEPTEMBER 2005 At 30 September 2004
---------------------------------- ----------------------------------
Gross book Accumulated Net book Gross book Accumulated Net book
value amortisation value value amortisation value
---------- ------------ -------- ---------- ------------ --------
Lm Lm Lm Lm Lm Lm
Licences 10,297 (835) 9,462 10,301 (203) 10,098
Other intangible assets 498 (374) 124 512 (353) 159
------ ------ ----- ------ ---- ------
10,795 (1,209) 9,586 10,813 (555) 10,247
====== ====== ===== ====== ==== ======
Under US GAAP the Group recorded impairment charges of L409 million and L1,475
million for the year ended 31 March 2003 to reduce the carrying value of the
goodwill that arose on the acquisitions of O2 UK and O2 Ireland respectively.
Under UK GAAP the Group recorded an impairment charge of L8,300 million against
the intangible assets of O2 UK, O2 Germany and O2 Ireland, of which L2,401
million related to the impairment of goodwill and L5,899 million related to the
impairment of long-lived assets. The difference between the impairment charges
under UK and US GAAP is a result of the requirement under US GAAP to initially
test the carrying value of long-lived assets using undiscounted cash flows and
the difference in methodology used in calculating the impairment of goodwill.
(C) EMPLOYEE STOCK COMPENSATION
Under IFRS, the Group has accounted for share awards and share options granted
since 7 November 2002 using fair values. The fair values have been calculated
using an adjusted Black-Scholes valuation model taking into account the expected
effect of performance conditions. The Group recognises an expense for share
based payments based on the fair value of the service rendered by the employee
in return for the share awards or share options. The fair value is calculated at
the grant date and excludes the impact of non-market conditions. Instead, the
expense is adjusted for the effect of non-market conditions at each reporting
date through the number of share awards or share options expected to be
exercisable. The effect of market conditions is included in the fair value at
the date of grant and is recognised as an expense irrespective of whether the
market condition is satisfied.
Under US GAAP, the Group accounts for share options and share awards in
accordance with the requirements of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees". APB No. 25 requires the use
of an intrinsic value method which differs to the IFRS accounting treatment
based on whether the options and share awards are considered fixed or variable.
Under APB No. 25 the cost of compensation for fixed awards (being awards under
which both the exercise price and the number of shares is fixed) is determined
at the date the award becomes fixed, based on the difference between the fair
value of the shares under award and the exercise price. The compensation cost is
expensed over the vesting period. Until the plan is fixed (including performance
conditions are met), it is considered a variable plan and compensation cost is
measured as the difference between the market price at the period end and the
exercise price based on the number of awards expected to vest.
SAYE schemes under IFRS are accounted for using fair values determined at the
grant date. Under US GAAP, a plan is considered compensatory when the discount
to market price is in excess of 15 per cent. Compensation cost is recognised for
the difference between the exercise price of the share options granted and the
quoted market price of the shares at the measurement date and is recognised over
the vesting period of the options. The Group has applied the guidance in FASB
Emerging Issues Task Force ("EITF") 00-23 such that an offer to enter into a new
Sharesave Plan at a lower price than a previous award requires variable
accounting to commence for all existing higher priced awards when the offer is
made. Variable accounting continues until the awards are exercised, are
forfeited or expire unexercised.
Additionally, under US GAAP, provision for employee payroll taxes on employee
stock compensation is recognised on the exercise date. Under IFRS, provision is
made for payroll taxes on shares that are expected to be exercised and spread
over the service period.
(D) OTHER EMPLOYEE COMPENSATION EXPENSE
B-14
Under IFRS, certain amounts paid to former owners of purchased companies who are
also employees are included as part of the acquisition cost of these companies.
Under US GAAP, where payment of those amounts is based on achievement of certain
performance goals, they qualify as employee compensation expense and are
recognised in the financial statements when the performance goals are met.
