Notes to the interim condensed consolidated financial statements

Segment information

Business segments recognised by the Group are as follows:

  • Fixed – network communications services using a fixed network and IS/ICT services provided by the Company and other consolidated subsidiaries,
  • Mobile – mobile communications services provided by the Company and by Telefónica O2 Slovakia, s.r.o.
For the six months ended 30 June 2010
In CZK million
Fixed Mobile * Group
Revenues 12,587 15,727 28,314
Inter-segment sales (171) (235) (406)
Total consolidated revenues 12,416 15,492 27,908
Operating profit 1,529 3,947 5,476
Interest and other financial costs (net) (121)
Profit before tax 5,355
Tax (1,001)
Profit after tax 4,354
Minority interest
Net profit 4,354
As at 30 June 2010
Assets (excluding goodwill and non-current assets held for sale)
52,220 29,859 82,079
Goodwill 128 13,320 13,448
Non-current assets held for sale 161 161
Total assets 52,509 43,179 95,688

*Standalone Revenues of Telefónica O2 Slovakia, s.r.o. of CZK 1,256 million included.

For the six months ended 30 June 2009
In CZK million
Fixed Mobile * Group
Revenues 13,543 16,786 30,329
Inter-segment sales (207) (319) (526)
Total consolidated revenues 13,336 16,467 29,803
Operating profit 2,502 4,957 7,459
Interest and other financial costs (net) (132)
Profit before tax 7,327
Tax (1,605)
Profit after tax 5,722
Minority interest -
Net profit 5,722
As at 31 December 2009
Assets (excluding goodwill and non-current assets held for sale)
58,947 34,193 93,140
Goodwill 128 13,320 13,448
Non-current assets held for sale 57 - 57
Total assets 59,132 47,513 106,645

*Standalone Revenues of Telefónica O2 Slovakia, s.r.o. of CZK 876 million included.

Revenue of the Group is predominantly derived from domestic trading activities and as a result, segment reporting is only shown on the basis of business segments.

The inter-segment pricing rates applied in 2010 and 2009 were determined on the same basis as rates applicable for other mobile operators and are consistent with rates applied for pricing with other mobile operators.

Income tax

In CZK million For the six months ended 30 June 2010 For the six months ended 30 June 2009
Total income tax expense is made up of:
Current income tax charge 1,275 1,704
Deferred income tax credit (274) (99)
Taxes on income 1,001 1,605

Deferred income taxes are calculated using currently enacted tax rates expected to apply when the asset is realized or the liability settled. For 2009 and 2010 19% applied.

Dividends proposed

In CZK million 30 June 2010 30 June 2009
Dividends declared (including withholding tax) 12,884 16,104

Dividends include withholding tax on dividends paid by the Company to its shareholders. There has been no interim dividend paid in respect of 2009 and 2010. Approval of the 2009 and 2008 profit and the decision regarding the amount of any dividend payment for these financial years took place at the Annual General Shareholders Meeting on 7 May 2010 (2009: 3 April 2009). Pursuant to the decision of the Annual General Shareholders Meeting the dividend for 2009 profit will be paid out on 6 October 2010.

Property plant and equipment

Acquisitions and disposals

During the six months ended 30 June 2010, the Group acquired assets with a cost of CZK 1,799 million (2009: CZK 1 934 million) Assets with a net book value of CZK 6 million were disposed of by Group during the six months ended 30 June 2010 (2009: CZK 129 million).

The Group achieved a total gain from the sale of the above fixed assets (including assets held for sale) amounting to CZK 13 million (2009: CZK 356 million) and total losses in amount CZK 18 million (2009: 2 CZK million) during the six months ended 30 June 2010.

Intangible fixed assets

Acquisitions and disposals

During the six months ended 30 June 2010, the Group acquired assets with a cost of CZK 580 million (2009: CZK 971 million).

Cash and cash equivalents

In CZK million 30 June 2010 31 December 2009
Cash at current bank accounts 243 169
Cash at cash-pooling structures (inter-company) 8,130 1,100
Total cash and cash equivalents 8,373 1,269

As at 30 June 2010, the Group had available equivalent of CZK 4,189 million (at 31 December 2009: CZK 4,115 million) of undrawn committed facilities.

As of 30 June 2010 and 31 December 2009 no cash and cash equivalents were pledged.

Inventories

As at 30 June 2010 the inventories are stated net of an allowance of CZK 64 million (as at 31 December 2009: CZK 68 million), reducing the value of the inventories to their net realisable value.

Restructuring costs

During the six months period ended 30 June 2010 restructuring costs of CZK 427 million have been recognised for the redundancy payments.

