SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the nine months ended September 1999
Polska Telefonia Cyfrowa Sp. z o.o.
(Exact Name of Registrant as Specified in Its Charter)
Al. Jerozolimskie 181, 02-222 Warsaw
(Address of Principal Executive Offices)
Poland
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 the 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): N/A
<PAGE>
Polska Telefonia Cyfrowa Sp. z o.o. (the "Company") is a limited liability
company (spolka z ograniczona odpowiedzialnoscia) organized under the laws of
the Republic of Poland. References to the "Notes" are to the 10 3/4 % Senior
Subordinated Guaranteed Discount Notes due July 1, 2007 issued by PTC
International Finance B.V., a wholly owned finance subsidiary of the Company
organized under the laws of The Netherlands ("PTC International Finance"), and
fully and unconditionally guaranteed by the Company. References to the "Company
Guarantee" are to the Company's guarantee of the Notes. PTC International
Finance essentially has no independent operations and does not file separate
reports under the Securities Exchange Act of 1934 (the "Exchange Act").
The Company publishes its Financial Statements in Polish Zloty. In this
quarterly report on Form 6-K (the "Form 6-K"), references to "zloty" or "PLN"
are to Polish currency, references to "U.S. dollars", "USD" or "$" are to United
States currency, references to "Deutschmark" or "DM" are to German currency and
references to "Euros" are to the single currency of those member states of the
European Union (the "EU") that entered the third stage of economic and monetary
union pursuant to the Maastricht Treaty on January 1, 1999. As at January 1,
1999, the Euro replaced the "ECU", the European Currency Unit at a ratio of one
Euro to one ECU.
The Federal Reserve Bank of New York does not certify for customs purposes a
noon buying rate for Zloty. For the convenience of the reader, this Form 6-K
contains translations of certain Zloty amounts into U.S. dollars at the rate of
PLN 4.1141 = $1.00, the exchange rate quoted for accounting purposes by the
National Bank of Poland ("NBP"), the Polish central bank, on September 30, 1999
(the "Fixing Rate"). These translations should not be construed as
representations that such zloty amounts actually represent such U.S. dollar
amounts or could be, or could have been, converted into U.S. dollars at the
rates indicated or at any other rate.
The Company's interim financial statements for the nine months ended September
30, 1999 (the "Financial Statements") attached to this Form 6-K have been
prepared in accordance with International Accounting Standards ("IAS"), which
differs in certain respects from generally accepted accounting principles in the
United States ("U.S. GAAP") (see Note 24 to the Financial Statements). Unless
otherwise stated herein, all financial information presented in this Form 6-K
has been prepared in accordance with IAS.
The Company's registered office and its headquarters are located at Al.
Jerozolimskie 181, 02-222 Warsaw; telephone (48 22 699-6000).
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<PAGE>
TABLE OF CONTENTS
Page
Selected Financial Data ...................................................... 4
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the nine months ended September 30, 1999 ..... 5
Significant Transactions and Agreements ......................................15
Legal Proceedings ............................................................15
Shareholders and Board Members ...............................................15
Signatures ...................................................................17
Financial Statements (unaudited):
Condensed Consolidated Statements of Operations for the
periods from January 1, 1999 to September 30, 1999 and
from January 1, 1998 to September 30, 1998 .............................19
Condensed Consolidated Balance Sheets as at September 30,
1999 and December 31, 1998 .............................................20
Condensed Consolidated Statements of Cash Flows for the
periods from January 1, 1999 to September 30, 1999 and
from January 1, 1998 to September 30, 1998 .............................21
Condensed Consolidated Statements of Changes in Equity
for the periods from January 1, 1999 to September 30,
1999 and from January 1, 1998 to December 31, 1998 ....................22
Notes to the Condensed Consolidated Financial Statements ...............23
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<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
--------------------------- ------------------
PLN $(1) PLN
--------------------------- ----------
(in thousands)
<S> <C> <C> <C>
Statement of Operations Data
International Accounting Standards
Net Sales:
Service revenues and fees 1,647,637 400,485 980,143
Sales of telephones and accessories 166,256 40,411 127,411
---------- ---------- ----------
Total net sales 1,813,893 440,896 1,107,554
Cost of sales:
Cost of services sold (642,345) (156,133) (425,867)
Cost of sales of telephones and accessories (528,494) (128,459) (254,181)
---------- ---------- ----------
Total cost of sales (1,170,839) (284,592) (680,048)
---------- ---------- ----------
Gross margin 643,054 156,304 427,506
Operating expenses:
Selling and distribution costs (330,013) (80,215) (193,626)
Administration and other operating costs (113,035) (27,475) (81,951)
---------- ---------- ----------
Total operating expenses (443,048) (107,690) (275,577)
---------- ---------- ----------
Operating profit 200,006 48,614 151,929
Interest and other financial expense, net (360,486) (87,621) (143,319)
---------- ---------- ----------
(Loss) profit before taxation (160,480) (39,007) 8,610
---------- ---------- ----------
Taxation expense (35,331) (8,588) (36,425)
---------- ---------- ----------
Net loss (195,811) (47,595) (27,815)
========== ========== ==========
U S GAAP
Revenues 1,813,893 440,897 1,107,554
Cost of sales (1,166,380) (283,508) (677,300)
Operating expenses (449,827) (109,338) (272,838)
Interest and other financial expense, net (400,861) (97,436) (174,114)
Taxation expense (35,331) (8,588) (36,425)
---------- ---------- ----------
Net loss (238,506) (57,973) (53,123)
========== ========== ==========
<CAPTION>
At September 30, 1999 At December 31, 1998
--------------------------- --------------------
<S> <C> <C> <C>
Balance Sheet Data
International Accounting Standards
Long-term assets 3,435,838 835,137 2,340,813
Total assets 4,091,888 994,601 2,761,103
Long-term liabilities, provisions and deferred taxes 2,751,339 668,758 1,892,501
Total liabilities 3,990,860 970,044 2,464,264
Shareholders' equity 101,028 24,557 296,839
U S GAAP
Long-term assets 3,315,512 807,538 2,263,182
Total assets 3,871,562 965,354 2,683,472
Shareholders' equity (19,298) (4,691) 219,208
</TABLE>
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(1) Solely for the convenience of the reader, zloty amounts have been
translated into U.S. dollars at the rate of PLN 4.1141 per $1.00, the
Fixing Rate announced by the National Bank of Poland on September 30,
1999.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIALCONDITION AND RESULTS OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999
Results of Operations
Overview
The Company was formed in December 1995 and awarded a fifteen-year non-exclusive
GSM license (the "License") in February 1996 by the Polish Ministry of
Communications. Thereafter, the Company commenced construction of its GSM
network, and in September 1996, started offering services to subscribers under
the brand name Era GSM. Since that time, the Company has experienced rapid
growth and development. The following table sets forth information about the
Company's subscribers and GSM cellular network coverage as at the dates
indicated:
September 30, September 30,
1999 1998
Number of Subscribers 1,499,989 646,821
Coverage of GSM cellular network in Poland:
Geographical area covered 83% 74%
Population covered 93% 85%
The Company recorded a net loss of PLN 195.8 million in the first nine months of
1999, as compared with a net loss of PLN 27.8 million during the same period in
1998. Operating profits increased to PLN 200.0 million in the first nine months
of 1999, compared with PLN 151.9 million for the same period in 1998. The strong
growth in net sales and gross margin in service revenues and fees was largely
offset by increased cost of sales for promotional telephones and accessories.
The net loss for the first three quarters of 1999 also reflects an increase in
net interest and other financial expense to PLN 360.5 million, as compared to
PLN 143.3 million for the same period in 1998.
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<PAGE>
The following table sets forth the Company's gross margin by net sales category
for the periods indicated:
Nine months ended
September 30,
-------------------------
1999 1998
---------- ----------
(in thousands of PLN)
Net service revenues and fees 1,647,637 980,143
Cost of services sold 642,345 425,867
---------- ----------
Gross margin from service revenues and fees 1,005,292 554,276
---------- ----------
Gross margin percentage of net service and
fees revenue 61.0% 56.6%
Sales of telephones and accessories 166,256 127,411
Cost of sales of telephones and accessories 528,494 254,181
---------- ----------
Gross margin from sales of telephones and
accessories (362,238) (126,770)
---------- ----------
Gross margin percentage of net telephones and
accessories revenue (217.9%) (99.5%)
---------- ----------
Gross margin 643,054 427,506
========== ==========
Gross margin percentage of total net revenues 35.5% 38.6%
========== ==========
Net Sales
The Company's net sales were PLN 1,813.9 million in the first nine months of
1999, as compared with PLN 1,107.6 million during the same period in 1998. Net
sales consist primarily of service revenues and fees, comprised of air-time
tariffs, monthly service fees and service activation fees. Air-time tariffs
include revenues from incoming and outgoing calls and revenue from the sale of
pre-paid air-time minutes.
Service revenues and fees were PLN 1,647.6 million during the first nine months
of 1999, as compared with PLN 980.1 million during the same period in 1998. The
growth in service revenues and fees primarily reflects an increase in the number
of the Company's subscribers to approximately 1.5 million as of September 30,
1999, including 319,000 Tak Tak pre-paid GSM service subscribers, as compared
with 647,000 subscribers as at September 30, 1998. This trend was partially
offset by a decrease in the monthly average revenue per subscriber to PLN 158
for the three months ended September 30, 1999, from PLN 222 for the same period
in 1998.