(E) RESTRUCTURING COSTS
Under US GAAP, site closure costs can only be recognised for the period after
cessation of operations at that site. Employee termination benefits paid to
employees that are required to render service beyond their minimum retention
period are spread over their remaining service period. Employee termination
benefits can also only be recognised if the terms of the benefit arrangement are
known in sufficient detail to enable employees to determine the type and amounts
of benefits that they will receive. Under IFRS the provision may be recognised
at the time of managements' commitment, communication and reasonable estimate of
the associated cost. Accordingly, adjustments have been made to eliminate the
IFRS provisions for restructuring that do not meet the US GAAP criteria.
At 31 March 2005 and 31 March 2004 the Group recognised reorganisation and
restructuring charges related to employee termination benefits and real estate
closures.
For the year ended 31 March 2005, this related to the redeployment of resources
within O2 UK into customer facing areas and away from non-customer facing areas.
The charge comprised redundancy and property costs. At 30 September 2005, the
remaining difference between the IFRS and US GAAP charges was L24 million.
For the year ended 31 March 2004 the restructuring involved the transfer of O2
Online, Products O2 and certain other central functions to the operating
businesses in the UK, Germany and Ireland, and included provisions relating to
redundancies and the termination of property leases. At 30 September 2004, the
remaining difference between the IFRS and US GAAP charges was L17 million.
(F) DERIVATIVE FINANCIAL INSTRUMENTS
Under IFRS certain derivative financial instruments qualify for hedge
accounting, but do not qualify for hedge accounting under US GAAP. As a result,
the movement in the fair value of these instruments is recognised in the profit
and loss account.
(G) ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires the Group
to record the fair value of a liability for an asset retirement obligation
("ARO") in the period in which it is incurred and capitalise the amount as part
of the book value of the long-lived asset. Over time the liability is accreted
to its present value and the capitalised cost is depreciated over the useful
life of the related asset.
The Group has certain legal obligations related to network infrastructure,
principally mast sites, which fall within the scope of SFAS No. 143. These legal
obligations may include obligations to restore the leased site to its original
condition at the termination of the lease. Under IFRS the Group follows the
requirements of IAS 37 "Provisions, contingent liabilities and contingent
assets" and a provision is made for the present value of the cost of restoration
of mast sites at the date of acquisition of the site. Under US GAAP an expected
cash flow approach to the measurement of the fair value of the ARO is used,
which considers the costs a third party would incur in performing the tasks
necessary for it to retire the asset. The different methods used in calculating
the ARO under US GAAP and IFRS result in an additional charge of L4 million for
the six months ended 30 September 2005 (2004: L1 million).
(H) PENSION LIABILITY
Under IFRS, pension assets, defined benefit pension liabilities and pension
expense are determined using the projected unit credit method in a similar
manner to US GAAP. However, under IFRS all actuarial gains and losses which
arise in calculating the present value of the defined benefit obligation and the
fair value of plan assets are recognised immediately in the statement of
recognised income and expense.
Under US GAAP, unrecognised actuarial gains and losses in excess of a corridor
are recognised in the income statement over the average remaining service life
of the employees. The corridor is the greater of 10% of scheme assets and scheme
projected benefits obligation. Also, under US GAAP an additional minimum
liability is recorded when the accumulated benefit obligation exceeds the fair
value of the plan assets by an amount greater than the liability recognised in
the balance sheet. In addition, there is a transition asset or obligation
recognised upon the adoption of FAS 87 'Employers' Accounting for Pensions',
which is then released to the income statement over the average remaining
service lives of the employees.
B-15
As the entire defined benefit pension liability is recognised on the balance
sheet under IFRS, whereas only a portion is recognised under US GAAP, the
liability under IFRS is greater. The pension liability under IFRS at 30
September 2005 is L125 million (2004: L105 million) whereas under US GAAP it is
L72 million (2004: L61 million).
The US GAAP pension charge is higher than that under IFRS as under US GAAP the
charge must include the amortisation of actuarial gains and losses in excess of
the corridor, whereas under IFRS these are recognised in the SORIE as they
arise. The US GAAP defined benefit charge for the 6 months ended 30 September
2005 is L3 million higher than IFRS (2004: no difference).
(I) DEFERRED TAX
IFRS and US GAAP both provide for deferred taxation on a full provision basis.
However, there are certain different GAAP bases on which this calculation is
made such as the recognition of deferred taxation on the share based payment
charge using the intrinsic value under US GAAP versus fair value under IFRS.
