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
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2004
DEUTSCHE TELEKOM AG
(Translation of registrant’s name into English)
Friedrich-Ebert-Allee 140
53113 Bonn
Germany
(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 ý Form 40-F o
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes o No ý
This Report on Form 6-K is incorporated by reference into the registration statement on Form F-3, File No. 333-13550, and the registration statement on Form S-8, File No. 333-106591, and into each respective prospectus that forms a part of those registration statements.
Defined Terms
The term “Report” refers to this Report on Form 6-K for the nine-month period ended September 30, 2004.
Deutsche Telekom AG is a private stock corporation organized under the laws of the Federal Republic of Germany. As used in this Report, unless the context otherwise requires, the term “Deutsche Telekom” refers to Deutsche Telekom AG and the terms “we,” “us,” “our” and “Group” refer to Deutsche Telekom and, as applicable, Deutsche Telekom and its direct and indirect subsidiaries as a Group. Our registered office is at Friedrich-Ebert-Allee 140, 53113 Bonn, Germany, telephone number +49-228-181-0. Our agent for service of process in the United States is Deutsche Telekom, Inc., 600 Lexington Avenue, New York, N.Y. 10022.
Forward-Looking Statements
This Report contains forward-looking statements that reflect the current views of our management with respect to future events. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “will,” “will continue,” “seeks” and similar expressions. Forward-looking statements are based on current plans, estimates and projections, and therefore you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws (such as our obligations to file annual reports on Form 20-F and periodic and other reports on Form 6-K) and under other applicable laws. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among other factors: the development of demand for our fixed and mobile telecommunications services, particularly for new, higher value service offerings; competitive forces, including pricing pressures, technological changes and alternative routing developments; regulatory actions and the outcome of disputes in which the company is involved or may become involved; the pace and cost of the rollout of new services, such as UMTS, which may be affected by the ability of suppliers to deliver equipment and other circumstances beyond our control; public concerns over health risks putatively associated with wireless frequency transmissions; risks associated with integrating our acquisitions; the development of asset values in Germany and elsewhere, the progress of our debt reduction program, including its degree of success in achieving desired levels of liquidity improvement and proceeds from dispositions of assets; the development of our cost control and efficiency enhancement initiatives, including in the areas of procurement optimization and personnel reductions; risks and uncertainties relating to benefits anticipated from our international expansion, particularly in the United States; the progress of our domestic and international investments, joint ventures and alliances; our ability to gain or retain market share in the face of competition; our ability to secure the licenses needed to offer new services; the effects of price reduction measures and our customer acquisition and retention initiatives; the availability, term and deployment of capital, particularly in view of our debt refinancing needs, actions of the rating agencies and the impact of regulatory and competitive developments on our capital outlays; and changes in currency exchange rates and interest rates. If these or other risks and uncertainties (including those described in “Forward-Looking Statements,” “Item 3. Key Information — Risk Factors” and “Item 5. Operating and Financial Review and Prospects — Factors Affecting Our Business” contained in our most recent Annual Report on Form 20-F for the year ended December 31, 2003 filed with the U.S. Securities and Exchange Commission) materialize, or if the assumptions underlying any of these statements prove incorrect, our actual results may be materially different from those expressed or implied by such statements.
Exchange Rates
Unless otherwise indicated, all amounts in this document are expressed in euros. As used in this document, “€,” “euro” or “EUR” means the single unified currency that was introduced in the Federal Republic of Germany (referred to as the “Federal Republic”) and ten other participating member states of the European Union on January 1, 1999. “U.S. dollar,” “$” or “USD” means the lawful currency of the United States of America. As used in this document, the term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in The City of New York for cable transfers in foreign currencies. Unless otherwise stated, conversions of euro into U.S. dollars have been made at the rate of EUR 1 to USD 1.2417, which was the noon buying rate on September 30, 2004.
1
Amounts appearing in this report that were translated into euros from other currencies were translated in accordance with the principles described in the consolidated financial statements contained in our Annual Report on Form 20-F under “Consolidation principles — Foreign currency translation.”
2
DEUTSCHE TELEKOM AT A GLANCE
|
|
|
For the three months |
|
|
|
For the nine months |
|
|
|
For the year |
|
||||
|
|
|
2004 |
|
2003 |
|
% Change |
|
2004 |
|
2003 |
|
% Change |
|
2003 |
|
|
|
|
millions of € |
|
|
|
millions of € |
|
|
|
millions of € |
|
||||
|
Total net revenue (total revenue, excluding inter-segment revenue) |
|
14,524 |
|
14,077 |
|
3.2 |
|
42,922 |
|
41,288 |
|
4.0 |
|
55,838 |
|
|
Domestic |
|
8,535 |
|
8,553 |
|
(0.2 |
) |
25,560 |
|
25,689 |
|
(0.5 |
) |
34,691 |
|
|
International |
|
5,989 |
|
5,524 |
|
8.4 |
|
17,362 |
|
15,599 |
|
11.3 |
|
21,147 |
|
|
Results from ordinary business activities |
|
1,974 |
|
691 |
|
n.m. |
|
4,726 |
|
1,783 |
|
n.m. |
|
1,398 |
|
|
Financial expense, net |
|
(793 |
) |
(789 |
) |
(0.5 |
) |
(2,584 |
) |
(2,734 |
) |
5.5 |
|
(4,031 |
) |
|
Depreciation and amortization |
|
(2,991 |
) |
(3,165 |
) |
5.5 |
|
(9,022 |
) |
(9,646 |
) |
6.5 |
|
(12,884 |
) |
|
Property, plant and equipment |
|
(1,863 |
) |
(1,996 |
) |
6.7 |
|
(5,642 |
) |
(6,129 |
) |
7.9 |
|
(8,206 |
) |
|
Intangible assets |
|
(1,128 |
) |
(1,169 |
) |
3.5 |
|
(3,380 |
) |
(3,517 |
) |
3.9 |
|
(4,678 |
) |
|
Other taxes |
|
(47 |
) |
(38 |
) |
(23.7 |
) |
(144 |
) |
(134 |
) |
(7.5 |
) |
(162 |
) |
|
Net income |
|
1,387 |
|
508 |
|
n.m. |
|
3,211 |
|
1,617 |
|
98.6 |
|
1,253 |
|
|
Earnings per share /ADS (EUR)(1) |
|
0.33 |
|
0.12 |
|
n.m. |
|
0.77 |
|
0.39 |
|
n.m. |
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
3,680 |
|
4,784 |
|
(23.1 |
) |
10,808 |
|
11,044 |
|
(2.1 |
) |
14,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity ratio (%)(2) |
|
— |
|
— |
|
|
|
34.0 |
|
29.0 |
|
n.m. |
|
29.1 |
|
|
Debt (in accordance with consolidated balance sheet at the balance sheet date) |
|
|
|
|
|
|
|
46,689 |
|
59,580 |
|
(21.6 |
) |
55,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at balance sheet date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deutsche Telekom Group |
|
|
|
|
|
|
|
247,891 |
|
249,974 |
|
(0.8 |
) |
248,519 |
|
|
Non-civil servants |
|
|
|
|
|
|
|
200,120 |
|
200,199 |
|
(0.04 |
) |
198,726 |
|
|
Civil servants |
|
|
|
|
|
|
|
47,771 |
|
49,775 |
|
(4.0 |
) |
49,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of fixed-lines and mobile customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone lines (including ISDN channels)(3) |
|
|
|
|
|
|
|
57.4 |
|
58.0 |
|
(1.0 |
) |
57.9 |
|
|
Broadband lines (in operation) |
|
|
|
|
|
|
|
5.4 |
|
3.8 |
|
42.1 |
|
4.1 |
|
|
Mobile communications subscribers(4) |
|
|
|
|
|
|
|
73.4 |
|
63.1 |
|
16.3 |
|
66.7 |
|
n.m. – not meaningful
(1) Earnings per share for each period are calculated by dividing net income by the weighted average number of outstanding shares. One American Depository Share (ADS) corresponds in economic terms to one share of common stock of Deutsche Telekom AG.
(2) The ratio equals total shareholders’ equity divided by total assets at the balance sheet date.
(3) Number of telephone channels (including those provided by T-Com as well as T-Systems and those used within the Group) as of the balance sheet date, including Maktel, a MATÁV subsidiary. All amounts are in millions.