Contingencies

The Company has been a party to several business lawsuits. In 2009, the Company managed to successfully conclude a number of significant litigations opened in previous years. Compared to the 2009 Annual Report the following has changed:

1) The litigation initiated by Vodafone Czech Republic, a.s. was finally closed. In May 2004, Vodafone filed a legal action due to an alleged breach of the Comlegal action Protection Act by Eurotel Praha, spol. s r.o. for damages in the amount of CZK 1,043 million. The Municipal Court in Prague completely rejected the unsubstantiated legal action as unjustified on 21 August 2008. Moreover, Vodafone Czech Republic, a.s. failed to succeed with its appeal filed with the High Court in Prague, which finally confirmed with its adjudication of 6 October 2009 that the rejection of the legal action had been correct. Vodafone Czech Republic, a.s. did not file an extraordinary appeal against the judgements.

2) AUGUSTUS spol. s r.o. sued the Company, claiming for an alleged loss of profit in years 1995–2001 in the amount of approximately CZK 183 million, incl. appurtenances. AUGUSTUS spol. s r.o. claims that the Company unlawfully terminated the contract for phone cards issuance which had been concluded for an indefinite period of time. Based on the adjudication, the Company paid CZK 83 million in August 2006 including interest (in total CZK 139 million). Both parties filed an extraordinary appeal against this judgement. The Supreme Court cancelled the previous decisions in June 2009. The Municipal Court in Prague completely rejected the legal action against the Company in April 2010.

3) Subsequently, AUGUSTUS spol. s r.o. sued the Company again for the amount of CZK 294 million. The legal action was based again on the contract for phone cards issuance between the Company and AUGUSTUS spol. s r.o. that was terminated 13 years ago. AUGUSTUS spol. s r.o. has tried to put forward other claims in this legal action that have no substantiation in law or are even contradictory. Considering the Supreme Court’s adjudication and the Municipal Court’s resolution in the previous case, it is obvious that AUGUSTUS spol. s r.o. cannot be successful in this case either.

4) In January 2010, the Company was sued by MEDIATEL for damages in the amount of CZK 359 million. The companies MEDIATEL and Telefónica O2 Czech Republic, a.s. cooperated from 1992 until 2008 in the area of telephone directory publishing. As the universal service provider, the Company was obliged to publish a printed phone directory based on the provision of Sec. 38 (2)(c) and 41(1) of the ECA.

To comply with the obligation, SPT TELECOM, the Company’s legal predecessor, made a contract for telephone directory publishing with MEDIATEL that was later replaced by other contracts which were in force until the end of 2008.

Although MEDIATEL had been profiting from being associated with the traditional and publicly recognized brand Telefónica O2 Czech Republic (previously ČESKÝ TELECOM and SPT TELECOM) for 16 years, in 2010 MEDIATEL surprisingly sued the Company for damages. MEDIATEL based its claim on an alleged unlawful unreasonable price conditions in the contracts for telephone directory publishing within the regime of universal service.

The Company is convinced that it has not breached any of the disputed obligations and caused any damage to MEDIATEL as a result. The litigation is in its starting phase and the Company assumes that it would be inappropriate to provide any other information at this stage, as it might compromise the Company’s position in this litigation.

The Company’s executive management believes that all risk associated with any ongoing disputes is appropriately reflected in the financial statements.

Commitments

Operating leases

The aggregate future minimum lease payments under operating leases are as follows:

In CZK million 30 June 2010 31 December 2009
No later than 1 year 1,403 1,453
Later than 1 year and not later than 5 years 4,705 4,900
Later than 5 years 3,841 4,747
Total 9,949 11,100

Capital and other commitments

In CZK million 30 June 2010 31 December 2009
Capital and other expenditure contracted but not provided for in the financial statements 4,741 5,422

The majority of contracted amounts relate to the telecommunications network and service contracts.

Related party transactions

The Group provides services to all related parties on normal commercial terms. Sales and purchase transactions with related parties are based on contractual agreements negotiated on normal commercial terms and conditions and at market prices. Outstanding balances of assets and liabilities are unsecured, interest free (excl. financial assets and liabilities used for financing) and the settlement occurs either in cash or by offsetting. The financial assets balances are tested for the impairment at the balance sheet date, and no allowance or write off was incurred.

The following transactions were carried out with related parties:

I. Parent company:

There was no dividend paid as at 30 June 2010 or 2009 to Telefónica, S.A. The dividend payable to Telefónica, S.A. is in the amount of CZK 8,943 million (31 December 2009: CZK 0).

For the six months ended 30 June 2010 the royalty fees to Telefónica, S.A. amounted to CZK 423 million (for the six months ended 30 June 2009: 379 CZK million).