In addition, IAS 12 "Income taxes" requires a deferred tax liability in respect
of rolled over gains to be recognised, irrespective of whether there is an
expectation that the gain will crystallise. Accordingly, the Group has
recognised a deferred tax liability of L358 million under IFRS relating to a
gain arising prior to the Group's demerger from BT. The gain arose on BT's
disposal of a non-mobile UK business which was rolled over into the goodwill
purchased on the acquisition of O2 Germany. On the subsequent disposal of this
goodwill for tax purposes, the deferred tax liability will reverse and be
recognised as a credit in the profit and loss account of the Group in the period
in which it reverses. A deferred tax liability for the rolled over gain is not
required to be recognised under US GAAP for this as FAS 109 prohibits the
recognition of a deferred tax liability relating to goodwill for which
amortisation is not deductible for tax purposes. IFRS also prohibits the
recognition of such a deferred tax liability upon initial recognition of
goodwill, however the deferred tax impact of subsequent basis differences in
goodwill are required to be recognised.
As at 30 September 2005, the adjustment of L608 million (2004: L393
million) reconciling shareholders' funds under IFRS to those under US GAAP
principally relates to the tax effect of US GAAP adjustments.
(J) FOREIGN EXCHANGE
The Group carries a significant portion of its net assets in Euros. The foreign
exchange adjustment reflects the retranslation of US GAAP adjustments which are
Euro denominated and have been recognised in other comprehensive income under US
GAAP.
(K) EARNINGS PER SHARE
In the six months ended 30 September 2004 and 30 September 2005 dilutive shares
have been included but the impact of including them in the calculation is not
material and therefore basic and diluted earnings per share is the same.
SUBSEQUENT EVENTS
On 31 October 2005, the Boards of Telefonica, S.A. ("Telefonica") and O2 jointly
announced that they had agreed the terms of a recommended cash offer to be made
on behalf of Telefonica for the entire issued and to be issued share capital of
O2 (the "Telefonica Offer"). Shareholders were offered L2 or a Loan Note
Alternative for every one O2 Share which they held in the Company. The
Telefonica Offer was declared wholly unconditional on 23 January 2006 at which
time Telefonica became the Company's ultimate holding company. As a consequence
of the acquisition, in the ten month period ended 31 January 2006, the Group has
recognised exceptional costs totally L187 million which comprised additional
depreciation and amortisation related to a review of the useful lives of certain
of its tangible fixed assets and provisions against certain irrecoverable debts,
and incurred costs as a consequence of the transaction of L133 million.
A full actuarial valuation of the defined benefit sections of the O2 Pension
Plan was undertaken at 30 September 2005 by a professionally qualified
independent actuary which indicated that as at 30 September 2005 the assets of
the O2 PP had a market value of L407 million and were sufficient to cover 83 per
cent of the benefits accrued to members at that date on the ongoing funding
measure. In December 2005 a one off cash contribution of L81 million was paid
into the O2 PP to fund the deficit.
GROUP CASH FLOW STATEMENTS
B-16
The cash flow statement prepared in accordance with IFRS is the same as if it
had been prepared under US GAAP.
ADDITIONAL US GAAP DISCLOSURES
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with IFRS and the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities to the date of the financial statements and
the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
RECENT US GAAP ACCOUNTING PRONOUNCEMENTS
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004): SHARE-BASED
PAYMENT
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based
Payments (SFAS 123R). This statement eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" to stock compensation
awards issued to employees. Rather, SFAS 123R requires companies to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognised over the period during which an employee is required to provide
services in exchange for the award - the requisite service period (usually the
vesting period). SFAS 123R applies to all awards granted after the required
effective date, December 15, 2005, and to awards modified, repurchased, or
cancelled after that date. SFAS 123R will be effective as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005 and
therefore we will apply this standard for US GAAP purposes in our the fiscal
year beginning February 1, 2006. The Company does not anticipate that adoption
of this Standard will have a material effect on its financial position, results
of operations, or cash flows.
