<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934 OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
TO
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-5396-01
BALTIC COMMUNICATIONS LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
RUSSIA
(JURISDICTION OF
INCORPORATION OR ORGANIZATION)
KONNOGVARDEISKY BLVD. 4
ST. PETERSBURG 190000 RUSSIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
NONE NONE
</TABLE>
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT:
GUARANTEE OF THE OUTSTANDING 14% SENIOR DISCOUNT NOTES DUE 2004 OF PLD TELEKOM
INC.
GUARANTEE OF THE OUTSTANDING 9% CONVERTIBLE SUBORDINATED NOTES DUE 2006 OF PLD
TELEKOM INC.
(TITLE OF CLASS)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 72,540 Common Shares.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
BALTIC COMMUNICATIONS LIMITED
FORM 20-F ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Description of Business..................................... 1
Item 2. Description of Property..................................... 13
Item 3. Legal Proceedings........................................... 13
Item 4. Control of Registrant....................................... 13
Item 5. Nature of Trading Market.................................... 13
Item 6 Exchange Controls and Other Limitations Affecting Security
Holders..................................................... 14
Item 7 Taxation.................................................... 15
Item 8. Selected Financial Data..................................... 16
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 9A. Quantitative and Qualitative Disclosure About Market Risk... 22
Item 10. Directors and Officers of the Registrant.................... 22
Item 11. Compensation of Directors and Officers...................... 22
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries................................................ 22
Item 13. Interest of Management in Certain Transactions.............. 22
PART II
Item 14. Description of Securities to be Registered.................. 23
PART III
Item 15. Defaults Upon Senior Securities............................. 23
Item 16. Changes in Securities, Changes in Security for Registered
Securities and Use of Proceeds.............................. 23
PART IV
Item 17. Financial Statements........................................ 23
Item 19. Financial Statements and Exhibits........................... 23
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Baltic Communications Limited (the "Company") is a wholly owned subsidiary
of PLD Telekom Inc. ("PLD") which provides dedicated international
telecommunications services in St. Petersburg, Russia.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), solely because
of the guarantees it has issued in respect of PLD's outstanding 14% Senior
Discount Notes due 2004 (the "Senior Notes") and 9% Convertible Subordinated
Notes due 2006 (the "Convertible Notes"). Upon the completion of PLD's merger
with Metromedia International Group, Inc. described below under "PLD Telekom
Inc.", the Company's guarantees will be terminated and it will cease to be
subject to the periodic reporting requirements of the Exchange Act.
PLD TELEKOM INC.
PLD, through its operating subsidiaries, is a major provider of local, long
distance and international telecommunications services in the Russian
Federation, Kazakhstan and Belarus. PLD's five principal operating businesses
are: (i) PeterStar Company Limited ("PeterStar"), which provides integrated
local, long distance and international telecommunications services in St.
Petersburg through a fully digital fiber optic network; (ii) Technocom Limited
("Technocom"), which, through Teleport-TP, provides dedicated international
telecommunications services to Russian and foreign businesses in Moscow and
operates a satellite-based pan-Russian long distance network; (iii) the Company;
(iv) ALTEL (known until May 1998 as BECET International), which provides
national cellular service in Kazakhstan; and (v) Belarus-Netherlands Belcel
Joint Venture ("BELCEL"), which provides the only national cellular service in
Belarus. In addition, PLD is developing a portfolio of international long
distance products and services, under the name "PLDncompass", targeted at
carriers and corporate customers in the United States, the United Kingdom and
Europe which require telecommunications services to and from the countries of
the former Soviet Union. PLD's Common Stock is traded on the Nasdaq National
Market under the symbol "PLDI" and the Toronto Stock Exchange under the symbol
"PLD".
In August 1998, News America Incorporated, through an affiliate ("News"),
acquired a 38% stake in PLD in a series of transactions with PLD and Cable and
Wireless plc ("Cable & Wireless"). Prior to the completion of these
transactions, Cable & Wireless had been, since 1994, PLD's principal
shareholder. As part of these transactions, PLD acquired an additional 11%
interest in PeterStar and its 50% interest in BELCEL.
On May 18, 1999, PLD entered into an agreement (the "Merger Agreement")
with Metromedia International Group, Inc. ("MMG") pursuant to which PLD would
merge with Moscow Communications, Inc., a newly formed, wholly owned subsidiary
of MMG. Upon consummation of the merger, PLD will become a wholly owned
subsidiary of MMG, and the holders of shares of common stock of PLD will receive
shares of MMG on the basis of an exchange ratio specified in the Merger
Agreement.
In connection with the merger, PLD's existing Senior Notes and Convertible
Notes, which are currently guaranteed by the Company, will be exchanged for
senior indebtedness of MMG and the Company's guarantees will be terminated. The
new MMG notes will not be guaranteed by the Company or any other subsidiary of
PLD.
MMG is a global communications company engaged in the development and
operation of a variety of communications businesses, including cellular
telecommunications, fixed telephony, international and long distance telephony,
cable television, paging and radio broadcasting, in Eastern Europe, the former
Soviet Union, China and other selected emerging markets. Its common stock is
listed on the American and Pacific Stock Exchanges, under the symbol MMG.
<PAGE> 4
TELECOMMUNICATIONS IN THE FORMER SOVIET UNION
In the Soviet era, telecommunications in the Russian Federation and other
republics of the former Soviet Union were government owned and designed
principally to serve the defense and security needs of the state. The telephone
network itself was highly centralized, reflecting the centralized nature of the
Soviet economy. Telephonic links were directed towards the center of the network
while neglecting inter-regional links. As a result, the ability to direct calls
between regions without going through the center remains limited, which in turn
has been a major constraint on economic growth in regional markets. Being
committed to a "hub and spoke" network, the former Soviet Union never developed
a trunk "backbone" capable of providing network expansion on a nationwide basis.
Consistent with a political philosophy which limited access to the world
outside the former Soviet Union, all international calls originating in the
former Soviet Union until 1992 were routed through a single international
exchange in Moscow which had a capacity of only 3,200 circuits. Due to the
inadequacies of the public network, as well as to ensure secrecy, many
individual ministries and security organizations, including the Communist Party
itself, established their own private nationwide networks. These private
networks absorbed a substantial amount of the relatively limited resources
available for investment in telecommunications. At the same time, these networks
currently present an opportunity for the development of a national network apart
from the existing public network.
With the break-up of the Soviet Union and the liberalization of the
economies of its former republics, the demand for telecommunications services
increased significantly. However, the governments of the countries of the former
Soviet Union did not have the significant capital necessary for the development
of the telecommunications infrastructure. As a result, they have actively
encouraged market liberalization, privatization and foreign investment in the
telecommunications sector. This has resulted in significant development in the
areas of fixed wire overlay systems, private networks and cellular and data
services. They have also made their own efforts to develop a basic
telecommunications infrastructure, but lack of capital, exacerbated by recent
difficult economic conditions, has made progress towards this goal slow.
TELECOMMUNICATIONS IN THE RUSSIAN FEDERATION
The Russian telecommunications sector has experienced substantial
difficulty in meeting the rapidly growing demand for telecommunications services
in the Russian Federation. At the local level, there has been a significant
growth in joint ventures providing discrete telecommunications services, such as
international access and cellular service. While the bulk of this activity has
been in Moscow and St. Petersburg, it has occurred in other regions as well.
This trend has been encouraged by the Russian government which has issued over
10,000 licenses through the Ministry of Communications of the Russian Federation
(the "Former MOC") (which as of March 17, 1997 has been replaced by the Russian
Federal Committee on Telecommunications and Informatics (the "RFCTI")) to these
new service providers. Most joint ventures involve a Russian and a foreign
partner. Many of these joint ventures have remained moribund; however, where
they have commenced operations, there has been an immediate improvement in
telecommunications services in the targeted areas. Since much of the marketing
activity has been aimed at the business community, the benefits of these
improvements have not been (and for the foreseeable future are not likely to be)
widely felt by residential customers, particularly those outside major
metropolitan areas.
When the Former MOC was reorganized in 1991, the Russian government decided
to convert each regional telephone center into a separate, privatized company
with the government maintaining the controlling interest in the company. There
are 89 of these regional telephone companies. The government's interests in most
of these companies are now held through Sviazinvest.
The national and international long distance market in the Russian
Federation is dominated by Rostelecom, a formerly state-owned enterprise which
has been privatized, but in which the Russian government continues to hold a 38%
equity and 51% voting interest through Sviazinvest. Until 1991, Rostelecom was
the monopoly provider of national and international long distance service. Since
then, the Former MOC has issued licenses to approximately twenty other providers
of international services.
2
<PAGE> 5
Rostelecom itself has entered into a number of joint ventures to develop its
network and services, including through its participation in Teleport-TP.
Sviazinvest, which was originally 100% owned by the Russian State Property
Committee (now the Ministry of State Property), is a holding company for the
Russian government's interests in the local and regional telephone companies
across the Russian Federation. In general, Sviazinvest has a portfolio that
comprises holdings of 35% of the equity interest and 51% of the voting
interests, with a number of notable exceptions, in these telephone companies.
Sviazinvest is represented on the board of directors of each of these companies,
but does not participate in the day-to-day management of the operations.
In 1997, it was reported that, notwithstanding previously announced plans
to have Sviazinvest compete with Rostelecom, the Russian government had
consolidated its telecommunications holdings in Sviazinvest and Rostelecom by
transferring its shareholding in Rostelecom (38% of the common stock, and 51% of
the voting stock) to Sviazinvest. The balance of the shares in Rostelecom remain
in the hands of private investors. In April 1997, the government announced that
it was seeking to sell 49% of Sviazinvest in two auctions, one as to a 25% stake
open to Russian and foreign investors and the other as to a 24% stake open only
to Russian investors. In July 1997, the government announced that the 25% stake
had been sold to a consortium which included Oneximbank and Renaissance Capital,
for a purchase price of $1.875 billion. Following this auction, the Russian
government announced its intention to increase the size of the other stake being
sold to 25% minus two shares. The schedule for the sale of the second stake has
been delayed following the August 1998 financial crisis, and the structure of
any such sale (including whether foreign participation will be permitted) has
not been announced. While it is not yet clear how the proceeds of this sale will
be employed, it is understood that the government wishes to have a substantial
part, if not all, of the proceeds allocated to its current budget deficit. Prior
to the August 1998 crisis, Sviazinvest had announced plans to raise $400 million
through a Eurobond offering in 1998, but that offering was also delayed as a
result of the Russian financial crisis. In light of all of the foregoing, it is
unclear what impact the consolidation of the government's telecommunications
holdings and the auction of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.
The provision of telecommunications services is currently regulated by the
Law on Telecommunications which came into effect on February 22, 1995 (the
"Telecommunications Law"). While the Former MOC had significant regulatory
powers prior to the passage of the Telecommunications Law, principally through
the issuance of new licenses, telecommunications had traditionally been viewed
as the province of the military and security services. The Telecommunications
Law placed control of the Russian telecommunications network (except for the
networks of the government, military and security forces) in the hands of a
civilian regulatory authority. Under the Telecommunications Law, the Former MOC
was, and now the RFCTI is, charged with the responsibility of coordinating the
development of telecommunications in the Russian Federation and regulating the
provision of services. Specifically, the Former MOC was and now the RFCTI is,
given authority to issue telecommunications licenses, allocate frequencies and
certify equipment for use in Russia. The Telecommunications Law also establishes
a number of important principles in the telecommunications area, including the
guarantee of equal access for all providers of telecommunications services and
safeguards for private business activity in the telecommunications sector. The
Telecommunications Law extends these principles to foreign companies and
individuals, thereby recognizing the need to encourage foreign participation in
the development of the Russian telecommunications sector.
