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1998 Annual Report - Financials NOTES TO FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998 AND 1997
(Currency: Jordanian Dinar)
1. Company, Activities and Share Capital
Palestine Telecommunications Company P.L.C. (“the Company”), located in Nablus,
was incorporated and registered at the Registrar of Companies in Jericho as of August 2,
1995 under registration No. 563201029. The Company’s founding general assembly was
held on December 27, 1995, during which the establishment of the Company was announced.
The Company’s authorized share capital consists of 45 million shares of JD 1 each.
The Company’s main activities are offering, managing, and selling wire and wireless
telecommunication services, as well as constructing and operating telecommunication
stations and telephone networks in Palestine and in other countries. This is in accordance
with the “License Agreement to Construct, Manage, and Operate the Telephone and
Mobile Telecommunications”, signed between the Company and the Palestinian National
Authority (PNA). The Company operates under the License Agreement and the
Telecommunication Law No. 3 of 1996 decreed by the PNA.
2. License Agreement to Construct, Manage, and
Operate the Telephone and Mobile Telecommunications
As of November 15, 1996, the PNA agreed to grant the Company the license to use, invest,
and operate all telecommunications network assets and equipment within the PNA territories
(the License). Hence, the license agreement to construct, manage, and operate the
telephone and mobile telecommunications (the Agreement) was signed between the PNA and the
Company. According to the Agreement terms and conditions, the Company has full right to
construct, install, and operate the telephone and mobile network including the exchanges,
earth and air cables and other related equipment, as well as the right to use this network
for sending and receiving telecommunications. The License is valid for a period of twenty
years, renewable.
As for the wire telephones, the Agreement grants the Company the full right for a period
of ten years with effect from November 15,1996, to provide the telecommunication services
between all locations inside Palestine, as well as between Palestine and elsewhere.
Further, as per the Agreement, the Company has to pay a one-time U.S. $ 25 million and an
annual fee of 7% of its annual operating revenues in exchange for transferring to the
Company the ownership of the telecommunication lines and to be recognized as the sole
Licensee in Palestine.
3. Summary of Significant Accounting Policies
The financial statements have been prepared under the historical cost convention.
The significant accounting policies are as follows:
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Use of Estimates
The preparation of the financial statements in conformity with the International
Accounting Standards requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements, as
well as revenues and expenses during the year. Actual results could differ from those
estimates.
Revenues and Expenses Recognition
Revenues and expenses are recognized on the accrual basis of accounting. Revenues from
telecommunication services are recognized during the period in which such services are
rendered after adjusting for amounts due to or from other telecommunications companies,
which amounted to JD 17,951,613 and 15,359,089 for the years 1998 and 1997 respectively.
Investments in Affiliates
Investments in affiliated companies are accounted for using the equity method. Share of
profits or losses in the investee companies is recognised in the statement of profit and
loss.
Materials in Stores
Materials in stores are stated at the lower of cost or market using the first in first out
or the average cost method. Materials in stores are primarily used in projects for
expanding or constructing telecommunications network.
Projects in Progress
Projects in progress comprise all costs incurred to expand and construct the national
telecommunications network and other projects. These costs include costs of direct
materials and contractors costs, except direct labour, for which the proper basis of
capitalization to projects in progress will be determined in the future. After completion,
projects in progress are added to property, plant and equipment.
License, Concession and Lines Costs
License, concession and lines costs are amortized over ten years using the straight line
method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, and depreciated over their estimated
useful lives using the straight line method at the following annual rates:
|
Depreciation Rate
% |
Telecommunication
exchanges
External telecommunication networks
Motor vehicles
Heavy duty equipment
Office equipment
Office furniture
Computer hardware and software
Leasehold improvements
Tools and small equipment |
10
10
20
15
20
15
25
10
15-25 |
Establishment and Preoperating Expenses
Establishment and preoperating expenses are amortized over five years using the straight
line method.
Foreign Currencies
The Company mainly deals with New Israeli Shekel (NIS), United States Dollar and Jordanian
Dinar (JD). The Company’s reporting currency is Jordanian Dinar. During 1998, fixed
exchange rates had been used to translate transactions dominated in other currencies to
JD. Monetary assets and liabilities in the balance sheet, which are denominated in foreign
currencies are translated into JD using the prevailing exchange rates at the balance sheet
date. At year end, total revenues, expenses, property, plant and equipment, projects in
progress and materials in stores that were paid in NIS have been re-translated to JD using
the average exchange rate prevailing at the date of the transaction.
As a result, a loss of JD 2,534,720 was incurred, and
reflected in the statement of profit and loss.
