Slovenské telekomunikácie, a.s.

Consolidated Financial Statements

Prepared in accordance with International Accounting Standards

 

General information

These consolidated financial statements have been prepared by Slovenské telekomunikácie, a.s. ("the Company") for Slovenské telekomunikácie, a.s., its subsidiaries RK Tower, s.r.o. and RK Transmission, s.r.o. and its joint venture EuroTel Bratislava, a.s., together ("the Group"). The Company is incorporated as a joint stock company in the Slovak Republic at 1 April 1999. On 4 August 2000 Deutsche Telekom AG obtained control of the Company by acquisition of 51% of shares of Slovenské telekomunikácie, a.s. The transaction involved a purchase of existing shares from the Slovak Government as well as issuance of new shares. The Slovak Government retained 49% of shares in the Company.

The Directors are responsible for establishing the direction and policies of the Group and are accountable to the owners of the Group.

The Group had a monopoly position on the provision of basic voice telephony services in the Slovak Republic until 1 January 2003. It supplies fixed-line telecommunication services in the Slovak Republic and owns and operates majority of the telecommunications facilities therein. The Group provides local, national and international telephony services and a wide range of other telecommunications services including leased circuits, data networks and internet access. It also provides residential and business customers with products ranging from standard telephones to computer communication networks. Through its joint venture, EuroTel Bratislava, a.s., it operates an analogue technology NMT 450 mobile telephony network and a DCS technology 900 MHz and 1 800 MHz frequency mobile telephony network. The Group has a peripheral business as the owner and operator of radio and television transmission equipment.

  2002 2001
 Staff numbers Number Number
 Average staff numbers employed during the year 9,804 12,068

Reporting currency

The consolidated financial statements are presented in millions of Slovak crowns ("Sk million").

Registered address

The registered address is:    Námestie slobody 6
817 62 Bratislava
Slovak Republic


Mark von Lillienskiold
Chief Financial Officer and Member of the Board of Directors
18 February 2003

 

Consolidated Income Statement for the year ended 31 December

(All amounts are in millions of Slovak crowns) 
  Notes 2002 2001
 Revenue 13 18,840 20,110
       
 Operating costs 14 (15,038) (16,036)
 Profit on sale of discontinued operations 15 51 -
       
 Profit from operations   3,817 4,074
       
 Share of results of joint venture 2 408 261
 Profit on sale of subsidiary 2 54 -
 Financial income - ne 16 207 164
     
 Profit before tax   4,486 4,499
       
 Taxation 17 (1,018) (577)
       
 Net profit   3,468 3,922

The consolidated financial statements on pages 48 to 73 were authorised for issue on behalf of the Board of Directors on 18 February 2003 by:

Ing. Štefan Bugár
Deputy Chairman of the Board of Directors

Dr. Mark von Lillienskiold
Chief Financial Officer and Member of the Board of Directors

 

Consolidated Balance Sheet at 31 December

(All amounts are in millions of Slovak crowns) 
  Notes 2002 2001
 ASSETS      
 Non-current assets      
 Property, plant and equipment 1 42,862 43,226
 Investments in joint venture 2 2,044 1,745
 Investments held to maturity 3 - 737
       
 Total non-current assets   44,906 45,708
       
 Current assets      
 Inventories 4 409 396
 Assets held for sale 5 419 -
 Investments held to maturity 3 282 -
 Receivables and prepayments 6 3,335 3,648
 Income tax prepayment   157 -
 Cash and cash equivalents 7 12,711 12,512
       
 Total current assets   17,313 16,556
       
 Total assets   62,219 62,264
       
 EQUITY AND LIABILITIES      
 Share capital and reserves      
 Share capital   26,028 26,028
 Share premium   11,632 11,632
 Statutory reserve   517 330
 Retained earnings   8,669 7,096
       
 Total share capital and reserves   46,846 45,086
       
 Non-current liabilities      
 Borrowings 9 5,322 6,470
 Deferred tax 10 4,339 4,413
 Other payables 20 352 43
 Provisions 12 50 99
       
 Total non-current liabilities   10,063 11,025
       
 Current liabilities      
 Trade and other payables 11 4,243 4,476
 Income tax payable   - 1,066
 Borrowings 9 793 259
 Provisions 12 274 352
       
 Total current liabilities   5,310 6,153
       
 Total liabilities   15,373 17,178
       
 Total equity and liabilities   62,219 62,264

 

Consolidated Statement of changes in shareholders' equity

(All amounts are in millions of Slovak crowns)
  Notes   Share 
capital
 Share 
premium
Statutory
reserve fund
Retained
earnings
Total
Equity
 Year ended 31 December 2001            
             
 At 1 January 2001            
 - as previously reported   26,028 11,632 292 3,321 41,273
 - effect of adopting IAS 39   - - - (109) (109)
 - as restated   26,028 11,632 292 3,212 41,164
             
 Allocation to funds   - - 38 (38) -
             
 Net profit for the year   - - - 3,922 3,922
             
 At 31 December 2001   26,028 11,632 330 7,096 45,086
             
 Year ended 31 December 2002            
             
 At 1 January 2002   26,028 11,632 330 7,096 45,086
             
 Dividends 8 - - - (1,708) (1,708)
 Allocation to funds   - - 187 (187) -
 Net profit for the year   - - - 3,468 3,468
             
 At 31 December 2002   26,028 11,632 517 8,669 46,846

 

Consolidated Cashflow Statement at 31 December

(All amounts are in millions of Slovak crowns) 
  Note 2002 2001
 Net cash flows from operating activities 18 5,250 10,877
       