In order to harmonize tariff plans and better target various markets, the
Company introduced three new tariff plans in the third quarter of 1999: (i) one
prepaid service, Caly Dzien, on October 11, 1999; and (ii) two post-paid
services, Po Prostu and VIP, on October 15, 1999. Caly Dzien offers lower
rates during the daytime for active
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<PAGE>
users, while Po Prostu and VIP feature flat rates per minute for calls
throughout Poland. The Company also introduced a night time zone rate pricing
and the decrease in activation fees for post-paid customers by more than 80%.
On October 15, 1999, the Company also launched Stokrotka, a customer loyalty
program with the Polish meaning "gratitude". The goal of the point-based program
is to minimize voluntary churn and promote phone usage. Customers earn points
through on-time payments and length of time in the program. Points can be
exchanged for telephone accessories or partner awards. Initial program partners
are Kodak, Empik (books and music retailer), Panasonic, Ving (package travel),
LOT Polish Airlines and British Airways.
Sales of handsets and accessories were PLN 166.3 million during the first nine
months of 1999, as compared with PLN 127.4 million during the same period in
1998. Since beginning operations, the Company has conducted many promotional
campaigns in which it offered reduced prices for handsets and activation fees
during specific periods. As a result of these promotional campaigns, a
significant number of new subscribers have been added, although revenues from
sales of handsets and accessories have been negatively effected by promotional
discounting of the cost of handsets and accessories to subscribers.
Net interconnect income of PLN 274.5 million is included in the gross margin
from service revenue and fees for the first nine months of 1999, which is
comprised of PLN 364.0 million in gross sales and PLN 89.5 million of expense.
For the same period in 1998, the net interconnect income was PLN 145.1 million,
consisting of PLN 196.3 gross sales and PLN 51.2 million of expense. The Company
has interconnect agreements with TPSA (Telekomunikacja Polska S.A.), Polkomtel
and Netia Telekom.
Cost of Sales
The Company's cost of sales were PLN 1,170.8 million in the first nine months of
1999, as compared with PLN 680.0 million in the same period in 1998. Gross
margin was PLN 643.0 million in the first nine months of 1999, as compared with
a gross margin of PLN 427.5 million in the same period in 1998. As a percentage
of net sales, gross margin represented 35.5% and 38.6% in the first nine months
of 1999 and 1998, respectively.
The decrease in gross margin as a percentage of net sales for the nine months
ended September 30, 1999 is the result of the Company's increased promotional
activities, primarily the cost of sales for handsets and accessories which are
often sold below cost in an effort to attract subscribers. This decline in gross
margin from sales of telephones and accessories of PLN 235.5 million was more
than offset by the increase in gross
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<PAGE>
margin from service revenues and fees of PLN 451.0 million, which reflected
strong growth in the Company's subscriber base.
The continuous growth of the Company's GSM network has resulted in increased
demand for transmission capacity. Presently, a large portion of the transmission
capacity is provided by lines leased from TPSA, the Polish wireline operator.
The Company has entered into a contract with Ericsson Radio Systems AB to
construct a new "backbone" transmission network in order to minimize the use of
the TPSA's leased lines. The Company believes that, when completed, the backbone
network will reduce cost of sales and the Company's dependence on external
suppliers. Construction of the initial phase of the backbone network commenced
in November 1998 and will be completed in the first quarter of 2000.
Operating Expenses
The Company's operating expenses were PLN 443.0 million during the first nine
months of 1999, as compared with PLN 275.6 million in the same period in 1998.
As a percentage of net sales; however, operating expenses during the nine months
ended September 30, 1999 were 24.4%, as compared to 24.9% during the nine months
ended September 30, 1998.
Selling and distribution costs were PLN 330.0 million in the nine months ended
September 30, 1999, as compared with PLN 193.6 million in the same period in
1998. The selling and distribution costs for the nine months ended September 30,
1999 included significant but proportional increases in advertising costs for
promotions associated with the Company's continued marketing roll-out, sales
force salaries and wages, and charges to the doubtful debtors provision. The
charge to doubtful debtors provision, increased to PLN 105.9 million for the
nine months ended September 30, 1999 from PLN 57.8 million for the nine months
ended September 30, 1998. This was primarily a result of a substantial increase
in the number of the Company's subscribers and the creation of a near full
provision for doubtful debtors for prior years.
Administration and other operating costs were PLN 113.0 million for the nine
months ended September 30, 1999, as compared with PLN 82.0 million for the same
period in 1998. The increase in operating cost for the first nine months of 1999
as compared with the same period in 1998 were primarily due to increased
employee hiring and external services to support the Company's growth.
Additionally, a portion of increased total wages and salaries in 1999 was
directly offset by lower cost for social insurance benefits. In 1999, the Polish
Government implemented a shared contribution plan between employers and
employees for social insurance pursuant to which a portion of the contribution
burden was shifted from the employer to the employees. The Company, therefore
was required to equalize the impact of this shift to employees by increasing
their compensation accordingly.
Interest and Other Financial Expenses, Net
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<PAGE>
Combined interest and other financial income and expenses for the nine months
ended September 30, 1999 were PLN 360.5 million net expense, as compared to PLN
143.3 million net expense for the same period in 1998. This reflects increased
interest charges and foreign exchange losses primarily due to borrowings and
currency exposure under the Bank Credit Facility and Notes for the purpose of
funding the network build-out.
Net interest expenses were PLN 159.1 million for the nine months ended September
30, 1999, as compared to PLN 76.4 million for the nine months ended September
30, 1998. Interest on the Bank Credit Facility accrues continuously. Cash
interest on the Notes does not commence accruing until July 1, 2002. Interest is
payable; however, on the Bank Credit Facility each year as individual drawdowns
mature; and payable on the Notes starting January 1, 2003 for the accrued
portion of the prior six months balance.
As a result of the depreciation of the Zloty in relation to other major
currencies, the Company incurred a net foreign exchange loss of PLN 201.4
million in the first nine months of 1999, as compared to a net foreign exchange
loss of PLN 67.0 million during the same period in 1998. (See further discussion
in the Inflation and Currency Fluctuation section of this document.)
Taxation
The loss before taxes was PLN 160.5 million for the nine months ended September
30, 1999 compared to a profit before taxes of PLN 8.6 million for the nine
months ended September 30, 1998. The Company incurred a net loss of PLN 195.8
million in the nine months ended September 30, 1999 compared to a net loss of
PLN 27.8 million for the same period in 1998, after reflecting the accounting
effect of taxation.
In accordance with the requirements of the Polish tax authorities, the cost of
the GSM 900 License is recorded on a cash basis, which is the most significant
component of the Company's total deferred tax liability of PLN 135.7 million as
at September 30, 1999, as compared to a deferred tax liability of PLN 64.0
million as at December 31, 1998. The Company also recorded a deferred tax asset
relating to the realization of accrued expenses and certain tax loss carry
forwards of PLN 101.3 million as at September 30, 1999 as compared to PLN 63.8
million as at December 31, 1998. See Note 9 to the Financial Statements.
Inflation and Currency Exchange Fluctuations
In connection with its transition from a state controlled to a free market
economy, Poland experienced high levels of inflation and significant fluctuation
in the exchange rate for the zloty. The Polish government has adopted policies
to slow the annual rate of consumer price inflation. For the twelve months ended
September 30, 1999, annualized consumer price inflation in Poland was 8.0% per
the Polish Office of Statistics. Since the launch of the Company's operations in
1996, the cumulative
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<PAGE>
inflation in Poland has been 33.0%. The Polish Communications Law provides that
the Ministry of Communications may impose a ceiling on the prices that the
Company and other telecommunications service providers can charge for their
services.
The Company's sales revenues are denominated in Polish Zlotys. A significant
portion of the Company's expenses and liabilities, however, are denominated in
other currencies. These include the Company's liability to the Polish government
for the GSM 900 and GSM 1800 Licenses, which are linked to Euro and payable in
Zlotys, and the Company's liabilities to its suppliers of network capital
equipment and handsets, which are generally denominated in Deutschmarks, French
Francs or U.S. dollars. In addition, all of the Company's liabilities under the
Notes and Shareholder Loans are denominated in U.S. dollars and a significant
portion of the Company's liabilities under the Bank Credit Facility (as defined
below) are denominated in Deutschmarks. As a result, the Company's operating
income and cash flow are and will remain significantly exposed to an
appreciation in these non-Polish currencies against the Zloty.
Future currency exchange fluctuations are expected to continue to have a
significant effect on the financial condition and results of operations of the
Company. The Company may consider entering into transactions to hedge the risk
of exchange rate fluctuations. As an alternative, the Company may attempt to
structure its foreign currency liabilities so that they are broadly in line with
the currency basket employed by the NBP. This technique will not eliminate
foreign exchange losses; however, Management believes the technique may improve
the Company's ability generally to manage the magnitude of these losses.
Starting in late 1998 and continuing through the current year, the Company drew
funds from the Bank Credit Facility and exhausted the Zloty denominated tranche
first in order to minimize the negative effects of currency exchange
fluctuations.
The table below summarizes the Company's foreign currency denominated long-term
obligations, including the future value of cash payments for principal and
interest, with the exception of the Bank Credit Facility which only presents
future principal payments due to its structure of variable interest rates and
continued refinancing.
