<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1999
REGISTRATION NO. 333-82791
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GOLDEN TELECOM, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 4812 51-0391303
(State or Other Jurisdiction of (Primary Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
GOLDEN TELECOM, INC.
12, KRASNOKAZARMENNAYA STR.
MOSCOW, RUSSIA 111250
(011-7-501) 797-9300
(Address and telephone number of Registrant's principal executive offices)
GRIER C. RACLIN
GLOBAL TELESYSTEMS GROUP, INC.
4121 WILSON BOULEVARD
STAFFORD PLACE II, 8TH FLOOR
ARLINGTON, VA 22203
(703) 236-3100
(Name, address and telephone number of agent for service)
Copies to:
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<S> <C> <C>
DAVID J. BEVERIDGE, ESQ. JEFFREY A. RIDDELL JAMES J. CLARK, ESQ.
SHEARMAN & STERLING GOLDEN TELESERVICES, INC. CAHILL GORDON & REINDEL
199 BISHOPSGATE 4121 WILSON BOULEVARD 80 PINE STREET
LONDON, EC2M 3TY, ENGLAND STAFFORD PLACE II, 8TH FLOOR NEW YORK, NEW YORK 10005
011-44-171-920-9000 ARLINGTON, VA 22203 (212) 701-3000
(703) 236-3100
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this registration statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SECURITY OFFERING PRICE(2) REGISTRATION FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, Par Value
$0.01 Per Share......................... 10,000,000 $12.00 $120,000,000 $33,360
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(1) Includes (i) shares of common stock to cover the underwriters'
over-allotment option and (ii) shares of common stock which are to be
offered outside the United States but that may be resold from time to time
in the United States during the distribution. The shares of common stock
registered hereby are not being registered for the purpose of sales outside
of the United States.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(3) Previously paid.
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The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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Golden Telecom Logo SUBJECT TO COMPLETION, DATED SEPTEMBER 29,
1999
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4,650,000 SHARES
COMMON STOCK
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This is Golden Telecom, Inc.'s initial public offering. We are offering
4,650,000 shares of common stock.
We expect the public offering price to be $12.00 per share. Our common stock has
been approved for listing on the Nasdaq National Market under the symbol "GLDN".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
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PROCEEDS, BEFORE
PRICE TO UNDERWRITING EXPENSES, TO
PUBLIC DISCOUNT GOLDEN TELECOM
Per Share $ $ $
Total $ $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters may also purchase from us up to an additional 697,500 shares of
common stock within 30 days of the date of this prospectus to cover
over-allotments.
DEUTSCHE BANK
BEAR, STEARNS & CO. INC. ING BARINGS
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 3
PROSPECTUS SUMMARY
The following is a summary of this prospectus. Please do not rely on any
part of this summary without referring to the more detailed information
contained in the other sections of this prospectus.
OUR COMPANY
We are a leading facilities-based provider of integrated telecommunications
services to businesses and other high-usage customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the Commonwealth of Independent States.
We offer our services through three business groups:
- Competitive Local Exchange Carrier Services using local exchange networks
to provide local, domestic long distance and international
telecommunications services to customers in Moscow, Kiev and St.
Petersburg;
- Data and Long Distance Services using a fiber optic and satellite-based
network in Russia and other countries of the Commonwealth of Independent
States; and
- Mobile Services using cellular networks in Kiev, Vladivostok and thirteen
other population centers throughout Russia.
Competitive Local Exchange Carrier Services. In Moscow, Kiev and St.
Petersburg, we own, lease and operate local access networks comprising over
1,000 kilometers of fiber optic rings. We provide a range of services including
local exchange and access services, international and domestic long distance
services, data communications, Internet access and the design and installation
of corporate networks that are integrated with our long distance network
facilities and the incumbent networks in these cities. We provide local exchange
services primarily through our operating companies, Sovintel, TCM and Golden
Telecom BTS. TCM was formerly called TeleCommunications of Moscow.
Data and Long Distance Services. In major population centers throughout
Russia and other countries of the Commonwealth of Independent States, we offer
traditional and high-speed data services, as well as Internet access, through
our operating companies Sovam Teleport and Sovam Teleport Ukraine. In Russia, we
also offer international and domestic long distance voice services primarily
through the TeleRoss operating company and the TeleRoss ventures.
Mobile Services. We offer mobile telephony services in Kiev, Vladivostok
and thirteen other urban areas of Russia. Our mobile services are provided
through our operating companies Golden Telecom GSM in Kiev and the Vostok Mobile
ventures in Russia, including PrimTelefone in Vladivostok. In accordance with
our current strategy, we intend to cease to provide further financial support to
certain of the ventures in less-developed urban areas. We will therefore abandon
these ventures, which are not material to our financial condition or results of
operations, and take a charge to earnings of $16-20 million in the third quarter
of 1999. We will also assume approximately $10-13 million in debt obligations of
these ventures. We intend to continue to support the ventures in the more
developed urban areas.
1
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The following table summarizes the three business groups through which we
currently conduct our operations:
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BUSINESS GROUP REGION OF OPERATIONS
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CLEC SERVICES:
Sovintel........................................... Moscow and St. Petersburg
TCM................................................ Moscow
Golden Telecom BTS................................. Kiev
DATA AND LONG DISTANCE SERVICES:
Sovam Teleport..................................... Russia and the Commonwealth
of Independent States
Sovam Teleport Ukraine............................. Ukraine
TeleRoss operating company......................... Russia
TeleRoss ventures.................................. 14 cities in Russia
MOBILE SERVICES:
Golden Telecom GSM................................. Kiev
Vostok Mobile ventures............................. 14 cities in Russia
</TABLE>
OUR STRATEGY
Our objective is to be the leading alternative telecommunications service
provider to the business markets in Moscow, Kiev, St. Petersburg and select
population centers throughout Russia and other countries of the Commonwealth of
Independent States. To achieve this objective, we intend to:
- Pursue consolidation opportunities through acquisitions that allow us to
improve and expand our service offerings and maintain operational
control;
- Increase market share by offering bundled data and voice services over an
integrated network for corporate customers that increasingly demand
integrated telecommunications solutions;
- Extend our leading position in data services by increasing the number of
network access points in our network to facilitate the growing demand for
our data communications;
- Reduce operating costs and satisfy capacity needs through network
planning and build out; and
- Focus operating activities and capital investments in Moscow, Kiev and
St. Petersburg, where demand for our services is most heavily
concentrated, and in cities where we see potential to grow businesses
which complement our current operations.
OUR ADDRESS
Our principal executive offices are located at 12, Krasnokazarmennaya Str.,
Moscow, Russia 111250. Our telephone number is (011-7-501) 797-9300.
2
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THE OFFERING
Shares offered by us....... 4,650,000 shares. In addition, if the underwriters
exercise their option to purchase additional shares
of common stock to cover over-allotments, the total
number of shares offered would increase by up to
697,500 shares.
Price to public............ $ per share.
Shares outstanding
immediately after the
offering................. shares. This number of shares does not include
shares of common stock that will be issuable upon
the exercise of employee stock options, none of
which will be immediately exercisable.
Use of proceeds............ We expect the net proceeds of this offering to be
$ million, after deducting estimated commissions
and offering expenses of approximately $ million.
We intend to use the net proceeds from the offering
primarily for the following purposes:
- potential acquisitions and business development;
- network expansion;
- working capital; and
- general corporate purposes.
Proposed Nasdaq National
Market symbol............ Our common stock has been approved for listing on
the Nasdaq National Market under the symbol "GLDN".
Lock-ups................... GTS has agreed that it will not offer, sell,
contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or
securities convertible into or exchangeable or
exercisable for any of our common stock without the
prior written consent of Deutsche Bank AG London,
which consent may not be unreasonably withheld, for
a period of 360 days after the date of this
prospectus. We, our directors and our executive
officers have entered into similar agreements for a
period of 180 days after the date of this
prospectus.
GTS investment............. GTS intends to purchase $50 million of shares
registered under the registration statement of
which this prospectus is a part at the initial
public offering price, net of underwriting
discounts.
Strategic investors........ Investment affiliates or designees of Soros Fund
Management LLC, and a major international financial
institution have indicated their interest to us for
the purchase of up to an aggregate of $25 million
of shares registered under the registration
statement of which this prospectus is a part at the
initial public offering price, net of underwriting
discounts. An investment affiliate of ING Barings,
one of the underwriters of this offering, has also
indicated its interest to us for the purchase of up
to $5 million of shares pursuant to an exemption
from the registration requirements of the
Securities Act of 1933, as amended. The sale of
these shares will not be subject to the
underwriting agreement between us and the
underwriters. Although no underwriting discounts
will apply to the sale of these shares, we will pay
a fee of $ to an affiliate of one of the
underwriters if these shares are sold.
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<PAGE> 6
Directed share program..... The underwriters will reserve for sale up to
150,000 shares for employees, directors and certain
other persons associated with us or our affiliates
who have expressed an interest in purchasing shares
in this offering.
Share exchange............. An affiliate of ING Barings, one of the
underwriters in this offering, intends to
contribute to us its interest in one of our
subsidiaries in exchange for approximately 420,000
newly issued shares of our common stock sold
pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as
amended. ING Barings' subscription through its
affiliate as a strategic investor is conditioned
upon the consummation of this exchange.
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma consolidated financial data
have been derived from our historical financial statements. Historical annual
financial data presented in this prospectus have been derived from audited
financial statements, whereas quarterly data and pro forma data are unaudited.
Our pro forma results of operations give effect to the transactions in
which we acquired minority interests to increase our ownership to 100% of Sovam,
56.75% of Golden Telecom (Ukraine) and 95% of TCM (formerly TeleCommunications
of Moscow). These transactions were consummated in February 1998, June 1998 and
July 1998, respectively, and allowed us to consolidate these ventures. However,
for the purpose of preparing these pro forma results, we have assumed that these
transactions were consummated at the beginning of the period indicated.
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PRO FORMA
FOR THE YEAR FOR THE
ENDED DECEMBER 31, YEAR ENDED
------------------------------ DECEMBER 31,
1996 1997 1998 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 13,140 $ 27,198 $ 86,086 $117,367
Gross margin.................................... 3,057 6,778 42,512 65,493
Equity in (earnings) losses of ventures......... (3,783) (12,428) (2,559) 863
Operating loss.................................. (13,599) (6,406) (16,965) (10,879)
Other (expense) income.......................... (1,586) (830) (10,455) (10,364)
Net loss........................................ (15,471) (7,883) (33,644) (32,832)
Net loss per share(1)........................... $ (1.46) $ (0.74) $ (3.17) $ (3.10)
</TABLE>
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AT DECEMBER 31, AT JUNE 30,
1998 1999
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 14,164 $ 14,495
Property and equipment, net................................. 52,186 56,563
Investments in and advances to ventures..................... 46,519 37,925
Total assets................................................ 235,849 222,350
Total debt.................................................. 24,459 23,156
Minority interest........................................... 7,993 8,985
Shareholders' equity........................................ 168,783 164,992
</TABLE>
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(1) Per share amounts in this table were calculated based upon an assumption of
10,600,000 shares of common stock outstanding for each period.
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED QUARTERLY FINANCIAL DATA
The following summary historical and pro forma consolidated quarterly
financial data since the start of 1998 show our results before and since the
August 1998 Russian financial crisis. Our pro forma results of operations give
effect to the transactions whereby we acquired minority interests to increase
our ownership to 100% of Sovam, 56.75% of Golden Telecom (Ukraine) and 95% of
TCM as if they had occurred at the beginning of the three-month periods
indicated, as opposed to their actual dates of February 1998, June 1998 and July
1998, respectively. These transactions allowed us to consolidate these business
ventures. However, for the purposes of preparing these pro forma results, we
have assumed that these transactions were consummated at the beginning of the
period indicated.
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PRO FORMA
FOR THE THREE ACTUAL
MONTHS ENDED FOR THE THREE MONTHS ENDED
--------------------- ---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $27,306 $ 32,680 $ 31,966 $ 25,415 $24,185 $23,170
Cost of Revenues.......................... 12,567 14,550 12,709 12,048 9,326 9,376
Gross Margin.............................. 14,739 18,130 19,257 13,367 14,859 13,794
Selling, general and administrative....... 11,049 11,624 17,124 11,299 8,638 10,432
Net loss.................................. (1,939) (395) (17,121) (13,377) (7,776) (8,194)
Net loss per share(1)..................... $ (0.18) $ (0.04) $ (1.62) $ (1.26) $ (0.73) $ (0.77)
</TABLE>
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(1) Per share amounts in this table were calculated based upon an assumption of
10,600,000 shares of common stock outstanding for each period.
6
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RISK FACTORS
You should carefully consider the following risks relating to us as well as
other information contained in this prospectus before deciding to invest in
shares of our common stock. Our business, financial condition or results of
operations have been, and could be, materially adversely affected by the
following risks. The value of your investment may decrease and could result in a
loss.
RISKS ASSOCIATED WITH DOING BUSINESS IN RUSSIA, UKRAINE AND
OTHER COUNTRIES OF THE COMMONWEALTH OF INDEPENDENT STATES
We generate all our revenues from operations in Russia, Ukraine and other
countries of the Commonwealth of Independent States. All foreign companies
operating in the Commonwealth of Independent States, including our company, face
significant political, economic, regulatory, legal and tax risks, as summarized
below.
CONTINUING POLITICAL INSTABILITY IN THE COUNTRIES WHERE WE OPERATE COULD DEPRESS
FOREIGN AND LOCAL INVESTMENT AND SPENDING, WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
Since the dissolution of the Soviet Union in December 1991, Russia and
Ukraine have been undergoing significant political and economic transformation,
the result of which is a generally unstable political climate characterized by
frequent changes in governments, political gridlock in the legislative process,
widespread corruption among government officials and a significant rise in
organized crime and other criminal activity.
This political and economic instability in Russia, Ukraine and the other
countries where we operate could disrupt the direction and the pace of political
and economic reforms. Such a disruption could discourage foreign and local
investment and spending, in which case demand for our services could decrease
and our results of operations could deteriorate. If this were to occur, then the
market price of our stock could decrease.
In addition, a dramatic change in government policies permitting foreign
investment or the privatization of the telecommunications industry could also
have a material adverse effect on our operations.
ECONOMIC INSTABILITY IN RUSSIA AND UKRAINE COULD ADVERSELY AFFECT THE DEMAND FOR
OUR SERVICES AND OUR ABILITY TO COLLECT ON OUR INVOICES
Since August 1998, the Russian and Ukrainian economies have remained in a
depression that has been exacerbated by political instability. If the political
situations in these countries do not stabilize and their economies do not
strengthen, we expect that demand for our services will remain depressed. The
failure of the Russian and Ukrainian economies has also weakened the financial
condition and the results of operations of many of our customers. As a result,
some of these customers have been unable to pay our invoices, and our revenues
have suffered accordingly.
The August 1998 Russian financial crisis caused a substantial decline in
the demand for our services. For example:
- Sovintel's revenues in July 1998 were $11.8 million. In September 1998,
they decreased to $10.2 million, and in December 1998, they were $7.3
million.
- Sovintel logged 5.2 million outgoing international minutes in July 1998.
In September 1998, outgoing international minutes decreased to 4.4
million, and in December 1998, they were 3.3 million.
- TCM (formerly TeleCommunications of Moscow) made over 25,000 connections
to the Moscow local exchange in the period from January to August 1998.
For the remainder of 1998, TCM made only 100 connections.
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<PAGE> 10
- Our Russian-based cellular operations had revenues of $3.9 million in
July 1998. In September 1998, these revenues decreased to $1.9 million,
and in December 1998, they were $1.6 million.
Demand for our services may remain depressed if the Russian and Ukrainian
political and economic situations do not improve.
THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT OUR ABILITY TO CONVERT RUBLES
TO HARD CURRENCY AND MANAGE CASH FLOWS
The Russian government's default on its obligations to make payments on its
internal debt in August 1998 triggered a substantial decline in the value of the
ruble and the bankruptcy of a number of prominent Russian banks and businesses.
As a result, the value of the ruble against the US dollar fell significantly,
and this decline has negatively affected, and may continue to affect, our
financial performance. Our consolidated and non-consolidated entities recorded
an aggregate $13.1 million pre-tax charge in the third quarter of 1998. This
charge related primarily to foreign currency exchange losses for
ruble-denominated net monetary assets with the remainder associated with
estimates for uncollectible accounts receivable and unrecoverable cash deposits.
A further decline in the value of the ruble would negatively affect our results
of operations and could require us to record another significant pre-tax charge.
The ruble is generally non-convertible outside Russia, so our ability to
hedge against further devaluations by converting to other currencies is
significantly limited. Within Russia, our ability to convert rubles into other
currencies is subject to rules that increasingly restrict the purposes for which
conversion and payment in foreign currencies are allowed. Another default on
Russia's sovereign debt could lead to greater protectionism and stricter
controls on currency conversion.
Many banks in Moscow suffer liquidity problems, and some are insolvent or
in the process of liquidation. At the same time, banks outside Moscow are
generally becoming more autonomous and less dependent on support from
Moscow-based banks, the Russian government and the Central Bank. As a result, it
has become increasingly more difficult to transfer money between local banks and
Moscow banks. This difficulty has imposed additional strains on our local
operations.
We manage intercompany liquidity through a cash-collateralized debt
facility offered through a Western bank operating under a Russian banking
licence. If we lose access to this or a similar hard currency facility, our
ability to manage our liquidity position and foreign exchange risk may suffer.
REORGANIZATIONS OF THE RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS INDUSTRIES MAY
INCREASE COMPETITION
RUSSIA
The Russian government has reorganized the telecommunications industry so
that one entity, Svyazinvest, controls Rostelecom, our partner in Sovintel, and
most of our other principal joint venture partners. According to recent reports
in the Russian business press, Rostelecom is proposed to be merged with
Svyazinvest. This reorganization could make it more difficult for us to attract
and retain customers because:
- Rostelecom may exercise its influence in Svyazinvest to cause regional
telephone companies to route domestic and international traffic
originating in the regions through Rostelecom rather than through us;
- Our business relationships with our joint venture partners, which make up
a major component of our business strategy in Russia, may suffer; and
- The effective consolidation of Rostelecom with our joint venture partners
would create greater competition for Sovintel and our regional TeleRoss
ventures.
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UKRAINE
In preparation for a large-scale privatization, the Ukrainian government
has reorganized the state telecommunications sector so that Ukrtelekom, the
state telecommunications operator, holds all the government's interests in the
telecommunications industry. Furthermore, the Ukrainian government has been
negotiating with the foreign partners of Utel, its joint venture which provides
international and domestic long distance services, to buy out their interests in
the company. It is anticipated that after the foreign partners are bought out,
Utel would then merge with Ukrtelekom.
The emergence of a single powerful Ukrainian telecommunications provider
could make it more difficult for us to attract and retain customers because:
- A single Ukrainian operator with political connections would be more
likely to be able to influence the Ukrainian government to create
favorable market conditions for itself and cause unfavorable conditions
for us;
- The new company is likely to become a stronger competitor;
- Our ability to negotiate reasonable interconnection rates may suffer; and
- Any subsequent privatization of Ukrtelekom may bring in strong management
and resources from a major Western telecommunications operator,
increasing its competitive strengths.
RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS POLICIES COULD RESTRICT OUR OPERATIONS
Russian and Ukrainian telecommunications regulations govern the procurement
and continuing validity of our licenses and the terms and conditions under which
we provide services. Changes to these regulations may make it prohibitively
expensive for us to provide services and could have a material adverse effect on
our results of operations.
Russia's parliament recently adopted legislation which, if implemented,
could restrict foreign ownership of telecommunications operators if necessary to
protect the social order and national security. Any change to current government
regulations or policies that negatively affects our licenses or our ability to
obtain licenses in the future would restrict our operations in Russia.
It may be difficult and prohibitively expensive for us to comply with
applicable Russian telecommunications regulations related to state surveillance
of communications traffic. For example, the Russian Communications Law provides
that telecommunications in Russia are confidential and may only be intercepted
by a court order. Nevertheless, we are subject to SORM, the Russian acronym for
the surveillance system operated partly by the government agency responsible for
electronic surveillance. Regulations applicable to SORM require
telecommunications networks to enable state monitoring of electronic traffic.
However, the government has not finalized its technical specifications for
compliance with SORM. We and other telecommunications operators have disagreed
with regulatory authorities over the appropriate level of technical compliance
with SORM and over who should pay for this compliance. Full compliance with SORM
to monitor voice and data traffic may be extremely burdensome and expensive.
Ukrainian regulatory authorities have established mandatory tariff
guidelines for wireline services. The national carrier, Ukrtelekom and its joint
venture, Utel, charge settlement fees in excess of the mandatory guidelines. In
addition, the mandatory guidelines set tariffs in local currency units and the
guidelines do not adjust to reflect the creeping devaluation of the local
currency. Consequently, our pricing structure in our wireline business in
Ukraine is in excess of the limits established in the mandatory guidelines. Any
enforcement action undertaken in regard to the pricing guidelines by Ukrainian
authority could result in fines or in the suspension or revocation of our
Ukrainian licenses.
Ukrainian legislation prohibits the establishment and operation of
telecommunications ventures that are more than 49%-owned by foreign investors.
We do not believe that this prohibition extends to indirect investment by a
foreign entity through a wholly owned Ukrainian subsidiary. Our investments in
Golden
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Telecom (Ukraine) are made both directly through a foreign company and
indirectly through a wholly owned Ukrainian subsidiary. This direct and indirect
investment in Golden Telecom (Ukraine) totals 56.75%. Our partner in Golden
Telecom (Ukraine), an affiliate of ING Barings Limited, intends to contribute to
us its interest in Golden Telecom (Ukraine) in exchange for approximately
420,000 newly issued shares of our common stock. If this exchange is
consummated, then our direct and indirect investment in Golden Telecom (Ukraine)
would increase to 69%. In addition, our wholly owned Ukrainian holding company
has recently executed a letter of intent to acquire an additional 8% of Sovam
Teleport Ukraine. If consummated, this acquisition would increase our direct and
indirect investment in Sovam Teleport Ukraine to 57%. If Ukrainian authorities
determine that the prohibition against foreign participation extends to indirect
holdings, then we would be in violation of this legislation. The consequences of
this violation are unpredictable and may include license suspension or
revocation, or an order to divest a portion of our holdings.
Special fees and taxes levied against telecommunications operators could
adversely affect our results of operations.
In May 1999, the Ukrainian government passed a resolution which effectively
increases the frequency fees for our cellular operations in Ukraine from $25,000
per month to $250,000 per month for the period July to December 1999. Recently,
this resolution was suspended. If reintroduced, this resolution would have a
material adverse effect on our financial condition and results of operation, and
it could negatively influence a decision to expand our cellular network in
Ukraine. We cannot ensure that the governments in Russia or Ukraine will not
demand similar frequency fees for the issuance or renewal of our licenses.
A number of industry-specific taxes have been directed at the cellular
industry in Ukraine. For example, the Ukrainian parliament recently passed
legislation introducing a 6% "pension tax" on cellular calls. The enforcement of
this law, which became effective on August 19, 1999, or the enactment of other
similar industry-specific legislation may have a material adverse effect on
demand for our services and on our results of operations.
CORRUPTION AND ORGANIZED CRIME MAY ADVERSELY AFFECT OUR OPERATIONS
Russia and Ukraine are both plagued with widespread corruption and criminal
activity. High levels of corruption exist among governmental officials and among
commercial enterprises in which the state has an ownership interest.
When customers fail to make full payment for services rendered after
several requests for payment, it is our policy to terminate their services until
full payment is received. We believe that some of these customers, particularly
those with links to organized crime, may physically endanger our employees or
damage our properties, especially those in remote regions of Russia where police
protection may be limited. So long as organized crime in Russia and Ukraine
remains pervasive, we believe that our employees may be subjected to threats of
violence, our property may be damaged, or both.
In addition, our cellular businesses tend to have a high profile in the
regions in which they operate and are perceived to be cash-intensive. We have
encountered situations where local criminal elements have attempted to exert
pressure on our management and to siphon money out of the ventures through
unauthorized activities. Any of these activities could have a material adverse
effect on our ability to provide services and on our financial results.
RUSSIAN AND UKRAINIAN LEGISLATION MAY NOT ADEQUATELY PROTECT AGAINST
EXPROPRIATION AND NATIONALIZATION
The governments of Russia and Ukraine have enacted legislation to protect
foreign investment and other property against expropriation and nationalization.
In the event that such property is expropriated or
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nationalized, legislation provides for fair compensation. However, we cannot
assure you that such protections would be enforced. This uncertainty is due to
several factors, including:
- - the lack of state budgetary resources;
- - the apparent lack of political will to enforce legislation to protect property
against expropriation and nationalization;
- - the lack of an independent judiciary and sufficient mechanisms to enforce
judgments; and
- - widespread corruption among government officials.
Expropriation or nationalization of our business would obviously be
detrimental to our operations.
BROAD DISCRETION OF RUSSIAN AND UKRAINIAN REGULATORS RESULTS IN INCONSISTENT
LEGISLATION AND UNPREDICTABLE ENFORCEMENT
The dispersion of regulatory powers among a number of government agencies
in Russia and Ukraine has resulted in inconsistent or contradictory regulations
and unpredictable enforcement. This situation has made it difficult for us to
comply with all laws and regulations that appear to apply to us and has resulted
in unpredictable regulatory enforcement. For example, pursuant to the Russian
Communications Law, Goskomsvyaz, the State Committee for Telecommunications, has
authority to regulate and control the development of the communications industry
in Russia. However, there is additional legislation that recognizes and defines
the roles of other regulatory organs.
The Russian Communications Law requires any entity that offers any
communications service to obtain the appropriate license in accordance with the
Communications Law and other applicable licensing regulations. A similar
licensing regime exists in Ukraine. However, neither the Communications Law nor
applicable regulations in Russia or Ukraine provide clear guidelines for the
issuance or extension of a license, and state agencies exercise broad discretion
when determining whether to approve a license application, as well as the terms
and conditions of any license. Such broad discretion in the issuance of licenses
may result in arbitrary decision making and may also give rise to opportunities
for corruption.
The Ukrainian regulatory agency requires that the terms of international
licenses include provisions requiring licensees to pay unspecified annual
amounts into local network development. The required amount of investment may be
substantial, and we cannot predict whether failure to comply will lead to the
revocation of our license.
OUR RUSSIAN AND UKRAINIAN TAX BURDENS MAY BE SIGNIFICANTLY GREATER THAN
CURRENTLY ANTICIPATED
RUSSIA
It is possible that our Russian taxes may be greater than the estimated
amount that we have expensed to date and paid or accrued on our balance sheets.
Because of the need for additional sources of budgetary finance, Russian tax
authorities have become increasingly aggressive in their interpretation of the
tax law and its many uncertainties, as well as in their enforcement and
collection activities. Foreign companies are often forced to negotiate their tax
bills with tax inspectors who demand higher taxes than applicable law appears to
provide. Any additional tax liability, as well as any unforeseen changes in the
tax law, could have a material adverse effect on our future results of
operations or cash flows in a particular period.
Russian tax authorities are conducting an examination of potential tax
liabilities in connection with some of our cellular operations. We cannot assure
you that this examination will not result in a fine or a revocation or
suspension of our cellular licenses.
UKRAINE
Ukrainian tax law is similarly unpredictable. The constitution prohibits
retroactive legislation, and the tax code requires new tax laws to be adopted no
later than six months prior to the beginning of the next fiscal year.
Nevertheless, sudden shifts in tax law and policy and retroactive legislation
are common. For
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example, we are currently allowed to deduct losses in hryvna, the Ukrainian
currency, on hard currency borrowings. This allowance resulted in a significant
tax benefit in 1998. Recent decisions by the tax authorities, however, make it
unclear as to whether this tax benefit will continue to be available. If this
tax benefit is removed, we will be subject to significantly higher tax liability
from hryvna exchange gains.
WE MAY BE AT A COMPETITIVE DISADVANTAGE BECAUSE OF RESTRICTIONS IN THE FOREIGN
CORRUPT PRACTICES ACT
The anti-bribery restrictions of the US Foreign Corrupt Practices Act make
it illegal for us to give anything of value to foreign officials in order to
obtain or retain any business or other advantage. Some of our current and
potential competitors are not subject to these anti-bribery restrictions. As a
result, we may be subject to competitive disadvantages to the extent that our
competitors are able to secure business, licenses or other preferential
treatment by making these payments. We believe that bribery is commonplace in
Russia and the other countries of the Commonwealth of Independent States where
we operate, and we cannot ensure that we will be able to compete effectively
with companies free from such limitations.
THE MILITARY SITUATION IN SERBIA MAY AFFECT THE RUSSIAN POLITICAL AND ECONOMIC
SITUATION AND THE DEMAND FOR OUR SERVICES
Russia and Serbia have traditionally maintained close ties. The recently
concluded NATO bombing campaign in Serbia has given rise to nationalistic
sentiment in Russia, including protest demonstrations at the US Embassy in
Moscow. Events in Serbia or Kosovo may give rise to increased Russian
nationalism, which could impact Duma elections to be held in December 1999,
Russian attitudes towards Western foreign direct investment and business
relationships with Western suppliers such as ourselves. These factors could lead
to decreased demand for our services.
RISKS ASSOCIATED WITH OUR BUSINESS
WE COMPETE WITH ESTABLISHED COMPETITORS WHO MAY HAVE GREATER RESOURCES THAN WE
DO
Our competitors include incumbent Russian and Ukrainian operators and other
large international telecommunications providers doing business in the
Commonwealth of Independent States. Our competitors may have substantially
greater resources, closer ties to governmental authorities and longer operating
histories. These advantages may give them a competitive edge over alternative
providers like us. This competition may result in a loss of customers, falling
prices and a decline in revenues.
We compete with large established national carriers, some of which are
powerful companies with political connections, as well as joint ventures of
large international operators doing business in Russia and Ukraine. Such
ventures include Global One and Combelga in Russia and Utel in Ukraine. Other
competitors are alliances among telecommunications companies, companies that own
equipment and networks, companies that purchase and resell the services of other
carriers, Internet service providers and other providers of bundled services. We
may also face increasing competition from wireless telephone companies and
satellite companies. Many of these competitors, including the Russian incumbent
operators, have established customer bases and extensive brand name recognition
and possess greater financial, management and other resources. Our results of
operation would suffer if we are unable to keep up with the increasing levels of
competition in the countries where we operate.
OUR RELATIONSHIPS WITH OUR JOINT VENTURE PARTNERS LIMIT OUR INDEPENDENCE AND OUR
FLEXIBILITY
We depend to a significant degree on local partners in our joint ventures
to provide us with interconnection with local networks, regulatory and marketing
expertise, and familiarity with the local business environment. They also help
to facilitate the acquisition of necessary licenses and permits. As a result,
any significant disruption in our relationship with these parties could make it
more difficult for us to expand our operations and to maintain our existing
services.
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Under the terms of some of our joint venture agreements, we have the right
to nominate key employees, direct operations and determine strategies for these
joint ventures. However, our partners in some ventures, particularly in our
wireless operations, have the ability to frustrate our exercise of these rights.
Significant corporate decisions by most ventures, such as approving budgets and
business plans, declaring and paying dividends, and entering into substantial
transactions, effectively require the consent of our local partners. Moreover,
we would prefer not to take significant actions without the consent and support
of our partners. Accordingly, we do not have unilateral control over the
operations of our joint ventures.
In addition, Ukrainian legislation restricts the level of foreign ownership
in the telecommunications industry. These regulations may restrict our ability
to increase our holdings in ventures and increase our reliance on local partners
who may lack significant financial resources and may be unable to meet capital
calls at the level of their ownership interests.
GOVERNMENT INTERACTION WITH OUR PARTNERS COULD HAVE ADVERSE SPILLOVER EFFECTS ON
US
The interactions between government authorities and our partners may create
problems for us. For example, we are aware that Russian authorities have been
reviewing the activities of our former partners in GTS-Vox, which owns our
interest in TCM. Their review has raised issues about the original and
subsequent acquisitions of our interests in that subsidiary, including issues
concerning Russian anti-monopoly and securities filings. Our involvement in the
authorities' review of our former partners' activities could result in a
diversion of our management's time and resources or a deterioration in our
relationship with our partners. In addition, the review could lead to the
imposition of administrative fines or the invalidation of our acquisition of
their interests in GTS-Vox.
OUR PARTNERS ARE OFTEN ALSO OUR COMPETITORS
Notwithstanding our agreements with our joint venture partners, they
sometimes compete directly with our joint ventures. Competition with our joint
venture partners in the same markets may create conflicts of interest and may
result in a loss of customers. For example, our partner in Sovintel, Rostelecom,
is the dominant international and domestic long distance carrier in Russia.
Similarly, most of our regional partners across Russia offer local and long
distance services in competition with our local joint ventures and TeleRoss, and
some of these partners also offer mobile services in direct competition with
some of our mobile operations. Our partners in our mobile ventures also
sometimes offer independent mobile services in direct competition with our joint
ventures.
We may consider acquiring some of our partners' interests in certain joint
ventures if we are able to do so within regulatory guidelines and on
commercially attractive terms. If we were to make such acquisitions, we expect
that we would continue to employ local personnel in order to retain the benefit
of their local expertise. After an acquisition, however, we would be directly
competing with a powerful, formerly state-owned enterprise that had been our
partner before we acquired its interest. We would have to rely on this
partner-turned-competitor to gain access from our networks to customer sites
along the so-called "last mile". It is possible that this competitor would
attempt to create adverse operating conditions for our business.
OUR TARGETED CUSTOMERS MAY NOT TRUST A PRIVATELY OWNED, FOREIGN CONTROLLED
ENTITY FOR THEIR COMMUNICATIONS NEEDS
Before 1991, the telecommunications industry in the countries where we
operate was wholly owned and controlled by the state. After 1991, private
companies, including foreign controlled companies, entered these markets as
telecommunications service providers. Many potential customers may be unwilling
to entrust their communications systems to non-state-controlled companies, and,
in particular, to private companies controlled by foreign investors.
Furthermore, state entities that require the types of services that we offer,
such as the Russian Central Bank, may refuse to select a service provider that
is controlled by
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foreign investors. Because we are controlled by foreign investors, we may
occasionally be unable to reach our targeted customers.
WE RELY ON A SMALL NUMBER OF MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES
Revenues from our five largest customers represented approximately 39% of
our consolidated revenues for the six months ended June 30, 1999. Accordingly,
the loss of business from any of our key customers, or a reduction in tariffs
charged to these customers could have a material adverse effect on our financial
condition and results of operations.
Vimpelcom, a Moscow cellular provider and our largest customer, has
recently requested a reduction in the fees paid to TCM. Revenues from Vimpelcom
and its affiliates represented approximately 22% of our consolidated revenues
for the six months ended June 30, 1999 and approximately 20% of our consolidated
revenues for the year ended December 31, 1998. We have agreed to a reduction in
Vimpelcom's fees through the end of 1999, and we have agreed to discuss possible
further reductions thereafter. These discussions may lead to a significant
reduction in payments by Vimpelcom and may have a material adverse effect on our
consolidated revenues. In addition, although we are currently unaware of any
plans on the part of our key customers to move their business to other carriers,
we cannot assure you that they will not reduce their reliance on us by
developing relationships with other service providers.
FALLING PRICES FOR OUR SERVICES MAY LEAD TO A DECLINE IN REVENUES
Prices for international and domestic long distance calls, as well as
Internet access and wireless services, have fallen substantially over the last
few years in most of our current and potential markets. We expect that the
prices for our services will continue to decrease for the foreseeable future as
competitive pressures increase. This is attributable, in part, to the frequent
devaluation of the ruble. Unlike us, most local Russian carriers do not link
their prices to the dollar/ruble exchange rate, so as the ruble devalues, their
prices become relatively cheaper than our prices. In order to compete with these
local operators, we expect that we will continue to lower our tariffs, which may
result in declining margins. As reduced tariffs impact our operating margins, we
may be unable to meet certain foreign currency debt obligations.
FAILURE TO LEASE SUFFICIENT TRANSMISSION CAPACITY COULD CAUSE US TO INCUR LOSSES
We currently lease a substantial portion of our network transmission
capacity under agreements which generally have twelve- or thirty-six-month fixed
terms. If our lease arrangements deteriorate or terminate and we are unable to
enter into new arrangements, our cost structure, service quality and network
coverage could be adversely affected.
We currently rely on Rostelecom, the exclusive supplier of international
switched voice channels in Russia, to lease transmission capacity to us, and we
rely on local operators for last-mile access to end-users. These companies may
be subject to political and economic pressures not to lease capacity to foreign
operators or competitors. Any changes in regulation or policies that restrict us
from leasing adequate capacity could have an adverse effect on our business.
Local telecommunications operators may, for business reasons or otherwise,
resist giving us access to the last mile.
THE SATELLITES WE USE TO TRANSMIT LONG DISTANCE SIGNALS MAY MALFUNCTION
Our domestic long distance business throughout Russia and other countries
of the Commonwealth of Independent States relies on a satellite to receive and
transmit caller signals. Satellites are subject to significant risks that may
prevent or impair proper commercial operation, including satellite defects, loss
of power, loss of orbit or damage from passing objects. One of our Russian
satellites has not remained stationary in its orbit, and consequently, we have
switched our signal transmission to an Intelsat satellite. The operation of the
satellite that we use to transmit caller signals is beyond our control, and,
although we have backup capacity on other satellites, a disruption of
transmission on these satellites could adversely affect our domestic long
distance operations.
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THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS
We rely substantially on computer systems and other technological devices.
These devices may not be capable of recognizing dates beginning on January 1,
2000. This problem could cause any of our network, Internet or programming
operations to malfunction or fail. We cannot assure you that our Year 2000
program or the programs of third parties who do business with us will be
effective or that our estimates about the timing and costs of completing our
program will be accurate.
We believe that the potential non-compliance of third parties on whom we
rely in providing our services poses a significant threat to our operations. A
failure of the Moscow, Kiev or St. Petersburg power network for an extended
period of time may result in the temporary suspension of our services if we are
unable to deliver power to our switches. Not all our systems in the provinces
have independent generators, and a failure of the local electric networks could
cause our services in these regions to be suspended until power is restored.
These factors are beyond our control, and we may not be able to identify
alternative means of sustaining our services in time for the Year 2000 date
change. Moreover, a significant part of our network, especially the access
network, is leased from third parties that may not consider the Year 2000 issue
as seriously as we would like. Again, the failure of these local access networks
could have a material adverse effect on our ability to provide effective
services from January 1, 2000.
In the event that our own systems are not Year 2000 compliant, we may
suffer disruption to our operations and our billing systems. We believe that
billing and information systems used by our ventures outside Moscow, Kiev and
St. Petersburg may not be fully Year 2000 compliant, and we are reviewing these
and our other computer systems to prepare for the Year 2000 date change.
OUR NETWORK MAY NOT BE ABLE TO SUPPORT THE GROWING DEMANDS OF OUR CUSTOMERS
The uninterrupted operation of our network is vital to our success. The
stability of our systems depends on our ability to provide sufficient capacity
to meet the needs of our customers, and that, in turn, depends on the
integration of suitable technology into our networks. As we continue to increase
both the capacity and the reach of our network, and as traffic volume continues
to increase, we will face increasing demands and challenges in managing our
circuit capacity and traffic management systems. Any prolonged failure of our
communications network or other systems or hardware that causes significant
interruptions to our operations could seriously damage our reputation and result
in customer attrition and financial losses.
It is possible that the current economic difficulties in Russia may create
difficulties in maintaining our network. We rely to a significant degree on the
Russian network being able to deliver our services, and the Russian network's
underdevelopment may hinder our ability to obtain sufficient capacity for our
traffic volumes. Moreover, we cannot expand into certain areas of Moscow because
the existing Russian network does not have sufficient capacity, and we may be
unable to procure enough telephone numbers for our customers. These factors are
beyond our control, yet they may have a material adverse effect on our expansion
plans and our ability to provide services to new customers.
In addition, the telecommunications industry is subject to rapid and
significant changes in technology. We cannot predict the effect of technological
changes on our business, even though our operations depend on our ability to
integrate new and emerging technologies successfully.
WE MAY ENCOUNTER DELAYS AND INCREASED COSTS IF WE CANNOT ACQUIRE KEY EQUIPMENT
FROM SUPPLIERS
We depend on technology and equipment that we acquire from various
manufacturers. These manufacturers also provide vendor financing and help us to
maintain this equipment. Without it, we could face delays, operational
disruption and higher expenses. Although we could obtain equipment of comparable
quality from several other suppliers, we may be unable to acquire compatible
equipment from alternative sources on a timely, cost-efficient basis.
Because of the economic difficulties in Russia, some of our ventures have
experienced significant reductions in revenues and may therefore be unable to
repay amounts due under certain vendor financings.
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If any such default were to occur, we may not be able to obtain vendor financing
from the affected suppliers for future equipment purchases.
In addition, almost all our telecommunications equipment is imported into
Russia, and we pay for it with dollars or other hard currency. Any change in
existing laws that creates difficulties importing equipment or that restricts us
from spending hard currency may have a material adverse effect on our ability to
obtain adequate supplies to sustain our network. Any increase in customs duties
may render it impractical to continue to import such equipment.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NECESSARY TO IMPLEMENT OUR BUSINESS
STRATEGY
We will need additional capital to maintain and expand our networks. Our
ability to raise funding to pursue our strategies depends on our access to
capital markets or private financing. Significant elements of our business
strategy that may require substantial capital expenditures include the
following:
- the construction or the acquisition of fiber optic links between heavy
traffic routes;
- expanding our existing network infrastructure to other parts of Russia,
Ukraine and other countries of the Commonwealth of Independent States;
- developing additional Internet capability and acquiring other Internet
service providers; and
- expanding our wireless capabilities, including investments in upgraded
technology.
In addition, we will need to maintain our existing infrastructure. The costs for
expanding and maintaining our infrastructure may exceed projected costs and
result in unforeseen deficits.
If we fail to generate sufficient funds from a combination of operating
cash flow and additional debt or equity financing, either because of the Russian
financial crisis or other factors, we may have to delay or abandon our expansion
plans or fall behind in our maintenance obligations. Any of these events could
have a material adverse effect on our operations.
OUR BILLING AND MANAGEMENT INFORMATION SYSTEMS MAY NOT BE ABLE TO MEET OUR NEEDS
We encounter difficulties in using and enhancing our billing and management
information systems and in integrating new technology into such systems. We have
historically operated through distinct companies, but we are in the process of
integrating our billing and management information systems so that we will be
able to bill our customers and to manage other administrative tasks through a
single system. If we are unable to integrate and upgrade our billing and
management information systems to support our integrated operations, we may not
be able to record accurate call details or bill our customers promptly and
accurately.
Additionally, any damage to our network management center or our major
switching centers could harm our ability to monitor and manage network
operations and generate accurate call detail reports from which we derive our
billing information.
In our operations outside Moscow, Kiev and St. Petersburg, we rely on our
ventures' switches for billing. We cannot ensure that their systems will meet
our needs or the needs of our customers.
WE ARE EXPOSED TO RISKS OF BAD DEBT AND FRAUD
We have experienced problems relating to the failure of some customers to
make full payment for services rendered and to the fraudulent use of our access
codes to Internet and cellular services. These risks are particularly high in
our markets because of the poor health of the economies in the Commonwealth of
Independent States and the worsening credit of Russian companies. Furthermore,
it is difficult for us to gauge the creditworthiness of most of our customers
because there are no reliable mechanisms for evaluating their financial
condition and because credible credit reports on Russian and Commonwealth of
Independent States companies and individuals are usually not available. We
expect that
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the credit risk of our customer base may increase as the share of our revenue
derived from small- to medium-sized enterprises and from service
provider/reseller customers increases.
OUR INTERNAL CONTROLS MAY BE INSUFFICIENT TO ENSURE THAT WE COMPLY WITH
APPLICABLE LAWS
Our reporting and control standards may be insufficient to ensure that
certain practices comply with all applicable laws. If we or any of our ventures
are found to be involved in unlawful practices, then we may be exposed, among
other things, to significant fines, the risk of prosecution or the loss of our
licenses. Russia and the other countries of the Commonwealth of Independent
States have inadequate corporate management and financial reporting legal
requirements, and have underdeveloped banking, computer and other internal
control systems. These countries often have commercial practices and legal and
regulatory frameworks that differ significantly from practices in the United
States and other Western countries. The application of the laws of any
particular country is not always clear or consistent. As a result, it is often
difficult to hire qualified management and accounting staff who can ensure
compliance with changing legal requirements. Thus, we have had and may again
have, difficulty establishing internal management, legal and financial controls,
preparing financial statements and corporate records, and instituting business
practices that meet Western standards.
In light of these circumstances, in the second half of 1996, we increased
our efforts to improve our management and financial controls and business
practices. In early 1997, we retained special outside counsel to conduct a
thorough review of our business practices in the emerging markets in which we
operate. In addition, in June 1999, our special counsel completed an update of
the 1997 review in Russia and Ukraine. Neither the review nor the update
identified any violations of law that we believe would have a material adverse
effect on our financial condition. However, we cannot ensure that all potential
deficiencies have been properly identified or that governmental authorities will
not disagree with our assessment. If our control procedures and compliance
programs are not effective or the government authorities determine that we have
violated any law, depending on the penalties assessed and the timing of any
unfavorable resolution, our future results of operations and cash flows could be
materially adversely affected.
LOSS OF KEY PERSONNEL COULD AFFECT OUR GROWTH AND FUTURE SUCCESS
We believe that our growth and our future success will depend in large part
upon a small number of key executive officers, as well as on our ability to
attract and retain highly skilled personnel to work in Russia and other parts of
the Commonwealth of Independent States, including senior management and
technical personnel. The competition for qualified technical personnel who are
familiar with the telecommunications industry in the Commonwealth of Independent
States is intense, particularly outside the major urban centers. We cannot
assure you that we will be able to hire and retain qualified personnel.
THERE MAY BE HEALTH RISKS TO USING MOBILE HANDSETS
In recent years, some people have expressed concerns about the potentially
harmful effects of electromagnetic emissions from handsets on the health of
mobile telephone users. Any actual or perceived health risks associated with the
use of mobile communications devices could have a material adverse effect on our
results of operations by reducing our mobile telephony customer base, our
customer growth rate and the average usage of our subscribers.
