![[q32004ptciasfinal002.jpg]](https://capedge.com/proxy/6-K/0001046962-04-000028/q32004ptciasfinal002.jpg)
POLSKA TELEFONIA CYFROWA SP. Z O.O.
CONDENSED
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 AND AS AT SEPTEMBER 30, 2004 and DECEMBER 31, 2003
#
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Condensed Consolidated Income Statements
for the nine and three month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
Notes | Nine month period ended September 30, 2004 (unaudited) | Three month period ended September 30, 2004 (unaudited) | Nine month period ended September 30, 2003 (restated, unaudited) | Three month period ended September 30, 2003 (restated, unaudited) | |
Net sales | 5 | 4,763,060 | 1,684,598 | 4,166,839 | 1,489,187 |
Cost of sales | 6 | (2,743,640) | (921,921) | (2,674,793) | (857,858) |
------------------- | ------------------- | ------------------- | ------------------- | ||
Gross margin | 2,019,420 | 762,677 | 1,492,046 | 631,329 | |
Operating expenses | 6 | (634,749) | (215,946) | (639,436) | (197,737) |
------------------ | ------------------ | ------------------ | ------------------ | ||
Operating profit | 1,384,671 | 546,731 | 852,610 | 433,592 | |
Non-operating items | |||||
Interest and other financial income/ (expenses) | 202,239 | 77,167 | 277,594 | (12,887) | |
Interest and other financial expenses | (528,908) | (182,078) | (685,254) | (176,307) | |
------------------ | ------------------ | ------------------ | ------------------ | ||
Profit before taxation | 1,058,002 | 441,820 | 444,950 | 244,398 | |
Taxation charge | 7 | (225,556) | (86,379) | (147,545) | (110,573) |
------------------- | ------------------- | ------------------- | ------------------- | ||
Net profit for the period | 832,446 | 355,441 | 297,405 | 133,825 | |
=========== | =========== | =========== | ========== | ||
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
as at September 30, 2004 and December 31, 2003
(in thousands of PLN, unless otherwise noted)
Notes | As at September 30, 2004 (unaudited) | As at December 31, 2003(restated) | |
Current assets | |||
Cash and cash equivalents | 554,839 | 20,880 | |
Short-term investments and other financial assets | 49,600 | 110,538 | |
Debtors and prepayments | 815,179 | 751,122 | |
Inventory | 8 | 210,511 | 185,866 |
-------------------- | ---------------- | ||
1,630,129 | 1,068,406 | ||
Long-term assets | |||
Property, plant and equipment | 9 | 2,774,308 | 3,023,831 |
Intangible fixed assets | 10 | 2,838,802 | 2,829,980 |
Financial assets | 95,461 | 248,373 | |
Deferred costs and other long-term assets | 4,409 | 4,536 | |
-------------------- | -------------------- | ||
5,712,980 | 6,106,720 | ||
-------------------- | -------------------- | ||
Total assets | 7,343,109 | 7,175,126 | |
============ | =========== | ||
Current liabilities | |||
Accounts payable | 205,384 | 290,405 | |
Amounts due to State Treasury | 154,987 | 69,385 | |
Interest-bearing liabilities | 11 | 178,172 | 101,445 |
Accruals | 272,675 | 220,595 | |
Deferred income and other liabilities | 358,677 | 211,787 | |
----------------- | ----------------- | ||
1,169,895 | 893,617 | ||
Long-term liabilities | |||
Interest-bearing liabilities | 11 | 2,840,755 | 3,811,750 |
Non-interest-bearing liabilities | 13 | 13 | |
Deferred tax liability | 320,048 | 290,563 | |
Provisions for liabilities and charges | 92,737 | 91,952 | |
------------------- | ------------------- | ||
3,253,553 | 4,194,278 | ||
------------------- | ------------------- | ||
Total liabilities | 4,423,448 | 5,087,895 | |
------------------- | ------------------- | ||
Capital and reserves | |||
Share capital | 471,000 | 471,000 | |
Additional paid-in capital | 409,754 | 409,754 | |
Hedge reserve | (3,278) | (3,262) | |
Accumulated profit | 2,042,185 | 1,209,739 | |
-------------------- | ------------------- | ||
2,919,661 | 2,087,231 | ||
-------------------- | -------------------- | ||
Total equity and liabilities | 7,343,109 | 7,175,126 | |
============ | =========== |
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements.
Nine month period ended September 30, 2004(unaudited) | Nine month period ended September 30, 2003(unaudited) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net profit before taxation | 1,058,002 | 444,950 |
Adjustments for: | ||
Depreciation and amortization | 711,391 | 692,824 |
Change in provision and write-offs of doubtful debtors | 36,007 | 29,130 |
Change in provision for inventory | (1,557) | 5,220 |
Change in other provisions long-term | 785 | 5,591 |
Foreign exchange losses, net and changes in financial instruments fair value | 120,285 | 158,564 |
Loss on disposal of tangibles and intangibles | 4,151 | 5,096 |
Interest expense, net | 206,384 | 249,096 |
-------------------- | -------------------- | |
Operating cash flows before working capital changes | 2,135,448 | 1,590,471 |
(Increase)/ decrease in inventory | (23,088) | 49,862 |
Increase in debtors, prepayments and deferred cost | (99,936) | (100,044) |
Increase in trade payables and accruals | 152,917 | 36,012 |
------------------ | ------------------ | |
Cash from operations | 2,165,341 | 1,576,301 |
Interest paid | (230,249) | (363,516) |
Interest received | 11,610 | 11,367 |
Income taxes paid | (157,004) | (30,869) |
Cash paid on initiation/ realization of financial instruments | (26,742) | (30,409) |
Cash received on realization of financial instruments | 9,810 | 24,779 |
----------------- | ----------------- | |
Net cash from operating activities | 1,772,766 | 1,187,653 |
CASH FLOWS USED IN INVESTING ACTIVITIES: | ||
Purchases of intangible fixed assets | (111,610) | (92,672) |
Purchases of tangible fixed assets | (352,328) | (230,629) |
Proceeds from sale of equipment and intangibles | 26,419 | 8,838 |
------------------ | ------------------ | |
Net cash used in investing activities | (437,519) | (314,463) |
CASH FLOWS USED IN FINANCING ACTIVITIES: | ||
Repayment of Bank Credit Facilities | (540,289) | (392,906) |
Redemption of the Notes | (237,313) | (520,053) |
----------------- | ----------------- | |
Net cash used in financing activities | (777,602) | (912,959) |
Net increase/(decrease) in cash and cash equivalents | 557,645 | (39,769) |
Effect of foreign exchange changes on cash and cash equivalents | 2,293 | 170 |
Cash and cash equivalents at beginning of period | (5,099) | 54,400 |
----------------- | ----------------- | |
Cash and cash equivalents at end of period | 554,839 | 14,801 |
========== | ========== | |
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements.