Expected Maturity Date
<TABLE>
<CAPTION>
=====================================================================================================================
Last
Quarter
of
1999 2000 2001 2002 2003 Thereafter Total Present
Value
9/30/99
- ---------------------------------------------------------------------------------------------------------------------
(in thousands of PLN)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GSM 900 License -- 150,929 246,711 -- -- -- 397,640 372,655
- ---------------------------------------------------------------------------------------------------------------------
GSM 1800 License -- 73,510 73,510 73,510 -- -- 220,530 185,894
=====================================================================================================================
</TABLE>
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<PAGE>
<TABLE>
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds -- -- -- -- 111,893 1,376,547 1,488,440 781,332
- ---------------------------------------------------------------------------------------------------------------------
Bank Credit
Facility
(excluding
interest) -- 38,787 77,573 90,502 103,431 206,862 517,155 517,155
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Loans 705,556 705,556 312,629
- ---------------------------------------------------------------------------------------------------------------------
Headquarters Lease 7,391 29,562 29,562 29,562 29,562 327,323 452,962 217,898
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average
Effective
Interest Rate 8.7765 8.7765 8.7765 8.7765 8.7765 8.7765 8.7765 8.7765
=====================================================================================================================
</TABLE>
The Company is exposed to interest rate risk primarily as a result of the Bank
Credit Facility which at the end of the third quarter of 1999 consisted of two
loans of DM 230 million and PLN 570 million at a rate of LIBOR or WIBOR plus
0.95% before and 0.75% after March 1, 1999. The table below presents principal
payments under the Bank Credit Facility including principal and related weighted
average interest rates for the balance drawn under the facility as of September
30, 1999. The weighted average interest rates computed do not consider the rate
at which individual drawdowns on the loan will be refinanced. Each drawdown has
a short-term maturity date, which can be rolled over, subject to the annual
repayment schedule for the entire facility.
Expected Maturity Date
<TABLE>
<CAPTION>
===============================================================================================================
Bank Credit Facility Last 2000 2001 2002 2003 Thereafter Total Present
Quarter Value
of 1999 9/30/99
- ---------------------------------------------------------------------------------------------------------------
(in thousands of PLN)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable Rate (DM) -- 38,787 77,573 90,502 103,431 206,862 517,155 517,155
- ---------------------------------------------------------------------------------------------------------------
Weighted Average
Effective Interest Rate -- 3.6519 3.6519 3.6519 3.6519 3.6519 3.6519 3.6519
- ---------------------------------------------------------------------------------------------------------------
Variable Rate (PLN) -- 42,750 85,500 99,750 114,000 228,000 570,000 570,000
- ---------------------------------------------------------------------------------------------------------------
Weighted Average
Effective Interest Rate -- 14.3434 14.3434 14.3434 14.3434 14.3434 14.3434 14.3434
===============================================================================================================
</TABLE>
Liquidity and Capital Resources
The Company's liquidity requirements arise primarily from the need to fund
capital expenditures for the expansion of its business and for its working
capital requirements.
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<PAGE>
On December 17, 1997, the Company entered into a loan facility arranged by
Citibank (Poland) S.A. and Citibank International plc. The lenders agreed to
make loans to the Company, on a term loan, guarantee or revolving credit basis
(as desired by the Company) in the aggregate principal amount of not more than
DM 672.0 million (the "Bank Credit Facility") subject to the Company having met
required liquidity and credit rating conditions. The Bank Credit Facility
consists of two tranches: (i) an offshore tranche of up to DM 420.0 million may
be drawn in Deutschmark, U.S. dollars, Euro or other freely convertible
currencies as agreed by the lenders; and (ii) a domestic tranche equal to the
Zloty equivalent of DM 252.0 million available to be drawn in Zloty. At the end
of September 1999, the combined loan limit for the Company under both traunches
was DM 540.0 million. The Company has established overdraft facilities with Bank
Rozwoju Eksportu S.A. and Citibank (Poland). These are limited to the Polish
Zloty equivalent of DM 25 million by terms of the Bank Credit facility.
On August 24, 1999 the operating shareholders extended to the Company USD 75.0
million in subordinated loans to fund the GSM 1800 license and provide continued
liquidity as follows: Elektrim, Zloty equivalent of USD 39,843,750; DeTe Mobil,
USD 17,578,125; and MediaOne, USD 17,578,125. Each shareholder loan bears an
interest rate of 12.5 percent compounded semi-annually on June 17th and December
17th. The full loan balance and all accrued interest are due on June 19, 2006.
However, interest may be due earlier dependent on the Company meeting Bank
Credit Facility covenants.
Net cash generated by the Company from operating activities during the nine
months ended September 30, 1999 was PLN 405.8 million, as compared to PLN 182.5
million during the nine months ended September 30, 1998. Non-cash provisions and
net non-operating items for the same periods totaled PLN 498.8 million and PLN
218.3 million, respectively, and principally reflect depreciation and
amortization, provisions for doubtful debtors, unrealized foreign exchange
losses and accrued interest expense. In addition, cash generated from net
working capital items for the first nine months of 1999 was PLN 67.5 million as
compared to cash used for net working capital items of PLN 45.4 million for the
same period in 1998. This was primarily due to increased cash generated from
trade payables.
Net cash used by the Company in investing activities was PLN 1,042.3 million for
the nine months ended September 30, 1999, as compared to PLN 756.8 million for
the nine months ended September 30, 1998, principally reflecting payments to
suppliers of network capital equipment used in the ongoing build-out of the
Company's GSM 900 network and the initial payment for the GSM 1800 license.
The Company's net cash generated from financing activities was PLN 742.6 million
for the nine months ended September 30, 1999 as compared to PLN 353.5 million
for the nine months ended September 30, 1998, reflecting increased long-term
borrowings.
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<PAGE>
Management anticipates that capital expenditures for the remaining quarter of
1999 will total approximately PLN 493.0 million, including expenditures related
to the Company's backbone network. The Company also expects that the level of
its capital expenditures will remain significant for the medium term, as the
Company upgrades its network capacity, coverage and quality in preparation to
offer services commencing in March 2000 under its new GSM 1800 license.
In order to implement the current business plan, the Company will need to raise
PLN 2,112.0 million (USD 533.0 million) to fund anticipated working capital
requirements, capital expenditures and other operating needs. The Company is in
the process of negotiating with various financial institutions to replace the
current DM 672.0 million equivalent bank credit facility with a larger bank
credit facility. Additionally, the Company is seeking to draw down DM 132.0
million under the existing bank credit facility, which draw down is subject to
certain incurrence covenants. This draw down is conditioned upon the completion
of a new offering of notes. If the Company (i) completes the note offering, and
(ii) replaces the existing bank credit facility with the larger bank credit
facility, there will be sufficient financing to implement the current business
plan. If the Company only completes the new Note offering to draw down the DM
132.0 million under the existing Bank Credit Facility, there will be sufficient
financing to implement the business plan through the end of the first quarter
2000.
Year 2000 issue
In cooperation with its shareholders, suppliers, energy suppliers, programmers
and other telecommunications operators, the Company has implemented a
comprehensive project to prevent or minimize Year 2000-related computer hardware
or software malfunctions. The project is managed by a team of Company employees
(the "Y2K Project Team") with additional support from KPMG Polska Sp. z o.o. The
project methodology is based on guidelines prepared by MediaOne, one of the
Company's major shareholders. Management believes the Y2K Project Team has
identified all systems and services which are critical to the Company's
operations and which might lose information, malfunction or fail completely as a
result of the date rollover before, during and after the Year 2000. Management
believes the process of testing, upgrading or replacing computer hardware and
software potentially vulnerable to the Year 2000 problem was more than 97%
complete as at September 30, 1999. Management expects to be completed with
testing for Year 2000 by the end of 1999.
The Company is currently developing, testing and implementing detailed business
continuity plans in the areas of four critical business processes: customer
service, customer care and billing, cash flow and employee health and safety.
Managers have been appointed to oversee the creation of these plans on all
levels (headquarters, regional offices, retail outlets). The Y2K Project Team
expects these business continuity plans to be tested and implemented by the end
of 1999.
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<PAGE>
The Company has also coordinated with other third party entities, including
banks and roaming partners, whose failure to address Year 2000 issues before
December 31, 1999 could adversely affect the operations of the Company. Of these
third party entities, TPSA poses the most significant risk to the operations of
the Company. The Company relies on TPSA for network interconnection and as an
international gateway and, consequently, the inability of TPSA to perform these
services could have a material adverse effect on the Company's financial
condition and results of operations. The Company has tested leased lines and
interconnections as provided under the Framework Agreement with TPSA, and has
outlined the responsibilities and liabilities of each entity toward the other in
regards to the provision of products and services which may be date-dependent or
affected by the Year 2000 problem. The Company has worked with the electrical
power supply companies to understand their Year 2000 readiness and is developing
a backup plan in case of disrupted power supply, which will be implemented by
November 30, 1999. These plans will include the use of generator units and
battery packs.
Although the Company is taking reasonable measures to lessen or eliminate the
basis for Year 2000 related problems, the uncertainty that surrounds this are
impossible to know how widespread or serious the effects of these problems will
be. A system modification freeze period has been imposed for all IT and GSM
network systems for a period before and after the end of 1999. Additionally, the
Company has allocated a Year 2000 compliance budget to deal with any internal or
external problems, and has the capacity to fund all Year 2000 compliance-related
expenditures including a temporary interruption in operations. Actual
incremental costs incurred on the Year 2000 project through September 30, 1999
were USD 727,000, slightly overspending the USD 650,000 budget for this
initiative. The Company does expect minor additional spending for system testing
and review into the new year.
