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 March 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 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): _______
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): _______
Indicate by check mark whether the registrant 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
---- ---
This report is deemed submitted and not filed pursuant to the
rules and regulations of the Securities and Exchange Commission.
[GRAPHIC]
Spirit. Commitment. Success.
The 2003 financial year.
Deutsche
Telekom
II
Selected financial data of the Deutsche Telekom Group.
-------------------------------------------------------------------------------------------------------------------------------
Financial data of the Group
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Change compared
(billions of (euro)) to prior year(a) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Net revenue 4.0% 55.8 53.7 48.3 40.9 35.5
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Results from ordinary business activities n.a. 1.4 -27.2 -2.5 6.4 3.1
-------------------------------------------------------------------------------------------------------------------------------
Net income/loss n.a. 1.3 -24.6 -3.5 5.9 1.3
-------------------------------------------------------------------------------------------------------------------------------
EBITDA(a, b, c) 14.6% 18.5 16.1 18.1 20.7 14.5
-------------------------------------------------------------------------------------------------------------------------------
EBITDA (adjusted to exclude special factors)(a, b, c) 12.1% 18.3 16.3 15.1 12.9 14.5
-------------------------------------------------------------------------------------------------------------------------------
EBITDA margin (adjusted to exclude special factors) (%)(a) 32.8 30.4 31.3 31.6 41.0
-------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity -4.5% 33.8 35.4 66.3 42.7 35.7
-------------------------------------------------------------------------------------------------------------------------------
Equity ratio (%)(a, d) 3.6% 29 28 39 33 36
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Debt (in acc. with the consolidated balance sheet) -12.1% 55.4 63.0 67.0 60.4 42.3
-------------------------------------------------------------------------------------------------------------------------------
Net debt(a, c) -23.8% 46.6 61.1 62.8 57.4 37.9
-------------------------------------------------------------------------------------------------------------------------------
Balance sheet total -7.7% 116.1 125.8 164.5 124.2 94.6
-------------------------------------------------------------------------------------------------------------------------------
Investments in intangible assets (excl. goodwill) and property,
plant, and equipment 21.4% -6.2 -7.9 -11.2 -23.5 -5.9
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14.9% 14.3 12.5 11.9 10.0 9.6
-------------------------------------------------------------------------------------------------------------------------------
Investments in intangible assets (excl. goodwill) and property,
plant, and equipment (in acc. with the statement of cash flows) 20.9% -6.0 -7.6 -10.9 -23.5 -6.0
-------------------------------------------------------------------------------------------------------------------------------
Free cash flow (before dividend)(a, c) 71.2% 8.3 4.8 1.1 -13.5 3.6
-------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities 79.4% -2.1 -10.0 -5.4 -27.7 -18.7
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/used for financing activities -52.1% -5.2 -3.4 -4.8 17.9 8.0
-------------------------------------------------------------------------------------------------------------------------------
Number of employees averaged over the year
(full-time employees excl. trainees) (thousands) -1.8% 251 256 242 205 198
-------------------------------------------------------------------------------------------------------------------------------
Revenue per employee (thousands of (euro)) 5.7% 222 210 199 201 183
-------------------------------------------------------------------------------------------------------------------------------
Earnings per share/ADS under German GAAP (euro)(e) n.a. 0.30 -5.86 -0.93 1.96 0.43
-------------------------------------------------------------------------------------------------------------------------------
Dividend per share/ADS (euro) -- 0.00(f) 0.00 0.37 0.62 0.62
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Items in accordance with U.S. GAAP
-------------------------------------------------------------------------------------------------------------------------------
Net income/loss n.a. 2.9 -22.0 0.5 9.3 1.5
-------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity -0.9% 45.0 45.4 73.7 46.1 37.6
-------------------------------------------------------------------------------------------------------------------------------
Earnings per share/ADS (euro)(e) n.a. 0.70 -5.30 0.14 3.06 0.53
-------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Financial data of the Group by division*
-----------------------------------------------------------------------------------------------------------------------------------
Group Headquarters &
T-Com T-Mobile T-Systems T-Online(g) Shared Services
----------- ------------ ----------- ----------- --------------------
(billions of (euro)) 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
Total revenue 29.2 30.6 22.8 19.7 10.6 10.5 1.9 1.6 4.2 4.4
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
Results from ordinary business activities 4.3 3.6 0.8 -23.8 -0.1 -2.0 0.1 -0.5 -4.1 -4.7
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
EBITDA(a, b, c) 10.2 10.1 7.0 5.0 1.4 0.8 0.3 0.1 -0.3 0.4
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
EBITDA (adjusted to exclude special
factors)(a, b, c) 10.4 10.3 6.7 5.0 1.4 1.2 0.3 0.1 -0.3 0.0
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
EBITDA margin
(adjusted to exclude special factors) (%)(a) 35.5 33.6 29.3 25.5 13.3 11.0 16.7 4.8 -7.4 0.7
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
Investments in intangible assets (excl. goodwill)
and property, plant, and equipment -2.1 -3.2 -3.0 -3.5 -0.7 -0.8 -0.1 -0.1 -0.4 -0.5
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
Number of employees averaged over the year
(full-time employees excl. trainees) (thousands) 139 153 42 39 42 43 3 3 25 18
----------------------------------------------------------------- ------------ ----------- ----------- --------------------
(a) Calculated on the basis of millions for the purpose of greater precision.
(b) Deutsche Telekom defines EBITDA as the results from ordinary business
activities excluding other taxes, net financial income/expense,
amortization and depreciation.
(c) EBITDA, EBITDA adjusted to exclude special factors, net debt and free cash
flow are pro forma figures that are not covered by the provisions of German
or U.S. GAAP. They should not be viewed in isolation as an alternative to
net income/loss, results from ordinary business activities, net cash
provided by operating activities, financial liabilities (in acc. with the
consolidated balance sheet), or other Deutsche Telekom figures reported
under German or U.S. GAAP. For detailed information and calculations please
refer to the chapter on "Reconciliation of pro forma figures" starting on
page 96.
(d) Based on shareholders' equity excluding amounts earmarked for dividend
payment, which are treated as short-term debt.
(e) Net income/loss based on the weighted average of outstanding shares. The
share/ADS ratio is 1:1.
(f) For more details please refer to the management report that is part of this
annual report.
(g) Figures are calculated in accordance with the provisions of German GAAP
specified in the German Commercial Code (HGB), as applied throughout the
Deutsche Telekom Group, and differ from those published in the reports of
T-Online International AG under IFRSs.
* For T-Com, T-Mobile, T-Systems, and T-Online, the figures for the previous
year were adjusted to the new allocation to segments.
III
Our mission statement:
Quality. Efficiency. Innovation.
As the leading services company in the telecommunications and information
technology industry, we network society for a better future. With top quality,
efficiency and innovation, to the benefit of our customers. In every respect.
We set ourselves the highest possible standards in everything we do, underlining
this with a clear promise: Deutsche Telekom's "T" brand stands for quality,
efficiency, and innovation.
The growth potential of broadband communications is the focal point of our
business development. We have concentrated our activities on the most important
future sectors of the information society: T-Com on the fixed network, T-Mobile
on mobile communications, T-Systems on information and telecommunications
technology and T-Online on the Internet.
IV
Divisions generating sustained growth.
T Deutsche
Telekom
Group Headquarters & Shared Services
T Com T Mobile T Systems T Online
----- -------- --------- --------
Strong brand drives Sustained growth in Successful new strategic Continued and profitable
success of broadband all markets. focus and marked efficiency implementation of mixed
campaign. gains. business model combining
Internet access, content,
value-added services and
e-commerce.
- Strongest revenue engine in - T-Mobile International - Strong market position with - Revenue up despite difficult
the Deutsche Telekom Group. established as a leading Deutsche Telekom named market climate, EBITDA and
mobile communications brand. accounts. operating results increase
once again.
- Dynamic increase in demand - Earnings-focused growth - 2003 financial year shaped - Strong growth in broadband
for broadband connections. in 2003. by new strategic direction: customer base.
Focus & Execution.
- Broadband strategy again - Mobile data services - Major contracts bear testimony - Innovative new entertainment
provides powerful vehicle to achieve a share of around to successful implementation services: music downloads
capture new areas of business. 16 percent in the European of the program, also laying the and video-on-demand; product
market in terms of revenue. foundation for future revenue portfolio expanded around
growth. content, services and e-com-
merce pillars.
- WLAN campaign successfully - "Best Global Mobile Operator - Marginal increase in revenue - Strategic acquisitions in
launched. 2003". despite challenging market content and portal marketing
conditions. fields.
- UMTS infrastructure expanded - Two-digit increase in earnings - 2004 will see further expan-
as planned. thanks to efficiency gains. sion of broadband offering
and launch of "T-Online
Vision on TV".
V
[MAP]
Deutsche Telekom worldwide.
VI
T
--------------------------------------------------------------------------------
Deutsche Telekom Group Headquarters
--------------------------------------------------------------------------------
1 Bonn
--------------------------------------------------------------------------------
Selected international subsidiaries and associated companies
--------------------------------------------------------------------------------
Europe Stake held by
Deutsche Telekom
--------------------------------------------------------------------------------
2 Austria - T-Mobile Austria 100%
- T-Online.at 100%
of shares held by
T-Online International
- T-Systems 100%
--------------------------------------------------------------------------------
3 Belgium - T-Systems 100%
--------------------------------------------------------------------------------
4 Croatia - Hrvatske 51%
telekomunikacije
- HTmobile 100% of shares
held by HT
--------------------------------------------------------------------------------
5 Czech Republic - T-Mobile Czech Republic 60.77%
- Pragonet 100%
- T-Systems 100%
--------------------------------------------------------------------------------
6 Denmark - T-Systems 100%
(with branch
in Sweden)
--------------------------------------------------------------------------------
7 France - T-Online France 100%
of shares held by
T-Online International
- T-Systems 100%
--------------------------------------------------------------------------------
8 Hungary - MATAV 59.49%
- Westel 100% of shares
held by MATAV
- T-Systems 100%
--------------------------------------------------------------------------------
9 Italy - T-Systems 100%
--------------------------------------------------------------------------------
10 Netherlands - T-Mobile Netherlands 100%
- T-Systems 100%
--------------------------------------------------------------------------------
11 Poland - PTC 49%
- T-Systems 100%
--------------------------------------------------------------------------------
12 Portugal - Terravista 100%
of shares held by
T-Online International
--------------------------------------------------------------------------------
13 Russia - MTS 25.15%
- T-Systems 100%
--------------------------------------------------------------------------------
14 Slovakia - Slovak Telecom 51%
- Eurotel Bratislava 51% of shares
held by ST
--------------------------------------------------------------------------------
15 Spain - Ya.com 100%
of shares held by
T-Online International
- T-Systems 100%
--------------------------------------------------------------------------------
16 Sweden - T-Systems Branch of
T-Systems Denmark
--------------------------------------------------------------------------------
17 Switzerland - T-Online.ch 100%
of shares held by
T-Online International
- T-Systems 100%
--------------------------------------------------------------------------------
18 Turkey - T-Systems 100%
--------------------------------------------------------------------------------
19 United Kingdom - T-Mobile UK 100%
- T-Systems 100%
--------------------------------------------------------------------------------
America
--------------------------------------------------------------------------------
20 USA - T-Mobile USA 100%
- T-Systems 100%
--------------------------------------------------------------------------------
21 Canada - T-Systems 100%
--------------------------------------------------------------------------------
South America
--------------------------------------------------------------------------------
22 Brazil - T-Systems 100%
--------------------------------------------------------------------------------
Asia
--------------------------------------------------------------------------------
23 Hong Kong - T-Systems 100%
24 Japan - T-Systems 100%
25 Philippines - T-Systems 100%
26 Singapore - T-Systems 99.99%
--------------------------------------------------------------------------------
Middle East
--------------------------------------------------------------------------------
27 Israel - Barak I.T.C 10.52%
- VocalTec 19.97%
--------------------------------------------------------------------------------
Africa
--------------------------------------------------------------------------------
28 South Africa - T-Systems 74.90%
--------------------------------------------------------------------------------
29 Australia - T-Systems 100%
--------------------------------------------------------------------------------
as of February 2004
VII
Key statistical data of the Deutsche Telekom Group.
-----------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Deutsche Telekom Group (millions)*
-----------------------------------------------------------------------------------------------------------
Telephone lines (incl. ISDN channels)(1, 3) 57.9 58.1 57.5 54.8 50.5
-----------------------------------------------------------------------------------------------------------
Mobile subscribers (majority shareholdings)(2) 66.2 58.6 48.9 31.2 15.8
-----------------------------------------------------------------------------------------------------------
T-Com (millions)*
-----------------------------------------------------------------------------------------------------------
Broadband lines (in operation) 4.1 2.9 1.4 0.1 --
-----------------------------------------------------------------------------------------------------------
T-DSL (Germany) 4.0 2.8 1.4 0.1 --
-----------------------------------------------------------------------------------------------------------
DSL (Eastern Europe) 0.11 0.04 -- -- --
-----------------------------------------------------------------------------------------------------------
Narrowband lines, incl. ISDN channels(1, 3) 55.5 56.1 56.9 54.5 50.5
-----------------------------------------------------------------------------------------------------------
Germany 48.7 49.3 50.2 49.1 47.8
-----------------------------------------------------------------------------------------------------------
Standard analog lines 27.2 28.6 30.1 31.9 34.2
-----------------------------------------------------------------------------------------------------------
ISDN channels 21.5 20.7 20.0 17.2 13.6
-----------------------------------------------------------------------------------------------------------
Eastern Europe 6.8 6.8 6.7 5.4 2.7
-----------------------------------------------------------------------------------------------------------
MATAV group(3) 3.5 3.6 3.4 2.9 2.7
-----------------------------------------------------------------------------------------------------------
Slovak Telecom (ST) 1.4 1.5 1.6 1.6 --
-----------------------------------------------------------------------------------------------------------
Hrvatske telekomunikacije (HT) 1.9 1.8 1.7 0.7 --
-----------------------------------------------------------------------------------------------------------
Subscribers to AktivPlus calling plan 11.6 10.7 8.4 4.3 0.8
-----------------------------------------------------------------------------------------------------------
Mobile subscribers 5.1 4.7 3.4 1.7 0.9
-----------------------------------------------------------------------------------------------------------
Westel 3.8 3.4 2.5 1.7 0.9
-----------------------------------------------------------------------------------------------------------
HT mobilne komunikacije(4) 1.3 1.2 0.9 -- --
-----------------------------------------------------------------------------------------------------------
T-Mobile (millions)*
-----------------------------------------------------------------------------------------------------------
Mobile subscribers of fully consolidated subsidiaries 61.1 53.9 45.5 29.5 14.9
-----------------------------------------------------------------------------------------------------------
T-Mobile Deutschland 26.3 24.6 23.1 19.1 9.2
-----------------------------------------------------------------------------------------------------------
T-Mobile UK(5) 13.6 12.4 10.4 8.3 4.2
-----------------------------------------------------------------------------------------------------------
T-Mobile USA(4) 13.1 9.9 7.0 -- --
-----------------------------------------------------------------------------------------------------------
T-Mobile Austria 2.0 2.0 2.1 2.1 1.5
-----------------------------------------------------------------------------------------------------------
T-Mobile CZ(4) 3.9 3.5 2.9 -- --
-----------------------------------------------------------------------------------------------------------
T-Mobile Netherlands(4) 2.0 1.4 -- -- --
-----------------------------------------------------------------------------------------------------------
T-Online (millions)*
-----------------------------------------------------------------------------------------------------------
Total number of subscribers 13.1 12.2 10.7 7.9 4.2
-----------------------------------------------------------------------------------------------------------
T-Online (Germany) 10.8 10.0 8.8 6.5 4.2
-----------------------------------------------------------------------------------------------------------
Rest of Europe 2.3 2.3 1.9 1.4 --
-----------------------------------------------------------------------------------------------------------
DSL subscribers (total) 3.6 2.8 1.4 -- --
-----------------------------------------------------------------------------------------------------------
Key figures for T-Systems
-----------------------------------------------------------------------------------------------------------
Systems Integration
-----------------------------------------------------------------------------------------------------------
Hours billed (millions)(6) 11.2 11.3 11.4 -- --
-----------------------------------------------------------------------------------------------------------
Utilization rate(%)(7) 67.0 65.2 67.1 -- --
-----------------------------------------------------------------------------------------------------------
Computing Services
-----------------------------------------------------------------------------------------------------------
Overall processor performance (MIPS)(8) 113,723 92,968 79,122 59,992 37,110
-----------------------------------------------------------------------------------------------------------
Number of servers managed and serviced 28,399 27,409 23,852 -- --
-----------------------------------------------------------------------------------------------------------
Mainframe utilization (%) 95.0 95.0 -- -- --
-----------------------------------------------------------------------------------------------------------
Desktop Services
-----------------------------------------------------------------------------------------------------------
Number of workstations managed and serviced 1,234,813 1,204,292 970,000 -- --
-----------------------------------------------------------------------------------------------------------
Proportion of support activities, Germany (%) 60.6 58.1 61.0 -- --
-----------------------------------------------------------------------------------------------------------
Proportion of retail, Germany (%) 39.4 41.9 39.0 -- --
-----------------------------------------------------------------------------------------------------------
Outside plant network in Germany
-----------------------------------------------------------------------------------------------------------
Copper cable (thousands of km) 1,473.9 1,460.8 1,481.1 1,449.8 1,450.2
-----------------------------------------------------------------------------------------------------------
Optical fiber cable (thousands of km) 195.0 176.2 172.9 167.7 162.5
-----------------------------------------------------------------------------------------------------------
(1) Telephone lines, including for internal use.
(2) Number of subscribers of T-Mobile's fully consolidated mobile
communications companies, plus HT mobile komunicacije and Westel.
(3) Subscriber-line figures are presented retrospectively from the 2001
financial year, including MATAV's subsidiary Maktel.
(4) These companies were fully consolidated in the following financial years:
HT-Hrvatske telekomunikacije, T-Mobile CZ, T-Mobile USA (including
Powertel, Inc.) in 2001; T-Mobile Netherlands in 2002.
(5) Including Virgin Mobile.
(6) Updated figure for the 2002 financial year.
(7) Ratio of average number of hours billed to maximum possible hours billed
per period.
(8) Million instructions per second.
* Figures rounded and expressed in millions. The total was calculated on the
basis of precise figures.
[GRAPHIC]
Deutsche Telekom. The 2003 financial year.
Spirit. Commitment. Success.
We know that in tomorrow's markets, the attitude of each individual determines
the success of the whole enterprise. We take this seriously and act accordingly,
pooling our strengths by focusing on shared values to guide our actions.
These values are shared across all divisions. For us at Deutsche Telekom, one
thing is clear: Only by working towards common goals can we fulfill our
ambitious promise to our shareholders, customers and partners - to deliver a
strong brand and an outstanding performance.
Deutsche Telekom is well positioned, which means our customers are right to have
high expectations of us. We intend to meet these expectations with commitment
and passion.
To our shareholders
Selected financial data of the Deutsche Telekom Group II
Our mission statement III
Divisions generating sustained growth IV
Letter to our shareholders 6
The Board of Management 10
Supervisory Board's report 12
The Supervisory Board 16
Corporate governance 17
Management report 2003
Combined management report of the Deutsche Telekom Group
and Deutsche Telekom AG for the 2003 financial year 24
The economic environment 28
Development of business in 2003 31
Purchasing 40
Research and development 42
Employees 44
Sustainability and environmental protection 48
Risk management 50
Key events after December 31, 2003 56
Outlook 57
The T-Share 62
The divisions
T-Com 68
T-Mobile 74
T-Systems 80
T-Online 86
Group Headquarters & Shared Services 92
Reconciliation of pro forma figures 96
Consolidated financial statements
Statement of income 108
Balance sheet 109
Noncurrent assets 110
Statement of cash flows 112
Statement of shareholders' equity 113
Segment reporting 114
Notes to the consolidated financial statements 115
Auditors' report 178
Summary of differences between German GAAP and U.S. GAAP 179
Further information
Supervisory board seats of the members of Deutsche Telekom AG's Board of
Management 184
Other supervisory board seats of the members of Deutsche Telekom AG's
Supervisory Board 185
Index 188
Glossary 189
Financial calendar 191
Contacts 192
Deutsche Telekom worldwide V/VI
Key statistical data of the Deutsche Telekom Group VII
[GRAPHIC]
Dedication.
Seek solutions. Facilitate solutions.
Focusing on goals with solutions and dedication.
[PHOTO]
[PHOTO]
To our shareholders
Letter to our shareholders 7
Dear shareholders,
We have achieved the turnaround! Deutsche Telekom - your company - can once
again look to the future with optimism. Despite the generally depressed
macroeconomic climate, we achieved our targets for 2003 - in some cases even
earlier than planned. Our double strategy of reducing debt on the one hand and
promoting profitable growth on the other has worked. This can be seen in the
following achievements:
o We have reduced our debt by even more than we had planned.
o We successfully completed our "6 plus 6" debt reduction program ahead of
schedule at the end of the third quarter.
o We have improved our margins in all divisions.
o As a result, the Group's EBITDA* has increased substantially
o We have returned to bottom-line profitability.
We not only reached our financial targets, we actually exceeded them! By cutting
net debt* to EUR 46.6 billion, we have surpassed our original target - at a
range between EUR 52.3 billion and EUR 49.5 billion. This means that we have
reduced debt by a total of EUR 17.7 billion since the strategic review in the
late fall of 2002. We also topped our original adjusted EBITDA* target of
between EUR 16.7 billion and EUR 17.7 billion, recording EUR 18.3 billion in
2003. Another strong driver was the free cash flow*, which at EUR 8.3 billion
exceeded the target by a clear margin of over EUR 2.0 billion. The target we had
set for net income was to be back in the black. As it turned out, we achieved
EUR 1.3 billion. Adjusted for special factors, net income amounted to EUR 0.2
billion.
After all we have accomplished, one of our priorities in 2004 will be to further
reduce liabilities. However, the spotlight is on profitable growth, which will
be our main goal for 2004 and beyond. We have gained new financial and strategic
scope We will be using our new financial flexibility to push profitable growth
within the Group.
A year of profitable growth. We have made some progress in this respect during
the year under review, as a look at revenue and EBITDA* trends reveals: 2003 was
more than just a year of consolidation. We increased our revenue by 4 percent or
EUR 2.1 billion - from EUR 53.7 billion in 2002 to EUR 55.8 billion in 2003. No
other integrated telecommunications group grew faster. We recorded this revenue
growth in a competitive environment that has become even tougher. Suffice it to
mention "call by call" and "preselection" in Germany's local networks. In spite
of this we are growing, and our EBITDA* shows that this growth is increasingly
profitable. Our adjusted EBITDA* improved by 12 percent, i.e., at a much faster
rate than revenue. This clearly demonstrates the effectiveness of the measures
we introduced to cut costs and increase efficiency. The positive trend is also
underscored by the development of EBITDA margins. At Group level, EBITDA* rose
from 30.4 to 32.8 percent. All divisions contributed to this and improved their
efficiency in line with a central objective: The companies in the Group worked
systematically to achieve this result on the basis of individual roadmaps.
We have restructured the Company. Our Group's positive economic development was
driven by the restructuring and reorganization that had been the focus of our
activities as early as 2002. We consistently continued activities in this area
in 2003, implementing far-reaching changes in some cases: Group Headquarters,
for instance, was relieved of all operational tasks and its organizational
structure was transformed into that of a strategic management holding company.
Responsibility for operational business was shifted to the divisions as far as
possible, which are now in a position to act faster, more flexibly and closer to
the market. The restructuring has made a valuable contribution to our
decentralization strategy, giving increased responsibility to the divisions to
improve management efficiency.
T-Spirit inspires the entire Group. We also focused our minds in 2003. Working
with the executives in all divisions, the Board of Management created T-Spirit -
our new framework of values for the entire Group. Our vision is anchored at the
heart of T-Spirit:
"As the leading services company in the telecommunications and information
technology industry, we network society for a better future. With top quality,
efficiency and innovation, to the benefit of our customers. In every respect."
* EBITDA, adjusted EBITDA, free cash flow and net debt are non-GAAP measures.
They should not be viewed in isolation as alternatives to net income/loss,
operating income, debt, or any other Deutsche Telekom financial measures
recorded in accordance with German or U.S. GAAP. Deutsche Telekom defines EBITDA
as the results from ordinary business activities excluding other taxes, net
financial income/expense, depreciation and amortization. For detailed
information and calculations, please refer to the chapter on "Reconciliation of
pro forma figures".
8
We have built our main goals and brand values around this vision. Our brand
values are quality, innovation and efficiency. These attributes will
differentiate us from the competition by positioning Deutsche Telekom as a
premium brand. We will make our "T" a seal of quality representing both the
services of the individual divisions and the value of the Group as a whole.
2003 was a highly satisfactory year for us. Strategically and operationally,
2003 was very successful for us - especially against the backdrop of the
difficult previous year. We have created new financial and strategic scope for
ourselves which we will be using to stabilize our Group's positive business
development in the long term.
Nevertheless, we also have to admit that not everything went fully according to
plan. The Toll Collect project caused us a lot of problems - there are no ifs
and buts about that. And so we welcome all the more the fact that we have found
a solution that is satisfactory for all sides. The consortium will make a
success of its satellite-based toll-collecting system. To this end, Deutsche
Telekom will become more involved in this project in the future - both
operationally and in terms of staff numbers.
Our focus is on profitable growth. Our clear-cut goal for 2004 is to push
profitable growth. As 2003 showed, we are already well on the way to achieving
this goal. However, we are now asking ourselves how we can secure this
profitable growth in the medium and long term. How will markets and technologies
change, and how will this affect our business? What do we have to do so that
Deutsche Telekom can continue its profitable growth course in a rapidly changing
environment?
From both the short-term and the long-term perspectives, the solution is an
integrated approach. Of course we will continue to make the most of our growth
potential in the individual divisions, just as we did in 2003. However, to
generate and secure further growth, we now have to leverage cross-divisional
potential to an even greater extent than before. Greater responsibility within
the divisions must be combined with Group-wide cooperation, because our strength
is in the fact that we are an integrated group and have an almost unique growth
portfolio at our disposal. We want to make the best of this, which is why in
Germany and Eastern Europe we are moving towards stronger integration. Our
"Agenda 2004" is the first major step in this direction.
Agenda 2004 set to fuel new growth. Our Agenda 2004 is a cross-divisional
business model which provides a solid and lasting foundation for the development
of the Deutsche Telekom Group. The objective of our Agenda 2004 is to provide
impetus for further - and profitable - growth.
As part of this agenda, we have defined six core initiatives which we will be
prioritizing during 2004:
1. Broadband
2. Business customers
3. Human resources
4. Innovation
5. Quality
6. Efficiency
Broadband is the buzz word for the future of our industry. It is also a key
source of growth for all divisions of the Deutsche Telekom Group. We intend to
dynamically expand the broadband market in Germany across all business areas and
segments. Broadband technology opens up exciting opportunities for generating
new revenues and increased earnings. We are determined to leverage this
potential for our benefit, by offering new, attractive solutions, by launching
in-house initiatives, by further expanding our infrastructure, and also by
teaming up with our competitors.
Our business customers initiative focuses on tightening cooperation between
T-Systems and T-Com to meet the needs of business customers more effectively. We
will bundle the strengths of T-Com and T-Systems in this high-growth segment:
T-Com will also become established in the growth market of IT business as a
strong, highly competent brand, positioning itself as a full-service provider
for small and medium-sized enterprises. Conversely, T-Systems will expand growth
areas in the field of network services and tap new opportunities for growth with
LAN/Wireless LAN.
Personnel costs also feature high on our list of priorities. We need to further
reduce this item of expenditure and we plan to do so through innovative
programs. We are well aware of our responsibility to our employees and to
society. This is why we are looking for alternative solutions, such as with our
outplacement agency, Vivento.
To our shareholders
Letter to our sharholders 9
Our innovation initiative is geared towards capturing future sources of revenue.
The objective is to combine our innovative efforts through close
cross-divisional cooperation and liaison with Group Headquarters. During the
year under review, we laid a new foundation for systematic innovation
management. Our innovation initiative for 2004 is built around technical windows
of opportunity which we defined through our innovation management program.
We aim to increase customer satisfaction by ensuring the highest standards of
quality. As part of this initiative, we will no longer measure our quality in
terms of internal processes. In the future, the spotlight will be on customer
benefit. Various projects are underway in all of the divisions to ensure
successful implementation.
In terms of efficiency we made considerable headway in 2003, as the figures
show. We will nevertheless work on further improvements and concentrate on seven
key areas:
o Optimization of working capital;
o Streamlining and enhancing the efficiency of noncurrent and current assets;
o Possible sale of non-strategic assets;
o Cost savings in purchasing;
o Standardization of the Group's IT infrastructure;
o Integration of network and IT platforms;
o Optimization of operating costs and capital expenditure.
Our medium-term focus is on leveraging added value in the integrated Group. Our
Agenda 2004 is the logical starting point for a truly customer-related,
integrated market approach in light of the expected changes in our market. We
have defined three core areas of growth for the Group: mobile communications,
broadband and business customers. We intend to concentrate our efforts on these
areas from an integrated Group perspective. In this context, we will gear
ourselves more and more to the relevant customer segments across all divisions.
These are the mass market of residential customers, the large market of business
customers, and the highly specialized market of key accounts and system
solutions customers.
In the future, the Group as a whole will focus more heavily on our customers
under the "T" brand, with integrated telecommunications companies operating from
the customer's perspective. We will expand internationally, particularly in the
area of mobile communications. In addition, we will use our growth opportunities
in IT services and in the portal business. Our goal is to become the leader in
our industry in terms of profitable growth.
Capitalizing on the new momentum. Spirit, commitment, success - this is the
title of our 2003 Annual Report. And these words also sum up the efforts we made
during the past year to improve ourselves and our Company. We were determined to
put our Company back on track and we certainly gave it our all. It was not easy,
but our efforts have paid off.
We have recovered from our slump and have created new impetus. We want our
shareholders to benefit from our new momentum as soon as possible. For this
reason, we are determined to pay a dividend for the current financial year in
2005 once again. I would like to thank you, as the owners of our Company, for
your confidence in us - particularly during recent difficult times.
I would also like to thank all of the employees in our Group. We asked a lot of
them during the past year, but it was worth it and we all can hold our heads
high.
We have taken great strides. 2003 was the year of the turnaround. We not only
achieved our financial targets for 2003, we even exceeded them in key areas. We
will now have to consolidate our positive business development further so that
Deutsche Telekom - your company - can grow profitably in the long term. We, the
management and employees of Deutsche Telekom, will do all we can to achieve this
goal.
Bonn, March 2004
/s/ Kai-Uwe Ricke
-----------------------------------
Kai-Uwe Ricke
Chairman of the Board of Management
10
From left to right:
[PHOTO] [PHOTO]
Kai-Uwe Ricke Rene Obermann
[PHOTO] [PHOTO]
Dr. Karl-Gerhard Eick Thomas Holtrop
[PHOTO] [PHOTO]
Dr. Heinz Klinkhammer Konrad F. Reiss
[PHOTO]
Josef Brauner
To our shareholders
The Board of Management 11
The Board of Management of Deutsche Telekom AG in 2003.
Kai-Uwe Ricke. Chairman of the Board of Management of Deutsche Telekom AG. Born
in 1961. Kai-Uwe Ricke was appointed Chairman of the Board of Management of
Deutsche Telekom AG effective from November 15, 2002. Following an
apprenticeship at a bank and studies at the Schloss Reichartshausen European
Business School, he started his career as assistant to the board of Bertelsmann
AG in Gutersloh. He then took up the position as head of sales and marketing of
the Bertelsmann subsidiary Scandinavian Music Club AG in Malmo, Sweden. Between
1990 and June 1995, Kai-Uwe Ricke was managing director of Talkline
Verwaltungsgesellschaft mbH and of Talkline PS Phone Service GmbH, both located
in Elmshorn. From July 1995 to December 1997, he was chairman and managing
director of Talkline GmbH. In January 1998, he took over as Chairman of the
Managing Board of DeTeMobil Deutsche Telekom Mobilnet GmbH. In February 2000, he
was appointed Chairman of the Board of Management of the newly founded T-Mobile
International AG. In May 2001, he was appointed to the Board of Management of
Deutsche Telekom. Before taking over as Chairman, he was responsible for
Deutsche Telekom's mobile communications and online busniess as Chief Operating
Officer (COO).
Dr. Karl-Gerhard Eick. Board member responsible for Finance and Controlling.
Deputy Chairman of the Board of Management. Born in 1954. He studied business
administration in Augsburg, where he earned his doctorate in 1982. Until 1988,
he worked in various positions at BMW AG in Munich, most recently as head of
controlling in the department of the chairman of the board of management. From
1989 to 1991, Dr. Eick was responsible for controlling at WMF AG in Geislingen,
and then took over the controlling, planning and IT unit at the Carl Zeiss group
in Oberkochen (until 1993). From 1993 to 1998, Dr. Eick was chief financial
officer at Gehe AG in Stuttgart, which is part of the Haniel group. In 1999, he
moved to the group's strategic management holding company, Franz Haniel & Cie
GmbH in Duisburg, and as member of the managing board assumed responsibility for
controlling, business administration and IT. Since January 2000, he has been
Member of the Deutsche Telekom Board of Management responsible for Finance and
Controlling.
Dr. Heinz Klinkhammer. Board member responsible for Human Resources. Born in
1946. He studied law and business administration, and received his legal
doctorate in 1977 at Freie Universitat Berlin. He began his career at the
Institute for German and European Labor, Social and Economic Law in Berlin, and
then moved on to be a labor court judge in Krefeld and Oberhausen. Between 1979
and 1990, Dr. Klinkhammer worked at the Ministry for Labor, Health and Social
Affairs of the regional state of North-Rhine/Westphalia in various management
functions, ultimately as the head of Central Matters. In 1991 he was appointed
labor director at the Krupp Mannesmann GmbH iron and steel works. From April
1992, he performed the same function as member of the board of management of
Mannesmannrohren-Werke AG. In February 1996, the Supervisory Board of Deutsche
Telekom AG appointed Dr. Klinkhammer Member of the Board of Management
responsible for Human Resources and Arbeitsdirektor (Director of Industrial
Relations). He is also in charge of Group Organization.
Josef Brauner. Board member responsible for T-Com. Born in 1950. He started his
sales career in the U.S. company Avery in 1971, following his commercial and
technical education in Munich. In 1975, he became the branch manager for
Germany, Austria and Switzerland. In 1980, Josef Brauner as sales manager joined
Sony Deutschland GmbH in Munich where, in 1982, he was appointed branch
manager. After joining Arnold & Richter Cinetechnik (Arri) in Munich, he
returned to Sony in 1986 where he was appointed member of the managing board in
1988 and chairman of the managing board in 1993. In June 1997, he was appointed
Head of Sales and Distribution at Deutsche Telekom. He has been a Member of the
Deutsche Telekom Board of Management since 1998. Initially he was responsible
for the Sales and Customer Care board department. From May 1, 2001 to January
31, 2003, Josef Brauner was in charge of the board department for T-Com and
T-Systems (acting responsibility). Since February 1, 2003, he has been Member of
the Deutsche Telekom Board of Management responsible for T-Com and CEO of T-Com.
Rene Obermann. Board member responsible for T-Mobile. Born in 1963. After
training to become an industrial business administrator at BMW AG in Munich,
Rene Obermann established the trading company ABC Telekom based in Munster in
1986. He was managing partner of the successor company Hutchison Mobilfunk GmbH
from 1991 and chairman of the managing board from 1994 to 1998. He was also
chairman of the former German Association of Mobile Communication Service
Providers (VAM) in 1995 and 1996. From April 1998 to March 2000, Rene Obermann
was Managing Director of T-Mobile Deutschland responsible for Sales, and then
assumed the position of Chairman of the Managing Board (until March 2002). From
June 2001 to December 2002, he was Member of the Board of Management of T-Mobile
International AG responsible for European Operations and Group Synergies. Rene
Obermann has been Member of the Deutsche Telekom Board of Management responsible
for T-Mobile since November 2002 and was also appointed Chairman of the Board of
Management of T-Mobile International AG in December 2002.
Thomas Holtrop. Board member responsible for T-Online. Born in 1954. After
studying psychology, in 1981 he embarked on a career with Club Mediterranee
Deutschland. After various positions in the tourism and advertising world, he
moved to American Express in 1989, where he advanced to become Vice President
International Business Partners. As of 1996, Thomas Holtrop helped set up BANK
24 AG as General Representative, and as of 1997 was member of the board of
management of Deutsche Bank 24 AG. Thomas Holtrop has been Chairman of the Board
of Management of T-Online International AG since January 1, 2001. He was also
appointed to the Board of Management of Deutsche Telekom AG on December 1, 2002.
Konrad F. Reiss. Board member responsible for T-Systems. Born in 1957. Following
studies in business administration in Berlin and Erlangen-Nuremberg and initial
career steps, he became founding managing director of two consultancy firms in
1986. After selling these companies to Cap Gemini, Konrad F. Reiss held various
management positions within the Cap Gemini group: From 1993 he was global head
of LMR Discipline (Leadership, Mobilization & Renewal), from 1994 European head
of the DI/ DS Market Team (Diversified Industries/Diversified Services), from
1995 head of the Central Region and member of the Global Executive Board of the
Gemini Consulting group. He was also Managing Director of Cap Gemini Deutschland
from 1998. In 2000 he moved to join the board of management of DaimlerChrysler
Services AG where he was responsible for debis IT Services (CEO debis
Systemhaus). In 2001 he established BlueChip Business Laboratories. In January
2003, he was appointed Member of the Board of Management of Deutsche Telekom AG
and Chairman of the T-Systems Board of Management.
12
[PHOTO]
To our shareholders
Supervisory Board's report 13
Supervisory Board's report to the
2004 shareholders' meeting.
Despite the difficult economic environment, the 2003 financial year saw key
successes for Deutsche Telekom AG in reducing debt and striving to generate net
income once again in the interests of the shareholders after having recorded a
loss in 2002. The Board of Management pursued this aim in 2003 with great
success, receiving intensive support from the Supervisory Board in its legal
capacity as advisor and supervisor.
Supervisory Board activities in the 2003 financial year. As a legal requirement,
the Board of Management regularly informed the Supervisory Board in written and
oral form about management planning, business developments, and individual
transactions of major importance to the Company and its principal subsidiaries
and associated companies. Decisions of strategic importance were submitted to
the Supervisory Board for approval. In particular, business development was
discussed regularly in the Supervisory Board meetings. In addition to the Board
of Management reports, the Chairman of the Supervisory Board was informed by the
Board of Management, and especially its Chairman, about results of business
activities and significant events as part of their continuous dialog.
In addition to regular reports, the following issues were discussed in greater
detail by the Supervisory Board:
o Measures of the Group to increase efficiency, reduce debt, and improve
results (the so-called Triple-E program);
o Results of the impairment tests according to FAS 141, 142 that must be
carried out in regular intervals under the American accounting standards
U.S. GAAP, and review of the accounting method used for intangible assets
in accordance with German GAAP;
o Development of the regulatory and competitive environment;
o The status of major projects, above all the Toll Collect project, in the
Deutsche Telekom Group;
o Development of staff requirements and workforce levels in the Deutsche
Telekom Group;
o Continued amendment of the Company's statutes to comply with the principles
of good corporate governance, giving particular consideration to
international standards in connection with Deutsche Telekom's listing on
the New York Stock Exchange;
o Changes in the shareholdings portfolio of the Deutsche Telekom Group.
Organization of the Supervisory Board's activities. To increase the efficiency
of its work, and taking into consideration the specific requirements made of the
Supervisory Board of Deutsche Telekom AG, the Supervisory Board established the
following committees (which all have equal representation of shareholders' and
employees' interests):
The General Committee is responsible for the preparation of the meetings and
major decisions of the Supervisory Board as well as for all matters relating to
the individual members of the Board of Management. Its members are Dr. Manfred
Overhaus, Franz Treml, Wilhelm Wegner, and Dr. Klaus Zumwinkel (committee
chairman).
The Finance Committee deals with complex corporate activities in the areas of
finance and business management, which are assigned to it by the Chairman of the
Supervisory Board or the Supervisory Board as a whole for review and advice. The
members of the Finance Committee are Dr. Manfred Overhaus, Dr. Klaus G. Schlede
(committee chairman), Wolfgang Schmitt, Franz Treml, Bernhard Walter, and
Wilhelm Wegner.
The Audit Committee deals with issues relating to accounting and risk
management, the requisite independence of auditors, the awarding of the audit
contract, the stipulation of the main focuses of the audit and the agreement on
fees as well as, within the scope of mandatory German law, with all tasks
assigned to the Audit Committee under existing U.S. law for listed companies
headquartered outside the United States of America. The members of the Audit
Committee are Dr. Manfred Overhaus, Dr. Klaus G. Schlede (committee chairman)
Wolfgang Schmitt, Franz Treml, Bernhard Walter and Wilhelm Wegner.
14
Until October 2003, the duties of the Finance Committee and the Audit Committee
were dealt with together in one committee. The tasks of the Finance Committee
were separated from those of the Audit Committee due to a special requirement
under U.S. law applying to the audit committees of companies listed in the
United States.
The Staff Committee deals with personnel matters of Deutsche Telekom AG, in
particular the Company's staff structure and human resources development and
planning. The members of the committee are Dr. Dieter Hundt, Franz Treml
(committee chairman), Wilhelm Wegner and Dr. Klaus Zumwinkel.
The Mediation Committee required pursuant to Section 27 (3) of the German
Codetermination Act performs the duties incumbent on it under the law. Its
members are Dr. Dieter Hundt, Franz Treml, Wilhelm Wegner and Dr. Klaus
Zumwinkel (committee chairman).
The chairman of each committee regularly informed the Supervisory Board of the
content and results of committee meetings.
Meetings of the Supervisory Board. In the 2003 financial year, the Supervisory
Board held five regular and six extraordinary meetings. The General Committee of
the Supervisory Board met nine times during the year under review, thus
supporting the Supervisory Board's activities. The Supervisory Board's Staff
Committee met twice. The Finance and Audit Committee held four meetings in 2003
financial year, the Audit Committee two and the Finance Committee one. The
Mediation Committee did not meet during the 2003 financial year. There were no
conflicts of interest in 2003 and no events with regard to the frequency of the
Board members' participation in Supervisory Board meetings that are subject to
reporting.
Conflicts of interest. The Supervisory Board is not aware of any conflicts of
interest of a Supervisory Board member in the 2003 financial year.
Corporate governance. The Supervisory Board and Board of Management are aware
that good corporate governance in the interests of the Company's shareholders
and capital markets is an essential precondition for corporate success. The
German Corporate Governance Code and a number of relevant provisions under U.S.
law have therefore been integrated in the Company's statutes. In December 2003,
the Board of Management and Supervisory Board issued the required Declaration of
Conformity with the Corporate Governance Code as amended. In addition, the
Company's corporate governance policy is also being presented in a separate
chapter of this Annual Report.
In line with the German Corporate Governance Code, the Supervisory Board carried
out an efficiency audit in the 2003 financial year to review its activities.
Changes in the composition of the Board of Management. As already disclosed in
the Supervisory Board's report to the 2003 shareholders' meeting, on January 16,
2003 Konrad F. Reiss was appointed member of the Company's Board of Management
with effect from January 20, 2003. Mr. Reiss is responsible for the T-Systems
subgroup and is Chairman of the T-Systems International GmbH Board of
Management. This appointment concluded the reorganization of the Board of
Management launched in 2002, aligning it to the divisional structure of the
Company.
Changes in the composition of the Supervisory Board. Shareholders'
representatives: As stated in last year's Supervisory Board report, Dr. Andre
Leysen retired from the Supervisory Board on February 28, 2003 for reasons of
age. He was replaced by Dr. Klaus Zumwinkel who was appointed to the Supervisory
Board by order of court in accordance with Section 104 (1) of the German Stock
Corporation Act (AktG) on March 7, 2003. On March 14, 2003, Dr. Winkhaus
resigned as Chairman of the Supervisory Board. On the same day, Dr. Klaus
Zumwinkel was elected as the new Chairman of the Supervisory Board.
Upon the closing of the shareholders' meeting on May 20, 2003, the long-standing
members of the Supervisory Board, Gert Becker, Prof. Helmut Sihler and Dr.
Hans-Dietrich Winkhaus resigned from the Supervisory Board. The 2003
shareholders' meeting newly elected Dr. Klaus G. Schlede, Dr. Hans-Jurgen
Schinzler and Dr. Wendelin Wiedeking to the Supervisory Board with effect from
May 20, 2003. In addition, Dr. Manfred Overhaus and Dr. Klaus Zumwinkel, who had
previously been appointed to the Supervisory Board by order of court, were
elected by the shareholders' meeting as members of the Supervisory Board.
To our shareholders
Supervisory Board's report 15
Employees' representatives: Rudiger Schulze resigned from office as Deputy
Chairman of the Supervisory Board with effect from July 1, 2003. He was replaced
by Franz Treml, who was appointed to the Supervisory Board on July 8, 2003 by
order of court. On August 21, 2003 the Supervisory Board elected Mr. Treml as
Deputy Chairman of the Supervisory Board.
The Supervisory Board would like to thank the former members of the board for
the effort they committed to the good of the Company over many years.
Review of annual financial statements of the parent company and consolidated
financial statements for the 2003 financial year. The annual financial
statements, the consolidated financial statements, the management report of
Deutsche Telekom AG and the Deutsche Telekom Group, and the Board of
Management's proposal for appropriation of net income, which were all prepared
and duly submitted by the Board of Management, together with the appropriate
auditors' reports were presented to all members of the Supervisory Board. The
Supervisory Board reviewed the documents submitted to it.
The audit firms, PwC Deutsche Revision Aktiengesellschaft
Wirtschaftsprufungsgesellschaft (Frankfurt/Main) and Ernst & Young Deutsche
Allgemeine Treuhand AG Wirtschaftsprufungsgesellschaft (Stuttgart), audited the
annual financial statements of Deutsche Telekom AG, the consolidated financial
statements and the combined management report of the parent company and the
Group as of December 31, 2003, together with the bookkeeping systems, in
accordance with statutory provisions, and issued unqualified audit opinions. In
addition, the auditors reported personally on the above issues, as well as the
U.S. financial statements prepared in accordance with 20-F, during the
Supervisory Board meeting held on March 25, 2004 and the preparatory meeting of
the Audit Committee on March 22, 2004.
During its March meeting the Supervisory Board was also informed about the
results of the audit and raised no objections. In compliance with Section 171 of
the German Stock Corporation Act, the Supervisory Board examined the annual
financial statements of the parent company and the consolidated financial
statements of the Deutsche Telekom Group, the management report of Deutsche
Telekom AG and the Deutsche Telekom Group, the proposal on appropriation of net
income, and the risk report, and approved the annual financial statements of the
parent company and the consolidated financial statements. The annual financial
statements are thereby approved.
PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprufungsgesellschaft and
Ernst & Young Deutsche Allgemeine Treuhand AG Wirtschaftsprufungsgesellschaft
also audited the report disclosing relations with affiliated companies
("Dependent Company Report") that was prepared by the Board of Management in
compliance with Section 312 of the German Stock Corporation Act. The auditors
reported on the results of their audit and issued the following audit
certificate:
"Based on the results of our statutory audit and our judgment we confirm that:
1. the actual information included in the report is correct;
2. the Company's compensation with respect to the transactions listed in the
report was not inappropriately high."
The Supervisory Board examined the Board of Management's report disclosing
relations with affiliated companies. It did not raise any objections to the
Board of Management's final statement contained in the report or to the results
of the audits conducted by PwC Deutsche Revision Aktiengesellschaft
Wirtschaftsprufungsgesellschaft and Ernst & Young Deutsche Allgemeine Treuhand
AG Wirtschaftsprufungsgesellschaft.
The Supervisory Board would like to thank the members of the Board of Management
and all the men and women who work for Deutsche Telekom for their dedicated
commitment in the 2003 financial year.
Bonn, March 25, 2004
The Supervisory Board
/s/ Dr. Klaus Zumwinkel
--------------------------------------
Dr. Klaus Zumwinkel
Chairman
16
Members of the Supervisory Board of Deutsche Telekom AG 2003.
Dr. Klaus Zumwinkel. Member of the Supervisory Board since March 7, 2003.
Chairman of the Supervisory Board since March 14, 2003. Chairman of the Board of
Management of Deutsche Post AG, Bonn
Franz Treml. Member of the Supervisory Board since July 8, 2003. Deputy Chairman
of the Supervisory Board since August 21, 2003. Deputy Chairman of ver.di trade
union, Berlin
Gert Becker. Member of the Supervisory Board from January 1, 1995 to May 20,
2003. Former Chairman of the Board of Management of Degussa AG, Dusseldorf
Monika Brandl. Member of the Supervisory Board since November 6, 2002. Member of
the Central Works Council at Deutsche Telekom AG, Bonn
Josef Falbisoner. Member of the Supervisory Board since October 2, 1997. Head of
ver.di District of Bavaria
Dr. Hubertus von Grunberg. Member of the Supervisory Board since May 25, 2000.
Member of the Supervisory Board at Continental Aktiengesellschaft, Hanover, et
al
Lothar Holzwarth. Member of the Supervisory Board since November 6, 2002.
Chairman of the Works Council at Deutsche Telekom AG, Business Customer Branch
Office, Southwestern District, Stuttgart
Dr. sc. techn. Dieter Hundt. Member of the Supervisory Board since January 1,
1995. Managing Shareholder of Allgaier Werke GmbH, Uhingen, and President of the
Confederation of German Employers' Associations (BDA), Berlin
Dr. h. c. Andre Leysen. Member of the Supervisory Board from January 1, 1995 to
February 28, 2003. Honorary Chairman of the Board of Directors of Gevaert NV,
Mortsel/Antwerp
Waltraud Litzenberger. Member of the Supervisory Board since June 1, 1999.
Member of the Works Council at Deutsche Telekom AG, Technical Customer Service
Branch Office, Central District, Mainz
Michael Loffler. Member of the Supervisory Board since January 1, 1995. Member
of the Works Council at Deutsche Telekom AG, Networks Branch Office, Dresden
Dr. Manfred Overhaus. Member of the Supervisory Board since November 28, 2002.
State Secretary, Federal Ministry of Finance, Berlin
Hans W. Reich. Member of the Supervisory Board since May 27, 1999. Chairman of
the Board of Managing Directors, KfW Bankengruppe, Frankfurt/Main
Dr. jur. Hans-Jurgen Schinzler. Member of the Supervisory Board since May 20,
2003. Member of the Supervisory Board of Munchener
Ruckversicherungs-Gesellschaft AG, Munich (Chairman of the Board of Management
of Munchener Ruckversicherungs-Gesellschaft AG until December 31, 2003)
Dr. Klaus G. Schlede. Member of the Supervisory Board since May 20, 2003. Member
of the Supervisory Board of Deutsche Lufthansa AG, Cologne
Wolfgang Schmitt. Member of the Supervisory Board since October 2, 1997.
Executive Vice President, Deutsche Telekom AG, Business Customer Branch Office,
Southwestern District, Stuttgart
Rudiger Schulze. Member and Deputy Chairman of the Supervisory Board between
March 29, 1999 and June 30, 2003. Former Head of Department 9 at ver.di trade
union, Berlin
Prof. Dr. Helmut Sihler. Member of the Supervisory Board from July 1, 1996 to
May 20, 2003. Chairman of the Supervisory Board from July 1, 1996 to May 25,
2000. Vice Chairman of the Board of Directors of Novartis AG, Basle
Michael Sommer. Member of the Supervisory Board since April 15, 2000. Chairman
of the German Trade Union Federation (DGB), Berlin
Ursula Steinke. Member of the Supervisory Board since January 1, 1995.
Chairwoman of the Works Council at T-Systems CDS GmbH, Northern District Branch
Office, Kiel
Prof. Dr. h. c. Dieter Stolte. Member of the Supervisory Board since January 1,
1995. Publisher of the "Welt" and "Berliner Morgenpost" newspapers, Berlin
Bernhard Walter. Member of the Supervisory Board since May 27, 1999. Dresdner
Bank AG, Frankfurt/Main
Wilhelm Wegner. Member of the Supervisory Board since July 1, 1996. Chairman of
the Central Works Council at Deutsche Telekom AG, Bonn
Dr. Wendelin Wiedeking. Member of the Supervisory Board since May 20, 2003.
Chairman of the Board of Management of Dr. Ing. h.c.F. Porsche AG, Stuttgart
Dr. Hans-Dietrich Winkhaus. Member of the Supervisory Board from May 27, 1999 to
May 20, 2003. Chairman of the Supervisory Board from May 25, 2000 to March 14,
2003. Member of the Shareholders' Committee of Henkel KGaA, Dusseldorf
To our shareholders
Members of the Supervisory Board/Corporate governance 17
Corporate governance.
Sound, systematic corporate governance is particularly important for an
international group such as Deutsche Telekom with its numerous subsidiaries and
associated companies. Therefore, the Company complies not only with German
national regulations (such as the Corporate Governance Code), but also with
international standards as applicable to companies listed on international stock
exchanges such as the New York Stock Exchange. The regulations of the United
States, including the Sarbanes Oxley Act which also applies to Deutsche Telekom,
are of particular relevance in this context. The Supervisory Board and the Board
of Management are convinced that sound corporate governance, taking company and
industry-specific issues into account, is an important building block for the
future success of Deutsche Telekom. Accordingly, responsibility for compliance
with the principles of sound corporate governance is vested in senior
management.
In accordance with item 3.10 of the German Corporate Governance Code, Deutsche
Telekom reports on its corporate governance activities as follows:
In the 2003 financial year, the Board of Management and Supervisory Board once
again carefully examined the corporate governance of Deutsche Telekom AG and the
Group as well as the content of the Corporate Governance Code and its amendment,
and decided to comply in future with all but one of the recommendations of the
Code as amended.
The Supervisory Board and Board of Management of Deutsche Telekom AG therefore
released the following Declaration of Conformity with the German Corporate
Governance Code on December 16, 2003:
Declaration of Conformity pursuant to Section 161 of the German Stock
Corporation Act
I. "The Supervisory Board and Board of Management of Deutsche Telekom AG
hereby declare that, in the period since submission of last year's
declaration of confirmity pursuant to Section 161 of the German Stock
Corporation Act on December 19, 2002, Deutsche Telekom AG has complied with
the recommendations of the Government Commission for a German Corporate
Governance Code announced by the Federal Ministry of Justice on November
26, 2002 in the official section of the electronic Federal Gazette
(Bundesanzeiger), with the following exceptions:
Members of the Supervisory Board have not received performance-related
compensation. Membership in committees was acknowledged by granting an
attendance fee; committee chairpersons did not receive separate
compensation (item 5.4.5 of the Code).
The consolidated financial statements were not made publicly accessible
within 90 days of the end of the financial year, and the interim reports
were not made publicly accessible within 45 days of the end of the period
under review (item 7.1.2 of the Code).
II. The Supervisory Board and Board of Management of Deutsche Telekom AG hereby
declare further that Deutsche Telekom AG has complied with the
recommendations of the Government Commission for a German Corporate
Governance Code announced by the Federal Ministry of Justice on July 4,
2003 in the official section of the electronic Federal Gazette
(Bundesanzeiger), with the following exceptions:
Members of the Supervisory Board do not receive performance-related
compensation. Membership in committees is acknowledged by granting an
attendance fee; committee chairpersons do not receive separate compensation
(item 5.4.5 of the Code). The Board of Management and the Supervisory Board
intend, however, to propose to the next shareholders' meeting on May 18,
2004 that the remuneration of the Supervisory Board as prescribed in the
Articles of Incorporation be amended to comply with the Code."
18
This Declaration of Conformity can be found on the Deutsche Telekom website
(www.telekom.de) via the following path: English/Investor Relations/Corporate
governance/Declaration of Conformity. Beyond the scope of the recommendations of
the Code, Deutsche Telekom also follows suggestions as outlined in the Code,
with a few exceptions. To date, the Company has not complied with the suggestion
that members of the Supervisory Board should receive variable compensation
linked to the long-term performance of the Company. The Board of Management and
the Supervisory Board intend, however, to propose to the next shareholders'
meeting on May 18, 2004 that the remuneration of the Supervisory Board as
prescribed in the Articles of Incorporation be amended to comply also with the
suggestion of the Code. In its 2002 Annual Report, the Company also did not
conform with the suggestion for individualized disclosure of the Board of
Management members' compensation. The Company has decided to disclose this
information individually from this Report onwards. There has been no reason to
date for the Board of Management and the Supervisory Board to consider the
suggestions that the appointment period of five years for first-time
appointments for members of the Board of Management should not be the rule (item
5.1.2 of the Code) and that an extraordinary shareholders' meeting should be
called, if appropriate, if the Company should receive a take-over bid.
Deutsche Telekom AG and its shareholders. Deutsche Telekom AG has over three
million shareholders worldwide. Due to the wide distribution of shares, the
Company makes every effort to keep its shareholders up to date on company
developments. To enable a continuous flow of information, the Company created
the T-Share forum (Forum T-Aktie) which gives shareholders news on current
developments and events on a regular basis. Furthermore, the Deutsche Telekom AG
website (www.telekom.de) contains extensive information for retail and
institutional investors. The company newsletter, which appears at regular
intervals, is another source of useful information for shareholders. This
newsletter can be ordered online at the site indicated above.
Non-classified company information is published on the Deutsche Telekom website
in German and English.
Deutsche Telekom AG shareholders exercise their voting rights at the
shareholders' meeting either by casting votes themselves or by having their
votes cast by a proxy of their choice or by an official proxy voter from the
Company. Deutsche Telekom AG was one of the first German companies to offer its
shareholders the option of participating in the shareholders' meeting and
casting votes over the Internet. The Company provides proxy voters who are
empowered to receive changes to the shareholders' vote via e-mail even during
the shareholders' meeting.
Cooperation between the Supervisory Board and the Board of Management. The Board
of Management and the Supervisory Board are in regular contact. The Supervisory
Board of Deutsche Telekom AG meets five times a year, thus exceeding the minimum
statutory requirement. The Board of Management keeps the Supervisory Board fully
informed of all relevant business developments, plans, and potential risk as
well as of any deviations from original business plans. The Board of Management
regularly submits written reports. The reporting obligations of the Board of
Management have been specified by the Supervisory Board beyond statutory
requirements. The work of the Board of Management and the Supervisory Board is
specified in Rules of Procedure.
The areas of responsibility assigned to individual Board of Management members
reflect the Company's divisional structure and consist of seven Board of
Management departments. Centralized management responsibilities are assigned to
the Chairman of the Board of Management, the Board member responsible for
Finance and Controlling, and the Board member responsible for Human Resources.
In addition, one member of the Board of Management is responsible for each of
the divisions T-Com, T-Mobile International AG, T-Online International AG, and
T-Systems International GmbH. The member of the Board of Management responsible
for the T-Com division is also Chairman of the T-Com Board of Management. The
members of the Board of Management responsible for the remaining divisions are
also chairmen of the respective management bodies of the T-Mobile, T-Online, and
T-Systems divisions. As a rule, members of the Board of Management should not be
older than 62 years of age.
To our shareholders
Corporate governance 19
Avoiding conflicts of interest. Board of Management members and Supervisory
Board members are obliged to immediately disclose any conflicts of interest to
the Supervisory Board. There were no such instances of conflict in 2003. Any
functions assumed by members of the Board of Management that are not covered by
the Board of Management mandate are subject to the approval of the General
Committee of the Supervisory Board. In addition to the regulation laid out in
Section 15a of the German Securities Trading Act, the Company has issued
Guidelines on Insider Trading which regulate trading of Deutsche Telekom Group
securities by Board members, executive officers and employees, and ensure the
necessary degree of transparency. Deutsche Telekom AG publishes details of any
transactions subject to reporting obligations on the Internet at www.telekom.de
under: English/Investor Relations/Corporate governance/Directors' dealings.
Compensation of the Board of Management and the Supervisory Board. Under the
terms of their service contracts, the members of the Group Board of Management
are entitled to fixed and variable, performance-related compensation components.
The compensation of the members of the Board of Management is in line with
market levels.
Performance-related compensation is determined on the basis of the targets
agreed between the Supervisory Board General Committee and the members of the
Board of Management, and the level of target achievement as determined by the
General Committee at the end of the financial year. In addition, the General
Committee of the Supervisory Board may decide that the Board of Management
should be granted variable compensation components linked to the long-term
performance of the Company, so-called long-term incentives. To date, these
long-term incentives have been in the form of stock options from the 2001 Stock
Option Plan. No options were granted to the Board of Management from this stock
option plan in the 2003 financial year. The compensation of the members of the
Board of Management for the 2003 financial year is reported individually in the
notes to the financial statements in the Annual Report, in accordance with the
recommendations of the German Corporate Governance Code.
Remuneration accruing to Supervisory Board members was last determined by virtue
of a resolution passed at the 2000 shareholders' meeting and is described in
Section 13 of the Articles of Incorporation. The members of the Supervisory
Board receive EUR 25,000 per year. The Chairperson of the Supervisory Board
receives double, and the Deputy Chairperson one and a half times that amount.
Members of the Supervisory Board who were not in office for the entire financial
year shall receive one twelfth of the remuneration for each month or part
thereof that they hold a seat. Members of the Supervisory Board receive an
attendance fee amounting to EUR 200 for each meeting of the Supervisory Board or
its committees that they have attended. The Company reimburses value-added tax
payable on remuneration and expenses. The compensation of the members of the
Supervisory Board for the 2003 financial year is reported individually in the
notes to the financial statements in the Annual Report, in accordance with the
recommendations of the German Corporate Governance Code.
The compensation of the Supervisory Board for the 2003 financial year does not
include any variable components linked to the long-term performance of the
Company. In order to improve future conformity with the recommendations of the
Government Commission for a German Corporate Governance Code announced by the
Federal Ministry of Justice in the official section of the electronic Federal
Gazette (Bundesanzeiger) with regard to the compensation of the members of the
Supervisory Board, the Board of Management and the Supervisory Board intend to
propose to the next shareholders' meeting on May 18, 2004 that the compensation
of the Supervisory Board as prescribed in the Articles of Incorporation be
amended to comply with the Code.
Composition of the Supervisory Board. The Supervisory Board of Deutsche Telekom
AG consists of twenty members, specifically ten representatives of the
shareholders and ten of the employees. The Supervisory Board members
representing the shareholders are elected by simple majority at the
shareholders' meeting. The Board members representing employees are elected by
the employees according to the provisions of the German Codetermination Act. The
terms of office of the individual members of the Supervisory Board end on
different dates. This makes it possible to adjust the composition of the
Supervisory Board of Deutsche Telekom AG to respond rapidly to changes in
requirements.
20
Tasks assigned to the Supervisory Board. The Supervisory Board advises the Board
of Management in issues concerning the governing of the Company and supervises
its activities. The Supervisory Board is directly involved in all decisions of
strategic importance to the Company. The work of the Supervisory Board is
specified in Rules of Procedure. To clarify the submission requirements on the
part of the Board of Management, the Supervisory Board has defined a catalogue
of transactions subject to approval. This catalogue forms an integral part of
the Rules of Procedure for the Supervisory Board and the Board of Management,
respectively.
In order to perform its tasks more effectively, the Supervisory Board has formed
various committees: the Mediation Committee as required under Section 27 (3) of
the German Codetermination Act, the General Committee to prepare Supervisory
Board meetings and deal with personnel matters at Board of Management level for
final decision by the general assembly of the Supervisory Board, the Staff
Committee to advise the Board of Management on personnel questions not connected
with the Board of Management, the Finance Committee to deal with complex
financial issues and with budgets, and an Audit Committee that performs the
tasks of an audit committee in accordance with the German Corporate Governance
Code as well as, within the scope of mandatory German law, the tasks of an audit
committee under U.S. law, and deals with annual financial statements before they
are discussed by the full Supervisory Board. Until October 2003, the duties of
the Finance Committee and the Audit Committee were dealt with together in one
committee.
The Supervisory Board has set an age limit. In future, no person shall be
proposed at the shareholders' meeting for election to the Supervisory Board if,
during the term of office for which he or she would have been elected, that
person would have reached his/her 72nd birthday.
To the extent permitted by law, the Supervisory Board makes use of modern
communication media to expedite its work and accelerate the decision-making
process in the interests of the Company.
The Chairperson of the Supervisory Board coordinates the work of the Supervisory
Board and presides over its meetings. Over and above his/her organizational
duties in the Supervisory Board, the Chairperson of the Supervisory Board
maintains regular contact with the Chairperson of the Board of Management and
with the Board of Management as a whole, in order to stay informed about the
Company's strategy, business developments, and risk management policy and to
discuss these with the Board of Management. In this context, the Chairperson of
the Board of Management advises the Chairperson of the Supervisory Board of all
events that are significant to the situation, development, and governance of the
Company.
Risk management. Appropriate management of risks arising in connection with the
Company's business activities is of vital importance to the Board of Management
and the Supervisory Board. Both the Board of Management and the Supervisory
Board receive regular reports from the Risk Management department of the Company
concerning current risks and their development. The risk management system in
place at Deutsche Telekom AG is evaluated by the external auditors and is
constantly being expanded and improved. Details on the topic of risk management
can be found in the appropriate chapter of this Annual Report.
Accounting and audit of financial statements. An agreement has been reached with
the company auditors that the Chairperson of the Supervisory Board/Audit
Committee shall be advised immediately of any issues uncovered during the audit
that might give rise to statements of exclusion or reservation in the auditors'
report, unless these issues can be resolved forthwith. Moreover it has been
agreed that the auditors shall immediately report any findings and issues which
emerge during the audit and which have a direct bearing upon the tasks of the
Supervisory Board. In addition, the auditing firms undertake to inform the
Supervisory Board or make a note in their report of any facts discovered during
the audit which might indicate a discrepancy in the Declaration of Conformity
with the German Corporate Governance Code submitted by the Board of Management
and Supervisory Board.
Management report 2003
Combined management report of the Deutsche Telekom Group
and Deutsche Telekom AG for the 2003 financial year 24
The economic environment 28
Development of business in 2003 31
Purchasing 40
Research and development 42
Employees 44
Sustainability and environmental protection 48
Risk management 50
Key events after December 31, 2003 56
Outlook 57
The T-Share 62
[GRAPHIC]
Passion.
Show courage. Inspire courage.
Courage and passion are a sign of strength.
[GRAPHIC]
24
Deutsche Telekom. Combined management report of the Deutsche Telekom Group and
Deutsche Telekom AG for the 2003 financial year.
o Debt reduction target for 2003 reached ahead of schedule
o Substantial rise in net cash provided by operating activities
o Net income - back in the black
o Net revenue increased 4.0 percent to EUR 55.8 billion
o T-Com boosts its growth opportunities with T-DSL and its own brand identity
o T-Mobile achieves strong growth in revenues and subscriber numbers
o T-Systems increases efficiency through focus program
o T-Online expands its customer base once again
o Profitable growth will be the focus in 2004
--------------------------------------------------------------------------------
Key financial figures for the Deutsche Telekom Group
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------
(billions of (euro)) 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------
Net revenue 55.8 53.7 48.3 40.9 35.5
------------------------------------------------------------------------------------
of which: international revenue 21.1 18.4 13.2 7.8 4.1
------------------------------------------------------------------------------------
Net income/(loss) 1.3 (24.6) (3.5) 5.9 1.3
------------------------------------------------------------------------------------
Net cash provided by operating
activities 14.3 12.5 11.9 10.0 9.6
------------------------------------------------------------------------------------
Cash outflows from investments
in intangible assets (excluding
goodwill) and property, plant,
and equipment (6.0) (7.6) (10.9) (23.5) (6.0)
------------------------------------------------------------------------------------
Free cash flow (before dividend) 8.3 4.8 1.1 (13.5) 3.6
------------------------------------------------------------------------------------
Number of employees at year-end 248,519 255,969 257,058 227,015 195,788
------------------------------------------------------------------------------------
The 2003 financial year was very satisfactory overall for Deutsche Telekom. The
Group achieved one of its most important goals for the year well before year's
end. The objective of the "6 plus 6" debt reduction program launched in the
fourth quarter of 2002 (to reduce net debt to three times adjusted EBITDA) was
achieved in the third quarter of 2003. The success of this debt reduction was
mainly due to strong net cash provided by operating activities, reduced
investments, cash inflows from the sale of non-core activities, and exchange
rate effects. By the end of the year, the Deutsche Telekom Group had reduced its
net debt by EUR 14.5 billion, totaling EUR 46.6 billion at December 31, 2003.
The fact that the Group is once again generating net income is also encouraging.
After reporting a net loss in 2002 due to higher depreciation and amortization,
the Group generated net income of EUR 1.3 billion in 2003.
Net revenue rose by 4.0 percent to EUR 55.8 billion in 2003, thus continuing the
positive development of previous years. The main contribution to this increase
was made by mobile communications.
The share of net revenue generated through international activities rose from
34.3 percent in 2002 to 37.9 percent in 2003.
Net cash provided by operating activities increased once again year-on-year.
Besides tax refunds and lower net interest payments, the strong growth of EUR
1.8 billion to EUR 14.3 billion in the period under review was mainly
attributable to the marked improvement in operational business.
Management report 2003 25
Upgrading subscriber lines helps consolidate fixed-network subscriber base
within the Group. The total number of standard analog lines and ISDN channels
within the Group dropped slightly from 58.1 million in 2002 to 57.9 million at
the end of 2003. Whereas the number of standard analog lines decreased due to
competition, the migration to more advanced lines continued. Demand for ISDN,
for instance, continued to develop positively in 2003. The number of ISDN
channels throughout the Group increased 5.6 percent year-on-year to 24.6
million.