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Equity
for the nine month period ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
Share Capital | Additional paid-in capital | Hedge reserve | Accumulated profit | Total | |
Balance as at January 1, 2003 | 471,000 | 409,754 | (86,649) | 558,422 | 1,352,527 |
Cash flow hedge: | |||||
net fair value gain, net of tax | - | - | 70,876 | - | 70,876 |
- | |||||
reclassified and reported in net profit | - | - | 42,073 | - | 42,073 |
deferred tax on reclassified item | - | - | (11,361) | - | (11,361) |
Net profit for the period | - | - | - | 297,405 | 297,405 |
--------------- | --------------- | --------------- | --------------- | ------------------ | |
Balance as at September 30, 2003 (unaudited) | 471,000 | 409,754 | 14,939 | 855,827 | 1,751,520 |
Cash flow hedge: | |||||
net fair value gain, net of tax | - | - | 5,010 | - | 5,010 |
hedging instrument replacement net of tax | (7,833) | (7,833) | |||
reclassified and reported in net profit | - | - | (21,685) | - | (21,685) |
deferred tax on reclassified item | - | - | 5,856 | - | 5,856 |
deferred tax change in rates | - | - | 451 | - | 451 |
Net profit for the period | - | - | - | 356,517 | 356,517 |
Effect of subsidiary closing | (2,605) | (2,605) | |||
---------------- | ---------------- | --------------- | --------------- | ------------------- | |
Balance as at December 31, 2003 | 471,000 | 409,754 | (3,262) | 1,209,739 | 2,087,231 |
Cash flow hedge: | |||||
net fair value gain, net of tax | - | - | 1,480 | - | 1,480 |
reclassified and reported in net profit | - | - | (1,848) | - | (1,848) |
deferred tax on reclassified item | - | - | 352 | - | 352 |
Net profit for the period | - | - | - | 832,446 | 832,446 |
---------------- | ---------------- | --------------- | --------------- | ------------------- | |
Balance as at September 30, 2004 (unaudited) | 471,000 | 409,754 | (3,278) | 2,042,185 | 2,919,661 |
========== | ========== | ========= | ========= | ===================== |
The accompanying notes are an integral part of these
condensed consolidated unaudited financial statements.
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
1.
Incorporation and Principal Activities
Polska Telefonia Cyfrowa Sp. z o.o. (the “Company”) is located in Warsaw, Al. Jerozolimskie 181 and was incorporated by the Notarial Deed dated December 20, 1995 and entered on the National Court Register kept by District Court in Warsaw, XIX Economic Department of National Court Register, Entry No. KRS 0000029159.
The principal activities of the Company are providing cellular telephone communication services in accordance with the GSM 900 and 1800 licenses granted by the Minister of Communications and the sale of cellular handsets and accessories compatible with its cellular services. On December 20, 2000 the Minister of Communications granted the Company a license to provide telecommunication services according to the Universal Mobile Telecommunication System (“UMTS”) standard. The UMTS services should be implemented not earlier than from January 1, 2004 and not later than January 1, 2006. The Company is currently performing UMTS tests, however the UMTS services are not offered commercially yet.
The principal activities of the Company are not significantly seasonal nor cyclical.
The Company generates and expends cash through its operating activities mostly in Polish zloty (“PLN”). Therefore Management has designated the PLN as the reporting (functional) currency of the Company. The accompanying condensed consolidated financial statements are reported in thousands of PLN (unless otherwise noted).
Authorization of the condensed consolidated financial statements
These condensed consolidated financial statements have been issued by the Management Board on November 10, 2004.
2.
Significant events in the nine month period ended September 30, 2004
On January 22, 2004 the Company concluded its selection process and chose Siemens Information and Communication Mobile Group as the main supplier of advanced UMTS technology, to be deployed in the Warsaw area.
On February 2, 2004 the Company repurchased on the market the principal amount of EUR 2,000 thousand and on February 5, 2004 the principal amount of EUR 3,000 thousand of the
10 ⅞% Notes (2.5% of the total initial principal amount).
On March 9, 2004 the Supreme Court rejected the cassation lodged by Telekomunikacja Polska SA (TP SA) in 2003 against the Antimonopoly Court’s judgment relating to international traffic rates terminating in the Company’s network. This is the final judgment and the Company currently does not expect any potential further claims related to this case.
In March 2004 the Company launched its new prepaid brand “Heyah” on the Polish cellular phone market. This brand is directed to young people. “Heyah” offers attractive prices for calls and SMS. Starter packages are sold through new distribution channels (without use of the “ERA” branded sales network).
On April 29, 2004 the Republic of Poland was granted an exemption period to the European Union ("EU") Directive 2003/49/EC of June 3, 2003 on a common system of taxation applicable to interest and royalty payments made between certain associated companies of different member states, which in effect enables Poland to collect withholding tax (see Note 14).
2.
Significant events in the nine month period ended September 30, 2004 (cont.)
In May 2004 the Company repurchased on the market the principal amount of USD 10,000 thousand of the 11 ¼% Notes (6.7% of the total initial principal amount), EUR 20,000 thousand of the 11 ¼% Notes (6.7% of the total initial principal amount) and EUR 16,000 thousand of the 10 ⅞% Notes (8.0% of the total initial principal amount).
As described in Note 12, on May 24, 2004 the Company was informed that Carston, a former dealer has increased its claim against the Company to the total amount of PLN 61,455 from PLN 530 previously claimed. Management, supported by independent legal opinion assesses that the likelihood of an adverse court judgement on any of the individual claims made by Carston ranges between less than probable through remote. Management intends to continue to vigorously defend this action and no provisions have been made in regard to Carston’s claims as at the balance sheet date September 30, 2004.
On July 14, 2004 the Regulator for the Telecommunication Market in Poland (“OTPR”) announced its intention to initiate two tenders to allocate available spectrum in the GSM 1800 MHz band and to issue a new UMTS licence. The tenders, in which the existing mobile operators will reportedly be allowed to participate, are expected to be finalized in the first quarter of 2005. In the coming months OTRP will proceed with preparation of tender documents, in which detailed conditions for the operation of a potential new mobile operator will be set out.
On July 16, 2004, the Sejm (Lower House of the Polish Parliament) approved a New Telecommunication Act. Also in July 2004 the President signed the New Telecommunication Act and it has been in force since September 2, 2004.
On July 19, 2004 the Company was informed by OTPR of a request from TP SA demanding the Regulator to set decreased rates for termination of calls in mobile networks. Current termination rates were set in an agreement between the Company and TP SA, signed in December 2002.
On August 23, 2004 the Company, as the first telecommunication company in Poland, launched a friendly user trial of UMTS in Warsaw.
On September 28, 2004 PTC International Finance II S.A., Company’s indirect wholly-owned subsidiary made a cash-tender offer to purchase all of the outstanding 10 ⅞% Notes (see Note 4 and 11.a) and announced its intention to utilise the first available early redemption option relating to the 11 ¼% Notes.
3.
Extract from the Company’s Accounting Policies
3.1.
