FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a or 15d - 16 of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
_____________________________
EuroTel Bratislava, a.s.
(Exact name of co-registrant and parent guarantor as specified in its Articles
of Association)
_____________________________
Stefanikova 17
811 05 Bratislava
Slovak Republic
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with rule 12g3-2(b):82 N/A
INDEX
Page
----
PART I - Financial Information......................................................... 3
ITEM 1. Financial Statements......................................................... 3
Consolidated Balance Sheets........................................................ 3
Consolidated Statements of Operations.............................................. 4
Condensed Consolidated Statements of Cash Flows.................................... 5
Consolidated Statement of Changes in Shareholders's Equity......................... 6
Notes to the Condensed Consolidated Financial Statements........................... 7
ITEM 2. Management's Discussion and Analysis of Results of Operation and
Financial Condition.................................................................. 18
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk.................... 27
PART II - Other Information............................................................ 28
ITEM 1. Legal Proceedings............................................................ 28
ITEM 2. Changes in Securities and Use of Proceeds.................................... 28
ITEM 3. Defaults upon Senior Securities.............................................. 28
ITEM 4. Submission of Matters to Vote of Security Holders............................ 28
ITEM 5. Other Information............................................................ 28
ITEM 6. Exhibits and Reports on Form 8-K............................................. 28
2
EuroTel Bratislava, a.s.
Part 1- Financial Information
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets
(in thousands of Slovak Crowns) (unaudited)
As of As of
December 31, March 31,
------------ -----------
Notes 2000 2001
ASSETS ------------ -----------
Non-current assets
Property and equipment................................................. 5,144,356 4,981,515
Licenses............................................................... 745,214 727,748
Deferred finance charges............................................... 327,187 318,522
Deferred expenses...................................................... 48,237 43,343
Deferred tax asset..................................................... 223,715 84,922
------------ -----------
6,488,709 6,156,050
------------ -----------
Current assets
Inventories............................................................ 2 136,923 171,546
Receivables, prepayments and deferred expenses......................... 920,160 1,031,512
Current investments.................................................... 3 3,559,842 3,529,643
Cash and cash equivalents.............................................. 1,483,765 1,328,675
------------ -----------
6,100,690 6,061,376
------------ -----------
Total assets........................................................... 12,589,399 12,217,426
============ ===========
LIABILITIES AND EQUITY
Shareholders' equity
Share capital.......................................................... 938,735 3,734,735
Accumulated deficit.................................................... (642,112) (317,017)
------------ -----------
4 296,623 3,417,718
------------ -----------
Non-current liabilities
Subordinated shareholder loans......................................... 3,058,929 -
Long term notes........................................................ 7,699,300 7,634,200
Deferred revenues...................................................... 48,237 43,343
------------ -----------
10,806,466 7,677,543
------------ -----------
Current liabilities
Trade, other payables and deferred revenues............................ 1,265,111 1,117,547
Accrued interest - long term notes..................................... 221,199 4,618
------------ -----------
1,486,310 1,122,165
------------ -----------
Total liabilities and equity........................................... 12,589,399 12,217,426
============ ===========
The accompanying notes form an integral part of these consolidated financial
statements.
3
EuroTel Bratislava, a.s.
Consolidated Statements of Operations
(in thousands of Slovak Crowns) (unaudited)
Three months ended March 31,
-----------------------------------------
Notes 2000 2001
(restated)
---------- ------------
Revenues............................................... 5,7 1,267,404 1,761,598
Cost of sales and services............................. 6,7 (540,777) (693,151)
---------- ------------
Gross profit........................................... 726,627 1,068,447
Operating expenses..................................... (650,163) (729,541)
---------- ------------
Operating profit....................................... 76,464 338,906
Finance costs.......................................... 8 (504,478) (131,773)
---------- ------------
Income / (loss) before tax............................. (428,014) 207,133
Income taxes........................................... 9 104,507 (68,718)
---------- ------------
Net income / (loss).................................... (323,507) 138,415
========== ============
The accompanying notes form an integral part of these consolidated financial
statements.
4
EuroTel Bratislava, a.s.
Condensed Consolidated Statements of Cash Flows
(in thousands of Slovak Crowns) (unaudited)
Three months ended March 31,
----------------------------------
2000 2001
(restated)
------------ -------------
Cash flows from operations............................................ 72,125 628,474
Interest paid......................................................... (131,008) (429,178)
Interest received..................................................... 15,116 52,906
Income tax paid....................................................... (10,598) (2,881)
------------ -------------
Net cash flows from operating activities.............................. (54,365) 249,321
============ =============
Cash flows from investing activities
Purchase of property and equipment.................................... (124,915) (413,557)
Purchase of current investments....................................... - (1,335,736)
Proceeds from disposal of property and equipment...................... 43 180
Proceeds from disposal of current investments......................... - 1,344,702
------------ -------------
Net cash used in investing activities................................. (124,872) (404,411)
============ =============
Cash flows from financing activities
Proceeds from borrowings - third parties.............................. 7,284,769 -
Proceeds from shareholder loans....................................... 615,962 -
Repayment of borrowings - third parties............................... (4,083,376) -
Payment of deferred finance charges................................... (277,991) -
------------ -------------
Net cash flows from financing activities.............................. 3,539,364 -
============ =============
Net (decrease) / increase in cash and cash equivalents............... 3,360,127 (155,090)
------------ -------------
Cash and cash equivalents at beginning of period...................... 503,741 1,483,765
------------ -------------
Cash and cash equivalents at end of period............................ 3,863,868 1,328,675
============ =============
The accompanying notes form an integral part of these consolidated financial
statements.
5
EuroTel Bratislava, a.s.
Consolidated Statement of Changes in Shareholders's Equity
(in thousands of Slovak Crowns) (unaudited)
Retained Earnings
Ordinary Share Preferred / (Accumulated
Shares Premium Shares deficit) Total
----------- ------- --------- ----------------- ---------
Balance as of December 31, 1999....................... 765,470 1,035 172,230 (75,434) 863,301
=========== ======= ========= ================= =========
Net loss for the three months ended March 31, 2000.... - - - (323,507) (323,507)
----------- ------- --------- ----------------- ---------
Balance as of March 31, 2000.......................... 765,470 1,035 172,230 (398,941) 539,794
=========== ======= ========= ================= =========
Balance as of December 31, 2000....................... 765,470 1,035 172,230 (642,112) 296,623
=========== ======= ========= ================= =========
Capitalization of shareholders loans (See Note 4).... 2,796,000 - - - 2,796,000
Adjustment related to statutory tax foreign exchange
losses on retired shareholder loans (See Note 4)..... - - - 186,680 186,680
Net income for the three months ended March 31, 2001.. - - - 138,415 138,415
----------- ------- --------- ----------------- ---------
Balance as of March 31, 2001.......................... 3,561,470 1,035 172,230 (317,017) 3,417,718
=========== ======= ========= ================= =========
The accompanying notes form an integral part of these consolidated financial
statements.
6
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
1. Basis of Preparation
These consolidated financial statements have been prepared in accordance with
and comply with International Accounting Standards ("IAS"). The financial
information contained in this quarterly report is unaudited. The financial
statements do not form the statutory accounts of EuroTel, which are prepared
separately in accordance with Slovak law and accounting practice.
The consolidated financial statements and accompanying notes have been presented
in thousands of Slovak Crowns.
In the opinion of management, the accompanying financial statements of EuroTel
contain all adjustments necessary to present fairly, in all material respects,
EuroTel's consolidated financial position as of March 31, 2001, and the results
of operations and cash flows for the three months ended March 31, 2001 and March
31, 2000. All such adjustments are deemed to be of a normal recurring nature.