 Cash flows from investing activities      
 Proceeds from the disposal of subsidiary 2 59 2
 Purchase of property, plant and equipment   (3,915) (5,745)
 Proceeds from sale of property, plant and equipment   124 48
 Proceeds from non-current investment settlement   398 -
 Investment income   83 85
 Disposal of activity, net of cash disposed 15 139 -
 Interest received   644 578
       
 Net cash used in investing activities   (2,468) (5,032)
       
 Cash flows from financing activities      
 Proceeds from long-term borrowings   - 439
 Repayment of loans   (241) (1,457)
 Payment of finance lease liabilities   (40) (96)
 Interest paid   (594) (775)
 Dividends paid to group shareholders 8 (1,708) -
       
 Net cash from financing activities   (2,583) (1,889)
       
 Net increase in cash and cash equivalents   199 3,956
       
 Cash and cash equivalents at 1 January   12,512 8,556
       
 Cash and cash equivalents at 31 December   12,711 12,512

 

Accounting policies

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below:

(a) Basis of preparation

These consolidated financial statements have been prepared in accordance with and comply with International Accounting Standards ("IAS") for Slovenské telekomunikácie, a.s. ("the Company") and its subsidiary undertakings and joint venture, (together "the Group"). The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments.

(b) Accounting for subsidiaries, associates and joint ventures

Investments in associates and jointly controlled entities are accounted for by the equity method of accounting. Jointly controlled entities are those in which the Group shares control of the operations with its joint venture partners. Associate undertakings are those undertakings in which the Group has a significant influence, but which it does not control.

Equity accounting involves recognising in the income statement the Group's share of the associates' or joint ventures' profit or loss for the year. The Group's interest in such entities is carried in the balance sheet at an amount that reflects its share of the net assets and includes goodwill on acquisition. Unrealised gains on transactions between the Group and its associates and jointly controlled entities are eliminated to the extent of the Group's interest in such entities; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Equity accounting is discontinued when the carrying amount of the investment in an associated undertaking reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated undertaking.

Investments in subsidiaries are accounted for by full consolidation. Subsidiaries are those in which the Group is controlling the subsidiary in a way, that it has the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

Full consolidation involves the presentation of the consolidated financial statements in a way as of a single enterprise. All transactions, balances and unrealised surpluses and deficits on transactions within the Group have been eliminated in the consolidation. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies of the Group. Subsidiaries whose assets and activities are not material either individually, nor in aggregate, are not consolidated, but are included in the investments at costs.

(c) Property, plant and equipment

(i) Cost
All fixed assets, other than land, are carried at cost less accumulated depreciation. Land is stated at values attributed to it in the legislation, which transferred ownership to the Group. All new purchased land is carried at acquisition cost.

Cost includes all costs directly attributable to bringing the asset to working condition for its intended use. In the case of the network this comprises all expenditure up to the distribution points within customers' premises, and includes contractors' fees, materials, direct labour and borrowing costs on loans used to finance capital projects during the course of construction.

Enhancement costs are capitalised when it is probable that future economic benefits, in excess of the original assessed standard of performance of the existing asset, will flow to the enterprise. Maintenance, repairs and minor renewals are charged to income as incurred.

Borrowing costs that are attributable to the purchase or construction of a property, plant and equipment are capitalised, during the period of time that is required to complete the asset for its intended use. All other borrowing costs are expensed as incurred.

Items that are retired or otherwise disposed of are eliminated from the balance sheet, along with the corresponding accumulated depreciation. Any gain or loss resulting from such retirement or disposal is included in other operating costs. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit.

(ii) Depreciation
Depreciation is calculated on property, plant and equipment on a straight-line basis from the time they are available for use, so as to write down their cost or valuation to their estimated residual values over their remaining useful lives. The useful economic lives assigned to the various categories of property, plant and equipment are:

 Freehold buildings 25 to 50 years 
 Duct, cable and other outside plant 30 years 
 Exchange equipment and related equipment 4 to 13 years 
 Radio and television equipment 8 to 30 years 
 Software 2 to 5 years 
 Other fixed assets 6 to 25 years 

No depreciation is provided on freehold land.

Management is continuing to assess network development plans. The effect of any future revisions to expected useful economic lives as a result of this exercise will be reflected in the depreciation charge for future periods.

During 2002, the management undertook a review of fixed assets in connection with restructuring and the re-focus on the core business. The review resulted in change of economic useful life of certain radio related equipment and the reclassification of certain assets from fixed assets to assets held for sale. Where the carrying amount of an asset is greater than its recoverable amount, it is written down immediately to its estimated recoverable amount.

Prior to 1 January 1994, the Group's fixed asset registers were maintained in accordance with Slovak tax legislation and therefore in order to calculate the accumulated depreciation, estimates have been made using the above useful economic lives. The estimated difference at 31 December 2002 reduced the accumulated depreciation balance by Sk 1.0 billion (2001: Sk 1.1 billion) from the values shown in the fixed asset records.

(d) Leased assets

Leases of property, plant and equipment where the Group has substantially all the benefits and risks of ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the estimated present value of the underlying lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in debt. The interest element of the finance charge is charged to the income statement over the lease period. The property, plant and equipment acquired under finance leasing contracts is depreciated over the useful life of the asset.

Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

(e) Investments

At 1 January 2001 the Group adopted IAS 39 and classified its investments into following categories: held-to-maturity, available-for-sale and trading investments. The classification is dependent on the purpose for which the investments were acquired. Investments with fixed maturity that the management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale, these are included in non-current assets unless management has the expressed intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Investments that are acquired principally for the purpose of generating a profit from short term fluctuations in price are classified as trading investments. Management determines the appropriate classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis.

All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Available-for-sale investments and trading investments are subsequently carried at fair value, whilst held-to-maturity investments are carried at amortised cost using the effective yield method. Realised gains and losses arising from changes in the fair value of available-for-sale investments are included in the income statement in the period in which they arise.

During the period the Group did not hold any investments classified as trading investments or available for sale investments.

(f) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated on weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less selling expenses. Provision is made against slow-moving and obsolete inventories.

(g) Trade receivables

Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. Such provision for impairment of trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowers. Bad debts are written off during the year in which they are identified.

Amounts payable to and receivable from the same international operators are shown net in the balance sheet when a right of set-off exists.

(h) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cashflow statement, cash and cash equivalents comprise cash in hand, deposits held at call with banks, net of bank overdrafts. In the balance sheet, bank overdrafts are included in borrowings in current liabilities.

(i) Borrowings

Borrowings are recognised initially at the proceeds received, net of transaction cost incurred. In subsequent periods, borrowings are stated at amortised cost using the effective yield method, any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings.

(j) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. Costs related to the ongoing activities of the Group are not provided in advance.

Restructuring
Restructuring provisions comprise employee termination payments, and are recognised in the period in which the Group becomes legally or constructively committed to payment. Employee termination benefits are recognised only after either an agreement with the appropriate employee representative is in place specifying the terms of redundancy and the numbers of employees affected or after individual employees have been advised of the specific terms.

Onerous contracts
The Group recognises a provision for onerous contracts when the expected benefits to be derived from the contract are less than the unavoidable costs of meeting the obligation under the contract. The provision is reversed when the future benefits exceed the cost of meeting the obligation under the contract.

(k) Revenue recognition

Revenues are recognised upon delivery of products and customer acceptance and on the performance of the services.

Installation fees and directly related costs are deferred over the estimated customer relationship period to achieve a better allocation of these revenues and costs to the period they relate to. Carrier Service revenues are derived from calls and other traffic that originate in the mobile networks or outside Slovakia but use Group's network. The Group pays a proportion of the call revenue collected from its customers to mobile operators and other telecommunication companies for calls and other traffic that originate in Group's network but use mobile operators' or international network.

Revenues and costs are shown gross in these consolidated financial statements.

(l) Operating costs

Operating costs are charged in the accounting period to which they relate.

(m) Marketing costs

Marketing costs are charged to expense as incurred.

(n) Dividends

Dividends on ordinary shares are recognised in equity in the period in which they are declared.

(o) Financial instruments

Financial instruments carried on balance sheet include cash, bank balances, investments, receivables, trade creditors, leases and borrowings. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.

(p) Foreign currency translation

Transactions denominated in foreign currencies are translated into Slovak crowns at the date of the transaction. Outstanding monetary items at the balance sheet date are reported at the closing rate. Non-monetary items are reported using the exchange rate at the date of the transaction.

Realised and unrealised exchange differences are recognised as income or expenses for the accounting period in which they arise. Where such gains and losses are incurred as part of the operating activities they are included within operating costs. Where they arise on foreign currency financing activities they are included within net interest and other charges.

(q) Deferred income taxes

Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities in the balance sheet and their carrying values in the consolidated financial statements. Tax rates enacted or substantively enacted by the balance sheet date are used to determine deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

The Group offsets deferred tax assets and deferred tax liabilities as the Group has a legally enforceable right to set off current tax assets against current tax liabilities and where the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority.

(r) Social security and pension schemes

The Group makes contributions to the Government's health, retirement benefit and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. Throughout the year, the Group made contributions amounting to 38% (2001: 38%) of gross salaries up to a monthly salary between Sk 24,000 to Sk 32,000 to such schemes, together with contributions by employees of a further 12.8% (2001: 12.8%). The cost of these payments is charged to the income statement in the same period as the related salary cost.

The Group has no obligation to contribute to these schemes beyond these statutory rates. The Group does not participate in any other schemes.

(s) Employee benefits

In accordance with an annually renegotiated collective labour agreement, the Group is required to pay on retirement an amount of between Sk 24,000 and Sk 65,000 depending on the length of service, starting with at least five years continuous service. These benefits are restricted to those employees who retire during the period for which the labour agreement is in place. The Group is not under a legal or constructive obligation to continue providing such benefits beyond the period of such agreement and therefore no provisions beyond the period of agreement are recognised.

(t) Comparatives

Certain comparatives have been reclassified to conform with current year presentation.

 

Financial risk management

(1) Financial risk factors

The Group's activities expose it to a variety of financial risks, including the effects of: changes in debt and equity market prices, foreign currency exchange rates and interest rates. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain exposures.

Risk management is carried out by a treasury sub-unit under various policies approved by Board of Directors of the Company. The treasury sub-unit identifies, evaluates and hedges financial risks in co-operation with the operating units. There are policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investing excess liquidity.

(i) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to EUR and USD. The main foreign currency exposures arise from foreign currency borrowings and contract commitments. The Group hedges the foreign currency exposure of its contract commitments to purchase certain production parts mainly from Germany and Austria. The Group uses foreign currency deposits, investments, forward contracts and foreign currency swaps to hedge its exposure to foreign currency risk in the local reporting currency.