- 14 -
<PAGE>
SIGNIFICANT TRANSACTIONS AND AGREEMENTS
On August 11, 1999 the Ministry of Communications granted the Company a GSM 1800
license which permits the Company to operate 48 channels on the 1800 MHz band
for 15 years commencing March 1, 2000. The total price of the license was
100,293,000 euro, of which 50% (50,146,500 euros) was paid upon receiving the
license. The remaining balance is due in three annual payments of 16.67%
(16,715,500 euros) each beginning on August 31, 2000 through August 31, 2002.
Other terms and conditions of the GSM 1800 license are similar to the 900
license held by the Company.
The Ministry of Communication granted the Company an additional phone number
prefix in August 1999 which will enable the company to continue aggressive
subscriber growth through sales campaigns and other selling methods.
LEGAL PROCEEDINGS
Except as disclosed above under "Management's Discussion and Analysis of
Financial Condition and Results of Operations for the nine months ended
September 30, 1999 - Net Sales" and in Note 1 to the Financial Statements,
neither the Company nor PTC International Finance is engaged in any material
litigation or arbitration and no material litigation or claim is known to the
Company to be threatened against the Company or PTC International Finance.
SHAREHOLDERS AND BOARD MEMBERS
Appointment of New General Director
On September 20, 1999 the Supervisory Board appointed Mr. Boguslaw
Kulakowski as General Director, Chairman of the Management Board, immediately
replacing Mr. Tadeusz Kubiak who was recalled after more than three years
service with the Company. Mr. Kulakowski formerly held internal company
positions of Director of Customer Care, and most recently, Chief Strategist.
Before joining the Company, he worked as Marketing Director for SAP Polska and
Marketing Consultant for Coca-Cola New York. Mr. Kulakowski is a 1990 graduate
of Maria Curie Sklodowska University (Poland) with a Master of Law, a 1995
graduate from New York State University (USA) with a Master of Business
Administration, and a 1999 graduate of Technical University Delft (The
Netherlands) with a Master of Business Telecommunications.
Appointment of New Finance Director
On August 11, 1999 the Supervisory Board appointed Mr. Stanislaw Majewski as
Finance Director replacing Mrs. Grazyna Chudziak who was temporarily assigned to
the position. He commenced his new duties with the Company on September 1, 1999.
- 15 -
<PAGE>
Mr. Majewski was formerly the Finance Director and Associate Comptroller with
Procter & Gamble, Polska, Baltics and Belarus where he was employed for over
nine years. Prior to Procter & Gamble, he held positions as Finance Director at
OMC Poll Ltd. (medical distributor) and Zrzeszenie Przemyslu Ciagnikowgo
Ursus (agricultural equipment manufacturer). Mr. Majewski holds degrees in
economics from the University of Lodz (1973); in production and management
systems, and marketing and market research from the Central School of Planning
and Statistics (1982 and 1984, respectively); and in international business from
the University of Bristol, UK (1997); and an executive MBA from Ecole Nationale
des Ponts et Chaussees - France (1998). Additionally, Mr Majewski is a Chartered
Accountant with auditing licenses for both industrial and trade companies, and
has his Certification for Supervisory Boards of State Companies in Poland.
Transfer of Ownership
On August 11, 1999 the Supervisory Board approved the transfer of minority share
ownership from the Minority Shareholders to Elektrim S.A. As a result of this
transaction, Elektrim acquired an additional 13.9% ownership. The Minority
Shareholders which transferred ownership were:
Minority Owner Shares Ownership
- -------------- ------ ---------
Kulczyk Holding S.A 22,608 shs 4.8%
Towarzystwo Ubezpiecze I Reasekuracji WARTA S.A 19,311 shs 4.1%
Bank Rozwoju Eksportu S.A. 14,130 shs 3.0%
Drugi Polski Fundusz Rozwoju BRE Sp. z.o.o. 9,420 shs 2.0%
Prior to the above transaction, Elektrim owned 34.1% of the Company's shares and
also currently holds controlling interests in other companies which hold an
additional 3.0% of the Company's shares.
A dispute between Elektrim and DeTeMobil has arisen regarding the transfer on
our share registry books of a portion (representing approximately 3.0% of our
shares) of Elektrim's announced acquisition. DeTeMobil sought an injunction to
prevent such transfer on our registry books in the Warsaw Regional Court, XX
Commercial Division, but the Court did not grant the injunction. DeTeMobil has
announced that it will appeal this decision. DeTeMobil also announced in October
the commencement of an arbitration claim (at the International Arbitration Court
in Vienna) against Elektrim and certain smaller shareholders. The claim seeks
the declaration that a portion of shares involved in Elektrim's announced
acquisition should have been sold to DeTeMobil in recognition of its first
refusal rights under the shareholders agreement. The timing of the resolution of
this arbitration is uncertain.
DeTeMobil currently owns 22.5% of our shares. On October 22, 1999, Deutsche
Telecom announced that it had entered into an agreement with MediaOne to acquire
MediaOne's wholly-owned subsidiary, MediaOne International B.V. (the owner of
22.5% of our shares), and would increase its ownership position to 45%.
- 16 -
<PAGE>
SIGNATURES
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.
POLSKA TELEFONIA CYFROWA Sp. z o.o.
(Registrant)
By: /s/ Boguslaw Kulakowski
-----------------------
Boguslaw Kulakowski, Director General
By: /s/ Karim Khoja
---------------
Karim Khoja, Director of Strategy, Marketing and Sales
October 29, 1999
- 17 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
- 18 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Consolidated Statements of Operations
for the three months and nine months periods ended
September 30, 1999 and September 30, 1998
(in thousands of PLN)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes Three months Three months Nine months Nine months
----- ended ended ended ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales 5 710,351 421,598 1,813,893 1,107,554
Cost of sales 6 (408,875) (240,505) (1,170,839) (680,048)
-------- -------- ---------- ---------
Gross margin 301,476 181,093 643,054 427,506
Operating expenses 6 (180,932) (105,465) (443,048) (275,577)
-------- -------- ---------- ---------
Operating profit 120,544 75,628 200,006 151,929
Non-operating items
Interest and other financial income 7 5,081 2,962 11,552 18,142
Interest and other financial expenses 8 (181,583) (119,229) (372,038) (161,461)
-------- -------- ---------- ---------
(Loss)/Income before taxation (55,958) (40,639) (160,480) 8,610
Taxation charge 9 (9,476) (4,753) (35,331) (36,425)
-------- -------- ---------- ---------
Comprehensive net loss (65,434) (45,392) (195,811) (27,815)
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
- --------------------------------------------------------------------------------
- 19 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Consolidated Balance Sheets
as at September 30, 1999 and December 31, 1998
(in thousands of PLN)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes At At
----- September 30, December 31,
------------- ------------
1999 1998
---- ----
(unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 21 111,948 5,695
Debtors and prepayments 10 388,683 253,585
Accounts receivable from
State Treasury 10 46,033 85,064
Inventory 11 109,386 75,946
---------- ----------
656,050 420,290
Long-term assets
Tangible fixed assets, net 12 2,418,595 1,671,182
Intangible fixed assets, net 13 986,795 638,872
Deferred cost 14 30,448 30,759
---------- ----------
3,435,838 2,340,813
---------- ----------
Total assets 4,091,888 2,761,103
========== ==========
Current liabilities 15 1,239,521 571,763
Long-term liabilities 16 2,715,334 1,890,218
Deferred tax liability, net 9 34,397 172
Provisions for liabilities and charges 17 1,608 2,111
---------- ----------
Total liabilities 3,990,860 2,464,264
---------- ----------
Shareholders' equity
Share capital 18 471,000 471,000
Accumulated deficit (369,972) (174,161)
---------- ----------
101,028 296,839
---------- ----------
Total liabilities and Shareholders' equity 4,091,888 2,761,103
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
- --------------------------------------------------------------------------------
- 20 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the nine months periods ended
September 30, 1999 and September 30, 1998
(in thousands of PLN)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, 1999 September 30, 1998
------------------ ------------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES: (see Note 21)
<S> <C> <C>
Net (loss)/income before taxation (160,480) 8,610
Adjustments for:
Depreciation and amortization 183,200 106,020
Charge to provision for doubtful debtors 105,926 57,817
Charge to provision for inventory 3,274 --
Other provisions and special funds (503) 544
Unrealized foreign exchange losses (gains), net 189,352 67,238
Loss (Gain) on sales of tangibles and intangibles 407 (55)
Interest expense, net 159,113 76,362
Other 3 (528)
---------- ----------
Operating cash flows before working capital changes 480,292 316,008
(Increase)/decrease in inventory (36,714) 4,855
Increase in debtors, prepayments and deferred cost (199,881) (159,547)
Increase in trade payables and accruals 304,063 110,266
---------- ----------
Cash from operations 547,760 271,582
Interest paid (116,437) (26,798)
Income taxes paid (25,549) (62,323)
---------- ----------
Net cash generated from operating activities 405,774 182,461
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of intangible fixed assets (263,256) (40,954)
Purchases of tangible fixed assets (779,579) (730,193)
Purchases of short-term investments, net -- 5,084
Proceeds from sale of equipment and intangibles 111 829
Interest received 440 8,484
---------- ----------
Net cash used in investing activities (1,042,284) (756,750)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 470,384 338,193
Proceeds from shareholder's loan 296,756 --
Net change in overdraft facility (24,558) 15,306
---------- ----------
Net cash generated from financing activities 742,582 353,499
Net increase/(decrease) in cash and cash equivalents 106,072 (220,790)
Effect of foreign exchange changes on cash and cash 181 18
equivalents
Cash and cash equivalents at beginning of period 5,695 228,156
---------- ----------
Cash and cash equivalents at end of period 111,948 7,384
========== ==========
Non Cash transactions
Assets acquired under capital lease and license fee due 305,856 80,497
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
- --------------------------------------------------------------------------------
- 21 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Consolidated Statements of Changes in Equity
for the periods from January 1, 1999 to September 30, 1999
and from January 1, 1998 to September 30, 1998
(in thousands of PLN)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Share Accumulated Currency Total
Capital deficit Translation -----
------- ------- Adjustment
----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 471,000 (175,630) 7 295,377
Currency translation adjustment -- -- (7) (7)
Net loss for the period -- (27,815) -- (27,815)
-------- -------- -------- --------
Balance at September 30, 1998 (unaudited) 471,000 (203,445) -- 267,555
======== ======== ======== ========
Balance at January 1, 1999 471,000 (174,161) -- 296,839
Net loss for the period -- (195,811) -- (195,811)
-------- -------- -------- --------
Balance at September 30, 1999 471,000 (369,972) -- 101,028
(unaudited) ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
- --------------------------------------------------------------------------------
- 22 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
1. Incorporation and Principal Activities
Polska Telefonia Cyfrowa Sp. z o.o. (the "Company") was incorporated under
Polish Law as a limited liability company based on a Notarial Act dated
December 20, 1995. The Company was registered in the Regional Court in
Warsaw, XVI Commercial Department on December 27, 1995.
