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 September 30, 2001
-----------------------------
EuroTel Bratislava, a.s.
(Exact name of co-registrant and parent guarantor as specified in its Articles
of Association)
-----------------------------
Vajnorska 100/A
831 03 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' Equity .................................... 6
Notes to the Condensed Consolidated Financial Statements ..................................... 7
ITEM 2. Management's Discussion and Analysis of Results of Operation and
Financial Condition ............................................................................... 22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ................................ 34
PART II - Other Information ............................................................................ 36
ITEM 1. Legal Proceedings ......................................................................... 36
ITEM 2. Changes in Securities and Use of Proceeds ................................................. 36
ITEM 3. Defaults upon Senior Securities ........................................................... 36
ITEM 4. Submission of Matters to Vote of Security Holders ......................................... 36
ITEM 5. Other Information ......................................................................... 36
ITEM 6. Exhibits and Reports on Form 8-K .......................................................... 36
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, September 30,
------------- -------------
Notes 2000 2001
------------- -------------
ASSETS
Non-current assets
Property and equipment ......................................... 5,144,356 5,226,341
Licenses ....................................................... 745,214 692,817
Deferred finance charges ....................................... 327,187 -
Deferred expenses .............................................. 48,237 30,643
Deferred tax asset ............................................. 2 223,715 15,615
------------- ------------
6,488,709 5,965,416
------------- ------------
Current assets
Inventories .................................................... 3 136,923 269,076
Receivables, prepayments and deferred expenses ................. 920,160 1,194,553
Current investments ............................................ 4 3,559,842 3,291,346
Cash and cash equivalents ...................................... 1,483,765 1,427,049
------------- ------------
6,100,690 6,182,024
------------- ------------
Total assets ................................................... 12,589,399 12,147,440
============= ============
LIABILITIES AND EQUITY
Shareholders' equity
Share capital .................................................. 938,735 3,734,735
Accumulated deficit ............................................ (642,112) (256,277)
------------- ------------
5 296,623 3,478,458
------------- ------------
Non-current liabilities
Subordinated shareholder loans ................................. 3,058,929 -
Long term notes ................................................ 6 7,699,300 6,918,612
Deferred revenues .............................................. 48,237 30,643
------------- ------------
10,806,466 6,949,255
------------- ------------
Current liabilities
Trade, other payables and deferred revenues .................... 7 1,265,111 1,674,477
Accrued interest - long term notes ............................. 221,199 2,250
Provisions ..................................................... 8 - 43,000
------------- ------------
1,486,310 1,719,727
------------- ------------
Total liabilities and equity .................................... 12,589,399 12,147,440
============= ============
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 September 30, Nine months ended September 30,
---------------------------------------- ---------------------------------------
Notes 2000 2001 2000 2001
------------------- ------------------- ------------------- ------------------
(restated) (restated)
Revenues 9,11 1,565,784 2,071,740 4,266,790 5,709,861
Cost of sales and services 10,11 (579,703) (942,165) (1,693,855) (2,463,489)
------------------- ------------------- ------------------- ------------------
Gross profit 986,081 1,129,575 2,572,935 3,246,372
Operating expenses (696,907) (876,056) (2,039,770) (2,407,192)
------------------- ------------------- ------------------- ------------------
Operating profit 289,174 253,519 533,165 839,180
Finance costs 12 (514,871) (290,346) (1,510,416) (494,819)
------------------- ------------------- ------------------- ------------------
Income / (loss) before tax (225,697) (36,827) (977,251) 344,361
Income taxes 13 54,228 1,013 232,275 (145,206)
------------------- ------------------- ------------------- ------------------
Net income / (loss) (171,469) (35,814) (744,976) 199,155
=================== =================== =================== ==================
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)
Nine months ended September 30,
------------------------------
2000 2001
---------- ----------
Cash flows from operations ................................................................. 1,460,021 1,871,800
Interest paid .............................................................................. (578,134) (858,623)
Interest received .......................................................................... 99,244 170,037
Income tax paid ............................................................................ (22,859) (10,982)
---------- ----------
Net cash flows from operating activities ................................................... 958,272 1,172,232
---------- ----------
Cash flows from investing activities
Purchase of property and equipment ......................................................... (421,349) (1,016,755)
Purchase of current investments ............................................................ (3,019,264) (3,720,570)
Proceeds from disposal of property and equipment ........................................... 1,901 124
Proceeds from disposal of current investments .............................................. 442,096 3,968,655
---------- ----------
Net cash used in investing activities ...................................................... (2,996,616) (768,546)
---------- ----------
Cash flows from financing activities
Proceeds from borrowings - third parties ................................................... 7,284,770 --
Proceeds from shareholder loans ............................................................ 615,962 --
Repayment of borrowings - third parties .................................................... (4,083,375) --
Repurchase of long term notes .............................................................. -- (460,402)
Payment of deferred finance charges ........................................................ (306,343) --
---------- ----------
Net cash flows from financing activities ................................................... 3,511,014 (460,402)
---------- ----------
Net (decrease) / increase in cash and cash equivalents .................................... 1,472,670 (56,716)
---------- ----------
Cash and cash equivalents at beginning of period ........................................... 503,741 1,483,765
---------- ----------
Cash and cash equivalents at end of period ................................................. 1,976,411 1,427,049
========== ==========
The accompanying notes form an integral part of these consolidated financial
statements.
5
EuroTel Bratislava, a.s.
Consolidated Statement of Changes in Shareholders' 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 nine months ended
September 30, 2000 ......................... - - - (744,976) (744,976)
--------- --------- --------- --------- ---------
Balance as of September 30, 2000 ............ 765,470 1,035 172,230 (820,410) 118,325
========= ========= ========= ========= =========
Balance as of December 31, 2000 ............. 765,470 1,035 172,230 (642,112) 296,623
========= ========= ========= ========= =========
Capitalization of shareholder loans (See
Note 5) .................................... 2,796,000 - - - 2,796,000
Adjustment related to statutory tax foreign
exchange losses on retired shareholder loans
(See Note 5) ............................... - - - 186,680 186,680
Net income for the nine months ended
September 30, 2001 ......................... - - - 199,155 199,155
--------- --------- --------- --------- ---------
Balance as of September 30, 2001 ............ 3,561,470 1,035 172,230 (256,277) 3,478,458
========= ========= ========= ========= =========
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 these financial statements is unaudited. The financial
statements do not form the statutory accounts of EuroTel Bratislava, a.s.
("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 September 30, 2001, and the
results of operations and cash flows for the three months and nine months ended
September 30, 2001 and September 30, 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 and nine
months ended September 30, 2001 are not necessarily indicative of the results to
be expected for the full year.
Deferred Finance Charges
During the period, EuroTel reclassified deferred finance charges related to
issue of its long term notes. The finance charges are included in the initial
measurement of the notes in accordance with IAS 39. As of September 30, 2001,
the deferred finance charges of Sk281,988 are not reported as a separate asset
in the balance sheet and are offsetting the long term notes liability. There is
no impact on earnings or equity associated with this adjustment. The charges
incurred in obtaining financing were deferred and amortized to expense over the
debt service period using the effective interest method.
Provisions
Provisions are recognized when EuroTel has a present legal or constructive
obligation as a result of past events, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation,
and a reliable estimate of the amount of the obligation can be made.
The present value of future payments for surplus properties under
non-cancellable operating leases is recognized as a liability, net of sublease
revenue, in the period in which it is determined that the leased property will
be of no future benefit to EuroTel.