Basis of preparation
The Company maintains its accounting books in accordance with accounting principles and practices employed by enterprises in Poland as required by Polish Accounting Standards (“PAS”). The accompanying condensed consolidated unaudited financial statements reflect certain adjustments not reflected in the Company's statutory books to present these statements in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”).
The principal differences between IFRS and generally accepted accounting principles in the United States (“US GAAP”), which have an impact on these condensed consolidated financial statements and their effect on net results for the nine and three month periods ended September 30, 2004 and September 30, 2003 have been presented in Note 16 to these condensed consolidated financial statements.
These condensed consolidated financial statements are prepared in accordance with IAS 34 “Interim Financial Reporting”. The accounting policies and methods of computation used in the preparation of the condensed consolidated financial statements are consistent with those used in the annual consolidated financial statements for the year ended December 31, 2003 prepared in accordance with IFRS, except for a change in revenue recognition policy. The new revenue recognition policy (see Note 3.5) was implemented by the Company as of January 1, 2004 to reflect the best practices on the market.
The IFRS standards that were mandatory as at September 30, 2004 were applied to these condensed consolidated financial statements.
IFRS 3 "Business Combinations" has been in force since April 1, 2004, therefore the Company has considered an accounting policy change. As there was no business combination during the period, the requirements of this new standard do not have any impact on these condensed consolidated financial statements.
The condensed consolidated financial statements have been prepared under the historical cost convention, modified by the revaluation of financial assets and financial liabilities held for trading or designated as hedging items.
The preparation of the condensed consolidated financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Although those estimates are based on the Management’s best knowledge of current events and actions, actual results ultimately may differ from these estimates.
The condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated results of operations, balance sheet and cash flows for each period presented.
These condensed consolidated financial statements are not necessarily indicative of results for the full year and should be read in a conjunction with the 2003 audited consolidated financial statements and the related notes.
3.
Extract from the Company’s Accounting Policies (cont.)
3.1.
Basis of preparation (cont.)
These condensed consolidated financial statements contain unaudited information for three and nine month periods ended September 30, 2004 and September 30, 2003 and balance sheet data as at December 31, 2003 derived from annual financial statements for 2003 after restatement to reflect changes in accounting policies as described in Note 3.5.
1.1.
Group Accounting
These condensed consolidated financial statements include the financial statements of Polska Telefonia Cyfrowa Sp. z o.o. and its wholly owned subsidiary PTC International Finance (Holding) B.V. (consolidated).
0.1.
Presentation of Cash Flow Statement
The Company reconsidered the nature of the overdraft facility as an integral part of the Company’s cash management and included the overdraft balance of PLN 28 in cash and cash equivalents in consolidated statements of cash flows for the nine month period ended September 30, 2003.
3.4. Reclassification of Revenue and Expenses in Income Statement
Beginning from the third quarter of 2003, the Company nets costs with revenue relating to premium calls and premium SMS, as a result of adoption of industry practice resulting from the principle of Emerging Issue Task Force 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”). The netting is applied to premium calls and premium SMS, when the Company is acting as an agent providing telecommunication services without being the primary obligor in delivery of the relevant service. As a result of previous quarters’ restatements made to 2003, the Company presented comparatives for nine month period ended September 30, 2003 with net sales and cost of sales decreased by PLN 14,079, without any impact on gross margin (see also Notes 5 and 6).
3.5. Change in revenue recognition policy
From January 1, 2004 the Company retrospectively implemented a new revenue recognition policy which adopts best industry practices based on Emerging Issue Task Force 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). As a result of the new revenue recognition policy implementation the revenue and costs related to sales of handsets and activation, as parts of multi-element arrangements, is recognized in the income statement immediately when incurred, except for the contracts where fair value analysis indicates revenue (and costs) deferral. As a result of retrospective implementation the Company increased the net sales and cost of sales for the nine and three month periods ended September 30, 2003 by
PLN 30,002 and PLN 12,960 respectively (see also Notes 5 and 6). Deferred costs and non-interest-bearing long-term liabilities as at December 31, 2003 have been decreased by PLN 118,344 which represented the deferred costs and deferred revenues in the balance sheet as at that date.
4.
Events after the balance sheet date
On October 7, 2004 the Company signed a new credit agreement (Bank Credit Facility) with a club of 14 Polish and foreign banks (Bank Club) in order to replace its existing senior secured Bank Credit Facilities, which were fully cancelled on October 12, 2004.
In accordance with the new Bank Credit Facility Bank Handlowy w Warszawie S.A. and Dresdner Kleinwort Wasserstein act as Facility Agent and as Documentation Agent respectively on behalf of the Bank Club. The new Bank Credit Facility totals to EUR 550 million, may be used for general corporate purposes including the refinancing of any of the Company’s outstanding obligations under any credit agreements and high yield bonds, is unsecured and ranks at least pari passu with all PTC’s other unsecured and unsubordinated obligations.
As mentioned in Notes 2 and 11.a, on September 28, 2004, PTC International Finance II S.A., the Company’s wholly-owned indirect subsidiary made a cash-tender offer to purchase all of the outstanding 10 ⅞% Notes. As of September 30, 2004 there was EUR 135,615,000 of
10 ⅞% Notes outstanding as a result of open market purchases performed by the Company in the past. The offer expired at 12:01 a.m. New York time on October 28, 2004. In accordance with the terms of the cash - tender offer the total consideration paid by the Company for the 10 ⅞% Notes was EUR 109,775,502, out of which the principal amount was EUR 99,178,000, interest accrued was EUR 2,666,442 and premium and fees totalled EUR 7,931,060. After the conclusion of the tender offer, EUR 36,437,000 remained outstanding.
On October 13, 2004 PTC and TP SA signed an Annex to their interconnection agreement that will have effect on reducing unit prices charged by PTC for terminating traffic originating in the TP SA network. As a result of this Annex both companies will withdraw pending actions against the other at OTRP and UOKIK, relating to interconnection. As a consequence of the above Annex OTPR will cancel the administrative proceedings requested by TP SA for setting decreased termination rates.
Upon the Company's notice submitted to the Trustee on October 28, 2004 all outstanding 1999 Notes will be redeemed with 105.625% premium on December 1, 2004.
On November 4, 2004 the Company obtained its Supervisory Board's approval to redeem all 2001 Notes outstanding after completion of the cash - tender offer on October 28, 2004 by utilization of the Tax Redemption Option. The Company’s Management was in discussion with the Trustee concerning submitting the notice of the Tax Redemption Option as at the date of authorization of these financial statements.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
5.
Net sales
Nine month period endedSeptember 30, 2004(unaudited) | Three month period endedSeptember 30, 2004 (unaudited) | Nine month period endedSeptember 30, 2003 (restated, unaudited) | Three month period endedSeptember 30, 2003(restated, unaudited) | |
Service revenues and fees | 4,628,134 | 1,648,624 | 4,022,511 | 1,432,396 |
Sales of telephones and accessories | 134,926 | 35,974 | 144,328 | 56,791 |
------------------- | ------------------- | ------------------- | ------------------- | |
4,763,060 | 1,684,598 | 4,166,839 | 1,489,187 | |
=========== | =========== | =========== | =========== |
6.