T-Com boosts its growth opportunities with T-DSL and its own brand identity. The
number of DSL subscribers continued to increase in the 2003 financial year. The
number of broadband lines in operation rose more than 41 percent to 4.1 million
in the year under review, which demonstrates that T-Com is continuing its DSL
success story. New products like "T-DSL 1500" and "T-DSL Business" were also
launched and marketed successfully in Germany.
In an effort to systematically promote the expansion of the fixed-line broadband
segment, T-Com focused on achieving further strong growth in T-DSL and on
exploiting synergies. The implementation of Wireless LANs (W-LANs) prepared the
ground for wireless T-DSL access for PCs in 2003. T-Com systematically realized
the potential of combining WLANs with T-DSL in customer-oriented solutions and
services.
In August 2003, T-Com was launched as the fixed-network division of the Deutsche
Telekom Group with its own brand identity. The aim is to establish the T-Com
brand in the minds of customers as a symbol of high-quality, future-oriented
fixed-network services. This will help T-Com to consolidate its position as
market leader for fixed-line services in Germany and improve its long-term
growth potential.
--------------------------------------------------------------------------------
Deutsche Telekom Group: Trend towards advanced subscriber lines continues
Narrowband lines and ISDN channels*
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2001 2002 2003
---- ---- ----
(million)
ISDN channels 21.0 23.3 24.6
Analog lines 36.5 34.8 33.3
---- ---- ----
57.5 58.1 57.9
---- ---- ----
* Including lines for internal use and including MATAV's subsidiary Maktel.
--------------------------------------------------------------------------------
Successful development of the broadband market: DSL lines (T-Com) in operation
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2001 2002 2003
---- ---- ----
(million)
1.4 2.9 4.1
26
--------------------------------------------------------------------------------
T-Mobile's majority shareholding: Strong growth in subscriber base
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2001 2002 2003
---- ---- ----
(millions)
Other(1, 2) 5.0 7.0 8.0
T-Mobile UK(3) 10.4 12.4 13.6
T-Mobile USA 7.0 9.9 13.1
T-Mobile Deutschland 23.1 24.6 26.3
---- ---- ----
45.5(1) 53.9(1) 61.1(1)
---- ---- ----
(1) Total amounts calculated on the basis of precise figures.
(2) Other: T-Mobile Austria, T-Mobile Czech Republic, and T-Mobile Netherlands
(from 2002).
(3) T-Mobile UK including Virgin Mobile.
--------------------------------------------------------------------------------
T-Systems Computing Services: Processor performance expanded continuoulsly
--------------------------------------------------------------------------------
(MIPS - million instructions per second)
2001 2002 2003
------ ------ ------
79,122 92,968 113,723
T-Mobile again achieves strong growth in subscriber numbers and revenue. As in
previous years, the mobile communications subsidiaries of the T-Mobile division
continued to achieve strong growth in revenue and subscriber numbers in 2003.
T-Mobile USA was particularly successful, improving its position on the North
American market considerably. Over the course of 2003, T-Mobile USA's customer
base grew by more than 32 percent to 13.1 million. In the UK, the number of
mobile communications subscribers rose almost 10 percent to 13.6 million.
T-Mobile Netherlands and T-Mobile Czech Republic also increased their customer
bases. In Austria, subscriber numbers held steady despite intense competition.
And with 26.3 million customers in Germany, T-Mobile remained the undisputed
leader among mobile communications providers on its home market. Despite
unfavorable exchange rate trends, the T-Mobile division increased its total
revenue by 15.4 percent to EUR 22.8 billion in 2003. Including the mobile
subscribers of the T-Com companies Westel (indirectly, via MATAV) and HT mobilne
Komunikacije, the total number of mobile subscribers served by the Deutsche
Telekom Group rose from 58.6 million in 2002 to 66.2 million at the end of 2003.
A focal point of activities during the 2003 financial year was the expansion of
mobile data services. The use of Multimedia Messaging Services (MMS) was
optimized with specially designed terminal devices. As a result, T-Mobile
attracted a broad range of user groups to MMS.
T-Systems implements strategic focus measures and benefits from increased
efficiency. T-Systems concentrated on organizational restructuring in 2003. The
heart of the new strategy is to provide focused key-account management for
T-Systems' highest-volume customers and to restructure the sales organization
vertically along the four sectors, i.e., the Manufacturing, Telecommunications,
Service & Finance, and Public & Healthcare industry lines. Additional elements
of the new strategy include a focus on providing expert service and support,
ensuring efficient global delivery, and achieving economies of scale within the
service lines. T-Systems' new strategy also includes the establishment of
strategic project acquisition teams dedicated to winning large-scale projects.
The team signed its first big deals in the second half of 2003, and these deals
show that the strategy program is off to a good start.
In addition to the strategic restructuring program, T-Systems is implementing a
range of measures aimed at increasing efficiency and quality. To streamline cost
structures and increase profitability, cost management was stepped up in all of
T-Systems' business areas in 2003.
Management report 2003 27
T-Systems also restructured the marketing of its services into three levels of
added value in the fourth quarter of 2003: ICT* infrastructure management,
business solution design & implementation, and business process management.
T-Systems has established so-called Focus Solutions for each of these levels.
These are solutions for major business customers which are of special strategic
importance to them and which serve as a driving force for their flexibility and
competitive success.
T-Online expands its customer base and product range. T-Online recorded further
subscriber growth of over 7 percent year-on-year in 2003. A key force driving
the increase to a total of 13.1 million subscribers at the end of 2003 was the
division's broad, yet customer-specific range of broadband products. As a
result, some 0.8 million new customers chose a broadband access in 2003. Of
T-Online's total customer base, broadband customers accounted for roughly 27
percent at the end of 2003. Thus, broadband is clearly an important growth
factor for T-Online.
T-Online launched its restructured and redesigned homepage www.t-online.de in
August 2003. The portal now combines the product areas for current issues,
services, and shopping. The homepage has been redesigned to bring it in line
with T-Online's combined business model, which attaches equal importance to the
Internet access, content, services, e-commerce, and advertising segments.
In December 2003, T-Online acquired Scout24 AG, a transaction which received
anti-trust approval in February 2004. This allows T-Online to pursue its
strategy of expanding its value creation in the Internet growth sectors by
adding a portfolio of its own high-potential online marketplaces. The Scout24
marketplaces are aimed at users in Germany, Switzerland, and other European
countries. The well-established online marketplaces give T-Online additional
potential for value creation and round out T-Online's range of services.
* ICT: Information and Communication Technology.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
--------------------------------------------------------------------------------
T-Online's customer base expanded further
--------------------------------------------------------------------------------
2001 2002 2003
---- ---- ----
(millions)
10.7 12.2 13.1
Profitable growth will be the Group's and divisions' focus in 2004. In 2004, we
want to continue to build on the Group's 2003 successes by achieving profitable
growth. With this in mind, we have drawn up a 6-item "Agenda 2004", which
defines the areas of action within the divisions as well as the areas of
coordination for collaboration among the divisions. This initiative is designed
to strengthen and leverage the growth potential within the divisions and the
Group.
28
The economic environment.
o Global economy picks up
o German economy stagnates again
o Continued growth in the mobile communications market
o Internet becomes established as the fourth mass medium
o Amendments to German Telecommunications Act planned
--------------------------------------------------------------------------------
Gross domestic product (on the basis of 1995 prices)
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Changes over prior-year period in real terms (%)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
2.0 2.9 0.8 0.2 -0.1
Source: Federal Statistical Office.
Global economy picks up. The global economy improved for the second time in a
row in 2003. In the United States in particular, the economy picked up
considerably, building on the slight recovery in 2002. Domestic demand was
boosted by expansive economic policy, low interest rates, and the continued
weakness of the U.S. dollar. There was also positive development in the emerging
economies in Asia, as well as in Japan and the United Kingdom. These countries
benefited primarily from a sharp increase in export activities and high domestic
demand. In contrast, the economies in the euro zone lagged behind. The euro
zone's economy stagnated throughout the entire first half of 2003 and did not
pick up until the second half of the year.
According to estimates by the Institut fur Weltwirtschaft (Institute for World
Economics), the United States and the United Kingdom recorded growth in their
real gross domestic product (GDP, i.e., the value of all products and services
produced within a country) of 3.1 percent and 2.0 percent respectively. By
contrast, development of the euro zone economies was weaker, with a growth rate
of just 0.5 percent.
Exchange rates for the world's major currencies changed significantly in 2003.
The euro and the Japanese yen gained considerably against the U.S. dollar over
the course of the year. If this exchange rate trend continues to intensify, it
could jeopardize the recovery in the economies whose currencies are growing
stronger.
Economy in Germany stagnates again. Despite a slight economic recovery in
Germany in the second half of 2003, which was supported by foreign trade, real
GDP in 2003 decreased 0.1 percent. Economic development in the first half of
2003 was mainly influenced by uncertainties linked to the war in Iraq. But the
continued problems in the labor market also caused a noticeable drop in demand
for consumer and capital goods in Germany.
Telecommunications market grew 2.4 percent. According to figures published by
the European Information Technology Observatory ("EITO 2003"), the German
telecommunications market grew by roughly 2.4 percent to around EUR 63.2 billion
in 2003. The size of the market in the previous year was adjusted to EUR 61.8
billion. Deutsche Telekom's domestic revenue was down 1.7 percent year-on-year,
to EUR 34.7 billion at the end of 2003. With an imputed market share of 54.9
percent in 2003, Deutsche Telekom's share of the German market was thus again
down slightly from the level of 55.1 percent recorded in the previous year.
Management report 2003
The economic environment 29
Even six years after the liberalization of the German telecommunications market,
competition continued to increase. The sector experienced further market
consolidation and employment figures fell. Nevertheless, the German
telecommunications market continued to grow in 2003 and remains of major
importance in Europe and worldwide. There is still a large number of
telecommunications providers on the German telecommunications market. The
licensing requirement for telecommunications companies was lifted in mid-2003.
At the time, the number of licensees issued was 875 (2002: 850). The number of
telecommunications companies that reported their activities to the German
Regulatory Authority for Telecommunications and Posts (Regulierungsbehorde fur
Tele-kommunikation und Post - RegTP) was 2,069 (2002: 2,007). Deutsche Telekom
is not only subject to regulation in Germany; some of its subsidiaries abroad
are also subject to local regulation. In the fixed-network segment, subsidiaries
in Hungary, Slovakia, and Croatia are subject to domestic regulatory frameworks.
In the mobile communications segment, Deutsche Telekom subsidiaries are also
subject to country-specific regulation in the United States, the UK, the
Netherlands, the Czech Republic, Croatia, and Austria.
Growth continues in the mobile communications segment. According to the
Regulatory Authority, the German mobile communications market comprised a total
of 64.8 million subscribers at the end of 2003. This represents a penetration
rate of 78.3 percent and a year-on-year increase of almost 5.7 million
subscribers. The penetration rate also increased in other European countries
where T-Mobile is active.
With more than 1.7 million new customers and a total of 26.3 million subscribers
at the end of 2003, T-Mobile Deutschland maintained its leadership on the
German mobile telecommunications market. In the United States, T-Mobile USA
gained 3.2 million new customers, improving on its 2002 figure of new additions
(2.9 million). However, due to rapid changes in the situation in the United
States, this was not enough to keep T-Mobile USA on top in terms of new
additions.
A strong showing in a difficult market environment. Competition on the market
for ICT services intensified once again in 2003. In addition, the effects of the
weaker economy continued to curb demand. Price pressures, smaller IT budgets,
and longer product life cycles were the main causes for the downward trend in
the IT market in 2003. By increasing efficiency and quality, the T-Systems
division maintained its market position despite market consolidation. In the
slumping systems integration segment, in particular, T-Systems recorded a less
drastic decline in its business figures than the market. Against the background
of continued intense competition in the telecommunications services market,
there was a clear shift in demand toward suppliers with good credit standing and
high quality during the period under review. T-Systems benefited significantly
from this trend.
Broadband lines increase growth potential of the online market. The Regulatory
Authority reports that the number of Internet users in Germany continued to rise
significantly in 2003. Based on various studies, the Regulatory Authority
estimates that approximately 39 million people in Germany had used the Internet
in one way or another. Not only did the number of Internet accesses and users
grow; the intensity and quality of use by individual Internet surfers also
increased considerably. According to the Regulatory Authority, Germany ranks
among the top countries in Europe in terms of Internet usage, with an average of
more than 11 hours per month. Key factors contributing to this trend were
reduced access prices and increased use of broadband Internet access.
In an international comparison, Germany is by far the largest Western European
Internet market, ahead the United Kingdom, and is above the Western European
average in terms of penetration rates among Internet users. The already high
overall penetration rates prove that the Internet has become established as the
fourth mass communications medium. The unique possibilities it offers with
respect to up-to-the-minute information, individualization, and interactivity
will enable continued market growth and strengthen the position of the Internet
within a changing media environment.
30
Amendments to German Telecommunications Act planned. The future regulatory and
competitive environment for Deutsche Telekom will be largely determined by the
forthcoming amendment of the Telecommunications Act (Telekommunikationsgesetz -
TKG). On October 15, 2003, Germany's government adopted the draft for a new
Telecommunications Act, which provides for a considerable increase in regulation
in the area of wholesale services in particular. In contrast, the level of
regulation of retail services may well be reduced. The new act is not likely to
enter into force until the middle of 2004.
The amendments to the act are in response to new EU telecommunications
directives, which prepare the ground for a reduction in sector-specific
regulation on the telecommunications markets. According to the EU directives,
national legislators are to establish flexible regulatory instruments that are
suited to their country's individual market situation. The Regulatory Authority
is to be given the flexibility to adapt regulatory interventions to increasing
competition and to limit these interventions to a minimum.
According to the Telecommunications Act in its current form, Deutsche Telekom's
major rate decisions and the core services offered to competitors and end users
are still subject to approval. The Regulatory Authority and various other
government bodies continued to make a large number of important regulatory
decisions in 2003. In chronological order, these include, in particular:
o The European Commission's recommendation concerning relevant product and
service markets as part of the new EU regulatory framework for electronic
communications networks and services. The recommendation contains a list of
markets which the Commission believes should be subject to sector-specific
regulation in the future.
o The requirement to introduce carrier selection in local networks.
o The establishment of new monthly rates to be charged by Deutsche Telekom
for competitors to use subscriber lines.
o Approval of an access charge for origination services for local calls, with
which operators selected using the carrier-selection option will pay a
proportion of the costs of the shared line.
o Approval of a higher monthly charge for analog telephone lines.
o The obligation to sell unbundled subscriber lines to resellers at wholesale
conditions.
o The establishment of new interconnection rates, i.e., the rates competitors
pay to route calls through Deutsche Telekom's network.
Deutsche Telekom or its competitors, respectively, have lodged appeals against
several of these rulings. In December 2003, the Monopoly Commission presented
its special report, which is published every two years, on the status of
competition in the telecommunications markets. In its report, the Monopoly
Commission stated that the strong growth in competitors' market shares indicated
a further development of competition on the whole. However, it maintained that
regulation is still necessary for most of the telecommunications markets. The
Monopoly Commission is of the opinion that ex-ante regulation can only be
dispensed with for long-distance and international calling.
Management report 2003
Development of business 31
Development of business in 2003.
o Net revenue increased 4 percent to EUR 55.8 billion
o Group generates net income once again
o Net cash provided by operating activities increased to EUR 14.3 billion
o Debt reduction target for 2003 exceeded by far
o IAS/IFRS conversion on schedule
Net revenue continues to grow, marked improvement in results. Deutsche Telekom's
net revenue increased by EUR 2.1 billion year-on-year in 2003, to EUR 55.8
billion. This increase is primarily a result of growth in the T-Mobile,
T-Systems, and T-Online divisions. The Group's main growth and revenue driver
was once more the T-Mobile division which recorded a double-digit percentage
increase in revenue despite unfavorable exchange rate trends. In addition to the
effect of the first full-year consolidation of T-Mobile Netherlands, the
considerable increase in the number of T-Mobile subscribers also had a positive
impact. The T-Systems division succeeded in increasing its revenue year-on-year
despite the unfavorable economic environment and the effects of the sale of
shareholdings in 2003. The increase was mainly driven by Telecommunication
Services, which offset the slight decline in information technology business.
Revenue growth at T-Online was driven by continued growth of the customer base,
especially for broadband services, coupled with stronger demand for content and
services, and the resulting increase in time spent online. The development of
T-Com's revenue was significantly affected by a weak economic environment and
regulatory and competition-related influences. Lower call revenues in particular
- partly as a result of the introduction of call-by-call and carrier
preselection in the local network and the ensuing losses of market share led to
a decrease in revenues that even the dynamic trend towards more advanced lines
such as T-DSL could not offset. The drop in net revenue was exacerbated by the
deconsolidation of the cable companies.
--------------------------------------------------------------------------------
Net revenue increased continuously
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(billions of (euro))
35.5 40.9 48.3 53.7 55.8
--------------------------------------------------------------------------------
Net revenue by division(1)
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2001 2002 2003
---- ---- ----
(billions of (euro))
T-Com 26.4 26.5 25.1
T-Mobile 13.1 18.3 21.5
T-Systems 7.1 6.9 7.2
T-Online(2) 1.0 1.4 1.7
GHS(3) 0.7 0.6 0.3
(1) DeTeMedien is no longer included under T-Online, but has been reported
under T-Com since January 1, 2003; in addition, the reallocation of
T-Systems' agency business to T-Com and T-Mobile has led to a
redistribution of intersegment revenue and net revenues which does not
affect income; prior-year comparatives have been adjusted accordingly.
(2) Figures are calculated in accordance with the provisions of German GAAP
specified in the German Commercial Code (HGB), as applied throughout the
Deutsche Telekom Group, and differ from those published in the reports of
T-Online International AG under IASs/IFRSs (since the beginning of 2003).
(3) GHS: Group Headquarters & Shared Services. Reported under "Other" until the
first quarter of 2003.
32
Net income - back in the black. Deutsche Telekom generated net income amounting
to EUR 1.3 billion in the 2003 financial year. This represents a year-on-year
improvement of EUR 25.9 billion from a net loss of EUR 24.6 billion in 2002.
This development is mainly the result of the nonscheduled write-downs on
goodwill and licenses at mobile communications companies in 2002, for which
there were no comparable write-downs in 2003. Other factors contributing to this
development were efficiency enhancements, increased levels of income from the
disposal of noncurrent assets, and a considerable improvement in net financial
income/expense.
The consolidated statement of income for the 2003 financial year is presented
using the cost-of-sales method (in accordance with Section 275 (3) HGB) for the
first time. Prior-year comparatives have been adjusted accordingly. With the
cost-of-sales method, net revenue is set against the expenses incurred to
generate these revenues, classified into cost of sales, selling cost, and
general and administrative cost functions. All expenses which cannot be
allocated to functional costs are reported under other operating expenses, which
are therefore calculated differently than under the total cost method.
The decrease in the cost of sales and other operating expenses in particular had
a positive impact on net income in 2003. The cost of sales fell by EUR 13.1
billion year-on-year to EUR 31.4 billion. This is primarily attributable to the
nonrecurrence of the nonscheduled write-downs charged on mobile communications
licenses at T-Mobile USA and T-Mobile UK in 2002 (totaling EUR 11.6 billion).
Other operating expenses decreased by EUR 9.8 billion year-on-year to EUR 5.1
billion. This considerable drop is mainly attributable to lower goodwill
amortization which, in 2002, was impacted by nonscheduled write-downs of the
goodwill of T-Mobile USA, T-Mobile Netherlands, and T-Systems SIRIS, totaling
EUR 9.8 billion.
Deutsche Telekom's concentration on its core business activities led to further
asset disposals in 2003. This was the main factor behind the increase of EUR 0.7
billion in other operating income. EUR 0.4 billion of the income from asset
disposals is attributable to the sale of the remaining cable activities, EUR 0.4
billion to the sale of shares in OJCS Mobile TeleSystems (MTS), and
approximately EUR 0.1 billion each to the sale of TELECASH, Globe Telecom, and
Eutelsat. Amounts reported under this item in the previous year related in
particular to the sale of Satelindo (EUR 0.2 billion) and the sale of T-Online
shares (approximately EUR 0.3 billion).
Net financial income/expense improved by EUR 2.0 billion year-on-year. This
development is partly due to the fact that in the previous year, net financial
income/expense was negatively affected by share price-related write-downs on the
net carrying amount of the shareholding in France Telecom amounting to EUR 0.6
billion and valuation adjustments on other investments in noncurrent securities
totaling EUR 0.4 billion; there were no comparable measures in the year under
review. In addition, the loss related to associated and related companies and
the net interest expense both decreased in the year under review. This was
mainly attributable to the non-recurrence, due to consolidation, of the expense
relating to companies accounted for using the equity method in the previous year
and the write-up of the net carrying amount of the stake in comdirect bank AG.
These positive effects were partially offset by expenses for Toll Collect
totaling EUR 0.4 billion in the year under review. The net interest expense
decreased primarily as a result of the reduction in debt and the recognition of
interest income from the reversal of interest rate derivatives which were no
longer necessary.
Positive development of results in every division. Income before income taxes of
the T-Com division increased by EUR 0.7 billion to EUR 4.3 billion in the year
under review, despite a decrease in revenue. This development is mainly due to
improved cost structures and decreased levels of depreciation and amortization
as a result of the disposal of property, plant, and equipment as part of the
sale of the remaining cable business at the beginning of 2003. In addition,
proceeds from the sale of the remaining cable companies also contributed to the
increase in income in this segment. These proceeds were partly offset, however,
by expenses for transfers to accruals, mainly for restructuring and increased
additions to pension accruals. The loss related to associated and related
companies of the T-Com division in 2003 was negatively impacted by expenses
relating to such shareholdings, in particular Toll Collect (EUR 0.4 billion); in
the previous year, this figure was mainly affected by valuation adjustments on
loans to associated companies of Kabel Deutschland (EUR 0.3 billion).
The loss before income taxes of the T-Mobile division in 2002 turned positive in
2003, due to a considerable improvement of EUR 24.6 billion, to income of EUR
0.8 billion. Factors contributing to this development include, on the one hand,
increased net revenue resulting in particular from the growth in the number of
subscribers and, on the other hand, the high level of nonscheduled write-downs
on goodwill and licenses in the previous year. Other factors that boosted
results include the sale of shares in the Russian company MTS as well as
considerable economies of scale and synergy effects.
Management report 2003
Development of business 33
The T-Systems division decreased its loss before income taxes by EUR 1.9 billion
year-on-year. One of the main contributory factors in this development was the
decrease of EUR 1.1 billion in depreciation and amortization to EUR 1.5 billion.
This decrease is mainly attributable to the nonscheduled write-downs of goodwill
and property, plant, and equipment charged in the previous year as a result of
the strategic review, for which there were no comparable activities in 2003.
Efficiency improvements, revenue growth and increased other operating income
also contributed to the improvement in results in the period under review. Other
operating income increased by EUR 0.2 billion, partly as a result of the sale of
the shareholdings in TELECASH and T-Systems SIRIS. Net financial expense
decreased by EUR 0.1 billion year-on-year, mainly as a result of the reduction
of debt.
The T-Online division turned its loss before income taxes of 2002 into income
before taxes of EUR 0.1 billion, recording an improvement of EUR 0.6 billion.
This is primarily a result of increased revenues and results related to
associated and related companies, which also turned positive in 2003 (up EUR 0.4
billion to plus EUR 0.1 billion). This was mainly a consequence of the write-up
of the shareholding in comdirect bank AG in the year under review due to its
positive development, whereas nonscheduled write-downs of goodwill had to be
charged in the previous year.
The loss before income taxes in Group Headquarters & Shared Services decreased
by EUR 0.6 billion year-on-year in 2003. This development is mainly attributable
to the valuation adjustments included in the figure for the previous year,
totaling EUR 1.0 billion, on the shares held in France Telecom and on other
investments in noncurrent securities; there were no comparable valuation
adjustments in the year under review. In addition, depreciation and amortization
decreased by EUR 0.4 billion in the year under review as a result of the
continued disposal of real estate assets and the related decrease in the
depreciation base. In contrast to this effect, however, lower levels of income
resulting from the sale of shareholdings led to a year-on-year decrease in
other operating income in 2003. The EUR 0.5 billion increase in personnel costs
relating to Vivento had a negative impact on results.
--------------------------------------------------------------------------------
Key figures for group segments(1)
--------------------------------------------------------------------------------
Income/(loss)
(billions of (euro)) Total revenue(2) before income taxes(3) Employees(4)
---------------- ---------------------- ------------
2003 2002 2003 2002 2003
--------------------------------------------------------------------------------
T-Com 29.2 30.6 4.3 3.6 139,548
--------------------------------------------------------------------------------
T-Mobile 22.8 19.7 0.8 (23.8) 41,767
--------------------------------------------------------------------------------
T-Systems 10.6 10.5 (0.1) (2.0) 42,108
--------------------------------------------------------------------------------
T-Online(5, 6) 1.9 1.6 0.1 (0.5) 2,637
--------------------------------------------------------------------------------
Group Headquarters &
Shared Services(7) 4.2 4.4 (4.1) (4.7) 25,203
--------------------------------------------------------------------------------
Reconciliation(5, 8) (12.9) (13.1) 0.4 0.2 --
--------------------------------------------------------------------------------
Group 55.8 53.7 1.4 (27.2) 251,263
--------------------------------------------------------------------------------
(1) DeTeMedien is no longer included under T-Online, but has been reported
under T-Com since January 1, 2003; in addition, the reallocation of
T-Systems' agency business to T-Com and T-Mobile has led to a
redistribution of intersegment revenue and net revenues which does not
affect income; prior-year comparatives have been adjusted accordingly.
(2) Net revenue plus revenue from business with other segments.
(3) Income before income taxes; following the change to the cost-of-sales
method, this item includes other taxes; prior-year comparatives have been
adjusted accordingly.
(4) Average figures for the year.
(5) As of January 1, 2003, subsequent measurement resulting from the admission
of new T-Online shareholders, which affects the income/loss related to
associated and related companies, as well as depreciation and amortization,
is no longer reported under the T-Online segment but in the reconciliation;
prior-year comparatives have been adjusted accordingly.
(6) Figures are calculated in accordance with the provisions of German GAAP
specified in the German Commercial Code (HGB), as applied throughout the
Deutsche Telekom Group, and differ from those published in the reports of
T-Online International AG under IASs/IFRSs (since the beginning of 2003).
(7) Reported as "Other" until the first quarter of 2003.
(8) Items to be reconciled mainly relate to consolidation entries.
34
--------------------------------------------------------------------------------
Condensed financial statements: Balance sheet of Deutsche Telekom AG*
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
(billions of (euro)) Dec.31, 2003 Dec.31, 2002
-----------------------------------------------------------------------------------
Property, plant, and equipment, and intangible assets 29.5 33.0
-----------------------------------------------------------------------------------
Financial assets 67.6 75.3
-----------------------------------------------------------------------------------
Noncurrent assets 97.1 108.3
-----------------------------------------------------------------------------------
Inventories, materials, and supplies 0.2 0.3
-----------------------------------------------------------------------------------
Receivables and other assets 22.6 5.9
-----------------------------------------------------------------------------------
Liquid assets 7.4 0.1
-----------------------------------------------------------------------------------
Current assets 30.2 6.3
-----------------------------------------------------------------------------------
Prepaid expenses and deferred charges 0.3 0.4
-----------------------------------------------------------------------------------
Total assets 127.6 115.0
-----------------------------------------------------------------------------------
Shareholders' equity 46.2 42.1
-----------------------------------------------------------------------------------
- of which: unappropriated net income 2.0 0.0
-----------------------------------------------------------------------------------
Accruals 8.8 7.6
-----------------------------------------------------------------------------------
Liabilities 72.5 65.2
-----------------------------------------------------------------------------------
Deferred income 0.1 0.1
-----------------------------------------------------------------------------------
Total shareholders' equity and liabilities 127.6 115.0
-----------------------------------------------------------------------------------
* The single-entity financial statements of Deutsche Telekom AG are published
in the Federal Gazette (Bundesanzeiger) and filed with the Commercial
Registry of the Bonn District Court. The financial statements are available
upon request from Deutsche Telekom, Investor Relations, Postfach 2000,
D-53105 Bonn, Germany, fax +49 228 181-88009.
Single-entity financial statements of Deutsche Telekom AG. In general, corporate
groups with international activities focus their reporting on the consolidated
financial statements. However, dividend payments at Deutsche Telekom are based
on the single-entity financial statements of Deutsche Telekom AG. For this
reason, the condensed financial statements of Deutsche Telekom AG are presented
in this section.
The change in Deutsche Telekom AG's total assets is due primarily to a rise in
receivables from subsidiaries and a reduction in investments in subsidiaries.
The latter decreased as a result in particular of the withdrawal of the equity
interest in
Deutsche Telekom BK-Holding GmbH, Bonn. The equity ratio was 37 percent at
December 31, 2003. Deutsche Telekom AG recorded a slight revenue decrease of EUR
0.6 billion to EUR 25.2 billion. Results from ordinary business activities were
positive, in particular due to an improvement in the income/loss related to
associated and related companies through the income from profit transfer
agreements of T-Mobile International Holding GmbH, Bonn, Deutsche Telekom BK-
Holding GmbH, Bonn, and T-Systems International GmbH, Frankfurt/Main, which
totaled EUR 4.6 billion. Taking into account tax refunds of EUR 0.1 billion, net
income amounted to EUR 4.1 billion.
Management report 2003
Development of business 35
--------------------------------------------------------------------------------
Statement of income of Deutsche Telekom AG*
--------------------------------------------------------------------------------
(billions of (euro)) 2003 2002
--------------------------------------------------------------------------------
Net revenue 25.2 25.8
--------------------------------------------------------------------------------
Cost of sales (15.1) (16.0)
--------------------------------------------------------------------------------
Gross profit 10.1 9.8
--------------------------------------------------------------------------------
Selling costs (5.1) (5.7)
--------------------------------------------------------------------------------
General and administrative costs (3.1) (3.8)
--------------------------------------------------------------------------------
Other operating income 3.2 5.2
--------------------------------------------------------------------------------
Other operating expenses (2.6) (2.9)
--------------------------------------------------------------------------------
Operating results 2.5 2.6
--------------------------------------------------------------------------------
Financial income/(expense), net 1.5 (6.4)
--------------------------------------------------------------------------------
Results from ordinary business activities 4.0 (3.8)
--------------------------------------------------------------------------------
Income taxes 0.1 0.8
--------------------------------------------------------------------------------
Income/(loss) after taxes 4.1 (3.0)
--------------------------------------------------------------------------------
* Deutsche Telekom AG's statement of income and the Consolidated statement of
income have been classified using the cost-of-sales method since the
beginning of the 2003 financial year; correspondingly, other taxes are
allocated to functional costs and are therefore included in the operating
results; prior-year comparatives have been adjusted accordingly.
Suspension of dividend payment to aid continued net debt reduction. As was the
case for the previous year, the Board of Management and the Supervisory Board
will propose to the 2003 financial year. This proposal is intended to help the
Group reduce its net debt further.
36
--------------------------------------------------------------------------------
Balance sheet structure of the Deutsche Telekom Group
--------------------------------------------------------------------------------
Assets
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
(billions of (euro); as of Dec. 31 of each year)
1999 2000 2001 2002 2003
---- ----- ----- ----- -----
Licenses, concessions and similar rights,
advance payments 1.6 16.5 39.4 24.0 20.7
Goodwill 13.4 19.3 40.6 29.4 24.5
Property, plant, and equipment, financial
assets 67.0 70.8 66.7 58.1 50.5
Current assets and other assets 12.6 17.6 17.9 14.3 20.4
---- ----- ----- ----- -----
Balance sheet total 94.6 124.2 164.6 125.8 116.1
==== ===== ===== ===== =====
Liabilities
(billions of (euro); as of Dec. 31 of each year)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1999 2000 2001 2002 2003
---- ----- ----- ----- -----
Shareholders' equity 35.7 42.7 66.3 35.4 33.8
Accruals 9.3 11.4 18.4 16.1 15.7
Debt 42.3 60.4 67.0 63.0 55.4
Other liabilities 7.3 9.7 12.9 11.3 11.2
---- ----- ----- ----- -----
Balance sheet total 94.6 124.2 164.6 125.8 116.1
==== ===== ===== ===== =====
Net worth and financial position improved by debt reduction program. The balance
sheet total of the Deutsche Telekom Group decreased by approximately 8 percent,
or EUR 9.7 billion, year-on-year as of December 31, 2003. This decrease is the
result of various positive and negative effects. The reduction in noncurrent
assets is due in particular to the disposal of noncore assets, depreciation and
amortization combined with lower levels of investment, and currency translation
effects. This was partly offset by an increase of EUR 7.2 billion in cash in
banks, which was due primarily to cash inflows from the sale of the remaining
cable businesses, real estate, and other assets, and from the issuance of a
mandatory convertible bond, as well as from net cash provided by operating
activities.
Management report 2003
Development of business 37
Debt (in accordance with the balance sheet) reduced by EUR 7.6 billion. The main
factors aiding the reduction of debt in 2003 were cash generated from
operations, disposals of noncore assets, and currency translation effects. New
debt resulted for instance from the issuance of a U.S. dollar bond and a
convertible bond.
Net debt reduced to EUR 46.6 billion. Deutsche Telekom reduced its net debt by
around EUR 14.5 billion in 2003. This was possible as a result of the strong
cash flow, inflows from the disposal of noncurrent assets, and exchange rate
effects.
Net debt comprises financial liabilities and, under other liabilities, loan
notes, liabilities from interest rate/cross currency swaps and collateral
payments received (EUR 1.1 billion; 2002: EUR 1.1 billion). The following items
on the assets side are subtracted from this total: liquid assets, noncurrent and
marketable securities, interest rate and cross currency swaps, collateral
payments made (reported under other assets), and discounts on loans, amounting
to a total of EUR 9.9 billion (2002: EUR 3.0 billion). As a result, Deutsche
Telekom's net debt amounts to EUR 46.6 billion (2002: EUR 61.1 billion).
Net debt is not a measure included in the consolidated financial statements
under German GAAP, but senior decision-makers at Deutsche Telekom use it for
debt management and control purposes. Although many of Deutsche Telekom's
competitors use this measure, there is no uniform definition of it to date.
--------------------------------------------------------------------------------
Debt (in accordance with the balance sheet)
--------------------------------------------------------------------------------
(billions of (euro); as of Dec. 31 of each year)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
42.3 60.4 67.0 63.0 55.4
38
--------------------------------------------------------------------------------
Consolidated statement of cash flows (condensed)(1)
--------------------------------------------------------------------------------
(billions of (euro)) 2003 2002 2001
---------------------------------------------------------------------------------
Net cash provided by operating activities 14.3 12.5 11.9
---------------------------------------------------------------------------------
Cash outflows from investments in intangible assets
(excluding goodwill) and property, plant, and equipment (6.0) (7.6) (10.9)
---------------------------------------------------------------------------------
Free cash flow (before dividend)(2) 8.3 4.8 1.1
---------------------------------------------------------------------------------
Net cash used for investing activities (2.1) (10.1) (5.4)
---------------------------------------------------------------------------------
Net cash used for financing activities (5.2) (3.4) (4.8)
---------------------------------------------------------------------------------
Effects of foreign exchange rate changes (0.0) (0.0) (0.0)
---------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 7.0 (1.0) 1.7
---------------------------------------------------------------------------------
Cash and cash equivalents (short- and long-term) 9.1 1.9 2.9
---------------------------------------------------------------------------------
(1) Calculated and rounded on the basis of millions for the purpose of greater
precision.
(2) "Free cash flow (before dividend)" is not a measure included in the
consolidated financial statements under German GAAP. Deutsche Telekom is of
the opinion that it is used by investors as a measure to enable them to
assess the Group's cash provided by operating activities (after deduction
of cash outflows for investments in intangible assets (excluding goodwill)
and property, plant, and equipment), in particular with regard to
investments in associated and related companies, and the repayment of
liabilities. "Free cash flow (before dividend)" should not be used to
determine the financial position of the Group. There is only limited
comparability between Deutsche Telekom's definition of free cash flow and
methods of calculating this measure and similarly designated measures and
disclosures of other companies.
Substantial rise in net cash provided by operating activities. Net cash provided
by operating activities increased by EUR 1.8 billion to EUR 14.3 billion. In
addition to tax refunds and lower net interest payments, this is due in
particular to the marked improvement in operational business. Net cash used for
investing activities decreased by EUR 8.0 billion to EUR 2.1 billion. This is
primarily because capital expenditure was higher in the previous year and the
acquisition of shares in T-Systems ITS (EUR 4.7 billion) and T-Mobile
Netherlands (EUR 1.7 billion) took their full effect on cash flow. In addition,
cash inflows from the sale of financial assets increased year-on-year, as did
cash inflows from the disposal of unconsolidated subsidiaries. Net cash used for
financing activities totaled EUR 5.2 billion in the 2003 financial year, a
year-on-year increase of EUR 1.8 billion. This development is mainly
attributable to the increase of EUR 3.3 billion in debt repayment (2003: EUR 5.1
billion; 2002: EUR 1.8 billion). In addition, the previous year's figure
included a dividend payment amounting to EUR 1.6 billion; in the year under
review, this contrasts with dividend payments to minority shareholders only
amounting to EUR 0.1 billion. The level of debt was reduced in 2003 mainly
through the repayment of U.S. dollar bonds, the reduction of a syndicated loan,
and the repayment of bonds. New debt was generated by the issuance of a
convertible bond and a U.S. dollar bond.
Conversion of accounting to IASs/IFRSs on schedule. 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
Accounting Standards (IASs) and International Financial Reporting Standards
(IFRSs) for each financial year starting on or after January 1, 2005.
Management report 2003
Development of business 39
Deutsche Telekom sees the conversion of its accounting to IASs/IFRSs as an
opportunity to further strengthen its position on the international capital
markets through increased transparency and comparability with its competitors.
Both external and internal reporting are being converted to IASs/IFRSs at the
same time. Deutsche Telekom's Board of Management attaches a high priority to
the preparations for this conversion. Deutsche Telekom will comply with the
requirements relating to IASs/IFRSs on time. Preparations are running on
schedule.
The Board of Management of Deutsche Telekom launched a project at the end of
2002 to make an early start with planning for the conversion of the Company's
accounting. In the initial phase, a Group-wide conversion plan was drawn up in
close cooperation with the divisions. Subsequently, in the first half of 2003,
all affected IT systems were identified and the necessary adjustments defined
and scheduled. Additionally, an IAS/IFRS accounting manual was drawn up for the
whole Group on the basis of the standards issued and drafts published by the
International Accounting Standards Board (IASB) by mid-2003. This manual is
constantly updated to take account of new standards and interpretations of the
standards and the concrete wording of draft standards and interpretations.
All necessary measures for the preparation of financial statements in accordance
with IASs/IFRSs in group companies, the divisions, and at group level were taken
in the second half of 2003. These include Group-wide training measures, the
adjustment of the relevant IT systems, and the restructuring of internal
processes. The phase of drawing up parallel IAS/IFRS financial statements began
at the end of 2003. During this phase, until the beginning of 2005, financial
statements under IASs/IFRSs will be drawn up following preparation of the
regular financial statements under German GAAP. For Deutsche Telekom, the date
of transition to IFRSs, the date for which the IAS/IFRS opening balance sheet is
being prepared, as defined by IFRS 1 is January 1, 2003. This date of transition
is necessary because companies such as Deutsche Telekom that are listed on the
New York Stock Exchange and are subject to the supervision of the Securities and
Exchange Commission in the United States are obliged to report comparatives for
two prior years rather than just one for certain items in the financial
statements.
IASs/IFRSs will replace German GAAP for external reporting from the first
quarter of 2005. Reporting data in accordance with IASs/IFRSs will then be
published together with the relevant prior-period comparatives.
Dependent company report. The Bundesanstalt fur Post und Telekommunikation (the
Federal Agency), a public law entity, held a 26.03-percent shareholding in
Deutsche Telekom AG at December 31, 2003 on behalf and on account of the Federal
Republic of Germany (the Federal Republic). Kreditanstalt fur Wiederaufbau
(KfW), a federal corporation, held a 16.74-percent shareholding at December 31,
2003 which, in accordance with Section 22 (1) no. 1 of the Securities Trading
Act (Wertpapierhandelsgesetz - WpHG), must be deemed to be held by the Federal
Republic as regards the exercising of the voting rights. The shareholding deemed
to be held by the Federal Republic therefore amounted to 42.77 percent at the
balance sheet date, as in the previous year. The increase in the shareholding of
KfW and the corresponding decrease in the shareholding of the Federal Agency of
around 4.7 percent compared with the previous year are due to the fact that the
Federal Republic transferred approximately 199 million shares to KfW in November
2003 as part of a so-called holding arrangement. As the Federal Republic,
despite its minority shareholding, represents a solid majority at the
shareholders' meeting due to the average attendance of the shareholders'
meeting, Deutsche Telekom is a dependent company of the Federal Republic
according to Section 17 (1) of the German Stock Corporation Act (Aktiengesetz -
AktG).
No controlling agreement or profit transfer agreement exists. Pursuant to
Section 312 of the German Stock Corporation Act, the Board of Management of
Deutsche Telekom AG has therefore prepared a dependent company report describing
relations between the controlling body and affiliated companies. The Board of
Management has included the following statement at the end of this report: "The
Board of Management hereby states that, under the circumstances known to the
Board of Management at the time of performing the business transactions, the
Company received appropriate remuneration for such transactions. The Company did
not perform or omit any actions on behalf of or on the instructions of the
controlling company or any affiliated companies."
40
Purchasing.
o Intense further development of procurement management
o Purchasing systems and e-procurement systematically expanded
o Stronger focus on major strategic suppliers
o Significant savings made in the divisions
The main focus of purchasing activities in 2003 was to consistently support the
Group-wide Triple-E program for reducing debt, increasing efficiency, and
improving results. Our global purchasing vision defines the approach as follows:
"Deutsche Telekom Purchasing will be the best within its industry and makes the
maximum contribution possible to the corporate result. Purchasing creates a
positive image with highly qualified and customer-focused purchasing
professionals."
Procurement management intensified. Investments and expenditures were cut
heavily as part of the rationalization measures introduced by the Triple-E
program. As a result, the purchasing volume dropped from EUR 18.7 billion in
2002 to EUR 16.5 billion in the year under review. T-Mobile accounted for the
largest share - around half - of the total purchasing volume, followed by T-Com
and T-Systems. Broken down into product groups, 2003 expenditures were once
again focused primarily on technology, IT, and terminal equipment.
As in previous years, Purchasing made a significant contribution to Deutsche
Telekom's value added in 2003 with tough purchasing negotiations,
standardization of products and services ordered, increased global pooling of
orders, online auctions, and improved payment terms.
Purchasing systems and e-procurement systematically expanded in the divisions.
An important focus of purchasing activities in 2003 was on optimizing processes
by increasing the use of electronic purchasing. In particular, the expansion of
eBest, the internal ordering system, further improved the efficiency of internal
processes. The number of users increased from around 20,000 in 2002 to roughly
30,000 in 2003. The roll-out of eBest has now almost been completed throughout
Germany. Users now have access to 60 internal catalogs and have placed around
250,000 orders directly with suppliers, at terms and conditions negotiated by
Purchasing. These transactions are increasingly processed using the T-Mart
platform, which T-Systems also makes available to companies outside the Deutsche
Telekom Group.
The global purchasing database is designed to ensure transparency and optimize
cooperation. It provides a detailed overview of spending within the Group. In
addition to a breakdown by suppliers, it is now possible to generate a breakdown
of expenditures by product groups according to the UNSPSC (United Nations
Standard Product and Services Code) that was introduced throughout the Group in
2002. This provides an important basis for identifying and leveraging purchasing
synergies within the Group.
Tendering procedures and negotiations are increasingly carried out via the
Internet. Negotiations can be completed efficiently and transparently within
defined time frames. The decision was taken in 2003 to implement a Group-wide
solution in 2004.
Focus on major strategic suppliers. Increasing competition and consolidation in
the IT and telecommunications sector makes close cooperation with strategic
suppliers essential. Last year, selected suppliers were integrated into Deutsche
Telekom's own processes to a greater extent, and development partnerships with
innovative suppliers were further expanded. These efforts are aimed at fostering
the Group's innovation potential for many years to come.
Management report 2003
Purchasing 41
Product group management developed further. The strategic purchasing management
program based on more than 30 core product groups that was introduced in 2001
was continually developed further in 2003. Purchases of specific product groups
for the divisions are now managed by procurement teams that serve various
functional areas. Synergies at Group level, however, will increasingly be
exploited through strategic, cross-divisional product group teams (strategic
sourcing teams) and common purchasing networks that will increasingly act
globally in the future. This approach offers the benefit of combining the
concentration of purchasing benefits at Group level with the flexibility of the
individual divisions.
E-procurement successfully boosted and T-Com's purchasing organization
streamlined. The systematic expansion of electronic ordering throughout Germany
enabled T-Com's purchasing organization to increase the share of purchasing
transactions that were handled electronically from approximately 50 percent in
2002 to over 70 percent in 2003. Considerable process improvements can also be
expected in 2004 thanks to the introduction of electronic contract awarding
procedures in the fields of civil engineering and installation, and the
integration of additional suppliers. There was a substantial increase in
Purchasing's productivity as the implementation of electronic ordering
procedures and the streamlining of the purchasing organization in 2003 led to a
significant increase in staff productivity and efficiency in purchasing. Through
close coordination with its international shareholdings and the realization of
joint projects, T-Com was able to exploit substantial potential for synergies in
2003. By optimizing cooperation with suppliers and service providers, T-Com
succeeded in improving its purchasing conditions despite a reduction in capital
expenditure.
UMTS roll-out prepared and GSM purchasing activities in Europe and the United
States bundled. For T-Mobile, 2003 was dominated by the construction of UMTS
networks. The primary aim was to prepare a suitable infrastructure for the
launch of UMTS services. In addition, the GSM purchasing activities between
Europe and the United States were bundled, yielding additional savings. T-Mobile
also achieved considerable purchasing benefits by consistently pursuing its
platform strategy. The implementation of an international functional structure
for T-Mobile's purchasing organization and close coordination with its Eastern
European subsidiaries and shareholdings allowed the division to exploit numerous
additional potential synergies.
T-Systems makes savings with e-auctions. Remarkable savings were made in
an invitation to tender for notebooks thanks to the definition of
Group-wide standards, the pooling of orders, and the use of electronic auctions.
The implementation of the "Purchasing Information System" (PU-IS) pilot project
lays the groundwork for division-wide purchasing controlling and provides a data
base for all strategic tasks of the T-Systems purchasing department. T-Systems
operates the server platform and applications needed to hold e-auctions on a
global scale. These services are used by all of the Group's divisions.
eBest implementation at T-Online Germany complete. T-Online completed the
implementation of the eBest electronic procurement system in Germany in 2003. In
addition, access to electronic catalogs was also realized, which makes it easier
for employees to select products and thus accelerates the ordering process by
allowing employees to place orders online, directly with suppliers.
42
Research and development.
o Content and organization of the Group's innovation activities restructured
o Number of intellectual property rights increased
o R&D's orientation toward market and profitable growth increased
One of the keys to generating profitable growth for Deutsche Telekom is
innovation. Innovation not only creates new business areas, products, and
services; it also serves as the basis for improving existing products and
services.
Innovation activities restructured from the ground up. Deutsche Telekcom's
innovation activities were clearly focused on the market in 2003. Current and
future market and technology trends were considered when determining the issues
and tasks in the field of innovation, with the emphasis on the "Four I's" of
innovation. "Intuitive Use" is aimed at ensuring that products and services are
easy and inherently logical to use. "Intelligent Access" focuses on providing
the best possible applications and connections for any given context and area of
use. "Integrated Addressing" meets the increasing demand for integrating
communications and data functions into everyday objects. The fourth "I",
"Infrastructure Development", emerged as a result of the increasingly intense
competition and cost situations that have arisen from new technologies and
applications.
The repositioning of the central Innovation Management department in terms of
organizational structure and activities underscores the great importance
Deutsche Telekom has placed on innovation. As a result, a new central department
called "Innovation" was established, reporting directly to the Chairman of the
Board of Management. This department will work in close collaboration with the
Group Strategy and Technology and Platforms departments.
Cooperation with the divisions was defined based on time horizons and will be
ensured through scheduled coordination meetings in the future. The divisions
will concentrate on product-oriented innovations within a period of up to two
years while the Innovation department will study future market and technology
trends in a timeframe of two to five years. In order to ensure transparency with
regard to the effectiveness of innovation activities within the Group, Deutsche
Telekom has developed a grid of indicators and will review its results on a
regular basis.
Innovation strategy focused on new technologies. The focus of the innovation
strategy was to identify, describe, and evaluate so-called "disruptive
technologies" - technologies that have a long-term influence on the business of
both Deutsche Telekom and its individual divisions - as well as customer
behavior patterns and trends. This resulted in recommendations for the
development of new technologies like WiMax and ad-hoc networks that were
incorporated into the work of the divisions, Group Strategy, Corporate R&D, and
standardization efforts. In keeping with its "Agenda 2004" and the innovation
campaign that goes along with "Agenda 2004", Deutsche Telekom oriented its
innovation strategy process even more heavily toward profitable growth by
defining clear results and interfaces. For example, innovation projects were
launched in market-oriented and cross-divisional fields, like E-Health, in order
to create new growth areas for the Group.
Central R&D projects focused on future products and services. The Group's R&D in
2003 was focused on using market and technology trends and the "Four I's" to
develop socalled "enabling technologies". These are technologies that should
serve as the basis for future products and services. The project portfolio was
streamlined to bring it in line with the "Four I's" and "enabling technologies"
as well as tasksharing with the divisions and average project completion times.
Management report 2003
Research and development 43
The projects themselves were implemented with the involvement of the divisions
to ensure that the results could be used for the development of products and
systems. For example, the "Global Seamless Networks" project was carried out in
collaboration with T-Com, T-Systems, and other industry partners. It
demonstrated the latest optical transmission systems and how they interact with
Ethernet and IP solutions in a long-haul network. A series of speech-based
projects was also launched as part of a "voice initiative". The "VoiceIdent"
project, for instance, dealt with voice-based authentication. It is based on the
human voice as a reliable means of identification, thus fulfilling one of the
key security requirements of modern communications.
Research and Development expenditure. At approximately EUR 0.9 billion,
expenditure on R&D activities was at the same level in the 2003 financial year
as in the previous year, with the development and adjustment of software systems
and architectures again accounting for the largest proportion. In 2003, a total
of around 6,400 employees were involved in projects and activities aimed at
creating new products and offering them efficiently to the customers.
Patent applications and intellectual property rights. As the use of applications
in mobile and fixed-networks grows, intellectual property rights play an
increasingly important role in national and international competition. Deutsche
Telekom's activities in the fields of in-house development and third-party
acquisition take this into account.
The number of patent applications made by Deutsche Telekom in the year under
review was 402. The number of patents granted in 2003 - for applications
submitted in prior years - rose by around 70 percent over the previous year
(2003: 308; 2002: 182). At the end of 2003, Deutsche Telekom owned a total of
5,282 intellectual property rights. These included a variety of
application-specific patents, such as in the field of intelligent traffic
systems, that may become particularly important as future applications are
developed.
The management of these intellectual property rights at Deutsche Telekom takes
into account cost-benefit factors. The portfolio of intellectual property rights
is reviewed on a regular basis and intellectual property rights that are no
longer relevant are eliminated. In the year under review, Deutsche Telekom
continued to push forward the marketing of a portion of its intellectual
property rights portfolio.
--------------------------------------------------------------------------------
Number of intellectual property rights owned by Deutsche Telekom
--------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2000 2001 2002 2003
----- ----- ----- -----
3,641 4,225 4,513 5,282
New strategic focus at T-Venture. The positioning and business model of
T-Venture (T-Venture Holding GmbH) were revised in line with the restructuring
of Deutsche Telekom's innovation management activities. Besides generating value
contributions for Deutsche Telekom and its divisions, T-Venture's new task is
to ensure access to new products and services. By making strategic investments,
T-Venture aims to secure for the Group options on new technologies and business
models with promising but not yet quantifiable prospects for the future. This
increases the strategic importance of T-Venture for Deutsche Telekom's
innovation potential. In view of this, a corporate fund was established in
addition to the existing divisional funds to make investments in close
coordination with the new Innovation department.
The concentration of investment activities in these funds is reflected in
T-Venture Holding's investment volumes. As part of T-Venture's revised strategy,
new investments will only be made through the divisional funds managed by
T-Venture Holding. Accordingly, investments made by T-Venture itself were
reduced in the 2003 financial year.
44
Employees.
o Safeguarding jobs through capacity-oriented employment management
o Vivento on the right track after restructuring
o T-Spirit - new corporate vision and values
o Focus on quality and communication in ideas management
o Deutsche Telekom still leader in vocational training
Deutsche Telekom's human resources (HR) strategy is closely linked with the
overall Group strategy and supports corporate decisions with corresponding
personnel measures. In light of the current employment structure within the
Group and the Group's strategic objective of increasing long-term profitability,
the current focus of our HR strategy is on personnel cost management. Personnel
cost management is aimed at significantly improving the ratio of revenues to
payroll costs in the divisions.
Group human resources strategy. The Group human resources strategy was further
developed in 2003 and incorporates five main areas of focus that will determine
the direction of all of our personnel-related activities. The HR strategy agenda
ties into our new focus on future-oriented personnel activities, which was
launched in 2001 and concentrated on increasing efficiency and improving
competitiveness in 2002. All five areas - Personnel Cost Management, Total
Compensation, HR Efficiency, Managing Skills and Competencies, and Managing
Diversity and Leadership - are clearly focused on reducing costs and increasing
efficiency.
Personnel Cost Management: The unfavorable personnel cost structure has forced
Deutsche Telekom to practice more intense and comprehensive personnel cost
management than before. In addition to looking at workforce figures alone, the
Company must now also examine pay and working hours. According to the plans for
this area, all divisions will contribute to improving results in the Group by
reducing their personnel cost ratios by 2006.
Total Compensation: Our future strategy for terms and conditions of employment
will react to a greater extent to the primary causes of cost pressures with an
appropriate set of personnel cost management measures. Such causes include
limited competitiveness due to higher-than-average wages and salaries in some
business areas, swings in the economic cycle, and structural problems resulting
from technical innovations on the product markets.
HR Efficiency and Quality: Deutsche Telekom's human resources departments must
become far more efficient. Our long-term objective is to establish a lean
structure, with the Group concentrating on strategic management. Increases in
operating efficiency must be achieved within the divisions.
Managing Skills and Competencies: Becoming a leader in innovation remains one of
Deutsche Telekom's strategic aims. In order to achieve this goal, it is
essential that our personnel have a superior level of qualification over the
long term. But the general hiring freeze and the fact that a considerable
proportion of employees have been with the Group for many years present major
hurdles in this respect. That is why we must intensify training and development
activities for all Deutsche Telekom employees. We will also implement a
Group-wide management development system to ensure that the vast majority of top
managers can be recruited from within Deutsche Telekom.
Managing Diversity and Leadership: Productivity-enhancing and
innovation-promoting elements will complement our diversity management efforts
in the future. With this aim in mind, the divisions have set up a catalog of
projects at operational level that should, for instance, help them reach
specific customer groups and occupy market niches more quickly or sooner by
leveraging the linguistic and cultural diversity within the Group. We will also
continue to integrate the corporate vision and values into all HR tools and
systems across the divisions.
Management report 2003
Employees 45
T-Spirit: new corporate vision brings change in culture at Deutsche Telekom. In
2003, Deutsche Telekom rolled out its new corporate vision and values: T-Spirit.
After discussions with members of management, the new principles of the Group's
corporate and management culture were introduced in July 2003. Deutsche
Telekom's vision is this: "As the leading services company in the
telecommunications and information technology industry, we network society for a
better future. With top quality, efficiency and innovation, to the benefit of
our customers. In every respect."
With this vision, we are putting our customers at the very center of all of the
Group's activities. The "T" stands for quality, innovation, and efficiency. It
is the element that links the entire Group and it is our shared promise to our
customers.
To realize the new vision, we have developed a set of six core values - our
corporate values. These corporate values form the word SPIRIT: Superior value,
Passion for our customers, Innovation, Respect, Integrity, and Top excellence.
The vision and the six core values apply to all group units. The divisions have
used this vision to develop their own mission statements, which are geared
toward their respective business models. The mission statement should
communicate to employees which objectives are being pursued in each division's
market.
T-Spirit is intended to communicate Deutsche Telekom's identity to stakeholders
(investors, customers, suppliers, nongovernmental organizations), make clear
Deutsche Telekom's role in the economy and society, and strengthen cooperation
within the Group for the future by establishing a set of common values. The HR
department bears an important responsibility for the long-term success of
T-Spirit within the Group and is working to ensure it by integrating T-Spirit
into its human resources tools.
Restructuring increases Vivento's power to perform. In our effort to reorganize
and restructure our Personnel Service Agency into Vivento, we also redefined the
agency's core objectives. Supported by a new management team, Vivento can now be
considerably more effective on markets both inside and outside the Group and, as
a personnel and business service provider, is far more broadly positioned than
before. Additional areas of action have been added to the agency's existing
tasks of arranging contract and temporary work both within and outside Deutsche
Telekom and providing Vivento employees with individual support, retraining as
needed, and placement in new, permanent positions. Personnel surpluses can be
avoided before employees are transferred to Vivento by means of "systematic
capacity management" in collaboration with all group units. Vivento is creating
new, promising employment options by developing new business and placing
complete specialist teams in IT/telecom and related areas and in other market
segments.
Looking ahead to the year 2004, a new Call Center Unit will be established
within Vivento. The unit will develop call center business within and outside
the Group or re-insource call center business. The planned gradual expansion
with new business will be supported by a company established specifically for
this purpose (Vivento Customer Services GmbH & Co KG).
The framework for Vivento's activities in 2003 was once again the collective
agreement on protection against rationalization and safeguarding employment
along with the corresponding provisions for Deutsche Telekom's civil servants.
As a result of experiences with the initial organization, Vivento now offers
more intensive support for transferred employees, and the branch structure has
been expanded to include eight regional offices and is oriented toward the major
T-Com sites.
46
--------------------------------------------------------------------------------
Workforce development (as of Dec. 31 of each year)
--------------------------------------------------------------------------------
Employees in the Group 2003 2002* 2001*
--------------------------------------------------------------------------------
Total 248,519 255,969 257,058
--------------------------------------------------------------------------------
of which: Deutsche Telekom AG 118,669 120,009 124,328
--------------------------------------------------------------------------------
T-Com 129,644 149,106 155,583
--------------------------------------------------------------------------------
T-Mobile 43,427 41,597 38,025
--------------------------------------------------------------------------------
T-Systems 40,833 43,292 43,449
--------------------------------------------------------------------------------
T-Online 2,615 2,608 2,719
--------------------------------------------------------------------------------
Group Headquarters &
Shared Services 32,000 19,366 17,282
--------------------------------------------------------------------------------
Breakdown by region
--------------------------------------------------------------------------------
Germany 173,278 177,823 178,336
--------------------------------------------------------------------------------
International 75,241 78,146 78,722
--------------------------------------------------------------------------------
of which: other EU member
countries 16,698 17,647 16,538
--------------------------------------------------------------------------------
of which: rest of Europe 35,336 39,601 43,343
--------------------------------------------------------------------------------
of which: North America 21,525 19,144 16,909
--------------------------------------------------------------------------------
of which: rest of world 1,682 1,754 1,932
--------------------------------------------------------------------------------
Revenue per employee
at Deutsche Telekom
--------------------------------------------------------------------------------
Development of productivity
(thousands of (euro)) 222 210 199
--------------------------------------------------------------------------------
* Figures for the previous years relating to the divisions have been adjusted
to reflect the new organizational structure in the 2003 financial year.
--------------------------------------------------------------------------------
Innovations
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Number of suggestions
for improvement 7,995 8,703 8,308
--------------------------------------------------------------------------------
Savings (millions of (euro)) 127 385 121
--------------------------------------------------------------------------------
Number of patent applications 402 547 479
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Further training with Telekom Training
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Seminars 9,476 12,021 11,580
--------------------------------------------------------------------------------
Participants 110,620 111,168 121,701
--------------------------------------------------------------------------------
Participant days 258,202 342,157 348,892
--------------------------------------------------------------------------------
Global Teach sessions* 239,248 175,373 152,298
--------------------------------------------------------------------------------
* Global Teach is an in-house e-learning platform; in 2003, sessions were
initiated from about 41,000 workstations.
Capacity-oriented employment management. A significant breakthrough was made
toward securing jobs in the collective bargaining for Deutsche Telekom
subsidiaries in 2003, with the new collective agreement on protection against
rationalization and safeguarding employment for salaried employees in T-Systems
International, T-Systems Nova, T-Systems CDS, T-Systems Multimedia Solutions,
and T-Mobile Deutschland. The collective agreement package that was negotiated
includes a provision to reduce weekly working hours - a step that is completely
new to Deutsche Telekom companies. This collective agreement will serve as a
model for the 2004 negotiations, which will be dominated by the issue of
safeguarding jobs.
2003 was focused on communication in ideas management. In 2003, a number of
communicative, organizational, and technical measures were implemented which
were aimed at increasing the quality of suggestions for improvement and
mobilizing employees to take an active role in innovatively shaping the Company.
Among the measures was a brochure that targeted managers and encouraged them, as
superiors, to motivate employees to submit suggestions and, as decision-makers,
to be more sensitive to employees' ideas. An interactive catalog of questions
illustrates the quality standards that suggestions submitted via the Intranet
are expected to meet. As submitters are increasingly taking up direct contact
with evaluators, lead times for implementation are becoming shorter. In 2003,
the Deutsche Telekom Group made savings of some EUR 127 million thanks to 7,995
suggestions for improvement (first-time filings including subsequent approvals).
State-of-the-art training and development will secure prospects for the future.
If we are to meet the challenges presented by the market and Deutsche Telekom's
economic situation, our training and development activities must be efficient
and of a consistently high quality. For example, in-class seminars will
increasingly be prepared and complemented with e-learning, web-based training,
and virtual classrooms. The implementation of the Group-wide debt reduction
program and structural measures with regard to necessary personnel adjustments
curbed our development activities in 2003.
Management report 2003
Employees 47
The Telekom Training Center and T-Systems Training GmbH were combined at the
beginning of 2003 to form Telekom Training. As the Group-wide partner for
training and development, Telekom Training has 20 training sites with nine
conference hotels and 39 vocational training centers, including around 240
vocational workshops throughout Germany. Telekom Training is a full-service
provider for training and development as well as the infrastructure for
educational events and conferences.
With state-of-the-art training concepts, we are working hard to promote lifelong
learning for the future of our employees. Our educational scope ranges from
technical and business topics to instruction in quality management, project
management, and human resources management. Telekom Training also offers
training sessions on the "E-Le@rning-Portal" to ease the transition to new
software. Our Global Teach learning platform is the access portal to all the
training measures on Deutsche Telekom's intranet. It provides access to more
than 320 computer- and web-based training options. In implementing WEB-TV, we
fulfilled our employees' request for brief, topical training sequences. This
learning platform can be accessed from any Intranet or Internet connection,
ensuring the highest possible degree of individual learning options.
Looking to the next generation. Despite the difficult employment situation and
the tight cost situation, 4,000 junior staff throughout Germany began their
vocational training at Deutsche Telekom in September 2003. This puts the total
number of trainees at the end of 2003 at around 11,600, and once again makes
Deutsche Telekom one of Germany's largest providers of vocational training. At
the end of 2003, the trainee ratio was approximately 7 percent of Deutsche
Telekom's domestic workforce. Within the framework of our employment pact, we
expect to reduce the number of training positions offered in 2004. However, the
training ratio will probably still be higher than the national average.
Telekom pension fund successfully launched. Financial security after retirement
is becoming an increasingly important issue for employees. In 2002, we were the
first large corporation in Germany to implement the provisions of the German Old
Age Pension Act by establishing the Telekom Pension Fund (TPF). Throughout the
Deutsche Telekom Group, more than 20,000 employees have now opted to take part
in the deferred compensation plan under the TPF. Over 85 percent are taking the
option of deferring part of their gross salary, whereas the share of
participants opting to defer part of their net salaries (in accordance with the
so-called "Riester pension" plan) is very low - as is the case on the market as
a whole. The total volume invested in the TPF was over EUR 54.5 million at the
end of 2003.
Regular documentation of our social contribution. Each year, we publish our
Human Resources and Sustainability Report in which we document the contribution
made by the HR department to Deutsche Telekom's economic situation and our
responsibility toward employees and society as a whole. In addition, we use HR
data and other information in order to inform readers about structures,
performance, and the potential of our employees (so-called human capital), and
about our Group HR strategy and relevant activities.
48
Sustainability and environmental protection.
o Group adopts pioneering sustainability strategy
o Social charter provides transparency
o Further support for uncoupling CO(2) emissions from energy consumption
o Fleet makes more use of natural gas
Our everyday life today would be unimaginable without information and
telecommunications technology, which quite properly counts as the central
nervous system of modern society. As a telecommunications company, we feel a
special sense of responsibility, and for that reason have made a commitment to
sustainability as a fundamental concept. As we understand the term, we will be
able to achieve sustainability in the medium and long term if we can integrate
economic, social, cultural and ecological factors to form the foundation for our
business operations. Our aim is to maintain these aspects of sustainability in a
permanent, dynamic equilibrium. We have to have the flexibility to shift the
equilibrium in favor of one aspect or another for a short time in response to a
given situation, but not without also defining a path that will bring us back
into balance.
Group adopts sustainability strategy. To achieve this ambition, Deutsche Telekom
has developed a broad-based sustainability strategy in close consultation with
the divisions and various central units. Our Group Sustainability Day in May
2003 was an opportunity to involve outside stakeholders (such as investors,
customers, suppliers, non-government organizations) in the process. The Board of
Management then adopted the sustainability strategy in September. Founded on the
new T-Spirit corporate vision and values, it is an integral part of the Group's
overall strategy. First, the sustainability strategy defines the main issues in
matters of sustainability for the Group worldwide. It also describes what these
mean for the divisions, and how they are generally to be implemented. The
strategy consists of four different areas which are not isolated elements, but
which are are linked together and influence each other in many ways.
Our strategic guidelines:
Our basic aim
o To be financially successful, both in the short term and the long term, and
to enhance our credibility amongst customers, investors, financial markets
and other stakeholders through honesty and transparency;
o To establish a systematic way of assessing the social implications of what
we do, and include them in our decisions.
For people
o To implement internationally recognized human rights, employment standards
and approaches to environmental protection, such as those outlined in the
United Nations Global Compact on a Group-wide basis;
o To respect differences between people and cultures, and actively promote
exchanges among them.
For the future
o To increasingly develop sustainable services and practice their
implementation;
o To play an active role in the further development of the working
environment and the knowledge society, both inside and outside the Company,
and to help overcome the so-called digital divide.
For the environment
o To help promote more ecologically efficient use of resources in society,
and help protect the climate;
o To systematically reduce our own impact on the environment.
Binding social charter introduced for employees and suppliers. As our business
has grown internationally, we are faced with a new situation in regard to social
responsibility. We now need a worldwide answer to the question of the conditions
under which we will produce our products and provide our services. Taking
account of the entire value chain, we have developed our own social charter,
which is binding throughout the Group. It prescribes compliance with
internationally recognized minimum social standards all along the value chain.
At the same time, it also makes our principles clear for our stakeholders. In
addition to the values of the UN Global Compact, the charter is also founded on
internationally recognized norms, guidelines and standards promulgated by the
International Labor Organization (ILO) and the Organization for Economic
Cooperation and Development (OECD).
Management report 2003
Sustainability and environmental protection 49
The charter includes the following requirements:
o To recognize and respect diversity among nations and societies;
o To acknowledge a fundamental right of association;
o To prohibit forced labor;
o To eliminate exploitative child labor;
o To reject discrimination and promote equal opportunities and diversity;
o To acknowledge a right to fair pay, and comply with national rules on
working hours;
o To help train and develop employees and support them in taking personal
responsibility for maintaining their employability;
o To comply with minimum standards with regard to occupational safety and
health.
The requirements of our social charter are not restricted to the Deutsche
Telekom Group. Our suppliers are likewise required to comply with international
social standards, and to respect and apply the principles of the Deutsche
Telekom Social Charter. This requirement will be made an integral part of our
General Purchasing Terms and Conditions.
Further pursuit of concept for uncoupling CO(2) emissions from energy
consumption. Deutsche Telekom's commitment to protecting the climate is
supported by a concept for separating power consumption from CO(2) emissions.
The concept takes account not just of how much electricity costs, but also how
it is generated. Different types of power plants generate electricity with
greater or lesser amounts of CO(2) emissions. By carefully selecting our
suppliers, we were able to buy electricity from especially efficient power
plants, thus considerably reducing our indirect CO(2) emissions.
For the first time in 2003 we were able to calculate energy consumption and
CO(2) emissions separately under the contracts that had been in effect for their
first full year in 2002. Deutsche Telekom's total energy consumption in Germany
for 2002 was approximately 3,149 GWh, or about 74 percent of the 1995 total. By
comparison, CO(2) generation was about 0.95 million metric tons in 2002, just 44
percent of the 1995 figure. This "uncoupling effect" was achieved by buying
nearly 50 percent of our electricity from combined heat and power plants - about
four times more than in the average power generation mix in Germany.
Fleet makes more use of vehicles powered by natural gas. With a total of roughly
32,000 service vehicles and some 8,700 company cars at the end of 2003, Deutsche
Telekom operates one of the largest civilian fleets in Europe. Because our fleet
is so large, we have taken a number of steps to optimize its ecological
characteristics, as part of our own commitment to reduce environmental impact
and conserve natural resources. For instance, we are aiming for a continuous
reduction in fuel consumption and harmful emissions. We have inaugurated a
number of measures to this end, such as paring back fleet size, buying
fuel-efficient vehicles, teaching environmentally aware driving techniques, and
using alternative fuels and engines (especially vehicles powered by natural
gas).
