VODAFONE EGYPT TELECOMMUNICATIONS COMPANY (S.A.E.) CONSOLIDATED FINANCIAL STATEMENTS TOGETHER WITH AUDITORS REVIEW REPORT AS OF SEPTEMBER 30, 2003

Transcription

1 VODAFONE EGYPT TELECOMMUNICATIONS COMPANY (S.A.E.) CONSOLIDATED FINANCIAL STATEMENTS TOGETHER WITH AUDITORS REVIEW REPORT AS OF SEPTEMBER 30,

2 LIMITED REVIEW REPORT To the shareholders of Vodafone Egypt Telecommunications S.A.E. We have reviewed the accompanying consolidated balance sheet of Vodafone Egypt Telecommunications S.A.E. and its subsidiaries as of September 30, 2003, and the related consolidated statements of income and cash flows for the period from April 1, 2003 to September 30,2003. These financial statements are the responsibility of the company s management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the Egyptian Auditing Standard applicable to review engagements. This standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of the company s personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review for the period from April 1,2003 to September 30, 2003, nothing has come to our attention that causes us to believe that the accompanying financial statements are not presented fairly, in all material respects, in accordance with Egyptian Accounting Standards. Without qualifying our opinion, we draw attention to note (20c) to the financial statements. On May 12, 2003, the company received a request from the Sales Tax Authority for payment of EGP 111 million plus penalties representing sales tax on its interconnect revenues retroactively from the inception of operations to March 31, The management and its advisors do not believe that this claim is justified or legally founded as the interconnect arrangements are not subject to sales tax and the full value of the calls have already been subjected to sales tax and, accordingly, do not consider that this claim represents a liability. Kamel Magdy Saleh ACA F.E.S.A.A. (R.A.A. 8510) Saleh, Barsoum and Abdel Aziz Deloitte & Touche Cairo, November 3,

3 VODAFONE EGYPT TELECOMMUNICATIONS COMPANY S.A.E. CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2003 Note September 30, 2003 March 31, 2003 Assets Long term assets Tangible fixed assets, net 1d,1e,2 1, ,917.0 Construction in progress Intangible assets, net 1h,4 1, ,284.0 Total long term assets 3, ,522.6 Current assets Inventories, net 1g Trade and notes receivables, net Other debit balances Due from affiliates Cash in hand and at banks Total current assets 1, ,311.4 Current liabilities Provisions Bank overdrafts Accounts payable and payables to fixed assets suppliers Due to affiliates Other credit balances Accrued expenses Loans current portion Total current liabilities 1, ,085.3 Working capital Total investments 3, ,748.7 Shareholders equity Issued and paid up capital 9 1, ,200.0 Legal reserve Retained earnings Profit for the period / year Total shareholders equity 2, ,248.7 Long term liabilities Long term loan 10 1, ,500.0 Total long term liabilities 1, ,500.0 Total finance of working capital and long term assets - The accompanying notes form an integral part of the financial statements. 3, ,748.7 Chief Financial Officer Chief Executive Officer Chairman Martin Moorhouse Ian Gray Mohamed Mahmoud Nosseir 3

4 VODAFONE EGYPT TELECOMMUNICATIONS COMPANY S.A.E. CONSOLIDATED INCOME STATEMENT FOR THE PERIOD FROM APRIL 1, 2003 TO SEPTEMBER 30, 2003 (Amounts expressed in Million Egyptian pound) Note 6 months period ended September 30, months period ended September 30, 2002 Service revenue 1, Customer acquisition revenue Other revenue Net operating revenue 1f 1, ,020.2 Cost of sales (594.6) (429.7) Gross profit General and administrative (195.1) expenses (138.5) Depreciation and amortization (122.4) (103.8) Provisions (25.5) (34.6) Profit from operating activities Interest expense (111.3) (102.8) Foreign exchange gain/(loss) 6.6 (4.6) Capital gain Credit interest Net profit for the period after minority interest Earnings per share The accompanying notes form an integral part of the financial statements. Chief Financial Officer Chief Executive Officer Chairman Martin Moorhouse Ian Gray Mohamed Mahmoud Nosseir 4