The financial statements should be read in conjunction with the financial
statements and the related notes included in EuroTel's financial statements as
of December 31, 2000 and 1999 and for each of the years then ended. The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. Inventories
As of As of
December 31, March 31,
---------------- ----------------
2000 2001
---------------- ----------------
GSM
Mobile phones and accessories................................................. 97,112 134,566
SIM cards..................................................................... 36,038 33,305
--------------- ---------------
133,150 167,871
NMT
Mobile phones and accessories................................................. 1,054 1,096
MDNS
MDNS inventory................................................................ 2,719 2,579
--------------- ---------------
136,923 171,546
=============== ===============
EuroTel uses an aging analysis of inventory that approximates the amount that
would have been provided for under specific identification. Inventories are
shown net of allowances of Sk33,711 and Sk11,520 as of December 31, 2000 and
March 31, 2001, respectively.
7
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
3. Current Investments
The Company has invested in a portfolio of Euro denominated government bonds.
The bonds mature in periods ranging from two to twelve months from the balance
sheet date. The bonds pay interest at fixed rates with effective interest rates
ranging from 4.43% to 5.06%. As of December 31, 2000 and as of March 31, 2001
the fair value of the securities was substantially the same as their carrying
value.
As of As of
December 31, March 31,
-------------- -------------
2000 2001
-------------- -------------
Opening net book amount......................................................... - 3,559,842
Additions....................................................................... 4,329,302 1,335,736
Disposals....................................................................... (881,240) (1,344,702)
Amortization of discount........................................................ 8,841 6,227
Foreign exchange differences.................................................... 102,939 (27,460)
-------------- -------------
Closing net book amount......................................................... 3,559,842 3,529,643
============== =============
4. Shareholders' Equity
Upon formation of EuroTel Bratislava, a.s., two classes of shares were issued,
ordinary shares and preferred shares.
On December 17, 1999 EuroTel's shareholders approved an increase in both
ordinary and preferred share capital by capitalizing shareholder loans with a
carrying value of Sk334,400. As a result, the total number of ordinary shares
issued and outstanding at December 31, 2000 was 765,470, of which 390,390 and
375,080 were issued to ST and AWBV respectively. The total number of preferred
shares issued and outstanding at December 31, 2000 was 172,230, all of which
were issued to ST.
On March 22, 2001, EuroTel's shareholders approved an increase in ordinary
share capital by capitalizing shareholder loans and interest accrued thereon
through December 31, 2000 with an aggregate value of Sk3,058,929. Pursuant to
and upon completion of this debt capitalization, ST will receive an additional
1,425,960 ordinary shares and AWBV will receive an additional 1,370,040 ordinary
shares, bringing the total number of issued and outstanding ordinary shares to
3,561,470, of which ST will hold 1,816,350 and AWBV will hold 1,745,120. The
total number of issued and outstanding preferred shares remains 172,230, all of
which are held by ST. The process of registering the increase in share capital
in the Slovak Republic has not been completed as of March 31, 2001, however,
these financial statements reflect the passing of the shareholders resolution.
The capitalization was effected at a blend of exchange rates in effect during
the loan periods giving rise to Sk186,680 increase in equity, (net of taxes of
Sk76,249).
Each class of shares has a nominal value of Sk1 per share and carries one vote
per share. The preferred shares have the right to share in profits of EuroTel
solely through the payment of a preference dividend of one Slovak Crown per
share prior to the payment of the dividend to the holders of ordinary shares.
Ordinary shares carry the right to share equally in the profits of EuroTel
through the payment of a dividend as and when declared. Share premiums represent
the excess of each owner's total initial capital contribution over their
proportionate contribution to EuroTel's registered capital prior to the
transformation of EuroTel into a joint stock company.
EuroTel cannot make any dividend payment or other distribution unless certain
criteria set forth in the indenture agreement are satisfied.
8
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
5. Revenues
Three months ended March 31,
-------------------------------------
2000 2001
(restated)
----------- -----------
Mobile service revenues............................................... 1,021,802 1,439,755
Mobile equipment and other sales (a)
Mobile equipment sales................................................ 60,185 126,264
Other revenues (a).................................................... 98,038 80,353
----------- -----------
158,223 206,617
Managed data network services ("MDNS")
MDNS service revenues................................................. 86,249 114,780
MDNS equipment revenues............................................... 1,130 446
----------- -----------
87,379 115,226
1,267,404 1,761,598
=========== ===========
Service Revenues
Total service revenues, which exclude revenues from the sale of mobile equipment
and MDNS equipment, were as follows:
Three months ended March 31,
-------------------------------------
2000 2001
(restated)
----------- -----------
Service revenues (a).................................................. 1,206,089 1,634,888
=========== ===========
(a) During 2000, EuroTel changed its accounting policy with respect to the
treatment of activation revenues. This change in accounting policy has been
accounted for retrospectively and the effect of the change is set out in
Note 7.
6. Cost of Sales and Services
Three months ended March 31,
-------------------------------------
2000 2001
(restated)
----------- -----------
Mobile service cost of sales
Interconnect....................................................... 151,606 221,735
Roaming............................................................ 51,550 59,041
Leased circuits.................................................... 56,907 55,815
License and other costs............................................ 12,556 14,414
----------- -----------
272,619 351,005
Mobile equipment and service commissions
Equipment, SIM cards, accessories and spare parts (a).............. 197,347 272,341
Service commissions (a)............................................ 35,867 33,147
----------- -----------
233,214 305,488
----------- -----------
Managed data network services cost of sales........................... 34,944 36,658
----------- -----------
540,777 693,151
=========== ===========
9
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
6. Cost of Sales and Services (continued)
Cost of Services
Depreciation and amortization are not included in cost of sales and services but
under operating expenses. Total service cost of goods sold, which excludes the
cost of mobile equipment and MDNS equipment sold, were as follows:
Three months ended March 31,
-----------------------------------
2000 2001
(restated)
---------- ----------
Cost of services (a).................................................. 337,846 420,820
========= ==========
(a) During 2000, EuroTel changed its accounting policy with respect to the
treatment of activation costs. This change in accounting policy has been
accounted for retrospectively and the effect of the change is set out in
Note 7.
7. Activation Revenues and Activation Costs - Change in Accounting Policy
During 2000, EuroTel changed its accounting policy with respect to the treatment
of activation revenues and activation costs. The effect of the change in the
accounting policy is as follows:
Three months ended March 31,
-----------------------------------
2000 2001
---------- ----------
Effect on revenues and costs of sales
Increase in revenue from mobile equipment and other sales............. 13,749 18,994
(Increase) / decrease in cost of sales of equipment, SIM cards,
accessories and spare parts......................................... 1,960 (3,830)
(Increase) / decrease in service commissions.......................... (15,709) (15,164)
--------- ---------
Net effect on income.................................................. - -
========= =========
As of As of
December 31, March 31,
------------ -------------
Effect on assets and liabilities 2000 2001
------------ -------------
Increase in deferred expenses (non-current)........................... 48,237 43,343
Increase in deferred expenses (current)............................... 99,759 85,659
Increase in deferred revenues (non-current)........................... 48,237 43,343
Increase in deferred revenues (current)............................... 99,759 85,659
10
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
8. Finance Costs
Three months ended March 31,
----------------------------------
2000 2001
------- -------
Write-off of deferred finance charges and
Prepayment penalties (a)............................................. 333,625 -
Interest expense on borrowings........................................ 169,594 212,571
Arrangement fees and other finance expenses, net...................... 11,949 8,784
Capitalized interest (b).............................................. (5,609) (2,052)
Interest income....................................................... (15,116) (58,830)
Foreign exchange losses / (gains)..................................... 10,035 (28,700)
------- -------
504,478 131,773
======= =======
(a) The write-off of the existing deferred finance charges and prepayment
penalties relates to the early extinguishment of the Syndicated and
International Finance Corporation loans which were repaid with the proceeds
from the issuance of senior guaranteed notes. The write-off of existing
deferred finance charges and prepayment penalties amounted to Sk189,730 and
Sk143,895 respectively for the year ended December 31, 2000.