(4) The number of subscribers of the consolidated subsidiaries included within our T-Mobile division plus HT Mobilne Telekomunikacije (T-Mobile Croatia) and Westel (T-Mobile Hungary), as of the balance sheet date. All amounts are in millions.
3
DEUTSCHE TELEKOM AG
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 AND
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
AND THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
4
DEUTSCHE TELEKOM AG
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
|
|
|
|
For the three months |
|
For the nine months |
|
For the year |
|
||||
|
|
|
Note |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
2003 |
|
|
|
|
|
|
(millions of €, except per share data) |
|
||||||||
|
Net revenue |
|
|
|
14,524 |
|
14,077 |
|
42,922 |
|
41,288 |
|
55,838 |
|
|
Cost of sales |
|
|
|
(7,849 |
) |
(7,828 |
) |
(23,185 |
) |
(23,138 |
) |
(31,402 |
) |
|
Gross profit |
|
|
|
6,675 |
|
6,249 |
|
19,737 |
|
18,150 |
|
24,436 |
|
|
Selling costs |
|
|
|
(3,014 |
) |
(3,266 |
) |
(9,583 |
) |
(9,821 |
) |
(13,505 |
) |
|
General and administrative costs |
|
|
|
(1,060 |
) |
(1,264 |
) |
(3,294 |
) |
(3,889 |
) |
(4,976 |
) |
|
Other operating income |
|
(3) |
|
1,369 |
|
1,045 |
|
4,858 |
|
3,674 |
|
4,558 |
|
|
Other operating expense |
|
(4) |
|
(1,203 |
) |
(1,284 |
) |
(4,408 |
) |
(3,597 |
) |
(5,084 |
) |
|
Operating results |
|
|
|
2,767 |
|
1,480 |
|
7,310 |
|
4,517 |
|
5,429 |
|
|
Financial expense, net |
|
(5) |
|
(793 |
) |
(789 |
) |
(2,584 |
) |
(2,734 |
) |
(4,031 |
) |
|
of which: net interest expense |
|
|
|
(836 |
) |
(888 |
) |
(2,604 |
) |
(2,818 |
) |
(3,776 |
) |
|
Results from ordinary business activities |
|
|
|
1,974 |
|
691 |
|
4,726 |
|
1,783 |
|
1,398 |
|
|
Income taxes |
|
(6) |
|
(483 |
) |
(57 |
) |
(1,221 |
) |
137 |
|
225 |
|
|
Income after taxes |
|
|
|
1,491 |
|
634 |
|
3,505 |
|
1,920 |
|
1,623 |
|
|
Income applicable to minority shareholders |
|
|
|
(104 |
) |
(126 |
) |
(294 |
) |
(303 |
) |
(370 |
) |
|
Net income |
|
|
|
1,387 |
|
508 |
|
3,211 |
|
1,617 |
|
1,253 |
|
|
Earnings per share(1)/ADS(2) |
|
|
|
0.33 |
|
0.12 |
|
0.77 |
|
0.39 |
|
0.30 |
|
(1) Earnings per share for each period are calculated by dividing net income by the weighted average number of outstanding shares (approximately 4,195 million for each period presented).
(2) One American Depository Share (ADS) corresponds in economic terms to one share of common stock of Deutsche Telekom AG.
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
5
DEUTSCHE TELEKOM AG
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|
|
|
Note |
|
As of |
|
As of |
|
|
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
(9) |
|
|
|
|
|
|
Intangible assets |
|
|
|
45,629 |
|
45,193 |
|
|
Property, plant and equipment |
|
|
|
44,928 |
|
47,268 |
|
|
Financial assets |
|
|
|
3,534 |
|
3,190 |
|
|
|
|
|
|
94,091 |
|
95,651 |
|
|
Current assets |
|
|
|
|
|
|
|
|
Inventories, materials and supplies |
|
|
|
1,857 |
|
1,432 |
|
|
Receivables |
|
|
|
5,557 |
|
5,762 |
|
|
Other assets |
|
|
|
2,676 |
|
3,162 |
|
|
Marketable securities |
|
|
|
177 |
|
173 |
|
|
Liquid assets |
|
|
|
5,907 |
|
9,127 |
|
|
|
|
|
|
16,174 |
|
19,656 |
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and deferred charges |
|
|
|
951 |
|
772 |
|
|
TOTAL ASSETS |
|
|
|
111,216 |
|
116,079 |
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY AND LIABILITIES |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
(10) |
|
|
|
|
|
|
Capital stock |
|
|
|
10,746 |
|
10,746 |
|
|
Additional paid-in capital |
|
|
|
50,107 |
|
50,092 |
|
|
Retained earnings |
|
|
|
248 |
|
248 |
|
|
Unappropriated net loss carried forward from previous year |
|
|
|
(23,311 |
) |
(24,564 |
) |
|
Net income |
|
|
|
3,211 |
|
1,253 |
|
|
Cumulative translation adjustment account |
|
|
|
(7,376 |
) |
(8,017 |
) |
|
Minority interest |
|
|
|
4,237 |
|
4,053 |
|
|
|
|
|
|
37,862 |
|
33,811 |
|
|
Accruals |
|
|
|
|
|
|
|
|
Pensions and similar obligations |
|
|
|
4,600 |
|
4,456 |
|
|
Other accruals |
|
|
|
12,459 |
|
11,247 |
|
|
|
|
|
|
17,059 |
|
15,703 |
|
|
Liabilities |
|
(11) |
|
|
|
|
|
|
Debt |
|
|
|
46,689 |
|
55,411 |
|
|
Other |
|
|
|
8,887 |
|
10,451 |
|
|
|
|
|
|
55,576 |
|
65,862 |
|
|
Deferred income |
|
|
|
719 |
|
703 |
|
|
TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES |
|
|
|
111,216 |
|
116,079 |
|
The accompanying
notes are an integral part of these
unaudited condensed consolidated financial statements.
6
DEUTSCHE TELEKOM AG
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
|
|
|
Capital |
|
Additional |
|
Consolidated |
|
Cumulative |
|
Shareholders’ |
|
Treasury |
|
Minority |
|
Consolidated |
|
|
|
|
(millions of €) |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 |
|
10,746 |
|
50,077 |
|
(24,316 |
) |
(5,079 |
) |
31,428 |
|
(7 |
) |
3,988 |
|
35,409 |
|
|
Changes in the composition of the Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
(11 |
) |
|
Dividends for 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(79 |
) |
(79 |
) |
|
Proceeds from exercise of stock options |
|
|
|
10 |
|
|
|
|
|
10 |
|
|
|
|
|
10 |
|
|
Income (loss) after taxes |
|
|
|
|
|
1,617 |
|
|
|
1,617 |
|
|
|
303 |
|
1,920 |
|
|
Foreign currency translation |
|
|
|
|
|
|
|
(2,079 |
) |
(2,079 |
) |
|
|
(46 |
) |
(2,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2003 |
|
10,746 |
|
50,087 |
|
(22,699 |
) |
(7,158 |
) |
30,976 |
|
(7 |
) |
4,155 |
|
35,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
10,746 |
|
50,092 |
|
(23,063 |
) |
(8,017 |
) |
29,758 |
|
(7 |
) |
4,053 |
|
33,804 |
|
|
Changes in the composition of the Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
(19 |
) |
|
Dividends for 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(154 |
) |
(154 |
) |
|
Proceeds from exercise of stock options |
|
|
|
15 |
|
|
|
|
|
15 |
|
|
|
|
|
15 |
|
|
Income after taxes |
|
|
|
|
|
3,211 |
|
|
|
3,211 |
|
|
|
294 |
|
3,505 |
|
|
Foreign currency translation |
|
|
|
|
|
|
|
641 |
|
641 |
|
|
|
63 |
|
704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2004 |
|
10,746 |
|
50,107 |
|
(19,852 |
) |
(7,376 |
) |
33,625 |
|
(7 |
) |
4,237 |
|
37,855 |
|
(1) Treasury shares are included within marketable securities in the condensed consolidated balance sheets.