(ii) Interest rate risk
The Group's income and operating cash flows are substantially independent of changes in market interest rates. The Group policy is to maintain approximately 70% of its borrowings in fixed rate instruments. At the year end 2002 88% (2001 88%) was at fixed rates. The Group uses interest rate swaps to optimise the portion of fixed to floating interest rate ratio based on current market conditions with the aim to reach 70% ratio. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly semiannually), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts.

(iii) Credit risk
The credit risk policy defines products, maturities of products and limits for financial counter-party. The Group keeps limit of credit exposure to any financial institution. These limits are reviewed on regular basis.

(2) Accounting for derivative financial instruments and hedging activities

Derivative financial instruments are recognised in the balance sheet at cost and subsequently are remeasured at their fair value.

The method of recognising the resulting gain or loss is dependent on the nature of the item being hedged. On the date a derivative contract is entered into, the Group designates certain derivatives as either:
(i) a hedge of the fair value of a recognised asset or liability (fair value hedge) or
(ii) a hedge of a forecast transaction or of a firm commitment (cash flow hedge)

The Group does not have any fair value hedges or cash flow hedges at 31 December 2002, which qualify for hedge accounting under the rules in IAS 39.

Certain derivative transactions, which provide effective economic hedges under the Group's risk management policies, do not qualify for hedge accounting under the rules in IAS 39. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting under IAS 39 are recognised immediately in the income statement. The fair value is periodically reviewed and any change in fair value is transferred to the income statement. Upon adoption of IAS 39 at 1 January 2001 the fair value of derivatives is recognised in retained earnings.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under IAS 39, any cumulative gain or loss existing in equity at that time remains in equity and is recognised, when the committed or forecast transaction ultimately is recognised in the income statement. However, if a committed or forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

The fair values of various derivative instruments used are disclosed in Note 20.

(3) Fair value estimation

The fair value of publicly traded derivatives is based on quoted market prices at the balance sheet date. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date.

In assessing the fair value of non-traded derivatives and other financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for the specific or similar instruments are used for long-term debt. Other techniques, such as option pricing models and estimated discounted value of future cash flows, are used to determine fair value for the remaining financial instruments.

The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

 

Notes to the consolidated financial statements

1 Property, plant and equipment

(All amounts are in millions of Slovak crowns) 
  Land and Buildings Duct, cable and other outside plant Telephone exchanges
and related equipment
Radio and television equipment Other fixed assets Capital work in progress including advances (CIP) Total
 At 1 January 2002              
 Cost 7,301 24,665 32,917 4,510 5,908 461 75,762
 Accumulated depreciation (1,663) (7,758) (16,469) (2,978) (3,610) (58) (32,536)
               
 Net book value 5,638 16,907 16,448 1,532 2,298 403 43,226
               
 Opening net book amount 5,638 16,907 16,448 1,532 2,298 403 43,226
               
 Additions - - - - - 5,789 5,789
 Transfer from CIP 194 686 2,717 191 1,095 (4,883) -
 Disposals (87) - - (8) (10) - (105)
 Discontinued operation
 (Note 15)
(6) (1) (21) - (93) - (121)
 Transfers to assets
 held for sale (Note 5)
(371) - (36) - (12) - (419)
 Depreciation charge (Note 14) (76) (765) (3,608) (435) (599) (25) (5,508)
               
 Closing net book  value 5,292 16,827 15,500 1,280 2,679 1,284 42,862
               
 At 31 December 2002              
 Cost 6,891 25,306 35,072 4,588 6,279 1,324 79,460
 Accumulated depreciation (1,599) (8,479) (19,572) (3,308) (3,600) (40) (36,598)
               
 Net book value 5,292 16,827 15,500 1,280 2,679 1,284 42,862

During 2002, the management undertook a review of fixed assets in connection with a re-focus on the core business. The review resulted in:
(i) the change of economic useful life of certain radio related equipment. The additional depreciation of Sk 127 million is
     included in total depreciation charge (Note 14);
(ii) the transfer of certain fixed assets to assets held for sale. (Note 5).

The Group will continue to conduct such reviews.

Assets subject to finance lease with a net book value of Sk 73 million (2001: Sk 163 million) are included in "other fixed assets".

No land or buildings were pledged as collateral as of 31 December 2002 and 2001.

2 Investments in subsidiaries and joint ventures

Details of the Group's subsidiaries and joint venture are given below.

  Country of incorporation   Interest in capital %   Activities   Method of consolidation  
 Subsidiaries        
 RK Tower, s.r.o. Slovak Republic 100% (2001: -) Broadcasting Full
 RK Transmission Slovak Republic 100% (2001: -) Broadcasting Full
         
 Joint venture        
 EuroTel Bratislava, a.s.   Slovak Republic 53% (2001: 53%)   Wireless telephony services Equity accounting

In May 2002 the Group sold its share in the subsidiary Telemont Slovensko, s.r.o. (Note 15).

On 21 February 2002, the Group founded a 100% subsidiary Nehnutežnosti, s.r.o. with share capital of Sk 0.2 million. On 5 April 2002, the Group sold Nehnutežnosti, s.r.o.

During 2002, certain assets were transferred to RK Tower, s.r.o. and the assets related to radio-communication activities are rented within the Group.