7
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
2. Deferred Taxes
As of As of
December 31, September 30,
---------- ----------
2000 2001
---------- ----------
Temporary differences arising from accelerated tax depreciation ................. (493,198) (650,956)
Unrealized foreign exchange losses .............................................. 273,130 101,347
Accrued interest ................................................................ 121,626 659
Deferred revenues ............................................................... 42,919 26,719
Deferred expenses ............................................................... (42,919) (26,719)
Other accruals .................................................................. 24,312 45,432
Premium on long term notes repurchase and write-off of deferred finance charges . - 11,911
Tax losses carried forward ...................................................... 297,845 507,222
---------- ----------
Deferred tax asset .............................................................. 223,715 15,615
========== ==========
The deferred tax asset relating to the tax loss carryforwards has been
recognized on the basis of estimated future taxable profits within the relevant
tax jurisdiction.
As of As of
December 31, September 30,
------------ -------------
2000 2001
------------ -------------
Deferred tax asset / (liability) at the beginning of the period ................. (44,942) 223,715
Deferred tax credited / (charged) to income ..................................... 268,657 (131,851)
Deferred tax credited / (charged) to equity ..................................... - (76,249)
--------- ---------
Deferred tax asset at the end of the period ..................................... 223,715 15,615
========= =========
3. Inventories
As of As of
December 31, September 30,
------------ -------------
2000 2001
------------ -------------
Mobile
Mobile phones and accessories ................................................... 98,166 232,277
SIM cards ....................................................................... 36,038 32,301
134,204 264,578
---------- ---------
MDNS
MDNS inventory .................................................................. 2,719 4,498
---------- ---------
136,923 269,076
========== =========
EuroTel uses an aging analysis of inventory that approximates the amount that
would have been provided for under specific identification; stock items with
carrying value of Sk85,665 are carried at net realizable value (Sk50,658 as of
December 31, 2000). Inventories are shown net of allowances of Sk33,711 and
Sk17,553 as of December 31, 2000 and September 30, 2001, respectively
8
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
4. Current Investments
EuroTel has invested in a portfolio of Euro denominated government bonds. The
bonds mature in periods ranging from one to ten months from the balance sheet
date. The bonds pay interest at fixed rates with effective interest rates
ranging from 3.76% to 4.57%. As of December 31, 2000 and as of September 30,
2001 the fair value of the securities was substantially the same as their
carrying value.
As of As of
December 31, September 30,
----------------- -----------------
2000 2001
----------------- -----------------
Opening net book amount ................................................ - 3,559,842
Additions .............................................................. 4,329,302 3,720,570
Disposals .............................................................. (881,240) (3,968,655)
Amortization of discount ............................................... 8,841 11,131
Foreign exchange differences ........................................... 102,939 (31,542)
----------------- -----------------
Closing net book amount ................................................ 3,559,842 3,291,346
================= =================
5. Shareholders' Equity
Upon formation of EuroTel, 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
authorized, issued and outstanding at December 31, 2000 was 765,470, of which
390,390 and 375,080 were issued to Slovak Telecom ("ST") and Atlantic West B.V.
("AWBV") respectively. The total number of preferred shares authorized, 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. As a result, the total
number of ordinary shares authorized, issued and outstanding at September 30,
2001 was 3,561,470, of which 1,816,350 and 1,745,120 were issued to ST and AWBV
respectively. The total number of authorized, issued and outstanding preferred
shares remains 172,230, all of which are held by ST.
The capitalization was effected at a blend of exchange rates in effect during
the loan periods giving rise to an increase in equity of Sk186,680 (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 preferred 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 (see Note 6).
9
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
6. Long Term Notes
As of As of
December 31, September 30,
2000 2001
------------- -------------
Long term notes ........................................................... 7,699,300 7,200,600
Less: deferred finance charges ............................................ - (281,988)
------------- -------------
7,699,300 6,918,612
============= =============
On March 23, 2000 EuroTel issued through Slovak Wireless Finance Company B.V.
("SWFC"), a wholly owned subsidiary, 11 1/4% Series A Senior Guaranteed Notes
("Series A Notes"). The Series A Notes were issued in an aggregate principal
amount of Euro175 million. On August 18, 2000, the United States Securities and
Exchange Commission ("SEC") declared effective a registration statement filed by
EuroTel and SWFC. Pursuant to that registration statement, SWFC offered to
exchange new 11.25% Series B Senior Guaranteed Notes ("Series B Notes") due 2007
for all outstanding Series A Notes that SWFC issued on March 23, 2000. In
aggregate, Euro172.2 million of Series A Notes have been exchanged for an
equivalent amount of Series B Notes to date. The Series B Notes are
substantially identical in terms to the Series A Notes, except that the Series B
Notes are registered with the SEC. There are currently Euro2.8 million of Series
A Notes still outstanding.
The Series A and B Notes will mature on March 30, 2007, and SWFC will be
required to repay the Series A and B Notes on that date at 100% of the principal
amount. The obligations of SWFC under the Series A and B Notes are fully and
unconditionally guaranteed by EuroTel. Interest is payable semiannually in
arrears on March 30 and September 30 of each year commencing on September 30,
2000. The fair value of the notes at December 31, 2000 and September 30, 2001
was Sk7,352,832 and Sk7,416,618 respectively.
The covenants that govern the Series A and B Notes include a Debt to Earnings
before interest, tax, depreciation and amortization ("EBITDA") ratio, excluding
subordinated shareholder loans. The maximum permitted debt under this ratio is
limited to 6:1 up to March 23, 2002 and 5:1 thereafter until maturity of the
Series A and B Notes. Debt incurred in respect of certain capital expenditures
and other permitted debt is excluded from this calculation.
There are restrictions on payment of dividends or distributions other than those
paid in compliance with the Series A and B Notes, on purchase, repurchase,
redemption, acquisition or retirement for value of any capital stock and
subordinated obligations and on any principal or interest payments on the
subordinated shareholder loans. The restricted payments test includes reference
to EBITDA from the issue date to the end of EuroTel's most recent fiscal quarter
less the product of 1.75 and the consolidated interest expense for such period.
During the period, EuroTel reclassified deferred finance charges related to
issue of its long term notes. The finance charges are included in the initial
measurement of the notes in accordance with IAS 39. As of September 30, 2001,
the deferred finance charges of Sk281,988 are not reported as a separate asset
in the balance sheet and are offsetting the long term notes liability. There is
no impact on earnings or equity associated with this adjustment. The charges
incurred in obtaining financing were deferred and amortized to expense over the
debt service period using the effective interest method.
In September 2001, EuroTel repurchased Euro10 million of the long term notes in
a series of open-market transactions. In accordance with IAS 39, related
liability was derecognized in EuroTel's consolidated balance sheet. EuroTel used
existing liquid assets to extinguish the debt. An amount of Sk29,160 (net of
deferred tax of Sk11,911, see Note 2), comprising the difference between the
carrying amount of the repurchased notes and net consideration paid amounting
Sk24,002 and unamortized deferred finance charges related to repurchased notes
of Sk17,069, was charged to income (see Note 12). In October 2001, EuroTel
repurchased an additional Euro5 million of the long term notes (see Note 18).
10
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
7. Trade, Other Payables and Deferred Revenues
As of As of
December 31, September 30,
------------ ------------
2000 2001
------------ ------------
Domestic trade payables ...................................................... 281,489 272,570
Foreign trade payables ....................................................... 256,799 101,053
Amounts due to related parties
ST ........................................................................ 32,549 29,668
AWBV ...................................................................... 8,575 19,891
Other related parties ..................................................... - 1,335
Amounts due to employees ..................................................... 18,249 20,969
VAT payable .................................................................. 27,527 14,886
Taxation and social security ................................................. 15,208 20,177
Deferred revenues ............................................................ 287,050 318,035
Fixed asset accruals ......................................................... 102,850 384,832
Other accruals ............................................................... 234,815 491,061
------------ ------------
............................................................................. 1,265,111 1,674,477
============ ============
8. Provisions
As of As of
December 31, September 30,
------------ ------------
2000 2001
------------ ------------
Provisions for surplus leased properties
Opening balance .............................................................. - -
Provisions created in the period ............................................. - 43,000
------------ ------------
Closing balance .............................................................. - 43,000
============ ============
During the period, EuroTel moved into new office space rented under an operating
lease contract. As a result certain properties previously occupied by EuroTel
rented under non-cancellable operating leases were vacated. A provision of
Sk43,000 has been recognized for expected future payments for such surplus
properties, net of sub-leasing revenue.