RISKS ASSOCIATED WITH THE OFFERING
THE INTERESTS OF GLOBAL TELESYSTEMS GROUP, INC., OUR CONTROLLING STOCKHOLDER,
MAY NOT COINCIDE WITH OURS, AND COULD HAMPER OUR DEVELOPMENT
Before this offering, Global TeleSystems Group, Inc. (GTS) has controlled
our business, and after this offering, GTS will continue to own approximately
% of our outstanding shares of common stock, or % if the underwriters
exercise their over-allotment option in full. Moreover, members of our
board
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of directors are also members of GTS's board of directors, and of GTS's
officers are members of our board of directors. These relationships create the
potential for conflicts of interest in circumstances where our interests and
GTS's interests are not aligned. Although we have entered into agreements that
address potential conflicts of interest, we can not assure you that any
conflicts will be resolved in our favor.
We expect to enter into an agreement with GTS which will provide that so
long as GTS owns at least % of our shares, it will have the right to nominate
a majority of our board of directors for approval by stockholders. Similarly,
GTS will have the power to determine matters submitted to a vote of our
stockholders without the consent of the other stockholders. Because GTS will own
the majority of our shares, these directors are certain to be elected, and these
matters are certain to be approved. GTS will also have the power to prevent a
change of control, and could take other actions that might be favorable to it
and unfavorable to us and our other stockholders. Consequently, GTS will be
capable of exercising significant influence over our business and policies.
Conflicts of interest may arise between us and GTS in a number of areas
relating to our past and ongoing relationships, including potential acquisitions
of businesses or properties or other corporate opportunities, potential
competitive business activities, the election of new or additional directors,
payment of dividends, incurrence of indebtedness, tax matters, financial
commitments, marketing functions, indemnity arrangements, registration rights,
administration of benefits plans, service arrangements, issuances of our capital
stock, sales or distributions by GTS of its remaining shares of our common stock
and the exercise by GTS of its ability to control our management and affairs.
We have entered into a number of agreements with GTS concerning our
relationships after this offering. Because we will remain a subsidiary of GTS,
these agreements are a result of negotiations between affiliated parties which
may not have been at arm's length. Therefore, the terms offered to us under
these agreements may be worse than the terms we may have reached with an
unaffiliated third party.
WE WILL NOT BE ABLE TO RELY ON GTS TO PROVIDE CAPITAL AT HISTORICAL COSTS
We have never operated as a stand-alone company. After the offering we will
continue to be a subsidiary of GTS, but will operate as a stand-alone company,
and GTS will have no obligation to provide assistance to us, except in
accordance with the agreements that we have made with it regarding the provision
of certain services. These agreements are described elsewhere in this
prospectus.
In the past, our working capital requirements have been satisfied pursuant
to GTS's corporate-wide cash management policies. After this offering, we do not
expect GTS to provide cash injections to finance our operations. We believe that
the proceeds of this offering and our cash flows from operations will be
sufficient to finance our capital requirements for the next 18 to 24 months.
However, market conditions and other factors may cause us to seek additional
financing sooner and we cannot ensure that we will be able to obtain financing
on terms as favorable as could be obtained from or by GTS. In this case, our
cost of capital would be higher than that reflected in our historical financial
statements.
WE HAVE INCURRED NET LOSSES AND EXPECT FUTURE LOSSES
If considered as a stand-alone entity, we have incurred net losses for the
past five years. We expect to continue to incur net losses as we spend
substantial resources on expanding our network, maintaining our existing
network, participating in the consolidation of the communications industry in
Russia and the other countries of the Commonwealth of Independent States and
marketing. We cannot assure you that we will achieve or sustain profitability.
THE RELEVANCE OF OUR FINANCIAL INFORMATION MAY BE LIMITED
The financial information we have provided in this prospectus may not
reflect what our results of operations, financial position and cash flows would
have been had we been a separate, stand-alone entity during the periods
presented or what our results of operations, financial position and cash flows
will be in
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the future. The financial information included in this prospectus does not
necessarily reflect the many significant changes that will occur in our business
and the funding of our operations as a result of our separation from GTS and
this offering.
WE HAVE NOT IDENTIFIED SPECIFIC USES OF THIS OFFERING'S PROCEEDS
We intend to use the net proceeds from this offering for potential
acquisitions and business development, network expansion, working capital and
general corporate purposes. Our management will have significant flexibility in
applying the net proceeds of this offering. We may, when an appropriate
opportunity arises, use a portion, or all, of the net proceeds from this
offering to acquire or invest in businesses, products or new technologies. Our
management's failure to apply these funds effectively could cause our business
to suffer.
RISKS ASSOCIATED WITH OUR SHARES OF COMMON STOCK
OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK MAY BE LIMITED
We do not expect to pay any cash dividends in the foreseeable future. If we
raise any capital in the future, we may be restricted from paying dividends
under the terms of such financings. In addition, the governments in the
countries where we operate may further devalue their currencies and take other
actions that may restrict the ability of our holding or operating companies to
declare and pay dividends.
THE PRICE OF THE SHARES MAY DECLINE IF SUBSTANTIAL AMOUNTS OF SHARES ARE SOLD IN
THE PUBLIC MARKET
After this offering, GTS will own a majority of our shares. GTS has agreed
that it will not offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any of
our common stock without the prior written consent of Deutsche Bank AG London,
which consent may not be unreasonably withheld, for a period of 360 days after
the date of this prospectus. Nevertheless, future sales of substantial amounts
of our shares in the public market, or even the perception that such sales could
occur, could adversely affect the market price of the shares.
We cannot ensure that GTS will maintain its ownership of our shares of
common stock, and we have agreed that GTS may require us to register its shares
of our common stock with the Securities and Exchange Commission for sale to the
public in certain circumstances.
THERE HAS NEVER BEEN A PUBLIC MARKET FOR OUR SHARES
Before this offering, there has not been a public market for our common
stock. We have applied to have our common stock quoted on the Nasdaq National
Market. However, we do not know the extent to which investor interest in Golden
Telecom will lead to the development of a trading market for the common stock or
how our shares will trade in the future. The initial public offering price will
be determined by negotiation among us, Deutsche Bank AG London and the other
underwriters. This negotiation may be based upon factors that are not indicative
of the future market performance of our shares of common stock.
OUR SHARE PRICE MAY BE HIGHLY VOLATILE
The price of shares sold in an initial public offering is frequently
subject to significant volatility for a period of time following the initial
public offering. In addition, a number of particular factors may adversely
affect the market price of our shares after this offering or cause the market
price to fluctuate and decline materially. These factors include:
- our historical and anticipated operating results;
- quarterly fluctuations in our financial and operating results;
19
<PAGE> 22
- the political, economic and financial conditions of Russia and Ukraine;
- changes in applicable regulation and the competitive environment in the
Russian and Ukrainian telecommunications industries;
- a limited public float in our shares; and
- fluctuations in financial markets generally.
ANY US AND OTHER WESTERN JUDGMENTS YOU MAY OBTAIN AGAINST US MAY NOT BE
ENFORCEABLE IN OTHER COUNTRIES
Substantially all of our assets are located in Russia and Ukraine. Although
arbitration awards are generally enforceable in Russia and Ukraine, judgments
obtained in the US or other Western courts, including those with respect to
federal securities law claims, may not be enforceable. Therefore, any US or
other western court judgment obtained against us or any of our operating
companies may not be enforceable in Russia or Ukraine.
USE OF PROCEEDS
We expect the net proceeds of this offering to be $ million, after
deducting estimated commissions and offering expenses of $ million.
We intend to use our net proceeds from the offering primarily for the
following purposes:
- potential acquisitions and business development;
- network expansion;
- working capital; and
- general corporate purposes.
We may, from time to time, evaluate potential acquisitions and investment
opportunities. Announcements concerning potential acquisitions and investments
could be made at any time; however, we cannot assure you that we will identify
suitable acquisition and investment candidates or that we will, in fact,
complete any acquisitions or investments. Until we use the net proceeds from
this offering for a particular purpose, we expect to invest them in short-term
interest-bearing securities.
We expect to fund future expenditures through the proceeds of this offering
and additional equity and debt offerings, debt financing facilities, and cash
flow from operations.
DIVIDEND POLICY
We have not paid any dividends on our common stock and do not intend to pay
dividends in the foreseeable future.
20
<PAGE> 23
DILUTION
At June 30, 1999, the net tangible book value of our common stock was
$102.2 million in the aggregate, or $9.64 per share. "Net tangible book value
per share" represents the amount of our total tangible assets reduced by the
amount of our total liabilities and divided by the number of our shares of
common stock outstanding. After giving effect to the offering, the pro forma net
tangible book value of our common stock would be $ million in the aggregate,
or $ per share. This represents an increase in net tangible book value of
$ per share to existing shareholders and an immediate dilution per share of
$ to new investors purchasing shares in the offering. "Dilution per share"
represents the difference between the price per share to be paid by new
investors and the pro forma net tangible book value per share after the
offering. The following table illustrates the dilution per share as described
above:
<TABLE>
<S> <C> <C>
Offering price per share.................................... $
Net tangible book value per share at June 30, 1999.......... $ 9.64
Pro forma increase in net tangible book value per share
attributable to this offering.............................
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Pro forma dilution per share to new investors in this
offering..................................................
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES OF COMMON STOCK TOTAL CONSIDERATION PER SHARE OF
----------------------- ------------------- COMMON
NUMBER PERCENT AMOUNT PERCENT STOCK
------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholder........... 10,600,000 100
New investors.................
Total.........................
=========== ==== ======== ======== ========
</TABLE>
The above computations assume no exercise of any outstanding options or
warrants. Immediately before this offering, there will be no outstanding options
or warrants. Immediately after this offering, there will be outstanding options
to purchase shares at a weighted average exercise price of $ per
share and warrants to purchase shares at an exercise price of $ per
share. To the extent outstanding options are exercised, there will be further
dilution to new investors.
21
<PAGE> 24
CAPITALIZATION
The following table sets forth our total cash, current debt and:
- our actual consolidated capitalization at June 30, 1999; and
- our consolidated capitalization, as adjusted to give effect to this
offering.
You should read this table in conjunction with our consolidated financial
statements, including the notes to the financial statements included in this
prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 14,495 $
Restricted cash............................................. 29,623
-------- --------
Total cash........................................ $ 44,118 $
======== ========
Debt maturing within one year............................... $ 5,047 $
-------- --------
Current debt.............................................. 5,047
Long-term obligations (net of current portion)
Long term debt............................................ 18,109
-------- --------
Total debt................................................ 23,156
-------- --------
Minority interest........................................... 8,985
Shareholders' equity(1):
Common stock, $0.01 par value (50,000,000 shares
authorized; 10,600,000 shares issued and outstanding,
actual; shares issued and outstanding, as
adjusted).............................................. 106
Additional paid-in capital.................................. 253,953
Accumulated deficit......................................... (89,067)
-------- --------
Total shareholders' equity........................ 164,992
-------- --------
Total capitalization.............................. $197,133 $
======== ========
</TABLE>
- ---------------
(1) At June 30, 1999, there were no outstanding options or warrants to purchase
shares. Immediately after this offering, there will be outstanding options
and warrants to purchase and shares, respectively, at an
exercise price that will be equal to the fair market value of our common
stock price on the date of grant.
22
<PAGE> 25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data have been
derived from our historical financial statements. Financial data at December 31,
1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 have been
audited, whereas financial data at December 31, 1994, 1995 and 1996 and for the
years ended December 31, 1994 and 1995, as well as quarterly data, are
unaudited.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------ -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... -- $ 3,837 $ 13,140 $ 27,198 $ 86,086 $ 28,706 $ 47,355
Cost of revenues.............. -- 4,653 10,083 20,420 43,574 18,816 18,702
Gross margin.................. -- (816) 3,057 6,778 42,512 9,890 28,653
Selling, general and
administrative.............. $1,643 13,225 17,686 21,249 45,327 16,904 19,070
Depreciation and
amortization................ 159 804 2,753 4,363 16,709 3,910 13,932
Equity in (earnings) losses of
ventures.................... (781) 409 (3,783) (12,428) (2,559) (9,279) 5,174
Operating loss................ (1,021) (15,254) (13,599) (6,406) (16,965) (1,645) (9,523)
Interest, net................. 98 (144) (1,140) (431) (3,003) (1,130) (283)
Foreign currency loss......... (16) (79) (446) (399) (7,452) (104) (848)
Provision for income taxes.... -- -- 286 647 5,184 267 4,291
Minority interest............. -- -- -- -- (1,040) -- (1,025)
Net loss...................... (939) (15,477) (15,471) (7,883) (33,644) (3,146) (15,970)
Net loss per share(1)......... $(0.09) $ (1.46) $ (1.46) $ (0.74) $ (3.17) $ (0.30) $ (1.51)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 216 $ 457 $ 3,420 $ 3,934 $ 14,164 $ 3,422 $ 14,495
Property and equipment, net..... 2,858 18,409 21,665 16,812 52,186 39,130 56,563
Investments in and advances to
ventures...................... 4,202 43,226 50,188 74,332 46,519 76,754 37,925
Total assets.................... 15,423 75,328 92,549 129,620 235,849 193,398 222,350
Total debt...................... 3,147 12,866 9,322 1,625 24,459 20,051 23,156
Minority interest............... -- 1,913 1,913 -- 7,993 1,994 8,985
Shareholders' equity............ 11,502 49,839 70,302 115,568 168,783 143,578 164,992
</TABLE>
- ---------------
(1) These amounts were calculated based upon an assumption of 10,600,000 shares
of common stock outstanding for each period.
23
<PAGE> 26
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited selected pro forma consolidated financial data give
effect to the transactions in which we acquired minority interests to increase
our ownership to 100% of Sovam, 56.75% of Golden Telecom (Ukraine) and 95% of
TCM. These transactions were consummated in February 1998, June 1998 and July
1998, respectively, and allowed us to consolidate these business ventures.
However, for the purpose of preparing these pro forma results, we have assumed
that these transactions were consummated at the beginning of the period
indicated.
<TABLE>
<CAPTION>
PRO FORMA AT AND FOR THE YEAR ENDED
DECEMBER 31, 1998
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $117,367
Cost of revenues............................................ 51,874
Gross margin................................................ 65,493
Selling, general and administrative......................... 51,096
Depreciation and amortization............................... 24,413
Equity in (earnings) losses of ventures..................... 863
Operating loss.............................................. (10,879)
Interest, net............................................... (2,455)
Foreign currency loss....................................... (7,909)
Provision for income taxes.................................. 10,084
Net loss.................................................... (32,832)
Net loss per share(1)....................................... $ (3.10)
BALANCE SHEET DATA:
Cash and Cash Equivalents................................... $ 14,164
Property and equipment, net................................. 52,186
Investments in and advances to ventures..................... 46,519
Total assets................................................ 225,442
Total debt.................................................. 24,459
Minority interest........................................... 3,865
Shareholders' equity........................................ 162,355
</TABLE>
- ---------------
(1) This amount was calculated based upon an assumption of 10,600,000 shares of
common stock outstanding for each period.
We provide below certain pro forma and historical information regarding our
quarterly results since the start of 1998 in order to show our results before
and after the August 1998 Russian financial crisis.
<TABLE>
<CAPTION>
PRO FORMA
-------------------- ACTUAL
FOR THE THREE ----------------------------------------------------
MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------- ----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $27,306 $ 32,680 $ 31,966 $ 25,415 $24,185 $23,170
Cost of revenues....................... 12,567 14,550 12,709 12,048 9,326 9,376
Gross margin........................... 14,739 18,130 19,257 13,367 14,859 13,794
Selling, general and administrative.... 11,049 11,624 17,124 11,299 8,638 10,432
Net loss............................... (1,939) (395) (17,121) (13,377) (7,776) (8,194)
Net loss per share(1).................. $ (0.18) $ (0.04) $ (1.62) $ (1.26) $ (0.73) $ (0.77)
</TABLE>
- ---------------
(1) These amounts were calculated based upon an assumption of 10,600,000 shares
of common stock outstanding for each period.
24
<PAGE> 27
VENTURES ACCOUNTED FOR UNDER THE EQUITY METHOD OF ACCOUNTING
We present below information that we believe provides additional insight
into our non-consolidated equity method investments. Following US GAAP, we
consolidate the financial results of entities in which we own an equity interest
of more than 50%, except in certain cases where we do not exercise effective
unilateral control. We use the equity method of accounting for the financial
results of ventures in which we own an equity interest of 50% or less, or of
majority-owned entities over which we do not exercise effective unilateral
control. Accordingly, the results of such non-consolidated ventures are included
in our consolidated statements of operations as a single line item, "Equity in
(earnings) losses of ventures". However, we recognize 100% of the losses of all
ventures where we bear all the financial risk, which includes all our
significant ventures except for Sovintel. For the impact of these excess losses,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations". The assets, liabilities and equity of such ventures are included in
our consolidated balance sheets as a single line item, "Investments in and
advances to ventures".
The following provides details of the results of operations of our
non-consolidated ventures for the periods in which they were not consolidated.
The ownership interest in the first column indicates our legal ownership
percentage for the respective equity investments. The information is being
provided to assist you in determining our legal rights associated with the
presented financial data. See Note 4 of our audited consolidated financial
statements for additional disclosures related to our equity investees. Our
selling, general, administrative and other expenses include non-income taxes.
The adjustment amounts at the end of each period represent the effect of
inter-affiliate transactions between our consolidated and equity method
ventures. More detailed information about inter-affiliate transactions is
included under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Accounting Methodology".
<TABLE>
<CAPTION>
SELLING,
GENERAL, DEPRECIATION
OWNERSHIP COST OF ADMINISTRATIVE & NET
INTEREST REVENUES REVENUES & OTHER AMORTIZATION INCOME/(LOSS)
--------- -------- -------- -------------- ------------ -------------
(IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Sovintel.......................... 50.0% $75,040 $40,674 $ 10,009 $ 3,638 $14,762
TCM............................... 50.0%(1) 16,507 3,238 1,838 108 8,874
TeleRoss ventures................. 50.0% 2,413 637 1,830 659 (841)
Sovam............................. 66.7%(2) 11,671 7,745 5,078 764 (2,138)
GTS Mobile Services............... 50.0%(3) 25,195 7,804 10,468 4,288 (669)
Golden Telecom (Ukraine).......... 24.5%(4) 583 502 1,752 816 (2,737)
-------- -------- -------- ------- -------
Total....................... $131,409 $60,600 $ 30,975 $10,273 $17,251
ADJUSTMENTS FOR INTERAFFILIATE
TRANSACTIONS...................... -- $(13,855) $(3,295) $(10,568) -- --
YEAR ENDED DECEMBER 31, 1997
Sovintel.......................... 50.0% $113,962 $68,381 $ 15,899 $ 5,312 $18,464
TCM............................... 50.0%(1) 29,308 6,670 2,762 633 13,023
TeleRoss ventures................. 50.0% 6,794 1,581 3,202 963 71
Sovam............................. 66.7%(2) 17,808 10,046 5,381 1,006 780
GTS Mobile Services............... 50.0%(3) 37,055 12,762 11,733 5,091 2,908
Golden Telecom (Ukraine).......... 24.5%(4) 7,220 3,343 4,695 2,500 (3,814)
-------- -------- -------- ------- -------
Total....................... $212,147 $102,783 $ 43,672 $15,505 $31,432
ADJUSTMENTS FOR INTERAFFILIATE
TRANSACTIONS...................... $(23,927) $(8,695) $(15,699) -- --
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
SELLING,
GENERAL, DEPRECIATION
OWNERSHIP COST OF ADMINISTRATIVE & NET
INTEREST REVENUES REVENUES & OTHER AMORTIZATION INCOME/(LOSS)
--------- -------- -------- -------------- ------------ -------------
(IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Sovintel.......................... 50.0% $124,168 $76,237 $ 23,772 $ 6,341 $ 4,260
TCM (through June 30, 1998)....... 50.0%(1) 21,586 5,343 1,732 472 9,309
TeleRoss ventures................. 50.0% 9,018 1,925 3,687 1,087 (223)
GTS Mobile Services............... 50.0%(3) 35,236 11,842 10,117 7,261 387
Golden Telecom (Ukraine) (through
June 30, 1998).................. 24.5%(4) 9,927 3,192 4,144 1,743 209
-------- -------- -------- ------- -------
Total....................... $199,935 $98,539 $ 43,452 $16,904 $13,942
ADJUSTMENTS FOR INTERAFFILIATE
TRANSACTIONS...................... $(25,223) $(24,881) $ (1,584) -- --
SIX MONTHS ENDED JUNE 30, 1998
Sovintel.......................... 50.0% $67,107 $41,990 $ 9,397 $ 3,004 $ 9,639
TCM............................... 50.0%(1) 21,586 5,343 1,732 472 9,309
TeleRoss ventures................. 50.0% 5,040 1,158 2,059 510 618
GTS Mobile Services............... 50.0%(3) 21,370 7,128 5,689 3,377 2,359
Golden Telecom (Ukraine).......... 24.5%(4) 9,927 3,192 4,144 1,743 209
-------- -------- -------- ------- -------
Total....................... $125,030 $58,811 $ 23,021 $ 9,106 22,134
ADJUSTMENTS FOR INTERAFFILIATE
TRANSACTIONS...................... $(15,801) $(14,530) $ (4,476) -- --
SIX MONTHS ENDED JUNE 30, 1999
Sovintel.......................... 50.0% 44,981 $26,233 $ 8,317 $ 3,845 $ 1,461
TeleRoss ventures................. 50.0% 1,585 347 783 535 (339)
GTS Mobile Services............... 50.0%(3) 8,784 2,710 3,753 5,200 (5,037)
-------- -------- -------- ------- -------
Total....................... $55,350 $29,290 $ 12,853 $ 9,580 $(3,915)
ADJUSTMENTS FOR INTERAFFILIATE
TRANSACTIONS...................... $(7,671) $(7,986) $ 836 -- --
</TABLE>
- ---------------
(1) Our ownership of TCM increased to 95% from July 1, 1998, and to 100% from
August 16, 1999.
(2) Our ownership of Sovam increased to 100% from February 1998.
(3) We generally have a 50% ownership interest in these equity investments
through our holding company, Vostok Mobile. See Note 4 in our audited
Consolidated Financial Statements for additional disclosures related to our
equity investees.
(4) Our effective ownership of Golden Telecom (Ukraine) increased to 56.75% from
June 30, 1998.
26
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis relates to our financial condition
and results of operations for each of the six-month periods ended June 30, 1999
and 1998, and for each of the years ended December 31, 1998, 1997 and 1996. This
discussion should be read in conjunction with the "Selected Historical and Pro
Forma Consolidated Financial Data" and the Consolidated Financial Statements and
the notes related thereto that appear elsewhere in this prospectus.
OVERVIEW
We are a leading facilities-based provider of integrated telecommunications
services to businesses and other high-usage customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the Commonwealth of Independent States.
We organize our operations into two business divisions, Business Services and
Mobile Services. Our Business Services Division comprises CLEC Services and Data
and Long Distance Services. Our Mobile Services Division operates cellular
networks in Kiev, Vladivostok and thirteen other cities throughout Russia.
Our financial condition and our results of operations have been, and
continue to be, adversely affected by ongoing economic instability in Russia and
the other countries of the Commonwealth of Independent States. The Russian
economy collapsed in August 1998 after the Russian government defaulted on its
obligation to make payments on its internal debt and allowed the ruble to
devalue. Although the markets have stabilized since August 1998, the Russian
economy remains in depression, exacerbated by continuing political instability
that may precipitate further economic volatility. See "-- Special Note Regarding
the Russian Financial Crisis".
Most of our revenue is derived from high-volume business customers and
carriers. Our business customers include large multinational companies, local
enterprises, financial institutions, hotels and government agencies. We believe
that the carriers, including mobile operators, which contribute to a substantial
portion of our revenues themselves also derive much of their business from
high-volume business customers. Thus, we believe that most of our ultimate
end-users are businesses that require access to highly reliable and advanced
telecommunications facilities to sustain their operations.
As a result of the August 1998 Russian financial crisis, a significant
number of our business customers have scaled back or closed their operations in
Russia, and many local companies have closed down operations in Russia because
of an inability to satisfy their payment obligations to creditors. Terminations
of service and reduction in services offered have reduced our recurring
revenues. Additionally, sales of equipment have declined significantly as new
customers prefer to lease rather than buy equipment under current market
conditions. We are also experiencing significant price pressure on our recurring
revenue by Moscow cellular operators, which include some of our largest
customers. Although reduced revenues from cellular operators will reduce our
margins in the short term, we believe that when the Moscow cellular market
recovers, we should be well positioned to improve our margins by selling
additional numbering capacity to cellular operators and by recognizing increased
recurring revenue as cellular traffic increases.
We have traditionally competed for customers on the basis of network
quality, customer service and range of service offered. In the past several
years, other telecommunications operators have also introduced high-quality
services to the segments of the business market in which we operate. Since the
August 1998 Russian financial crisis, competition with these operators has
intensified, resulting in declining prices, which has also adversely affected
our revenues. In addition, some of our competitors do not link their prices to
the dollar/ruble exchange rate, so as the ruble devalues, their prices
effectively become lower than our prices. In order to compete with these
carriers in the regions outside Moscow and St. Petersburg, we have been forced
to lower our tariffs, which has resulted in reduced revenues and declining
margins.
Together, these factors have resulted in a significant reduction in the
level of demand for many of our services, and this has contributed to a
significant reduction in revenues.
27
<PAGE> 30
In recent months, although we have seen what appears to be a slight
recovery in the Russian market, the downward price pressure has persisted, both
because of competitive pressures in Russia and because of a global trend toward
lower telecommunications tariffs. Although we have experienced an increase in
traffic volume over recent months, the volume increase has not kept pace with
the reduction in prices. As economic conditions in Russia improve, we expect to
see further improvements in our traffic volume, which we believe may eventually
offset the decline in prices and result in an increase in revenue.
Although we expect competition to continue to force the general level of
tariffs downward, we expect to mitigate the effects of this pressure by seeking
further reductions in the settlement and interconnection rates that we pay to
other telecommunications operators. Our ability to reduce our cost of revenue by
reducing these payments has enabled us generally to maintain, or even improve,
our margins. We expect settlement and interconnection rates to continue to
decline in line with tariffs.
In the months leading to the August 1998 Russian financial crisis, we had
been expanding our headcount to support the expected growth of our business.
Since the crisis, however, we have introduced a number of measures intended to
reduce our overhead costs, including headcount reductions. We expect to maintain
a strong focus on enhancing our productivity and taking measures to integrate
and streamline our operations.
OWNERSHIP AND INITIAL PUBLIC OFFERING
Our business is currently wholly owned by Global TeleSystems Group, Inc.
(GTS). GTS has created a separate holding company, Golden Telecom, Inc., that
will issue the shares offered in this public offering. Before the consummation
of this offering, GTS intends to transfer its interests in its Russian and other
Commonwealth of Independent States operations to Golden Telecom, Inc., which
will then issue common stock in this initial public offering. The remainder of
this section discusses our organizational structure as it will exist after the
consummation of this offering. After the completion of the offering, GTS will
own approximately % of the outstanding shares of common stock of our company,
or % if the underwriters' over-allotment option is exercised in full.
We and GTS have decided to conduct this initial public offering because we
believe that the offering will enable us, GTS and our investors to recognize
greater long-term value in our business interests in Russia and the other
countries of the Commonwealth of Independent States than if these interests were
to remain entirely within the GTS group of companies. Following this offering,
we believe that our independence will afford us greater flexibility in managing
our business and pursuing our business strategy in order to bring greater
long-term value to our company and to our shareholders. For example, after this
offering is consummated, we would be able to use our shares of common stock to
acquire other companies. The offering will also create a basis for our investors
to value our assets separately from GTS.
RESTRUCTURING OF CERTAIN CELLULAR VENTURES
We have recently determined that the allocation of sufficient resources to
support certain of our cellular ventures, which are not material to our
financial condition or results of operations, is inconsistent with our current
strategic plans. We therefore do not intend to provide any further financial
assistance to certain cellular ventures, other than the assumption of certain
debt obligations, and we are seeking to sell our ownership interests in these
assets in furtherance of our plan of abandonment. We therefore intend to take a
charge to earnings of $16-20 million in the third quarter of 1999, and we will
assume approximately $10-13 million in debt obligations of these ventures. We
will continue to support those cellular ventures where the allocation of
financial, operational and management resources is consistent with our strategic
plans.
ACCOUNTING METHODOLOGY
The presentation of our financial statements in accordance with US GAAP is
influenced by the accounting conventions described below:
Accounting for Business Ventures. We consolidate all our significant wholly
owned subsidiaries and majority owned ventures where we exercise unilateral
operating and financial control. We use equity
28
<PAGE> 31
method accounting to account for those ventures where we exercise significant
influence, but do not exercise unilateral operating and financial control. We
also use the equity method to account for certain insignificant majority-owned
ventures where we elect not to exercise unilateral operating and financial
control.
The following table summarizes the method by which we account for our
ownership interests in our principal ventures for the periods presented in this
prospectus:
<TABLE>
<CAPTION>
EQUITY METHOD ACCOUNTING CONSOLIDATION METHOD ACCOUNTING
----------------------------------- --------------------------------
PERIOD OWNERSHIP PERIOD OWNERSHIP
------------------------ --------- --------------------- ---------
<S> <C> <C> <C> <C>
Sovintel............. All 50% -- --
TeleRoss
ventures(1)........ All 50% -- --
Vostok Mobile
ventures(2)........ All 50%-100% -- --
Sovam(3)............. Through January 31, 1998 66.67% From February 1, 1998 100%
Golden Telecom
(Ukraine)(4)....... Through June 29, 1998 24.5% From June 30, 1998 56.75%
TCM(5)............... Through June 30, 1998 50% From July 1, 1998 95%
TeleRoss operating
company............ -- -- All 100%
</TABLE>
- ---------------
(1) We own 50% interests in 13 of the 14 TeleRoss ventures, and we own a 100%
interest in the TeleRoss venture in Irkutsk. We do not consolidate our
wholly owned TeleRoss venture in Irkutsk because we do not consider it
material to our operations, and we do not exercise our unilateral operating
and financial control over it.
(2) We own 50-70% interests in 13 of the 14 Vostok Mobile ventures, and we own a
100% interest in the Vostok Mobile venture in Novgorod, which we
consolidate, although it is not material to our operations.
(3) In February 1998, we purchased our remaining 33% interest in Sovam from our
minority partner, and, as a result, Sovam is now accounted for by the
consolidation method as opposed to the equity method.
(4) In June 1998, we initiated a restructuring of the capital and ownership
structure of Golden Telecom (Ukraine), so that our total economic interest
in Golden Telecom (Ukraine), held directly and indirectly, is now 56.75%. An
affiliate of ING Barings, one of the underwriters in this offering, is a
12.25% indirect shareholder of Golden Telecom (Ukraine). This shareholder
intends to contribute its indirect interest in Golden Telecom (Ukraine) to a
wholly owned subsidiary of Golden Telecom, Inc. upon the consummation of
this offering in exchange for approximately 420,000 newly issued shares of
Golden Telecom. ING Barings' subscription through its affiliate as a
strategic investor is conditioned upon the consummation of this exchange.
(5) Before July 1998, we owned 52.64% of the holding company, GTS-Vox Limited,
that controlled 95% of TCM. In July 1998, we acquired the remaining
outstanding interests in GTS-Vox Limited and then owned 95% of TCM. As a
result of this acquisition, TCM was accounted for by the consolidation
method as opposed to the equity method. We acquired the remaining 5% of TCM
on August 16, 1999.
Our interest in TCM is held indirectly through GTS-Vox Limited. We have
included in this prospectus the financial statements for GTS-Vox Limited, a
direct subsidiary of Golden Telecom, Inc. However, for the purposes of this
management's discussion and analysis, we have presented the results of the
operating telecommunications company, TCM. We believe that TCM's financial
results more closely reflect the ongoing nature of this company's operations
than the financial results of GTS-Vox Limited, which also reflect goodwill and
transaction costs relating to its acquisition by Golden Telecom.
Profit and Loss Accounting. We recognize profits and losses in our ventures
in accordance with the underlying ownership percentage or allocation percentage
as specified in our agreements with partners;
29
<PAGE> 32
however, we recognize 100% of the losses in ventures where we bear all the
financial risk. We bear the financial risk of all our significant ventures,
except for Sovintel. Accordingly, we recognize the portion of the losses, which
we refer to as the excess losses, that would be assigned to the minority
interest partner in accordance with its ownership interest in the venture. When
such ventures become profitable, we recognize 100% of the profits until the
excess losses previously recognized by us are recovered.
As of June 30, 1999, our CLEC Services had no cumulative excess losses, our
Long Distance and Data Services had $1.3 million of cumulative excess losses,
and our Mobile Services had $5.9 million of cumulative excess losses. To the
extent these business groups report profits in future periods, we expect that
our financial results will be favorably affected due to the reversal of these
excess losses.
Inter-Affiliate Transactions. Our companies trade extensively with each
other. For the companies that follow the consolidation method of accounting,
those inter-affiliate transactions are eliminated in the process of
consolidating our accounts. For example, interconnection costs of one company
can be revenue to another of our companies.
Intercompany transactions occur primarily between Sovintel and TCM.
Sovintel's cost of revenue for the year ended December 31, 1998 included $7.5
million paid to TCM and $3.0 million to other group companies, which are
included as revenue in our results of operations to the extent that these
revenues were with companies that follow the consolidation method of accounting
for the applicable period of accounting.
Turnover Taxes. Our ventures in Russia and Ukraine incur a 4% and 2%
turnover tax, respectively, based on their revenue earned. We include these
taxes as a component of our operating expenses, since such taxes are incidental
to the revenue cycle.
PRESENTATION OF FINANCIAL STATEMENTS
Golden Telecom, Inc. was formed in June 1999 to be the holding company for
all of GTS's businesses in the Commonwealth of Independent States. The
consolidated financial statements included in this prospectus have been prepared
as if Golden Telecom, Inc. had been in existence throughout all relevant
periods. Before 1998, the only material consolidated subsidiary was TeleRoss
operating company.
We have also included a presentation of certain unaudited pro forma results
of operations, which we believe mitigates the lack of comparability of our
results of operations among historical periods. These pro forma results of
operations give effect to the transactions in which we acquired minority
interests to increase our ownership to 100% of Sovam, 56.75% of Golden Telecom
(Ukraine) and 95% of TCM. These transactions were consummated in February 1998,
June 1998 and July 1998, respectively, and allowed us to consolidate these
ventures. Because these ventures are material to our results of operations, we
believe that a discussion only of our historical consolidated results of
operations would not be meaningful or relevant to an understanding of our
business as it is currently constituted. Thus, for the purpose of preparing our
pro forma results of operations, we have assumed that the transactions by which
we acquired these minority interests were consummated at the beginning of the
period indicated. However, the pro forma data are not necessarily indicative of
what our consolidated results of operations would actually have been had these
transactions in fact occurred at the beginning of the periods indicated and do
not purport to project our consolidated results of operations for any period.
In addition, we have included a discussion of certain non-consolidated
operations that are material to our business, primarily Sovintel. We believe
that this discussion is helpful to developing an understanding of the factors
contributing to our overall financial condition and results of operations.
The discussion of our results of operations is organized as follows:
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
- Consolidated Results. Results of Operations for the Six Months Ended June
30, 1999 compared to the Results of Operations for the Six Months Ended
June 30, 1998
30
<PAGE> 33
- Pro Forma Consolidated Revenue and Cost of Revenue. Consolidated Revenue
and Cost of Revenue for the Six Months Ended June 30, 1999 compared to
the Pro Forma Consolidated Revenue and Cost of Revenue for the Six Months
Ended June 30, 1998
- Non-consolidated Results. Results of Non-Consolidated Operations for the
Six Months Ended June 30, 1999 compared to the Results of
Non-Consolidated Operations for the Six Months Ended June 30, 1998
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
- Consolidated Results. Consolidated Results of Operations for the Year
Ended December 31, 1998 compared to the Consolidated Results of
Operations for the Year Ended December 31, 1997
- Pro Forma Consolidated Revenue and Cost of Revenue. Pro Forma
Consolidated Revenue and Cost of Revenue for the Year Ended December 31,
1998 compared to Pro Forma Consolidated Revenue and Cost of Revenue for
the Year Ended December 31, 1997
- Non-consolidated Results. Results of Non-Consolidated Operations for the
Year Ended December 31, 1998 compared to the Results of Non-Consolidated
Operations for the Year Ended December 31, 1997
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
- Consolidated Results. Consolidated Results of Operations for the Year
Ended December 31, 1997 compared to the Consolidated Results of
Operations for the Year Ended December 31, 1996
- Non-consolidated Results. Results of Non-Consolidated Operations for the
Year Ended December 31, 1997 compared to the Results of Non-Consolidated
Operations for the Year Ended December 31, 1996
CONSOLIDATED RESULTS -- CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1998
For the six months ended June 30, 1998, we only consolidated two
significant ventures: TeleRoss operating company and Sovam. TeleRoss operating
company was consolidated for the entire period, and Sovam was consolidated from
February 1, 1998. Golden Telecom (Ukraine) and TCM were consolidated in our
results of operations from June 30, 1998 and July 1, 1998, respectively, and,
therefore, their results are included only for the six months ended June 30,
1999. Immediately after this discussion of our consolidated results, we have
also included a pro forma discussion of our results for these periods, assuming
that the acquisitions of Sovam, Golden Telecom (Ukraine) and TCM were
consolidated from January 1, 1998.
REVENUE
Our revenue increased by 65% to $47.4 million for the six months ended June
30, 1999 from $28.7 million for the six months ended June 30, 1998. The increase
was due primarily to our consolidation of Golden Telecom (Ukraine) and TCM in
the first half of 1999, offset by decreased revenues caused by the August 1998
Russian financial crisis. The breakdown of revenue by business group was as
follows:
<TABLE>
<CAPTION>
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1999
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services........................................... $ 0.0 $21.6
Data and Long Distance Services......................... 28.0 18.1
Mobile Services......................................... 0.9 8.6
Eliminations............................................ (0.2) (0.9)
----- -----
Total Revenue................................. $28.7 $47.4
</TABLE>
31
<PAGE> 34
CLEC Services. Revenue from CLEC Services was $21.6 million for the six
months ended June 30, 1999. There was no CLEC Services revenue in the six months
ended June 30, 1998.
Of the CLEC Services revenue of $21.6 million in the six months ended June
30, 1999, $15.5 million was due to the consolidation of TCM from July 1, 1998.
The balance of the CLEC Services revenue of $6.1 million was due to the
consolidation of Golden Telecom BTS from June 30, 1998.
TCM's revenue decreased by 28% to $15.5 million for the six months ended
June 30, 1999 from $21.6 million for the six months ended June 30, 1998. The
decrease was due to the continuing effects of the August 1998 Russian financial
crisis. Port sales declined because fewer ports were installed in the first half
of 1999 than in the first half of 1998. In addition, a reduction in traffic
revenue offset an increase in monthly recurring revenue. TCM was not
consolidated in the six months ended June 30, 1998.
Golden Telecom BTS revenue increased by 39% to $6.1 million for the six
months ended June 30, 1999 from $4.4 million for the six months ended June 30,
1998. The financial crisis affected Ukraine less strongly than Russia. Decreases
in Golden Telecom BTS revenue from installation fees, connection fees and
equipment sales were more than offset by increased traffic revenue and monthly
recurring revenue attributable to an increased customer base. Golden Telecom BTS
was not consolidated until June 30, 1998.
Data and Long Distance Services. Revenue from Data and Long Distance
Services decreased by 35% to $18.1 million for the six months ended June 30,
1999 from $28.0 million for the six months ended June 30, 1998.
The Data and Long Distance Services decrease in revenue of $9.9 million in
the six months ended June 30, 1999 was due entirely to a reduction in revenue of
TeleRoss operating company.
Revenue from data services remained flat at $12.5 million for the six
months ended June 30, 1999 and for the six months ended June 30, 1998. An
increase in private line revenues offset a reduction from the sale of equipment.
Furthermore, although the Russian financial crisis caused a decrease in data
revenue from banking customers, this decrease was offset by an increase in
revenue from other multinational corporate customers.
Revenue from long distance services decreased by 64% to $5.6 million for
the six months ended June 30, 1999 from $15.5 million for the six months ended
June 30, 1998 primarily as a result of reduced tariffs on long distance calls in
response to competition from Rostelecom and other carriers and partially as a
result of reduced traffic. Rostelecom quotes its tariffs in rubles; therefore,
its tariffs declined in dollar terms as the ruble devalued following the August
1998 Russian financial crisis. As a result, the average tariff in the six months
ended June 30, 1999 was 70% lower than the average tariff in the six months
ended June 30, 1998. In addition, traffic declined by 11% in the first half of
1999.
Mobile Services. Revenue from Mobile Services increased by 856% to $8.6
million for the six months ended June 30, 1999 from $0.9 million for the six
months ended June 30, 1998.
The increase of $7.7 million in the six months ended June 30, 1999
represented an increase of $8.4 million due to the consolidation of Golden
Telecom (Ukraine) from June 30, 1998, offset by a reduction of $0.7 million in
the business group's revenue.
Golden Telecom GSM revenue increased by 45% to $8.4 million for the six
months ended June 30, 1999 from $5.8 million for the six months ended June 30,
1998 primarily as a result of the 118% growth in its active subscribers from
June 30, 1998 to June 30, 1999. Golden Telecom GSM was still in the early stages
of its development during the first half of 1998.
32
<PAGE> 35
EXPENSES
The following table shows our principal expenses for the six months ended
June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED EXPENSES CONSOLIDATED EXPENSES
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1999
--------------------- ---------------------
(IN MILLIONS)
<S> <C> <C>
Cost of Revenue
CLEC Services....................................... $0.0 $6.3
Data and Long Distance Services..................... 18.1 11.3
Mobile Services..................................... 0.8 2.1
Eliminations........................................ (0.1) (1.0)
---- ----
Total Cost of Revenue................................. 18.8 18.7
Selling, General and Administrative................... 16.9 19.1
Depreciation and Amortization......................... 3.9 13.9
Equity in (Earnings) Losses of Ventures............... (9.3) 5.2
Interest, Net......................................... 1.1 0.3
Foreign Currency Loss................................. 0.1 0.8
Provision for Income Taxes............................ $0.3 $4.3
</TABLE>
Cost of Revenue
Our cost of revenue decreased slightly to $18.7 million for the six months
ended June 30, 1999 from $18.8 million for the six months ended June 30, 1998.
The increase in cost of revenue due to Golden Telecom (Ukraine) and TCM being
included in our consolidated results of operations only from June 30, 1998 and
July 1, 1998, respectively, almost offset all of the reductions in cost of
revenue at our other operating companies.
CLEC Services. Cost of revenue from CLEC Services were $6.3 million, or 29%
of revenue, for the six months ended June 30, 1999. There was no CLEC Services
cost of revenue for the six months ended June 30, 1998.
Of the CLEC Services cost of revenue of $6.3 million in the six months
ended June 30, 1999, $3.5 million was due to the consolidation of TCM from July
1, 1998. The balance of the CLEC Services cost of revenue of $2.8 million was
due to the consolidation of Golden Telecom BTS from June 30, 1998.
TCM's cost of revenue decreased by 34% to $3.5 million, or 23% of revenue,
for the six months ended June 30, 1999 from $5.4 million, or 25% of revenue, for
the six months ended June 30, 1998. The small decrease as a percentage of
revenue resulted from improved efficiency in TCM's network operations. TCM was
not consolidated in the six months ended June 30, 1998.
Golden Telecom BTS cost of revenue increased by 47% to $2.8 million, or 46%
of revenue, for the six months ended June 30, 1999 from $1.9 million, or 43% of
revenue, for the six months ended June 30, 1998. Cost of revenue as a percentage
of revenue increased because the reduction in tariffs in response to competitive
pressures exceeded the decrease in settlement costs. Golden Telecom BTS was not
consolidated until June 30, 1998.
Data and Long Distance Services. Cost of revenue from Data and Long
Distance Services decreased by 38% to $11.3 million, or 62% of revenue, for the
six months ended June 30, 1999 from $18.1 million, or 65% of revenue, for the
six months ended June 30, 1998. The decrease reflected a reduction in long
distance settlement rates paid to other carriers, similar to our own reduction
in revenue caused by decreased tariffs.
Mobile Services. Cost of revenue from Mobile Services increased by 163% to
$2.1 million, or 24% of revenue, for the six months ended June 30, 1999 from
$0.8 million, or 89% of revenue, for the six months ended June 30, 1998.
33
<PAGE> 36
Of the Mobile Services increase in cost of revenue of $1.3 million in the
six months ended June 30, 1999, $1.8 million was due to the consolidation of
Golden Telecom (Ukraine) in the first half of 1999, offset by a $0.5 million
decline in the business group's cost of revenue.
Golden Telecom GSM cost of revenue increased by 13% to $1.8 million, or 21%
of revenue, in the six months ended June 30, 1999, from $1.6 million, or 28% of
revenue, in the six months ended June 30, 1998. The cost of revenue decreased as
a proportion of revenue because a lower proportion of revenue was derived from
sales of handsets, which produce low margins. Golden Telecom GSM was not
consolidated until June 30, 1998.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 13% to $19.1
million, or 40% of revenue, for the six months ended June 30, 1999 from $16.9
million, or 59% of revenue, for the six months ended June 30, 1998. Of the
increase in selling, general and administrative expenses of $2.2 million, $5.2
million was due to the consolidation of Golden Telecom (Ukraine) and $2.2
million due to the consolidation of TCM. These increases were offset by a
reduction of $5.2 million, which reflected decreases in costs at our other
consolidated entities. These reduced costs included employee remuneration as a
result of our efforts to enhance operating efficiency, as well as bad debt
expense and non-income taxes.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 256% to $13.9
million for the six months ended June 30, 1999 from $3.9 million for the six
months ended June 30, 1998. This increase was a result of the transactions that
enabled us to consolidate Golden Telecom (Ukraine) and TCM beginning in the
second half of 1998.
Interest, Net
Our interest expense, net, decreased by 73% to $0.3 million for the six
months ended June 30, 1999 from $1.1 million for six months ended June 30, 1998.
Equity in Earnings/Losses of Ventures
The losses after interest and tax charges from our investments in
non-consolidated ventures were $5.2 million for the six months ended June 30,
1999, and our earnings from investments in non-consolidated ventures were $9.3
million for the six months ended June 30, 1998. These amounts include excess
losses of $2.9 million for the first six months of 1999. In the first six months
of 1998, we recovered $0.1 million of excess losses relating to previous
periods. We recognized earnings at Sovintel of $0.7 million for the six months
ended June 30, 1999 which partially offset our recognized losses at other
ventures. In the six months ended June 30, 1998, our recognized earnings at
Sovintel and TCM together were $9.5 million.