The principal activities of the Company are providing cellular telephone
communication services in accordance with the GSM 900 and 1800 licenses
granted by the Minister of Telecommunications and the sale of cellular
telephones and accessories compatible with its cellular services.
During 1996 the Company signed an interim interconnect agreement with
Telekomunikacja Polska S.A. ("TPSA") on a "bill and keep" basis. On May
22, 1997 the Ministry of Communications issued a decision with respect to
new interconnect arrangements between the Company and TPSA. The decision
was binding for both parties, however, certain terms, including the
effective date, were still to be agreed. The decision defined
interconnect, international and leased-lines settlements with TPSA.
In the course of 1997, TPSA filed in the Supreme Administrative Court an
appeal against the above mentioned decision. In the appeal, it challenges
the entitlement of the Minister to issue the above decision on the basis
that the established interconnect rates are not fair.
On December 9, 1998, the Company signed a framework agreement with TPSA
defining the terms of mutual interconnect arrangements. Notwithstanding
the interconnect frame agreement, TPSA appeal to the Supreme
Administrative Court has not been withdrawn.
2. Principles of Consolidation
a. Group Entities
All intercompany balances and transactions are eliminated in
consolidation. The consolidated financial statements include the financial
statements of Polska Telefonia Cyfrowa Sp. z o.o. and its wholly owned
subsidiary, PTC International Finance B.V.
On June 17, 1997, PTC International Finance B.V. was incorporated under
the laws of the Netherlands for the purpose of issuing long-term Notes
(see Note 16). The Company has acquired 40 fully-paid shares with a par
value of 1,000 Netherlands Guilders each, issued by PTC International
Finance B.V. PTC International Finance B.V. has no subsidiaries of its
own.
- --------------------------------------------------------------------------------
- 23 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
2. Principles of Consolidation (continued)
b. Reporting Currency
The Company primarily generates and expends cash through its operating
activities in Polish zloty ("PLN"). Additionally, all of the receivables
and the large part of its short-term liabilities are PLN denominated.
Therefore, Management has designated the PLN as the functional currency of
the Company.
The accompanying consolidated financial statements are reported in
thousands of PLN.
3. Accounting Standards in Poland
The Company maintains its books of account in accordance with accounting
principles and practices employed by enterprises in Poland as required by
Polish accounting regulations. The accompanying financial statements
reflect certain adjustments not reflected in the Company's books to
present these statements in accordance with standards issued by the
International Accounting Standards Committee. These adjustments and their
effect on earnings for the three month and nine month periods ended
September 30, 1999 and September 30, 1998 are shown in Note 23 to these
Financial Statements.
The differences between International Accounting Standards ("IAS") and
generally accepted accounting principles in the United States ("U.S.
GAAP") and their effect on net results for the three months and nine
months periods ended September 30, 1999 and September 30, 1998 have been
presented in Note 24 to these Financial Statements.
In Management's opinion, the financial statements for the nine months
ended September 30, 1999 and 1998 include all adjustments necessary for a
fair statement of the results for the period. All such adjustments are of
normal, recurring nature.
- --------------------------------------------------------------------------------
- 24 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
4. Principal Accounting Policies
a. Tangible Fixed Assets
Tangible fixed assets are shown at historical cost less accumulated
depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful life of the asset. The following depreciation rates have
been applied:
Estimated
Useful Lives in years
---------------------
Leasehold improvements Lease term
Buildings 40
Plant and equipment 3.3 - 25
Motor vehicles 3.3 - 8
Other 5 - 8
b. Intangible fixed assets
License
The Company has acquired from the Polish State, represented by the
Ministry of Communications, a license to provide telecommunication
services according to ETSI/GSM standard, including a permit to install and
use network equipment and to use its allocation of ETSI/GSM frequencies
("the GSM 900 license"). The GSM 900 license was acquired on February 23,
1996 and has been valued at the present value of the payments due to the
State. For the period of development of the GSM 900 system, the cost of
interest and foreign exchange losses were capitalized in the cost of the
asset. This development period terminated during the third quarter of
1997.
The GSM 900 license is amortized over the period of its validity, i.e., 15
years on a straight-line basis.
On August 26, 1999 the Ministry of Communications granted the Company a
GSM 1800 license to operate 48 channels on the 1800 MHz band for 15 years
commencing March 1, 2000 ("the GSM 1800 license"). The GSM 1800 license
has been valued at the present value of the payments due plus the cost of
interest and foreign exchange losses capitalized during the development
period.
- --------------------------------------------------------------------------------
- 25 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
4. Principal Accounting Policies (continued)
b. Intangible fixed assets (continued)
Other intangible fixed assets
Other intangible assets are stated at cost less accumulated amortization.
Amortization is calculated using the straight-line method over the
estimated useful life of the asset. The following amortization rates have
been applied:
Annual Rate
in %
-----------
Technical drawings and plans 20.0%
Computer software 10.0 - 50.0%
Trademarks 6.7%
Other intangible assets 25.0 - 50.0%
c. Debtors
Amounts due from debtors are shown net of provisions for doubtful
accounts. The provisions are based on specific amounts due where
realization is unlikely and on a general basis, calculated using historic
collection experience.
d. Inventories
Inventories are stated at the lower of cost and net realizable value. Cost
is determined principally under the average method. Provisions are set for
obsolete, slow moving and damaged inventory and are deducted from the
related inventory balances.
e. Special funds
Special funds consist primarily of the social fund. The social fund is an
employer's obligation based on a government mandated calculation based on
number of employees and the monthly minimum wage in Poland. The amounts
calculated under this formula must be used for the benefits of the
employees.
f. Foreign currency
Transactions denominated in foreign currencies are recorded in the local
currency (the Polish zloty) at actual exchange rates prevailing at the
date of the transaction. Monetary assets and liabilities denominated in
foreign currencies are reported at the rates of exchange prevailing at the
end of the period. Any gain or loss arising from a change in exchange
rates subsequent to the date of the transaction is recorded in the
statement of operations as a foreign exchange gain or loss, included in
non-operating items in the statement of operations.
- --------------------------------------------------------------------------------
- 26 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
4. Principal Accounting Policies (continued)
g. Vacation pay
Vacation pay is accrued when earned by employees.
h. Taxation
The income tax charge is based on profit for the period and takes into
account deferred taxation. Deferred taxation is calculated using the
liability method. Under the liability method the expected tax effects of
temporary differences are determined using enacted tax rates and reported
either as liabilities for taxes payable or assets representing advance
payment of future taxes. Temporary differences are the differences between
the carrying amount of an asset or liability in the balance sheet and its
taxable base.
Deferred tax assets are recognized for all deductible temporary
differences to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences can be
utilised.
i. Net sales
Net sales consists of the value of sales (excluding value added tax) of
goods and services in the normal course of business but excludes
extraordinary disposals of inventory and other assets.
Revenue is recognized when services are provided or goods are shipped out.
Sales allowances are accounted in the same period when the related portion
of revenue is recognized.
j. Fair value of financial instruments
The fair value of the Company's financial instruments approximates the
reported carrying amounts, except for long - term Notes, as disclosed in
Note 16.
k. Use of estimates
Preparation of financial statements requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
- --------------------------------------------------------------------------------
- 27 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
5. Net sales
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Service revenues and fees 653,242 379,650 1,647,637 980,143
Sales of telephones and
accessories 57,109 41,948 166,256 127,411
--------- --------- --------- ---------
710,351 421,598 1,813,893 1,107,554
========= ========= ========= =========
</TABLE>
The Company operates in one segment (providing cellular telecommunication
services and the ancillary sale of cellular telephones and accessories)
and in one market (the Republic of Poland).