9. Revenues
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 2001 2000 2001
(restated) (restated)
---------- ---------- ---------- ----------
Mobile service revenues ............................. 1,276,218 1,696,079 3,476,455 4,676,050
Mobile equipment and other sales (a)
Mobile equipment sales ............................ 92,378 206,813 212,881 485,766
Other revenues (a) ................................ 72,990 53,575 248,353 201,117
---------- ---------- ---------- ----------
165,368 260,388 461,234 686,883
---------- ---------- ---------- ----------
Managed data network services ("MDNS")
MDNS service revenues ............................. 119,579 114,723 321,498 344,889
MDNS equipment revenues ........................... 4,619 550 7,603 2,039
---------- ---------- ---------- ----------
124,198 115,273 329,101 346,928
---------- ---------- ---------- ----------
1,565,784 2,071,740 4,266,790 5,709,861
========== ========== ========== ==========
11
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
9. Revenues (continued)
Service Revenues
Total service revenues, which exclude revenues from the sale of mobile equipment
and MDNS equipment, were as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2000 2001 2000 2001
(restated) (restated)
----------- ----------- ----------- -----------
Service revenues (a) ........................... 1,468,787 1,864,377 4,046,306 5,222,056
=========== =========== =========== ===========
(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 11.
10. Cost of Sales and Services
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2000 2001 2000 2001
(restated) (restated)
--------- --------- --------- ---------
Mobile service cost of sales
Interconnect ..................................... 180,830 267,142 502,336 721,463
Roaming .......................................... 85,154 93,579 193,572 222,510
Leased circuits .................................. 51,783 54,315 170,095 168,806
Other costs ...................................... 15,685 38,760 46,085 89,454
--------- --------- --------- ---------
333,452 453,796 912,088 1,202,233
--------- --------- --------- ---------
Mobile equipment and service commissions
Equipment, SIM cards, accessories and spare
parts (a) ....................................... 175,144 412,793 562,065 1,035,758
Service commissions (a) .......................... 29,759 38,500 106,023 114,146
--------- --------- --------- ---------
204,903 451,293 668,088 1,149,904
--------- --------- --------- ---------
Managed data network services cost of sales
MDNS service cost of sales ....................... 38,329 36,590 108,088 110,216
MDNS equipment cost of sales ..................... 3,019 486 5,591 1,136
--------- --------- --------- ---------
41,348 37,076 113,679 111,352
--------- --------- --------- ---------
579,703 942,165 1,693,855 2,463,489
========= ========= ========= =========
12
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
10. 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 Nine months ended
September 30, September 30,
---------------------------- -------------------------
2000 2001 2000 2001
(restated) (restated)
---------- ---------- ---------- ----------
Cost of services (a) ............................... 401,540 528,886 1,126,199 1,426,595
========== ========== ========== ==========
(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 11.
11. 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
accounting policy is as follows:
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ----------------------------------
Effect on revenues and costs of sales 2000 2001 2000 2001
---------------- -------------- --------------- ----------------
Increase in revenue from mobile equipment
and other sales ....................... 18,445 15,163 54,057 55,863
(Increase) / decrease in cost of sales of
equipment, SIM cards, accessories and
spare parts ........................... (2,270) (838) (1,862) (6,263)
(Increase) / decrease in service
commissions ........................... (16,175) (14,325) (52,195) (49,600)
---------------- -------------- --------------- ----------------
Net effect on income .................... - - - -
================ ============== =============== ================
As of As of
December 31, September 30,
----------------- ---------------
Effect on assets and liabilities 2000 2001
----------------- ---------------
Increase in deferred expenses (non-current) ................................ 48,237 30,643
Increase in deferred expenses (current) .................................... 99,759 61,490
Increase in deferred revenues (non-current) ................................ 48,237 30,643
Increase in deferred revenues (current) .................................... 99,759 61,490
13
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
12. Finance Costs
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
---------------- -------------- --------------- ---------------
Write-off of deferred finance charges
and Prepayment penalties (a), (b) ......... - 17,069 333,625 17,069
Premium on repurchase of long term notes
(b) ....................................... - 24,002 - 24,002
Interest expense on borrowings .............. 318,009 221,598 779,096 639,780
Arrangement fees and other finance costs,
net ....................................... 8,053 9,735 26,726 30,331
Capitalized interest (c) .................... (3,604) (3,574) (12,698) (7,545)
Interest income ............................. (58,492) (60,004) (113,490) (173,852)
Foreign exchange losses / (gains) ........... 250,905 81,520 497,157 (34,966)
---------------- -------------- --------------- ---------------
514,871 290,346 1,510,416 494,819
================ ============== =============== ===============
(a) The write-off of deferred finance charges and prepayment penalties in the
nine months ended September 30, 2000 related to the early extinguishment of
the Syndicated and International Finance Corporation loans which were
repaid with the proceeds from the issuance of long term notes (see Note 6).
The write-off of the deferred finance charges and prepayment penalties
amounted to Sk189,730 and Sk143,895 respectively.
(b) The write-off of Sk17,069 of unamortized deferred finance charges in the
three months and nine months ended September 30, 2001 related to the
repurchase of Euro10 million of long term notes (see Note 6) in a series of
open-market transactions. Premium of Sk24,002 paid over the face value of
repurchased notes was also charged to income. Deferred tax of Sk11,911 was
recognized with respect to the above charges (see Note 6).
(c) Capitalization rates used to determine capitalized interest were as
follows:
Three months ended Nine months ended
September 30, September 30,
--------------------------------- --------------------------------
2000 2001 2000 2001
--------------- --------------- -------------- ---------------
Capitalization rates .................. 10.6% 8.4% 10.6% 8.1%
=============== =============== ============== ===============
14
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
13. Income Taxes
A reconciliation between the reported income tax charge / (credit) and the
theoretical amount that would arise using the statutory tax rates is as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2000 2001 2000 2001
--------------- --------------- --------------- ---------------
Income / (loss) before tax ............ (225,697) (36,827) (977,251) 344,361
=============== =============== =============== ===============
Income tax at 29% ..................... (65,452) (10,680) (283,403) 99,865
Nondeductible provision for doubtful
accounts (a) .......................... 6,420 (3,185) 28,339 8,293
Nondeductible provision for inventory . (2,804) 802 (4,565) (4,686)
Increase in valuation allowance ....... - - 15,103 -
Forgiven interest on shareholder loans - - - 18,280
Other, net ............................ (6,514) 8,942 (1,871) 10,099
--------------- --------------- --------------- ---------------
(68,350) (4,121) (246,397) 131,851
--------------- --------------- --------------- ---------------
Income tax expense for the period
The tax charge for the period comprises:
Deferred tax charge / (credit) (b).. (68,350) (4,121) (246,397) 131,851
Tax charge in respect of current and
prior periods .................... - - - 4,990
Withholding tax charged to income .. 14,122 3,108 14,122 8,365
--------------- --------------- --------------- ---------------
(54,228) (1,013) (232,275) 145,206
=============== =============== =============== ===============
(a) Uncollectible receivables are tax non-deductible until certain statutory
collection requirements are 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.