(b) Capitalization rates used to determine capitalized interest were as follows:
Three months ended March 31,
-------------------------------------
2000 2001
----------- ---------
Capitalization rates.................................................. 7.7% 7.7%
=========== =========
11
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
9. Income Taxes
A reconciliation between the reported income tax credit and the theoretical
amount that would arise using the statutory tax rates is as follows:
Three months ended March 31,
----------------------------------------
2000 2001
----------- ----------
Income / (loss) before tax............................................ (428,014) 207,133
=========== ==========
Income tax at 29%..................................................... (124,124) 60,068
Nondeductible provision for doubtful accounts (a)..................... 14,470 6,391
Nondeductible provision for inventory................................. (695) (6,435)
Increase in valuation allowance....................................... 11,412 -
Other, net............................................................ (5,570) 2,520
----------- ----------
(104,507) 62,544
----------- ----------
Income tax expense for the period
The tax charge for the period comprises:
Deferred tax charge / (credit) (b)................................. (104,507) 62,544
Tax charge in respect of prior periods............................. - 3,290
Withholding tax charged to income.................................. - 2,884
----------- ----------
(104,507) 68,718
=========== ==========
(a) Uncollectible receivables are not tax deductible until certain statutory
collection requirements are not complied with.
(b) The deferred tax credit is the result of unrealized foreign exchange losses
which are not considered tax deductible under current Slovak tax
legislation until realized, accruals including interest on shareholder
loans and interest on long term notes which are not considered tax
deductible under current Slovak tax legislation until paid, and tax loss
carryforwards.
10. Capital Commitments
EuroTel had the following contractual capital commitments:
As of As of
December 31, March 31,
-------------- -----------
2000 2001
-------------- -----------
Capital expenditures that have been contracted for but have not been 658,069 1,313,646
provided for in the financial statements............................. ============== ===========
These commitments principally relate to the network, with the majority of
payments expected to occur within one year. These commitments are cancelable
without significant penalty.
12
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
11. Related Party Transactions
In the normal course of business EuroTel purchases certain telecommunications
services from and sells certain services to ST. EuroTel has certain lease
agreements with ST. Related party transactions with AWBV constitute management
fees paid for consulting services and payments for seconded employees. In
addition, EuroTel had outstanding long term borrowings from its shareholders
(see Note 4). On March 22, 2001, EuroTel's shareholders approved an increase in
ordinary share capital by capitalizing all shareholder loans and interest
accrued thereon through December 31, 2000 (see Note 4). EuroTel also purchases
and sells in the normal course of business telecommunications services from the
following related parties: EuroTel Praha and Radiomobil in the Czech Republic,
DeTeMobil in Germany, Max.mobil in Austria, Westel 900 in Hungary, Omnitel in
Italy and PTC in Poland.
EuroTel's transactions with the aforementioned related parties, all of which
were undertaken on an arms length basis, were as follows:
Three months ended March 31,
-----------------------------------
2000 2001
-------- --------
Sales to ST......................................................... 238,385 248,096
Purchases from ST................................................... 227,274 176,246
Lease expense paid to ST............................................ 4,947 10,482
Sales to EuroTel Praha.............................................. 17,092 15,752
Purchases from EuroTel Praha........................................ 7,844 8,079
Sales to other related parties...................................... 22,974 24,227
Purchases from other related parties................................ 11,833 11,692
Management fees paid to AWBV........................................ 10,962 6,357
Directors and management fees....................................... 2,968 6,264
12. Contingencies
Litigation
EuroTel is not involved in any legal proceedings outside of the normal course of
business. Management does not believe the resolution of EuroTel's legal
proceedings will have a material adverse effect on its financial conditions,
results of operations or cash flows.
Taxation
The taxation system in Slovakia is at an early stage of development and is
subject to varying interpretations and changes, which may be retroactive. In
Slovakia, tax periods remain open for tax audits for 6 years.
Concentration of Risk
EuroTel faces foreign exchange risk as its revenues are denominated in Slovak
Crowns, while most of its debt and a significant portion of capital expenditures
are denominated in other currencies. These include payments for GSM network
equipment and for mobile phone handsets, which are generally denominated in
Euros. Any devaluation of the Slovak Crown against the Euro that EuroTel is
unable to offset through price adjustments will require the use of a larger
portion of revenues for capital expenditures and for debt service. This would
cause an adverse effect on EuroTel's financial position and results of
operations. EuroTel has not engaged in any hedging activities.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising EuroTel's customer base. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. EuroTel maintains provisions for potential
credit losses and such losses, in the aggregate, have not exceeded management's
expectations.
13
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
13. Segment Information
Management considers EuroTel to operate in two business segments based on
services provided: mobile telecommunications services and managed data network
services. There was no inter-segment revenue recognized. EuroTel tracks and
manages financial results for its segments down to the gross profit level.
Operating expenses not attributable to reportable segments include all operating
expenses except for amortization of licenses and depreciation relating to
cellular plant and equipment and managed data network services equipment. Assets
attributable to segments include cellular plant and equipment and managed data
network services equipment and the related construction in progress as well as
licenses, inventory and trade receivables. Unallocated assets include computer
equipment, motor vehicles, furniture and fixtures, tax and other receivables,
prepayments, deferred finance charges and cash.
The information in the following tables is disclosed in the same manner and
amounts as used by the chief operating decision-maker to make operational
decisions and allocate resources.
EuroTel's segment financial information was as follows:
Mobile Managed
Communications Data Network
Services Services Unallocated Total
(restated) (restated)
------------------ ------------------ ------------ -------------
Three months ended March 31, 2000
Revenues (a)....................... 1,180,024 87,380 - 1,267,404
Cost of sales and services (a)..... (505,833) (34,944) - (540,777)
------------------ ------------------ ------------ -------------
Gross profit....................... 674,191 52,436 - 726,627
Operating expenses................. (210,391) (12,726) (427,046) (650,163)
------------------ ------------------ ------------ -------------
Operating profit................... 463,800 39,710 (427,046) 76,464
- - (504,478) (504,478)
Finance costs...................... ------------------ ------------------ ------------ -------------
Income / (loss) before tax......... 463,800 39,710 (931,524) (428,014)
Income taxes....................... - - 104,507 104,507
------------------ ------------------ ------------ -------------
Net income / (loss)................ 463,800 39,710 (827,017) (323,507)
================== ================== ============ =============
Depreciation....................... (192,716) (11,392) (96,257) (300,365)
Amortization....................... (17,675) (1,334) - (19,009)
14
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
13. Segment Information (continued)
Mobile Managed
Communications Data Network
Services Services Unallocated Total
------------------ ------------------ ------------ -------------
Three months ended March 31, 2001
Revenues.......................... 1,646,372 115,226 - 1,761,598
Cost of sales and services........ (656,493) (36,658) - (693,151)
------------------ ------------------ ------------ -------------
Gross profit...................... 989,879 78,568 - 1,068,447
Operating expenses................ (249,398) (13,722) (466,421) (729,541)
------------------ ------------------ ------------ -------------
Operating profit.................. 740,481 64,846 (466,421) 338,906
Finance costs..................... - - (131,773) (131,773)
------------------ ------------------ ------------ -------------
Income / (loss) before tax........ 740,481 64,846 (598,194) 207,133
Income taxes...................... - - (68,718) (68,718)
------------------ ------------------ ------------ -------------
Net income / (loss)............... 740,481 64,846 (666,912) 138,415
================== ================== ============ =============
Depreciation...................... (231,991) (13,663) (95,201) (340,855)
Amortization...................... (17,407) (59) - (17,466)
Mobile Managed
Communications Data Network
Services Services Unallocated Total
------------------ ------------------ ------------ -------------
As of December 31, 2000
Total assets (a)..................... 5,784,203 337,449 6,467,747 12,589,399
================== ================== ============ =============
Total liabilities (a)................ 950,628 69,309 11,272,839 12,292,776
================== ================== ============ =============
Capital expenditure.................. 619,913 51,024 296,106 967,043
================== ================== ============ =============
As of March 31, 2001
Total assets......................... 5,691,244 302,014 6,224,168 12,217,426
================== ================== ============ =============
Total liabilities.................... 850,559 56,636 7,892,513 8,799,708
================== ================== ============ =============
Capital expenditure.................. 123,967 5,095 49,424 178,486
================== ================== ============ =============
(a) During 2000, EuroTel changed its accounting policy with respect to the
treatment of activation revenues and activation costs. This change in
accounting policy has been accounted for retrospectively and the effect of
the change is set out in Note 7.