Foreign Currency Loss
Our foreign currency loss was $0.8 million for the six months ended June
30, 1999, compared to a $0.1 million loss for the six months ended June 30,
1998. This increased loss reflects the devaluation of the ruble that resulted
from the August 1998 Russian financial crisis.
Provision for Income Taxes
Our provision for income taxes increased by 1333% to $4.3 million for the
six months ended June 30, 1999 from $0.3 million for six months ended June 30,
1998. The increase was almost entirely due to the consolidation of TCM in the
six months ended June 30, 1999. TCM was not consolidated in the six months ended
June 30, 1998.
34
<PAGE> 37
PRO FORMA CONSOLIDATED REVENUE AND COST OF REVENUE -- CONSOLIDATED REVENUE AND
COST OF REVENUE FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE PRO FORMA
CONSOLIDATED REVENUE AND COST OF REVENUE FOR THE SIX MONTHS ENDED JUNE 30, 1998
Revenue
Our revenue decreased by 21% to $47.4 million for the six months ended June
30, 1999 from $60.0 million, on a pro forma basis, for the six months ended June
30, 1998. The breakdown of revenue by business group was as follows:
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
CONSOLIDATED REVENUE REVENUE
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1999
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services.................................. 26.0 21.6
Data and Long Distance Services................ 28.0 18.1
Mobile Services................................ 6.7 8.6
Eliminations................................... (0.7) (0.9)
----- -----
Total Revenue.......................... 60.0 47.4
</TABLE>
CLEC Services. Revenue from CLEC Services decreased by 17% to $21.6 million
for the six months ended June 30, 1999 from $26.0 million, on a pro forma basis,
for the six months ended June 30, 1998. The decrease was largely attributable to
a substantial decline in non-recurring revenue, comprised of installation fees,
port sales and equipment sales. The revenue from these non-recurring items
decreased to $0.3 million for the six months ended June 30, 1999 from $6.7
million, on a pro forma basis, for the six months ended June 30, 1998. The
decrease in non-recurring revenue was due to the effects of the August 1998
Russian financial crisis, which resulted in our customers, especially cellular
operators, having sufficient capacity for their reduced needs.
Partially offsetting the decline in non-recurring revenue was an increase
in recurring revenue, comprised of monthly fees and traffic revenue, to $21.3
million for the six months ended June 30, 1999 from $19.3 million, on a pro
forma basis, for the six months ended June 30, 1998. The increase was partially
due to increased traffic at Golden Telecom BTS, reflecting its growing customer
base. In addition, the 1998 financial crisis affected Russia worse than Ukraine.
The increase in recurring revenue was also partially due to the higher number of
ports in use at TCM, as reflected by the high level of port sales for the six
months ended June 30, 1998.
Data and Long Distance Services. Revenue from Data and Long Distance
Services decreased by 35% to $18.1 million for the six months ended June 30,
1999 from $28.0 million, on a pro forma basis, for the six months ended June 30,
1998. Data revenue remained flat at $12.5 million, primarily as a result of an
increase in private line revenues offsetting a reduction in revenues from the
sale of equipment. Long distance revenue decreased 64% to $5.6 million from
$15.5 million as a result of reduced tariffs on long distance calls in response
to competition from Rostelecom and other carriers. Rostelecom quotes its tariffs
in rubles; therefore, its tariffs declined in dollar terms as the ruble devalued
following the August 1998 Russian financial crisis. As a result, the average
tariff in the six months ended June 30, 1999 was 70% lower than the average
tariff in the six months ended June 30, 1998. In addition, traffic declined by
11% in the first half of 1999.
Mobile Services. Revenue from Mobile Services increased by 28% to $8.6
million for the six months ended June 30, 1999 from $6.7 million, on a pro forma
basis, for the six months ended June 30, 1998. Recurring revenue increased to
$7.9 million for the six months ended June 30, 1999 from $4.8 million, on a pro
forma basis, for the six months ended June 30, 1998. This increase is primarily
attributable to the 118% growth in Golden Telecom GSM's active subscribers from
June 30, 1998 to June 30, 1999 which was caused by the expansion of our
Ukrainian cellular operations during 1998. Non-recurring revenue declined to
$0.7 million for the six months ended June 30, 1999 from $1.9 million, on a pro
forma basis, for the six months ended June 30, 1998. This decrease reflected
reduced equipment sales in Russia as a result of the Russian financial crisis
and a decline in the unit prices of handsets in Ukraine as a result of
35
<PAGE> 38
increased competition for new subscribers by Ukrainian cellular providers as the
cellular market in Kiev continued to develop during 1998.
Cost of Revenue
The following table shows our cost of revenue in the six months ended June
30, 1998, on a pro forma basis, and the six months ended June 30, 1999:
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED CONSOLIDATED
COST OF REVENUE COST OF REVENUE
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1999
------------------- -------------------
(IN MILLIONS)
<S> <C> <C>
Cost of Revenue
CLEC Services................................... $ 7.3 $ 6.3
Data and Long Distance Services................. 18.1 11.3
Mobile Services................................. 2.4 2.1
Eliminations.................................... (0.7) (1.0)
----- -----
Total Cost of Revenue............................. 27.1 18.7
</TABLE>
Our cost of revenue decreased by 31% to $18.7 million for the six months
ended June 30, 1999 from $27.1 million, on a pro forma basis, for the six months
ended June 30, 1998.
CLEC Services. Pro forma cost of revenue from CLEC Services decreased by
14% to $6.3 million, or 29% of revenue, for the six months ended June 30, 1999
from $7.3 million, or 28% of revenue, on a pro forma basis, for the six months
ended June 30, 1998. The small increase as a percentage of revenues resulted
from increased settlement and costs of sales as a result of increased traffic
revenue and a reduction in our installation and connection revenue.
Data and Long Distance Services. Pro forma cost of revenue from Data and
Long Distance Services decreased by 38% to $11.3 million, or 62% of revenue, for
the six months ended June 30, 1999 from $18.1 million, or 65% of revenue, on a
pro forma basis, for the six months ended June 30, 1998. The significant
decrease reflected a reduction in long distance settlement rates paid to other
carriers, similar to our own reduction in revenue caused by decreased tariffs.
Mobile Services. Pro forma cost of revenue from Mobile Services decreased
by 13% to $2.1 million, or 24% of revenue, for the six months ended June 30,
1999 from $2.4 million, or 36% of revenue, on a pro forma basis, for the six
months ended June 30, 1998. The increased gross margin was due to the lower
proportion of revenue from sales of handsets, which produce low margins.
NON-CONSOLIDATED RESULTS -- RESULTS OF NON-CONSOLIDATED OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1999 COMPARED TO THE RESULTS OF NON-CONSOLIDATED
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
This section includes a discussion of Sovintel's results of operations in
the six months ended June 30, 1998 and 1999. Sovintel was our principal
non-consolidated operating company during these periods.
SOVINTEL
Revenue
Sovintel's revenue decreased by 33% to $45.0 million for the six months
ended June 30, 1999 from $67.1 million, for the six months ended June 30, 1998.
Revenue from local, long distance and international call traffic decreased as a
result of the August 1998 Russian financial crisis which adversely affected both
traffic volumes and tariffs charged. In particular, traffic from cellular
operators decreased 67% compared to the six months ended June 30, 1998. Revenue
from incoming international traffic also fell sharply, largely because of a 26%
reduction in the average settlement rates paid to Sovintel by other operators.
36
<PAGE> 39
Cost of Revenue
Sovintel's cost of revenue decreased by 38% to $26.2 million for the six
months ended June 30, 1999 from $42.0 million for the six months ended June 30,
1998. The decrease to 58% from 63% of revenue was primarily a result of lower
international and domestic settlement rates paid to other operators. In
particular, the effective rate paid to Russian carriers decreased because their
tariffs are denominated in rubles.
Selling, General and Administrative
Sovintel's selling, general, administrative and certain other expenses
decreased by 12% to $8.3 million, or 18% of revenue, for the six months ended
June 30, 1999 from $9.4 million, or 14% of revenue for the six months ended June
30, 1998. This decrease was primarily due to lower turnover taxes as a result of
decreased revenue. However, as a consequence of the decrease in revenue,
selling, general and administrative expenses increased as a proportion of
revenue.
CONSOLIDATED RESULTS -- CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997
During 1998, we began to consolidate the results of Sovam from February 1,
1998, Golden Telecom (Ukraine) from June 30, 1998, and TCM from July 1, 1998.
Before consolidating these companies, we used the equity method of accounting to
report their results. Immediately after this discussion of our consolidated
results we have also included a pro forma discussion of our results for 1997 and
1998, assuming that the acquisition of Sovam, Golden Telecom (Ukraine) and TCM
were consolidated from January 1, 1997 and January 1, 1998, respectively.
REVENUE
Our revenue increased by 217% to $86.1 million for the year ended December
31, 1998 from $27.2 million for the year ended December 31, 1997. The increase
was due primarily to our consolidation of Sovam from February 1, 1998, Golden
Telecom (Ukraine) from June 30, 1998 and TCM from July 1, 1998, offset by
decreased revenues caused by the August 1998 Russian financial crisis. The
breakdown of revenue by business group was as follows:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services............................................. $ 0.0 $26.5
Data and Long Distance Services........................... 24.7 51.6
Mobile Services........................................... 2.3 9.8
Eliminations.............................................. 0.2 (1.8)
----- -----
Total Revenue................................... $27.2 $86.1
</TABLE>
CLEC Services. Revenue from CLEC Services was $26.5 million for the year
ended December 31, 1998. There was no CLEC Services revenue for the year ended
December 31, 1997 because TCM and Golden Telecom BTS were not consolidated
during that period.
Of the CLEC Services increase in revenue of $26.5 million for the year
ended December 31, 1998, $20.7 million was due to the consolidation of TCM from
July 1, 1998. The balance of the CLEC Services revenue increase of $5.8 million
was due to the consolidation of Golden Telecom BTS from June 30, 1998.
TCM's revenue increased by 44% to $42.2 million for the year ended December
31, 1998 from $29.3 million for the year ended December 31, 1997. Of these
amounts, traffic and monthly recurring revenue at TCM increased by 58% to $32.8
million in 1998 from $20.7 million in 1997, primarily due to the increased
number of ports sold and to increased cellular traffic from Vimpelcom and KB
Impulse. Port sales at TCM increased by 10% to $9.5 million in 1998 from $8.6
million in 1997, primarily as a result of
37
<PAGE> 40
increased port sales before the August 1998 Russian financial crisis. TCM was
not consolidated in the year ended December 31, 1997.
Golden Telecom BTS revenue increased by 212% to $10.3 million for the year
ended December 31, 1998 from $3.3 million for the year ended December 31, 1997.
Of these amounts, traffic and monthly recurring revenue at Golden Telecom BTS
increased by 300% to $8.8 million in 1998 from $2.2 million in 1997, primarily
due to the increased customer base and to increased international incoming and
outgoing traffic. Non-recurring revenues such as equipment sales, installation
and connection revenue increased by 27% to $1.4 million in 1998 from $1.1
million for the year ended December 31, 1997. Golden Telecom BTS was not
consolidated in the year ended December 31, 1997.
Data and Long Distance Services. Revenue from Data and Long Distance
Services increased by 109% to $51.6 million for the year ended December 31, 1998
from $24.7 million for the year ended December 31, 1997.
The Data and Long Distance Services increase in revenue of $26.9 million in
the year ended December 31, 1998 was principally due to the consolidation of
Sovam from February 1, 1998. The balance of the Data and Long Distance Services
revenue increase was due to an increase in revenue of TeleRoss operating
company.
Sovam's revenue increased by 41% to $24.9 million for the year ended
December 31, 1998 from $17.8 million for the year ended December 31, 1997,
primarily due to increased revenue from leasing private line facilities. Revenue
from Internet access services increased by 65% to $6.1 million in 1998 from $3.7
million in 1997 because of increased usage, of which $3.3 million related to
dedicated leased lines and $2.8 million to dial-up access facilities in 1998.
Sovam was not consolidated in the year ended December 31, 1997.
Revenue from long distance services increased by 8% to $26.7 million in
1998 from $24.7 million in 1997 as a result of increased long distance traffic
volumes during the first six months of 1998. After the August 1998 Russian
financial crisis, traffic levels decreased, and TeleRoss reduced its tariffs to
remain competitive with Rostelecom. These decreased tariffs resulted in
decreased revenue in the third and fourth quarters of 1998.
Mobile Services. Revenue from Mobile Services increased by 326% to $9.8
million for the year ended December 31, 1998 from $2.3 million for the year
ended December 31, 1997.
Of the Mobile Services revenue increase of $7.5 million in the year ended
December 31, 1998, $8.0 million was due to the consolidation of Golden Telecom
(Ukraine) from June 30, 1998. The balance, a reduction of $0.5 million, was due
to a decrease in revenue largely generated by equipment sales, including
handsets.
As its network became fully operational during 1998, Golden Telecom GSM
revenue increased by 254% to $13.8 million for the year ended December 31, 1998
from $3.9 million for the year ended December 31, 1997. Golden Telecom GSM was
not consolidated in the year ended December 31, 1997.
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<PAGE> 41
EXPENSES
The following table shows our principal expenses for the years ended
December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
Cost of Revenue
CLEC Services........................................... $ 0.0 $ 7.3
Data and Long Distance Services......................... 18.5 34.6
Mobile Services......................................... 1.9 3.6
Eliminations............................................ 0.0 (1.9)
------ -----
Total Cost of Revenue..................................... 20.4 43.6
Selling, General and Administrative....................... 21.2 45.3
Depreciation and Amortization............................. 4.4 16.7
Equity in (Earnings) Losses of Ventures................... (12.4) (2.6)
Interest, Net............................................. 0.4 3.0
Foreign Currency Loss..................................... 0.4 7.5
Provision for Income Taxes................................ 0.6 5.2
</TABLE>
Cost of Revenue
Our cost of revenue increased by 114% to $43.6 million for the year ended
December 31, 1998 from $20.4 million for the year ended December 31, 1997. The
increase was caused primarily by our acquisitions of minority interests, and the
resulting consolidations, of Sovam, Golden Telecom (Ukraine) and TCM during
1998.
CLEC Services. Cost of revenue from CLEC Services was $7.3 million, or 28%
of revenue, for the year ended December 31, 1998. There was no CLEC Services
cost of revenue for the year ended December 31, 1997.
Of the CLEC Services increase in cost of revenue of $7.3 million in the
year ended December 31, 1998, $5.0 million was due to the consolidation of TCM
from July 1, 1998. The balance of the CLEC Services cost of revenue increase of
$2.3 million was due to the consolidation of Golden Telecom BTS from June 30,
1998.
TCM's cost of revenue increased by 55% to $10.4 million, or 25% of revenue,
for the year ended December 31, 1998 from $6.7 million, or 23% of revenue, for
the year ended December 31, 1997. This slight increase as a percentage of
revenue was due to traffic revenue increasing as a percentage of TCM's revenue
mix. TCM was not consolidated in the year ended December 31, 1997.
Golden Telecom BTS cost of revenue increased by 200% to $4.2 million, or
41% of revenue, for the year ended December 31, 1998 from $1.4 million, or 42%
of revenue, for the year ended December 31, 1997. Golden Telecom BTS was not
consolidated in the year ended December 31, 1997.
Data and Long Distance Services. Cost of revenue from Data and Long
Distance Services increased by 87% to $34.6 million, or 67% of revenue, for the
year ended December 31, 1998 from $18.5 million, or 75% of revenue, for the year
ended December 31, 1997.
Of the Data and Long Distance Services increase in cost of revenue of $16.1
million for the year ended December 31, 1998, $12.6 million was due to the
consolidation of Sovam from February 1, 1998. The balance of the Data and Long
Distance Services cost of revenue increase of $3.5 million was due to an
increase in cost of revenue of TeleRoss operating company.
Sovam's cost of revenue increased by 24% to $12.6 million, or 51% of
revenue, for the year ended December 31, 1998 from $10.2 million, or 57% of
revenue, for the year ended December 31, 1997. The
39
<PAGE> 42
reduction as a percentage of revenue was due to increased usage of our fixed
network. Sovam was not consolidated in the year ended December 31, 1997.
Cost of revenue from long distance services increased by 22% to $22.0
million, or 82% of revenue, in 1998 from $18.0 million, or 73% of revenue, in
1997. The decreased gross margin in 1998 was primarily due to tariff reductions
following the August 1998 Russian financial crisis.
Mobile Services. Cost of revenue from Mobile Services increased by 89% to
$3.6 million, or 37% of revenue, for the year ended December 31, 1998 from $1.9
million, or 83% of revenue, for the year ended December 31, 1997.
The Mobile Services cost of revenue increase of $1.7 million in the year
ended December 31, 1998, was entirely due to the consolidation of Golden Telecom
(Ukraine) from June 30, 1998.
Golden Telecom GSM cost of revenue increased by 43% to $3.3 million, or 24%
of revenue, for the year ended December 31, 1998 from $2.3 million, or 59% of
revenue, for the year ended December 31, 1997. The cost of revenue decreased
because a lower proportion of revenue was derived from sales of handsets, which
have higher costs in relation to their selling price than revenues derived from
traffic. Golden Telecom GSM was not consolidated in the year ended December 31,
1997.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 114% to $45.3
million, or 53% of revenue, for the year ended December 31, 1998 from $21.2
million, or 78% of revenue, for the year ended December 31, 1997. This increase
was attributable primarily to the fact that such expenses of Sovam, Golden
Telecom (Ukraine) and TCM were included in our consolidated results of
operations for part of 1998 and not during 1997.
Of the increase in selling, general and administrative expenses of $24.1
million, $10.9 was due to the consolidation of Sovam, $2.2 million was due to
the consolidation of TCM and $4.6 million was due to the consolidation of Golden
Telecom (Ukraine). The remainder of the increase, $6.4 million, was largely due
to increased costs in our Mobile Services business group.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 280% to $16.7
million for the year ended December 31, 1998 from $4.4 million for the year
ended December 31, 1997. This increase was a result of the transactions that
enabled us to consolidate Sovam, Golden Telecom (Ukraine) and TCM beginning in
the second half of 1998 and not during 1997.
Equity in Earnings/Losses of Ventures
Our earnings after interest and tax charges from investments in
non-consolidated ventures decreased to $2.6 million for the year ended December
31, 1998 from $12.4 million for the year ended December 31, 1997. These results
included excess losses of $2.3 million for 1998 and $2.0 million for 1997.
Sovintel and TCM generated combined earnings of $6.8 million for 1998 and $15.7
million for 1997, which offset losses generated by our other ventures. We began
to consolidate TCM effective as of July 1, 1998.
Interest, Net
Our interest expense, net, increased by 650% to $3.0 million for the year
ended December 31, 1998 from $0.4 million for the year ended December 31, 1997.
The increase was partly due to the consolidation of Golden Telecom (Ukraine) and
partly due to certain debt financing costs that we incurred in 1998 associated
with our mobile ventures.
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<PAGE> 43
Foreign Currency Loss
Our foreign currency loss increased to $7.5 million for the year ended
December 31, 1998 from $0.4 million for the year ended December 31, 1997. This
substantial increase in foreign currency loss in 1998 was due to the devaluation
of the ruble. See "-- Special Note Regarding the Russian Financial Crisis".
Provision for Income Taxes
Our provision for income taxes increased by 767% to $5.2 million for the
year ended December 31, 1998 from $0.6 million for year ended December 31, 1997.
The increase was almost entirely due to the consolidation of TCM from July 1,
1998. TCM's provision for income taxes following consolidation was $4.8 million.
TCM was not consolidated in the year ended December 31, 1997.
PRO FORMA CONSOLIDATED REVENUE AND COST OF REVENUE -- PRO FORMA CONSOLIDATED
REVENUE AND COST OF REVENUE FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO PRO
FORMA CONSOLIDATED REVENUE AND COST OF REVENUE FOR THE YEAR ENDED DECEMBER 31,
1997
Revenue
Our pro forma revenue increased by 47% to $117.4 million for the year ended
December 31, 1998 from $79.7 million for the year ended December 31, 1997. The
breakdown of revenue by business group was as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services................................... $32.6 $ 52.5
Data and Long Distance Services................. 42.4 51.6
Mobile Services................................. 6.2 15.9
Eliminations.................................... (1.5) (2.6)
----- ------
Total Revenue................................... $79.7 $117.4
</TABLE>
CLEC Services. Pro forma revenue from CLEC Services increased by 61% to
$52.5 million for the year ended December 31, 1998 from $32.6 million for the
year ended December 31, 1997. TCM's revenue increased by 44% to $42.2 million
for 1998 from $29.3 million for 1997. Golden Telecom BTS's revenue increased by
212% to $10.3 million in 1998 from $3.3 million in 1997. Combined pro forma
traffic and monthly recurring revenue increased by 82% to $41.6 million in 1998
from $22.9 million in 1997. This increase was primarily attributable to
increased customer base and to increased international incoming and outgoing
traffic at Golden Telecom BTS, as well as an increase in TCM's revenue from
Vimpelcom and KB Impulse due to an increase in cellular traffic. Pro forma
installation and connection revenue increased 11% to $10.4 million in 1998 from
$9.4 million in 1997, primarily as a result of increased port connection fees at
TCM before the August 1998 Russian financial crisis.
Data and Long Distance Services. Pro forma revenue from Data and Long
Distance Services increased by 22% to $51.6 million for the year ended December
31, 1998 from $42.4 million for the year ended December 31, 1997. Pro forma data
revenue increased by 41% to $24.9 million in 1998 from $17.7 million in 1997,
primarily due to increased revenue from leasing private line facilities. Pro
forma revenue from Internet access services increased by 65% to $6.1 million in
1998 from $3.7 million in 1997 because of increased usage, of which $3.3 million
related to dedicated leased lines and $2.8 million to dial-up access facilities
in 1998. Pro forma revenue from long distance services increased by 8% to $26.7
million in 1998 from $24.7 million in 1997 as a result of increased long
distance traffic volumes during the first six months of 1998. After the August
1998 Russian financial crisis, traffic levels decreased and TeleRoss reduced its
tariffs to remain competitive with Rostelecom, resulting in decreased revenue in
the third and fourth quarters of 1998.
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<PAGE> 44
Mobile Services. Pro forma revenue increased by 156% to $15.9 million for
the year ended December 31, 1998 from $6.2 million for the year ended December
31, 1997, as our Golden Telecom GSM network became fully operational.
Cost of Revenue
The following table shows our principal pro forma cost of revenue for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CONSOLIDATED CONSOLIDATED
COST OF REVENUE COST OF REVENUE
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ ------------------
(IN MILLIONS)
<S> <C> <C>
Cost of Revenue
CLEC Services.................................... $ 8.1 $ 14.6
Data and Long Distance Services.................. 28.2 34.6
Mobile Services.................................. 4.1 5.3
Eliminations..................................... (1.3) (2.6)
------ ------
Total Cost of Revenue.............................. $ 39.1 $ 51.9
</TABLE>
Our pro forma cost of revenue increased by 33% to $51.9 million, or 44% of
revenue, for the year ended December 31, 1998 from $39.1 million, or 49% of
revenue, for the year ended December 31, 1997.
CLEC Services. Pro forma cost of revenue from CLEC Services increased by
80% to $14.6 million, or 28% of revenue, for the year ended December 31, 1998
from $8.1 million, or 25% of revenue, for the year ended December 31, 1997. The
increase was due to higher settlement and interconnection costs.
Data and Long Distance Services. Pro forma cost of revenue from Data and
Long Distance Services increased by 23% to $34.6 million, or 67% of revenue, for
the year ended December 31, 1998 from $28.2 million, or 67% of revenue, for the
year ended December 31, 1997. Pro forma cost of revenue from data services
increased by 24% to $12.6 million, or 51% of revenue, in 1998 from $10.2
million, or 58% of revenue, in 1997. Pro forma cost of revenue from domestic
long distance services increased by 22% to $22.0 million, or 82% of revenue, in
1998 from $18.0 million, or 73% of revenue, in 1997. The decreased gross margin
in 1998 in domestic long distance services was due to tariff reductions
following the August 1998 Russian financial crisis.
Mobile Services. Pro forma cost of revenue from Mobile Services increased
by 29% to $5.3 million, or 33% of revenue, for the year ended December 31, 1998
from $4.1 million, or 66% of revenue, for the year ended December 31, 1997. The
increased gross margin was due to the lower proportion of revenue from sales of
handsets, which produce low margins.
NON-CONSOLIDATED RESULTS -- RESULTS OF NON-CONSOLIDATED OPERATIONS FOR THE YEAR
ENDED
DECEMBER 31, 1998 COMPARED TO THE RESULTS OF NON-CONSOLIDATED OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997
This section includes a discussion of Sovintel's results of operations in
the years ended December 31, 1998 and 1997. Sovintel was our principal
non-consolidated operating company during these periods.
SOVINTEL
Revenue
Sovintel's revenue increased by 9% to $124.2 million for the year ended
December 31, 1998 from $114.0 million for the year ended December 31, 1997. This
increase was due to a 7% increase to $52.0 million in international outgoing
calls, a 41% increase to $19.7 million in domestic long distance calls, and a
36% increase to $18.9 million in switched line rentals. However, the August 1998
Russian
42
<PAGE> 45
financial crisis adversely affected revenue from local calls, international
incoming calls, and new connections during the third and fourth quarters of
1998.
Cost of Revenue
Sovintel's cost of revenue increased by 11% to $76.2 million, or 61% of
revenue, for the year ended December 31, 1998, from $68.4 million, or 60% of
revenue, for the year ended December 31, 1997. The gross margin percentage did
not change significantly.
Selling, General and Administrative
Sovintel's selling, general and administrative expenses increased by 50% to
$23.8 million, or 19% of revenue, for the year ended December 31, 1998 from
$15.9 million, or 14% of revenue, for the year ended December 31, 1997. The
largest portion of the increase was attributable to the provision for bad debt
and to turnover and other taxes. The provision for bad debt increased by $2.1
million to $2.7 million in 1998 from $0.6 million in 1997 principally as a
result of the effect of the August 1998 Russian financial crisis. Turnover and
other taxes increased by 37% to $7.1 million in 1998 from $5.2 million in 1997,
primarily as a result of the increase in revenue during 1998.
CONSOLIDATED RESULTS -- CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1996
For the years ended December 31, 1997 and 1996, TeleRoss operating company
accounted for the majority of our results of operations because it was the sole
operating subsidiary that was consolidated.
Revenue
Our revenue increased by 108% to $27.2 million for the year ended December
31, 1997 from $13.1 million for the year ended December 31, 1996. The increase
was mainly caused by a 160% increase in our revenue from long distance services
due to the commencement of operations of many of the TeleRoss regional ventures.
Cost of Revenue
Our cost of revenue increased to $20.4 million, or 75% of revenue, for the
year ended December 31, 1997, compared to $10.1 million, or 77% of revenue, for
the year ended December 31, 1996.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 20% to $21.2
million, or 78% of revenue, for the year ended December 31, 1997 from $17.7
million, or 135% of revenue, for the year ended December 31, 1996. The TeleRoss
operating company accounted for $11.8 million of the total selling, general and
administrative expenses in 1997. The balance was attributable to our mobile
services and general corporate overhead.
Depreciation and Amortization
Our depreciation and amortization increased by 57% to $4.4 million for the
year ended December 31, 1997 from $2.8 million for the year ended December 31,
1996. The increase reflected new investment in our network, plant and equipment.
Equity in Earnings/Losses of Ventures
The earnings from our non-consolidated ventures were $12.4 million for the
year ended December 31, 1997 and $3.8 million for the year ended December 31,
1996. These figures are net of excess losses of $2.0 million in 1997 and $3.3
million in 1996. Our recognized earnings in Sovintel and TCM combined was $15.7
million in 1997 and $11.8 million in 1996. These earnings were offset by losses
generated by
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<PAGE> 46
other ventures. See "-- Non-Consolidated Results -- Results of Non-Consolidated
Operations for the Year Ended December 31, 1997 compared to the Results of
Non-Consolidated Operations for the Year Ended December 31, 1996".
NON-CONSOLIDATED RESULTS -- RESULTS OF NON-CONSOLIDATED OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1997 COMPARED TO THE RESULTS OF NON-CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
This section includes a discussion of Sovintel's results of operations in
the years ended December 31, 1997 and 1996. Sovintel was our principal
non-consolidated operating company during these periods.
SOVINTEL
Revenue
Sovintel's revenue increased by 52% to $114.0 million for the year ended
December 31, 1997 from $75.0 million for the year ended December 31, 1996. This
increase was primarily attributable to increases in local and international
incoming and outgoing traffic.
Cost of Revenue
Sovintel's cost of revenue increased by 68% to $68.4 million, or 60% of
revenue, for the year ended December 31, 1997 from $40.7 million, or 54% of
revenue, for the year ended December 31, 1996. The increase as a percentage of
revenue was primarily attributable to a decrease in the margin earned on
international outgoing minutes, and an increase in the proportion of traffic
consisting of lower margin domestic traffic.
Selling, General and Administrative
Sovintel's selling, general and administrative expenses increased by 59% to
$15.9 million, or 14% of revenue, for the year ended December 31, 1997 from
$10.0 million, or 13% of revenue, for the year ended December 31, 1996. This
increase was related to increases in turnover and other taxes, as well as higher
personnel and advertising costs.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $14.5 million and $3.4 million as of
June 30, 1999 and 1998, respectively. Our restricted cash was $29.6 million and
$16.3 million as of June 30, 1999 and 1998, respectively. The restricted cash is
maintained in connection with certain of our debt obligations as described
below.
Our total equity of $165.0 million as of June 30, 1999 included an
accumulated deficit of $89.1 million. Included in the $89.1 million are net
losses of approximately $33.6 million, $7.9 million and $15.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively, and $16.0 million
for the six months ended June 30, 1999. During 1998, GTS contributed additional
capital to our company amounting to $86.9 million, of which $67.4 million was in
cash. The remainder of the contributed capital related to payments made in
accordance with an agreement under which we acquired an indirect shareholding in
TCM.
During the six months ended June 30, 1999 and 1998, we used cash of $3.3
million and $4.3 million, respectively, for our operating activities. We also
used cash of $6.9 million and $19.5 million for investing activities, that was
principally attributable to building our telecommunications networks, for the
six months ended June 30, 1999 and 1998, respectively.
We had working capital of $7.5 million as of June 30, 1999 and $2.2 million
as of June 30, 1998. At June 30, 1999, we had total debt of approximately $23.2
million, of which $5.0 million were current maturities. At December 31, 1998, we
had total debt of approximately $24.5 million, of which $3.0 million
44
<PAGE> 47
were current maturities. This compared to total debt of $1.6 million at December
31, 1997, of which $1.5 million were current maturities. At December 31, 1998,
none of our long-term debt was at fixed rates.
In connection with the purchase of equipment and services for certain
Vostok Mobile ventures in Russia, those ventures entered into a credit agreement
with The Chase Manhattan Bank, New York, providing for up to $30.7 million of
financing. The facility is guaranteed by the vendor of such equipment and
services, and is insured against certain political risks by the Overseas Private
Investment Corporation. To the extent that the guarantor is required to make any
payments pursuant to such guarantee, GTS is required to reimburse 50% of such
payments. The loans under the facility bear interest at LIBOR plus 35 basis
points, with principal and interest payments due semiannually in June and
December of each year through December 15, 2002. At June 30, 1999, $14.4 million
in loans were outstanding under the facility. Because of the financial condition
of certain Vostok Mobile ventures, GTS has made some of the principal and
interest payments on behalf of the ventures.
In early September 1999, we and GTS reached an agreement in principle with
the vendor which has guaranteed the obligations under this facility. GTS agreed
with the vendor that, contingent upon the completion of this offering by
November 15, 1999, GTS and the vendor would each pay, on behalf of the ventures
that are borrowers under the facility, one-half of the amount due under the
facility, or a total of approximately $14.4 million. This payment would be made
at the completion of this offering. The other material terms of this agreement
in principle are described under "Description of Certain Financing Arrangements
and Indebtedness".
In November 1996, Golden Telecom (Ukraine) entered into an agreement with
Siemens GmbH, whereby Golden Telecom (Ukraine) could purchase up to 8.6 million
Deutsche Marks (DM) of certain equipment from Siemens. The terms allowed Golden
Telecom (Ukraine) to finance up to 70% of this amount. Golden Telecom (Ukraine)
is required to make semiannual principal payments plus accrued interest for
three years beginning six months after completion of installation of such
equipment. The agreement carries interest at a rate equal to the DM LIBOR rate
plus 4.5% per annum. At June 30, 1999, approximately $2.6 million, including
accrued interest, was outstanding under this agreement.
In June 1996, Golden Telecom (Ukraine) entered into an agreement with
Motorola Corporation, whereby Golden Telecom (Ukraine) could purchase up to
$20.0 million of certain equipment from Motorola. Golden Telecom (Ukraine) is
required to make semiannual payments plus accrued interest beginning six months
after completion of the installation of such equipment. The agreement carries
interest at a rate equal to the LIBOR rate plus 3.0% per annum. At June 30,
1999, approximately $9.2 million, including accrued interest, was outstanding
under this agreement.
In August 1998, one of the Vostok Mobile ventures entered into an
installment purchase agreement with Ericsson Radio Systems AB. Under the
agreement, the venture is required to make quarterly payments of interest and
principal. The agreement carries an implicit interest rate equal to
approximately 10.2% per annum. At June 30, 1999, approximately $1.9 million was
outstanding under this agreement.
GTS has guaranteed the payments under the Motorola and Ericsson agreements.
To the extent that GTS makes any payments under such guarantees, we will be
required to indemnify GTS for such payments.
We have historically received funding from GTS to meet our operational and
capital requirements. We do not anticipate that GTS will provide additional
funding to us following the completion of this offering.
We currently expect the net proceeds of this offering to be $ million,
after deducting estimated commissions and offering expenses of $ million. We
intend to use our net proceeds from the offering primarily to finance potential
acquisitions and business development, network expansion, working capital and
general corporate purposes. We may, from time to time, evaluate potential
acquisitions and investment opportunities. Announcements concerning potential
acquisitions and investments could be made at any time; however, we cannot
assure you that we will identify suitable acquisition and investment candidates
or
45
<PAGE> 48
that we will, in fact, complete any acquisitions or investments. Until we use
the net proceeds from this offering for a particular purpose, we expect to
invest them in short-term interest-bearing securities.
In order for us to compete successfully, we will require substantial
additional capital to continue to develop our networks and meet the funding
requirements of our operations and ventures, including losses from operations.
We will also require additional capital for our acquisition and business
development initiatives. We expect that we will require over $140 million over
the next three years to fund our capital expenditures and operations. This
amount relates to our consolidated and equity method ventures. The net proceeds
of this offering will be applied to these funding requirements. We also expect
to fund these requirements through proceeds from additional equity and debt
offerings that we may conduct, debt financing facilities, and our cash flow from
operations.
In addition to the external financing discussed above, we have funded our
consolidated subsidiaries and affiliates through two methods of financing.
Certain of our operating companies have received direct debt financing through
loans from affiliated companies. In addition, since September 1997, certain of
our operating companies have borrowed funds under a $30.0 million back-to-back,
three-year, revolving bank facility from a Western-owned bank licensed to
operate in Russia. Under this facility, we provide cash collateral for onshore
loans made by the bank to our Russian-registered ventures. The funding level as
at June 30, 1999 totalled $24.5 million, of which $9.4 million was funded to our
consolidated subsidiaries and $15.1 million was funded to our affiliates.
We expect our current sources of funding, including the net proceeds from
this offering, to finance our capital requirements for the next 18 to 24 months.
The actual amount and timing of our future capital requirements may differ
materially from our current estimates because of changes and fluctuations in our
revenue, operating costs, acquisitions and investments, network expansion plans
and access to alternative sources of financing on favorable terms. However, we
may not be able to obtain additional financing on favorable terms. As a result,
we may be subject to additional or more restrictive financial covenants, our
interest obligations may increase significantly and our shareholders may be
adversely diluted. Our failure to generate sufficient funds in the future,
whether from operations or by raising additional debt or equity capital, may
require us to delay or abandon some or all of our anticipated expenditures, to
sell assets, or both, which could have a material adverse effect on our
operations.
We cannot assure you that our operations will achieve or sustain
profitability or positive cash flow in the future. If we cannot achieve and
sustain operating profitability or positive cash flow from operations, we may
not be able to meet our debt service obligations or working capital
requirements, and the value of our shares of common stock may decline.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK AND TREASURY AND
CURRENCY EXPOSURE MANAGEMENT
Our treasury function has managed our funding, liquidity and exposure to
interest rate and foreign currency exchange rate risks. Our treasury operations
are conducted within a framework of policies and guidelines that have been
established and authorized by our board of directors. In accordance with our
policy, we do not enter into any treasury management transactions of a
speculative nature.
The ruble and the hryvna are generally non-convertible outside Russia and
Ukraine, respectively, so our ability to hedge against further devaluation by
converting to other currencies is significantly limited. Further, our ability to
convert rubles and hryvna into other currencies in Russia and Ukraine,
respectively, is subject to rules that increasingly restrict the purposes for
which conversion and the payment of foreign currencies are allowed.
Given that much of the operating ventures' costs are indexed to or
denominated in US dollars, including employee compensation expense, capital
expenditure and interest expense, we have taken specific steps to minimize our
exposure to fluctuations in the appropriate foreign currency. Although local
currency control regulations require us to collect virtually all of our revenue
in local currency, certain ventures generally either price or invoice in US
dollars or index their invoices and collections to the applicable
46
<PAGE> 49
dollar exchange rate. Customer contracts may include clauses allowing additional
invoicing if the applicable exchange rate changes significantly between the
invoice date and the date of payment, favorable terms for early or pre-payments
and heavy penalty clauses for overdue payments. Maintaining the dollar value of
our revenue subjects us to additional tax on exchange gains. Exposure on ruble
cash balances is reduced by lending cash from cash-generating operating
companies to those that are able to convert and pay down dollar denominated
liabilities.
Although we are attempting to match revenue, costs, borrowing and
repayments in terms of their respective currencies, we may experience economic
loss and a negative impact on earnings as a result of foreign currency exchange
rate fluctuations.
We are exposed to market risk from changes in interest rates on our
obligations and we also face exposure to adverse movements in foreign currency
exchange rates. A portion of our debt obligations is denominated in foreign
currencies which exposes us to risks associated with changes in foreign currency
exchange rates. We have developed risk management policies that establish
guidelines for managing foreign currency exchange rate risk and we also
periodically evaluate the materiality of foreign currency exchange exposures and
the financial instruments available to mitigate this exposure.
The following table provides information about our debt obligations that
are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
FAIR
VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
------ ------- ------ ------ ---- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current portion
Variable rate................. $3,018 $16,263 $3,098 $2,080 $-- $-- $24,459 $24,459
Average interest rate......... 8.54% 9.74% 8.65% 8.70% -- -- -- --
</TABLE>
The following table provides information about our financial instruments by
functional currency and where applicable, presents such information in US dollar
equivalents. The table summarizes information on instruments that are sensitive
to foreign currency exchange rates, including foreign currency denominated debt
obligations.
<TABLE>
<CAPTION>
FAIR
VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
------ ------- ------ ------ ---- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current portion
US dollars
Variable rate................ $1,501 $14,746 $2,661 $2,080 $-- $-- $20,988 $20,988
Average interest rate........ 8.70% 9.89% 8.70% 8.70% -- -- -- --
German marks
Variable rate................ $1,465 $ 1,465 $ 427 $ -- $-- $-- $ 3,357 $ 3,357
Average interest rate........ 8.38% 8.38% 8.38% -- -- -- -- --
Ukrainian hryvna
Variable rate................ $ 52 $ 52 $ 10 $ -- $-- $-- $ 114 $ 114
Average interest rate........ 8.38% 8.38% 8.38% -- -- -- -- --
</TABLE>
SPECIAL NOTE REGARDING THE RUSSIAN FINANCIAL CRISIS
As a result of the devaluation of the ruble and the consequences of the
August 1998 Russian financial crisis, our consolidated and non-consolidated
entities recorded a $13.1 million pre-tax charge for the third quarter of 1998.
This charge related primarily to foreign currency exchange losses of $9.6
million for ruble-denominated net monetary assets with the remainder associated
with estimates for uncollectable accounts receivable of $2.2 million and
unrecoverable cash deposits of $1.3 million. We do not believe that the possible
loss of these cash deposits was material to our results of operations or our
liquidity.
The charge followed a monetary and financial crisis in Russia when, on
August 17, 1998, the exchange rate of the Russian ruble, relative to other
currencies, declined significantly. Three measures
47
<PAGE> 50
implemented by the Russian government were the immediate and primary cause of
this monetary and financial crisis:
- The Russian government suspended the repayment of domestic sovereign
securities; subsequently, secondary trading in these securities was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks;
- The Russian government allowed the value of the ruble to fluctuate below
the ruble/US dollar exchange rate corridor that the Russian government
had previously committed to support; this represented an effective
devaluation of the ruble; and
- The Russian government imposed a 90-day moratorium on certain offshore
credit repayments. The 90-day moratorium expired on November 16, 1998.
The banking situation in Russia remains unstable and there remains an
ongoing risk that many banks may be declared bankrupt. Although Sberbank has
been identified as a possible vehicle for offering federal deposit insurance,
the necessary legislation has not been adopted. Currently, deposits held at
Russian banks, including Sberbank, are not insured.
The Russian financial crisis has adversely affected foreign investment and
has contributed to the decreased demand for business services. This reduction in
demand has, in turn, contributed to a significant reduction in our revenues and
in the operating results of some of our largest customers. For example,
Vimpelcom, a Moscow cellular provider and one of our largest customers, has
recently requested a reduction in the fees paid to TCM. Revenues from Vimpelcom
and its affiliates represented approximately 22% of our consolidated revenues
for the six months ended June 30, 1999 and approximately 20% of our consolidated
revenues for the year ended December 31, 1998. We have agreed to a reduction in
Vimpelcom's fees through the end of 1999, and we have agreed to discuss possible
further reductions. These discussions may lead to a significant reduction in
payments by Vimpelcom and may have a material adverse effect on our consolidated
revenues. Although reduced revenues from Vimpelcom will reduce our margins in
the short term, we believe that when the Moscow cellular market recovers, we
should be well positioned to improve our margins by selling additional numbering
capacity to Vimpelcom and by recognizing increased recurring revenue as cellular
traffic increases.
The table below presents, for the periods indicated, the exchange rate for
the US dollar against the ruble based on the official rate of the Central Bank
of Russia, expressed in terms of rubles per US dollar. These exchange rates are
calculated as the average of the exchange rates each business day during the
relevant period. On January 1, 1998, the ruble was redenominated at the ratio of
1000:1. The entries in the table before that date are adjusted to reflect this
redenomination.
<TABLE>
<CAPTION>
QUARTER ENDED PERIOD END AVERAGE HIGH LOW
------------- ---------- ------- ----- -----
<S> <C> <C> <C> <C>
December 31, 1996.................................. 5.56 5.43 5.56 5.40
March 31, 1997..................................... 5.73 5.65 5.73 5.56
June 30, 1997...................................... 5.78 5.77 5.78 5.73
September 30, 1997................................. 5.86 5.82 5.86 5.78
December 31, 1997.................................. 5.96 5.91 5.96 5.86
March 31, 1998..................................... 6.11 6.15 6.11 5.96
June 30, 1998...................................... 6.20 6.27 6.20 6.11
September 30, 1998(1).............................. 16.06 9.26 20.82 6.24
December 31, 1998.................................. 20.65 17.46 20.90 13.00
March 31, 1999..................................... 24.18 22.90 24.18 20.65
June 30, 1999...................................... 24.22 24.90 25.12 23.99
September 30, 1999(2).............................. 25.71 24.67 25.87 24.19
</TABLE>
- ---------------
(1) The last official exchange rate prior to the suspension of trading on August
17, 1998 was 6.27 rubles per US dollar.
(2) Through September 10, 1999.
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<PAGE> 51
The following table shows the effect of the August 1998 Russian financial
crisis on our historical and pro forma results of operations by presenting our
quarterly results since the beginning of 1998. Our pro forma results of
operations give effect to the transactions whereby we obtained ownership of 100%
of Sovam, 56.75% of Golden Telecom (Ukraine) and 95% of TCM as if they had
occurred at the beginning of the three-month periods indicated, as opposed to
their actual dates of February 1998, June 1998 and July 1998, respectively.
These transactions allowed us to consolidate these ventures.
<TABLE>
<CAPTION>
PRO FORMA
-------------------- ACTUAL
FOR THE THREE ---------------------------------------------------
MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------- ---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue............................ $27,306 $32,680 $ 31,966 $ 25,415 $ 24,185 $ 23,170
Cost of revenue.................... 12,567 14,550 12,709 12,048 9,326 9,376
Gross margin....................... 14,739 18,130 19,257 13,367 14,859 13,794
Selling, general and
administrative................... 11,049 11,624 17,124 11,299 8,638 10,432
Net loss........................... (1,939) (395) (17,121) (13,377) (7,776) (8,194)
</TABLE>
Revenue declined sharply in the fourth quarter of 1998, beginning
immediately after the August financial crisis. The areas principally affected
include:
- Our domestic long distance business, because TeleRoss was required to
lower its rates significantly to remain competitive with Rostelecom,
which continues to price in rubles and has not adjusted its rates to
reflect the devaluation of the ruble;
- New installations and connections, which have significantly decreased
across all our business groups; and
- Our Mobile Services division, because mobile telephony usage has declined
significantly in Russia since the financial crisis.
As a result of the financial crisis, we have implemented a number of
measures to rationalize our operations. These measures include renegotiating
settlement costs and reducing selling, general and administrative expenses,
including headcount reductions. As a result of these measures, our cost of
revenue of $9.4 million in the second quarter of 1999 was 22% lower than the
cost of revenue in the fourth quarter of 1998, resulting in an improvement of
the gross margin to 60% of revenue from 53% of revenue. Furthermore, selling,
general and administrative expenses fell by a similar proportion resulting in a
significant overall improvement in cash flow from operations compared to the
fourth quarter of 1998. We have also recently unified our management of TCM,
TeleRoss and Sovam. We believe that we will derive operational benefits from the
further integration of these consolidated companies and the changes in our
operations and corporate structure.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using 00 as the
year 1900 rather than the year 2000. Use of non-Year 2000 compliant programs
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, a temporary
inability to process transactions and invoices or engage in similar normal
business activities.