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
7
DEUTSCHE TELEKOM AG
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
For the nine months ended |
|
For the year ended December 31, |
|
||
|
|
|
2004 |
|
2003 |
|
2003 |
|
|
|
|
(millions of €) |
|
||||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
3,211 |
|
1,617 |
|
1,253 |
|
|
Income applicable to minority shareholders |
|
294 |
|
303 |
|
370 |
|
|
Income after taxes |
|
3,505 |
|
1,920 |
|
1,623 |
|
|
Depreciation and amortization |
|
9,022 |
|
9,646 |
|
12,884 |
|
|
Income tax expense (refund) |
|
1,221 |
|
(137 |
) |
(225 |
) |
|
Net interest expense |
|
2,604 |
|
2,818 |
|
3,776 |
|
|
Net gains from the disposition of noncurrent assets |
|
(177 |
) |
(727 |
) |
(792 |
) |
|
Results from associated companies |
|
(32 |
) |
(79 |
) |
247 |
|
|
Other noncash transactions |
|
(2,464 |
) |
(553 |
) |
(699 |
) |
|
Change in working capital (assets)(1) |
|
(333 |
) |
(278 |
) |
(542 |
) |
|
Decrease in accruals |
|
823 |
|
742 |
|
1,584 |
|
|
Change in working capital (liabilities)(2) |
|
(865 |
) |
71 |
|
149 |
|
|
Income taxes received |
|
250 |
|
284 |
|
88 |
|
|
Dividends received |
|
66 |
|
59 |
|
39 |
|
|
Cash generated from operations |
|
13,620 |
|
13,766 |
|
18,132 |
|
|
Net interest paid |
|
(2,812 |
) |
(2,722 |
) |
(3,816 |
) |
|
Net cash provided by operating activities |
|
10,808 |
|
11,044 |
|
14,316 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Cash outflows from investments in |
|
(404 |
) |
(485 |
) |
(844 |
) |
|
property, plant and equipment |
|
(3,819 |
) |
(3,166 |
) |
(5,187 |
) |
|
financial assets |
|
(665 |
) |
(213 |
) |
(373 |
) |
|
consolidated companies |
|
(209 |
) |
(35 |
) |
(275 |
) |
|
Cash inflows from disposition of |
|
11 |
|
22 |
|
24 |
|
|
property, plant and equipment |
|
486 |
|
686 |
|
1,055 |
|
|
financial assets |
|
360 |
|
1,124 |
|
1,569 |
|
|
shareholdings in consolidated companies and business units |
|
1 |
|
1,502 |
|
1,510 |
|
|
Net change in short-term investments and marketable securities |
|
(113 |
) |
(2,891 |
) |
(18 |
) |
|
Other |
|
0 |
|
0 |
|
466 |
|
|
Net cash used for investing activities |
|
(4,352 |
) |
(3,456 |
) |
(2,073 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net repayment of short-term debt |
|
(8,916 |
) |
(6,522 |
) |
(9,214 |
) |
|
Issuance of medium and long-term debt |
|
155 |
|
6,869 |
|
6,951 |
|
|
Repayment of medium and long-term debt |
|
(418 |
) |
(2,209 |
) |
(2,879 |
) |
|
Dividends paid |
|
(178 |
) |
(79 |
) |
(92 |
) |
|
Proceeds from exercise of stock options |
|
15 |
|
10 |
|
15 |
|
|
Change in minority interests |
|
0 |
|
(11 |
) |
(7 |
) |
|
Net cash used for financing activities |
|
(9,342 |
) |
(1,942 |
) |
(5,226 |
) |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
5 |
|
(20 |
) |
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
(2,881 |
) |
5,626 |
|
6,974 |
|
|
Cash and cash equivalents, at beginning of the period |
|
8,686 |
|
1,712 |
|
1,712 |
|
|
Cash and cash equivalents, at end of the period |
|
5,805 |
|
7,338 |
|
8,686 |
|
8
(1) Changes in receivables, other assets, inventories, materials and supplies and prepaid expenses and deferred charges.
(2) Changes in other liabilities (which do not relate to financing activities) and deferred income.
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
9
Note (1) Summary of presentation principles
Our condensed consolidated financial statements (unaudited) as of September 30, 2004 and December 31, 2003 and for the three months and the nine months ended September 30, 2004 and 2003 and the year ended December 31, 2003, have been prepared in accordance with the requirements of the German Commercial Code (Handelsgesetzbuch — HGB) and the German Stock Corporation Law (Aktiengesetz — AktG).
These condensed consolidated financial statements are unaudited. In management’s opinion, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated results of operations, balance sheet and cash flows for each period presented. The consolidated results for interim periods are not necessarily indicative of results for the full year. These financial results should be read in conjunction with our annual report on Form 20-F for the year ended December 31, 2003 and our report on Form 6-K filed on September 9, 2004.
Note (2) Changes within the consolidated Group
The Deutsche Telekom Group sold shareholdings in various companies last year which were included (some ratably) in the condensed consolidated financial statements as of September 30, 2003. These were, at T-Com, the remaining cable businesses, at T-Mobile, Niedermeyer in Austria, at T-Systems, predominantly TeleCash GmbH, SIRIS S.A.S. and Multilink SA, and at T-Online, Auto.T-Online. The T-Online division acquired the Scout24 group, the results of which are reflected in the first nine months of 2004. The following table shows the effects of the new acquisitions and disposals on the individual line items of the consolidated statement of income for the first nine months of 2004.
|
|
|
T-Mobile |
|
T-Com |
|
T-Systems |
|
T-Online |
|
Total |
|
|
|
|
(millions of €) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
(99 |
) |
(127 |
) |
(149 |
) |
53 |
|
(322 |
) |
|
Cost of sales |
|
78 |
|
80 |
|
139 |
|
(19 |
) |
278 |
|
|
Gross profit (loss) |
|
(21 |
) |
(47 |
) |
(10 |
) |
34 |
|
(44 |
) |
|
Selling costs |
|
22 |
|
32 |
|
16 |
|
(21 |
) |
49 |
|
|
General and administrative costs |
|
8 |
|
50 |
|
11 |
|
(11 |
) |
58 |
|
|
Other operating income |
|
(1 |
) |
(468 |
) |
(109 |
) |
3 |
|
(575 |
) |
|
Other operating expenses |
|
0 |
|
100 |
|
25 |
|
(12 |
) |
113 |
|
|
Operating results |
|
8 |
|
(333 |
) |
(67 |
) |
(7 |
) |
(399 |
) |
|
Financial expense, net |
|
0 |
|
0 |
|
4 |
|
0 |
|
4 |
|
|
Results from ordinary business activities |
|
8 |
|
(333 |
) |
(63 |
) |
(7 |
) |
(395 |
) |
|
Income taxes |
|
0 |
|
179 |
|
1 |
|
(2 |
) |
178 |
|
|
Income (loss) after taxes |
|
8 |
|
(154 |
) |
(62 |
) |
(9 |
) |
(217 |
) |
|
Income applicable to minority shareholders |
|
0 |
|
0 |
|
0 |
|
(1 |
) |
(1 |
) |
|
Net income (loss) |
|
8 |
|
(154 |
) |
(62 |
) |
(10 |
) |
(218 |
) |
Note (3) Other operating income
The components of other operating income for the nine months ended September 30, 2004 and 2003 are as follows:
10
|
|
|
For the nine months ended |
|
||
|
|
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
Reversal of accruals |
|
600 |
|
536 |
|
|
Income from write-up of noncurrent assets |
|
2,448 |
|
8 |
|
|
Income from the dispositions of noncurrent
assets |
|
267 |
|
1,240 |
|
|
Income from the reversal of valuation
adjustments |
|
458 |
|
510 |
|
|
Cost reimbursements |
|
270 |
|
385 |
|
|
Foreign currency transaction gains |
|
98 |
|
248 |
|
|
Insurance compensation |
|
34 |
|
51 |
|
|
Refund of value-added-tax |
|
22 |
|
41 |
|
|
Other income |
|
661 |
|
655 |
|
|
Total |
|
4,858 |
|
3,674 |
|
Other operating income increased by EUR 1.2 billion, or 32.2%, year-on-year, primarily due to the write-up of U.S. mobile communications licenses in the amount of EUR 2.4 billion. In the first nine months of 2003, other operating income consisted mainly of income from the sale of financial assets, which did not arise on a comparable level in the first nine months of 2004.