SAB NO. 107: SHARED BASED PAYMENT
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating
to the FASB accounting standard for stock options and other share-based
payments. The interpretations in SAB No. 107, "Share-Based Payment," (SAB 107)
express views of the SEC Staff regarding the application of SFAS No. 123
(revised 2004), "Share-Based Payment "(Statement 123R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123R and certain SEC rules and regulations, as well as provides the Staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company does not anticipate that adoption of SAB 107 will have
any effect on its financial position, results of operations or cash flows.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 151: INVENTORY COSTS - AN
AMENDMENT OF ARB NO. 43, CHAPTER 4
On November 24, 2004, the FASB issued SFAS No. 151, "Inventory Cost, a revision
of ARB No. 43, Chapter 4". The amendments to SFAS No. 151 aim to improve
financial information, stating that the expenses of inactive facilities,
transportation costs, manipulation costs and scrap material costs should be
recorded in the statement of operation as expenses of the period. The
application of fixed cost to inventories should be based on the normal capacity
of the production facilities. SFAS No. 151 will be applicable to valuation of
Inventories for inventory costs incurred during fiscal years beginning after
June 15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after the date this Statement is issued. The
Company does not anticipate that the adoption of SFAS No. 151 will have a
material impact on its financial position, cash flows or results of operations.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 153: EXCHANGES OF NON-MONETARY
ASSETS - AN AMENDMENT OF APB OPINION NO. 29
On December 16, 2004, the FASB issued SFAS N0.153, "Exchanges of Non-monetary
Assets - an amendment of APB Opinion No. 29", which amends Accounting Principles
Board Opinion No. 29 "Accounting for Nonmonetary Transactions". This amendment
is based on the idea that exchange transactions should be valued in accordance
with the value of the exchanged assets. The exception made for similar
non-monetary productive assets is eliminated and substituted by a more extensive
exception related to non-monetary assets with a non-commercial consideration.
APB No. 29 stated that the exchange transaction of a productive asset for a
similar one should be recorded at the book value of the exchanged asset. SAS No.
153 will be applicable for non-monetary asset exchange transactions occurring in
fiscal periods beginning after June 15, 2005. The Company does not anticipate
that the adoption of SFAS No. 153 will have a material impact on its financial
position, cash flows or results of operations.
B-17
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 154: ACCOUNTING CHANGES AND
ERROR CORRECTIONS - A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO.
3
On May, 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change.
SFAS No. 154 shall be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date the Statement is issued. The Company does not
anticipate that the adoption of SFAS No. 154 will have a material impact on its
financial position, cash flows or results of operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 155 ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140
On February 2006 the FASB issued this Statement that amends FASB Statements No.
133, Accounting for Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement resolves issues addressed in Statement 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets."
This Statement permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement 133, establishes a requirement to
evaluate interests in securitised financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This Statement is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. Earlier adoption is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued financial
statements, including financial statements for any interim period for that
fiscal year. The Company does not anticipate that the adoption of this new
statement at the required effective date will have a significant effect in its
results of operations, financial position or cash flows.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 156 ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS AN AMENDMENT OF FASB STATEMENT NO. 140
On March 2006 the FASB issued this Statement that amends FASB Statements No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for separately
recognized servicing assets and servicing liabilities.
The new Statement should be adopted as of the beginning of the first fiscal year
that begins after September 15, 2006. The Company does not anticipate that the
adoption of this new statement at the required effective date will have a
significant effect in its results of operations, financial position or cash
flows.
THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS
On November 2, 2005, the FASB issued Financial Staff Position ("FSP") FAS 115-1
and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," which nullifies certain requirements of
Emerging Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" and
supersedes EITF Abstracts Topic No. D-44, "Recognition of Other-Than-Temporary
Impairment Upon the Planned Sale of a Security whose Cost Exceeds Fair Value."
The guidance in this FSP will be applied to reporting periods beginning after
December 15, 2005. The Company does not expect that the adoption of this
guidance will have a material effect on its financial position, results of
operations or cash flows.