The Federal Committee for Regulating Natural Monopolies in
Telecommunications (now under the government of the Russian Federation) has been
empowered to regulate international and, since mid-1997, domestic long distance
tariffs, together with interconnect fees for public operators in the Russian
Federation. In addition, this Committee has the authority to establish the
framework for local fees and tariffs which, in the future, will be regulated by
newly-established Regional Committees for Regulating Natural Monopolies. At the
current time, regional governments set and regulate local tariffs, and it is
currently uncertain as to how, and when, local tariff regulation will be
transferred to the Regional Committees. While the Company's businesses are not
public operators and will therefore not be directly affected by any tariff
regulation imposed by the Federal or Regional Committees, their own pricing
policies are inevitably influenced by the tariffs charged by public operators.
3
<PAGE> 6
While the RFCTI appears to have succeeded to all of the powers and
authorities of the Former MOC (with the exception of tariff regulation), it is
not yet clear whether it will in fact continue to operate in the same manner,
and wield the same influence as the Former MOC. In particular, it is not clear
whether the RFCTI will be able to control the actions of local governmental and
other regulatory authorities who may endeavor to impose their own informal
licensing and other regulatory requirements or conditions on operators. In
addition, in the area of tariff regulation, it is not yet clear how the various
Committees will interact with the regional governments, and the regional
governments may continue to seek to regulate tariffs in their regions. See "Risk
Factors -- Risks Involving the Company -- Regulatory Uncertainties."
St. Petersburg. The telephone network serving St. Petersburg is operated
by Petersburg Telephone Network ("PTN"), the local telephone company which was
privatized in May 1993. PTN has 1,800,000 lines in operation, amounting to a
nominal penetration rate of 36%. PTN's intra-city traffic is carried through a
network of thirty-four transit exchanges distributed throughout St. Petersburg
and all connected to each other in a "cobweb" fashion. The existing PTN network
is outdated and overloaded, producing congestion, interference, "crossed lines"
and poor transmission quality. Only 23% of PTN's exchanges are digital/
electronic, and some of its equipment is over 40 years old. PTN has recently
installed a modern fiber optic loop which, once fully operational, will
significantly enhance its ability to deliver traffic throughout its service
area. PTN has also entered into a number of other, primarily wireless,
telecommunications joint ventures.
PTN routes long distance traffic through a gateway exchange operated by St.
Petersburg Intercity and International Telephone ("SPMMTS"). This traffic is
then passed to the Rostelecom long distance network for delivery throughout the
rest of the Russian Federation and the other countries of the former Soviet
Union. PLD held a 10.4% equity interest in SPMMTS from 1994 to June 1997.
SPMMTS is the gateway for international calls to and from St. Petersburg.
SPMMTS has a number of options for the forwarding of international calls. Such
calls can be directed to an international gateway owned by St. Petersburg
International ("SPI"), a joint venture between British Telecommunications plc
("BT") and SPMMTS which has satellite connections to the UK. In addition, SPMMTS
has access, via Rostelecom, to the undersea cable between Russia and Denmark for
international traffic. Finally, SPMMTS has the option to route international
traffic through the international gateway in Moscow. In addition to SPMMTS,
there are several independent dedicated networks which provide international
telecommunications access in St. Petersburg, including the Company.
The telecommunications market in St. Petersburg also supports three
cellular operators (two analog and one digital) and a number of paging networks.
BALTIC COMMUNICATIONS LIMITED
BUSINESS
The Company, in which PLD acquired a 100% equity interest in April 1996,
provides international direct dial, international payphone and leased line
services for Russian and foreign businesses in St. Petersburg and the Leningrad
Oblast. The Company also offers a number of advanced broadband services, as well
as "carrier's carrier" services to other telecommunications operators. The
Company has its own switching and international transmission facilities in St.
Petersburg, which act as a gateway for corporate customers in both Moscow and
St. Petersburg. The Company's network consists of an international and local
switch and capacity on the international fiber optic cable via Finland to Sweden
and the United Kingdom. The Company's primary international carrier
relationships are with Telia of Sweden, Cable & Wireless Communications of the
United Kingdom and Lattelekom of Latvia. The Company rents local access from
PeterStar and PTN to connect its customers in St. Petersburg.
The Company had a total of approximately 1,200 lines connected as of
December 31, 1998 and generated approximately 10,408,000 million minutes of
traffic for the year ended December 31, 1998. The Company is currently
investigating means to increase the capacity on its network and to provide
additional capacity for "carrier's carrier" services.
4
<PAGE> 7
PLD endeavors to cross-sell the distinct service offerings provided by
PeterStar and the Company to their respective customer bases. For example,
PeterStar's marketing representatives are now also able to market the Company's
international private line services to PeterStar's and other corporate
customers. In addition, control of both PeterStar and the Company provides PLD
with the opportunity to: (i) potentially realize economies of scale at the
operational level (i.e. a single sales and customer services channel and
coordinated technical resources); and (ii) introduce new services to targeted
markets in a more efficient manner. In addition, PeterStar and the Company are
exploring the possibilities of closer cooperation in connection with the
expansion of their respective core businesses in St. Petersburg and the
implementation of their strategies in Northwest Russia.
The Company generated net income for the year ended December 31, 1998 of
$0.4 million on operating revenues of $9.9 million, as compared to net income of
$0.8 million on operating revenues of $7.6 million for the year ended December
31, 1997. The Company accounted for 6.8% of PLD's operating revenues for the
year ended December 31, 1998, compared to 6.6% for the year ended December 31,
1997.
The Company, a Russian closed joint stock company, was incorporated in
1991.
TELECOMMUNICATIONS LICENSE
The Company's primary license permits it to provide long distance and
international telephone, facsimile and data transmission services within St.
Petersburg and the surrounding region for a term expiring on December 31, 2003.
Management believes that, so long as it is being actively utilized, the
Company's license will be renewed at the end of its current term. The Company is
not required to route its long distance traffic through the facilities of
SPMMTS, and has its own international facilities providing cable access.
However, the Company's license does not permit it to interconnect with PTN's
public network. The Company is therefore working with PeterStar to explore
providing integrated long distance and international solutions for customers.
The license sets the upper limit of subscribers to the Company's network at
100,000 and requires that 70,000 of these be in place by January 2001. The
Company had a total of approximately 1,200 lines as of December 31, 1998. Based
on its experience in renewing existing, and obtaining new, licenses and its
general knowledge of the licensing environment in Russia, management of the
Company believes that the maximum and minimum line numbers are not strict
requirements but are instead designed to provide general guidance as to the
number of lines intended to be included on the system. However, there can be no
assurance that the RFCTI would not take a different position which in turn could
result in the revocation of the license or its renegotiation on terms
unfavorable to the Company or the imposition of penalties. It is not possible to
calculate the amount of any penalties which might be imposed, which are in the
discretion of the RFCTI. See "-- Risk Factors -- Risks Involving Baltic
Communications Limited -- Reliance on Telecommunications License; Risks of
Revocation or Renegotiation of License."
EMPLOYEES
As of December 31, 1998, the Company had 94 employees, all of whom were
full-time. Of these employees, 93 were Russian nationals and one was an
expatriate manager. None of its employees is subject to a collective bargaining
agreement, although there is a union representative at the Company. The Company
believes that its relations with its employees are good.
5
<PAGE> 8
RISK FACTORS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company's operating subsidiaries, proposed changes in the
Company's corporate structure and centers of operations and interpretations and
actions of certain regulatory authorities, including in Russia, as well as
information contained elsewhere in this Report where statements are preceded by,
followed by or include the words "believes," "expects," "anticipates" or similar
expressions. For such statements the Company claims the protection of the safe
harbor for forward-looking statements contained in the private Securities
Litigation Reform Act of 1995. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including without limitation, those discussed elsewhere in this Report
and in the documents incorporated herein by reference. Furthermore, this
document constitutes a Year 2000 Readiness Disclosure Statement, and the
statements herein are subject to the Year 2000 Information and Readiness
Disclosure Act, and the Company hereby claims the protection of such Act for
this document and all information contained herein.
COUNTRY RISKS
General. Foreign companies conducting operations through affiliates in the
Russian Federation and Kazakhstan face significant political, economic,
currency, legal and social risks. For example, a report released February 20,
1997 by the United States Embassy in Moscow on the commercial environment in the
Russian Federation listed the following general difficulties affecting trade and
investment in the Russian Federation, some or all of which could affect the
ability of the Company to conduct or realize income from its business:
- ownership disputes
- high taxes, and a frequently changing tax regime
- high operating costs
- lack of systematic and accessible credit information
- corruption and commercial crime
- financial illiquidity of many firms
- changing requirements from regulatory bodies
- lack of market information
- an infant commercial legal framework
- cultural and language differences
- infrastructure problems
- payments, arrears and frozen accounts
- frequent changes in governmental personnel
Political Risks. Since the breakup of the Soviet Union, the political
situation in the Russian Federation has been characterized by uncertainty and
instability.
There have been significant tensions between the executive and legislative
branches of the government and efforts by the regions and autonomous republics
of the Russian Federation to gain a greater degree of independence (the most
dramatic example of which was the conflict in Chechnya). Lack of consensus
between local and regional authorities and the federal government often results
in the enactment of conflicting legislation at various levels and may result in
political instability. This lack of consensus may have negative economic effects
on the Company, which could be material to its operations.
In addition, Communist and nationalist parties wield strong influence in
the lower house of Parliament (the Duma) and have made gains in regional
governorships which could result in a slow down or reversal of the development
of a free market economy.
During the transformation to a market-oriented economy in the Russian
Federation, legislation has been enacted to protect property against
expropriation and nationalization. However, a resurgence in nationalism
6
<PAGE> 9
could result in pressures for the reduction or even elimination of non-Russian
ownership of Russian businesses, and there can be no assurance that such
recently enacted protections would be enforced in the event of an attempted
expropriation or nationalization. Legislation to restrict foreign ownership in
the telecommunications industry is introduced from time to time and, while not
expected to become law, is symptomatic of these increasingly nationalistic
attitudes.
There is also significant instability in the executive branch. Boris
Yeltsin, President of the Russian Federation, has been unable because of
ill-health to carry out the many and significant responsibilities of that
office. Instead, he has increasingly delegated his responsibilities to
ministerial appointees, while at the same time endeavoring to retain, and
demonstrate, his continuing constitutional powers by making frequent changes in
his appointments. All of this has served to create significant uncertainty, not
only as to the policies his government will pursue, but also as to whether the
government is likely to take any action to deal with the many significant
problems which the Russian Federation faces.
Additionally, he has announced that he will not run for re-election in
2000, which has set off a race between a number of candidates anxious to succeed
him. The efforts of these other candidates to be elected as President, and the
resulting change in leadership at that time, could result in additional
political instability and also substantial changes in government policies. Any
such matters could have a material adverse effect on the Company.
Russian Economic and Political Turmoil. During 1998 there was considerable
turmoil and uncertainty in the Russian financial markets, prompted in large part
by a drop in commodity prices and economic problems in Russia, together with the
crisis in the Asian financial markets which began in late 1997. These
developments were accompanied by a substantial decline in the Russian stock
market. These developments led the Russian government to raise interest rates
significantly and to seek special assistance from the International Monetary
Fund. In August 1998, the Russian government announced a substantial widening of
the trading band in which the Russian Rouble would be permitted to float,
together with a moratorium on certain foreign debt payments. Thereafter the
Rouble dropped substantially in value and traded outside of the high end of the
band, and the Russian government did not intervene to stop this trading, thereby
effectively acquiescing to a major devaluation of the Rouble. In the latter part
of 1998 and the first months of 1999, the Rouble has further declined in value
and this process is expected to continue.