Note (4) Other operating expenses
The components of other operating expenses for the nine months ended September 30, 2004 and 2003 are as follows:
|
|
|
For the nine months ended |
|
||
|
|
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
Amortization of goodwill |
|
1,859 |
|
1,907 |
|
|
Foreign currency transaction losses |
|
140 |
|
274 |
|
|
Losses on disposition of noncurrent assets |
|
104 |
|
160 |
|
|
Other operating expenses |
|
2,305 |
|
1,256 |
|
|
Total |
|
4,408 |
|
3,597 |
|
Other operating expenses increased by EUR 0.8 billion, or 22.5%, year-on-year, primarily as a result of the recognition of accruals relating to the winding up of the U.S. mobile communications joint venture totaling EUR 0.6 billion. The increased workforce and the associated rise in personnel costs at Vivento also contributed to this increase.
Note (5) Financial expense, net
The components of financial expense, net for the three- and nine-months ended September 30, 2004 and 2003 are as follows:
11
|
|
|
For the three months ended |
|
For the nine months ended |
|
||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
(836 |
) |
(888 |
) |
(2,604 |
) |
(2,818 |
) |
|
Income related to associated and related companies |
|
43 |
|
103 |
|
41 |
|
104 |
|
|
Write-downs on financial assets and marketable securities |
|
0 |
|
(4 |
) |
(21 |
) |
(20 |
) |
|
Financial expense, net |
|
(793 |
) |
(789 |
) |
(2,584 |
) |
(2,734 |
) |
The decrease in net financial expense was mainly attributable to lower interest expense related to continued debt reduction. In addition, increased income related to companies accounted for under the equity method had a positive effect on the income related to associated and related companies, offset, in part, by EUR 0.1 billion in losses related to the investment in Toll Collect.
Note (6) Income Taxes
|
|
|
For the three months ended |
|
For the nine months ended |
|
||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
(483 |
) |
(57 |
) |
(1,221 |
) |
137 |
|
Our domestic combined income tax rate for the first nine months of 2004 was 39%, consisting of a corporate income tax of 25%, a trade earnings tax (at an average rate) and a solidarity surcharge levied at 5.5% on corporate income tax.
The Reductions of Tax Concessions Act introduced a limitation on the use of loss carryforwards (so-called minimum taxation) for corporate income tax and trade tax with effect from 2004. Deutsche Telekom therefore incurred corporate income tax and trade tax expense, despite the existence of net operating loss carryforwards. There was an additional tax expense as a result of the recognition of deferrd tax liabilities (EUR 0.6 billion) from the write-up of U.S. mobile communications licenses. The tax income reported for the first nine months of 2003 mainly relates to corporate income tax of EUR 0.4 billion for T-Mobile International AG & Co .KG. This was a one-time effect.
Note (7) Personnel
|
|
|
For the three months ended |
|
For the nine months ended |
|
||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
(3,310 |
) |
(3,421 |
) |
(10,103 |
) |
(10,323 |
) |
In the first nine months of 2004, personnel costs were EUR 0.2 billion or 2.1% lower year-on-year. This reduction is due, in part, to a decline in the number of employees, which decreased both on average and at the balance sheet date. Staff reductions, at T-Com and T-Systems in particular, were offset by staff increases at T-Mobile (especially T-Mobile USA) and T-Online (acquisition of the Scout24 group) and increases in personnel costs at Vivento as described in Note 4 above. In addition, the first nine months of 2003 contain charges relating to currency translation effects and adjusted discount rates applied to pension accruals (AML). Collectively agreed wage and salary increases partly offset this reduction.
12
Average number of employees
|
|
|
For the nine months |
|
|
|
|
|
For the year |
|
||
|
|
|
2004 |
|
2003 |
|
Change |
|
% Change |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Civil servants |
|
48,886 |
|
50,067 |
|
(1,181 |
) |
(2.4 |
) |
49,998 |
|
|
Non-civil servants |
|
199,284 |
|
201,951 |
|
(2,667 |
) |
(1.3 |
) |
201,265 |
|
|
Deutsche Telekom Group |
|
248,170 |
|
252,018 |
|
(3,848 |
) |
(1.5 |
) |
251,263 |
|
|
Trainees and student interns |
|
9,607 |
|
9,809 |
|
(202 |
) |
(2.1 |
) |
9,958 |
|
Number of employees as of the balance sheet date
|
|
|
As of September 30, |
|
|
|
|
|
As of |
|
||
|
|
|
2004 |
|
2003 |
|
Change |
|
% Change |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Civil servants |
|
47,771 |
|
49,775 |
|
(2,004 |
) |
(4.0 |
) |
49,793 |
|
|
Non-civil servants |
|
200,120 |
|
200,199 |
|
(79 |
) |
(0.04 |
) |
198,726 |
|
|
Deutsche Telekom Group |
|
247,891 |
|
249,974 |
|
(2,083 |
) |
(0.8 |
) |
248,519 |
|
|
Trainees and student interns |
|
11,753 |
|
11,992 |
|
(239 |
) |
(2.0 |
) |
11,554 |
|
13
Note (8) Depreciation and amortization
|
|
|
Three months ended |
|
Nine months ended |
|
||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
(1,128 |
) |
(1,169 |
) |
(3,380 |
) |
(3,517 |
) |
|
of which: UMTS licenses |
|
(150 |
) |
(149 |
) |
(451 |
) |
(448 |
) |
|
of which: U.S. mobile communications licenses |
|
(137 |
) |
(127 |
) |
(379 |
) |
(392 |
) |
|
of which: goodwill |
|
(623 |
) |
(637 |
) |
(1,859 |
) |
(1,907 |
) |
|
Depreciation of property, plant and equipment |
|
(1,863 |
) |
(1,996 |
) |
(5,642 |
) |
(6,129 |
) |
|
Total depreciation and amortization |
|
(2,991 |
) |
(3,165 |
) |
(9,022 |
) |
(9,646 |
) |
The decrease in depreciation and amortization is mainly a result of lower depreciation of property, plant and equipment, which in turn is a consequence of restrained capital expenditure in recent periods.
Note (9) Noncurrent assets
The components of noncurrent assets as of September 30, 2004 and December 31, 2003 are as follows:
|
|
|
As of |
|
||
|
|
|
September 30, |
|
December |
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
Intangible assets |
|
45,629 |
|
45,193 |
|
|
of which: goodwill |
|
23,269 |
|
24,513 |
|
|
of which: UMTS licenses |
|
9,899 |
|
10,260 |
|
|
of which: U.S. mobile communications licenses |
|
10,389 |
|
8,179 |
|
|
Property, plant and equipment |
|
44,928 |
|
47,268 |
|
|
Financial assets |
|
3,534 |
|
3,190 |
|
|
Total noncurrent assets |
|
94,091 |
|
95,651 |
|
Intangible assets increased by around EUR 0.4 billion compared with December 31, 2003 to EUR 45.6 billion. In addition to currency translation effects, the increase is primarily due to the write-up of mobile communications licenses in the United States in the amount of EUR 2.4 billion. The decrease in property, plant, and equipment is due in particular to depreciation charges, which substantially exceed the volume of new capital expenditures.
14
Investments
Investments for the nine months ended September 30, 2004 and 2003 are as follows:
|
|
|
For the nine months |
|
||
|
|
|
2004 |
|
2003 |
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
Intangible assets |
|
566 |
|
425 |
|
|
Property, plant and equipment |
|
3,411 |
|
3,134 |
|
|
Financial assets |
|
863 |
|
444 |
|
|
Total investments |
|
4,840 |
|
4,003 |
|
The increased spending on intangible assets is due primarily to goodwill from the acquisition of the Scout24 group. Investments in property, plant, and equipment mainly relate to transmission platform upgrades, the access network at T-Com, and the expansion of T-Mobile’s mobile communications network. The increase in financial assets is primarily driven by additions at associated companies.
Note (10) Shareholders’ equity
The components of shareholders’ equity as of September 30, 2004 and December 31, 2003 are as follows:
|
|
|
As of |
|
||
|
|
|
September 30, |
|
December 31, |
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
Capital stock |
|
10,746 |
|
10,746 |
|
|
Additional paid-in capital |
|
50,107 |
|
50,092 |
|
|
Retained earnings |
|
248 |
|
248 |
|
|
Unappropriated net loss carried forward |
|
(23,311 |
) |
(24,564 |
) |
|
Net income |
|
3,211 |
|
1,253 |
|
|
Cumulative translation adjustment account |
|
(7,376 |
) |
(8,017 |
) |
|
|
|
33,625 |
|
29,758 |
|
|
Minority interest |
|
4,237 |
|
4,053 |
|
|
Total shareholders’ equity |
|
37,862 |
|
33,811 |
|
Shareholders’ equity rose substantially compared with December 31, 2003, primarily as a result of reduced losses from exchange rate translation adjustments of foreign Group companies and an increase in net income.