15
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
14. Reconciliation to United States Generally Accepted Accounting Principles
EuroTel's financial statements are prepared in accordance with IAS, which differ
in certain respects from U.S. GAAP. The principal differences between IAS and
U.S. GAAP are presented and described below, together with explanations of the
adjustments that affect consolidated net loss for the three months ended March
31, 2000 and consolidated net income for the three months ended March 31, 2001.
Three months ended March 31,
-----------------------------
2000 2001
----------- -----------
Reconciliation of net income / (loss)
Net income / (loss) reported under IAS ....................................... (323,507) 138,415
U.S. GAAP adjustments:
- shareholders pushdown (a).............................................. (645) (706)
----------- -----------
Presentation of net income / (loss) under U.S. GAAP........................... (324,152) 137,709
=========== ===========
There are no differences between shareholder's equity reported under IAS and
U.S. GAAP.
(a) Shareholder Pushdown
Under IAS, expenses paid by the shareholders on behalf of EuroTel do not
constitute a contribution of capital. In addition, EuroTel is not required to
recognize an expense related to shareholder payments. During the periods
presented, EuroTel had portions of compensation expense paid by its
shareholders. Under U.S. GAAP, EuroTel is required to recognize an expense and a
concurrent contribution of capital by the shareholder for these costs when
material. This transaction has no effect under Slovak law and no effect on net
equity.
(b) Change in Accounting Policy
Until 2000, under IAS and U.S. GAAP, direct activation costs (SIM cards and
sales commissions) were charged to income at the time of activation. In the
fourth quarter of 2000, in accordance with IAS and the Securities and Exchange
Commission Staff Accounting Bulletin No. 101 ("SAB 101") management elected to
defer direct activation costs over the estimated customer relationship period.
This change was enacted to achieve a better allocation of these revenues and
costs to the periods they relate to. EuroTel has restated its comparative
historical financial statements to reflect the retroactive application of this
policy.
Under U.S. GAAP this change is reported in accordance with Statement of
Financial Accounting Standards No. 3 ("FAS 3"). As a result of the adoption of
this new policy net loss reported under U.S. GAAP for the three months ended
March 31, 2000 increased by Sk 9,762 (net of tax of Sk 3,987).
(c) Extraordinary Item
Under IAS, EuroTel may not recognize the write-off of the existing deferred
finance charges and prepayment penalties relating to the early extinguishment of
the Syndicated and International Finance Corporation loans as an extraordinary
item (see Note 8). Under U.S. GAAP, EuroTel is required to recognize the
write-off of existing deferred finance charges and prepayment penalties as an
extraordinary item. The extraordinary item has the same impact on the net loss
for the period under review for both U.S. GAAP and IAS.
16
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
14. Reconciliation to United States Generally Accepted Accounting Principles
(continued)
(d) Comprehensive Income
In September 1997, the FASB adopted Statement of Financial Accounting Standards
No. 130. "Reporting Comprehensive Income" ("FAS 130") which establishes rules
for the reporting of comprehensive income and its components. EuroTel had no
income components that qualified as comprehensive income under FAS 130 for any
of the periods presented.
(e) Operating Loss Carryforwards
U.S. GAAP requires disclosure of the amounts and expiration dates of net
operating loss carryforwards. Under Slovak Tax Law a company may accumulate
three consecutive years of tax losses for carryforwards. As of March 31, 2001
EuroTel had approximately Sk1,747,161 of net operating loss carryforwards which
expire at the earliest in 2002 if EuroTel does not produce taxable income by
that date. Otherwise, those operating loss carryforwards expire ratably over
five years beginning in the year EuroTel records taxable income.
(f) Recent Pronouncements
In September 1999 the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which will be
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. It is not expected that the adoption of the
statement will have a material effect on the Company's results of operations and
financial position.
17
EuroTel Bratislava, a.s.
Part 1 - Financial Information
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion should be read together with our financial statements,
including the accompanying notes, beginning on page 3. The financial statements
and the accompanying notes have been prepared in accordance with IAS, which
differs in certain respects from U.S. GAAP. For a description of the principal
differences between IAS and U.S. GAAP as they relate to us and a reconciliation
of our net income from IAS to U.S. GAAP, see note 14 of our financial
statements. You should read the statements under "Safe Harbor Statement Under
the Private Securities Litigation Reform Act of 1995" below for information
about the presentation of our forward-looking information.
Overview
We are a leading telecommunications company in the Slovak Republic offering
mobile telecommunications and managed data network services. We are one of two
mobile providers licensed to offer nationwide GSM mobile telecommunications
services and we are the sole provider of analog NMT services. We also provide
managed data network services to a variety of domestic and multinational
businesses and Slovak government institutions. As of March 31, 2001, we had
560,532 mobile customers, and 3,001 managed data network customers, consisting
primarily of subscribers to our X.25 and frame relay services. For the three
months ended March 31, 2001, we generated revenues of Sk1,761.6 million, cash
flows from operating activities of Sk249.3 million, EBITDA of Sk697.2 million
and net income of Sk138.4 million.
The following table sets forth information about our network:
As of March 31,
------------------------------------
2000 2001
----------------- -----------------
Geographical area of Slovak Republic covered
NMT.............................................................. 79% 79%
GSM.............................................................. 81% 81%
Population of Slovak Republic covered
NMT.............................................................. 96% 96%
GSM.............................................................. 98% 98%
Number of base stations
NMT.............................................................. 140 139
GSM.............................................................. 527 576
Revenues
Our revenues consist of mobile service revenues, mobile equipment and other
sales and managed data network services revenues. Mobile service revenues
include all revenues we receive on a recurring basis from our mobile
telecommunications services and include monthly access fees, airtime charges for
calls that originate on our network and interconnection and roaming fees.
Airtime charges are the single largest source of our mobile revenues and include
fees charged for our value-added services and special features. We generally set
fees on a network-wide basis, although occasionally we negotiate individual fee
agreements with large business customers. Airtime charges are generally paid by
the initiator of the call, commonly referred to as "calling party pays," except
when a customer travels outside the Slovak Republic, in which case the customer
is charged for a portion of the incoming call. Interconnection and roaming fees
include interconnection fees from Slovak Telecom and Globtel for calls by their
customers terminating on our network and roaming fees for calls by our mobile
customers travelling outside of the Slovak Republic and for visitors using our
network in the Slovak Republic.