At the end of 2002, Deutsche Telekom was using 49 gas-powered vehicles (20 of
them running purely on natural gas, and 29 hybrids). In the summer of 2003 we
launched a new project, buying 56 Opel Astra CNGs. These appropriately sized
vehicles run only on natural gas, without restrictions on their possible uses or
driving range. They were delivered in a number of pilot regions in December
2003. One area of special emphasis is the Berlin region, where a good network of
fueling stations ensures acceptance among users. Starting in 2004, we plan to
offer gas-powered vehicles nationwide to all our offices that use vehicles, as
an ecological and economical alternative to conventional diesel vehicles.
50
Risk management.
o Major risks eliminated as a result of the 2003 debt reduction target being
achieved ahead of time
o Regulation risks continue to predominate
o Reduction in excess staff remains a factor crucial to future success
o Established system for recording and monitoring risks proves its
effectiveness throughout the Group
The risk management system. Deutsche Telekom is exposed to various risks in its
business activities. The Group counteracts these risks by using a risk
management system. Deutsche Telekom views risk management as a business
challenge in which efficient procedures and a constant awareness of risks
contribute to making risks manageable. In its business policy, which focuses on
profitable growth, Deutsche Telekom consistently takes advantage of any
opportunities which arise. The associated risks are taken provided they are
manageable and the measures can be expected to produce additional value. Each
group unit is responsible for the risks which it takes in its field of
responsibility.
Deutsche Telekom's management needs a solid base of accurate information to be
able to appropriately deal with opportunities and risks and then make the
necessary decisions. To this end, Deutsche Telekom has been using an established
risk management system for several years. The risk management system is a
comprehensive system which is based on existing planning, information, and
monitoring processes and procedures. These include, for example, the integrated
planning and management process carried out each year, additional controlling
tools, and a review of the system (independent of processes) at regular
intervals by Group Auditing.
Deutsche Telekom attaches particular importance to managing risks arising
from financial positions. All our treasury activities - in particular the use of
derivatives - are subject to the principle of risk minimization. Derivative
financial instruments are used for the purpose of hedging interest rate and
currency exposures which could have an effect on cash flow. All financial
transactions and risk positions are managed in a central treasury system.
Management is informed about these positions on a regular basis.
In addition to the other reporting systems, there is a separate risk reporting
system in the Group. A network of risk managers reports identified risks that
exceed a defined threshold value to the next reporting level and ensures that
counter-measures are taken and these risks are taken into account in planning.
Corporate Risk Management is in charge of the central methods and system used
for this purpose. This unit ensures that the system works efficiently and
informs the Board of Management on a quarterly and, if need be, ad-hoc basis
about important risks facing the Group.
Deutsche Telekom thus has a sophisticated system for identifying, evaluating,
and monitoring risks throughout the Group, with the individual elements of this
system ensuring that business risks are recognized and actively managed early
on, while business risks in general are hedged in accordance with the principles
of risk management.
The risks. Of all the risks which have been identified for the Group, those risk
areas or individual risks which Deutsche Telekom considers to be significant
from a present-day perspective are examined below.
Economic and industry developments. The IT/telecommunications markets were not
able to escape the effects of the current difficult state of the economy. This
was reflected in particular in the restrained investment activities by key
account customers. An economic upswing is expected in 2004 following the
moderate revival in the second half of 2003. If this upswing is not sustained,
there is a risk that key account customers' willingness to invest will not
increase to the extent hoped for.
Management report 2003
Risk management 51
If the economy remains weak and consumer behavior does not pick up, the
achievement of Deutsche Telekom's growth targets - multimedia services in mobile
communications, for example, or higher-value accesses in the fixed network -
could be put at risk in the medium and long term and thus have a negative impact
on the net worth, financial position, and results of Deutsche Telekom.
The trend towards broadband accesses and other forms of line upgrading in the
fixed network continues unabated in the telecommunications sector. At the same
time, however, there is an increasing risk of substitution of traditional
fixed-network voice telephony by mobile communications.
Regulation and competition. Unlike its competitors, Deutsche Telekom is subject
to strict regulation in Germany, combined with extensive powers of government
agencies to intervene in the definition of products and pricing. The scope of
these risks can only be estimated to a limited extent.
The federal government adopted the draft for the new Telecommunications Act on
October 15, 2003, which provides for a considerable increase in regulation,
particularly in the area of wholesale services. The draft act expressly includes
an obligation to sell services to resellers at wholesale prices. In addition,
expansion of the obligation to provide invoicing and collection services for
competitors is planned. When this law comes into force, Deutsche Telekom may be
exposed to the risk of shifts in market shares. The possibility cannot be ruled
out that stricter regulations will also be issued in other areas, e.g., consumer
protection and public security, which could lead to increased expenses.
Although the amended Telecommunications Act does not explicitly provide for
regulation in the area of mobile communications, regulatory intervention, e.g.,
with respect to call termination charges, cannot be ruled out. Deutsche Telekom
does not expect the amended Telecommunications Act to come into force before the
middle of 2004.
Deutsche Telekom is not only subject to regulation in Germany; some of its
subsidiaries abroad also have to comply with local regulatory provisions. In the
fixed network segment, this applies in particular to subsidiaries in Hungary,
Slovakia, and Croatia. In mobile communications, group companies in the United
States, the United Kingdom, the Netherlands, the Czech Republic, Croatia, and
Austria are supervised by regulatory authorities. A possible tightening of
regulatory control in the area of mobile communications by the European Union is
associated with a risk of price reductions for international roaming and call
termination charges. In the United States, new consumer protection regulations
could cause T-Mobile USA, for instance, to incur considerable additional
expenses in the future in the area of customer data administration.
In the fixed-network area, classic voice telephony is in decline, not least due
to substitution by mobile communications. The trend towards broadband accesses
and other forms of upgraded subscriber lines, however, is proceeding unabated.
For T-Com, competition has become fiercer due to decisions of the Regulatory
Authority in 2003 (launch of "call-by-call" and "carrier preselection" in the
local network). Here the possibility of a further drop in prices and continued
loss of market share cannot be ruled out. Risks also arise from the increase in
charges for the termination of calls in the networks of alternative local
carriers (coupled with the elimination of reciprocity for call termination
charges).
For T-Online, there is also a risk of more intense competition as a result of
possible decisions by the regulator, e.g., with regard to broadband access.
In spite of its disproportionately strong growth in terms of customer additions,
T-Mobile USA is still a player with a relatively small market share in the
United States compared to other enterprises operating at the national level. If
a consolidation process takes place among U.S. mobile communications companies,
as announced by Cingular and AT&T-Wireless in February 2004, and T-Mobile USA is
not involved in this process, there could be competitive disadvantages and a
negative effect on growth and profitability for the company over the medium and
long term.
52
In its capacity as a provider of solutions covering the entire value chain of
information and communications technology, T-Systems is subject to risks
associated with the general economic situation and the willingness of customers
to invest, as well as sharper price competition both at the national and
international levels. In spite of the difficult market environment, T-Systems is
increasingly successful in winning large contracts in the area of ICT
(information and communication technologies) solutions.
Products and services. As a result of rapid technological progress and the trend
towards technological convergence, there is a danger that new and established
technologies or products not only complement one another, but that they also -
at least in part - serve as substitutes for one another. Voice over IP and WLAN,
for example, are such new technologies.
Considerable risks arise from dependence on individual suppliers. Especially in
conjunction with the launch of UMTS, there is still a risk that the appropriate
terminals will not be available in sufficient quantity and quality, as a result
delaying or impeding the marketing of UMTS.
In addition, against the background of the restraint being shown by consumers at
present, there is a risk that Deutsche Telekom will not succeed in making
customers sufficiently aware of the existing added value offered by its products
and services and in generating customer acceptance. This risk applies not only
to mobile data services, but also to other product innovations aimed at the mass
market, e.g., T-DSL. It is therefore essential for the success of Deutsche
Telekom's marketing strategy that we make it possible for consumers to
experience this added value. This also applies to the area of paid content for
T-Online.
The T-Systems business model is oriented towards the performance of major
projects. These are based on agreements which provide for considerable customer
claims for warranty, damage, or contractual penalties in the event of
unsatisfactory rendering of performance by T-Systems. As there is of course
little in the way of historical experience with such projects, there are
increased risks associated with these projects as well.
Toll Collect. DaimlerChrysler Services, Deutsche Telekom AG, and Compagnie
Financiere et Industrielle des Autoroutes S.A. (Cofiroute) reached an agreement
with the Federal Republic of Germany, represented by the German Federal Ministry
of Transport, Building and Housing (Federal Ministry of Transport), in September
2002 on the establishment and operation of a system for the recording and
collection of toll charges for the use of German autobahns by commercial
vehicles with a permissible total weight of more than 12 tons. Deutsche Telekom
and DaimlerChrysler Services each hold a 45-percent stake in the Toll Collect
consortium, with the remaining 10 percent being held by Cofiroute. The start of
operations, initially scheduled for August 31, 2003, has been delayed.
The 45-percent stake in the operating company entails a range of risks for
Deutsche Telekom which could have a negative impact on the Company's net worth,
financial position, and results. This includes the possibility of contractual
penalties due to further postponement of the start of operations and
corresponding losses of revenue as well as additional expenses. Termination of
the agreement by the Federal Ministry of Transport would have a considerable
negative impact on the net worth, financial position, and results of the Group.
Additionally, this may have a negative effect on the Company's image.
As a member of the Toll Collect consortium, Deutsche Telekom has received a
claim from the Federal Republic of Germany for the payment of damages. The
government is demanding compensation for lost toll revenues resulting from the
postponement of system completion. The Federal Republic is asserting claims for
damages of EUR 156 million per month for the period September 1 to December 31,
2003 and EUR 180 million for each month thereafter. In addition, the Federal
Republic is enforcing contractual penalties of approximately EUR 680 million for
reasons such as the members of the consortium did not seek the necessary
agreement of the Federal Ministry of Transport before concluding certain
subcontractor agreements. The Federal Republic is also demanding enforcement of
further contractual penalties. Deutsche Telekom believes the claims of the
Federal Republic are unfounded. Under the terms of the agreement between the
members of the consortium and the Federal Republic of Germany, any disputes
relating to the toll collection system shall be settled by an arbitrational
court. The Federal Republic has stated clearly that it intends to resort to the
arbitrational court in its assertion of these claims.
Management report 2003
Risk management 53
Personnel. Deutsche Telekom is continuing with its planned significant reduction
in the number of staff. A considerable proportion of Deutsche Telekom staff in
Germany, however, is protected against dismissal as a result of their status as
civil servants or under statutory provisions and collective agreements. This
poses a major challenge for the implementation of these measures.
There is a risk that individual placements of employees transferred to Vivento,
Deutsche Telekom's personnel service provider which was restructured in 2003, to
jobs on the external labor market will not be possible to the extent originally
planned due to the difficult economic situation. This would jeopardize the
achievement of the aim to reduce personnel costs. For this reason, additional
employment opportunities are to be created within Germany by staffing major
projects and establishing new business activities, such as on the call center
market.
In addition, Deutsche Telekom expects to agree a collective reduction in weekly
working hours combined with a limited drop in salaries for the employees of
Deutsche Telekom AG within the framework of the "Deutsche Telekom employment
pact", which is an issue in collective bargaining in 2004 aimed at producing an
agreement to safeguard jobs. This assumes that negotiations with the trade
unions will be brought to a successful conclusion. A change in statutory
provisions is also required if the arrangements to be agreed upon are to apply
to the large number of civil servants.
Health and the environment. The safety of all Deutsche Telekom's products and
technical facilities constitutes an essential element of the Company's business
activities. One important issue in the area of (mobile) networks is their
electromagnetic compatibility with the environment. This is a controversial
issue and the subject of public debate. It cannot be ruled out that existing
uncertainties and concerns relating to the effects of electromagnetic radiation
on users of mobile services cannot be completely dispelled by scientific
studies. This could lead to a drop in the use of mobile communications and
impede efforts by network operators to find sites for mobile communications base
stations.
Deutsche Telekom aims to overcome doubts among the general public by means of an
objective, scientifically well-founded, and transparent information policy. It
was to this end that the "Mobile Communications Information Center" was founded
in Germany in an initiative by mobile communications enterprises seeking to
satisfy public information needs regarding the issue of "mobile communications
and health".
IT and telecommunications infrastructure. Network and nodal breakdowns and
resulting disruptions in production processes are reduced to a minimum by means
of redundant structures in IT and telecommunications networks as well as back-up
mechanisms for network nodes and computing centers. Protective systems such as
firewalls, virus scanners, building security, and access systems, etc., are a
basic standard in the Group. In addition, networks as well as IT and
telecommunications nodes are monitored by separate early warning systems so that
automated and manual counter-measures can be initiated in good time in the event
of disruptions. Moreover, efficient organizational and technical emergency
measures also aim to minimize damage.
It can nevertheless not be ruled out that acts of God such as lightning, fires,
flooding, or other events such as terrorist attacks, malicious actions, and
hacker attacks may lead to temporary and local disruptions in internal processes
or services for customers.
Litigation. Deutsche Telekom AG is party to several court and out-of-court
proceedings with government agencies, competitors, and other parties. The
proceedings listed below are of special importance from Deutsche Telekom's point
of view.
54
A series of lawsuits combined to form class actions have been submitted to the
United States District Court for the Southern District of New York by or on
behalf of alleged buyers of American Depository Shares of Deutsche Telekom AG,
which were issued on the basis of a registration statement on Form F-3 filed
with the SEC on May 22, 2000 and a prospectus of June 17, 2000, as well as by
alleged buyers of American Depository Shares who purchased these shares in the
period from June 19, 2000 up to and including February 21, 2001. These lawsuits
are asserting claims in court against Deutsche Telekom AG and its former
Chairman of the Board of Management, Kreditanstalt fur Wiederaufbau, Deutsche
Bank, Deutsche Bank Alex Brown, Dresdner Kleinwort Benson, Dresdner Kleinwort
Benson North America LLC, and Goldman Sachs & Co. pursuant to U.S. securities
laws. The lawsuits are based on the charge that essential points stated in the
registration statement and in the prospectus were incorrect and misleading since
the registration statement and the prospectus failed to provide any relevant
information on the status of merger negotiations between Deutsche Telekom AG and
VoiceStream Wireless Corporation, and that the stated values of Deutsche Telekom
AG's real property assets were too high. The court has admitted the lawsuits as
a class action; the class comprises all the buyers of American Depository Shares
who purchased these shares in the period from June 19, 2000 up to and including
February 21, 2001. The selling shareholder in the share placement, Kreditanstalt
fur Wiederaufbau, was dismissed from the class action as a defendant. Discovery
in this class action is nearly complete. On September 10, 2003 Deutsche Telekom
AG submitted two motions for summary judgment to the court. No rulings have been
made on these motions yet.
In Germany, a number of actions have been filed by alleged buyers of Deutsche
Telekom shares that were sold on the basis of the prospectuses of May 28, 1999
and May 26, 2000. Deutsche Telekom AG expects this to involve some several
thousand plaintiffs. Many of these actions maintain that Deutsche Telekom AG did
not recognize and amortize the carrying amount of its real property assets
correctly in accordance with statutory accounting requirements. Moreover, claims
regarding the VoiceStream transaction were filed in several of these actions
that are based on the same charges made in the U.S. class action. In other
proceedings, it has been asserted that Deutsche Telekom AG failed to provide
information on certain risks and to draw attention to discussions being held by
the Board of Management. However, since not all the actions have been served
yet, it is possible that further charges may be filed of which Deutsche Telekom
AG is not yet aware. Some of the actions are also directed at Kreditanstalt fur
Wiederaufbau and/or the Federal Republic of Germany. It is not possible to make
any statement about the expected outcome of these actions at the present time.
Several thousand buyers of Deutsche Telekom shares have applied for conciliatory
proceedings regarding the above charges.
In April 2001, QPSX Europe GmbH filed an application for an injunction against
Deutsche Telekom AG and Siemens AG at Munich Regional Court, contending that the
defendants are infringing a patent right belonging to the plaintiff by providing
services on the basis of the Asynchronous Transfer Mode Technology (ATM
technology). As a result of the fact that ATM technology is used in a series of
products and services provided by Deutsche Telekom, such as T-DSL and T-ATM, an
unfavorable outcome to these proceedings might entail significant disadvantages
and detrimental effects for Deutsche Telekom's business.
In September 1998, Deutsche Post AG instigated arbitration proceedings in order
to receive payments from Deutsche Telekom AG for costs entailed in providing
housing assistance to former employees of Deutsche Bundespost, including a
number of Deutsche Telekom employees. The responsibility for providing housing
assistance to the former employees of Deutsche Bundespost was transferred to
Deutsche Post AG in 1995. The parties differ in opinion regarding the proportion
to be reimbursed by Deutsche Telekom AG for these services. At present, Deutsche
Post AG is demanding payments amounting to EUR 131 million from Deutsche Telekom
AG. If this claim is successful, Deutsche Telekom AG expects Deutsche Post AG to
file further claims. In March 2000, Deutsche Telekom AG filed counterclaims
amounting to EUR 62.6 million, demanding the return of prepayments it had made
in 1995 and 1996.
Management report 2003
Risk management 55
Deutsche Telekom AG intends to defend itself resolutely in each of these court,
conciliatory and arbitration proceedings. It is not possible to make any
statement about the outcome of these proceedings at this point in time.
Currency and interest rate risks. Deutsche Telekom is exposed to currency risks
due to its international business activities. The risks resulting from the
purchase and sale of goods and services in various currencies are relatively
low, as the inflows and outflows relating to the companies operating abroad are
mostly recorded in the respective local currency. As a rule, Group Treasury only
hedges currency risks that have an impact on cash flows. Currency risks relating
to financing and investment activities, and which have an impact on cash flows
are also hedged in full. Foreign currency effects from the translation of
balance sheet items, and which do not have an impact on cash flows are not
hedged as a rule.
Deutsche Telekom is primarily exposed to interest risks in the euro, U.S. dollar
and British pound sterling currencies. Interest rate risks arise as a result of
fluctuations in interest rates affecting the level of interest payments due in
each of these currencies. Each year, the Board of Management specifies the ratio
of fixed and variable interest-bearing items in these three currencies. Group
Treasury takes appropriate measures using derivative instruments to implement
the interest-risk management decisions of the Board of Management.
Financing and rating. Deutsche Telekom has achieved the debt reduction target
for the 2003 financial year. The successful reduction of net debt in 2003 to
three times adjusted EBITDA ensures access to the capital market. Although the
Group's profitable growth has priority in 2004, Deutsche Telekom will continue
its efforts to further reduce its net debt. Deutsche Telekom has already
pre-financed its repayment obligations for 2004 and 2005.
The Moody's rating agency upgraded the outlook for the long-term rating of
Deutsche Telekom from "stable" to "positive" on June 24, 2003, with Fitch making
the same move on August 28, 2003. Deutsche Telekom is assigned a long-term
rating of Baa3 (outlook: positive) by Moody's and a BBB+ (outlook: positive) by
Fitch. This was confirmed by Standard & Poor's on July 10, 2003 with a long-term
rating of BBB+ and a stable outlook. The risk of greater financing costs due to
a deterioration in rating is low in view of the current rating situation.
Sales of shares by the Federal Republic or Kreditanstalt fur Wiederaufbau (KfW).
The federal government has announced that it intends to sell additional shares
in Deutsche Telekom by means of a so-called holding arrangement, i.e., the
transfer of the shares to KfW, to finance its planned reforms. This plan has not
yet been spelled out in detail, however. For holders of T-Shares, there is a
danger that a sale of Deutsche Telekom shares through KfW or rumors to this
effect circulating in the market could have a negative short-term impact on the
share price.
Assessment of overall risk. Major risks for Deutsche Telekom have been
eliminated by the attainment of the debt reduction target planned for the end of
2003 ahead of schedule. Other risks have increased, however. These include the
regulatory risks resulting from the pending amendment to the Telecommunications
Act, the successful launch of product and service innovations and risks relating
to the planned further reduction in excess staff. The Group is not exposed to
any risk endangering its continued existence.
56
Key events after December 31, 2003.
Discontinuation of monthly line sharing charge for 2004; new tariffs planned
from 2005. At the end of February 2004, Deutsche Telekom agreed with the EU
Commission to close the supposed cost/price differential between broadband rates
charged to competitors and retail broadband rates as of April 1, 2004. To this
end, the monthly wholesale rate for competitors will no longer exist from April
2004; this arrangement will initially apply until the end of December 2004. For
the period starting 2005, Deutsche Telekom will develop new, more favorable
line-sharing rates in the next few months. In view of the proposed rate
reduction, the EU Competition Commission decided at the beginning of March to
discontinue its investigations relating to Deutsche Telekom's alleged abuse of
its market-dominant position.
Acquisition of Scout24 approved by anti-trust authorities. On December 10, 2003
the Supervisory Board of T-Online International AG approved acquisition of 100
percent of the shares in Scout24 AG, Baar (Switzerland) from the private equity
company Beisheim Holding Schweiz AG, Baar (Switzerland). The German and Austrian
anti-trust authorities approved the transaction at the beginning of February
2004. Subject to agreed adjustments depending on the 2003 financial statements
of Scout24 AG, the purchase price is approximately EUR 180 million in cash and
includes the take-over of a shareholder loan. As part of the acquisition of
Scout24 AG, T-Online International AG is also acquiring the shares held by
Scout24 in the companies AutoScout24, ImmobilienScout24, JobScout24,
FinanceScout24, FriendScout24, Scout24 Schweiz AG and TopJobsScout24, as well as
other Scout24 brands. The Scout24 marketplaces are aimed at users in Germany,
Switzerland, and other European countries.
Sale of shares in Virgin Mobile. At the end of January 2004, T-Mobile and Virgin
Group Ltd. signed a contract agreeing that Virgin Group Ltd. would take over
T-Mobile UK's 50-percent stake in their joint venture Virgin Mobile. In return,
under the terms of a new wholesale agreement, Virgin Mobile will continue to use
T-Mobile UK's network for at least another 10 years; Virgin Mobile has no mobile
communications network of its own. In addition, T-Mobile will share in the
proceeds of the stock market flotation of Virgin Mobile.
Toll Collect. DaimlerChrysler Services, Deutsche Telekom AG, and Compagnie
Financiere et Industrielle des Autoroutes S.A. (Cofiroute) reached an agreement
with the Federal Republic of Germany, represented by the German Federal Ministry
of Transport, Building and Housing (Federal Ministry of Transport), in September
2002 on the establishment and operation of a system for the recording and
collection of toll charges for the use of German autobahns by commercial
vehicles with a permissible total weight of more than 12 tons. Deutsche Telekom
and DaimlerChrysler Services each hold a 45-percent stake in the Toll Collect
consortium, with the remaining 10 percent being held by Cofiroute. The start of
operations, initially scheduled for August 31, 2003, has been delayed.
The consortium has been in negotiations with the Federal Ministry of Transport
for weeks. The discussions are focused in particular on the timing and the form
the system will take at its launch, issues of liability and other amendments to
the agreement, as well as technical aspects of the toll collection system. The
Federal Minister of Transport, Building and Housing announced on February 17,
2004 that notice of termination would be given. Deutsche Telekom received this
notice of termination on February 19, 2004.
Under the terms of the operating agreement, the consortium then has the
opportunity to remedy within two months the reasons for termination as stated,
insofar as they are justified, and to agree with the Federal Ministry of
Transport the remaining preconditions for continuation of the Toll Collect
project before the Federal Ministry of Transport can finally terminate the
agreement. Termination by the Federal Ministry of Transport would also have a
negative impact on the net worth, financial position, and results of the Group.
On February 29, 2004, the conosortium and the Federal Ministry of Transport
agreed on modalities for continued cooperation. The agreement concerns the
project plan in particular, as well as issues of liability and remuneration. The
consortium and the Federal Ministry of Transport will implement the agreed
amendments in the coming weeks.
A further capital increase of EUR 80 million was carried out on February 27,
2004 to extend the financing of Toll Collect GmbH and to comply with the agreed
equity guarantee. A further capital increase of EUR 150 million is planned for
March 2004. Deutsche Telekom has already taken precautionary measures for this
in its 2003 financial statements.
Management report 2003
Outlook 57
Outlook.
o World economy on course toward recovery
o Broad program of measures initiated
o Divisions aim to further improve earnings
o Focus on profitable growth
World economy expected to pick up further. The worldwide economic recovery
projected by leading economic research institutes is forecast to gain momentum
in 2004. The strongest economic impetus is initially expected to come from the
United States. At least at the outset, the euro region will lag behind the
trend. We assume, however, that the discrepancy in business conditions will
narrow as the year goes on. The primary reasons for the delay will be the
continued strength of the euro, limited corporate investment, and a weak level
of private consumption. We agree with the research institutes in expecting
economic growth of about 1.7 percent in the euro region during 2004 and about
3.1 percent worldwide.
Corporate strategy focused on profitable growth. We intend to position the Group
as a growth leader in the ICT sector. But this growth is not to be at the
expense of profitability. To achieve this ambitious goal, the Group has
developed its "Agenda 2004". This defines six cross-divisional areas that will
be our top priorities during the current financial year: broadband, human
resources, innovation, quality, efficiency, and business customers. As "Agenda
2004" is implemented, it will significantly enhance the business potential of
the Group's divisions. It will also play an active role in strengthening
coordination between the divisions.
"Agenda 2004" sets out specific steps. Broadband will be a crucial aspect in our
Group's future development. Growing demand for broadband access and more
widespread content usage necessitating high transmission rates mean that the
outlook is promising for the coming years in terms of potential revenue growth.
We are preparing to leverage this potential with appropriate initiatives,
especially in our T-Com and T-Online divisions. The Deutsche Telekom Group
expects a marketing surge in its T-DSL business thanks to innovative offers in
the areas of access, personalized services and content.
Another key aspect in the 2004 financial year will be managing personnel costs.
The principal areas of action here will be in the T-Com division, and also
within the purview of Vivento, our personnel service provider. Besides
conducting individual placements, we will also develop additional outplacement
business models. The Group is also in intensive negotiations with employee
representatives to shorten the working week. We view this as a promising way of
relieving the financial pressure on the Group while avoiding compulsory
redundancies. We are additionally reviewing methods for adjusting salaries, and
the re-introduction of a severance program.
Our innovation drive is already under way, and will continue throughout all
divisions. This underscores the importance we attach to innovation as a factor
for profitable growth. We will continue to pool the divisions' core competencies
with a more market-oriented focus, and take advantage of inter-divisional
technology platforms to create new products and services. Important areas for
innovation will include enhancing inter-operability among different terminal
devices ("seamless services") and further developing our network infrastructure
("next generation networks"). And we will continue to improve our already
successful Wireless LAN and broadband network access services.
The objective of our Group-wide quality drive is to increase customer
satisfaction and strengthen customer loyalty to the "T" brand. Our extensive
range of measures puts a clear emphasis on increasing the quality of service at
points of contact with the customer. By optimizing our planning for staff
deployment and requirements, and through focused staff coaching, we will achieve
higher-quality customer assistance with shorter waiting times. We expect IT
solutions to provide an additional improvement in service quality, for example
with the implementation of an order management system at T-Online. T-Systems is
systematically internationalizing its solutions, highlighting our quality
standards on an international level. Another aspect of this campaign focuses on
crucial interfaces between divisions. For example, we will improve the
synchronization of the provision of broadband accesses by T-Com and the
activation of Internet accesses by T-Online.
58
Efficiency enhancements and cost cuts are another focal point of "Agenda 2004".
All divisions will participate in this drive with the implementation of specific
measures. With this objective in mind, we will continue to work on improving our
productivity in all relevant areas. This includes the planned sale of noncurrent
assets no longer needed for operations, and a further optimization of working
capital. We will also realize synergies from Group-wide network and IT
platforms, and build up our purchasing power with procurement bundling in this
field.
The business customer drive at T-Systems and T-Com aims to attune cooperation
between these divisions better to our customers' needs. The ultimate goal is to
optimize sales management for large and medium-sized business customers. This
will enable us to identify specific customer needs and address the relevant
customer groups with coordinated sales activities and appropriate products and
services. In addition, we plan to refocus the individual sales units' target
systems in terms of internal supply and service relations, to concentrate them
more on optimizing the Group's overall results.
T-Com aims to improve EBITDA. The T-Com division is focusing on safeguarding and
expanding its core business in 2004 - and more specifically, on stabilizing its
existing business and pursuing its broadband drive. T-Com is more exposed to the
effects of regulation than any other division. The introduction of call-by-call
for local calls during the year under review, together with other regulatory
actions such as the reduction of interconnection charges, will add to the
pressure in 2004. But we plan to counter this trend with such means as special,
attractive tariff options. Establishing T-Com as a brand in its own right is
expected to make an important contribution toward building customer loyalty.
The T-Com division will continue to focus on enhancing profitability and
improving cash generated from operations. We expect T-Com to improve its EBITDA
(earnings before interest, tax, depreciation and amortization) in 2004 with new
measures, for example those included in its efficiency and human resources
drives. T-Com's capital expenditure will be focused on a steady expansion of the
subscriber line network and transmission platforms.
T-Mobile will be growth driver for the Group in 2004. The T-Mobile division will
be one of the Group's growth drivers in 2004. The driving force will be an
expansion of the core business in voice traffic, while at the same time playing
a key role in the development of the future market for mobile data services.
Although growth is likely to lose momentum slightly in Western Europe, we still
expect very satisfactory growth rates in the U.S. market. We will also generate
additional growth potential with the improvement of our customer structure and
strengthening the "T-Mobile" brand.
All in all, we expect to see significant revenue growth at T-Mobile in the 2004
financial year. Furthermore, EBITDA should grow substantially compared with
2003. Our strong international presence and expanded customer base will enable
us to take advantage of significant economies of scale and synergies under the
"One Company" approach. Specific efficiency advantages exist in purchasing, and
in processes that are already standardized division-wide and are to be optimized
further under "Agenda 2004".
As in 2003, the mobile communications growth market will account for a
substantial proportion of capital expenditures this year. One focal point will
be the expansion of the UMTS network in Europe. We will also continue to expand
GSM network capacity and quality in the United States to ensure medium-term
growth in this market.
T-Systems will continue to gain ground despite more intense competition. With
its focus on selected industries and its optimized portfolio of solutions, the
T-Systems division has already improved its earnings substantially. In tandem
with our drive to win more business customers, this development will continue to
bear fruit. Consistent orientation towards customer needs - for example, by
providing innovative, flexible business solutions - will enable the division to
grow despite the competition for business customers.
T-Systems will still face intense pressure from competitors in the markets for
IT and telecom services during 2004, especially with regard to prices. But the
pleasing level of new orders up to the end of 2003 still leads us to expect a
slight increase in revenues, despite the adverse market environment. The
division will counter the heavy price pressure with programs to enhance quality
and efficiency in every segment. Examples of these programs include the further
consolidation of computer centers and the restructuring of the Systems
Integration unit. This will further boost an already good earnings position.
Management report 2003
Outlook 59
T-Online will continue to increase user numbers and intensity of usage. Once
again in the new financial year, the T-Online division is maintaining its
position as a growth driver in the online market. We expect that user numbers
will keep growing and that users will spend more time online. The reason is the
successful combined business model that pairs access with non-access business.
The broadband drive is also expected to provide important impetus. With the
support of "Agenda 2004", growth potential will also be generated in the
innovative market for paid content and services (such as video on demand) in the
future. We therefore expect T-Online's revenue to increase in 2004. The factors
propelling the increase in efficiency will be process improvements and a
consistent exploitation of economies of scale.
Divisions' successes will be reflected in Group figures. Following on from our
considerable progress in debt reduction during 2003, our focus for the 2004
financial year will be on profitable growth. As part of "Agenda 2004" we have
identified fields for action which we expect to create additional impetus for
growth when the relevant measures are implemented. We intend to maintain the
position of our T-Mobile and T-Online divisions as growth drivers in their
respective markets. At the same time, we expect the T-Com division to profit
from the intensified broadband drive and once again to generate high, almost
stable revenues for the Group. With the additional contribution from the
T-Systems division, we expect net revenue to grow again this year. We also
expect an increasing proportion of revenue growth to come from our international
affiliates, especially T-Mobile USA.
We expect EBITDA to increase once again in 2004. This growth will be driven not
just by expanding revenue, but by sustained improvements in efficiency.
After our successful debt reduction measures in the 2003 financial year, we are
planning a moderate expansion of our investment activities in 2004. We will do
so in line with the principle of profitable growth.
We expect no major changes compared with the previous year in depreciation and
amortization. As a result of the particularly high nonscheduled write-downs on
noncurrent assets that resulted from the strategic review in the 2002 financial
year, depreciation and amortization stabilized at an appropriate level in 2003.
This development is likely to continue during the current year.
The range of measures under "Agenda 2004" combines growth objectives with debt
reduction. We expect our net debt to fall further in the 2004 financial year,
primarily through the use of our cash generated from operations. Consequently,
we expect a further moderate year-on-year decrease in our net interest expense.
We are aiming to increase our net income in the 2004 financial year. This growth
will be driven mainly by the revenue increases outlined above, combined with
improvements in efficiency and in cost structures. But we also expect this
earnings growth to be associated with a higher tax burden.
Suspension of dividend payment. The Board of Management and Supervisory Board
will propose to the shareholders' meeting that no dividend be paid to
shareholders' for the 2003 financial year. Suspending dividend payments again
will continue to support the Group in reducing its debt and thus improve its
balance-sheet ratios. This underlines our determination to create a solid
foundation for profitable growth. Our aim is to reinstate the dividend for the
2004 financial year to let our shareholders benefit from the Company's success
once again.
Group on track for 2004. After our major advances in reducing debt, the 2004
financial year will be focused on profitable growth. We are confident that this
strategy will allow us to continue our successes of 2003.
[GRAPHIC]
Determination.
Promise performance. Deliver performance.
Taking responsibility with the power to perform.
[GRAPHIC]
62
The T-Share. On the way up.
o Share price rises by over 18 percent in the course of the year
o Marked upswing in international stock markets
o Debt reduction and profitable growth within the Group well received by
capital markets
-------------------------------------------------------------------------------
T-Share information
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Xetra closing prices (euro)
-------------------------------------------------------------------------------
Share price at Dec. 31 14.51 12.25
-------------------------------------------------------------------------------
Year high 14.51 20.16
-------------------------------------------------------------------------------
Year low 9.13 8.42
-------------------------------------------------------------------------------
Trading volume (number of shares)
-------------------------------------------------------------------------------
German exchanges 5.9 billion 5.7 billion
-------------------------------------------------------------------------------
New York Stock Exchange (ADRs) 169 million 211 million
-------------------------------------------------------------------------------
Tokyo Stock Exchange 1.2 million 1.2 million
-------------------------------------------------------------------------------
Market capitalization at Dec. 31 (euro) 60.9 billion 51.4 billion
-------------------------------------------------------------------------------
Weighting of the T-Share in major stock indices
-------------------------------------------------------------------------------
DAX 30 8.8% 9.3%
-------------------------------------------------------------------------------
Dow Jones Euro STOXX 50(C) 2.7% 2.3%
-------------------------------------------------------------------------------
T-Share - key figures
-------------------------------------------------------------------------------
Net cash provided by operating activities
per share (euro)3.41 (euro)2.97
-------------------------------------------------------------------------------
Earnings per share (German GAAP) (euro)0.30 (euro)-5.86
-------------------------------------------------------------------------------
Earnings per share (U.S. GAAP) (euro)0.70 (euro)-5.30
-------------------------------------------------------------------------------
Dividend -- --
-------------------------------------------------------------------------------
Shares issued (millions) 4,197.75 4,197.75
-------------------------------------------------------------------------------
Capital markets. In 2003, after three successive years of decline, international
stock markets recorded positive results for the year. Although the markets
clearly suffered in the first two quarters of 2003 from the uncertainty caused
by the Iraq crisis, with the second quarter also impacted by the SARS epidemic,
the markets picked up significantly in the rest of the year. The easing of
political tensions around the world and signs of economic recovery restored
confidence and optimism around the markets. The DAX closed on December 31, 2003
at a high for the year of 3,965 points, an increase of 37 percent on the
previous year's close.
Trends in international indices. Other international stock exchanges also showed
a distinct upward trend in 2003, although gains generally lagged behind the DAX.
The Euro STOXX 50(C) gained 16 percent in the course of the year, while the Dow
Jones Industrial increased by 25 percent. The Asian markets also marked a clear
recovery once the SARS problem was contained. The Nikkei 225 - bolstered by
massive intervention from the Japanese government - also rose in 2003 to close
24 percent up on the year.
Growth of the T-Share. The T-Share rose by more than 18 percent over the whole
year, from its starting point of EUR 12.25 on December 31, 2002.
In the run-up to the outbreak of the Iraq war, the share suffered another
distinct drop in March. It touched bottom on March 12 at EUR 9.13, with the DAX
also languishing at 2,189 points, its lowest since 1996.
Since April, however, the T-Share has been clearly on the way up, with the
successful drive by Deutsche Telekom to reduce debt being especially well
received by the markets. In the remainder of the year, the main focus among
investors and analysts shifted to restructuring and profitable growth.
The EUR 2.3 billion mandatory convertible bond issued by Deutsche Telekom in
February had no lasting negative impact on the share price.
On July 8, Kreditanstalt fur Wiederaufbau (KfW), a federal corporation, issued
an exchangeable bond worth EUR 5 billion, convertible into Deutsche Telekom
shares. The terms and conditions of the bond specify that, upon conversion, it
will be converted into shares already held by KfW. For this reason, the
convertible bond cannot have a dilution effect on Deutsche Telekom's capital
stock. This bond issue also had no lasting effect on the share price, which
actually rose by 3.6 percent in the month of issue. The presentation in November
of the Group's figures for the first nine months, with the early attainment of
its debt reduction target and free cash flow well above the planned level, was
also very well received on the capital markets. The T-Share underwent a distinct
rise towards the end of the year, and finally closed trading at a high for the
year of EUR 14.51.
The T-Shares 63
Dividend. In order to further reduce debt, the Board of Management and the
Supervisory Board will propose to the shareholders' meeting that no dividend be
paid for the 2003 financial year. The Board of Management does, however, aim to
reinstate the dividend for the 2004 financial year, payable in 2005.
Deutsche Telekom issues mandatory convertible bond.
In February 2003, as an addition to its regular financing activities, and to
increase liquidity, Deutsche Telekom AG issued a mandatory convertible bond with
a principal value of approximately EUR 2.3 billion via its Dutch subsidiary
Deutsche Telekom International Finance B.V. This amount is backed by up to 194
million shares, which will be issued to creditors at the end of the three year
term. The mandatory conversion in 2006 will create a dilution effect of under 5
percent. The transaction, more than three times over-subscribed, was based on a
resolution to authorize convertible bond and warrant issues approved by the
shareholders' meeting on May 29, 2001.
--------------------------------------------------------------------------------
T-Share as compared to DAX and Euro STOXX 50(C)in 2003
--------------------------------------------------------------------------------
[GRAPHIC]
--------------------------------------------------------------------------------
T-Share as compared to other telecommunications companies in 2003
--------------------------------------------------------------------------------
[GRAPHIC]
--------------------------------------------------------------------------------
T-Share as compared to DAX and Euro STOXX 50(C), November 1996-2003
--------------------------------------------------------------------------------
[GRAPHIC]
64
Shareholder structure. In the year under review, the ratio of free float to all
shares remained unchanged against the previous year. Following the transfer of
around 199 million shares held by the Federal Republic to KfW in November 2003
in a so-called holding arrangement, the government retained approximately 26
percent of the shares at the end of the year, with 17 percent held by KfW.
At the year-end, the Federal Republic's stake, including shares held by KfW,
thus remained unchanged at 43 percent.
--------------------------------------------------------------------------------
Shareholder structure
--------------------------------------------------------------------------------
[GRAPHIC]
--------------------------------------------------------------------------------
Geographical distribution of free float
--------------------------------------------------------------------------------
[GRAPHIC]
Investor relations. With its policy of timely and transparent communication,
Deutsche Telekom enables all players in the capital markets to obtain prompt
factual information about the Company. Altogether, six road shows were run in
Europe, Asia, and North America addressing institutional investors, bond
investors, and analysts, with Deutsche Telekom management personally attending
over 230 individual and group sessions to discuss the economic situation,
corporate strategy, and future prospects for the Company. The management also
represented Deutsche Telekom at major international investment conferences. The
"Investors' Day" at CeBIT in Hanover as well as the analysts' meetings and
conference calls organized around the publication of the quarterly and annual
financial statements in Bonn were broadcast live via the Internet. This ensures
that all groups of investors receive the same information on the position of
Deutsche Telekom.
About 9,000 shareholders attended the shareholders' meeting in Cologne on May
20, 2003. Voting facilities for shareholders unable to come to Cologne in person
were further extended. For the first time, they were able to change their voting
instructions via the Internet right up to the start of voting. Out of about
80,000 voting instructions issued to employees of the Company (proxy voting),
about 10,000 came via the Internet.
The use of the Internet allows all interested parties to obtain prompt and
comprehensive information about the Company. The Investor Relations website,
where all relevant Company information can be retrieved, is being constantly
enhanced and updated with the latest news.
The call center for the T-Share forum (FTA), the permanent contact for retail
investors, handled an average of 300 Deutsche Telekom-related enquiries a day in
2003. The FTA call center can be contacted weekdays within Germany from 8 a.m.
to 8 p.m. at the toll-free number 0800 330 2100 (fax: 0800 330 1100).
The divisions
T-Com 68
T-Mobile 74
T-Systems 80
T-Online 86
Group Headquarters & Shared Services 92
Reconciliation of pro forma figures 96
[GRAPHIC]
[GRAPHIC]
Interest.
Generate ideas. Put ideas into practice.
Interest and ideas drive innovation.
68
T-Com. Strong brand drives success of broadband campaign.
o Strongest revenue engine in the Deutsche Telekom Group
o Dynamic increase in demand for broadband connections
o Broadband strategy again provides powerful vehicle to capture new areas of
business
o WLAN campaign successfully launched
--------------------------------------------------------------------------------
T-Com
--------------------------------------------------------------------------------
(millions of (euro)) 2003 2002 Change
--------------------------------------------------------------------------------
Total revenue(a) 29,206 30,559 -1,353
--------------------------------------------------------------------------------
Germany 25,351 26,682 -1,331
--------------------------------------------------------------------------------
Eastern Europe 3,855 3,877 -22
--------------------------------------------------------------------------------
Results from ordinary business activities 4,247 3,604 643
--------------------------------------------------------------------------------
EBITDA(b) 10,164 10,051 113
--------------------------------------------------------------------------------
EBITDA, adjusted(b) 10,356 10,268 88
--------------------------------------------------------------------------------
Germany 8,667 8,471 196
--------------------------------------------------------------------------------
Eastern Europe 1,689 1,797 -108
--------------------------------------------------------------------------------
EBITDA margin, adjusted(b)(%) 35.5 33.6 1.9
--------------------------------------------------------------------------------
Investments in property, plant and equipment
and intangible assets(c) -2,129 -3,180 1,051
--------------------------------------------------------------------------------
Number of employees averaged over the year 139,548 153,065 -13,517
--------------------------------------------------------------------------------
(a) Including DeTeMedien and agency business.
(b) Deutsche Telekom defines EBITDA as results from ordinary business
activities excluding other taxes, net financial income/expense,
amortization and depreciation. For detailed information and calculations
please refer to the chapter on "Reconciliation of pro forma figures"
starting on page 96.
(c) Excluding goodwill und intragroup transfers.
--------------------------------------------------------------------------------
T-Com, the fixed-network division of the Deutsche Telekom Group successfully
continued its braodband campaign in 2003, increasing the number of T-DSL lines
in operation to a total of 4.1 million. Furthermore, T-Com serves both private
and corporate customers in Germany, Hungary, Croatia, Slovakia, and Macedonia.
In total, T-Com operates 55.5 million narrowband subscriber lines (including
ISDN channels), making it one of the largest fixed-network providers in Europe.
T-Com also delivers its products to the other Deutsche Telekom Group divisions
and to some 200 telecom companies. To deliver these services, T-Com operates the
Group's state-of-the-art fixed-network infrastructure - one of the most modern
worldwide. In total, the network features around 1.4 million kilometers of
copper cabling and 195,000 kilometers of fiber-optic cabling. During the 2003
financial year, as many as 30,000 terrabytes of data were transmitted each month
over T-Com's IP network alone. In June 2003, T-Com launched its MDCS (Media
Distribution and Caching Service) content delivery platform. This service
provides customers with a user-friendly platform to access multimedia content on
the Internet over a broadband connection. T-Com thus offers a fully featured,
intelligent network for content delivery. As early as February 2003, T-Com
opened its new Internet User Help Desk in Ulm. This Help Desk handles a
significant percentage of total Internet traffic in Germany. Thanks to its
state-of-the-art monitoring, diagnosis and troubleshooting functionality, the
call center ensures extremely high quality of service for Internet users in
Germany.
T-Com has been positioned as an independent brand under the umbrella of the
Deutsche Telekom Group since August 1, 2003. The move reflects the special
status enjoyed by fixed-network communications within the Deutsche Telekom
Group. Under the T-Com brand, the company offers innovative products and
solutions such as T-ISDN, T-DSL and WLAN. The T-Com brand promises its customers
the very latest, highest-quality fixed-network services and premium customer
service. The objective is to communicate this promise to T-Com customers.
Intensive competition on a regulated market. Once again, competition was stiff
on the German fixed-network market in 2003. By virtue of its dominant position,
T-Com continues to remain subject to asymmetrical regulation. During the year
under review, the strong competition that has shaped the national long-distance
call segment for several years started to creep into the local call segment. In
April 2003, the call-by-call option was extended to local calls in Germany. This
means the customer is free to select the operator of his or her choice on a
call-by-call basis simply by entering an operator-specific code. In July 2003,
preselection was introduced in the local network. Customers can now assign a
permanent operator for all local calls. The aim of these government regulations
is to shift market share from T-Com to competitors.
In response to the rise in competitive pressure, T-Com introduced a new variant
of the "AktivPlus xxl" and the "AktivPlus calltime 120" tariff options in
October 2003. By the end of the financial year, more than 1.3 million
subscribers had opted for one or other of these tariff rates. In December 2003,
the
Administrative Court in Cologne had suspended approval of the two tariff
options by the Regulatory Authority in response to an injunction against the
approval by two T-Com competitors. In a summary proceeding, however, the Higher
Administrative Court of Munster reversed the judgment of the lower court. T-Com
can thus continue to offer the tariffs pending a final decision on the merits of
the case.
In addition, T-Com reduced City Standard rates by up to 50 percent in the
financial year. This reduction in local/city rates was in response to demands
from the Regulatory Authority that T-Com clear its access deficit by raising
monthly charges for analog T-Net lines. By raising rates in this area, T-Com
increased its fixed income for subscriber access. On December 1, 2003, T-Com
also reduced international rates in the AktivPlus tariff scheme by up to 87
percent. On the same date, T-Com introduced a new range of attractively priced
corporate tariffs. The BusinessCall rate plans, for example, cut the cost of
international calls to more than 50 countries.
During the 2003 financial year, T-Com implemented a number of measures to
increase its customer focus. These included T-Com's far-reaching "Perform+"
quality program launched in mid-2003. This initiative uses customer surveys to
identify and understand quality issues (e.g. in service or customer care).
Possible approaches to solving such issues are put through their paces at local
subsidiaries and, once proven, implemented nationwide. The impact of the
measures on customer satisfaction ratings is checked regularly. T-Com will
continue this initiative in 2004.
Market presence for various customer groups improved.
T-Com serves its residential and corporate customer base through various sales
channels. Consumer Sales reach private customers through four different sales
channels unified through a carefully aligned marketing strategy. Customer Care
is the strongest sales channel. In 2003, the 0800 330 1000 hotline handled
approximately 70 million customer contacts. A uniform image was established for
the T-Com brand across all T-Punkt shops. This was instrumental in enabling
T-Com's offering to be presented in a consistent, appealing way. During the
financial year, T-Com also decided to establish its store-based retailing
organization as a wholly-owned subsidiary. The objective is to increase the
market success of these retail outlets. The spin-off will be completed during
the course of 2004.
--------------------------------------------------------------------------------
T-Com
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(millions)* 2003 2002 Change
--------------------------------------------------------------------------------
Broadband lines (in operation) 4.1 2.9 1.2
--------------------------------------------------------------------------------
T-DSL (Germany) 4.0 2.8 1.2
--------------------------------------------------------------------------------
DSL (Eastern Europe) 0.11 0.04 0.07
--------------------------------------------------------------------------------
Narrowband lines, incl. ISDN channels(a), (b) 55.5 56.1 -0.6
--------------------------------------------------------------------------------
Germany 48.7 49.3 -0.6
--------------------------------------------------------------------------------
Standard analog lines 27.2 28.6 -1.4
--------------------------------------------------------------------------------
ISDN channels 21.5 20.7 0.8
--------------------------------------------------------------------------------
Eastern Europe 6.8 6.8 0.0
--------------------------------------------------------------------------------
MATAV group(b) 3.5 3.6 -0.1
--------------------------------------------------------------------------------
Slovak Telecom (ST) 1.4 1.5 -0.1
--------------------------------------------------------------------------------
Hrvatske telekomunikacije (HT) 1.9 1.8 0.1
--------------------------------------------------------------------------------
Subscribers to AktivPlus calling plan 11.6 10.7 0.9
--------------------------------------------------------------------------------
Mobile subscribers 5.1 4.7 0.4
--------------------------------------------------------------------------------
Westel 3.8 3.4 0.4
--------------------------------------------------------------------------------
HT mobilne komunikacije(c) 1.3 1.2 0.1
--------------------------------------------------------------------------------
(a) Telephone lines, including for internal use.
(b) Subscriber-line figures are presented retrospectively from the 2001
financial year, including MATAV's subsidiary Maktel.
(c) These companies were fully consolidated in the following financial years:
HT-Hvratske telecomunikacije, T-Mobile CZ, T-Mobile USA (including
Powertel, Inc.) in 2001; T-Mobile Netherlands in 2002.
(*) Figures rounded and expressed in millions. The total was calculated on the
basis of precise figures.
--------------------------------------------------------------------------------
Complementing its own retail network, T-Com also cooperates with sales partners.
This ensures that T-Com products are available at over 18,000 stores nationwide.
The Internet is emerging as an increasingly strategic sales channel. In 2003,
T-Com redesigned its online shop www.t-com.de/shop to make it more appealing.
This involved making it easier for online shoppers to find the products and
services they are looking for, get the information they need, and complete their
purchase. Thanks to its enhanced design, T-Com's new e-shop is ideally
positioned to meet rising consumer interest in online shopping and services.
Towards the end of the financial year, T-Com restructured its corporate customer
sales activities. Business Sales is now responsible for the entire corporate
market, including some 2.5 million very small enterprises (VSEs). This move
enables T-Com to better serve all customers in this segment. With 220 offices,
Technical Customer Service guarantees nationwide reach. T-Com meets its
corporate customers' diverse and individual needs through a broad range of
innovative services (such as IT Service, User Help Desk, Network Management, LAN
Service and Remote Service).
70
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
--------------------------------------------------------------------------------
Broadband subscriber lines (in operation)
--------------------------------------------------------------------------------
2001 2002 2003
---- ---- ----
(millions)
1.4 2.9 4.1
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
--------------------------------------------------------------------------------
ISDN channels
--------------------------------------------------------------------------------
2001 2002 2003
---- ---- ----
(millions)
20.0 20.7 21.5
Successful marketing of T-DSL and ISDN lines. Despite the difficult market
climate in 2003, T-Com experienced a strong increase in demand for broadband
communications. By the end of the year, T-Com was operating 4 million T-DSL
connections throughout Germany, an increase of more than 40 percent on the
previous year's figure. Taking the DSL lines operated by T-Com majority
shareholdings in Eastern Europe into consideration, T-Com now operates some 4.1
million DSL connections. This places the company among the leading providers of
broadband communications in Europe.
T-Com plans to continue its broadband strategy, leveraging the rising number of
broadband customers to generate new business through individualized services.
T-Com also plans to increase the market penetration of broadband through
wholesale services, for example.
Despite the impressive depth of the existing installed base, demand for ISDN
continued to flourish. The number of ISDN lines operated by T-Com in Germany
rose from 20.7 million to 21.5 million during the course of the financial year.
Although the growth rate for T-ISDN was down slightly on previous years (mainly
due to the rise in demand for T-DSL for Internet communication), T-Com's
strategy of encouraging customers to migrate to faster lines (such as T-ISDN and
T-DSL) remained successful. Through this upgrade strategy, T-Com is building
lasting customer relationships, while at the same time expanding business in
higher-value segments.
Broadband innovations. During 2003, the division continued to expand its T-DSL
offering. For example, T-Com achieved another noticeable service improvement for
broadband Internet use with the introduction of the "T-DSL 1500" product
variant at all locations in Germany. T-DSL 1500 allows users to download data
from the Internet at speeds of up to 1.5 megabits per second (Mbit/s) and upload
data at speeds of up to 192 kilobits per second (kbit/s).
T-Com also introduced a new "T-DSL Business" variant offering corporate
customers even more bandwidth. This new service is ideal for business customers
with high volumes of data traffic, enabling download speeds of up to 3 Mbit/s
and upload speeds of up to 384 kbit/s, rising if necessary to 512 kbit/s. With a
special flat rate option, T-Com succeeded in targeting professional Internet
users in 2003.
The divisions
T-Com 71
Launched during the financial year, T-Com's "FastPath" T-DSL feature set a new
performance standard for online gaming. FastPath accelerates the signal path
over T-DSL. This makes a big difference to the speed of online games. FastPath
is compatible with Xbox, Microsoft's console for online gaming. By the end of
2003, 64,000 T-Com customers were using FastPath for broadband interactive
gaming.
The market success of T-DSL in the 2003 financial year was also attributable to
T-Com's wide range of innovative broadband communication devices. In the year
under review, for example, T-Com started marketing the T-Concept XI524 DSL PBX.
With its integrated router, the system can be easily connected to T-DSL. It also
offers intelligent telephony features. Another key success factor in the growing
popularity of T-DSL is the close collaboration between T-Com and T-Online.
T-Online offers attractive multimedia services for T-DSL customers through its
T-Online Vision broadband portal.
WLAN gives strong momentum to broadband strategy. During 2003, T-Com pushed its
broadband strategy through a marketing campaign for WLAN (Wireless Local Area
Network) products and solutions. WLAN technology gives users wireless access to
the Internet over T-DSL from notebooks, PCs, wireless devices, etc. This gives
users much more flexible access to the benefits of broadband communications. To
capitalize on the market potential of WLAN, T-Com developed numerous
customer-focused solutions and services during the financial year, with the
result that wireless technology has now evolved into another strong driver
behind T-Com's broadband campaign. Business in WLAN devices flourished, with
over 200,000 devices sold compared with 16,000 in 2002.
In future, T-Com plans to offer its customers WLAN-enabled broadband solutions
networking home entertainment and home management systems. In combination with
broadband T-DSL connections, WLAN paves the way for sophisticated solutions
integrating information, communication and security applications. T-Com plans to
capitalize in full on emerging broadband possibilities to generate new revenue
streams.
In close collaboration with T-Mobile, T-Com decided to expand its HotSpot
network in December 2003. Users can access the Internet with a WLAN-enabled
device from hotspots. By the end of the year, the first 30 hotspots had been set
up. Together with T-Mobile, T-Com plans to install more than 10,000 hotspots
nationwide.
New solutions for business customers add further value.
In the corporate segment, T-Com succeeded in strengthening its position as the
provider of a comprehensive information and telecommunications technology
portfolio. Thanks to special T-DSL offers, broadband communication also
established a broad footprint among this target group during the year under
review. In addition, T-Com launched a range of new products and services for
small and medium-sized companies aimed at further optimization of
telecommunications activities.
"In close collaboration with T-Mobile, T-Com decided to expand its HotSpot
network in December 2003."
A whole range of special business solutions has been defined with the objective
of creating added value in the corporate segment in particular. These solutions
include innovative services such as OnlineBackup, enabling easy, cost-effective
backup of local data across corporate networks. This service addresses the
growing security concerns among many business customers. At CeBIT 2003, T-Com
presented "DDV-M Ethernet100", a service for integrating LANs across different
locations into a uniform network. The market response to this new service was
extremely positive. In the 2003 financial year, T-Com laid the groundwork for
the expansion of business with small and medium-sized enterprises (SMEs) on the
basis of integrated IT and communications solutions. Marketing and sales
activities will focus heavily on these solutions during the 2004 financial year.
During 2003, T-Com focused activities within its partner program. In order to
extend business with corporate customers beyond straightforward telecom
services, T-Com plans to take this partnership model to the next level, stepping
up collaboration with strategic partners (specialized medium-sized system
houses) and aligning collaborative activities more closely with key target
markets.
72
Ground-breaking innovations. One of the cornerstones of T-Com's brand strategy
is to inextricably link the brand with a clear innovation strategy. In 2003,
T-Com thus set a number of major industry milestones through the launch of
numerous innovative products and services. In August, the company reached an
agreement with the German music industry, outlining the parameters for setting
up and operating an Internet-based music platform. T-Com is providing the
technical infrastructure for this platform. From this platform, users will be
able to legally download music from the Internet and burn the tracks to CD.
Music shoppers will have the option of paying for the tracks via T-Pay (an
online payment service that bills via the standard phone bill), the MicroMoney
prepaid card, or a regular credit card. Customers can also pay by direct debit.
"T-Com operates the Group's state-of-the-art fixed-network infrastructure - one
of the most modern worldwide."
NetPhone was another ground-breaking innovation launched by T-Com during the
year under review. This application gives corporate customers the flexibility to
cost-effectively expand PBX systems over LANs and add new functionality on the
basis of Voice over IP.
Efficiency gains improve EBITDA. Adjusted EBITDA posted by T-Com increased to
EUR 10.4 billion during the financial year despite the 4.4 percent drop in
revenue resulting from the sale of the cable business and stiffer competition.
This improvement in adjusted EBITDA corresponds to a one percent increase on
2002's figure. This enabled T-Com to increase its profit margin by a sizeable
1.9 percent. Adjusted to reflect deconsolidation of the cable business sold
during 2003, EBITDA excluding special factors rose by EUR 393 million or 4.1
percent. This is largely attributable to efficiency gains and cost savings
(particularly in the areas of maintenance, fault repair, marketing, leasing and
improved accounts receivable management).
With a total turnover of EUR 29.2 billion in 2003, T-Com remained the strongest
revenue engine within the Deutsche Telekom Group. The sale of the remaining
regional cable companies, the restrictive effects of state regulation, and the
weak economic climate combined to push 2003 revenue approximately 4 percent
below the figure for 2002. Although the introduction of call-by-call and
preselection for local calls had a particularly dampening effect on German
operations, the Eastern European subsidiaries and associated companies generally
managed to maintain revenue at the previous year's levels.
Access revenue continued to rise in Germany, more than offsetting the decrease
in call revenue resulting from restrictive regulation and competitive pressures.
Despite falling interconnection revenue (due to ongoing network
interconnection), Carrier Services managed to maintain a positive course.
Revenue in online call originating services rose, partly fuelled by the growing
broadband market.
Particularly due to the depressed economy, business in both terminal devices and
data communications experienced a downward trend.
Foreign subsidiaries contributed more than 13 percent to total T-Com revenue.
Expressed in the local currency, revenue in Hungary and Croatia increased
slightly, but dropped in Slovakia. Currency fluctuations against the euro
inflated these figures in the case of Slovakia, deflating them however for
Hungary and Croatia. The results from T-Com's ordinary business activities
increased substantially by 17.8 percent to EUR 4.3 billion. This positive result
is attributable primarily to the decrease in production and sales costs, and the
improvement in the net financial income/expense figure.
T-Com investments amounted to EUR 2.1 billion, concentrated mainly in
infrastructure. This figure is 33 percent (or EUR 1.1 billion) lower than
investment levels for 2002. T-Com managed to cut investment levels to this
extent through a restrictive investment policy, process optimization, improved
purchasing conditions, and by timing investments to coincide more closely with
order confirmation from the customer. The corresponding figure for 2002, on the
other hand, was shaped by considerable investments necessary to build the new
synchronous digital hierarchy (SDH) platform and the T-DSL platform.
Payroll cut even further. T-Com cut its payroll in 2003 by a total of 19,462
employees (FTEs). Some 13,000 of these (FTEs), who did not leave the company
through an organized scheme such as redundancy payments or retirement, were
transferred to Vivento, the Group's personnel placement agency. Job cuts in
T-Com's German operations were primarily undertaken under the umbrella of WIN
2003, the division's action program to optimize business processes and
streamline organizational structures.
The divisions
T-Com 73
Delineation of eight regions guarantees customer proximity. To serve its German
customer base even better, T-Com reorganized its regional zoning in 2003. The
new plan splits Germany into eight regions. In each region, one branch office is
responsible for business customers, one for consumers, one for technical
infrastructure, and one for technical customer service. This arrangement
facilitates collaboration between the branch offices, thus paving the way for
ongoing business process optimization which, in turn, should translate into cost
efficiencies and improved customer service.
Growth path for mobile communications in Eastern Europe. Whereas fixed-network
subscriber figures remained more or less stable in Eastern European T-Com
subsidiaries, the customer base of mobile operators Westel and HT mobilne
komunikacije grew significantly -- despite the increase in competition.
At Slovak Telecom (ST) (www.telekom.sk), the trend away from fixed-network
services in favor of mobile connectivity remains pronounced. Fixed-network
subscriber figures thus continued to drop slightly. ST is capitalizing on the
rising demand for mobile services through its 51 percent shareholding in
Eurotel, which is consolidated at equity. In June 2003, ST launched its
broadband offering. The strongest area of growth for ST in the 2003 financial
year was the number of new ISDN subscriber lines.
To stabilize its market position, Hrvatske telekomunikacije (HT) (www.ht.hr)
introduced a new fixed-network tariff scheme and launched an online content
platform in August 2003. HT has taken the first steps to tap the broadband
market. It serves the growing Internet market through its online unit HTnet.
Parallel to its concerted marketing campaign for ISDN, HTnet launched a new
broadband platform with information and entertainment content in the middle of
2003.
Since the introduction of ADSL, MATAV(www.matav.hu) has experienced dynamic
growth in business, increasing the number of broadband connections by more than
200 percent compared with 2002 to a total of over 100,000. Deutsche Telekom has
a 59.49 percent shareholding in MATAV, Hungary's leading telecom company. On the
narrowband side, however, customers are moving towards wireless services.
MATAV's mobile communications subsidiary Westel retained its market leadership
position in 2003, increasing its customer base to 3.8 million subscribers.
Further expansion of growth segments planned for 2004. As a direct result of
regulatory restrictions, T-Com reckons with a further loss of market share in
traditional telephony segments on the German market in 2004. T-Com will
therefore strengthen its market position above all by its activities on the
broadband growth market, enhanced through ongoing profitability-focused process
optimization and systematic quality improvements. The broadband campaign will
continue to feature prominently in T-Com's market strategy. Consequently, T-Com
will offer a new broadband range from April 2004: T-DSL 1000, 2000, 3000.
Parallel to the concerted marketing of broadband connections, the company will
leverage its broad customer base to introduce new broadband products and
services to the market. T-Com envisages that broadband communications will play
a pivotal role in people's lives. This includes networked home services,
enabling users to control a wide range of functions and household tasks.
Leveraging its strong position as a solutions provider, T-Com plans to generate
additional revenue streams in the corporate segment by offering added value in
new areas. Efforts in this area focus on IT services in particular. In response
to user demands for customized, future-proof solutions, T-Com offers SMEs
end-to-end bundles combining information and telecommunications technologies,
for example, that can scale with the customer's business, thus offering
protection of investments. By developing its network platforms in line with
customer and market demands, T-Com is also ensuring that it will remain at the
cutting edge into the future.
"The broadband campaign will continue to feature prominently in T-Com's market
strategy".
T-Com's foreign subsidiaries are focusing on the mobile communications and
broadband growth markets. They intend to capitalize in full on the market
opportunities offered by these areas. In doing so, not only are these companies
meeting their own performance targets, they are also contributing to the global
expansion of these networks.
74
T-Mobile. Sustained growth in all markets.
o T-Mobile International established as a leading mobile communications brand
o Earnings-focused growth in 2003
o Mobile data services achieve a share of around 16 percent in the European
market in terms of revenue
o "Best Global Mobile Operator 2003"
o UMTS infrastructure expanded as planned
--------------------------------------------------------------------------------
T- Mobile
--------------------------------------------------------------------------------
(millions of (euro)) 2003 2002 Change
--------------------------------------------------------------------------------
Total revenue 22,778 19,735 3,043
--------------------------------------------------------------------------------
Results from ordinary business activities 831 -23,754 24,585
--------------------------------------------------------------------------------
EBITDA(a) 7,016 5,038 1,978
--------------------------------------------------------------------------------
EBITDA, adjusted(a) 6,671 5,038 1,633
--------------------------------------------------------------------------------
EBITDA margin, adjusted(a)(%) 29.3 25.5 3.8
--------------------------------------------------------------------------------
Investments in property, plant and equipment
and intangible assets(b) -3,012 -3,484 472
--------------------------------------------------------------------------------
Number of employees averaged over the year 41,767 38,943 2,824
--------------------------------------------------------------------------------
(a) Deutsche Telekom defines EBITDA as results from ordinary business
activities excluding other taxes, net financial income/expense,
amortization and depreciation. For detailed information and calculations
please refer to the chapter on "Reconciliation of pro forma figures"
starting on page 96.
(b) Excluding goodwill.
During the 2003 financial year, T-Mobile, in conjunction with its national
companies in key European markets (Germany, Austria, Great Britain, the Czech
Republic, and the Netherlands) and in the United States, established itself as
one of the world's T-Mobile International AG & Co. KG's majority shareholdings
now go by the name of T-Mobile, offering their products and services under the
T-Mobile brand. The company met its sustained growth targets across all
subsidiaries and associated companies, with T-Mobile USA faring particularly
well in terms of its subscriber base and revenue figures. During the financial
year, T-Mobile focused on expanding its mobile data service offering. This
included optimizing the delivery of mobile multimedia services through specially
designed devices. In the European markets, mobile data services increased their
share of revenue per subscriber to around 16 percent. This year, T-Mobile
International plans to step up the current pace of growth in the national
companies, make a sizeable contribution to reducing debt, and actively deliver
on the Group's brand and service promises.
"One company" reaching across the global mobile communications market. T-Mobile
International is responsible for the core mobile communications activities of
the Deutsche Telekom Group. An international group, T-Mobile pursues a uniform
strategy on all consolidated markets, presenting a common brand and corporate
culture to all target audiences. This strategy is best encapsulated by the
company motto -"One company - the only winning strategy". The objective of this
strategy is to position T-Mobile successfully on national and international
markets, establishing profitable operations worldwide. T-Mobile operates wholly
owned subsidiaries in Germany (T-Mobile Deutschland GmbH), Austria (T-Mobile
Austria GmbH), Great Britain (T-Mobile UK Ltd.), the Netherlands (T-Mobile
Netherlands B.V.), and the United States (T-Mobile USA, Inc.). In the Czech
Republic, the company owns 56 percent of T-Mobile Czech Republic. T-Mobile also
has a 49 and 25.1 percent stake respectively in the Polish and Russian mobile
communications providers, Polska Telefonia Cyfrowa (PTC) and MTS.
Deutsche Telekom AG also has mobile communications shareholdings in Hungary
(Westel, through MATAV), Slovakia (EuroTel Bratislava, through Slovak Telecom),
and Croatia (HTmobile, division of Hrvatske telekomunikacije). During the year
under review, T-Mobile sold its remaining shareholdings in Asian mobile
communications providers. The proceeds from these sales were used to reduce the
Group's debt
The divisions
T-Mobiles 75
Growing interest in mobile multimedia services. Through its majority and
minority shareholdings, the Deutsche Telekom Group was serving well over 90
million mobile subscribers by the end of 2003. T-Mobile International, along
with its majority-owned companies, delivered mobile communications services to a
total of 61 million users. During 2003, T-Mobile pushed its mobile data
communications activities on all target markets. It succeeded in extending the
reach of its Multimedia Messaging Service (MMS) in particular. In conjunction
with multimedia devices, MMS supports multimedia messages containing text,
photos, animated graphics, sound, and even short video clips. In 2003, T-Mobile
subscribers in Europe sent a total of 18 million multimedia messages.
During the year, T-Mobile significantly expanded its t-zones portal content to
make mobile multimedia services even more attractive. Since March 2003, for
example, T-Mobile Deutschland has been offering users of t-zones access to
useful information from the online division of n-tv through its "n-tv mobil"
service package. The mobile news services are complemented by the exclusive MMS
News and T-D1 News offers. During 2003, T-Mobile, in collaboration with
cellphone manufacturers, also introduced "t-zones cellphones". Special features
of these phones include a dedicated t-zones button, an integrated camera, a
color display, and polyphonic ring tones. They can also be MMS and Java(C)
-enabled. In Europe, T-Mobile currently has about 20 special t-zones phones on
offer.
T-Mobile also expanded its t-zones portfolio by cooperating with other leading
providers - in some cases through exclusive partnerships. The new and highly
appealing mobile multimedia services offered on the basis of these strategic
partnerships include the Rolling Stones European tour, U.S. rapper Eminem's
concerts in Germany, and numerous box office hits. This year, T-Mobile will be
cooperating with UEFA (the governing body for European football) to offer
special services based on the European Championships in Portugal.