Issues Posed by the Year 2000 Issue. We are exposed to the Year 2000 issue
in a number of ways. Among other things, the Year 2000 issue might affect our:
(1) computer hardware and software; (2) telecommunications equipment and other
systems with embedded logic, including, among other things, our fire detection,
access control systems, heating, ventilation and air conditioning, and
uninterruptible power supply; (3) operating partners and organizations upon
which we are dependent; (4) local access connections, upon which we are
dependent; and (5) supply chain.
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<PAGE> 52
Our Year 2000 Compliance Program. We have initiated a Year 2000 compliance
program to address the aforementioned risks which the Year 2000 issue poses and
to avoid any material loss or impact to us or our customers due to these risks.
The object of this Year 2000 compliance program is to ensure that neither the
performance nor functionality of our operations are affected by dates, prior to,
during and after 2000. The scope of the Year 2000 compliance program includes
all of the business functions, locations and resources which are essential to
us. The resources which are within the scope of the Year 2000 compliance program
are, among other things, our computer systems, software, vendor supplied
software, telecommunications equipment, third party telecommunications partners
and other network service suppliers, environmental and building control systems,
internal communication systems and other interfaces with third party services.
As explained below, our efforts to assess our systems as well as non-system
areas related to Year 2000 compliance involve (1) a wide-ranging assessment of
the Year 2000 problems that may affect us, (2) the development of remedies to
address the problems discovered in the assessment phase and (3) testing of the
remedies.
Assessment Phase. The assessment phase includes internal and third party
review of potential risks associated with the availability, integrity and
reliability of operational systems necessary to conduct business. During the
assessment phase we have identified substantially all of our major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 compliance program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
which might be materially impacted by Year 2000 issues. Our observations from
the assessment phase during the third and fourth quarters of 1998 is that most
of our telecommunications equipment and software has been purchased within the
past three years and the majority is already compliant or can be made compliant
with minor upgrades. We completed the assessment phase of our Year 2000
readiness in the fourth quarter of 1998.
Remediation, Prevention and Testing Phases. Based on those resources
identified in the assessment phase, we developed a detailed plan in the fourth
quarter of 1998 that was followed by an upgrade, a remediation, a prevention and
a testing phase in early 1999. We believe that billing and information systems
used by our ventures outside Moscow, Kiev and St. Petersburg may not be fully
Year 2000 compliant, and we are reviewing these and our other computer systems
to prepare for the Year 2000 date change.
Assessment of Third Party Compliance. We believe that the potential
non-compliance of third parties on whom we rely in providing our services poses
a significant threat to our operations in connection with the Year 2000 problem.
Although we have independent generators that could sustain our central switches
for a limited period of time, a failure of the Moscow, Kiev or St. Petersburg
power network for an extended period of time may result in the temporary
suspension of our services if we are unable to deliver power to these switches.
Not all our systems in the regions have independent generators, and a failure of
the local electric networks could cause our services in these regions to be
suspended until power is restored. These factors are beyond our control, and we
may not be able to identify alternative means of sustaining our services in time
for the Year 2000 date change. Moreover, a significant part of our network,
especially the access network, is leased from third parties that may not
consider the Year 2000 issue as seriously as we would like them to do. Again,
the failure of these local access networks could have a material adverse effect
on our financial condition and results of operation.
Our Worst Case Scenario. Our worst case scenario would include any of the
following:
- the failure of our telecommunications equipment, power providers and/or
interfaces with other telecommunication vendors;
- a loss of interconnect capacity from one or more major suppliers of
transmission capacity; and
- our inability to record, track or invoice billable minutes which could
ultimately cause us to temporarily stop carrying traffic.
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<PAGE> 53
These cases would create business interruption at some of our operations
and would adversely affect our revenue. For example, the Moscow power
authorities have publicly stated that they do not intend to address Year 2000
issues until problems arise. However, we have operations that are geographically
diversified; therefore, it is not anticipated that the worst case scenario would
affect all operations at the same time. Additionally, if power failures occur,
we currently have diesel generators at certain of our major sites. Based on our
assessment during the third and fourth quarters of 1998, we do not foresee a
material loss due to these conditions. However, we cannot assure you that Year
2000 non-compliance by our systems or the systems of vendors, customers,
partners or others will not have in a material adverse effect on our business,
financial condition or results of operations.
Contingency Plans. We are considering a contingency plan to address our
worst case scenario; however, certain of the initiatives are subject to
execution risk. This risk would include the ability to have access to diesel
fuel or large generators should power failures occur, the ability to quickly
replace telecommunications equipment and the ability to contract with
alternative telecommunication and maintenance providers at reasonable terms.
Moreover, we are further limited in resources in certain geographical regions
due to the market volatility and weak economies in which we have business
operations.
Costs Related to the Year 2000 Issue. We have spent approximately $300,000
for our Year 2000 compliance through June 30, 1999, and expect to spend an
additional $100,000 to $200,000 through the end of calendar year 1999. In
addition, we expect to spend approximately $300,000 to replace identified
telecommunications equipment and software. We do not expect that the costs of
addressing our Year 2000 readiness will have a material effect on our financial
condition or results of operations. However, we cannot assure you that Year 2000
non-compliance by our systems or the systems of vendors, customers, partners or
others, especially state agencies on which we depend for our power supplies,
will not result in a material adverse effect for us.
Risks Related to the Year 2000 Issue. Although our efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
our business and operations, the actual effects of the issue will not be known
until 2000. Difficulties in implementing the remediation or prevention phases or
failure by us to fully implement the planning or remediation phases or the
failure of our major vendors, third party network service providers, and other
material service providers and customers to adequately address their respective
Year 2000 issues in a timely manner would have a material adverse effect on our
business, results of operations, and financial condition.
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<PAGE> 54
BUSINESS
INTRODUCTION
We are a leading facilities-based provider of integrated telecommunications
services to businesses and other high-usage customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the Commonwealth of Independent States.
We offer our services through three business groups:
- Competitive Local Exchange Carrier (CLEC) Services using our local access
overlay networks in Moscow, Kiev and St. Petersburg;
- Data and Long Distance Services using a fiber optic and satellite-based
network, including more than 80 combined points of presence in Russia and
other countries of the Commonwealth of Independent States; and
- Mobile Services using cellular networks in Kiev, Vladivostok and thirteen
other population centers throughout Russia.
Competitive Local Exchange Carrier (CLEC) Services. In Moscow, Kiev and St.
Petersburg, we provide a range of services including local exchange and access
services, international and domestic long distance services, data
communications, Internet access and the design and installation of corporate
networks. We offer these services through our local access networks comprising
over 1,000 kilometers of fiber optic rings that are integrated with our long
distance network facilities and the incumbent networks in these cities. We
provide local exchange services primarily through our operating companies
Sovintel, TCM and Golden Telecom BTS. TCM was formerly called TeleCommunications
of Moscow.
Data and Long Distance Services. In major population centers throughout
Russia and other countries of the Commonwealth of Independent States, we offer
traditional and high-speed data services, using X.25, frame relay and
asynchronous transfer mode. These are technologies that offer varying degrees of
speed and capacity for data transmission. We also offer Internet service through
dedicated lines and dial-up access. We offer these services through a fiber
optic network leased from Rostelecom and our satellite-based long distance
network. We provide data services primarily through our Sovam operating
companies.
In Russia, we offer international and domestic long distance voice
services. We offer these services primarily through our satellite-based long
distance network. During 1998, the financial crisis following the devaluation in
the ruble and the resulting increased level of competition forced us to lower
our long distance tariffs. Our satellite-based long distance network is also
used for our growing data services business despite the fact that revenues
associated with our long distance services have significantly declined. We
provide our long distance voice services primarily through the TeleRoss
operating companies and TeleRoss ventures.
Mobile Services. In Kiev, Vladivostok and thirteen other metropolitan areas
of Russia we offer mobile telephony services. We provide mobile services with
value-added features such as voicemail, roaming and message services on a
subscription and prepaid basis. Our mobile services are provided through our
operating companies Golden Telecom GSM in Kiev and the Vostok Mobile ventures in
Russia, including PrimTelefone in Vladivostok. In accordance with our current
strategy, we intend to cease to provide further financial support to certain of
the ventures in less-developed urban areas. We will therefore abandon these
ventures, which are not material to our financial condition or results of
operations, and take a charge to earnings of $16-20 million in the third quarter
of 1999. We will also assume approximately $10-13 million in debt obligations of
these ventures. We intend to continue to support the ventures in the more
developed urban areas.
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<PAGE> 55
The following table sets forth certain operating data related to our
consolidated and unconsolidated ventures:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------
OPERATING DATA 1996 1997 1998 1998 1999
-------------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Points of Presence(1).......................... 38 50 79 69 103
Total Voice Minutes (millions) Local........... 133.0 269.1 340.4 176.2 141.6
Domestic Long Distance....................... 15.8 57.1 101.6 51.5 42.8
International Outgoing....................... 20.5 46.0 60.0 32.4 23.7
Incoming..................................... 33.2 69.9 86.5 42.3 46.4
Dial-up Internet Access Subscribers(2)......... 1,854 3,159 4,261 3,474 5,505
Total Active Cellular Subscribers
(thousands).................................. 9.8 20.4 25.5 25.3 33.5
Total Employees................................ 856 1,116 1,439 1,401 1,407
</TABLE>
- ---------------
(1) A point of presence is a physical place where a carrier has placed
equipment, typically a router or a switch, to allow network access.
(2) These figures do not reflect the acquisition, completed in June 1999, of the
Glasnet business, which had 10,791 subscribers at June 30, 1999.
OVERVIEW OF RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS MARKETS
RUSSIA
Until the early 1990s, the telecommunications network in the Soviet Union
was inefficient, unreliable and underdeveloped relative to the networks in most
developed countries. In the early 1990s, the Ministry of Communications, which
had formerly controlled the Soviet telecommunications infrastructure, ceded
operational control to 80 regional operators, including four independent city
networks in Moscow, St. Petersburg and two other cities, and a single long
distance and international carrier, Rostelecom. The local operators, which we
refer to as the local telcos, provide local exchange services for customers
within their regions, but they cannot provide domestic long distance or
international services. Likewise, Rostelecom is prohibited from offering local
exchange and local access services. Domestic long distance calls to and from
areas outside the local telcos' service area, as well as international calls,
are switched through Rostelecom, which interconnects with the local telcos to
complete domestic long distance calls and with foreign carriers to complete
international calls.
In September 1995, the Russian government established Svyazinvest as a
holding company for the state's telecommunications assets. Svyazinvest now holds
the Russian government's interests in all the local telcos, as well as
Rostelecom. In July 1997, a 25% plus one share interest in Svyazinvest was sold
to a private consortium, Mustcom Limited, for approximately $1.9 billion. The
Russian government intends to sell a further 25% minus two shares, but it has
not yet scheduled a new tender date. Svyazinvest currently owns controlling
voting interests in 84 local telcos, substantial equity interests in four other
local telcos, including Moscow City Telephone Network, and a voting majority
interest in Rostelecom. There have been some recent press reports that
Svyazinvest will merge with Rostelecom.
Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia has occurred.
Under Russian law, state-owned enterprises within the telecommunications sector
were subject to privatization but only pursuant to a decision of the Russian
government in each individual case and with the state retaining a certain
percentage of the stock of the privatized entity for three years, subject to
extension for national security reasons. At present, virtually all the former
state telecommunications enterprises have been privatized and, subject to the
above restrictions, shares of the newly formed joint stock companies have been
sold to the public. Also, a significant number of private operators provide a
wide variety of telecommunications services pursuant to licenses issued by
Goskomsvyaz, the successor agency to the Ministry of Communications.
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<PAGE> 56
The disintegration of the Soviet Union and the collapse of the centrally
planned economy reduced the funding available to the local telcos at a time when
demand for telecommunications was increasing. The growth in the Russian
telecommunications industry since the early 1990s has been principally driven by
businesses in Moscow requiring international and domestic long distance voice
and data services and by mobile telephony users. The growth in Moscow has
accelerated as multinational corporations have established a presence in the
capital and Russian businesses have begun to expand. The formerly state-owned
local telcos, however, which generally employed an outdated, dilapidated
infrastructure, could not support the requirements of high-volume consumers of
sophisticated telecommunications services. As a result, the inadequacies of the
existing legacy networks constructed during the Soviet era gradually became more
apparent. Further, the proceeds received by the Russian government from the
privatization of state telecommunications assets were not used for the
infrastructure improvements required to meet increased demand. As a result,
Goskomsvyaz began to issue licenses to domestic and foreign funded companies to
encourage investment in the telecommunications infrastructure.
The licensing structure adopted by Goskomsvyaz directly reflected the areas
of the legacy networks in most urgent need of investment. Generally, voice and
telephony licenses were issued to provide local access, local exchange,
international and domestic long distance services. We are licensed through
various companies to operate at each level of this hierarchy, and, as a
consequence, we are able to offer an integrated service offering. Sovintel
invests in and operates local access networks and an international gateway. TCM
provides access to the public local exchanges and via transmission along its
alternative overlay network interconnected with public exchanges. TeleRoss
operates at the toll exchange level to provide domestic long distance services.
The August 1998 Russian financial crisis severely restricted the
profitability of the local telcos. This has severely restricted the local
telcos' ability to make payments on liabilities denominated in foreign
currencies and their ability to access new capital. The crisis has also had a
negative effect on demand for telecommunications services and on the ability of
our customers to make timely payments.
UKRAINE
The evolution of the telecommunications sector in Ukraine is similar to
that in Russia. The infrastructure is outdated, the industry is inefficient and
provides low-quality services, and many tariffs are set as a result of political
considerations.
In contrast to Russia, there has been no privatization of government
telecommunications organizations in Ukraine. The Ukrainian government has
attempted to attract foreign investment by entering into joint ventures with
foreign operators and by allowing private operators into the market. These new
entrants generally provide services in the higher priced and rapidly growing
service segments of the market.
The State Committee of Communications is the regulatory body of the
Ukrainian telecommunications industry. The Committee has responsibility for the
management of state telecommunications holdings, licensing, and setting tariff
regulations. Tariffs for line rentals, local calls and calls between and within
regions are set at levels far below those which would prevail in a deregulated
market. In addition, the regulator requires all telecommunications operators to
invest in local loop development.
Ukrtelecom, the Ukrainian incumbent public operator, is the main provider
of telecommunications services in the country, followed by Utel and several
other smaller providers. Ukrtelecom was formed in 1993 as a holding company for
the state's telecommunications interests, including 24 regional local telcos,
two municipal telecommunications operators, and the national transmission
networks, along with broadcasting, research and satellite assets. Ukrtelecom
currently provides local and domestic long distance services.
Utel was formed in 1992 as a joint venture between AT&T, Deutsche Telekom,
PTT Netherlands and Ukrtelekom. Utel became the country's sole international
carrier with an effective monopoly over Ukraine's international traffic. In
return for this concession, Utel was required to make infrastructure
investments, primarily in digital switches, throughout Ukraine. Utel today
provides domestic long distance
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<PAGE> 57
and international services. In preparation for the privatization of Ukrtelekom,
the government has stated its intention to buy out its foreign partners in Utel
to further enhance the value of any future privatization offering. Although
price negotiations are ongoing, the foreign partners have agreed in principle to
sell their interests.
Public switched voice telephony in Kiev is delivered through a layered
hierarchy similar to that used in Moscow. We use our own local access network
with fiber optic and copper-based facilities to connect our local customers, and
we also have direct interconnection with the Kiev city telephone network.
For additional information regarding the matters discussed above, see "The
Political, Legal and Economic Environments in Russia and Ukraine" and
"Regulation".
OUR POSITION IN THE RUSSIAN AND UKRAINIAN MARKETS
Despite the August 1998 Russian financial crisis and the ensuing difficult
business environment, we believe that we are well positioned to maintain and
consolidate our strong presence in the business segment of the Russian and
Ukrainian telecommunications markets for the following reasons:
- our early market entry;
- our focus on service, quality and reliability;
- our strong infrastructure position in Moscow;
- the local market experience of our partners;
- the extent and quality of our existing customer base; and
- our extensive range of international, domestic and data
telecommunications services.
BUSINESS STRATEGY
Our objective is to be the leading alternative telecommunications service
provider to the business market in Moscow, Kiev, St. Petersburg and select
population centers throughout Russia and other countries of the Commonwealth of
Independent States. To achieve this objective, we intend to:
- Pursue Consolidation Opportunities
The August 1998 Russian financial crisis has created significant
consolidation opportunities. We intend to pursue those opportunities
through acquisitions that allow us to improve and expand our service
offerings and maintain operational control. We will target complementary
opportunities that will enable us to achieve synergies and economies of
scale.
- Increase Market Share by Offering Bundled Data and Voice Services Over an
Integrated Network
Corporate customers increasingly demand integrated telecommunications
solutions from one-stop providers that are able to deliver a full service
offering in the areas in which they operate. As a result, we plan to
continue to develop and combine our businesses to create a unified service
platform for local access, local exchange, domestic and international long
distance, data and systems integration services.
- Extend Leading Position in High Growth Data and Internet Markets
We plan to build on our position as a leading provider of data
communication services in Russia and other countries of the Commonwealth of
Independent States by increasing the number of network access points in our
network to facilitate the growing demand for data communications. In
addition, we plan to expand our dedicated and dial-up Internet access and
connectivity, web hosting and other Internet service offerings by
increasing our direct marketing efforts and through acquisitions.
- Reduce Operating Costs and Satisfy Capacity Needs through Network
Planning and Build Out
Our network strategy has been to build and own our local exchange and
customer access networks. We have typically leased digital terrestrial
channels to supply our regional connectivity,
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supplementing these channels with satellite circuits for redundancy and
remote connectivity. We intend to construct or acquire fiber optic capacity
along our heavy traffic and high cost routes to reduce our unit
transmission costs and ensure sufficient capacity to meet the growing
demand for Internet and data services.
- Focus Operating Activities and Capital Investments in Major Metropolitan
Areas
We plan to deploy our capital investments primarily in Moscow, Kiev
and St. Petersburg where demand for our services is most heavily
concentrated. We also intend to consider opportunities to expand our
operations in regional cities with sufficiently strong local economies, and
where we believe potential exists to grow businesses which complement our
current operations.
CORPORATE HISTORY AND ORGANIZATION
HISTORY
Golden Telecom, Inc., a wholly owned subsidiary of Global TeleSystems
Group, Inc. (GTS), was incorporated in Delaware in June 1999 in preparation for
the current offering. GTS was founded in 1983 as a not-for-profit company under
the name San Francisco/Moscow Teleport, Inc. GTS was incorporated as a
for-profit corporation in 1986 and reincorporated into Delaware in 1993. GTS was
among the first foreign telecommunications operators in the former Soviet Union,
where it began offering data links to the United States in 1986, international
long distance services in 1992, local access to its networks in 1994 and
cellular services in 1995. In most cases, GTS's Russian and Commonwealth of
Independent States businesses have been built through the establishment of joint
ventures with local and foreign partners, with GTS progressively increasing its
ownership. In 1995, GTS began to expand its telecommunications operations,
primarily within Western and Central Europe.
We and GTS have decided to conduct this initial public offering because we
believe that the offering will enable us, GTS and our investors to recognize
greater long-term value in our business interests in Russia and the other
countries of the Commonwealth of Independent States than if these interests were
to remain entirely within the GTS group of companies. Following this offering,
we believe that our independence will afford us greater flexibility in managing
our business and pursuing our business strategy in order to bring greater
long-term value to our company and to our stockholders. The offering will also
create a basis for our investors to value our assets separately from those of
GTS.
Before the consummation of this offering, GTS intends to transfer its
interests in its Russian and other Commonwealth of Independent States operations
to Golden Telecom, Inc., which will then issue common stock in this initial
public offering. The remainder of this section discusses our organizational
structure as it will exist after the consummation of this offering.
ORGANIZATION
Golden Telecom, Inc. is a holding company for the interests in our
operating companies. We currently organize our operations into three business
groups: CLEC Services, Data and Long Distance Services, and Mobile Services. Our
Business Services Division, which comprises CLEC Services and Data and Long
Distance Services, consists of Sovintel, Sovam Teleport, Sovam Teleport Ukraine,
TCM, TeleRoss operating company and ventures and Golden Telecom BTS. Our Mobile
Services Division consists of Golden Telecom GSM and the regional ventures owned
by Vostok Mobile, including PrimTelefone.
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The following chart shows the organization and ownership of our operations:
[CHART]
OWNERSHIP AND CONTROL OF OPERATING COMPANIES
Sovintel. We own 50% of Sovintel, and Rostelecom, the national long
distance carrier, owns the remaining 50%. Sovintel's control structure consists
of the Meeting of Participants, the Board of Directors, the Executive Committee
of the Board of Directors and the Executive Directorate. Certain business
decisions, including the distribution of profits and losses, require the
approval of both us and Rostelecom at a Meeting of Participants. Sovintel's
annual budget and business plan are adopted by its Board of Directors. Under
Sovintel's charter, each partner has the right to appoint three of the six
members of its Board of Directors. Rostelecom has the right to propose a
candidate for the position of the General Director, and we have the right to
propose a candidate for the position of the First Deputy General Director, who
together constitute the Executive Directorate. In addition, we have the right to
propose a candidate for the position of Finance Director.
The Board of Directors develops the annual budget and strategic business
plans and recommends acquisitions and other significant corporate actions.
Certain functions of the Board of Directors, including oversight of related
party transactions are delegated to the Executive Committee, comprised of one
representative from each partner. Major business decisions require joint
approval of both members of the Executive Directorate. The Executive Directorate
oversees the daily operations of the company and leads strategic planning
initiatives to be presented to the Sovintel Board of Directors. Neither we nor
Rostelecom are obligated to fund Sovintel's operations or capital expenditures.
Losses (up to the amount of their respective charter capital contributions or
commitments) and profits of Sovintel are allocated to the partners in accordance
with their ownership percentages, in consideration of funds at risk.
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TCM. Before July 1998, we owned 52.64% of the holding company, GTS-Vox,
that controls 95% of TCM. In July 1998, we acquired the remaining outstanding
interests in GTS-Vox and then owned 95% of TCM. We acquired the remaining 5% of
TCM on August 16, 1999.
Sovam. Sovam Teleport is the subsidiary through which we conduct our data
activities in Russia and other Commonwealth of Independent States countries
except Ukraine. In February 1998, we acquired the ownership interest of our
former partner, thereby making Sovam a wholly owned subsidiary. We operate our
Ukrainian data services business through our 49%-owned affiliate, Sovam Teleport
Ukraine. Our Ukrainian holding company recently executed a letter of intent to
acquire an additional 8% of Sovam Teleport Ukraine from our Ukrainian partners.
TeleRoss. Our TeleRoss business consists of the wholly owned TeleRoss
operating company, thirteen regional joint ventures in which we hold 50%
ownership interests, and one wholly owned regional venture. TeleRoss operating
company holds the applicable operating licenses to offer pan-Russian domestic
long distance services and thereby controls rates and tariffs, billing and
collections for all fourteen regional ventures. In addition, TeleRoss directly
controls the activities related to remotely located very small aperture terminal
(VSAT) customers. TeleRoss participates in the management of the TeleRoss
ventures under the terms of their applicable foundation agreements and charters.
Under most of these charters, each partner has the right to appoint an equal
number of members to each venture's board of directors. The boards of directors
are authorized to approve the annual operating budget, strategic business plans,
and to declare dividends. The foundation agreements and charters do not have
expiration dates. While we have significant influence within these ventures,
decisions, including the decision to declare and pay dividends, are generally
subject to our partners' approvals.
Neither we nor our respective joint venture partners are obligated to fund
operations or capital expenditures of the TeleRoss ventures. Losses and profits
are allocated to the partners in accordance with their ownership percentages, in
consideration of funds at risk.
Golden Telecom (Ukraine). Our total economic interest in Golden Telecom
(Ukraine), consisting of two business divisions, Golden Telecom BTS and Golden
Telecom GSM, held directly and indirectly, is 56.75%. We own 75% of GTS
Ukrainian TeleSystems LLC which in turn owns 49% of Golden Telecom (Ukraine),
and we have an additional 20% ownership interest in Golden Telecom (Ukraine)
through two wholly owned subsidiaries. An affiliate of ING Barings, one of the
underwriters in this offering, intends to contribute its 25% interest in GTS
Ukrainian TeleSystems LLC to a wholly owned subsidiary of Golden Telecom, Inc.
upon the consummation of this offering in exchange for approximately 420,000
newly issued shares of Golden Telecom. ING Barings' subscription through its
affiliate as a strategic investor is conditioned upon the consummation of this
exchange. Golden Telecom (Ukraine) is co-managed by us and our Ukrainian
partners. These partners appoint the General Director and we appoint the Chief
Financial Officer and a general manager for each of the business divisions.
Vostok Mobile. We own 100% of Vostok Mobile, a Netherlands registered
holding company, which in turn owns between 50% and 100% of our regional
cellular operators in Russia. In PrimTelefone, we have the right to appoint a
deputy General Director and a Finance Director. In our other regional joint
ventures, we typically exercise joint control with our partners through the
Board of Directors. While we have significant influence within these ventures, a
number of major decisions, including the decision to declare and pay dividends,
generally require our partners' approvals.
Neither we nor our respective joint venture partners are obligated to fund
operations or capital expenditures of the Vostok Mobile joint ventures. Losses
and profits are allocated to the partners in accordance with their ownership
percentages, in consideration of funds at risk.
CUSTOMER BASE
We compete primarily for high-volume business customers and carriers who
require access to highly reliable and advanced telecommunications facilities to
operate their business. Together, our top five customers accounted for
approximately 39% of our consolidated revenues for the six months ended June 30,
1999. Our largest customer, Vimpelcom, together with its affiliate KB Impulse,
accounted for
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approximately 22% of our consolidated revenues for the six months ended June 30,
1999. No other customer, except for Sovintel, which accounted for approximately
9% of our consolidated revenues, accounted for over 5% of our consolidated
revenues for the six months ended June 30, 1999. We provide services to our
largest customers, including Vimpelcom and Sovintel, pursuant to agreements
which specify the services we must maintain for these customers, and the tariffs
that we charge for these services. Our principal customer segments are:
Corporate Network Customers. Corporate network customers are typically
large multinational or Russian companies which require the full range of voice
and data services in several cities across Russia and other countries of the
Commonwealth of Independent States. While pricing is always a factor, this
segment places more value on network coverage, reliability as defined by service
level agreements, and ability to design, install and maintain local area and
wide area networks. These customers are willing to make longer commitments to
integrated one-stop providers in exchange for increased levels of service.
Corporate End-Users. Corporate end-users are foreign and Russian
enterprises with centralized operations, either in Moscow or in the regions.
These corporate end-users also require a full range of voice and data services,
but are more likely to purchase distinct services from separate suppliers based
on price. We attempt to acquire business from corporate customers by providing
superior technology, service levels and pricing.
Fixed-Line Operators. Fixed-line operators are other telecommunications
providers, including the Moscow overlay operators, alternative regional
fixed-line operators and the local telcos. Price is the primary factor in their
purchase decision, and although long-term contracts are rare, traffic volumes
are large. Voice telephony is a commodity for the customers in this segment.
Cellular Operators. Cellular operators are heavy consumers of our local
exchange capacity in Moscow because each cellular customer requires a unique
telephone number. In contrast, our corporate customers may require only one
port, which can serve multiple end-users. Because of the scarcity of ports in
Moscow, we can charge premium tariffs for access to the Moscow local exchange,
which makes cellular operators important contributors to our revenues.
Mass Market. We define the mass market as those customers who require
calling cards or dial-up Internet access. This market segment is increasingly
price-sensitive, especially since the August 1998 financial crisis, but quality
of service is also important, particularly in the Internet access business. In
some select regions, we also offer cellular services to the high-end mass
market, where price has also become a prime decision factor.
REVIEW OF OPERATING COMPANIES
This section provides a more detailed review of our business on a
company-by-company basis.
SOVINTEL
Sovintel is a competitive local exchange carrier that has constructed and
operates a fully-digital overlay network in and around Moscow. Sovintel has a
limited network in St. Petersburg that is interconnected to Sovintel's Moscow
network to support new business customers and Sovintel's Moscow clients.
Sovintel services over 50,000 telephone numbers for business customers and
cellular providers. As of June 30, 1999, Sovintel had 312 employees.
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The following table sets forth certain operating data related to Sovintel's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
International Outgoing Number of Minutes
(thousands)............................... 20,839 43,664 54,075 28,975 20,247
Average Rate Per Minute................... $ 1.55 $ 1.12 $ 0.96 $ 0.97 $ 0.84
Incoming Number of Minutes (thousands)...... 24,306 43,626 25,925 14,664 11,122
Average Rate Per Minute................... $ 0.28 $ 0.30 $ 0.28 $ 0.31 $ 0.23
Domestic Long Distance Outgoing Number of
Minutes (thousands)....................... 10,098 26,606 45,152 23,708 17,754
Average Rate Per Minute................... $ 0.65 $ 0.52 $ 0.44 $ 0.46 $ 0.36
Moscow (Local) Cellular Number of
Minutes (thousands)....................... 83,673 118,447 88,058 61,164 20,024
Average Rate Per Minute................... $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.08
Ports
Number of Ports (cumulative).............. 29,646 43,976 54,776 50,042 55,480
Number of Private Line Channels (cumulative)
International............................. 22 39 50 57 51
Inter- and Intra-City..................... 177 405 577 693 656
Equipment Sales (in thousands,
approximate).............................. $ 2,200 $ 3,400 $ 4,400 $ 2,400 $ 800
</TABLE>
Services and Customers
Local Access Services. Local telephone services are provided through the
interconnection of Sovintel's fiber optic ring with the switches of TCM,
MTU-Inform and other competitive local exchange carriers that operate in Moscow.
These switches provide access to local telephone services through
interconnections with the local public telephone network and with the principal
Moscow cellular providers.
International and Domestic Long Distance Services. Sovintel provides
domestic long distance services primarily through the TeleRoss long distance
network as a preferred carrier, or through Rostelecom's network. Sovintel
provides international services primarily through its international gateway,
which transmits international traffic through dedicated channels leased from
Rostelecom.
When an international call is placed to one of Sovintel's customers which
uses a number acquired from and serviced by the alternative local exchange
providers, TCM or MTU-Inform, the calling party has the option of dialing
through either the public city code (095) or Sovintel's exclusive city code
(501). When a caller chooses to dial through the 501 code, the call is connected
directly to Sovintel's dedicated network and can thereby avoid the frequently
congested public international and domestic long distance networks. Sovintel
receives a settlement from international carriers for calls routed through its
501 city code. International outbound switched voice traffic is routed by
destination based on either anticipated return traffic from the foreign operator
through Sovintel's 501 city code, or through least-cost routing. Sovintel
attempts to direct international traffic through particular foreign operators so
as to balance the settlements paid to and received from foreign operators.
Thereafter, Sovintel directs all international outbound switched voice traffic
in excess of that required to achieve the balance of the bilateral relationships
to the lowest cost route.
Data Services. Sovintel provides high-speed data services through
interconnection with the Sovam data network and through its own Moscow city data
network. These services include a private line service, an integrated voice and
data integrated services digital network (ISDN) connection, frame relay and
asynchronous transfer mode service. Private line channels, which are provided
over dedicated leased lines, are principally used by customers with high-volume
data traffic needs, such as large data providers.
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Equipment Sales. As part of its integrated service offering, Sovintel
distributes equipment manufactured by Nortel Networks. Sovintel installs and
maintains Nortel Meridian One products, Norstar key system, Mercator PBXs and
the Magellan DPN and the Passport lines of data equipment. Sovintel's
technicians have been trained to install, configure and maintain all the
products that it sells to its customers. These services enable Sovintel to
maintain close customer contact, helping Sovintel to market additional services
and enhance customer retention.
Sovintel's customers primarily consist of corporate network customers,
corporate end-users, fixed-line operators and cellular operators.
Marketing and Pricing
Sales to customers are made through a direct sales force consisting of 19
account managers in Moscow and St. Petersburg, supervised by an expatriate
commercial director. Each of these account managers targets specific customer
groups and industry segments, and is supported by specialists in technical sales
support, marketing, customer service and user training. Sovintel's sales and
marketing personnel receive various financial incentives through a combination
of salary, commissions, bonuses and benefits. Sovintel offers one of the
broadest range of products among alternative providers, and frequently releases
new products and enhancements to existing products in order to strengthen its
market position. In addition, Sovintel trains its employees to provide customer
service at a level which is comparable to that provided by Western
telecommunications companies. As a result, we believe Sovintel has earned a
reputation for providing high-quality telecommunications services through an
experienced and professional customer service staff.
Sovintel prices its services at a premium to those offered by the national
monopoly operator and competitively with other alternative service providers
within the market. Sovintel offers customers volume discounts for exceeding
certain defined revenue thresholds. Although Sovintel publishes standard
tariffs, it does not require regulatory approval to change its tariffs.
Competition
Sovintel competes principally on the basis of price, network quality,
customer service and range of services offered. While Sovintel has a leading
position in the corporate market, it faces significant competition from other
service providers, including:
- Rostelecom, the Russian national international and domestic long distance
carrier;
- Comstar, a joint venture between GPT Plessey and Moscow City Telephone
Network;
- Combellga, a joint venture among Alcatel, Belgacom, Comincom and Moscow
City Telephone Network;
- Global One, a joint venture between Central Telegraph and Global One;
- TelMos, a joint venture among Moscow City Telephone Network, Rostelecom
and AT&T;
- MTU-Inform, a company formed by several individual entrepreneurs in
partnership with Moscow City Telephone Network;
- Petersburg Telephone Network, the incumbent local operator in St.
Petersburg; and
- Peterstar, an affiliate of PLD Telekom.
All the companies listed above provide Internet solutions, and some also
offer limited data transmission. Of Sovintel's competitors, Global One is a
market leader in Moscow in the data services market. Numerous small and
medium-sized Internet service providers compete for the corporate end-user
market.
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Several smaller operators also compete for niche markets in Moscow. These
include Direct Net, for international voice and data, Corbina, a reseller, and
Aerocom, a reseller and an operator of pay phones.
TCM
TCM is an integral part of our competitive local exchange carrier services
in Moscow. Its infrastructure is integrated into the Moscow city incumbent
telephone network at 64 transit and local exchanges allowing it to deliver
traffic within the local public network. TCM's network also interconnects
directly with other fixed-line and cellular operators in Moscow and with
Rostelecom. TCM has constructed 100,000 ports, each corresponding to a unique
telephone number. It is currently constructing an additional 50,000 ports
expected to be completed in the first quarter of 2000. As of June 30, 1999, TCM
had 32 employees.
Services and Customers
Local Access and Operating Services. TCM provides carriers with telephone
numbers, ports and interconnectivity to the Moscow city telephone network
through its local gateway. Access to the Moscow city telephone network provides
customers with a high-quality network and a broad range of services. These
services are complemented by additional value added services such as conference
call facility, unified messaging and call forwarding.
TCM's customers primarily consist of cellular operators and fixed-line
operators.
Pricing
There is currently a scarcity of ports in Moscow that are fully integrated
into the public telephone network. As a result, TCM is able to charge a premium
for its services. For each port, customers pay a one-time port sale, a flat
monthly fee and per minute charges based on usage. These usage charges are
collected by the individual carriers and a portion of the charges are paid to
TCM in accordance with settlement agreements. The settlement agreements
typically have five-year terms.
Competition
TCM's main competitor is MTU-Inform, a Moscow City Telephone Network
affiliate that, until August 16, 1999, had been a 5% shareholder in TCM.
SOVAM
Sovam provides data transmission services, dedicated and dial-up Internet
access, Internet on-line services and information services. They use leased
capacity on satellite and land-based networks to provide these data services in
68 cities in Russia, 15 cities in Ukraine and 7 cities in Kazakstan, Azerbaijan,
Georgia and Uzbekistan to create wide area networks. Through reciprocal
cooperation agreements with other international operators, Sovam provides
connectivity and delivery through its Commonwealth of Independent States-based
network. As of June 30, 1999, Sovam had 150 employees.
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The following table sets forth certain operating data related to Sovam's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Data Service
Percentage of Total Sovam Revenue............... 79% 81% 84% 82% 86%
Number of Customers............................. 1,726 1,571 1,460 1,549 1,410
Average Revenue Per Month Per Customer.......... $ 446 $ 728 $1,095 $1,081 $1,249
Number of Cities in Service..................... 25 30 54 43 68
Equipment and Hardware Sales
Percentage of Total Sovam Revenue............... 14% 8% 5% 7% 4%
Dial-up Internet Access Service
Percentage of Total Sovam Revenue............... 7% 11% 11% 11% 10%
Number of Subscribers(1)........................ 1,854 3,159 4,261 3,474 5,505
Average Revenue Per Month Per Subscriber........ $ 52 $ 64 $ 63 $ 67 $ 43
</TABLE>
- ---------------
(1) In addition to the subscribers included above, Sovam frequently connects
potential dial-up Internet access subscribers on a complimentary one-month
trial basis. There were 84 trial subscribers as of June 30, 1999. These
figures do not reflect the acquisition, completed in June 1999, of the
Glasnet business which had 10,791 subscribers as of June 30, 1999.
Services and Customers
Data Transmission Services. Sovam offers traditional and high-speed data
communications services, using X.25, frame relay and asynchronous transfer mode
technologies, to business customers who require wide area networks to link
computer networks in geographically dispersed offices. Its major customers are
large multinational corporations, financial institutions and professional
organizations. These customers require an integrated product offering, including
network access and hardware and software solutions featuring installation,
configuration and maintenance.
Private Line Services. Sovam provides private line channels to customers
who require high-capacity and high-quality domestic and international
point-to-point connections. Private lines can be used for voice and data
applications.
Information Services. Sovam offers a variety of information services
addressing the needs of professional markets. Today, these services address
primarily the banking and financial industries with products such as S.W.I.F.T.,
Reuters, Bloomberg, MICEX (Moscow Interbank Currency Exchange) and in Ukraine
Sovam carries airline reservations systems.
Internet Services. Sovam serves the professional Internet market with
dedicated access to Sovam's Internet transmission network. Sovam also offers
dial-up services, which consist of Russia-On-Line, a business we developed
internally that targets the higher end of the market, and Glasnet, our recently
acquired business that targets mass market consumers. Russia-On-Line is the
first Russian-English language, online service for accessing the Internet
through either dedicated private lines or dial-up servers. This service is
distributed through its domestic long distance infrastructure, and provides
customers with access to the Internet, as well as an array of proprietary
Russian and English language information services, such as news and radio. As of
June 30, 1999, Sovam had 5,505 Russia-On-Line customers, while Glasnet had
10,791 subscribers.
Voice over Data Services. Sovam initiated voice over frame relay services
for private line customers that desire to reduce their long distance charges.
Voice over frame relay involves "packetizing" voice calls using frame relay, a
data transmission protocol, and transporting the voice call over our data
network to be "de-packetized" at the terminating end. The call is finally
terminated through normal circuit switching.
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Packet switching offers greater cost efficiencies over circuit switching, and
offers Sovam an opportunity to leverage its data network investment across a
greater number of services and geographic areas.
Equipment Sales. As part of its integrated service offering, Sovam
distributes, installs, configures and maintains the equipment and software
necessary to support the data requirements of its customers.
Sovam's data customers primarily consist of corporate network and corporate
end-user customers. Sovam also provides dial-up access to mass-market consumers
and dedicated access to corporate end-users.
Marketing and Pricing
Sovam has a dedicated sales force in Moscow, Kiev and St. Petersburg,
consisting of approximately 23 account managers who have comparable financial
incentives to the sales account managers of Sovintel. In addition to direct
sales, Sovam's Internet access packages are distributed in Moscow through large
retailers. In the regions, TeleRoss and its venture partners market the Sovam
data product portfolio which helps build cooperation with our local joint
venture partners, who do not have the capability to offer a comparable range of
data services, and increase the customer base of Sovam and TeleRoss.
Sovam prices data services on a two-tier structure with high-volume users
generally negotiating a monthly flat-rate fee and lower volume users paying a
volume-based fee. Dial-up and dedicated Internet access customers pay a fixed
monthly access charge plus an additional volume-based fee in an increasingly
competitive market.
Competition
Global One and Rostelecom are Sovam's primary competitors in the data
services market. DEMOS and Relcom are Sovam's primary competitors in the
Internet service provider market.
TELEROSS
TeleRoss operates a pan-Russian, satellite-based, domestic long distance
network and, in cooperation with fourteen regional joint ventures, is a provider
of local access, international and domestic long distance services in the cities
where the joint ventures are located. The satellite-based network is comprised
of regional earth stations and VSATs supporting our long distance activities.
Joint venture partners provide local access in the cities where TeleRoss
operates. As of June 30, 1999, TeleRoss had 195 employees.
The following table sets forth certain operating data related to TeleRoss's
operations:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Domestic Minutes(thousands)........... 4,035 23,233 40,332 20,458 18,154
Average Rate Per Domestic Minute.... $ 0.99 $ 0.63 $ 0.46 $ 0.53 $ 0.16
International Minutes(thousands)...... 272 744 982 522 370
Average Rate Per International
Minute........................... $ 2.76 $ 2.47 $ 1.87 $ 2.10 $ 0.89
Number of Cities Served............... 13 14 15 15 15
Private Lines
Number of Dedicated Channels........ 33 60 112 84 119
Average Price Per Channel........... $4,553 $ 4,140 $ 2,599 $ 3,212 $ 1,130
VSAT Services
Number of VSATs..................... 12 24 18 26 14
Average Revenue Per VSAT Per Month.. -- $ 8,324 $13,393 $15,501 $ 5,815
</TABLE>
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Services and Customers
Public Switched Voice Telephony Services. TeleRoss provides switched voice
services to its customers through local city switches connected to its earth
stations and leased intercity fiber optic lines. When a customer in one of its
fourteen TeleRoss regions makes a domestic long distance or an international
call, it is typically transmitted to its Moscow hub by satellite. The call is
then connected to the customer's destination through a land-based line that it
operates, through the Rostelecom network, or, for international calls, through
our Sovintel international gateway. Telecommunications operators also rely on
TeleRoss ventures to provide data and voice transmission.
VSAT Services. TeleRoss offers VSAT service to its customers located in
remote areas that cannot be physically connected to our regional long distance
switches, as well as to large infrastructure projects in need of sophisticated
and reliable communications systems. The VSAT service connects these customers
directly to TeleRoss's Moscow-based hub through a VSAT antenna installed at the
customer's location using TeleRoss's satellite transmission facilities.
TeleRoss's customers primarily consist of corporate network customers,
corporate end-users, fixed-line operators and cellular operators.
Marketing and Pricing
TeleRoss and its regional ventures typically employ a direct sales force to
market to corporate end-users. This sales force consists of approximately 20
sales and account managers. In addition, a team of three regional sales managers
are responsible for supporting the regional sales force and maintaining
relations with its regional partners. TeleRoss has introduced sales incentive
plans to the regional ventures but depends on these ventures to implement these
plans.
TeleRoss's regional ventures are increasingly driven by their corporate
network customers, who require uniform solutions for their wide area networks.
While pricing remains a factor, this customer segment places more value on
network coverage, reliability and ability to design, install and maintain local
area and wide area networks. These customers often require integrated solutions,
including data services to connect different offices. Local telcos often cannot
provide the required solutions, and TeleRoss can adjust its prices to reflect
the integrated services that it provides.
Competition
Rostelecom and Global One are the principal competitors to TeleRoss.
Rostelecom provides similar services in all regions where TeleRoss operates.
Global One provides integrated voice and data services in a limited number of
regions.
GOLDEN TELECOM (UKRAINE)
Golden Telecom (Ukraine) has two operating divisions: CLEC Services, which
operates under the name Golden Telecom BTS, and Mobile Services, which operates
under the name Golden Telecom GSM. Golden Telecom (Ukraine) has an agreement
with the local telco in Kiev under which the local telco has allocated 100,000
local numbers to Golden Telecom (Ukraine). These numbers are integrated into the
local public telephone network and are allocated in exchange for certain
contributions provided by Golden Telecom (Ukraine) to upgrade the local
infrastructure. Both divisions of Golden Telecom (Ukraine) provide this
numbering capacity to their customers in accordance with their respective needs.
As of June 30, 1999, Golden Telecom (Ukraine) had 182 employees.
GOLDEN TELECOM BTS
Golden Telecom BTS, our Kiev-based competitive local exchange carrier, has
constructed a 123 kilometer fiber optic network that is interconnected to the
local public telephone network in Kiev and to our international gateway. As of
June 30, 1999, Golden Telecom BTS serviced over 1,900 telephone numbers for
business customers.
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The following table shows certain operating data with respect to Golden
Telecom BTS, which commenced service during 1997:
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
International
Number of Minutes(thousands)........ -- 927 2,710 1,145 1,531
Average Rate Per Minute............. -- $ 1.63 $ 1.50 $ 1.55 $ 1.23
Domestic Long Distance
Number of Minutes(thousands)........ -- 648 3,280 1,120 2,366
Average Rate Per Minute............. -- $ 0.12 $ 0.11 $ 0.13 $ 0.11
Local Service
Number of Minutes(thousands)........ -- 3,333 14,323 5,324 10,263
Average Rate Per Minute............. -- $ 0.02 $ 0.01 $ 0.01 $ 0.01
Number of Ports in Use................ -- 751 1,703 1,254 1,961
</TABLE>
Services and Customers
Local Access Services. Local access services are provided through the
connection of customers to Golden Telecom BTS's fiber network which
interconnects to the local public telephone network in Kiev.
International and Domestic Long Distance Services. Golden Telecom BTS
terminates incoming traffic from foreign operators destined for Kiev and Odessa
through its gateway switch in Kiev. Traffic destined for cities other than Kiev
and Odessa is routed through the national carrier. Outgoing international
traffic is routed to other international operators according to least-cost
routing.
Golden Telecom BTS offers domestic long distance services throughout
Ukraine through interconnection with Utel. However, it recently acquired an
intercity operator's license allowing it to offer domestic long distance
services directly. Golden Telecom BTS is considering the development of a
network with direct interconnection with local operators in five principal
population centers in Ukraine outside Kiev. Domestic long distances services
from Kiev to Odessa are currently provided through infrastructure leased from
the national long distance carrier, Ukrtelecom, and the Odessa local telco.
Data Services. Golden Telecom BTS provides a private line service, an
integrated voice and data ISDN connection, frame relay and asynchronous transfer
mode service. Private line channels, which are provided over dedicated leased
lines, are principally used by customers with high-volume data traffic needs,
such as large data providers.
Golden Telecom BTS's customers primarily consist of corporate network
customers, corporate end-users, fixed-line operators and cellular operators.