Mobile equipment revenues include all revenues we receive on a
non-recurring basis from our mobile business and include sales of handsets and
accessories as well as one-time activation fees. Managed data
18
EuroTel Bratislava, a.s.
network services revenues consist of revenues generated when we provide our data
customers with access and use of our data network, as well as revenue from the
installation and rental of data transmission equipment.
As a provider of telecommunications services, our revenues are affected by
growth in our customer base, usage of our services and prices charged for each
of the services that we offer. Our revenues are also affected by customer mix,
with business customers generally having higher average call volume than
non-business customers. Continued customer and service usage growth will depend
on a number of competitive factors, including pricing and promotions, the range
and quality of our services, the capacity and coverage of our network, as well
as general economic and market conditions in the Slovak Republic. We expect that
average minutes of use and revenue per customer for our mobile customers will
fall as mobile penetration in the Slovak Republic increases, because many of our
new customers will be non-business customers who use their mobile phones less
frequently.
The following table sets forth certain information about our customers as of and
for the periods indicated:
As of March 31,
-------------------------------------
2000 2001
------------------ ---------------
Mobile customers
NMT Post-paid................................................. 18,343 15,833
GSM Post-paid................................................. 172,751 183,426
GSM Pre-paid.................................................. 117,420 361,273
------------------ ---------------
Total......................................................... 308,514 560,532
Managed data network connections.................................... 6,190 6,536
Three months ended March 31,
-------------------------------------
2000 2001
------------------ ---------------
Average monthly revenue per customer
Post-paid..................................................... Sk1,617 Sk1,825
Pre-paid...................................................... 348 358
Average monthly billable minutes per customer(2)
Post-paid..................................................... 203(1) 258
Pre-paid...................................................... 56(1) 55
Average monthly churn rate
Post-paid..................................................... 2.25% 1.72%
Pre-paid...................................................... 0.84% 1.40%
- ---------------------
(1) Restated number. Please refer to the Form 6-K filed with the SEC on
February 28, 2001, when making historical comparisons.
(2) We have changed from reporting monthly switched minutes per customer to
reporting monthly billable minutes per customer as we believe billable
minutes to be of more relevance in analyzing our operating performance.
We have experienced tariff reductions in our mobile business as a result of
increased competition with Globtel, our only competitor in the provision of
mobile telecommunications services. Present competition with Globtel is based
mainly on pricing of handsets and services, network quality and coverage, the
range of services offered and customer service. Mobile tariffs in the Slovak
Republic are among the lowest in Europe. We have experienced increasing minutes
of use and mobile service revenue as effective tariffs per minute decline.
Churn
As previously noted, "Churn" refers to customer disconnections or
suspensions of service. Involuntary disconnections or suspensions of service
occur when customers fail to pay or we suspect fraudulent use. Voluntary
disconnections or suspension of service occur when customers switch to a
competing mobile network or terminate their use of mobile services. The rate of
churn indicates the percentage of customers that we need to replace in any given
period before we can achieve net customer growth. Our total average monthly
churn rate was approximately 1.8% in the three months ended March 31, 2000, and
1.5% in the three months ended March 31, 2001. We recognize that managing churn
is an important factor in maximizing revenue and cash flow.
19
EuroTel Bratislava, a.s.
To minimize voluntary churn, we provide a high-quality network and service
at competitive prices. We use our advanced information technology systems to
understand, monitor and control voluntary churn. We also minimize voluntary
churn through loyalty programs and targeted renewal campaigns for post-paid
customers near the end of their contract. However, the success of our customer
retention and cost recovery measures depends partially upon competitive factors
beyond our control, including our competitor's rate structures, service
offerings and incentive programs.
A significant cause of churn has been our policy to terminate customers for
failure to pay for our services. Under Slovak law, we cannot conduct credit
checks through credit bureaus or other third parties. We established and
maintain our own databases through which we conduct credit checks on potential
customers, but our information is limited. Our inability to check the credit
history of potential customers increases the risk of customer default and our
rate of churn. Our current churn rate for pre-paid customers is relatively low
due to the rapid increase in pre-paid customers since our relaunching of this
service in April 1999. Going forward, we expect the churn rate of pre-paid
customers to increase because these customers are not contractually bound to
continue using our services.
Expenses
Cost of Sales and Services. Cost of sales and services, which does not
include depreciation, principally consists of expenses related to the operation
of our mobile and data networks, including interconnection costs, roaming fees
paid to other mobile operators when our customers use their networks, leased
circuit costs and license fees. Until December 31, 1999, Slovak Telecom paid for
incoming international calls terminating on our network by giving us a discount
of up to 35% on our interconnection costs depending on traffic volume and on
outgoing international calls originating on our network. As a result of the
direct interconnection agreement entered into between us and Globtel on December
23, 1999, neither we nor Globtel pays Slovak Telecom for interconnection to our
respective networks. Cost of sales and services also includes the cost of
equipment sold to customers, including mobile handsets, SIM cards, accessories
and modems. These costs are proportional to the number of gross customer
additions in each period.
Operating Expenses. Operating expenses consist of selling, general and
administrative expenses and depreciation and amortization expenses. Selling,
general and administrative expenses consist of:
o advertising expenses;
o marketing and sales expenses;
o wages and employee benefits;
o network support and maintenance expenses;
o bad debt expense; and
o other general costs such as rent, building maintenance, professional
fees and administrative costs and office supplies.
We reserve for bad debt expense using a formula based on an aging of
accounts receivable. This formula is reflected in our statements of operations.
Under Slovak law, however, we cannot claim the tax benefit of a bad debt
write-off until we pursue all available remedies against a delinquent customer.
As a result, before we can claim the tax benefit of a write-off, a delinquent
customer must either go through a bankruptcy proceeding or we must commence
legal proceedings against this customer and obtain a final adjudication of our
claim. It is not commercially feasible for us to pursue each customer that fails
to make payments on our invoices. Accordingly, our balance sheet will reflect,
over time, higher levels of gross accounts receivable and bad debt reserves
until we can record a tax benefit related to a bad debt write-off under Slovak
law. Our bad debt expense is lower for pre-paid customers.
Depreciation and amortization expenses consist of the depreciation of the
property, plant and equipment used in our mobile and data networks and
amortization of our licenses. These expenses have increased significantly over
recent years because we have constructed our GSM network and they will continue
to increase as we expand our network coverage and capacity.
20
EuroTel Bratislava, a.s.
Finance Costs. Our finance costs include net interest expense (net of
interest income), arrangement fees and other finance expenses and foreign
exchange losses or gains on non-Slovak Crown-denominated debt. We capitalize
borrowing costs that are directly attributable to the purchase of property used
in the development or construction of property, plant or equipment as part of
the cost of such asset during the course of construction. Accordingly, we do not
expense or include these borrowing costs as part of our finance costs. Our
finance costs vary with the level of our debt, interest rates and exchange
losses. Substantially all of our debt is in currencies other than the Slovak
Crown.
Taxes. The corporate tax rate in the Slovak Republic decreased in 1999 from
40% to 29%, effective January 1, 2000. Taxes in the Slovak Republic can be
reduced by operating losses which generate tax benefits offsetting taxable
income. Legislation put into effect on January 1, 2000 allows for the
carryforward of up to three successive years of tax losses, inclusive of the
1999 tax year. The cumulative tax benefit of these carryforwards must be
amortized evenly over the next consecutive five years. Any additional tax losses
incurred during the amortization period are not available as a future tax
benefit, including any amortized amount, which cannot be fully utilized. Prior
to the new legislation, only one year of tax losses could be carried forward at
any one time. Taxes are also affected by the tax deductibility of bad debt
expense, which can only be deducted after all collection remedies are pursued.