Also in August 1998 the Russian government announced a 90-day moratorium on
debt repayments. This moratorium caused considerable difficulties for Russian
banks and businesses with hard currency obligations, as well as significantly
impairing the ability of such banks and businesses, as well as the Russian
government itself, to access the Western capital markets. The difficulties
experienced by the Russian banks in turn caused difficulties for their
customers, as bank transfers and deposits were frozen in many cases. The Russian
government itself has effectively defaulted on substantial amounts of its debt,
and is engaged in negotiations with Western banks and institutions (which reach
back several months) to restructure this indebtedness. Continuation of these
conditions for any significant period of time could have serious long-term
effects on the Russian economy. At the present time, it is impossible to predict
whether or when any resolution of these problems is likely.
In August 1998, the Russian government experienced a significant upheaval,
with the dismissal of the reformist government led by Sergei Kiriyenko and its
replacement by one led by Yevgeny Primakov. The Primakov government did not
propose a plan to address Russia's economic and financial difficulties, one
result of which has been to cause the International Monetary Fund to delay
further assistance to the Russian government. In May 1999, another political
upheaval occurred, when President Boris Yeltsin dismissed the Primakov
government and selected Sergei Stepashin as the new Prime Minister. It is too
soon to predict what policies will be adopted by the new Stepashin government.
This most recent governmental reshuffling creates increased uncertainty about
the future political situation in Russia, which in turn creates additional
concern about the ability of the government to deal with the many problems
currently afflicting the Russian economic system.
At the present time, it is not possible to predict the complete effect of
the continuing economic, financial and political difficulties in Russia,
although they have made for a difficult business environment in Russia.
7
<PAGE> 10
Although demand for the Company's telecommunications services continued during
the economic and banking crisis in the second half of 1998, the economic
difficulties in Russia have adversely affected the Company's results for the
year ended December 31, 1998 and the first six months of 1999. The Company is
not yet able to predict the effects of the ongoing difficulties on its results
for 1999 as a whole, but the continuing economic difficulties in Russia will
likely continue to have an adverse effect on the Company in current and future
reporting periods, and there can be no assurance that such adverse effects will
not be material.
Economic Risks -- Uncertain Pace of, and Difficulties Experienced in,
Economic Reform; Reliance on Foreign Economic Aid. Until recently, the economy
of the Russian Federation was administered by the central authorities of the
former Soviet Union. Following the collapse of those authorities and the command
economy they managed, the government of the Russian Federation sought to
implement policies designed to introduce a free market economy into its country.
While these policies have met with some success, the economy of the Russian
Federation has been characterized by high unemployment, high rates of business
failure, the deterioration of certain sectors of the economy, high government
debt relative to gross domestic product and declining real wages. Real economic
improvement has been limited to the Moscow and St. Petersburg regions. The
Russian Federation is still experiencing a lack of political consensus as to the
scope, content and pace of free market reforms. No assurance can be given that
policies to introduce or support a free market economy will continue to be
implemented in the Russian Federation, that it will remain receptive to foreign
investment or that the economy of the Russian Federation will stabilize. The
failure of any of these to occur could have a material adverse effect on the
Company. In addition, the Russian Federation currently receives substantial
financial assistance from several foreign governments and international
organizations. To the extent any of this financial assistance is reduced or
eliminated, economic development in the Russian Federation may be adversely
affected, and any resulting difficulties in the Russian economy could have a
material adverse effect on the Company.
-- Limited Experience with Free Market Economy. Russian businesses have
limited operating history in free market conditions and have had limited
experience compared with Western companies with the entering into and
performance of contractual obligations. Accordingly, as compared to Western
companies, such businesses are often characterized by management that lacks
experience in responding to changing market conditions and limited capital
resources with which to develop their operations. In addition, the Russian
Federation has limited infrastructure to support a market system, and banks and
other financial systems are not well developed or well regulated. Businesses
therefore may experience difficulty in obtaining working capital facilities.
Moreover, these countries' banking system have faced and may encounter in the
future liquidity crises as well as other problems arising as a result of
under-capitalization of the banking sector as a whole. The experiences gained
from the financial and banking crisis in Russia in the last two quarters of 1998
demonstrate how fragile the Russian banking system is, and at the same time how
dependent Western investors are on such system. Another general Russian banking
crisis in particular could have a material adverse effect on the Company's
operations and financial performance and on the ability of its customers to pay
amounts due.
Restrictions on Currency Conversion; Historical Volatility in Currency
Prices. The Russian Rouble is not convertible outside of Russia.
In Russia, a market exists for the conversion of Roubles into other
currencies, but it is limited in size and is subject to rules limiting the
purposes for which conversion may be effected. The history of trading in the
Russian Rouble against the U.S. Dollar has been characterized by significant
declines in value and considerable volatility, although the Russian Rouble
experienced relative stability against the U.S. dollar during 1996 and 1997.
However, during 1998 and 1999, the Russian Rouble has been under considerable
pressure and suffered substantial declines against the U.S. Dollar and other
currencies. See "-- Russian Economic and Political Turmoil."
In general, the Company post its tariffs in U.S. Dollars, and receives
payment in Roubles at the U.S. dollar exchange rate prevailing on the date of
payment. The Company faces an exchange risk to the extent that it experiences
any difficulty in converting the Rouble payment received into U.S. Dollars. In
8
<PAGE> 11
addition, it faces a risk that the Rouble weakens against the U.S. Dollar during
the period between the customer instructing its bank to pay the Company and the
day the payment is actually received by the Company. Historically, this time
period has been short and the exchange risks arising from this particular issue
have therefore been minimal.
All of these factors, and others, may serve to increase the Company's
exposure to foreign exchange losses in the future, the effect of which cannot
currently be predicted. No assurance can be given that the Company will be able
to continue to post its tariffs in U.S. Dollars and collect payments in Roubles
in amounts determined by reference to the value of the U.S. Dollar, or that it
will continue be able to process such payments without banking delays or to
exchange Roubles for U.S. Dollars without significant difficulties, delays or
costs.
It is not practical or economical for the Company to hedge its exchange
risks. See "Quantitative and Qualitative Disclosure About Market Risk." Any of
these factors, in conjunction with further declines, or volatility, in the value
of the Russian Rouble against the U.S. Dollar, could have a material adverse
effect on the Company. See also "-- Risks Involving the Company -- Currency
Controls."
Legal Risks -- Underdeveloped Legal System. The Russian Federation lacks
fully developed legal systems. Russian law is evolving rapidly and in ways that
may not always coincide with market developments, resulting in ambiguities,
inconsistencies and anomalies, and ultimately in investment risk that would not
exist in more developed legal systems. Furthermore, effective redress in Russian
courts in respect of a breach of law or regulation, or in an ownership dispute,
may be difficult to obtain.
Risks associated with the Russian legal system include: (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influences; (ii) the relative inexperience of judges
and courts in commercial dispute resolution, and generally in interpreting legal
norms; (iii) inconsistencies among laws, presidential decrees and governmental
and ministerial orders and resolutions; (iv) often times conflicting local,
regional and national laws, rules and regulations; (v) the lack of judicial or
administrative guidance on interpreting the applicable rules; (vi) retroactive
changes in laws and regulations; and (vii) a high degree of discretion on the
part of government authorities and arbitrary decision-making which increases,
among other things, the risk of property expropriation. The result has been
considerable legal confusion, particularly in areas such as company law,
property, commercial and contract law, securities law, foreign trade and
investment law and tax law. No assurance can be given that the uncertainties
associated with the existing and future laws and regulations of the Russian
Federation will not have a material adverse effect on the Company. In addition,
there is no guarantee that a foreign investor would obtain effective redress in
any court. No treaty exists between the United States and the Russian Federation
for the reciprocal enforcement of foreign court judgments.
Furthermore, the relative infancy of business and legal cultures in the
Russian Federation are reflected in the inadequate commitment of local business
people, government officials, agencies and the judicial system to honor legal
rights and agreements, and generally to uphold the rule of law. Accordingly, the
Company may, from time to time, confront threats of, or actual, arbitrary or
illegal revision or cancellation of its licenses and agreements, and face
uncertainty or delays in obtaining legal redress, any of which could have a
material adverse effect on the Company.
Social Risks. The political and economic changes in the Russian Federation
since the break-up of the former Soviet Union have resulted in significant
social dislocations, as existing governing structures have collapsed and new
ones are only beginning to take shape. The resulting broad decline in the
standard of living has often resulted in substantial political pressure on the
government to slow or even reverse the economic policies currently being
pursued. In addition, such decline in the standard of living has led in the
past, and could lead in the future, to labor and social unrest. Such labor and
social unrest may have political, social and economic consequences, such as
increased support for a renewal of centralized authority, increased nationalism
(with restrictions on foreign investment in the Russian economy) and increased
violence, any of which could have a material adverse effect on the Company.
9
<PAGE> 12
In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generating businesses, and an increased integration of
Russian organized crime with major international criminal organizations. A
substantial increase in property crime in large cities has also been reported.
Finally, the local and international press have reported high levels of official
corruption in the locations where the Company operates. No assurance can be
given that organized or other crime or claims that the Company has been involved
in official corruption will not in the future have a material adverse effect on
the Company.
Official Data Reliability. The official data published by Russian federal,
regional and local governments and federal agencies are substantially less
complete or reliable than those of Western countries, and there can be no
assurance that the official sources from which certain of the information set
forth herein has been drawn are reliable. Official statistics may also be
produced on different bases than those used in Western countries. Any discussion
of matters relating to the Russian Federation herein must therefore be subject
to uncertainty due to concerns about the completeness or reliability of
available official and public information.
RISKS INVOLVING THE COMPANY
Guarantee of PLD Debt. As it has disclosed in its Annual Report on Form
10-K, PLD has significant debt service requirements, including the payment of
interest on the Senior Notes and the Convertible Notes and amounts owing to The
Travelers Insurance Company and The Travelers Indemnity Company (together, the
"Travelers Parties"), and PLD does not presently have sufficient funds on hand
to meet its current debt obligations. The Company is a guarantor of the Senior
Notes and the Convertible Notes under the terms of the related indentures and of
the amounts owing to the Travelers Parties.
While an agreement has been reached with the holders of the Senior Notes
and the Convertible Notes and with the Travelers Parties on a restructuring of
PLD's indebtedness to such parties, those agreements are conditioned upon the
closing of PLD's merger with MMG. If the merger did not close, PLD would remain
obligated to pay the interest on the Senior Notes and the Convertible Notes and
there can be no assurance that the Travelers Parties would not demand payment in
full of PLD's obligations to them. PLD's failure to make the interest payments
on the Senior Notes and the Convertible Notes could result in a default under
and acceleration of those Notes for which the Company serves as guarantor. In
addition, PLD's failure to make payment in full to the Travelers Parties could
result in a claim being made against the Company under its guarantee of the
amounts due to the Travelers Parties, as well as resulting in a cross-default
under and acceleration of the Senior Notes and the Convertible Notes.
Any such events would have a material adverse effect on the Company and
would raise substantial doubt about the Company's ability to continue as a going
concern.
Limited Operating History. The Company, which was acquired by PLD in April
1996, was formed in 1991 to provide international direct dial and private line
services for foreign companies in St. Petersburg. While the Company generated
profits in the years ended December 31, 1997 and 1998, in view of its limited
operating history there can be no assurance that the Company will be able to
generate sufficient revenues or control their costs enough to remain profitable
in the future.