--------------------------------------------------------------------------------
T-Mobile International
--------------------------------------------------------------------------------
(millions)* 2003 2002 Change
--------------------------------------------------------------------------------
Mobile subscribers of fully consolidated subsidiaries 61.1 53.9 7.2
--------------------------------------------------------------------------------
T-Mobile Deutschland 26.3 24.6 1.7
--------------------------------------------------------------------------------
T-Mobile UK(a) 13.6 12.4 1.2
--------------------------------------------------------------------------------
T-Mobile USA(b) 13.1 9.9 4.0
--------------------------------------------------------------------------------
T-Mobile Austria 2.0 2.0 0.0
--------------------------------------------------------------------------------
T-Mobile CZ(b) 3.9 3.5 0.4
--------------------------------------------------------------------------------
T-Mobile Netherlands(b) 2.0 1.4 0.6
--------------------------------------------------------------------------------
(a) Including Virgin Mobile.
(b) These companies were fully consolidated in the following financial years:
T-Mobile CZ, T-Mobile USA (including Powertel, Inc.) in 2001; T-Mobile
Netherlands in 2002.
* Figures rounded and expressed in millions. The total was calculated on the
basis of precise figures.
--------------------------------------------------------------------------------
T-Mobile International - Mobile subscribers of fully consolidated subsidiaries
--------------------------------------------------------------------------------
(millions)
2001 45.5
2002 53.9
2003 61.1
76
In acknowledgement of its new value-added mobile services in Europe and the
United States, T-Mobile was named winner of the World Communications Award for
Best Global Mobile Operator (www.totaltele.com/wca2003) in October 2003. In this
category, the judges were looking for strong and innovative service offerings,
reliability and customer service, sound performance, and new business models.
The award is organized by the publishers EMAP Communications Group, and ECTA
(European Competitive Telecommunications Association). By the end of 2003,
mobile data services accounted for 16 percent (previous year: 14 percent) of
revenue per subscriber in T-Mobile's European markets (Germany, Austria, Great
Britain, the Netherlands, and the Czech Republic). In December, around 5.5
million subscribers used data services such as t-zones, downloads or fast data
connections. Short Message Services (SMS) again topped the popularity polls. By
the end of December 2003, a total of 22 billion SMS messages had been
transmitted over T-Mobile networks worldwide, compared with 16.5 billion the
year before.
Significant increase in revenue and EBITDA. During the 2003 financial year,
T-Mobile achieved sustained growth. The postpay (fixed-term contract) subscriber
base grew, accompanied by a drop in the acquisition costs for new customers.
T-Mobile International's consolidated revenue increased from EUR 19.7 billion in
the previous year to EUR 22.8 billion. Adjusted EBITDA was up 32 percent on the
previous year's figure, rising from EUR 5.0 billion to EUR 6.7 billion. Earnings
before taxes in 2003 totaled EUR 831 million. This figure contrasts with the
prior-year loss before taxes. Posted at EUR 23.7 billion, this was attributable
to the high level of write-downs in 2002. The number of employees at T-Mobile at
year end was around 43,000 compared with 41,597 at the close of 2002.
"During the 2003 financial year, T-Mobile achieved sustained growth."
T-Mobile Deutschland sets the pace as market leader. Market leader in Germany,
T-Mobile Deutschland is the largest national company in the T-Mobile group of
companies. By the end of 2003, the company had increased its subscriber base
from 24.6 million in 2002 to 26.3 million customers. Revenue climbed to EUR 8.5
billion, up from EUR 7.8 billion at the close of 2002.
In 2003, T-Mobile Deutschland reinforced its status as innovation leader and
trendsetter on the German market by introducing a range of innovative,
value-added services. It was the first German mobile communications operator to
send TV images to cellphones. T-Mobile live-streams broadcasts by the news
channel n-tv to GPRS-enabled (General Packet Radio Service) devices. Subscribers
on the move can keep track of n-tv's live reports from international stock
floors, for example. In 2003, T-Mobile also introduced its new photo service,
enabling MMS photos and other digital images to be printed onto photo paper,
coffee mugs, mouse pads, jigsaw puzzles or t-shirts. The images are developed by
T-Mobile's cooperation partner Kodak. With these two new services in particular,
T-Mobile is clearly demonstrating its pioneering role in anticipating and
delivering on rising market demands for individualized mobile services.
Also tailored to customers' changing needs are the new Relax rates, which
T-Mobile started introducing in February 2004. These rates provide a fixed
number of minutes of voice calls each month at a package price. By enabling
subscribers to call at fixed prices at any time of the day, within and outside
the budget, this tariff does away with the hassle of different rates at
different times of the day. By keeping it simple, T-Mobile is meeting customer
demands for uncomplicated, transparent mobile phone rates.
T-Mobile Deutschland cooperates with 62 roaming partners in 34 countries for
GPRS-based mobile data transmission services. Although T-Mobile's roaming
agreements are particularly beneficial to private users who, for example, like
to send MMS holiday messages from abroad, GPRS roaming also means business as
usual for professional users, allowing them to send and receive e-mails, surf
the Web or visit their intranet on their travels.
The divisions
T-Mobile 77
In the fall of 2003, T-Mobile decided to restructure sales activities for its
small and medium-sized corporate customers. The company now serves its corporate
customers directly - and no longer through T-Com's sales agents. The objective
of this new channel policy is to strengthen T-Mobile's market position by
enabling it to meet customer needs even faster and more flexibly than before.
Rapid rise in number of new customers for T-Mobile USA. In the financial year
under review, T-Mobile USA again succeeded in significantly expanding its
subscriber base. By year end, T-Mobile USA had 13.1 million customers, up from
9.9 million at the close of 2002. Revenue figures were also up, rising from EUR
6.1 billion in 2002 to a total of EUR 7.4 billion.
T-Mobile USA is the only mobile operator in the United States to build its
entire network on GSM (Global System for Mobile communications) technology. By
the end of 2003, 971 million subscribers in more than 200 countries and regions
were using GSM, the world's most important digital standard. T-Mobile USA's
customers benefit from the reach and popularity of GSM. With the same telephone
and number, they can call GSM networks anywhere in the world. T-Mobile's network
now reaches over 250 million residents in the United States. In conjunction with
its partners, it has licensing coverage for over 95 percent of the American
population.
Like T-Mobile's European companies, T-Mobile USA offers its customers a wide
range of mobile voice, messaging and data services. These include the T-Mobile
Sidekick. This service lets users stay connected on the move with e-mail access,
the Instant Messenger service, and Internet browsing. The company's portfolio
also includes the BlackBerry handheld device with integrated e-mail
functionality and a telephone, as well as a pocket PC phone with the Microsoft
Windows operating system. This device is marketed in Europe as T-Mobile MDA
(Mobile Digital Assistant).
Since January 2003, T-Mobile USA customers can access the t-zones portal to
download ring tones, wallpaper, logos, screensavers, and plenty more. In March
2003, T-Mobile became the first American mobile operator to introduce video
messaging. T-Mobile USA is the leading American provider of wireless local area
network (WLAN) technology. Using T-Mobile HotSpot, customers with a laptop or
PDA enjoy wireless access to the Internet or intranet from over 4,000 public
"T-Mobile USA is the only mobile operator in the United States to build its
entire network on GSM technology."
hotspots (in restaurants, airports, stores, etc.).
T-Mobile UK displays its innovative talent on the British market. Market surveys
show that T-Mobile UK has improved its quality of service more dynamically than
any other mobile communications provider on the British market. T-Mobile ranks
third on the British market, with approximately 13.6 million subscribers by the
end of 2003 (previous year: 12.5 million). This figure includes 3.6 million
customers (previous year: 2.4 million) acquired through the joint venture with
Virgin Mobile. In 2003, T-Mobile UK's revenue amounted to EUR 4.3 billion,
compared with EUR 4.0 billion in 2002.
In June, T-Mobile UK became the first network operator in the UK to launch
E-Mail Push, a service that automatically forwards e-mails to a mobile device.
T-Mobile UK offers the service with BlackBerry handhelds, various Nokia
cellphones, and a SonyEricsson phone.
Launched in July, T-Mobile's "Mix it" service provided another proof point of
its innovative spirit. This service is a mixture of prepay and postpay rates,
combining minute-based mobile packages with appealing mobile devices. Customers
pay for a fixed number of minutes per month and, similar to postpay customers,
receive a reduced-price cellphone. If customers use up their monthly allowance,
they are free to buy additional minutes using a credit card or voucher (similar
to the prepay process).
78
In December 2003, T-Mobile UK also was the first mobile operator in Europe to
offer Caller Tunes. This service meets user demands for greater freedom to
personalize mobile communications. Caller Tunes allow customers to change the
ring tone. While waiting for the call to be answered, callers hear the tune
chosen by the person called instead of the usual ring tone. T-Mobile companies
in Germany and the Czech Republic have also been offering personalized ring
tones since the beginning of 2004. In addition, a pilot project for Caller Tunes
is currently underway at PTC in Poland.
T-Mobile Czech Republic maintains strong market position. The Czech Republic is
one of Eastern Europe's most progressive mobile communications markets. With a
penetration rate of over 90 percent, mobile connections outnumber fixed-network
lines. T-Mobile Czech Republic is the secondlargest mobile operator in the Czech
Republic with 3.9 million customers (previous year: 3.5 million) and revenue of
EUR 768 million in the year under review. During 2003, the partner program
launched by T-Mobile Czech Republic in October 2002 proved to be a resounding
success. Through this program, T-Mobile Czech Republic gives partner companies
the opportunity to use its network as a development platform for end-customer
products and services. Successful partnerships included a project developed for
the electricity supply company Severomoravska energetika to improve transformer
station monitoring. In the event of an outage, Severomoravska is now able to
restore power more quickly, leveraging the operational data transferred in
realtime over T-Mobile's network. Using GPRS and T-Mobile MDA, T-Mobile Czech
Republic also implemented a remote maintenance solution for VEIDEC, specialist
in repair and maintenance products.
"In acknowledgement of its new value-added mobile services in Europe and the
United States, T-Mobile was named winner of the World Communications Award for
Best Global Mobile Operator in October 2003."
T-Mobile Austria takes the lead on the Austrian WLAN market. T-Mobile Austria's
subscriber base remained stable at 2.0 million during the 2003 financial year.
At EUR 1.1 billion, revenue was up slightly on last year's figure (EUR 1.0
billion). The company thus maintained its position as the second-largest
provider of mobile voice and data communication products and services on the
Austrian market.
As was the case for the other national companies, mobile data services was one
of the main areas of momentum in 2003, with T-Mobile Austria expanding its
offering for MMS subscriptions to six new categories: news, sport, weather,
entertainment, lifestyle and adult content. Subscribers can choose
their personal favorites from a total of 28 listings under these headings.
In May 2003, T-Mobile Austria became the first Austrian network operator to
offer subscribers the option of calling up teletext pages from the TV channel
ORF on their WAP phones or T-Mobile MDAs. Over 1,000 pages of teletext
information are available.
At the start of 2004, T-Mobile Austria acquired Metronet, Austria's largest WLAN
provider and one of the largest wireless Internet service providers in Europe.
Metronet operates more than 300 WLAN hotspots in hotels, cafes, service areas on
highways, train stations, airports, and gas stations.
T-Mobile Netherlands again succeeds in expanding customer base. The Dutch
subsidiary of the T-Mobile group of companies was renamed T-Mobile Netherlands
in February 2003. Dutch mobile customers now also benefit from the strength and
reach of the global T-Mobile brand. T-Mobile Netherlands ranks third among the
five mobile communications operators on the Dutch market. It has extended its
reach to cover 99 percent of the country. By the close of 2003, T-Mobile
Netherlands had almost 2 million customers, compared with 1.4 million in
December 2002. Postpay customers accounted for the lion's share of this
increase, with T-Mobile Netherlands clearly outpacing its competitors in this
area. T-Mobile Netherlands recorded revenue of EUR 861 million in 2003.
The divisions
T-Mobile 79
PTC widens lead in Polish market. T-Mobile International's Polish subsidiary,
Polska Telefonia Cyfrowa (PTC), again closed the 2003 financial year as the
country's leading mobile communications operator. With a total of around 6.2
million subscribers for its Era/GSM network, PTC had 1.3 million more customers
than it had at the close of 2002 (4.9 million). PTC, 49 percent of which is
owned by T-Mobile International, is the only fully private mobile communications
operator in Poland. Talks on the possibility of T-Mobile purchasing the
remaining 51 percent from Elektrim Telekomunikacja (ET) S.A. and Vivendi
Universal S.A. were abandoned in September 2003.
Russia's MTS doubles subscriber base once more. Mobile TeleSystems (MTS) OJCS is
Russia's leading mobile communications operator. By the end of December 2003,
the MTS network had 16.7 million subscribers, an increase of 10.1 million on the
previous year. Together with its subsidiaries, MTS has GSM licenses for 76
regions in Russia, as well as for the Ukraine and Belarus, thus reaching a
population of around 186.3 million people. MTS's primary strategic goal is to
establish itself as Russia's no. 1 national mobile communications operator. To
achieve this, the company is converging its regional networks to create one
nationwide network, standardizing its rates and streamlining its customer
service and billing systems across the country. T-Mobile International has a
25.1 percent shareholding in MTS. The company has been listed on the New York
Stock Exchange since July 2000.
Preparation for the commercial launch of UMTS-based mobile multimedia. In
December 2003, T-Mobile Austria was the first T-Mobile national company to
announce the launch of its UMTS (Universal Mobile Telecommunications System)
network, as provided for in the terms of the license. At 37 percent, the rate of
coverage exceeds licensing requirements. In view of the lack of UMTS terminals,
the service will not be actively marketed for the time being, however. The
licensing requirements were also exceeded in Germany, with a 40 percent coverage
rate. By year end, UMTS had reached 200 towns and cities. Both T-Mobile
Deutschland and T-Mobile UK are planning to start marketing UMTS-based
multimedia services during the course of 2004. On the Dutch market, the first
third-generation mobile communications services are scheduled to be introduced
before the end of the year. To comply with the terms of the UMTS license, Dutch
operators must cover around 84 percent of the population and 60 percent of the
country by January 2007.
80
T-Systems. Successful new strategic focus and marked efficiency gains.
o Strong market position with Deutsche Telekom named accounts
o 2003 financial year shaped by new strategic direction: Focus & Execution
o Major contracts bear testimony to successful implementation of the program,
also laying the foundation for future revenue growth
o Marginal increase in revenue despite challenging market conditions
o Two-digit increase in earnings thanks to efficiency gains
--------------------------------------------------------------------------------
T-Systems
--------------------------------------------------------------------------------
(millions of (euro)) 2003 2002 Change
--------------------------------------------------------------------------------
Total revenue 10,614 10,489 125
--------------------------------------------------------------------------------
Results from ordinary business activities -138 -1,990 1,852
--------------------------------------------------------------------------------
EBITDA(a) 1,412 753 659
--------------------------------------------------------------------------------
EBITDA, adjusted(a) 1,415 1,151 264
--------------------------------------------------------------------------------
EBITDA margin, adjusted(a)(%) 13.3 11.0 2.3
--------------------------------------------------------------------------------
Investments in property, plant and equipment
and intangible assets(b) -660 -811 151
--------------------------------------------------------------------------------
Number of employees averaged over the year 42,108 43,482 -1,374
--------------------------------------------------------------------------------
(a) Deutsche Telekom defines EBITDA as results from ordinary business
activities excluding other taxes, net financial income/expense,
amortization and depreciation. For detailed information and calculations
please refer to the chapter on "Reconciliation of pro forma figures"
starting on page 96.
(b) Excluding goodwill.
T-Systems International GmbH serves the large corporate customers of the
Deutsche Telekom Group by providing them individualized information and
communication technology (ICT) solutions. T-Systems delivers ICT infrastructures
and customized ICT solutions, leveraging these solutions to manage entire
business process flows, if required. T-Systems helps customers to increase their
competitiveness by giving them the benefits of increased flexibility, lower
costs and greater freedom to focus on their core areas of competence. Through
its "Managed business flexibility" strategy, T-Systems promises its customers
precisely the flexibility and cost efficiencies they need to focus on their core
business more effectively. Represented in more than 20 countries, the T-Systems
division of the Deutsche Telekom Group had an average payroll of 42,108 in the
2003 financial year.
Strategic role in Deutsche Telekom Group. Unlike the other divisions, T-Systems
does not target the mass market. It concentrates on individualized ICT services
for key accounts with international operations. Cooperation with national and
international named accounts is an extremely important area of business for
Deutsche Telekom. This is due to the fact that other divisions within the Group
(such as T-Com in its offering for small and medium-sized enterprises) benefit
from and leverage the corporate ICT solutions developed by T-Systems. T-Systems
thus plays a pivotal role within the Group.
Solid foundation for future growth. T-Systems defined and gradually implemented
its new Focus & Execution strategy during the course of 2003. In line with this
strategy, the company focused its structure and market approach to concentrate
on four growth areas. By bundling skills and experience in the areas of
Manufacturing, Telecommunications, Services & Finance, and Public & Healthcare,
these four T-Systems Industry Lines are ideally equipped to meet rising customer
expectations.
These four business lines serve T-Systems' biggest customers worldwide through
an integrated key account management approach. These key customers enjoy ICT
services that are tailored to their individual needs and industry-specific
challenges. A wealth of innovative solutions help build lasting relationships
with these key accounts, ensuring that both T-Systems and the Group as a whole
can continue to benefit from this strategic target group in the future.
The divisions
T-Systems 81
T-Systems' Service Lines (Systems Integration, Computing and Desktop Services,
Network Services, and International Carrier Sales & Solutions) serve all other
strategic customers. Although individual T-Systems services account for the
lion's share of business in this segment, service bundles are also in demand.
These Service Lines possess the ICT know-how needed to develop high-quality
solutions, delivering them to both service line customers and industry line key
accounts.
The Systems Integration line optimizes customers' business processes by
integrating new applications with existing systems, thus enabling a seamless
process flow across the enterprise. T-Systems operates the most powerful network
of data centers in Europe, the Global Computing Factory. Through this factory,
T-Systems delivers an extensive range of IT services to its customers, including
computing and desktop services.
The Network Services line plans, builds and operates company-specific data and
voice network solutions, leveraging T-Systems' international telecommunications
network infrastructure (the Global Network Factory). T-Systems also cooperates
with international network operators through the International Carrier Sales &
Solutions line.
In line with the Focus & Execution strategy, all Service Lines increased
efficiency and quality levels, at the same time capitalizing on economies of
scale. The cumulative effect of these measures was to strengthen T-Systems'
competitive positioning.
Special teams focus on strategic wins. Strategic project acquisition teams were
also set up to support T-Systems' new strategy. These project teams are equipped
with all the necessary skills and experience to win multi-million-euro contracts
on both the national and international market. T-Systems succeeded in securing
several of these mega deals during the second half of 2003.
--------------------------------------------------------------------------------
Key figures for T-Systems
--------------------------------------------------------------------------------
2003 2002 Change
---------------------------------------------------------------------------------
Systems Integration
---------------------------------------------------------------------------------
Hours billed (millions)(a) 11.2 11.3 -0.1
---------------------------------------------------------------------------------
Utilization rate(b)(%) 67.0 65.2 1.8
---------------------------------------------------------------------------------
Computing Services
---------------------------------------------------------------------------------
Overall processor performance (MIPS)(c) 113,723 92,968 20,755
---------------------------------------------------------------------------------
Number of servers managed and serviced 28,399 27,409 990
---------------------------------------------------------------------------------
Mainframe utilization (%) 95.0 95.0 0.0
---------------------------------------------------------------------------------
Desktop Services
---------------------------------------------------------------------------------
Number of workstations managed and serviced 1,234,813 1,204,292 30,521
---------------------------------------------------------------------------------
Proportion of support activities, Germany (%) 60.6 58.1 2.5
---------------------------------------------------------------------------------
Proportion of retail, Germany (%) 39.4 41.9 -2.5
---------------------------------------------------------------------------------
(a) Updated figure for the 2002 financial year.
(b) Ratio of average number of hours billed to maximum possible hours billed
per period.
(c) Million instructions per second.
Stronger differentiation between value-add levels. Parallel to the creation of
four Industry Lines, T-Systems also restructured its service marketing
activities during the year under review. The company now differentiates between
three different value-add levels:
o ICT Infrastructure Management: T-Systems delivers flexible ICT
infrastructure management services, offering customers long-term cost
efficiencies and performance gains.
o Business Solution Design & Implementation: T-Systems develops, implements
and operates end-to-end ICT solutions across a variety of application
scenarios. Business solutions add value by optimizing processes, increasing
productivity (in sales, for example) and enhancing operational efficiency
(in production, for example).
o Business Process Management: Customers outsource their entire process
chains to T-Systems. This frees customers to focus on their core business,
at the same time benefiting from process and cost efficiencies.
82
So-called focus solutions are assigned to these value-add levels. ICT
Infrastructure Management, for example, includes all-inclusive operation of
entire SAP solution architectures and extensive desktop management services.
Business Solution Design & Implementation ranges from customer service
applications for banks and insurance companies to end-to-end supply chain
optimization solutions for automotive accounts. Business Process Management
includes telecommunications billing and payroll accounting solutions.
"These focus solutions spearhead T-Systems' offering and are therefore of
crucial strategic significance."
These focus solutions spearhead T-Systems' offering and are therefore of crucial
strategic significance. By giving customers greater flexibility to concentrate
on their core business, these solutions make a valuable contribution to our
customers' market success.
Focus on global service delivery capabilities. 2003 saw another important
decision at T-Systems. In future, the company plans to shift the focus of
international expansion plans towards global customers. This calls for global
service delivery capabilities rather than just a global presence. T-Systems
ensures these capabilities through cross-border account management in its
Industry Lines and Service Lines.
Post-consolidation signs of recovery on telecom market. Demand for IT services
pulling out of the doldrums. Due to the depressed economic climate, demand on
the market on which T-Systems is active remained generally conservative during
the course of 2003. This applied to IT services in particular. Leveling out at
around two percent, the growth rate for IT solutions in Western Europe was again
down on the previous year's figure. The German market fared worse than the
Western European average. The market for telecom services, on the other hand,
grew by around five percent in Western Europe. Following on from the intensive
wave of consolidations, which was particularly pronounced in 2002, market prices
stabilized at very low levels in 2003.
T-Systems performed well, increasing earnings and efficiency levels. Against
this challenging background, T-Systems made good progress during 2003. Total
revenue rose by 1.2 percent to a total of EUR 10.6 billion during the financial
year. This was fuelled by the extremely strong performance of the telecom
business unit. Revenue generated by this unit was up 5.3 percent, slightly
outperforming the market average. The Western European market grew on average 5
percent faster than last year. T-Systems benefited in particular from rising
customer demands for quality and a growing tendency to opt for providers
offering long-term security and a solid financial standing.
Demand for IT solutions declined, with the result that revenue in this segment
was down 2.3 percent on the previous year. The Systems Integration segment,
however, managed to keep the overall downward market trend in check. Compared
with the general market decline of 7 percent, T-Systems' revenue dropped a mere
4.4 percent on the previous year's figure.
Earnings before interest, tax, depreciation and amortization (EBITDA) improved
considerably on the previous year's figure. Quarter on quarter, EBITDA and
adjusted EBITDA (excluding special factors) generally rose significantly in
2003, clearly outperforming 2002 results. T-Systems posted an EBITDA of EUR 1.4
billion during the year under review, compared with EUR 0.8 billion in 2002.
Special factors totaling EUR 0.4 billion, attributable to restructuring measures
in response to the Group's strategic review, impacted negatively on EBITDA in
2002. After discounting these special factors, adjusted EBITDA in 2002 amounted
to EUR 1.2 billion. By comparison, adjusted EBITDA was up 23 percent in the 2003
financial year, leveling out at EUR 1.4 billion. Special factors that impacted
positively on EBITDA during the 2003 financial year amounted to EUR 0.1 billion.
These related primarily to proceeds from the sale of non-core lines of business.
This figure was matched by the special factors that impacted negatively on
EBITDA,
The divisions
T Systems 83
attributable mainly to losses on the sale of shareholdings and the expenditure
incurred in connection with these sales. Whereas the results of ordinary
business activities showed a marked deficit in 2002 (largely due to
restructuring costs and write-downs), this figure improved significantly in
2003, where a result of minus EUR 0.1 billion was recorded. Discounting the
special factors applicable in both 2003 and 2002, the increase amounts to EUR
0.9 billion, reflecting in particular the success of cost-cutting measures. This
positive trend enabled T-Systems to meet its ambitious goals and even exceed the
expectations of market analysts.
Lower costs, higher margins. Fuelled by the disproportionate improvement in
adjusted EBITDA relative to revenue, the profit margin at T-Systems increased
from 11 to 13 percent in 2003. This positive trend was mainly attributable to
organizational efficiencies enabled by streamlined business processes,
optimization of the server farms, further consolidation of data centers, and
tighter cost control.
For example, selling cost decreased significantly in the financial year. Whereas
this item amounted to EUR 0.9 billion in 2002, a mere EUR 0.7 billion was
required in the year under review. Cost of sales was also successfully cut back
during 2003, down 2.5 percent on the figure for 2002 (based on adjusted
figures). Particularly when the quarter-on-quarter rise in the volume of new
orders is taken into consideration, the decline in selling costs and cost of
sales bears tribute to the success of the company's Focus & Execution strategy.
Structural improvements, lower personnel costs. In 2003, T-Systems further
optimized its organizational structure. Processes were streamlined by
centralizing headquarters activities and functions. As a result of this
initiative and other efficiency-focused measures, general and administrative
costs were cut by 16.1 percent compared with the previous year (based on
adjusted figures). T-Systems cut personnel costs by more than four percent
during 2003. Despite the additional staff required to manage new outsourcing
projects, T-Systems managed to cut its payroll by an average of 3.2 percent.
Streamlined portfolio of shareholdings. As part of the move to focus on its core
areas of business, T-Systems streamlined its shareholdings portfolio in the
course of the financial year. In the first quarter of 2003, the division sold
its TELECASH GmbH subsidiary. In the second quarter, the French subsidiary
T-Systems Siris S.A.S. was sold. In the same quarter, T-Systems parted with its
shareholdings in the Swiss fixed-network operator MultiLink S.A. In the last
quarter of 2003, the division sold T-Systems Card Services AG.
" This positive trend enabled T-Systems to meet its ambitious goals and even
exceed the expectations of market analysts."
T-Systems wins major deals and strategic projects. During the year under review,
T-Systems secured a number of major strategic contracts from leading national
and international corporations and institutions.
In 2003, the market saw a strong trend towards outsourcing of IT and telecom
processes and applications. By outsourcing activities to service providers such
as T-Systems, companies can cut costs, increase business process efficiency and
are free to focus on core activities.
84
With precisely these goals in mind, Westdeutsche Landesbank AG (WestLB)
concluded a five-year contract with T-Systems in November 2003. Under the terms
of the contract, which is valued at approximately EUR 200 million, the bank has
outsourced its print services and the operation of its data center to T-Systems.
T-Systems fought off stiff competition from other leading service providers to
win the WestLB contract.
Strategic outsourcing wins during the financial year also included a major
project from the Vorwerk group. Vorwerk has entered into a long-term partnership
with T-Systems as part of its plan to outsource its IT operations worldwide.
T-Systems operates Vorwerk's data centers, networks, applications and
international help desk worldwide. The contract is worth more than EUR 150
million. It includes the takeover of Vorwerk's subsidiary ZEDA by T-Systems as
part of Vorwerk's strategy to establish a uniform IT landscape for the group's
global direct sales operations.
"One of the most important aspects of the new customer- and market-oriented
strategy launched by T-Systems during the financial year is the fact that it
lays a solid foundation for sustainable growth over the coming years."
In the manufacturing segment, key achievements included a sizable contract from
the DaimlerChrysler automotive group. Building on and expanding the close
cooperation between the two companies, this global contract provides for the
delivery of extensive ICT services for DaimlerChrysler by T-Systems. This
includes the operation of mainframes and distributed client/server architectures
as well as network and desktop administration. In addition, T-Systems develops
and supports DaimlerChrysler-specific applications targeted, for example, at
vehicle development, production, sales, and customer support. The contract has a
term of three years - with an option to extend to 2008.
Also on an international scale, T-Systems closed a deal with the aircraft
manufacturer Airbus. Based in Europe, Airbus has consolidated its three data
centers in England, France and Germany at its Toulouse headquarters. Starting in
2004, T-Systems will be operating all mainframe systems run for these three
countries at Toulouse. The contract has been concluded for an initial period of
five years. In addition, T-Systems will be supporting some 42,000 Airbus
desktops over the next three years. This includes running user help desks in
Hamburg and Toulouse. The cooperation with T-Systems offers Airbus significant
cost savings and enhanced service quality. This contract is worth more than EUR
100 million.
These and other major wins in 2003 clearly illustrate the success and speed with
which T-Systems is implementing its new strategic direction. One of the most
important aspects of the new customer- and market-oriented strategy launched by
T-Systems during the financial year is the fact that it lays a solid foundation
for sustainable growth over the coming years.
Outlook: Gradual recovery expected for ICT market from mid 2004 onwards.
According to the Gartner and Meta Group market research institutes, the
international IT market should show the first signs of recovery towards the
middle of 2004, finally returning to a growth path in 2005. Industry experts do
not expect us to see the dramatic growth rates experienced in the past, however.
It is anticipated that the positive trends in the telecom market will be
sustained. The rate of expansion in the telecom market over the next few years
will depend heavily on general economic trends and developments.
The divisions
T-Systems 85
T-Systems predicts that the growing demand for end-to-end IT and telecom
solutions among corporate customers will emerge as one of the key drivers of the
ICT market. We expect this demand to pick up as the economic upturn gains
momentum. This growth will be fuelled by the realization among companies from
practically all branches of trade and industry that the systematic exploitation
of IT and telecom technologies is essential to maintain the flexibility needed
to sustain a competitive edge. Large enterprises in particular will most likely
step up ICT investment levels as the economy recovers.
The economic upswing will also be largely pushed by new technologies that
improve the performance and bandwidth of telecom networks, and broaden the reach
and possibilities of information technologies. Such technologies include MPLS
(Multi-Protocol Label Switching), a new network technology that enables
different services (such as voice and data) to be delivered over a single
network, improving quality of service through prioritization. T-Systems already
delivers a range of international solutions based on MPLS technology.
Slight increase in revenue and positive results expected. T-Systems will
continue to implement its Focus & Execution strategy during 2004. On the back of
the projected market recovery, the company plans to capitalize on market growth
during the second half of the year. T-Systems is aiming for a marked increase in
new orders during 2004. In line with the recovery projected mid-year for the IT
market, T-Systems envisages a moderate increase in revenue in this area.
The company will continue to pursue measures aimed at increasing efficiency.
These measures will include further optimization of the purchasing process for
third-party services and a systematic performance increase in the network
infrastructure required for customer projects. The combined effect of the new
efficiency-enabling measures and the projected rise in revenue should result in
a significant improvement in earnings. For the first time, ordinary business
activities are expected to return a positive result in 2004.
To achieve these goals, T-Systems will be more aggressive in marketing its
clearly differentiated portfolio with three value add levels (ICT Infrastructure
Management, Business Solution Design & Implementation, Business Process
Management). The objective of this portfolio is to give customers even greater
flexibility in the pursuit of their core business. Companies clearly need
comprehensive, end-to-end ICT services to optimize internal processes,
collaborate more closely with partners and suppliers and completely outsource
technically complex processes. To meet these needs, T-Systems provides
extensive, individualized ICT infrastructure, business solutions and process
management services from a single source. Through its "Managed business
flexibility" promise, T-Systems undertakes to give its customers the freedom and
flexibility they need to succeed.
"Through its 'Managed business flexibility' strategy, T-Systems promises its
customers precisely the flexibility and cost efficiencies they need to focus on
their core business more effectively."
86
T-Online. Continued and profitable implementation of mixed business model
combining Internet access, content, value-added services and e-commerce.
o Revenue up despite difficult market climate
o EBITDA and operating results increase once again
o Strong growth in broadband customer base
o Innovative new entertainment services: music downloads and video-on-demand
o Product portfolio expanded around content, services and e-commerce pillars
o Strategic acquisitions in content and portal marketing fields
o 2004 will see further expansion of broadband offering and launch of
"T-Online Vision on TV"
--------------------------------------------------------------------------------
T-Online*
--------------------------------------------------------------------------------
(millions of (euro) 2003 2002 Change
--------------------------------------------------------------------------------
Total revenue 1,851 1,584 267
--------------------------------------------------------------------------------
Germany 1,681 1,444 237
--------------------------------------------------------------------------------
Rest of Europe 170 140 30
--------------------------------------------------------------------------------
Results from ordinary business activities 104 -471 575
--------------------------------------------------------------------------------
EBITDA(a) 335 103 232
--------------------------------------------------------------------------------
EBITDA, adjusted(a) 310 76 234
--------------------------------------------------------------------------------
EBITDA margin, adjusted(a) (%) 16.7 4.8 11.9
--------------------------------------------------------------------------------
Investments in property, plant and equipment
and intangible assets(b) -81 -101 20
--------------------------------------------------------------------------------
Number of employees averaged over the year 2,637 2,536 101
--------------------------------------------------------------------------------
* Figures are calculated in accordance with the provisions of German GAAP
specified in the German Commercial Code (HGB), as applied throughout the
Deutsche Telekom Group, and differ from those published in the reports of
T-Online International AG under IFRSs.
(a) Deutsche Telekom defines EBITDA as results from ordinary business
activities excluding other taxes, net financial income/expense,
amortization and depreciation. For detailed information and calculations
please refer to the chapter on "Reconciliation of pro forma figures"
starting on page 96.
(b) Excluding goodwill.
Market position further expanded. Powered by its innovative access and
non-access product mix, T-Online International AG again recorded substantial
growth in the 2003 financial year. T-Online combines Internet access with
value-added content, services and e-commerce. Defying the general downward
economic trend, the company succeeded in expanding its market position and
increasing profitability.
Revenue and earnings up. Figures are calculated in accordance with the
provisions of German GAAP specified in the German Commercial Code (HGB), as
applied throughout the Deutsche Telekom Group, and differ from those published
in the reports of T-Online International AG under IFRSs. Compared with last
year, revenue of the T-Online group of companies increased from EUR 1.6 billion
to EUR 1.9 billion. This corresponds to an increase of 16.9 percent. At EUR 1.8
billion, the German market segment accounted for the lion's share of this
revenue. Revenue in this segment was up 24 percent on last year's figure. The
"Rest of Europe" segment accounted for 9.2 percent of the group's revenue in
2003. Results from ordinary business activities generated by the T-Online group
of companies was up EUR 575 million on last year's figure. EBITDA (adjusted to
exclude special factors) rose by EUR 234 million to EUR 310 million.
T-Online shares also performed very well. Stable financial results and positive
signals from the Internet market contributed to the above-average development of
the T-Online share price in 2003. At year end, the share closed at EUR 10.30, up
93.6 percent on the 2002 closing price.
Innovative offering attracts growing number of broadband customers. Once again,
the number of T-Online customers grew substantially during the year under
review. By December 31, 2003, the T-Online group of companies boasted 13.1
million subscribers, around 880,000 more than the previous year. Enhanced
broadband services are attracting an ever-increasing number of customers. Around
800,000 customers opted for T-DSL broadband Internet access during the course of
2003. Broadband services were thus an important growth engine in 2003.
The growing swell of broadband subscribers will play a pivotal role in the
future of T-Online, providing a sound basis for the parallel expansion of
T-Online's multimedia paid-content offering. We anticipate that an ever-growing
number of customers will be prepared to pay for value-added Web services in
future. In addition, we see broadband technology as a valuable vehicle for
building customer loyalty.
The divisions
T-Online 87
Expansion of rate options. The success of T-DSL is also driven by T-Online's
ever-expanding content and service offering, coupled with the appeal of
usage-based rate plans. Broadband access accounts for 30.7 percent of T-Online's
customer base in Germany and 27.2 percent on a groupwide basis. The T-DSL
flat-rate option proved particularly popular among T-Online customers in
Germany, with the number of flat-rate subscribers rising to a total of 2
million. T-DSL volume-based rates also fared well, with the number of customers
rising by 240,000 to a total of 314,000 at the close of 2003. The T-DSL 1000
tariff, which targets newcomers to broadband communications, was one of the
biggest successes among volume-based rates. T-Online also added dsl flat 1500 to
its tariff options in 2003. Free of time and volume limits, this new rate
enables customers to access Internet content at a speed of up to 1.5 megabits
per second. 2003 also saw the introduction of T-Online dsl 5000 MB. This tariff
is of particular interest to business customers with a high volume of Internet
traffic.
Growth in the T-Online customer base was accompanied by a rise in demand for
T-Online services. At 3,052, the average number of access minutes per customer
and month increased substantially compared with 2002 (2,523 minutes). This
enabled T-Online to utilize its network capacity more effectively, thus
generating significant cost efficiencies. This rise in online time reaffirms the
fact that broadband communication enhances the user experience and thus fuels an
increase in demand for online services.
Wireless LAN successfully positioned. Enabling high-speed wireless access to the
Internet is evolving into an increasingly strategic area of activity at T-Online
International AG. As planned, however, revenue in this area was modest during
the financial year. In August 2003, T-Online introduced broadband Internet
access over wireless local area networks (WLANs). T-Online customers need only
an e-mail address and password to dial into WLANs operated by various local and
national T-Online partners. No special software is needed. Billing for WLAN
services is added to the regular telephone bill.
--------------------------------------------------------------------------------
Total number of T-Online subscribers
--------------------------------------------------------------------------------
(millions)* 2003 2002 Change
--------------------------------------------------------------------------------
Total number of subscribers 13.1 12.2 0.9
--------------------------------------------------------------------------------
T-Online (Germany) 10.8 10.0 0.8
--------------------------------------------------------------------------------
Rest of Europe 2.3 2.3 0.0
--------------------------------------------------------------------------------
DSL subscribers (total) 3.6 2.8 0.8
--------------------------------------------------------------------------------
* Figures rounded and expressed in millions. The total was calculated on the
basis of precise figures.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
--------------------------------------------------------------------------------
Development of subscriber figures
--------------------------------------------------------------------------------
(millions) 2001 2002 2003
--------------------------------------------------------------------------------
10.7 12.2 13.1
--------------------------------------------------------------------------------
New trends with innovative portal content and services. On the content side,
T-Online further strengthened its position as one of Germany's leading portal
operators in 2003. On average, 50.7 percent of all German Internet users visited
T-Online's Website at www.t-online.de in the year under review. The monthly
unique audience figures (visitors to the T-Online portal) rose to an average of
16.0 million (source: Nielsen Netratings 12/2003).
88
A closer look at the individual market segments shows that T-Online succeeded in
maintaining a strong market position, despite stiff competition from specialist
content providers. The News, Entertainment, Sport, Business and Finance, and
Computer listings were and have remained extremely popular. The growing number
of page impressions registered during visits to the T-Online portal provide
clear indication of this positive trend. This figure rose by 62 million to a
monthly average of 562 million compared with the previous year.
"The systematic expansion of T-Online's paid content and service offering played
a valuable role in swaying customers to visit the T-Online portal for longer
periods of time."
T-Online relaunched its Website (www.t-online.de) at the end of August 2003. The
objective was to structure content more transparently without modifying the
underlying look & feel of the site. The result meets rising customer
expectations. The clear positioning of the "Content", "Services" and "Shopping"
zones supports the business model mix of access products, content, services and
e-commerce.
T-Online took advantage of the relaunch to position the shopping zone more
prominently. The objective is to proactively draw visitors' attention to the
possibilities of Internet shopping at T-Online.
During the financial year, T-Online also entered into a cooperation agreement
with the Internet search engine provider Google as a means of further boosting
revenue. Through its partnership with Google, T-Online is ideally positioned to
capitalize on the growing popularity of search engines.
Broadband paid content adds value. The systematic expansion of T-Online's paid
content and service offering played a valuable role in swaying customers to
visit the T-Online portal for longer periods of time, thus generating additional
revenue through e-commerce.
Building on the enhanced user experience enabled by broadband access,
customer-friendly payment options for paid content also contributed
significantly to ensuring smooth customer relations. In addition to its
established pay-per-click services (where visitors pay for an information or
entertainment service as they go), T-Online also offers numerous subscriptions
to its online services. With subscription rates rising by over 100 percent, the
Computer Insider portal was particularly successful during 2003. Computer
Insider gives users access to extensive software archives from leading IT
vendors and up-to-date articles from the "PC Welt" computer magazine.
T-Online entered into a number of strategic partnerships during 2003 to ensure
that its customers can choose from a broad range of high-quality paid content.
One such partnership was with match.com, one of the leaders in online dating
services worldwide. T-Online users can post their profiles (including photo) to
the site to find dates or make new friends. Through its close cooperation with
match.com, T-Online is actively capitalizing on the rapidly expanding market for
online dating services that users are willing to pay for.
Games-on-demand (GoD) have also clearly emerged as one of the more promising
paid online services. Users can rent popular PC games for an agreed period of
time (the user simply downloads the games and can play them for the agreed
rental period) or play the games directly online. By the end of the financial
year, T-Online was offering more than 50 of the most popular PC games.
On the sports front, T-Online has been covering German Bundesliga football
matches since April 2003. A mere 60 minutes after the final whistle, T-Online
customers can enjoy video streams with the game's highlights at the T-Online
portal. This offer appeals in particular to broad-band customers.
The divisions
T-Online 89
T-Online captures tomorrow's entertainment market with musicload.de and
video-on-demand innovations. The rise in demand for broadband Internet access
with new access options was also fuelled in 2003 by the launch of T-Online's own
online music platform, musicload.de. At musicload.de, T-Online customers can
legally download digital music in return for a fee. The site lists songs from
leading labels such as Sony Music, BMG, EMI, Warner, Kontor, and EDEL. This
music portal helps successfully position T-Online in the e-commerce market,
adding significant momentum to music sales over the Internet.
Video-on-demand was another key installment in T-Online's drive to innovate
broadband Internet services. This service was launched on the T-Online Vision
portal in November 2003. The latest films are streamed to the customer's PC over
a T-Online connection. T-Online concluded agreements with DreamWorks, Universal,
MGM and others, enabling it to broadcast popular films such as "8 Mile" and "2
Fast 2 Furious". As part of a pilot project, the first subscribers experienced
"T-Online Vision on TV" at the end of 2003. Through this service, T-Online has
laid the foundation for new online services and expanded the possibilities of
Internet communication. With T-Online Vision on TV, customers equipped with
special devices can now view T-Online Vision's offering on TV. In 2003, T-Online
concluded its first cooperation agreement in this area with the IT manufacturer
Fujitsu Siemens Computers. Fujitsu Siemens Computers produces devices that
support the convergence of Internet and TV. T-Online plans to market this
service to the public in 2004.
Successful expansion of corporate offering. T-Online was quick to recognize and
act on the growing importance of the Internet for corporate customers. At the
start of 2002, the company expanded its offering to include products that
address strategic areas such as hosting, security, communication, and online
content. With 1.5 million corporate customers by the end of 2003, T-Online had
captured around 60 percent of the corporate market.
T-Online's tariff and service structure is tailored to the needs of both small
and medium-sized enterprises. The content offering for this segment centers
around T-Online's business portal, which was revamped in November 2003. With 1.5
million corporate subscribers, T-Online's corporate offering is one of the most
popular business portals in Germany.
New services in the corporate segment included the Business Hosting product
line. This product line offers a wide spectrum, ranging from simple digital
business cards for newcomers to high-end hosting services for Websites. The
Business Homepage Professional service comes with numerous technical options and
features. T-Online presented its Professional security package at CeBIT 2003.
This package integrates the latest versions of Norton Anti Virus, Norton
Personal Firewall and extensive dialer protection features. Business eMail was
added to T-Online's extensive corporate offering in November 2003. In addition
to a personal e-mail address and an Internet domain, the Business eMail service
offers users practical functions such as folder management and unified
messaging. T-Online was also busy expanding its offering for large enterprise
customers in 2003.
"Video-on-demand was another key installment in T-Online's drive to innovate
broadband Internet services. This service was launched on the T-Online Vision
portal in November 2003."
In cooperation with T-Systems, T-Online markets corporate solutions for content
management and online security. T-Online also offers special access tariffs for
major customers. Launched in August 2003, T-Online's Global Corporate Access
gives business customers equipped with appropriate wireless devices high-quality
and high-speed access to the Internet and corporate networks from numerous
hotspots in airports, conference centers, and hotels across 150 different
countries.
90
Acquisition of Scout24 marketplaces expands service portfolio. T-Online
integrated AutoScout24, Germany's bestknown automotive marketplace, into its
portal in September 2003. Almost 800,000 used cars and more than 20,000 new
vehicles are listed on this site. In December 2003, T-Online and Scout24 signed
an agreement allowing for the purchase of most of the companies in the Scout24
group by T-Online. In addition to AutoScout24, the group also includes the
ImmobilienScout24 (marketing real estate), JobScout24, TopJobsScout24,
FinanceScout24, FriendScout24 marketplaces as well as Scout24 Schweiz AG and
other Scout24 brands. Scout24 marketplaces have penetrated numerous European
markets, including Germany and Switzerland. The well-established online offering
of these marketplaces is the perfect complement to T-Online's service portfolio,
adding value to T-Online's Internet deliverables in key growth areas. The
purchase was approved by the German Federal Cartel Office on February 5, 2004.
"The market launch of `T-Online Vision on TV', a TV-based version of T-Online
Vision, will be a key milestone in this broadband roadmap for 2004."
Portal marketing set to gain in strategic importance. Marketing through the
T-Online portal plays a strategic role in efforts to win new non-access
business, particularly given the growth in online advertising. T-Online
developed a cross-media check in 2003 to maximize transparency and budget
efficiencies for its advertising customers. This check measures not only the
effectiveness of online advertising, but also the cross-media impact when the
Internet is combined with other advertising channels (such as print or TV).
During 2003, T-Online also started developing its permission marketing service.
Permission marketing is a new type of interactive advertising where customers
explicitly request the electronic marketing materials they receive. It evolved
into one of the most promising growth segments in online marketing. Its
popularity is partly due to the flexibility it offers marketers in their choice
of format. Leading mail-order companies Quelle, Neckermann and Bauer were among
T-Online's first customers and cooperation partners in this area. Portal
marketing activities were also intensified on the organizational front in 2003.
Effective as of January 1, 2003, T-Online fully integrated the marketing company
Interactive Media. Interactive Media is the exclusive marketing agent for the
T-Online portal network. It also manages Websites operated by the Axel Springer
Publishing Group and other prominent companies.
Market positions of group members consolidated across Europe. The growing
penetration of broadband also benefited the European subsidiaries and associated
companies of T-Online International AG, fuelling an increase in their customer
base and a boost in revenue. This applied in particular to the fully owned
T-Online subsidiary T-Online France. Leveraging new DSL tariffs and innovative
multimedia services, Club Internet succeeded in expanding its broadband customer
base. The relaunch of the Club Internet Website and expansion of the broadband
portal combined to increase the average number of unique visitors by around 84
percent compared with the previous year.
The divisions
T Online 91
The Spanish Internet market also capitalized on the fastgrowing popularity of
DSL. T-Online's Spanish subsidiary Ya.com reported significant growth in its
access and e-commerce lines of business. The online travel service operated by
Ya.com (www.viajar.com) succeeded in increasing the number of online bookings
significantly compared with last year's figure. T-Online is also active on the
Austrian, Swiss and Portuguese markets, where it operates the t-online.at,
t-online.ch and terravista.pt Internet portals.
Outlook for 2004: Growth in broadband offering, launch of "T-Online Vision on
TV". Now that the Internet has firmly established itself as the fourth mass
medium, T-Online expects the Internet market to gather further momentum during
the current financial year. This applies in particular to service and product
segments where traditional media and distribution channels simply cannot compete
with the benefits offered by the Internet. T-Online is convinced that the future
of the Internet will be inextricably linked with broadband connectivity as a
growing number of users look to capitalize on the diversity of delivery options
and communication formats enabled by broadband, particularly in the
entertainment arena. Since going public in 2000, T-Online International AG has
systematically pursued a growth and profitability-focused strategy through its
combined business model. As time goes on, the company increasingly prioritizes
quality over quantity. T-Online will continue along this path in 2004. During
the current financial year, the company will be focusing on the step-by-step
expansion of its broadband offering. The market launch of "T-Online Vision on
TV", a TV-based version of T-Online Vision, will be a key milestone in this
broadband roadmap for 2004. Through this and other innovative measures, T-Online
thus continues to position itself for success in the dynamic Internet market.
92
Group Headquarters & Shared Services. Strategic focus brings tangible benefits.
o Reorganization as virtual strategic management holding completed
o New areas of business for Vivento
o Substantial proceeds realized from the sale of Group-held real estate
o Debt further reduced through sale of minority shareholdings
--------------------------------------------------------------------------------
Group Headquarters & Shared Services
--------------------------------------------------------------------------------
(millions of (euro)) 2003 2002 Change
--------------------------------------------------------------------------------
Total revenue 4,268 4,411 -143
--------------------------------------------------------------------------------
Results from ordinary business activities -4,071 -4,690 619
--------------------------------------------------------------------------------
EBITDA(a) -276 447 -723
--------------------------------------------------------------------------------
EBITDA, adjusted(a) -316 30 -346
--------------------------------------------------------------------------------
EBITDA margin, adjusted(a) (%) -7.4 0.7 n.a.
--------------------------------------------------------------------------------
Investments in property, plant and equipment
and intangible assets(b) -416 -472 56
--------------------------------------------------------------------------------
Number of employees averaged over the year 25,203 17,870 7,333
--------------------------------------------------------------------------------
(a) Deutsche Telekom defines EBITDA as results from ordinary business
activities excluding other taxes, net financial income/expense,
amortization and depreciation. For detailed information and calculations
please refer to the chapter on "Reconciliation of pro forma figures"
starting on page 96.
(b) Excluding goodwill.
In the 2003 financial year, Deutsche Telekom concluded its restructuring
measures, successfully evolving into a virtual strategic management holding. The
division known as "Other" until the first quarter of 2003, was renamed "Group
Headquarters & Shared Services". In keeping with the new organizational
structure and philosophy, Group Headquarters now focuses on strategic,
cross-division management activities. All other operational tasks not directly
related to the core business of the various divisions are the responsibility of
the new Shared Services unit. Shared services include in particular Vivento,
billing services, real estate activities, and DeTeFleetServices GmbH. Acting as
a one-stop provider of fleet management and mobility services for all member
companies of the Deutsche Telekom Group, DeTeFleetServices GmbH assumed
responsibility for the development, delivery and operation of fleet solutions
(covering both company cars and service vehicles) on July 1, 2002. It also
offers consulting and other mobility services. The Billing Services unit
develops and operates billing and accounts receivable management solutions for
those Deutsche Telekom divisions that operate on the open market.
Vivento refocuses operations to secure jobs on a lasting basis. One of the
Group's top priorities is to provide a socially acceptable and efficient
staffing service to accommodate Group-wide restructuring. To support achievement
of this aim in Germany, the Personnel Service Agency (PSA) was established in
the fourth quarter of 2002. To adapt to evolving needs, the name of the PSA was
changed to Vivento in the third quarter of 2003 and a new strategy was defined.
With its new management team and wider business mandate, Vivento is now better
positioned to rise to the challenging conditions on the labor market. The unit
has expanded its range of activities by adding large-scale project placements to
its individual staff placement services. It will also develop its own lines of
business with high HR requirements. Plans for 2004 include the launch of a Call
Center Unit. Vivento employees will be deployed as call center agents for
Group-internal and external customers. The company Vivento Customer Services
GmbH & Co. KG was set up specifically to generate new call-center business
opportunities.
The divisions
Group Headquarters & Shared Services 93
Vivento's work is governed by the collective agreement on rationalization and
protection of employment for salaried employees and the corresponding
regulations applicable to civil servants. In order to efficiently place and
relocate civil servants working at Deutsche Telekom, it is vital that Vivento
enjoys a high profile among both government bodies/public authorities and
companies/corporate associations.
Since its foundation in the fourth quarter of 2002, Vivento has taken on
approximately 19,200 employees, about 3,700 of whom had left Vivento again by
the end of 2003. Approximately 2,200 of those employees took up permanent
employment outside the Group. These placements translate into annual cost
savings of around EUR 150 million for the Deutsche Telekom Group. These cost
savings are realized in two ways. Employees who take up external employment
reduce Group payroll costs. And placements within the Group eliminate the
personnel costs that would have been incurred had an external candidate been
recruited.
In December 2003, a further 4,000 Vivento employees were placed in temporary
positions. 3,300 of these were working within the Deutsche Telekom Group and 700
for other companies. These temporary placements are of benefit to the Group on
two counts: They provide additional revenue that helps to cover personnel costs
and they eliminate the costs involved in hiring staff from external temp
agencies.
By the end of the financial year, Vivento had around 440 regular employees and
some 15,500 staff transferred to it and awaiting placement.
As part of its human resource management strategy, the Group initiated further
staffing measures in 2003 to permanently improve the ratio between personnel
costs and revenue in the divisions. These include a redundancy package for T-Com
and Vivento. Approximately 1,700 employees had opted for this package by the end
of the year under review. Collective negotiations on working conditions and
salaries for 2004 are currently in progress, with discussions focusing on the
possibility of a shorter working week.
Group Headquarters(a)
[GRAPHIC]
(a) Plus other affiliates (other than those included in Shared Services) such
as Deutsche Telekom International Finance B.V., Deutsche Telekom Holding
B.V., T-Venture Holding GmbH.
(b) The former PSA (Personnel Service Agency).
(c) Includes Deutsche Telekom Immobilien und Service GmbH (DeTeImmobilien),
DFMG Deutsche Funkturm GmbH, GMG Generalmietgesellschaft mbH (GMG), Sireo
Real Estate Asset Management (Sireo) and real estate assets of Deutsche
Telekom AG.
(d) Primarily Deutsche Telekom Training GmbH, SolvenTec GmbH, SAF
Forderungsmanagement GmbH, DeTeAssekuranz GmbH - Deutsche Telekom
Assekuranzvermittlungsgesellschaft mbH, Leipzig University of Applied
Sciences, Inhouse Consulting Telekom, Group Auditing, Group Security, Human
Resources Management.
Plans to further streamline real estate portfolio and increase profitability
successfully implemented. The Group's ongoing strategy to reduce its real estate
portfolio again made a valuable contribution to debt reduction in the 2003
financial year. Sireo Real Estate Asset Management GmbH, responsible for
managing the Group's real estate, was able to close several sales deals during
the financial year. The proceeds from the sale of land and buildings amounted to
EUR 0.2 billion in the fourth quarter of 2003. Over 2003 as a whole, cash
inflows from the sale of real estate totaled EUR 0.8 billion, although some of
these payments related to contracts concluded in 2002.
94
As part of these sales, Deutsche Telekom parted with more than 180 realties that
it did not need to run its business, reducing space by approximately 100,000
square meters (approximately 119,600 square yards). In addition, notice of
termination was served on about 520,000 square meters (622,000 square yards) of
floor space by the end of 2003. Termination was effective on 210,000 square
meters (251,000 square yards) of this by the end of the year. By reducing
leasing commitments, Sireo and DeTeImmobilien succeeded in further lowering the
Group's leasing and facility management costs in Germany.
Real estate costs are expected to be reduced even further in 2004 through a
combination of the ongoing divesture strategy and an increased emphasis on
portfolio streamlining.
Sale of minority shareholdings further reduces debt. Flanking the move to sell
off real estate, Deutsche Telekom also pressed ahead with the sale of minority
shareholdings during the financial year. Not only did sales negotiations
initiated in 2002 draw to a fruitful close in 2003, new agreements on the sale
of minority shareholdings were also reached. December 2003 saw the sale of the
Group's shareholding in satellite operator Inmarsat Venture Plc. By October,
Deutsche Telekom had sold almost all of its shares in Globe Telecom, a
telecommunications operator in the Philippines. The remaining shares were sold
in February 2004. Sale of the Group's six percent stake in Celcom, the Malaysian
mobile communications provider, in June 2003 further reduced outstanding debts.
Back at the start of 2003, Deutsche Telekom parted with its minority
shareholdings in the European satellite operator Eutelsat S.A. and in Ukrainian
Mobile Communications (UMC). In total, proceeds from the sale of minority
shareholdings by the Group Headquarters & Shared Services division amounted to
roughly EUR 0.7 billion by the end of the year under review.
Revenue down. Group Headquarters & Shared Services experienced a slight overall
drop in revenue during the 2003 financial year. To some extent this was because
cost efficiencies generated in the Billing Services area were passed on to the
respective divisions. It is also attributable to the fact that revenue from real
estate and facilities services was on the decline. This was partly caused by the
reduction in project development revenue and the drop in prices charged to the
divisions as a result of efficiency gains. On the other hand, this decrease in
revenue should also be seen in the context of DeTeFleet GmbH. Founded on July 1,
2002, DeTeFleet GmbH returned full-year figures for the first time in 2003.
Adjusted to exclude special factors, EBITDA was down on last year's figure. The
main factors causing this decline were personnel expenditure for Vivento
amounting to approximately EUR 0.5 billion and expenses for the newly
established Deutsche Telekom Foundation totaling approximately EUR 0.1 billion.
On a more positive note, lower rebranding costs and the absence of one-off
start-up costs for the sale of receivables completed in 2002 had a positive
influence on earnings.
The deterioration in the unadjusted EBITDA figure compared with 2002 is
attributable on the one hand to the adjusted EBITDA figure and, on the other, to
the decline in EBITDA-relevant special factors. The proceeds from the sale of
Satelindo and of T-Online shares to the value of approximately EUR 0.5 billion
in 2002 could not be matched by the EUR 0.2 billion in sales proceeds realized
in 2003 (predominantly through the sale of minority shareholdings in Eutelsat
S.A., UMC, Celcom, Globe Telecom and Inmarsat). Other special factors had a
negative impact on EBITDA. These included higher additions to accruals for the
Civil Service Health Insurance Fund and pension accruals occasioned by changes
in discount rates as well as accruals for redundancy payments. These items
totaled approximately EUR 0.3 billion. By contrast, the EUR 0.1 billion in
transfer payments for employees transferred from T-Com to Vivento had a positive
impact on EBITDA.
The divisions
Group Headquarters & Shared Services 95
Despite the increase in EBITDA, the results from ordinary business activities
improved significantly on the previous year's figures. This is mainly
attributable to the absence of special factors that impacted heavily on last
year's results (valuation adjustments on the shares in France Telecom and other
valuation adjustments for investments in noncurrent securities amounting to
approximately EUR 1 billion). The reduction in write-downs of approximately EUR
0.4 billion resulting from the sale of real estate and the absence of oneoff
influences that affected 2002 earnings combined to impact positively on 2003
figures.
96
Reconciliation of pro forma figures.
o EBITDA
o EBITDA after adjustment for special factors
o Free cash flow
o Gross and net debt
EBITDA, EBITDA adjusted for special factors, the EBITDA margin, the EBITDA
margin adjusted for special factors, free cash flow, and gross and net debt, are
all "pro forma figures".
Pro forma figures are not governed by German or U.S. GAAP. As other companies
may not compute the pro forma figures presented by Deutsche Telekom in the same
way, Deutsche Telekom's pro forma figures are only comparable with similarly
designated disclosures by other companies to a limited extent.
Pro forma figures should not be viewed in isolation or as an alternative to net
income/loss, results from ordinary business activities, net cash provided by
operating activities, debt (in accordance with the consolidated balance sheet),
or other Deutsche Telekom figures reported under German or U.S. GAAP.
EBITDA and EBITDA adjusted for special factors. EBITDA of the divisions and the
Group as a whole is derived from the results from ordinary business activities.
This measure of earnings before minority interest in income/loss and before
income taxes is additionally adjusted for other taxes, net financial expense,
and depreciation and amortization. It should be noted that Deutsche Telekom's
definition of EBITDA may differ from that used by other companies.
In this definition, net financial expense includes net interest expense,
income/loss related to associated and related companies, and write-downs of
financial assets and marketable securities. As it is based on the results from
ordinary business activities, this method of computation allows EBITDA to be
derived in a uniform way on the basis of an accepted accounting measure of
earnings published for the divisions and the Group as a whole.
EBITDA is an important indicator used by Deutsche Telekom's senior operating
decision-makers to manage Deutsche Telekom's operating activities and measure
the performance of the individual units.
Deutsche Telekom defines EBITDA adjusted for special factors as the results from
ordinary business activities excluding other taxes, net financial
income/expense, amortization and depreciation, and before the effects of any
special factors. Deutsche Telekom uses EBITDA adjusted for special factors as an
internal performance indicator for the management of its operational business
activities, and in order to better evaluate and compare developments over
several reporting periods. More detailed explanations of the effects of special
factors on Group EBITDA, the EBITDA of the divisions, and net income/loss are
contained in the following section "Special factors".
In order to compare the EBITDA earnings power of results-oriented units of
different sizes, the EBITDA margin is presented in addition to EBITDA. The
EBITDA margin represents the ratio of EBITDA or EBITDA adjusted for special
factors to net revenue (EBITDA divided by net revenue).
Reconciliation of pro forma figures. 97
Special factors. Deutsche Telekom's net income/loss and the EBITDA of the
Deutsche Telekom Group and of the divisions were affected by a range of special
factors in both the period under review and the previous periods.
The underlying concept involves the elimination of special factors that affect
ordinary business activities and thus impair the comparability of EBITDA and net
income/loss with previous years.
The adjustments are made irrespective of whether the relevant income and
expenses are reported in the results from ordinary business activities, in
extraordinary income/loss, or in tax expense. Income and expenses directly
relating to the items being adjusted are also adjusted.
The following tables show how Deutsche Telekom derives EBITDA adjusted for
special factors for the Group and for its divisions from the results from
ordinary business activities. The special factors have been defined and
quantified both for the year under review and for the previous year. At Group
level, we have provided a multi-year review for the period 1999 to 2003.
--------------------------------------------------------------------------------
Reconciliation of Group EBITDA, 1999 to 2003
--------------------------------------------------------------------------------
(billions of (euro)) 2003 2002 Change %(1) 2001 2000 1999
--------------------------------------------------------------------------------------------------------
Net revenue 55.8 53.7 2.1 4.0 48.3 40.9 35.5
--------------------------------------------------------------------------------------------------------
Results from ordinary business activities 1.4 (27.2) 28.6 n.a. (2.5) 6.4 3.1
--------------------------------------------------------------------------------------------------------
Financial income/(expense), net (4.0) (6.0) 2.0 33.1 (5.3) (1.2) (2.9)
--------------------------------------------------------------------------------------------------------
Depreciation and amortization (12.9) (36.9) 24.0 65.1 (15.2) (13.0) (8.4)
--------------------------------------------------------------------------------------------------------
Other taxes (0.2) (0.4) 0.2 55.5 (0.1) (0.1) (0.1)
--------------------------------------------------------------------------------------------------------
EBITDA(1) 18.5 16.1 2.4 14.6 18.1 20.7 14.5
--------------------------------------------------------------------------------------------------------
EBITDA margin (%)(1) 33.1 30.0 37.4 50.6 41.0
--------------------------------------------------------------------------------------------------------
Special factors affecting EBITDA 0.2 (0.2) 0.4 n.a. 3.0 7.8 --
--------------------------------------------------------------------------------------------------------
EBITDA adjusted for special factors(1) 18.3 16.3 2.0 12.1 15.1 12.9 14.5
--------------------------------------------------------------------------------------------------------
EBITDA margin adjusted for special factors (%)(1) 32.8 30.4 31.3 31.6 41.0
--------------------------------------------------------------------------------------------------------
(1) Calculated and rounded on the basis of millions for the purpose of greater
precision.
98
Special factors that positively affected EBITDA in the 2003 financial year
include income of EUR 0.4 billion from the sale of the remaining cable companies
in the T-Com division. In conjunction with the sale of the cable business, this
income is partly offset by additions to accruals and transaction costs totaling
EUR 0.2 billion, which reduced EBITDA in the period under review.
Income from the sale of the T-Systems subsidiaries TELECASH
Telekommunikations-Service GmbH and T-Systems SIRIS S.A.S. (EUR 0.1 billion) and
from the sale of shares in Mobile TeleSystems (MTS) (EUR 0.4 billion) in the
T-Mobile division also had a positive effect on EBITDA. Additional income of EUR
0.3 billion resulted from the sale of minority interests in Eutelsat S.A.,
Ukrainian Mobile Communications (UMC), Celcom (Malaysia) Bhd., Globe Telecom,
and Inmarsat Venture Plc.
In addition to the recognition of an additional minimum liability (AML), and an
addition to the accrual for payments to the Civil Service Health Insurance Fund
(PBeaKK), due to the adjustment of the discount rate applied, the loss on the
sale of T-Systems MultiLink SA and the Swiss T-Systems CS AG, Card Services, and
restructuring expenses in the T-Com division due to personnel reduction at the
Croatian subsidiary Hrvatske telekomunikacije (HT) totaling EUR 0.7 billion
reduced EBITDA in the period under review.
There was an additional special factor, also attributable to accruals for
employee severance payments totaling EUR 0.1 billion, in the T-Com division,
relating to domestic business, and to Vivento at Group Headquarters & Shared
Services.
By contrast, the special factors affecting EBITDA in the previous year were
negative, amounting to EUR 0.2 billion. These primarily included the book gain
of EUR 0.2 billion on the sale of the PT Satelindo investment, as well as income
of EUR 0.3 billion from the sale of T-Online shares. Special factors that
reduced EBITDA included expenses for restructuring measures in the T-Com and
T-Systems divisions amounting to EUR 0.4 billion, as well as transaction costs
and the recognition of an additional minimum liability (AML) totaling EUR 0.3
billion.
In addition, the intragroup sale of t-info to DeTeMedien (T-Com division) had an
EBITDA effect in the T-Online division in the period under review that, however,
had no impact at Group level; in the previous year, there was a gain from the
intragroup sale of T-Motion to T-Mobile. An expense at the T-Com division and a
gain at Group Headquarters & Shared Services resulting from internal staff
transfer payments for Vivento amounting to EUR 0.1 billion also had a neutral
effect in the Group in the 2003 financial year.
The following special factors impacted EBITDA in the previous years (2001-1999):
2001: Income from the sale of the interests in Sprint-FON and Sprint-PCS
(including sale costs) in the total amount of EUR 1.9 billion, a book gain on
the sale of the Baden-Wurttemberg cable TV company (EUR 0.9 billion), income
from the sale of regional cable service companies (EUR 0.1 billion), and from
the reversal of accruals (EUR 0.3 billion). EBITDA was reduced by the
recognition of an additional minimum liability of EUR 0.2 billion.
2000: Income from the sale of Atlas/Global One (EUR 2.8 billion) and of the
North Rhine-Westphalia and Hesse cable companies (EUR 3.0 billion), as well as
the T-Online IPO (EUR 2.7 billion), and the dilutive effect of the public
offerings of MTS (Russia) and of comdirect bank AG (EUR 0.2 billion), in which
T-Online International AG holds an interest. Furthermore, additions to accruals,
losses from dispositions, and losses on receivables had a negative effect
totaling EUR 0.9 billion.
1999: No special factors affecting EBITDA.
Reconciliation of pro forma figures 99
--------------------------------------------------------------------------------
Reconciliation of EBITDA in the divisions in 2003 and 2002
--------------------------------------------------------------------------------
T-Com T-Mobile T-Systems
---------------- --------------- ---------------
(billions of (euro)) 2003 2002(2) 2003 2002(2) 2003 2002(2)
----------------------------------------------------------------------------------------------------
Total revenue 29.2 30.6 22.8 19.7 10.6 10.5
----------------------------------------------------------------------------------------------------
Results from ordinary business activities 4.3 3.6 0.8 (23.8) (0.1) (2.0)
----------------------------------------------------------------------------------------------------
Financial income/(expense), net (0.7) (0.9) (0.9) (1.4) 0.0 (0.1)
----------------------------------------------------------------------------------------------------
Depreciation and amortization (5.2) (5.5) (5.2) (27.3) (1.5) (2.6)
----------------------------------------------------------------------------------------------------
Other taxes 0.0 (0.1) (0.1) (0.1) 0.0 0.0
----------------------------------------------------------------------------------------------------
EBITDA (1) 10.2 10.1 7.0 5.0 1.4 0.8
----------------------------------------------------------------------------------------------------
EBITDA margin (%)(1) 34.8 32.9 30.8 25.5 13.3 7.2
----------------------------------------------------------------------------------------------------
Special factors affecting EBITDA (0.2)(a) (0.2)(b) 0.3(c) -- 0.0(d) (0.4)(e)
----------------------------------------------------------------------------------------------------
EBITDA adjusted for special factors(1) 10.4 10.3 6.7 5.0 1.4 1.2
----------------------------------------------------------------------------------------------------
EBITDA margin adjusted for special
factors (%)(1) 35.5 33.6 29.3 25.5 13.3 11.0
----------------------------------------------------------------------------------------------------
Group Headquarters &
T-Online(3) Shared Services
-------------- --------------------
(billions of (euro)) 2003 2002(2) 2003 2002
---------------------------------------------------------------------------------
Total revenue 1.9 1.6 4.2 4.4
---------------------------------------------------------------------------------
Results from ordinary business activities 0.1 (0.5) (4.1) (4.7)
---------------------------------------------------------------------------------
Financial income/(expense), net 0.2 (0.1) (2.9) (3.6)
---------------------------------------------------------------------------------
Depreciation and amortization (0.4) (0.4) (0.9) (1.3)
---------------------------------------------------------------------------------
Other taxes 0.0 0.0 0.0 (0.2)
---------------------------------------------------------------------------------
EBITDA(1) 0.3 0.1 (0.3) 0.4
---------------------------------------------------------------------------------
EBITDA margin (%)(1) 18.1 6.5 (6.5) 10.1
---------------------------------------------------------------------------------
Special factors affecting EBITDA 0.0 0.0 0.1(f) 0.4(g)
---------------------------------------------------------------------------------
EBITDA adjusted for special factors(1) 0.3 0.1 (0.3) 0.0
---------------------------------------------------------------------------------
EBITDA margin adjusted for special
factors (%)(1) 16.7 4.8 (7.4) 0.7
---------------------------------------------------------------------------------
(1) Calculated and rounded on the basis of millions for the purpose of greater
precision.