2,670,828 treasury shares were held at September 30, 2004.
Note (11) Liabilities
The components of liabilities as of September 30, 2004 and December 31, 2003 are as follows:
15
|
|
|
As of |
|
||
|
|
|
September 30, |
|
December 31, |
|
|
|
|
(millions of €) |
|
||
|
|
|
|
|
|
|
|
Debt |
|
|
|
|
|
|
Bonds and debentures |
|
43,542 |
|
51,613 |
|
|
Liabilities to banks |
|
3,147 |
|
3,798 |
|
|
|
|
46,689 |
|
55,411 |
|
|
Other liabilities |
|
8,887 |
|
10,451 |
|
|
Total liabilities |
|
55,576 |
|
65,862 |
|
Note (12) Guarantees and commitments, and other financial obligations
Guarantees and commitments, and other financial obligations increased by EUR 0.7 billion in the reporting period. This increase, which was mainly due to the increase in purchasing and leasing obligations, was partly offset by a decrease in special pension fund and guarantee obligations.
Note (13) Segment information in accordance with SFAS 131
The structure of the segments has been adjusted to reflect the revised reporting structure at T-Com and T-Systems. The Toll Collect joint venture has been managed by and reported under the T-Systems segment since April 1, 2004. For segment reporting purposes, the net carrying amounts of investments and accruals as well as their effects on the statement of income are no longer shown under T-Com, but under T-Systems. To facilitate comparison, prior-year figures and the figures for the first quarter of 2004 have been adjusted to reflect the changes described above. All segment information in this report has been prepared in accordance with U.S. Statement of Financial Accounting Standards No. 131 (SFAS 131) and German Accounting Standard 3, “Segment Reporting” (GAS 3).
The following tables give an overall summary of our segments for the full 2003 financial year as well as for the third quarters and first nine months of both 2003 and 2004. In addition to the amounts disclosed for the segments, there is also a reconciliation line.
|
For the year ended December 31, |
|
Net |
|
Intersegment |
|
Total |
|
Depreciation |
|
Net interest |
|
Income (loss) |
|
Income |
|
|
|
|
(millions of €) |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T-Com(1) |
|
25,116 |
|
4,090 |
|
29,206 |
|
(5,169 |
) |
(315 |
) |
31 |
|
4,690 |
|
|
T-Mobile |
|
21,572 |
|
1,206 |
|
22,778 |
|
(5,196 |
) |
(992 |
) |
97 |
|
831 |
|
|
T-Systems(1) |
|
7,184 |
|
3,430 |
|
10,614 |
|
(1,499 |
) |
(39 |
) |
(447 |
) |
(581 |
) |
|
T-Online(2) |
|
1,662 |
|
189 |
|
1,851 |
|
(430 |
) |
110 |
|
90 |
|
104 |
|
|
Group Headquarters & Shared Services |
|
304 |
|
3,964 |
|
4,268 |
|
(881 |
) |
(2,874 |
) |
(3 |
) |
(4,071 |
) |
|
Reconciliation |
|
— |
|
(12,879 |
) |
(12,879 |
) |
291 |
|
334 |
|
(23 |
) |
425 |
|
|
Group |
|
55,838 |
|
— |
|
55,838 |
|
(12,884 |
) |
(3,776 |
) |
(255 |
) |
1,398 |
|
16
|
For the three |
|
Net |
|
Intersegment |
|
Total |
|
Depreciation |
|
Net interest |
|
Income (loss) |
|
Income |
|
|
|
|
(millions of €) |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T-Com (1) |
|
6,007 |
|
799 |
|
6,806 |
|
(1,158 |
) |
37 |
|
8 |
|
1,455 |
|
|
T-Mobile |
|
6,273 |
|
206 |
|
6,479 |
|
(1,282 |
) |
(241 |
) |
38 |
|
1,287 |
|
|
T-Systems(1) |
|
1,747 |
|
817 |
|
2,564 |
|
(342 |
) |
(8 |
) |
(1 |
) |
39 |
|
|
T-Online(2) |
|
419 |
|
45 |
|
464 |
|
(112 |
) |
29 |
|
(3 |
) |
24 |
|
|
Group Headquarters & Shared Services |
|
78 |
|
1,086 |
|
1,164 |
|
(180 |
) |
(678 |
) |
2 |
|
(799 |
) |
|
Reconciliation |
|
— |
|
(2,953 |
) |
(2,953 |
) |
83 |
|
25 |
|
(1 |
) |
(32 |
) |
|
Group |
|
14,524 |
|
— |
|
14,524 |
|
(2,991 |
) |
(836 |
) |
43 |
|
1,974 |
|
|
For the three |
|
Net |
|
Intersegment |
|
Total |
|
Depreciation |
|
Net interest |
|
Income (loss) |
|
Income |
|
|
|
|
(millions of €) |
|
||||||||||||
|
T-Com(l) |
|
6,152 |
|
952 |
|
7,104 |
|
(1,265 |
) |
(60 |
) |
37 |
|
1,255 |
|
|
T-Mobile |
|
5,632 |
|
288 |
|
5,920 |
|
(1,298 |
) |
(216 |
) |
27 |
|
239 |
|
|
T-Systems(l) |
|
1,798 |
|
819 |
|
2,617 |
|
(373 |
) |
(6 |
) |
(43 |
) |
(34 |
) |
|
T-Online(2) |
|
413 |
|
40 |
|
453 |
|
(104 |
) |
26 |
|
97 |
|
103 |
|
|
Group Headquarters & Shared Services |
|
82 |
|
974 |
|
1,056 |
|
(195 |
) |
(659 |
) |
(5 |
) |
(878 |
) |
|
Reconciliation |
|
— |
|
(3,073 |
) |
(3,073 |
) |
70 |
|
27 |
|
(14 |
) |
6 |
|
|
Group |
|
14,077 |
|
— |
|
14,077 |
|
(3,165 |
) |
(888 |
) |
99 |
|
691 |
|
17
|
For the nine |
|
Net |
|
Intersegment |
|
Total |
|
Depreciation |
|
Net interest |
|
Income (loss) |
|
Income (loss) |
|
|
|
|
(millions of €) |
|
||||||||||||
|
T-Com(l) |
|
18,114 |
|
2,549 |
|
20,663 |
|
(3,546 |
) |
28 |
|
30 |
|
4,259 |
|
|
T-Mobile |
|
17,956 |
|
704 |
|
18,660 |
|
(3,786 |
) |
(667 |
) |
134 |
|
3,289 |
|
|
T-Systems(l) |
|
5,282 |
|
2,382 |
|
7,664 |
|
(1,032 |
) |
(19 |
) |
(145 |
) |
(189 |
) |
|
T-Online(2) |
|
1,328 |
|
129 |
|
1,457 |
|
(332 |
) |
84 |
|
(3 |
) |
106 |
|
|
Group Headquarters & Shared Services |
|
242 |
|
3,166 |
|
3,408 |
|
(565 |
) |
(2,026 |
) |
8 |
|
(2,794 |
) |
|
Reconciliation |
|
— |
|
(8,930 |
) |
(8,930 |
) |
239 |
|
(4 |
) |
(4 |
) |
55 |
|
|
Group |
|
42,922 |
|
— |
|
42,922 |
|
(9,022 |
) |
(2,604 |
) |
20 |
|
4,726 |
|
|
For the nine |
|
Net |
|
Intersegment |
|
Total |
|
Depreciation |
|
Net interest |
|
Income (loss) |
|
Income (loss) |
|
|
|
|
(millions of €) |
|
||||||||||||
|
T-Com(l) |
|
18,716 |
|
3,031 |
|
21,747 |
|
(3,865 |
) |
(291 |
) |
55 |
|
3,569 |
|
|
T-Mobile |
|
15,871 |
|
916 |
|
16,787 |
|
(3,857 |
) |
(817 |
) |
36 |
|
637 |
|
|
T-Systems(l) |
|
5,267 |
|
2,477 |
|
7,744 |
|
(1,120 |
) |
(32 |
) |
(78 |
) |
(160 |
) |
|
T-Online(2) |
|
1,209 |
|
138 |
|
1,347 |
|
(311 |
) |
86 |
|
91 |
|
126 |
|
|
Group Headquarters & Shared Services |
|
225 |
|
2,995 |
|
3,220 |
|
(694 |
) |
(1,814 |
) |
2 |
|
(2,330 |
) |
|
Reconciliation |
|
— |
|
(9,557 |
) |
(9,557 |
) |
201 |
|
50 |
|
(22 |
) |
(59 |
) |
|
Group |
|
41,288 |
|
— |
|
41,288 |
|
(9,646 |
) |
(2,818 |
) |
84 |
|
1,783 |
|
(1) Under new structure as described above.