Costs and expenses
Nine month period endedSeptember 30, 2004 (unaudited) | Three month period endedSeptember 30, 2004 (unaudited) | Nine month period endedSeptember 30, 2003 (restated, unaudited) | Three month period endedSeptember 30, 2003(restated, unaudited) | |
Cost of sales: | ||||
Cost of services sold | 2,037,409 | 714,508 | 1,745,325 | 590,704 |
Cost of sales of telephones and accessories | 706,231 | 207,413 | 929,468 | 267,154 |
------------------ | ------------------ | ------------------ | ------------------ | |
2,743,640 | 921,921 | 2,674,793 | 857,858 | |
------------------ | ------------------ | ------------------ | ----------------- | |
Operating expenses: | ||||
Selling and distribution costs | 462,727 | 155,875 | 461,376 | 139,072 |
Administration and other operating costs | 172,022 | 60,071 | 178,060 | 58,665 |
------------------ | ------------------ | ------------------ | ------------------ | |
634,749 | 215,946 | 639,436 | 197,737 | |
------------------- | ------------------- | ------------------- | ------------------- | |
3,378,389 | 1,137,867 | 3,314,229 | 1,055,595 | |
=========== | =========== | =========== | =========== |
Costs and expenses include research and development costs that were expensed when incurred. The research and development costs were immaterial in the above periods.
The rental expenses included in costs and expenses amounted to PLN 115,367 and PLN 112,318 for the nine month periods ended September 30, 2004 and September 30, 2003, respectively. The rental expenses included in costs and expenses amounted to PLN 38,336 and PLN 37,931 for the three month periods ended September 30, 2004 and September 30, 2003, respectively.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
7.
Taxation
The difference between the effective tax rate of approximately 21.3 percent for the nine month period ended September 30, 2004 and the 19 percent statutory tax rate in Poland primarily results from incurring non-tax deductible costs including the change in valuation of Note and currency options together with creation of part of doubtful debt provisions.
8.
Inventory
As at September 30, 2004 (unaudited) | As at December 31, 2003 | As at September 30, 2003(unaudited) | |
Cellular handsets | 135,841 | 118,323 | 110,363 |
Network spare parts and accessories | 74,670 | 67,543 | 69,100 |
----------------- | ----------------- | ---------------- | |
210,511 | 185,866 | 179,463 | |
========== | ========== | ========= |
9.
Property, plant and equipment
As at September 30, 2004 (unaudited) | As at December 31, 2003 | As at September 30, 2003(unaudited) | |
Land and buildings | 215,896 | 219,340 | 220,702 |
Plant and equipment | 1,940,953 | 2,171,110 | 2,248,830 |
Motor vehicles | 3,223 | 5,617 | 7,494 |
Other fixed assets | 505,756 | 535,214 | 505,859 |
Construction in progress | 108,480 | 92,550 | 83,792 |
------------------- | ------------------- | ------------------- | |
2,774,308 | 3,023,831 | 3,066,677 | |
=========== | =========== | =========== |
During the nine month period ended September 30, 2004 the Company capitalized PLN 1,339 of foreign exchange gains, PLN 2,080 of interest expense and PLN 604 of hedging losses on cross-currency interest rate swaps and forward contracts and during the nine month period ended September 30, 2003 the Company capitalized PLN 2,576 of foreign exchange losses, PLN 2,700 of interest expense and PLN 706 of hedging gains on cross-currency interest rate swaps and forward contracts. During the three month period ended September 30, 2004 the Company capitalized PLN 929 of foreign exchange gains, PLN 712 of interest expense and PLN 525 of hedging losses on cross-currency interest rate swaps and forward contracts and during the three month period ended September 30, 2003 the Company capitalized PLN 583 of foreign exchange losses, PLN 784 of interest expense and PLN 204 of hedging gains on cross-currency interest rate swaps and forward contracts.
The effective capitalization rate used to determine borrowing costs to be capitalized was 9.0% in nine month period ended September 30, 2004 and 21.0% in nine month period ended September 30, 2003.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
9.
Property, plant and equipment (cont.)
The movement of property, plant and equipment was as follows:
Land and Buildings | Plant and equipment | Motor vehicles | Other fixed assets | Construction in progress | Total | |
Cost | ||||||
As at December 31, 2003 | 247,592 | 4,431,181 | 23,576 | 790,402 | 105,773 | 5,598,524 |
Additions | - | - | - | 2,572 | 306,014 | 308,586 |
Asset retirement obligation | - | - | - | 3,128 | - | 3,128 |
Transfers | 1,139 | 252,626 | 1,049 | 31,529 | (286,343) | - |
Disposals | - | (85,299) | (11,329) | (7,721) | (6,462) | (110,811) |
---------------- | ------------------- | --------------(14,428) | ---------------- | ---------------- | ----------------- | |
As at September 30, 2004 | 248,731 | 4,598,508 | 13,296 | 819,910 | 118,982 | 5,799,427 |
---------------- | ------------------- | -------------- | --------------- | --------------- | --------------- | |
Depreciation | ||||||
As at December 31, 2003 | 28,252 | 2,260,071 | 17,959 | 255,188 | 13,223 | 2,574,693 |
Charge | 4,583 | 459,260 | 2,921 | 63,413 | - | 530,177 |
Charge from asset retirement obligation | - | - | - | 3,219 | - | 3,219 |
Provision for construction in progress | - | - | - | - | (2,721) | (2,721) |
Disposals | - | (61,776) | (10,807) | (7,666) | - | (80,249) |
-------------- | ---------------- | -------------- | --------------- | ---------------- | ----------------- | |
As at September 30, 2004 | 32,835 | 2,657,555 | 10,073 | 314,154 | 10,502 | 3,025,119 |
--------------- | ---------------- | -------------- | --------------- | ---------------- | ----------------- | |
Net book value as at December 31, 2003 | 219,340 | 2,171,110 | 5,617 | 535,214 | 92,550 | 3,023,831 |
========= | ========== | ======== | ======== | ========= | ========== | |
Net book value as at September 30, 2004 | 215,896 | 1,940,953 | 3,223 | 505,756 | 108,480 | 2,774,308 |
(unaudited) | ========== | =========== | ======== | ========= | ========= | ========== |
Property, plant and equipment held under capital leases without later improvements (included
in the previous schedule):
As at September 30, 2004 (unaudited) | As at December 31, 2003 | As at September 30, 2003 (unaudited) | |||||||
Land | Buildings | Other | Land | Buildings | Other | Land | Buildings | Other | |
Cost | 6,293 | 197,806 | 990 | 6,293 | 197,806 | 990 | 6,293 | 197,806 | 990 |
Accumulated depreciation | - | (27,500) | (513) | - | (24,697) | (438) | - | (22,556) | (413) |
---------- | -------------- | ----------- | ---------- | ------------- | ----------- | ---------- | -------------- | ---------- | |
Net | 6,293 | 170,306 | 477 | 6,293 | 173,109 | 552 | 6,293 | 175,250 | 577 |
====== | ======== | ====== | ====== | ======= | ====== | ====== | ======= | ====== | |
9.