(2) For T-Com, T-Mobile, T-Systems, and T-Online, the figures for the previous
year were adjusted to the new allocation to segments.
(3) Figures are calculated in accordance with the provisions of German GAAP
specified in the German Commercial Code (HGB), as applied throughout the
Deutsche Telekom Group, and differ from those published in the reports of
T-Online International AG under IFRSs.
T-Com
(a) Income from the sale of the cable activities (EUR 0.4 billion) and related
expenses and transaction costs (EUR 0.2 billion), recognition of an
additional minimum liability (AML) due to the adjustment of the discount
rate applied (EUR 0.2 billion), accruals for restructuring expenses at HT
(Croatia) and accruals for employee severance payments for the domestic
business (EUR 0.1 billion), and expenses of EUR 0.1 billion resulting from
internal staff transfer payments for Vivento.
(b) Restructuring expenses for personnel reduction at the Eastern European
subsidiaries, associated and related companies, and recognition of an
additional minimum liability (AML).
T-Mobile
(c) Income from the sale of shares in MTS and recognition of an additional
minimum liability (AML) due to the adjustment of the interest rate applied.
T-Systems
(d) Income from the sale of TELECASH and SIRIS (EUR 0.1 billion). This is
offset by losses on the sale of MultiLink and T-Systems CS, and the
recognition of an additional minimum liability (AML) due to the adjustment
of the discount rate applied (total EUR 0.1 billion).
(e) Restructuring expenses (resulting from measures taken in connection with
the strategic review in the third quarter of 2002), plus the recognition of
an additional minimum liability (AML).
Group Headquarters & Shared Services
(f) Income from the sale of the minority interests in Eutelsat, UMC, Celcom,
Globe Telecom, and Inmarsat (EUR 0.3 billion); income of EUR 0.1 billion
resulting from internal staff transfer payments for Vivento, personnel
accruals of EUR 0.3 billion: primarily recognition of an additional minimum
liability (AML) due to the adjustment of the discount rate applied and an
accrual for payments to the Civil Service Health Insurance Fund.
(g) Book gain on the sale of shares in PT Satelindo (EUR 0.2 billion) and on
the sale of T-Online shares (EUR 0.3 billion), as well as transaction costs
and the recognition of an additional minimum liability (AML) totaling EUR
0.1 billion.
100
Special factors not affecting EBITDA in the 2003 financial year were the
write-up of the net carrying amount of the interest in comdirect (EUR 0.1
billion), in which T-Online holds a stake, as well as separate special factors
in the form of tax income totaling EUR 0.8 billion, resulting in particular from
the change of T-Mobile International AG into a limited partnership (AG & Co. KG)
(EUR 0.4 billion), and a related reduction in the tax expense from the
intragroup reclassification of foreign shareholdings (EUR 0.4 billion). Deferred
taxes of EUR 0.1 billion were also recognized on the additional minimum
liability (AML). The tax effects on the other special factors amounting to EUR
0.1 billion were determined on the basis of the corporation tax rate. These were
mainly offset by tax effects from the reduction in deferred tax assets relating
to sales of deferred payments (cable business in Baden-Wurttemberg and Hesse)
amounting to EUR-0.2 billion.
Overall, special factors increasing net income amounted to EUR 2.2 billion in
the period under review, while special factors decreasing net income amounted to
EUR 1.1 billion.
Special factors not affecting EBITDA in the previous year amounting to EUR-19.6
billion were mainly attributable to the measures taken as a result of the
strategic review carried out in the third quarter of 2002. These were primarily
nonscheduled write-downs, mostly on intangible assets (goodwill and mobile
communications licenses) amounting to EUR 21.3 billion.
Furthermore, valuation adjustments on loans to associated companies of Kabel
Deutschland GmbH (EUR 0.3 billion), on the carrying amounts of Deutsche
Telekom's stake in France Telecom (EUR 0.6 billion) and comdirect (EUR 0.1
billion), as well as write-downs of other investments in noncurrent securities
(EUR 0.4 billion) reduced net income in the prior-year period. In addition, a
nonscheduled write-down of EUR 0.2 billion was charged on the UMTS license of
T-Mobile Netherlands in the third quarter of 2002. In the third quarter,
T-Mobile Netherlands was still included in the consolidated financial statements
of Deutsche Telekom as an associated company.
In the 2002 financial year, special factors totaling EUR 19.8 billion had a
negative impact on the Group's result. The vast majority of this amount (EUR
19.6 billion) is the result of special factors which had no effect on EBITDA. Of
the EUR 19.8 billion, around EUR 19.0 billion is attributable to special factors
resulting from the measures taken in connection with the strategic review which
was implemented in the third quarter of 2002.
Reconciliation of pro forma figures 101
As a separate special factor, tax income of EUR 3.0 billion was generated from
the reversal of deferred tax liabilities in 2002, in particular in relation to
the nonscheduled write-downs of mobile communications licenses held by T-Mobile
USA. Furthermore, retroactive amortization of goodwill to be recognized in
Deutsche Telekom AG's tax accounts in accordance with a Federal Fiscal Court
ruling resulted in positive tax effects for the 2002 financial year, which were
in turn a separate special factor affecting the Group's result. The tax effects
on the individual special factors amounting to EUR 0.3 billion were determined
on the basis of the corporation tax rate.
In the 2002 financial year, EUR 23.6 billion of the total special factors
negatively affected the results, and EUR 3.8 billion had a positive impact.
In the previous years (2001-1999): the following special factors not affecting
EBITDA had an impact on net income/loss.
--------------------------------------------------------------------------------
Nonscheduled write-downs of intangible assets and property, plant, and equipment
--------------------------------------------------------------------------------
(billions of (euro))
--------------------------------------------------------------------------------
2001 Total (1.8)
--------------------------------------------------------------------------------
Land and buildings (0.8)
--------------------------------------------------------------------------------
Write-downs of goodwill on brand names as part of the
rebranding of the mobile communications majority
shareholdings in the T-Mobile division (1.0)
--------------------------------------------------------------------------------
2000 Total (3.0)
--------------------------------------------------------------------------------
Land (2.0)
--------------------------------------------------------------------------------
Parts of the long-distance copper cable network and
telecommunications equipment (1.0)
--------------------------------------------------------------------------------
1999 No special factors not affecting EBITDA
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Financial income/(expense), net
--------------------------------------------------------------------------------
(billions of (euro))
--------------------------------------------------------------------------------
2001 Total (0.9)
--------------------------------------------------------------------------------
Write-down of the net carrying amount of the
shareholding in France Telecom as a result of the
decrease in its share price (0.3)
--------------------------------------------------------------------------------
Other write-downs of financial investments (0.6)
--------------------------------------------------------------------------------
2000 Proceeds from the sale of WIND 2.3
--------------------------------------------------------------------------------
1999 No special factors not affecting EBITDA
--------------------------------------------------------------------------------
The tax effects on the individual special factors were determined on the basis
of the corporation tax rate.
102
In addition, a separate overview of the effects of special factors on the
consolidated statement of income in the 2003 financial year is presented:
--------------------------------------------------------------------------------
Reconciliation of the consolidated statement of income for the financial year
from January 1, 2003 to December 31, 2003
--------------------------------------------------------------------------------
2003
Special (excluding
(billions of (euro)) 2003 factors special factors)
---------------------------------------------------------------------------------------------------
Net revenue 55.8 55.8
---------------------------------------------------------------------------------------------------
Cost of sales (31.4) (0.2)(1) (31.2)
---------------------------------------------------------------------------------------------------
Gross profit/(loss) from sales(6) 24.4 (0.2) 24.6
---------------------------------------------------------------------------------------------------
Expenses (23.6) (0.8)(2) (22.8)
---------------------------------------------------------------------------------------------------
Other operating income 4.6 1.2(3) 3.4
---------------------------------------------------------------------------------------------------
Operating results 5.4 0.2 5.2
---------------------------------------------------------------------------------------------------
Financial income/(expense), net (4.0) 0.1(4) (4.1)
---------------------------------------------------------------------------------------------------
Results from ordinary business activities(6) 1.4 0.3 1.1
---------------------------------------------------------------------------------------------------
Income taxes 0.2 0.8(5) (0.5)
---------------------------------------------------------------------------------------------------
Income/(losses) applicable to minority shareholders (0.4) (0.4)
---------------------------------------------------------------------------------------------------
Net income/effect of special factors on net income/(loss)(6) 1.3 1.1 0.2
---------------------------------------------------------------------------------------------------
Reconciliation of EBITDA
---------------------------------------------------------------------------------------------------
Results from ordinary business activities(6) 1.4 0.3 1.1
---------------------------------------------------------------------------------------------------
Financial income/(expense), net (4.0) 0.1 (4.1)
---------------------------------------------------------------------------------------------------
Depreciation and amortization (12.9) (12.9)
---------------------------------------------------------------------------------------------------
Other taxes (0.2) (0.2)
---------------------------------------------------------------------------------------------------
EBITDA(6) 18.5 0.2 18.3
---------------------------------------------------------------------------------------------------
EBITDA margin (%)(6) 33.1 n.a. 32.8
---------------------------------------------------------------------------------------------------
(1) Recognition of an additional minimum liability (AML) due to the adjustment
of the discount rate applied (T-Com, T-Systems, T-Mobile, and T-Online
divisions) and accruals for restructuring expenses (employee severance
payments at Croatian company HT) in the T-Com division.
(2) Additions to accruals and transaction costs relating to the sale of the
remaining cable companies (T-Com) (EUR 0.2 billion), personnel accruals of
EUR 0.4 billion; primarily recognition of additional minimum liabilities
(AML) due to the adjustment of the discount rate applied (affecting all
divisions, plus Group Headquarters & Shared Services) and an accrual for
payments to the Civil Service Health Insurance Fund (Group Headquarters &
Shared Services), addition to accrual for employee severance payments
(T-Com division: concerning domestic business, and at Group Headquarters &
Shared Services: for Vivento) (EUR 0.1 billion), accruals for restructuring
expenses at Croatian company HT (Division T-Com), and losses on the sale of
T-Systems MultiLink and T-Systems CS amounting to a total of EUR 0.1
billion.
(3) Income from the sale of cable businesses (EUR 0.4 billion) (T-Com division)
and book gains on the sale of TELECASH, SIRIS (T-Systems division), MTS
(T-Mobile division), and interests in Eutelsat, UMC, Celcom, Globe Telecom,
and Inmarsat (Group Headquarters & Shared Services) amounting to a total of
EUR 0.8 billion.
(4) Write-up of the net carrying amount of the shareholding in comdirect
(T-Online division).
(5) Primarily tax income of EUR 0.4 billion from the change of T-Mobile
International AG into a limited partnership (AG & Co. KG), and a related
reduction in the tax expense from the intragroup reclassification of
foreign shareholdings (EUR 0.4 billion). In addition, tax effects from the
reduction in deferred tax assets relating to sales of deferred payments
(cable business in Baden-Wurttemberg and Hesse) amounting to EUR -0.2
billion and other tax effects of the various special factors totaling EUR
0.2 billion, determined on the basis of the corporate income tax rate.
(6) Calculated and rounded on the basis of millions for the purpose of greater
precision.
Reconciliation of pro forma figures 103
Free cash flow. Deutsche Telekom is of the opinion that free cash flow as cash
generated from operations minus interest paid and cash outflows for investments
in intangible assets (excluding goodwill) and property, plant, and equipment.
Deutsche Telekom is of the opinion that free cash flow is used by investors as a
measure to enable them to assess the Group's cash generated from operations
(after deductions for interest paid and cash outflows for intangible assets
(excluding goodwill) and property, plant, and equipment), in particular with
regard to investments in associated and related companies, and the repayment of
liabilities. Free cash flow should not be used to determine the financial
position of the Group. A further factor to be noted is that Deutsche Telekom's
definition of free cash flow and methods of calculating this measure are only
comparable with similarly designated measures and disclosures by other companies
to a limited extent.
--------------------------------------------------------------------------------
Reconciliation of free cash flow in the Group, comparison for the period 1999 to
2003
--------------------------------------------------------------------------------
(billions of (euro)) 2003 2002 Change %(1) 2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Cash generated from operations 18.1 16.7 1.4 8.8 16.3 12.9 12.2
---------------------------------------------------------------------------------------------------------------
Interest received/(paid) (3.8) (4.2) 0.4 9.2 (4.3) (2.9) (2.6)
---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities(1) 14.3 12.5 1.8 14.9 11.9 10.0 9.6
---------------------------------------------------------------------------------------------------------------
Cash outflows from investments in intangible assets
(excluding goodwill) and property, plant, and equipment (6.0) (7.6) 1.6 20.9 (10.9) (23.5) (6.0)
---------------------------------------------------------------------------------------------------------------
Free cash flow (before dividend)(1) 8.3 4.8 3.5 71.2 1.1 (13.5) 3.6
---------------------------------------------------------------------------------------------------------------
Dividend (0.1) (1.6) 1.5 94.2 (1.9) (1.9) (1.7)
---------------------------------------------------------------------------------------------------------------
Free cash flow (after dividend)(1) 8.2 3.3 4.9 n.a. (0.8) (15.4) 1.9
---------------------------------------------------------------------------------------------------------------
(1) Calculated and rounded on the basis of millions for the purpose of greater
precision.
The reconciliation of the Group's free cash flow is based on the amounts
reported in the consolidated statement of cash flows prepared in accordance with
International Accounting Standard (IAS) No. 7, Cash Flow Statements, and German
Accounting Standard (GAS) No. 2, Cash Flow Statements.
104
Gross and net debt. In the consolidated financial statements, the items "bonds
and debentures" and "liabilities to banks" are reported as "debt" (in accordance
with consolidated balance sheet).
Gross debt includes not only "debt (in accordance with consolidated balance
sheet)", but also liabilities to non-banks from loan notes, cash collateral
received for positive fair values from derivatives, and necessary settlement
amounts for interest rate and cross currency swaps for loans taken out in
foreign currencies summarized under "Other liabilities" in the balance sheet.
Gross debt is the basis for total net interest expense incurred.
In addition to this key figure, Deutsche Telekom shows "net debt". Net debt is
generally calculated by subtracting liquid assets, other investments in
noncurrent securities and in marketable securities, as well as discounts on
loans, which are contained in the balance sheet item "Prepaid expenses and
deferred charges". In addition, the following items (which are reported under
the balance sheet item "other assets") are subtracted in the same way as for the
liabilities side: cash collateral paid for negative fair values from derivatives
and necessary settlement amounts for interest rate and cross currency swaps for
loans taken out in foreign currencies.
Gross and net debt are common indicators in Deutsche Telekom's competitive
environment, although definitions may vary, and are used by Deutsche Telekom's
senior operating decision-makers to manage and monitor debt.
--------------------------------------------------------------------------------
Reconciliation of gross and net debt in the Group, comparison for the period
1999 to 2003
--------------------------------------------------------------------------------
(billions of (euro)) 2003 2002 Change %(1) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------
Bonds and debentures 51.6 56.7 (5.1) (9.1) 58.3 51.4 9.5
--------------------------------------------------------------------------------------------------------------
Liabilities to banks 3.8 6.3 (2.5) (39.6) 8.7 9.0 32.8
--------------------------------------------------------------------------------------------------------------
Debt (in accordance with consolidated balance sheet)(1) 55.4 63.0 (7.6) (12.1) 67.0 60.4 42.3
--------------------------------------------------------------------------------------------------------------
Liabilities to non-banks from loan notes 0.8 0.8 0.0 (5.1) 0.7 0.7 0.6
--------------------------------------------------------------------------------------------------------------
Miscellaneous other liabilities 0.3 0.3 0.0 15.7 0.2 0.2 --
--------------------------------------------------------------------------------------------------------------
Gross debt(1) 56.5 64.1 (7.6) (11.9) 67.9 61.3 42.9
--------------------------------------------------------------------------------------------------------------
Liquid assets 9.1 1.9 7.2 n.a. 2.9 1.9 1.2
--------------------------------------------------------------------------------------------------------------
Other investments in marketable securities 0.2 0.4 (0.2) (58.1) 0.7 0.8 1.8
--------------------------------------------------------------------------------------------------------------
Other investments in noncurrent securities 0.1 0.2 (0.1) (63.9) 0.9 1.1 2.0
--------------------------------------------------------------------------------------------------------------
Other assets 0.3 0.2 0.1 53.1 0.3 0.0 --
--------------------------------------------------------------------------------------------------------------
Discounts on loans (prepaid expenses and deferred charges) 0.2 0.3 (0.1) (10.5) 0.3 0.1 0.1
--------------------------------------------------------------------------------------------------------------
Net debt(1) 46.6 61.1 (14.5) (23.8) 62.8 57.4 37.9
--------------------------------------------------------------------------------------------------------------
(1) Calculated and rounded on the basis of millions for the purpose of greater
precision.
Consolidated financial statements
Statement of income 108
Balance sheet 109
Noncurrent assets 110
Statement of cash flows 112
Statement of shareholders' equity 113
Segment reporting 114
Notes to the consolidated financial statements 115
Auditors' report 178
Summary of differences between German GAAP and U.S. GAAP 179
[GRAPHIC]
Respect.
Strive to understand. Promote understanding.
Understanding and respect create value.
[GRAPHIC]
108
Consolidated statement of income.
2003 2002 2001
Note millions of (euro) millions of (euro) millions of (euro)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Net revenue 1 55,838 53,689 48,309
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Cost of sales 2 (31,402) (44,477) (29,766)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Gross profit 24,436 9,212 18,543
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Selling costs 3 (13,505) (13,264) (11,675)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
General and administrative costs 4 (4,976) (6,062) (5,622)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Other operating income 5 4,558 3,901 6,619
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Other operating expenses 6 (5,084) (14,915) (5,078)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Operating results 5,429 (21,128) 2,787
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Financial income/(expense), net 7 (4,031) (6,022) (5,348)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Results from ordinary business activities(1) 1,398 (27,150) (2,561)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Income taxes 8 225 2,847 (751)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Income/(loss) after taxes 1,623 (24,303) (3,312)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
(Income)/losses applicable to minority shareholders 9 (370) (284) (142)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Net income/(loss) 1,253 (24,587) (3,454)
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) per share in (euro) 0.30 (5.86) (0.93)
-------------------------------------------------------------------------------------------------------------------------
(1) Including other taxes in accordance with the classification of the
statement of income by the cost-of-sales method.
Consolidated financial statements
Statement of income/Balance sheet 109
Consolidated balance sheet.
Dec. 31, 2003 Dec. 31, 2002
Note millions of (euro) millions of (euro)
----------------------------------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------------------------------
Noncurrent assets
----------------------------------------------------------------------------------------------------
Intangible assets 13 45,193 53,402
----------------------------------------------------------------------------------------------------
Property, plant, and equipment 14 47,268 53,955
----------------------------------------------------------------------------------------------------
Financial assets 15 3,190 4,169
----------------------------------------------------------------------------------------------------
95,651 111,526
----------------------------------------------------------------------------------------------------
Current assets
----------------------------------------------------------------------------------------------------
Inventories, materials, and supplies 16 1,432 1,556
----------------------------------------------------------------------------------------------------
Receivables 17 5,762 6,258
----------------------------------------------------------------------------------------------------
Other assets 18 3,162 3,392
----------------------------------------------------------------------------------------------------
Marketable securities 19 173 413
----------------------------------------------------------------------------------------------------
Liquid assets 20 9,127 1,905
----------------------------------------------------------------------------------------------------
19,656 13,524
----------------------------------------------------------------------------------------------------
Prepaid expenses and deferred charges 21 772 771
----------------------------------------------------------------------------------------------------
116,079 125,821
----------------------------------------------------------------------------------------------------
Shareholders' equity and liabilities
----------------------------------------------------------------------------------------------------
Shareholders' equity 22
----------------------------------------------------------------------------------------------------
Capital stock 23 10,746 10,746
----------------------------------------------------------------------------------------------------
Additional paid-in capital 24 50,092 50,077
----------------------------------------------------------------------------------------------------
Retained earnings 25 248 248
----------------------------------------------------------------------------------------------------
Unappropriated net income/(loss) carried forward (24,564) 23
----------------------------------------------------------------------------------------------------
Net income/(loss) 1,253 (24,587)
----------------------------------------------------------------------------------------------------
Cumulative translation adjustment account (8,017) (5,079)
----------------------------------------------------------------------------------------------------
29,758 31,428
----------------------------------------------------------------------------------------------------
Minority interest 26 4,053 3,988
----------------------------------------------------------------------------------------------------
33,811 35,416
----------------------------------------------------------------------------------------------------
Accruals
----------------------------------------------------------------------------------------------------
Pensions and similar obligations 28 4,456 3,942
----------------------------------------------------------------------------------------------------
Other accruals 29 11,247 12,155
----------------------------------------------------------------------------------------------------
15,703 16,097
----------------------------------------------------------------------------------------------------
Liabilities 30
----------------------------------------------------------------------------------------------------
Debt 55,411 63,044
----------------------------------------------------------------------------------------------------
Other 10,451 10,541
----------------------------------------------------------------------------------------------------
65,862 73,585
----------------------------------------------------------------------------------------------------
Deferred income 703 723
----------------------------------------------------------------------------------------------------
116,079 125,821
----------------------------------------------------------------------------------------------------
110
Consolidated statement of noncurrent assets.
Acquisition or production cost
-------------------------------------------------------
Changes in the
Currency composition of
translation the Deutsche
(millions of (euro)) Jan. 1, 2003 adjustment Telekom Group Additions
----------------------------------------------------------------------------------------------------------------
Intangible assets
----------------------------------------------------------------------------------------------------------------
Concessions, industrial and similar rights and assets,
and licenses in such rights and assets 40,774 (4,055) (79) 681
----------------------------------------------------------------------------------------------------------------
of which: UMTS licenses 15,371 (483) 0 0
----------------------------------------------------------------------------------------------------------------
of which: FCC licenses 20,273 (3,398) 14 20
----------------------------------------------------------------------------------------------------------------
of which: GSM licenses 741 (4) 0 0
----------------------------------------------------------------------------------------------------------------
of which: other assets 4,389 (170) (93) 661
----------------------------------------------------------------------------------------------------------------
Goodwill 46,875 (4,331) (41) 150
----------------------------------------------------------------------------------------------------------------
Advance payments 134 1 0 2
----------------------------------------------------------------------------------------------------------------
87,783 (8,385) (120) 833
----------------------------------------------------------------------------------------------------------------
Property, plant, and equipment
----------------------------------------------------------------------------------------------------------------
Land and equivalent rights, and buildings including
buildings on land owned by third parties 18,779 (99) (2) 199
----------------------------------------------------------------------------------------------------------------
Technical equipment and machinery 86,460 (1,490) (3,954) 2,267
----------------------------------------------------------------------------------------------------------------
Other equipment, plant, and office equipment 6,573 (189) (256) 456
----------------------------------------------------------------------------------------------------------------
Advance payments and construction in progress 2,274 (184) (19) 2,629
----------------------------------------------------------------------------------------------------------------
114,086 (1,962) (4,231) 5,551
----------------------------------------------------------------------------------------------------------------
Financial assets
----------------------------------------------------------------------------------------------------------------
Investments in unconsolidated subsidiaries 310 (2) 39 9
----------------------------------------------------------------------------------------------------------------
Loans to unconsolidated subsidiaries 58 0 (57) 0
----------------------------------------------------------------------------------------------------------------
Investments in associated companies 3,151 (409) (28) 607
----------------------------------------------------------------------------------------------------------------
Other investments in related companies 1,488 (14) 0 4
----------------------------------------------------------------------------------------------------------------
Long-term loans to associated and related companies 800 (1) 0 24
----------------------------------------------------------------------------------------------------------------
Other investments in noncurrent securities 622 (1) 46 3
----------------------------------------------------------------------------------------------------------------
Other long-term loans 121 (4) (42) 36
----------------------------------------------------------------------------------------------------------------
6,550 (431) (42) 683
----------------------------------------------------------------------------------------------------------------
208,419 (10,778) (4,393) 7,067
----------------------------------------------------------------------------------------------------------------
Acquisition or production cost
-------------------------------------
Reclassi-
(millions of (euro)) Disposals fications Dec. 31, 2003
----------------------------------------------------------------------------------------------
Intangible assets
----------------------------------------------------------------------------------------------
Concessions, industrial and similar rights and assets,
and licenses in such rights and assets 752 297 36,866
----------------------------------------------------------------------------------------------
of which: UMTS licenses 0 0 14,888
----------------------------------------------------------------------------------------------
of which: FCC licenses 17 (16) 16,876
----------------------------------------------------------------------------------------------
of which: GSM licenses 0 0 737
----------------------------------------------------------------------------------------------
of which: other assets 735 313 4,365
----------------------------------------------------------------------------------------------
Goodwill 969 0 41,684
----------------------------------------------------------------------------------------------
Advance payments 14 (48) 75
----------------------------------------------------------------------------------------------
1,735 249 78,625
----------------------------------------------------------------------------------------------
Property, plant, and equipment
----------------------------------------------------------------------------------------------
Land and equivalent rights, and buildings including
buildings on land owned by third parties 1,288 423 18,012
----------------------------------------------------------------------------------------------
Technical equipment and machinery 1,786 1,658 83,155
----------------------------------------------------------------------------------------------
Other equipment, plant, and office equipment 466 253 6,371
----------------------------------------------------------------------------------------------
Advance payments and construction in progress 78 (2,583) 2,039
----------------------------------------------------------------------------------------------
3,618 (249) 109,577
----------------------------------------------------------------------------------------------
Financial assets
----------------------------------------------------------------------------------------------
Investments in unconsolidated subsidiaries 33 (1) 322
----------------------------------------------------------------------------------------------
Loans to unconsolidated subsidiaries 0 0 1
----------------------------------------------------------------------------------------------
Investments in associated companies 503 (44) 2,774
----------------------------------------------------------------------------------------------
Other investments in related companies 852 45 671
----------------------------------------------------------------------------------------------
Long-term loans to associated and related companies 490 0 333
----------------------------------------------------------------------------------------------
Other investments in noncurrent securities 584 0 86
----------------------------------------------------------------------------------------------
Other long-term loans 19 0 92
----------------------------------------------------------------------------------------------
2,481 0 4,279
----------------------------------------------------------------------------------------------
7,834 0 192,481
----------------------------------------------------------------------------------------------
Consolidated financial statements
Noncurrent assets 111
Depreciation, amortization, and write-downs Net carrying amount
---------------------------------------------------------------------------------------------------- ----------------------------
Changes in the
Currency composition of
translation the Deutsche Reclassi-
Jan. 1, 2003 adjustment Telekom Group Additions Disposals fications Write-ups Dec. 31, 2003 Dec. 31, 2003 Dec. 31, 2002
----------------------------------------------------------------------------------------------------------------------------------
16,937 (2,022) (62) 2,157 728 (22) 0 16,260 20,606 23,837
----------------------------------------------------------------------------------------------------------------------------------
4,254 (223) 0 597 0 0 0 4,628 10,260 11,117
----------------------------------------------------------------------------------------------------------------------------------
9,909 (1,712) 0 516 16 0 0 8,697 8,179 10,364
----------------------------------------------------------------------------------------------------------------------------------
206 (1) 0 48 0 0 0 253 484 535
----------------------------------------------------------------------------------------------------------------------------------
2,568 (86) (62) 996 712 (22) 0 2,682 1,683 1,821
----------------------------------------------------------------------------------------------------------------------------------
17,439 (1,934) (41) 2,521 814 0 0 17,171 24,513 29,436
----------------------------------------------------------------------------------------------------------------------------------
5 0 0 0 4 0 0 1 74 129
----------------------------------------------------------------------------------------------------------------------------------
34,381 (3,956) (103) 4,678 1,546 (22) 0 33,432 45,193 53,402
----------------------------------------------------------------------------------------------------------------------------------
7,417 (25) (1) 743 600 87 8 7,613 10,399 11,362
----------------------------------------------------------------------------------------------------------------------------------
48,426 (506) (2,588) 6,700 1,630 (38) 1 50,363 32,792 38,034
----------------------------------------------------------------------------------------------------------------------------------
4,287 (100) (226) 763 365 (26) 0 4,333 2,038 2,286
----------------------------------------------------------------------------------------------------------------------------------
1 0 0 0 0 (1) 0 0 2,039 2,273
----------------------------------------------------------------------------------------------------------------------------------
60,131 (631) (2,815) 8,206 2,595 22 9 62,309 47,268 53,955
----------------------------------------------------------------------------------------------------------------------------------
161 0 32 22 11 0 0 204 118 149
----------------------------------------------------------------------------------------------------------------------------------
0 0 0 0 0 0 0 0 1 58
----------------------------------------------------------------------------------------------------------------------------------
558 (41) (8) 94 88 (43) 84 388 2,386 2,593
----------------------------------------------------------------------------------------------------------------------------------
467 (5) 1 3 327 43 7 175 496 1,021
----------------------------------------------------------------------------------------------------------------------------------
797 0 0 0 489 0 0 308 25 3
----------------------------------------------------------------------------------------------------------------------------------
384 0 0 9 393 0 0 0 86 238
----------------------------------------------------------------------------------------------------------------------------------
14 0 0 0 0 0 0 14 78 107
----------------------------------------------------------------------------------------------------------------------------------
2,381 (46) 25 128 1,308 0 91 1,089 3,190 4,169
----------------------------------------------------------------------------------------------------------------------------------
96,893 (4,633) (2,893) 13,012 5,449 0 100 96,830 95,651 111,526
----------------------------------------------------------------------------------------------------------------------------------
112
Consolidated statement of cash flows.
2003 2002 2001
Note millions of millions of millions of
(euro) (euro) (euro)
-----------------------------------------------------------------------------------------------------------------------
Net income/(loss) 1,253 (24,587) (3,454)
-----------------------------------------------------------------------------------------------------------------------
Income/(losses) applicable to minority shareholders 370 284 142
-----------------------------------------------------------------------------------------------------------------------
Income/(loss) after taxes 1,623 (24,303) (3,312)
-----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 12,884 36,880 15,221
-----------------------------------------------------------------------------------------------------------------------
Income tax expense (225) (2,847) 751
-----------------------------------------------------------------------------------------------------------------------
Net interest expense 3,776 4,048 4,138
-----------------------------------------------------------------------------------------------------------------------
Net losses from the disposition of noncurrent assets (792) (428) (1,106)
-----------------------------------------------------------------------------------------------------------------------
Results from associated companies 247 430 547
-----------------------------------------------------------------------------------------------------------------------
Other noncash transactions (699) 1,144 (1,146)
-----------------------------------------------------------------------------------------------------------------------
(Increase)/decrease in capitalized working capital(1) (542) 184 428
-----------------------------------------------------------------------------------------------------------------------
(Increase)/decrease in accruals 1,584 1,410 (136)
-----------------------------------------------------------------------------------------------------------------------
(Increase)/decrease in other working capital carried as a liability(2) 149 101 761
-----------------------------------------------------------------------------------------------------------------------
Income taxes received/(paid) 88 (15) 10
-----------------------------------------------------------------------------------------------------------------------
Dividends received 39 63 115
-----------------------------------------------------------------------------------------------------------------------
Cash generated from operations 18,132 16,667 16,271
-----------------------------------------------------------------------------------------------------------------------
Interest paid (4,481) (6,112) (4,779)
-----------------------------------------------------------------------------------------------------------------------
Interest received 665 1,908 442
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31 14,316 12,463 11,934
-----------------------------------------------------------------------------------------------------------------------
Cash outflows for investments in
-----------------------------------------------------------------------------------------------------------------------
- intangible assets (844) (841) (1,021)
-----------------------------------------------------------------------------------------------------------------------
- property, plant, and equipment (5,187) (6,784) (9,847)
-----------------------------------------------------------------------------------------------------------------------
- financial assets (373) (568) (498)
-----------------------------------------------------------------------------------------------------------------------
- consolidated companies (275) (6,405) (5,695)
-----------------------------------------------------------------------------------------------------------------------
Cash inflows from disposition of
-----------------------------------------------------------------------------------------------------------------------
- intangible assets 24 14 208
-----------------------------------------------------------------------------------------------------------------------
- property, plant, and equipment 1,055 1,304 1,146
-----------------------------------------------------------------------------------------------------------------------
- financial assets 1,569 1,130 3,514
-----------------------------------------------------------------------------------------------------------------------
- shareholdings in consolidated companies and business units 1,510 697 1,004
-----------------------------------------------------------------------------------------------------------------------
Net change in short-term investments and marketable securities (18) 226 4,440
-----------------------------------------------------------------------------------------------------------------------
Other 466 1,187 1,384
-----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities 32 (2,073) (10,040) (5,365)
-----------------------------------------------------------------------------------------------------------------------
Issuance of short-term debt (9,214) (10,012) (10,266)
-----------------------------------------------------------------------------------------------------------------------
Issuance of medium and long-term debt 6,951 11,677 13,949
-----------------------------------------------------------------------------------------------------------------------
Repayments of medium and long-term debt (2,879) (3,472) (6,589)
-----------------------------------------------------------------------------------------------------------------------
Dividends (92) (1,582) (1,905)
-----------------------------------------------------------------------------------------------------------------------
Proceeds from share offering 15 1 0
-----------------------------------------------------------------------------------------------------------------------
Change in minority interests (7) (47) 0
-----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities 33 (5,226) (3,435) (4,811)
-----------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash equivalents (43) (14) (26)
-----------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 6,974 (1,026) 1,732
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at beginning of year 1,712 2,738 1,006
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of year 8,686 1,712 2,738
-----------------------------------------------------------------------------------------------------------------------
(1) Changes in receivables; other assets; inventories, materials and supplies;
and prepaid expenses and deferred charges.
(2) Change in other liabilities (which do not relate to financing activities)
as well as deferred income.
Consolidated financial statements
Statement of cash flows/Statement of shareholders' equity 113
Consolidated statement of shareholders' equity.
Deutsche Telekom AG
-----------------------------------------------------------------------------------------------------
Consolidated shareholders'
equity generated
--------------------------------
Unappr. net Cumulative Shareholders'
Additional income/(loss) Net translation equity in acc.
Capital paid-in Retained carried income/ adjustment with cons. Treasury
(millions of (euro)) stock capital earnings forward (loss) account balance sheet Shares Total
----------------------------------------------------------------------------------------------------------------------------------
Balance at Jan. 1, 2001 7,756 24,290 1,159 44 5,926 (761) 38,414 (7) 38,407
----------------------------------------------------------------------------------------------------------------------------------
Changes in the composition
of the Group
----------------------------------------------------------------------------------------------------------------------------------
Dividends for 2000 (1,877) (1,877) (1,877)
----------------------------------------------------------------------------------------------------------------------------------
Unappropriated net income
carried forward 3,992 1,934 (5,926) -- --
----------------------------------------------------------------------------------------------------------------------------------
Proceeds from VoiceStream/
Powertel stock swap 2,990 25,704 28,694 28,694
----------------------------------------------------------------------------------------------------------------------------------
Loss after taxes (3,454) (3,454) (3,454)
----------------------------------------------------------------------------------------------------------------------------------
Difference from currency
translation 28 (811) (783) (783)
----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2001 10,746 49,994 5,179 101 (3,454) (1,572) 60,994 (7) 60,987
----------------------------------------------------------------------------------------------------------------------------------
Changes in the composition
of the Group
----------------------------------------------------------------------------------------------------------------------------------
Dividends for 2001 (1,539) (1,539) (1,539)
----------------------------------------------------------------------------------------------------------------------------------
Unappropriated net income/
(loss) carried forward (4,915) 1,461 3,454 -- --
----------------------------------------------------------------------------------------------------------------------------------
Proceeds from stock options 83 83 83
----------------------------------------------------------------------------------------------------------------------------------
Loss after taxes (24,587) (24,587) (24,587)
----------------------------------------------------------------------------------------------------------------------------------
Difference from currency
translation (16) (3,507) (3,523) (3,523)
----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2002 10,746 50,077 248 23 (24,587) (5,079) 31,428 (7) 31,421
----------------------------------------------------------------------------------------------------------------------------------
Changes in the composition
of the Group
----------------------------------------------------------------------------------------------------------------------------------
Dividends for 2002
----------------------------------------------------------------------------------------------------------------------------------
Unappropriated net income/
(loss) carried forward (24,587) 24,587 -- --
----------------------------------------------------------------------------------------------------------------------------------
Proceeds from stock options 15 15 15
----------------------------------------------------------------------------------------------------------------------------------
Income after taxes 1,253 1,253 1,253
----------------------------------------------------------------------------------------------------------------------------------
Difference from currency
translation (2,938) (2,938) (2,938)
----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2003 10,746 50,092 248 (24,564) 1,253 (8,017) 29,758 (7) 29,751
----------------------------------------------------------------------------------------------------------------------------------
Minority Cons. Share-
interest holders' equity
-----------------------------------------------------
Cumulative
Minority translation Total in acc.
interest adjustment with cons.
capital account balance sheet
(millions of (euro))
----------------------------------------------------------------------------------
Balance at Jan. 1, 2001 4,667 (365) 4,302 42,709
----------------------------------------------------------------------------------
Changes in the composition
of the Group 808 808 808
----------------------------------------------------------------------------------
Dividends for 2000 (33) (33) (1,910)
----------------------------------------------------------------------------------
Unappropriated net income
carried forward --
----------------------------------------------------------------------------------
Proceeds from VoiceStream/
Powertel stock swap 28,694
----------------------------------------------------------------------------------
Loss after taxes 142 142 (3,312)
----------------------------------------------------------------------------------
Difference from currency
translation 88 88 (695)
----------------------------------------------------------------------------------
Balance at Dec. 31, 2001 5,584 (277) 5,307 66,294
----------------------------------------------------------------------------------
Changes in the composition
of the Group (1,586) (1,586) (1,586)
----------------------------------------------------------------------------------
Dividends for 2001 (43) (43) (1,582)
----------------------------------------------------------------------------------
Unappropriated net income/
(loss) carried forward --
----------------------------------------------------------------------------------
Proceeds from stock options 83
----------------------------------------------------------------------------------
Loss after taxes 284 284 (24,303)
----------------------------------------------------------------------------------
Difference from currency
translation 26 26 (3,497)
----------------------------------------------------------------------------------
Balance at Dec. 31, 2002 4,239 (251) 3,988 35,409
----------------------------------------------------------------------------------
Changes in the composition
of the Group (123) (123) (123)
----------------------------------------------------------------------------------
Dividends for 2002 (102) (102) (102)
----------------------------------------------------------------------------------
Unappropriated net income/
(loss) carried forward --
----------------------------------------------------------------------------------
Proceeds from stock options 15
----------------------------------------------------------------------------------
Income after taxes 370 370 1,623
----------------------------------------------------------------------------------
Difference from currency
translation (80) (80) (3,018)
----------------------------------------------------------------------------------
Balance at Dec. 31, 2003 4,384 (331) 4,053 33,804
----------------------------------------------------------------------------------
114
Segment reporting.
Income/
(loss)related
Revenue Depreciation Net interest to associated
Net between and amor- income/ and related
(millions of (euro)) revenue segments tization (expense) companies
----------------------------------------------------------------------------------------------
T-Com(1) 2003 25,116 4,090 (5,169) (315) (412)
----------------------------------------------------------------------------------------------
2002 26,491 4,068 (5,539) (562) (304)
----------------------------------------------------------------------------------------------
2001 26,427 3,401 (5,444) (346) (509)
----------------------------------------------------------------------------------------------
T-Mobile(1) 2003 21,572 1,206 (5,196) (992) 97
----------------------------------------------------------------------------------------------
2002 18,339 1,396 (27,285) (1,005) (427)
----------------------------------------------------------------------------------------------
2001 13,101 1,536 (6,324) (3,008) (204)
----------------------------------------------------------------------------------------------
T-Systems(1) 2003 7,184 3,430 (1,499) (39) (4)
----------------------------------------------------------------------------------------------
2002 6,895 3,594 (2,616) (98) (20)
----------------------------------------------------------------------------------------------
2001 7,121 3,700 (1,372) 102 13
----------------------------------------------------------------------------------------------
T-Online(1), (3) 2003 1,662 189 (430) 110 90
----------------------------------------------------------------------------------------------
2002 1,391 193 (435) 128 (265)
----------------------------------------------------------------------------------------------
2001 1,027 113 (416) 164 (381)
----------------------------------------------------------------------------------------------
Group Headquarters &
Shared Services 2003 304 3,964 (881) (2,874) (3)
----------------------------------------------------------------------------------------------
2002 573 3,838 (1,298) (2,510) (1,093)
----------------------------------------------------------------------------------------------
2001 633 4,481 (1,447) (1,102) (375)
----------------------------------------------------------------------------------------------
Reconciliation(1) 2003 0 (12,879) 291 334 (23)
----------------------------------------------------------------------------------------------
2002 0 (13,089) 293 (1) 135
----------------------------------------------------------------------------------------------
2001 0 (13,231) (218) 52 246
----------------------------------------------------------------------------------------------
Group 2003 55,838 0 (12,884) (3,776) (255)
----------------------------------------------------------------------------------------------
2002 53,689 0 (36,880) (4,048) (1,974)
----------------------------------------------------------------------------------------------
2001 48,309 0 (15,221) (4,138) (1,210)
----------------------------------------------------------------------------------------------
Income/
(loss)
before Segment
income Segment invest- Segment
(millions of (euro)) taxes assets ments liabilites Employees(2)
--------------------------------------------------------------------------------
T-Com(1) 4,247 29,030 2,324 4,549 139,548
--------------------------------------------------------------------------------
3,604 33,782 3,273 13,120 153,065
--------------------------------------------------------------------------------
4,673 -- -- -- --
--------------------------------------------------------------------------------
T-Mobile(1) 831 50,025 3,813 17,617 41,767
--------------------------------------------------------------------------------
(23,754) 57,655 5,766 20,224 38,943
--------------------------------------------------------------------------------
(6,441) -- -- -- --
--------------------------------------------------------------------------------
T-Systems(1) (138) 5,665 708 4,314 42,108
--------------------------------------------------------------------------------
(1,990) 6,646 3,551 5,268 43,482
--------------------------------------------------------------------------------
(389) -- -- -- --
--------------------------------------------------------------------------------
T-Online(1), (3) 104 1,532 116 212 2,637
--------------------------------------------------------------------------------
(471) 1,797 170 119 2,536
--------------------------------------------------------------------------------
(820) -- -- -- --
--------------------------------------------------------------------------------
Group Headquarters &
Shared Services (4,071) 10,631 455 41,334 25,203
--------------------------------------------------------------------------------
(4,690) 12,978 551 34,539 17,870
--------------------------------------------------------------------------------
402 -- -- -- --
--------------------------------------------------------------------------------
Reconciliation(1) 425 (1,232) (349) (3,255) --
--------------------------------------------------------------------------------
151 (1,332) (149) (844) --
--------------------------------------------------------------------------------
14 -- -- -- --
--------------------------------------------------------------------------------
Group 1,398 95,651 7,067 64,771 251,263
--------------------------------------------------------------------------------
(27,150) 111,526 13,162 72,426 255,896
--------------------------------------------------------------------------------
(2,561) -- -- -- --
--------------------------------------------------------------------------------
(1) According to new structure (see Note on Segment reporting (36)).
(2) Average number of employees for the year.
(3) Figures are calculated in accordance with the provisions of German GAAP, as
applied throughout the Deutsche Telekom Group, and differ from those
published in the reports of T-Online International AG under the IFRSs.
Consolidated financial statements
Segment reporting/Notes 115
Notes to the consolidated financial statements.
Summary of accounting policies.
Description of business and relationship with the Federal Republic of Germany.
The Deutsche Telekom Group (referred to as Deutsche Telekom below) is one of the
world's leading companies in the telecommunications industry. With its four
divisions T-Com, T-Mobile, T-Systems, and T-Online, Deutsche Telekom covers the
full range of state-of-the-art telecommunications services.
T-Com is responsible in particular for Deutsche Telekom's fixed-network
business, where it is one of Europe's largest operators. In the upstream market,
T-Com provides networkrelated services to all of Deutsche Telekom's divisions,
as well as around 200 telecommunications companies. In Germany, T-Com serves
residential and business customers with a broad range of products and services.
Small and mediumsized enterprises (SMEs) benefit from T-Com's end-to-end,
integrated IT and telecom solutions. Shareholdings in Magyar Tavkozlesi (MATAV)
(Hungary), HT-Hrvatske telekommunikacije (Croatia), and Slovak Telecom
(Slovakia) (formerly Slovenske Telekomunikacie) have given T-Com a foothold in
Central and Eastern European markets. The DeTeMedien business previously
reported under T-Online has been reported at T-Com since January 1, 2003. T-Com
has operated as an independent brand under the umbrella of the Deutsche Telekom
Group since August 1, 2003.
T-Mobile's business combines all the activities of the T-Mobile International
group. Via subsidiaries, T-Mobile operates a transatlantic GSM mobile
communications network and thus offers the advantages of a standardized
technical platform for a broad range of customers mainly in Germany, the United
Kingdom, the United States, Austria, the Czech Republic, and the Netherlands.
T-Mobile is also represented on the Polish and Russian markets through its
investments in the mobile communications companies Polska Telefonia Cyfrowa
(PTC) and OJCS Mobile TeleSystems (MTS).
T-Systems provides Deutsche Telekom's national and international key accounts
with tailored information and communication technology (ICT) solutions.
T-Systems provides the infrastructure needed to do this, implements customer
solutions, and operates end-to-end business processes based on these solutions
if required. T-Systems is represented in over 20 countries around the world by
branch offices and its own national companies.
T-Online is one of the leading Internet service providers in Germany. T-Online
operates a combined business model within Deutsche Telekom, consisting of the
access business as well as content, services, e-commerce, and advertising.
It is represented by subsidiaries in France, Spain, Portugal, Austria, and
Switzerland. The DeTeMedien business previously shown under T-Online has been
reported at T-Com since January 1, 2003.
"Group Headquarters & Shared Services" includes all group units which cannot be
directly allocated to an individual segment. Deutsche Telekom completed its
reorganization to create a virtual Strategic Management Holding in the 2003
financial year. As part of this reorganization, the unit reported as "Other"
until the first quarter of 2003 has been renamed "Group Headquarters & Shared
Services". Group Headquarters now focuses on strategic and cross-divisional
management functions. All other operating functions not directly related to the
segments' core businesses are now the responsibility of Shared Services. In
particular, these include subsidiaries and shared services, such as real estate,
billing services, fleet management, and Vivento, the service provider for
personnel and business (formerly PSA).
The Company was registered as Deutsche Telekom AG with the Commercial Registry
of the Bonn District Court (Amtsgericht - HRB 6794) on January 2, 1995.
116
The Federal Republic of Germany's direct and indirect shareholding in Deutsche
Telekom at December 31, 2003 amounted to 42.77 %. In accordance with the letter
dated January 12, 2004, the direct shareholding amounts to 26.03% (1,092,721,315
shares); a further 16.74% (702,704,750 shares) are held by a federal
corporation, Kreditanstalt fur Wiederaufbau, Frankfurt/Main, (KfW), in
accordance with the letter dated January 20, 2004. The Federal Republic
administers its shareholding and exercises its rights as a shareholder through a
public law entity, the Bundesanstalt fur Post und Telekommunikation Deutsche
Bundespost (the Federal Agency), which is subject to supervision by the Federal
Ministry of Finance (BMF).
The Regulatory Authority for Telecommunications and Posts (the Regulatory
Authority) commenced its activities on January 1, 1998. The Regulatory
Authority, which is under the authority of the Federal Ministry of Economics
(BMWA), supervises the telecommunications sector in Germany and in this capacity
regulates the business activities of Deutsche Telekom.
The Federal Republic of Germany is Deutsche Telekom's customer; it sources
services from the Company on an arm's length basis. Charges for services
provided to the Federal Republic and its departments and agencies are based on
Deutsche Telekom's commercial pricing policies. Services provided to any one
department or agency do not represent a significant component of Deutsche
Telekom's net revenues.
Summary of significant accounting principles.
The consolidated financial statements and the group management report of the
Deutsche Telekom Group have been prepared in accordance with the provisions of
the German Commercial Code (Handelsgesetzbuch - HGB), referred to for
convenience as "German GAAP" below, and the German Stock Corporation Act
(Aktiengesetz - AktG). In general, Deutsche Telekom applies the relevant German
Accounting Standards (GASs), but reserves the right not to apply these standards
where it believes that non-application is justified. At present, the revaluation
method for capital consolidation required by GAS 4 and GAS 10 "Deferred taxes in
consolidated financial statements" are not applied.
In addition to Frankfurt, other German stock exchanges, and Tokyo, Deutsche
Telekom shares are also traded on the New York Stock Exchange (NYSE) in the form
of American Depositary Shares (ADSs). As a result of special reporting
requirements, in particular to the U.S. Securities and Exchange Commission
(SEC), Deutsche Telekom also uses accounting policies in line with those of U.S.
GAAP (generally accepted accounting principles - GAAP) applicable at the balance
sheet date. Differences between the accounting policies applied in Deutsche
Telekom's consolidated financial statements and those of U.S. GAAP are, in most
cases, the result of binding rules of German GAAP that differ from those of U.S.
GAAP.
The accompanying consolidated financial statements also differ from consolidated
financial statements prepared in accordance with U.S. GAAP where the
classification and presentation requirements of German GAAP (Sections 298 in
conjunction with 266 and 275 HGB) are binding. Differences between accounting
and measurement principles applied in Deutsche Telekom's consolidated financial
statements and those of U.S. GAAP are presented as a separate reconciliation to
supplement the consolidated financial statements, and explained in detail in the
"Annual Report on Form 20-F" filed with the SEC.
Although German GAAP requires only the presentation of one year's comparative
figures in the statement of income, Deutsche Telekom's income statement presents
two years' comparatives, in accordance with SEC requirements. The same applies
to the consolidated statement of cash flows, the consolidated statement of
shareholders' equity and those parts of segment reporting affecting the
statement of income.
Consolidated financial statements
Notes 117
For the first time, the consolidated statement of income for the 2003 financial
year is presented using the cost-of-sales method (in accordance with Section 275
(3) HGB). This format compares net revenue with the expenses incurred to
generate these revenues, classified into cost of sales, selling, and general and
administrative functions. The classification of the consolidated statement of
income using the cost-of-sales method is designed to enhance the international
comparability of financial reporting.
All amounts shown are in millions of euros ((euro)/EUR). Certain items have been
combined for presentation purposes in the statement of income and the balance
sheet in order to make the financial statements more informative and
understandable. These items are disclosed separately in the notes. In the case
of changes in presentation, prior-year amounts are reclassified to conform with
the current-year presentation. In accordance with Section 297 (1) sentence 2
HGB, the consolidated financial statements also include a consolidated statement
of cash flows, a consolidated statement of shareholders' equity, and a segment
report.
The single-entity financial statements included in the consolidated financial
statements were prepared using uniform group accounting policies. The accounting
policies used in the consolidated financial statements differ from those used in
the single-entity financial statements of Deutsche Telekom AG. Such differences,
mostly applied to conform with U.S. GAAP, include the following:
o Property, plant, and equipment leased under contracts for which, in
accordance with U.S. GAAP and in contrast to the leasing provisions of tax
law, the risks and rewards of ownership have been assumed (primarily
excluding sale and lease back transactions) are recognized at cost.
Scheduled depreciation is recorded over the useful economic life of the
asset or over the term of the lease. The present value of payment
obligations resulting from future lease payments is included as
liabilities.
o Interest incurred during the construction of items of property, plant, and
equipment has been capitalized as part of these assets' costs.
o No accruals are recognized for internal year-end closing expenses.
o Investment grants received are recorded as reductions in the acquisition
cost of assets.
The single-entity financial statements of Deutsche Telekom AG as well as the
consolidated financial statements of the Deutsche Telekom Group are published in
the Federal Gazette (Bundesanzeiger) and filed under HRB 6794 with the
Commercial Registry of the Bonn District Court. This annual report and the
Annual Report on Form 20-F, filed with the SEC due to Deutsche Telekom's listing
on the NYSE, are available upon request from Deutsche Telekom AG, Bonn, Investor
Relations, and on the Internet at www.telekom.de.
Consolidated group.
The consolidated financial statements comprise of the accounts of Deutsche
Telekom AG and its subsidiaries.
The subsidiaries, associated companies, and other related companies have been
included in the consolidated financial statements in accordance with the
following criteria:
o Subsidiaries are companies in which Deutsche Telekom directly or indirectly
holds majority voting rights or exercises management control.
o Associated companies are companies in which Deutsche Telekom directly or
indirectly holds between 20 and 50% of the voting rights and exercises a
significant influence. Such companies are generally included in the
consolidated financial statements using the equity method.
o Companies in which Deutsche Telekom holds less than 20% of the voting
rights are carried in the consolidated financial statements at the lower of
cost or market value and classified as other investments in related
companies.
118
The changes in the composition of the Deutsche Telekom Group in 2003 are
presented in the following table:
--------------------------------------------------------------------------------
Changes in the composition of the Deutsche Telekom Group
--------------------------------------------------------------------------------
Domestic International Total
----------------------------------------------------------------------------------------
Consolidated subsidiaries
----------------------------------------------------------------------------------------
Jan. 1, 2003 101 260 361
----------------------------------------------------------------------------------------
Additions 4 11 15
----------------------------------------------------------------------------------------
Disposals (42) (22) (64)
----------------------------------------------------------------------------------------
Reclassifications 1 (3) (2)
----------------------------------------------------------------------------------------
Dec. 31, 2003 64 246 310
----------------------------------------------------------------------------------------
Associated companies included at equity
----------------------------------------------------------------------------------------
Jan. 1, 2003 22 27 49
----------------------------------------------------------------------------------------
Additions 3 3 6
----------------------------------------------------------------------------------------
Disposals (7) (6) (13)
----------------------------------------------------------------------------------------
Reclassifications 1 (2) (1)
----------------------------------------------------------------------------------------
Dec. 31, 2003 19 22 41
----------------------------------------------------------------------------------------
Other unconsolidated subsidiaries and other
investments in related companies (greater than 5%)
----------------------------------------------------------------------------------------
Jan. 1, 2003 89 48 137
----------------------------------------------------------------------------------------
Additions 25 4 29
----------------------------------------------------------------------------------------
Disposals (25) (16) (41)
----------------------------------------------------------------------------------------
Reclassifications (2) 5 3
----------------------------------------------------------------------------------------
Dec. 31, 2003 87 41 128
----------------------------------------------------------------------------------------
Total
----------------------------------------------------------------------------------------
Jan. 1, 2003 212 335 547
----------------------------------------------------------------------------------------
Additions 32 18 50
----------------------------------------------------------------------------------------
Disposals (74) (44) (118)
----------------------------------------------------------------------------------------
Reclassifications 0 0 0
----------------------------------------------------------------------------------------
Dec. 31, 2003 170 309 479
----------------------------------------------------------------------------------------
The consolidated financial statements include the single-entity financial
statements of the parent company, Deutsche Telekom AG, as well as 64 (December
31, 2002: 101) domestic and 246 (December 31, 2002: 260) foreign subsidiaries in
which Deutsche Telekom AG has a direct or indirect controlling interest.
Consolidated financial statements
Notes 119
The changes in the composition of the Deutsche Telekom Group had the following
effects on the consolidated financial statements:
--------------------------------------------------------------------------------
Effects on the consolidated statement of income
--------------------------------------------------------------------------------
(millions of (euro))
-------------------------------------------------------------------------------
Net revenue (86)
-------------------------------------------------------------------------------
Cost of sales 144
-------------------------------------------------------------------------------
Gross profit 58
-------------------------------------------------------------------------------
Selling costs (129)
-------------------------------------------------------------------------------
General and administrative costs (21)
-------------------------------------------------------------------------------
Other operating income 551
-------------------------------------------------------------------------------
Other operating expenses (205)
-------------------------------------------------------------------------------
Operating results 254
-------------------------------------------------------------------------------
Financial income/(expense), net (54)
-------------------------------------------------------------------------------
Results from ordinary business activities(1) 200
-------------------------------------------------------------------------------
Income taxes (180)
-------------------------------------------------------------------------------
Income after taxes 20
-------------------------------------------------------------------------------
(Income)/losses applicable to minority shareholders 0
-------------------------------------------------------------------------------
Net income/(loss) 20
-------------------------------------------------------------------------------
(1) Including other taxes in accordance with the classification of the
statement of income by the cost-of-sales method.
--------------------------------------------------------------------------------
Effects on the consolidated balance sheet
--------------------------------------------------------------------------------
(millions of (euro))
-------------------------------------------------------------------------------
Assets
-------------------------------------------------------------------------------
Noncurrent assets (1,615)
-------------------------------------------------------------------------------
Current assets, prepaid expenses
and deferred charges 1,425
-------------------------------------------------------------------------------
(190)
-------------------------------------------------------------------------------
Shareholders' equity and liabilities
-------------------------------------------------------------------------------
Shareholders' equity 248
-------------------------------------------------------------------------------
Accruals (49)
-------------------------------------------------------------------------------
Liabilities and deferred income (389)
-------------------------------------------------------------------------------
(190)
-------------------------------------------------------------------------------
Significant changes in the composition of the Deutsche Telekom Group.
2003:
Deutsche Telekom AG completed the sale of its cable activities in the six
regions of Rhineland Palatinate/Saarland, Lower Saxony/Bremen,
Berlin/Brandenburg, Bavaria, Hamburg/Schleswig-Holstein/Mecklenburg-Western
Pomerania, and Saxony-Anhalt on March 13, 2003. These companies were sold for a
total of EUR 1.7 billion to a consortium consisting of APEX, Goldman-Sachs
Capital Partners, and Providence Equity. The companies were deconsolidated
effective February 28, 2003. The sale of the companies generated a book gain of
around EUR 0.4 billion.
T-Systems International GmbH sold TELECASH Kommunikations-Service GmbH for EUR
0.1 billion effective March 24, 2003. The disposition of this company generated
a book gain of EUR 0.1 billion. The company was deconsolidated effective
February 28, 2003.
In early May 2003, T-Systems International GmbH disposed of its interest in
T-Systems SIRIS S.A.S. for a price of EUR 30 million. This company was
deconsolidated effective May 1, 2003, and the transaction generated a book gain
of EUR 32 million.
2002:
Deutsche Telekom AG acquired the remaining shares of T-Systems ITS GmbH from
DaimlerChrysler Services AG on March 4, 2002 via its T-Systems International
GmbH subsidiary. The purchase price was EUR 4.7 billion. The goodwill of EUR 2.7
billion generated by this acquisition will be amortized on a straight-line basis
over a period of up to ten years, corresponding to the estimated useful life.
T-Systems ITS GmbH has been included in the consolidated financial statements of
Deutsche Telekom AG since October 2000 as a result of the acquisition of the
majority shareholding of 50.1%. In November 2002, T-Systems International GmbH
was combined with T-Systems ITS GmbH in a downstream merger. At the same time,
T-Systems ITS GmbH was renamed T-Systems International GmbH.
120
On September 25, 2002, T-Mobile International AG acquired the remaining 50.0001%
of the shares of the mobile communications company Ben Nederland Holding B.V.
from the company's other shareholders Belgacom, TDC, and Gringots (Credit Suisse
First Boston) for a purchase price of EUR 1.7 billion. In addition, T-Mobile
International took over outstanding shareholder loans amounting to approximately
EUR 0.3 billion. The goodwill of EUR 1.7 billion generated by this transaction
was written down by EUR 1.0 billion as a result of the strategic review of net
carrying amounts; the remaining amount will be amortized over a period of 12
years. Ben provides mobile communications services in the Netherlands; the
company generated net revenues of EUR 552 million in 2002 (2001: EUR 448
million) and recorded a net loss of EUR 594 million (2001: net loss of EUR 199
million). The net loss before extraordinary items in 2002 amounted to EUR 578
million (2001: EUR 199 million). The company was included in the consolidated
financial statements as a fully consolidated subsidiary for the first time as of
September 30, 2002.
2001:
On January 15, 2001 Deutsche Telekom acquired 51% of the shares of the
Macedonian telecommunications company Makedonski Telekommunikacii A.D., Skopje
(referred to as Maktel below) via a subsidiary of MATAV. The acquisition costs
amounted to EUR 301.5 million. Maktel was included in the subgroup financial
statements of MATAV for the first time in the first quarter of 2001. The
resulting goodwill of EUR 180.3 million will be amortized over a period of 20
years.
In April 2001, Deutsche Telekom acquired a further shareholding in the Czech
mobile communications company T-Mobile Czech Republic, Prague (formerly
RadioMobil) via CMobil B.V., Amsterdam, a subsidiary of T-Mobile International
AG, Bonn (referred to as T-Mobile International in the following). The
acquisition costs for this additional 11.77% stake amounted to EUR 598 million.
CMobil's shareholding thus increased to 60.77%. The additional goodwill
generated amounting to EUR 444 million will be amortized over a period of 12
years. T-Mobile Czech Republic was fully consolidated for the first time on
April 1, 2001.
On May 31, 2001 Deutsche Telekom acquired 100% of the shares of VoiceStream
Wireless Corp., Bellevue, USA (renamed T-Mobile USA, Inc. on August 30, 2002)
and Powertel, Inc., Bellevue, for a total purchase price of EUR 39.4 billion,
including a cash component of EUR 4.9 billion and the initial investment in
VoiceStream preferred stock amounting to EUR 5.6 billion that Deutsche Telekom
had already made in September 2000. VoiceStream Wireless Corp. provides
communications services for private households in urban areas of the United
States on the basis of GSM (Global System for Mobile Communications) technology.
Powertel, Inc. provides communications services for private households, mainly
in urban areas in the Southeast of the United States on the basis of GSM
technology. VoiceStream shareholders received for each share of VoiceStream
common stock either 3.6693 Deutsche Telekom shares and USD 15.7262 in cash,
3.6683 Deutsche Telekom shares and USD 15.9062 in cash, or 3.7647 Deutsche
Telekom shares. Each Powertel shareholder received 2.6353 Deutsche Telekom
shares for each Powertel share. VoiceStream and Powertel were fully consolidated
for the first time on May 31, 2001. The consolidation of VoiceStream and
Powertel generated goodwill totaling EUR 23.6 billion. This will be amortized
over a period of up to 20 years. This goodwill was written down by EUR 8.3
billion as a result of the strategic review in the second half of 2002. In
conjunction with the acquisition of VoiceStream and Powertel as described above,
Deutsche Telekom granted rights to acquire a total of 43,619,261 no par value
Deutsche Telekom shares on the basis of existing agreements on the exchange of
warrants, options, and bonds for shares of these two companies (exchange rights
of Cook Inlet and Eliska Wireless).
Consolidated financial statements
Notes 121
Deutsche Telekom AG acquired an additional 16% equity interest in the Croatian
telecommunications company HT-Hrvatske telekomunikacije d.d., Zagreb, on October
25, 2001 for a purchase price of EUR 507 million. Deutsche Telekom AG is
therefore now the majority shareholder with a stake of 51%, and has fully
consolidated this company since November 1, 2001. The goodwill arising in the
amount of EUR 240 million will be amortized over a period of up to 20 years.
The following pro forma information shows Deutsche Telekom's most important
financial data, including the major subsidiaries acquired in 2002 and 2003, as
if they had been consolidated at January 1, 2002.
Pro forma information
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Net revenue (billions of (euro))
-------------------------------------------------------------------------------
Reported 55.8 53.7
-------------------------------------------------------------------------------
Pro forma 55.8 54.1
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Net income/(loss) under
German GAAP (billions of (euro))
-------------------------------------------------------------------------------
Reported 1.3 (24.6)
-------------------------------------------------------------------------------
Pro forma 1.3 (24.9)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Earnings/(loss) per share under
German GAAP (euro)
-------------------------------------------------------------------------------
Reported 0.30 (5.86)
-------------------------------------------------------------------------------
Pro forma 0.30 (5.93)
-------------------------------------------------------------------------------
88 subsidiaries (December 31, 2002: 77) were not included because they were not
material to the net worth, financial position, and results of the Deutsche
Telekom Group. These subsidiaries accounted for less than 1% of revenue, net
income/loss, and total assets of the Deutsche Telekom Group.
In accordance with Section 311 (1) HGB, 41 (December 31, 2002: 49) companies
over which Deutsche Telekom exercises significant influence have been classified
as associated companies and are accounted for using the equity method. The
remaining 30 (December 31, 2002: 35) associated companies which have little or
no effect on the net worth, financial position, and results of the Deutsche
Telekom Group were classified as other investments in related companies, and are
carried at amortized cost.
The full list of investment holdings is filed with the Commercial Registry of
the Bonn District Court (HRB 6794). The list is available upon request from
Deutsche Telekom AG, Bonn, Investor Relations. Furthermore, the list of
investment holdings includes a full list of all subsidiaries that exercise
disclosure simplification options in accordance with Section 264 (3) HGB.
122
Principal subsidiaries and associated companies. The principal subsidiaries and
associated companies whose revenues and results, together with Deutsche Telekom
AG, account for more than 90% of the Group are shown in the table below:
--------------------------------------------------------------------------------
Principal subsidiaries and associated companies
--------------------------------------------------------------------------------
Shareholders'
Deutsche Telekom equity Revenue
share Dec. 31, 2003 2003
Dec. 31, 2003 millions of millions of
Name and regitered office % (euro) (euro)
------------------------------------------------------------------------------------------------------------
Fully consolidated subsidiaries
------------------------------------------------------------------------------------------------------------
T-Mobile Deutschland GmbH, Bonn(2) 100.00 1,456 8,479
------------------------------------------------------------------------------------------------------------
T-Mobile Holdings Ltd., Hatfield, United Kingdom(1, 3) 100.00 7,523 4,303
------------------------------------------------------------------------------------------------------------
T-Mobile Austria GmbH, Vienna, Austria(1, 4) 100.00 462 1,098
------------------------------------------------------------------------------------------------------------
T-Mobile USA, Inc., Bellevue, Washington, USA(1, 2) 100.00 13,351 7,416
------------------------------------------------------------------------------------------------------------
T-Mobile Czech Republic a.s., Prague,
Czech Republic(5) 60.77 515 768
------------------------------------------------------------------------------------------------------------
T-Mobile Netherlands Holding B.V., The Hague,
Netherlands(1, 3) 100.00 326 861
------------------------------------------------------------------------------------------------------------
T-Online International AG, Darmstadt(1) 73.94 5,367 1,851
------------------------------------------------------------------------------------------------------------
T-Systems International GmbH, Frankfurt/Main 100.00 1,179 6,325
------------------------------------------------------------------------------------------------------------
T-Systems CDS GmbH, Darmstadt(6) 100.00 260 1,981
------------------------------------------------------------------------------------------------------------
T-Systems GEI GmbH, Aachen(6) 100.00 80 546
------------------------------------------------------------------------------------------------------------
T-Systems PCM GmbH, Feldkirchen(6) 100.00 30 491
------------------------------------------------------------------------------------------------------------
GMG Generalmietgesellschaft mbH, Munster 100.00 264 2,340
------------------------------------------------------------------------------------------------------------
DeTeImmobilien, Deutsche Telekom Immobilien
und Service GmbH, Munster 100.00 11 941
------------------------------------------------------------------------------------------------------------
Deutsche Telekom Network
Projects & Services GmbH, Bonn(1) 100.00 533 1,066
------------------------------------------------------------------------------------------------------------
MATAV, Magyar Tavkozlesi Rt., Budapest, Hungary(1, 7) 59.49 2,362 2,396
------------------------------------------------------------------------------------------------------------
Slovak Telecom a.s. (formerly: Slovenske
Telekomunikacie, a.s.), Bratislava, Slovakia(1) 51.00 1,175 431
------------------------------------------------------------------------------------------------------------
HT-Hrvatske telekomunikacije d.d., Zagreb, Croatia(1) 51.00 1,895 1,036
------------------------------------------------------------------------------------------------------------
Associated companies
------------------------------------------------------------------------------------------------------------
MTS, OJSC Mobile TeleSystems, Moscow,
Russia(1, 8, 10, 11) 25.15 1,152 1,205
------------------------------------------------------------------------------------------------------------
PTC, Polska Telefonia Cyfrowa Sp.z o.o.,
Warsaw, Poland(1, 9, 10, 11) 49.00 308 1,121
------------------------------------------------------------------------------------------------------------
Income/(loss)
after taxes
2003 Employees
millions of 2003
Name and regitered office (euro) annual average
------------------------------------------------------------------------------------------
Fully consolidated subsidiaries
------------------------------------------------------------------------------------------
T-Mobile Deutschland GmbH, Bonn(2) 2,273 8,812
------------------------------------------------------------------------------------------
T-Mobile Holdings Ltd., Hatfield, United Kingdom(1, 3) (613) 6,201
------------------------------------------------------------------------------------------
T-Mobile Austria GmbH, Vienna, Austria(1, 4) 73 2,540
------------------------------------------------------------------------------------------
T-Mobile USA, Inc., Bellevue, Washington, USA(1, 2) (1,298) 19,372
------------------------------------------------------------------------------------------
T-Mobile Czech Republic a.s., Prague,
Czech Republic(5) 139 2,532
------------------------------------------------------------------------------------------
T-Mobile Netherlands Holding B.V., The Hague,
Netherlands(1, 3) (76) 1,418
------------------------------------------------------------------------------------------
T-Online International AG, Darmstadt(1) 0 2,638
------------------------------------------------------------------------------------------
T-Systems International GmbH, Frankfurt/Main 531 12,351
------------------------------------------------------------------------------------------
T-Systems CDS GmbH, Darmstadt(6) 323 6,697
------------------------------------------------------------------------------------------
T-Systems GEI GmbH, Aachen(6) 58 4,085
------------------------------------------------------------------------------------------
T-Systems PCM GmbH, Feldkirchen(6) 22 1,582
------------------------------------------------------------------------------------------
GMG Generalmietgesellschaft mbH, Munster (290) 0
------------------------------------------------------------------------------------------
DeTeImmobilien, Deutsche Telekom Immobilien
und Service GmbH, Munster (12) 6,647
------------------------------------------------------------------------------------------
Deutsche Telekom Network
Projects & Services GmbH, Bonn(1) 56 2,710
------------------------------------------------------------------------------------------
MATAV, Magyar Tavkozlesi Rt., Budapest, Hungary(1, 7) 319 15,178
------------------------------------------------------------------------------------------
Slovak Telecom a.s. (formerly: Slovenske
Telekomunikacie, a.s.), Bratislava, Slovakia(1) 89 8,091
------------------------------------------------------------------------------------------
HT-Hrvatske telekomunikacije d.d., Zagreb, Croatia(1) 193 9,708
------------------------------------------------------------------------------------------
Associated companies
------------------------------------------------------------------------------------------
MTS, OJSC Mobile TeleSystems, Moscow,
Russia(1, 8, 10, 11) 245 11,042
------------------------------------------------------------------------------------------
PTC, Polska Telefonia Cyfrowa Sp.z o.o.,
Warsaw, Poland(1, 9, 10, 11) 79 3,643
------------------------------------------------------------------------------------------
(1) Consolidated subgroup financial statements.