(2) Amounts are calculated in accordance with German GAAP as specified in the German Commercial Code (HGB), as applied throughout the Deutsche Telekom Group, and differ from those published in separate reports of T-Online International AG, which are calculated in accordance with IFRS.
18
Note (14) Subsequent events
Merger of T-Online International AG
On October 9, 2004, we announced our intent to pursue a statutory merger of T-Online International AG with and into Deutsche Telekom AG under the German Transformation Act. We already own approximately 73.9% of T-Online’s outstanding shares. The proposed merger involves a statutory exchange of T-Online International AG shares for Deutsche Telekom AG shares. Each of Deutsche Telekom AG and T-Online International AG have engaged a valuation specialist to support the determination of an appropriate share exchange ratio in connection with the merger. The exchange ratio and other merger related agreements will be reviewed by an independent court-appointed merger auditor who will determine the appropriateness of such terms on behalf of both companies. We have also decided to initiate a voluntary cash tender offer to T-Online International AG shareholders at a cash price per T-Online share of EUR 8.99 in order to provide liquidity and price certainty to those shareholders that desire to dispose of their shares prior to the completion of the merger. The tender offer is expected to commence in November 2004 and remain open for the statutory maximum period of ten weeks. Additionally, we intend to repurchase as many of our own shares during 2005 as are necessary to avoid or eliminate any increase in total shares outstanding as a result of the merger. The total cash outlay by us in connection with the merger is anticipated to be approximately EUR 2.9 billion, inclusive of the tender offer and repurchase of shares as mentioned above. However, the precise amount may vary depending on the number of shares that will ultimately be tendered (we have assumed that 50% of holders will tender). The merger will be subject to approval by the shareholders of both T-Online and DTAG (in the case of the latter, unless a statutory exemption should apply which is as yet uncertain) and it is hoped that the merger will be completed in the second half of 2005.
T-Mobile USA to acquire GSM networks in California and Nevada from Cingular
The U.S. Federal Communications Commission announced on October 26, 2004 that it has approved the planned acquisition by Cingular Wireless of AT&T Wireless Services, subject to certain conditions. The merger transaction had been approved by the U.S. Department of Justice on October 25, 2004. These approvals and the consummation of the merger satisfy certain conditions precedent that will allow T-Mobile USA to acquire from Cingular Wireless the GSM networks in California and Nevada for USD 2.5 billion as previously reported. This acquisition, which was announced on May 25, 2004, is expected to be consummated in the first quarter of 2005.
As previously reported, for German GAAP purposes, we recorded a charge of EUR 0.6 billion in connection with expected future losses relating to the dissolution of the joint venture with Cingular upon consummation of the transactions contemplated above. However, for US GAAP purposes, no such charge was recorded since the dissolution of the joint venture was subject to certain conditions, which have now been satisfied. Accordingly, for US GAAP purposes, we expect to record a charge, which is not yet reasonably estimable, in the fourth quarter, which will be reflected in the reconciliation of our results to U.S. GAAP included in the Annual Report on Form 20-F for the year ending December 31, 2004.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion in conjunction with the annual consolidated financial statements, including the notes to those financial statements, contained in our Annual Report on Form 20-F filed with the Securities and Exchange Commission for the year ended December 31, 2003 and our report on Form 6-K filed on September 9, 2004. Those financial statements have been prepared in accordance with the requirements of the German Commercial Code (HGB-German GAAP), which differ in certain significant respects from U.S. generally accepted accounting principles (U.S. GAAP). For a discussion of the principal differences between German GAAP and U.S. GAAP as they relate to us and a reconciliation of net income (loss) and total shareholders’ equity to U.S. GAAP, see “Reconciling Differences between German GAAP and U.S. GAAP” and notes (41) through (44) to the consolidated financial statements contained in our Annual Report on Form 20-F and our report on Form 6-K filed on September 9, 2004.
19
RECENT DEVELOPMENTS
Agenda 2004
Agenda 2004 supports our goal of the growth of our business. This Group-wide program encompasses six initiatives. The focus and content of Agenda 2004 have been seminal to our realignment to the strategic growth areas of broadband/fixed network, business customers and mobile communications as discussed below.
Broadband
Broadband is a key issue for our future. In September 2004, four years after T-DSL was launched on the market, the five-millionth line went “online” in Germany. The target is for this figure to reach 10 million DSL lines by 2007. The success achieved up to now has also been the result of joint marketing activities by T-Com and T-Online. In order to offer customers an integrated product bundle and fulfill our objectives, our Board of Management and Supervisory Board have decided to merge T-Online AG with and into Deutsche Telekom AG as discussed below.
Business customers
Our selling power has been further increased by pooling the strengths of T-Com and T-Systems. The portfolio of attractive, advanced solutions for small and medium-sized enterprises has been expanded as a result of the coordination of sales activities and the optimization of processes. The success of the business customer initiative can be seen in revenue growth in these product areas.
Quality
The objective of the quality campaign is to improve the quality of products and services from the customer perspective. Employees from all business areas are working on a large number of projects to implement this quality drive, which aims to further improve customer satisfaction.
Innovation
Our sustained and profitable growth will be ensured through the development of new products and services. As part of the “Partners for Innovation” initiative launched in January 2004 by the German Chancellor Gerhard Schröder in cooperation with the worlds of politics, business and science, we have taken over management of the “Networked Worlds” ‘(vernetzte Welten)’ project. Since October 2004, it has been possible to experience our innovation potential first hand in the T-Gallery at Group Headquarters.
Efficiency
The efficiency campaign also continues to successfully support the strategy of the growth of our business by increasing productivity and constantly striving to improve efficiency. The measures that contribute toward the sustained growth of our business are cost reductions and restrictions on investment, process optimization, synergies from the Group-wide use of technical platforms, reduction of the commitment of capital, coordination of procurement processes and optimization of the employment of capital through the disposal of noncurrent assets no longer needed for operations.
Human resources
The core issues of the human resources initiative are the employment alliance, Vivento, and the motivation and qualification campaign. The employment alliance has been implemented as planned following the passing of the amendment to the Act Concerning the Legal Provisions for the Former Deutsche Bundespost Staff ‘(Postpersonalrechtsgesetz - PostPersRG)’ by the German national parliament, the Bundestag, and the chamber representing the regions, the Bundesrat. The PostPersRG ensures funding for the reduction in weekly working hours for civil servants of Deutsche Telekom AG, thereby also ensuring the planned cost reduction. This means that the last hurdle
20
toward implementation of the employment alliance has now been cleared, because the removal of the year-end bonus guaranteed in the PostPersRG will fund the planned reduction in weekly working hours for civil servants. The amended Act will come into effect in November 2004. Additionally, of the more than 19,000 employees assigned to Vivento, more than two thirds were in active positions (temporary and permanent) as of September 2004. The collective bargaining negotiations at T-Systems have been successfully completed.
Deutsche Telekom steps up efforts to implement new strategic focus
The strategic realignment announced by the Group is taking shape. The new rules of procedure and schedule of responsibilities for the Group Board of Management came into force on October 1, 2004. The three strategic business areas (SBAs) – Broadband/Fixed Network, Business Customers, and Mobile Communications – will be official reporting bodies with effect from January 1, 2005. T-Systems Business Services, the new business unit to be created as part of the Business Customers SBA that will support the Group’s medium-sized and large corporate customers, will be officially launched on January 1, 2005. This first major step in the strategic realignment is the logical consequence of a stronger focus on customers and their specific needs.