14. Capital Commitments
EuroTel had the following contractual capital commitments:
As of As of
December 31, September 30,
---------------- ---------------
2000 2001
---------------- ---------------
Capital expenditures that have been contracted for but have not
been provided for in the financial statements ........................ 658,069 816,814
================ ===============
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.
15
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
15. 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 and Deutsche Telekom
("DT") constitute management fees paid for consulting services and payments for
seconded employees. In addition, EuroTel had outstanding long term borrowings
from its shareholders. 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 5). EuroTel also
purchases and sells in the normal course of business telecommunications services
from the following subsidiaries, associated undertakings and joint ventures
within the respective groups of EuroTel's shareholders: 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 Nine months ended
September 30, September 30,
------------------------------- ------------------------------
2000 2001 2000 2001
------------- ------------- ------------- -------------
Sales to ST .................................. 204,500 247,969 575,452 735,767
Purchases from ST ............................ 64,653 187,810 513,864 548,021
Lease expense paid to ST ..................... 9,723 10,056 27,870 30,926
Sales to Eurotel Praha ....................... 18,801 33,099 53,037 65,291
Purchases from Eurotel Praha ................. 8,467 8,042 25,109 24,826
Sales to other related parties ............... 23,316 32,044 66,520 77,670
Purchases from other related parties ......... 13,634 14,310 37,658 38,792
Management fees paid to AWBV ................. 5,962 7,732 24,858 18,748
Management fees paid to DT ................... - 1,335 - 1,335
Directors and management fees ................ 3,484 4,333 10,514 13,637
16. Contingencies
Litigation
EuroTel is not involved in any material 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.
16
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
17. 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 mobile
plant and equipment and managed data network services equipment. Assets
attributable to segments include mobile 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 September 30, 2000
Revenues (a) .................................. 1,441,586 124,198 - 1,565,784
Cost of sales and services (a) ................ (538,355) (41,348) - (579,703)
------------- ------------- ------------- -------------
Gross profit .................................. 903,231 82,850 - 986,081
Operating expenses ............................ (234,455) (12,884) (449,568) (696,907)
------------- ------------- ------------- -------------
Operating profit .............................. 668,776 69,966 (449,568) 289,174
Finance costs ................................. - - (514,871) (514,871)
------------- ------------- ------------- -------------
Income / (loss) before tax .................... 668,776 69,966 (964,439) (225,697)
Income taxes .................................. - - 54,228 54,228
------------- ------------- ------------- -------------
Net income / (loss) ........................... 668,776 69,966 (910,211) (171,469)
============= ============= ============= =============
Depreciation .................................. (216,921) (12,412) (84,438) (313,771)
Amortization .................................. (17,534) (472) - (18,006)
17
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
17. Segment Information (continued)
Mobile Managed
Communications Data Network
Services Services Unallocated Total
-------------- -------------- -------------- ------------
Three months ended September 30, 2001
Revenues ................................... 1,956,467 115,273 - 2,071,740
Cost of sales and services ................. (905,089) (37,076) - (942,165)
-------------- -------------- -------------- ------------
Gross profit ............................... 1,051,378 78,197 - 1,129,575
Operating expenses ......................... (268,753) (13,013) (594,290) (876,056)
-------------- -------------- -------------- ------------
Operating profit ........................... 782,625 65,184 (594,290) 253,519
Finance costs .............................. - - (290,346) (290,346)
-------------- -------------- -------------- ------------
Income / (loss) before tax ................. 782,625 65,184 (884,636) (36,827)
Income taxes ............................... - - 1,013 1,013
-------------- -------------- -------------- ------------
Net income / (loss) ........................ 782,625 65,184 (883,623) (35,814)
============== ============== ============== ============
Depreciation ............................... (251,315) (12,986) (78,884) (343,185)
Amortization ................................ (17,438) (27) - (17,465)
Mobile Managed
Communications Data Network
Services Services Unallocated Total
(restated) (restated)
-------------- -------------- -------------- ------------
Nine months ended September 30, 2000
Revenues (a) ............................... 3,937,689 329,101 - 4,266,790
Cost of sales and services (a) ............. (1,580,176) (113,679) - (1,693,855)
-------------- -------------- -------------- ------------
Gross profit ............................... 2,357,513 215,422 - 2,572,935
Operating expenses ......................... (668,434) (39,994) (1,331,342) (2,039,770)
-------------- -------------- -------------- ------------
Operating profit ........................... 1,689,079 175,428 (1,331,342) 533,165
Finance costs .............................. - - (1,510,416) (1,510,416)
-------------- -------------- -------------- ------------
Income / (loss) before tax ................. 1,689,079 175,428 (2,841,758) (977,251)
Income taxes ............................... - - 232,275 232,275
-------------- -------------- -------------- ------------
Net income / (loss) ........................ 1,689,079 175,428 (2,609,483) (744,976)
============== ============== ============== ============
Depreciation ............................... (615,583) (36,855) (269,672) (922,110)
Amortization ............................... (52,851) (3,139) - (55,990)
18
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
17. Segment Information (continued)
Mobile Managed
Communications Data Network
Services Services Unallocated Total
-------------- -------------- -------------- --------------
Nine months ended September 30, 2001
Revenues .................................... 5,362,933 346,928 - 5,709,861
Cost of sales and services .................. (2,352,137) (111,352) - (2,463,489)
-------------- -------------- -------------- --------------
Gross profit ................................ 3,010,796 235,576 - 3,246,372
Operating expenses .......................... (776,917) (39,764) (1,590,511) (2,407,192)
-------------- -------------- -------------- --------------
Operating profit ............................ 2,233,879 195,812 (1,590,511) 839,180
Finance costs ............................... - - (494,819) (494,819)
-------------- -------------- -------------- --------------
Income / (loss) before tax .................. 2,233,879 195,812 (2,085,330) 344,361
Income taxes ................................ - - (145,206) (145,206)
-------------- -------------- -------------- --------------
Net income / (loss) ......................... 2,233,879 195,812 (2,230,536) 199,155
============== ============== ============== ==============
Depreciation ................................ (724,646) (39,638) (272,257) (1,036,541)
Amortization ................................ (52,271) (126) - (52,397)
Mobile Managed
Communications Data Network
Services Services Unallocated Total
-------------- -------------- -------------- ------------
As of December 31, 2000
Total assets ................................ 5,784,203 337,449 6,467,747 12,589,399
============== ============== ============== ============
Total liabilities ........................... 950,628 69,309 11,272,839 12,292,776
============== ============== ============== ============
Capital expenditure ......................... 619,913 51,024 296,106 967,043
============== ============== ============== ============
As of September 30, 2001
Total assets ................................ 5,962,731 319,746 5,864,963 12,147,440
============== ============== ============== ============
Total liabilities ........................... 1,337,479 57,618 7,273,885 8,668,982
============== ============== ============== ============
Capital expenditure ......................... 875,629 37,041 206,811 1,119,481
============== ============== ============== ============
(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 11.
18. Subsequent Events
In October 2001, EuroTel repurchased Euro5 million of the long term notes (see
Note 6) in a series of open-market transactions for a net consideration of
Sk226,346 including a premium of Sk8,706 over the face value which will be
charged to income in the three months ended December 31, 2001. The transactions
will result in a write-off of deferred finance charges of Sk8,545 in the three
months ended December 31, 2001. The transactions were not recognized in these
financial statements.
19
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
19. 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 and nine
months ended September 30, 2000 and consolidated net income for the three months
and nine months ended September 30, 2001.
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Reconciliation of net income / (loss)
Net income / (loss) reported under IAS ........... (171,469) (35,814) (744,976) 199,155
U.S. GAAP adjustments:
- shareholders pushdown (a) ................. (645) (706) (1,935) (2,118)
- extraordinary loss (b) ................... - 29,160 236,874 29,160
----------- ----------- ----------- -----------
Presentation of net income / (loss) under U.S.