5 VODAFONE EGYPT TELECOMMUNICATIONS COMPANY S.A.E. CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD FROM APRIL 1, 2003 TO SEPTEMBER 30, 2003 (Amounts expressed in Million Egyptian pound) Note 6 months period ended September 30, months period ended September 30, 2002 Cash flows from operating activities Net profit for the period Adjustments to reconcile net profit with cash flows from operating activities : - - Depreciation and amortization Provisions Capital gain (0.8) - Operating profit before working capital changes Decrease in inventories (Increase) decrease in trade & notes receivables (94.4) 6.2 Decrease in other debit balances Increase in due from affiliates (65.0) (3.7) Decrease in accounts payable (14.4) (24.5) Increase in other credit balances and provisions Increase (decrease) in due to affiliates 31.8 (8.6) Decrease in accrued expenses Net cash flows from operating activities Cash flows from investing activities Proceeds from disposal of fixed assets Payments for purchase of fixed assets and construction in progress (352.6) (177.1) Intangible assets (4.9) (6.1) Net cash flows used in investing activities (355.2) (183.2) Cash flows from financing activities Dividends paid (252.4) (18.2) Long term loan Net cash flows from / (used in) financing activities (252.4) Net change in cash and cash equivalents during the period Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period The accompanying notes form an integral part of the financial statements. Chief Financial Officer Chief Executive Officer Chairman Martin Moorhouse Ian Gray Mohamed Mahmoud Nosseir 5

6 VODAFONE EGYPT TELECOMMUNICATIONS COMPANY S.A.E. STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE PERIOD FROM APRIL 1, 2003 To SEPTEMBER 30, 2003 (Amounts expressed in Million Egyptian pound) Description Retained Share capital Legal reserve earnings (loss) Profit for the year/ period Balance Shareholders equity as of March 31, 2001 Transfer of the profits for the year ended March 31, 2001 to retained earnings Legal reserve for the year ended March 31, 2001 Net profit for the year ended March 31, 2002 Shareholders equity as of March 31, 2002 Transfer of the profits for the year ended March 31, 2002 to retained earnings Legal reserve for the year ended March 31, 2002 Amounts appropriated for year 2002 dividends distribution Net profit for the year ended March 31, 2003 Shareholders equity as of March 31, 2003 Transfer of the profits for the year ended March 31, 2003 to retained earnings Legal reserve for the year ended March 31, 2003 Amounts appropriated for year 2003 dividends distribution Net profit for the period ending September 30, 2003 Shareholders equity as of September 30, , (67.8) , (493.3) (21.3) , , (235.8) (11.8) (123.2) -- (123.2) , , (510.6) (25.5) (270.6) -- (270.6) , , The accompanying notes form an integral part of the financial statements. Chief Financial Officer Chief Executive Officer Chairman Martin Moorhouse Ian Gray Mohamed Mahmoud Nosseir 6

7 VODAFONE EGYPT TELECOMMUNICATIONS COMPANY S.A.E. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003 General The company has been incorporated on May 26, 1998 as an Egyptian joint stock company under the provisions of the Investment Incentives and Guarantees law no. 8 of 1997 and its executive regulations, and the Capital Market Law no. 95 for 1992 and its executive regulations. The objective of the company is to design, construct, develop, own and operate GSM mobile telecommunication facilities, and to provide and sell GSM services and GSM terminal equipment as well as to provide and sell other telecommunication equipment and services in Egypt. 1 - Significant accounting policies a Basis of preparing the financial statements The financial statements have been prepared according to Egyptian Accounting Standards, and in the light of the Egyptian related laws and regulations. b- Accounting convention The financial statements are prepared under the historical cost convention. c- Basis of consolidation The consolidation is prepared according to the purchase method. The consolidated financial statements incorporate the financial statements of Vodafone Egypt Telecommunications Company S.A.E. (parent Company), Misrfone Trading Company LLC (subsidiary) and Vodafone Egypt Technologies LLC (subsidiary). Vodafone Telecommunications Company S.A.E. owns and controls 99% of Misrfone Trading Company LLC and 99.99% of Vodafone Egypt Technologies. d- Foreign currency transactions The company s functional and reporting currency is the Egyptian pound. Transactions denominated in foreign currencies are translated to Egyptian pound during the year at the rates prevailing at the date of the transactions. At year/period-end, monetary assets and liabilities denominated in other currencies are translated to Egyptian pound at exchange rates prevailing on the financial statements date. Any resulting difference is taken to the income statement. Due to the severe devaluation of the exchange rate of the Egyptian pound, foreign exchange losses resulting from the revaluation of current liabilities that arose due to the recent acquisition of fixed assets are capitalized on these fixed assets (Note 2). 7