(2) Indirect shareholding via T-Mobile International AG& Co. KG, Bonn (Deutsche
Telekom AG's indirect share: 100%).
(3) Indirect shareholding via T-Mobile Global Holding GmbH, Bonn (Deutsche
Telekom AG's indirect share: 100%).
(4) Indirect shareholding via T-Mobile Global Holding Nr. 2 GmbH, Bonn
(Deutsche Telekom AG's indirect share: 100%).
(5) Indirect shareholding via CMobil B.V., Amsterdam (Deutsche Telekom AG's
indirect share: 92.14%).
(6) Indirect shareholding via T-Systems International GmbH, Frankfurt/Main
(Deutsche Telekom AG's share: 100%).
(7) Indirect shareholding via MagyarCom Holding GmbH, Bonn (Deutsche Telekom
AG's share: 100%).
(8) Indirect shareholding via T-Mobile Worldwide Holding GmbH, Bonn (Deutsche
Telekom AG's share: 100%).
(9) Indirect shareholding via T-Mobile Deutschland GmbH, Bonn; Mediaone
International B.V., Eindhoven; and Polpager Sp.z o.o., Warsaw (Deutsche
Telekom AG's indirect share: 100% each).
(10) 2002 financial year.
(11) Employees at balance sheet date at end of 2002.
Consolidated financial statements
Notes 123
Consolidation principles.
Capital consolidation uses the German purchase method of accounting. Under this
method, the purchase consideration for an acquisition is allocated to the assets
and liabilities acquired, based on their fair values. Any resulting excess of
the purchase consideration over the parent's interest in the fair value of net
assets acquired is capitalized as goodwill and amortized over its useful life.
Negative goodwill from capital consolidation is included under other accruals.
Profits or losses generated by subsidiaries during their period of affiliation
with the Group are included in retained earnings/deficit; they also include the
consolidation adjustments recognized in the statement of income and the net
income/loss of subsidiaries.
If shares are issued to third-party shareholders without the involvement of
Deutsche Telekom in the course of capital increases of subsidiaries, and
associated and related companies, the resulting added value for Deutsche Telekom
is recognized in the income statement in cases of cash capital increases; in
cases of capital increases for noncash contributions, it is only recognized in
the income statement if the added value exceeds a given level of goodwill
acquired by the subsidiary, or associated or related company, in the course of
the capital increase.
Revenue, income, and expenses, as well as receivables and liabilities between
the consolidated companies, are eliminated. Intercompany profits and losses and
income effects from the consolidation of intercompany debt are eliminated in the
income statement.
Deferred taxes are recognized for consolidation adjustments recognized in the
income statements, provided that the tax expense is expected to reverse in later
years, and the consolidation adjustments at the parent company do not relate to
the periods prior to the end of 1995, when it was essentially exempt from
taxation.
The investments in associated companies included at equity are accounted for
using the German purchase method; equity is calculated by applying local GAAP
measurement principles, as permitted by Section 312 (5), sentence 2 HGB. The
principles used for full consolidation are also applied to the treatment of the
differences resulting from first-time consolidation.
Joint ventures are included using the equity method.
Foreign currency translation.
In the single-entity financial statements of the companies included in the
consolidated financial statements, foreign currency receivables, cash in banks,
and liabilities are translated at the exchange rate applicable on the
transaction date. Unrealized foreign currency losses due to exchange rate
fluctuations through the balance sheet date are recognized in the income
statement, while unrealized foreign currency gains are not recognized. Where
foreign currency items have been hedged by forward exchange contracts, they are
measured at the corresponding hedge rate.
The financial statements of foreign subsidiaries are translated using the
functional currency method. The functional currency is the currency in which the
foreign subsidiary performs its principal operations. The activities and
financial structure reported in this currency should be reflected in the
consolidated financial statements. Generally, the functional currency of
dependent subsidiaries is identical with that of the parent company. Dependent
subsidiaries are translated according to the temporal method. On the other hand,
the functional currency of independent subsidiaries is the local currency.
Currently, all consolidated foreign subsidiaries of Deutsche Telekom conduct
their operations independently of the parent company; the currencies are
therefore translated according to the modified current rate method. In the
consolidated financial statements, the balance sheet items of foreign
subsidiaries are translated from the local currencies into euros using middle
rates at the balance sheet date. Gains and losses resulting from translation are
taken directly to the cumulative translation adjustment account in equity. The
income statements of foreign subsidiaries are translated at the average exchange
rates.
124
The exchange rates of certain significant currencies changed as follows:
--------------------------------------------------------------------------------
Exchange rates
--------------------------------------------------------------------------------
Annual average rate Rate at balance sheet date
------------------------------ -----------------------------
2003 2002 2001 Dec. 31, 2003 Dec. 31, 2002
(euro) (euro) (euro) (euro) (euro)
----------------------------------------------------------------------------------------------
100 Swiss Francs (CHF) 65.76650 68.15990 66.20630 64.15200 68.73340
----------------------------------------------------------------------------------------------
100 Czech Koruna (CZK) 3.14101 3.24851 2.90920 3.08873 3.18167
----------------------------------------------------------------------------------------------
1 Pound Sterling (GBP) 1.44585 1.59101 1.60761 1.41663 1.53635
----------------------------------------------------------------------------------------------
100 Croatian Kuna (HRK) 13.21220 13.49190 13.36850 13.11000 13.37340
----------------------------------------------------------------------------------------------
1,000 Hungarian Forints (HUF) 3.94347 4.11657 3.90371 3.79407 4.23909
----------------------------------------------------------------------------------------------
1,000 Japanese Yen (JPY) 7.64138 8.47821 9.16991 7.42171 8.03280
----------------------------------------------------------------------------------------------
100 Malaysian Ringgit (MYR) 23.28190 27.93620 29.39340 20.89500 25.07720
----------------------------------------------------------------------------------------------
100 Philippine Pesos (PHP) 1.63218 2.08452 2.19127 1.44055 1.79995
----------------------------------------------------------------------------------------------
100 Polish Zloty (PLN) 22.73590 25.99300 27.22010 21.27500 24.99940
----------------------------------------------------------------------------------------------
100 Russian Ruble (RUB) 2.88655 3.38456 3.82700 2.71500 2.98257
----------------------------------------------------------------------------------------------
100 Singapore Dollars (SGD) 50.70260 59.22700 62.55940 46.72500 55.34030
----------------------------------------------------------------------------------------------
100 Slovak Koruna (SKK) 2.41004 2.34284 2.30987 2.43000 2.41429
----------------------------------------------------------------------------------------------
1 U.S. Dollar (USD) 0.88492 1.06158 1.11683 0.79340 0.95293
----------------------------------------------------------------------------------------------
Accounting policies.
Net revenues contain all revenues from the ordinary business activities of
Deutsche Telekom. For example, these include revenues from the rendering of
services and the sale of goods and products that are typical for Deutsche
Telekom. Net revenues are recorded net of value-added tax (VAT) and
sales-related reductions. They are recognized in the accounting period concerned
in accordance with the realization principle. Revenue was generated in the
individual divisions as follows:
T-Com.
T-Com provides customers with narrow and broadband access to its fixed-line
network. It also sells, leases, and services telecommunications equipment for
its customers and provides other ancillary telecommunications services. T-Com
recognizes service revenues when the services are provided in accordance with
contract terms. The revenue and related expenses associated with the sale of
telecommunications equipment and accessories are recognized when the products
are delivered, provided there are no unfulfilled company obligations that affect
the customer's final acceptance of the arrangement. Revenue from rentals and
operating leases is recognized monthly as the fees accrue.
T-Mobile.
Mobile revenues include revenues from the provision of mobile services, customer
activation fees, and sales of mobile handsets and accessories. Mobile services
revenues include monthly recurring charges and charges for special features,
airtime charges, and roaming charges billed to T-Mobile customers, as well as
other mobile operators. Mobile services revenue is recognized based upon minutes
of use and contracted fees, net of credits and adjustments for service
discounts. The revenue and related expenses associated with the sale of mobile
telephones, wireless data devices and accessories are recognized when the
products are delivered, and accepted by the customer.
Consolidated financial statements
Notes 125
T-Systems.
Telecommunication Services.
Telecommunication Services include Network Services, Carrier Services, Hosting
and ASP Services, and Broadcast Services. Contracts for network services, which
consist of the installation and operation of communication networks for
customers, have an average duration of approximately three years. Revenues for
voice, billed on a per-minute basis, and data services, billed on a bandwidth
basis, are recognized under such contracts when used by the customer. Revenues
from Carrier Services and Hosting and ASP Services are recognized as the
services are provided.
Information Technology Services and Consulting.
The terms of information technology service contracts generally range from less
than one year up to ten years. Revenue from outsourcing contracts reflects the
extent of actual services delivered in the period in accordance with the terms
of the contract. Revenue from time and material service contracts is recognized
as the services are provided. Revenue from systems integration contracts
requiring the delivery of unique products and/or services is generally covered
by one of the following types of contracts: fixed price, milestone, or
cost-related contracts. For fixed-price contracts, revenue is generally
recognized when a project is completed and accepted by the customer. For
milestone contracts, revenue is recognized at the time a milestone is achieved
and approved by the customer. Revenue for cost-related contracts is recognized
on a similar basis to time and material service contracts. Revenue from
maintenance services is recognized over the contractual period or as the
services are performed.
In some of the Company's services contracts, Deutsche Telekom performs the
service prior to billing the customer. This situation may lead to unbilled
accounts receivable for Computing Services and Telecommunication Services which
are included as revenues in the consolidated statement of income.
Revenue from hardware sales or sales-type leases is recognized when the product
is shipped to the customer, provided there are no unfulfilled company
obligations that affect the customer's final acceptance of the arrangement. Any
cost of these obligations is accrued when the corresponding revenue is
recognized. Revenue from rentals and operating leases is recognized monthly as
the fees accrue.
The Company enters into transactions that include multiple element arrangements,
which may include any combination of hardware, services, or software. These
arrangements and stand-alone software arrangements may also involve any
combination of software maintenance, software support, or unspecified software
upgrades. When some elements are delivered prior to others in an arrangement,
revenue is deferred until the delivery of the last element.
T-Online.
T-Online revenues consist primarily of revenues from subscriber fees, and
charges for advertising and e-commerce. Subscriber fees, consisting primarily of
basic monthly charges for T-Online services and Internet access as well as
use-related fees, are recognized as revenue in the period the service is
provided. Advertising revenues are recognized in the period that the
advertisements are exhibited. Transaction revenues are recognized upon
notification from the customer that qualifying transactions have occurred and
collection of the resulting receivable is reasonably assured.
The cost of sales comprises the aggregate cost of products and services sold in
the year under review. In addition to directly attributable costs, such as
direct material and labor costs, it also includes indirect costs, including
depreciation and amortization.
Selling costs comprise all costs of activities that do not directly increase the
value of the Company's products and services, but serve to secure sales. Selling
costs include the costs of all sales, advertising, and marketing departments.
126
General and administrative costs generally include all expenses attributable to
the core administrative functions that cannot be allocated directly to the
production or selling process.
Research and development costs are expensed in full as incurred.
Pension costs for defined benefit plans are actuarially computed using the
projected unit credit method in accordance with SFAS No. 87, and are presented
in accordance with SFAS No. 132 (as revised in 2003). This method is based on
the total present value of the benefit obligations accumulated during the
reporting period and takes into consideration the expected increases in wages
and salaries and in retirement benefits. By contrast, the minimum accrual method
in accordance with Section 6a of the German Income Tax Act
(Einkommen-steuergesetz, EStG) is aimed at the recognition of the expense over
the employees' entire working lives and does not take the expected increases in
wages and salaries and retirement benefits into account (see Note on Accruals
for pensions and similar obligations (28)).
Total pension costs for the current year include standard costs for benefit
obligations acquired in the financial year (service cost), interest cost, and
amortization of actuarial gains and losses, less the return on plan assets to
cover pension obligations. In accordance with U.S. GAAP, if the measurement of
pension obligations under SFAS No. 87 results in the need to disclose an
additional minimum liability (AML), this special item is charged directly to
other comprehensive income (OCI). The consolidated financial statements in
accordance with German GAAP do not include an equivalent shareholders' equity
line; changes in the additional minimum liability are expensed here.
Marketing expenses are expensed as incurred.
Income tax expense includes current income taxes payable as well as deferred
taxes. Deferred income taxes are recognized for the expected future tax effects
attributable to temporary differences between the carrying amounts in the tax
accounts and in the financial statements, except for the effects of those
differences that are not expected to reverse in the foreseeable future. Due to
the minimum taxation provision in effect from the 2004 financial year, deferred
taxes are recognized for only 40% of the differences in Deutsche Telekom AG's
income tax consolidation group that are offset within the expected net operating
loss carryforward periods. Such differences may arise at the individual taxable
entity level as well as in the consolidated financial statements as a result of
measurement and consolidation adjustments. Deferred taxes on temporary
differences relating to Deutsche Telekom AG have not been included in the
consolidated financial statements for periods prior to January 1, 1996 as
Deutsche Telekom AG was not taxable prior to January 1, 1995, and benefited from
an essentially complete exemption from tax in 1995.
Earnings per share for each period are calculated by dividing net income/loss by
the weighted average number of ordinary bearer shares outstanding during that
period. The weighted average number of ordinary bearer shares in 2001 was
calculated after recognizing the effect of the issuance of shares as part of the
acquisition of VoiceStream/Powertel and the start of trading in these shares on
June 4, 2001 in Frankfurt/Main, including those shares that are held on a trust
basis for later issue and later trading as registered ordinary shares or ADRs.
Purchased intangible assets including UMTS and U.S. mobile communications
licenses are carried at acquisition cost and are amortized on a straight-line
basis over their estimated useful lives. Acquired goodwill, including goodwill
resulting from capital consolidation, is amortized on a straight-line basis over
its useful life.
Consolidated financial statements
Notes 127
Deutsche Telekom tests the goodwill of subsidiaries for which a considerable
level of goodwill is recorded for impairment. These tests are based on the
calculation of the enterprise value of the respective company and are carried
out using the discounted cash flow method.
As permitted by Postreform II, items of property, plant, and equipment
transferred to Deutsche Telekom AG on January 1, 1995 were recorded in the
opening balance sheet of Deutsche Telekom AG at their fair market values at that
date. However, due to the short period of time that had elapsed since the
measurement date for the items of property, plant, and equipment acquired since
January 1, 1993, their carrying amount as of December 31, 1994 was recognized as
the future historical cost basis. The remaining useful lives and the
depreciation methods applicable to these assets were not changed. The fair
market values shown in the opening balance sheet have been carried forward as
the acquisition cost of these items of property, plant, and equipment.
Other items of property, plant, and equipment are carried at acquisition or
production cost, less depreciation. Production cost includes directly
attributable costs, an appropriate allocation of indirect material and labor
costs, and interest accruing during construction. General and administrative
costs are not capitalized.
Nonscheduled write-downs are charged where the carrying amount of the asset is
impaired, because the decrease in the market value is not temporary. Events or
circumstances which may lead to this situation include unfavorable developments
in the economic environment and changes in the expectations originally
associated with an investment.
As a rule, noncurrent assets are depreciated or amortized using the
straight-line method, based largely on the following useful lives:
--------------------------------------------------------------------------------
Useful life
--------------------------------------------------------------------------------
Years
--------------------------------------------------------------------------------
Mobile communications licenses
--------------------------------------------------------------------------------
UMTS licenses 20 to 22
--------------------------------------------------------------------------------
FCC licenses 20
--------------------------------------------------------------------------------
GSM licenses 10 to 20
--------------------------------------------------------------------------------
Goodwill 3 to 20
--------------------------------------------------------------------------------
Other intangible assets 2 to 7
--------------------------------------------------------------------------------
Buildings 25 to 50
--------------------------------------------------------------------------------
Shop improvements and window displays 8
--------------------------------------------------------------------------------
Telephone facilities and terminal equipment 3 to 10
--------------------------------------------------------------------------------
Data communications equipment, telephone network
and ISDN switching equipment, transmission
equipment, radio transmission equipment and
technical equipment for broadband distribution
networks 4 to 10
--------------------------------------------------------------------------------
Broadband distribution networks, outside plant
networks, and cable conduit lines 15 to 35
--------------------------------------------------------------------------------
Telecommunications power facilities and other 3 to 10
--------------------------------------------------------------------------------
Other equipment, plant, and office equipment 3 to 23
--------------------------------------------------------------------------------
Additions to limited-life real estate are depreciated ratably in the year of
acquisition. For movable items of property, plant, and equipment acquired in the
first half of a year, the full-year rate of depreciation is charged in the year
of acquisition and, for those assets acquired in the second half of the year,
half the full-year rate of depreciation is charged.
Low-value asset additions are written off in full in the year of their
acquisition and presented as disposals in the statement of noncurrent assets.
Maintenance and repair costs are expensed as incurred.
128
Noncurrent assets sold or otherwise disposed of are derecognized at their
relevant carrying amount (cost less cumulative depreciation). A gain or loss is
recognized in income in the amount of the difference between the proceeds from
the sale and the carrying amount of the asset concerned.
Financial assets are carried at the lower of cost or market value. Low-interest
or non-interest bearing loan receivables are discounted and carried at their net
present value. Write-downs are charged only if the impairment of financial
assets is assumed to be permanent. The market value is preferably based on stock
exchange or market prices as well as other measurement methods, taking into
account any available information about the company concerned. Loss absorption
obligations are accrued and reported in net financial income/ expense.
Raw materials and supplies, and merchandise purchased and held for resale, are
measured at acquisition cost, while work in process and finished goods are
carried at production cost. Based on normal capacity utilization, production
cost includes directly attributable costs, such as direct material and labor
costs, as well as special production costs, plus an appropriate pro rata
allocation of indirect material and labor costs and straight-line depreciation.
General and administrative, and selling costs, social amenities expenses, as
well as voluntary benefits to personnel, including pensions, are not generally
included in production costs. The carrying amount of inventories is reduced to
the lower of cost or market value at the balance sheet date. Adequate
write-downs are charged for inventory risks resulting from obsolescence or
impaired marketability.
Receivables and other assets are carried at their nominal value. Identifiable
individual risks are accounted for through appropriate individual valuation
adjustments, and general credit risks through general valuation adjustments of
receivables. Low-interest and non-interest bearing items with more than one year
to maturity are discounted.
Marketable securities are carried at the lower of cost or market value at the
balance sheet date.
Stock options granted in the course of a contingent capital increase are
recognized at the date the options are exercised, and not at the grant date. At
the time the options are exercised, the amount received by the Company is
transferred to capital stock in the amount of the corresponding nominal capital
increase and a value of an additional amount to additional paid-in capital in
accordance with Section 272 (2) No. 1 HGB.
Accruals for pensions and similar obligations are based on obligations to
non-civil servants. They are calculated using actuarial methods in accordance
with the internationally accepted projected unit credit method, which is
consistent with U.S. GAAP (SFAS No. 87), and are presented in accordance with
SFAS No. 132 (as revised in 2003).
Deutsche Telekom is obliged to make annual contributions to a special pension
fund which makes pension payments to its active and former civil servant
employees. The amounts of these contributions are set out by Postreform II,
which came into force in 1995, and are therefore not subject to a separate
actuarial calculation. The contributions are expensed in the period in which
they are incurred.
Tax and other accruals, including those for contingent losses and environmental
liabilities, are computed in accordance with prudent commercial practice.
Sufficient allowance was made for all identifiable risks when measuring these
accruals.
Deferred taxes are calculated for temporary differences between carrying amounts
in the financial statements and the tax accounts, and for temporary differences
arising from consolidation adjustments. Deferred taxes are offset and the
balance is reported separately either as a deferred tax asset, or as a deferred
tax liability reported under tax accruals. For purposes of computing deferred
taxes, Deutsche Telekom uses a combined tax rate for domestic companies,
covering German corporate income taxes, trade taxes (at an average German
assessment national rate), and the solidarity surcharge (Solidaritatszuschlag);
the respective local tax rate is used for foreign companies.
Consolidated financial statements
Notes 129
Cost accruals are only recognized by Deutsche Telekom when there is an
obligation to recognize the corresponding liabilities under Section 249 (1) HGB.
These relate mainly to accruals for costs of maintenance work deferred in the
financial year but carried out within the first three months of the following
year.
No accruals are discounted, with the exception of pensions and similar
obligations, Civil Service Health Insurance Fund accruals for future shortfalls,
and accruals for long-term contingent losses.
Liabilities are carried at their repayment amount. In instances where the
repayment amount of a liability is greater than the principal amount, the
difference is recorded as an asset and recognized as an adjustment to interest
expense over the term of the liability.
Unrealized losses relating to derivative financial instruments that do not
qualify for hedge accounting are recognized when incurred, whereas unrealized
gains are deferred until realized.
The preparation of consolidated financial statements in accordance with German
GAAP requires the Company to make estimates and assumptions that affect the
reported carrying amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the closing date, as well as the amounts of
revenues and expenses recognized during the reporting period. Actual results
could differ from those estimates.
130
Notes to the consolidated statement of income.
1 Net revenue.
2003 2002 2001
millions millions millions
of (euro) of (euro) of (euro)
--------------------------------------------------------------------------------
T-Com(1) 25,116 26,491 26,427
--------------------------------------------------------------------------------
T-Mobile(1) 21,572 18,339 13,101
--------------------------------------------------------------------------------
T-Systems(1) 7,184 6,895 7,121
--------------------------------------------------------------------------------
T-Online(1), (2) 1,662 1,391 1,027
--------------------------------------------------------------------------------
Group Headquarters & Shared Services 304 573 633
--------------------------------------------------------------------------------
55,838 53,689 48,309
--------------------------------------------------------------------------------
(1) Net revenue according to new structure (see Note on Segment reporting
(36)).
(2) Figures are calculated in accordance with the provisions of German GAAP, as
applied throughout the Deutsche Telekom Group, and differ from those
published in the reports of T-Online International AG under IFRSs.
2003 2002 2001
millions millions millions
of (euro) of (euro) of (euro)
--------------------------------------------------------------------------------
Revenue by geographic area:
--------------------------------------------------------------------------------
Domestic 34,691 35,288 35,107
--------------------------------------------------------------------------------
International 21,147 18,401 13,202
--------------------------------------------------------------------------------
55,838 53,689 48,309
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Breakdown of international net revenue:
--------------------------------------------------------------------------------
European Union (excluding Germany) 7,962 6,836 6,088
--------------------------------------------------------------------------------
Rest of Europe 5,118 5,067 3,787
--------------------------------------------------------------------------------
North America 7,610 6,166 3,066
--------------------------------------------------------------------------------
Latin America 69 74 85
--------------------------------------------------------------------------------
Other 388 258 176
--------------------------------------------------------------------------------
21,147 18,401 13,202
--------------------------------------------------------------------------------
The percentage of the individual revenue segments in relation to net revenue is
as follows:
T-Online 3%
Group Headquarters & Shared Services 1%
T-Com 44%
T-Systems 13%
T-Mobile 39%
Net revenue rose by EUR 2,149 million or 4.0% year-on-year despite unfavorable
exchange rate trends. This figure also includes the effect of changes in the
composition of the consolidated group, which reduced net revenue by a total of
EUR 86 million.
Regulatory decisions and a weak economic environment resulted in a decrease in
revenue at T-Com. The drop in net revenue was exacerbated by the deconsolidation
of the cable companies.
Sustained high growth in subscriber numbers was again the driving force behind
the increased revenue at T-Mobile. Changes in the composition of the
consolidated group (T-Mobile Netherlands) also had a positive effect on revenue
growth.
Positive developments in the telecommunications sector pushed up revenue at
T-Systems, more than offsetting the slight decline in the IT business. This
increase in revenue was partially offset by the effect of deconsolidations, in
particular of TELECASH and SIRIS.
Revenue growth at T-Online was driven primarily by an expanded customer base,
especially for broadband services, coupled with stronger demand for content and
services, and the resulting increase in time spent online.
2 Cost of sales.
The cost of sales, which mainly relates to the T-Com and T-Mobile divisions,
fell by EUR 13.1 billion year-on-year to EUR 31.4 billion. This is primarily due
to a decrease in the amortization of mobile communications licenses that is
included in the cost of sales. As a result of the strategic review carried out
in 2002, the cost of sales was impacted by nonscheduled write-downs of mobile
communications licenses held by T-Mobile USA and T-Mobile UK totaling EUR 11.6
billion.
Changes in the composition of the Deutsche Telekom Group in 2003 further reduced
the cost of sales by EUR 0.1 billion.
Consolidated Financial Statements
Notes 131
3 Selling costs.
Selling costs increased by EUR 0.2 billion year-on-year to EUR 13.5 billion, of
which EUR 0.1 billion are attributable to changes in the composition of the
Group. Based on net revenues generated, however, the ratio of selling costs to
net revenues decreased from 24.7% to 24.2%.
The T-Mobile division accounts for the majority of selling costs and their
year-on-year increase. This increase is attributable to the full-year
consolidation of T-Mobile Netherlands for the first time and higher expenses for
marketing and commissions. This is partially offset by lower losses on accounts
receivable and provisions for doubtful accounts at T-Com in particular.
4 General and administrative costs.
General and administrative costs decreased year-on-year by EUR 1.1 billion to
EUR 5.0 billion. This is equivalent to a 17.9% reduction on the prior-year
figure. The factors behind this development include efficiency improvements and
a decrease in other taxes (see Note 12).
5 Other operating income.
2003 2002 2001
millions of (euro) millions of (euro) millions of (euro)
---------------------------------------------------------------------------------------------------------------------------------
Income from the disposition of noncurrent
assets (including sale of investments) 1,464 818 1,584
---------------------------------------------------------------------------------------------------------------------------------
Reversal of accruals 804 791 1,139
---------------------------------------------------------------------------------------------------------------------------------
Income from the reversal of valuation
adjustments (including asset-backed securities) 688 556 288
---------------------------------------------------------------------------------------------------------------------------------
Cost reimbursements 367 388 255
---------------------------------------------------------------------------------------------------------------------------------
Foreign currency transaction gains 291 222 533
---------------------------------------------------------------------------------------------------------------------------------
Insurance compensation 63 77 46
---------------------------------------------------------------------------------------------------------------------------------
Refund of value-added tax (Section 15a Value-Added Tax Act - UStG) 54 68 85
---------------------------------------------------------------------------------------------------------------------------------
Income from disposition of marketable securities 2 1 1,967
---------------------------------------------------------------------------------------------------------------------------------
Other income 825 980 722
---------------------------------------------------------------------------------------------------------------------------------
4,558 3,901 6,619
---------------------------------------------------------------------------------------------------------------------------------
The increase in other operating income is due primarily to higher income from
noncurrent asset dispositions amounting to approximately EUR 1.5 billion. EUR
0.4 billion of this amount is attributable to the disposal of the remaining
cable activities, EUR 0.4 billion to the sale of shares in MTS, and
approximately EUR 0.1 billion each to the sale of TELECASH, Globe Telekom, and
Eutelsat.
Amounts reported here in the previous year relate in particular to the sale of
Satelindo (EUR 0.2 billion) and the sale of T-Online shares (approximately EUR
0.3 billion).
The increase in income from the reversal of valuation adjustments relates
primarily to the bonuses amounting to approximately EUR 0.1 billion collected
for the first time by T-Systems from asset-backed securities (ABS) transactions.
Of the total amount of other operating income, EUR 2,680 million (2002: EUR
1,342 million; 2001: EUR 1,897 million) relates to other financial years.
132
6 Other operating expenses.
2003 2002 2001
millions of (euro) millions of (euro) millions of (euro)
---------------------------------------------------------------------------------------------------------------
Amortization of goodwill 2,521 13,108 3,663
---------------------------------------------------------------------------------------------------------------
Losses from the disposition of noncurrent assets
(including sale of investments) 323 390 478
---------------------------------------------------------------------------------------------------------------
Foreign currency translation losses 307 310 333
---------------------------------------------------------------------------------------------------------------
Other expenses 1,933 1,107 604
---------------------------------------------------------------------------------------------------------------
5,084 14,915 5,078
---------------------------------------------------------------------------------------------------------------
Other operating expenses decreased by EUR 9,831 million year-on-year to EUR
5,084 million. This considerable drop is attributable to the lower amortization
of goodwill which, in 2002, consisted mainly of nonscheduled write-downs on the
goodwill of T-Mobile USA (EUR 8.3 billion), T-Mobile Netherlands (EUR 1.0
billion), and SIRIS (EUR 0.5 billion) (at T-Systems) primarily as a result of
the strategic review.
The increase of EUR 0.8 billion in other expenses is primarily the result of
Vivento personnel costs at Deutsche Telekom AG.
Of the operating expenses, EUR 395 million (2002: EUR 463 million, 2001: EUR 534
million) relates to other accounting periods.
7 Financial income/expense, net.
2003 2002 2001
millions of (euro) millions of (euro) millions of (euro)
-------------------------------------------------------------------------------------------------------------------------
Dividend income from investments 26 41 107
-------------------------------------------------------------------------------------------------------------------------
Results related to companies accounted for under the
equity method (including amortization of goodwill) (247) (430) (547)
-------------------------------------------------------------------------------------------------------------------------
Income/(loss) related to associated and related companies (221) (389) (440)
-------------------------------------------------------------------------------------------------------------------------
Income from debt securities and long-term loan receivables 7 171 152
-------------------------------------------------------------------------------------------------------------------------
Other interest and similar income 703 1,781 408
-------------------------------------------------------------------------------------------------------------------------
Interest and similar expense (4,486) (6,000) (4,698)
-------------------------------------------------------------------------------------------------------------------------
Net interest income/(expense) (3,776) (4,048) (4,138)
-------------------------------------------------------------------------------------------------------------------------
Write-downs on financial assets and marketable securities (34) (1,585) (770)
-------------------------------------------------------------------------------------------------------------------------
(4,031) (6,022) (5,348)
-------------------------------------------------------------------------------------------------------------------------
Consolodated Financial statments
Notes 133
Financial expense improved year-on-year by EUR 2.0 billion to EUR 4,031 million.
The main factors with a negative impact on the level of net financial expense in
the previous year were the share price-related write-downs of the net carrying
amount of the shareholding in France Telecom amounting to EUR 0.6 billion, and
valuation adjustments on investments in noncurrent securities totaling EUR 0.4
billion. Overall, the loss relating to associated and related companies and the
net interest expense developed positively in the year under review. In
particular the non-recurrence, due to consolidation, of the expense relating to
companies accounted for using the equity method in the previous year and the
positive effect of the write-up of the net carrying amount of the stake in
comdirect bank AG had a positive impact on loss relating to associated and
related companies; expenses for Toll Collect totaling EUR 0.4 billion had an
offsetting effect. The net interest expense decreased primarily as a result of
the reduction in debt and the recognition of interest income from the reversal
of interest rate derivatives that were no longer necessary.
8 Income taxes.
Breakdown of income before income taxes:
--------------------------------------------------------------------------------
Income before income taxes
--------------------------------------------------------------------------------
2003 2002 2001
millions millions millions
of (euro) of (euro) of (euro)
--------------------------------------------------------------------------------
Germany 4,270 712 2,946
--------------------------------------------------------------------------------
International (2,872) (27,862) (5,507)
--------------------------------------------------------------------------------
1,398 (27,150) (2,561)
--------------------------------------------------------------------------------
Breakdown of the Group's income taxes, Germany and international:
--------------------------------------------------------------------------------
Group's income taxes
--------------------------------------------------------------------------------
2003 2002 2001
millions millions millions
of (euro) of (euro) of (euro)
--------------------------------------------------------------------------------
Current taxes
--------------------------------------------------------------------------------
Germany (181) 132 686
--------------------------------------------------------------------------------
International 257 190 91
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Deferred taxes
--------------------------------------------------------------------------------
Germany (357) (150) (30)
--------------------------------------------------------------------------------
International 56 (3,019) 4
--------------------------------------------------------------------------------
(225) (2,847) 751
--------------------------------------------------------------------------------
As a result of the Flutopfersolidaritatsgesetz (German Flood Victims Act),
Deutsche Telekom AG's combined statutory income tax rate for 2003 amounts to
40.4% (compared to 39.0% in the two previous years), comprising corporate income
taxes at a rate of 26.5%, the solidarity surcharge of 5.5% on corporate income
tax, and trade taxes at an average German national rate. The German Flood
Victims Act led to a onetime increase in the corporate income tax rate in 2003
of 1.5 percentage points from 25% to 26.5%.
The results from ordinary business activities amounted to EUR 1.4 billion.
Deutsche Telekom AG also had net operating loss carryforwards affecting
corporate income tax and trade tax net operating loss carryforwards, with the
result that no taxes were incurred in the tax consolidation group. EUR 361
million (income) of the current taxes reported relate to the 2002 corporate
income tax of T-Mobile International AG & Co. KG as a result of the backdated
change of the legal form of the company from a stock corporation to a
partnership. This tax income is offset by tax expense relating to domestic and
foreign shareholdings not included in the tax consolidation group.
Deferred taxes result primarily from temporary differences between income
determined under German GAAP and under applicable tax law. Due to the minimum
taxation provision that will come into effect from the 2004 financial year
(which limits the deduction of net operating loss carryforwards to 60% of
positive income), only 40% of the differences in Deutsche Telekom AG's income
tax consolidation group that are offset in the period of utilization of the net
operating loss carryforwards were recognized.
134
The decrease in income from deferred taxes year-on-year is due to the fact that
deferred tax liabilities had to be reversed in 2002 as a result of the strategic
review and the ensuing nonscheduled write-down of FCC licenses (U.S. licenses
issued by the Federal Communications Commission). There were no comparable
effects in the year under review.
Differences between total income taxes income of EUR 225 million (2002: income
of EUR 2,847 million) and the imputed, "expected" corporate income tax expense
(computed using the statutory corporate income tax rate for the parent company
(combined income tax rate) of 40.4%) are as follows:
2003 2002 2001
millions of (euro) millions of (euro) millions of (euro)
----------------------------------------------------------------------------------------------------------------------------
Expected corporate income tax at the statutory income tax 565 (10,447) (977)
rate applicable for the parent company
----------------------------------------------------------------------------------------------------------------------------
Increase/(decrease) in income tax due to:
----------------------------------------------------------------------------------------------------------------------------
Reduction of the Group's results without tax effect 3,136 11,027 2,896
----------------------------------------------------------------------------------------------------------------------------
Increase in the Group's results without tax effect (1,001) (435) (966)
----------------------------------------------------------------------------------------------------------------------------
Group results not subject to the Group's rate of taxation (44) (2,878) (491)
----------------------------------------------------------------------------------------------------------------------------
Permanent and semi-permanent differences between the carrying
amounts in the tax accounts and in the financial statements (1,809) (34) 611
----------------------------------------------------------------------------------------------------------------------------
Off-balance sheet adjustments (58) (323) 0
----------------------------------------------------------------------------------------------------------------------------
Trade tax (e.g., long-term debt) (10) 247 216
----------------------------------------------------------------------------------------------------------------------------
Effect of losses 61 386 (1,186)
----------------------------------------------------------------------------------------------------------------------------
Effects of changes in tax law/adjustments due to losses (1,058) (361) 676
----------------------------------------------------------------------------------------------------------------------------
Other (7) (29) (28)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Income taxes (225) (2,847) 751
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Effective income tax rate (16%) 11% 30%
----------------------------------------------------------------------------------------------------------------------------
At December 31, 2003, the Deutsche Telekom Group had net operating loss
carryforwards and similar net operating loss carryforwards affecting corporate
income tax amounting to approximately EUR 17,686 million (2002: EUR 22,198
million) and trade tax net operating loss carryforwards amounting to
approximately EUR 5,488 million (2002: EUR 6,448 million). With the exception of
net operating loss carryforwards of EUR 10,180 million, the utilization of which
is limited to periods from 2005 to 2023, these net operating loss carryforwards
have an unlimited carryforward period under German and local tax law.
Consolidated financial statements
Notes 135
9 Income/losses applicable to minority shareholders.
Income/losses applicable to minority shareholders includes EUR 384 million
(2002: EUR 390 million; 2001: EUR 322 million) in gains and EUR 14 million
(2002: EUR 106 million, 2001: EUR 180 million) in losses. The gains in 2003
relate mainly to MATAV, HT-Hrvatske telekommunikacije, T-Mobile Czech Republic,
and Slovak Telecom. The losses relate mainly to CAP Customer Advantage Program.
--------------------------------------------------------------------------------
10 Personnel costs/Average number of employees.
2003 2002 2001
millions of (euro) millions of (euro) millions of (euro)
---------------------------------------------------------------------------------------------------------------------
Wages and salaries 10,571 10,467 9,313
---------------------------------------------------------------------------------------------------------------------
Social security contributions and expenses for pension
plans and benefits:
---------------------------------------------------------------------------------------------------------------------
Social security costs 1,406 1,340 1,147
---------------------------------------------------------------------------------------------------------------------
Pension costs(1) 1,746 1,497 1,486
---------------------------------------------------------------------------------------------------------------------
Health care expenses 194 176 168
---------------------------------------------------------------------------------------------------------------------
13,917 13,480 12,114
---------------------------------------------------------------------------------------------------------------------
(1) Include the net periodic pension costs, plus the change in additional
minimum liability (AML) and the expenses for Bundes-Pensions-Service fur
Post und Telekommunikation e.V. (BPS-PT).
Despite reduced staff levels, personnel costs increased by EUR 0.4 billion or
3.2% in the year under review to EUR 13.9 billion.
In addition to collectively agreed salary increases, this is attributable in
particular to additional minimum liabilities (AML).
--------------------------------------------------------------------------------
Number of employees (average for the year)
--------------------------------------------------------------------------------
2003 2002 2001
Number Number Number
--------------------------------------------------------------------------------
Civil servants 49,998 52,961 56,707
--------------------------------------------------------------------------------
Non-civil servants 201,265 202,935 184,953
--------------------------------------------------------------------------------
Total Deutsche Telekom Group 251,263 255,896 241,660
--------------------------------------------------------------------------------
Trainees/student interns 9,958 9,869 8,147
--------------------------------------------------------------------------------
136
11 Depreciation and amortization.
2003 2002 2001
millions millions millions
of (euro) of (euro) of (euro)
-----------------------------------------------------------------------------------
Amortization of intangible assets 4,678 27,355 5,743
-----------------------------------------------------------------------------------
of which: amortization of goodwill 2,521 13,108 3,663
-----------------------------------------------------------------------------------
of which: UMTS licenses and FCC licenses 1,113 13,244 1,414
-----------------------------------------------------------------------------------
Depreciation of property, plant, and equipment 8,206 9,525 9,478
-----------------------------------------------------------------------------------
12,884 36,880 15,221
-----------------------------------------------------------------------------------
Depreciation and amortization decreased during the year under review by EUR
23,996 million or 65.1% year-on-year to EUR 12,884 million. The decrease in the
amortization of intangible assets is mainly the result of the non-recurrence of
nonscheduled write-downs of goodwill and mobile communications licenses as a
result of the strategic review carried out in the third quarter of 2002. The
reduction in amortization is a result of the lower amortization base due to the
high level of nonscheduled write-downs charged in the previous year.
Depreciation of property, plant, and equipment fell by EUR 1,319 million (13.8%)
in the year under review. In addition to deconsolidation effects (in particular
from the sale of the cable business) and the disposal of real estate, this is
also due to the decrease in nonscheduled write-downs. In the previous year,
property, plant, and equipment was written down by approximately EUR 0.8
billion, of which EUR 0.3 billion relates to real estate, EUR 0.2 billion to
submarine cables, and EUR 0.3 billion to other technical assets. Nonscheduled
write-downs only amounted to EUR 0.3 billion in the year under review; of this
amount, EUR 0.2 billion relates to buildings for which no further business use
is planned.
12 Other taxes.
Other taxes included in the operating results amounted to EUR 162 million,
compared with EUR 364 million in the previous year. The decrease in other taxes
results in particular from the non-recurrence of a one-time expense in the prior
year in connection with the Federal Fiscal Court ruling on the recognition of
goodwill in Deutsche Telekom AG's tax accounts.
Consolidated financial statements
Notes 137
Notes to the consolidated balance sheet.
13 Intangible assets.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Concessions, industrial and similar
rights and assets, and licenses
in such rights and assets 20,606 23,837
--------------------------------------------------------------------------------
of which: UMTS licenses 10,260 11,117
--------------------------------------------------------------------------------
of which: FCC licenses 8,179 10,364
--------------------------------------------------------------------------------
of which: GSM licenses 484 535
--------------------------------------------------------------------------------
Goodwill 24,513 29,436
--------------------------------------------------------------------------------
Advance payments 74 129
--------------------------------------------------------------------------------
45,193 53,402
--------------------------------------------------------------------------------
The decline in intangible assets by EUR 8.2 billion to EUR 45.2 billion is due
primarily to the effect of exchange rate losses on the translation of foreign
group companies and to continued amortization, while the investment volume
decreased by EUR 4.5 billion to EUR 0.8 billion. The decrease in 2003 has to be
seen against the background of the high level of investments in the prior year,
relating in particular to goodwill of EUR 2.7 billion as a result of the
acquisition of the remaining shares in T-Systems ITS GmbH (formerly debis
Systemhaus GmbH) and T-Mobile Netherlands accounting for EUR 1.7 billion.
As of the balance sheet date, Deutsche Telekom did not record any
indefinite-lived intangible assets. The following remaining useful lives apply
to the mobile communications licenses at December 31, 2003: UMTS licenses: 13.5
to 18.0 years, FCC licenses: 17.4 years, and GSM licenses 6.0 to 18.0 years.
The development of intangible assets is shown in the statement of noncurrent
assets.
14 Property, plant, and equipment.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Land and equivalent rights and
buildings including buildings
on land owned by third parties 10,399 11,362
--------------------------------------------------------------------------------
Technical equipment
and machinery 32,792 38,034
--------------------------------------------------------------------------------
Other equipment, plant, and
office equipment 2,038 2,286
--------------------------------------------------------------------------------
Advance payments and
construction in progress 2,039 2,273
--------------------------------------------------------------------------------
47,268 53,955
--------------------------------------------------------------------------------
Besides foreign currency effects, the EUR 6.7 billion decrease in the carrying
amount of property, plant, and equipment to EUR 47.3 billion is due primarily to
the sale of the remaining cable businesses, sales of real estate relating to
sale-and-lease-back transactions, and further depreciation charges, combined
with a decline in the volume of new capital expenditure.
The development of property, plant and equipment is shown in the statement of
noncurrent assets.
Rental and leasing obligations.
Minimum lease payments under leases expiring subsequent to December 31, 2003 are
shown below (millions of (euro)).
Capital Operating
Financial year leases leases
--------------------------------------------------------------------------------
2004 52 1,703
--------------------------------------------------------------------------------
2005 48 1,515
--------------------------------------------------------------------------------
2006 48 1,347
--------------------------------------------------------------------------------
2007 47 1,125
--------------------------------------------------------------------------------
2008 47 995
--------------------------------------------------------------------------------
after 2008 432 5,052
--------------------------------------------------------------------------------
Total minimum lease payments 674 11,737
--------------------------------------------------------------------------------
Imputed interest 251
--------------------------------------------------------------------------------
Present value of net minimum lease payments 423
--------------------------------------------------------------------------------
Capital leases relate primarily to office buildings and have terms of up to 25
years.
138
15 Financial assets.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
------------------------------------------------------------------------------------
Investments in unconsolidated subsidiaries 118 149
------------------------------------------------------------------------------------
Loans to unconsolidated subsidiaries 1 58
------------------------------------------------------------------------------------
Investments in associated companies 2,386 2,593
------------------------------------------------------------------------------------
Other investments in related companies 496 1,021
------------------------------------------------------------------------------------
Long-term loans to associated and related
companies 25 3
------------------------------------------------------------------------------------
Other investments in noncurrent securities 86 238
------------------------------------------------------------------------------------
Other long-term loans 78 107
------------------------------------------------------------------------------------
3,190 4,169
------------------------------------------------------------------------------------
The net carrying amount of associated companies decreased by EUR 207 million due
to currency translation adjustments affecting PTC (Poland), GSM Facilities
(United States), and MTS (Russia) in particular. The decline was also due to the
sale of the 11.05% shareholding in MTS. These factors were partly offset by the
addition of shares in GSM Facilities, positive earnings contributions, and the
write-up of the net carrying amount of the investment in comdirect bank AG.
The EUR 525 million decrease in other investments in related companies is due
primarily to the sale of shares in Globe Telecom (EUR 320 million), Eutelsat
(EUR 118 million), and Celcom (EUR 51 million).
Long-term loans to associated and related companies are mainly composed of
shareholder loans. The additions relate mainly to loans to DeaSat.
The decrease in other investments in noncurrent securities is attributable in
particular to the sale of securities from the portfolio of Deutsche Telekom
Holding B.V., Amsterdam, and a valuation adjustment in Deutsche Telekom AG's
securities portfolio.
The development of financial assets is shown in the statement of noncurrent
assets. The list of investment holdings is filed with the Commercial Registry of
the Bonn District Court (HRB 6794). The list is available upon request from
Deutsche Telekom AG, Bonn, Investor Relations.
Significant investments in associated companies are shown below:
Dec. 31, 2003 Dec. 31, 2002
-------------------------------------------------- --------------------------------------------------
Deutsche Net of which: Deutsche Net of which:
Telekom carrying embedded Telekom carrying embedded
share amount goodwill share amount goodwill
Name % millions of (euro) millions of (euro) % millions of (euro) millions of (euro)
------------------------------------------------------------------------------------------------------------------------
PTC 49.00 1,097 877 49.00 1,287 1,122
------------------------------------------------------------------------------------------------------------------------
GSM Facilities 29.20 592 -- 25.60 586 --
------------------------------------------------------------------------------------------------------------------------
MTS(1) 25.15 330 5 36.20 455 11
------------------------------------------------------------------------------------------------------------------------
Other 367 107 265 52
------------------------------------------------------------------------------------------------------------------------
2,386 989 2,593 1,185
------------------------------------------------------------------------------------------------------------------------
(1) Proportional market value on December 31, 2003: EUR 1,647 million (December
31, 2002: EUR 1,277 million).
Consolidated financial statements
Notes 139
16 Inventories, materials, and supplies.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Raw materials and supplies 391 466
--------------------------------------------------------------------------------
Work in process 307 350
--------------------------------------------------------------------------------
Finished goods and merchandise 635 730
--------------------------------------------------------------------------------
Advance payments 99 10
--------------------------------------------------------------------------------
1,432 1,556
--------------------------------------------------------------------------------
Inventories, materials, and supplies decreased by EUR 124 million or 8.0%
year-on-year. This figure includes reductions of EUR 15 million resulting from
changes in the composition of the Deutsche Telekom Group.
Raw materials and supplies include spare parts for data communications
equipment, transmission equipment, and other telecommunications spare parts,
components, and cable. Work in process relates mainly to projects that have not
yet been completed, such as the installation of telecommunications systems and
the implementation of IT systems solutions.
Finished goods and merchandise relate mainly to inventories of terminal
equipment held both for resale and leasing, as well as existing rights of use
for submarine cables.
Advance payments relate primarily to orders for terminal equipment, replacement
modules, and replacement components.
--------------------------------------------------------------------------------
17 Receivables.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Trade accounts receivable 5,318 5,840
--------------------------------------------------------------------------------
Receivables from unconsolidated
subsidiaries 203 171
--------------------------------------------------------------------------------
Receivables from associated
and related companies 241 247
--------------------------------------------------------------------------------
5,762 6,258
--------------------------------------------------------------------------------
The decrease in trade accounts receivable relates in particular to the
first-time asset-backed securitization at T-Mobile. In November 2003, T-Mobile
Deutschland GmbH sold certain trade accounts receivable to a special purpose
vehicle in a global assignment of debts under an asset-backed securitization
program. The contract strictly rules out the retransfer of the receivables sold.
The credit risks assumed by the purchaser and the moral hazard remaining at the
seller are compensated by a corresponding discount. The contract provides for a
bonus for the discounts if the risks covered by the discounts are ultimately not
realized to the detriment of the purchaser. The receivables sold are still
collected by T-Mobile Deutschland GmbH on behalf of the purchaser.
All receivables are due within one year, with the exception of trade accounts
receivables amounting to EUR 16 million.
140
18 Other assets.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
-----------------------------------------------------------------------------------
Tax receivables 1,526 1,782
-----------------------------------------------------------------------------------
Accrued interest 408 390
-----------------------------------------------------------------------------------
Receivables from reimbursements and loans
receivable 120 96
-----------------------------------------------------------------------------------
Receivables from employees 41 46
-----------------------------------------------------------------------------------
Miscellaneous other assets 1,067 1,078
-----------------------------------------------------------------------------------
3,162 3,392
-----------------------------------------------------------------------------------
The decrease in other assets results mainly from the decrease in tax
receivables, and relates to income taxes. The decrease in income tax receivables
is attributable primarily to the refund of a corporate income tax receivable of
Deutsche Telekom AG in June 2003. The claim for reimbursement amounting to EUR
550 million related to corporate income tax receivables from the external tax
audit for the period 1997 to 1999.
--------------------------------------------------------------------------------
19 Marketable securities.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount amount
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Treasury shares 7 7
--------------------------------------------------------------------------------
Other marketable securities 166 406
--------------------------------------------------------------------------------
173 413
--------------------------------------------------------------------------------
At 2,670,828, the portfolio of treasury shares at the balance sheet date was
unchanged year-on-year, and is comprised as follows:
--------------------------------------------------------------------------------
Treasury shares
--------------------------------------------------------------------------------
1996 Employee Stock Purchase Plan 459,900
-------------------------------------------------------------------------------
1999 Employee Stock Purchase Plan 5,185,278
-------------------------------------------------------------------------------
Decrease as a result of the 2000
Employee Stock Purchase Plan (2,988,980)
-------------------------------------------------------------------------------
Shares acquired from KfW, not yet issued 14,630
-------------------------------------------------------------------------------
2,670,828
-------------------------------------------------------------------------------
The shares are recorded in the balance sheet at an acquisition cost of EUR 2.56
per share. The shares not purchased by employees in 2000 (14,630) were initially
shown in the balance sheet at their acquisition cost of EUR 0.9 million, and
written down to the lower quoted price at the balance sheet date. Treasury
shares account for a total of 0.07% of the capital stock.
The decrease in other marketable securities compared with the previous year is
mainly attributable to the reduction of Deutsche Bundespost bonds held to
maintain favorable trading conditions, and to the expiration of callable bonds.
Consolidated financial statements
Notes 141
20 Liquid assets.
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount millions amount millions
of (euro) of (euro)
--------------------------------------------------------------------------------
Checks 8 10
--------------------------------------------------------------------------------
Cash-in-hand and deposits at the Bundesbank 33 42
--------------------------------------------------------------------------------
Cash in banks 9,086 1,853
--------------------------------------------------------------------------------
9,127 1,905
--------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
Net carrying Net carrying
amount millions amount millions
of (euro) of (euro)
--------------------------------------------------------------------------------
Cash and cash equivalents
--------------------------------------------------------------------------------
Original maturity less than 3 months 8,686 1,712
--------------------------------------------------------------------------------
Temporary cash investments (original
maturity longer than 3 months) 441 193
--------------------------------------------------------------------------------
9,127 1,905
--------------------------------------------------------------------------------
Cash and cash equivalents with original maturity of less than 3 months consist
primarily of fixed-term bank deposits, cash-in-hand, deposits at the Bundesbank,
and checks. Temporary cash investments (with maturities longer than three
months) consist almost exclusively of fixed-term bank deposits. The development
of cash and cash equivalents is shown in the consolidated statement of cash
flows.
--------------------------------------------------------------------------------
21 Prepaid expenses and deferred charges.
Prepaid expenses and deferred charges of EUR 772 million (Dec. 31, 2002: EUR 771
million) include discounts on loans of EUR 264 million (Dec. 31, 2002: EUR 295
million) which are amortized on a straight-line basis over the terms of the
respective liabilities. Other prepaid expenses and deferred charges are also
recognized for advance personnel costs and lease payments.
--------------------------------------------------------------------------------
22 Shareholders' equity.
A detailed account of the development of the consolidated shareholders' equity
for the years 2001, 2002, and 2003 is presented in a separate table before the
notes to the consolidated financial statements. The development of the
consolidated shareholders' equity from December 31, 1995 to December 31, 2003 is
as follows (millions of (euro)):
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
------------------------------------------------------------------------------
Total shareholders' equity
------------------------------------------------------------------------------
at year-end (millions of (euro))
------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003
------------------------------------------------------------------------------
12,646 23,826 24,616 25,064 35,689 42,716 66,301 35,416 33,811
------------------------------------------------------------------------------
142
23 Capital stock.
Deutsche Telekom AG's capital stock in accordance with Section 5(1) of its
Articles of Incorporation totaled EUR 10,746 million as of December 31, 2003,
and is composed of 4,197.8 million no-par value ordinary registered shares. Each
share entitles the holder to one vote.
The Federal Republic's direct shareholding in Deutsche Telekom AG, represented
by the Federal Agency, was 26.03% at December 31, 2003; KfW's shareholding was
16.74% at December 31, 2003. 1,093 million individual no-par value shares (EUR
2,797 million) of the capital stock were therefore held by the Federal Republic
at December 31, 2003 and 703 million (EUR 1,799 million) by KfW. The remaining
shares are in free float.
In the course of the acquisition of T-Mobile USA/Powertel, Deutsche Telekom AG
granted options on Deutsche Telekom shares in exchange for the outstanding
warrants between Deutsche Telekom and T-Mobile USA/Powertel at the time of the
acquisition. As of December 31, 2003, the number of Deutsche Telekom shares
lodged as collateral for the outstanding preemptive rights granted to T-Mobile
USA/Powertel employees amounted to 22,539,480.
Authorized capital.
With the approval of the Supervisory Board, the Board of Management is
authorized to increase the capital stock (share capital) by up to a nominal
amount of EUR 3,865,093,163.52 by issuing up to 1,509,802,017 ordinary
registered shares against noncash contributions in the period up to May 25,
2005. The authorization may be exercised in full or in part. Shareholders'
preemptive rights are disapplied. The Board of Management is authorized to
determine the rights accruing to the shares in future and the conditions for
issuing shares, with the approval of the Supervisory Board. As of December 31,
2003, 1,168,148,391 of the 1,509,802,017 authorized no-par value shares had been
issued in conjunction with the acquisition of T-Mobile USA and Powertel.
Contingent capital.
The capital stock has been contingently increased by up to EUR 500,000,000.00,
composed of up to 195,312,500 shares (contingent capital I). The contingent
capital increase will be implemented only to the extent that
a. the holders and creditors of conversion rights or warrants attached to
convertible bonds or bonds with warrants to be issued before May 28, 2006
by Deutsche Telekom AG or its direct or indirect majority shareholdings on
the basis of the authorizing resolution adopted by the shareholders'
meeting on May 29, 2001 exercise their conversion or option rights; or
b. the holders and creditors of convertible bonds to be issued before May 28,
2006 by Deutsche Telekom AG or its direct or indirect majority
shareholdings on the basis of the authorizing resolution adopted by the
shareholders' meeting on May 29, 2001 who are obligated to convert the
convertible bonds fulfill their conversion obligation.
The new shares carry dividend rights from the beginning of the financial year in
which they arise through exercise of conversion rights or options, or the
fulfillment of conversion obligations. Contingent capital I was used in 2003 to
issue convertible bonds amounting to approximately EUR 2.3 billion that will be
converted into shares of Deutsche Telekom AG common stock at maturity (June 1,
2006). The convertible bonds were issued by Deutsche Telekom's financing company
in the Netherlands - Deutsche Telekom International Finance B.V. - and are
guaranteed by Deutsche Telekom AG. The securities were issued at par with a
coupon of 6.5%. Depending on share price performance, the conversion ratio may
fluctuate between 3,417.1679 to 4,237.2881 shares per bond (EUR 50,000 par
value). The securities were placed with non-U.S. institutional investors outside
the United States.
On the basis of the authorizing resolution adopted by the shareholders' meeting
on May 29, 2001, the capital stock was contingently increased by up to EUR
307,200,000, composed of up to 120,000,000 new no-par value registered shares
(contingent capital II). This contingent capital increase is exclusively for the
purpose of granting stock options to members of the Board of Management of
Deutsche Telekom AG, to members of Deutsche Telekom's second-tier management,
and to other executives, managers, and specialists of Deutsche Telekom AG, and
to members of the boards of management, members of management, and other
executives, managers, and specialists of lower-tier group companies in
Consolidated financial statements
Notes 143
Germany and other countries as part of the Deutsche Telekom 2001 Stock Option
Plan. It will be implemented only to the extent that the holders of stock
options exercise these options. The new shares carry dividend rights from the
beginning of the financial year in which they are issued. If new shares are
issued after the end of a financial year but before the Company's shareholders'
meeting that resolves the appropriation of net income for the preceding
financial year, the new shares carry dividend rights from the beginning of the
preceding financial year. No stock options granted under the 2001 Stock Option
Plan had been exercised at December 31, 2003.
On the basis of the authorizing resolution adopted by the shareholders' meeting
on May 25, 2000, in conjunction with the amending resolution by the
shareholders' meeting on May 29, 2001, the capital stock was contingently
increased by up to EUR 2,621,237.76, composed of up to 1,023,921 new no-par
value registered shares (contingent capital III). This contingent capital
increase is exclusively for the purpose of granting stock options to members of
the Board of Management of Deutsche Telekom AG and executives of the Company,
and to members of the boards of management, members of management, and other
executives of lower-tier subsidiaries as part of the Deutsche Telekom 2000 Stock
Option Plan established on the basis of a resolution by the shareholders'
meeting on May 25, 2000. It will only be implemented if these beneficiaries
exercise their stock options. The new shares carry dividend rights from the
beginning of the financial year in which they are issued. If new shares are
issued after the end of a financial year but before the Company's shareholders'
meeting that resolves the appropriation of net income for the preceding
financial year, the new shares carry dividend rights from the beginning of the
preceding financial year. No stock options granted under the 2000 Stock Option
Plan had been exercised at December 31, 2003.
Treasury shares.
The shareholders' meeting on May 20, 2003 rescinded the authorization of the
Board of Management to acquire treasury shares resolved by the shareholders'
meeting on May 28, 2002 with effect from the end of the shareholders' meeting on
May 20, 2003. At the same time, the Board of Management of Deutsche Telekom AG
was authorized to acquire up to 419,775,242 shares, i.e., up to almost 10% of
the capital stock, before November 19, 2004. The treasury shares acquired on the
basis of this authorization may be resold on the stock exchange, used to list
the Company's shares on foreign stock exchanges, offered to third parties in the
course of business combinations or for the acquisition of companies, parts of
companies, or interests in companies, withdrawn, offered to shareholders on the
basis of a subscription offer made to all shareholders, or sold other than on
the stock exchange or by way of an offer to all shareholders. The authorizations
to acquire and utilize treasury shares may be exercised in full or in parts.
24 Additional paid-in capital.
The additional paid-in capital of the Group exceeds Deutsche Telekom AG's
additional paid-in capital of EUR 24,333 million by EUR 25,759 million. This is
due in part to the recognition of the new Deutsche Telekom shares issued in the
course of the acquisition of VoiceStream/Powertel at fair value (EUR 28,680
million) instead of at their par value (EUR 2,990 million), which is permitted
in the consolidated financial statements. There were also other allocations to
additional paid-in capital in 2003 at group level amounting to approximately EUR
1 million (2002: EUR 68 million) from the exercise of conversion options by
former shareholders of T-Mobile USA/Powertel. The shares of Deutsche Telekom
reserved for these conversion options in a trust were included in the
single-entity financial statements of Deutsche Telekom AG in 2001 at the time of
the appropriation of the additional paid-in capital.
25 Retained earnings.
In addition to the transfers made from Deutsche Telekom AG's net income from
prior years, retained earnings include the consolidated group's share of the
consolidated subsidiaries' net income or losses, provided they were generated by
such subsidiaries since being included in the consolidated group, as well as a
reserve for treasury shares held by the Company in accordance with Section 272
(4) HGB. This item also includes the cumulative effects of consolidation
adjustments from prior years.
26 Minority interest.
Minority interest represents the minority shareholders' proportionate share of
the equity of the consolidated subsidiaries and relates primarily to T-Online
International AG, HT-Hrvatske telekommunikacije, MATAV, Slovak Telecom, and
T-Mobile Czech Republic.
144
27 Stock-based compensation.
Deutsche Telekom AG.
2000 Stock Option Plan.
In the 2000 financial year, Deutsche Telekom granted stock options to members of
the Board of Management and senior managers of Deutsche Telekom AG and to
members of the boards of management and senior managers of Group companies
within and outside Germany for the first time. On July 19, 2000, Deutsche
Telekom granted 1,023,920.54 options for the purchase of 1,023,920.54 shares at
an exercise price of EUR 62.69 to the beneficiaries of the 2000 Stock Option
Plan on the basis of the resolution adopted by the shareholders' meeting in May
2000. The closing price of Deutsche Telekom AG's common stock quoted in Xetra
trading at Deutsche Borse AG, Frankfurt/Main, on the grant date was EUR 60.40
per share. The term of the options runs until July 20, 2005.
The options were not exercisable before the end of the lockup period on July 19,
2002. The options may only be exercised if and when the absolute and relative
performance targets have both been exceeded at least once in the period from
July 20, 2002 to July 19, 2005.
The absolute performance target is achieved when the moving thirty-day average
closing price of the T-Share in Xetra trading at Deutsche Borse AG,
Frankfurt/Main, exceeds the exercise price of EUR 62.69 by more than 20% at the
end of the lock-up period.
The relative performance target is linked to share price performance relative to
the performance of the Dow Jones Euro STOXX 50(C) Total Return Index. The
options may only be exercised if, after the end of the two-year lock-up period,
the share price performance adjusted for dividends, preemptive rights, and other
special rights (total shareholder return) exceeds the performance of the Euro
STOXX 50(C) Total Return Index measured on a moving thirty-day average basis.
Neither the absolute target nor the relative target had been exceeded at
December 31, 2003.
Deutsche Telekom AG reserves the right, at its own discretion, to settle the
options through the payment of a cash amount (stock appreciation rights - SARs)
instead of issuing new shares. The exercise of an SAR cancels the related
option, and the exercise of an option cancels the related SAR. As of December
31, 2003, no resolution on conversion had been passed to this effect.
As of December 31, 2003, the weighted average remaining contractual life of the
outstanding options from the 2000 Stock Option Plan was around 1.5 years.
The shareholders' meeting in May 2001 resolved that no further stock options
would be granted on the basis of the 2000 Stock Option Plan. The contingent
capital was reduced by the appropriate amount.
The activities relating to the stock options granted by Deutsche Telekom AG to
beneficiaries of the 2000 Stock Option Plan are as follows:
--------------------------------------------------------------------------------
2000 Stock Option Plan
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Stock Weighted- Stock Weighted- Stock Weighted-
options in average options in average options in average
thousands exercise price thousands exercise price thousands exercise price
(euro) (euro) (euro)
--------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 994 62.69 1,001 62.69 1,022 62.69
--------------------------------------------------------------------------------------------------------------------------
Granted 0 -- 0 -- 0 --
--------------------------------------------------------------------------------------------------------------------------
Exercised 0 -- 0 -- 0 --
--------------------------------------------------------------------------------------------------------------------------
Forfeited 7 62.69 7 62.69 21 62.69
--------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 987 62.69 994 62.69 1,001 62.69
--------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year
under review 0 -- 0 -- 0 --
--------------------------------------------------------------------------------------------------------------------------
Consolidated financial statements
Notes 145
2001 Stock Option Plan.
For the 2001 Stock Option Plan, the shareholders' meeting in May 2001 resolved
to increase the capital stock (share capital) of Deutsche Telekom AG by EUR
307,200,000 by issuing up to 120,000,000 new no-par value registered shares.
This contingent capital increase is exclusively for the purpose of allowing up
to 120,000,000 stock options to be issued to members of the Board of Management,
other executives, and specialists of the Company and lower-tier subsidiaries as
part of the Deutsche Telekom 2001 Stock Option Plan. In accordance with the
resolution passed by the shareholders' meeting, the allocation of the total
number of options to beneficiaries is as follows:
o a maximum of 15% to members of the Board of Management of Deutsche Telekom
AG,
o a maximum of 20% to members of Deutsche Telekom AG's second-tier
management,
o a maximum of 15% to other executives, managers and specialists of Deutsche
Telekom AG,
o a maximum of 15% to members of the boards of management of Group companies
within and outside Germany,
o a maximum of 35% to other executives, managers and specialists of Group
companies within and outside Germany.
The following conditions apply under the terms of the 2001 Stock Option Plan:
50% of the options granted to each beneficiary may only be exercised following
the end of a lock-up period of two years, starting from the day on which the
options are granted. The remaining 50% of the options granted to each
beneficiary may be exercised at the earliest following the end of a lock-up
period of three years, starting from the day on which the options are granted.
The exercise price is payable upon exercise of the options. The exercise price
per share is 120% of the reference price. The reference price corresponds to the
non-weighted average closing prices of Deutsche Telekom shares in Deutsche Borse
AG's Xetra trading in Frankfurt/Main (or a successor system to the Xetra system)
over the last thirty trading days before the grant of the options. If the
average closing price calculated by this method is lower than the closing price
of Deutsche Telekom shares in Deutsche Borse AG's Xetra trading (or in a
successor system) on the grant date of the options, this closing price shall be
taken as the reference price. The exercise price may not be lower than the
notional value of one share in the capital stock (share capital). The exercise
price is also the performance target.
The options may not legally be sold, transferred, pledged, or otherwise disposed
of except in the event of death, in which case the options are transferred to
the heirs.
Deutsche Telekom AG reserves the right, at its own discretion, to settle the
options through the payment of a cash amount (stock appreciation rights - SARs)
instead of issuing new shares. The exercise of an SAR cancels the related
option, and the exercise of an option cancels the related SAR. As of December
31, 2003, no resolution on conversion had been passed to this effect.
On August 13, 2001, Deutsche Telekom granted 8,220,803 options for the purchase
of 8,220,803 shares at an exercise price of EUR 30.00 to the beneficiaries of
the 2001 Stock Option Plan on the basis of the resolution adopted by the
shareholders' meeting in May 2001. The closing price of Deutsche Telekom's
common stock quoted in Frankfurt in Xetra trading on the grant date was EUR
19.10 per share. The term of the options runs until August 12, 2011.
In the 2002 financial year, Deutsche Telekom granted additional stock options to
certain employees. On July 15, 2002, Deutsche Telekom granted a further
3,927,845 options for the purchase of 3,927,845 shares at an exercise price of
EUR 12.36 to the beneficiaries of the Stock Option Plan on the basis of the
resolution adopted by the shareholders' meeting in May 2001. The closing price
of Deutsche Telekom's common stock quoted in Frankfurt in Xetra trading on the
grant date was EUR 10.30 per share. The term of the options runs until July 14,
2012.
As of December 31, 2003, the weighted average remaining contractual life of all
outstanding options from the 2001 Stock Option Plan was around 8.1 years.
146
The activities relating to the stock options granted by Deutsche Telekom AG to
beneficiaries of the 2001 Stock Option Plan are as follows:
--------------------------------------------------------------------------------
2001 Stock Option Plan
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Stock Weighted- Stock Weighted- Stock Weighted-
options in average options in average options in average
thousands exercise price thousands exercise price thousands exercise price
(euro) (euro) (euro)
--------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 11,964 24.22 8,219 30.00 -- --
--------------------------------------------------------------------------------------------------------------------------
Granted 0 -- 3,928 12.36 8,221 30.00
--------------------------------------------------------------------------------------------------------------------------
Exercised 0 -- 0 -- 0 --
--------------------------------------------------------------------------------------------------------------------------
Forfeited 196 25.89 183 29.16 2 --
--------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 11,768 24.25 11,964 24.22 8,219 30.00
--------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year
under review 3,964 30.00 0 -- 0 --
--------------------------------------------------------------------------------------------------------------------------
At Deutsche Telekom AG, 5,360 SARs were additionally forfeited in the year under
review by employees in countries in which it was not legally possible to issue
stock options. As of December 31, 2003, 162,560 of the SARs granted between 2001
and 2003 were still outstanding.
T-Online International AG.
2000 Stock Option Plan.
In 2000, T-Online, for the first time, granted stock options to certain
employees of T-Online International AG. On July 6, 2000, T-Online used its
authority under shareholders' resolutions adopted in March 2000 to grant 214,473
options in respect of 214,473 shares of its stock to participants in its Stock
Option Plan at an exercise price of EUR 37.65. The term of the options runs
until July 6, 2005. In accordance with the resolution by the shareholders'
meeting in March 2000, a total of 20,000,000 shares were reserved as contingent
capital for future issuance under the 2000 Stock Option Plan. This contingent
capital increase was reduced to EUR 214,473.00 at the shareholders' meeting on
May 30, 2001.