Control of EuroTel is shared between the Group and Atlantic West B.V. and hence this investment is considered a joint venture. Neither party has unilateral control over major decisions affecting the joint venture. Pursuant to EuroTel's Shareholders Agreement, the Group has a 51% economic interest in the profits and net assets of the joint venture as shown below:

(All amounts are in millions of Slovak crowns)
  Joint venture  
 At 1 January 2002    
 Cost 1,641  
 Share of profit (loss) 104  
     
 Opening net book value 1,745  
     
 Share of profit before tax 408  
 Share of income tax (Note 17) (109)  
     
 Closing net book value 2,044  
     
 At 31 December 2002    
 Cost 1,641  
 Share of profit (loss) net 403  
     
 Closing net book value 2,044  

The following amounts represent the Group's share of the assets and liabilities and revenue and expenses of the joint venture:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Non-current assets 4,607 3,197
 Current assets 2,141 3,058
     
  6,748 6,255
     
 Non-current liabilities (3,478) (3,389)
 Current liabilities (1,146) (1,036)
     
  (4,624) (4,425)
     
 Net assets 2,124 1,830
     
 Sales 4,663 3,891
     
 Income before tax 408 261
 Income taxes (109) (104)
     
 Profit after tax 299 157
     
 Proportionate interest in joint venture commitments 122 158

The average number of employees in the joint venture in 2002 was 1,060 (2001: 923).

3 Investments held to maturity

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Debt securities 282 737

Debt securities amounting to Sk 282 million (2001: Sk 737 million) are U.S. Dollar and SKK denominated Slovak Government guaranteed bonds maturing within one year from 31 December 2002. The bonds pay interest at a fixed rate of 9.5% to 12.0% and were purchased at a premium ranging from 0.5% to 4.9% to their nominal value.

(All amounts are in millions of Slovak crowns) 
 Maturity of bonds is as follows: 2002 2001
 2002 - 385
 2003 282 352
     
  282 737

In 2001, the Group classified all investments as non-current assets. In 2002, investments with maturity of less than one year were classified as current assets.

  2002 2001
 Weighted average of interest earned 10,02% 9,39%

4 Inventories

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Cable 74 83
 Engineering 285 283
 Other 50 30
     
  409 396

The inventory items are shown after slow-moving provision of Sk 165 million (2001: Sk 214 million).

5 Assets held for sale

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Property - real estate (Note 1) 371 -
 Related equipment (Note 1) 48 -
     
  419 -

As a consequence of the restructuring of the Group (Note 12) certain items of property are no longer required for the purposes for which they were originally purchased. The assets held for sale are carried at their recoverable amount.

6 Receivables and prepayments

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Domestic trade receivables 2,403 1,823
 Foreign trade receivables 323 1,089
 Amounts due from related parties (Note 21) 155 369
 Other receivables 406 298
 Prepayments 48 69
     
  3,335 3,648

All receivables fall due within one year. Trade receivable are shown after a provision for impairment of Sk 757 million (2001: Sk 1,074 million).

Foreign trade receivables and amounts due from related parties at 31 December 2002 include amounts due from international operators providing carrier services after set-offs with accounts payable to the same operator, in the amount of Sk 355 million and Sk 150 million respectively. The amounts at 31 December 2001 are shown gross. The offsetting would require adjustment of Sk 601 million and Sk 178 million respectively. (Note 11)

7 Cash and cash equivalents

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Cash 11,459 12,512
 Cash equivalents 1,252 -
     
  12,711 12,512

The cash balance of the Group at 31 December 2002 includes Sk 11,179 million (2001: Sk 12,199 million) held in interest-bearing deposits on terms of less than three months. The cash equivalents contain a short-term security on terms of less than three months. There was no cash balance with restricted use as at 31 December 2002 and 2001.

8 Capital and reserves

On 1 April 1999 the legal form of the Company was changed from a state company to a joint stock company. Following the corporatisation, the share capital of the Company consisted of 20,717,920 ordinary shares authorised, issued and fully paid at par value of Sk 1,000 per share.

Pursuant to privatisation agreement effective 4 August 2000 the Company issued 5,309,580 new ordinary shares with par value of Sk 1,000 per share. The shares were issued at premium totalling Sk 11,632 million. All newly issued shares were subscribed and fully paid by Deutsche Telekom AG. The privatisation transaction also involved a purchase by Deutsche Telekom AG of 7,964,445 existing ordinary shares from the Slovak Government. The combined effect of the transaction was an acquisition of 51% of Slovenské telekomunikácie, a.s. by Deutsche Telekom AG.

As of 31 December 2002 the Group had authorised 26,027,500 ordinary shares (2001: 26,027,500) with a par value of Sk 1,000 per share. All issued shares were fully paid.

The legal reserve is set up in accordance with Slovak law and is not distributable. The reserve is created from retained earnings to cover possible future losses. In 2002, the Group transferred 5% of prior year statutory profit to the reserve fund.

On 3 July 2002 a dividend in respect of 2001 of Sk 1,708 million was approved by General meeting. No dividends were declared in respect of 2002.

9 Interest bearing borrowings

(All amounts are in millions of Slovak crowns) 
  2002 2001
 International Financial Institution loans 6,082 6,663
 Finance lease obligations 33 66
     
 Total interest bearing borrowings 6,115 6,729
     
 Less Current portion of interest bearing borrowings (793) (259)
     
 Long term portion of interest bearing borrowings 5,322 6,470

Repayments of the long term portion of interest bearing borrowings fall due as follows:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Between one and two years 683 781
 Between two and five years 2,821 2,223
 After five years 1,818 3,466
     
  5,322 6,470

Loans from the World Bank and the European Investment Bank (together the "IFI's"), are subject to restrictive covenants which require the Group to achieve minimum ratios in respect of financial leverage, interest cover and debt service based on the IAS consolidated financial statements. The IFI facilities are guaranteed by the Slovak Government and Syndicated Bank Guarantee. At 18 September 2002 the Group signed a new Syndicated Bank Guarantee for an amount of EUR 93 million which expires in September 2007.