GAAP before extraordinary items .................. (172,114) (7,360) (510,037) 226,197
----------- ----------- ----------- -----------
Presentation of net income / (loss) under U.S.
GAAP after extraordinary items ................... (172,114) (36,520) (746,911) 197,037
=========== =========== =========== ===========
There are no differences between shareholders' 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) Extraordinary Item
In March 2000, EuroTel repaid the Syndicated and International Finance
Corporation loans with the proceeds from the issuance of long term notes (see
Note 6). An amount of Sk236,874 (net of tax of Sk96,751), comprising unamortized
deferred finance charges of Sk189,730 and prepayment penalties of Sk143,895, was
charged to income.
In September 2001, EuroTel repurchased Euro10 million of the long term notes in
a series of open-market transactions. An amount of Sk29,160 (net of deferred tax
of Sk11,911, see Note 2), comprising the difference between the carrying amount
of the repurchased notes and net consideration paid amounting Sk24,002 and
unamortized deferred finance charges related to repurchased notes of Sk17,069,
was charged to income (see Note 12).
Under IAS, the above amounts were classified as finance costs and a tax credit.
Under U.S. GAAP, EuroTel is required to recognize the early extinguishment of
debt as an extraordinary item and report its effect net of tax and after income
from continuing operations.
20
EuroTel Bratislava, a.s.
Notes to Condensed Consolidated Financial Statements
(in thousands of Slovak Crowns) (unaudited)
19. Reconciliation to United States Generally Accepted Accounting
Principles (continued)
(c) 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 and nine
months ended September 30, 2000 increased by Sk13,095 (net of tax of Sk5,350)
and Sk38,380 (net of tax of Sk15,677) respectively.
(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 tax
losses for carryforwards in respect of three consecutive years immediately
proceeding the year for which company records taxable income. The tax loss
carryforwards can subsequently be released against taxable income ratably over
five years. As of September 30, 2001 EuroTel had approximately Sk1,749,042 of
tax loss carryforwards accumulated over the years ended December 31, 1999 and
2000, and nine months ended September 30, 2001.
(f) Deferred Finance Charges
Under IAS 39, the Company offsets the deferred finance charges related to the
issue of its long term notes against the long term notes liability. Under U.S.
GAAP in accordance with Accounting Principles Board Opinion No. 21, "Interest on
Receivables and Payables", deferred finance charges must be reported as a
separate asset in the balance sheet. The "Long term notes" balance and "Deferred
finance charges" balance at September 30, 2001 were Sk7,200,600 and Sk281,988,
respectively, under U.S. GAAP. There was no effect on consolidated net income or
shareholder's equity reported under U.S. GAAP.
21
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 19 of our Financial
statements. You should read the statements under "Safe Harbor Statement Under
the Private Securities Litigation Reform Act of 1995" 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 September 30, 2001, we had
803,638 mobile customers, and 3,113 managed data network customers, consisting
primarily of subscribers to our X.25 and frame relay services. For the three
months ended September 30, 2001, we generated revenues of Sk2,071.8 million,
cash flows from operating activities of Sk260.3 million, EBITDA of Sk614.1
million and net loss of Sk35.8 million. For the nine months ended September 30,
2001, we generated revenues of Sk5,709.9 million, cash flows from operating
activities of Sk1,172.2 million, EBITDA of Sk1,928.1 million and net income of
Sk199.2 million.
The following table sets forth certain information about our network:
As of September 30,
--------------------------------------
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 .......................................................... 529 607
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 and access fees are the 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. Revenues
from interconnection fees from Slovak Telecom and Globtel account for
approximately 25% of Mobile services Revenue.
22
EuroTel Bratislava, a.s.
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 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 September 30,
------------------------------------
2000 2001
----------------- ---------------
Mobile customers
NMT Post-paid .................................................. 16,580 14,509
GSM Post-paid .................................................. 173,606 199,631
GSM Pre-paid ................................................... 216,435 589,498
----------------- ----------------
Total .......................................................... 406,621 803,638
Managed data network connections ..................................... 6,500 6,841
Three months ended Nine months ended
September 30, September 30,
------------------------------ ----------------------------
2000 2001 2000 2001
------------- --------------- ------------- -------------
Average monthly revenue per customer
Post-paid ....................................... Sk1,864 Sk1,947 Sk1,760 Sk1,884
Pre-paid ........................................ Sk364 Sk295 Sk354 Sk322
Average monthly billable minutes per customer(2)
Post-paid ....................................... 237(1) 278 224(1) 270
Pre-paid ........................................ 54(1) 44 55(1) 49
Average monthly churn rate
Post-paid ....................................... 1.64% 1.48% 2.02% 1.52%
Pre-paid ........................................ 1.14% 2.16% 1.12% 1.77%
- ---------------------
(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.
Our current interconnection agreements with Slovak Telecom and Globtel will
both expire in December 2001 and we are in the process of negotiating their
renewal. If we have not renegotiated the renewal of one or both of these
interconnection agreements prior to its expiration, the Slovak
telecommunications regulator may, if necessary, set the technical and
operational terms upon which the networks have to be interconnected as well as
may set the methodology for the calculation of prices to be paid under new
interconnection agreements. The
23
EuroTel Bratislava, a.s.
regulator may also mediate in our negotiations with Slovak Telecom and Globtel
and, if necessary, set the terms upon which each interconnection agreement is to
be renewed. We cannot assure you that the terms of renewed interconnection
agreements with either Slovak Telecom or Globtel will be the same or as
favorable as those in our current interconnection agreements. A reduction in the
rates we can charge Slovak Telecom and/or Globtel for calls made by their
respective customers and terminating on our network could have a negative effect
on our overall revenues from interconnection fees and, as a consequence, on our
Mobile service revenues.
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 1.4% in the three months ended September 30, 2000,
and 2.0% in the three months ended September 30, 2001. The increase in total
average monthly churn rate occurred due to the increase in churn of our pre-paid
customers. We recognize that managing churn is an important factor in maximizing
revenue and cash flow.
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. We experienced an increasing churn rate of pre-paid customers
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, service
commissions paid to dealers and accessories. 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.
24
EuroTel Bratislava, a.s.
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.
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 is 29%, effective from
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 cost in Slovak Crowns 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 Euros, 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 5.7% and 5.2% of our total revenues in the three months ended
September 30, 2000 and 2001, respectively.
25
EuroTel Bratislava, a.s.