Foreign currency exchange rates against Jordanian Dinar
(JD) at the balance sheet date were as follows.
|
1998 |
1997 |
Change rate |
| One New Israeli Shekel |
0.171 |
0.200 |
(14.5%) |
| One United States Dollar |
0.710 |
0.710 |
-- |
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4. Cash
|
|
1998 |
1997 |
 |
Cash on hand |
148,348 |
12,973 |
|
Cash at banks in JD |
15,953 |
1,549,372 |
|
Cash at banks in NIS |
1,530,518 |
380,099 |
|
Short-term deposits at banks
in JD* |
337,703 |
7,908,895 |
|
Short-term deposits at banks
in U.S. $* |
8,314,365 |
-- |
|
|
10,346,887 |
9,851,339 |
* Short-term deposits at bank as of December 31, 1998
include restricted cash of JD 8,451,292 as a guarantee of certain credit facilities (See
Note 17).
5. Accounts Receivable, net
Accounts receivable are stated net of provision for doubtful accounts. This provision is
computed based on certain percentages applied for the aging of accounts receivable.
Accounts receivable comprise.
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|
1998 |
1997 |
|
Subscribers receivables |
14,086,160 |
12,454,326 |
|
Accrued revenues * |
4,261,920 |
3,509,521 |
|
Telecommunication companies
receivables |
298,756 |
-- |
|
New installations
receivables |
-- |
345,949 |
|
Leased lines receivables |
70,922 |
-- |
|
Ministry of Post and
Telecommunications |
-- |
2,144,210 |
|
|
18,717,758 |
18,454,006 |
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Provision for doubtful
accounts |
(4,515,293) |
(3,738,484) |
|
|
14,202,465 |
14,715,522 |
*Accrued revenues comprise of revenues for the period from
November 19, 1998 to December 31, 1998, based on invoices issued to subscribers during
January 1999 covering the two months period.
Following is a summary of the movements on the provision
for doubtful accounts during the year.
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|
1998 |
1997 |
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Balance, beginning of year |
3,738,484 |
-- |
|
Additions |
1,443,936 |
3,738,484 |
|
Translation difference from
NIS to JD |
(667,127) |
-- |
|
Write-off during the year |
-- |
-- |
|
Balance, end of year |
4,515,293 |
3,738,484 |
6. Other Current Assets
|
|
1998 |
1997 |
|
VAT receivables* |
1,815,050 |
971,809 |
|
Due from Bezeq** |
696,110 |
-- |
|
Advance payments |
137,518 |
149,098 |
|
Cash margins |
358,748 |
336,077 |
|
Prepaid expenses |
563,617 |
441,558 |
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Insurance claims |
173,767 |
222,514 |
|
Other |
115,425 |
57,369 |
|
|
3,860,235 |
2,178,425 |
*According to the Value Added Tax (VAT) law in Palestine, a
VAT of 17% is levied on the Company’s revenues and on purchases of property materials
and services. Also, VAT is levied on imported property and materials. The Company has the
right either to refund VAT paid on local purchases and imports, or to deduct the amount
from VAT collected on revenues.
**During 1998, the agreement with the Israeli
Telecommunication Company (Bezeq) was modified. As a result the charge for services
provided by Bezeq were reduced retroactively from 1997. Accordingly, the Company has, to
date, the right for a refund of JD 696,110 from Bezeq.
7. Investment in Affiliate
The Company owns 175,000 shares (JD 1 each) in Palestine Information Technology, a private
shareholding limited liability company (Pal-Tech). The holding represents 25% of Pal-Tech
share capital of which 50% of the par value has been paid up.
The investment in Pal-Tech is stated at cost, since
Pal-Tech is just a start-up.
8. Materials in Stores, net
Materials in stores mainly comprise materials purchased by the Company for use in the
expansion and construction of the telecommunications network. Following are details of
materials in stores, classified according to usage:
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|
1998 |
1997 |
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External network materials |
4,954,068 |
3,047,490 |
|
Installation materials |
956,490 |
655,618 |
|
Electricity and air
conditioning materials |
84,558 |
80,268 |
|
Kits and tools |
82,578 |
33,225 |
|
Other |
268,435 |
44,783 |
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|
|
|
|
|
6,346,129 |
3,861,384 |
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|
|
|
|
Provision for obsolete and
slow moving materials |
(403,400) |
(148,682) |
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|
|
|
|
|
5,942,729 |
3,712,702 |
9. Projects in Progress
Projects in progress comprise the following.
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|
1998 |
1997 |
|
Telecommunication exchanges |
-- |
3,684,143 |
|
External network projects |
3,244,360 |
5,353,483 |
|
Mobile telephone project
(GSM)* |
4,727,038 |
157,277 |
|
Letters of credit advances
and expenses |
3,339,777 |
402,356 |
|
Flipper Optic project |
3,138,648 |
-- |
|
Payphones project |
906,559 |
-- |
|
Buildings in progress |
851,454 |
-- |
|
Data transmission project |
52,451 |
-- |
|
|
|
|
|
|
16,260,287 |
9,597,259 |
*During 1998, an agreement was signed giving the Company
the right to design, supply, install and manage the Mobile telephone project (GSM) in
Palestine. The capacity will enable the Company to serve 120,000 customers on two phases;
phase one will serve 70,000 customers and phase two will serve 50,000 customers. PALTEL is
currently working on finalizing the necessary arrangements in order to commence the
operations of the Mobile telephone project during 1999.