Reliance on Telecommunications License; Risks of Revocation or
Renegotiation of License. The Company's primary license permits it to provide
long distance and international telephone, facsimile and data transmission
services to private networks in St. Petersburg and the surrounding region for a
term expiring on December 31, 2003. Based on its experience in renewing
existing, and obtaining new, licenses and its general knowledge of the licensing
environment in Russia, management of the Company believes that, so long as it is
being actively utilized, the Company's license will be renewed at the end of its
current term. The license limits the number of subscribers to 100,000 and
requires that 70,000 of these be in place by January 2001. Based on its
experience in renewing existing, and obtaining new, licenses and its general
knowledge of the licensing environment in Russia, management of the Company
believes that the maximum and minimum line numbers are not strict requirements
but are instead designed to provide general guidance as to the number of lines
intended to be included on the system. As of December 31, 1998, the Company had
a total of approximately 1,200 lines. Based on that knowledge and experience,
the Company has no reason to believe that its license
10
<PAGE> 13
would be terminated if it either exceeded 100,000 lines or failed to have 70,000
lines in place by January 2001, but there can be no assurance that the RFCTI
would not interpret the license provisions differently, which in turn could
result in the revocation of its license or its renegotiation on terms
unfavorable to the Company or the imposition of penalties. It is not possible to
calculate the amount of any penalties which might be imposed, which are in the
discretion of the RFCTI.
No assurance can be given that the Company will be able to maintain its
license, that the terms will not be interpreted, altered or renegotiated to its
disadvantage or that it will be renewed upon expiration. The loss of, or a
substantial limitation upon the terms of, its license could have a material
adverse effect on the Company.
Year 2000. While the Company believes that it should not encounter
material problems as a result of its own equipment not being Year 2000
compliant, it may encounter disruptions in service as a result of noncompliance
on the part of other traffic carriers, particularly those in Russia and other
C.I.S. countries on which it is dependent for the completion of its calls. The
Company believes that the Year 2000 compliance of the Russian and other C.I.S.
parties with which the Company interacts appears to be substantially behind that
of Western parties, and that it is unlikely that those parties will be able to
become fully Year 2000 compliant, given the limited amount of time left for
this, and the severe funding constraints faced by those parties. Accordingly,
there is a significant risk that the Company may experience disruptions in its
operations as a result of its C.I.S. interconnect partners not being able to
complete calls or pass traffic to the Company. Additionally, the billing systems
of those interconnect partners may also be disrupted, resulting in those
partners being unable to make timely settlements with the Company. All of these
items have the potential to adversely impact the operations of the Company, and
such adverse impact on the Company's own financial results may be material. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Issues."
Taxation. Taxes payable by Russian companies are substantial and include
value-added taxes ("VAT"), excise taxes, export taxes and income taxes. The tax
risks of investing in the Russian Federation can be substantial. Obtaining the
benefits of any relevant tax treaties can be extremely difficult due to the
documentary and other requirements imposed by the Russian authorities and the
unfamiliarity of those administering the tax system with the international tax
treaty system or their unwillingness to recognize the treaty system. For
example, a recent instruction issued by the Russian State Tax Service mandates
full withholding regardless of tax treaty status and requires the recipient to
seek to obtain a refund for withholding in excess of treaty amounts. The need to
deal with these issues may negate or impair tax planning initiatives undertaken
by the Company to reduce its overall tax obligations. Furthermore, the taxation
system in the Russian Federation is at an early stage of development and is
subject to varying interpretations, frequent changes and inconsistent and
arbitrary enforcement at the federal, regional and local levels. In certain
instances, new taxes and tax regulations have been given retroactive effect.
Currency Controls -- Risks of Changing Regulatory and Administrative
Environment. While applicable legislation in the Russian Federation currently
permits the repatriation of profits and capital and the making of other payments
in hard currency, the ability of the Company to repatriate such profits and
capital and to make such other payments is dependent upon the continuation of
the existing legal regimes for currency control and foreign investment,
administrative policies and practices in the enforcement of such legal regimes
and the availability of foreign exchange in sufficient quantities in those
countries.
The Company's ability to repatriate distributions and other payments in
hard currency will be dependent upon the continued ability of the Company to
bill its customers in the U.S. dollars or the equivalent amount of Roubles, as
well as its ability to exchange freely Rouble receipts into U.S. dollars. There
can be no assurance that, because of changes in Russian currency regulations,
and/or because of a recurrence of the financial, banking and currency crises
which afflicted the Russian Federation in the latter part of 1998, the Company's
ability to fully and/or on a timely basis realize benefits from its operations
in the Russian Federation through the receipt of hard currency payments will
continue.
-- Currency Licensing Requirements. Under current currency regulations in
the Russian Federation, while there do not appear to be additional
administrative requirements for the payment of dividends or interest
11
<PAGE> 14
on debt, until January 1999, specific licenses from the Central Bank were
required for repayments of principal on debt with a term of more than 180 days.
As of January 1999, the Central Bank required licenses for any such obligations
with a term of more than 90 days. Failure to obtain such currency licenses where
required can result in the imposition of fines and penalties. While the
requirements for obtaining such licenses largely involve the production of
documentation, not only are the documentary requirements themselves burdensome,
but there can be no assurance that the entity granting the licenses may not
impose additional, substantive requirements for the grant of a license or deny a
request for a license on an arbitrary basis. See "-- Country Risks -- Legal
Risks -- Underdeveloped Legal System." Furthermore, the time typically taken by
the Central Bank to issue such licenses can be lengthy. Delays of up to one year
or more in the issuance of licenses have not been uncommon. Failure to obtain
currency licenses, where required, can result in the imposition of fines and
penalties, significant delays in delivering equipment to the Company's operating
businesses and resulting difficulties in generating cash flows from the
Company's operating businesses in the Russian Federation.
-- Possible Effects of Currency Controls and Regulations on the Company's
Ability to Meet its Obligations. There can be no assurance that, due to the
risks outlined above, the Company will not experience difficulties or delays in
receiving cash flows from its operations. Any such difficulties or delays could
materially affect the Company's ability to make payments on its outstanding
indebtedness (including its guarantees of PLD's Senior Notes and Convertible
Notes) and could result in defaults in the Company's payment obligations under
that indebtedness. In addition, the Company's ability to meet its working
capital requirements or to declare and pay dividends to its shareholder could be
adversely affected by any cash flow restrictions experienced by the Company.
Anti-Monopoly Committee Approval. Under Russian anti-monopoly legislation,
transactions which potentially influence competition in the Russian Federation
are subject to the disclosure to and/or prior consent of the Russian
Anti-Monopoly Committee. The Anti-Monopoly Committee generally has wide
discretion to approve or disapprove transactions falling within the scope of its
authority, though in practice transactions are rarely challenged. The time
typically required by the Anti-Monopoly Committee to review a proposed
transaction varies between three and four months. Failure to obtain prior
consent may constitute grounds for the Anti-Monopoly Committee to seek a court
decision declaring the relevant transaction null and void. In particular,
transactions (including rental or lease transactions) which involve the
acquisition of more than 20% of a Russian company's stock or the transfer of
assets amounting to more than 10% of the assets of a transferor to a transferee,
are subject to prior consent of the Anti-Monopoly Committee.
Susceptibility to Political and Other Pressures. Although the Russian
government may be limited in the extent to which it can legally direct the
Company's policies, in practice it may be able to exercise significant
influence. As a consequence, not only may the Company's activities be restrained
if a governmental entity is not supportive, but the Company may be forced to
take action to support policies or agendas of the government which are not in
its commercial or other interests. In addition, in order to maintain good
working relationships with its partners, the Company may need to take certain
actions which may not necessarily be in its commercial or business interests.
Competition. The Company is developing and operating its business in a
highly competitive environment. A number of companies compete with the Company,
many of which have access to greater financial and technical resources than the
Company. There can be no assurance that the Company will be able to overcome
successfully the competitive pressures to which it is subject, both in the
markets in which it currently operates and in markets into which it might
expand. At this time it is unclear what impact the consolidation of the Russian
government's holdings in Sviazinvest and Rostelecom and the sale of significant
stakes in Sviazinvest to Russian and foreign investors will have on the Russian
telecommunications market in general and the Company in particular.
Impact of Auction of Stakes in Sviazinvest on the Company and the
Telecommunications Market in Russia. In 1997, it was reported that,
notwithstanding its previously announced plans to have Sviazinvest compete with
Rostelecom, the Russian government had consolidated its telecommunications
holdings in Sviazinvest and Rostelecom by transferring its shareholding in
Rostelecom (38% of the common stock, and 51% of the voting stock) to
Sviazinvest. The balance of the shares in Rostelecom remain in the hands of
12
<PAGE> 15
private investors. In April 1997, the government announced that it was seeking
to sell 49% of Sviazinvest in two auctions, one as to a 25% stake open to
Russian and foreign investors and the other as to a 24% stake open only to
Russian investors. In July 1997, the government announced that the 25% stake had
been sold to a consortium which included Oneximbank and Renaissance Capital, for
a purchase price of $1.875 billion. Following this auction, the Russian
government announced its intention to increase the size of the other stake being
sold to 25% minus two shares. The schedule for the sale of the second stake has
been delayed following the August 1998 financial crisis, and the structure of
any such sale (including whether foreign participation will be permitted) has
not been announced. While it is not yet clear how the proceeds of this sale will
be employed, it is understood that the government wishes to have a substantial
part, if not all, of the proceeds allocated to its current budget deficit. Prior
to the August 1998 crisis, Sviazinvest had announced plans to raise $400 million
through a Eurobond offering in 1998, but that offering was also delayed as a
result of the Russian financial crisis. In light of all of the foregoing, it is
unclear what impact the consolidation of the government's telecommunications
holdings and the auction of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.
Regulatory Uncertainties. The Company operates in an uncertain regulatory
environment. The Russian telecommunications system is currently regulated by the
RFCTI, largely through the issuance of licenses. Despite the 1995 enactment of
the Telecommunications Law in Russia, considerable uncertainty still exists as
to the application and interpretation of many of its terms.
While the RFCTI appears to have succeeded to all of the powers and
authorities of the Former MOC, it is not yet clear whether it will in fact
continue to operate in the same manner and wield the same influence as the
Former MOC. In particular, it is unclear whether the RFCTI will be able to
control the actions of local and regional governmental authorities who may
endeavor to impose new conditions upon operators in their respective
jurisdictions or areas of influence.
The absence of adequate regulation in the telecommunications sector has
meant that decisions, including the granting and renewal of licenses, may at
times be made by governmental officials without reference to precedent or
procedure.
Furthermore, the introduction of regulation of tariffs, or any other type
of regulation, could have far-reaching, and potentially materially adverse,
effects on the Company. In particular, there is considerable uncertainty as to
what impact the transfer of authority to regulate local tariffs to Regional
Committees will have on local tariffs in Russian. See "Telecommunications in the
Former Soviet Union -- Telecommunications in the Russian Federation."
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal office, which it leases on a commercial basis, is
located in the Admiralteiski district of St. Petersburg, Russia. The Company's
commercial and technical facilities are located at this location.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. CONTROL OF REGISTRANT
All of the issued and outstanding ordinary shares of the Company are held
directly by PLD Telekom Inc.
ITEM 5. NATURE OF TRADING MARKET
None.