DETERMINING THE AMORTIZATION PERIOD FOR LEASEHOLD IMPROVEMENTS PURCHASED AFTER
LEASE INCEPTION OR ACQUIRED IN A BUSINESS COMBINATION
At the June 15 and 16 EITF meeting, and further modified at the September 15,
2005 meeting, the EITF discussed Issue 05-6, "Determining the Amortization
Period for Leasehold Improvements Purchased after Lease Inception or Acquired in
a Business Combination," ("EITF 05-6"), and concluded on the appropriate
amortization periods for leasehold improvements either acquired in a business
combination or which were not preexisting and were placed in service
significantly after, and not contemplated at, the beginning of the lease term.
This Issue is effective for leasehold improvements (that are within the scope of
this Issue) that are purchased or acquired in reporting periods beginning after
June 29, 2005. The Company does not anticipate that the adoption of EITF 05-6
will have a material effect on its financial position, results of operations or
cash flows.
B-18
10. RECONCILIATIONS FROM UK GAAP TO IFRS
RECONCILIATIONS OF RETAINED PROFIT FROM UK GAAP TO IFRS FOR THE YEAR ENDED 31
MARCH 2005 AND FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2004, AND EQUITY FOR THE
TRANSITION BALANCE SHEET AT 1 APRIL 2004 AND AS AT 30 SEPTEMBER 2004 AND
31 MARCH 2005.
ADJUSTMENT SIX MONTHS
REFERENCE ENDED 30
RETAINED PROFIT YEAR ENDED SEPTEMBER
31 MARCH 2005 2004
Lm Lm
As reported under UK GAAP 105 236
Revenue recognition 1 - -
Cessation of goodwill amortisation 2 200 100
Pensions 3 (7) -
Share-based payments 4 (2) (1)
Recognition of financial instruments 5 2 1
UMTS licence creditor 6 (1) -
Non-recognition of dividends 7 196 -
----- -----
Restated under IFRS 493 336
===== =====
ADJUSTMENT AS AT 30
EQUITY REFERENCE AS AT SEPTEMBER AS AT
31 MARCH 2005 2004 1 APRIL 2004
Lm Lm Lm
As reported under UK GAAP 10,281 10,403 10,094
Cessation of goodwill amortisation 2 200 100 -
Pensions 3 (119) (93) (93)
Recognition of financial instruments 5 - (2) (3)
UMTS licence creditor 6 (3) (2) (2)
Non-recognition of dividends 7 196 - -
Deferred tax liability 8 (358) (358) (358)
Other employee benefits 9 (2) (2) (2)
------- ------- -------
Restated under IFRS 10,195 10,046 9,636
======= ======= =======
The major areas of difference between UK GAAP and IFRS which impact the Group's
financial information comprise the following:
ADJUSTMENT 1 - REVENUE RECOGNITION
O2 UK receives income and incurs a related expense on calls which are "ported"
to another mobile operator. Porting arises when an O2 customer leaves O2 and
joins another operator and takes ("ports") their existing mobile number to the
new network. All calls received by that customer are still routed via the O2
network to the network of the new operator. For all incoming calls to the O2
network, O2 receives a termination fee per minute and is required to pass that
termination fee to the new operator. The receiving operator pays O2 a small
commission for conveying the call.
Under UK GAAP the Group recognised the termination fees on a gross basis and
thus included these amounts in both revenue and cost of sales. The Group has
reconsidered this policy under IAS 18, which states that in an agency
relationship the gross inflows of economic benefits include amounts collected on
behalf of the principal and which do not result in increases in equity for the
entity. The amounts collected on behalf of the principal are therefore not
revenue. Instead, revenue is the amount of commission. Accordingly under IFRS,
the Group will recognise the termination payments on a net basis.
B-19
The impact of this adjustment on the income statement of the Group and O2 UK is
as follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Revenue (108) (58)
Cost of sales 108 58
------- -------
Gross profit - -
======= =======
This adjustment reduces O2 UK's service revenue and cost of sales and is solely
a reclassification which does not alter profit or cash flows.
The commission received by O2 from the receiving operator, described above,
which totals L12 million for the year ended 31 March 2005, has been reclassified
from service revenue to other revenue. This adjustment has no effect on the
Group's total revenue.