Results of Operations
Our major revenue and expense categories for the three months and nine months
ended September 30, 2000 and 2001 are set forth in the table below.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 2001 2000 2001
------------- ------------- -------------- -------------
(in millions of Slovak Crowns)
Mobile service revenues .......................... 1,276.3 1,696.1 3,476.5 4,676.1
Mobile service cost of sales ..................... 333.4 453.8 912.1 1,202.2
------------- ------------- -------------- -------------
Gross profit from mobile services ................ 942.9 1,242.3 2,564.4 3,473.9
Gross margin from mobile services ................ 73.9% 73.2% 73.8% 74.3%
Mobile equipment and other sales ................. 165.3 260.4 461.2 686.9
Mobile equipment and other cost of sales ......... 204.9 451.3 668.1 1,149.9
------------- ------------- -------------- -------------
Gross profit / (loss) from mobile equipment ...... (39.6) (190.9) (206.9) (463.0)
Gross margin from mobile equipment sales ........ (24.0)% (73.3)% (44.9)% (67.4)%
Data network service revenues ..................... 124.2 115.3 329.1 346.9
Data network service cost of sales ................ 41.4 37.1 113.7 111.4
------------- ------------- -------------- -------------
Gross profit from managed data network services ... 82.8 78.2 215.4 235.5
Gross margin from managed data network services ... 66.7% 67.8% 65.5% 67.9%
Total revenues .................................... 1,565.8 2,071.8 4,266.8 5,709.9
Cost of sales and services ........................ 579.7 942.2 1,693.9 2,463.5
------------- ------------- -------------- -------------
Gross profit ...................................... 986.1 1,129.6 2,572.9 3,246.4
Gross margin ...................................... 63.0% 54.5% 60.3% 56.9%
Selling, general and administration expenses ...... 365.1 515.5 1,061.6 1,318.3
Depreciation and amortization ..................... 331.8 360.6 978.1 1,088.9
------------- ------------- -------------- -------------
Operating income .................................. 289.2 253.5 533.2 839.2
Finance costs ..................................... 514.9 290.3 1,510.4 494.8
Tax expense / (benefit) ........................... (54.2) (1.0) (232.2) 145.2
------------- ------------- -------------- -------------
Net income / (loss) ............................... (171.5) (35.8) (745.0) 199.2
============= ============= ============== =============
Three and Nine months ended September 30, 2001 Compared to Three and Nine months
ended September 30, 2000
Revenues. Our total revenues increased by Sk506.0 million, or 32.3%, from
Sk1,565.8 million in the three months ended September 30, 2000 to Sk2,071.8
million in the three months ended September 30, 2001. For the nine months ended
September 30, 2001, total revenues increased by Sk1,443.1 million, or 33.8%,
from Sk4,266.8 million in the first nine months of 2000 to Sk5,709.9 million.
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 Sk419.8 million, or 32.9%, from Sk1,276.3 million
in the three months ended September 30, 2000 to Sk1,696.1 million in the same
period of 2001. For the nine months ended September 30, 2001, mobile service
revenues increased by Sk1,199.6 million, or 34.5%, to Sk4,676.1 million. This
increase reflected a 97.6% increase in the number of our total mobile customers,
which grew from 406,621 as of September 30, 2000 to 803,638 as of September 30,
2001. Average monthly revenue per customer decreased by 31.3% from Sk1,104 in
the three months ended September 30, 2000 to Sk758 in the three months ended
September 30, 2001 and decreased by 28.1% from Sk1,154 in the nine months ended
September 30, 2000 to Sk830 in the nine months ended September 30, 2001. This
decline was primarily due to the increased number of non-business mobile
customers, who typically choose our pre-paid service and generate lower average
monthly revenues than business
26
EuroTel Bratislava, a.s.
customers. Our pre-paid customers increased by 373,063 or 172.4% from 216,435 as
of September 30, 2000 to 589,498 as of September 30, 2001. Deferred revenue
increased by Sk2.3 million, from Sk346.4 million at September 30, 2000 to
Sk348.7 million at September 30, 2001. This increase is due to an increase of
Sk69.5 million in deferred mobile service revenue due to the increase in the
number of customers, offset by a reduction in deferred activation revenue of
Sk67.2 million due to pricing promotions throughout 2001 that reduced activation
fees paid by new subscribers, and the fact that the growth of our post-paid
subscriber base in the nine months ended September 30, 2001 is lower compared to
the growth during the initial periods of GSM service.
Mobile equipment and other sales increased by Sk95.1 million, or 57.5%, from
Sk165.3 million in the three months ended September 30, 2000 to Sk260.4 million
in the three months ended September 30, 2001. This increase was primarily due to
sales of mobile phone handsets and accessories, which increased by Sk114.4
million, to Sk206.8 million, in the three months ended September 30, 2001.
Offsetting the increase in sales of mobile phone handsets and accessories was a
decrease in activation revenue and contract termination penalty revenue of
Sk14.0 million and Sk11.4 million respectively. Activation revenue decreased due
to pricing promotions throughout 2001 that reduced activation fees paid by new
subscribers. Revenue from contract termination penalties declined as higher
proportion of churn is represented by low-end, non-business subscribers, where
the collectibility of the contract termination penalties is lower than we
experienced before. 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.
Mobile equipment and other sales increased by Sk225.7 million, or 48.9%,
from Sk461.2 million in the nine months ended September 30, 2000 to Sk686.9
million in the nine months ended September 30, 2001. This increase was primarily
due to sales of mobile phone handsets and accessories, which increased by
Sk272.9 million, to Sk485.8 million, in the nine months ended September 30,
2001. Offsetting the increase in sales of mobile phone handsets and accessories
was a decrease in contract termination penalty revenue and activation revenue of
Sk44.1 million and Sk27.2 million respectively. Revenue from contract
termination penalties declined as higher proportion of churn is represented by
low-end, non-business subscribers, where the collectibility of the contract
termination penalties is lower than we experienced before. Activation revenue
declined due to pricing promotions throughout 2001 that reduced activation fees
paid by new subscribers. 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 decreased by Sk8.9 million, or 7.2%,
from Sk124.2 million in the three months ended September 30, 2000 to Sk115.3
million in the three months ended September 30, 2001. For the nine months ended
September 30, 2001, managed data network service revenues increased by Sk17.8
million, or 5.4%, to Sk346.9 million. 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 Sk4.1 million, from Sk4.6 million in the three
months ended September 30, 2000 to Sk0.5 million in the three months ended
September 30, 2001, due to competitive pressures. For the nine months ended
September 30, 2001 revenue from the sale of managed data network equipment also
declined by Sk5.6 million from Sk7.6 million in the nine months ended September
30, 2000 to Sk2.0 million. The number of total data customer connections
increased by 5.2% from 6,500 as of September 30, 2000 to 6,841 as of September
30, 2001.
Cost of Sales and Services. Cost of sales and services increased by Sk362.5
million, or 62.5%, from Sk579.7 million in the three months ended September 30,
2000 to Sk942.2 million in the three months ended September 30, 2001. As a
percentage of total revenues, cost of sales increased from 37.0% in the three
months ended September 30, 2000 to 45.5% in the three months ended September 30,
2001. The decline in gross margin results primarily from higher costs of mobile
phone handsets sold resulting from accelerating growth of our customer base. For
the nine months ended September 30, 2001, costs of sales increased by 45.4%, to
Sk2,463.5 million, from Sk1,693.9 million in the nine months ended September 30,
2000. As a percentage of total revenues, cost of sales increased from 39.7% in
the nine months ended September 30, 2000 to 43.1% in the nine months ended
September 30, 2001.
Cost of sales and services in our mobile business increased by Sk366.8
million, or 68.1%, from Sk538.3 million in the three months ended September 30,
2000 to Sk905.1 million in the three months ended September 30, 2001. This
increase was due to an increase of Sk120.4 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 Sk246.4
million in costs of sales related to mobile equipment and other sales,
27
EuroTel Bratislava, a.s.
which increased from Sk204.9 million in the three months ended September 30,
2000 to Sk451.3 million in the three months ended September 30, 2001, on mobile
equipment and other sales of Sk165.3 million and Sk260.4 million, respectively.
For the nine months ended September 30, 2001, cost of sales and services in our
mobile business increased by Sk771.9 million, or 48.8%, as compared to the same
period last year, to Sk2,352.1 million. This increase reflects an increase of
Sk290.1 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 an increase of Sk481.8 million in costs of sales related to
mobile equipment and other sales, which increased from Sk668.1 million in the
nine months ended September 30, 2000 to Sk1,149.9 million in the nine months
ended September 30, 2001, on mobile equipment and other sales of Sk461.2 million
and Sk686.9 million, respectively. Our negative gross margin on sales of mobile
phone handsets and accessories was (99.6)% in the three months ended September
30, 2001 and (113.2)% in the nine months ended September 30, 2001, as compared
to a negative gross margin of (89.6)% in the three months ended September 30,
2000 and (164.0)% in the nine months ended September 30, 2000. The improvement
in margins on sales of mobile phones and accessories in the nine months ended
September 30,2001 is due to management's continuing efforts to reduce subsidies
on mobile phones sold to new customers. 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
decreased by Sk4.3 million, or 10.4%, from Sk41.4 million in the three months
ended September 30, 2000 to Sk37.1 million in the three months ended September
30, 2001. For the nine months ended September 30, 2001, cost of sales and
services in our managed data network services business decreased by Sk2.3
million, or 2.0%, as compared to the same period last year, to Sk111.4 million.