13
<PAGE> 16
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Exchange Controls. Following the economic crisis in August and September
1998, the Russian Federation introduced more stringent procedural requirements
on Russian residents wishing to pay non-residents in hard currency. The main
reason for this was to attempt to reduce the level of illegal hard currency
outflows from the country. Significant documentary requirements may have to be
satisfied in respect of payments in U.S. Dollars between Russian residents
(which generally includes all Russian companies and citizens resident in Russia)
and non-residents (which generally includes non-Russian companies even if they
have a representative office or other permanent establishment in Russia) for
current currency transactions (generally those where payment is made within 90
days of the provision of goods and services). Payments in U.S. Dollars
classified as movements of capital (which generally includes direct investments,
portfolio investments, acquisition of real estate and payments made pursuant to
loan agreements, or agreements for the lease or sale of goods and services
having terms of over 90 days) are subject to licensing by the Central Bank. The
Company believes that it holds, or has applied for and expects eventually to
receive, all required Central Bank licenses. The need to apply for Central Bank
licenses can be burdensome, because of the substantial documentary and other
requirements involved and because of the considerable length of time involved,
often running into several months. Failure to apply for the appropriate
licenses, or to receive the outstanding licenses could result in fines and
penalties. See "Business -- Risk Factors -- Risks Involving the Company --
Currency Controls." Finally, banks in Russia require that certain hard currency
transfers be accompanied by a "transaction passport" setting forth that all
required tax and regulatory requirements have been followed. Other requirements
may be introduced in the future by the Russian Federation to further control
hard currency payments from the country.
Payments between Russian residents must generally be made in Roubles.
Russian companies may exchange Roubles for U.S. Dollars if they can document
U.S. Dollar-denominated liabilities that are due and payable within specified
periods. Russian companies are required to convert 75% of most hard currency
earnings into Roubles, but (as noted in the preceding sentence) may be able to
reconvert such amounts into hard currency if they can document hard currency
denominated liabilities that are due and payable within a specified period.
Roubles may not be lawfully exported from, or converted into, other currencies
outside of Russia.
Availability of Hard Currency for Conversion Purposes. The ability of
foreign investors to convert Roubles into hard currency is also subject to the
availability of hard currency in the Russian currency markets. Although there is
an existing market within Russia for the conversion of Roubles into other
currencies, including the interbank currency exchange, over-the-counter and
currency futures markets, conversion of Roubles at times of crisis, such as in
August 1998, may be difficult.
Exchange Rates. Significant fluctuations in the value of the Rouble
against the U.S. Dollar and other hard currencies can also have a material
impact on the value of a foreign investor's Rouble dividend income or Rouble
proceeds from the sale of Rouble denominated securities. The history of trading
in the Russian Rouble against the U.S. Dollar has been characterized by
significant declines in value and considerable volatility, although the Russian
Rouble experienced relative stability against the U.S. dollar during 1996 and
1997. However, during 1998 and 1999, the Russian Rouble has been under
considerable pressure and suffered substantial declines against the U.S. Dollar
and other currencies. See "Risk Factors -- Country Risks -- Russian Economic and
Political Turmoil."
Repatriation. Although Russian law governing foreign investment guarantees
foreign investors the right to repatriate their earnings from Russian
investments, the Russian exchange control regime, including licensing
requirements administered by the Central Bank, may materially affect their
ability to do so and may increase the cost of such repatriation. See
"Business -- Risk Factors -- Risks Involving the Company -- Currency Controls."
Impact upon the Company. In general, the impact on the Company of the
Russian exchange controls regime has not been particularly adverse but there can
be no assurance that there will be no such impact in the future. See
"Business -- Risk Factors -- Risks Involving the Company -- Currency
Controls -- Currency Licensing Requirements."
14
<PAGE> 17
ITEM 7. TAXATION
The Company is subject to a number of taxes in Russia, including corporate
profits tax at the rate of approximately 33%, withholding taxes on distributions
made by the Company, property taxes, advertising taxes, road taxes, housing
taxes, transport taxes and education taxes. A recent instruction issued by the
Russian State Tax Service mandates full withholding regardless of any treaty and
requires the recipient to seek to obtain a refund for withholding in excess of
treaty amounts, although in practice those refunds can be difficult to obtain.
The need to comply with these provisions may negate or impair tax planning
initiatives undertaken by the Company to reduce its overall tax obligations in
Russia.
The tax system in Russia has changed rapidly in recent years and may
undergo additional changes, which may have a material adverse effect on the
Company.
15
<PAGE> 18
ITEM 8. SELECTED FINANCIAL DATA
The following summary financial and operating data was derived from, and
should be read in conjunction with, the audited Financial Statements of the
Company and the related notes thereto, and Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996*
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues....................................... $9,854 $7,602 $5,304
Operating expenses....................................... 8,746 6,362 4,220
Operating income......................................... 1,108 1,240 1,084
Income before income taxes............................... 395 1,191 1,031
Income taxes............................................. 31 383 194
------ ------ ------
Net income............................................... $ 364 $ 808 $ 837
------ ------ ------
</TABLE>
<TABLE>
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash..................................................... $ 266 $ 242 $ 170
Non-cash working deficiency.............................. (834) (1,274) (1,807)
Property and equipment, net.............................. 4,668 4,802 4,622
Total assets............................................. 6,883 6,723 5,949
Shareholder's equity..................................... 4,192 3,828 3,020
</TABLE>
- ---------------
* represents nine months ended December 31, 1996.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company, the impact of Year 2000 issues on the Company's
operations and interpretations and actions of certain regulatory authorities,
including in Russia, as well as information contained elsewhere in this report
where statements are preceded by, followed by, or include the words "believes,"
"expects," "anticipates," and similar expressions. For such statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed elsewhere in the Report.
Furthermore, this document constitutes a Year 2000 Readiness Disclosure
Statement, and the statements herein are subject to the Year 2000 Information
and Readiness Disclosure Act, and the Company hereby claims the protection of
such Act for this document and all information contained herein.
BASIS OF PRESENTATION
The Company was formed to provide international direct dial, international
payphone and leased line services for Russian and foreign businesses in St.
Petersburg and the Leningrad Oblast. The Company was incorporated on September
3, 1991 under the laws of the Russian Federation as a closed joint stock
company.
On April 1, 1996, PLD purchased 100% of the common shares of the Company.
PLD's investment in the Company has been pushed down into the Company's
financial statements and allocated to fixed assets. The Company's balance sheets
as at December 31, 1998 and 1997 reflect the effect of this push down accounting
treatment.
16
<PAGE> 19
Certain reclassifications have been made to the prior year's financial
statements to conform to the current years' presentation.
EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities, or other income or cash flow data
prepared in accordance with generally accepted accounting principles, or as a
measure of a company's profitability or liquidity.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
Overview. For the year ended December 31, 1998, the Company reported net
income of $0.4 million and operating income of $1.1 million earned on revenues
of $9.9 million compared to net income of $0.8 million and operating income of
$1.2 million earned on revenues of $7.6 million in 1997. EBITDA of $1.0 million
in 1998 compared to $1.7 million in 1997.
Revenues. Revenues increased 30.3% from $7.6 million to $9.9 million in
1998 reflecting the continued strong year-on-year growth in minutes of traffic.
At year end, the Company had a total of approximately 1,200 lines connected,
unchanged from the end of 1997. Traffic for the year was in excess of 10.4
million minutes, up from 8.3 million minutes in 1997. Revenues also increased in
1998, in part, due to ongoing cross-marketing efforts with PeterStar through
which the Company's and PeterStar's existing customers can take advantage of a
wider array of telecom products and services.
Management believes that revenues in 1999 are unlikely to grow at the same
rate as they have in recent years given the many uncertainties in the Russian
political and economic landscape at present. Further deterioration in the
Russian economic situation would likely impact the Company's businesses
adversely. See "Risk Factors". While management believes that it is taking all
available measures to protect its business from the negative effects of any
further problems in Russia, there can be no assurance that those measures will
be successful.
Gross profit. Gross profit in 1998 remained unchanged from 1997 at $4.7
million. As a percentage of revenues, gross margin decreased from 61.8% in 1997
to 47.5% in 1998 due to BCL entering into two new international capacity
contracts in support of PLD global projects and introducing a new system of
discounts to its retail clients. Margins are generally expected to come under
continued pressure in 1999 due to the continuing impact of the Russian economic
crises.
General and administrative expenses. General and administrative expenses
which include salaries, sales and marketing and overhead expenses increased 4.0%
from $2.5 million in 1997 to $2.6 million in 1998. As a percentage of revenues,
general and administrative expenses were reduced to 26.3% in 1998 vs. 32.9% in
1997, largely due to the realization of economies of scale.
Depreciation and amortization. Total depreciation and amortization
expenses in 1998 of $0.6 million were unchanged from 1997. A total of $0.5
million was invested in capital equipment in 1998 compared with $0.9 million
invested in 1997. Depreciation is expected to remain relatively constant over
the near term as no significant capital projects are anticipated. As a
percentage of revenues, depreciation is expected to decrease gradually as the
Company reaches limits on capacity of its switching facilities.
Taxes other than income taxes. Taxes other than income taxes (which
include road tax, property tax, employee-related taxes, etc.) of $0.4 million in
1998 were unchanged from 1997.
Interest income. Interest income earned in 1998, primarily on cash
balances, was nominal at $3,093 in 1998 down from $35,777 in 1997.
17
<PAGE> 20
Foreign exchange loss. The foreign exchange loss in 1998 of $0.7 million
compared with a $43,082 loss recorded in 1997 and was the result of unfavorable
movements in the rouble, vis-a-vis the U.S. dollar, as applied to the Company's
rouble denominated net monetary assets. The 1998 loss accelerated in the second
half of the year when extreme market conditions resulting from the Russian
economic crisis caused major disruptions in the Russian banking system. This
prevented the Company from converting rouble cash balances into hard currency at
a time when the value of the rouble was depreciating significantly. The Company
has sought, and will continue to seek, to limit the effects of such conditions
by minimizing the amount of rouble balances held by the Company and by taking
measures to accelerate collection and currency conversion procedures in so far
as this is possible in the current banking and legislative environment.
Income taxes. Income taxes decreased from $0.4 million in 1997 to $30,706
in 1998 as a result of the reduction in the Company's pre-tax earnings in 1998
adjusted for non-deductible expenditures for statutory purposes.
YEAR ENDED DECEMBER 31, 1997 VERSUS NINE MONTHS ENDED DECEMBER 31, 1996
Overview. For the year ended December 31, 1997, the Company reported net
income of $0.8 million and operating income of $1.2 million on revenues of $7.6
million compared to $0.8 million in net income and $1.1 million in operating
income earned on revenues of $5.3 million in the nine months ended December
1996. EBITDA of $1.7 million in 1997 compared to $1.4 million in the nine months
ended December 31, 1996.
Revenues. Revenues increased 43.4% from $5.3 million recorded in the nine
months ended December 31, 1996 to $7.6 million for the full year in 1997. At the
end of 1997, the Company had a total of approximately 1,200 lines connected,
compared to 1,100 lines at the end of 1996. Traffic in 1997 was in excess of 8.3
million minutes, up from 3.7 million recorded in 1996.
Gross profit. Gross profit, as a percentage of revenues increased
marginally from 60.4% recorded in the nine months ended December 31, 1996 to
61.8% in 1997 due to BCL negotiating lower accounting rates on a number of its
key international routes, thereby bringing down the unit cost of each
international minute.
General and administrative expenses. General and administrative expenses
which include salaries, sales and marketing and overhead expenses increased
66.7% from $1.5 million in the nine months ended December, 1996 to $2.5 million
in full year 1997. As a percentage of revenues, general and administrative
expenses increased to 32.9% in 1997 vs. 28.3% in the nine months ended December
31, 1996, reflecting a full year's effect of the Company's expanded marketing
efforts initiated by PLD in the second half of 1996.