ADJUSTMENT 2 - GOODWILL AMORTISATION
IFRS 3 "Business combinations" prohibits the annual amortisation of goodwill and
instead subjects such goodwill to an annual impairment review. The carrying
value of goodwill at the date of transition to IFRS is L3,189 million and the
amortisation charge ceases from that date.
Accordingly, the impact on the income statement of the Group is as follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Goodwill amortisation 200 100
======= =======
ADJUSTMENT 3 - PENSIONS
In accordance with IAS 19 "Employee benefits", on transition to IFRS the Group
has elected to recognise the net deficit of its defined benefit pension schemes
on the consolidated balance sheet. Thereafter, the Group has elected to
recognise actuarial gains and losses in full in the statement of recognised
income and expense, rather than in the income statement, in the period in which
they arise.
The impact on the Group's income statement of the adoption of IAS 19 is as
follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Pension costs - administrative expenses (6) -
Pension costs - net financing costs (1) -
------- -------
(7) -
======= =======
Actuarial losses - in statement of total recognised income and
expense (19) -
======= =======
The pension deficit recognised on the consolidated balance sheet is as follows:
AT AT
31 MARCH 2005 1 APRIL 2004
Lm Lm
Retirement benefit obligations (126) (105)
======= =======
The operating charge included within administrative expenses under IAS 19
represents the current service cost, and the net financing charge represents the
net of the expected return on scheme assets and the unwinding of the discount on
the scheme liabilities. The actuarial losses arise on experience adjustments
(being the effects of the differences between the previous actuarial assumptions
and what has actually occurred) and the impact of changes in actuarial
assumptions.
ADJUSTMENT 4 - SHARE-BASED PAYMENTS
The Group has historically accounted for share scheme costs under UK GAAP using
the intrinsic value. IFRS 2 "Share based payments" requires the value of all
share based payments to be measured, and an expense recognised in the income
statement, based on fair value. Additionally, under UK GAAP, Inland Revenue
approved SAYE schemes are exempt from the requirement to recognise a charge
whereas under IFRS there is no such exemption.
B-20
The impact on the Group's income statement of the adoption of IFRS 2 in
accounting for share-based payments is as follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Administrative expenses (2) (1)
====== ======
ADJUSTMENT 5 - FINANCIAL INSTRUMENTS
The Group holds financial instruments principally to finance its operations, for
the temporary investment of short term funds and to manage currency and interest
rate risks arising from its operations. IAS 39 "Financial instruments:
Recognition and measurement" addresses the accounting for financial instruments.
Since the transition to IFRS on 1 April 2004, the Group has prepared
documentation and performed effectiveness testing procedures for certain
derivative financial instruments which are designated as hedges. This permits
the application of hedge accounting for these instruments.
The impact on the Group's income statement of the adoption of IAS 39 is as
follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Net financing costs 2 1
======= =======
The impact on the consolidated balance sheet of the adoption of IAS 39 is as
follows:
AT AT
31 MARCH 2005 1 APRIL 2004
Lm Lm
Net assets - (3)
======= =======
The Group's cash flow hedges and hedges of net investments in foreign operations
do not give rise to significant adjustments under IAS 39.
The main components of the IAS 39 adjustments are:
Fair value hedges
The Group holds Euro 1,000 million of interest rate swaps which hedge certain
fixed rate borrowings by denominating them as floating rate. Under IAS 39, these
interest rate swaps are a fair value hedge and are accounted for using hedge
accounting. The interest rate swaps at 31 March 2005 result in the recognition
of a non-current asset of L21 million (1 April 2004: L56 million) with a
corresponding increase in the value of the Group's non-current borrowings. There
is no impact on the Group's net assets.
Derivatives which are not designated as hedges
The Group uses forward foreign exchange contracts to hedge exchange rate
movements on certain monetary assets. The overall effect of recognition of these
derivatives is to increase current liabilities by L1 million at 1 April 2004,
with no impact at 31 March 2005.