Marketing and Pricing
Golden Telecom BTS positions itself as a premium service provider to
businesses, emphasizing the quality and reliability of its services. Sales to
our customers are made through a direct sales force consisting of eight account
managers in Kiev. Our direct sales force employees are incentivized through
salary, commission and bonuses.
Although Golden Telecom BTS prices switched voice services at a premium to
Ukrtelecom and other lower priced providers, it makes use of a lower billing
increment, volume discounts and agency fees to compete for corporate network and
corporate end-user customers. As a carrier for other telecommunications
operators, however, Golden Telecom BTS adopts a more aggressive pricing
structure than the incumbent operators in order to attract cellular and smaller
public switched telecommunications network (PSTN) operators.
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Competition
In Kiev, Golden Telecom BTS competes with Ukrtelekom, the incumbent
operator, and Utel, which handles mostly long distance and international
traffic. Golden Telecom BTS believes that because of its early market entry and
its ability to provide both international, domestic and local access, it has a
leading position in the high end segments of the corporate market.
In Ukraine, the fixed-line operators market is dominated by Utel, although
Golden Telecom BTS is seeking to increase its share of this market, especially
by carrying international outgoing traffic from independent telecommunications
operators, including cellular companies.
GOLDEN TELECOM GSM
Golden Telecom GSM operates a cellular network using GSM-1800 cellular
technology in the city and the region of Kiev, where its network covers an area
with a population of approximately 2.7 million people. Golden Telecom GSM began
cellular operations in accordance with a license which allowed it to offer
services in Kiev and the Kiev region. Golden Telecom GSM recently acquired a
national GSM-1800 license. Golden Telecom GSM is exploring the possibility of
expanding its operations in other major cities in Ukraine in accordance with the
terms of this license.
Services and Customers
Mobile Services. Golden Telecom GSM provides two types of mobile services
to its clients: a basic service for clients who utilize prepaid calling cards
and an expanded service for subscription clients, including international access
and value-added services such as voicemail, call forwarding, and conferencing.
International roaming services with 50 operators in 37 countries are available
to customers who subscribe to the expanded service offering.
Golden Telecom GSM's customers consist of a broad spectrum of private and
corporate users representing the high-end mass market and business customer
segments.
Marketing and Pricing
Golden Telecom GSM's network uses the widest frequency bandwidth of all
cellular operators in Kiev, allowing it to deploy a high quality network
throughout the city and thus market itself as a quality service provider. Due to
the highly competitive nature of the cellular market in Kiev, Golden Telecom GSM
focuses on providing a flexible and competitive tariff structure at a slight
premium to other operators reflecting the high quality of its service. Golden
Telecom GSM targets two markets for its services. The subscription service is
marketed as a high-quality service to private and business users providing
clients with flexible tariff plans and a variety of value-added services. The
prepaid package is targeted at younger, entry-level users, offering them mobile
services without fixed contracts or monthly fees and with control over their
expenditures. Golden Telecom GSM makes wide use of advertising and brand
promotions in order to maintain its core customer base.
Competition
The Ukrainian cellular market is very competitive. Ukrainian Mobile
Communications, Kyivstar GSM (Kyivstar) and URS operate GSM-900 networks in
Kiev. Ukrainian Mobile Communications and Kyivstar offer roaming services in
major cities within Ukraine, including Kiev. Ukrainian Mobile Communications
also operates a NMT-450 network throughout Ukraine. DCC operates an AMPS-800
network in Kiev and other regions in Ukraine.
VOSTOK MOBILE
Vostok Mobile is a holding company through which we operate thirteen
ventures that have deployed cellular networks based on AMPS-800 technology
primarily in Western Russia. Vostok Mobile also holds
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our interest in PrimTelefone, a venture that has deployed a cellular network
based on NMT-450 technology in Vladivostok and the Primorski region.
Restructuring of Certain Cellular Ventures
We have recently determined that the allocation of sufficient resources to
support certain of our cellular ventures, which are not material to our
financial condition or results of operations, is inconsistent with our current
strategic plans. We therefore do not intend to provide any further financial
assistance to certain cellular ventures, other than the assumption of certain
debt obligations, and we are seeking to sell our ownership interests in these
assets in furtherance of our plan of abandonment. We therefore intend to take a
charge to earnings of $16-20 million in the third quarter of 1999, and we will
assume approximately $10-13 million in debt obligations of these ventures. We
will continue to support those cellular ventures where the allocation of
financial, operational and management resources is consistent with our strategic
plans.
Services and Customers
Vostok Mobile ventures offer basic mobile telephony services and value
added enhanced services such as voicemail and call forwarding.
Customers of the Vostok Mobile ventures consist of high-income individuals
and corporate end users.
Marketing and Pricing
In the regions operating in the AMPS-800 standard, Vostok Mobile's
marketing efforts have focused on the branding of its trade name, Unicel, which
is marketed and promoted at the local level by the joint ventures. By promoting
the Unicel trade name, local ventures can emphasize their relationship with the
other Unicel joint ventures, allowing customers to view these ventures as
integrated parts of a larger cellular organization. Each venture employs a
commercial director who is responsible for sales and marketing and oversees a
sales force of between two and four individuals.
The AMPS-800 ventures generally offer at least two tariff plans, a standard
tariff plan and a premium tariff plan. The standard tariff plan typically
provides for a monthly fixed fee, a small amount of a free airtime and a
per-minute fee. The premium tariff plan typically provides for a monthly fixed
fee, a larger amount of free airtime and a discounted per-minute fee. Most plans
price late night and weekend calls at off-peak rates.
PrimTelefone markets itself under its company name as the leading operator
in Vladivostok and the Primorski region. To complement its mobile services
offering, PrimTelefone offers prepaid or payment cards and domestic roaming in
cooperation with other operators using the NMT-450 standard. PrimTelefone offers
several tariff plans, including the business premium, corporate, standard and
economy plans.
Competition
Vostok Mobile is experiencing increased competition in the regional
cellular market and expects this competition to intensify. Each region in which
the cellular joint ventures operate is permitted to have at least five licensed
operators, including one operator for each of the Advanced Mobile Phone System
(AMPS), Nordic Mobile Telephone System (NMT) and Global System for Mobile
Communications (GSM) cellular standards and two operators in the Digital
Cellular System (DCS) cellular standard. Although not all the licensed entities
have started operations, each of our mobile ventures face competition from at
least one active operator, including Sotel, a loosely affiliated group of
operators in the federal NMT standard, Vimpelcom which operates networks of
various standards in numerous regions and Russian Telephone Development Company
which owns interests in cellular ventures throughout Russia.
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Mobile Services Operating Data
The following table sets forth current operating data for our Mobile
Services business group (Golden Telecom GSM and Vostok Mobile). The ownership
interest in the second column indicates our legal ownership percentage for the
respective equity investments. We have decided to cease financial support and to
dispose of our ownership interests in some of these ventures.
<TABLE>
<CAPTION>
NUMBER OF AVERAGE REVENUE PER
ECONOMIC, ACTIVE ACTIVE SUBSCRIBER FOR
BENEFICIAL SUBSCRIBERS AT THE QUARTER ENDED
OPERATING COMPANY INTEREST CITY JUNE 30, 1999 JUNE 30, 1999
- ----------------- ----------- ---- -------------- ---------------------
<S> <C> <C> <C> <C>
Russia
Arkhangelsk Mobile Network.... 50.0% Arkhangelsk 1,040 $168
Astrakhan Mobile.............. 50.0% Astrakhan 1,358 234
Altaisvyaz.................... 50.0% Barnaul 483 329
Chuvashia Mobile.............. 70.0% Cheboksary 738 223
Lipetsk Mobile................ 70.0% Lipetsk 819 202
Murmansk Mobile Network....... 50.0% Murmansk 1,268 252
Penza Mobile.................. 60.0% Penza 483 207
Saratov Mobile................ 50.0% Saratov 1,682 284
Parma Mobile.................. 50.0% Syktyvkar 447 289
Volgograd Mobile.............. 50.0% Volgograd 2,066 338
Votec Mobile.................. 51.0% Voronezh 2,569 202
Mar Mobile.................... 50.0% Yoshkar-ola 427 213
Novotel....................... 100.0% Novgorod 387 258
PrimTelefone.................. 50.0% Vladivostok 4,208 381
Ukraine
Golden Telecom GSM............ 56.75% Kiev 15,547 317
------ ----
Total/average......... 33,522 $297
====== ====
</TABLE>
VOICE AND DATA NETWORK FACILITIES
Our telecommunication networks reflect the licensing regime adopted by the
Ministry of Communications and its successor agencies and consist of
technologically advanced systems designed for businesses and other high usage
customers. We own the electronic hardware and software elements of the network,
including transmission equipment, and depending upon economic and strategic
criteria, we own or lease the network transport elements.
The map on the inside front cover of this prospectus shows the location of
our networks throughout Russia and the other countries of the Commonwealth of
Independent States.
METROPOLITAN AREA NETWORKS
In Moscow, Kiev and St. Petersburg, we operate metropolitan area networks
(MANs) through Sovintel, TCM and Golden Telecom (Ukraine). In each of these
locations, we own or lease local access lines and private branch exchanges
(PBXs), local exchange switches, local numbering capacity, fiber optic
transmission rings and a fiber optic backbone. Our facilities in Moscow are
fully integrated with our domestic and international networks, as well as with
the networks of Rostelecom and the Moscow city public telephone network. The
elements of this Moscow MAN operated by Sovintel and TCM include the following
facilities:
- Access lines supporting approximately 55,000 local access numbers
connecting approximately 2,500 buildings to more than 400 PBXs. These
PBXs are often located on customer premises, to distribute advanced
telephony services in those premises to the end-users. These PBXs
function as switches that permit users to receive incoming calls, to dial
any other telephones on the premises
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that are connected to the PBX, to access a line leading to another PBX or to
access an outside line to the public switched telephone network;
- A network of 16 hub PBXs connected to the fiber optic network,
complemented by a Nortel DMS 100E local switch with advanced
functionality. These hub PBXs act as traffic aggregators for our 400
PBXs;
- Fiber optic Synchronous Digital Hierarchy rings of over 750 kilometers
that carry our traffic between our network elements. This network
connects us to major office buildings, hotels, business centers, and
factories and is co-located with 22 central offices of Moscow City
Telephone Network, where we have access to copper wire facilities. The
copper wire facilities are used in circumstances where a customer's
requirements do not justify the immediate investment in fiber optic
facilities;
- A Nokia DX200 local and tandem switch, with 100,000 operational local
numbers and an additional 50,000 local numbers under construction, is
interconnected to the local public switched telephone network via the
backbone fiber optic network and leased channels; and
- A fiber optic backbone network based on Synchronous Digital Hierarchy
technology, consisting of approximately 142 kilometers of fiber optic
cable in service. The second stage of construction of the backbone
network of approximately 350 kilometers of fiber optic cable has
commenced and is expected to be completed by the end of the first quarter
2000. The network interfaces with the 64 local/tandem switches of the
Moscow public telephone network and Rostelecom's long distance and
international network to provide full interconnectivity between the Nokia
DX200 tandem switch and the public switched telephone network.
Sovintel provides local access for our data service offering in Moscow
generally using the same intracity transport and customer access network as
described above. This network is complemented by access lines leased from other
Moscow-based operators that possess their own local access networks in cases
where our data customers are not otherwise on our network. In these
circumstances, involving approximately half of our Moscow data customers, we
lease local access from Moscow City Telephone Network, Combelga, Macomnet,
Golden Line and other competitors. Thus, our customers for data services may use
the same local access as provided by their voice service providers.
Sovintel's St. Petersburg network consists of two hub PBXs interconnected
to the St. Petersburg public telephone network through St. Petersburg City
Telephone Network, with capacity for 2,000 local numbers, and twenty PBXs that
are installed on customer premises and within business centers. We have already
constructed approximately 45 kilometers of fiber optic cable in and around St.
Petersburg, which is used to connect office buildings and business centers to
our network. We plan to construct an additional 60 kilometers of fiber optic
cable in St. Petersburg in 1999 extending service to the rapidly developing
industrial complex located outside the city center.
In Ukraine, Golden Telecom (Ukraine) provides local exchange carrier
services through our MAN in Kiev. Golden Telecom BTS provides last mile
connections (both copper and fiber optic) from three large PBX switches acting
as central offices in the city and a large quantity of smaller PBXs. In Kiev, we
have constructed a 123-kilometer fiber optic ring consisting of a main loop and
two sub-rings. We plan to extend the total fiber optic network to serve
additional customers. We have also constructed a data network consisting of
seven data switches.
We offer combined voice and data services with access to the local public
switched telecommunications network (PSTN) in 14 different major metropolitan
areas in Russia through our Sovam and TeleRoss operating companies. Depending on
the region, we have between 100 to 500 local lines in service, for a total
combined capacity through our Sovam and TeleRoss operating companies of
approximately 4,000 lines. Last mile access to the customers is usually provided
through leased copper or fiber optic lines.
Sovam also employs dial-up Internet access servers using approximately 750
dial-up lines in 35 cities in Russia and Ukraine, allowing our customers to get
Internet access through a local call. This dial-up roaming service is also
available in over 80 countries through the international data-roaming entity,
GRIC
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dial. Through these dial-up access servers, we offer local roaming for Internet
access, whereby an Internet customer normally residing in Moscow may travel to
other regions in Russia and internationally, call a local access number, and
access the Internet. This service may further expand with the development of our
network.
INTERNATIONAL NETWORKS
Sovintel and TeleRoss provide international switched voice services in
Russia using leased transmission capacity that they obtain from Rostelecom
within Russia, and international carriers beyond the Russian borders. Similarly,
in Ukraine, Golden Telecom (Ukraine) leases capacity from Ukrtelekom for
domestic segments and international operators for international segments. We
operate two international gateway switches. One switch, Sovintel's Nortel DMS
300, is located in Moscow, and the other international gateway switch, Golden
Telecom (Ukraine)'s Siemens EWSD, is in Kiev. These international gateway
switches carry our international switched voice traffic to international
operators with which we have interconnect and settlement agreements.
Sovam uses Nortel asynchronous transfer mode Passport technology for its
core data network to provide certain international private line circuits and
international data transmission services, such as X.25, asynchronous transfer
mode and frame relay and Cisco routers for Internet access. Sovam leases the
domestic fiber optic capacity necessary to implement these service offerings
from Rostelecom, Ukrtelekom, Rascom and Sonera. International segments of these
offerings are provided in cooperation with international operators such as Cable
& Wireless, AT&T and Unisource. In Ukraine, international outgoing and incoming
traffic is similarly routed by Golden Telecom (Ukraine) via fiber optic cable to
GTS Wholesale Services, Cable & Wireless, Sovintel in Moscow and several other
international operators. In addition to their terrestrial network, TeleRoss and
Sovam also use satellite transmission to offer the same services between Moscow
and other major Commonwealth of Independent States cities such as Almaty,
Tashkent, Tbilisi and Baku.
DOMESTIC LONG DISTANCE NETWORKS
TeleRoss has developed a land-based regional network to provide domestic
long distance and data services in Russia. Its land-based domestic long distance
network consists primarily of fiber optic capacity leased from Rostelecom. We
use this land-based network primarily to serve our regional data and Internet
businesses. This network currently accesses more than 80 different points of
presence across Russia and in certain large Commonwealth of Independent States
cities. We may further develop our land-based network to meet the demands of our
customers, especially data users.
TeleRoss also leases capacity on a satellite transponder (72 MHZ) from
Intelsat. We recently signed a five-year lease for this capacity, which expires
in March 2004. The coverage area of this satellite, or "footprint", includes the
full territory of Russia and other countries of the Commonwealth of Independent
States. Using this leased satellite transponder, TeleRoss serves fourteen
Regional Earth Stations (RESs) and 26 VSAT stations across the country. A VSAT
is a relatively small satellite antenna, typically 1.5 to 5 meters in diameter,
used primarily for satellite-based point-to-point applications. These RESs and
VSATs interconnect with our central hub in Moscow and with local facilities in
the areas where the RESs and VSATs are located. TeleRoss's central hub in Moscow
interconnects with Sovintel's and TCM's Moscow-based international, domestic
long distance and local facilities.
TeleRoss and Sovam have developed their land-based technology in parallel
with its satellite network for a number of reasons, including the following:
- Fiber transmission is more suitable for data applications than satellite
transmission because of fewer transmission delays;
- High entry cost for VSAT technology for customers with limited capacity
requirements; and
- Because there is no "public data network", we need to establish
land-based points of presence in each location where data services are
required.
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We are implementing a strategy to integrate the land-based and satellite
networks and to integrate the different technologies integral to each, thereby
developing a single, multi-purpose network. The technologies required to carry
voice over packet networks, such as voice over frame relay, voice over Internet
Protocol and voice over asynchronous transfer mode, have become available and
allow for such network integration. This integration may benefit us in different
ways:
- Creates a possibility to carry voice "on net" between multiple locations.
This application was not possible with a satellite-only network, because
the time delays in consecutive satellite "hops" are impractical for
efficient communications;
- Creates a possibility to terminate traffic in significantly more points
of presence. Points of presence established originally for data services
may be extended to carry voice over an interface to a local voice
operator, allowing us to extend our carrier's carrier services;
- Improves network resilience both for voice and data networks through the
optimal combination of land-based fiber and satellite transport capacity;
and
- Enables us to operate an integrated network over which could offer voice,
data and Internet services.
We have already upgraded five points of presence to carry packet switched
voice, and we intend to upgrade other points of presence.
CELLULAR NETWORK
Our cellular operations are each comprised of a mobile switching center and
a network of radio base stations providing coverage to each licensed region. In
most cases, base stations are interconnected via microwave transmission
facilities although some are connected to their associated mobile switching
centers with fiber optic or copper facilities. Our most extensive cellular
networks have been deployed in Kiev and the Primorski region of the Russian Far
East.
Golden Telecom (Ukraine) operates a GSM-1800 network in Kiev and the
immediately surrounding areas with a mobile switching center and 55 base
stations. The network also includes various value-added service platforms
offering voicemail, short message service, and prepaid cellular administration.
This network provides full coverage of the city and international airport
Borispol.
PrimTelefone, one of our Vostok Mobile ventures, operates a NMT-450 network
in Vladivostok and seven other cities in the Primorski region, including the
road between Vladivostok and the regional airport. Nine base stations are
deployed in the Vladivostok metropolitan area and fourteen base stations cover
other cities in the Primorski region.
EMPLOYEES
On June 30, 1999, we, our consolidated subsidiaries and our joint ventures
employed a total of 1,407 full-time employees. This included 353 employees
dedicated to customer relations, sales and marketing, 469 employees dedicated to
technical services, and 289 employees dedicated to company finances. We do not
have any collective bargaining agreements with our employees, and we believe
that our relations with our employees are generally good. We believe our future
success will depend on our continued ability to attract and retain highly
skilled and qualified employees.
PROPERTIES
We possess the right to occupy and utilize four floors of a building in
eastern Moscow which serve as the principal office for TCM, Sovam and TeleRoss
and which houses our representative office. Three of our cellular joint ventures
own small premises which serve as their main offices. We lease various buildings
and space in buildings throughout the Commonwealth of Independent States that we
use for our offices. Besides this office space, our principal facilities consist
of telecommunications installations, including
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switches of various sizes, cables and VSAT and other transmission devices
located throughout the Commonwealth of Independent States. We believe that our
facilities are adequate for our present needs.
LITIGATION
We are occasionally involved in routine litigation concerning various
matters. However, we do not currently consider any of this litigation to be
material in the aggregate.
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THE POLITICAL, LEGAL AND ECONOMIC ENVIRONMENTS IN RUSSIA AND UKRAINE
RUSSIA
Political Environment. Since the dissolution of the Soviet Union in
December 1991, Russia has been in the process of a substantial political
transformation. The Russian Constitution, ratified in 1993, establishes a
three-branch governing system that replaced the Communist dominated Soviet
system. The three-branch system consists of a powerful executive branch led by
the President, a bicameral legislative branch with an upper assembly, the
Federation Council, and a lower assembly, the Duma, and a judicial branch. Boris
Yeltsin was elected to a second term as President in July 1994, and his term
will end in June 2000. In recent years, Yeltsin has lost popular support on
account of political and economic dislocations, disaffection with economic
reform, institutionalized corruption and his erratic stewardship of the country.
Prime Minister Putin was appointed by President Yeltsin and confirmed by
the Duma on August 16, 1999. Prior to his appointment as Prime Minister, Putin
served as the Head of the Russian Federal Counter-Intelligence Agency and as the
Head of the Internal Controls Department of the President's Administration.
Prime Minister Putin has stated that he intends to follow his predecessors'
policies. Putin enjoys the full support of the President to succeed him.
Putin's predecessor, Prime Minister Stepashin, was appointed by President
Yeltsin and confirmed by the Duma in May 1999. Before his appointment as Prime
Minister, Stepashin served as the Head of the USSR Federal Security Agency and
Russian Federal Counter-Intelligence Agency, the Minister of Justice and the
Minister of the Interior. Prime Minister Stepashin's frequently stated goal was
to renew prior efforts to improve the economy, including measures to revive
domestic production and reform the economy, create better living conditions and
restore Russia's international stature.
Prime Minister Stepashin's predecessor was Yevgeny Primakov, a career
academic who later joined the USSR and Russian government as the head of the
Committee for State Security (KGB) and its successor agency and still later as
the Russian Minister of Foreign Affairs. Prior to his dismissal in May 1999,
Prime Minister Primakov followed a mixed economic policy, recommending lower
value-added and profit taxes, greater government intervention in the economy,
and deficit spending. Primakov was credited with stabilizing Russia's political
and economic situation after the August 1998 financial crisis and for lobbying
the Russian legislature to adopt stricter currency controls and oil and gas
production sharing legislation. Prime Minister Primakov also advocated increased
foreign direct investment in the Russian economy and initiated a well-publicized
campaign against institutionalized corruption in the state bureaucracy.
The political and economic changes in Russia over the last eight years have
resulted in significant dislocations of authority. As a result of the frequent
turnover at the federal government level, the continuing absence of an effective
central government, and direct elections at the local level, certain regions of
Russia are exercising more independence in both political and economic policies.
Significant organized criminal elements have taken advantage of these
dislocations. High levels of corruption exist among government officials and
among commercial enterprises in which the state has an ownership interest.
With the frequent changes of government in Russia and the other countries
of the Commonwealth of Independent States, government policies are subject to
rapid and potentially radical change. Duma elections are scheduled for December
1999 and presidential elections are slated for June 2000. As these dates
approach, the political situation may become increasingly unstable. In the event
that an increased number of ultra-nationalistic, anti-western or Communist
lawmakers are chosen by the electorate, it is possible that some of the
political reforms initiated during the last eight years could be reversed. The
likelihood of this prospect has increased as a result of the widespread
displeasure over NATO's military campaign in Serbia and the United States'
leading role in this effort.
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Russia and Serbia have traditionally maintained close ties. The recently
concluded NATO bombing campaign in Serbia gave rise to nationalistic sentiment
in Russia, including protest demonstrations at the US Embassy in Moscow. Events
in Serbia or Kosovo may give rise to increased Russian nationalism, which could
impact Duma elections to be held in December 1999, attitudes towards Western
foreign direct investment or business usage of Western suppliers such as
ourselves.
Legal Environment. Since the dissolution of the Soviet Union in December
1991, President Yeltsin and the Duma have been enacting piecemeal legislation in
an attempt to develop a legal framework to guide the transition from a
centralized command economy to a more market-oriented economy. While a
rudimentary legal framework has partially developed, legislation is often
inconsistent, contradictory, poorly drafted and unclear. This general
characterization is particularly applicable to tax legislation. Ambiguities in
the law are exploited by tax collectors struggling to increase state budgetary
resources. Administrative regulations and decrees are frequently not published
and are not available for review. The judiciary lacks the power necessary to
enforce its judgments and judges are frequently underpaid, inexperienced and
commercially unsophisticated. In addition, judges are subject to intimidation,
and corruption in the judiciary is not unusual. Hence, in such an environment,
contracts are frequently unenforceable in courts of law.
The Duma has enacted legislation to protect foreign investment and other
property against expropriation and nationalization. In the event that such
property is expropriated or nationalized, legislation provides for reimbursement
of the value of the property and damages. However, due to the lack of state
budgetary resources, experience and political will to enforce these provisions,
and due to potential political changes, we cannot assure you that such
protections would be enforced.
Legislation and normative acts specific to the telecommunications industry
provide a narrower legislative framework that guide our operations. Russian
Federation Law No. 15-FZ, On Communications, signed by President Yeltsin on
February 16, 1995 (the "Communications Law") provides a framework for the
regulation of the Russian telecommunications industry.
Pursuant to the Communications Law and subsequent governmental decrees, the
State Committee for Telecommunications (Goskomsvyaz) is assigned the authority
to regulate and control the development of the communications industry in
Russia. Additional legislation defines the roles of other communications
regulatory organs, with Goskomsvyaz exercising responsibility over the issuance
of operator's licenses and the supervision of each of those organs. The State
Service for the Supervision of Communications (Gossvyaznadzor) is empowered to
issue certain permits required for network operation and for the importation and
use of telecommunications equipment. Gossvyaznadzor conducts periodic
inspections to determine an operator's compliance with the terms and conditions
of its licenses and is authorized to issue orders and instructions requiring
operators to bring their network into compliance with their licenses or to face
fines and/or to recommend to Goskomsvyaz that a license should be suspended or
revoked.
The State Commission for Radio Frequencies (GKRCh) is responsible for
administering the utilization of the radio spectrum. This government agency
assigns and oversees the operation of radio frequencies. The State Commission
for Information is charged to coordinate the development and integration of
governmental and private telecommunications projects and networks. The State
Commission for Electrosvyaz (GKES) is responsible for improving the legislative
and regulatory base governing the telecommunication industry and for
coordinating the development of different telecommunications networks.
Pursuant to Article 15 of the Communications Law, any entity that offers
any communications service must obtain the appropriate license from Goskomsvyaz
in accordance with the Communications Law and relevant licensing regulations. In
fact, neither the Communications Law nor such regulations provide clear
guidelines or base standards for the issuance or extension of a license and
Goskomsvyaz exercises broad discretion when determining whether to approve a
license application and when setting the terms and conditions of the license.
Telecommunications licenses are typically issued for terms between three and ten
years, and are not transferable.
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Article 17 of the Communications Law provides that communications networks
and facilities in Russia may be owned by legal entities and individuals acting
as communications operators, including foreign organizations and individuals.
Article 18 of the Communications Law states that foreign investors may
participate in the privatization of state-owned communications enterprises
within limits established by relevant privatization legislation.
In addition to telecommunications legislation, the Russian
telecommunications industry is also shaped by privatization legislation and the
resulting privatization of state-owned telecommunications enterprises over the
last several years.
Economic Environment. Before the August 1998 financial crisis, the Russian
government and Central Bank took measures to stabilize a deteriorating economy
and provide adequate liquidity, including the August 17, 1998 decision to allow
the ruble's value to float between 6.0 and 9.5 rubles to the US dollar. They
also imposed a 90-day moratorium on the payment of foreign exchange to meet
certain obligations of Russian entities, and declared their intent to
restructure the payment terms of certain treasury bills. Since then, the ruble's
value declined substantially below the 9.5 ruble/US dollar floor set on that
date, but has recently settled at approximately 25 rubles/US dollar. As a
result, our financial performance has been negatively affected.
After the August 1998 financial crisis, the International Monetary Fund
refused to rollover Russia's sovereign debt, as well as lend any additional
funds, until the Russian legislature passed a package of economic reform
legislation submitted by the Primakov government. Although the IMF has rolled
over Russia's pre-existing financing, it has tied the release of tranches
thereunder to the achievement of certain budgetary and monetary performance
targets. In addition, political pressure is building to halt further
disbursements until the Russian government has fully and satisfactorily
accounted for the use of prior IMF funding. Meanwhile, the Russian government
continues to negotiate with the London and Paris Clubs of creditors for a
restructuring of debt Russia inherited from the former Soviet Union totaling
$32.4 billion and $38.7 billion, respectively. This underscores the extent to
which Russia has been dependent upon substantial financial assistance from
multilateral organizations and foreign governments. However, both clubs have
refused to reschedule the Soviet-era debt until the economic reform legislation
is adopted. If such debt is not rescheduled, economic development in Russia and
other countries of the Commonwealth of Independent States may be adversely
affected.
In addition, the Russian government has defaulted on rescheduled payments
of certain commercial and sovereign debt obligations inherited from the former
USSR, including the recent default of approximately $900 million in interest
payments to the London Club of creditors. As a result, it is likely that the
Russian government and Russian businesses will have difficulty accessing Western
financial markets for the foreseeable future.
Lastly, Russian and other Commonwealth of Independent States businesses
have a limited operating history in market-oriented conditions. Many Russian
banks are undercapitalized and continue to have cash shortages. The Russian
Central Bank has reduced banks' reserve requirements in order to inject more
liquidity into the Russian financial system, but has stressed that it will not
bail out the weaker banks. Many of these banks are expected to close over the
next several years as a result of bank failure and anticipated consolidation in
the industry.
Taxes. Generally, taxes payable by Russian companies are numerous and
substantial. They include taxes on profits, revenue, assets and payroll, as well
as value-added tax. Russian companies within the same ownership group cannot be
consolidated, and therefore, each company must pay its own Russian taxes.
Because there is no consolidation provision, dividends are subject to Russian
taxes at each level that they are paid. Currently, dividends are taxed at 15%
and the payor is required to withhold such tax when paying dividends, except
with respect to dividends paid to foreign entities that qualify for an exemption
under treaties on the avoidance of double taxation. To date, the system of tax
collection has been relatively ineffective, resulting in the continual
imposition of new taxes in an attempt to raise government revenues. This
history, plus the existence of large government budget deficits, raises the risk
of a sudden imposition of arbitrary or onerous taxes, which could adversely
affect us.
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In various foreign jurisdictions, we are obligated to pay value-added tax
on the purchase or importation of assets, and for certain other transactions. In
many instances, value-added tax liabilities can be offset against value-added
tax which we collect and otherwise would remit to the tax authorities, or may be
refundable. Because the law in some jurisdictions is unclear, the local tax
authorities could assert that we are obligated to pay additional amounts of
value-added tax. In our opinion, any additional value-added tax which we may be
obligated to pay would be immaterial.
In addition, the new Tax Code authorizes Russia's regional legislative
authorities to impose a local tax on the sale of goods and services on their
territories. A number of such subdivisions have exercised this authority,
including Moscow and St. Petersburg which have established a local sales tax at
a rate of 4 percent.
UKRAINE
Ukraine declared independence from the Soviet Union in 1991. Since that
time, Ukraine has established a three-branch system of government similar to
that in Russia, although the position of the president in Ukraine is not as
strong as in Russia. Following a period of significant political debate, the new
Ukrainian Constitution was ratified in June 1996. Independent Ukraine's first
President Leonid Kravchuk led the country through a period of significant
economic and social decline. Following the 1995 presidential elections, Leonid
Kuchma succeeded him. Ukraine is one of the few former Soviet republics to
smoothly and peaceably transfer executive power. New presidential elections are
scheduled to take place in October 1999.
Valery Pustovoitenko became Prime Minister in 1998, replacing Pavel
Lazarenko who is now the subject of criminal inquiries relating to corruption
and money laundering in Switzerland and Ukraine. In general, the political
situation in Ukraine has remained stable since the removal of Lazarenko. The
socialist/Communist dominated Parliament, the Rada, is not as combative as its
Russian counterpart although it is generally reluctant to support reforms,
resulting in most reform-minded legislation being watered down or rendered
ineffective.
In September 1996 a new currency, the hryvna, was introduced, replacing the
temporary karbovanets (coupons) that were in circulation following the country's
independence from the Soviet Union. The National Bank of Ukraine, the nation's
central bank, has steadfastly refused to permit wholesale printing of the
currency despite much pressure from Parliament. Recently, however, the Rada
enacted legislation stripping the central bank of its independence and making it
accountable to the President as well as the Rada.
As with other former Soviet Republics, Ukraine is plagued with widespread
corruption and criminal activity. Organized criminal groups are active
throughout Ukraine. High levels of corruption exist among government officials
and among commercial enterprises in which the state has an ownership interest.
Although we do not believe we have been adversely affected by these activities
to date, organized or other crime could in the future may have a material
adverse effect on our operations and the market price of our common stock.
The regulatory and tax environment in Ukraine is even less developed than
in Russia despite significant technical assistance provided by the United States
and the European Union.
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REGULATION
Telecommunications operators in Russia are regulated by the State Committee
for Telecommunications or Goskomsvyaz, the successor of the Russian Ministry of
Communications, and its subordinate bodies, Gossvyaznadzor and the State Radio
Frequency Commission. These telecommunications authorities and their regional
branches, together with certain other regional and local authorities, generally
regulate telecommunications operators in their jurisdictions through their power
to issue licenses and permits and conduct periodical compliance inspections.
The Communications Law sets out a legal and regulatory framework for the
telecommunications industry. It sets forth general principles for the right to
carry on telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. Separate
legislation and administrative regulations implement this institutional
framework.
Goskomsvyaz issues licenses to provide telecommunications services on the
basis of a decision by the Licensing Commission at Goskomsvyaz. Goskomsvyaz has
generally issued no new licensing regulations since the enactment of the
Communications Law, and in practice Goskomsvyaz continues to issue licenses
based on the general regulations applicable to any licensing activity in Russia,
except to the extent such regulations have been effectively modified by the
introduction of more specific regulations covering the licensing of cellular
services. According to the general licensing regulations, licenses for rendering
telecommunications services may be issued and renewed for periods which range
from 3 to 10 years and several different licenses may be issued to one person.
Under the recently enacted cellular licensing regulations, licenses for
rendering cellular services may be issued only on the basis of a competitive
tender typically for longer periods which range from 5 to 15 years. Once the
licenses are received, the licensee is required to register its right to hold
and operate under the license with Gossvyaznadzor. Renewals may be obtained upon
application to Goskomsvyaz and verification by appropriate government
authorities that the licensee has conducted its activities in accordance with
the terms of the licenses. Officials of Goskomsvyaz have broad discretion with
respect to both the issuance and renewal procedures. The Communications Law and
general licensing regulations provide that a license may not be transferred or
assigned to another holder. Cellular service licenses obtained through
competitive tender are freely assignable.
Regional authorities also exercise influence in the issuance of Advanced
Mobile Phone System (AMPS) licenses, partly because AMPS has been designated a
"regional standard". In addition, entities such as Svyazinvest at the federal
level, as well as other entities in Moscow and St. Petersburg and other
administrative regions within Russia exercise significant control over their
respective local telephone networks and may therefore affect the licensing
process.
Licensing procedures for our cellular services include frequency licensing
from Goskomsvyaz through a two step process. A license must first be obtained
from Goskomsvyaz for permission to operate mobile cellular services on a
commercial basis in a specific standard and frequency bandwidth. Thereafter, an
approval to use specific frequencies within the band must be received from the
State Radio Frequencies Commission. Once the licenses are received,
Gossvyaznadzor confirms the rights of an operator to offer radio frequency
transmissions on specific frequencies, administers type acceptance procedures
for radio communications equipment and monitors compliance with licensing
conditions. Both the general and the cellular licensing regulations require us
to obtain additional permits with respect to the use of equipment and the
provision of services.
It can be difficult and expensive for us to comply with applicable Russian
telecommunications regulations. For example, the Communications Law provides
that telecommunications in Russia are confidential and may only be intercepted
by a court order. Nevertheless, we are subject to SORM, the Russian acronym for
the surveillance system operated partly by the Federal Security Service, a
government agency that is responsible for electronic surveillance. SORM requires
telecommunications networks to facilitate monitoring of electronic traffic.
However, the Federal Security Service has not finalized its
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technical specifications governing compliance with SORM, and there is a dispute
regarding the appropriate level of technical compliance with SORM and the costs
of implementing SORM facilities to monitor e-mail and Internet traffic.
The regulatory framework governing the telecommunications industry in
Ukraine, while relatively less developed and less comprehensive, is generally
similar to the Russian regulatory framework. For example, there is greater
uncertainty as to the regulatory regime concerning the terms and conditions for
interconnection to the public network. Therefore, regulations in Ukraine tend
toward greater unpredictability and ambiguity.
Ukrainian legislation prohibits the establishment and operation of
telecommunications ventures that are more than 49%-owned by foreign investors.
We do not believe that this prohibition extends to indirect investment by a
foreign entity through a wholly owned Ukrainian subsidiary. Thus, we established
a local holding subsidiary which owns another 20% of the Company. In addition,
the Ukrainian government has imposed substantial frequency permit fees in
connection with providing GSM service in Ukraine, and Golden Telecom (Ukraine)
has paid a one-time $2.9 million frequency license fee on Golden Telecom
(Ukraine)'s license. In May 1999, the government passed a resolution which
would, if enforced, effectively increase our frequency fees from $25,000 per
month to $250,000 per month for the period July-December 1999, and would have a
material adverse effect on our operations in Kiev, however this resolution has
recently been suspended. We cannot assure you that additional fees will not be
imposed in the future upon the reissuance and/or renewal of such license or for
the continued use of assigned frequencies, nor that the increase in fees will
not be implemented again. Ukrainian international operators are also required to
make yearly investments into PTSN as a condition of their international
licenses.
Our subsidiaries and ventures hold the following licenses in Russia and
Ukraine which are materially significant to their operations:
Switched Services. In Russia, we hold two licenses for switched services.
The first license was reissued to Sovintel in January 1999 and authorizes
Sovintel to operate as an international overlay network with the ability to
interconnect with the Moscow region and St. Petersburg PSTN. This license
requires Sovintel to provide service to at least 50,000 subscribers and expires
in May 2000. The second license was reissued to TeleRoss, a wholly owned
subsidiary of GTS, in October 1998 for provision of intercity services in 40
regions including the city of Moscow with ability to interconnect with the PSTN.
In Kiev, Ukraine, we hold a license for provision of overlay network services,
including domestic and international long distance services, in the name of
Golden Telecom (Ukraine) -- Business Services.
Leased Circuits. In January 1999 Sovintel was reissued a five-year license
to lease local, intercity and international circuits in the territory of Moscow,
the Moscow region and St. Petersburg. The license requires Sovintel to lease no
less than 2,500 circuits by the end of its term.
Data Services. In November 1998, Sovam was reissued a 5 1/2-year license to
provide data transmission services via a dedicated network to a number of
regions covering a large portion of Russia. The license permits a network
capacity of not less than 14,000 customers and allows it to interconnect with
other data transfer networks in Russia. Sovam Teleport Ukraine and Golden
Telecom (Ukraine) provide data services within the territory of Ukraine.
Local Access Services. In January 1997, TCM was licensed to provide local
telephone service in Moscow to not less than 100,000 subscriber local access
lines. The license expires in May 2006. TCM has received authorization from
Goskomsvyaz to construct an additional 50,000 numbers. TCM has also completed
negotiations with Moscow City Telephone Network to interconnect these numbers
with the Moscow city telephone network. TCM is currently discussing with
Goskomsvyaz whether an amendment to its license is necessary to add these
numbers to its license.
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Mobile Services. Our cellular companies have licenses which expire on
various dates between 2005 and 2007. One of the companies initially received an
operating license in 1994, five companies initially received an operating
license in 1995, five companies initially received an operating license in 1996
and one company initially received an operating license in 1997, and one company
has renewed its license in 1999 for an extended term of more than eight years.
Additionally, Vostok Mobile has received AMPS licenses for five cities which it
currently does not plan to exploit.
Golden Telecom GSM holds a license for provision of GSM-1800 mobile
services within the territory of Ukraine.
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MANAGEMENT
The following table sets forth the name and principal business occupation
or employment, and material occupations, positions, offices or employments for
the past five years of each of our directors and executive officers. Unless
otherwise indicated, each such person is a citizen of the United States.
MEMBERS OF THE BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME AGE PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
- ---- --- ------------------------------------------
<S> <C> <C>
Alexander M. Knaster................. 40 Chief Executive of Alfa Bank, Moscow
Stewart P. Reich..................... 54 President and Chief Executive Officer of Golden
Telecom, Inc.
Grier C. Raclin...................... 46 Senior Vice President -- External Affairs,
General Counsel and Secretary of GTS
Robert A. Schriesheim................ 39 Executive Vice President and Chief Corporate
Development Officer and Chief Financial
Officer of GTS
H. Brian Thompson.................... 60 Chairman of the Board and Chief Executive
Officer of GTS
</TABLE>
ALEXANDER M. KNASTER was elected to our Board of Directors in September
1999. Mr. Knaster has been Chief Executive of Alfa Bank, a commercial bank
headquartered in Moscow, since October 1998. Prior to joining Alfa Bank, from
1995-1998, Mr. Knaster was President and Chief Executive Officer of Credit
Suisse First Boston (Moscow) and was responsible for that investment banking
firm's operations in Russia and other countries of the Commonwealth of
Independent States. Before his tenure with Credit Suisse First Boston (Moscow),
Mr. Knaster spent ten years in the investment banking industry as director with
Deutsche Morgan Grenfell in Moscow, as managing director with Bankers Trust in
New York and London, and as managing director and partner with Simmons & Company
International in Houston.
STEWART P. REICH joined GTS as President -- GTS-CIS in September 1997. From
September 1992 to August 1997, Mr. Reich was President of Utel, a joint venture
of AT&T, Deutsche Telekom, PTT Telecom (Netherlands) and Ukrtelekom, a Ukrainian
company which provides international and domestic services in Ukraine.
GRIER C. RACLIN joined GTS as its Senior Vice President and General Counsel
in September 1997, and was elected Corporate Secretary of the Company in
December 1997. Prior to joining GTS, Mr. Raclin served as Vice-Chairman and a
Managing Partner of the Washington, D.C. office of Gardner, Carton & Douglas, a
250-attorney, corporate law firm based in Chicago, Illinois, where his practice
was concentrated in the area of international telecommunications.
ROBERT A. SCHRIESHEIM joined GTS as Executive Vice President and Chief
Corporate Development Officer in February 1999 and assumed the duties of Chief
Financial Officer of GTS in September 1999. Since 1997, he was President, Chief
Executive Officer and Director of SBC Equity Partners, Inc., a private equity
firm affiliated with Sanwa Business Credit Corporation that invests in
technology-based service and manufacturing companies. From 1996-1997, Mr.
Schriesheim was Vice President -- Corporate Business Development for Ameritech
Corp., the regional Bell operating company, and Managing Director -- Ameritech
Development Corporation. From 1993-1996, he was Vice President -- Acquisitions
and New Business Development (1993-1994) and Vice President -- Global Corporate
Development (1995-1996) of A.C. Nielsen Company, a consumer marketing research,
information and decision-support service.
H. BRIAN THOMPSON was elected Chairman of the Board and Chief Executive
Officer of GTS in March 1999. From 1991 until June 1998, Mr. Thompson was
Chairman and Chief Executive Officer of LCI International, Inc., a provider of
telecommunications services in the United States and to more than 230
international locations. In June 1998, LCI was acquired by Qwest Communications
International, Inc.
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and Mr. Thompson became Vice Chairman of Qwest. He resigned from the Board of
Directors of Qwest in December 1998. He serves as a member of the boards of
directors of Bell Canada International, Inc., PageNet do Brazil and Williams
Communications Group, Inc. Mr. Thompson also serves as Co-Chairman of the Global
Information Infrastructure Commission and as Chairman of the Advisory Committee
for Telecommunications for Ireland Department of Public Enterprise.
EXECUTIVE OFFICERS
The following are our executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stewart P. Reich........................... 54 President and Chief Executive Officer
David J. Wisher............................ 43 Chief Financial Officer
Stan M. Abbeloos........................... 46 Chief Operating Officer
Jeffrey A. Riddell......................... 38 General Counsel and Secretary
</TABLE>
STEWART P. REICH joined GTS as President -- GTS-CIS in September 1997. From
September 1992 to August 1997, Mr. Reich was President of Utel, a joint venture
of AT&T, Deutsche Telekom, PTT Telecom (Netherlands) and Ukrtelekom (a Ukrainian
company which provides international and domestic services in Ukraine).
DAVID J. WISHER joined GTS as Vice President-Finance -- GTS-CIS in January
1997. From 1992 through 1996, Mr. Wisher was the Assistant Controller for Andrew
Corporation, a telecommunications equipment manufacturer that has made extensive
investments in Russia.
STAN M. ABBELOOS joined GTS-CIS in July 1996 as Commercial Director of
Sovintel. In October 1997, he was appointed as General Director of Sovam
Teleport, and since October 1998, he has also been the Deputy General Director
of TeleRoss. From 1991 through 1996, Mr. Abbeloos worked for Alcatel as General
Director of LenBell, a joint venture between Alcatel and Krasnaya Zaria, which
produces and sells Alcatel's switching and transmission equipment in Russia. Mr.
Abbeloos is a citizen of Belgium.
JEFFREY A. RIDDELL joined GTS as Deputy Director of the Legal
Department -- GTS-CIS in July 1997 and was appointed as Legal
Director -- GTS-CIS in August 1998. Before joining GTS, Mr. Riddell worked as an
associate attorney in the Moscow office of Salans, Hertzfeld & Heilbronn, a
Paris-based law firm with a significant practice in the Commonwealth of
Independent States, from June 1996 through July 1997. Mr. Riddell worked at the
Pacific Law Center in Vladivostok and Khabarovsk from May 1994 through June
1996.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
Each non-employee member of our board of directors will receive an annual
retainer fee of $15,000. In addition, each non-employee member of the board of
directors will receive a fee of $1,000 for each board meeting attended in person
and a fee of $500 for each board meeting attended by telephone. Non-employee
members will also receive a fee of $750 for each board committee meeting
attended in person and a fee of $500 for each board committee attended by
telephone. However, board committee fees will not be paid if the meeting is held
on the same day as a board meeting.