Depreciation and amortization. Depreciation and amortization increased to
$0.6 million in 1997 from $0.3 million in the nine months ended December 31,
1996. The increase reflects the investment of $0.9 million in capital equipment
in 1997 as well as a full year's depreciation on approximately $1.8 million in
capital equipment acquired in April through December of 1996.
Taxes other than income taxes. Taxes other than income taxes in 1997
remained relatively unchanged from the nine months ended December 31, 1996 at
$0.4 million.
Interest income. Interest income earned in 1997, primarily on cash
balances, was nominal at $35,777 compared to $3,424 in the nine months ended
December 31, 1996.
Foreign exchange loss. A foreign exchange loss in 1997 of $43,082 was up
from the $7,206 loss recorded in the nine months ended December 31, 1996 and was
the result of unfavorable movements in the rouble, vis-a-vis the U.S. dollar, as
applied to the Company's rouble denominated net monetary assets.
Income taxes. Income taxes increased from $0.2 million in the nine months
ended December 31, 1996 to $0.4 million in 1997 reflecting the overall increase
in the pre-tax earnings of the Company between the periods adjusted for
non-deductible expenditures for statutory purposes.
18
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, a total of $0.2 million in cash was
generated from operations (1997 -- $0.1 million; 1996 (nine months) -- $0.4
million), and $0.5 million was used in net investing activities (1997 -- $0.8
million; 1996 (nine months) -- $1.8 million). Investments consisted primarily of
capital expenditures on switching and transmission equipment as well as
leasehold improvements and additional furniture and equipment costs associated
with the Company's move to new premises in late 1997.
As of December 31, 1998, the Company reported a working capital deficiency
of $0.6 million (1997 -- $1.0 million). Excluding advances from PLD and
wholly-owned subsidiaries of PLD, the Company's 1998 year end working capital
position improves to $0.4 million (1997 -- $0.4 million). As at December 31,
1998 total assets of $6.9 million ($6.7 million as of December 31, 1997)
consisted primarily of $2.1 million in current assets (including $0.3 million in
cash and cash equivalents), and net property and equipment of $4.7 million.
Shareholder's equity of $4.2 million as of December 31, 1998, which
consisted of $2.2 million in share capital and $2.0 million in retained
earnings, compared to $3.8 million recorded at the end of 1997.
In the past, the Company's operations have been financed primarily from
internally generated cash and advances from PLD. While the Company has, to a
large extent, become a self-sufficient, cash positive business from an operating
perspective, any significant capital programs involving the development of its
network in the future would likely require capital infusions from PLD. In
addition, to the extent that the Company experiences lower than expected
revenues, higher operating costs, or other problems as a result of continuing
economic difficulties in Russia, the Company may need to seek other sources of
financing to fund its operations.
As it has disclosed in its Annual Report on Form 10-K, PLD has significant
debt service requirements, including the payment of interest on the Senior Notes
and the Convertible Notes and amounts owing to the Travelers Parties, and PLD
does not presently have sufficient funds on hand to meet its current debt
obligations. The Company is a guarantor of the Senior Notes and the Convertible
Notes under the terms of the related indentures and of the amounts owing to the
Travelers Parties.
While an agreement has been reached with the holders of the Senior Notes
and the Convertible Notes and with the Travelers Parties on a restructuring of
PLD's indebtedness to such parties, those agreements are conditioned upon the
closing of PLD's merger with MMG. If the merger did not close, PLD would remain
obligated to pay the interest on the Senior Notes and the Convertible Notes and
there can be no assurance that the Travelers Parties would not demand payment in
full of PLD's obligations to them. PLD's failure to make the interest payments
on the Senior Notes and the Convertible Notes could result in a default under
and acceleration of those Notes for which the Company serves as guarantor. In
addition, PLD's failure to make payment in full to the Travelers Parties could
result in a claim being made against the Company under its guarantee of the
amounts due to the Travelers Parties, as well as resulting in a cross-default
under and acceleration of the Senior Notes and the Convertible Notes. Any such
events would have a material adverse effect on the Company and would raise
substantial doubt about the Company's ability to continue as a going concern.
In connection with the Merger Agreement with MMG and the transactions
contemplated thereunder, the holders of the Senior and Convertible Notes have
agreed, subject to completion of the merger and other transactions contemplated
by the Merger Agreement, to exchange their outstanding notes for new notes
issued by MMG which will not be guaranteed by the Company.
EFFECTS OF NEWLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 cannot be applied retroactively to
19
<PAGE> 22
financial statements of prior periods. At the current time the Company has not
evaluated the impact SFAS 133 will have, if any.
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's financial statements.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result of the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19 -- ). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process transactions,
incorrect data being generated and critical deadlines being overlooked. The
impact of these disruptions could be significant.
PLD has conducted, and has caused each of its operating subsidiaries to
conduct a survey of the equipment and software used by them.
The Company's business involves the supply of services. To the very limited
extent that it maintains actual inventory for sale, it does not manufacture such
inventory itself but resells goods supplied by recognized manufacturers of such
goods.
Its survey has involved testing of equipment as well as contacting the
manufacturers of equipment and producers of software (or review of materials
published by such parties, including websites) to assess such parties' Year 2000
readiness. Such survey has indicated that, except in a few instances, the
equipment and software which it uses are Year 2000 compliant. The Company is
taking steps to upgrade or replace those items which are not compliant. In many
cases the items required to be upgraded or replaced were due to be upgraded or
replaced in any event, so that the Company's exposure has been the acceleration
of already planned expenditures, rather than new or unanticipated expenditures.
The Company expects that essentially all of its upgrading and replacement work,
and any remaining testing required, will be complete by the end of the third
quarter of 1999.
To date, PLD has expended approximately $400,000 for remediation efforts
and expects that its total remediation costs, including scheduled upgrades and
replacements of approximately $3,100,000, will be approximately $4,000,000.
Starting in January 1998, all operating businesses were required to use
their best efforts to obtain specific warranties of Year 2000 compliance from
parties with which they contract for products or services thereafter. While
almost all new contracts for products or services entered into since that date
have contained some form of warranty, these have generally been limited to
recovering of direct losses, and not indirect or consequential losses, such as
loss of revenues or profits. In consequence, the actual efficacy of such
warranties may be somewhat limited.
Additionally, all operating businesses have been required to review the
terms under which they have heretofore supplied products and/or services to
third parties. No case has been identified in which any operating business has
specifically guaranteed Year 2000 compliance, and the Company has instituted a
policy regarding the giving of such guarantees in the future in order to control
and limit possible exposure thereunder. Further, since none of the operating
businesses manufacture equipment or produce proprietary software for customers
other than in exceptional cases, virtually all such transactions involve the
re-sale or assignment of
20
<PAGE> 23
products and services supplied by others. Accordingly, the Company believes
that, to the extent that such products and services are either warranted or
shown to be Year 2000 compliant, its own exposure is commensurately reduced.
While there can be no assurances that equipment failures will not occur,
the effect of such failures may be ameliorated by the fact that such equipment
is usually part of a network of facilities and equipment maintained by the
Company. This means that a failure in an individual component will not
necessarily cause a substantial disruption to the network as a whole, because no
individual item is critical to the operation of the network as a whole, and the
network also provides opportunities to by-pass the failure.
The foregoing indicates that, to the extent that its business depends upon
equipment, software, facilities and networks under its control, the Company
believes that, by the year 2000, it will have taken all steps reasonably
required to ensure that those items are Year 2000 compliant, and that it has
reasonable contingency arrangements to deal with failures.
The Company's principal Year 2000 risks arise from the fact that it is
dependent for the completion of its calls upon a variety of other traffic
carriers who provide interconnection and termination services. Since in many
cases there are a variety of routes over which traffic can be carried, it is
simply not possible for the Company to verify that each entity which could be
involved in providing telecommunications services to its operating subsidiaries
will be Year 2000 compliant. To a large extent, the Company is reliant in these
circumstances on the actions of the other telecommunications operators and
service providers to ensure that their counterparts are Year 2000 compliant.
While the Company believes that the parties providing these services which are
based in the United States and other Western countries are expected to be
substantially Year 2000 compliant, the Year 2000 compliance and readiness of the
Russian and other C.I.S. parties with which the Company interacts appears to be
substantially behind that of Western parties. The Company has been unable to
determine with any degree of certainty the extent to which its interconnect
partners in the C.I.S. are non-compliant because those parties have generally
been reluctant to share this information. The recent decision by the Russian
government not to cooperate in Year 2000 compliance exercises, prompted by the
Kosovo crisis, is likely to make it more difficult for the Company to obtain
this information. Nevertheless the Company believes, based on such reluctance
and anecdotal and other evidence, that many of those partners, particularly in
those in the less developed regions of the Russian Federation or the C.I.S., are
substantially non-compliant.
Furthermore, the likelihood that those parties will be able to become Year
2000 compliant seems problematical, given the limited amount of time left for
this, the severe funding constraints faced by those parties, principally as a
result of poor economic conditions in their home countries, and the possible
lack of governmental pressure on those parties.
Accordingly, there is a significant risk that the Company may experience
disruptions in its operations as a result of its C.I.S. interconnect partners
not being able to complete calls or pass traffic to the Company. While the
Company is unable to predict the extent or duration of such disruptions, the
possibility exists that they could be extensive, and also take considerable
time, perhaps even months, to correct.
An additional risk is the likelihood that the billing systems of those
interconnect partners may also be disrupted, resulting in those partners being
unable to collect from their customers or to make timely settlements with the
Company.
Accordingly, the Company believes that there is a considerable risk that it
will experience disruptions in providing telecommunications services to and from
the countries of the C.I.S. which it serves, and that those disruptions may be
substantial. Given its inability to obtain an accurate assessment of the extent
to which its C.I.S. partners may be non-compliant, it is impossible for the
Company to predict either the extent or the magnitude of those disruptions.
Nevertheless, they have the potential to adversely impact the operations of its
operating subsidiaries, and such adverse impact may be material.
The Company has investigated the possibility of obtaining insurance against
liability arising out of claims that products or services supplied are not Year
2000 compliant, but has determined that such insurance is not
21
<PAGE> 24
obtainable upon terms which are sufficiently comprehensive and/or is only
obtainable upon terms which are uneconomical given the level of perceived risk,
and accordingly has elected not to pursue such insurance.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PLD's finance department is responsible for the evaluation and, to the
extent practicable, management of the Company's exposure to market risks.
The Company's primary market risk is related to the movement in foreign
currency exchange rates in Russia. See "Risk Factors -- Country Risks --
Restrictions on Currency Conversion; Historical Volatility in Currency Prices"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Currency Controls." PLD and the Company periodically evaluate the
materiality of their foreign exchange exposures and the financial instruments
available to mitigate this exposure. However, PLD and the Company do not
currently believe that it is practical or economical to hedge these foreign
currency exchange risks and as a result will continue to experience foreign
currency gains and losses.
The Company does not use any derivative instruments, either as a trading or
non-trading activity.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Ian Armour has been a Director of the Company since 1998. He is a Senior
Vice President and the Chief Operating Officer of PLD.
Peter Owen Edmunds has been a Director of the Company since 1996. He is the
Representative Director -- St. Petersburg of PLD.
Simon Edwards has been a Director of the Company since 1998. He is a
Director, Senior Vice President and the Chief Financial Officer of PLD.
Stephen Gardner has been a Director of the Company since 1998. He is the
Vice President -- Commercial, Russia of PLD.