No options granted under the 2000 Stock Option plan have yet been exercised,
firstly because they were not exercisable until the end of the lock-up period on
July 6, 2002 and, secondly, because the options are only exercisable when both
the absolute and the relative performance targets have been exceeded at least
once in the period between July 7, 2002 and July 6, 2005. The absolute
performance target is deemed achieved when the moving thirty-day average closing
price of the T-Online share in Xetra trading exceeds the exercise price by more
than 40%. The relative performance target is linked to share price performance
relative to the performance of the Dow Jones Euro STOXX Telecom(C) index.
The options may only be exercised if, following expiration of the two year
lock-up period, the performance of the shares, adjusted for dividends, options,
and other special rights (total shareholder return), exceeds the performance of
the Euro STOXX Telecom (C) index by more than 20% measured on a
moving thirty-day average basis.
The weighted average remaining contractual life as of December 31, 2003 was 1.5
years.
Consolidated financial statements
Notes 147
The activities relating to the stock options granted by T-Online International
AG to beneficiaries of the 2000 Stock Option Plan are as follows:
--------------------------------------------------------------------------------
2000 Stock Option Plan
--------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Stock average Stock average Stock average
options in exercise options in exercise options in exercise
thousands price (euro) thousands price (euro) thousands price (euro)
---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 112 37.65 117 37.65 177 37.65
---------------------------------------------------------------------------------------------------------------------------
Granted 0 -- 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------
Exercised 0 -- 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------
Forfeited 0 -- 5 37.65 60 37.65
---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 112 37.65 112 37.65 117 37.65
---------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year under review 0 -- 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------
2001 Stock Option Plan.
The shareholders' meeting on May 30, 2001 contingently increased the capital
stock of T-Online International AG by EUR 51,000,000 for the 2001 Stock Option
Plan and authorized the Supervisory Board to issue preemptive rights to the
members of the Board of Management of T-Online International AG, and authorized
the Board of Management to issue preemptive rights to managers below the Board
of Management. These include directors, senior managers, selected specialists at
T-Online International AG, and members of the boards of management, members of
the management and other directors, senior managers, and selected specialists at
group companies within and outside Germany in which T-Online International AG
directly or indirectly holds a majority shareholding.
The Stock Option Plan is structured as a "premium priced plan". The exercise
price is payable upon exercise of the options. The exercise price per share is
125% of the reference price. The reference price corresponds to the non-weighted
average closing price of T-Online shares in Deutsche Borse AG's Xetra trading
(or in a comparable successor system) on the Frankfurt Stock Exchange over the
last thirty trading days before the day on which the options are granted. If the
average price calculated using this method is lower than the closing price of
T-Online shares in Deutsche Borse AG's Xetra trading (or in a successor system)
on the grant date of the options, this closing price shall be taken as the
reference price.
Options are granted in annual tranches for periods of five years; stock options
can be granted for the last time in 2005.
50% of the options granted may only be exercised after a two-year lock-up -
calculated from the grant date of the options. The remaining 50% of the options
granted may only be exercised three years after the day the preemptive rights
are issued. The options have a life of ten years from the date of granting,
meaning that options granted in the first tranche in 2001 and the options
granted in the second tranche in 2002 are forfeit without replacement or
compensation at the latest on August 12, 2011 and July 14, 2012 respectively. As
of December 31, 2003, the weighted average remaining contractual life of the
outstanding options from the 2001 Stock Option Plan was around 8 years.
2,369,655 options were granted on August 13, 2001 in the first tranche on the
basis of the resolution adopted by the shareholders' meeting in May 2001.
A further 2,067,460 options were granted in the second tranche on July 15, 2002.
The exercise price, i.e., the performance target, for the first tranche is EUR
10.35 (125% of the reference price of EUR 8.28) and for the second tranche EUR
10.26 (125% of the reference price of EUR 8.21). The Board of Management decided
not to issue the tranche for 2003.
148
On this basis, 26,410 stock options have been exercised from the 2001 tranche
since August 14, 2003.
The activities relating to the stock options granted by T-Online International
AG to beneficiaries of the 2001 Stock Option Plan are as follows:
--------------------------------------------------------------------------------
2001 Stock Option Plan
--------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Stock average Stock average Stock average
options in exercise options in exercise options in exercise
thousands price (euro) thousands price (euro) thousands price (euro)
---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,415 10.31 2,348 10.35 0 --
---------------------------------------------------------------------------------------------------------------------------
Granted 0 -- 2,067 10.26 2,369 10.35
---------------------------------------------------------------------------------------------------------------------------
Exercised 26 10.35 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------
Forfeited 205 10.35 0 -- 21 10.35
---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 4,184 10.31 4,415 10.31 2,348 10.35
---------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year under review 1,062 10.35 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------
Stock Option Plan for the acquisition of Ya.com shares.
In connection with the acquisition of shares in Ya.com, employees of Ya.com were
granted 1,863,886 options for T-Online shares, for which the capital stock of
T-Online was increased by EUR 1,863,886 in accordance with a resolution adopted
on September 22, 2000.
The activities relating to the stock options granted by T-Online International
AG as part of the acquisition of shares are as follows:
--------------------------------------------------------------------------------
Ya.com 2000 Option Plan
--------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Stock average Stock average Stock average
options in exercise options in exercise options in exercise
thousands price (euro) thousands price (euro) thousands price (euro)
---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 366 0.00 1,084 0.00 1,864 0.00
---------------------------------------------------------------------------------------------------------------------------
Granted 0 -- 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------
Exercised 363 0.00 376 0.00 692 0.00
---------------------------------------------------------------------------------------------------------------------------
Forfeited 3 0.00 342 0.00 88 0.00
---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 0 -- 366 0.00 1,084 0.00
---------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year under review 0 -- 366 0.00 1,084 0.00
---------------------------------------------------------------------------------------------------------------------------
In its function as conversion trustee, Dresdner Bank holds 433,000 (2002:
430,000) forfeit options that may be sold upon the instructions of T-Online
International AG. As the clearance of the forfeit T-Online shares is regarded as
an indirect financial payment by Ya.com shareholders to T-Online International
AG as a result of the issue of T-Online shares, the proceeds of the sale will be
allocated upon sale as a premium to additional paid-in capital.
Consolidated financial statements
Notes 149
T-Mobile USA.
Before its acquisition on May 31, 2001, T-Mobile USA had granted stock options
to its employees. On May 31, 2001, as a consequence of the acquisition, all
unvested, outstanding options of T-Mobile USA employees were converted from
T-Mobile USA options into Deutsche Telekom options at a conversion rate of
3.7647 per unvested, outstanding T-Mobile USA option. The Deutsche Telekom
shares linked to these options are administered in a trust deposit account that
has been established for the benefit of holders of T-Mobile USA stock options.
The exercise price for each share of Deutsche Telekom AG common stock
corresponds to the applicable exercise price per share of T-Mobile USA common
stock divided by 3.7647. Furthermore, no more options will be granted under any
other T-Mobile USA stock option plans.
At December 31, 2003, 22.5 million shares were available for outstanding options
for the 1999 Management Incentive Stock Option Plan ("MISOP"), which was changed
as a consequence of the acquisition on May 31, 2001. The MISOP provides for the
issue of up to 8 million shares of Deutsche Telekom common stock, either as
non-qualified stock options or as incentive stock options, plus the number of
shares of common stock deliverable upon the exercise of the T-Mobile USA
rollover options in accordance with the Agreement and Plan of Merger between
Deutsche Telekom and T-Mobile USA. The vesting period and option term relating
to the option plan are determined by the MISOP administrator. The options
typically vest for a period of four years and have a term of up to 10 years.
The activities relating to the stock options granted since the acquisition of
T-Mobile USA are as follows:
2003 2002 2001
------------------------ ------------------------- -------------------------
Weighted- Weighted- Weighted-
Stock average Stock average Stock average
options in exercise options in exercise options in exercise
thousands price (USD) thousands price (USD) thousands price (USD)
---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 24,980 16.41 22,090 16.21 24,278(1) 15.36(1)
---------------------------------------------------------------------------------------------------------------------------
Granted 865 12.86 5,964 13.35 0 --
---------------------------------------------------------------------------------------------------------------------------
Exercised 3,709 4.20 2,133 3.35 1,639 3.21
---------------------------------------------------------------------------------------------------------------------------
Forfeited 1,865 21.34 941 19.51 549 17.47
---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 20,271 17.95 24,980 16.41 22,090 16.21
---------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year under review 11,756 17.88 10,028 13.95 6,299 9.88
---------------------------------------------------------------------------------------------------------------------------
(1) Time of first-time consolidation.
Exercisable options as
Outstanding options as of Dec. 31, 2003 of Dec. 31, 2003
-------------------------------------------------------- -----------------------
Weighted
average Weighted Weighted
Ranges of the remaining average average
exercise prices Number in contractual exercise Number in exercise
(USD) thousands life (years) price (USD) thousands price (USD)
----------------------------------------------------------------------------------
0.02 - 7.60 2,750 4.2 2.79 2,840 2.79
----------------------------------------------------------------------------------
7.60 - 15.20 7,673 7.3 12.22 2,551 11.00
----------------------------------------------------------------------------------
15.20 - 22.80 58 5.8 17.50 58 17.50
----------------------------------------------------------------------------------
22.80 - 30.39 8,604 6.3 26.30 5,412 26.88
----------------------------------------------------------------------------------
30.39 - 37.99 1,186 6.1 30.97 895 30.97
----------------------------------------------------------------------------------
0.02 - 37.99 20,271 6.4 17.95 11,756 17.88
----------------------------------------------------------------------------------
150
Powertel.
Before its acquisition on May 31, 2001, Powertel had granted stock options to
its employees. On May 31, 2001, as a consequence of the acquisition, all
unvested, outstanding Powertel options were converted into Deutsche Telekom
options at a conversion rate of 2.6353. The Deutsche Telekom AG shares linked to
these options are administered in a trust deposit account established for the
benefit of holders of Powertel stock options. The exercise price for each share
of Deutsche Telekom common stock corresponds to the applicable exercise price
per share of Powertel common stock divided by 2.6353. Furthermore, no more
options will be granted under any other Powertel stock option plans.
The Powertel 2000 Stock Plan had 456,611 shares available at December 31, 2003.
This plan was changed as a consequence of the acquisition. Under the terms of
this plan, all employees, managers, directors, consultants, and advisors may be
eligible for the allocation of options, conditional share allocations, or other
allocations within the framework of the 2000 Stock Plan.
A total of 962,118 shares were available for outstanding options at December 31,
2003 for the Powertel Employee Stock Option Plan in force since 1991 ("1991
Option Plan"). The Powertel Board of Directors has decided not to grant any
further options under the 1991 Option Plan.
At December 31, 2003, there were no shares available for outstanding options for
the Non-employee Stock Option Plan ("Non-employee Plan"). The Powertel Board of
Directors has decided not to grant any further options under the Non-employee
Plan.
The activities relating to the stock options granted since the acquisition of
Powertel are as follows:
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Stock average Stock average Stock average
options in exercise price options in exercise price options in exercise price
thousands (USD) thousands (USD) thousands (USD)
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,790 21.85 2,509 19.50 5,323(1) 20.04(1)
---------------------------------------------------------------------------------------------------------------------------------
Granted 0 -- 0 -- 0 --
---------------------------------------------------------------------------------------------------------------------------------
Exercised 171 5.05 446 5.39 1,200 6.29
---------------------------------------------------------------------------------------------------------------------------------
Forfeited 201 28.65 273 27.27 1,614 31.42
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,418 22.79 1,790 21.85 2,509 19.50
---------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year under review 1,100 20.62 891 16.93 883 8.76
---------------------------------------------------------------------------------------------------------------------------------
(1) Time of first-time consolidation.
Outstanding options as of Dec. 31, 2003 Exercisable options as of Dec. 31, 2003
------------------------------------------------------------------ ---------------------------------------
Weighted
Ranges of the average remaining Weighted Weighted
exercise prices Number in contractual life average exercise Number in average exercise
(USD) thousands (years) price (USD) thousands price (USD)
------------------------------------------------------------------------------------------------------------
0.02 - 7.60 394 4.1 5.60 394 5.60
------------------------------------------------------------------------------------------------------------
7.60 - 15.20 98 4.3 9.72 99 9.72
------------------------------------------------------------------------------------------------------------
15.20 - 22.80 19 6.1 19.97 16 19.86
------------------------------------------------------------------------------------------------------------
22.80 - 30.39 418 6.9 26.92 226 26.91
------------------------------------------------------------------------------------------------------------
30.39 - 37.99 489 6.2 35.87 365 35.95
------------------------------------------------------------------------------------------------------------
0.02 - 37.99 1,418 5.7 22.79 1,100 20.62
------------------------------------------------------------------------------------------------------------
Consolidated financial statements
Notes 151
MATAV.
On April 26, 2002, the shareholders' meeting of MATAV approved the introduction
of a new management stock option plan.
In order to satisfy the exercise of options granted, the annual shareholders'
meeting of MATAV authorized MATAV's Board of Directors to purchase 17 million
"A" series registered ordinary shares, each with a nominal value of HUF 100, as
treasury shares.
On July 1, 2002, MATAV used its authority under the shareholders' resolutions
adopted in April 2002 to grant 3,964,600 options in respect of 3,964,600 shares
of its stock to participants in its stock option plan at an exercise price of
HUF 933 for the first tranche (exercisable 2003) and HUF 950 for the second
tranche and third tranche (exercisable 2004/2005). The closing price of MATAV
common stock quoted on BET (Budapest Stock Exchange) on the grant date was HUF
833 per share. The options have a life of five years from the grant date,
meaning that the options are forfeited without replacement or compensation on
June 30, 2007. The remaining contractual life as of December 31, 2003 was 3.5
years.
The options with respect to the maximum of one-third of the shares that can be
purchased under the relevant options (first tranche) may be exercised at any
time from and including the first anniversary of the grant date of such options
until the end of the term.
The options with respect to the maximum of a further one-third of the shares
that can be purchased under the options (second tranche) may be exercised at any
time from and including the second anniversary of the grant date of such options
until the end of the term.
The options with respect to the rest of the shares that can be purchased under
the options (third tranche) may be exercised at any time from and including the
third anniversary of the grant date of such options until the end of the term.
The options may not be sold, transferred, assigned, charged, pledged, or
otherwise encumbered or disposed of to any third person.
The activities relating to the share options granted by MATAV are as follows:
--------------------------------------------------------------------------------
2002 Stock Option Plan
--------------------------------------------------------------------------------
2003 2002
--------------------------- ---------------------------
Weighted- Weighted-
Stock average Stock average
options in exercise price options in exercise price
thousands (HUF) thousands (HUF)
---------------------------------------------------------------------------------------------------
Outstanding, beginning of period 3,965 944 0 --
---------------------------------------------------------------------------------------------------
Granted 0 -- 3,965 944
---------------------------------------------------------------------------------------------------
Exercised 0 -- 0 --
---------------------------------------------------------------------------------------------------
Forfeited 310 944 0 --
---------------------------------------------------------------------------------------------------
Outstanding at end of year 3,655 944 3,965 944
---------------------------------------------------------------------------------------------------
Exercisable at end of year under review 1 944 0 --
---------------------------------------------------------------------------------------------------
152
28 Accruals for pensions and similar obligations.
Deutsche Telekom's pension obligations for non-civil servants are provided for
by a range of defined benefit plans; there are further obligations under Article
131 of the Basic Law (Grundgesetz - GG). Deutsche Telekom's indirect pension
obligations were made to its employees via the Versorgungsanstalt der Deutschen
Bundespost (VAP) and the Deutsche Telekom Betriebsrenten-Service e.V. (DTBS).
The VAP provides pension services for pensioners who were employed by Deutsche
Telekom. The VAP benefits, which supplement statutory pension benefits up to the
level specified by the pension benefits formula, are generally calculated on the
basis of the level of employee compensation during specific periods of their
employment. Within the scope of negotiations on the realignment of the company
pension plan, the employer and the trade unions agreed in 1997 on arrangements
for the protection of vested VAP benefits. Pursuant to this agreement, the
benefit obligations due to retirees and employees approaching retirement will
remain unchanged. For younger employees with vested benefits, the obligations
have been converted into an initial amount based on the number of years of
coverage to date, which was then credited to a capital account held by the
employer (cash balance plan). Deutsche Telekom credits further amounts to this
account; when the insured event occurs, the account balance will be paid out in
full, in installments, or converted into a pension. If the relevant employees
had not reached the age of 35 and had been insured for less than ten years,
their benefit obligations are due directly from Deutsche Telekom. The DTBS was
founded for processing the remaining obligations.
A new regulation of VAP benefits was made by collective agreement in the year
2000 without affecting obligations. The pensioners covered by this collective
agreement no longer receive their pension payments directly from the VAP as the
indirect provider of pension services, but, since November 2000, directly and
with a legal claim from Deutsche Telekom. VAP's obligations are therefore
suspended (parallel obligation). Pension accruals are recognized for financial
reporting purposes for the now direct pension obligations in accordance with
U.S. GAAP (SFAS No. 87). Due to the direct nature of the parallel obligation,
these pension accruals must also be shown in the tax accounts, measured
according to Section 6a of the Income Tax Act (EStG). Those pensioners remaining
in the VAP continue to receive their benefits directly from the VAP as the
provider of pension services. Pursuant to the VAP's business plan, Duetsche
Telekom will to a certain extent continue to be assigned additional obligations
and the corresponding assets on a pro rata basis.
Benefits relating to other direct pension plans are generally determined on the
basis of salary levels and years of service; these benefit obligations are also
usually determined by the amounts credited by Deutsche Telekom to its capital
accounts.
The following table shows the composition of pension obligations:
--------------------------------------------------------------------------------
Pension obligations
--------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Pension obligations
--------------------------------------------------------------------------------
- Direct 3,163 2,927
--------------------------------------------------------------------------------
- Indirect 1,286 1,007
--------------------------------------------------------------------------------
Obligations in accordance
with Article 131 GG 7 8
--------------------------------------------------------------------------------
4,456 3,942
--------------------------------------------------------------------------------
The obligation amounts shown contain an "additional minimum liability" for
individual pension plans. An additional minimum liability is a step-up amount
for pension obligations relating to individual pension plans; this is recognized
in income under German GAAP, but directly in equity under U.S. GAAP. Excluding
the additional minimum liability, the accrual for pensions amounts to EUR 3,553
million (2002: EUR 3,465 million).
Consolidated financial statements
Notes 153
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
----------------------------------------------------------------------------------------------------
Actuarial present value of benefits
----------------------------------------------------------------------------------------------------
Vested benefit obligation 4,455 3,978
----------------------------------------------------------------------------------------------------
Nonvested benefit obligation 486 409
----------------------------------------------------------------------------------------------------
Accumulated benefit obligation 4,941 4,387
----------------------------------------------------------------------------------------------------
Effect of projected future salary increases 91 85
----------------------------------------------------------------------------------------------------
Projected benefit obligation 5,032 4,472
----------------------------------------------------------------------------------------------------
Plan assets at fair value (489) (412)
----------------------------------------------------------------------------------------------------
Projected benefit obligations in excess of plan assets 4,543 4,060
----------------------------------------------------------------------------------------------------
Unrecognized net (losses) gains (990) (595)
----------------------------------------------------------------------------------------------------
Unfunded accrued pension cost (+)/prepaid pension cost (-) 3,553 3,465
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Additional minimum liability 903 477
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Total obligation 4,456 3,942
----------------------------------------------------------------------------------------------------
Calculation of pension accruals:
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Unfunded accrued pension cost 3,555 3,467
--------------------------------------------------------------------------------
Prepaid pension cost (2) (2)
--------------------------------------------------------------------------------
Accrual for pensions 3,553 3,465
--------------------------------------------------------------------------------
Taking into consideration the assets transferred to other entities, the pension
obligations were accounted for in full. The carrying amount of the corresponding
pension accruals measured in accordance with Section 6a EStG is EUR 3,674
million (2002: EUR 3,474 million). The amount of pension obligations was
determined using actuarial principles that are consistent with U.S. GAAP (SFAS
No. 87), and using the assumptions at the respective balance sheet dates as
shown in the following table:
Assumptions for the measurement of benefit obligations as of Dec. 31
2003 2002 2001
% % %
--------------------------------------------------------------------------------
Discount rate 5.25 5.75 6.00
--------------------------------------------------------------------------------
Projected salary increase 2.75-3.50 2.75-3.50 2.75-3.50
--------------------------------------------------------------------------------
Projected pension increase 1.50 1.50 1.50
--------------------------------------------------------------------------------
Assumptions for determining the net periodic pension cost for years ending Dec.
31
2003 2002 2001
% % %
--------------------------------------------------------------------------------
Discount rate 5.75 6.00 6.25
--------------------------------------------------------------------------------
Projected salary increase 2.75-3.50 2.75-3.50 2.75-3.50
--------------------------------------------------------------------------------
Expected return on assets 6.00 6.00 6.00-6.50
--------------------------------------------------------------------------------
Projected pension increase 1.50 1.50 1.50
--------------------------------------------------------------------------------
154
Development of the projected benefit obligation:
--------------------------------------------------------------------------------
Projected benefit obligation
--------------------------------------------------------------------------------
2003 2002
millions of (euro) millions of (euro)
-----------------------------------------------------------------------------------------------------
Projected benefit obligation, beginning of year (January 1) 4,472 4,164
-----------------------------------------------------------------------------------------------------
Service cost 140 155
-----------------------------------------------------------------------------------------------------
Interest cost 251 241
-----------------------------------------------------------------------------------------------------
Change in obligations 24 (59)
-----------------------------------------------------------------------------------------------------
Actuarial (gains)/losses 395 201
-----------------------------------------------------------------------------------------------------
Total benefits actually paid (250) (230)
-----------------------------------------------------------------------------------------------------
Projected benefit obligation, end of year 5,032 4,472
-----------------------------------------------------------------------------------------------------
Development of plan assets at fair value:
--------------------------------------------------------------------------------
Plan assets at fair value
--------------------------------------------------------------------------------
2003 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------------
Plan assets at fair value, beginning of year 412 405
--------------------------------------------------------------------------------------
Actual return on plan assets 14 (20)
--------------------------------------------------------------------------------------
Contributions by employer 87 79
--------------------------------------------------------------------------------------
Benefits actually paid through pension funds (58) (52)
--------------------------------------------------------------------------------------
Change in obligations 34 0
--------------------------------------------------------------------------------------
Plan assets at fair value, end of year 489 412
--------------------------------------------------------------------------------------
Information on pension plans with accumulated benefit obligation exceeding
assets:
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Projected benefit obligation 1,813 1,533
--------------------------------------------------------------------------------
Accumulated benefit obligation 1,754 1,474
--------------------------------------------------------------------------------
Transferred assets 489 412
--------------------------------------------------------------------------------
Breakdown of transferred assets:
Dec. 31, 2003 Dec. 31, 2002
% %
--------------------------------------------------------------------------------
Equity securities 18 20
--------------------------------------------------------------------------------
Debt securities 43 47
--------------------------------------------------------------------------------
Real estate 0 0
--------------------------------------------------------------------------------
Other 39 33
--------------------------------------------------------------------------------
Investment strategy:
Deutsche Telekom's investment strategy is conservative and concentrates on
safeguarding liquidity and on investments in the euro region; no derivative
instruments are used. Most investments are made in deposits and fixed-rate
notes. Unless regulated by the requirements of Section 54 of the Insurance
Supervision Act, the investment strategy is determined by investment committees
which regularly review investment decisions made.
Consolidated financial statements
Notes 155
Net periodic pension cost is summarized as follows:
--------------------------------------------------------------------------------
Pension cost
--------------------------------------------------------------------------------
2003 2002 2001
millions of (euro) millions of (euro) millions of (euro)
---------------------------------------------------------------------------------------------
Service cost 140 155 144
---------------------------------------------------------------------------------------------
Interest cost 251 241 228
---------------------------------------------------------------------------------------------
Return on plan assets (27) (24) (24)
---------------------------------------------------------------------------------------------
Distribution amounts (payback) 13 7 0
---------------------------------------------------------------------------------------------
Net periodic pension cost 377 379 348
---------------------------------------------------------------------------------------------
Expected amounts for subsequent years:
--------------------------------------------------------------------------------
Years starting after Dec. 31
--------------------------------------------------------------------------------
2003 2002
millions millions
of (euro) of (euro)
--------------------------------------------------------------------------------
Expected contributions by employer 87 80
--------------------------------------------------------------------------------
Civil servant retirement arrangements.
Until the 2000 financial year, Deutsche Telekom AG maintained a special pension
fund (Unterstutzungskasse) for its active and former civil servants, which was
merged with the special pension funds of Deutsche Post AG and Deutsche Postbank
AG by notarized agreement on December 7, 2000 to form the joint pension fund
Bundes-Pensions-Service fur Post und Telekommunikation e.V. (BPS-PT). On January
11, 2001, the fund was entered in the Register of Associations with retroactive
effect from July 1, 2000. The BPS-PT works for the fund of all three companies
and also handles financial administration for the Federal Republic on a trust
basis. It carries out all transactions for pension and allowance payments in
respect of civil servants for Deutsche Post AG, Deutsche Postbank AG, and
Deutsche Telekom AG.
In accordance with the provisions of the Posts and Telecommunications
Reorganization Act (Postneuordnungsgesetz-PTNeuOG), BPS-PT makes pension and
allowance payments to retired employees and their surviving dependents who are
entitled to pension payments as a result of civil servant status. The level of
Deutsche Telekom AG's payment obligations to its special pension fund is defined
under Section 16 of the Law concerning the Legal Provisions for the former
Deutsche Bundespost Staff (PostPersRG). Since 2000, Deutsche Telekom AG has
been legally obliged to make an annual contribution to the special pension fund
amounting to 33% of the pensionable gross emoluments of active civil servants
and the notional pensionable gross emoluments of civil servants on leave of
absence. This contribution is recognized as an ongoing expense in the respective
year, and amounted to EUR 809 million in the year under review (2002: EUR 838
million) (see Note on Guarantees and commitments, and other financial
obligations (34)).
Under PTNeuOG, the Federal Republic compensates the special pension fund for
differences between the ongoing payment obligations of the special pension fund,
amounts received from Deutsche Telekom AG and returns on assets, and guarantees
that the special pension fund is always in a position to fulfill the obligations
it has assumed. The Federal Republic cannot require reimbursement from Deutsche
Telekom AG for amounts paid by it to the special fund.
156
29 Other accruals.
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Taxes 1,762 2,086
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Provisions for deferred taxes 919 1,646
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Accruals other than taxes
--------------------------------------------------------------------------------
Employee benefits
--------------------------------------------------------------------------------
Civil Service Health Insurance Fund 1,358 1,101
--------------------------------------------------------------------------------
Personnel restructuring 566 558
--------------------------------------------------------------------------------
Other obligations 1,231 1,080
--------------------------------------------------------------------------------
3,155 2,739
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Outstanding invoices 1,849 2,540
--------------------------------------------------------------------------------
Unused telephone units 524 500
--------------------------------------------------------------------------------
Investment risks 399 126
--------------------------------------------------------------------------------
Advertising cost subsidies/commissions 300 351
--------------------------------------------------------------------------------
Restoration commitments 265 303
--------------------------------------------------------------------------------
Loss contingencies 243 426
--------------------------------------------------------------------------------
Refunds to be granted 230 168
--------------------------------------------------------------------------------
Risks related to real 220 227
estate
--------------------------------------------------------------------------------
Litigation risks 209 164
--------------------------------------------------------------------------------
Deferred maintenance 67 55
--------------------------------------------------------------------------------
Other accruals 1,105 824
--------------------------------------------------------------------------------
8,566 8,423
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
11,247 12,155
--------------------------------------------------------------------------------
The Civil Service Health Insurance Fund (PBeaKK) provides services for its
members mainly in cases of illness, birth, or death and calculates the
allowances. When Postreform II came into effect, the PBeaKK was closed to new
members. Due to the aging of the group of people insured, there is an expected
shortfall between the fund's sources of regular income and benefits paid. The
present value of this future deficit has been determined on the basis of
actuarial principles, based on the new "1998 life expectancy tables" by Prof.
Dr. Klaus Heubeck ("Richttafeln 1998"), which primarily reflect the increase in
average life expectancy. Deutsche Telekom is required to cover part of this
deficit, and has recognized an accrual for its share. The expense for the
addition to this accrual was EUR 271 million in the year under review (2002: EUR
44 million; 2001: EUR 70 million), in particular as a result of the decrease in
the discount rate.
Deutsche Telekom had, in response to competition, announced its intention to
reduce its workforce by approximately 60,000 to 170,000 full-time equivalent
employees by the end of the year 2000 (excluding employees of subsidiaries first
consolidated after January 1, 1995) through natural attrition, early retirement,
and other programs. The planned reductions included an estimated 38,300
non-civil servants expected to leave under voluntary separation agreements. The
personnel restructuring program has now been completed. There are, however,
still contracts originating from this time which have to be fulfilled. In
particular collective agreements are still used for bridging allowances and
old-age part-time work and lead to the establishment of new accruals when a
concrete contractual relationship is entered into.
Non-civil servants accepted severance offers in the year under review. By
contrast, natural attrition does not lead to any financial burden for Deutsche
Telekom AG.
Consolidated financial statements
Notes 157
The personnel restructuring accruals, other HR obligations, and other accruals
include accruals of EUR 662 million for restructuring measures, which developed
as follows in the 2003 financial year:
--------------------------------------------------------------------------------------------------------------------
Accruals as of Change recognized Accruals Accruals as of
Jan. 1, 2003 in income realized Dec. 31, 2003
Type of measure millions of (euro) millions of (euro) millions of (euro) millions of (euro)
--------------------------------------------------------------------------------------------------------------------
Personnel restructuring 558 192 184 566
--------------------------------------------------------------------------------------------------------------------
Contracts terminated prematurely 62 49 30 81
--------------------------------------------------------------------------------------------------------------------
Other 16 13 14 15
--------------------------------------------------------------------------------------------------------------------
636 254 228 662
--------------------------------------------------------------------------------------------------------------------
Personnel restructuring accruals mainly relate to Deutsche Telekom AG (EUR 390
million) and T-Systems CDS (EUR 24 million). Restructuring accruals for
premature termination of contracts consist primarily of accruals at T-Systems
CDS of EUR 68 million.
The decrease in accruals for loss contingencies in 2003 is primarily due to the
non-recurrence of prior-year accruals for debt premiums at T-Mobile USA
amounting to EUR 150 million. These accruals were the result of the difference
between the repayment amount and the higher fair value of bonds. The repurchase
of the bonds issued reduced the accrual to EUR 1 million in 2003.
The accruals for unused telephone units are recognized for charges for telephone
services as yet not rendered but which have already been recognized as income.
The increase in accruals for investment risks relates primarily to our
investment in Toll Collect.
158
30 Liabilities.
--------------------------------------------------------------------------------
Liabilities
--------------------------------------------------------------------------------
Dec. 31, 2003
-------------------------------------------
Total of which due
----------------------------------
within in one to after
(millions of (euro)) one year five years five years
------------------------------------------------------------------------------------------
Debt
------------------------------------------------------------------------------------------
Bonds and debentures 51,613 12,295 22,336 16,982
------------------------------------------------------------------------------------------
Liabilities to banks 3,798 806 1,928 1,064
------------------------------------------------------------------------------------------
55,411 13,101 24,264 18,046
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Other liabilities
------------------------------------------------------------------------------------------
Advances received 402 402
------------------------------------------------------------------------------------------
Trade accounts payable 4,175 4,143 32
------------------------------------------------------------------------------------------
Liabilities on bills accepted and drawn 4 4
------------------------------------------------------------------------------------------
Payables to unconsolidated subsidiaries 198 198
------------------------------------------------------------------------------------------
Payables to associated and related companies 213 213
------------------------------------------------------------------------------------------
Other liabilities 5,459 4,264 179 1,016
------------------------------------------------------------------------------------------
of which: from taxes (1,091) (1,091)
------------------------------------------------------------------------------------------
of which: from social security (100) (100)
------------------------------------------------------------------------------------------
10,451 9,224 211 1,016
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Total liabilities 65,862 22,325 24,475 19,062
------------------------------------------------------------------------------------------
Dec. 31, 2002
-------------------------------------------
Total of which due
----------------------------------
within in one to after
(millions of (euro)) one year five years five years
------------------------------------------------------------------------------------------
Debt
------------------------------------------------------------------------------------------
Bonds and debentures 56,752 8,535 29,243 18,974
------------------------------------------------------------------------------------------
Liabilities to banks 6,292 1,341 3,534 1,417
------------------------------------------------------------------------------------------
63,044 9,876 32,777 20,391
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Other liabilities
------------------------------------------------------------------------------------------
Advances received 414 228 186
------------------------------------------------------------------------------------------
Trade accounts payable 3,833 3,807 26
------------------------------------------------------------------------------------------
Liabilities on bills accepted and drawn
------------------------------------------------------------------------------------------
Payables to unconsolidated subsidiaries 158 157 1
------------------------------------------------------------------------------------------
Payables to associated and related companies 147 147
------------------------------------------------------------------------------------------
Other liabilities 5,989 4,436 448 1,105
------------------------------------------------------------------------------------------
of which: from taxes (1,159) (1,159)
------------------------------------------------------------------------------------------
of which: from social security (153) (153)
------------------------------------------------------------------------------------------
10,541 8,775 661 1,105
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Total liabilities 73,585 18,651 33,438 21,496
------------------------------------------------------------------------------------------
The main items under bonds and debentures relate to old bonds issued by Deutsche
Bundespost amounting to EUR 9.2 billion, and bonds issued by Deutsche Telekom
International Finance B.V., Amsterdam, between 2000 and 2003 at the following
conditions:
--------------------------------------------------------------------------------
Structure of the 2000 global bond
--------------------------------------------------------------------------------
Nominal Nominal Nominal
amounts amounts interest
Tranche in currency (euro) rate Maturity
--------------------------------------------------------------------------------
EUR 2,250,000,000 2,250,000,000 6.625% 2005
--------------------------------------------------------------------------------
EUR 750,000,000 750,000,000 7.125% 2010
--------------------------------------------------------------------------------
GBP 625,000,000 885,394,532 7.625% 2005
--------------------------------------------------------------------------------
GBP 300,000,000 424,989,375 7.625% 2030
--------------------------------------------------------------------------------
USD 3,000,000,000 2,380,196,792 8.250% 2005
--------------------------------------------------------------------------------
USD 3,000,000,000 2,380,196,792 8.500% 2010
--------------------------------------------------------------------------------
USD 3,500,000,000 2,776,896,223 8.750% 2030
--------------------------------------------------------------------------------
JPY 90,000,000,000 667,953,888 2.000% 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Structure of the 2001 eurobond
--------------------------------------------------------------------------------
Nominal Nominal Nominal
amounts amounts interest
Tranche in currency (euro) rate Maturity
--------------------------------------------------------------------------------
EUR 4,500,000,000 4,500,000,000 6.375% 2006
--------------------------------------------------------------------------------
EUR 3,500,000,000 3,500,000,000 7.125% 2011
--------------------------------------------------------------------------------
After the downgrading by Moody's from A3 to Baa1 in March 2002, and by Standard
& Poor's from A- to BBB+ in April 2002, the coupons of the 2000 global bond and
the 2001 eurobond increased by 0.5%. The change in the interest rate has
already been included in the tables. If Deutsche Telekom is upgraded to at least
an A- grade by both agencies, the coupons will be reduced again by 0.5%.
Consolidated financial statements
Notes 159
--------------------------------------------------------------------------------
Structure of the 2002 global bond
--------------------------------------------------------------------------------
Nominal Nominal Nominal
amounts amounts interest
Tranche in currency (euro) rate Maturity
--------------------------------------------------------------------------------
EUR 2,000,000,000 2,000,000,000 8.125% 2012
--------------------------------------------------------------------------------
EUR 2,500,000,000 2,500,000,000 7.500% 2007
--------------------------------------------------------------------------------
USD 500,000,000 396,699,460 9.250% 2032
--------------------------------------------------------------------------------
The coupons of the 2002 global bond will increase by 0.5% if Deutsche Telekom is
downgraded by Standard & Poor's and Moody's to below Baa1/BBB+ respectively.
Structure of the 2003 USD bond
--------------------------------------------------------------------------------
Nominal Nominal Nominal
amounts amounts interest
Tranche in currency (euro) rate Maturity
--------------------------------------------------------------------------------
USD 750,000,000 595,049,190 3.875% 2008
--------------------------------------------------------------------------------
USD 1,250,000,000 991,748,651 5.250% 2013
--------------------------------------------------------------------------------
A EUR 2.3 billion mandatory convertible bond with a term up to 2006 and a
nominal coupon of 6.500 % was also issued by Deutsche Telekom International
Finance B.V., Amsterdam, in 2003.
Deutsche Telekom International Finance B.V. is a wholly owned subsidiary of
Deutsche Telekom AG, and its bond issuances are unconditionally and irrevocably
guaranteed by Deutsche Telekom AG.
Breakdown of bonds and debentures (millions of (euro)):
--------------------------------------------------------------------------------
Effective interest rate
------------------------------------------------------------
up to 6% up to 7% up to 8% up to 9% over 9% Total
Due in
--------------------------------------------------------------------------------
2004 2,757 3,233 6,212 93 12,295
--------------------------------------------------------------------------------
2005 2,091 2,417 886 2,380 7,774
--------------------------------------------------------------------------------
2006 453 4,500 2,288 7,241
--------------------------------------------------------------------------------
2007 500 500 2,500 80 3,580
--------------------------------------------------------------------------------
2008 3,741 3,741
--------------------------------------------------------------------------------
after 2008 1,004 1,569 6,844 7,157 408 16,982
--------------------------------------------------------------------------------
10,546 12,219 18,730 9,630 488 51,613
--------------------------------------------------------------------------------
Liabilities to banks (mainly loan notes and short-term loans) due in the next
five years and thereafter are as follows (millions of (euro)):
--------------------------------------------------------------------------------
Due in Amounts
--------------------------------------------------------------------------------
2004 806
--------------------------------------------------------------------------------
2005 1,444
--------------------------------------------------------------------------------
2006 123
--------------------------------------------------------------------------------
2007 119
--------------------------------------------------------------------------------
2008 242
--------------------------------------------------------------------------------
after 2008 1,064
--------------------------------------------------------------------------------
3,798
--------------------------------------------------------------------------------
The average effective interest rate of total debt is as follows:
Bonds and debentures 6.82% p.a. (2002: 6.69% p.a.)
Liabilities to banks 6.12% p.a. (2002: 5.74% p.a.)
Deutsche Telekom has agreements with a number of banks pursuant to which it can
draw on credit facilities of up to EUR 18.1 billion. These include syndicated
loan facilities entered into by Deutsche Telekom AG and T-Mobile UK (formerly
One 2 One) for EUR 9.0 billion (Deutsche Telekom syndicated loan) and EUR 3.9
billion (T-Mobile UK syndicated loan). Deutsche Telekom AG serves as guarantor
of the T-Mobile UK syndicated loan. The level of the interest rates depends on
Deutsche Telekom's rating, the amount of the syndicated loan, and the LIBOR rate
to be applied, plus a margin ranking of between 0.275 and 0.500%.
160
The loan commitment fee is between 0.050 and 0.200% and also depends on Deutsche
Telekom's rating. EUR 1.0 billion of the T-Mobile UK syndicated loan has been
drawn down at December 31, 2003. This drawdown has an interest rate of 4.22%,
excluding the loan commitment fee.
Part of the syndicated loan serves as collateral for Deutsche Telekom's
commercial paper program. Deutsche Telekom may not draw on the syndicated loan
in the amount of commercial paper drawdowns. Deutsche Telekom had not issued any
commercial paper at December 31, 2003. There were no additional outstanding
debts relating to the Deutsche Telekom syndicated loan at the end of 2003.
Deutsche Telekom's credit facilities continue to include bilateral bank lines
amounting to EUR 5.2 billion, of which EUR 0.3 billion had been used at the end
of 2003 for short-term drawings and EUR 0.2 billion for guarantees.
The development of debt over time is shown below:
--------------------------------------------------------------------------------
Debt
--------------------------------------------------------------------------------
(millions of (euro))
--------------------------------------------------------------------------------
Jan. 1, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1995 1996 1997 1998 1999 2000 2001 2002 2003
-----------------------------------------------------------------------------------------------------------
64,146 56,440 51,072 44,938 39,933 42,337 60,357 67,031 63,044 55,411
-----------------------------------------------------------------------------------------------------------
The Company's original debt was raised principally to finance the development of
the communications networks in Eastern Germany.
The increase in debt in 2001 was primarily a result of the acquisition and
first-time consolidation of T-Mobile USA (formerly VoiceStream/Powertel).
Debt decreased by around EUR 4 billion in 2002, despite the acquisition of the
remaining shares in debis Systemhaus and T-Mobile Netherlands, mainly because of
cash generated from operations, divestitures of real estate and financial
assets, and positive foreign currency effects.
In 2003, cash generated from operations, sales of assets, and positive foreign
currency effects were the main drivers behind the further reduction in debt. New
debt resulted from the issuance of a U.S. dollar bond and a convertible bond,
for example.
Financial liabilities include borrowings of EUR 17,261 million (2002: EUR 20,777
million) in foreign currencies.
Consolidated financial statements
Notes 161
Other liabilities.
--------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Interest 1,698 1,556
--------------------------------------------------------------------------------
Rental and leasing obligations 425 573
--------------------------------------------------------------------------------
Loan notes 799 842
--------------------------------------------------------------------------------
Liabilities to employees 162 164
--------------------------------------------------------------------------------
Other 2,375 2,854
--------------------------------------------------------------------------------
5,459 5,989
--------------------------------------------------------------------------------
Other liabilities include taxes of EUR 1,091 million (Dec. 31, 2002: 1,159
million) and social security liabilities of EUR 100 million (Dec. 31, 2002: EUR
153 million).
Liabilities in the amount of EUR 5 million (Dec. 31, 2002: EUR 7 million)
payable by subsidiary companies to banks and third parties are collateralized by
the assignment of receivables and other collateral assignments. Deutsche Telekom
AG has provided no collateral for its liabilities.
In accordance with Postreform II (Section 2 (4) of the Stock Corporation
Transformation Act - Postumwandlungsgesetz), the Federal Republic is guarantor
of all Deutsche Telekom AG's liabilities which were outstanding at January 1,
1995. At December 31, 2003, this figure was EUR 11.6 billion.
162
Notes to the consolidated statement of cash flows.
The consolidated statement of cash flows has been prepared in conformity with
International Accounting Standard (IAS) No. 7, Cash Flow Statements. Besides IAS
7, German Accounting Standard (GAS) No. 2, Cash Flow Statements, as approved by
the German Standardization Council (DSR), is also used in preparing the
consolidated statement of cash flows.
Liquid assets and short-term investments with original maturities of less than 3
months at the date of purchase are considered cash equivalents in drawing up the
consolidated statement of cash flows. These current cash and cash equivalents
increased by EUR 7.0 billion to EUR 8.7 billion in the year under review.
This is a result of the following developments:
31 Net cash provided by operating activities.
Net cash provided by operating activities increased in the year under review by
EUR 1.8 billion to EUR 14.3 billion.
In addition to tax refunds and lower net interest payments, this is due in
particular to the improvement in operational business.
32 Net cash used for investing activities.
Net cash used for investing activities amounted to EUR 2.1 billion. This
includes primarily investments of EUR 6.4 billion in noncurrent assets and EUR
0.3 billion in shares of fully consolidated companies. This is partially offset
in particular by cash inflows from the disposal of noncurrent assets amounting
to EUR 2.6 billion and the sale of shares of fully consolidated companies
amounting to EUR 1.5 billion. As a result, net cash used for investing
activities decreased by EUR 8.0 billion from EUR 10.1 billion in the prior year.
Investing activities declined year-on-year primarily due to lower investments in
property, plant, and equipment of EUR 1.3 billion and shares of fully
consolidated companies amounting to EUR 6.1 billion, in particular from the
acquisitions of T-Systems ITS (EUR 4.7 billion) and T-Mobile Netherlands (EUR
1.7 billion) in the previous year. In addition, cash inflows from the sale of
financial assets increased year-on-year (EUR 0.4 billion), as did cash inflows
from the disposal of subsidiaries (EUR 0.8 billion). EUR 1.7 billion of these
relates to the sale of the Kabel Deutschland companies, and EUR 0.1 billion to
the sale of T-Systems companies (mainly TELECASH); this was offset by outflows
of liquid assets amounting to EUR 0.3 billion.
33 Net cash used for financing activities.
Net cash used for financing activities totaled EUR 5.2 billion in the 2003
financial year, a year-on-year increase of EUR 1.8 billion.
This is due to a reduction in debt of EUR 5.1 billion compared with EUR 1.8
billion in 2002 resulting mainly from the repayment of U.S. dollar bonds, the
reduction of a syndicated loan, and the repayment of bonds. New debt was
generated by the issuance of the convertible bond and a U.S. dollar bond.
In addition, the previous year's figure included a dividend payment amounting to
EUR 1.6 billion; in the year under review, this contrasts with dividend payments
to minority shareholders only amounting to EUR 0.1 billion.
Consolidated financial statements
Notes 163
Other disclosures.
34 Guarantees and commitments, and other financial obligations.
Dec. 31, 2003 Dec. 31, 2002
millions of (euro) millions of (euro)
--------------------------------------------------------------------------------
Guarantees 28 47
--------------------------------------------------------------------------------
Liabilities arising from
warranty agreements 2,199 927
--------------------------------------------------------------------------------
2,227 974
--------------------------------------------------------------------------------
The increase in liabilities arising from warranty agreements is due primarily to
loan collateral guarantees by Deutsche Telekom AG for T-Mobile. This increase
was partially offset by a decline in T-Mobile International AG's obligation
under a QTE (Qualified Technology Equipment) lease, which decreased by EUR 140
million year-on-year to EUR 768 million due to exchange rate effects.
Deutsche Telekom AG (45 %), DaimlerChrysler Services AG (45%), and Compagnie
Financiere et Industrielle des Auto-routes S.A. (Cofiroute; 10%) - collectively
the consortium -entered into an agreement with the Federal Republic of Germany,
represented by the German Federal Ministry of Transport, Building and Housing
(Federal Ministry of Transport), "on the collection of toll charges for the use
of German autobahns by heavy vehicles, and the creation and operation of a toll
system for the collection of autobahn toll charges for heavy vehicles (operating
agreement)", dated September 2002 and last amended in November 2002, under the
terms of which they are obligated to set up and operate a system for the
electronic collection of toll charges for heavy vehicles; this is to be
performed by a project company with the legal form of a limited liability
company under German law (GmbH) -Toll Collect GmbH. In addition, the parties of
the consortium have undertaken, on a joint and several basis, in agreement with
the Federal Republic, to maintain an equity ratio in the project company of 20%
of the balance sheet total (calculated based on the German GAAP single-entity
financial statements of the limited liability company) until August 31, 2004,
and 15% thereafter; the total risk for Cofiroute arising from the Toll Collect
project is limited to EUR 70 million.
Under the terms of the "Equity Maintenance Undertaking", the parties of the
consortium are obliged to inject additional capital in the event of negative
developments within the Toll Collect project. As Deutsche Telekom AG did not
expect any future injection of additional capital to be repaid during the
project by any corresponding dividend from Toll Collect GmbH, accruals were
recognized at December 31, 2003 for anticipated losses relating to the project
(see Note 29). The calculation of the accruals is based on the assumption that
the system will start operation on January 1, 2005; correspondingly, foreseeable
losses of income and expenses, such as contractual penalties for a delayed start
of operations, were also taken into consideration.
Additional contractual penalties shall be payable if the start of operations is
postponed beyond December 31, 2004. In addition, the agreement includes
provisions for further contractual penalties after the approved start of
operations (issuance of the preliminary operating permit) if the performance of
the system is not adequate. The Federal Republic is asserting claims for damages
from the parties of the consortium of EUR 156 million per month for the period
September 1 to December 31, 2003 and EUR 180 million per month from January 1,
2004 for lost toll revenues. In addition, the Federal Republic is enforcing
contractual penalties of EUR 680 million because the members of the consortium
did not seek the necessary agreement of the Federal Ministry of Transport before
concluding certain subcontractor agreements. Deutsche Telekom AG believes the
claims of the Federal Republic are unfounded. Under the terms of the agreement,
the Federal Republic may resort to arbitrational proceedings for clarification
of the legal position. The maximum future obligations arising from the Toll
Collect project cannot be quantified with adequate certainty; it is therefore
not possible to express this in figures under guarantees and commitments.
In addition, Deutsche Telekom AG has given a guarantee for bank loans to Toll
Collect GmbH amounting to EUR 312 million; these are included in the table
above.
164
Other financial obligations.
Dec. 31, 2003 Dec. 31, 2002
-------------------------------------------- --------------------------------------------
Total of which due Total of which due
----------------------------------- -----------------------------------
in the from the second in the from the second
following year after the following year after the
(millions of (euro)) financial year balance sheet date financial year balance sheet date
-------------------------------------------------------------------------------------------------------------------------
Present value of payments 9,000 950 8,050 9,001 831 8,170
to special pension fund
-------------------------------------------------------------------------------------------------------------------------
Purchase commitments for 763 254 509 826 218 608
interests in other
companies
-------------------------------------------------------------------------------------------------------------------------
Obligations under rental 11,737 1,703 10,034 10,050 1,813 8,237
and lease agreements
-------------------------------------------------------------------------------------------------------------------------
Purchase commitment from 1,924 1,634 290 1,213 1,141 72
capital projects in
progress
-------------------------------------------------------------------------------------------------------------------------
Commitments arising from 869 783 86 475 364 111
transactions not yet
settled
-------------------------------------------------------------------------------------------------------------------------
Other financial obligations 12 3 9 0 0 0
-------------------------------------------------------------------------------------------------------------------------
Total other financial 24,305 5,327 18,978 21,565 4,367 17,198
obligations
-------------------------------------------------------------------------------------------------------------------------
The present value of payments that Deutsche Telekom is required to make in
accordance with Postreform II to the Company's special pension fund for civil
servants, or its successor, on the basis of the 1998 life expectancy tables
prepared by Prof. Klaus Heubeck, amounted to EUR 9.0 billion at December 31,
2003.
The purchase commitments for interests in other companies relate mainly to
Deutsche Telekom AG (EUR 510 million). The slight decrease in the commitments is
marked by offsetting effects. An arbitration panel decided that T-Mobile's
obligation to purchase additional shares of PTC no longer applies (2002: EUR 128
million). In addition, T-Online no longer has an obligation to contribute to a
venture fund due to the inclusion of the company in the Group. New obligations
result from the announcement by T-Online International AG that it will buy
shares of Scout24 AG (EUR 180 million).
The increase in obligations under rental and lease agreements is mainly
attributable to new and prolonged leases for real estate and radio towers. The
majority of the lease obligations are attributable to Group Headquarters &
Shared Services, and to T-Mobile.
The purchase commitments for capital projects in progress are primarily
attributable to Deutsche Telekom AG (EUR 1.0 billion), T-Systems (EUR 0.4
billion), and T-Mobile (EUR 0.3 billion). A large number of different purchase
commitments, most of which are short-term in nature, have been entered into by
Deutsche Telekom AG. T-Systems has entered into commitments relating in
particular to license agreements and software projects. T-Mobile's commitments
include commitments to purchase network and UMTS equipment. There are detailed
agreements covering the purchase quantities and periods.
The commitments arising from transactions not yet settled relate primarily to
short-term purchase commitments at T-Mobile (EUR 0.8 billion). The increase in
commitments is due in particular to new contracts for mobile terminals at
T-Mobile Deutschland and T-Mobile UK. There are detailed agreements covering the
purchase quantities and periods.
Deutsche Telekom is a party to a number of lawsuits and other proceedings
arising out of the general conduct of its business, including proceedings under
laws and regulations related to environmental and other matters. Litigation
accruals include the costs of litigation and any probable losses. The Company
does not believe that any additional costs will have a material adverse effect
on the net worth, financial position, and results of the Deutsche Telekom Group.
Consolidated financial statements
Notes 165
35 Financial instruments.
Fair value.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. The following is a summary of the estimated
fair value of Deutsche Telekom's financial instruments:
------------------------------------------------------------------------------------------------------------------------------
Dec. 31, 2003 Dec. 31, 2002
--------------------------------------- ---------------------------------------
Net carrying Net carrying
Fair value amount Fair value amount
millions of (euro) millions of (euro) millions of (euro) millions of (euro)
------------------------------------------------------------------------------------------------------------------------------
Assets
------------------------------------------------------------------------------------------------------------------------------
Other investments in related companies 750 496 1,169 1,021
------------------------------------------------------------------------------------------------------------------------------
Other long-term loans 77 78 109 107
------------------------------------------------------------------------------------------------------------------------------
Other investments in noncurrent assets 80 86 238 238
------------------------------------------------------------------------------------------------------------------------------
Accounts receivable 5,874 5,874 6,258 6,258
------------------------------------------------------------------------------------------------------------------------------
Liquid assets 9,127 9,127 1,905 1,905
------------------------------------------------------------------------------------------------------------------------------
Other investments in marketable securities 175 173 413 413
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Liabilities
------------------------------------------------------------------------------------------------------------------------------
Bonds and debentures 56,151 51,613 60,144 56,752
------------------------------------------------------------------------------------------------------------------------------
Liabilities to banks 3,730 3,798 6,368 6,292
------------------------------------------------------------------------------------------------------------------------------
Other liabilities 10,666 10,666 10,541 10,541
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
Derivative financial instruments(1)
------------------------------------------------------------------------------------------------------------------------------
Interest rate swaps (74) (194) 67 (230)
------------------------------------------------------------------------------------------------------------------------------
Cross-currency interest rate swaps sold (712) (231) (488) (190)
------------------------------------------------------------------------------------------------------------------------------
Foreign currency forward contracts (80) (16) 12 28
------------------------------------------------------------------------------------------------------------------------------
Foreign currency options 1 0 0 0
------------------------------------------------------------------------------------------------------------------------------
(1) Non-bracketed amounts represent assets, bracketed amounts represent
liabilities.
Fair values were determined as follows:
The fair value of other investments in noncurrent securities and in marketable
securities is based on quoted market prices for those instruments or similar
instruments. The net carrying amount of other investments in marketable
securities is adjusted to market value where market value is less than the
original investment. The net carrying amounts of trade accounts receivable
approximate their fair values, due to the short period to maturity. The net
carrying amounts of liquid assets also reflect reasonable estimates of fair
value due to the relatively short period to maturity of the instruments.
The fair value of debt which is publicly traded, primarily bonds and debentures,
is estimated based on quoted market prices at year end. The carrying amounts of
liabilities to banks and other liabilities approximate their fair values. The
fair value of off-balance sheet financial instruments generally reflects the
estimated amount the Company would receive or pay to terminate the contracts at
the reporting date, thereby taking into account the current unrealized gains and
losses of open contracts. The estimated fair values of derivatives used to hedge
or modify the Company's risk will vary substantially with future changes in
interest rates or with fluctuations in foreign exchange rates. These changes in
fair values should not be viewed in isolation, but rather in relation to adverse
changes in the values of the underlying hedged transactions.
The fair values of other investments in related companies as well as loans to
unconsolidated subsidiaries and associated companies, which have carrying
amounts of EUR 523 million and EUR 1,082 million at December 31, 2003 and 2002
respectively, could not be determined, except for the investments in VocalTec
and SES Global S.A., because they are not publicly traded. VocalTec and SES
Global S.A. are measured at their fair values, based on share prices.
166
Derivative financial instruments.
The Company uses derivative financial instruments for the purpose of hedging
interest rate and currency exposures that arise from its ongoing business
operations. The top priority in all cases in which derivatives are used is to
limit the risk of the underlyings. Derivatives may therefore only be used to
eliminate risk exposures, and may never be used to create new risks for
speculative reasons. Derivative financial instruments are subject to internal
controls.
Derivatives classified as hedging instruments are those entered into for the
purpose of matching or eliminating risk from potential movements in interest
rates and foreign exchange rate inherent in the Company's assets and
liabilities. A derivative is designated as a hedge where there is an offset
between the effects of potential movements in the derivative and designated
underlying asset, liability, or position being hedged. Such derivatives are
reviewed regularly for their effectiveness as hedge instruments. Derivative
instruments designated as hedges are accounted for on the same basis as the
hedged item.
The main interest rate instruments used are interest rate swaps. These are
entered into with the aim of transforming the coupons on bonds, and the interest
rates on loans and financial assets, in accordance with a mix of fixed and
floating rate interest instruments that is laid down once a year. Interest rate
swaps are designated as hedging instruments for specific liabilities or groups
of similar liabilities. Cross-currency interest rate swaps usually swap foreign
currency bonds or medium-term notes in required target currencies.
Gains or losses related to changes in the value of interest rate swaps are
generally not recognized. Interest rate swaps which are not designated as
hedging instruments for balance sheet assets and liabilities (which are mainly
hedges of planned future transactions) are marked to market and resultant
negative values are accrued and included as a component of net interest expense;
gains are recognized upon realization. Unrealized gains and losses from changes
in fair value are netted currency for currency and assigned to portfolios, and
the resultant net loss is accrued. The interest differential to be paid or
received on interest rate swaps is recognized in the statement of income, as
incurred, as a component of net interest expense. Gains or losses on interest
rate swaps released prior to their maturity are recognized immediately in net
interest expense.
The Company uses foreign currency forward contracts and foreign currency options
purchased as well as cross-currency interest rate swaps to eliminate
fluctuations in foreign currency cash flows related to capital expenditures and
financial liabilities. Foreign currency forward contracts hedging firm
commitments to invest in or sell a foreign entity are not recognized at the
balance sheet date. Such firm commitments are recognized using the foreign
exchange rate fixed by the foreign currency forward contract. Where the Company
uses call options to hedge firm commitments to invest in a foreign entity, the
option is carried in other assets and is not measured until exercised or
expiration. The option premium is included in the purchase cost of the
investment when its addition is recorded, and in the proceeds from the sale when
the selling price is received. Gains and losses resulting from foreign currency
forward contracts, cross-currency interest rate swaps, and foreign currency
financing which relate to the net investments in foreign entities are recorded
in the cumulative translation adjustment account.
Foreign currency forward contracts hedging other payments and receipts are
assigned to foreign currency portfolios categorized by foreign currency type
with the related financial instruments. These portfolios are marked to market at
the balance sheet date and resulting negative portfolio values are accrued under
other liabilities. Measurement gains and losses are netted portfolio for
portfolio. An accrual for loss contingencies is established for each portfolio
for the amount of the excess loss. Net gains are not recognized.
Consolidated financial statements
Notes 167
The following is a summary of the contract or notional principal amounts
outstanding and the average interest paid/received at December 31, 2003 and
2002:
--------------------------------------------------------------------------------------
Dec. 31, 2003
--------------------------------------------
Notional Average
amount Average interest
millions interest rate
Maturity of (euro) rate paid received
--------------------------------------------------------------------------------------
Interest rate swaps (EUR)
--------------------------------------------------------------------------------------
Receive fixed, pay variable 2004-2010 13,664 2.12% 3.96%
--------------------------------------------------------------------------------------
Forward receive fixed, pay variable 2007-2008 2,000 EURIBOR6M 3.86%
--------------------------------------------------------------------------------------
Receive variable, pay fixed 2005-2010 2,555 5.80% 2.20%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Interest rate swaps (USD)
--------------------------------------------------------------------------------------
Receive fixed, pay variable 2005-2007 2,539 1.23% 2.31%
--------------------------------------------------------------------------------------
Forward receive fixed, pay variable 2007 793 USDL6M 3.22%
--------------------------------------------------------------------------------------
Receive variable, pay fixed 2007 793 4.65% 1.22%
--------------------------------------------------------------------------------------
Forward receive variable, pay fixed 2007-2008 3,015 4.70% USDL6M
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Interest rate swaps (GBP)
--------------------------------------------------------------------------------------
Receive fixed, pay variable 2005 283 4.18% 3.84%
--------------------------------------------------------------------------------------
Receive variable, pay fixed 2005-2006 779 5.80% 3.83%
--------------------------------------------------------------------------------------
Forward receive variable, pay fixed -- -- -- --
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Interest rate swaps (JPY)
--------------------------------------------------------------------------------------
Receive fixed, pay variable 2005 668 0.31% 1.50%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Interest rate swaps (CZK)
--------------------------------------------------------------------------------------
Receive fixed, pay variable -- -- -- --
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Interest rate swaps (HUF)
--------------------------------------------------------------------------------------
Receive variable, pay fixed 2006 241 9.25% 9.61%
--------------------------------------------------------------------------------------
Forward receive variable, pay fixed -- -- -- --
--------------------------------------------------------------------------------------
Interest rate caps/collars -- -- -- --
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Cross currency interest rate swaps 2004-2032 4,883 5.25% 2.57%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Forward cross currency interest rate -- -- -- --
swaps
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Foreign currency forward contracts
--------------------------------------------------------------------------------------
Forward purchases 2004-2008 1,190 -- --
--------------------------------------------------------------------------------------
Forward sales 2004-2006 982 -- --
--------------------------------------------------------------------------------------
Currency options 2004-2005 5 -- --
--------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Dec. 31, 2002
----------------------------------------------
Notional Average Average
amount Average interest
millions interest rate
Maturity of (euro) rate paid received
----------------------------------------------------------------------------------------
Interest rate swaps (EUR)
----------------------------------------------------------------------------------------
Receive fixed, pay variable 2003-2010 12,019 3.26% 4.44%
----------------------------------------------------------------------------------------
Forward receive fixed, pay variable 2005 820 EURIBOR6 4.21%
----------------------------------------------------------------------------------------
Receive variable, pay fixed 2003-2010 4,652 5.23% 3.07%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Interest rate swaps (USD)
----------------------------------------------------------------------------------------
Receive fixed, pay variable 2003-2008 1,144 2.11% 8.00%
----------------------------------------------------------------------------------------
Forward receive fixed, pay variable -- -- -- --
----------------------------------------------------------------------------------------
Receive variable, pay fixed -- -- -- --
----------------------------------------------------------------------------------------
Forward receive variable, pay fixed 2007 2,859 5.07% USDL6M
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Interest rate swaps (GBP)
----------------------------------------------------------------------------------------
Receive fixed, pay variable -- -- -- --
----------------------------------------------------------------------------------------
Receive variable, pay fixed 2003-2006 1,575 5.91% 3.94%
----------------------------------------------------------------------------------------
Forward receive variable, pay fixed 2005 307 6.04% GBPL6M
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Interest rate swaps (JPY)
----------------------------------------------------------------------------------------
Receive fixed, pay variable 2005 723 0.32% 1.50%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Interest rate swaps (CZK)
----------------------------------------------------------------------------------------
Receive fixed, pay variable 2004 13 3.18% 8.14%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Interest rate swaps (HUF)
----------------------------------------------------------------------------------------
Receive variable, pay fixed -- -- -- --
----------------------------------------------------------------------------------------
Forward receive variable, pay fixed 2006 269 9.25% BUBOR6M
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Interest rate caps/collars 2003 38 -- --
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Cross currency interest rate swaps 2003-2032 6,437 5.29% 3.05%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Forward cross currency interest rate 2006 252 BUBOR6M EURIBOR6M
swaps
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Foreign currency forward contracts
----------------------------------------------------------------------------------------
Forward purchases 2003-2008 1,955 -- --
----------------------------------------------------------------------------------------
Forward sales 2003-2006 2,917 -- --
----------------------------------------------------------------------------------------
Currency options 2003 4 -- --
----------------------------------------------------------------------------------------
The notional amounts of the derivative financial instruments do not generally
represent amounts exchanged by the parties, but are merely the basis for
measuring these amounts. They do not reflect the risk exposure of the financial
derivatives.
The amounts exchanged are calculated by reference to the notional amounts and by
the other terms of the derivatives, such as interest rates, exchange rates, or
other indices.
168
36 Segment reporting.
Deutsche Telekom applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS 131)
and the German Accounting Standard No. 3, Segment Reporting, (GAS 3) for the
calculation of segment information. These require companies to disclose
information on their operational segments in accordance with their internal
reporting structures. Under SFAS No. 131 and GAS 3, Deutsche Telekom has the
following operational segments for which reporting is required: T-Com, T-Mobile,
T-Systems, and T-Online. The segments for which reporting is required are
strategic divisions which differ in their products and services, their relevant
sub-markets, the profile of their customers, and their regulatory environment.
The measurement methods used for the Group segment reporting correspond mainly
to those used in the German consolidated financial statements. Deutsche Telekom
evaluates the segments' performance based on the income before income taxes; the
operational figures EBIT and EBITDA are also used. Based on income before taxes,
EBIT does not include extraordinary income/losses or net financial
income/expense. EBITDA additionally excludes depreciation and amortization. The
first-time application of the cost-of-sales method at Deutsche Telekom from
January 1, 2003 led to a change in the composition of income before taxes, which
now includes other taxes. As no extraordinary items arose in any of the periods,
the income before income taxes reported here corresponds to results from
ordinary business activities.
Revenues generated and goods and services exchanged between segments are, as far
as possible, calculated on the basis of market prices. With the exception of
depreciation and amortization, additions to and reversal of accruals, no major
noncash items are shown in the segments. The income/loss related to associated
and related companies relates to income from investments and associated
companies, as well as writedowns of financial assets and other investments in
marketable securities.
Segment assets under segment reporting include the carrying amount of property,
plant, and equipment, intangible assets, and financial assets. Segment
investments are defined as increases in these areas. In addition, the segment
assets and segment investments are shown by geographical region; assignment to
the individual regions is generally determined by the location of the asset.
Please refer to (1) in the notes to the consolidated financial statements for
the presentation of revenue by regions. In accordance with GAS 3, liabilities
have been assigned to the segments since the 2000 financial year. As part of
Group segment reporting, these include debt and other liabilities, excluding tax
liabilities.
The structure of the segments was adapted to the adjusted reporting structure at
the T-Com and T-Online divisions in the first quarter of 2003. DeTeMedien is no
longer included under T-Online, but has been reported under T-Com since January
1, 2003. In the same way, subsequent measurement resulting from the inclusion of
new shareholders at T-Online, which affects the income/loss related to
associated and related companies, as well as depreciation and amortization, is
no longer reported under the T-Online segment but in the reconciliation to
consolidated amounts. In addition, the direct allocation of the agency business
from the T-Systems segment to the T-Com and T-Mobile segments has led to a
redistribution of intersegment revenue and net revenues which does not affect
income. To facilitate comparison, prior-year figures have been adjusted in
accordance with the aforementioned changes.
Consolidated financial statements
Notes 169
----------------------------------------------------------------------------------------------
Income/
(loss) related
Revenue Depreciation Net interest to associated
Net between and income/ and related
(millions of (euro)) revenue segments amortization (expense) companies
----------------------------------------------------------------------------------------------
T-Com(1) 2003 25,116 4,090 (5,169) (315) (412)
----------------------------------------------------------------------------------------------
2002 26,491 4,068 (5,539) (562) (304)
----------------------------------------------------------------------------------------------
2001 26,427 3,401 (5,444) (346) (509)
----------------------------------------------------------------------------------------------
T-Mobile(1) 2003 21,572 1,206 (5,196) (992) 97
----------------------------------------------------------------------------------------------
2002 18,339 1,396 (27,285) (1,005) (427)
----------------------------------------------------------------------------------------------
2001 13,101 1,536 (6,324) (3,008) (204)
----------------------------------------------------------------------------------------------
T-Systems(1) 2003 7,184 3,430 (1,499) (39) (4)
----------------------------------------------------------------------------------------------
2002 6,895 3,594 (2,616) (98) (20)
----------------------------------------------------------------------------------------------
2001 7,121 3,700 (1,372) 102 13
----------------------------------------------------------------------------------------------
T-Online(1, 3) 2003 1,662 189 (430) 110 90
----------------------------------------------------------------------------------------------
2002 1,391 193 (435) 128 (265)
----------------------------------------------------------------------------------------------
2001 1,027 113 (416) 164 (381)
----------------------------------------------------------------------------------------------
Group Headquarters &
Shared Services 2003 304 3,964 (881) (2,874) (3)
----------------------------------------------------------------------------------------------
2002 573 3,838 (1,298) (2,510) (1,093)
----------------------------------------------------------------------------------------------
2001 633 4,481 (1,447) (1,102) (375)
----------------------------------------------------------------------------------------------
Reconciliation(1) 2003 0 (12,879) 291 334 (23)
----------------------------------------------------------------------------------------------
2002 0 (13,089) 293 (1) 135
----------------------------------------------------------------------------------------------
2001 0 (13,231) (218) 52 246
----------------------------------------------------------------------------------------------
Group 2003 55,838 0 (12,884) (3,776) (255)
----------------------------------------------------------------------------------------------
2002 53,689 0 (36,880) (4,048) (1,974)
----------------------------------------------------------------------------------------------
2001 48,309 0 (15,221) (4,138) (1,210)
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Income/
(loss)
before
income Segment Segment Segment
(millions of (euro)) taxes assets investments liabilites Employees(2)
------------------------------------------------------------------------------------------
T-Com(1) 2003 4,247 29,030 2,324 4,549 139,548
------------------------------------------------------------------------------------------
2002 3,604 33,782 3,273 13,120 153,065
------------------------------------------------------------------------------------------
2001 4,673 -- -- -- --
------------------------------------------------------------------------------------------
T-Mobile(1) 2003 831 50,025 3,813 17,617 41,767
------------------------------------------------------------------------------------------
2002 (23,754) 57,655 5,766 20,224 38,943
------------------------------------------------------------------------------------------
2001 (6,441) -- -- -- --
------------------------------------------------------------------------------------------
T-Systems(1) 2003 (138) 5,665 708 4,314 42,108
------------------------------------------------------------------------------------------
2002 (1,990) 6,646 3,551 5,268 43,482
------------------------------------------------------------------------------------------
2001 (389) -- -- -- --
------------------------------------------------------------------------------------------
T-Online(1, 3) 2003 104 1,532 116 212 2,637
------------------------------------------------------------------------------------------
2002 (471) 1,797 170 119 2,536
------------------------------------------------------------------------------------------
2001 (820) -- -- -- --
------------------------------------------------------------------------------------------
Group Headquarters &
Shared Services 2003 (4,071) 10,631 455 41,334 25,203
------------------------------------------------------------------------------------------
2002 (4,690) 12,978 551 34,539 17,870
------------------------------------------------------------------------------------------
2001 402 -- -- -- --
------------------------------------------------------------------------------------------
Reconciliation(1) 2003 425 (1,232) (349) (3,255) --
------------------------------------------------------------------------------------------
2002 151 (1,332) (149) (844) --
------------------------------------------------------------------------------------------
2001 14 -- -- -- --
------------------------------------------------------------------------------------------
Group 2003 1,398 95,651 7,067 64,771 251,263
------------------------------------------------------------------------------------------
2002 (27,150) 111,526 13,162 72,426 255,896
------------------------------------------------------------------------------------------
2001 (2,561) -- -- -- --
------------------------------------------------------------------------------------------
(1) According to new structure (see Note on Segment reporting (36)).