In addition, only realized foreign exchange losses are tax deductible under
current Slovak tax legislation.
Foreign Exchange Exposure
While the majority of our revenues are in Slovak Crowns, a significant
portion of our expenses and liabilities are in currencies other than the Slovak
Crown. Substantially all of our debt is in currencies other than the Slovak
Crown. As a result, our operating income and cash flow may be affected if these
other currencies appreciate against the Slovak Crown. Depreciation of the Slovak
Crown in recent years increased the Slovak Crown cost of servicing our debt as
well as the cost of maintaining and expanding our mobile and data networks. We
recognize foreign exchange gains and losses on monetary assets or liabilities in
foreign currency in the period in which we incur them. We include foreign
exchange gains and losses incurred as part of our operating activities as
operating costs. We include foreign exchange gains and losses arising from
financing activities in finance costs.
We receive some revenues in U.S. dollars and special drawing rights from
foreign carriers. These non-Slovak Crown-denominated revenues are derived from
roaming fees for calls placed by foreign customers on our network in the Slovak
Republic. Our non-Slovak Crown-denominated revenues represented approximately
6.0% and 5.2% of our total revenues in the three months ended March 31, 2000 and
2001, respectively.
21
EuroTel Bratislava, a.s.
Results of Operations
Our major revenue and expense categories for the three months ended March 31,
2000 and 2001 are set forth in the table below.
Three months ended March 31,
----------------------------------------
2000 2001
-------------------- ------------------
(millions of Slovak Crowns)
Mobile service revenues...................................... 1,021.8 1,439.8
Mobile service cost of sales................................. 272.6 351.0
-------------------- ------------------
Gross profit from mobile services............................ 749.2 1,088.8
Gross margin from mobile services............................ 73.3% 75.6%
Mobile equipment and other sales............................. 158.2 206.6
Mobile equipment and other cost of sales..................... 233.3 305.5
-------------------- ------------------
Gross profit (loss) from mobile equipment.................... (75.1) (98.9)
Gross margin from mobile equipment sales..................... (47.5)% (47.9)%
Data network service revenues................................ 87.4 115.2
Data network service cost of sales........................... 34.9 36.7
-------------------- ------------------
Gross profit from managed data network services.............. 52.5 78.5
Gross margin from managed data network....................... 60.1% 68.1%
Total revenues............................................... 1,267.4 1,761.6
Cost of sales and services................................... 540.8 693.2
-------------------- ------------------
Gross profit................................................. 726.6 1,068.4
Gross margin................................................. 57.3% 60.6%
Selling, general and administration expenses................. 330.7 371.2
Depreciation and amortization................................ 319.4 358.3
-------------------- ------------------
Operating income............................................. 76.5 338.9
Finance costs................................................ 504.5 131.8
Tax expense/(benefit)........................................ (104.5) 68.7
-------------------- ------------------
Net income / (loss).......................................... (323.5) 138.4
==================== ==================
Three months ended March 31, 2001 Compared to Three months ended March 31, 2000
Revenues. Our total revenues increased by Sk494.2 million, or 39.0%, from
Sk1,267.4 million in the three months ended March 31, 2000 to Sk1,761.6 million
in the three months ended March 31, 2001. This increase was primarily
attributable to an increase in the number of our mobile customers, particularly
in our pre-paid customer base.
Mobile service revenues, including interconnection and roaming fees paid by
other operators, increased by Sk418.0 million, or 40.9%, from Sk1,021.8 million
in the three months ended March 31, 2000 to Sk1,439.8 million in the same period
of 2001. This increase reflected an 81.7% increase in the number of our mobile
customers, which grew from 308,514 as of March 31, 2000 to 560,532 as of March
31, 2001. Average monthly revenue per customer decreased by 24.0% from Sk1,205
in the three months ended March 31, 2000 to Sk916 in the three months ended
March 31, 2001. We believe that this decline was primarily due to the increased
number of non-business mobile customers, who typically generate lower average
monthly revenues than business customers. Deferred revenue increased by Sk13.0
million, from Sk328.4 million at March 31, 2000 to Sk341.4 million at March 31,
2001. This increase is due to an increase of Sk83.7 million in deferred mobile
service revenue due to the increase in the number of customers, offset by a
reduction in deferred activation revenue of Sk70.7 million due to pricing
promotions throughout first quarter 2001 that reduced activation fees for new
subscribers, and the fact that in the quarters following our launch of GSM
service in 1997 we added more post-paid subscribers than we did in first quarter
2001.
22
EuroTel Bratislava, a.s.
Mobile equipment and other sales increased by Sk48.4 million, or 30.6%, from
Sk158.2 million in the three months ended March 31, 2000 to Sk206.6 million in
the three months ended March 31, 2001. This increase was primarily due to sales
of mobile phone handsets and accessories, which increased by Sk66.1 million, to
Sk126.3 million, in the three months ended March 31, 2001. Offsetting the
increase in sales of mobile phone handsets and accessories was a decrease in
contract penalty revenue of Sk21.7 million. Contract termination penalties
declined in the three months ended March 31, 2001 due to lower churn. The
remaining change in mobile equipment and other sales is due primarily to an
increase in other non-recurring revenues, such as sales of certain value-added
services.
Managed data network service revenues increased by Sk27.8 million, or
31.8%, from Sk87.4 million in the three months ended March 31, 2000 to Sk115.2
million in the three months ended March 31, 2001. This revenue increase is
attributable to an increase in data network connections, and also a change in
the composition of our managed data network service revenues reflecting a shift
towards higher-value services. Concurrently, revenue from the sale of managed
data network equipment declined by Sk0.7 million, from Sk1.1 million in the
three months ended March 31, 2000 to Sk0.4 million in the three months ended
March 31, 2001, due to competitive price pressures. The number of total data
customer connections increased by 5.6% from 6,190 as of March 31, 2000 to 6,536
as of March 31, 2001.
Cost of Sales and Services. Cost of sales and services increased by Sk152.4
million, or 28.2%, from Sk540.8 million in the three months ended March 31, 2000
to Sk693.2 million in the three months ended March 31, 2001. As a percentage of
total revenues, cost of sales decreased from 42.7% in the three months ended
March 31, 2000 to 39.4% in the three months ended March 31, 2001.
Cost of sales and services in our mobile business increased by Sk150.6
million, or 29.8%, from Sk505.9 million in the three months ended March 31, 2000
to Sk656.5 million in the year three months ended March 31, 2001. This increase
was due to an increase of Sk78.4 million in mobile service costs of sales, due
primarily to additional interconnect costs required to connect our growing
customer base to other networks, and also due to an increase of Sk72.2 million
in costs of sales related to mobile equipment and other sales, which increased
from Sk233.3 million in the three months ended March 31, 2000 to Sk305.5 million
in the three months ended March 31, 2001, on mobile equipment and other sales of
Sk158.2 million and Sk206.6 million, respectively. Our negative gross margin on
sales of mobile phone handsets and accessories was (115.7)% in the three months
ended March 31, 2001, as compared to a negative gross margin of (227.9)% in the
three months ended March 31, 2000. This improvement in margins on sales of
mobile phones and accessories is due to management's continuing efforts to
reduce subsidies on mobile phones sold to new subscribers, particularly prepaid
customers, and is largely responsible for the improvement in total cost of sales
in our mobile business. Handset subsidies refer to the mobile telecommunications
industry practice of selling mobile phone handsets at a price below our cost, in
order to attract customers to our service.
Cost of sales and services in our managed data network services business
increased by Sk1.8 million, or 5.2%, from Sk34.9 million in the three months
ended March 31, 2000 to Sk36.7 million in the three months ended March 31, 2001.