8 e- Tangible fixed assets Fixed assets are stated at historical cost and are depreciated over their estimated useful lives on straight line basis, as follows: Buildings Network infrastructure (switches, base stations and towers) Leasehold improvements Tools and testing equipment Motor vehicles Computers and software Office furniture, machinery and building equipment 50 years 8 years 2 years 3 years 5 years 3 years 10 years The company has changed the depreciation rates of network infrastructure to be depreciated over 8 years instead of 10 to 15 years to reflect the management revised estimate of the useful lives of these assets. This change lead to the increase in depreciation expense for the 6 months period ended September 30, 2003 by an amount of EGP 11.8 million (Note 1h). f- Revenue recognition Revenue is recognized upon the delivery of service and goods on accrual basis, net of sales tax. g- Inventories Inventories are stated at the lower of cost and estimated net realizable value. The cost is determined applying the first in first out method. h- Intangible assets Intangible assets are stated at cost and are amortized as follows: License fees Network license fees are amortized over 14.5 years representing the period from commencement of service of the network until the end of license period, which is 15 years, starting May 5, Loan arrangement fee The loan arrangement fee was amortized over the terms of the loan contract. Sites acquisition costs Sites acquisition costs are amortized over eight years instead of nine years (terms of lease contract) in conjunction with the change in depreciation rates of network infrastructure. (Note 1e) I - Financial instruments Financial assets and financial liabilities are recognized on the company s balance sheet when the company becomes a party to the contractual provisions of the instrument. 8

9 1- Trade receivables Trade receivables are stated at their nominal value as reduced by appropriate allowance for estimated irrecoverable amounts. 2- Bank borrowings Interest bearing bank loans are recorded at the proceeds received and interest due on bank loans is recognized as incurred. Finance charges are accounted for on an accrual basis. 3- Trade payables Trade payables are stated at their nominal value. 4- Provisions Provisions are recognized when the company has legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. 9

10 2- Fixed Assets The net book value of fixed assets amounted to EGP million as of September 30, 2003, and is analyzed as follows: (Amounts in ) Description Land, buildings and building equipments Network infrastructure Leasehold improvements Computer and network software Others Total Balance as of March 31, , ,594.7 Additions Disposals (6.0) (.5) (7.5) Balance as of September 30, , ,835.9 Accumulated depreciation as of March 31, Depreciation for the period Accumulated depreciation of disposals (5.0) (0.9) (5.9) Accumulated depreciation as of September 30, Net book value as of September 30, , ,987.0 Net book value as of March 31, , ,917.0 Foreign exchange losses from revaluation of liabilities arising from acquisition of fixed assets amounting to EGP 8.7 million for the 6 months period ending September 30, 2003 were capitalized on networks (EGP 13.5 million for the same period in year 2002). (Note 1d). 10

11 3- Construction in progress September 30, 2003 March 31, 2003 Buildings Network infrastructure Others Intangible assets, net Cost as of September 30, 2003 Accumulated Amortization Net book value as of September 30, 2003 Net book value as of March 31, 2003 License fees (588.4) Loan arrangement fees 17.2 (9.3) Sites acquisition 67.8 (18.8) (616.5) * Amortization for intangible assets amounting to EGP 65.4 million for the 6 months period ending September 30, Trade and notes receivables, net September 30, 2003 March 31, 2003 Trade debtors Roaming receivables Other receivables Allowance for doubtful debts (163.3) (153.5) Other debit balances September 30, 2003 March 31, 2003 Advance payments to suppliers Cheques under collection Letters of credit Prepaid expenses Others (*)

12 (*) At September 30, 2003 other debit balances include an amount of EGP 3.4 million representing payments made to the employees during the period as advances for year ending March 31, 2004 profit share. (EGP 18 million for the year ending March 31, 2003). 7- Cash in hand and at banks September 30, 2003 March 31, 2003 Cash in hand Current accounts & time deposits Deposits for letters of guarantee Other credit balances September 30, 2003 March 31, 2003 Notes payable Deferred revenues Taxes payable Others Capital The authorized capital amounts to EGP 2 billion and the issued and fully paid up capital amounted to EGP 1.2 billion, distributed among nominal shares of EGP 5 par value each. All being cash shares. According to the resolution of the extraordinary general assembly meeting on January 23, 2003, the company shares were split and accordingly the number of shares was increased from shares of EGP 10 par value to shares of EGP 5 par value each. The share split resolution is currently being registered with the General Authority for Investment. 10- Long-term loan The Company obtained a syndicated loan in 1998 with an authorized limit of EGP 2.4 billion divided into 2 tranches, where Banque Misr and Banque du Caire act as lead managers amongst other participant banks. In September 2002, by the end of the loan grace period the company and Banque Du Caire (lead manager) agreed to amend the original loan contract as follows: ƒ Tranche A is a term loan up to EGP 1 billion (fully utilized by the company) ƒ Tranche B is credit facility up to EGP 750 million (fully utilized by the company). ƒ Tranche C is credit facility up to EGP 650 million (not utilized by the company). 12