Property, plant and equipment (cont.)
Capital equipment commitments (not included in liabilities)
As at September 30, 2004(unaudited) | As at December 31, 2003 | As at September 30, 2003(unaudited) | |
Authorized and contracted | 342,410 | 127,839 | 147,483 |
Authorized and not contracted | 312,112 | 812,511 | 345,686 |
------------------- | ------------------ | ------------------- | |
654,522 | 940,350 | 493,169 | |
=========== | ========== | =========== |
10.
Intangible fixed assets
As at September 30, 2004 (unaudited) | As at December 31, 2003 | As at September 30, 2003 (unaudited) | |
GSM and UMTS licenses | 2,548,830 | 2,523,010 | 2,486,983 |
Computer and network software | 285,711 | 284,640 | 268,842 |
Trademark | 94 | 104 | 108 |
Transaction costs | 4,167 | 22,226 | 25,565 |
------------------- | ------------------- | ------------------- | |
2,838,802 | 2,829,980 | 2,781,498 | |
=========== | =========== | =========== |
During the nine month period ended September 30, 2004 the Company capitalized to intangible fixed assets PLN 111,851 of foreign exchange gains, PLN 150,930 of interest expense and PLN 44,584 of hedging losses on cross-currency interest rate swaps and forward contracts and during the nine month period ended September 30, 2003 the Company capitalized to intangible fixed assets PLN 105,583 of foreign exchange losses, PLN 125,220 of interest expense and PLN 21,811 of hedging gains on cross-currency interest rate swaps. During the three month period ended September 30, 2004 the Company capitalized to intangible fixed assets PLN 59,604 of foreign exchange gains, PLN 51,053 of interest expense and PLN 25,363 of hedging losses on cross-currency interest rate swaps and forward contr acts and during the three month period ended September 30, 2003 the Company capitalized to intangible fixed assets PLN 35,704 of foreign exchange losses, PLN 41,974 of interest expense and PLN 7,267 of hedging gains on cross-currency interest rate swaps.
The effective annual capitalization rate for the whole period of capitalization from 2000 was 13.8%.
The Company has no intangible assets generated internally.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
10.
Intangible fixed assets (cont.)
The movements of intangible fixed assets were as follows:
GSM & UMTS Licenses | Computer and network software | Trade Mark | Transaction costs | Total | |
Cost | |||||
As at December 31, 2003 | 2,983,015 | 746,343 | 206 | 49,496 | 3,779,060 |
Additions | - | 109,750 | - | 1,264 | 111,014 |
Other | - | - | - | (396) | (396) |
Capitalization of borrowing costs | 83,663 | - | - | - | 83,663 |
----------------- | ---------------- | ---------------- | ---------------- | ----------------- | |
As at September 30, 2004 | 3,066,678 | 856,093 | 206 | 50,364 | 3,973,341 |
----------------- | ----------------- | ---------------- | ---------------- | ----------------- | |
Amortization | |||||
As at December 31, 2003 | 460,005 | 461,703 | 102 | 27,270 | 949,080 |
Charge | 57,843 | 109,662 | 10 | 10,480 | 177,995 |
Other | - | (983) | - | 8,447 | 7,464 |
---------------- | ---------------- | ----------------- | ---------------- | ------------------ | |
As at September 30, 2004 | 517,848 | 570,382 | 112 | 46,197 | 1,134,539 |
---------------- | ---------------- | ----------------- | ---------------- | ------------------ | |
Net book value as at December 31, 2003 | 2,523,010 | 284,640 | 104 | 22,226 | 2,829,980 |
========== | ========== | ========== | ========== | =========== | |
Net book value as at September 30, 2004 | 2,548,830 | 285,711 | 94 | 4,167 | 2,838,802 |
(unaudited) | ========== | ========== | ========== | ========== | =========== |
As described in Note 11.b, in October 2004 the Company signed a new credit facility agreement and cancelled its previous bank credit facility agreement. Transaction costs in the amount of PLN 9,043 relating to previous facility have been written down and transaction costs attributable to the new financing in amount of PLN 585 have been capitalized.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
11.
Interest-bearing liabilities
As at September 30, 2004 (unaudited) | As at December 31, 2003 | As at September 30, 2003 (unaudited) | |
Short-term portion | |||
Interest accrued on Notes | 105,459 | 56,915 | 87,165 |
Interest accrued on Bank Credit Facilities | 1,219 | 3,415 | 5,213 |
UMTS license liability | 58,646 | - | - |
Finance lease payable | 12,848 | 15,136 | 16,727 |
Overdraft facilities | - | 25,979 | 28 |
------------------- | ----------------- | ------------------- | |
178,172 | 101,445 | 109,133 | |
=========== | ========== | =========== | |
Long-term portion | |||
Long-term Notes | 2,140,861 | 2,510,042 | 2,707,122 |
Bank Credit Facilities | - | 535,933 | 603,477 |
UMTS license liability | 524,662 | 576,875 | 551,199 |
Finance lease payable | 143,066 | 155,129 | 166,506 |
Index swaps | 32,166 | 33,771 | 35,461 |
------------------- | -------------------- | ------------------- | |
2,840,755 | 3,811,750 | 4,063,765 | |
=========== | ============ | =========== |
a.
Notes
In February 2004 the Company repurchased on the market the principal amount of EUR 5,000 thousand of the 10 ⅞% Notes (2.5% of the total initial principal amount). Additionally in May 2004 the Company repurchased on the market the principal amount of USD 10,000 thousand of the 11 ¼% Notes (6.7% of the total initial principal amount), EUR 20,000 thousand of the 11 ¼% Notes (6.7% of the total initial principal amount) and EUR 16,000 thousand of the 10 ⅞% Notes (8.0% of the total initial principal amount).
The Company is full and unconditional guarantor of the following Notes issued by its subsidiary. The outstanding balances as at September 30, 2004 of the Notes represent the Company’s liabilities (measured at amortized cost) due to holders of the Notes as at the balance sheet date:
11¼% Notes – face value of USD 140,000,000 (“11¼ Notes”) maturing on December 1, 2009
11¼% Notes – face value of EUR 248,242,000 (“11¼ Notes”) maturing on December 1, 2009
10⅞% Notes – face value of EUR 135,615,000 (“10⅞ Notes”) maturing on May 1, 2008
Interest and other financial expenses includes the Premium and fees due to the 73.14% of EUR 10⅞% Notes that were tendered between September 28, 2004 and October 28, 2004 in the amount of PLN 34,763.
11.
Interest-bearing liabilities (cont.)
b.