6. Costs and expenses
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cost of sales:
Cost of services sold 248,734 158,622 642,345 425,867
Cost of sales of telephones
and accessories 160,141 81,883 528,494 254,181
--------- --------- --------- ---------
408,875 240,505 1,170,839 680,048
Operating expenses:
Selling and distribution
costs 136,741 75,700 330,013 193,626
Administration and other
operating cost 44,191 29,765 113,035 81,951
--------- --------- --------- ---------
180,932 105,465 443,048 275,577
--------- --------- --------- ---------
588,807 345,970 1,613,887 955,625
========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
- 28 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
6. Costs and expenses (continued)
The following costs and expenses were included in cost of sales:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Merchandise sold 159,290 81,883 525,220 254,181
Depreciation and amortization 58,450 35,354 162,640 90,819
Other external services 50,180 30,472 119,535 87,658
Commissions 46,627 22,693 114,943 75,355
Interconnect 34,972 20,131 89,529 51,157
Leased lines 19,921 24,420 67,736 62,630
Roaming 27,773 15,352 57,561 31,225
Wages and salaries 6,227 3,043 18,360 9,211
Materials and energy 3,410 3,223 6,916 5,425
Social security and other benefits 1,833 2,582 5,249 8,006
Taxes and other charges 1,399 1,632 3,870 4,381
Charge to inventory provision 851 -- 3,274 --
Other (2,058) (280) (3,994) --
---------- ---------- ---------- ----------
408,875 240,505 1,170,839 680,048
========== ========== ========== ==========
</TABLE>
The following costs and expenses were included in selling and distribution
costs:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Advertising costs 48,490 25,545 121,633 70,626
Charge to doubtful debtors
provision 46,386 24,455 105,926 57,817
Wages and salaries 19,377 7,888 48,541 21,209
External services 10,098 8,107 21,444 20,266
Social security and other
benefits 4,318 4,503 11,990 11,588
Depreciation and amortization 2,743 1,871 7,773 5,066
Materials and energy 2,083 1,711 5,626 3,652
Taxes and other charges 2,430 950 5,587 1,916
Other 816 670 1,493 1,486
------- ------- ------- -------
136,741 75,700 330,013 193,626
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
- 29 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
6. Costs and expenses (continued)
The following costs and expenses were included in administration costs:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
External services 18,752 14,157 51,423 39,631
Wages and salaries 10,040 4,844 27,214 14,198
Depreciation and
amortization 5,146 4,410 12,787 10,135
Social security and other
benefits 2,669 2,771 6,757 7,697
Materials and energy 1,631 1,619 3,647 4,163
Taxes and other charges 982 494 3,862 4,102
Other 4,971 1,470 7,345 2,025
------- ------- ------- -------
44,191 29,765 113,035 81,951
======= ======= ======= =======
</TABLE>
7. Interest and other financial income
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Foreign exchange gains 2,322 1,786 8,353 9,063
Interest income 2,759 976 3,199 8,250
Other financial income -- 200 -- 829
------ ------ ------ ------
5,081 2,962 11,552 18,142
====== ====== ====== ======
</TABLE>
8. Interest and other financial expenses
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest expense 58,924 30,922 162,312 84,612
Foreign exchange losses 122,659 88,123 209,726 76,075
Other financial expense -- 184 -- 774
------- ------- ------- -------
181,583 119,229 372,038 161,461
======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
- 30 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
9. Taxation
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Polish current tax 16,788 (30,276) (571) (67,808)
benefit / (charge)
Polish deferred tax (8,494) 36,831 11,690 47,245
benefit / (charge)
Foreign current tax charge (206) (113) (535) (278)
Change in valuation allowance (17,564) (11,195) (45,915) (15,584)
------- ------- ------- -------
Tax charge (9,476) (4,753) (35,331) (36,425)
======= ======= ======= =======
</TABLE>
Tax losses for the period from December, 27 1995 to December 31, 1996 can
be offset with future taxable income in three equal installments during
the three years following the loss. The unused portion of a tax loss
installment expires. The 1996 tax losses were being utilized as follows:
PLN 58,006 in 1997, PLN 122,550 in 1998 and the remaining PLN 122,550 is
available to be utilized in 1999.
According to the Polish tax regulations, the tax rates in effect in 1999,
1998 and 1997 were 34%, 36% and 38%, respectively. The tax rate in 2000 is
set to be 32%.
- --------------------------------------------------------------------------------
- 31 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
9. Taxation (continued)
Reconciliation of the profit/(loss) before taxation to taxable income is
as follows :
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Profit/(loss) before taxation (55,958) (40,639) (160,480) 8,610
Tax rate 34% 36% 34% 36%
-------- -------- -------- --------
Tax benefit/(charge) using
statutory rate 19,026 14,630 54,563 (3,100)
Permanent differences (11,504) (8,061) (41,517) (13,141)
Polish losses for which no
tax benefits were provided (4,051) -- (4,051) --
Change in temporary
differences for which
realization is not probable (17,564) (11,196) (48,351) (15,585)
Effect of different tax rate
in foreign entity (38) (5) (101) (41)
Change in tax rates 4,655 (121) 4,126 (372)
-------- -------- -------- --------
Tax benefit/(charge) (9,476) (4,753) (35,331) (36,425)
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
- 32 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
9. Taxation (continued)
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Deferred tax assets in Poland:
Unrealized foreign exchange loss, net 59,877 13,562
Bad debt provision 47,116 44,375
Tax losses carry forward 41,667 41,667
Accrued expenses 25,282 4,608
Book versus tax basis of fixed assets 22,366 14,499
Accrued interest 12,158 10,942
Accrued advertising 3,488 --
Inventory provision 2,398 1,285
-------- --------
214,352 130,938
Temporary differences for which realization is not (113,073) (67,158)
probable ("valuation allowance")
-------- --------
101,279 63,780
Deferred tax liabilities in Poland:
Book versus tax basis of GSM licenses
(125,530) (63,234)
Book versus tax basis of fixed assets (8,342) (718)
Accrued revenues (1,804) --
-------- --------
(135,676) (63,952)
-------- --------
Net deferred tax liability (34,397) (172)
======== ========
</TABLE>
The increase in valuation allowance results primarily from the increase of
unrealized foreign exchange losses on Long-term Notes and bad debt
provision for which tax deductibility is yet uncertain.
- --------------------------------------------------------------------------------
- 33 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
10. Debtors and prepayments
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Trade debtors and accrued income 514,939 356,675
Corporate Income Tax and other taxes
recoverable from State Treasury 46,033 85,064
Prepaid expenses 23,340 9,480
Accounts receivable from shareholders -- 3,332
Other debtors 2,478 1,925
-------- --------
586,790 456,476
Provision for doubtful debtors (152,074) (117,827)
-------- --------
434,716 338,649
======== ========
</TABLE>
Substantially all of the Company's trade debtors are Polish businesses and
individuals. Further, the Company has established a network of dealers
within Poland to distribute its products. The dealers share many economic
characteristics and receivables from each of these dealers present similar
risk to the Company.
11. Inventory
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
Telephones 76,406 50,462
Accessories and other 40,034 29,264
-------- --------
116,440 79,726
Inventory provision (7,054) (3,780)
-------- --------
109,386 75,946
======== ========
- --------------------------------------------------------------------------------
- 34 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
12. Tangible fixed assets, net
At September 30, At December 31,
1999 1998
(unaudited)
Land and buildings 197,935 79,954
Plant and equipment 1,294,254 844,729
Motor vehicles 10,618 8,254
Other fixed assets 48,179 35,678
Construction in progress 867,609 702,567
--------- ---------
2,418,595 1,671,182
========= =========
For tangible fixed assets under construction, the Company capitalizes
interest and foreign exchange gains/losses incurred and directly
attributable to the acquisition and construction of the qualifying assets.
The financing costs are capitalized only during the period of construction
of the qualifying assets. During the nine month period ended September 30,
1999, the Company capitalized PLN 37,474 of net foreign exchange losses
and 2,040 of interest expense (PLN 50,502 foreign exchange losses and PLN
2,040 of interest expense during three months ended September 30, 1999).
For the corresponding period ending September 30, 1998, PLN 30,794 of
foreign exchange gains and PLN 4,074 of interest expense were capitalized
(PLN 27,153 and PLN 1,369, respectively during three months ended
September 30, 1998).