Walter Raizner appointed Member of the Board of Management for the Broadband/Fixed Network strategic business area
Our Supervisory Board has appointed Walter Raizner to the Group Board of Management effective November 1, 2004. Walter Raizner is the Board member responsible for the newly created Broadband/Fixed Network SBA, which combines the two divisions active in the consumer market, T-Com and T-Online. Walter Raizner also heads the T-Com Board of Management.
Deutsche Telekom launches integration of T-Online
On October 9, 2004, we announced our intent to pursue a statutory merger of T-Online International AG with and into Deutsche Telekom AG under the German Transformation Act. We already own approximately 73.9% of T-Online’s outstanding shares. The proposed merger involves a statutory exchange of T-Online International AG shares for Deutsche Telekom AG shares. Each of Deutsche Telekom AG and T-Online International AG have engaged a valuation specialist to support the determination of an appropriate share exchange ratio in connection with the merger. The exchange ratio and other merger related agreements will be reviewed by an independent court-appointed merger auditor who will determine the appropriateness of such terms on behalf of both companies. We have also decided to initiate a voluntary cash tender offer to T-Online International AG shareholders at a cash price per T-Online share of EUR 8.99 in order to provide liquidity and price certainty to those shareholders that desire to dispose of their shares prior to the completion of the merger. The tender offer is expected to commence in November 2004 and remain open for the statutory maximum period of ten weeks. Additionally, we intend to repurchase as many of our own shares during 2005 as are necessary to avoid or eliminate any increase in total shares outstanding as a result of the merger. The total cash outlay by us in connection with the merger is anticipated to be approximately EUR 2.9 billion, inclusive of the tender offer and repurchase of shares as mentioned above. However, the precise amount may vary depending on the number of shares that will ultimately be tendered (we have assumed that 50% of holders will tender). The merger will be subject to approval by the shareholders of both T-Online and DTAG (in the case of the latter, unless a statutory exemption should apply which is as yet uncertain) and it is hoped that the merger will be completed in the second half of 2005.
Framework Agreement in principle on T-Online merger
Deutsche Telekom AG and T-Online International AG have signed a framework agreement in which the parties have expressed their intention to pursue a statutory merger and have agreed to details of the intended future integration of T-Online into Deutsche Telekom as well as on procedural matters regarding the implementation of the proposed merger.
Toll Collect arbitration proceedings
As previously reported, in September 2002, Deutsche Telekom AG, DaimlerChrysler Services AG, and Compagnie Financière et Industrielle des Autoroutes S.A. (Cofiroute) (individually, the “partners” and collectively, the “consortium”) entered into an agreement dated September 2002 and last amended in November 2002 (the “operating
21
agreement”) with the Federal Republic of Germany (represented by the German Federal Ministry of Transport, Building and Housing) (the “Federal Republic”) relating to a project to create and operate an innovative system for the collection of toll charges for the use by heavy vehicles of the German high-speed highway system. We refer to this project as the “Toll Collect project.” The partners are responsible for the development of the toll collection system which will be built and operated by the joint venture Toll Collect GmbH (“Toll Collect”). DaimlerChrysler Services and we each hold a 45% stake in Toll Collect, with the remaining 10% being held by Cofiroute. Our investments in the Toll Collect project include our equity interests therein which are recognized in our consolidated financial statements using the equity method of accounting, and certain financial guarantees.
The start of operations initially was scheduled for August 31, 2003, but has been delayed. Commencing on December 2, 2003, the partners are paying under protest for contractual penalties relating to such delay in the amount of EUR 250,000 per day until March 1, 2004 and EUR 500,000 per day thereafter until the toll collection system is operational. Upon the planned accession to the operating agreement by Toll Collect, the Federal Republic will be able to request payment of penalties from either the partners or Toll Collect. Beside these penalties relating to delay, we believe that further penalties or liability for fault are excluded in the operating agreement until operations have commenced and have been accepted by the Federal Republic.
On February 17, 2004, the Federal Ministry of Transport sent us a letter advising that a notice of termination of the operating agreement was imminent. On February 25, 2004, we received such notice of termination of the operating agreement, dated February 19, 2004. On February 29, 2004, the consortium members reached an agreement with the Federal Republic to continue the Toll Collection project. On April 23, 2004, the members of the Consortium and the Federal Republic entered into an Implementation Agreement in which the parties agreed upon the implementation of the terms in the agreement of February 29, 2004 and in which the Federal Republic agreed not to exercise any rights of termination which it alleged to have resulting from the notice of termination. The Implementation Agreement also provides additional detail with respect to certain of the terms of the agreement of February 29, 2004, including a revised phase-in period and new penalty provisions as previously reported. In addition, the joint and several guarantee by the consortium members that Toll Collect will duly perform its duties pursuant to the operating agreement, has been modified to extend to one year beyond phase 2 commencement. For more information, see “Liquidity and Capital Resources – Contractual Obligations and Other Commitments.”
On September 8, 2004, the Federal Republic provided us with notice that it has initiated arbitration proceedings and asserted claims for damages against the partners, DaimlerChrysler Services AG and Deutsche Telekom AG, and the consortium through the joint venture partnership, Toll Collect GbR. The Federal Republic alleges various breaches of the operating agreement and breach of duties of care in connection with the negotiation and conclusion of the operating agreement. On this basis, the Federal Republic has alleged initial claims for damages relating to lost toll revenues in the aggregate amount of approximately EUR 3.56 billion plus interest, contractual penalties (including penalties as a result of the members of the consortium allegedly not seeking the agreement of the Federal Republic before concluding certain subcontractor agreements) in the aggregate amount of approximately EUR 1.03 billion plus interest, and additional as yet unspecified damages. Further, the Federal Republic has demanded production of certain documents and compliance with other terms of the operating agreement. On October 7, 2004, we, together with DaimlerChrysler and Cofiroute, appointed a second arbitrator. We also provided a reply to the claims of the Federal Republic indicating, among other things, that we consider the claims of the Federal Republic as presented in the arbitration notice to be unsustainable. We intend to contest the Federal Republic’s claims vigorously.
Although the outcome of arbitration proceedings is difficult to predict with certainty, we have not established a reserve with respect to damages and any additional contractual penalties claimed by the Federal Republic, including with respect to claims relating to subcontractor agreements and delays in construction of infrastructure, as we believe the claims presented in the arbitration notice are unsustainable.
Slovak Telecom intends to acquire all shares in EuroTel Bratislava
Slovak Telecom (ST), our majority-owned subsidiary in Slovakia, plans to acquire the remaining 49% stake in its mobile communications arm, EuroTel Bratislava (EuroTel). An agreement to this effect was concluded on September 27, 2004 with the Atlantic West B.V. (Verizon Communications and AT&T Wireless) consortium. ST’s acquisition of the remaining 49% stake in EuroTel is a prerequisite for extending the successful cooperation between EuroTel and T-Mobile International. EuroTel is one of Slovakia’s two mobile communications providers. It has a
22
market share of approximately 44%. Acquisition by ST of the remaining 49% stake is still subject to approval by the European Commission.
T-Systems wins major outsourcing projects
Deutsche Post AG and T-Systems revised the IT cooperation agreement signed in 2000 and extended the duration of the modified agreement. T-Systems will continue to provide Deutsche Post with desktop, computing, and corporate network services, including the integrated user helpdesk. As part of its managed desktop services, T-Systems will operate approximately 55,000 workstations for Deutsche Post. The services include infrastructure services for approximately 2,000 locations, software distribution for all workstations, and a centralized user help desk. Since T-Systems has not committed itself to specific providers in the area of computing services, it can offer optimum technical and financial conditions to run the 270 or so applications. In addition, the network infrastructure of Deutsche Post will be merged and entrusted to T-Systems together with corporate network services on the basis of the new MPLS (Multi Protocol Label Switching) technology. These networks interlink Deutsche Post sites, as well as approximately 55,000 PCs and computing centers. T-Systems also integrates customers of Deutsche Post into the corporate network.
Swiss Federal Railways (SBB) and T-Systems successfully completed one of Europe’s largest server-based computing projects. Over a period of seven months, approximately 10,000 workstatons were replaced as part of the OPUS innovation project, which standardized the office platform throughout the company. Thanks to this concept and the implementation of server-based computing with Citrix MetaFrame, SBB set a new milestone in the ICT market. SBB now has a uniform, state-of-the-art, standardized IT platform that enabled it to lower its operating expenses and enhance data security at the same time. T-Systems was also put in charge of the day-to-day operation of the new IT platform.