Bank Credit Facilities
On February 20, 2001 the Company signed the two loan facility agreements (“Main Bank Facility Agreement” amounting to EUR 550 million and “Supplemental Bank Facility Agreement” amounting to EUR 150 million (extended from EUR 100 million on September 21, 2001 – together “Bank Credit Facilities”) with the consortium of banks organized by Deutsche Bank AG London, Deutsche Bank Polska S.A., Dresdner Bank Luxembourg S.A. and the European Bank for Reconstruction and Development.
As of June 30, 2004, PTC had fully repaid its senior secured Bank Credit Facilities, leaving EUR 700 million committed by banks and available for the Company. In the third quarter of 2004 PTC did not draw any new funds under the Bank Credit Facilities. As of September 2004 the amounts available under the above mentioned agreements were reduced to EUR 672.5 million due to the first scheduled reduction of Bank Credit Facilities. Amounts classified as accrued interest on Bank Credit Facilities as at September 30, 2004 relate solely to commitment fees in relation to the facility.
On October 7, 2004 the Company signed a new credit agreement (Bank Credit Facility) with a club of 14 Polish and foreign banks (Bank Club) in order to replace its existing senior secured Bank Credit Facilities, which were fully cancelled on October 12, 2004.
12.
Contingent Liability
On May 24, 2004 the Company was informed that Carston, a former dealer has increased its claim against the Company to the total amount of PLN 61,455 from PLN 530 previously claimed. Management, supported by independent legal opinion assesses that the likelihood of an adverse court judgement on any of the individual claims made by Carston ranges between less than probable through remote. Management intends to continue to vigorously defend this action and no provisions have been made in regard to Carston’s claims as at the balance sheet date September 30, 2004.
13.
Related party transactions
The below transactions consist primarily of roaming services rendered and received as well as consulting services.
Management believes that related party transactions were conducted primarily on market terms.
As at and for nine month period ended September 30, 2004 (unaudited) | As at and for twelve month period ended December 31, 2003 | As at and for nine month period ended September 30, 2003 (unaudited) |
Elektrim S.A.
Inter-company receivables | - | 9 | 19 |
Inter-company payables and accruals | 7 | 34 | 45 |
Inter-company sales | 72 | 120 | 89 |
Inter-company purchases | 169 | 231 | 172 |
Elektrim Telekomunikacja Sp. z o.o. (“ET”)
Inter-company receivables | - | 8 | 9 |
Inter-company payables and accruals | 481 | 518 | 473 |
Inter-company sales | 75 | 94 | 59 |
Inter-company purchases | 1,174 | 1,970 | 1,608 |
T-Mobile Deutschland GmbH, T-Mobile International AG & Co. KG (“T-Mobile”)
Inter-company receivables | 8,767 | 3,922 | 6,723 |
Inter-company payables and accruals | 11,756 | 5,770 | 6,497 |
Inter-company sales | 8,767 | 27,556 | 16,597 |
Inter-company purchases | 12,174 | 28,340 | 17,255 |
MediaOne International B.V. (“MediaOne”)
There were no material transactions with MediaOne International B.V.
Vivendi Telecom International (“Vivendi”)
There were no material transactions with Vivendi Telecom International.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
14.
Derivative financial instruments
Type of derivative | Forward and FRA contracts | Note Options | Currency options and option structures | CC swaps | Index swaps | Trade contract derivatives | Total |
Balance as at December 31, 2003 asset/(liability) | 86,186 | 123,307 | 20,826 | 65,155 | (30,172) | 36,607 | 301,909 |
Cash paid on initiation | - | - | 24,038 | - | - | - | 24,038 |
Cash paid/(received) on realization | 2,704 | - | (406) | (2,195) | (2,909) | (4,300) | (7,106) |
Changes in the fair value reported in the income statement | (112,633) | (74,576) | (45,724) | (43,872) | 4,010 | 10,041 | (262,754) |
Changes in the fair value reported in shareholders’ equity (hedge reserve) | 1,828 | - | - | - | - | - | 1,828 |
Changes in the fair value reclassified from shareholder’s equity to income statement | - | - | - | (6,934) | - | - | (6,934) |
Balance as at | ---------------- | --------------- | -------------- | ---------------- | -------------- | -------------- | ---------------- |
September 30, 2004 asset/(liability) (unaudited) | (21,915) | 48,731 | (1,266) | 12,154 | (29,071) | 42,348 | 50,981 |
========== | ========= | ========= | ========= | ======== | ======== | ========= |
Forward contracts are used by the Company to hedge foreign exchange risk related to operational and financial transactions.
FRA contracts are used by the Company to hedge its short to medium-term interest rate exposure arising from forecasted drawdowns under the bank credit facilities. The Company applies hedge accounting with respect to these FRA contracts in accordance with IAS 39.
Note options represent the estimated fair values of call options embedded in the Company’s Notes. Upon exercise of the call option or upon redemption of the Notes by other means, the fair value of the relevant call options is written back to income immediately. Any reduced interest payments resulting from the redemption of the relevant Notes are recognized as they accrue. In September 2004, the Company has written down the amount of PLN 16,781 of Note option related to 10 ⅞% Notes purchased in the cash – tender offer, as described in Note 4.
On March 18, 2003 a new treaty on avoidance of double taxation between Poland and the Netherlands became law. The new treaty provides for a 5 percent withholding tax on interest payments whereas previously no tax was due. On April 29, 2004 the Republic of Poland was granted an eight year exemption period to the European Union ("EU") Directive 2003/49/EC of June 3, 2003 on a common system of taxation applicable to interest and royalty payments made between certain associated companies of different member states, which in effect enables Poland to collect withholding tax under the forementioned treaty. As a result, the Company will incur additional costs of 5 percent in servicing Note interest from January 1, 2005.
14.
Derivative financial instruments (cont.)
In addition to the Note Options, the Company’s Notes also contain Tax Redemption Options, which may allow the Company to redeem the 10 ⅞% Notes and 11¼% Notes at face value plus accrued interests in the circumstances described above.
As at the date of authorization of these condensed financial statements, the Company has obtained the Supervisory Board's approval to redeem all 2001 Notes outstanding after completion of the cash - tender offer on October 28, 2004 by utilization of the Tax Redemption Option. The Company’s Management was in discussion with the Trustee concerning submitting the notice of the Tax Redemption Option as at the date of authorization of these financial statements.
Upon the Company's notice submitted to the Trustee on October 28, 2004 all 1999 Notes will be redeemed with 105.625% premium on December 1, 2004.
Currency options and option structures are used to reduce the risk of currency fluctuation and are measured at market value.
CC swaps were designated as hedges against exposure to changes in future cash flows arising from the foreign exchange risk on the future interest coupon payments.
In 2003 the Company changed its Notes refinancing plans and effectively shortened the term of coupon payments exposure. As a result the maturity of some outstanding CC swap cash flows would exceed the planned date of Notes refinancing. In order to match those CC swap cash flows with the new refinancing plan the Company restructured outstanding CC swaps. The USD CC swaps were terminated.