- --------------------------------------------------------------------------------
- 35 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
12. Tangible fixed assets, net (continued)
The movement in each period was as follows:
<TABLE>
<CAPTION>
Land and Plant and Motor Other fixed Construction Total
buildings equipment vehicles assets in progress -----
--------- --------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Cost
At January 1, 1998 77 231,643 10,901 17,324 528,660 788,605
Additions 80,691 11,377 4,453 2,847 914,276 1,013,644
Transfers -- 709,360 -- 31,469 (740,369) 460
Disposals -- (385) (439) (3,110) -- (3,934)
------- ---------- ---------- ---------- ---------- ----------
At December 31, 1998 80,768 951,995 14,915 48,530 702,567 1,798,775
------- ---------- ---------- ---------- ---------- ----------
Depreciation
At January 1, 1998 -- 19,622 3,013 5,185 -- 27,820
Charge 814 87,741 3,819 9,456 -- 101,830
Disposals -- (97) (171) (1,789) -- (2,057)
------- ---------- ---------- ---------- ---------- ----------
At December 31, 1998 814 107,266 6,661 12,852 -- 127,593
------- ---------- ---------- ---------- ---------- ----------
Net book value at 79,954 844,729 8,254 35,678 702,567 1,671,182
December 31, 1998 ======= ========== ========== ========== ========== ==========
Cost
At January 1, 1999 80,768 951,995 14,915 48,530 702,567 1,798,775
Additions 120,042 9,336 6,114 22,047 727,129 884,668
Transfers -- 561,681 -- -- (561,681) --
Disposals -- -- (395) (736) (406) (1,537)
------- ---------- ---------- ---------- ---------- ----------
At September 30, 1999 200,810 1,523,012 20,634 69,841 867,609 2,681,906
------- ---------- ---------- ---------- ---------- ----------
Depreciation
At January 1, 1999 814 107,266 6,661 12,852 -- 127,593
Charge 2,061 121,492 3,641 9,543 -- 136,737
Disposals -- -- (286) (733) -- (1,019)
------- ---------- ---------- ---------- ---------- ----------
At September 30, 1999 2,875 228.758 10,016 21,662 -- 263,311
------- ---------- ---------- ---------- ---------- ----------
Net book value at 197,935 1,294,254 10,618 48,179 867,609 2,418,595
September 30, 1999 ======= ========== ========== ========== ========== ==========
(unaudited)
</TABLE>
Tangible fixed assets held under capital leases (included in above schedule):
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
Land Building Land Building
---- -------- ---- --------
<S> <C> <C> <C> <C>
Cost 6,293 194,167 2,383 78,114
Accumulated depreciation -- (2,875) -- (814)
-------- -------- -------- --------
Net 6,293 191,292 2,383 77,300
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
- 36 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
13. Intangible fixed assets, net
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
GSM licenses 950,824 593,066
Technical drawings and plans 5,916 8,087
Computer software 29,029 36,164
Trademark 164 174
Other 862 1,381
------- -------
986,795 638,872
======= =======
The movement in each period was as follows:
<TABLE>
<CAPTION>
Technical
GSM drawings Computer Trade
Licenses and plans software Mark Other Total
-------- --------- -------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cost
At January 1, 1998 700,564 13,877 20,631 206 10,192 745,470
Additions -- -- 26,534 -- -- 26,534
Transfers -- -- (474) -- -- (474)
---------- ---------- ---------- ---------- ---------- ----------
At December 31, 1998 700,564 13,877 46,691 206 10,192 771,530
---------- ---------- ---------- ---------- ---------- ----------
Amortization
At January 1, 1998 58,710 2,895 2,881 19 5,382 69,887
Charge 48,788 2,895 7,660 13 3,429 62,785
Transfers -- -- (14) -- -- (14)
---------- ---------- ---------- ---------- ---------- ----------
At December 31, 1998 107,498 5,790 10,527 32 8,811 132,658
---------- ---------- ---------- ---------- ---------- ----------
Net book value at
December 31, 1998 593,066 8,087 36,164 174 1,381 638,872
========== ========== ========== ========== ========== ==========
Cost
At January 1, 1999 700,564 13,877 46,691 206 10,192 771,530
Additions 394,317 -- 69 -- -- 394,386
Transfers -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
At September 30, 1999 1,094,881 13,877 46,760 206 10,192 1,165,916
---------- ---------- ---------- ---------- ---------- ----------
Amortization
At January 1, 1999 107,498 5,790 10,527 32 8,811 132,658
Charge 36,559 2,171 7,204 10 519 46,463
Transfers -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
At September 30, 1999 144,057 7,961 17,731 42 9,330 179,121
---------- ---------- ---------- ---------- ---------- ----------
Net book value at
September 30, 1999 950,824 5,916 29,029 164 862 986,795
(unaudited) ========== ========== ========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
- 37 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
13. Intangible fixed assets, net (continued)
During the three months and nine months ended September 30, 1999 the
Company capitalized PLN 2,901 of foreign exchange losses and PLN 1,494 of
interest expenses on intangible fixed assets. No financial cost/expenses
was capitalized during the three months and nine months ended September
30, 1998.
14. Deferred costs
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
Notes issuance cost 14,456 15,941
Senior debt issuance cost 13,101 14,818
Other 2,891 --
------ ------
30,448 30,759
====== ======
As explained in Note 16, the Company obtained long-term financing by
issuing Discount Notes, in July 1997, and through Citibank loan facility
("Senior debt"), signed in December 1997. These debt issuance costs have
been deferred and are amortized over the period of financing (10 and 8
years, respectively).
15. Current liabilities
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
Construction payables 507,784 225,176
Trade creditors 288,759 122,398
GSM licenses liabilities 214,241 63,419
Accruals 111,058 66,385
Deferred income 58,526 32,602
Amounts due to State Treasury 23,900 14,829
Overdraft facility -- 24,558
Finance leases payable 27,988 9,978
Accounts payable to shareholders 6,723 11,939
Payroll 542 479
--------- ---------
1,239,521 571,763
========= =========
- --------------------------------------------------------------------------------
- 38 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
15. Current liabilities (continued)
In May 1998, the Company entered into a short-term renewable overdraft
agreement with Bank Rozwoju Eksportu S.A. The terms provided for maximum
borrowings of PLN 30,000 thousand (balance as of December 31, 1998 PLN
4,430) and interest based on monthly WIBOR plus 0.5% p.a.(17.88% as of
December 31, 1998). Additionally, in December 1998, the Company signed a
one-year overdraft facility with Citibank. The terms provided for maximum
borrowings of PLN equivalent of DEM 15,000 thousand and interest based on
average monthly WIBOR for the last month plus 0.5% p.a (balance as of
December 31, 1998 PLN 20,128). No borrowings were outstanding as of
September 30, 1999.
16. Long-term liabilities
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
Loan facility 1,087,155 596,830
Long-term Notes 781,332 614,993
Construction payables -- 278,247
GSM and DCS license liability 344,308 331,124
Finance leases payable 189,910 69,024
Shareholders loan 312,629 --
--------- ---------
2,715,334 1,890,218
========= =========
On July 1, 1997, PTC International Finance B.V., a wholly owned subsidiary
of the Company, issued 10 3/4 % Senior Subordinated Guaranteed Discount
Notes ("Notes"). The Notes are unsecured, subordinated obligations of PTC
International Finance B.V., are limited to an aggregate principal amount
at maturity of approximately USD 253 million (PLN 1,041 million as of
September 30, 1999) and are issued at a discount to their principal amount
at maturity to generate gross proceeds of approximately USD 150 million
(PLN 493 million at historical exchange rate). The Notes will mature on
July 1, 2007. Cash interest does not accrue on the Notes prior to July 1,
2002. The obligations of PTC International Finance B.V. under the Notes
are fully and unconditionally guaranteed by the Company on a senior
subordinated and unsecured basis pursuant to the Company Guarantee. The
net proceeds from the Notes are loaned to the Company.
The Notes are traded publicly in the United States and their market value
as of September 30, 1999 was 69% of the nominal value (USD 175 million or
PLN 720 million as of September 30, 1999) whilst the carrying amount is
PLN 781 million.
- --------------------------------------------------------------------------------
- 39 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
Construction payables are liabilities to GSM construction vendors. The
Company began financing these liabilities in 1998 through its loan
facility agreement, discussed below and through operating cash flow. The
above December 31, 1998 balance was to be financed through the long-term
loan facility and was hence classified as long-term. However, at September
30, 1999 the loan facility available was no longer sufficient to ensure
that these would be settled through the facility. Therefore, all
construction payables at September 30, 1999 were classified as short-term.
The fees for the Company's GSM 900 and 1800 licenses are denominated in
EUR and payable in installments. These deferred payments have been
discounted at 6.78% (GSM 900 license from 1996) and at 9.52% (GSM 1800
license from 1999), which approximated the market rate for EUR as of the
date of acquisition of the license. The unaudited balances payable as of
September 30, 1999 are presented below:
EUR'000 EUR'000 PLN'000
Maturity nominal discounted discounted
-------- ------- ---------- ----------
Due in one year (see Note 15) 51,035 48,716 214,241
Due in year two 72,815 65,458 287,862
Due in year three 16,716 12,835 56,446
------- ------- -------
140,566 127,009 558,549
======= ======= =======
The balances payable as of December 31, 1998 were:
EUR'000 EUR'000 PLN'000
Maturity nominal discounted discounted
-------- ------- ---------- ----------
Due in one year (see Note 15) 15,730 15,496 63,419
Due in two to five years 90,420 80,910 331,124
------- ------- -------
106,150 96,406 394,543
======= ======= =======
- --------------------------------------------------------------------------------
- 40 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
16. Long-term liabilities (continued)
On December 17, 1997 the Company signed a loan facility agreement with a
consortium of banks organized by Citibank N.A. Subsequently, the Company
made drawings of PLN 1,087 million, which consisted of DM 230 million
(equivalent of PLN 517 million as of September, 1999) and PLN 570 million
(equivalent of DM 254 million as of September 30, 1999) borrowings. The
main terms of the agreement are as follows:
Facility limit equivalent of DM 672 million
Interest LIBOR or WIBOR
plus margin of 0.95% p.a. stepping
down to 0.40% p.a.