Other adjustments - accrued interest reclassification
IAS 39 requires all accrued interest on borrowings to be classified within the
"borrowings" balance in the consolidated balance sheet. Accrued interest is also
required to be recorded at its un-hedged rate if it has been hedged by an
interest rate swap. Under UK GAAP, interest is accrued at the hedged rate and
classified as an accrual rather than as part of the borrowings balance. At 31
March 2005, accrued interest totalling L13 million was reclassified from
accruals to borrowings (1 April 2004: L14 million).
IAS 39 also requires accrued interest on cash and cash equivalents to be
included within the cash balance reported in the consolidated balance sheet,
although the impact is not significant.
ADJUSTMENT 6 - UMTS LICENCE CREDITOR
B-21
In the year ended 31 March 2003, O2 Ireland purchased a UMTS "B" licence. The
total licence fee was Euro 114 million with payments phased over fifteen years.
Under UK GAAP the asset and liability are recognised at their undiscounted value
whereas under IFRS, the asset cost is recorded at the discounted present value
of the payments and a corresponding creditor established.
The effect at 1 April 2004 is to reduce the carrying value of O2 Ireland's UMTS
licence and creditor by L13 million and to recognise an interest cost of L1
million in the year ended 31 March 2005 representing the unwinding of the
discount on the long-term liability.
The impact on the Group's income statement is as follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Net financing costs (1) -
====== ======
The impact on the Group's consolidated balance sheet is as follows:
AT AT
31 MARCH 2005 1 APRIL 2004
Lm Lm
Other intangible assets (13) (13)
Non-current liabilities: trade and other payables 10 11
------ ------
Net assets (3) (2)
====== ======
ADJUSTMENT 7 - DIVIDENDS
Under IAS 10 "Events after the balance sheet date", if an entity declares a
dividend after the balance sheet date, the entity shall not recognise that
dividend as a liability at the balance sheet date.
The dividend declared by the Group in May 2005 totalling L196 million is not
recognised in the year ended 31 March 2005 under IFRS but is recognised under UK
GAAP. The impact on the Group's consolidated balance sheet is as follows:
AT AT
31 MARCH 2005 1 APRIL 2004
Lm Lm
Current liabilities: other payables 196 -
======= =======
ADJUSTMENT 8 - TAXATION
IAS 12 "Income taxes" bases the calculation of the deferred tax assets and
liabilities on the difference between tax carrying values and balance sheet
carrying values, rather than the income statement approach required by FRS 19.
As a result, the scope of IAS 12 is wider than that of FRS 19. IAS 12 requires a
deferred tax liability in respect of rolled over gains to be recognised,
irrespective of whether there is an expectation that the gain will crystallise.
The Group is required to recognise a deferred tax liability of L358 million on
transition to IFRS relating to a gain arising prior to the Group's demerger from
BT. The gain arose on BT's disposal of a non-mobile UK business which was rolled
over into the goodwill relating to one of O2's operating businesses. This
deferred tax liability is expected to reverse in the short to medium term as
part of an internal reorganisation and, as a result, will be recognised as a
credit in the tax line in the income statement of the Group in the corresponding
period.
The other adjustments between UK GAAP and IFRS have no taxation effect as each
adjustment either gives rise to a deferred tax asset in an entity where it is
currently inappropriate to recognise further deferred tax assets or gives rise
to a deferred tax liability in an entity which is already carrying unrecognised
deferred tax assets such that a portion of that asset would be recognised to the
extent of the any liability.
ADJUSTMENT 9 - OTHER EMPLOYEE BENEFITS
The Group has recognised a liability of L2 million under IFRS on transition at 1
April 2004 in respect of holiday pay which under IAS 19 is defined as a
short-term compensated absence.
B-22
ADJUSTMENT 10 - SOFTWARE RECLASSIFICATION
Certain software, classified as tangible fixed assets under UK GAAP, has been
assessed in accordance with IAS 38 and is reclassified to intangible assets
under IFRS.