Sanlam, one of South Africa’s largest insurance groups, extended its outsourcing agreement with T-Systems for a further three years. The agreement covers the provision of both information and communication technology (ICT) services from the areas of networks, support of workstations, mainframe computers, and open systems services. The outsourcing will substantially increase Sanlam’s flexibility and provide the group with ICT infrastructure services that are tailored to its requirements. The agreement, which has a volume of ZAR 500 million (EUR 62 million), is an extremely large deal in the South African market.
T-Online’s music portal
Musicload, T-Online’s music portal, is one of Germany’s most successful providers in the Top 20 download charts. According to Media Control, Musicload had a 55% share in this business segment in September 2004. With over 350,000 titles and a daily average of 5,500 downloads in the third quarter of 2004, the portal is now one of the leading providers of legal music downloads in Germany. T-Online’s platform cooperates with all major record companies, but also with independent labels.
T-Mobile USA to acquire GSM networks in California and Nevada from Cingular
The U.S. Federal Communications Commission announced on October 26, 2004 that it has approved the planned acquisition by Cingular Wireless of AT&T Wireless Services, subject to certain conditions. The merger transaction had been approved by the U.S. Department of Justice on October 25, 2004. These approvals and the consummation of the merger satisfy certain conditions precedent that will allow T-Mobile USA to acquire from Cingular Wireless the GSM networks in California and Nevada for USD 2.5 billion as previously reported. This acquisition, which was announced on May 25, 2004, is expected to be consummated in the first quarter of 2005.
As previously reported, for German GAAP purposes, we recorded a charge of 0.6 billion in connection with expected future losses relating to the dissolution of the joint venture with Cingular upon consummation of the transactions contemplated above. However, for US GAAP purposes, no such charge was recorded since the dissolution of the joint venture was subject to certain conditions, which have now been satisfied. Accordingly, for US GAAP purposes, we expect to record a charge, which is not yet reasonably estimable, upon the consummation of the transactions discussed above. Such charge will be reflected in the reconciliation of our results to U.S. GAAP included in the Annual Report on Form 20-F for the year ending December 31, 2004.
23
Deutsche Telekom AG intends to pay dividend for the 2004 financial year
The Board of Management intends to recommend a dividend of EUR 0.62 for the 2004 financial year. The final dividend will be dependent on the level of net income for the full year. The Board of Management, therefore, will recommend to the Supervisory Board, at its meeting to review the 2004 financial accounts, a dividend in the range of EUR 0.56 to EUR 0.62 per share (EUR 2.4 billion to EUR 2.6 billion in total). We are hopeful that the level of the dividend for 2004 will continue to be a minimum level for future years. The further development of the dividend will depend on future levels of net income.
Moody’s upgrades Deutsche Telekom
The rating agency Moody’s upgraded our long-term senior unsecured ratings and those of our Dutch financing subsidiary, Deutsche Telekom International Finance B.V., from Baa2 to Baa1. The outlook for the further development of the rating is stable.
Majority-owned Croatian subsidiary Hrvatske telekomunikacije renamed T-Hrvatski Telekom
The rebranding of Croatian telecommunications provider Hrvatske telekomunikacije (HT) to T-Hrvatski Telekom took effect as of October 1, 2004, and marks the first appearance of Deutsche Telekom’s T-Com brand abroad. Croatian fixed-line subsidiary HTtel and Internet provider HTnet have now been combined to form the new T-Com brand under the umbrella of T-Hrvatski Telekom (T-HT). The rebranding of T-Hrvatski Telekom is a further step towards increasing customer retention and obtaining synergies through global marketing activities. T-Mobile Croatia, a wholly owned subsidiary of T-Harvatski Telekom, has also adopted the new brand as a member of the T-Mobile International group.
Bid for UMTS license in Croatia
On October 18, 2004, the Croatian government announced that it would grant T-Mobile Croatia a UMTS license at a cost of HRK 132 million (approximately EUR 18 million) plus annual license fees. The license will be effective for 20 years.
T-Mobile plans a program to increase efficiency
T-Mobile has started planning a program to increase the efficiency of its European investments. The objective of this program is to reduce annual operating expenses by approximately EUR 1 billion by 2006. It is contemplated that approximately half of the projected savings will be reinvested in new products and services to generate growth.
Deutsche Telekom sells its remaining shares in SES Global
On November 17, 2004, we sold our remaining 7.3% interest in the European satellite operator SES Global for approximately EUR 345 million. The proceeds from this sale will be used for debt reduction.
Implementation of International Financial Reporting Standards (IFRS)
In accordance with Regulation 1606/2002 of the European Parliament and of the Council of July 19, 2002, listed companies within the European Union are obliged to prepare their consolidated financial statements in accordance with the International Financial Reporting Standards for each financial year starting on or after January 1, 2005. IFRS will replace German GAAP for our external financial reporting as of January 1, 2005. The measures necessary for conversion have been initiated and are progressing on schedule.
U.S. GAAP Impairment Charge
For U.S. GAAP purposes, we perform our annual assessment of our carrying amounts relating to goodwill and intangible assets with indefinite useful lives for impairment as of the end of the third quarter. Although our assessment is not yet complete, it is probable that the U.S. GAAP carrying amounts of certain intangible assets at T-Mobile UK and Slovak Telecom exceed their fair values. Accordingly, we expect to record an aggregate impairment
24
charge estimated at EUR 1.2 billion for U.S. GAAP purposes. Any such impairment charge will be reflected in the reconciliation of our results to U.S. GAAP included in the Annual Report on Form 20-F for the year ending December 31, 2004. There will be no corresponding impairment charge for German GAAP purposes.
25
RESULTS OF OPERATIONS
The following table shows information concerning our condensed consolidated statements of income for the periods indicated.
|
|
|
For the three months |
|
For the nine months |
|
For the year ended |
|
||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
2003 |
|
|
|
|
(millions of €, except per share data) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
14,524 |
|
14,077 |
|
42,922 |
|
41,288 |
|
55,838 |
|
|
Cost of sales |
|
(7,849 |
) |
(7,828 |
) |
(23,185 |
) |
(23,138 |
) |
(31,402 |
) |
|
Gross profit |
|
6,675 |
|
6,249 |
|
19,737 |
|
18,150 |
|
24,436 |
|
|
Selling costs |
|
(3,014 |
) |
(3,266 |
) |
(9,583 |
) |
(9,821 |
) |
(13,505 |
) |
|
General and administrative costs |
|
(1,060 |
) |
(1,264 |
) |
(3,294 |
) |
(3,889 |
) |
(4,976 |
) |
|
Other operating income |
|
1,369 |
|
1,045 |
|
4,858 |
|
3,674 |
|
4,558 |
|
|
Other operating expenses |
|
(1,203 |
) |
(1,284 |
) |
(4,408 |
) |
(3,597 |
) |
(5,084 |
) |
|
Operating results |
|
2,767 |
|
1,480 |
|
7,310 |
|
4,517 |
|
5,429 |
|
|
Financial expense, net |
|
(793 |
) |
(789 |
) |
(2,584 |
) |
(2,734 |
) |
(4,031 |
) |
|
of which: net interest expense |
|
(836 |
) |
(888 |
) |
(2,604 |
) |
(2,818 |
) |
(3,776 |
) |
|
Results from ordinary business activities |
|
1,974 |
|
691 |
|
4,726 |
|
1,783 |
|
1,398 |
|
|
Income taxes |
|
(483 |
) |
(57 |
) |
(1,221 |
) |
137 |
|
225 |
|
|
Income after taxes |
|
1,491 |
|
634 |
|
3,505 |
|
1,920 |
|
1,623 |
|
|
Income applicable to minority shareholders |
|
(104 |
) |
(126 |
) |
(294 |
) |
(303 |
) |
(370 |
) |
|
Net income |
|
1,387 |
|
508 |
|
3,211 |
|
1,617 |
|
1,253 |
|
|
Earnings per share(1) /ADS(2) |
|
0.33 |
|
0.12 |
|
0.77 |
|
0.39 |
|
0.30 |
|
(1) Earnings per share for each period are calculated by dividing net income by the weighted average number of outstanding shares.
(2) One American Depository Share (ADS) corresponds in economic terms to one share of common stock of Deutsche Telekom AG.