(2) Average number of employees for the year.
(3) Figures are calculated in accordance with the provisions of German GAAP, as
applied throughout the Deutsche Telekom Group, and differ from those
published in the reports of T-Online International AG under the IFRSs.
170
Segments by geographic area.
--------------------------------------------------------------------------------------------------
Segment assets Segment investments
----------------------------- -----------------------------
(millions of (euro)) Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
--------------------------------------------------------------------------------------------------
Germany 46,065 51,707 3,201 6,883
--------------------------------------------------------------------------------------------------
European Union (excluding Germany) 16,459 20,370 824 2,694
--------------------------------------------------------------------------------------------------
Rest of Europe 10,878 12,006 986 1,173
--------------------------------------------------------------------------------------------------
North America 21,815 26,448 2,033 2,228
--------------------------------------------------------------------------------------------------
Other 434 995 23 184
--------------------------------------------------------------------------------------------------
Group 95,651 111,526 7,067 13,162
--------------------------------------------------------------------------------------------------
T-Com.
The T-Com segment is responsible in particular for Deutsche Telekom's
fixed-network business, where it is one of Europe's largest operators. In the
upstream market, T-Com provides network-related services to all of Deutsche
Telekom's divisions, as well as around 200 telecommunications companies. In
Germany, T-Com serves residential and business customers with a broad range of
products and services. Small and medium-sized enterprises (SMEs) benefit from
T-Com's end-to-end, integrated IT and telecom solutions. Shareholdings in MATAV
(Hungary), HT-Hrvatske telekommunikacije (Croatia), and Slovak Telecom
(Slovakia) (formerly Slovenske Telekommunikacie) have given T-Com a foothold in
Central and Eastern European markets. The DeTeMedien business previously shown
under T-Online has been reported at T-Com since January 1, 2003. T-Com has had
its own brand identity under the umbrella of the Deutsche Telekom Group since
August 1, 2003.
Net revenue decreased in the year under review by EUR 1,375 million to EUR
25,116 million. This is largely attributable to the reduction in revenue as a
result of the sale and ensuing deconsolidation of the subsidiaries of Kabel
Deutschland. In addition, regulatory decisions, further interconnection of
carriers, and the weak economic environment also had an impact on revenue. By
contrast, revenue in the local loop in Germany continued to grow as a result of
higher access charges, the continued migration of customers from analog to more
advanced ISDN lines, and the roll-out of DSL lines, slightly more than
offsetting the decline in call revenues driven by the level of regulation and
competition. Lower revenues from data communications as a result of the economic
situation and from terminal equipment also had a negative impact on net revenue.
Revenue generated in Eastern Europe is at the same level as in the previous
year.
Revenue from business with other segments amounting to EUR 4,090 million relates
mainly to network and support services billed by T-Com to other segments, and to
the provision of fixed-network terminal equipment for other segments. This
year's figure is on a par with the previous year.
In the year under review, depreciation and amortization decreased by EUR 370
million year-on-year to EUR 5,169 million. This is primarily due to the reduced
volume of depreciation following the disposal of property, plant, and equipment
as part of the sale of the remaining cable business at the beginning of 2003.
The reduction in capital expenditure at T-Com in Germany also had an impact on
the level of depreciation and amortization. The net interest expense reflects
the level of financial liabilities assigned to the segment. The decrease in the
net interest expense by EUR 247 million from EUR 562 million to EUR 315 million
relates in particular to the sharp decline in T-Com's debt in the year under
review. By contrast, the loss related to associated and related companies
increased. In the year under review, the loss related to associated and related
companies was more heavily impacted than in 2002, primarily due to expenses
arising from minority interests, in particular for the the interest in Toll
Collect; the prior-year figure was affected by valuation adjustments on loans to
associated companies of Kabel Deutschland.
Despite a decline in net revenues, income before income taxes increased by EUR
643 million to EUR 4,247 million in the year under review. In addition to the
reasons indicated above, this increase is due to improved efficiency relating to
operating expenses: in particular, decreases were achieved in rental and lease
expenses, losses on accounts receivable, expenses for domestic and international
upstream telecommunications services, raw materials and supplies, as well as
Consolidated financial statements
Notes 171
advertising, travel and consulting expenses. In addition, income from the sale
of the remaining cable companies helped to increase income before income taxes.
These proceeds were partly offset, however, by expenses for transfers to
accruals, mainly for restructuring and increased additions to pension accruals.
The reduction in segment assets to EUR 29,030 million is due in particular to
the decline in property, plant, and equipment in connection with the sale of the
remaining cable companies, as well as the depreciation of property, plant, and
equipment. As in the previous year, the investments in T-Com's segment assets
were mainly made in technical equipment and advance payments as well as
construction in progress. These investments were driven by the expansion and
upgrading of the local loop, the roll-out of the new transmission platform
SDH200+, and the increasing number of DSL lines. Capital expenditure decreased
further in comparison with previous years. Segment liabilities consist mainly of
financial liabilities. This decrease reflects the positive development of the
net worth, financial position, and results of T-Com.
T-Mobile.
In the first quarter of 2003, T-Mobile International AG and therefore all the
subsidiaries and investments of T-Mobile International AG were transferred to
Deutsche Telekom AG's wholly owned subsidiary "T-Mobile International Holding
GmbH". T-Mobile International Holding's mobile communications companies, which
are now consolidated in the T-Mobile segment, account for all the activities of
the T-Mobile International group. Via these subsidiaries, T-Mobile operates a
transatlantic GSM mobile communications network and thus offers the advantages
of a standardized technical platform for a broad range of customers mainly in
Germany, the United States, the United Kingdom, Austria, the Czech Republic, and
the Netherlands. T-Mobile also holds substantial minority interests in mobile
communications companies, particularly in Poland and Russia. In addition to
T-Mobile International Holding as the parent company, the companies that are
fully consolidated as operational subsidiaries primarily include T-Mobile
Deutschland, T-Mobile UK, T-Mobile USA, T-Mobile Austria, T-Mobile Czech
Republic, and T-Mobile Netherlands.
The increase in net revenue by EUR 3,233 million to EUR 21,572 million reflects
in particular the considerable increase in the number of subscribers in almost
all the mobile communications networks under T-Mobile's majority control. In
2003, T-Mobile's mobile communications subsidiaries in Germany, the United
States, the United Kingdom, the Czech Republic, and the Netherlands recorded a
substantial increase in subscribers; even in Austria, customer levels remained
stable despite a fiercely competitive environment. T-Mobile succeeded in
increasing its revenue once more in 2003 despite unfavorable exchange rate
trends. The full-year consolidation of T-Mobile Netherlands also had a positive
effect on net revenue in 2003. The company was only consolidated over three
months in 2002.
Revenue of EUR 1,206 million from business with other segments was primarily
generated within Germany through network interconnection services (so-called
"mobile terminated calls").
Depreciation and amortization decreased by EUR 22,089 million year-on-year,
mainly due to the non-recurrence of the need for nonscheduled write-downs of
licenses and goodwill totaling EUR 20,795 million that was identified as part of
the strategic review carried out in 2002. In 2003, on the other hand, the
T-Mobile group merely charged nonscheduled write-downs totaling EUR 61 million,
as well as regular depreciation and amortization. In addition, the first-time
full consolidation of T-Mobile Netherlands increased depreciation and
amortization in the year under review.
The net interest expense amounting to EUR 992 million is almost on a par with
the previous year, whereas the loss related to associated and related companies
in 2002 improved by EUR 524 million, resulting in income of EUR 97 million. In
contrast to the 2003 financial year, the prior-year loss related to associated
and related companies was impacted for nine months in the amount of EUR 292
million by the negative contribution of T-Mobile Netherlands, which was only
fully consolidated from September 30, 2002. The write-down in full of the
minority interest in the Canadian company Microcell also had a negative effect
amounting to EUR 51 million on this figure in 2002.
172
The loss before income taxes of the T-Mobile segment in 2002 was turned around
by an improvement of EUR 24,585 million, resulting in an income of EUR 831
million in 2003. On the one hand, this turnaround is attributable to the
non-recurrence of the nonscheduled write-downs of goodwill and licenses in the
previous year. On the other hand, the proceeds from the sale of part of the
interest in the Russian company MTS amounting to around EUR 352 million, as well
as tangible economies of scale and synergy effects, made a key contribution to
improving operating performance.
Segment assets amounting to EUR 50,025 million continue to consist mainly of
intangible assets, in particular mobile communications licenses and goodwill.
The decline in the segment's intangible assets and property, plant, and
equipment is due primarily to the exchange rate effects caused by translating
the currencies of foreign subsidiaries - in particular T-Mobile USA and T-Mobile
UK - and to continued amortization. In 2003, investments focused in particular
on property, plant, and equipment as a result of the construction of the UMTS
network in Europe, as well as the further expansion of the U.S. network. Segment
liabilities consist primarily of debt; the decline is mainly attributable to the
debt reduction in 2003.
T-Systems.
T-Systems provides the Deutsche Telekom Group's national and international key
accounts with tailored information and communication technology (ICT) solutions.
T-Systems provides the infrastructure needed to do this, implements customer
solutions, and operates end-to-end business processes based on these solutions
if required. T-Systems is represented in over 20 countries by branch offices and
its own national companies.
Net revenue increased in the year under review by EUR 289 million to EUR 7,184
million. This was primarily due to the continued positive development of the
Telecommunications (TC) unit which, in turn, was largely attributable to the
implementation of measures designed to improve quality in domestic and
international network services business. This was offset by the decline in net
revenues in the Information Technology (IT) unit as well as the sale of
interests in T-Systems SIRIS, T-Systems MultiLink, TELECASH
Kommunikations-Service GmbH, and T-Systems CS in 2003.
In contrast, revenues generated with other segments fell by EUR 164 million
year-on-year to EUR 3,430 million.
The decrease of EUR 1,117 million in depreciation and amortization to EUR 1,499
million is particularly attributable to the nonscheduled write-downs on goodwill
and property, plant, and equipment in the previous year amounting to EUR 600
million and a nonscheduled write-down on submarine cables in the North Atlantic
and the Pacific. There were no comparable activities in the year under review.
The net financial expense improved in the year under review from EUR 118 million
to EUR 43 million, primarily as a result of debt reduction.
In addition, the decrease of EUR 1,852 million in the loss before income taxes
to EUR 138 million in 2003 is mainly attributable to the comprehensive measures
implemented as part of the Triple-E program to increase efficiency and quality.
Operating expenses decreased considerably in 2003 as a result of improved
business processes and consistent cost management. In addition, the proceeds
from the sale of T-Systems SIRIS and TELECASH Kommunikations-Service GmbH had an
impact in the period under review. These were offset by expenses to the same
amount, mainly as a result of losses and transaction costs relating to the sale
of other subsidiaries. Factors affecting the loss before income taxes in the
previous year included restructuring expenses.
Segment assets amounting to EUR 5,665 million consist mainly of intangible
assets, which essentially comprise goodwill relating to the former T-Systems
ITS. In 2003, segment assets decreased in particular as a result of goodwill
amortization. Segment liabilities consist mainly of financial liabilities.
T-Online.
T-Online is one of the leading Internet service providers in Germany. T-Online
operates a combined business model within the Deutsche Telekom Group, consisting
of the access business as well as content, services, e-commerce, and
advertising. The segment is represented by subsidiaries in France, Spain,
Portugal, Austria, and Switzerland. The DeTeMedien business previously shown
under T-Online has been managed by the T-Com segment since January 1, 2003.
Consolidated financial statements
Notes 173
The net revenue of the T-Online segment increased further in the year under
review by EUR 271 million to EUR 1,662 million and thus continued the upward
trend of the previous years. This development is due, in particular, to the
increase in subscriber numbers in Germany, as well as the growth in demand for
content and services, and the resulting increase in time spent online.
Net revenue from the internal provision of services between segments was on a
par with the previous year.
Depreciation and amortization mainly consists of goodwill amortization and
remained almost unchanged year-on-year at EUR 430 million. Net interest income
declined year-on-year to EUR 110 million as a result of changes in the
development of the capital market. By contrast, the loss related to associated
and related companies of EUR 265 million in 2002 was turned around by an
improvement of EUR 355 million, resulting in an income of EUR 90 million in
2003. This is primarily the result of a write-up of the shareholding in
comdirect bank in the year under review due to its positive development, and the
non-recurrence of nonscheduled write-downs on goodwill, also relating to the
shareholding in comdirect bank, from the previous year.
The turnaround of the loss before income taxes in 2002 to an income of EUR 104
million in 2003 after an improvement of EUR 575 million is mainly due to
increased net revenues and the fact that positive income related to associated
and related companies was recorded in 2003, after a loss in 2002.
The assets of the T-Online segment consist mainly of intangible assets,
primarily goodwill. The decrease in segment assets in the year under review is
due in particular to the amortization of goodwill. The year-on-year decline in
investing activities relates mainly to investments in property, plant, and
equipment, and financial assets. The increase in segment liabilities is
attributable to short-term liabilities to Deutsche Telekom AG.
Group Headquarters & Shared Services.
"Group Headquarters & Shared Services" (GHS) includes all group units which
cannot be allocated to an individual segment. Deutsche Telekom completed its
reorganization to create a virtual Strategic Management Holding in the 2003
financial year. As part of this reorganization, the unit reported as "Other"
until the first quarter of 2003 has been renamed "Group Headquarters & Shared
Services". Group Headquarters now focuses on strategic and cross-divisional
management functions. All other operating functions not directly related to the
segments' core businesses are now the responsibility of Shared Services. In
particular, these include the real estate business, billing services, fleet
management by DeTeFleetServices GmbH, and Vivento.
GHS's net revenue amounting to EUR 304 million consists largely of the revenues
generated by the real estate companies. The year-on-year decrease is mainly due
to lower revenues from project development.
The increase in revenue from the internal provision of services between segments
by EUR 126 million to EUR 3,964 million relates mainly to changes in the
composition of the Deutsche Telekom Group. Revenue generated by
DeTeFleetServices GmbH in the 2003 financial year is set against net revenues
from only six months in the previous year. This was offset by passing on cost
savings in customer billing as well as price reductions at the Real Estate
shared service to the operational segments.
The decrease of EUR 417 million in depreciation and amortization to EUR 881
million reflects in particular the lower amortization base as a result of the
continued reduction of real estate assets. The increase of EUR 364 million in
the net interest expense is due to a decline in internal net interest income. In
addition, the loss related to associated and related companies decreased
substantially by EUR 1,090 million to EUR 3 million in 2003. One of the main
reasons for this was the valuation adjustments included in the previous year on
the shares held in France Telecom (EUR 613 million) and on other investments in
noncurrent securities (EUR 384 million). There were no comparable valuation
adjustments in the year under review.
174
The loss before income taxes of EUR 4,071 million was positively impacted by
gains on the sale of minority interests in Eutelsat (EUR 65 million), the joint
venture UMC (Ukrainian Mobile Communications), (EUR 54 million), Celcom (EUR 20
million), Globe Telecom (EUR 72 million), and Inmarsat (EUR 32 million), as well
as transfer payments for T-Com staff transferred to Vivento amounting to EUR 131
million. The loss before income taxes in 2002 included higher proceeds from the
sale of T-Online shares and PT Satelindo. Furthermore, additions to Civil
Service Health Insurance Fund accruals due to the adjustment of the discount
rate applied, increased additions to accruals for pensions and employee
severance payments, and personnel costs for employees transferred to Vivento
also had a negative impact in the period under review. This contrasts with
expenses in the previous year arising from the sale of receivables as well as
from the launch of a uniform brand for individual mobile communications
companies.
The reduction in segment assets to EUR 10,631 million is attributable in
particular to the decrease in property, plant, and equipment and in financial
assets. This resulted primarily from the sale of further tranches of real estate
assets and the sale of shares in various minority interests and other
investments in noncurrent securities. GHS's investing activities in the 2003
financial year were on a par with the previous year.
Reconciliation.
The items to be reconciled relate mainly to consolidation measures. As in the
previous year, the reconciliation does not include any additional items for the
year under review. In 2001, this included a final nonscheduled write-down in the
form of a general valuation adjustment amounting to EUR 466 million, made as
part of Deutsche Telekom's strategy to dispose more rapidly of a considerable
proportion of its real estate portfolio. This valuation adjustment, which does
not affect the operational segments, has no effect on the internal operation of
the segments; it is almost exclusively an element of the depreciation and
amortization shown in the reconciliation.
37 Related party disclosures.
Federal Republic of Germany and majority shareholdings.
Deutsche Telekom has numerous business relationships with the Federal Republic
of Germany and the companies in which it holds majority shareholdings. All
relationships are conducted on an arm's length basis. Key related parties
include Deutsche Post AG and Kreditanstalt fur Wiederaufbau (KfW).
In the 2003 financial year, Deutsche Telekom purchased goods and services
amounting to EUR 0.7 billion from the Deutsche Post World Net group. These
mainly relate to postage charges for letters and packages. In the same period,
Deutsche Post World Net group purchased goods and services totaling EUR 0.5
billion from Deutsche Telekom. This amount primarily consists of IT products and
services.
In addition, Deutsche Telekom AG and Deutsche Postbank AG have entered into a
master credit agreement in the amount of EUR 0.2 billion. In the 2003 financial
year, this credit line was drawn down to a maximum of EUR 0.1 billion. This
agreement is initially valid until May 30, 2004.
Deutsche Telekom AG also has a credit facility with Deutsche Postbank AG as part
of the EUR 9 billion multi-currency syndicated loan amounting to EUR 0.3
billion, which however was not utilized in the 2003 financial year.
The Company's Dutch financing subsidiary, Deutsche Telekom Finance, has taken
out three loans of GBP 150 million each with Kreditanstalt fur Wiederaufbau
(total volume EUR 637 million). The loans were extended at the normal market
rate of interest which is based on Deutsche Telekom AG's current rating, among
other things. The loans are due in one, four, and six years.
Consolidated financial statements
Notes 175
Associated companies.
Deutsche Telekom also has business relationships with numerous associated
companies. All delivery and service relationships involving these companies were
also conducted on an arm's length basis. Key associated companies include Virgin
Mobile Telecoms and Toll Collect.
The Company's British mobile communications subsidiary, T-Mobile UK, generated
revenue from the joint venture Virgin Mobile Telecoms amounting to EUR 0.3
billion. This figure relates to call charges and interconnection fees. At the
same time, the contractually agreed allowance for marketing expenses, which
amounted to EUR 0.2 billion in the year under review, was reimbursed to Virgin
Mobile Telecoms.
T-Systems generated revenues of EUR 0.1 billion from business with the Toll
Collect joint venture. This amount consists mainly of services for the
integration and implementation of hardware and software components for the toll
collection system.
Natural persons.
No transactions have taken place between Deutsche Telekom and persons in key
management positions.
--------------------------------------------------------------------------------
38 Compensation of the Board of Management and the Supervisory Board.
Under the terms of their service contracts, the members of the Group Board of
Management are entitled to fixed and variable, performance-related compensation
components. The compensation of the members of the Board of Management is in
line with market levels.
Performance-related compensation is determined on the basis of the targets
agreed between the Supervisory Board General Committee and the members of the
Board of Management, and the level of target achievement as determined by the
General Committee at the end of the financial year.
In observance of the requirements of German commercial and accounting
legislation, a total of EUR 12,996,215.92 is reported as compensation for the
members of the Board of Management for the past financial year. This figure
includes EUR 928,386.75 of noncash compensation which is treated as noncash
benefits. EUR 82,052.83 of the accruals recognized in 2002 was reversed in
conjunction with the payment in the 2003 financial year of the variable
compensation for the 2002 financial year.
Subject to the condition that the financial statements of Deutsche Telekom AG
are approved in their current form, the members of the Board of Management shall
receive the following total compensation for the 2003 financial year (fixed
annual salary, variable compensation, and long-term incentives):
Fixed Variable Long-term incentive:
Amounts (euro) annual salary compensation Stock options granted
Name in 2003 for 2003 for 2003
---------------------------------------------------------------------------------------------------
Kai-Uwe Ricke 1,250,000.00 1,375,000.00 0
---------------------------------------------------------------------------------------------------
Dr. Karl-Gerhard Eick 937,500.00 1,031,250.00 0
---------------------------------------------------------------------------------------------------
Dr. Heinz Klinkhammer 900,000.00 660,000.00 0
---------------------------------------------------------------------------------------------------
Josef Brauner 900,000.00 546,000.00 0
---------------------------------------------------------------------------------------------------
Rene Obermann 700,000.00 770,000.00 0
---------------------------------------------------------------------------------------------------
Konrad F. Reiss (pro rata since appointment) 711,694.00 898,438.00 0
---------------------------------------------------------------------------------------------------
Thomas Holtrop 700,000.00 770,000.00 0
---------------------------------------------------------------------------------------------------
Total 6,099,194.00 6,050,688.00 0
---------------------------------------------------------------------------------------------------
176
As in the previous year, no stock options from the 2001 Stock Option Plan were
granted to the members of the Board of Management in the 2003 financial year.
There was no increase in compensation for the 2003 financial year.
Compensation paid to former members of the Board of Management and their
surviving dependents totaled EUR 1,106,105.31. The accruals set up for ongoing
pensions and pension entitlements amounted to EUR 41,000,962.00. Indirect
pension obligations for former members of the Board of Management resulting from
pensions for civil servants via the Deutsche Telekom special pension fund in
accordance with Section 15 (1) of the Act concerning the Legal Provisions for
the former Deutsche Bundespost Staff (PostPersRG) amounted to EUR 3,393,899.00.
No accruals were recognized for these obligations.
Deutsche Telekom has not granted any loans to current or former members of the
Board of Management.
The compensation received by the members of the Supervisory Board is specified
under Section 13 of the Articles of Incorporation. The members of the
Supervisory Board receive EUR 25,000.00 per year. The Chairperson of the
Supervisory Board receives double, and the Deputy Chairperson one and a half
times that amount. Members of the Supervisory Board who were not in office for
the entire financial year shall receive one twelfth of the remuneration for each
month or part thereof that they hold a seat. Members of the Supervisory Board
receive an attendance fee amounting to EUR 200.00 for each meeting of the
Supervisory Board or its committees that they have attended. The Company
reimburses value-added tax payable on remuneration and expenses.
Compensation totaling EUR 593,625.02 was paid to the members of the Supervisory
Board in the 2003 financial year; individually, the members received the
following amounts:
Compensation
Member of the Supervisory Board (euro)
-------------------------------------------------------------------------------
Becker, Gert 11,416.67
-------------------------------------------------------------------------------
Brandl, Monika 27,200.00
-------------------------------------------------------------------------------
Falbisoner, Josef 27,000.00
-------------------------------------------------------------------------------
Dr. von Grunberg, Hubertus 27,200.00
-------------------------------------------------------------------------------
Holzwarth, Lothar 27,200.00
-------------------------------------------------------------------------------
Dr. Hundt, Dieter 26,800.00
-------------------------------------------------------------------------------
Dr. Leysen, Andre 0.00(1)
-------------------------------------------------------------------------------
Litzenberger, Waltraud 26,800.00
-------------------------------------------------------------------------------
Loffler, Michael 27,200.00
-------------------------------------------------------------------------------
Dr. Overhaus, Manfred 29,600.00
-------------------------------------------------------------------------------
Reich, Hans W 26,400.00
-------------------------------------------------------------------------------
Dr. Schinzler, Hans-Jurgen 17,066.67
-------------------------------------------------------------------------------
Dr. Schlede, Klaus G 18,466.67
-------------------------------------------------------------------------------
Schmitt, Wolfgang 28,400.00
-------------------------------------------------------------------------------
Schulze, Rudiger (2) 21,550.00
-------------------------------------------------------------------------------
Prof. Dr. Sihler, Helmut 11,616.67
-------------------------------------------------------------------------------
Sommer, Michael 26,600.00
-------------------------------------------------------------------------------
Steinke, Ursula 27,000.00
-------------------------------------------------------------------------------
Prof. Dr. Stolte, Dieter 26,800.00
-------------------------------------------------------------------------------
Treml, Franz (3) 19,708.33
-------------------------------------------------------------------------------
Walter, Bernhard 27,800.00
-------------------------------------------------------------------------------
Wegner, Wilhelm 30,600.00
-------------------------------------------------------------------------------
Dr. Wiedeking, Wendelin 17,266.67
-------------------------------------------------------------------------------
Dr. Winkhaus, Hans-Dietrich 19,066.67
-------------------------------------------------------------------------------
Dr. Zumwinkel, Klaus 44,866.67
-------------------------------------------------------------------------------
Total 593,625.02
-------------------------------------------------------------------------------
(1) Dr. Leysen waived compensation for his Supervisory Board activities.
(2) Mr. Schulze received Supervisory Board compensation of EUR 7,900.00 from
T-Mobile International AG, a wholly-owned subsidiary of Deutsche Telekom
AG, for the 2003 financial year for a mandate as a member of the
Supervisory Board of this company.
(3) Mr. Treml received Supervisory Board compensation of EUR 12,271.00 from
DeTeImmobilien, Deutsche Telekom Immobilien und Service GmbH, a
wholly-owned subsidiary of Deutsche Telekom AG, for the 2003 financial year
for a mandate as a member of the Supervisory Board of this company.
Consolidated financial statements
Notes 177
39 Proposal for appropriation of net income/loss of Deutsche Telekom AG.
The statement of income for the 2003 financial year reports net income of EUR
4,069,084,823.20. Of this net income, EUR 2,034,000,000.00 has been transferred
to retained earnings in accordance with Section 19 (3) of the Articles of
Incorporation. After deducting the amount transferred to retained earnings, this
results in cumulative unappropriated net income of EUR 2,035,084,823.20.
The Board of Management and the Supervisory Board of Deutsche Telekom AG will
propose to the shareholders' meeting to transfer the unappropriated net income
to retained earnings.
--------------------------------------------------------------------------------
40 Declaration of conformity with the German Corporate Governance Code in
accordance with Section 161 AktG.
In accordance with Section 161 AktG, the Board of Management and the Supervisory
Board submitted the mandatory declaration of conformity, and made it available
to shareholders on Deutsche Telekom's website on December 16, 2003.
The declaration of conformity by the publicly traded subsidiary T-Online
International AG has been made available to shareholders on T-Online
International AG's website.
--------------------------------------------------------------------------------
Bonn, March 11, 2004
Deutsche Telekom AG
Board of Management
/s/ Kai-Uwe Ricke
--------------------------------
Kai-Uwe Ricke
/s/ Dr. Karl-Gerhard Eick
--------------------------------
Dr. Karl-Gerhard Eick
/s/ Josef Brauner
--------------------------------
Josef Brauner
/s/ Thomas Holtrop
--------------------------------
Thomas Holtrop
/s/ Dr. Heinz Klinkhammer
--------------------------------
Dr. Heinz Klinkhammer
/s/ Rene Obermann
--------------------------------
Rene Obermann
/s/ Konrad F. Reiss
--------------------------------
Konrad F. Reiss
178
Auditor's report.
We have audited the consolidated financial statements (consisting of the
consolidated statement of income, the consolidated balance sheet, the
consolidated statement of cash flows, the consolidated statement of
sharehoulder's equity, the segment reporting, and the notes to the consolidated
financial statements) and the group management report of Deutsche Telekom AG,
which is combined with the management report of the Company, for the financial
year from January 1 to December 31, 2003. The preparation of the consolidated
financial statements and the group management report in accordance with German
commercial law is the responsibility of the Company's Board of Management. Our
responsibility is to express an opinion on the consolidated financial statements
and the combined management report based on our audit.
We conducted our audit of the consolidated annual financial statements in
accordance with Section 317 HGB and the generally accepted German standards for
the audit of financial statements promulgated by the Institut der
Wirtschaftsprufer in Deutschland (IDW). Those standards require that we plan and
perform the audit such that misstatements materially affecting the presentation
of the net assets, financial position and results of operations in the
consolidated financial statements in accordance with German principles of proper
accounting and in the combined management report are detected with reasonable
assurance. Knowledge of the business activities and the economic and legal
environment of the Company and evaluations of possible misstatements are taken
into account in the determination of audit procedures. The effectiveness of the
accounting-related internal control system and the evidence supporting the
disclosures in the consolidated financial statements and the combined management
report are examined primarily on a test basis within the framework of the audit.
The audit includes assessing the annual financial statements of the companies
included in consolidation, the determination of the companies to be included in
consolidation, the accounting and consolidation principles used and significant
estimates made by the Company's Board of Management, as well as evaluating the
overall presentation of the consolidated financial statements and the combined
management report. We believe that our audit provides a reasonable basis for our
opinion.
Our audit has not led to any reservations.
In our opinion, the consolidated financial statements give a true and fair view
of the net assets, financial position, and results of operations of the Group in
accordance with German principles of proper accounting. On the whole the
combined management report provides a suitable understanding of the Group's
position and suitably presents the risks of future development.
Stuttgart/Frankfurt am Main, March 11, 2004
Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
Stuttgart
(Prof. Dr. Pfitzer) (Hollweg)
Wirtschaftsprufer Wirtschaftsprufer
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Frankfurt am Main
(Frings) (Laue)
Wirtschaftsprufer Wirtschaftsprufer
Consolidated financial statements
Summary of differences between German GAAP and U.S. GAAP Notes 179
Summary of differences between
German GAAP and U.S. GAAP.
Our results as reported under German GAAP differ from our results as reconciled
to U.S. GAAP, as summarized below. A more detailed discussion and quantification
of significant differences between German GAAP and U.S. GAAP applicable to our
consolidated financial statements are described in notes 41 et seq. of our
consolidated financial statements contained in our annual report on Form 20-F,
which can be found on our website at http://www.deutschetelekom.com.
The differences between German GAAP and U.S. GAAP that have a significant impact
on net income/(loss) and shareholders' equity are summarized below. Other
differences may arise in future years, resulting from new transactions and/or
the adoption of new accounting standards.
Differences in bases of long-lived assets.
Adjustments to valuation of fixed assets - Under German GAAP, we previously
wrote-down fixed assets primarily relating to our real estate holdings. This
write-down was not required under U.S. GAAP for real estate classified as held
and used. This results in a difference in the carrying basis of land and
buildings between U.S. GAAP and German GAAP. This basis difference results in
higher depreciation expenses to be recorded under U.S. GAAP than under German
GAAP. In addition, these bases differences will affect the gains or losses to be
recognized upon sale of real estate, to the extent these differences in carrying
values relate to assets sold.
Real estate sale and leaseback - In 2002 and 2003, we entered into a series of
sale and leaseback transactions underlying our real estate holdings. These
leasebacks generally qualify as off-balance-sheet operating leases under German
GAAP. However, these transactions have been accounted for as financings under
U.S. GAAP due to our continuing involvement. This results in interest expense
and the continuation of depreciation expense for U.S. GAAP, as compared with
gains/ losses on sales of real estate and rent expense for German GAAP.
--------------------------------------------------------------------------------
2003 2002 2001
billions billions billions
of (euro) of (euro) of (euro)
--------------------------------------------------------------------------------
Net income/(loss) - German GAAP 1.3 (24.6) (3.5)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net income/(loss) - U.S. GAAP 2.9 (22.0) 0.5
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shareholders' equity - German GAAP 33.8 35.4 66.3
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shareholders' equity - U.S. GAAP 45.0 45.4 73.7
--------------------------------------------------------------------------------
Differences in valuations of goodwill and other assets -The differences between
German GAAP and U.S. GAAP in the determination of total purchase consideration
in purchase business combinations has resulted in differences in the initial
valuation of goodwill and other intangible and tangible assets. Purchase price
differences between German and U.S. GAAP have been generated from business
combinations due to net assets acquired, valuation of shares and stock options
issued (including subsidiary shares issued in a business combination), valuation
of underlying assets and liabilities (including deferred taxes), dates used to
calculate consideration paid as well as the date at which an acquisition is
considered consummated. These differences have resulted in differences in
depreciation and amortization expenses. In 2002, the U.S. GAAP accounting for
goodwill and indefinite lived intangible assets changed, resulting in these
intangibles no longer being amortized, but rather subject to an annual
impairment test.
Capitalization and amortization of mobile communication licenses - Under German
GAAP, we begin to amortize our communication licenses, primarily European UMTS
licenses, upon acquisition and continue to amortize these licenses through their
expected period of use. Under U.S. GAAP, amortization begins at the time the
network is placed into service. In addition, interest on mobile network
construction related to debt is expensed under German GAAP, whereas under
180
U.S. GAAP this interest is capitalized during the period the mobile network is
being constructed, and is subsequently amortized over the expected period of
use. This results in deferrals of interest and amortization expenses for U.S.
GAAP, and a higher carrying basis of our mobile network fixed assets. Once the
networks are in use, capitalization of these costs will cease and related costs
capitalized will be amortized into earnings over the remaining expected period
of use.
Differences in equity transactions by our subsidiaries.
Effects of dilution gains - Transactions conducted by our consolidated
subsidiaries or associated companies, using their common equity as currency,
directly results in a reduction of our ownership percentage. Under German GAAP,
we recognize "dilution gains" from share issuances by subsidiary or associated
companies for cash, but do not recognize gains for shares issued in non-cash
transactions (for example, as consideration for a business acquisition). Under
U.S. GAAP, we recognize dilution gains both for cash and non-cash transactions.
Differences in revenue recognition.
Deferred income - Under German GAAP, we recognize revenues in the period when
earned by the delivery of goods or the rendering of services. Under U.S. GAAP,
we defer certain activation and one-time fees and related direct costs (to the
extent of revenues deferred), and amortize these revenues and expenses over the
expected duration of our customer relationship. We expense any excess costs as
customer acquisition expense. Additionally, we deferred revenues on certain
other contracts under U.S. GAAP, and are amortizing these revenues over their
contract lives.
Differences in income taxes.
Deferred taxes - Under German GAAP, deferred taxes have not been recognized for
temporary differences that arose during tax-free periods, temporary differences
that are not expected to reverse in the foreseeable future and temporary
differences that are expected to reverse during future periods in which net
operating losses are expected to be available to offset income taxes that would
otherwise be payable. Under U.S. GAAP, deferred taxes generally are recognized
for all temporary differences, including temporary differences during tax-free
periods. In addition, in contrast to German GAAP, U.S. GAAP requires the
recognition of deferred taxes attributable to net operating losses.
Other differences.
Other differences in our financial results between German GAAP and U.S. GAAP
consist primarily of the accounting for capitalization of internally developed
software, unrealized gains on marketable securities, deferral of gains on
divestitures, valuation of residual interests in asset backed securitizations,
hedge accounting from derivatives, additions to pension liabilities and
investments in equity investees, which historically are recurring differences.
In 2003, other differences also includes differences resulting from the adoption
of a new U.S. GAAP accounting standard for asset retirement obligations.
Further information
Supervisory board seats of the members of Deutsche Telekom AG's Board of
Management 184
Other supervisory board seats of the members of Deutsche Telekom AG's
Supervisory Board 185
Index 188
Glossary 189
Financial calendar 191
Contacts 192
Deutsche Telekom worldwide V/VI
Key statistical data of the Deutsche Telekom Group VII
[GRAPHIC]
Perfection.
Define quality. Demand quality.
Quality and drive for perfection enhance efficiency.
[GRAPHIC]
184
Supervisory board seats of the members of Deutsche Telekom AG's Board of
Management.
Kai-Uwe Ricke.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o T-Online International AG, Darmstadt (since 10/2001), Chairman of the
Supervisory Board (since 9/2002)
o T-Mobile International AG, Bonn (since 11/2002), Chairman of the
Supervisory Board (since 12/2002)
o T-Mobile USA, Inc., Bellevue (U.S.), Board of Directors (since 5/2001)
o T-Systems International GmbH, Frankfurt/Main, Chairman of the Supervisory
Board (since 1/2003)
Dr. Karl-Gerhard Eick.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o GMG Generalmietgesellschaft mbH, Munster (since 1/2000), Chairman of the
Supervisory Board (since 5/2002)
o Sireo Real Estate Asset Management GmbH, Frankfurt/Main, Chairman of the
Supervisory Board (since 5/2001)
o DeTeImmobilien, Deutsche Telekom Immobilien und Service GmbH, Munster
(since 2/2002)
o DFMG, Deutsche Funkturm GmbH, Munster, Deputy Chairman of the Supervisory
Board (since 1/2002)
o T-Mobile International AG, Bonn (since 3/2000)
o T-Mobile USA, Inc., Bellevue (U.S.), Board of Directors (since 5/2001)
o T-Online International AG, Darmstadt (since 2/2000)
o T-Systems International GmbH, Frankfurt/Main (since 6/2002)
Member of the supervisory boards of other companies or institutions:
o Dresdner Bank Luxembourg S.A., Luxembourg, Board of Directors (since
1/2001)
Josef Brauner.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o T-Mobile International AG, Bonn (since 5/2003)
o T-Online International AG, Darmstadt (from 2/2000 to 5/2003)
o T-Systems International GmbH, Frankfurt/Main (since 11/2000)
o Deutsche Telekom Network Projects & Services GmbH, Bonn (since 5/2003)
o CAP Customer Advantage Program GmbH, Cologne, Chairman of the Supervisory
Board (since 4/2002)
Member of the supervisory boards of other companies or institutions:
o FC Bayern Munchen AG, Munich (since 4/2003)
o Karstadt Warenhaus AG, Essen (since 4/2003)
Thomas Holtrop.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o T-Online France S.A.S., Paris (France), Member of the Conseil
d'administration (Board of Directors) (from 4/2001 to 7/2003)
o T-Online France S.A.S., Paris (France), Chairman of the Conseil
d'administration (since 7/2003)
o Club Internet S.A.S., Paris (France), Chairman of the Supervisory Board
(from 4/2001 to 7/2003)
o Ya.com Internet Factory, S.A.U., Madrid (Spain), Presidente del Consejo de
Administracion (Chairman of the Board of Directors) (since 5/2001)
o T-Online Travel AG, Darmstadt, Chairman of the Supervisory Board (from
4/2002 to 6/2003)
Dr. Heinz Klinkhammer.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o DeTeImmobilien, Deutsche Telekom Immobilien und Service GmbH, Munster
(since 2/2002), Chairman of the Supervisory Board (since 4/2002)
o GMG Generalmietgesellschaft mbH, Munster (since 6/1996)
o Sireo Real Estate Asset Management GmbH, Frankfurt/Main (since 5/2001)
o T-Mobile International AG, Bonn (since 5/2003)
o T-Online International AG, Darmstadt (since 2/2003)
o T-Systems International GmbH, Frankfurt/ Main (since 11/2000)
Member of the supervisory boards of other companies or institutions:
o Federal Posts and Telecommunications Agency, Bonn, Administrative Board
(since 2000)
Rene Obermann.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o T-Systems International GmbH, Frankfurt/ Main (from 6/2002 to 1/2003)
o T-Mobile Austria GmbH, Vienna (Austria) (from 9/2001 to 4/2004), Chairman
of the Supervisory Board (from 4/2002 to 1/2003)
o T-Mobile Deutschland GmbH, Bonn, Chairman of the Supervisory Board (since
6/2002)
o Ben Nederland Holding B.V., Amsterdam (Netherlands), Chairman of the
Supervisory Board (from 10/2001 to 1/2003)
o T-Mobile UK Ltd., Borehamwood (UK) (from 9/2001 to 1/2004)
Konrad F. Reiss.
Member of the supervisory boards of the following subsidiaries, associated and
related companies:
o DETECON International GmbH, Bonn (since 2/2003), Chairman of the
Supervisory Board (since 3/2003)
o Deutsche Telekom Network Projects & Services GmbH, Bonn, Chairman of the
Supervisory Board (since 5/2003)
Further information
Supervisory board seats 185
Other supervisory board seats of the members of
Deutsche Telekom AG's Supervisory Board.
Dr. Klaus Zumwinkel.
Member of the Supervisory Board since March 7, 2003
Chairman of the Supervisory Board since March 14, 2003
Chairman of the Board of Management of Deutsche Post AG
o Allianz Versicherungs-AG, Munich (from 1/2001 to 12/2003)
o Deutsche Lufthansa AG, Cologne (since 6/1998)
o Deutsche Postbank AG, Bonn, Chairman of the Supervisory Board* (since
1/1999)
o Karstadt Quelle AG, Essen (since 5/2003)
o Tchibo Holding AG, Hamburg (from 7/1997 to 8/2003)
Member of comparable supervisory bodies of companies in Germany or abroad:
o C.V. International Post Corp. U.A., Amsterdam (Netherlands), Deputy
Chairman of the Board of IPC* (since 4/1990)
o Danzas Holding AG, Switzerland, Chairman of the Board of Directors* (from
3/1999 to 12/2003)
o Deutsche Post Ventures GmbH, Bonn, Investment Committee* (from 5/2000 to
5/2003)
o DHL Worldwide Express B.V., Netherlands, Board of Directors* (from 7/1998
to 11/2003)
o Morgan Stanley, New York (U.S.), Board of Directors (since1/2004)
Franz Treml.
Member of the Supervisory Board since July 8, 2003
Deputy Chairman of the Supervisory Board since August 21, 2003
Deputy Chairman of ver.di trade union
o DeTeImmobilien, Deutsche Telekom Immobilien und Service GmbH, Munster,
Deputy Chairman (since 3/2000)
o DBV-Winterthur - Leben, Wiesbaden (since 4/2000)
Gert Becker.
Member of the Supervisory Board from January 1, 1995 to May 20, 2003
Former Chairman of the Board of Management of Degussa AG, Dusseldorf
o Bankhaus Metzler KGaA, Frankfurt/Main, Chairman of the Supervisory Board
(since 1/1997)
o Bilfinger Berger AG, Mannheim, Chairman of the Supervisory Board (since
7/1983)
Monika Brandl.
Member of the Supervisory Board since November 6, 2002
Member of the Central Works Council at Deutsche Telekom AG, Bonn
o no other seats -
Josef Falbisoner.
Member of the Supervisory Board since October 2, 1997
Head of ver.di District of Bavaria
o PSD Bank Munich eG, Augsburg office (since 6/1994)
Dr. Hubertus von Grunberg.
Member of the Supervisory Board since May 25, 2000
Member of the Supervisory Board at Continental Aktiengesellschaft, Hanover, et
al.
o Allianz Versicherungs-AG, Munich (since 5/1998)
o Continental AG, Hanover (since 6/1999)
o MAN Aktiengesellschaft, Munich (since 2/2000)
o SAI Automotive, Frankfurt/Main (from 8/2002 to 6/2003)
Member of comparable supervisory bodies of companies in Germany or abroad:
o Schindler Holding AG, Hergiswil (Switzerland), Board of Directors (since
5/1999)
Lothar Holzwarth.
Member of the Supervisory Board since November 6, 2002
Chairman of the Works Council at Deutsche Telekom AG, Business Customer Branch
Office, Southwestern District, Stuttgart
o PSD Bank RheinNeckarSaar eG (since 1/1996), Chairman of the Supervisory
Board (since 7/2000)
Dr. sc. techn. Dieter Hundt.
Member of the Supervisory Board since January 1, 1995
Managing Shareholder of Allgaier Werke GmbH, Uhingen and President of the
Confederation of German Employers' Associations (BDA), Berlin
o EvoBus GmbH, Stuttgart (since 5/1995)
o Stauferkreis Beteiligungs-AG, Goppingen, Chairman of the Supervisory Board
(since 1/1999)
o Stuttgarter Hofbrau AG, Stuttgart (since 4/1993)
o Stuttgarter Hofbrau Verwaltungs-AG, Stuttgart (since 5/1999), Deputy
Chairman of the Supervisory Board (since 9/2003)
o Landesbank Baden-Wurttemberg, Stuttgart, Administrative Board (since
1/1999)
Dr. h.c. Andre Leysen.
Member of the Supervisory Board from January 1, 1995 to February 28, 2003
Honorary Chairman of the Board of Directors of Gevaert NV, Mortsel/Antwerp
(Belgium)
o E.ON AG, Dusseldorf (from 1993 to 4/2003)
o Schenker AG, Essen (from 1972 to 5/2003)
* Supervisory board seats in companies that are members of the same group, as
defined in Section 100(2), Sentence 2 AktG (German Stock Corporation Act).
186
Waltraud Litzenberger.
Member of the Supervisory Board since June 1, 1999 Member of the Works Council
at Deutsche Telekom AG, Technical Customer Service Branch Office, Central
District, Mainz
o PSD Bank Koblenz eG, Koblenz (since 9/1998)
Michael Loffler.
Member of the Supervisory Board since January 1, 1995 Member of the Works
Council at Deutsche Telekom AG, Networks Branch Office, Dresden
o no other seats -
Dr. Manfred Overhaus.
Member of the Supervisory Board since November 28, 2002 State Secretary, Federal
Ministry of Finance, Berlin
o Deutsche Post AG, Bonn (since 1/1995)
o GEBB mbH, Cologne (since 8/2000)
Hans W. Reich.
Member of the Supervisory Board since May 27, 1999 Chairman of the Board of
Managing Directors, KfW Bankengruppe, Frankfurt/Main
o Aareal Bank AG, Wiesbaden (since 6/2002)
o ALSTOM GmbH, Frankfurt/Main (from 8/1999 to 11/2003)
o HUK-COBURG Haftpflicht-Unterstutzungs- Kasse kraftfahrender Beamter
Deutschlands a.G., Coburg (since 7/2000)
o HUK-Coburg-Holding AG, Coburg (since 7/2000)
o IKB Deutsche Industriebank AG, Dusseldorf (since 9/1999)
o RAG AG, Essen (since 11/2000)
o Thyssen Krupp Steel AG, Duisburg (since 7/2000)
Member of comparable supervisory bodies of companies in Germany or abroad:
o DePfa Bank plc., Dublin (Ireland), Board of Directors (since 3/2002)
Dr. jur. Hans-Jurgen Schinzler.
Member of the Supervisory Board since May 20, 2003
Member of the Supervisory Board of Munchener Ruckversicherungs-Gesellschaft AG,
Munich (Chairman of the Board of Management of Munchener Ru
ckversicherungs-Gesellschaft AG until December 31, 2003)
o Bayerische Hypo- und Vereinsbank AG, Munich (since 3/2003), Deputy Chairman
of the Supervisory Board (since 1/2004)
o ERGO Versicherungsgruppe AG, Dusseldorf, Chairman of the Supervisory Board
(from 1/1998 to 12/2003)
o MAN AG, Munich, Deputy Chairman of the Supervisory Board (from 1/1993 to
6/2003)
o Metro AG, Dusseldorf (since 5/2002)
Member of comparable supervisory bodies of companies in Germany or abroad:
o Aventis S.A., Schiltigheim, (France) (since 12/1999)
Dr. Klaus G. Schlede.
Member of the Supervisory Board since May 20, 2003 Member of the Supervisory
Board of Deutsche Lufthansa AG, Cologne
o Deutsche Postbank AG, Bonn (since 4/2000)
o Deutsche Lufthansa AG, Cologne (since 8/1998)
o Gerling-Konzern Globale Ruckversicherungs-AG, Cologne (from 10/1991 to
12/2003)
o Thomas Cook AG, Oberursel (from 12/1997 to 11/2003)
Wolfgang Schmitt.
Member of the Supervisory Board since October 2, 1997 Executive Vice President,
Deutsche Telekom AG, Business Customer Branch Office, Southwestern District,
Stuttgart
o PSD Bank RheinNeckarSaar eG (since 1993)
Rudiger Schulze.
Member and Deputy Chairman of the Supervisory Board between March 29, 1999 and
June 30, 2003 Former Head of Department 9 at ver.di trade union, Berlin
o T-Mobile Deutschland GmbH, Bonn, Deputy Chairman of the Supervisory Board
(from 3/1999 to 7/2003)
Prof. Dr. Helmut Sihler.
Member of the Supervisory Board from July 1, 1996 to May 20, 2003 Chairman of
the Supervisory Board from July 1, 1996 to May 25, 2000 Vice President of the
Board of Directors of Novartis AG, Basle (Switzerland)
o Dr. Ing. h.c. F. Porsche AG, Stuttgart, Chairman of the Supervisory Board
(since 1/1993)
Member of comparable supervisory bodies of companies in Germany or abroad:
o Novartis AG, Basle (Switzerland), Vice President of the Board of Directors
(since 4/1996)
Michael Sommer.
Member of the Supervisory Board since April 15, 2000 Chairman of the German
Trade Union Federation (DGB), Berlin
o Deutsche Postbank AG, Bonn, Deputy Chairman of the Supervisory Board (since
11/1997)
Further information
Supervisory board seats 187
Ursula Steinke.
Member of the Supervisory Board since January 1, 1995 Chairwoman of the Works
Council at T-Systems CDS GmbH, Northern District Branch Office, Kiel
o no other seats -
Prof. Dr. h.c. Dieter Stolte.
Member of the Supervisory Board since January 1, 1995 Publisher of the "Welt"
and "Berliner Morgenpost" newspapers, Berlin
o Out of home Media AG, Cologne (since 10/2002)
o ZDF Enterprises GmbH, Mainz (since 1992)
Bernhard Walter.
Member of the Supervisory Board since May 27, 1999 Dresdner Bank AG,
Frankfurt/Main
o Bilfinger Berger AG, Mannheim (since 7/1998)
o DaimlerChrysler AG, Stuttgart (since 5/1998)
o Henkel KGaA, Dusseldorf (since 5/1998)
o mg technologies ag, Frankfurt/Main (since 3/1993)
o Staatliche Porzellan-Manufaktur MeiBen GmbH, MeiBen (since
1/2001)
o Thyssen Krupp AG, Dusseldorf (since 3/1997)
o Wintershall AG, Kassel, Deputy Chairman of the Supervisory Board (since
2/2001)
Member of comparable supervisory bodies of companies in Germany or abroad:
o Joint-stock company "Sibirsko-Uralskaya Neftegazohimicheskaya Companiya"
(AK "Sibur"), Moscow (Russia) (from 4/2002 to 2/2003)
Wilhelm Wegner.
Member of the Supervisory Board since July 1, 1996 Chairman of the Central Works
Council at Deutsche Telekom AG, Bonn
o VPV Allgemeine Versicherungs-AG, Cologne (since 8/1995)
o VPV Holding AG, Stuttgart (since 1/2002)
o Vereinigte Postversicherung VVaG, Stuttgart (since 7/1998)
o PSD Bank Dusseldorf eG, Dusseldorf (from 8/2000 to 8/2003)
Dr. Wendelin Wiedeking.
Member of the Supervisory Board since May 20, 2003 Chairman of the Board of
Management of Dr. Ing. h.c. F. Porsche AG, Stuttgart
o Sachsen LB, Leipzig (from 5/1998 to 5/2003)
Member of comparable supervisory bodies of companies in Germany or abroad:
o Novartis AG, Basle (Switzerland)
o Eagle-Picher Industries Inc., Phoenix, Arizona (U.S.)*
o Porsche Business Services Inc., Wilmington, Delaware (U.S.)*
o Porsche Cars Great Britain Ltd., Reading (UK)*
o Porsche Cars North America Inc., Wilmington, Delaware (U.S.)*
o Porsche Deutschland GmbH, Bietigheim-Bissingen*
o Porsche Engineering Group GmbH, Weissach*
o Porsche Enterprises Inc., Wilmington, Delaware (U.S.)*
o Porsche Financial Services GmbH, Bietigheim-Bissingen*
o Porsche Financial Services Inc., Wilmington, Delaware (U.S.)*
o Porsche Iberica S.A., Madrid (Spain)*
o Porsche Italia S.p.A., Padua (Italy)*
o Porsche Japan K.K., Tokyo (Japan)*
o Porsche Lizenz-und Handelsgesellschaft mbH, Bietigheim-Bissingen*
Dr. Hans-Dietrich Winkhaus.
Member of the Supervisory Board from May 27, 1999 to May 20, 2003 Chairman of
the Supervisory Board from May 25, 2000 to March 14, 2003 Member of the
Sharaholders' Committee of Henkel KgaA, Dusseldorf
o BMW AG, Munich (since 5/1999)
o Degussa AG, Dusseldorf (since 3/1999)
o Deutsche Lufthansa AG, Cologne (since 6/1998)
o ERGO Versicherungsgruppe AG, Dusseldorf (since 5/1998)
o Schwarz Pharma AG, Monheim, (since 6/1998), Chairman of the Supervisory
Board (since 5/2000)
* Supervisory board seats in companies that are members of the same group, as
defined in section 100 (2), Sentence 2 AktG (German Stock Corporation Act).
188
Index.
term page
A
================================================================================
Affiliates 59, 93
--------------------------------------------------------------------------------
AktivPlus VII, 68, 69
--------------------------------------------------------------------------------
Associated and related companies 32, 33, 34, 38, 96, 99, 110, 117, 118,
--------------------------------------------------------------------------------
123, 132, 133, 138, 139, 158, 168, 170,
--------------------------------------------------------------------------------
171, 173
--------------------------------------------------------------------------------
B
================================================================================
BlackBerry 77
--------------------------------------------------------------------------------
Broadband III, IV, 8, 9, 25, 27, 29, 31, 51, 56,
--------------------------------------------------------------------------------
57, 58, 59, 68, 69, 70, 71, 72, 73, 86,
--------------------------------------------------------------------------------
87, 88, 89, 90, 91, 127, 130
--------------------------------------------------------------------------------
C
================================================================================
Call revenues 31, 170
--------------------------------------------------------------------------------
Carrier services 72, 125
--------------------------------------------------------------------------------
Cash flow II, 7, 24, 37, 38, 50, 62, 96, 103,
--------------------------------------------------------------------------------
112, 116, 117, 127, 141, 162, 166
--------------------------------------------------------------------------------
Charges 34, 51, 52, 54, 56, 58, 69, 104, 109,
--------------------------------------------------------------------------------
112, 116, 119, 124, 125, 137, 141, 157,
--------------------------------------------------------------------------------
163, 170, 174, 175
--------------------------------------------------------------------------------
Content IV, 14, 17, 27, 31, 42, 52, 57, 59, 68,
--------------------------------------------------------------------------------
73, 75, 78, 86, 87, 88, 89, 115, 130,
--------------------------------------------------------------------------------
172, 173
--------------------------------------------------------------------------------
D
================================================================================
Dividend II, 9, 24, 34, 35, 38, 59, 62, 63, 103,
--------------------------------------------------------------------------------
112, 132, 142, 143, 146, 162, 163
--------------------------------------------------------------------------------
DSL (see also T-DSL) VII, 25, 69, 70, 71, 87, 90, 91, 170,
--------------------------------------------------------------------------------
171
--------------------------------------------------------------------------------
E
================================================================================
E-commerce IV, 27, 86, 88, 89, 91, 115, 125, 172
--------------------------------------------------------------------------------
Employees II, 8, 9, 13, 15, 19, 24, 33, 41, 43,
--------------------------------------------------------------------------------
44, 45, 46, 47, 48, 49, 53, 54, 64, 68,
--------------------------------------------------------------------------------
72, 74, 76, 80, 86, 92, 93, 94, 114,
--------------------------------------------------------------------------------
122, 126, 128, 135, 140, 142, 145, 146,
--------------------------------------------------------------------------------
148, 149, 150, 152, 155, 156, 161, 169,
--------------------------------------------------------------------------------
174
--------------------------------------------------------------------------------
Environmental protection 48, 49
--------------------------------------------------------------------------------
Equity ratio II, 34, 163
--------------------------------------------------------------------------------
F
================================================================================
Financial calendar 191
--------------------------------------------------------------------------------
G
================================================================================
GPRS 76, 78
--------------------------------------------------------------------------------
GSM 41, 58, 77, 79, 110, 115, 120, 127,
--------------------------------------------------------------------------------
137, 138, 171
--------------------------------------------------------------------------------
H
================================================================================
HotSpot 71, 77
--------------------------------------------------------------------------------
I
================================================================================
ICT (Information and Communication
Technology) 27, 29, 52, 57, 80, 81, 82, 84, 85,
--------------------------------------------------------------------------------
115, 172
--------------------------------------------------------------------------------
Investor Relations 18, 19, 34, 64, 121, 138, 192
--------------------------------------------------------------------------------
ISDN (see also T-ISDN) 25, 68, 69, 70, 71, 127, 170
--------------------------------------------------------------------------------
IT (Information Technology) 8, 9, 29, 38, 39, 40, 45, 50, 53, 57,
--------------------------------------------------------------------------------
58, 69, 71, 73, 81, 82, 83, 84, 85, 88,
--------------------------------------------------------------------------------
89, 115, 130, 139, 170, 172, 174
--------------------------------------------------------------------------------
L
================================================================================
LAN (Local Area Network) 8, 69
--------------------------------------------------------------------------------
Liberalization 29
--------------------------------------------------------------------------------
M
================================================================================
MMS (Multimedia Messaging Services) 26, 75, 76, 78
--------------------------------------------------------------------------------
Multimedia 51, 68, 71, 74, 75, 79, 86, 90
--------------------------------------------------------------------------------
O
================================================================================
Outlook 55, 57, 84, 91
--------------------------------------------------------------------------------
R
================================================================================
Regulation 19, 29, 30, 38, 50, 51, 58, 68, 72,
--------------------------------------------------------------------------------
152, 170
--------------------------------------------------------------------------------
R&D (Research and Development) 42, 43, 126
--------------------------------------------------------------------------------
Risk management 13, 20, 50, 55
--------------------------------------------------------------------------------
Roaming 51, 76, 124
--------------------------------------------------------------------------------
S
================================================================================
Shareholders' meeting 13, 14, 17, 18, 19, 20, 35, 39, 59, 63,
--------------------------------------------------------------------------------
64, 142, 143, 144, 145, 146, 147, 151,
--------------------------------------------------------------------------------
177, 191
--------------------------------------------------------------------------------
Stock options 19, 113, 128, 142, 143, 144, 145, 146,
--------------------------------------------------------------------------------
147, 148, 149, 150, 175, 176, 179
--------------------------------------------------------------------------------
Subsidiaries VI, VII, 13, 17, 26, 29, 34, 38, 41,
--------------------------------------------------------------------------------
46, 51, 69, 72, 73, 74, 75, 79, 90, 98,
--------------------------------------------------------------------------------
99, 110, 115, 117, 118, 121, 122, 123,
--------------------------------------------------------------------------------
127, 138, 139, 143, 145, 156, 158, 162,
--------------------------------------------------------------------------------
165, 170, 171, 172, 180
--------------------------------------------------------------------------------
Sustainability 47, 48
--------------------------------------------------------------------------------
T
================================================================================
T-D1 75
--------------------------------------------------------------------------------
T-DSL VII, 24, 25, 31, 52, 54, 57, 68, 69,
--------------------------------------------------------------------------------
70, 71, 72, 73, 86, 87
--------------------------------------------------------------------------------
T-ISDN 68, 70
--------------------------------------------------------------------------------
T-Net 69
--------------------------------------------------------------------------------
T-Punkt 69
--------------------------------------------------------------------------------
T-Share 18, 62, 63, 64, 144
--------------------------------------------------------------------------------
t-zones 75, 76, 77
--------------------------------------------------------------------------------
Tariff 58, 68, 69, 73, 76, 87, 89
--------------------------------------------------------------------------------
Telecommunications Act 28, 30, 51
--------------------------------------------------------------------------------
Total revenue II, 26, 74, 80, 82, 86, 92, 99
--------------------------------------------------------------------------------
U
================================================================================
UMTS IV, 41, 52, 58, 74, 79, 100, 110, 126,
--------------------------------------------------------------------------------
127, 136, 137, 164, 172, 179
--------------------------------------------------------------------------------
V
================================================================================
Vivento 8, 33, 44, 45, 53, 57, 72, 92, 93, 94,
--------------------------------------------------------------------------------
96, 98, 99, 102, 115, 132, 173, 174
--------------------------------------------------------------------------------
W
================================================================================
WAP 78
--------------------------------------------------------------------------------
Wireless LAN/WLAN IV, 8, 25, 52, 57, 87
--------------------------------------------------------------------------------
Further information
Glossary 189
Glossary.
ADS
Short for American Depositary Share (sometimes also American Depositary Receipt
= ADR). A bearer certificate being traded on a U.S. stock exchange (such as the
New York Stock Exchange, for example) in representation of a number of foreign
shares.
The buyer of ADSs acquires the same rights and obligations that apply to the
holder of ordinary shares in terms of a claim on pro rata share in annual
profits, a right to be given information, voting rights and participation in the
annual general meeting.
One ADS of Deutsche Telekom commercially equals one Deutsche Telekom no par
value share. The ratio of shares to ADS is 1:1.
ASP
Short for Application Service Provider (or Provision). This refers to the
principle of software being leased via the Internet.
Call-by-call selection of a telephone company
Dialing procedure that enables a telephone customer to use the carrier
(long-distance operator) of his or her choice for long-distance and
international calls (i.e., the customer can change carriers for each call).
Call center
A company, or department of a company, that offers operator-supported voice
services. A large number of operators handle inbound calls via a hotline, with
outbound calls being part of direct marketing efforts.
Carriers' carrier
A network operator who provides network services to other telecommunications
companies.
Desktop services
Our Global Desktop Services product features a variety of support services
including outsourcing of whole IT networks. Deutsche Telekom offers an
integrated IT service portfolio for corporate customers, providing everything
from the server infrastructure and PC workstations through to application
management and call center services for user support.
Downstream
Communication of data from the Internet server to the user's PC.
DRSC
Short for Deutsches Rechnungslegungs Standards Committee e.V. (German Accounting
Standards Committee). National body that develops recommendations for corporate
accounting standards and their practical application.
Earnings per share
This key figure shows the Group's net income or loss per share. It is computed
by dividing net income/loss for the year as reported in the consolidated
statement of income by the weighted average of outstanding shares.
EITO
Short for European Information Technology Observatory. The establishment of this
institution, which is unique in Europe, is the result of a widely-based
initiative for gathering comprehensive information and data about the overall
European IT and telecom (ICT) market. The Observatory also provides specific
services for companies from this sector and for users and public organizations.
Goodwill
Goodwill is the excess amount that results if the purchase consideration of an
acquisition is higher than the pro-rata shareholders' equity of the acquisition
in the balance sheet. Goodwill is as a rule recorded as an asset in Deutsche
Telekom's consolidated financial statements and amortized over its estimated
useful life (between 3 and 20 years) with a net impact on results.
GPRS - General Packet Radio Service
A technology allowing higher data transmission rates in GSM networks.
GSM - Global System for Mobile Communications
A pan-European mobile communications standard for the 900-MHz frequency range.
Hosting
Provision of storage capacity via the Internet.
Interconnection
Term used for the linking of networks of different providers, as regulated by
the German Telecommunications Act.
190
Internet/intranet
The Internet is a worldwide IP-based computer network that has no central
network management. Intranets, on the other hand, are managed IP networks that
can be accessed only by specific user groups.
IP - Internet Protocol
Nonproprietary transport protocol in layer 3 of the OSI reference model for
inter-network communications.
Multimedia
Term used for real-time integration of text with still images and graphics,
video and sound.
Portal site
Central point of entry to the Internet with an intelligent and personalized user
interface that helps online customers navigate the content offered.
Preselection
Preselection of a telephone company. Procedure in which the customer selects a
certain provider known as the long-distance carrier - for all of his or her
long-distance and international calls.
Roaming
A feature of cellular mobile communications networks. Activated mobile stations
remain accessible, regardless of location, in all radio cells of the entire area
served by the network. Roaming can also include similar networks of different
network operators, as is the case with international roaming in the pan-European
GSM system.
Statement of cash flows
The cash flow statement forms the liquidity-related part of business accounting.
It records cash flows during the financial year in terms of value by comparing
inflows and outflows within the period under review, thus showing the change in
cash and cash equivalents at year-end.
T-DSL
Deutsche Telekom's asymmetrical digital subscriber line (ADSL) service.
T-ISDN
Deutsche Telekom's integrated services digital network (ISDN).
T-Net
Deutsche Telekom's digitized telephone network.
Treasury
The treasury unit operates at the financial markets and is responsible for the
management of cash assets and investments in securities, for leasing
arrangements and the refinancing of the Deutsche Telekom Group through a variety
of financial arrangements, including, among others, bank loans and other
credits, as well as the raising of credits in the capital markets, the handling
of payments and clearing transactions, and money market and foreign exchange
dealings.
UMTS - Universal Mobile Telecommunications System
International third-generation mobile communications standard that integrates
mobile multimedia and telematics services in the 2-GHz range.
VOIP - Voice Over Internet Protocol
Technology for establishing telephone calls via the Internet. There are three
methods: PC to PC, PC to Phone, Phone to Phone.
WAP - Wireless Application Protocol
Enables content to be made visible on the mobile phone display.
WLAN - Wireless Local Area Network
A wireless network for highly flexible data communication in the in-house area
or on campus. Can serve as an extension or alternative to a wired LAN. WLAN data
links offer users the greatest degree of flexibility for call set-up
and a high level of mobility.
Further information
Financial calendar 191
Financial calendar.
--------------------------------------------------------------------------------------------
2004/2005 financial calendar
--------------------------------------------------------------------------------------------
Annual press conference on the 2003 financial year and analysts' meeting March 10, 2004
--------------------------------------------------------------------------------------------
Publication of the 2003 Annual Report March 30, 2004
--------------------------------------------------------------------------------------------
Group Report Jan. 1 to March 31, 2004 and conference call May 13, 2004
--------------------------------------------------------------------------------------------
2004 shareholders' meeting May 18, 2004
--------------------------------------------------------------------------------------------
2004 Group half-year report August 12, 2004
--------------------------------------------------------------------------------------------
Group Report Jan. 1 to September 30, 2004 November 11, 2004
--------------------------------------------------------------------------------------------
Annual press conference on the 2004 financial year and analysts' meeting March 3, 2005
--------------------------------------------------------------------------------------------
Publication of the 2004 Annual Report* March 15, 2005
--------------------------------------------------------------------------------------------
2005 shareholders' meeting April 26, 2005
--------------------------------------------------------------------------------------------
* planned.
--------------------------------------------------------------------------------------------
This Annual Report contains forward-looking statements that reflect the current
views of Deutsche Telekom management with respect to future events. The words
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan",
"project" and "should" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are based on current
plans, estimates, and projections, and therefore you should not place too much
reliance on them. Such statements are subject to risks and uncertainties, most
of which are difficult to predict and are generally beyond Deutsche Telekom's
control, including, without limitation, those factors set forth in
"Forward-Looking Statements" and "Risk Factors" contained in Deutsche Telekom's
annual report on Form 20-F filed with the SEC. If these or other risks and
uncertainties materialize, or if the assumptions underlying any of these
statements prove incorrect, Deutsche Telekom's actual results may be materially
different from those expressed or implied by such statements. Deutsche Telekom
does not intend or assume any obligation to update these forward-looking
statements.
This Annual Report contains a number of non-GAAP figures, such as EBITDA and
EBITDA adj. for special factors, EBITDA margin adj., capex, adj. net income,
free cash flow, and gross and net debt. These non-GAAP figures should not be
viewed as a substitute for our GAAP figures. Our non-GAAP measures may not be
comparable to non-GAAP measures used by other companies. To interpret the
non-GAAP measures, please refer to the chapter "Reconciliation of pro forma
figures" of this Annual Report (posted on Deutsche Telekom's Investor relations
link under www.telekom.de).
192
Contacts.
Deutsche Telekom AG
Corporate Communications
Postfach 2000, D-53105 Bonn, Germany
Phone +49228181-4949
Fax +49228181-94004
Internet: www.telekom.de
Investor Relations:
Phone +49228181-88880
Fax +49228181-88009
E-Mail: Investor.Relations@telekom.de
New York Office
Phone +1-212-424-2959
Fax +1-212-424-2933
E-Mail: investor.relations@usa.telekom.de
Deutsche Telekom's Annual Report is available on the Internet at:
www.deutschetelekom.com/annualreport2003
Additional copies of this report are available at:
E-Mail: Forum-TAktie@telekom.de
The German version of this Annual Report is legally binding.
Translation:
Deutsche Telekom AG,
Foreign Language Service et al.
Production:
Citigate SEA GmbH & Co. KG, Dusseldorf
Reproduction:
O/R/T Medien Verbund, Krefeld
Printing:
Heining & Muller GmbH, Mulheim a.d. Ruhr
Printed with mineral-oil-free color on chlorine-
free paper.
Photographs:
grundflum, Thomas Ollendorf, gettyimages
Design: KNr. 642 100 094 (English)
Interbrand Zintzmeyer & Lux KNr. 642 100 092 (German)
SIGNATURE
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.
DEUTSCHE TELEKOM AG
By: /s/ ppa. Rolf Ewenz-Sandten
------------------------------
Name: Rolf Ewenz-Sandten
Title: Vice President
Date: April 1, 2004