With the exception of Mr. Gardner (who is a U.S. citizen), none of the
directors of the Company are citizens or residents of the United States.
The directors of the Company are elected for an unspecified term, until
their successors are elected and duly qualified.
There are no officers of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The directors of the Company are not compensated by the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
None.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
None.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
None.
22
<PAGE> 25
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
None.
PART IV
ITEM 17. FINANCIAL STATEMENTS
The financial statements of the Company are attached to this Report
beginning on page F-1.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(i) Balance sheets of the Company as of December 31, 1998 and 1997;
(ii) Statements of operations and retained earnings of the Company for
the years ended December 31, 1998 and 1997 and the nine months
ended December 31, 1996; and
(iii) Statements of cash flows of the Company for the years ended
December 31, 1998 and 1997 and the nine months ended December 31,
1996.
(b) Exhibits
<TABLE>
<C> <S>
4.1 Indenture, dated as of May 31, 1996, among PLD Telekom Inc.,
as Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
Limited, PLD Capital Limited, the Company and Wireless
Technology Corporations Limited as Guarantors, and The Bank
of New York, as Trustee, with respect to $123,000,000
aggregate principal amount at stated maturity of 14% Senior
Discount Notes due 2004 (the "Senior Note Indenture")
(Exhibit 4.1)(1)
4.2 Indenture, dated as of May 31, 1996, among PLD Telekom Inc.
as Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
Limited, PLD Capital Limited, the Company and Wireless
Technology Corporations Limited as Guarantors, and The Bank
of New York, as Trustee, with respect to $26,500,000
aggregate principal amount of 9% Convertible Subordinated
Notes due 2006. (Exhibit 4.1)(2)
4.3 First Supplemental Indenture, Amendment Agreement, Consent
and Waiver, dated as of March 20, 1998, among PLD Telekom
Inc., as Issuer, NWE Capital (Cyprus) Limited, PLD Asset
Leasing Limited, PLD Capital Limited, the Company and
Wireless Technology Corporations Limited, as Guarantors,
Clayton A. Waite and Apropos Investments Ltd., as nominee
shareholders, and The Bank of New York, as Trustee. (Exhibit
4.3)(1)
99.1 Consent of KPMG.
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-5398).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 333-5396).
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York on
June , 1999.
BALTIC COMMUNICATIONS LIMITED
By: /s/ SIMON EDWARDS
------------------------------------
Simon Edwards
Director
24
<PAGE> 27
BALTIC COMMUNICATIONS LIMITED
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C>
Independent auditors' report................................ F-2
Balance sheets.............................................. F-3
Statements of operations and retained earnings.............. F-4
Statements of cash flows.................................... F-5
Notes to financial statements............................... F-6
</TABLE>
F-1
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
Shareholder and Board of Directors of
Baltic Communications Limited:
We have audited the accompanying balance sheets of Baltic Communications
Limited as of December 31, 1998 and 1997, and the related statements of
operations and retained earnings and cash flows for the years ended December 31,
1998 and 1997 and the nine months ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baltic Communications
Limited as of December 31, 1998 and 1997 and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997 and the nine
months ended December 31, 1996 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9(c) to the
financial statements, the Company's parent, PLD Telekom Inc. (PLD) does not
presently have sufficient funds on hand to meet its current debt obligations.
The Company is a guarantor of such obligations. PLD's failure to make payment in
full when required could result in a claim being made against the Company under
its guaranty and a cross-default under and acceleration of other debt
obligations for which the Company is also a guarantor. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Without qualifying our opinion, we draw your attention to the information
contained in Note 1 to the financial statements regarding the uncertain
operating environment in Russia. The ultimate effect that these significant
economic uncertainties could have on the stated values, classification,
realisation or settlement of assets and liabilities stated in these financial
statements cannot presently be determined and accordingly no provisions have
been made.
Without qualifying our opinion, we draw your attention to the disclosures
in Note 9 to the financial statements concerning the uncertainty relating to the
effects of the Year 2000 problem.
KPMG
St. Petersburg, Russia
March 30, 1999
F-2
<PAGE> 29
BALTIC COMMUNICATIONS LIMITED
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 266,076 241,949
Trade receivables, net (note 3)........................... 995,919 1,239,370
Due from related parties (note 7)......................... 531,998 --
Prepayments............................................... 80,800 167,908
Prepaid taxes............................................. 171,759 --
Inventory................................................. 76,025 214,394
---------- ---------
Total current assets.............................. 2,122,577 1,863,621
Property and equipment, net (note 4)........................ 4,668,005 4,801,791
Investments................................................. 8,000 8,000
Intangible assets, net (note 5)............................. 84,052 49,505
---------- ---------
Total assets...................................... $6,882,634 6,722,917
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,510,134 1,871,857
Accrued liabilities....................................... 87,177 154,288
Deferred revenues......................................... 4,019 3,861
Taxes payable............................................. 100,211 151,499
Deferred income tax liability............................. 30,706 --
Due to related parties (note 6)........................... 932,646 686,609
Customer deposits......................................... 26,234 27,217
---------- ---------
Total current liabilities......................... 2,691,127 2,895,331
---------- ---------
Shareholder's equity:
Common stock (note 8)..................................... 2,183,000 2,183,000
Retained earnings......................................... 2,008,507 1,644,586
---------- ---------
Total shareholder's equity........................ 4,191,507 3,827,586
---------- ---------
Total liabilities and shareholder's equity........ $6,882,634 6,722,917
========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 30
BALTIC COMMUNICATIONS LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Telecommunications revenues.......................... $9,780,176 $7,562,269 $5,266,803
Other non-telecommunications revenues................ 73,678 39,980 36,704
---------- ---------- ----------
Total revenues....................................... 9,853,854 7,602,249 5,303,507
Direct costs........................................... 5,110,896 2,904,632 2,053,763
---------- ---------- ----------
Gross profit................................. 4,742,958 4,697,617 3,249,744
---------- ---------- ----------
Operating expenses:
General and administrative........................... 2,599,278 2,470,769 1,510,934
Depreciation......................................... 575,708 557,494 331,256
Amortisation......................................... 12,943 6,783 319
Taxes other than income taxes........................ 447,429 422,094 323,266
---------- ---------- ----------
Total operating expenses..................... 3,635,358 3,457,140 2,165,775
---------- ---------- ----------
Operating income............................. 1,107,600 1,240,477 1,083,969
Other income/(expense):
Interest income...................................... 3,093 35,777 3,424
Foreign exchange loss (note 1)....................... (672,087) (43,082) (7,206)
Loss on disposal of property and equipment........... (43,979) (42,069) (49,059)
---------- ---------- ----------
Income before income taxes................... 394,627 1,191,103 1,031,128
Income taxes (note 10)................................. 30,706 383,255 194,390
---------- ---------- ----------
Net income................................... 363,921 807,848 836,738
---------- ---------- ----------
Retained earnings, beginning of period................. 1,644,586 836,738 --
---------- ---------- ----------
Retained earnings, end of period....................... $2,008,507 $1,644,586 $ 836,738
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 31
BALTIC COMMUNICATIONS LIMITED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 363,921 807,848 836,738
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 575,708 557,494 331,256
Amortisation........................................... 12,943 6,783 319
Loss on disposal of property and equipment............. 43,979 42,069 49,059
Changes in operating assets and liabilities:
(Increase)/decrease in trade receivables............... 243,451 (359,164) 355,754
(Increase)/decrease in prepayments..................... 87,108 (13,250) (93,937)
(Increase)/decrease in inventory....................... 138,369 (143,949) 17,947
(Increase)/decrease in prepaid taxes................... (171,759) 16,765 (16,765)
Increase in due from related parties................... (531,998) -- --
Increase/(decrease) in due to related parties.......... 246,037 (361,311) 1,047,920
Increase/(decrease) in deferred revenues............... 158 3,861 (18,255)
Decrease in customer deposits.......................... (983) (1,642) (10,530)
Increase/(decrease) in taxes payable................... (51,288) 151,499 (386,557)
Increase/(decrease) in accrued liabilities............. (67,111) 83,318 70,970
Increase in deferred income tax liability.............. 30,706 -- --
Increase/(decrease) in accounts payable................ (361,723) 90,685 (912,575)
--------- -------- ----------
Net cash provided by operating activities........... 193,597 73,158 434,606
--------- -------- ----------
Cash flows from investing activities:
Capital expenditures................................... (538,658) (854,151) (1,845,522)
Proceeds on disposal of fixed assets................... 5,267 44,986 7,000
--------- -------- ----------
Net cash used in investing activities............... (533,391) (809,165) (1,838,522)
--------- -------- ----------
Increase/(decrease) in cash......................... 24,127 71,841 (567,178)
Cash at beginning of period.............................. 241,949 170,108 737,286
--------- -------- ----------
Cash at end of period.................................... $ 266,076 241,949 170,108
========= ======== ==========
Supplementary disclosures:
Income tax paid.......................................... $ 368,431 240,047 --
========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 32
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) BACKGROUND
(a) Business, Operations and Future Activities
Baltic Communications Limited (the "Company") was formed to provide
international direct dial, international payphone and leased line services to
business customers in St. Petersburg and the Leningrad Oblast. The Company was
incorporated on September 3, 1991 under the laws of the Russian Federation as a
closed joint stock company.
On April, 1 1996 PLD Telekom Inc. ("PLD" or the "Parent") purchased 100% of
the common shares of the Company for a net purchase price of $2,183,000. Such
purchase price was allocated to the assets and liabilities of the Company as
follows:
<TABLE>
<S> <C>
Cash........................................................ $ 737,000
Other current assets........................................ 1,385,000
Fixed assets................................................ 3,199,000
Current liabilities......................................... (3,138,000)
-----------
$ 2,183,000
===========
</TABLE>
The Company's principal telecommunications license allows it to operate an
international, national and local telecommunications system in St. Petersburg;
this expires in 2003. Other licenses, all of which expire in 2001, are for
telematic services, rent of circuits, data services and the operation of a
dedicated national/international overlay network. These licenses are generally
renewed on application. Grounds for termination of licenses are broad and
subjective and there is little precedent upon which to determine the practical
likelihood of termination.
(b) Russian Business Environment
In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other environments.
The immediate and ongoing effects of severe economic instability in Russia
include or may include slower economic growth or decline, a reduction in the
availability of credit and the ability to service debt, volatile interest rates,
changes and increases in taxes, higher inflation or hyperinflation, further
devaluation of the rouble, restrictions on convertibility and movements of
funds, bankruptcies including bank failures, and other severe economic and
political consequences. These conditions and future policy changes could have a
material adverse effect on the operations of the Company and the realisation and
settlement of its assets and liabilities.
The accompanying financial statements reflect management's current
assessment of the impact of the economic situation on the financial position of
the Company. Actual results could differ from management's current assessments
and such differences could be material. In addition, the effect of future
developments on the Company's financial position and the ability of others to
continue to transact with the Company cannot presently be determined. The
financial statements therefore may not include all adjustments that might
ultimately result from these adverse conditions.
(c) Uncertain Operating Environment in Russia
The recoverability of the Company's assets, as well as the future operation
of the Company, may be significantly affected by the current and future economic
environment in Russia. The accompanying financial statements do not include any
adjustments with regard thereto.
F-6
<PAGE> 33
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(d) Convertibility of the Rouble
The Russian rouble is not a convertible currency outside the Russian
Federation and, accordingly, any conversion of Russian rouble amounts to US
dollars should not be construed as a representation that Russian rouble amounts
have been, could be, or will be in the future, convertible into US dollars at
the exchange rate used, or at any other exchange rate.