As of 31 December 2002 and 2001, there are no assets pledged as collateral for borrowings. At 31 December 2002, the Group has total undrawn loan facilities available of Sk 200 million (2001: Sk 502 million). The facility is available for the period till 31 December 2003.

The carrying amount and fair value of interest bearing borrowings are as follows:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Carrying amount 6,115 6,729
 Fair value 6,387 6,906

Interest bearing borrowings can be analysed by currency as follows, after taking into account the impact of the cross currency interest rate swaps outstanding at 31 December 2002:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Euro and EU member currencies 5,225 4,882
 Slovak crowns 890 1,847
     
  6,115 6,729

The Group is exposed to foreign exchange risk related to foreign currency debt and foreign exchange payments. Further, the Group's major financial market risk exposure is interest rate fluctuations. This is due to changing interest rates in the U.S. and Western Europe affecting the fair value of fixed rate debt. To control interest rate and foreign exchange risk, a combination of fixed and floating rate debt is used within the foreign currency portfolio and interest rate and currency derivative instruments are used (Note 20).

Interest bearing borrowings can be analysed into fixed rate and variable rate debt as follows, after taking into account the impact of the cross currency interest rate swaps and interest rate swaps outstanding at 31 December 2002:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Fixed 5,383 5,962
 Floating 732 767
     
  6,115 6,729

The average effective borrowings cost (total interest payable and other charges for Group's loans and borrowings) for the year ended 31 December 2002 were 5.2% (2001: 6.4%).

10 Deferred tax

The movement on the deferred income tax account is as follows:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 At beginning of year 4,413 5,188
 Effect of applying IAS 39 at 1 January 2001 - (45)
 Capitalised loan to EuroTel - (39)
 Impact of change in the tax rate from 29% to 25% (Note 17) - (706)
 Charge to income for the year (74) 15
     
 At end of year 4,339 4,413

Deferred income tax (assets) / liabilities and the deferred tax charge in the income statement are attributable to the following items:

(All amounts are in millions of Slovak crowns) 
    31 December 2001     Credited/charged to income     31 December 2002  
 Accelerated tax depreciation 4,736 (86) 4,650
 Unrealised foreign exchange gains/losses (202) 47 (155)
 Bad debt provision - (59) (59)
 Restructuring (Note 12) (57) (12) (69)
 Fair value of swaps (Note 20) (14) 7 (7)
 Onerous contract (Note 12) (54) 54 -
 Leasing 11 (9) 2
 Unpaid cash-based services (7) (13) (20)
 Retirement obligation - (3) (3)
       
 Net deferred tax (asset) liability 4,413 (74) 4,339

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Deferred tax assets to be recovered after more than one year (119) (214)
 Deferred tax liabilities to be settled after more than one year 4,333 4,656
     
  4,214 4,442

11 Trade and other payables

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Amounts due within one year    
 Domestic trade payables 2,867 2,201
 Foreign trade payables 229 715
 Amounts due to employees 270 403
 Payables to related parties (Note 21) 66 326
 Accruals and other payables 751 658
 Fair value of swaps (Note 20) 60 173
     
  4,243 4,476

Foreign trade payables and payables to related parties include amounts due from international operators providing
carrier services. (Note 6)

12 Provisions

(All amounts are in millions of Slovak crowns) 
  Onerous contract Restructuring Legal claims 2002 Total 2001Total
 Opening carrying amount 213 238 - 451 320
 Additional provisions (Note 14) - 317 50 367 556
 Unused amount reversed (203) - - (203)  
 Amount used (10) (281) - (291) (425)
           
 Closing carrying amount - 274 50 324 451
           
 Non -current liabilities - - 50 50 99
 Current liabilities - 274 - 274 352
           
  - 274 50 324 451

The Group has signed a business contract for rent of satellite transponders. Provision was created in 2001 to cover the unavoidable costs of meeting the obligation under the contract in excess of the expected benefits. During 2002 the Group has concluded new business contracts generating additional revenue in the following years. The provision was reversed accordingly.

The restructuring of the Group's operations will result in the loss of 1,450 jobs in 2003. An agreement has been reached with the local union representatives based on a detailed formal plan that specifies the number of staff involved, location and function. The amount payable to staff to be made redundant was calculated using the method agreed with trade unions. The full amount of these costs to be incurred has been recognised in the current period. The termination benefits are expected to be paid within 12 months from 31 December 2002.

The amounts shown include a provision in respect of certain legal claims brought against the Group. In the opinion of directors, after taking appropriate legal advice, the outcome of these legal claims will not result in any significant loss beyond the amounts provided at 31 December 2002.

13 Revenue

(All amounts are in millions of Slovak crowns) 
 Reporting by product cluster 2002 2001
 Traffic charges 9,108 10,209
 Access fees 3,729 3,450
 Voice total 12,837 13,659
 Value added services 555 660
 Data services 1,637 1,522
 Terminal equipment 276 351
 Fixed network total 15,305 16,192
 Carrier Services 2,321 2,693
 Online 132 72
 Broadcasting 810 832
 Other 272 321
     
  18,840 20,110

Other revenue includes revenue from construction and rental activities and other telecom related services. Revenues for the year ended 31 December 2002 include Sk 862 million of revenues from the joint-venture company (2001: Sk 756 million). Revenue from carrier services in 2002 includes Sk 325 million from other related parties (2001: Sk 524 million).