Commitment fee 0.375%
Collateral pledge of Company's assets, rights
and shares
Repayment date (last installment) December 17, 2005
In August 1999, the Company's operating shareholders (Elektrim S.A.,
DeTeMobil and MediaOne) extended USD 75 million (PLN 309 million as of
September 30, 1999) in subordinated loans as follows: Elektrim S.A.,
equivalent of USD 40 million, DeTeMobil, USD 17.5 million; and MediaOne,
USD 17.5 million. Each shareholder loan bears an interest rate of 12.5%
compounded semi-annually on June 17 and December 17, and a repayment date
for principal amounts and accrued interest is June 19, 2006.
17. Provisions for liabilities and charges
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
Social fund 1,608 778
Other provisions -- 1,333
----- -----
1,608 2,111
===== =====
The social fund is an employer's obligation based on a mandated
calculation based on the number of employees and the monthly minimum wage
in Poland. The amounts calculated under this formula must be used for the
benefits of the employees.
- --------------------------------------------------------------------------------
- 41 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
18. Share capital
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Allotted, called-up and fully paid:
471,000 ordinary shares of 1,000 PLN each 471,000 471,000
======= =======
</TABLE>
19. Finance Lease
On March 25, 1997 the Company entered into a finance lease agreement
relating to its new headquarters building and underlying land. The term of
the lease is 15 years and the Company has a right to acquire the leased
asset at the end of the lease. The Company relocated to its new
headquarters buildings in two stages, in second half of 1998 and in mid
1999.
The headquarters lease obligation, consisting of two buildings, first
occupied in 1998 and second in August 1999, is denominated in USD and
payable in PLN. The nominal value of future lease payments is USD 110.1
million (PLN 453 million as of September 30, 1999). This consists of USD
47.7 million 62.4 million for the 1st and 2nd buildings, respectively.
This consists of combined minimum monthly payments of USD 598.8 thousand
(PLN 2.464 as of September 30, 1999) and the combined purchase options of
USD 11.8 million (PLN 48.5 million as of September 30, 1999) that is
broken down as USD 5.7 million and 6.1 million for the 1st and 2nd
building respectively.
Annually, the Company`s lease liabilities are changed based on the U.S.
consumer price index ("CPI"). In 1999, this resulted in an increase in
minimum monthly payments of only USD 4.3 thousand (PLN 17,7 thousand as of
September 30, 1999).
20. Dividend restriction
The Company's statutory financial statements are prepared in accordance
with Polish accounting regulations. Dividends may only be distributed from
the net profit reported in the Polish annual statutory financial
statements. As of 30 September 1999, the Company has no net profit
available for distribution.
- --------------------------------------------------------------------------------
- 42 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
21. Supplementary cash flow information
Cash and cash equivalents consists of cash on hand, balances deposited
with banks and short-term, highly liquid investments.
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Balances deposited with banks:
Current accounts 29,217 2,958
Term deposits with original maturity of less then
90 days 81,171 2,540
Social fund cash 1,123 59
Cash on hand 437 138
------- -------
111,948 5,695
======= =======
</TABLE>
At September 30, 1999 the Company revalued cash on hand and balances
deposited with banks denominated in foreign currencies. The net result of
the revaluation was PLN 181 of foreign exchange losses.
22. Future financing
As of September 30, 1999 the Company had negative current assets and
obligations and commitments exceeding the available financing sources. The
Company is planning to issue additional long-term notes during the fourth
quarter of 1999 in order to secure financing for its obligations and
commitments. The issuance of these notes requires certain waivers from the
current Company lenders. There is no guarantee that the financing will be
obtained or the waivers will be obtained. Meeting the Company's current
obligations and commitments is dependent on successful completion of the
intended issue of long-term notes, as discussed above, or achievement of
alternative financing.
- --------------------------------------------------------------------------------
- 43 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
23. Supplementary Information to IAS Financial Statements
A reconciliation of the Company's consolidated net profit (loss) under
Polish statutory accounting regulations and International Accounting
Standards is summarized as follow:
<TABLE>
<CAPTION>
Net loss for Net loss for
three months ended nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Polish Accounting
Regulations (61,762) (23,397) (176,153) 13,820
Foreign translation difference (472) -- (1,784) --
IAS adjustment for GSM
license amortization 1,141 1,140 3,422 3,380
IAS adjustment for GSM
license discount (5,341) (6,033) (17,060) (17,973)
Unrealized foreign exchange
differences (11,938) (14,070) (4,227) 3,454
Finance lease 1,561 (4,229) 450 (4,229)
IAS assets adjustment (864) -- (5,512) --
Deferred tax benefit/
(charge) 12,241 1,197 5,053 (26,267)
-------- -------- -------- --------
International Accounting
Standards (65,434) (45,392) (195,811) (27,815)
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
- 44 -
<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
23. Supplementary Information to IAS Financial Statements (continued)
Shareholders' equity at
September 30, December 31,
1999 1998
---- ----
(unaudited)
Polish accounting
Regulations 113,706 289,758
Foreign translation difference
(1,829) 56
IAS adjustment for GSM
License amortization 14,481 11,059
IAS adjustment for GSM
License discount (47,642) (30,582)
Unrealized foreign exchange
differences 6,059 10,286
Finance lease 2,554 2,104
IAS assets adjustment 6,220 11,732
Deferred tax benefit/
(charge) 7,479 2,426
-------- --------
International Accounting
Standards 101,028 296,839
======== ========
The above differences are caused by the following reasons:
o Recognition of the long-term license liabilities at present value
for IAS purposes, while they were recorded at undiscounted nominal
value under Polish accounting regulations. This accounting results
in higher interest expense under IAS, which is partially offset by
lower amortization expense (for the first license) and foreign
exchange losses.
o Reversal of unrealized foreign exchange gains recognized in 1998 as
financial income for IAS purposes but deferred for PAS purposes.
o Difference in treatment of assets held under finance lease and other
capital assets written off for PAS purposes.
o Adjustment to deferred tax on temporary differences in preceding
adjustments.
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<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
24. Differences between IAS and U.S. GAAP
The Company's consolidated financial statements are prepared in accordance
with International Accounting Standards, which differ in certain respects
from U.S. GAAP.
The effect of the principal differences between IAS and U.S. GAAP in
relation to the Company's consolidated financial statements are presented
below, with explanations of certain adjustments that affect total
consolidated net result for the periods from January 1, 1999 to September
30, 1999 and from January 1, 1998 to September 30, 1998 and consolidated
net assets as of September 30, 1999 and December 31, 1998:
Reconciliation of consolidated net profit/(loss):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Consolidated net profit / (loss) reported (65,434) (45,392) (195,811) (27,815)
under IAS
U.S. GAAP adjustments:
(a) Removal of foreign exchange
differences capitalized for IAS (45,479) (34,436) (40,375) (30,795)
(b) Depreciation and amortization of
foreign exchange 1,596 952 4,459 2,748
(c) Development and start-up cost
capitalized 896 16 (6,779) --
(d) Amortization of consulting fees
capitalized -- 915 -- 2,739
-------- -------- -------- --------
Consolidated net profit / (loss)
under U.S. GAAP (108,421) (77,945) (238,506) (53,123)
======== ======== ======== ========
</TABLE>
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<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
24. Differences between IAS and U.S. GAAP (continued)
Reconciliation of consolidated net assets:
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Consolidated net assets reported under IAS 101,028 296,839
U.S. GAAP adjustments:
(a) Removal of foreign exchange differences (125,391) (85,016)
capitalized for IAS
(b) Depreciation and amortization on above 11,844 7,385
(c) Development and start-up costs
capitalized - net (6,779) --
-------- --------
Consolidated net assets under U.S. GAAP (19,298) 219,208
======== ========
</TABLE>
(a) Removal of foreign exchange differences capitalized for IAS
In accordance with IAS 23, "Borrowing Costs", the Company capitalizes
financing costs, including interest and foreign exchange gains or losses,
into assets under construction.
For tangible fixed assets under construction, the Company capitalizes
interest and foreign exchange gains or losses incurred and directly
attributable to the acquisition and construction of the qualifying assets
that would have been avoided if the expenditure on the qualifying assets
had not been made. The financing costs are capitalized only during the
period of construction of the qualifying assets (see Note 12). As
explained in Note 4.b., the Company capitalized financing costs
attributable to the acquisition of its GSM 900 and 1800 licenses,
including interest on the related long-term obligation and foreign
exchange losses because the GSM 900 and 1800 licenses are integral parts
of the network.
Under Statement of Financial Accounting Standards 52 "Foreign Currency
Translation", however, foreign exchange losses relating to financing
obligations should be included in the statement of operations of the
Company. Consequently, the amounts of foreign exchange differences
capitalized in accordance with IAS 23 in the Company's financial
statements are expensed under U.S. GAAP.
- --------------------------------------------------------------------------------
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<PAGE>
POLSKA TELEFONIA CYFROWA SP. Z O.O. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(in thousands of PLN)
- --------------------------------------------------------------------------------
24. Differences between IAS and U.S. GAAP (continued)
(b) Depreciation and amortization
The U.S. GAAP adjustments for depreciation and amortization shown above
represent the amounts of depreciation and amortization charges relating to
capitalized foreign exchanges differences in the Company's IAS financial
statements. Since under U.S. GAAP these foreign exchange differences are
not permitted to be capitalized and are instead expensed, the depreciation
and amortization of these capitalized differences under IAS has been
reversed.
(c) Development and start-up costs capitalized
The Company capitalized in 1996 certain start up costs amounting to PLN
16,811. Following the issuance of SOP 98-5 in the United States, the
Company has expensed for U.S. GAAP purposes in 1999 the net book value of
the above costs previously capitalized.
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