As a percentage of revenues, cost of sales in our managed data network services
business decreased from 33.3% in the three months ended September 30, 2000 to
32.2% in the three months ended September 30, 2001 and decreased from 34.5% in
the nine months ended September 30, 2000 to 32.1% in the nine months ended
September 30, 2001, as we were able to maintain premium pricing on our services
despite a general decline in the price of such managed data network services.
Operating Expenses. Total operating expenses increased by Sk179.2 million,
or 25.7%, from Sk696.9 million in the three months ended September 30, 2000 to
Sk876.1 million in the three months ended September 30, 2001. Operating expenses
increased by Sk367.5 million, or 18.0%, to Sk2,407.2 million, in the nine months
ended September 30, 2001. This increase primarily reflected higher levels of
rent of buildings, depreciation and amortization expense, advertising, marketing
and sales expense and wages and employee benefits.
Expenses related to rent of buildings increased by Sk71.3 million, or
304.7%, from Sk23.4 million in the three months ended September 30, 2000 to
Sk94.7 million in the three months ended September 30, 2001 and by Sk70.9
million, or 90.9%, to Sk148.9 million in the nine months ended September 30,
2001. The increase occurred due to the fact that EuroTel moved into new office
space under an operating lease contract. As a result, EuroTel booked exit costs
of Sk12.2 million and a provision of Sk43.0 million for surplus leased
properties. We expect that the move of corporate offices will result in savings
in rent expense in future years.
Depreciation and amortization expense increased by Sk28.8 million, or
8.7%, from Sk331.8 million in the three months ended September 30, 2000 to
Sk360.6 million in the three months ended September 30, 2001 and by Sk110.8
million, or 11.3%, to Sk1,088.9 million in the nine months ended September 30,
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 increased by approximately Sk28.7
million, or 31.0%, from Sk92.7 million in the three months ended September 30,
2000 to Sk121.4 million in the three months ended September 30, 2001 and
increased by Sk70.7 million, or 27.7%, to Sk326.3 million in the nine months
ended September 30, 2001 due largely to the timing of certain promotional
activities. We expect advertising, marketing and sales expenses as a percentage
of revenue to decrease in the fourth quarter of 2001.
Wages and employee benefits increased by Sk21.7 million, or 20.1%, from
Sk108.0 million in the three months ended September 30, 2000 to Sk129.7 million
in the three months ended September 30, 2001 due primarily to annual wage
increase and also due to an increase of average number of our employees. For the
nine months ended September 30, 2001, wages and employee benefits increased by
Sk69.9 million, or 22.2%, to Sk384.4 million also due to higher bonus payments
in 2001 reflecting the achievement of specific financial and operational goals.
28
EuroTel Bratislava, a.s.
Bad debt expense decreased by Sk9.0 million, or 49.7%, from Sk18.1 million
in the three months ended September 30, 2000 to Sk9.1 million in the three
months ended September 30, 2001. Bad debt expense related to fraud, which is
netted against revenues for the relevant period, increased from Sk5.3 million in
the three months ended September 30, 2000 to Sk8.9 million in the three months
ended September 30, 2001. As a percentage of total revenues, our total bad debt
expense, including bad debt related to fraud, decreased from 1.5% in the three
months ended September 30, 2000 to 0.9% in the three months ended September 30,
2001. For the nine months ended September 30, 2001, bad debt expense decreased
by Sk29.4 million, or 52.9%, from Sk55.6 million in the nine months ended
September 30, 2000 to Sk26.2 million in the nine months ended September 30,
2001. Bad debt expense related to fraud decreased from Sk52.9 million in the
nine months ended September 30, 2000 to Sk29.1 million in the nine months ended
September 30, 2001. As a percentage of total revenues, our total bad debt
expense, including expense related to fraud, decreased from 2.5% in the nine
months ended September 30, 2000 to 1.0% in the nine months ended September 30,
2001. This decline reflects management's ongoing initiatives focused on reducing
bad debt expense and lowering churn rates, and also reflects an increasing
number of pre-paid customers 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.
Due to the factors discussed above, operating income decreased from
Sk289.2 million in the three months ended September 30, 2000 to Sk253.5 million
in the three months ended September 30, 2001 and increased from Sk533.2 million
in the nine months ended September 30, 2000 to Sk839.2 million in the nine
months ended September 30, 2001.
Finance Costs. Total finance costs decreased by Sk224.6 million, or 43.6%,
from Sk514.9 million in the three months ended September 30, 2000 to Sk290.3
million in the three months ended September 30, 2001. Interest expense on
borrowings decreased from Sk318.0 million in the three months ended September
30, 2000 to Sk221.6 million in the three months ended September 30, 2001 as a
result of avoided interest expense in 2001 on capitalized shareholder loans. In
September 2001 we repurchased Euro10 million of long term notes resulting in one
time write-off of deferred finance charges of Sk17.1 million and premium of
Sk24.0 million charged to income. Foreign exchange losses decreased from Sk250.9
million in the three months ended September 30, 2000 to Sk81.5 million in the
three months ended September 30, 2001 primarily due to elimination of the
foreign exchange losses we incurred on U.S. dollar denominated shareholder loans
in the three months ended September 30, 2000. The remaining difference is
primarily due to an increase in interest income from Sk58.5 million to Sk60.0
million, reflecting the investment of excess borrowings and due to a small
change in capitalized interest.
For the nine months ended September 30, 2001 total finance costs decreased
by Sk1,015.6 million, or 67.2%, from Sk1,510.4 million in the nine months ended
September 30, 2000 to Sk494.8 million. Interest expense on borrowings decreased
from Sk779.1 million in the nine months ended September 30, 2000 to Sk639.8
million in the nine months ended September 30, 2001 as a result of avoided
interest expense in 2001 on capitalized shareholder loans. Foreign exchange
gains and losses improved from a loss of Sk497.2 million in the nine months
ended September 30, 2000 to a gain of Sk35.0 million in the nine months ended
September 30, 2001 primarily due to elimination of the foreign exchange losses
we incurred on U.S. dollar denominated shareholder loans in the nine months
ended September 30, 2000 and an appreciation of Slovak Crown against Euro, in
which all our borrowings are denominated. In September 2001 we repurchased
Euro10 million of long term notes resulting in one time write-off of deferred
finance charges of Sk17.1 million and premium of Sk24.0 million over the face
value charged to income. In addition, in the nine months ended September 30,
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. The remaining
difference is primarily due to an increase in interest income from Sk113.5
million to Sk173.9 million, reflecting the investment of excess borrowings and
due to a small change in capitalized interest.
Taxes. Our tax benefit decreased by Sk53.2 million, or 98.2%, from Sk54.2
million in the three months ended September 30, 2000 to Sk1.0 million in the
three months ended September 30, 2001. We reported a loss before tax of Sk36.8
million in the three months ended September 30, 2001 compared to a loss before
tax of Sk225.7 million in the three months ended September 30, 2000. For the
nine months ended September 30, 2001, our tax charge increased by Sk377.4
million, or 162.5%, from a tax benefit of Sk232.2 million in the nine months
ended September 30, 2000 to a tax charge of Sk145.2 million in the nine months
ended September 30,
29
EuroTel Bratislava, a.s.