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SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid or awarded to, or
earned by, our Chief Executive Officer and the four other most highly
compensated executive officers serving the operations of Golden Telecom, Inc. in
1998. Each bonus listed below represents a cash bonus paid in the year indicated
for services rendered in the immediately preceding year. The number of
securities underlying stock options refers to shares of GTS common stock
underlying stock options awarded, based on the fair market value of GTS common
stock on the date of grant, under the GTS stock option plan.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------------------
NUMBER OF
RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SAR COMPENSATION(1)
- ------------------ ---- -------- ------- ------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart P. Reich
President and Chief Executive
Officer of GTS-CIS........... 1998 $243,750 $98,300 $187,008(2) 0 300,000 $5,197
Stan Abbeloos
General Director of Sovam and
Deputy General Director of
TeleRoss..................... 1998 $173,837 $66,700 $ 93,600(3) 0 60,000 $ 0
Gerard Essing
President of GTS Mobile
Services(4).................. 1998 $177,500 $47,500 $150,500(5) 0 150,000 $ 0
Jean Pierre VanDromme
Chief Operating Officer of
GTS-CIS(6)................... 1998 $191,000 $84,400 $107,766(7) 0 60,000 $ 0
Kevin Koski
Deputy General Director of
Sovintel..................... 1998 $163,500 $30,900 $213,112(8) 0 48,000 $4,181
</TABLE>
- ---------------
(1) Amounts disclosed represent the sum of premiums paid by GTS for $1 million
in term life insurance for each named executive officer and contributions
by GTS under the 401(k) Plan to each named executive's account, except Mr.
VanDromme, Mr. Abbeloos and Mr. Essing who do not participate in the 401(k)
Plan because of their non-US citizenship. In each case in which GTS paid
401(k) Plan contributions, $4,000 was paid in 1998 to the named executive
officers.
(2) For 1998, the amount disclosed includes an overseas living allowance of
$72,000, rent on a residence in Moscow of $90,000, and a tax equalization
payment of $19,844 that compensated Mr. Reich for the higher taxes he pays
because he resides in Russia instead of the United States.
(3) For 1998, the amount disclosed includes an overseas living allowance of
$42,000 and rent on a residence in Moscow of $51,600.
(4) Mr. Essing commenced his employment with the Company in 1995 and left the
Company in May 1999.
(5) For 1998, the amount disclosed includes an overseas living allowance of
$56,000 and rent on a residence in Moscow of $94,500.
(6) Mr. VanDromme commenced his employment with the Company in 1995 and
transferred to another GTS company in April 1999.
(7) For 1998, the amount disclosed includes an overseas living allowance of
$42,000 and rent on a residence in Moscow of $60,000.
(8) For 1998, the amount disclosed includes an overseas living allowance of
$92,631, inclusive of $50,631 for home leave benefits, and rent on a
residence in Moscow of $118,000.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock option grants of GTS
common stock to the five most highly compensated officers in 1998 under the GTS
stock option plan. The exercise price for all of the GTS stock options awarded
approximated the fair market value of GTS common stock on the date of grant. The
options noted in the second column would vest in February 2005, when GTS's
financial results for 2004 are expected to be publicly announced. If certain
performance targets are met or exceeded, these options could be fully
exercisable in February 2002, when GTS's financial results for 2001 are expected
to be publicly announced. The present value of each grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: dividend yield 0%, expected volatility of 0.75,
risk-free interest rate of 4.37% and expected life of five years.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES TO GTS
UNDERLYING EMPLOYEES IN EXERCISE OR BASE GRANT DATE
OPTIONS GRANTED FISCAL YEAR PRICE (PER SHARE) EXPIRATION DATE PRESENT VALUE
--------------- --------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Stewart P. Reich.......... 300,000 4.0 $12.87 10/14/08 $2,476,905
Stan Abbeloos............. 60,000 0.8 $12.87 10/14/08 $ 495,381
Gerard Essing............. 150,000 2.0 $12.87 10/14/08 $1,238,453
Jean Pierre VanDromme..... 60,000 0.8 $12.87 10/14/08 $ 495,381
Kevin Koski............... 48,000 0.6 $12.87 10/14/08 $ 396,305
</TABLE>
All these options that do not vest by the end of 1999 will be surrendered
upon the consummation of this offering. Our employees who currently hold GTS
options will receive a mixture of restricted shares and options to purchase
shares of Golden Telecom as described below in "Stock-Related Compensation".
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information on the number and value of GTS
stock options exercised by the five most highly compensated officers during
1998, the number of options under the GTS Stock Option Plan held by such persons
at December 31, 1998, and the value of all unexercised options held by such
persons as of that date. The value of the options stated in the last column is
based on the closing price of $55.75 on the Nasdaq Stock Market of the GTS
shares on December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT FY-END AT FY-END
ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stewart P. Reich.......... -- -- 52,250/468,750 $1,127,250/$7,881,750
Stan Abbeloos............. -- -- 18,000/114,000 $ 373,005/$2,019,015
Gerard Essing............. -- -- 30,000/240,000 $ 609,975/$4,079,925
Jean Pierre VanDromme..... -- -- 131,060/137,440 $3,045,497/$2,567,833
Kevin Koski............... 12,250 $261,844 71,250/84,500 $1,588,086/$1,473,105
</TABLE>
Unexercised GTS options that do not vest by the end of 1999 will be
surrendered upon the consummation of the offering. Holders will receive
restricted shares and options to purchase shares of Golden Telecom as described
below in "Stock-Related Compensation".
STOCK-RELATED COMPENSATION
Before this offering, our executive officers and some of our employees
participated in GTS stock option plans, pursuant to which they were granted
options to purchase GTS common stock. At the time of the consummation of the
offering, such persons will surrender all their GTS options that do not vest by
the end of 1999, and they will receive restricted shares and options to purchase
shares of Golden Telecom. These restricted shares and the shares underlying
these options will represent 12% of our fully diluted
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share capital immediately after the consummation of this offering. These
restricted shares and options are intended as long-term compensation and to
align the interests of the grantees with our stockholders.
The restricted shares of Golden Telecom will vest on the second anniversary
of the date of the consummation of this offering. Each of the Golden Telecom
options will have an exercise price equal to the public offering price in this
offering. One-third of these options will vest on the first anniversary of the
consummation of this offering. Thereafter, the options will vest in equal
monthly installments for a period of 24 months.
GOLDEN TELECOM, INC. EQUITY PARTICIPATION PLAN
Prior to the effective date of this offering, our board of directors
intends to approve the 1999 Equity Participation Plan of Golden Telecom, Inc.,
which we also refer to as the Equity Plan. A total of shares of common
stock are reserved for issuance under the Equity Plan. The principal purposes of
the Equity Plan are to provide incentives for our officers, employees and
consultants through granting of options and restricted stock, thereby
stimulating their personal and active interest in our development and financial
success, and inducing officers and employees to remain with our company. The
Equity Plan is also intended to assist us in attracting and retaining qualified
independent directors (that is, directors who are not employed by us), by
providing for the automatic grant of options to independent directors. As of the
date of this filing, no grants have been made under the Equity Plan.
Under the Equity Plan, not more than shares of common stock
(subject to antidilution and other adjustment provisions) are authorized for
issuance upon exercise of options or upon vesting of restricted or deferred
stock awards. Of these shares, not more than are designated
for issuance solely pursuant to Incentive Stock Options, which are described
below. Furthermore, the maximum number of shares which may be subject to options
and restricted stock granted under the Equity Plan to any individual in any
calendar year cannot exceed (subject to antidilution and other
adjustment provisions).
The principal features of the Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to the Equity Plan, which is
filed as an exhibit to the registration statement.
Administration
The compensation committee of the board of directors or another committee
or subcommittee appointed under the terms of the Equity Plan (which we refer to
as the Committee) which other committee or subcommittee consists solely of two
or more members of the board of directors, each of whom is both a "non-employee
director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (which we refer to as the Exchange Act) and an "outside director" for
the purposes of Section 162(m) of the Internal Revenue Code (which we refer to
as the Code), will administer the Equity Plan with respect to grants to our
employees or consultants and the full board of directors will administer the
Equity Plan with respect to options granted to independent directors.
Notwithstanding the foregoing, the full board of directors may administer
the Equity Plan with respect to grants to our employees or consultants, except
with respect to matters which under Rule 16b-3 of the Exchange Act or Section
162(m) of the Code are required to be determined by the Committee.
Subject to the terms and conditions of the Equity Plan, the Committee has
the authority to select the employees and consultants, if any, to whom awards
are to be made, to determine the number of shares to be subject thereto and the
terms and conditions thereof, to interpret the provisions of the Equity Plan,
and to make all other determinations and to take all other actions necessary or
advisable for the administration of the Equity Plan with respect to grants or
awards made to employees or consultants. The Committee (and the board of
directors) is also authorized to adopt, amend and rescind rules relating to the
administration of the Equity Plan. Notwithstanding the foregoing, the Board
shall conduct the general administration of the Equity Plan with respect to
options granted to independent directors.
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Eligibility
Options and restricted stock under the Equity Plan may be granted to
individuals who are our employees, directors or consultants (or employees or
consultants of any of our current or future subsidiaries) selected by the
Committee for participation in the Equity Plan. In addition, the Equity Plan
provides for certain automatic grants of non-qualified stock options to
independent directors.
Independent Directors
The Equity Plan provides for automatic grants of non-qualified stock
options to independent directors. Each person who is elected to serve as an
independent director will receive, as of the date of such election, an option to
purchase 10,000 shares of common stock, and will receive, upon each re-election
as an independent director, an additional option to purchase 2,500 shares of
common stock. Each such option will have a per-share exercise price equal to the
fair market value per share on the trading day before the date of grant. Each
such option will become exercisable in accordance with the terms of the Equity
Plan. No portion of an option granted to any independent director shall be
exercisable ten years from the date of grant or, except under certain
circumstances, after the termination of the independent director's services as
our director.
Awards Under the Equity Plan
The Equity Plan provides that the Committee may grant or issue stock
options and restricted stock, or a combination thereof, to any eligible
employee, director or consultant. Each such award will be set forth in a
separate agreement with the person receiving the award and will indicate the
type, terms and conditions of the award.
Nonqualified Stock Options, which we also refer to as NQSOs, will provide
for the right to purchase common stock at a specified price which, except with
respect to NQSOs intended to qualify as performance-based compensation under
Section 162(m) of the Code, may be less than fair market value on the date of
grant, and usually will become exercisable (in the discretion of the Committee)
in one or more installments after the grant date, subject to the participant's
continued employment with us and/or subject to the satisfaction of individual
performance targets established by the Committee. NQSOs may be granted for any
term specified by the Committee. Notwithstanding the foregoing, NQSOs granted to
independent directors shall be subject to the terms described above.
Incentive Stock Options, which we also refer to as ISOs, will be designed
to comply with certain restrictions contained in the Internal Revenue Code.
Among such restrictions, ISOs: (1) must have an exercise price not less than the
fair market value of a share of common stock on the date of grant, (2) may only
be granted to employees, (3) must expire within a specified period of time
following the optionee's termination of employment, and (4) must be exercised
within ten years after the date of grant; but may be subsequently modified to
disqualify them for treatment as ISOs. In the case of an ISO granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all of our classes of stock, the Equity Plan provides that the
exercise price must be at least 110% of the fair market value of a share of
common stock on the date of grant and the ISO must expire upon the fifth
anniversary of the date of its grant.
Restricted Stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Committee. Restricted stock, typically, may be repurchased by us at the
original purchase price if the conditions or restrictions are not met. In
general, restricted stock may not be sold, or otherwise transferred, until
restrictions are removed or expire. Purchasers of restricted stock, unlike
recipients of options, will have voting rights and will receive dividends in
escrow prior to the time when the restrictions lapse.
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Securities Laws and Federal Income Taxes
Securities Laws. The Equity Plan is intended to conform to the extent
necessary with all provisions of the Securities Act and the Exchange Act and any
and all regulations and rules promulgated by the SEC thereunder, including,
without limitation, Rule 16b-3. To the extent permitted by applicable law, the
Equity Plan and options or restricted stock granted thereunder shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.
General Federal Tax Consequences. Under current federal laws, in general,
recipients of awards and grants of nonqualified stock options and restricted
stock under the Equity Plan are generally not taxable at the time of grant but
are taxable under Section 83 of the Code upon their receipt of Class A common
stock or cash with respect to the exercise or vesting of such awards or grants
and, subject to Section 162(m) of the Code, we will be entitled to an income tax
deduction with respect to the amounts taxable to these recipients. Under
Sections 421 and 422 of the Code, recipients of ISOs are generally not taxable
at the time of grant or on their receipt of Class A common stock upon their
exercises of ISOs if the ISOs and option stock are held for certain minimum
holding periods and, in such event, we are not entitled to income tax deductions
with respect to such exercises.
Section 162(m) Limitation. In general, under Section 162(m) of the Internal
Revenue Code, income tax deductions of publicly-held corporations may be limited
to the extent total compensation (including base salary, annual bonus, stock
option exercises and non-qualified benefits paid) for certain executive officers
exceeds $1 million in any one year. However, under Section 162(m), the deduction
limit does not apply to certain "performance-based compensation" established by
an independent compensation committee which is adequately disclosed to, and
approved by, stockholders. In particular, stock options will satisfy the
"performance-based compensation" exception if the awards are made by a
qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any person within a specified period and the compensation
is based solely on an increase in the stock price after the grant date (that is,
the option exercise price is equal to or greater than the fair market value of
the stock subject to the award on the grant date). Under an Internal Revenue
Code Section 162(m) transition rule for compensation plans of corporations which
are privately held and which become publicly held in an initial public offering,
the Equity Plan will not be subject to Section 162(m) until the transition date,
which is the earliest of (1) the material modification of the Equity Plan; (2)
the issuance of all common stock and other compensation that has been allocated
under the Equity Plan; or (3) the first meeting of shareholders at which
directors are to be elected that occurs after December 31, 2002. After this
transition date, rights and awards granted under the Equity Plan, other than
options will not qualify as "performance-based compensation" for purposes of
Section 162(m) unless such rights and awards are granted or vest upon
preestablished objective performance goals, the material terms of which are
disclosed to and approved by our shareholders.
We have attempted to structure the Equity Plan in such a manner that, after
the transition date discussed above, subject to obtaining shareholder approval
of the Equity Plan, the remuneration attributable to stock options which meet
the other requirements of Section 162(m) will not be subject to the $1,000,000
limitation. We have not, however, requested a ruling from the IRS or an opinion
of counsel regarding this issue.
GOLDEN TELECOM, INC. 401(K) PLAN
Our board of directors intends to approve a 401(k) retirement savings plan
(which we refer to as the 401(k) Plan), which will be a defined contribution
retirement benefit plan that we intend to have qualified for favorable tax
treatment under Section 401 of the Code. All employees of Golden Telecom, Inc.,
subject to certain regulatory qualifications, who are US citizens and at least
21 years of age and have completed the minimum service requirement will be
eligible to participate in our 401(k) Plan. The 401(k) Plan participants will be
able to defer pre-tax income by contributing to the plan up to the maximum
amount permitted by law. After-tax contributions will also permitted under the
401(k) Plan. We intend to match 50% of each participant's pre-tax contribution
to the 401(k) Plan, up to 5% of the
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participant's total compensation. In addition, we may, in our sole discretion
and in a nondiscriminatory manner, contribute additional amounts as profit
sharing to each participant's account. The amounts deposited into each
participant's account will be invested among various investment options
according to the direction of the participant. Each participant's pre-tax and
after-tax contributions will be immediately vested and nonforfeitable. Our
matching contribution and profit sharing allocations to each participant's
account will not vest until the participant has completed three years of service
either with us or with GTS before this offering, at which time the matching
contribution and profit sharing allocations become 100% vested.
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BENEFICIAL OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDER
The following table sets forth certain information regarding ownership of
our common stock and rights to acquire common stock by stockholders that manage
or own, either beneficially or of record, five percent or more of our common
stock, by each of our directors and executive officers, and all our directors
and executive officers as a group. For the purpose of this table, a person or a
group of persons is deemed to have "beneficial ownership" of any shares as of a
date when such person or group has the right to acquire such shares within 60
days after such date, but such shares are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Percentages
of shares owned are based on 10,600,000 shares of common stock outstanding
immediately before the offering, and shares of common stock
outstanding immediately after the offering.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK TO BE BENEFICIALLY OWNED
BENEFICIALLY OWNED IMMEDIATELY AFTER THE
IMMEDIATELY BEFORE THE COMPLETION OF THIS
COMPLETION OF THIS OFFERING OFFERING
--------------------------- ------------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES PERCENTAGE
- ------------------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Global TeleSystems Group, Inc. .................. 10,600,000 100
European Bank for Reconstruction and
Development.................................... -- 0
Alexander M. Knaster............................. -- 0
Stewart P. Reich................................. -- 0
Grier C. Raclin.................................. -- 0
Robert A. Schriesheim............................ -- 0
H. Brian Thompson................................ -- 0
David J. Wisher.................................. -- 0
Stan M. Abbeloos................................. -- 0
Jeffrey A. Riddell............................... -- 0
All directors and executive officers as a group
(8 persons).................................... -- 0
</TABLE>
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RELATIONSHIP WITH GTS AND CERTAIN RELATED PARTY TRANSACTIONS
GENERAL
Upon completion of the offering, GTS will own shares of our
outstanding common stock, which will represent approximately % of the combined
voting power of all of our outstanding common stock, or approximately % if the
underwriters' over-allotment option is exercised in full. As long as GTS
continues to own more than 50% of our common stock, it will be able to determine
any corporate action requiring approval of our stockholders, including the
election of the entire board of directors, amendments to our certificate of
incorporation and by-laws and approval of certain mergers and other control
transactions, without the consent of our other shareholders. See "Description of
Capital Stock".
In addition, through its ownership of our common stock and its control of
our board of directors, GTS will be able to control certain decisions, including
decisions with respect to our dividend policy, our access to capital, mergers or
other business combinations, the acquisition or disposition of our assets and
any change in our control. Subject to applicable securities and other laws, GTS
may sell or distribute its shares, other than as restricted by the underwriting
agreement relating to this offering, in which GTS has agreed that it will not
offer, sell, contract to sell, announce an intention to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any of our common
stock without the prior written consent of Deutsche Bank AG London, which
consent may not be unreasonably withheld, for a period of 360 days after the
date of this prospectus. We, our directors and our officers have entered into
similar agreements for a period for 180 days after the date of this prospectus.
See "Underwriting."
Our relationship with GTS will be governed by agreements that we intend to
enter in connection with this offering. The principal terms of these agreements
are summarized below. The descriptions set forth below are summaries and are
qualified in their entirety by reference to the relevant agreement. Complete
copies of these agreements are filed as exhibits to the registration statement
of which this prospectus is a part.
Immediately before this offering, GTS will transfer to us all the
properties that currently constitute our business, including the shares of our
operating and holding companies that are currently owned, directly or
indirectly, by GTS. Except as discussed in this prospectus, because all our
agreements with third parties are made through these operating and holding
companies, GTS will not transfer to us any additional rights or obligations that
are made through companies that will be retained by GTS.
ADMINISTRATIVE SERVICES AGREEMENT
We intend to enter into an administrative services agreement with GTS.
Pursuant to this agreement, GTS will provide us with certain accounting, tax and
financial management and budgeting services, legal and regulatory services and
human resources services. Under the terms of the administrative services
agreement, GTS will provide these administrative services subject to the
oversight, supervision and approval of our executive officers. We will pay GTS a
fixed monthly fee each month for these services, which is intended to be
comparable to the fees that we would pay if an independent third party provided
the services.
The administrative services agreement will become effective upon the
consummation of this offering, and may be terminated by either party upon at
least 90 days' written notice and, in the case of a termination by us, with the
consent of GTS, which consent may not be unreasonably withheld. In addition, the
administrative services agreement will be terminated if we experience a change
of control. A change of control shall be deemed to have occurred if:
- a majority of the seats on our board of directors shall be occupied by
persons who are neither nominated by GTS or by its board of directors,
nor appointed by our directors nominated by GTS; or
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- any person or group other than GTS or the companies controlled by GTS
shall directly or indirectly have the power to exercise control over 50%
of the voting securities of Golden Telecom.
EMPLOYEE BENEFITS AGREEMENT
We intend to enter into an employee benefits agreement with GTS. Pursuant
to this agreement, our employees will participate in the employee benefit plans
(including all retirement plans and welfare benefit plans) which, immediately
prior to the consummation of this offering, covered these employees. We will pay
GTS a management fee equal to 25% of the aggregate amount of all employees' base
salaries, as in effect from time to time.
INDEMNIFICATION AGREEMENT
We intend to enter into an indemnification agreement with GTS. This
agreement will provide for a full and complete release and discharge between GTS
and us as of the closing date of all liabilities existing or arising on or
before the closing date, except as expressly set forth in the indemnification
agreement. Except as set forth in the indemnification agreement, GTS will agree
to indemnify and hold harmless us and each of our directors, officers, employees
and agents against all liabilities relating to, arising out of or resulting from
any material breach by GTS under any of the separation agreements.
Except as set forth in the indemnification agreement, we will agree to
indemnify and hold harmless each of GTS and its directors, officers, employees
and agents from and against all liabilities relating to, arising out of or
resulting from:
- our failure to pay, perform or otherwise promptly discharge any of our
liabilities arising out of our business, operations or assets on or after
the closing date, whether or not expressly assumed by us;
- any liabilities attributable to Golden Telecom in connection with any
United States federal or state tax audit of GTS;
- any material breach by us of any of the separation agreements; and
- any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be
stated in this prospectus or necessary to make the statements in this
prospectus not misleading, with respect to all information contained in
this prospectus or the registration statement, as amended or
supplemented, of which it forms a part.
The indemnification agreement will also provide that we will indemnify and
hold harmless GTS for any liabilities incurred by GTS under any of its
guarantees of our obligations or liabilities and that we will pay GTS for its
direct costs, if any, of maintaining such guarantees.
Neither we nor GTS intends to make any representation or warranty to one
another or to any other person or party as to:
- the assets, businesses or liabilities transferred or assumed as part of
the separation,
- any consent or liability transferred or assumed as part of the separation
of us and GTS,
- any consent or approval required in connection therewith,
- the value or freedom from any security interests of any of the assets
transferred,
- the absence of any defense or freedom from counterclaim with respect to
any claim or any part thereof, or
- the legal sufficiency of any assignment, document or instrument delivered
to convey title to any asset transferred.
Except as expressly set forth in any separation agreements, all assets are
being transferred to us on an "as is, where is" basis, and we and GTS have
agreed to bear the economic and legal risks that the
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conveyance is insufficient to vest in the transferee good and marketable title,
free and clear of any encumbrances.
REGISTRATION RIGHTS AGREEMENT
We intend to enter into a registration rights agreement with GTS. This
agreement will provide that, on up to three occasions, following the 360-day
lock-up on sales of our shares of common stock held by GTS and on GTS's written
request, we will use our reasonable best efforts to register under the
applicable federal and state securities laws the resale of any of GTS's shares
of our common stock. GTS will also have the right, following the 360-day lock-up
on sales of our shares of common stock held by GTS, to include its shares of our
common stock in future registrations initiated by us on our own behalf or on
behalf of other shareholders. This right is subject to certain limitations as to
whether and to what extent GTS may request registration. GTS will pay the
out-of-pocket costs for registrations which it initiates. We have agreed to pay
all of our out-of-pocket costs and expenses, other than underwriting discounts
and commissions pertaining to shares resold by GTS, in connection with
registrations in which GTS participates but does not initiate. In addition to
the above rights, when GTS owns less than 25% of our outstanding shares of
capital stock, it may request that we register such remaining shares in a shelf
registration statement, at GTS's expense. Subject to certain limitations, such
registration rights may be assigned by GTS. The registration rights agreement
contains customary indemnification and contribution provisions between us and
GTS.
SHAREHOLDERS' AGREEMENT
We intend to enter into a shareholders' agreement with GTS. This agreement
will provide GTS with pre-emptive rights for any subsequent equity that we
issue. Specifically, among other things, we will grant to GTS the right to
purchase any new equity securities that we issue so that GTS can maintain its
percentage ownership in our company immediately prior to the issuance of such
new equity securities. These pre-emptive rights will terminate when GTS owns
less than 25% of our shares of common stock.
The shareholders' agreement will also provide for certain corporate
governance matters. The shareholders' agreement will provide that certain
"interested transactions" between us or our affiliates, on the one hand, and GTS
or its affiliates, on the other hand, will require the approval of a majority of
these independent directors, unless the transaction has been described in a
business plan or a budget that had already been separately approved by our
independent directors.
TRADEMARK TRANSFER AGREEMENT
We intend to enter into a trademark transfer agreement with GTS, pursuant
to which GTS will transfer all rights and interests in all trademarks used by
Golden Telecom, including, without limitation, Sovintel, Sovam Teleport,
TeleRoss, TCM, Russia-On-Line, Golden Telecom, GlasNet and PrimTelefone. If
GTS's ownership of our company falls below 50% or a majority of our Board of
Directors is not appointed by GTS, then GTS will have the right to require us to
cease using certain other trademarks and service marks.
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DESCRIPTION OF CERTAIN FINANCING ARRANGEMENTS AND INDEBTEDNESS
In connection with the purchase of equipment and services for certain
Vostok Mobile ventures in Russia, those ventures entered into a credit agreement
with The Chase Manhattan Bank, New York, providing for up to $30.7 million of
financing. The facility is guaranteed by the vendor of such equipment and
services, and is insured against certain political risks by the Overseas Private
Investment Corporation. To the extent that the guarantor is required to make any
payments pursuant to such guarantee, GTS is required to reimburse 50% of such
payments. The loans under the facility bear interest at LIBOR plus 35 basis
points, with principal and interest payments due semiannually in June and
December of each year through December 15, 2002. At June 30, 1999, $14.4 million
in loans were outstanding under the facility. Because of the financial condition
of certain Vostok Mobile ventures, GTS has made some of the principal and
interest payments on behalf of the ventures.
In early September 1999, we and GTS reached an agreement in principle with
the vendor which has guaranteed the obligations under this facility. GTS agreed
in principle with the vendor that, contingent upon the consummation of this
offering, GTS and the vendor will each pay, at the completion of the offering
and on behalf of the ventures that are borrowers under the facility, one-half of
the amount due under the facility, or a total of approximately $14.4 million. In
addition, GTS will pay to the vendor $2.5 million in cash, on behalf of the
borrowers, in settlement of certain accounts payable. In consideration of such
payments, the agreement in principle also provides for the following, all of
which will also occur upon consummation of this offering.
- We will issue a promissory note to the vendor for $4.75 million, which
will bear interest at 14% per annum. The note will be subordinated to
accounts payable and senior loans and have a maturity of seven years.
However, we will not be required to make any payments under the note for
the two-year period ending on the second anniversary of its issuance. At
its election, during the one-year period ending on the first anniversary
of the note's issuance, the vendor will have the option of selling the
note to GTS at 60% of its face value, or $2.85 million.
- We will issue two promissory notes to GTS for $4.75 million and $1.5
million. These notes will have the same ranking, maturity, interest rate
and payment terms as the $4.75 million promissory note that we will issue
to the vendor, as described above.
- We will issue warrants to the vendor to purchase that number of shares of
our common stock equal to (A) $1.5 million divided by (B) the per share
price of shares sold in this offering minus the exercise price of the
warrants, which will be $0.10 per share. The warrants will be exercisable
for five years, but will not be exercisable during the two-year period
ending on the second anniversary of the issuance of the warrants. During
this two-year period, we will be required to transfer one-half of the
warrants to GTS if GTS or its subsidiaries place orders in Western and
Central Europe with the vendor in an amount equal to or exceeding $50
million, as invoiced by the vendor. If GTS or its subsidiaries place such
orders in an amount equal to or exceeding $75 million, we will be
required to transfer all of the warrants to GTS.
The entire agreement is contingent upon this offering (1) raising at least $70
million in net proceeds from all investors at a price per share of not less than
$10 and (2) closing by November 15, 1999.
In November 1996, Golden Telecom (Ukraine) entered into an agreement with
Siemens GmbH, whereby Golden Telecom (Ukraine) could purchase up to 8.6 million
Deutsche Marks (DM) of certain equipment from Siemens. The terms allowed Golden
Telecom (Ukraine) to finance up to 70% of this amount. Golden Telecom (Ukraine)
is required to make semiannual principal payments plus accrued interest for
three years beginning six months after completion of installation of such
equipment. The agreement carries interest at a rate equal to the DM LIBOR rate
plus 4.5% per annum. At June 30, 1999, approximately $2.6 million, including
accrued interest, was outstanding under this facility.
In June 1996, Golden Telecom (Ukraine) entered into an agreement with
Motorola Corporation, whereby Golden Telecom (Ukraine) could purchase up to
$20.0 million of certain equipment from Motorola. Golden Telecom (Ukraine) is
required to make semiannual payments plus accrued interest
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beginning six months after completion of the installation of such equipment. The
agreement carries interest at a rate equal to the LIBOR rate plus 3.0% per
annum. At June 30, 1999, approximately $9.2 million, including accrued interest,
was outstanding under this agreement.
In August 1998, one of the Vostok Mobile ventures entered into an
installment purchase agreement with Ericsson Radio Systems AB. Under the
agreement, the venture is required to make quarterly payments of interest and
principal. The agreement carries an implicit interest rate equal to
approximately 10.2% per annum. At June 30, 1999, approximately $1.9 million was
outstanding under this agreement.
GTS has guaranteed the payments under the Motorola and Ericsson agreements.
To the extent that GTS makes any payments under such guarantees, we will be
required to indemnify GTS for such payments.
In September 1997, our finance subsidiary entered into a $30.0 million
credit facility with Citibank. Drawings outstanding under this agreement by our
consolidated ventures totaled $0.2 million, $12.7 million and $9.4 million at
December 31, 1997, 1998 and June 30, 1999, respectively. Total borrowings
outstanding by all entities under the Citibank credit facility totaled $4.7
million, $27.4 million and $24.5 million at December 31, 1997 and 1998, and June
30, 1999, respectively. All amounts outstanding under this facility are due
September 30, 2000 and are fully collateralized by restricted cash. The loan
carries interest at a rate equal to the three-month LIBOR plus 5.0% per annum
(equivalent to 10.08% at December 31, 1998).
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share, of which shares will be issued and
outstanding immediately after this offering. We have also agreed to issue up to
an additional 697,500 shares if the underwriters exercise their over-allotment
option.
The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares we issue does not purport to be
complete and is subject to the detailed provisions of, and qualified in its
entirety by reference to, our Certificate of Incorporation and By-laws, and to
the applicable provisions of the General Corporation Law of the State of
Delaware, which we refer to as the DGCL.
OUR COMMON STOCK
You are entitled to one vote for one share held of record on all matters
upon which shareholders have the right to vote. There are no cumulative voting
rights. All issued and outstanding shares of common stock are, and the offered
shares, when issued and paid for, will be, validly issued, fully paid and non-
assessable. You are entitled to such dividends as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
Upon dissolution, you are entitled to share pro rata in our assets remaining
after payment in full of all of our liabilities and obligations, including
payment of the liquidation preference, if any, of any preferred stock then
outstanding.
SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation). A corporation may indemnify such person if he is or was a
director, officer, employee or agent of the corporation. A corporation may also
indemnify such person if he is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. Such person may recover the following
from the corporation:
- expenses, including attorneys' fees;
- judgments;
- fines; and
- amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor. Such person
may recover expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. However, no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not
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eliminate or limit the liability of a director (1) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (2) for acts
or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or (4)
for any transaction from which the director derived an improper personal
benefit.
Our Certificate of Incorporation provides that our directors shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that such exculpation from liabilities is
not permitted with respect to liability arising from items described in clauses
(1) through (4) in the preceding paragraph. The Certificate and our By-laws
further provide that we shall indemnify our directors and officers to the
fullest extent permitted by the DGCL.
Our directors and officers are covered under directors' and officers'
liability insurance policies that we maintain.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the offering, there will be shares of
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option. Of the outstanding shares, the shares registered
in the offering will be freely tradable without restriction under the Securities
Act, except that any shares purchased in the offering by our "affiliates" may
generally only be resold in compliance with applicable provisions of Rule 144.
We, our directors and our officers have agreed not to offer, sell, contract
to sell, announce our intention to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
into or exchangeable or exercisable for any of our common stock without the
prior written consent of Deutsche Bank AG London, which consent may not be
unreasonably withheld, for a period of 180 days after the date of this
prospectus. GTS has entered into a similar arrangement for a period of 360 days
after the date of this prospectus.
Before the offering, there has been no established market for the common
stock and no predictions can be made about the effect, if any, that future sales
of common stock or the availability of the common stock for sale would have on
the market price prevailing from time to time. Sales of substantial amounts of
common stock in the public market, or the perception that such sales could
occur, may have an adverse impact on the market price for the common stock.
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-US HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of the United States federal income
and estate tax consequences of the ownership and disposition of common stock
that may be relevant to you if you are a "non-US Holder". For purposes of this
summary, a non-US Holder is a beneficial owner of common stock that is, for
United States federal income tax purposes, (1) a nonresident alien individual,
(2) a foreign corporation, (3) a nonresident alien fiduciary of a foreign estate
or trust, or (4) a foreign partnership one or more of the members of which is,
for United States federal income tax purposes, a nonresident alien individual, a
foreign corporation or a nonresident alien fiduciary of a foreign estate or
trust.
This discussion does not address all aspects of United States federal
income and estate taxation that may be relevant to you in light of your
particular circumstances, and does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code (the "Code"), Treasury regulations and administrative and
judicial interpretations as of the date hereof. All of these are subject to
change, possibly with retroactive effect, or different interpretations. If you
are considering buying common stock you should consult your own tax advisor
about current and possible future tax consequences of holding and disposing of
common stock in your particular situation.
DISTRIBUTIONS
At present, we do not anticipate paying dividends in the foreseeable
future. If we do pay distributions on the shares of our common stock, these
distributions generally will constitute dividends for United States federal
income tax purposes to the extent paid from our current or accumulated earnings
and profits, as determined under United States federal income tax principles,
and then will constitute a return of capital that is applied against your basis
in the common stock to the extent these distributions exceed such earnings and
profits. Unless we meet the 80% foreign business requirements set forth in
861(c) of the Code (and thus qualify as an "80/20 company"), dividends that we
pay to a non-US holder that are not effectively connected with a US trade or
business of the non-US holder will be subject to United States withholding tax
at a 30% rate or, if a tax treaty applies, a lower rate specified by the treaty.
To receive a reduced treaty rate, a non-US holder must furnish to us or our
paying agent a duly completed Internal Revenue Service ("IRS") Form 1001 or IRS
Form W-8BEN (or substitute form) certifying as to its qualification for such
rate.
We will be an 80/20 company if at least 80% of the income we earn during
the applicable testing period qualifies as "active foreign business income"
(either directly or through our subsidiaries). If we are an 80/20 company for
any period, the proportion of our dividends paid during such period equal to our
total gross income from foreign sources over our total income from US sources
will be exempt from US withholding tax. Because our operations are outside the
US, we may in the future qualify as an 80/20 company. However, because our
operations and business plans may change in the future, no assurance can be
given in this regard.
Currently, subject to the discussion regarding 80/20 companies, withholding
generally is imposed on the gross amount of a distribution, regardless of
whether we have sufficient earnings and profits to cause the distribution to be
a dividend for United States federal income tax purposes. However, withholding
on distributions made after December 31, 2000 may be imposed on a less than the
gross amount of the distribution if the distribution exceeds a reasonable
estimate made by us of our accumulated and current earnings and profits.
Dividends that are effectively connected with the conduct of a trade or
business within the US and, if a tax treaty applies, are attributable to a US
permanent establishment of the non-US holder, are exempt from United States
federal withholding tax, provided that the non-US holder furnishes to us or our
paying agent a duly completed IRS Form 4224 or IRS Form W-8ECI (or substitute
form) certifying the exemption. However, dividends exempt from US withholding
because they are effectively connected or
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because they are attributable to a US permanent establishment are subject to
United States federal income tax on a net income basis at the regular graduated
United States federal income tax rates applicable to US persons. Any such
effectively connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or a lower rate specified by an applicable income tax treaty.
Under current US Treasury regulations, dividends paid before January 1,
2001 to an address outside the United States are presumed to be paid to a
resident of the country of address for purposes of the withholding discussed
above and for purposes of determining and applicability of a tax treaty rate.
However, US Treasury regulations applicable to dividends paid after December 31,
2000 eliminate this presumption, subject to certain transition rules.
For dividends paid after December 31, 2000, a non-US holder generally will
be subject to US backup withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or a reduced rate
under an income tax treaty or if we are an 80/20 company, as described above,
unless the non-US holder complies with certain IRS certification procedures or,
in the case of payments made outside the US with respect to an offshore account,
certain IRS documentary evidence procedures. Further, to claim the benefit of a
reduced rate of withholding under a tax treaty for dividends paid after December
31, 2000, a non-US holder must comply with certain modified IRS certification
requirements. Special rules also apply to dividend payments made after December
31, 1999 to foreign intermediaries, US or foreign wholly owned entities that are
disregarded for United States federal income tax purposes and entities that are
treated as fiscally transparent in the US, the applicable income tax treaty
jurisdiction, or both. You should consult your own tax advisor concerning the
effect, if any, of the rules affecting post-December 31, 1999 dividends on your
possible investment in common stock.
A non-US holder may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund along with the required information with
the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-US holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of our
common stock unless one of the following apply:
- If the gain is effectively connected with a trade or business of the
non-US holder in the United States and, if a tax treaty applies, the gain
is attributable to a US permanent establishment maintained by the non-US
holder. The non-US holder will, unless an applicable treaty provides
otherwise, be taxed on its net gain derived from the sale under regular
graduated United States federal income tax rates. If the non-US holder is
a foreign corporation, it may be subject to an additional branch profits
tax equal to 30% of its effectively connected earnings and profits within
the meaning of the Internal Revenue Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty and duly demonstrates such qualification.
- If a non-US holder who is an individual and holds our common stock as a
capital asset is present in the United States for 183 or more days in the
taxable year of the disposition and certain other conditions are met, the
non-US holder will be subject to a flat 30% tax on the gain derived from
the sale, which may be offset by certain US capital losses.
FEDERAL ESTATE TAX
Common stock held by an individual non-US holder at the time of death will
be included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under US Treasury regulations, we must report annually to the IRS and to
each non-US holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected dividends or withholding was reduced or eliminated by
an applicable income tax treaty. Pursuant to an applicable tax treaty, that
information may also be made available to the tax authorities in the country in
which the non-US holder resides.
United States Federal backup withholding generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain required information. Backup withholding generally will not apply to
dividends paid before January 1, 2001 to non-US holders. See the discussion
under "Distributions" above for rules regarding reporting requirements to avoid
backup withholding on dividends paid after December 31, 1999.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of our common stock effected outside the United States.
However, information reporting requirements, but not backup withholding, will
apply to a payment by or through a foreign office of a broker of the proceeds of
a sale of our common stock effected outside the United States if that broker:
- is a United States person;
- is a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States;
- is a "controlled foreign corporation" as defined in the Code; or
- is a foreign partnership with certain US connections (for payments made
after December 31, 1999).
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-US
holder and certain conditions are met or the holder otherwise establishes an
exemption.
Payment by or through a US office of a broker of the proceeds of a sale of
our common stock is subject to both backup withholding and information reporting
unless the holder certifies to the payor in the manner required as to its non-US
status under penalties of perjury or otherwise establishes an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate United States federal income tax. Rather, any amounts withheld under
the backup withholding rules will be refunded or allowed as a credit against the
holder's United States federal income tax liability, if any, provided the
required information or appropriate claim for refund is filed with the IRS.
The foregoing discussion is a summary of certain United States federal
income and estate tax consequences of the ownership, sale or other disposition
of our common stock by non-US holders. You are urged to consult your own tax
advisor with respect to the particular tax consequences to you of ownership and
disposition of our common stock, including the effect of any state, local,
foreign or other tax laws.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Deutsche Bank AG
London, Bear, Stearns & Co. Inc. and ING Barings Ltd., have severally agreed to
purchase from us the following respective number of shares of common stock at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Deutsche Bank AG London*+...................................
Bear, Stearns & Co. Inc.*+..................................
ING Barings Ltd.*+..........................................
--------
Total............................................. 4,650,000
========
</TABLE>
- ---------------
* These underwriters or their affiliates intend to sell shares in the United
States.
+ These underwriters or their affiliates intend to sell shares outside the
United States.
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent and that the
underwriters will purchase all shares of the common stock offered hereby if any
of such shares are purchased.
We have been advised by Deutsche Bank AG London that the underwriters
propose to offer the shares of common stock directly to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The underwriters may allow and such dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the initial public
offering of the shares, the offering price and other selling terms may be
changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 697,500 additional
shares of common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise such option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number set forth next to such
underwriter's name in the above table bears to the total number of shares of
common stock offered hereby. The underwriters may exercise such option only to
cover over-allotments made in connection with the sale of common stock offered
by this prospectus. If purchased, the underwriters will offer such additional
shares on the same terms as those on which the 4,650,000 shares are being
offered.
The following table summarizes the compensation to be paid to the
underwriters by us.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us....... $ $ $
</TABLE>
Pursuant to the underwriting agreement each of the underwriters represents
to us, and agrees with us that:
(1) it has not offered or sold prior to the date six months after the date
of issue any of our common stock to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances
which have not resulted or do not result in an offer to the public in
the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995:
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(2) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to our common stock in, from or otherwise involving the United
Kingdom; and
(3) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue
of our common stock to a person who is of a kind described in Article
II(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
We and GTS have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect thereof.
GTS has agreed that it will not offer, sell, contract to sell, announce its
intention to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock without the prior written consent of
Deutsche Bank AG London, which consent may not be unreasonably withheld, for a
period of 360 days after the date of this prospectus. We, our directors and our
officers have entered into similar agreements for a period of 180 days after the
date of this prospectus.
Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "GLDN".
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock was
determined by negotiation between us and the representative of the underwriters.
Among the factors that were considered in such negotiations were:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, the industry in which we compete;
- an assessment of our management;
- the prospects for, and the timing of, our future earnings;
- the present state of our development and our current financial condition;
- the political, economic and financial conditions of Russia and Ukraine;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly traded common
stock of companies in businesses similar to us;
- market conditions for initial public offerings; and
- other relevant factors.
Investment affiliates or designees of Soros Fund Management, and a major
international financial institution have indicated their interest to us for the
purchase of up to an aggregate of $25 million of shares registered under the
registration statement of which this prospectus is a part at the initial public
offering price, net of underwriting discounts. An investment affiliate of ING
Barings, one of the underwriters of this offering, has also indicated its
interest to us for the purchase of up to $5 million of shares pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended. We expect that these strategic investors will enter into agreements not
offer, sell, contract to sell, announce its intention to sell, pledge or
otherwise dispose of, directly or indirectly, any of the shares so purchased by
them for a period of at least 180 days following the completion of this
offering. The sale of these shares will not be subject to the underwriting
agreement between us and the underwriters.
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Although no underwriting discounts will apply to the sale of these shares, we
will pay a fee of $ to an affiliate of one of the underwriters if these
shares are sold.
The underwriters have reserved for sale up to 150,000 shares of the common
stock for employees, directors and certain other persons associated with us or
our affiliates who have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same terms as other shares.
An affiliate of ING Barings, one of the underwriters in this offering and a
12.25% indirect shareholder of Golden Telecom (Ukraine), intends to contribute
its indirect interest in Golden Telecom (Ukraine) to a wholly owned subsidiary
of Golden Telecom, Inc. upon the consummation of this offering in exchange for
approximately 420,000 newly issued shares of Golden Telecom sold pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended. ING Barings' subscription through its affiliate as a strategic investor
is conditioned upon the completion of this exchange.
We have been advised by the representatives of the underwriters that during
and after this offering, the underwriters may purchase and sell common stock in
the open market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the common stock: and syndicate short positions involve the sale by the
underwriters of a greater number of shares of common stock than they are
required to purchase from us in this offering. The underwriters also may impose
penalty bids, whereby selling concessions allowed to the syndicate members or
other broker-dealers in respect of the common stock sold in this offering for
their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
the common stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.
The representatives of the underwriters have informed us that the
underwriters do not expect to make sales to accounts over which they exercise
discretionary authority in excess of 5.0%.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
From time to time, Deutsche Bank AG London, Bear, Stearns & Co. Inc., ING
Barings or their affiliates have engaged in certain investment banking services
with our affiliates, and may in the future engage in certain investment banking
services with us and our affiliates, for which they have received or will
receive compensation.
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LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Golden Telecom, Inc. by Shearman & Sterling, New York, New York and for the
underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission (SEC). This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. You may review a copy of the
registration statement, including exhibits, at the SEC's public reference room
at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 or Seven World
Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms.
As a result of the offering of shares in the United States, we will become
subject to the reporting requirement of the Securities Exchange Act of 1934, and
therefore, we will also file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information on file at the public reference rooms.
You can also request copies of these documents, for a copying fee, by writing to
the SEC.
Our SEC filings and the registration statement can also be reviewed by
accessing the SEC's Internet site at http://www.sec.gov, which contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
We have applied to list our shares on the Nasdaq National Market. If our
application is accepted and the shares are listed on the Nasdaq National Market,
then you will also be able to review reports and other information concerning
our company at the offices of the Nasdaq Stock Market.
EXPERTS
The consolidated financial statements of Golden Telecom, Inc. as of
December 31, 1997 and 1998, and for each of the three years in the period ended
December 31, 1998 appearing in this prospectus and registration statement, have
been audited by Ernst & Young (CIS) Limited, independent auditors, as set forth
in their report appearing elsewhere in this prospectus and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of EDN Sovintel LLC as of December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement, have been audited by
Ernst & Young (CIS) Limited, independent auditors, as set forth in their report
appearing elsewhere in this prospectus and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of GTS-Vox Limited as of December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement, have been audited by
Ernst & Young (CIS) Limited, independent auditors, as set forth in their report
appearing elsewhere in this prospectus and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral forward-looking statements,
including in this prospectus, in other filings with the Securities and Exchange
Commission, in reports to shareholders and in other communications. These
statements relate to analyses and other information which are based on forecasts
of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies. Examples of such forward-looking statements include, but are not
limited to:
- statements regarding our results of operations and financial condition;
- statements of our plans, objectives or goals, including those related to
products or services;
- statements regarding our investment program;
- statements regarding our services and anticipated customer demand for
these services;
- statements of future economic performance; and
- statements of assumptions underlying such statements.
Words such as "believe", "anticipate", "expect", "intend", "seek", "will",
"plan", "could", "may", "project" and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements.
By their very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, and there are risks that the
predictions, forecasts, projections and other forward-looking statements will
not be achieved. Our risks are more specifically described in the "Risk Factors"
section. If one or more of these materialize, or should underlying assumptions
prove incorrect, actual results may be very different from those anticipated in
this prospectus. You should understand that a number of important factors could
cause actual results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements. These factors include:
- political, economic and legal changes in the markets where we operate;
- the effect of, and changes in, regulation and government policy;
- the effects of competition;
- our need for additional financing;
- possible failure to complete acquisitions and integrate acquired
businesses; and
- our success at managing the risks of the foregoing.