As a percentage of revenues, cost of sales in our managed data networks services
business decreased from 39.9% in the three months ended March 31, 2000 to 31.9%
in the three months ended March 31, 2001, as we were able to maintain premium
pricing on our services despite a general decline in the price of such managed
network services.
Operating Expenses. Total operating expenses increased by Sk79.4 million, or
12.2%, from Sk650.1 million in the three months ended March 31, 2000 to Sk729.5
million in the three months ended March 31, 2001. This increase primarily
reflected higher levels of depreciation and amortization expense, network
support and maintenance expense, and wages and employee benefits.
Depreciation and amortization expense increased by Sk38.9 million, or
12.2%, from Sk319.4 million in the three months ended March 31, 2000 to Sk358.3
million in the three months ended March 31, 2001. This increase reflects
additional depreciation expense we incurred relating to the property, plant and
equipment we acquired and constructed to meet the needs of our growing
subscriber base.
Advertising, marketing and sales expense decreased by approximately Sk2.2
million, or 2.9%, from Sk74.6 million in the three months ended March 31, 2000
to Sk72.4 million in the three months ended March 31, 2001, due largely to the
timing of certain promotional activities. We expect advertising, marketing and
sales expenses
23
EuroTel Bratislava, a.s.
to increase in subsequent quarters in 2001, but believe that as a percentage of
revenue they will decrease compared to 2000.
Network support and maintenance expense increased by approximately Sk6.9
million, or 13.7%, from Sk50.3 million in the three months ended March 31, 2000
to Sk57.2 million in the three months ended March 31, 2001. This increase
reflects a continuing increase in repair and maintenance expense for our network
equipment as some of our warranties on hardware and software purchased from
Ericsson expire.
Bad debt expense increased by Sk1.0 million, or 5.4%, from Sk18.6 million
in the three months ended March 31, 2000 to Sk19.6 million in the three months
ended March 31, 2001. Bad debt expense related to fraud, which is netted against
revenues for the relevant period, decreased from Sk35.9 million in the three
months ended March 31, 2000 to Sk13.3 million in the three months ended March
31, 2001. As a percentage of total revenues, our total bad debt expense,
including bad debt related to fraud, decreased from 4.2% in the three months
ended March 31, 2000 to 1.9% in the three months ended March 31, 2001. This
decline reflects management's ongoing initiatives focused on reducing bad debt
expense, lowering churn rates, and also reflects an increasing number of
pre-paid subscribers as a percentage of our total customer base. Changes in our
provision for doubtful accounts are determined based on an aging schedule and
also on the specific identification of uncollectible accounts. Receivables older
than 90 days and receivables related to customer fraud are 100% reserved for in
our provision for doubtful accounts. In order to preserve the tax-deductible
status of bad debt expense, our trade receivables may not be written out of our
primary books and records until certain statutory collection requirements have
been complied with.
Wages and employee benefits increased by Sk27.3 million, or 27.6%, from
Sk99.0 million in the three months ended March 31, 2000 to Sk126.3 million in
the three months ended March 31, 2001 due primarily to annual wage increases and
also to higher bonus payments in 2001 reflecting the achievement of specific
financial and operational goals.
Due to the factors discussed above, operating income increased from Sk76.5
million in the three months ended March 31, 2000 to Sk338.9 million in the three
months ended March 31, 2001.
Finance Costs. Total finance costs decreased by Sk372.7 million, or 73.9%,
from Sk504.5 million in the three months ended March 31, 2000 to Sk131.8 million
in the three months ended March 31, 2001. Interest expense on borrowings
increased from Sk169.6 million in the three months ended March 31, 2000 to
Sk212.6 million in the three months ended March 31, 2001 as a result of
increased borrowings incurred to finance network construction needed to serve
our growing mobile customer base. In addition, in first quarter 2000 we incurred
a one-time write-off of arrangement and commitment fees of Sk333.6 million,
related to a financing repaid in March 2000. Amortization of arrangement fees
and other finance expenses decreased from Sk11.9 million in the three months
ended March 31, 2000 to Sk8.8 million in the three months ended March 31, 2001,
due in part to the write-off of the deferred costs noted above. Foreign exchange
gains and losses improved from a loss of Sk10.0 million in the three months
ended March 31, 2000 to a gain of Sk28.7 million in the three months ended March
31, 2001. The remaining difference is due to a small change in capitalized
interest, and primarily to an increase in interest income from Sk15.1 million to
Sk58.8 million, reflecting the investment of excess borrowings.
Taxes. Our taxes increased by Sk173.2 million, or 165.7%, from a tax
benefit of Sk104.5 million in the three months ended March 31, 2000 to a tax
charge of Sk68.7 million in the three months ended March 31, 2001. We reported
income before taxes of Sk207.1 million in the three months ended March 31, 2001
compared to a loss before taxes of Sk428.0 million in the three months ended
March 31, 2000. The tax charge related to the non-deductible portion of bad debt
expense decreased from Sk14.5 million in the three months ended March 31, 2000
to Sk6.4 million in the same period of 2001, consistent with an overall decline
in bad debt expense including fraud, which served to slightly lessen our tax
expense.
Net Loss. As a result of the factors discussed above, we reported net
income of Sk138.4 million for the three months ended March 31, 2001 compared to
a net loss of Sk323.5 million for the three months ended March 31, 2000.
24
EuroTel Bratislava, a.s.
Liquidity and Capital Resources
The telecommunications business requires substantial capital to construct
and expand mobile and data network infrastructure and to fund operations,
particularly during the network development stage. Although our initial network
build-out for GSM and managed data network services is substantially complete,
we expect to incur additional capital expenditures to provide the network
capacity needed to serve our increasing customer base, as well as to enhance the
quality and coverage of our service offerings.
We believe that our capital resources will provide sufficient financing for
our anticipated capital expenditures and other operating needs under our current
business plan. However, we cannot precisely determine the amount of capital we
will need to operate, because our expenditures will depend on our future
performance, market conditions and other factors, many of which are beyond our
control and therefore cannot be predicted with certainty.
The following table sets forth certain information concerning our
historical cash flows:
Three months ended March 31,
-----------------------------------------
2000 2001
-------------------- -------------------
(millions of Slovak Crowns)
Net cash flows
(Used in) / from operating activities............................. (54.4) 249.3
Used in investing activities...................................... (124.9) (404.4)
From financing activities ........................................ 3,539.4 -
Net Cash from Operating Activities. Net cash used in operating activities
was Sk54.4 million in the three months ended March 31, 2000, and net cash from
operating activities was Sk249.3 million in the three months ended March 31,
2001. The significant increase in cash flow from operating activities in the
three months ended March 31, 2001 resulted from growth in our customer base and
reduced handset subsidies, as well as from timing differences in working capital
items such as accounts receivable and accounts payable.
Net Cash Used in Investing Activities. Net cash used in investing
activities is driven primarily by capital expenditures and by the investment of
excess cash in interest-bearing securities. Net cash used in investing
activities for capital expenditures was Sk124.9 million in the three months
ended March 31, 2000, and Sk413.4 million in the three months ended March 31,
2001. Capital expenditures included expenditures for network equipment and
infrastructure, information technology and other miscellaneous items, such as
computer equipment and software, motor vehicles and other new equipment and
fixtures. In the three months ended March 31, 2001, approximately 65.3% of total
capital expenditures were related to our mobile network. The increase in capital
expenditures in the three months ended March 31, 2001 relative to the same
period last year is due to the addition of network capacity to serve our growing
customer base, and to roll out additional products and services. Net cash used
in investing activities in the three months ended March 31, 2001 included the
purchase of Euro-denominated government bonds of Sk1,335.7 million and proceeds
of Sk1,344.7 million from Euro-denominated government bonds which matured during
the period.