II. Other related parties – Telefónica Group:

Balance sheet
In CZK million
30 June 2010 31 December 2009
a) Receivables 349 581
b) Payables (excl. dividend payable) 575 874
d) Short-term receivables (interest) 6
e) Cash equivalents (Note 6) 8,130 1,100
Comprehensive income
In CZK million
For the six months ended 30 June 2010 For the six months ended 30 June 2009
a) Sales of services and goods 402 432
b) Purchases of services and goods 344 234
c) Interest income 22 101
d) Interest expense 31

The capital purchases for the six months ended 30 June 2010 amounted to 0 CZK million (for the six months ended 30 June 2009: 9 CZK million).

The list of the Telefónica companies with which the Company had any transaction in 2010 and 2009 includes the following entities: Telefónica S.A., Telefónica de España, S.A.U., Telefónica O2 Germany GmbH& CO.OHG, Telefónica O2 UK Ltd., Telefónica O2 Ireland Ltd., Telefónica Móviles España, S.A.U., Telefónica Móviles Argentina, S.A., Pléyade Peninsular, O2 Holdings Ltd., Manx Telecom Ltd., Telefónica Móviles Guatemala, S.A., Telefónica Móviles El Salvador, S.A. de C.V., Telefónica Móviles Panamá, S.A., Telefónica Móviles Chile, S.A., Otecel, S.A., Telefónica Móviles Nicaragua, S.A., Telefónica Móviles Columbia, S.A., Telefónica S. de Informática y Comunicaciones de España, S.A.U., Telefónica Investigación y Desrrollo, S.A., Portugal Telecom, S.G.P.S., S.A., Telecom Italia S.p.A., Telfisa Global, BV., Telefónica Finanzas, S.A., Telefónica International Wholesale Services, Telefónica International Wholesale Services II, S.L., Telefónica Gestión de Servicios Compartidos, S.A., Telefónica Factoring E.F.C., S.A., Atento Chequia, Telefónica Compras Electrónica, S.L., Telefónica Móviles Mexico, S.A, Telefónica Móviles del Uruguay, S.A., Telefónica Móviles Peru, S.A., Telefónica Venezuela, S.A., China Unicom (Hong Kong) Limited, Telefónica O2 Business Solutions, spol. s r.o., CZECH TELECOM Germany GmbH, CZECH TELECOM Austria GmbH, Telefónica O2 Slovakia, s.r.o., Telefónica Global Roaming GmbH.

a) Key management compensation

Members of the Board of Directors and of the Supervisory Board of the Telefónica O2 Czech Republic, a.s. were provided with benefits as follows:

In CZK million For the six months ended 30 June 2010 For the six months ended 30 June 2009
Salaries and other short-term benefits 57 43
Personal indemnification insurance 3 2
Total 60 45

b) Loans to related parties

There were no loans provided to members of Board of Directors and Supervisory Board in 2010 and 2009.

As at 31 December 2008 Telfisa Global, BV. has provided a loan in the amount of CZK 3,194 million to Telefónica O2 Slovakia, s.r.o. The loan has bore a floating interest based on 1M BRIBOR. As of 30 June 2009 the total interest expense was CZK 31 million. The loan was repaid in July 2009 together with related interest.

No other loan was provided to related parties by the Group.

Principal subsidiary undertakings

Group’s interest Cost of investment in CZK million Country of incorporation Activity
Subsidiaries
1. Telefónica O2 Business Solutions, spol. s r.o. (formerly Telefónica O2 Services, spol. s r.o., merged with DELTAX Systems a.s.) 100 % 237 Czech Republic Network and consultancy services in telecommunications,
IT/ICT services
2. CZECH TELECOM Germany GmbH 100 % 13 Germany Data transmission services
3. CZECH TELECOM Austria GmbH 100 % 11 Austria Data transmission services
4. Telefónica O2 Slovakia, s.r.o. 100 % 6,116 Slovakia Mobile telephony, internet and data transmission services
Associates
5. První certifikační autorita, a.s. 23 % 9 Czech Republic Rendering of certification services
6. AUGUSTUS, spol. s r.o. 40 % Czech Republic Sales by auctions and advisory services

Following the Resolution of sole participant of Telefónica O2 Slovakia, s.r.o., the increase of the registered capital by a monetary investment in the amount of EUR 40 million from the amount of the registered capital of EUR 200 million to the amount of the registered capital of EUR 240 million was approved. Effective date of increase of the registered capital was 6 May 2010.

Events after the statement of financial position date

There were no other events, which have occurred subsequent to the year-end, which would have a material impact on the financial statements at 30 June 2010.

Up