13 The term loan is payable over 9 years starting from the date of the agreement (September 10,1998). The above facilities are guaranteed by a first priority commercial mortgage on the company s tangible and intangible assets including machinery, equipment, license, goodwill, intellectual and industrial rights, amounting to EGP 2.4 billion in favor of the lending banks. Following is an analysis of the loan interest rates and repayment terms: Tranche Interest rate Payment terms A B C The interest rates for Tranches A, B and C are as follows: - Fixed rates of 11.25% and 13%. - Variable rates that range from CBEDR (*) 1% to 3%. Except for an amount of EGP 75m and EGP 100m are subject to a minimum of 13% and 12.5% respectively. - EGP 250m is subject to an average rate of 11.58% approximately (currently applied) (*) Central Bank of Egypt Discount Rate. 11- Minority interest Four equal semi annual installments, first installment is due on March 10, Amounts drawn are to be paid in full on or before September 10, Three equal semiannual installments starting September 10, (Not utilized yet) Short term portion as of September 30, 2003 Long term portion as of September 30, The minority interest represents the minority s proportionate share (1%) in the net assets of Misrfone Trading Company LLC (subsidiary) and (0.01%) in the net assets of Vodafone Egypt Technologies LLC (subsidiary). The share of the minority s losses has exceeded their interest in the subsidiaries for the period ending September 30, The minority s share in subsidiaries losses amounting to EGP 0.24 million for the period ending September 30, 2003, is totally charged against Vodafone Egypt Telecommunications Co., S.A.E. interest in the consolidated financial statements as of September 30,

14 12- Cash flow statement supplemental information (non-cash transactions) For the purpose of preparing the cash flow statement for the 6 months period ending September 30, 2003, the following amounts have been excluded from the cost of fixed assets acquisitions and construction in progress, as they represent non-cash transactions. Amounts transferred from construction in progress to fixed assets Amounts due to fixed assets suppliers Related party transactions Following is an analysis of significant related party transactions that occurred during the period ending September 30, 2003: Balance as of Volume of Company September 30, 2003 transactions during Explanation the period Alan company 2.6 Credit. Construction work. Alkan Group of Companies. Credit 28.3 Construction work. Alkaz Consultant. Giza Systems Engineering Banque du Caire: -Long term Loan -Debit Interest Credit 73.6 Credit 34.0 Vodafone Group 32.0 Credit 36.3 Vodafone operating companies Hard and Software support services. - Share in long term loan - Share in debit interest for the period Cost of participation in various service arrangements and secondees labor and services 10.0 Debit 32.0 Roaming revenue. Due from affiliates account as of September 30, 2003 includes an amount of EGP million representing cash held at Vodafone Group PLC under full control of Vodafone Egypt Telecommunication S.A.E. 14

15 14- Capital commitments The company has entered into construction contracts, software license contracts, hardware supplies contracts, and supplies of network infrastructure. The outstanding balance amounted to EGP 163 million representing the contractual amounts that were not yet executed as of September 30, Financial instruments The financial instruments are represented in assets balances (cash in hand and at banks and debtors), and the liabilities balances (loans, bank overdrafts, creditors and other credit balances). Fair value of financial instruments The carrying amounts of these financial instruments represent a reasonable estimate for their fair values. a- Foreign currency risk Foreign currency risk is represented in foreign currency fluctuations affecting the company s liabilities in foreign currencies mainly, for acquiring fixed assets. The company has entered into foreign exchange agreements in order to manage the foreign exchange exposures. b- Credit risk Credit risk is represented in the customer s failure to pay according to the terms of the contract. Disconnecting the service in case of non-payment covers the risk. 16- Tax position a- Corporate tax The company being incorporated under the provisions of the Investment Incentives and Guarantees Law no. 8 of 1997, is entitled to a five years tax holiday period and an additional five years tax holiday period on the basis that the core activities and network control are being operated in a new urban community. The company is in the process of obtaining this exemption on its tax card. The tax authority has not yet inspected the company s books, as of the balance sheet date b- Sales Tax In addition to what is fully explained in (note 20c), the Sales Tax Authority has inspected the books for the financial year ended March 31, 2003, however the company has not yet received the formal tax claim. c- Others The company is consistently and duly paying taxes due and presenting tax returns in accordance with the tax laws. 15