The foregoing list of important factors is not exhaustive; when relying on
forward-looking statements to make investment decisions you should carefully
consider the foregoing factors and other uncertainties and events. Such
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update or revise any of them, whether as a
result of new information, future events or otherwise.
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INDEX TO FINANCIAL STATEMENTS
GOLDEN TELECOM, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1998................................ F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998................................ F-5
Consolidated Statements of Shareholder's Equity for the
three years ended December 31, 1998.................... F-6
Notes to Consolidated Financial Statements................ F-7
SECOND QUARTER FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31,
1998 and June 30, 1999................................. F-25
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and June 30,
1999................................................... F-26
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1998 and June 30,
1999................................................... F-27
Notes to Condensed Consolidated Financial Statements...... F-28
EDN SOVINTEL LLC
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-36
Balance Sheets as of December 31, 1997 and 1998........... F-37
Statements of Income and Retained Earnings for the three
years ended December 31, 1998.......................... F-38
Statements of Cash Flows for the three years ended
December 31, 1998...................................... F-39
Notes to Financial Statements............................. F-40
SECOND QUARTER FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1998 and June
30, 1999............................................... F-50
Condensed Statements of Income for the three and six
months ended June 30, 1998 and June 30, 1999........... F-51
Condensed Statements of Cash Flows for the three and six
months ended June 30, 1998 and June 30, 1999........... F-52
Notes to Condensed Financial Statements................... F-53
GTS-VOX LIMITED
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-56
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-57
Consolidated Statements of Income and Retained Earnings
for the three years ended December 31, 1998............ F-58
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998................................ F-59
Notes to Consolidated Financial Statements................ F-60
SECOND QUARTER FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31,
1998 and June 30, 1999................................. F-70
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and June 30,
1999................................................... F-71
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1998 and June 30,
1999................................................... F-72
Notes to Condensed Consolidated Financial Statements...... F-73
</TABLE>
F-1
<PAGE> 108
REPORT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
The Board of Directors
Golden Telecom, Inc.
We have audited the accompanying consolidated balance sheets of Golden
Telecom, Inc. as of December 31, 1997 and 1998, and the related consolidated
statements of operations, cash flows, and shareholder's equity for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 16(b). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial position of Golden Telecom,
Inc. at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG (CIS) LIMITED
Moscow, Russia
June 18, 1999, except for Note 14, as to which the date is September 10, 1999
and Note 1, as to which the date is September , 1999
The foregoing report is in the form that will be signed upon the completion
of the reorganization described in Note 1 to the consolidated financial
statements.
/s/ ERNST & YOUNG (CIS) LIMITED
Moscow, Russia
September 28, 1999
F-2
<PAGE> 109
GOLDEN TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 3,934 $ 14,164
Accounts receivable, net.................................. 8,332 13,404
Restricted cash........................................... 1,435 --
Prepaid expenses.......................................... 2,620 4,643
Other assets.............................................. 4,522 5,289
-------- --------
Total Current Assets.............................. 20,843 37,500
Property and equipment, net................................. 16,812 52,186
Investments in and advances to ventures..................... 74,332 46,519
Goodwill and intangible assets, net of accumulated
amortization of $3,940 and $23,510 at December 31, 1997
and 1998, respectively.................................... 10,649 71,924
Restricted cash and other non-current assets................ 6,984 27,720
-------- --------
Total Assets...................................... $129,620 $235,849
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 6,210 $ 25,770
Debt maturing within one year............................. 1,475 3,018
Other current liabilities................................. 1,724 5,674
-------- --------
Total Current Liabilities......................... 9,409 34,462
Long-term debt, less current portion........................ 150 21,441
Taxes and other non-current liabilities..................... 4,493 3,170
-------- --------
Total Liabilities................................. 14,052 59,073
Commitments and Contingencies
Minority interest........................................... -- 7,993
Shareholder's Equity
Common stock, $0.01 par value (50,000,000 shares
authorized;
10,600,000 shares issued and outstanding at December
31, 1997 and 1998 respectively)........................ 106 106
Additional paid-in capital................................ 154,916 241,775
Accumulated deficit....................................... (39,454) (73,098)
-------- --------
Total Shareholder's Equity........................ 115,568 168,783
-------- --------
Total Liabilities and Shareholder's Equity........ $129,620 $235,849
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 110
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Revenues:
Telecommunication services................................ $ 9,853 $21,727 $ 77,131
Equipment sales........................................... 3,287 5,471 8,955
-------- ------- --------
13,140 27,198 86,086
Operating Costs and Expenses:
Costs of revenues:
Telecommunications services............................ 7,026 15,158 37,779
Equipment sales........................................ 3,057 5,262 5,795
Selling, general and administrative....................... 17,686 21,249 45,327
Depreciation and amortization............................. 2,753 4,363 16,709
Equity in (earnings) of ventures.......................... (3,783) (12,428) (2,559)
-------- ------- --------
Loss from operations........................................ (13,599) (6,406) (16,965)
Other Income/(Expense):
Interest income........................................... 260 146 1,649
Interest expense.......................................... (1,400) (577) (4,652)
Foreign currency losses................................... (446) (399) (7,452)
-------- ------- --------
(1,586) (830) (10,455)
-------- ------- --------
Net loss before income taxes and minority interest.......... (15,185) (7,236) (27,420)
Income taxes................................................ 286 647 5,184
-------- ------- --------
Net loss before minority interest........................... (15,471) (7,883) (32,604)
Minority interest........................................... -- -- (1,040)
-------- ------- --------
Net loss.................................................... $(15,471) $(7,883) $(33,644)
======== ======= ========
Pro forma net loss per share................................ $ (1.46) $ (0.74) $ (3.17)
======== ======= ========
Weighted average common shares outstanding.................. 10,600 10,600 10,600
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 111
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net loss.................................................. $(15,471) $ (7,883) $(33,644)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Depreciation and amortization............................. 2,753 4,363 16,709
Equity in earnings of ventures, net of dividends
received............................................... (3,783) (12,428) (2,559)
Foreign currency losses................................... 446 399 7,452
Other..................................................... 1,668 605 6,528
Changes in assets and liabilities:
Accounts receivable.................................... (4,585) (3,228) (1,145)
Accounts payable and accrued expenses.................. 376 3,040 4,570
Other changes in assets and liabilities................ 1,519 (5,459) 3,379
-------- -------- --------
Net Cash (Used in) Provided by Operating
Activities........................................ (17,077) (20,591) 1,290
Investing Activities
Acquisitions, net of cash acquired........................ -- -- (40,017)
Purchases of property and equipment....................... (9,510) (9,011) (18,704)
Restricted cash........................................... (1,435) (5,000) (19,096)
Investments in and advances to ventures, net of
repayments............................................. (1,329) (8,192) 15,404
-------- -------- --------
Net Cash Used in Investing Activities................ (12,274) (22,203) (62,413)
Financing Activities
Proceeds from debt........................................ -- -- 13,885
Net proceeds from GTS..................................... 35,935 51,235 67,370
Repayments of debt........................................ (3,545) (7,697) (7,104)
-------- -------- --------
Net Cash Provided by Financing Activities............ 32,390 43,538 74,151
Effect of exchange rate changes on cash and cash
equivalents............................................... (76) (230) (2,798)
-------- -------- --------
Net increase in cash and cash equivalents................... 2,963 514 10,230
Cash and cash equivalents at beginning of year.............. 457 3,420 3,934
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 3,420 $ 3,934 $ 14,164
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 112
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............. 10,600 $106 $ 65,833 $(16,100) $ 49,839
Proceeds from GTS...................... -- -- 35,934 -- 35,934
Net loss............................... -- -- -- (15,471) (15,471)
------ ---- -------- -------- --------
Balance at December 31, 1996............. 10,600 106 101,767 (31,571) 70,302
Proceeds from GTS...................... -- -- 53,149 -- 53,149
Net loss............................... -- -- -- (7,883) (7,883)
------ ---- -------- -------- --------
Balance at December 31, 1997............. 10,600 106 154,916 (39,454) 115,568
Proceeds from GTS...................... -- -- 86,859 -- 86,859
Net loss............................... -- -- -- (33,644) (33,644)
------ ---- -------- -------- --------
Balance at December 31, 1998............. 10,600 $106 $241,775 $(73,098) $168,783
====== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 113
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS OPERATIONS
On June 10, 1999, Golden Telecom, Inc. ("Golden Telecom" or "the Company")
was incorporated in Delaware for the purpose of acting as a holding company,
which as of the date of completion of its initial public offering will hold the
operations of Global TeleSystems Group, Inc. ("GTS") entities within the
Commonwealth of Independent States ("CIS"). Golden Telecom, a wholly-owned
subsidiary of GTS, is a provider of a broad range of telecommunications services
to businesses, other telecommunications service providers and consumers through
its operation of voice and data networks, international gateways, local access
and cellular networks and various value-added services in the CIS, primarily
Russia.
Prior to the reorganization, principally the transfer of ownership rights
of GTS entities within the CIS (the "CIS entities") to the Company from GTS, the
CIS entities were subsidiaries of GTS. As the CIS entities are under common
control, the accompanying financial statements give effect to the reorganization
as if it were a pooling of interest and have been presented on a carve-out basis
and include the historical results of operations and assets and liabilities
directly related to Golden Telecom and have been prepared from GTS' historical
accounting records. No intangible assets are to be created and recorded as a
result of this reorganization.
Business Environment
All of the Company's operating companies operate within the CIS. There is
currently a high level of political and economic instability and uncertainty
within the CIS, specifically the Russian Federation. As a result of the
financial crisis in Russia that began in August 1998, all Russian financial
markets were subject to significant downward adjustments. The Russian national
currency was severely devalued during the crisis and continued to deteriorate to
and subsequent to the end of the year. The Russian banking system suffered
significant liquidity problems, and several large Russian banking institutions
stopped operations and/or experienced significant losses. The Russian government
defaulted on, and announced a restructuring of, its internal debt due to a lack
of funds and is likely to seek forgiveness and/or restructuring of its external
debt. Difficulties with the collection of budgeted tax revenues and fulfilling
the significant pension and wages arrears to individuals in many regions and
constituencies of the Russian Federation have continued. The financial crisis
was further exacerbated by continuing political uncertainties over the
development, and application, of existing and future legislation, tax
regulations, and economic programs supported by the majority of political
institutions and international funding agencies. Other countries within the CIS
also had devaluations of their national currency, although typically to a lesser
degree than that incurred by the Russian national currency. These matters had a
direct negative impact on the financial position and results of operations of
the Company.
In the telecommunications industry, the impact of the financial crisis has
been more severe in the regions of Russia outside of Moscow and in the cellular
business generally. The average monthly service revenue per subscriber and
minutes of use in the Company's cellular businesses, which are all regionally-
based, have declined significantly both since August 1998 for all of the
Company's cellular businesses and continued during 1999 for certain of its
cellular businesses. These issues raise uncertainties over the future operations
of other parts of the Company's business; however, the Company cannot predict
the negative impact these matters may have on its future financial position and
results of operations.
Under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company is required to review whether the carrying amount
of an asset may be recoverable when an event indicates that the carrying amount
of an asset may not be recoverable. The financial crisis in Russia was an event
that was considered an indicator of impairment that caused the Company to
evaluate and assess whether or not it had any impairment of assets. Upon the
conclusion of an analysis, the Company determined that there was no impairment
that would result in a write-off of assets or investments.
F-7
<PAGE> 114
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Wholly-owned subsidiaries and majority-owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned and 50% owned ventures that are
accounted for by the equity method as a result of minority shareholder rights,
super majority voting conditions, or other considerations that prevent the
Company from obtaining unilateral control of the venture. All significant
inter-company accounts and transactions are eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recognized have been recovered.
Results of subsidiaries acquired and accounted for by the purchase method
have been included in operations from the relevant date of acquisition.
Foreign Currency Translation
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Each of the legal entities domiciled in the CIS maintains its records
and prepares its financial statements in the local currency (either Russian
rubles or Ukrainian hryvna) in accordance with the requirements of accounting
and tax legislation. The accompanying financial statements differ from the
financial statements used for statutory purposes in the CIS in that they reflect
certain adjustments, recorded on the Company's CIS legal entities' books, which
are appropriate to present the financial position, results of operations and
cash flows in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The principal adjustments are related to
foreign currency translation, deferred taxation, consolidation, and depreciation
and valuation of property and equipment.
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). The temporal method for translating assets and
liabilities is used for translation of the Company's legal entities domiciled in
the CIS. Accordingly, monetary assets and liabilities are translated at current
exchange rates while non-monetary assets and liabilities are translated at their
historical rates. Income and expense accounts are translated at average monthly
rates of exchange. The resultant translation adjustments are included in the
operations of the subsidiaries and ventures.
All foreign currency gains and losses recognized in the operations of
consolidated subsidiaries are included in the Company's statement of operations
as "foreign currency losses." The Company's proportionate share of all foreign
currency gains and losses recognized in the operations of ventures accounted for
by the equity method of accounting are recognized in the Company's statement of
operations as "equity in earnings of ventures".
The local currencies of the countries located within the CIS are not
convertible outside the territory of the respective countries. Official exchange
rates are determined daily by the respective Central Banks and were considered
to be reasonable approximations of market rates until mid-August 1998. Since
that date, liquidity in the currency trading and interbank trading has varied.
As a result, the market rates have
F-8
<PAGE> 115
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fluctuated significantly and have, at times, diverged from the official rates.
Nonetheless, the various market-related rates are based on the official rates.
Accordingly, the respective official rates have been used for translation
purposes in these financial statements. The translation of local currency
denominated assets and liabilities into US dollars for the purpose of these
financial statements does not indicate that the Company could realize or settle
in US dollars the reported values of the assets and liabilities. Likewise, it
does not indicate that the Company could return or distribute the reported US
dollar values of capital and retained earnings to its shareholders.
Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $8.1 million and $27.5
million of restricted cash at December 31, 1997 and 1998, respectively. The
restricted cash is primarily related to cash held in escrow at a financial
institution for the collateralization of debt obligations that certain of the
Company's equity ventures have borrowed from such financial institution.
Accounts Receivable, Net
Accounts receivable are shown at their net realizable value which
approximates their fair value. Accounts receivable are shown on the balance
sheet net of an allowance for doubtful accounts of $3,947 and $4,208 at December
31, 1997 and 1998, respectively. Such allowances are determined based upon an
evaluation of recoverability of the respective receivables.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on
a specific identification basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
Construction in process reflects amounts incurred for the configuration and
build-out of telecommunications equipment not yet placed into service.
Maintenance and repairs are charged to expense as incurred.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses, and is being amortized on a
straight-line basis over their estimated useful lives, generally five to ten
years. Intangible assets, principally telecommunications service contracts and
licenses, are amortized on a straight-line basis over the lesser of their
estimated useful lives, generally three to five years, or their contractual
term. In accordance with Accounting Principles Board ("APB") Opinion No. 17,
"Intangible Assets," the Company continues to evaluate the amortization period
to determine whether events or circumstances warrant revised amortization
periods. Additionally, the Company considers whether the carrying value of such
assets should be reduced based on the future benefits of its intangible assets.
F-9
<PAGE> 116
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets to be held and used by the Company are reviewed to determine whether an
event or change in circumstances indicates that the carrying amount of the asset
may not be recoverable. For long-lived assets to be held and used, the Company
bases its evaluation on such impairment indicators as the nature of the assets,
the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured using
discounted cash flow analysis or other valuation techniques. No impairment
expense was recognized in 1996, 1997 or 1998.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign companies, as such earnings are intended to be
reinvested in those operations permanently. Prior to its formation, the Company
was functioning as operating units of GTS and was included in the consolidated
tax return of GTS.
Revenue Recognition
The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that are partial minutes and test traffic
which will be neither billed nor collected. Revenue from service contracts is
accounted for when the services are provided. Billings received in advance of
service being performed are deferred and recognized as revenue as the service is
performed. Revenues are stated net of any value-added taxes ("VAT") charged to
customers. Certain other taxes that are based on revenues earned were incurred
at rates ranging from 1.5% to 4.0% during 1996, 1997 and 1998, and have been
included in operating expenses since these taxes are incidental to the revenue
cycle.
Pro forma Net Loss Per Share
Pro forma net loss per share has been computed pursuant to the provisions
of SFAS No. 128, "Earnings Per Share," which requires the Company to present
basic and diluted earnings per share for all years presented. The Company's pro
forma net loss per share calculation (basic and diluted) is based upon the
number of shares of the Company issued to GTS upon formation and are considered
to be outstanding for all periods presented. There are no reconciling items in
the numerator or denominator of the Company's pro forma net loss per share
calculation.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from non-owner sources. For the years
ended December 31, 1996, 1997 and 1998, comprehensive income for the Company is
equal to net income.
F-10
<PAGE> 117
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Off Balance Sheet Risk and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents, most of which is
maintained in several foreign-owned and, to a lesser extent, local financial
institutions within the CIS. The Company extends credit to various customers and
establishes an allowance for doubtful accounts for specific customers that it
determines to have significant credit risk.
On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. It is anticipated that the ruble will
continue to devalue. Due to the devaluation, there is an ongoing risk that many
Russian banks may be declared bankrupt. Deposits held at Russian banks, other
than Sberbank, are not insured by the Russian government. The last official
exchange rate prior to the suspension of trading on August 17, 1998 was 6.2725
rubles per US dollar. The official exchange rate as of December 31, 1998 and
June 18, 1999 was 20.65 rubles and 24.23 per US dollar, respectively. The
Company has taken and intends to continue to take actions that may minimize the
unfavorable effect of a continued ruble devaluation.
Stock-Based Compensation
Prior to its formation, certain employees of the Company participated in
one or more of the stock option plans of GTS.
The Company will follow the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," for its plan. SFAS No. 123 establishes a fair value
method of accounting for employee stock options and similar equity instruments.
The fair value method requires compensation cost to be measured at the grant
date based on the value of the award and is recognized over the service period.
SFAS No. 123 generally allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." The Company will elect
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and present pro forma disclosures of net loss as if the fair value
method had been adopted.
Use of Estimates in Preparation of Financial Statements
The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3: VENTURE TRANSACTIONS
During 1998, the Company increased its ownership interest in several of its
previously existing ventures by either buying all or part of the minority
shareholders' interest in these ventures. These transactions have enabled the
Company to consolidate certain ventures that were previously accounted for
following the equity method of accounting. The Company has executed these
transactions by paying cash and has accounted for these transactions under the
purchase method of accounting, and as such, any purchase price paid over net
tangible assets acquired has been reflected as goodwill, which is being
amortized on a straight-line basis for a period of five years. No adjustments
have been made to the assets and liabilities acquired, since their carrying
values approximated their fair market values on the date of the transactions.
F-11
<PAGE> 118
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Company acquired the remaining interest in Sovam
Teleport ("Sovam") for cash consideration of $5.0 million. The Company's 1998
financial statements reflect the allocation of the purchase price, and as such,
the Company recorded approximately $4.6 million of goodwill.
In July 1998, the Company acquired the remaining interest in GTS Vox Ltd.,
the holding company for TCM, for cash consideration of $37.0 million. The
Company's 1998 financial statements reflect the allocation of the purchase
price, and as such, the Company has recorded approximately $30.2 million in
goodwill.
In June 1998, the Company increased its beneficial interest in Golden
Telecom LLC ("Golden Telecom (Ukraine)") to 56.75% for cash consideration of
approximately $9.8 million. The Company's 1998 financial statements reflect the
allocation of the purchase price, and as such, the Company recorded
approximately $1.4 million in goodwill.
The following unaudited pro forma combined results of operations for the
Company gives effect to the Sovam, TCM and Golden Telecom (Ukraine) business
combinations as if they had occurred at the beginning of each period presented
(in thousands, except per share data). These pro forma amounts are provided for
informational purposes only and do not purport to present the results of
operations of the Company had the transactions assumed therein occurred on or as
of the date indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $79,706 $117,367
Net loss.................................................... (9,530) (32,832)
Net loss per common share................................... $ (0.90) $ (3.10)
</TABLE>
NOTE 4: INVESTMENTS IN AND ADVANCES TO VENTURES
The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 50% to 70%. The Company has no investments in ventures
that are accounted for by the cost method.
The components of the Company's investments in and advances to ventures are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Equity in net assets acquired............................... $29,656 $10,006
Excess of investment cost over equity in net assets acquired
net of amortization of $4,851 and $3,752 at December 31,
1997 and 1998, respectively............................... 7,582 1,512
Accumulated earnings recognized............................. 20,178 20,737
Dividends................................................... (3,848) (706)
Cash advances and other..................................... 20,764 14,970
------- -------
Total investments in and advances to ventures..... $74,332 $46,519
======= =======
</TABLE>
In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
F-12
<PAGE> 119
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies."
The Company has financed the operating and investing cash flow requirements
of several of its ventures in the form of cash advances. The Company anticipates
that these ventures will generate sufficient cash inflows for the repayment of
the cash advances as their businesses mature. Also, due to the long-term nature
of the anticipated repayment period and the potential risk associated with the
repatriation of the cash advances, the Company has aggregated its investments in
and cash advances to the ventures.
The Company's share of the ventures' foreign currency translation
adjustments is reflected in the investment accounts.
CHANGES IN THE INVESTMENTS IN AND ADVANCES TO VENTURES
The changes in the investments in and advances to ventures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance, at beginning of period............................. $ 50,188 $ 74,332
Equity in net assets acquired............................. 29,656 10,372
Excess of investment cost over equity in net assets
acquired............................................... 4,340 48,125
Dividends................................................. (3,848) (706)
Cash advances (repayments) and other...................... (18,432) 1,542
Effect of consolidating equity method companies........... -- (89,705)
-------- --------
11,716 (30,372)
Equity ownership in earnings.............................. 15,711 6,914
Excess losses recognized over amount attributable to
ownership interest..................................... (2,043) (2,253)
Interest income on advances............................... 1,767 932
Amortization of excess of investment cost over equity in
net assets acquired.................................... (3,007) (3,034)
-------- --------
12,428 2,559
-------- --------
Balance, at end of period................................... $ 74,332 $ 46,519
======== ========
</TABLE>
For all periods presented through December 31, 1998, the significant
investments accounted for under the equity method and the percentage interest
owned consist of the following:
<TABLE>
<CAPTION>
EQUITY METHOD ENTITIES
--------------------------------
PERIOD OWNERSHIP
-------------------- ---------
<S> <C> <C>
EDN Sovintel........................................ All 50%
TeleRoss Ventures................................... All 50%
Vostok Mobile Ventures.............................. All 50%-70%
Sovam............................................... Through January 1998 66.67%
TCM................................................. Through June 1998 50%
Golden Telecom (Ukraine)............................ Through June 1998 24.5%
</TABLE>
Sovam, TCM and Golden Telecom (Ukraine) are all accounted for using the
consolidation method subsequent to the dates indicated above.
F-13
<PAGE> 120
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
------------------------------------------------- -------------------------------------------------
MAJORITY OWNED 50% OR LESS TOTAL EQUITY MAJORITY OWNED 50% OR LESS TOTAL EQUITY
VENTURES OWNED VENTURES METHOD VENTURES VENTURES OWNED VENTURES METHOD VENTURES
-------------- -------------- --------------- -------------- -------------- ---------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue............... $52,496 $159,651 $212,147 $ 4,306 $164,116 $168,422
Gross margin.......... 19,792 82,990 102,782 2,869 75,549 78,418
Net income............ 10,161 20,110 30,271 (187) 4,611 4,424
Equity in net
losses.............. 7,233 8,477 15,710 (51) 122 71
Current assets........ 16,640 52,972 69,612 953 41,806 42,759
Total assets.......... 33,635 160,362 193,997 7,837 136,658 144,495
Current liabilities... 16,945 57,512 74,457 3,431 50,880 54,311
Total liabilities..... 20,263 84,743 105,006 6,975 68,175 75,150
Net assets............ 13,372 75,619 88,991 862 68,481 69,343
Ownership interest in
equity in net
assets.............. 9,528 47,342 56,870 548 122 670
</TABLE>
NOTE 5: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Accounts receivable consists of:
Trade accounts receivable................................. $ 9,779 $15,420
Value added taxes receivable.............................. 1,857 1,276
Other receivables......................................... 643 916
------- -------
12,279 17,612
Less: allowance for doubtful accounts..................... 3,947 4,208
------- -------
Total accounts receivable, net.................... $ 8,332 $13,404
======= =======
Other assets consists of:
Inventories............................................... $ 4,256 $ 4,216
Other assets.............................................. 266 1,073
------- -------
Total other assets................................ $ 4,522 $ 5,289
======= =======
Property and equipment consists of:
Telecommunications equipment.............................. $19,476 $55,219
Furniture, fixtures and equipment......................... 2,646 7,224
Other property............................................ 549 3,880
Construction in process................................... 138 5,044
------- -------
22,809 71,367
Less: accumulated depreciation.............................. 5,997 19,181
------- -------
Total property and equipment, net................. $16,812 $52,186
======= =======
Goodwill and intangible assets consists of:
Goodwill.................................................. $11,271 $78,761
Other intangibles......................................... 3,318 16,673
------- -------
14,589 95,434
Less: accumulated amortization............................ 3,940 23,510
------- -------
Total goodwill and intangible assets, net......... $10,649 $71,924
======= =======
</TABLE>
F-14
<PAGE> 121
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Accounts payable and accrued expenses consists of:
Accounts payable.......................................... $ 2,082 $10,570
Interest payable.......................................... -- 964
Income taxes.............................................. 508 4,206
Accrued compensation...................................... 1,037 1,764
Accrued other taxes....................................... 778 1,912
Other accrued expenses.................................... 1,805 6,354
------- -------
Total accounts payable and accrued expenses....... $ 6,210 $25,770
======= =======
</TABLE>
NOTE 6: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Citibank General Credit Agreement........................... $ 150 $12,665
Siemens Equipment Agreement................................. -- 3,440
Motorola Equipment Agreement................................ -- 8,354
Other short-term indebtedness............................... 1,475 --
------ -------
1,625 24,459
Less: debt maturing within one year......................... 1,475 3,018
------ -------
Total long-term debt.............................. $ 150 $21,441
====== =======
</TABLE>
Aggregate maturities of long-term debt, as of December 31, 1998, are as
follows: 1999 -- $3.0 million, 2000 -- $16.3 million, 2001 -- $3.1 million, and
2002 -- $2.1 million.
The Company paid interest of $0.2 million, $0.3 million and $1.9 million in
1996, 1997, and 1998, respectively.
In September 1997, the Company's finance subsidiary entered into a $30.0
million credit facility with Citibank. Drawings outstanding under this agreement
by the Company's consolidated ventures totaled $0.2 million and $12.7 million at
December 31, 1997 and 1998, respectively. Total borrowings outstanding by all
entities under the Citibank General Credit Agreement totaled $4.7 and $27.4
million at December 31, 1997 and 1998, respectively. All amounts outstanding
under this agreement are due September 30, 2000 and are fully collateralized by
the Company's restricted cash. The loan is subject to certain covenants which
require all contracted companies to be in compliance. The companies were in
compliance with these covenants as of December 31, 1998. The loan carries
interest at a rate equal to the three-month London Inter-Bank Offering Rate
("LIBOR") plus 5.0 percent per annum (equivalent to 10.08% at December 31,
1998).
In November 1996, Golden Telecom (Ukraine) entered into an agreement with
Siemens GmbH, which was amended to include MKM Telekom (a subsidiary of Siemens)
(collectively referred to as the "Siemens equipment agreement") whereby Golden
Telecom (Ukraine) could purchase up to 8.6 million Deutsche Marks (DM) of
certain equipment from Siemens. The terms allowed Golden Telecom (Ukraine) to
finance up to 70% of this amount. Golden Telecom (Ukraine) is required to make
semiannual principal payments plus accrued interest for three years beginning
six months after completion of installation of such equipment. Amounts
outstanding under this agreement totaled 5.8 million DM
F-15
<PAGE> 122
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($3.4 million) at December 31, 1998. The agreement carries interest at a rate
equal to the DM LIBOR rate plus 4.5 percent per annum (equivalent to 8.375% at
December 31, 1998).
In June 1996, Golden Telecom (Ukraine) entered into an agreement with
Motorola Corporation (the "Motorola equipment agreement") whereby Golden Telecom
(Ukraine) could purchase up to $20.0 million of certain equipment from Motorola.
Through December 31, 1998, the Company had purchased $13.5 million of equipment
under this agreement. Golden Telecom (Ukraine) is required to make semiannual
payments plus accrued interest beginning six months after completion of
installation of such equipment. Amounts outstanding under this agreement totaled
$8.4 million at December 31, 1998. The agreement carries interest at a rate
equal to the LIBOR rate plus 3.0 percent per annum (equivalent to 8.7% at
December 31, 1998).
Prior to June 30, 1998, amounts outstanding under the Siemens and Motorola
equipment agreements were not included in the debt of the consolidated accounts
of the Company. Effective June 30, 1998, the Company acquired a controlling
interest in Golden Telecom (Ukraine) and, accordingly, amounts outstanding under
these agreements were consolidated at December 31, 1998 (See Note 3). Golden
Telecom (Ukraine) also has an unused revolving $0.5 million credit facility that
expires April 9, 1999.
In 1996, certain non-consolidated joint ventures of the Company entered
into a 5.0 million Netherlands Guilders ("NLG") credit facility which is
guaranteed by Vostok Mobile B.V., a subsidiary of the Company. Borrowings
outstanding by the regional joint ventures totaled NLG 2.5 million ($1.3
million) at December 31, 1998.
In 1997, certain non-consolidated joint ventures of the Company entered
into a $30.7 million credit facility with Chase Manhattan Bank, which is
guaranteed by Lucent Technologies. GTS has provided a guarantee to Lucent of 50%
of the amounts guaranteed by Lucent to Chase. At December 31, 1998, $16.5
million was outstanding under this credit facility.
NOTE 7: SHAREHOLDERS' EQUITY
Common Stock
On June 10, 1999, the Company issued one thousand shares of $0.01 par
common stock to GTS. The accompanying financial statements have been prepared
with the assumption that 10,600,000 shares of common stock have been issued and
outstanding for all of the periods presented, which reflects a stock split that
will be effected prior to the initial public offering.
The Company does not intend to pay dividends on common stock in the
foreseeable future. In addition, certain of the Company's financing agreements
include covenant restrictions precluding the payment of dividends by the
Company.
NOTE 8: STOCK OPTION PLANS
Prior to the formation of the Company, certain employees participated in
one or more of the stock option plans of GTS. As a result of changes made to
certain individual GTS option agreements in 1997, the Company has recorded a
$2.2 million expense for the year ended December 31, 1997. No such expenses were
incurred for the years ended December 31, 1996 or 1998.
The Company intends to establish a stock option plan similar to the
principal option plan of GTS. It is the Company's intention to offer options to
key employees and members of the Board of Directors of the Company. No charge to
operations is expected to result from options issued under this new plan.
F-16
<PAGE> 123
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: EMPLOYEE BENEFIT PLAN
Prior to the formation of the Company, certain employees participated in
the GTS 401(k) retirement savings plan (the "Savings Plan") covering all US
citizen employees. The Savings Plan qualifies under section 401(k) of the
Internal Revenue Code and, as such, participants may defer pretax income in
accordance with federal income tax limitations. GTS provides a 50% matching
contribution on the first 5% contributed by the employee. GTS may also, at its
discretion, make non-matching contributions. Both matching and non-matching
contributions by GTS vest 100% after three years of service. The Company's
expense under the Savings Plan for the Company's employees was approximately
$30,000, $32,000 and $40,000 for the years ended December 31, 1996, 1997 and
1998, respectively. GTS made no discretionary (non-matching) contributions for
the years ended December 31, 1996, 1997 or 1998.
The Company intends to establish a 401(k) retirement Savings Plan similar
to the GTS Savings Plan.
NOTE 10: INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax loss:
Domestic............................................ $ (3,442) $(4,976) $ (8,210)
Foreign............................................. (11,743) (2,260) (19,210)
-------- ------- --------
$(15,185) $(7,236) $(27,420)
======== ======= ========
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, the Company recorded
$0.3 million, $0.6 million, and $5.2 million respectively, in income tax expense
that related exclusively to its current provision for foreign taxes.
The Company paid foreign income taxes of $0.0 million, $0.1 million and
$5.4 million in 1996, 1997 and 1998, respectively.
The Company has not recorded a domestic provision for income taxes as,
prior to its formation, the Company was functioning as operating units of GTS.
The domestic US based subsidiaries of the Company (the "US subsidiaries") were
wholly-owned subsidiaries of GTS and accordingly, were included in GTS' US
consolidated income tax returns. Under the previous structure, had the US
subsidiaries filed a consolidated US income tax return (which is required upon
formation of the Company), the Company would have incurred income taxes of $1.7
million, $2.9 million, and $2.9 million for years ended December 31, 1996, 1997
and 1998, respectively. However, as a component of the formation of the Company,
certain elections and transactions have been made that would have eliminated any
US income tax liabilities incurred under the previous structure. Although no
provision for domestic US taxes has been recorded in the accompanying financial
statements, the Company's future effective tax rate will depend largely on its
structure and tax strategies as a separate, independent company.
Effective upon the formation of the Company, any taxable income or losses
recorded is reported on the Company's consolidated income tax return. The
Company was allocated its proportionate share of GTS' US net operating loss
carryforwards. A valuation allowance has been established by the Company, due to
management's estimate of the future benefits of these amounts that are less
likely than not to be realized. Accordingly, there was no impact in the
accompanying financial statements.
F-17
<PAGE> 124
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the US statutory federal tax rate of 35.0% to the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Taxes at US statutory rates................................. 35.0% 35.0% 35.0%
Foreign income taxes........................................ (1.9) (8.9) (18.9)
Foreign operating losses with no related tax benefit........ (35.0) (35.0) (35.0)
----- ----- -----
(1.9)% (8.9)% (18.9)%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities are recorded based on temporary differences
between earnings as reported in the financial statements and earnings for income
tax purposes. The following table summarizes major components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.......................... $ 3,119 $ 6,300
Other deferred tax assets................................. 700 700
------- -------
Total deferred tax asset.................................... 3,819 7,000
Less: valuation allowance................................. (3,819) (7,000)
------- -------
Total............................................. $ -- $ --
======= =======
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards
for US federal income tax purposes of approximately $18.0 million expiring in
fiscal years 2010 through 2018. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carryforwards may be subject to an annual limitation.
Certain of the Company's consolidated foreign ventures have foreign tax
loss carryforwards in excess of $27.2 million. These tax loss carryforwards are
typically denominated in the local currency, subject to annual limitations and
expire in fiscal years 1999 through 2003. The Company's financial statements do
not reflect any provision for benefits that might be associated with such loss
carryforwards.
GTS' investment in EDN Sovintel has historically been treated for US tax
purposes as a partnership and, therefore, GTS' share of EDN Sovintel's income
has flowed through to the GTS consolidated federal income tax return on a
current basis. However, as part of the formation of the Company and the transfer
of ownership rights in EDN Sovintel to the Company, the Company elected to treat
it's ownership in EDN Sovintel as a corporation for US tax purposes;
accordingly, such undistributed future earnings of EDN Sovintel will be treated
consistent with the Company's investments in other foreign entities.
Undistributed earnings of the Company's other foreign investments are considered
to be indefinitely reinvested and, accordingly, no provision for US federal and
state income taxes, or foreign withholding taxes has been made. Upon
distribution of those earnings, the Company would be subject to foreign
withholding taxes and US income taxes (subject to reduction for foreign tax
credits).
F-18
<PAGE> 125
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES
Leases
The Company has various cancelable and non-cancelable operating lease
agreements for equipment and office space with terms ranging from one to five
years. Rental expense for operating leases aggregated $1.1 million, $1.0
million, and $2.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively.
Future minimum lease payments under non-cancelable operating leases with
terms of one year or more, as of December 31, 1998, are as follows: 1999 -- $2.0
million, 2000 -- $2.0 million, 2001 -- $2.0 million, 2002 -- $2.0 million, and
2003 -- $2.0 million.
Other Commitments and Contingencies
The Company's non-consolidated ventures have future purchase commitments
amounting to $1.2 million as of December 31, 1998.
In the ordinary course of business, the Company has issued financial
guarantees on debt for the benefit of certain of its non-consolidated ventures.
The total amounts guaranteed at December 31, 1998 were approximately $9.5
million.
Major Customers
There were no major customers in 1996 or 1997 and in 1998, the Company had
one major customer, representing $17.4 million, or 20%, of total revenues.
Tax Matters
The taxation systems within the various countries of the CIS ("CIS Taxes")
are evolving as the respective governments transform from command to
market-oriented economies. The various CIS governments have introduced and
continue to introduce new tax and royalty laws and related regulations. These
laws and regulations are not always clearly written and their interpretation is
subject to the opinions of the local tax inspectors, Central Bank officials and
other governmental bodies. Instances of inconsistent opinions between local,
regional and federal tax authorities and between the Central Bank and other
governmental bodies are not unusual.
The Company's policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
CIS Taxes, the Company's final CIS Taxes may be in excess of the estimated
amount expensed to date and accrued at December 31, 1996, 1997, and 1998. It is
the opinion of management that the ultimate resolution of the Company's CIS Tax
liability, to the extent not previously provided for, will not have a material
effect on the financial condition of the Company. However, depending on the
amount and timing of an unfavorable resolution of this contingency, it is
possible that the Company's future results of operations or cash flows could be
materially affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.
F-19
<PAGE> 126
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: RELATED PARTY TRANSACTIONS
Golden Telecom and GTS will enter into agreements providing for the
separation of the companies and governing various relationships between Golden
Telecom and GTS, including a separation agreement, employee programs agreement,
registration rights agreement and shared services agreement. Subsequent to the
offering, Golden Telecom will be required to manage these functions and will be
responsible for the expenses associated with the operations of a public company.
Pursuant to a 1995 purchase agreement, the Company received its interest in
GTS-Vox Limited, the intermediate holding company of TCM, in exchange for a note
in the principal amount of $0.7 million issued to the sellers and certain
additional consideration to its partners payable in the form of either cash or
Common Stock of GTS based upon its financial performance. The Company paid the
note in 1996. On January 17, 1997, the agreement was amended such that the
consideration would only be in the form of the issuance of Common Stock of GTS.
In the first quarter of 1997, pursuant to this agreement GTS issued 1,009,200
common shares at the then current fair market value of $6.67 per share. In
addition, in April 1998 and July 1998, pursuant to this agreement, GTS issued
673,260 and 253,718 shares of its common stock at the then current fair market
values of $20.13 per share and $23.55 per share, respectively. Further, in July
1998, the Company purchased the remaining 47.36% interest in GTS-Vox Limited for
$40.5 million from its former partners.
In April 1996, the Company entered into an agreement with First NIS
Regional Fund SICAF, an affiliate of Baring International Investment Management
Limited ("Barings"), to acquire a 29% effective interest in Golden Telecom
(Ukraine), a Ukrainian limited liability company. Such acquisition closed in May
1996. Barings funded $4.5 million to be applied towards the purchase of the
interest in Golden Telecom (Ukraine). Barings could exercise an option to
convert its initial investment into 438,311 shares of GTS Common Stock at an
exercise price of $10.27. In June 1997 the agreement was amended, such that
Barings funded an additional $4.1 million to be applied to Golden Telecom
(Ukraine). In connection with a restructuring of Golden Telecom (Ukraine), the
agreement was further amended in June 1998 to restructure the capital and
ownership of Golden Telecom (Ukraine). Pursuant to such amendment Barings
exercised and received 713,311 shares of GTS Common Stock and made an additional
investment of $5.75 million to be applied toward Golden Telecom (Ukraine)'s
capital expenditure and operating capital requirements. As a result of the June
1998 amendment, the Company increased its effective ownership interest in Golden
Telecom (Ukraine) to approximately 57%. Affiliates of Barings, which consist
primarily of investment funds and trusts, are shareholders of GTS.
In September 1997, the Company acquired from its minority partner, Tricor
B.V., their 49% ownership interest in Vostok Mobile B.V., the Company's
intermediate holding company that has investment interests, between 50% and
100%, in eleven cellular operating companies, for total consideration of up to
$7.7 million. Pursuant to the Company's agreement with Tricor B.V., the Company
made payments of $5.3 million and $2.4 million in 1997 and 1999, respectively.
Tricor B.V. is owned by three individuals, one of whom is the former chief
executive officer of GTS Mobile Services (CIS).
The Company derived revenue from non-consolidated affiliates of $2.7
million, $5.7 million and $6.6 million in 1996, 1997 and 1998, respectively.
F-20
<PAGE> 127
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: SEGMENT INFORMATION
LINE OF BUSINESS DATA
The Company operates in three segments within the telecommunications
industry. These three segments are: Competitive Local Exchange Carrier (CLEC)
Services using our local access overlay networks in Moscow, Kiev, and St.
Petersburg; Data and Long Distance Services using a fiber optic and
satellite-based network; and Mobile Services consisting of cellular networks
throughout the Commonwealth of Independent States and Ukraine on a subscription
and prepaid basis. The Company has adopted the SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The following table presents
financial information for both consolidated ventures and equity investee
ventures, segmented by the Company's lines of businesses for 1996, 1997 and
1998. Transfers between lines of businesses are included in the adjustments to
reconcile segment to consolidated results. The Company evaluates performance
based on the operating margin of each strategic business unit.
<TABLE>
<CAPTION>
ADJUSTMENTS TO
RECONCILE BUSINESS
SEGMENT TO
CONSOLIDATED RESULTS
-----------------------
BUSINESS EQUITY
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
------- ------------- -------- ------------ -------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Revenue................. $87,720 $ 19,375 $26,793 $(3,196) $130,692 $ 13,140 $(131,409) $13,857
Depreciation &
amortization.......... 3,770 3,587 7,068 (1,399) 13,026 2,753 (10,273) --
Equity in (earnings) of
ventures.............. -- -- -- -- -- (3,783) -- (3,783)
Operating income
(loss)................ 31,404 (12,519) (5,385) (1,764) 11,736 (13,599) (29,561) 4,226
Identifiable assets..... 64,826 57,239 67,993 24,499 214,557 92,549 (122,008) --
Capital expenditures.... 16,686 14,304 13,182 73 44,245 5,705 (38,540) --
</TABLE>
<TABLE>
<CAPTION>
BUSINESS
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- ------------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenue............................ $139,996 $38,019 $40,219 $(5,237) $212,997 $ 27,198
Depreciation & amortization........ 6,290 5,441 8,368 (231) 19,868 4,363
Equity in (earnings) of ventures... -- -- -- -- -- (12,428)
Operating income (loss)............ 43,072 (5,765) 551 (6,745) 31,113 (6,406)
Identifiable assets................ 97,280 65,231 90,095 54,191 306,797 129,620
Capital expenditures............... 24,507 2,052 17,020 (810) 42,769 1,846
<CAPTION>
ADJUSTMENTS TO
RECONCILE BUSINESS
SEGMENT TO
CONSOLIDATED RESULTS
-----------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenue............................ $(212,147) $26,348
Depreciation & amortization........ (15,505) --
Equity in (earnings) of ventures... -- (12,428)
Operating income (loss)............ (50,187) 12,668
Identifiable assets................ (177,177) --
Capital expenditures............... (44,572) 3,649
</TABLE>
<TABLE>
<CAPTION>
BUSINESS
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- ------------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenue............................ $168,573 $49,237 $50,019 $ (9,357) $258,472 $ 86,086
Depreciation & amortization........ 8,004 5,006 13,246 7,357 33,613 16,709
Equity in (earnings) of ventures... -- -- -- -- -- (2,559)
Operating income (loss)............ 47,336 (6,126) (3,584) (16,390) 21,236 (16,965)
Identifiable assets................ 129,071 44,709 95,776 113,319 382,875 235,849
Capital expenditures............... 27,679 6,438 24,172 415 58,704 20,738
<CAPTION>
ADJUSTMENTS TO
RECONCILE BUSINESS
SEGMENT TO
CONSOLIDATED RESULTS
-----------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenue............................ $(199,935) $27,549
Depreciation & amortization........ (16,904) --
Equity in (earnings) of ventures... -- (2,559)
Operating income (loss)............ (41,040) 2,839
Identifiable assets................ (147,026) --
Capital expenditures............... (37,966) --
</TABLE>
F-21
<PAGE> 128
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC DATA
Revenues from external customers are based on the location of the operating
company providing the service.
Prior to June 30, 1998, all operations were located within Russia. Since
that time, the Company has operated within two main geographic regions of the
CIS-Russia and Ukraine. Geographic information as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenue......................................... $ 72,242 $ 13,906 $ (62) $ 86,086
Long-lived assets............................... 130,412 33,612 6,651 170,675
</TABLE>
NOTE 14: SUBSEQUENT EVENT
Abandonment
In September 1999, the Board of Directors of GTS approved a formal plan of
restructuring that will result in the Company abandoning certain cellular
business operations in Russia. As part of this plan of restructuring, the
Company is currently seeking a buyer for its ownership interests in these
operations and does not intend to provide any further financial assistance to
such businesses, other than debts assumed as described below.
In reaching its decision, which has been influenced by the pending initial
public offering, the Company had determined that the financial, operational and
management support required for these ventures does not meet its current
strategic plan; however, it will continue to actively support the remaining
Russian cellular businesses.
In connection with this decision, a charge to earnings in the third quarter
of 1999 in the range of $16 million to $20 million will be incurred as a result
of the plan of abandonment. This charge will be calculated based on the
anticipated write-down of the carrying value of these business operations to
their estimated realizable value, which includes the assumption of certain debt
obligations that were outstanding under the Citibank General Credit Agreement
and the Chase Manhattan Bank facility.
F-22
<PAGE> 129
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt Restructuring
In early September 1999, the Company and GTS reached an agreement in
principle with the vendor which has guaranteed the obligations under a credit
facility for certain debt obligations, that total $14.4 million as of June 1999,
that are due from certain of our equity method investees. As a result of this
agreement, the Company may be assigned the debt obligations from the financial
institution as a result of GTS and the vendor prepaying the outstanding debt due
from the equity investees. Further, the Company will also reflect $11.0 million
in new debt on its books as a result of this transaction that is payable to GTS
and the vendor.