The impact on the Group's income statement is as follows:
YEAR ENDED SIX MONTHS ENDED
31 MARCH 2005 30 SEPTEMBER 2004
Lm Lm
Depreciation 171 89
Other amortisation (171) (89)
------ ------
- -
====== ======
The impact on the Group's consolidated balance sheet is as follows:
AT AT
31 MARCH 2005 1 APRIL 2004
Lm Lm
Property, plant and equipment (606) (530)
Other intangible assets 606 530
------ ------
- -
====== ======
ADJUSTMENT 11 - JOINT VENTURES AND ASSOCIATES
Under both UK GAAP and IFRS, the profits and losses of joint ventures and
associates are recognised under the equity method of accounting. IFRS requires
the Group's share of the post tax profits or losses to be included in one line
in the income statement whereas under UK GAAP the Group's share of the interest
and tax of associates are included under those headings in the profit and loss
account.
The effect on the Group for the year ended 31 March 2005 is to reclassify a
interest receivable of L1 million and a tax charge of L1 million to the "share
of result of joint ventures and associates" line.
ADJUSTMENT 12 - CASH RECLASSIFICATION
IAS 7 "Cash flow statements" requires cash, which comprises cash on hand, demand
deposits and cash equivalents to be reported in one line on the face of the
balance sheet. Cash equivalents are defined as short term highly liquid
investments that are readily convertible to known amounts of cash, UK GAAP does
not recognise cash equivalents and such items are classified as current asset
investments.
The impact on the Group's consolidated balance sheet is as follows:
AT AT
31 MARCH 2005 1 APRIL 2004
Lm Lm
Other financial assets (968) (645)
Cash and cash equivalents 968 645
------ ------
- -
====== ======
B-23
RECONCILIATION OF CASH FLOWS FROM UK GAAP TO IFRS FOR THE YEAR ENDED
31 MARCH 2005 AND FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2004.
CONSOLIDATED CASH FLOW STATEMENT - IFRS FORMAT YEAR ENDED 31 MARCH 2005
IFRS
UK GAAP ADJUSTMENTS IFRS
(AUDITED) (UNAUDITED) (UNAUDITED)
Lm Lm Lm
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations 1,755 - 1,755
Tax paid (15) - (15)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 1,740 - 1,740
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,287) 144 (1,143)
Purchase of intangible assets (60) (144) (204)
Investment in joint venture (2) - (2)
Management of other financial assets (302) 316 14
Dividends received from associated undertakings 7 - 7
Interest received 28 2 30
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,616) 318 (1,298)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issue of ordinary share capital 24 - 24
Interest paid (68) - (68)
Purchase of own shares (1) - (1)
Settlement of cross-currency swaps 22 - 22
Settlement of forward foreign exchange contracts (32) - (32)
Premium paid to shareholders in capital reorganisation (15) - (15)
Costs of capital reorganisation (15) - (15)
Repayment of borrowings including finance leases (21) - (21)
Dividends paid to shareholders - - -
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (106) - (106)
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 18 318 336
-------- -------- --------
Cash and cash equivalents at start of year 23 645 668
Exchange gains/(losses) on cash and cash equivalents - 5 5
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 41 968 1,009
======== ======== ========
CONSOLIDATED CASH FLOW STATEMENT - IFRS FORMAT SIX MONTHS ENDED 30 SEPTEMBER 2004
IFRS
UK GAAP ADJUSTMENTS IFRS
Lm Lm Lm
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations 787 - 787
Tax paid (4) - (4)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 783 - 783
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (579) 45 (534)
Purchase of intangible assets (57) (45) (102)
Management of other financial assets (147) 160 13
Dividends received from associated undertakings 7 - 7
Interest received 12 1 13
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (764) 161 (603)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issue of ordinary share capital 1 - 1
Interest paid (22) - (22)
Purchase of own shares (1) - (1)
Settlement of cross-currency swaps 22 - 22
Settlement of forward foreign exchange contracts (1) - (1)
Repayment of borrowings including finance leases (11) - (11)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (12) - (12)
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 7 161 168
-------- -------- --------
Cash and cash equivalents at start of period 23 645 668
Exchange gains/(losses) on cash and cash equivalents - 7 7
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 30 813 843
======== ======== ========
B-24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELEFONICA, S.A.
Date: May 16, 2006 By: /s/ Ramiro Sanchez de Lerin Garcia-Ovies
-----------------------------------------
Name: Ramiro Sanchez de Lerin Garcia-Ovies
Title: General Secretary and Secretary to
the Board of Directors