14 Operating costs

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Staff costs 3,385 4,000
 Material and equipment 1,008 1,395
 Depreciation (Note 1) 5,508 5,457
 Network operators 3,167 3,644
 Energy costs 348 344
 Repairs and maintenance 421 388
 Legal and consulting fees 277 339
 Value added services 122 98
 Foreign exchange differences (net) (23) (7)
 Restructuring costs (Note 12) 317 343
 Provision for onerous contract (Note 12) (203) 213
 Provision for bad and doubtful debts and write offs (193) 130
 Marketing 328 284
 Postal expenses 199 191
 Other costs 1,309 1,415
     
  15,970 18,234
     
 Own work capitalised (932) (2,198)
     
  15,038 16,036

Costs for network operators services include Sk 933 million (2001: Sk 1,108 million) of costs incurred to the joint- venture and costs to international network operators of Sk 261 million incurred to other related parties (2001: Sk 397 million).

Staff costs include Sk 444 million (2001: Sk 542 million) of contributions to social security scheme and Sk 3 million (2001: Sk 5 million) of remuneration of directors.

Own work capitalised comprises direct material and equipment costs, labour and overheads that are attributable to the construction of fixed assets.

15 Discontinued operation

In May 2002 the Group sold its share in subsidiary Telemont Slovensko, s.r.o. Subsequently, on 1 June 2002 the Group sold the construction activity to Telemont Slovensko, s.r.o. The sales, results, cash flows and net assets of the construction activity were as follows:

(All amounts are in millions of Slovak crowns) 
  5 months 2002 12 months 2001
 Sales 35 83
 Operating costs (41) (120)
 Operating (loss)/profit (6) (37)
 Finance costs - -
 (Loss)/profit before tax (6) (37)
 Tax - -
     
 (Loss)/profit after tax (6) (37)
     
 Operating cash flows 88 59
 Investing cash flows - (4)
 Financing cash flows - -
     
 Total cash flows 88 55

(All amounts are in millions of Slovak crowns) 
  At 1 June 2002 At 31 Dec 2001
 Property, plant and equipment (Note 1) 121 134
 Current assets 5 138
 Total assets 126 272
 Total liabilities (2) (60)
     
 Net assets 124 212

The loss/profit on disposal was determined as follows:

(All amounts are in millions of Slovak crowns)
 Net assets sold 124  
 Proceeds from sale 139  
     
 Profit (Loss) on disposal 15  

The net cash inflow on sale is determined as follows:

(All amounts are in millions of Slovak crowns)
 Proceeds from sale 139  
 Less: cash and cash equivalents in activity sold -  
     
 Net cash inflow on sale 139  

16 Financial income - net

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Interest expense    
 International Financial Institutions loans (307) (379)
 Foreign supplier loans - (16)
 Interest payable arising on interest rate swaps (120) (287)
 Finance leases (7) (16)
 Commitment fees and other financial expense (95) (56)
 Net foreign exchange gains (losses) 382 25
     
 Total interest payable and other charges (147) (729)
 Borrowing costs capitalised - 2
     
 Borrowing expense total (147) (727)
     
 Change in Fair-value and settlement impact of swaps (Note 20) (183) 245
 Interest income on short term deposits 644 676
 Interest income from debt securities held (Note 18) 73 67
 Net foreign exchange gains (losses) (180) (97)
     
 Net financial income (expense) 207 164

17 Taxation

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Current tax charge 983 1,164
 Deferred tax (income) charge (Note 10) (74) (691)
 Share of income tax of joint venture (Note 2) 4 5
 Share of deferred tax of joint venture (Note 2) 105 99
     
  1,018 577

A reconciliation between the reported income tax expense and the theoretical amount that would arise using the standard tax rates is as follows:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Net profit before tax 4,486 4,499
     
 Income tax calculated at 25% (2001; 29%) 1,121 1,305
 Change in tax rate - deferred tax effect (Note 10) - (706)
 Effect of income not taxable (160) (269)
 Effect of expenses not deductible for tax purposes 109 253
 Over-provision in respect of previous years (52) (6)
     
  1,018 577

On 4 December 2001 a new Slovak Corporation tax rate of 25% (previously 29%) was enacted effective from 1 January 2002.

18 Net cash flows from operating activities

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Net profit 3,468 3,922
 Adjustments for:    
   Income tax 1,018 577
   Depreciation (Note 1,14) 5,508 5,457
   Investment income (Note 16) (73) (67)
   Interest (income) expense net 69 (173)
   Share of results of associates and joint ventures (Note 2) (408) (261)
   (Profit)/loss on disposals on fixed assets (73) 35
   (Profit)/loss on disposal of discontinued operation (Note 15) (15) -
   Net foreign exchange (gains) losses (351) 72
   Provision charge (Note 12) (127) 131
     
 Operating profit before working capital changes 9,016 9,693
     
 Decrease/(increase) in trade and other receivables 302 (278)
 (Increase)/decrease in inventories (15) 34
 (Decrease)/increase in trade and other payables (1,846) 350
     
 Cash generated from operations 7,457 9,799
     
 Income taxes (paid)/ received (2,207) 1078
     
 Net cash flows from operating activities 5,250 10,877

19 Commitments

Capital commitments

The Group had the following capital commitments at 31 December:

(All amounts are in millions of Slovak crowns) 
  2002 2001
 Capital expenditure that has been contracted for but has not been
 provided for in the consolidated financial statements
1,109 959

The commitments under contractual arrangements principally relate to the telecommunications network, with the majority of payments due within one year.