The ability of the Russian government to maintain the stability of the
rouble will depend on many political and economic factors, including its ability
to control inflation and the availability of sufficient reserves to support the
rouble. Uncertainty also exists with respect to the Central Bank's policy
direction. The possibility of further restrictions on convertibility and
currency movements cannot be ruled out.
As a result of the devaluation of the rouble during the latter part of 1998
the Company has suffered transaction losses of $672,087 (1997: a loss of
$43,082; 1996: a loss of $7,206).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarised as follows:
(a) Basis of Presentation
The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).
The financial statements have been presented on the push-down basis of
accounting.
The accompanying financial statements present the financial position and
results of operations of the Company on a stand-alone basis. The Company incurs
and pays its own expenses. Management assistance is provided by the Parent under
the terms of negotiated management agreements and specific costs incurred by the
Parent on behalf of the Company are charged thereto. All intercompany
transactions and charges are disclosed in note 11, "Related Party Transactions."
Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," on a stand-alone basis. Refer
to note 10, "Income Taxes."
There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements -- refer to note 11, "Related Party
Transactions." Management of the Company believes that the accompanying
financial statements include all the costs incurred by the Company in its
operations.
(b) Reporting Currency and Foreign Currency Translation
The statutory accounts of the Company are maintained in accordance with
local accounting regulations and are stated in local currencies.
Local statements are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 (SFAS 52), "Foreign Currency
Translation."
Under SFAS 52, the financial statements of entities in highly inflationary
economies are measured in all cases using the U.S. dollar as the functional
currency. U.S. dollar transactions are shown at their historical value. Monetary
assets and liabilities denominated in local currencies are translated into U.S.
dollars at the prevailing period-end exchange rate. All other assets and
liabilities are translated at historical exchange rates. Results of operations
have been translated using the exchange rates effective at the date of the
transaction.
F-7
<PAGE> 34
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Translation differences resulting from the use of these different rates are
included in the accompanying statements of operations except where otherwise
noted.
(c) Revenue Recognition
The Company records telecommunications revenues as earned, at the time
services are provided.
(d) Inventory
Inventory is stated at the lower of cost or net realisable value and is
comprised of spare parts for maintenance of the Company's transmission network
and telephony products held for resale to customers.
(e) Property and Equipment
Property and equipment and other assets are stated at cost less accumulated
depreciation and amortisation. Costs directly related to the installation of
telecommunications equipment are included in the cost of the equipment.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET ESTIMATED USEFUL LIFE
- ----- ---------------------
<S> <C>
Telecommunications equipment.............. 10 years
Office furniture and equipment............ 8 years
Motor vehicles............................ 7.5 years
Computer equipment........................ 8 years
</TABLE>
(f) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, trade and
other receivables, amounts due to or from related parties, and accounts payable
approximate fair value due to their short maturity.
(g) Income Taxes
Tax on the profit or loss for the year comprises current tax and the change
in deferred tax. Current tax comprises tax payable calculated on the basis of
the expected taxable income for the year, using the tax rates enacted at the
balance sheet date, and any adjustment of tax payable for previous years.
Deferred tax is provided using the balance sheet liability method on all
temporary differences between the carrying amounts for financial reporting
purposes and the amounts used for taxation purposes, except differences relating
to the initial recognition of assets or liabilities which affect neither
accounting nor taxable profit (taxable loss).
The tax value of losses expected to be available for utilisation against
future taxable income is set off against the deferred tax liability within the
same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realised.
Deferred tax is calculated on the basis of the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled.
The effect on deferred tax of any changes in tax rates is charged to the
statement of operations, except to the extent that it relates to items
previously charged or credited directly to equity.
(h) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
F-8
<PAGE> 35
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ
from those estimates.
(i) Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(j) Comprehensive Income
SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997, and 1996 comprehensive income was equal
to net income reported in the statement of operations. As SFAS 130 only requires
additional disclosures in the Company's financial statements, its adoption did
not have any impact on the Company's financial position or results of
operations.
(3) TRADE RECEIVABLES
Trade receivables at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Trade receivables.................................... $1,113,564 1,303,650
Less: allowance for doubtful accounts................ (117,645) (64,280)
---------- ---------
Trade receivables, net of allowance................ $ 995,919 1,239,370
========== =========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Telecommunications equipment....................... 5,654,426 5,249,255
Office furniture and equipment..................... 627,792 758,934
Vehicles and leasehold improvements................ 708,777 577,424
----------- ----------
Total property and equipment..................... 6,990,995 6,585,613
Less: accumulated depreciation..................... (2,322,990) (1,783,822)
----------- ----------
Property and equipment, net...................... $ 4,668,005 4,801,791
=========== ==========
</TABLE>
F-9
<PAGE> 36
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Computer software....................................... $ 40,264 35,637
Licenses................................................ 45,560 30,057
Other................................................... 27,361 --
-------- -------
Total intangible assets............................... 113,185 65,694
Less: accumulated amortisation.......................... (29,133) (16,189)
-------- -------
Intangible assets, net................................ $ 84,052 49,505
======== =======
</TABLE>
Amortisation of intangible assets is provided over the estimated useful
life of 3-10 years.
(6) DUE TO RELATED PARTIES
The Company's liability to related parties at December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
PLD Telekom Inc......................................... 615,000 455,000
PeterStar............................................... 37,875 --
PLD Management Services Limited......................... 256,254 231,609
Teleport-TP............................................. 23,517 --
-------- -------
$932,646 686,609
======== =======
</TABLE>
(7) DUE FROM RELATED PARTIES
The receivables due from related parties at December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ----
<S> <C> <C>
PLD Telekom Inc........................................... 182,553 --
PeterStar................................................. 103,797 --
Teleport-TP............................................... 237,985 --
CPY Yellow Pages Limited.................................. 7,663 --
-------- --
$531,998 --
======== ==
</TABLE>
(8) SHAREHOLDER'S EQUITY
(a) Common Stock
At December 31, 1998 and 1997 the Company had authorised share capital of
72,540 shares with a par value of 100 roubles each.
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Issued and outstanding common shares with a par value
of 100 roubles each................................ $ 1,494 1,494
Additional paid-in capital........................... 2,181,506 2,181,506
---------- ---------
Issued, outstanding and fully contributed............ $2,183,000 2,183,000
========== =========
</TABLE>
F-10
<PAGE> 37
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(b) Distributable Reserves
Distributable reserves are restricted to the retained earnings of the
Company which are determined according to Russian legislation. At December 31,
1998 and 1997 there are no reserves for distribution. No dividends have been
approved for payment.
(9) COMMITMENTS AND CONTINGENCIES
(a) Taxation Contingencies
Russia currently has a number of laws related to various taxes imposed by
both federal and regional governmental authorities. Applicable taxes include
value added tax, corporation tax ("profit tax"), a number of turnover based
taxes, and payroll (social) taxes, together with others.
Laws related to these taxes have not been in force for significant periods,
in contrast to more developed market economies. Therefore, regulations are often
unclear, open to wide interpretation, and in some instances are conflicting.
Accordingly few precedents with regard to issues have been established. Often,
differing opinions regarding legal interpretation exist both among and within
government ministries and organisations (like the State Tax Service and its
various inspectorates), thus creating uncertainties and areas of conflict.
Tax declarations, together with other legal compliance areas (such as
customs and currency control matters) are subject to review and investigation by
a number of authorities, which are enabled by law to impose extremely severe
fines, penalties and interest charges. These facts create tax risks in Russia
substantially more significant than typically found in countries with more
developed tax systems.
The Company has had extensive tax inspections during the periods, which
have resulted in minimal penalties. These inspections have covered most of the
taxes applicable to the Company.
Management believes that it has adequately provided for tax liabilities in
the accompanying financial statements. However, the risk remains that the
relevant authorities could take differing positions with regard to
interpretative issues and the effect could be significant.
(b) The Year 2000 Issue (unaudited)
The Year 2000 problem (or "Millennium Bug") arises as a result of
information systems and/or equipment with embedded chips that incorrectly read
the date 2000 and incorrectly perform calculations related to it. Any
information technology that relies on a time or date function may not operate
correctly, producing an inaccurate date when dealing with dates beyond 1999.
The Company may experience the effects of the Year 2000 problem before, on,
or after January 1, 2000 and the effects on operations and financial reporting,
if not addressed, may range from minor errors to significant systems failures
which could affect the Company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
The Company is incurring significant costs in its efforts to mitigate any
possible effects of the Year 2000 problem. These costs totalled approximately
$100,000 in 1998, with approximately $80,000 planned to be spent during 1999.
(c) Guarantees
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures.
F-11
<PAGE> 38
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. The Company is a
guarantor of such obligations. While management of PLD believe that, as long as
progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of April
30, 1999, there can be no assurance that the holders will grant such deferrals
or that they will not demand payment in full of the obligations. PLD's failure
to make payment in full could result in a claim being made against the Company
under its guaranty and a cross-default under and acceleration of senior discount
notes and convertible subordinated notes with an aggregate principal amount in
excess of $150 million for which the Company also serves as a guarantor. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
(10) INCOME TAXES
At December 31, 1998 Company has deferred income tax liabilities of $30,706
(deferred tax assets of $94,000 as of December 31, 1997). As a result of the
rapid change in the regulatory environment and uncertainty surrounding the
Russian tax regime, the Company had provided a valuation allowance against the
deferred tax assets, calculated as of December 31, 1997.
The tax effects of temporary differences that gave rise to the deferred tax
assets are as follows:
<TABLE>
<CAPTION>
1998 1997
---- -------
<S> <C> <C>
Expenses not yet deducted for Russian tax purposes......... $ -- 94,000
Less: valuation allowance.................................. -- (94,000)
---- -------
Deferred tax asset....................................... $ -- --
==== =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Income not recognised yet for Russian tax purposes....... $30,706 --
------- -------
Deferred tax liability................................. $30,706 --
======= =======
</TABLE>
The provision for current income taxes differs from that expected by
applying statutory tax rates as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Provision for income tax at statutory rates........... $ 130,227 $393,064
Tax effect of temporary differences................... 30,706 (94,000)
Tax effect of non-deductible expenditures or losses
deductible for statutory purposes................... (130,227) 84,191
--------- --------
Income tax expense.................................... $ 30,706 $383,255
========= ========
</TABLE>
(11) RELATED PARTY TRANSACTIONS
There have been various transactions with the following related parties:
Teleport-TP, CPY Yellow Pages Limited, PeterStar, PLD Management Services
Limited and PLD Telekom Inc.
These transactions are of a minor routine nature and generally involve the
provision of telecommunications services.
F-12
<PAGE> 1
EXHIBIT 99.1
Independent Auditors' Consent
The Board of Directors
Baltic Communications Limited:
We consent to incorporation by reference in the registration statement (no.
333-5396) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the balance sheets of Baltic Communications Limited as of December
31, 1998 and 1997, and the related statements of operations, shareholder's
equity, and cash flows for the years ended December 31, 1998 and 1997, and the
nine months ended December 31, 1996, which report appears in the Annual Report
on Form 20-F for the year ended December 31, 1998 of Baltic Communications
Limited.
Our report dated March 30, 1999 contains an explanatory paragraph that states
that the Company's parent, PLD Telekom Inc. (PLD) does not presently have
sufficient funds on hand to meet its current debt obligations. The Company is a
guarantor of such obligations. PLD's failure to make payment in full when
required could result in a claim being made against the Company under its
guaranty and a cross-default under and acceleration of other debt obligations
for which the Company is also a guarantor. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG
St. Petersburg, Russia
June 25, 1999