In respect to EUR CC swaps, cash flows due after Notes refinancing may hedge other exposure than coupon payments namely EUR borrowings used for refinancing of part of EUR denominated Notes or may restructure or terminate those swaps in line with USD CC swaps. The Company discontinued hedge accounting in relation to all CC swaps since part of the coupon payments on EUR denominated Notes is no longer expected to occur.
As at September 30, 2004 the hedge reserve represented PLN 4,585 of the gross cumulative losses and PLN 2,501 of the gross cumulative gains on CC swaps retained in equity related to hedged interest coupon payments which are expected to occur and PLN 1,963 of the gross cumulative losses on forward and FRA contracts for which the Company applies hedge accounting.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
14.
Derivative financial instruments (cont.)
Derivatives structure analysis:
As at September 30, 2004 (unaudited) | As at December 31, 2003 | |||
Assets | Liabilities | Assets | Liabilities | |
Short-term portion | ||||
Forward contracts | 33,773 | (55,688) | 68,289 | (22,091) |
Trade contract derivatives | 10,313 | - | 7,784 | - |
Index swaps | 3,095 | - | 3,599 | - |
CC swaps | 1,374 | (3,845) | 10,040 | - |
Currency options and option structures | 532 | (1,798) | 20,826 | - |
--------------- | ---------------- | -------------- | ---------------- | |
49,087 | (61,331) | 110,538 | (22,091) | |
========= | ========= | ======== | ========== | |
Long-term part | ||||
Note option | 48,731 | - | 123,307 | - |
Trade contract derivatives | 32,035 | - | 28,823 | - |
CC swaps | 14,625 | - | 55,115 | - |
Forward contracts | - | - | 39,988 | - |
Index swaps | - | (32,166) | - | (33,771) |
---------------- | ---------------- | --------------- | ------------------ | |
95,391 | (32,166) | 247,233 | (33,771) | |
========== | ========== | ========== | =========== | |
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
15.
Estimation of the fair values
The following table presents the carrying amounts and fair values of the Company’s financial instruments outstanding as at September 30, 2004 and December 31, 2003, in million PLN. The carrying amounts in the table are included in the balance sheet under the indicated captions.
As at September 30, 2004 (unaudited) | As at December 31, 2003 | |||
million PLN | million PLN | |||
Carrying amount | Fair value | Carrying amount | Fair value | |
Financial Assets | ||||
Cash and cash equivalents | 555 | 555 | 21 | 21 |
Short-term investments and other financial assets | 50 | 50 | 111 | 111 |
Debtors and accrued revenue | 777 | 777 | 713 | 713 |
Financial assets (long-term) | 95 | 95 | 247 | 247 |
Financial Liabilities | ||||
Current liabilities and accruals | 868 | 870 | 668 | 662 |
Long-term liabilities | 2,791 | 3,467 | 3,749 | 4,356 |
The fair value of derivatives held for trading is based on quoted market prices at the balance sheet date. The fair value of CC swaps is calculated as the present value of estimated future cash flows. The fair value of forward contracts is determined using forward exchange market rates at the balance sheet date.
In assessing fair value of non-traded derivatives and other financial instruments, the Company uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Option pricing models and estimated discounted value of future cash flows are used to determine fair value of options split from the Notes and derivatives split from trade contracts.
All “regular way” purchases of financial assets are accounted for at the trade date.
16.
Differences between IFRS and US GAAP
The Company’s condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards, which differ in certain aspects from US GAAP.
The effects of the principal differences between IFRS and US GAAP in relation to the Company’s condensed consolidated financial statements are presented below, with explanations of certain adjustments that affect total comprehensive income.
Reconciliation of consolidated net income:
Nine month period ended September 30, 2004(unaudited) | Three month period ended September 30, 2004(unaudited) | Nine month period ended September 30, 2003 (unaudited) | Three month period ended September 30, 2003 (unaudited) | |
Net income under IFRS | 832,446 | 355,441 | 297,405 | 133,825 |
US GAAP adjustments: | ||||
(a) Removal of foreign exchange differences and hedging gains on forward contracts capitalized for IFRS | 67,360 | 34,643 | (84,250) | (27,618) |
(b) Depreciation and amortization of foreign exchange differences and hedging gains | 7,454 | 2,493 | 7,286 | 2,434 |
(c) Revenue recognition (SAB 101/EITF 00-21) | 394 | 121 | (369) | 20 |
(d) SFAS 133/IAS 39 | 71,536 | 20,349 | 30,474 | 98,101 |
(g) reclassification of CC Swaps from hedge reserve to income statement. | 5,992 | 5,992 | - | - |
(h) Deferred tax on above | (15,085) | (8,263) | 21,289 | 6,989 |
----------------- | ----------------- | ----------------- | ----------------- | |
Net income under US GAAP | 970,097 | 410,776 | 271,835 | 213,751 |
========== | ========== | ========== | ========== |
Reconciliation of comprehensive income:
Nine month period ended September 30, 2004 (unaudited) | Three month period ended September 30, 2004(unaudited) | Nine month period ended September 30, 2003 (unaudited) | Three month period ended September 30, 2003(unaudited) | |
Net income under US GAAP | 970,097 | 410,776 | 271,835 | 213,751 |
Other comprehensive gain/ (loss) (Hedge Reserve) | (4,227) | (7,752) | 100,197 | 15,099 |
----------------- | ----------------- | ----------------- | ----------------- | |
Total comprehensive income under US GAAP | 965,870 | 403,024 | 372,032 | 228,850 |
========== | ========== | ========== | ========== |
16.
Differences between IFRS and US GAAP (cont.)
Reconciliation of consolidated shareholders’ equity:
As at September 30, 2004 (unaudited) | As at December 31, 2003 | |
Consolidated shareholders’ equity under IFRS (restated) | 2,919,661 | 2,087,231 |
US GAAP adjustments: | ||
(a) Removal of foreign exchange differences capitalized for IFRS | (125,996) | (193,356) |
(b) Depreciation and amortization on above | 58,953 | 51,499 |
(c) Revenue recognition (SAB 101/EITF 00-21) | (185) | (579) |
(d, e) SFAS No. 133/IAS 39 | (24,435) | (95,971) |
(f) Asset retirement obligations (SFAS No. 143) | - | 24,285 |
(g) Reclassification of CC swaps | (2,681) | (8,673) |
(h) Deferred tax on above | 16,160 | 26,631 |
(i) Hedge reserve | (6,696) | (2,485) |
-------------------- | ------------------ | |
Consolidated shareholders’ equity under US GAAP before cumulative effect of changes in accounting principles | 2,834,781 | 1,888,582 |
Changes in accounting principles adjustments in 2003: | ||
(f) SFAS No. 143 cumulative effect | - | (24,285) |
(h) Deferred tax on above | - | 4,614 |
--------------------- | ------------------ | |
Consolidated shareholders’ equity under US GAAP | 2,834,781 | 1,868,911 |
============ | =========== |
a.