Net Cash from Financing Activities. We obtain financing from equity
investments and subordinated loans from our shareholders, notes issued on
international bond markets, and borrowings under bank credit facilities. Net
cash from financing activities was Sk3,539.4 million in the three months ended
March 31, 2000, while there was no net cash flow from financing activities in
the first quarter of 2001.
Debt. As of March 31, 2001, our debt consisted of Sk7,634.2 million of
outstanding long-term senior guaranteed notes payable. On March 23, 2000 we
issued Euro175 million, seven-year senior guaranteed notes at a coupon rate of
11.25%, for total net proceeds of Euro170.4 million. Euro90.5 million of the
net proceeds of the offering were used to repay existing long-term borrowings
from third parties; the remaining net proceeds will be used to fund selected
capital additions, customer acquisitions, and general corporate purposes. These
notes provide, among other things, for (i) an 11.25% interest rate; (ii)
restrictions on dividend payments, liens, and future indebtedness; (iii)
restrictions on the sale of certain assets or merging with or into other
companies, and (iv) restrictions on entering into transactions with affiliates.
On August 18, 2000, the SEC declared effective a registration statement we filed
together with our financing subsidiary Slovak Wireless Finance Company, B.V.,
pursuant to which SWFC offered to exchange New Notes for all outstanding Old
Notes issued on March 23, 2000. The exchange offer closed on September 19, 2000
and an aggregate of Euro169.5 million in Old Notes were exchanged for New
Notes. The New Notes are substantially identical in terms to the Old Notes,
except that the
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EuroTel Bratislava, a.s.
New Notes are registered with the SEC. As of March 31, 2001, there were Euro5.5
million of Old Notes outstanding. As of March 31, 2001, we believe we were in
compliance with all of our covenants under the Old and the New Notes. On
February 6, 2001, EuroTel's Board of Directors approved a proposal to convert
Sk3,058.9 million of subordinated loans from our shareholders into equity. On
March 22, 2001, our shareholders formally approved an increase in ordinary share
capital by capitalizing these shareholder loans and interest accrued thereon
through December 31, 2000 with an aggregate value of Sk3,058.9 million. This
transaction was completed in April 2001.
Market Risk
Our market risk is related to changes in foreign exchange rates and interest
rates.
The foreign exchange risk results primarily from movements of the Slovak Crown
against other currencies such as the US Dollar and the Euro. As of March 31,
2001 our foreign currency denominated liabilities consist entirely of Euro175
million senior guaranteed notes denominated in Euros. Our policy is to consider
hedging this risk following detailed analysis, which takes into account the cost
of hedging. We do not currently have in place hedging arrangements with respect
to our foreign currency risk.
As our debt is entirely comprised of fixed-rate notes, our interest rate risk is
limited to any future credit facilities which may bear interest at floating
rates.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
In this Management's Discussion and Analysis, and elsewhere in this Quarterly
Report, we have made statements about expected future events and financial
results that are forward-looking and subject to risks and uncertainties. For
those statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Listed below are some important factors which could affect future results and
could cause those results to differ materially from those expressed in the
forward-looking statements: materially adverse changes in the business
environment in Slovakia, such as the devaluation of the Slovak Crown, inflation
levels above those in the U.S. and economic downturns; the effect of changes in
the regulatory environment in Slovakia; our ability to develop new technologies
and recruit and retain qualified personnel; our ability to obtain financing
necessary to pursue business opportunities; and our ability to adapt to rapid
technological change and significant competition.
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EuroTel Bratislava, a.s.
Part I - Financial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary risk exposure includes both interest rate risks and foreign exchange
rate risks. As of March 31, 2001 we had Sk7,634 million and as of December 31,
2000 we had Sk10,758 million in debt. Our current investments totalled Sk3,530
million as of March 31, 2001 and Sk3,560 million as of December 31, 2000. The
following table represents material changes in our interest rate risk as of
December 31, 2000 and March 31, 2001.
As of December 31, As of March 31,
-------------------------------- --------------------------------
2000 2000 2001 2001
-------------- -------------- --------------- -------------
(millions of Slovak Crowns, except %)
Debt Carrying Value Fair Value Carrying Value Fair Value
Fixed Rate - Euro..................... 7,699 7,353 7,634 7,787
Interest Rate......................... 11.25% - 11.25%
Shareholder Loans
Fixed rate - U.S. dollars............. 3,059 2,215 - -
Interest Rate......................... 10.47% - - -
----------- ---------- ----------- ---------
Total Debt............................ Sk 10,758 Sk 9,568 Sk 7,634 Sk 7,787
=========== ========== =========== =========
The December 31, 2000 and March 31, 2001 fixed-rate Euro-debt consists entirely
of the senior guaranteed notes we issued on March 23, 2000 and August 18, 2000.
The fair value is based on the market price at December 29, 2000 and March 30,
2001, respectively. The senior guaranteed notes will mature on March 30, 2007.
Interest on the senior guaranteed notes is payable semiannually in arrears, on
March 30 and September 30 of each year commencing on September 30, 2000.
The December 31, 2000 fair value of the shareholder loans is estimated
calculating the net present value of the loans based on an estimated curve
appropriate for the terms of the loan agreements. On March 22, 2001, the
EuroTel's shareholders approved an increase in ordinary share capital by
capitalizing shareholder loans and interest accrued thereon through December 31,
2000 with an aggregate value of Sk3,058.9 million. The process of registering
the increase in share capital in the Slovak Republic has not been completed as
of March 31, 2001, however the consolidated financial statements for the three
months ended March 31, 2001 presented in this Form 6-K reflect the passing of
the shareholder resolution.
As of March 31, 2001, all of our current investments and all our debt were
denominated in Euros. To the extent that we engage in transactions and
borrowings in currencies other than the Slovak Crown, we will be exposed to
currency exchange risk. As of March 31, 2001, we had realized Sk28.7 million
foreign exchange gains as a result of fluctuation in currency exchange rates.
The sensitivity to changes in exchange rates of our foreign currency position
was determined using current market pricing models. We estimate that a 10%
appreciation or devaluation in the foreign exchange rate of the Euro against the
Slovak Crown at March 31, 2001 would have changed the combined fair value of the
facility and of current investments by Sk425 million.
We have considered the possibility of entering into transactions to reduce
exposures to market risks resulting from fluctuations in foreign exchange rates.
However, there can be no assurances that we will engage in hedging transactions
or that, if we were to do so, these transactions would successfully mitigate our
risk. Despite the potential favorable outcome that such transactions could have,
it may not be feasible or desirable for us to do so, as the costs could far
exceed the possible benefits. As a result, changes in the exchange rate could
have a material adverse effect on our ability to pay off non-Slovak
Crown-denominated indebtedness.
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EuroTel Bratislava, a.s.
Part II - Other Information
Item 1. Legal Proceedings
We are not aware of any pending or threatened litigation against EuroTel.
We have filed a number of claims against former customers for amounts owed to
EuroTel for services rendered. As of March 31, 2001, no final judgements had
been rendered in respect of these claims. The total amount of these claims is
Sk158.9 million. We do not expect to recover any material amounts in connection
with these claims.
Item 2. Changes in securities and use of proceeds
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to vote of security holders
None.
Item 5. Other information
None.
Item 6. Exhibits and reports on form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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EuroTel Bratislava, a.s.
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.
EuroTel Bratislava, a.s.
Date: May 14, 2001
By: /S/ JOZEF BARTA
---------------------------
Jozef Barta
Chief Executive Officer
By: /S/ THOMAS J. CANCRO
---------------------------
Thomas J. Cancro
Chief Financial Officer
29