16 17- Earnings per share Earnings per share is computed based on the weighted average number of nominal shares outstanding. September 30, 2003 September 30, 2002 Net profit Less: employees profit share (15.2) Divided by: Number of shares outstanding * Earnings per share The earnings per share for the period ended September 30, 2002 is calculated after deducting employees profit share in the net profits for the period. * For the purpose of calculating earnings per share, the weighted average number of company shares shall be million as of September 30, 2002 to comply with current period presentation. (note 9) 18- Leased assets Operating leases Commitments to non-cancelable operating lease payments within the period are as follows: 6 months period ended September 30, 2003 In respect of leases expiring: Within one year 3.9 Between two and five years 6.6 After five years 10.6 Total 21.1 Future minimum amounts payable under non-cancelable operating leases for the years 2004 through 2008 and thereafter are as follows: Years ending 30 September: Thereafter 68.0 Total

17 19- License Agreement The company has signed a license contract with the Government represented by the Telecom Regulatory Authority (TRA), to establish and operate a GSM Digital Cellular Mobile Telephone Network within the Arab Republic of Egypt for a period of 15 years starting May 5,1998. The company has paid the license fees amounting to EGP million for the licensed period, in addition to other annual charges to be paid by the company to Telecom Regulatory Authority (TRA). 20- Contingent Liabilities The company s contingent liabilities are represented in the following: a- Litigation claims The company is involved in several court cases. The management believes that the outcome of each individual case or total cases do not affect the financial results of the company. b - Telecom Egypt - International interconnect claim On January 19, 2003 the company received a claim from Telecom Egypt for an amount of EGP 35 million resulting from applying different basis for calculating the interconnect cost of using the international gateway of Telecom Egypt retroactively for the years 1998 to September The difference as of September 30, 2003 amounted to EGP 53 million. The company responded to Telecom Egypt by rejecting such claim based on the following: i. The basis of calculation of the international calls is clearly stated in the interconnection agreement. ii. Telecom Egypt already issued its invoices for these periods in accordance to the agreement. iii. Legal advisor of the company confirmed that Telecom Egypt has no legal right to change the basis of calculation. Based on the above, the management believes that Telecom Egypt s claim is unjustified and does not represent an obligation on the company. c - Sales Tax On May 12, 2003, the company received a request from the Sales Tax Authority for payment of EGP 111 million plus penalties representing sales tax on its interconnect revenues retroactively from the inception of operations to March 31, The Sales Tax Authority request was directed to all operators in Egypt on the basis that interconnect revenues resulting from allowing operators to use other networks is, in their opinion, subject to sales tax. This request considers the interconnect arrangements to be services provided for others (renting or using equipment and machinery) which the authorities would consider subject to sales tax. 17

18 The company s legal position as supported by its advisors is that this request is neither justified nor legally founded, as the interconnect arrangements are not subject to sales tax and since the total value of all calls was subjected to sales tax which was paid to the Sales Tax Authority. Any attempt to levy another sales tax on the same service is unfounded and has no justification in law. The company in association with all other operators has rejected these claims and is conducting talks with the relevant authorities. Accordingly, the company s view is that this request does not represent a liability on the company and therefore no provision has been made in the financial statements as of September 30, Interconnect and the license arrangements All interconnect arrangements between the company and Telecom Egypt are subject to renegotiation with effect from May These negotiations have not been concluded but ultimately should not result in worse position for Vodafone Egypt that currently enjoyed. Negotiations are further extended to cover the acquisitions of 1800 spectrum to enhance network quality, and other changes that will significantly change the whole telecommunications industry in Egypt to the best of the Egyptian economy. Chief Financial Officer Chief Executive Officer Chairman Martin Moorhouse Ian Gray Mohamed Mahmoud Nosseir 18