The cost of the Mobile telephone project comprises.
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|
1998 |
1997 |
|
Land |
180,750 |
-- |
|
Letter of credit advances
and expenses |
3,512,426 |
-- |
|
Building in progress |
419,742 |
-- |
|
Direct salaries and other
expenses |
614,120 |
157,277 |
|
|
4,727,038 |
157,277 |
10. Property, Plant and Equipment
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|
Balance,
beginning
of year |
Additions/
Charge |
Disposals |
Balance,
end of
year |
|
Cost: |
|
|
|
|
|
Land |
-- |
936,922 |
-- |
936,922 |
|
Telecommunication exchanges |
5,001,215 |
10,072,052 |
-- |
15,073,267 |
|
External telecommunication
network |
3,978,107 |
19,539,300 |
-- |
23,517,407 |
|
Payphones |
-- |
917,273 |
-- |
917,273 |
|
Motor vehicles |
941,768 |
274,670 |
-- |
1,216,438 |
|
Heavy duty equipment |
220,835 |
99,672 |
-- |
320,507 |
|
Office equipment |
242,162 |
276,915 |
-- |
519,077 |
|
Office furniture |
334,735 |
343,921 |
-- |
678,656 |
|
Computer hardware and
software |
229,999 |
1,130,066 |
-- |
1,360,065 |
|
Leasehold improvements |
68,919 |
357,106 |
-- |
426,025 |
|
Tools and small equipment |
62,833 |
370,384 |
-- |
433,217 |
|
|
|
|
|
|
|
|
11,080,573 |
34,318,281 |
-- |
45,398,854 |
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|
Balance,
beginning
of year |
Additions/
Charge |
Disposals |
Balance,
end of
year |
|
Accumulated depreciation: |
|
|
|
|
|
Telecommunication exchanges |
17,929 |
832,464 |
-- |
850,393 |
|
External telecommunication
networks |
36,787 |
482,919 |
-- |
519,706 |
|
Payphones |
-- |
-- |
-- |
-- |
|
Motor vehicles |
25,424 |
183,477 |
-- |
208,901 |
|
Heavy duty equipment |
1,117 |
38,980 |
-- |
40,097 |
|
Office equipment |
26,522 |
68,528 |
-- |
95,050 |
|
Office furniture |
25,927 |
69,604 |
-- |
95,531 |
|
Computer hardware and
software |
29,695 |
167,186 |
-- |
196,881 |
|
Leasehold improvements |
580 |
17,680 |
-- |
18,260 |
|
Tools and small equipment |
1,412 |
41,810 |
-- |
43,222 |
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|
|
|
|
|
|
|
165,393 |
1,902,648 |
|
2,068,041 |
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Net book value |
10,915,180 |
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|
43,330,813 |
11. License, Concession and Lines Cost, net
This item represents the cost of telecommunication lines transferred to the Company
according to the Agreement with PNA and the related supplements. In addition, the Company
has exclusively been granted the telecommunication license in the PNA areas for which the
Company paid U.S. $ 25 million (equivalent to JD 17,772,258), as explained in Note 2.
During 1998, the Company paid additional U.S. $ 5 million to PNA for costs that have been
incurred by PNA before transferring the Telecommunication lines to the Company.
Following is a summary of the movement on the license
concession, and lines cost during the year.
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|
1998 |
1997 |
|
Balance, beginning of year,
net |
15,481,530 |
-- |
|
Cost of license, concession
and lines paid during the year |
3,550,000 |
17,201,700 |
|
Amortization for the year |
(1,938,182) |
(1,720,170) |
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Balance, end of year, net |
17,093,348 |
15,481,530 |
12. Establishment and Preoperating Expenses
Establishment and preoperating expenses represent all expenses incurred during the
establishment phase as well as all expenses incurred before the Company’s
commencement of its operations as of January 1, 1997, net of revenues earned during that
period.
Following is a summary of the movement on establishment and
preoperating expenses during the year.
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|
1998 |
1997 |
|
Balance, beginning of year,
net |
279,336 |
250,907 |
|
Additions |
-- |
98,263 |
|
Amortization |
(69,643) |
(69,834) |
|
Net establishment and
perpetrating expenses at year end |
209,693 |
279,336 |
13. Due to Banks
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1998 |
1997 |
|
Current maturity of long
term loans |
3,498,756 |
-- |
|
Bank overdraft in United
States Dollar |
3,572,469 |
46,853 |
|
Bank overdraft in Jordanian
Dinar |
18,577 |
11,029 |
|
Bank overdraft in New
Israeli Shekel |
112,406 |
1,639,555 |
|
|
|
|
|
|
7,202,208 |
1,697,437 |
14. Notes Payable
Notes payable represent deferred payments due to suppliers for materials and exchanges
supplied during the year against banks letters of credit. The maturity dates of these
notes payable are within one year from the issuance date.
Notes To Financial
Statements Continued...
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