Removal of foreign exchange differences capitalized for IFRS
In accordance with IAS 23 “Borrowing Costs”, the Company capitalizes financing costs, including interest, foreign exchange gains or losses and hedging gains and losses to the extent they adjust foreign exchange differences initially capitalized, into assets under construction. The financing costs are capitalized only during period of construction or acquisition of the qualifying assets.
Under Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation”, however, foreign exchange differences relating to financing obligations should be included in the income statement of the Company. Consequently, the amounts of foreign exchange differences and hedging gains and losses on forward contracts capitalized in accordance with IAS 23 in the Company’s condensed consolidated financial statements are expensed under US GAAP, while hedging gains or losses on CC swaps are recognized as other comprehensive gain or loss.
16.
Differences between IFRS and US GAAP (cont.)
b.
Depreciation and amortization
The US GAAP adjustments for depreciation and amortization shown above represent the amounts of depreciation and amortization charges relating to capitalized foreign exchange differences and hedging gains and losses in the Company’s IFRS condensed consolidated financial statements. Since under US GAAP these foreign exchange differences and hedging gains and losses are not permitted to be capitalized and are instead expensed or recognized as comprehensive gain or loss, the depreciation and amortization of these capitalized differences under IFRS has been reversed.
c.
Revenue recognition (SAB 101/EITF 00-21)
Under IFRS the Company implemented effective from January 1, 2004 the new recognition policy based on EITF 00-21 and restated previous periods retrospectively. Under US GAAP, the Company implemented principles of EITF 00-21 for the arrangements entered into on or after July 1, 2003 whereas the arrangements entered into before July 1, 2003 are settled under SAB 101 though the contract termination date.
d.
SFAS No. 133
Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument’s gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that a company must formally document, designate, and assess the effec tiveness of transactions that receive hedge accounting.
The Company separates call options from long-term Notes’ host contract and accounts for them as derivatives under IAS 39, while they are not recognized as embedded derivatives for US GAAP purposes.
e.
Transaction costs
IAS 39 requires transaction costs to be included in the initial measurement of financial assets and liabilities. Under US GAAP these costs should be presented as deferred costs in the amount of PLN 44,053 as at September 30, 2004 and PLN 60,524 as at December 31, 2003.
- # -
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
for the nine month periods ended September 30, 2004 and September 30, 2003
(in thousands of PLN, unless otherwise noted)
16.
Differences between IFRS and US GAAP (cont.)
f.
SFAS No. 143
Effective on January 1, 2003 the Company adopted Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). Upon adoption, the Company recorded the fair value of the liabilities for asset retirement obligations and increased the carrying amount of the associated long-lived asset. The liability is being accreted to its present value each period through charges to operating expense. The capitalized asset retirement cost is being depreciated over the shorter of the related asset’s useful life or the period to the expected settlement of the retirement obligation. As a result, the Company recorded in the income statement for 2003 an expense of PLN 19,671, representing a cumulative effect of the adoption of SFAS No. 143, net of taxes of PLN 4,614.
The Company has asset retirement obligations relating primarily to equipment and other leasehold improvements installed in leased network sites. Those leases generally contain provisions that require the Company to restore the sites to their original condition at the end of the lease term.
The development of the liability for asset retirement obligations for the nine month period ended September 30, 2004 is presented below:
Cumulative effect change in adoption of accounting principle on liability as at January 1, 2003: | 54,011 |
Accretion expense | 4,075 |
New assets retirement obligations incurred | 1,543 |
--------------- | |
Liability for asset retirement obligations as at December 31, 2003 | 59,629 |
New assets retirement obligations incurred | 4,238 |
Accretion expense for the nine month period ended September 30, 2004 | 2,984 |
Change of estimation of discount rate | (1,110) |
---------------- | |
Liability for asset retirement obligations as at September 30, 2004 | 65,741 |
========= |
a.
Reclassification of CC swaps
Under IFRS the Company discontinued hedge accounting and recognized in the income statement for 2003 PLN 55,115 of gains previously recognized in equity. Under US GAAP the cumulative gains at the amount of PLN 8,673 resulting from the hedge accounting discontinuance have been retained as hedge reserve pending completion of forecasted replacement financing cash flows. As a result of refinancing, redemption of Notes and signing new credit facility agreement amount of PLN 5,992 was written off to income statement in September 2004.
16.
Differences between IFRS and US GAAP (cont.)
h.
Deferred taxation
Under IFRS the Company may, if certain criteria are met, net deferred tax liabilities and assets and present a net balance in the balance sheet. Under US GAAP current and
non-current portions, by tax jurisdiction, of the above should be disclosed separately. As at September 30, 2004 the Company recognized PLN 56,507 of net current deferred tax asset (PLN 99,930 as at December 31, 2003) and PLN 360,904 of net long-term deferred tax liability (PLN 360,896 as at December 31, 2003).
Under IFRS changes in the fair value of Note options are not taxable transactions, which causes the effective tax rate on US GAAP adjustments to differ as compared to corporate income tax rates for the periods.
i.
Other comprehensive income
The hedge reserve under US GAAP constitutes a part of other comprehensive income,
a component of shareholders’ equity. Under US GAAP the changes in other comprehensive income (hedge reserve) are reflected in accumulated other comprehensive income. A sum of other comprehensive income and net income for the period represents comprehensive income for the period.
j.
SFAS No. 95
The Company applied IAS 7 “Cash Flow Statement” so that cash flow from operating activities begins with net income before taxation, whereas Statement of Financial Accounting Standards No. 95 “Statement of Cash Flows” (“SFAS No. 95”) requires cash flow from operating activities to begin with net income after tax. Under IFRS the Company presents the overdraft facility as a net amount in the balance of cash and cash equivalents in the consolidated statements of cash flows while under US GAAP since no legal right of off – set of such amounts exists, the overdraft facility is not netted and presented under cash flows from financing activities.
k.
FIN 46
On December 24, 2003, the FASB issued a revised interpretation to FIN 46 (“FIN 46R”) to modify some of the provisions of FIN 46 and to exempt certain entities from its requirements. The Company adopted the provisions of FIN 46R to all newly created entities after January 31, 2003 and to all existing SPEs and the modified provisions of FIN 46R to all entities that are not SPEs and which were created before February 1, 2003 as at March 31, 2004.
The Company has a single finance lease agreement with Office Park Ltd. The lessor has been considered as a SPE due to single finance lease agreement, however the Company applies lease accounting to this arrangement and the related assets and liabilities are already reflected in the Company’s condensed consolidated financial statements. There are no other material activities nor material assets or liabilities in this entity. The Company has also considered certain dealers contracts to identify additional VIEs. After analyzing these dealers agreements, the Company has concluded that certain dealers are VIEs. The maximum risk of expected losses from dealers contracts would be limited to the respective credit limits of such dealers totalling PLN 29,880 as at September 30, 2004. PTC has determined it is not the primary beneficiary of these entities.
16.
Differences between IFRS and US GAAP (cont.)
l.
New accounting standards
The implementation of the Statements No. 132 (revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits” from January 1, 2004 has not caused material changes to the Company’s condensed consolidated financial statements.
- # -