The shared joint venture commitments are shown in Note 2.

20 Financial instruments

Movements in derivatives during the year ended 31 December 2002.

(All amounts are in millions of Slovak crowns) 
  Cross currency swap Interest rate swap Total
 At 1 January 2002      
 Fair value 221 (5) 216
 Deferred income tax (Note 10) (32) 18 (14)
       
  189 13 202
       
 Movements during the year:      
 Settlement of swaps (Note 16) (215) 18 (107)
 Change in fair value (Note 16) 303 (13) 290
 Deferred income tax (Note 10) 25 (18) 7
       
 Net balance at 31 December 2002 392 - 392
       
 Non current liabilities 339 - 339
 Current liabilities (Note 11) 60 - 60
 Deferred income tax (Note 10) (7) - (7)
       
 Net balance at 31 December 2002 392 - 392

Upon the adoption of IAS 39 the Group recognised the above derivatives as not qualified for hedge accounting and measured them at fair value.

Interest rate swaps
The Group has entered into interest rate swap contracts that entitle it to receive interest at fixed rate on notional principal amounts and oblige it to pay interest at floating rates on the same amount which equals the outstanding balance of interest bearing borrowing. Interest rate swaps matured in 2002.

Cross currency swaps
The Group has entered into cross currency interest rate swap contracts to manage the exposure of the combined effect of fluctuation in foreign currency exchange rates and fluctuation in interest rates on specific transactions: repayments of both foreign currency borrowings and interest charge.

At 31 December 2002 the outstanding principal amounts payable by the Group under cross currency interest rate swaps were Sk 857 million and EUR 42 million. The Group expects to receive the income at variable interest rates and to pay an expense at fixed and variable interest rates. At 31 December 2002 the interest rates receivable vary from 1.49% to 2.804% and interest rates payable vary from 3.014% to 9.15%. Cross currency interest rate swaps mature in 2003 and 2010.

21 Related party transactions

The Group provides services to State departments and related businesses, in general, on normal commercial terms.

The Group receives revenues from and pays expenses to its joint venture EuroTel and to its parent company Deutsche Telekom AG and its subsidiaries, associates and joint ventures, for calls which access each others network and other services. These revenues and costs are based on contractual agreements negotiated on normal commercial terms.

(All amounts are in millions of Slovak crowns) 
  Receivables Payables Revenues Expenses
  2002 2001 2002 2001 2002 2001 2002 2001
 EuroTel 65 66 55 68 862 756 948 1,108
 Deutsche Telecom 83 258 2 222 243 363 429 436
                 
 Other 7 45 9 36 82 161 167 106
 Directors - - - - - - 3 5
                 
 Total 155 369 66 326 1,187 1,280 1,547 1,655

Other includes Deutsche Telecom's subsidiaries, associates and joint ventures.

22 Contingencies

The Group is in legal proceedings in the normal course of business and regulatory proceedings initiated by the Anti-Monopoly office of the Slovak Republic regarding the dominant position of Slovenské telekomunikácie, a.s. on the telecommunications market. Management is confident that the Group will suffer no material loss as a result of such proceedings and therefore no provision was made in respect of these disputes in excess of the provision already recorded in the consolidated financial statements (Note 12).

The Group's joint venture EuroTel is in legal proceedings in the normal course of business including one administrative proceedings initiated by the Anti-Monopoly Office of the Slovak Republic based on a petition of a Voice over IP technology operator alleging breach of antimonopoly law. The outcome of the proceedings is subject to a certain degree of uncertainty due to the anti-monopoly law in Slovakia being in early stage of development and subject to varying interpretations. Management does not believe that the outcome will have a material adverse effect on EuroTel's financial conditions, results of operations or cash flows.

23 Post balance sheet events

Changes in top management
Mr. Miroslav Majoroš became the new Chief Executive Officer of Slovenské telekomunikácie, a.s. at 1 January 2003. He was appointed to the position by Board of Directors at the meeting held on 9 December 2002.

Liberalisation
At 1 January 2003 the voice service monopoly position of Slovenské telekomunikácie, a.s. in the public fixed telecommunications network ended on the basis of the Telecommunication Act No. 195/2000 Coll.

At 2 January 2003 the Group has submitted the interconnection prices proposal and the Reference Interconnection Offer to the Telecommunications Office of the Slovak Republic. The Reference Interconnection Offer represents the basis for negotiations on interconnection with new operators that have been granted a licence for provisioning of public telephone service after 1 January 2003.

The end of the monopoly position of Slovenské telekomunikácie, a.s. caused new responsibilities for the Group. One such responsibility is to provide the access customers with the possibility to choose their conveyance carrier either by the means of the carrier pre-selection or by the means of the call-by-call selection. Slovenské telekomunikácie, a.s. continues to provide the Universal telecommunications service, i.e. a minimum set of services, which are available at a specified quality to all users in the whole territory of the country at an affordable price.

The price regulation continues to be based on the price basket. The Group was defined as the operator with the significant influence on the voice service and the leased line market.

Change of VAT rate
The value added tax rate applicable for telecommunications services has changed from 23% to 20% according to VAT Act No. 289/1995 Coll. and Act No. 637/2002 Coll. effective from 1 January 2003.

Introduction of the new technology
At 22 January 2003, Slovenské telekomunikácie, a.s., started testing of ADSL (Asymetric Digital Subscriber Line) technology with certain Internet service providers.