2001. We reported income before tax of Sk344.4 million in the nine months ended
September 30, 2001 compared to a loss before tax of Sk977.2 million in the nine
months ended September 30, 2000.
Net Income. As a result of the factors discussed above, we reported a net
loss of Sk35.8 million for the three months ended September 30, 2001 and a net
income of Sk199.2 million for the nine months ended September 30, 2001, compared
to a net loss of Sk171.5 million for the three months ended September 30, 2000
and a net loss of Sk745.0 million for the nine months ended September 30, 2000.
30
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:
Nine months ended September 30,
-----------------------------------------
2000 2001
-------------------- -------------------
(in millions of Slovak Crowns)
Net cash flows
From operating activities .................................................. 958.3 1,172.2
Used in investing activities ............................................... (2,996.6) (768.5)
From / (used in) financing activities ...................................... 3,511.0 (460.4)
Net Cash from Operating Activities. Net cash from operating activities was
Sk958.3 million in the nine months ended September 30, 2000 and Sk1,172.2
million in the nine months ended September 30, 2001. The increase in cash flow
from operating activities in the nine months ended September 30, 2001 resulted
from growth in our customer base as well as from timing differences in working
capital items. Offsetting the increase in cash flow from operating activities
was an increase by Sk280.5 million of interest paid from Sk578.1 million for the
nine months ended September 30, 2000 to Sk858.6 million for the nine months
ended September 30, 2001.
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 Sk419.4 million in the nine months ended
September 30, 2000, and Sk1,016.6 million in the nine months ended September 30,
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 nine months ended September 30, 2001, approximately 70.3% of
total capital expenditures were related to our mobile network. The increase in
capital expenditures in the nine months ended September 30, 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 nine months ended September 30, 2001
included the purchases of Euro-denominated government bonds of Sk3,720.6 million
and proceeds of Sk3,968.7 million from Euro-denominated government bonds which
matured during the period while in the nine months ended September 30, 2000 the
purchases of Euro-denominated government bonds amounted to Sk3,019.3 million and
proceeds from Euro-denominated government bonds which matured during the period
were Sk442.1 million.
Net Cash from Financing Activities. We obtain financing from equity
investments and notes issued on international bond markets. Net cash from
financing activities was Sk3,511.0 million in the nine months ended September
30, 2000, while there was cash outflow of Sk460.4 million from financing
activities in the nine months ended September 30, 2001 due to repurchase of
Euro10 million of long term notes in September 2001 (see Note 6 of our Financial
statements).
Debt. As of September 30, 2001, our gross debt consisted of Sk7,200.6
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
31
EuroTel Bratislava, a.s.
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. In aggregate, Euro172.2 million of Old Notes were exchanged for New
Notes. The New Notes are substantially identical in terms to the Old Notes,
except that the New Notes are registered with the SEC. As of September 30, 2001,
there were Euro2.8 million of Old Notes outstanding. As of September 30, 2001,
we believe we were in compliance with all of our covenants under the Old and the
New Notes. During the period, EuroTel reclassified deferred finance charges
related to issue of its long term notes. The finance charges are included in the
initial measurement of the notes in accordance with IAS 39. For a description of
the reclassification, see Note 6 and Note 19 (f) of our Financial statements. In
September 2001, EuroTel repurchased Euro10 million of the senior guaranteed long
term notes in a series of open-market transactions for a net consideration of
Sk460.4 million. In October 2001, EuroTel repurchased further Euro5 million of
the senior guaranteed long term notes for a net consideration of Sk226.3
million. As a result, EuroTel's gross debt decreased to Euro165 million and
Euro160 million as of September 30, 2001 and October 31, 2001, respectively (see
Note 6 and Note 18 of our Financial statements).
In February 2001, EuroTel's Board of Directors approved a proposal to
convert Sk3,058.9 million of subordinated loans from our shareholders into
equity. In March 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.
IAS to U.S. GAAP Reconciliation
Under U.S. GAAP, we reported net loss before extraordinary items of
Sk7.4 million for the three months ended September 30, 2001, and net income
before extraordinary items of Sk226.2 million for the nine months ended
September 30, 2001, compared to a net loss before extraordinary items of
Sk172.1million for the three months ended September 30, 2000 and net loss before
extraordinary items of Sk510.0 million for the nine months ended September 30,
2000.
The most significant adjustments related to the loss on the repurchase
of Euro10 million of long term notes from existing liquid funds in September
2001 and to the repayment of the Syndicated and International Finance
Corporation loans with the proceeds from the issuance of long term notes in
March 2000. Under U.S. GAAP, the loss of Sk29.2 million (net of tax of Sk11.9
million) for the three and nine months ended September 30, 2001 and the loss of
Sk236.9 million (net of tax of Sk96.8 million) for the nine months ended
September 30, 2000 are reported as an extraordinary items and shown net of tax
and after continuing operations.
Under U.S. GAAP, we reported a net loss after extraordinary items of
Sk36.5 million for the three months ended September 30, 2001 and net income
after extraordinary items of Sk197.0 million for the nine months ended September
30, 2001, compared to a net loss after extraordinary items of Sk172.1 million
for the three months ended September 30, 2000 and net loss after extraordinary
items of Sk746.9 million for the nine months ended September 30, 2000.
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: material 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
32
EuroTel Bratislava, a.s.
adapt to rapid technological change and significant competition. Readers are
cautioned not to place undue reliance on the aforementioned forward-looking
statements, which speak only as of the date hereof and EuroTel undertakes no
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events
33
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 September 30, 2001 we had Sk7,201 million and as of December
31, 2000 we had Sk10,758 million in gross debt. During the period, EuroTel
reclassified deferred finance charges related to issue of its long term notes.
The finance charges are included in the initial measurement of the notes in
accordance with IAS 39. For a description of the reclassification, see Note 6
and Note 19 (f) of our Financial statements. Our current investments totaled
Sk3,291 million as of September 30, 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 September 30, 2001.
As of December 31, As of September 30,
------------------------------- --------------------------------
2000 2000 2001 2001
------------- ------------- ------------- -------------
(millions of Slovak Crowns, except %)
Debt Carrying Value Fair Value Carrying Value Fair Value
Long term notes
Fixed Rate - Euro.............. 7,699 7,353 7,201 7,417
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 7,201 Sk 7,417
============= ============= ============= =============
The December 31, 2000 and September 30, 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
September 28, 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 denominated in U.S.
dollar 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 been
completed in April 2001.
In September 2001, EuroTel repurchased Euro10 million of the long term notes in
a series of open-market transactions. In accordance with IAS 39, related
liability was derecognized in EuroTel's consolidated balance sheet. EuroTel used
existing liquid assets to extinguish the debt. An amount of Sk29.2 million (net
of deferred tax of Sk11.9 million), comprising the difference between the
carrying amount of the repurchased notes and net consideration paid amounting
Sk24.0 million and unamortized deferred finance charges related to repurchased
notes of Sk17.0 million, was charged to income (see Note 12 of our Financial
statements). In October 2001, EuroTel repurchased an additional Euro5 million of
the long term notes (see Note 18 of our Financial statements).
As of September 30, 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. For the nine months ended September 30, 2001, we had
incurred Sk35.0 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 September 30, 2001 would have changed the combined fair value of
the facility, current investments and cash and cash equivalents by Sk300
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
34
EuroTel Bratislava, a.s.
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.
35
EuroTel Bratislava, a.s.
Part II - Other Information
Item 1. Legal Proceedings
We are not aware of any material 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 September 30, 2001, the total amount of
outstanding claims was Sk182.7 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.
36
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: November 14, 2001
By: /S/ JOZEF BARTA
-------------------------------
Jozef Barta
Chief Executive Officer
By: /S/ IVAN BOSNAK
-------------------------------
Ivan Bosnak
Acting Chief Financial Officer
37