F-23
<PAGE> 130
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER OF 1999
(UNAUDITED)
F-24
<PAGE> 131
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 14,164 $ 14,495
Accounts receivable, less allowance for doubtful accounts
of $4,208 and $4,491 at December 31, 1998 and June 30,
1999, respectively..................................... 13,404 11,731
Prepaid expenses.......................................... 4,643 4,998
Other assets.............................................. 5,289 4,265
-------- --------
Total Current Assets.............................. 37,500 35,489
Property and equipment, net of accumulated depreciation of
$19,181 and $24,442 at December 31, 1998 and June 30,
1999, respectively........................................ 52,186 56,563
Investments in and advances to ventures..................... 46,519 37,925
Goodwill and intangible assets, net of accumulated
amortization of $23,510 and $31,863 at December 31, 1998
and June 30, 1999, respectively........................... 71,924 62,790
Restricted cash and other non-current assets................ 27,720 29,583
-------- --------
Total Assets...................................... $235,849 $222,350
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 25,770 $ 19,457
Debt maturing within one year............................. 3,018 5,047
Other current liabilities................................. 5,674 3,447
-------- --------
Total Current Liabilities......................... 34,462 27,951
Long-term debt, less current portion........................ 21,441 18,109
Taxes and other non-current liabilities..................... 3,170 2,313
-------- --------
Total Liabilities................................. 59,073 48,373
Commitments and Contingencies
Minority interest........................................... 7,993 8,985
Shareholder's Equity
Common stock, $0.01 par value (50,000,000 shares authorized;
10,600,000 shares issued and outstanding at December 31,
1998 and June 30, 1999)................................... 106 106
Additional paid-in capital.................................. 241,775 253,953
Accumulated deficit......................................... (73,098) (89,067)
-------- --------
Total Shareholder's Equity........................ 168,783 164,992
-------- --------
Total Liabilities and Shareholder's Equity........ $235,849 $222,350
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-25
<PAGE> 132
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1999 1998 1999
------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services...................... $13,161 $ 22,706 $25,416 $ 46,132
Equipment sales................................. 1,788 464 3,290 1,223
------- -------- ------- --------
14,949 23,170 28,706 47,355
Operating Costs and Expenses:
Cost of revenues:
Telecommunication services................... 8,824 8,749 16,237 17,389
Equipment sales.............................. 1,059 627 2,579 1,313
Selling, general and administrative............. 8,113 10,432 16,904 19,070
Depreciation and amortization................... 2,101 7,127 3,910 13,932
Equity in (earnings) losses of ventures......... (4,874) 1,604 (9,279) 5,174
------- -------- ------- --------
Loss from Operations.............................. (274) (5,369) (1,645) (9,523)
Other Income/(Expense):
Interest income................................. 334 160 334 919
Interest expense................................ (760) (622) (1,464) (1,202)
Foreign currency losses......................... (66) (106) (104) (848)
------- -------- ------- --------
(492) (568) (1,234) (1,131)
------- -------- ------- --------
Net loss before income taxes and minority
interest........................................ (766) (5,937) (2,879) (10,654)
Income taxes...................................... 74 1,691 267 4,291
------- -------- ------- --------
Net loss before minority interest................. (840) (7,628) (3,146) (14,945)
Minority interest................................. -- (566) -- (1,025)
------- -------- ------- --------
Net Loss.......................................... $ (840) $ (8,194) $(3,146) $(15,970)
======= ======== ======= ========
Pro forma net loss per share...................... $ (0.08) $ (0.77) $ (0.30) $ (1.51)
======= ======== ======= ========
Weighted average common shares outstanding........ 10,600 10,600 10,600 10,600
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-26
<PAGE> 133
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1999 1998 1999
-------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Activities
Net loss.......................................... $ (840) $(8,194) $ (3,146) $(15,970)
Adjustments to Reconcile Net Loss to Net Cash Used
in Operating Activities:
Depreciation and amortization..................... 2,101 7,127 3,910 13,932
Equity in (earnings) losses of ventures, net of
dividends received............................. (4,874) 1,604 (9,279) 5,174
Minority interest................................. -- 566 -- 1,025
Foreign currency losses........................... 66 106 104 848
Other............................................. 2,861 (498) 3,086 (919)
Changes in assets and liabilities, excluding
effects of acquisitions and ventures:
Accounts receivable............................ (1,494) 3,771 (2,870) 1,099
Accounts payable and accrued expenses.......... 28 (6,723) 1,598 (9,385)
Other changes in assets and liabilities........ (1,187) (410) 2,334 916
-------- ------- -------- --------
Net Cash Used in Operating Activities........ (3,339) (2,651) (4,263) (3,280)
Investing Activities
Acquisitions, net of cash acquired................ (6,503) -- (10,290) --
Investments in and advances to ventures, net of
repayments..................................... 1,661 5,557 4,476 3,420
Purchases of property and equipment............... (4,655) (5,192) (5,742) (8,258)
Restricted cash................................... (3,346) (2,859) (7,907) (2,109)
-------- ------- -------- --------
Net Cash Used in Investing Activities........ (12,843) (2,494) (19,463) (6,947)
Financing Activities
Proceeds from debt................................ 6,519 800 10,031 2,029
Repayments of debt................................ (4,420) (3,102) (4,420) (3,332)
Net proceeds from GTS............................. 13,065 6,652 17,640 12,179
-------- ------- -------- --------
Net Cash Provided by Financing Activities.... 15,164 4,350 23,251 10,876
Effect of exchange rate changes on cash and cash
equivalents....................................... (19) (40) (37) (318)
-------- ------- -------- --------
Net (decrease) increase in cash and cash
equivalents....................................... (1,037) (835) (512) 331
Cash and cash equivalents at beginning of period.... 4,459 15,330 3,934 14,164
-------- ------- -------- --------
Cash and cash equivalents at end of period.......... $ 3,422 $14,495 $ 3,422 $ 14,495
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-27
<PAGE> 134
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
On June 10, 1999, Golden Telecom, Inc. ("Golden Telecom" or "the Company")
was incorporated in Delaware for the purpose of acting as a holding company,
which as of the date of completion of its initial public offering will hold the
operations of Global TeleSystems Group, Inc. ("GTS") entities within the
Commonwealth of Independent States ("CIS"). Golden Telecom, a wholly-owned
subsidiary of GTS, is a provider of a broad range of telecommunications services
to businesses, other telecommunications service providers and consumers through
its operation of voice and data networks, international gateways, local access
and cellular networks and various value-added services in the CIS, primarily
Russia.
Prior to the reorganization, principally the transfer of ownership rights
of GTS entities within the CIS (the "CIS entities") to the Company from GTS, the
CIS entities were subsidiaries of GTS. As the CIS entities are under common
control, the accompanying financial statements give effect to the reorganization
as if it were a pooling of interest and have been presented on a carve-out basis
and include the historical results of operations and assets and liabilities
directly related to Golden Telecom and have been prepared from GTS' historical
accounting records. No intangible assets are to be created and recorded as a
result of this reorganization.
The financial statements of the Company included herein are unaudited and
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Significant intercompany affiliate account transactions have been
eliminated. In the opinion of management, the financial statements reflect all
adjustments of a normal and recurring nature necessary to present fairly the
Company's financial position, results of operations and cash flows for the
interim periods. These financial statements should be read in conjunction with
the Company's 1998 audited consolidated financial statements and the notes
related thereto. The results of operations for the three and six months ended
June 30, 1999 may not be indicative of the operating results for the full year.
Many of the Company's operations are carried out through alliances with
strategic local partners in the form of venture arrangements. Wholly-owned
subsidiaries and majority-owned ventures where the Company has unilateral
operating and financial control are consolidated within the Company's financial
results and operations. Those ventures where the Company exercises significant
influence, but does not exercise unilateral operating and financial control, are
accounted for by the equity method. The Company has certain majority-owned
investments that are accounted for by the equity method as a result of minority
shareholder rights, super-majority voting conditions or other considerations
that prevent the Company from obtaining unilateral control of the venture.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recorded have been recovered.
Business Environment
All of the Company's operating companies operate within the CIS. There is
currently a high level of political and economic instability and uncertainty in
the Russian Federation. As a result of the financial crisis in August 1998,
financial markets were subject to significant downward adjustments. The national
F-28
<PAGE> 135
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currency was severely devalued during the crisis and continued to deteriorate
through the end of the year. The Russian banking system suffered significant
liquidity problems, and several large Russian banking institutions stopped
operations and/or experienced significant losses. The Russian government
defaulted on, and announced a restructuring of, its internal debt due to a lack
of funds and is negotiating forgiveness and/or restructuring of its external
debt. Difficulties with the collection of budgeted tax revenues and fulfilling
the significant pension and wages arrears to individuals in many regions and
constituencies of the Russian Federation have continued. The financial crisis
was further exacerbated by continuing political uncertainties over the
development, and application, of existing and future legislation, tax
regulations, and economic programs supported by the majority of political
institutions and international funding agencies. These matters had a direct
negative impact on the financial position and results of operations of the
Company.
In the telecommunications industry, the impact of the financial crisis has
been more severe in the regions of Russia outside of Moscow and in the cellular
business generally. The average monthly service revenue per subscriber and
minutes of use in the Company's cellular businesses, which are all regionally-
based, have declined significantly both since August 1998 for all of the
Company's cellular businesses and continued during 1999 for certain of its
cellular businesses. These issues raise uncertainties over the future operations
of other parts of the Company's business; however, the Company cannot predict
the negative impact these matters may have on its future financial position and
results of operations.
Under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company is required to review whether the carrying amount
of an asset may be recoverable when an event indicates that the carrying amount
of an asset may not be recoverable. The financial crisis in Russia was an event
that was considered an indicator of impairment that caused the Company to
evaluate and assess whether or not it had any impairment of assets. Upon the
conclusion of an analysis, the Company determined that there was no impairment
that would result in a write-off of assets or investments.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from nonowner sources. For the three and
six months ended June 30, 1998 and 1999, comprehensive income for the Company is
equal to net income.
Pro forma net loss per share has been computed pursuant to the provisions
of statement of SFAS No. 128, "Earnings Per Share", which requires the Company
to present basic and diluted earnings per share. The Company's pro forma net
loss per share calculation (basic and diluted) is based upon the issuance of
shares of the Company and are considered to be outstanding for all periods
presented. There are no reconciling items in the numerator or denominator of the
Company's pro forma net loss per share calculation.
3. SHAREHOLDERS' EQUITY
Common Stock
On June 10, 1999, the Company issued one thousand shares of $0.01 par
common stock to GTS. The accompanying financial statements have been prepared
with the assumption that 10,600,000 shares of common stock have been issued and
outstanding for all of the periods presented, which reflects a stock split that
will be effected prior to the initial public offering.
F-29
<PAGE> 136
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER TRANSACTIONS
In February 1998, the Company acquired the remaining interest in Sovam
Teleport for cash consideration of $5.0 million. As a result effective February
1, 1998, Sovam is accounted for by the consolidation as opposed to the equity
method of accounting. Goodwill in the amount of $4.6 million has been recorded
by the Company.
In July and June 1998, the Company increased its beneficial ownership of
GTS Vox Ltd. and Golden Telecom (Ukraine) to 100% and 56.7%, respectively. As a
result, effective July 1 and June 30, 1998, these companies are accounted for by
the consolidation as opposed to the equity method of accounting. Goodwill in the
amount of $30.2 million and $1.4 million, respectively has been recorded by the
Company.
The following pro forma combined results of operations for the Company
gives effect to the Sovam, TCM and Golden Telecom (Ukraine) business
combinations as if they had occurred at the beginning of each period indicated.
These pro forma amounts are provided for informational purposes only and do not
purport to present the results of operations of the Company had the transactions
assumed therein occurred on or as of the date indicated, nor is it necessarily
indicative of the results of operations which may be achieved in the future.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
----------------------
1998 1999
--------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $59,986 $ 47,355
Net loss.................................................... (2,334) (15,970)
Net loss per common share................................... $ (0.22) $ (1.51)
</TABLE>
5. CONTINGENCIES
Tax Matters
The taxation system within the various countries of the CIS ("CIS Taxes")
is evolving as the respective governments transform from command to market
oriented economies. The various CIS governments have introduced and continue to
introduce new tax and royalty laws and related regulations. These laws and
regulations are not always clearly written and their interpretation is subject
to the opinions of the local tax inspectors, Central Bank officials and other
governmental bodies. Instances of inconsistent opinions between local, regional
and federal tax authorities and between the Central Bank and other governmental
bodies are not unusual.
The Company's policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
CIS Taxes, the Company's final CIS Taxes may be in excess of the estimated
amount expensed to date and accrued at June 30, 1999. It is the opinion of
management that the ultimate resolution of the Company's CIS Tax liability, to
the extent not previously provided for, will not have a material effect on the
financial condition of the Company. However, depending on the amount and timing
of an unfavorable resolution of this contingency, it is possible that the
Company's future results of operations or cash flows could be materially
affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.
F-30
<PAGE> 137
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT INFORMATION
LINE OF BUSINESS DATA
The Company operates in three segments within the telecommunications
industry. These three segments are: Competitive Local Exchange Carrier (CLEC)
Services using our local access overlay networks in Moscow, Kiev, and St.
Petersburg; Data and Long Distance Services using a fiber optic and
satellite-based network; and Mobile Services consisting of cellular networks
throughout the Commonwealth of Independent States and the Ukraine on a
subscription and prepaid basis. The Company has adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
following table presents financial information for both consolidated ventures
and equity investee ventures, segmented by the Company's lines of businesses for
the three and six month periods ended June 30, 1998 and 1999. Transfers between
lines of businesses are included in the adjustments to reconcile segment to
consolidated results. The Company evaluates performance based on the operating
margin of each strategic business unit.
<TABLE>
<CAPTION>
BUSINESS
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- ------------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998
Revenue....................... $ 46,679 $13,771 $ 14,476 $ (1,772) $ 73,154 $ 14,949
Operating income (loss)....... 15,131 (964) 843 (3,232) 11,778 (274)
Identifiable assets........... 120,467 62,277 105,491 111,571 399,806 193,398
Capital expenditures.......... 4,565 2,030 7,943 115 14,653 2,177
<CAPTION>
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
-------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998
Revenue....................... $ (65,873) $ 7,668
Operating income (loss)....... (18,234) 6,182
Identifiable assets........... (206,408) --
Capital expenditures.......... (12,476) --
</TABLE>
<TABLE>
<CAPTION>
BUSINESS
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- ------------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenue....................... $ 30,707 $ 8,798 $ 9,146 $ (1,963) $ 46,688 $ 23,170
Operating income (loss)....... 8,844 (1,843) (2,459) (5,510) (968) (5,369)
Identifiable assets........... 119,168 44,687 91,607 101,026 356,488 222,350
Capital expenditures.......... 3,058 2,225 2,572 (250) 7,605 4,937
<CAPTION>
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
-------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenue....................... $ (28,051) $ 4,533
Operating income (loss)....... (2,397) (2,004)
Identifiable assets........... (134,138) --
Capital expenditures.......... (2,668) --
</TABLE>
<TABLE>
<CAPTION>
BUSINESS
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- ------------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenue....................... $ 88,312 $26,147 $ 27,701 $ (4,225) $137,935 $ 28,706
Operating income (loss)....... 27,453 (2,050) 2,225 (7,089) 20,539 (1,645)
Identifiable assets........... 120,467 62,277 105,491 111,571 399,806 193,398
Capital expenditures.......... 10,036 3,388 12,183 308 25,915 3,262
<CAPTION>
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
-------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenue....................... $(125,030) $15,801
Operating income (loss)....... (34,092) 11,908
Identifiable assets........... (206,408) --
Capital expenditures.......... (22,653) --
</TABLE>
F-31
<PAGE> 138
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUSINESS
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- ------------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenue....................... $ 62,961 $17,701 $ 17,368 $ (3,968) $ 94,062 $ 47,355
Operating income (loss)....... 17,484 (3,291) (5,394) (9,238) (439) (9,523)
Identifiable assets........... 119,168 44,687 91,607 101,026 356,488 222,350
Capital expenditures.......... 6,284 3,810 7,072 612 17,778 10,335
<CAPTION>
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
-------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenue....................... $ (55,350) $ 8,643
Operating income (loss)....... (3,627) (5,457)
Identifiable assets........... (134,138) --
Capital expenditures.......... (7,443) --
</TABLE>
GEOGRAPHIC DATA
Revenues from external customers are based on the location of the operating
company providing the service.
Prior to June 30, 1998, all operations were located within Russia. Since
that time, the Company has operated within two main geographic regions of the
CIS -- Russia and Ukraine. The following tables
F-32
<PAGE> 139
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
present financial information segmented by the Company's geographic regions for
the three and six month periods ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998
Revenue......................................... $ 14,949 $ 0 $ 0 $ 14,949
Long-lived assets............................... 107,367 30,814 6,881 145,062
</TABLE>
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenue......................................... $ 15,827 $ 7,386 $ (43) $ 23,170
Long-lived assets............................... 120,402 33,052 5,296 158,750
</TABLE>
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenue......................................... $ 28,706 $ 0 $ 0 $ 28,706
Long-lived assets............................... 107,367 30,814 6,881 145,062
</TABLE>
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenue......................................... $ 32,894 $ 14,530 $ (69) $ 47,355
Long-lived assets............................... 120,402 33,052 5,296 158,750
</TABLE>
F-33
<PAGE> 140
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: SUBSEQUENT EVENTS
Abandonment
In September 1999, the Board of Directors of GTS approved a formal plan of
restructuring that will result in the Company abandoning certain cellular
business operations in Russia. As part of this plan of restructuring, the
Company is currently seeking a buyer for its ownership interests in these
operations and does not intend to provide any further financial assistance to
such businesses, other than debts assumed as described below.
In reaching its decision, which has been influenced by the pending initial
public offering, the Company had determined that the financial, operational and
management support required for these ventures does not meet its current
strategic plan; however, it will continue to actively support the remaining
Russian cellular businesses.
In connection with this decision, a charge to earnings in the third quarter
of 1999 in the range of $16 million to $20 million will be incurred as a result
of the plan of abandonment. This charge will be calculated based on the
anticipated write-down of the carrying value of these business operations to
their estimated realizable value, which includes the assumption of certain debt
obligations that were outstanding under the Citibank General Credit Agreement
and the Chase Manhattan Bank facility.
Debt Restructuring
In early September 1999, the Company and GTS reached an agreement in
principle with the vendor which has guaranteed the obligations under a credit
facility for certain debt obligations, that total $14.4 million as of June 1999,
that are due from certain of its equity method investees. As a result of this
agreement, the Company may be assigned the debt obligations from the financial
institution as a result of GTS and the vendor prepaying the outstanding debt due
from the equity investees. Further, the Company will also reflect $11.0 million
in new debt on its books as a result of this transaction that is payable to GTS
and the vendor.
F-34
<PAGE> 141
AUDITED FINANCIAL STATEMENTS
EDN SOVINTEL LLC
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
F-35
<PAGE> 142
REPORT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EDN Sovintel LLC
We have audited the accompanying balance sheets of EDN Sovintel LLC as of
December 31, 1997 and 1998, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1998. 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 of America. 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 EDN Sovintel LLC at December
31, 1997 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited the financial statements of the Company at December
31, 1997 and 1998 and for each of the three years ended December 31, 1998, not
presented herewith, prepared in compliance with the regulations for bookkeeping
and accounting for income tax and statutory reporting purposes in the Russian
Federation on which we expect to report separately for the 1998 audited
financial statements and have reported separately for the 1996 and 1997
financial statements. The significant differences between the accounting
principles applied in preparing the statutory financial statements and
accounting principles generally accepted in the United States of America are
summarized in Note 2.
/s/ ERNST & YOUNG (CIS) LIMITED
Moscow, Russia
February 12, 1999
F-36
<PAGE> 143
EDN SOVINTEL LLC
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
------- -------
(IN THOUSANDS OF
US DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,620 $ 5,116
Cash deposit with related party........................... 485 --
Accounts receivable, net.................................. 16,223 16,726
Due from affiliates....................................... 1,586 1,329
Inventories............................................... 1,697 1,487
Prepaid expenses and other assets......................... 1,630 3,716
VAT receivable, net....................................... 3,688 4,904
Prepaid taxes............................................. -- 2,836
Deferred income taxes..................................... 186 --
------- -------
Total current assets........................................ 31,115 36,114
Property and equipment, net................................. 38,709 51,057
Deferred expenses........................................... 945 810
------- -------
Total assets................................................ $70,769 $87,981
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade payable............................................. $ 5,725 $10,897
Accrued liabilities and other payables.................... 3,233 3,779
Taxes accrued or payable.................................. 1,088 --
Amounts due to shareholder and affiliates................. 10,104 12,736
Amount due to partner in commercial venture............... 1,350 1,350
Short-term loan........................................... -- 3,500
Deferred income taxes..................................... -- 2,190
------- -------
Total current liabilities................................... 21,500 34,452
Commitments and contingencies
Shareholders' equity:
Capital contributions..................................... 2,000 2,000
Retained earnings......................................... 47,269 51,529
------- -------
Total shareholders' equity.................................. 49,269 53,529
------- -------
Total liabilities and shareholders' equity.................. $70,769 $87,981
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 144
EDN SOVINTEL LLC
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- -------- --------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Revenues:
Telecommunication services................................ $63,488 $105,288 $115,823
Equipment sales and other revenues........................ 11,552 8,674 8,345
------- -------- --------
75,040 113,962 124,168
Operating Costs and Expenses:
Cost of revenues:
Service costs.......................................... 34,648 62,926 71,010
Equipment sales and other cost of revenues............. 6,026 5,455 5,227
Selling, general and administrative....................... 10,009 15,899 23,772
Depreciation and amortization............................. 3,638 5,312 6,341
------- -------- --------
Income from operations...................................... 20,719 24,370 17,818
Interest expense............................................ 638 503 --
Interest income............................................. (87) (392) (199)
Foreign currency losses..................................... 252 131 7,628
------- -------- --------
Income before taxes......................................... 19,916 24,128 10,389
Income taxes................................................ 5,154 5,664 6,129
------- -------- --------
Net income.................................................. 14,762 18,464 4,260
Retained earnings, beginning of year........................ 14,043 28,805 47,269
------- -------- --------
Retained earnings, end of year.............................. $28,805 $ 47,269 $ 51,529
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 145
EDN SOVINTEL LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 14,762 $ 18,464 $ 4,260
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,638 5,312 6,341
Deferred income taxes..................................... -- (186) 2,376
Provision for doubtful accounts........................... 678 602 2,684
Write-off of accounts receivable.......................... (147) (859) (900)
Foreign exchange loss..................................... 252 131 7,628
Changes in operating assets and liabilities:
Accounts receivable....................................... (8,460) (637) (16,402)
Due from affiliates....................................... (683) 293 257
Inventories............................................... (811) 52 210
Prepaid expenses and other assets......................... (1,108) (538) (2,086)
VAT receivable, net....................................... 54 (2,609) (6,011)
Trade payables............................................ (193) (2,491) 16,891
Accrued liabilities and other payables.................... 310 1,533 3,451
Taxes accrued or payable.................................. 326 570 (1,609)
Amounts due to shareholder and affiliates................. 3,039 4,401 2,632
-------- -------- --------
Net cash provided by operating activities................... 11,657 24,038 19,722
INVESTING ACTIVITIES -- Purchases of property and
equipment................................................. (9,863) (16,177) (18,554)
FINANCING ACTIVITIES
Proceeds from shareholder................................. 11,300 10,760 --
Payments to shareholder................................... (11,100) (16,421) (39)
Proceeds from short-term loan............................. -- -- 3,500
Payments of long-term loan................................ (694) -- --
Cash withdrawn (deposited) with related party............. (476) (41) 121
-------- -------- --------
Net cash (used in) provided by financing activities......... (970) (5,702) 3,582
Effect of exchange rate changes on cash and cash
equivalents............................................... (312) (145) (5,254)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 512 2,014 (504)
Cash and cash equivalents at beginning of year.............. 3,094 3,606 5,620
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 3,606 $ 5,620 $ 5,116
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 146
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND ENVIRONMENT
EDN Sovintel LLC (the "Company") was created in August 1990 to design,
construct, and operate a telecommunications network in Moscow. This network
provides worldwide communications services, principally to major hotels,
business offices and mobile communication companies. Telecommunications services
are subject to local licensing. The Company's license for international,
intercity and local calls was most recently renewed on January 15, 1999 and is
valid until May 1, 2000. The Company received a license for leased lines on
January 15, 1999 valid for five years. The Company began operating in December
1991, providing services under long-term contracts payable in US dollars.
The Company initially registered as a Soviet-American joint venture. The
venture re-registered as a Russian limited liability partnership in November
1992 and further reregistered as a limited liability company (LLC) in December
1998. The Company is 50% owned by Open Joint Stock Company "Rostelecom", a
domestic and international long distance carrier which is 50.67% controlled
indirectly by the Government of the Russian Federation, and 50% owned by
Sovinet, a US general partnership, owned by two wholly-owned Global TeleSystems
Group, Inc. ("GTS") subsidiaries.
There is currently a high level of political and economic instability and
uncertainty in the Russian Federation. As a result of the financial crisis in
August 1998, financial markets were subject to significant downward adjustments.
The national currency was severely devalued during the crisis and continued to
deteriorate through the end of the year. The Russian banking system suffered
significant liquidity problems, and several large Russian banking institutions
stopped operations and/or experienced significant losses. The Russian government
defaulted on, and announced a restructuring of, its internal debt due to a lack
of funds and is negotiating forgiveness and/or restructuring of its external
debt. Difficulties with the collection of budgeted tax revenues and fulfilling
the significant pension and wages arrears to individuals in many regions and
constituencies of the Russian Federation have continued. The financial crisis
was further exacerbated by continuing political uncertainties over the
development, and application, of existing and future legislation, tax
regulations, and economic programs supported by the majority of political
institutions and international funding agencies. These matters had a direct
negative impact on the financial position and results of operations of the
Company.
Under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company is required to review whether the carrying amount
of an asset may be recoverable when an event indicates that the carrying amount
of an asset may not be recoverable. The financial crisis in Russia was an event
that was considered an indicator of impairment that caused the Company to
evaluate and assess whether or not it had any impairment of assets. Upon the
conclusion of an analysis, the Company determined that there was no impairment
that would result in a write-off of assets or investments.
2. BASIS OF PRESENTATION
The Company maintains its records and prepares its financial statements in
Russian rubles in accordance with the requirements of Russian accounting and tax
legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP"). The principal adjustments are related to certain accrued
revenue and expenses, foreign currency translation, deferred taxation, and
depreciation and valuation of property and equipment.
F-40
<PAGE> 147
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements, in conformity with US GAAP,
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Foreign Currency Translation
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Accordingly, transactions and balances not already measured in US
dollars (primarily Russian rubles) have been remeasured into US dollars in
accordance with the relevant provisions of SFAS No. 52, "Foreign Currency
Translation".
Under FAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US dollars are credited or charged to operations.
The ruble is not a convertible currency outside the territory of Russia.
Official exchange rates are determined daily by the Central Bank of Russia
("CBR") and were considered to be a reasonable approximation of market rates
until mid-August 1998. Since that date, liquidity in the CBR currency trading
and interbank trading has varied as have bid and offer exchange rates. As a
result, the market rates have fluctuated significantly and have diverged from
the CBR rate. Nonetheless, the various market-related rates are based on the CBR
rate. Accordingly, CBR rates have been used for translation purposes in these
financial statements. The translation of ruble denominated assets and
liabilities into US dollars for the purpose of these financial statements does
not indicate that the Company could realize or settle in US dollars the reported
values of the assets and liabilities. Likewise, it does not indicate that the
Company could return or distribute the reported US dollar values of capital and
retained earnings to its shareholders.
The exchange rates at December 31, 1996, 1997 and 1998 for one US dollar
were RUR 5.56, RUR 5.96 and RUR 20.65, respectively. At February 12, 1999, the
CBR rate had changed to RUR 22.79; the effect of this subsequent devaluation of
the ruble on monetary assets and liabilities has not been determined.
On January 1, 1998, the CBR introduced a new ruble to replace existing
rubles. The new ruble has been redenominated so that one new ruble is equivalent
to one thousand old rubles. The old ruble continued in circulation until
December 31, 1998 and will be accepted as legal tender until December 31, 2002.
All amounts herein are presented in new rubles.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in the bank.
Accounts Receivable
Accounts receivable are shown at their net realizable value which
approximates fair value. Accounts receivable are shown in the balance sheet net
of an allowance for uncollectible accounts of $643 and $2,427 at December 31,
1997 and 1998, respectively.
F-41
<PAGE> 148
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories consist of telecommunication equipment held for resale and are
stated at the lower of cost or market. Cost is computed on a weighted average
basis.
Property and Equipment
Property and equipment are recorded at their historical cost. Depreciation
is provided on the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Network equipment........................................... 10 years
Other property and equipment................................ 3-5 years
</TABLE>
There is no depreciation charge for construction-in-progress. Depreciation
commences upon completion of the related project.
The Company recognizes impairment of property and equipment in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. During the years ended December 31, 1996, 1997 and
1998, the Company's analyses indicated that there was not an impairment of its
property and equipment.
Deferred Expenses
Deferred expenses represent the Company's interest in the historical cost
of network equipment owned by MTU Inform, a partner in a commercial venture
(Note 9). These expenses are amortized over the equipment's useful life of 10
years.
Revenue Recognition and Taxes on Revenue
Revenues from telecommunication traffic are recognized in the period in
which the traffic occurs. Revenues from equipment sales, connection fees, and
other services are recognized in the period in which the equipment is sold,
connections made, and services rendered. The revenues earned from connection
fees partially offset the direct costs that the Company incurs to connect its
customers. Taxes on certain revenues were charged at rates ranging from 3.0% to
4.0% over the three years ended December 31, 1996, 1997 and 1998 and amounted to
$2,792, $4,458 and $4,953, respectively, and are charged to selling general and
administrative expenses.
Advertising
The Company expenses the cost of advertising as incurred. Advertising
expenses for the years ended December 31, 1996, 1997 and 1998 were $512, $671
and $555, respectively, and are included in selling, general and administrative
expenses.
Income Taxes
The Company computes and records income taxes in accordance with FAS No.
109, "Accounting for Income Taxes."
Investment Incentive Deductions
Russian legislation allows for certain additional tax deductions related to
new asset investments. These deductions are accounted for as a reduction to
current income taxes in the year in which they arise.
F-42
<PAGE> 149
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Government Pension Funds
The Company contributes to the Russian Federation state pension fund,
social fund, medical insurance fund, unemployment fund and transport fund on
behalf of all its Russian employees. Contributions were 40.5%, 40.5% and 39.5%
from base payroll for 1996, 1997 and 1998, respectively.
Fair Value of Financial Instruments
The fair value of financial instruments included in current assets and
liabilities is considered to be the carrying value.
Comprehensive Income
Effective January 1, 1998, the Company adopted FAS No. 130, "Reporting of
Comprehensive Income". FAS No. 130 establishes standards for the display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from the issuance of shares of stock and distributions to
shareholders. There were no differences between net income and comprehensive
income.
Business Segments
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". FAS No. 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes the Company's operations comprise only
one segment and as such adoption of FAS No. 131 did not impact the disclosures
made in the Company's financial statements.
Comparative Figures
Certain of the 1996 and 1997 amounts have been reclassified to conform to
the presentation adopted in the current year.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Network equipment........................................... $ 43,876 $ 59,805
Other property and equipment................................ 4,527 5,567
-------- --------
48,403 65,372
Accumulated depreciation.................................... (14,557) (20,763)
Construction-in-progress.................................... 4,409 6,448
Network equipment and advances for network equipment not yet
in service................................................ 454 --
-------- --------
Net book value.............................................. $ 38,709 $ 51,057
======== ========
</TABLE>
Total depreciation expense on property and equipment for 1996, 1997 and
1998 was $3,503, $5,177 and $6,206, respectively.
F-43
<PAGE> 150
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The Russian Federation was the only tax jurisdiction in which the Company's
income was taxed. The income tax expense reported in the accompanying statements
of income and retained earnings for the years ended December 31, 1996, 1997 and
1998 represents the provision for current and deferred taxes.
Significant components of the provision for income taxes for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current tax expense........................................ $5,154 $5,850 $3,753
Deferred tax expense (benefit)............................. -- (186) 2,376
------ ------ ------
Provision for income taxes................................. $5,154 $5,664 $6,129
====== ====== ======
</TABLE>
A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Income tax expense at statutory tax rate of 35%......... $ 6,970 $ 8,445 $ 3,636
Tax effect of permanent differences:
Investment incentive deductions....................... (3,161) (4,318) (3,753)
Tax loss carryforwards utilized....................... (40) (34) --
Depreciation differences due to revaluation of fixed
assets............................................. 524 735 1,625
Taxes on local currency exchange gains................ -- -- 3,241
Other permanent differences........................... 700 1,266 890
Increase (decrease) in the valuation allowance for
deferred tax assets................................... 161 (430) 490
------- ------- -------
Income tax expense reported in the financial
statements............................................ $ 5,154 $ 5,664 $ 6,129
======= ======= =======
</TABLE>
The deferred tax balances are calculated by applying the statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying financial statements, and consist of the following
at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Depreciation.......................................... $ 300 $ 398 $ 393
Inventory write-downs and allowances.................. 235 235 257
Accrual of expenses................................... 898 1,132 965
Accrual of revenue.................................... (383) (946) (1,134)
Taxes on unrealized local currency exchange gains..... -- -- (1,561)
Other deferred tax liabilities........................ -- (13) --
------- ------- -------
Deferred tax (liabilities)/assets....................... 1,050 806 (1,080)
Valuation allowance for deferred tax assets............. (1,050) (620) (1,110)
------- ------- -------
Net deferred tax (liabilities)/assets................... $ -- $ 186 $(2,190)
======= ======= =======
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized
to reflect management's estimate of the deferred tax assets that are less likely
than not to be realized.
The Company paid in cash Russian profits tax of $5,849, $4,302 and $7,309,
in 1996, 1997 and 1998, respectively.
F-44
<PAGE> 151
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTE DUE TO SHAREHOLDER
On January 16, 1997, a six-month facility was established with GTS Finance,
Inc. for $7,000 which was then extended to December 19, 1997. The loan was
repaid prior to December 31, 1997 except for withholding taxes on interest which
were paid in 1998. The loan carried interest at a rate equal to the then current
six-month LIBOR rate plus 5.0 percent per annum.
The Company paid in cash interest of $542, $697 and $0, in 1996, 1997 and
1998, respectively.
7. SHORT-TERM LOAN
In December 1998, the Company entered into a $10,000 credit facility with
Citibank. This loan is issued under a three-year General Credit Agreement
obtained by GTS Finance, Inc. (a related entity) and certain other related
entities on September 30, 1997. Drawings outstanding under this agreement by the
Company totaled $3,500 at December 31, 1998. Collective maximum borrowings that
are allowed under this agreement are $30,000. Total borrowings outstanding by
all entities under the General Credit Agreement totalled $27,415 at December 31,
1998. All amounts outstanding under this agreement are due at the earlier of
thirty days after a request from GTS Finance, Inc. or September 30, 2000. The
loan is subject to certain covenants which require all contracted companies to
be in compliance. The companies were in compliance with these covenants as of
December 31, 1998. The loan carries interest at a rate equal to the three-month
LIBOR rate plus 5.0 percent per annum (10.08% at December 31, 1998).
8. SHAREHOLDERS' EQUITY
The Company's capital structure as specified in the charter capital
document is as follows as of December 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Registered capital in Russian rubles:
Rostelecom................................................ 600 600
Sovinet................................................... 600 600
------ ------
1,200 1,200
====== ======
Historical value of the Company's capital in US dollars..... $2,000 $2,000
====== ======
</TABLE>
As a Russian limited liability company, the Company has no capital stock;
rather, it has only contributed and locally registered capital in accordance
with its charter. As such, no earnings per share data are presented in these
financial statements.
Retained earnings available for distribution at December 31, 1998 amounted
to 415 million rubles or approximately $20,119 at applicable year-end exchange
rates.
9. RELATED PARTY TRANSACTIONS
Transactions and balances with Rostelecom (one of the Company's
shareholders) and its affiliates were as follows, as of and for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Sales.................................................... $1,525 $ 2,310 $ 900
Telecommunication lease and traffic costs................ 4,586 11,183 15,962
Amounts due to shareholder and affiliates................ 656 4,184 4,860
Cash deposit with related party.......................... 476 485 --
</TABLE>
F-45
<PAGE> 152
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At the request of Rostelecom, a shareholder, the Company placed a deposit
of 2.65 million rubles in August 1996 with a Russian bank related to this
shareholder. The bank deposit agreement stated a deposit term of one year, which
was rolled over for an additional year during 1997. The deposit earned interest
quarterly at a rate of 15% per annum plus any devaluation losses against the US
dollar up to a maximum of 4.8% per quarter. This amount was withdrawn in October
and November 1998 for a total value of $121.
Transactions and balances with GTS and its affiliates were as follows, as
of and for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Sales...................................................... $3,115 $4,974 $5,097
Management service fees and reimbursements of expenses of
expatriate staff......................................... 927 1,318 1,265
Balances due under credit facility......................... 5,700 39 --
Interest expense........................................... 626 503 --
Amounts due from affiliates................................ 1,879 1,586 1,329
Amounts due to shareholder and affiliates.................. 5,047 5,919 7,876
</TABLE>
Transactions and balances with MTU Inform, an entity with which the Company
entered into a commercial agreement to co-develop and operate phone exchange
operations were as follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Telecommunication settlement and rent expense........... $15,889 $19,003 $15,001
Balances in trade payables.............................. 1,237 -- 39
Balances in accounts receivable......................... -- 487 266
Amount due to partner in commercial venture............. 1,350 1,350 1,350
Balances in prepaid expenses and other assets........... -- 800 --
</TABLE>
The Company also has an interest in the cost of the related network
equipment owned by MTU Inform, which is reflected in the balance sheet, net of
related amortization, as deferred expenses. In 1997, the Company prepaid $800 of
1998 rent to MTU-Inform for additional office space to be occupied during 1998.
10. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash deposits and trade accounts
receivable. The Company deposits the majority of its available cash with two
foreign-owned financial institutions in Russia and maintains certain balances
with several Russian financial institutions. The Company's sales and accounts
receivable are made to and due from a variety of international and Russian
business customers. As of December 31, 1996, two customers accounted for 17% and
16% of revenues and 25% and 10% of accounts receivable, respectively. As of
December 31, 1997, one customer accounted for 11% of revenues and 11% of
accounts receivable. As of December 31, 1998, this same customer accounted for
13% of revenues and 5% of accounts receivable. The Company has no other
significant concentrations of credit risk except for transactions with related
parties as discussed in Note 9.
F-46
<PAGE> 153
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS
The Company has several cancelable operating leases for office and
warehouse space and telecommunications lines with terms ranging from one to five
years.
Total rent expense for 1996, 1997 and 1998 was $2,137, $2,794 and $2,261,
respectively.
12. CONTINGENCIES
The tax, legal and banking regulatory system continues to evolve in the
Russian Federation as the Russian government manages the transformation from a
command to a market-oriented economy. There were many new tax and foreign
currency laws and related regulations introduced during 1997 and 1998 which were
not always clearly written and were, at times, conflicting. In addition, their
interpretation is subject to the opinions of a variety of local, regional and
federal tax inspectors, the Central Bank of Russia officials and the Ministry of
Finance. Instances of inconsistent opinions among and between these authorities
are not unusual.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amounts paid to date and accrued as of December
31, 1998. Management believes, based upon its best estimates, that the Company
has paid or accrued all taxes that are applicable for the current and prior
years, and complied with all essential provisions of laws and regulations of the
Russian Federation. In management's opinion, the ultimate determination of the
Company's overall tax liability and potential loss contingencies, to the extent
not previously provided for, will not have a material effect on the financial
position of the Company.
The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation and tax regulations which significantly impact Russian
economy. The likelihood of such occurrences and their effect on the Company
could have a significant impact on the Company's current activity and its
overall ability to continue operations. The Company does not believe that these
contingencies, as related to its operations, are any more significant than those
of similar enterprises in Russia.
13. IMPACT OF THE YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software which is not "Year 2000
Compliant" may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure of miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
The Company has completed an assessment and will have to modify portions of
its software so that its computer systems will function properly with respect to
dates in year 2000 and thereafter. The total cost of modification or replacement
is included in the maintenance agreements with the respective software
companies. To date, the Company has taken actions, primarily for assessment of
the Year 2000 Issue, and the development of a modification plan and upgrades to
software.
The project is expected to be completed not later than September 1999,
which is prior to any anticipated impact on the Company's operating systems. The
Company believes that with modifications to existing software, the Year 2000
Issue will not pose significant operational problems for its computer
F-47
<PAGE> 154
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
systems. If, however, such modifications are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the operations of
the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. In particular, it is unclear as to the extent that the Russian
government and other organizations who provide significant infrastructure
services within the Russian Federation have addressed the Year 2000 Issue.
Furthermore, the current crisis discussed in Notes 1 and 12 could adversely
affect the ability of the government and such organizations to fund adequate
Year 2000 compliance programs. There is no guarantee that the systems of the
government or of other organizations on which the Company relies will be timely
converted and would not have an adverse effect on the Company and its systems.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. There can be
no guarantee, however, that these estimates will be achieved and actual results
could differ materially from those anticipated. The Company's financial
statements as of December 31, 1998 and for the year then ended do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
F-48
<PAGE> 155
EDN SOVINTEL LLC
CONDENSED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER OF 1999
(UNAUDITED)
F-49
<PAGE> 156
EDN SOVINTEL LLC
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 5,116 $ 2,759
Accounts receivable, less allowance for doubtful accounts
of $2,427 and $2,332 at December 31, 1998 and June 30,
1999, respectively..................................... 16,726 18,219
Due from affiliated companies............................. 1,329 612
Inventory................................................. 1,487 1,148
VAT receivable, net....................................... 4,904 4,330
Prepaid taxes............................................. 2,836 407
Prepaid expenses and other assets......................... 3,716 1,537
------- -------
Total current assets...................................... 36,114 29,012
Property and equipment, net of accumulated depreciation of
$20,763 and $24,643 at December 31, 1998 and June 30,
1999, respectively........................................ 51,057 50,699
Deferred expenses........................................... 810 743
------- -------
Total assets................................................ $87,981 $80,454
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $10,897 $10,758
Accrued expenses.......................................... 3,779 4,534
Due to affiliated companies............................... 12,736 4,084
Other liabilities......................................... 1,350 1,064
Short-term loan........................................... 3,500 4,000
Deferred income taxes..................................... 2,190 1,024
------- -------
Total liabilities........................................... 34,452 25,464
Commitments and contingencies
Shareholders' equity:
Contributed capital......................................... 2,000 2,000
Retained earnings........................................... 51,529 52,990
------- -------
Total shareholders' equity.................................. 53,529 54,990
------- -------
Total liabilities and shareholders' equity.................. $87,981 $80,454
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-50
<PAGE> 157
EDN SOVINTEL LLC
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1999 1998 1999
-------- -------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES, NET:......................................... $34,703 $22,497 $67,107 $44,981
COST OF REVENUES:...................................... 21,361 12,695 41,990 26,233
------- ------- ------- -------
Gross margin........................................... 13,342 9,802 25,117 18,748
OPERATING EXPENSES:
Selling, general and administrative.................. 3,331 2,493 6,362 5,599
Depreciation and amortization........................ 1,503 1,986 3,004 3,845
Non-income taxes..................................... 1,593 1,631 3,035 2,718
------- ------- ------- -------
Total operating expenses..................... 6,427 6,110 12,401 12,162
------- ------- ------- -------
Income from operations................................. 6,915 3,692 12,716 6,586
OTHER INCOME/(EXPENSE):
Interest income...................................... 61 56 98 81
Interest expense..................................... -- (116) -- (203)
Foreign currency (losses) gains...................... (73) 54 (293) (845)
------- ------- ------- -------
Net income before taxes................................ 6,903 3,686 12,521 5,619
Income taxes........................................... 1,609 3,213 2,882 4,158
------- ------- ------- -------
Net income............................................. $ 5,294 $ 473 $ 9,639 $ 1,461
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-51
<PAGE> 158
EDN SOVINTEL LLC
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1999 1998 1999
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 5,294 $ 473 $ 9,639 $ 1,461
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 1,503 1,986 3,004 3,845
Deferred income taxes................................ -- (1,552) -- (1,166)
Foreign currency losses (gains)...................... 73 (54) 293 845
Changes in assets and liabilities:
Accounts receivable.................................. (1,010) (459) (4,714) (1,584)
Prepaid expenses and other assets.................... (4,508) 7,043 (6,482) 5,521
Accounts payable and accrued expenses................ 1,252 (1,040) 4,105 432
------- ------- ------- -------
Net cash provided by operating activities.............. 2,604 6,397 5,845 9,354
INVESTING ACTIVITIES -- Purchases of property and
equipment............................................ (3,620) (1,571) (7,120) (3,522)
FINANCING ACTIVITIES
Due to affiliated companies, net..................... (2,536) (4,679) (882) (7,935)
Proceeds from debt................................... -- 500 -- 500
------- ------- ------- -------
Net cash used in financing activities.................. (2,536) (4,179) (882) (7,435)
Effect of exchange rate changes on cash and cash
equivalents.......................................... (139) (7) (198) (754)
------- ------- ------- -------
Net (decrease) increase in cash and cash equivalents... (3,691) 640 (2,355) (2,357)
Cash and cash equivalents at beginning of period....... 6,956 2,119 5,620 5,116
------- ------- ------- -------
Cash and cash equivalents at end of period............. $ 3,265 $ 2,759 $ 3,265 $ 2,759
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-52
<PAGE> 159
EDN SOVINTEL LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
EDN Sovintel LLC (the "Company") was created in August 1990 to design,
construct, and operate a telecommunications network in Moscow. This network
provides worldwide communications services, principally to major hotels,
business offices and mobile communication companies. Telecommunications services
are subject to local licensing. The Company's licenses for international,
intercity and local calls were most recently renewed on January 15, 1999 and
April 16, 1999, and are valid until May 1, 2000 and April 16, 2007,
respectively. The Company received licenses for leased lines on January 15, 1999
and April 16, 1999, and each these licenses is valid for five years. The Company
also holds two licenses to provide data services. The Company began operating in
December 1991, providing services under long-term contracts payable in US
dollars. Currently, customers have the option of being billed in rubles or
dollars. All payments from Russian companies are made in rubles.
The Company initially registered as a Soviet-American joint venture. The
venture re-registered as a Russian limited liability partnership in November
1992 and further reregistered as a limited liability company (LLC) in December
1998. The Company is 50% owned by Open Joint Stock Company "Rostelecom," a
domestic and international long distance carrier which is 50.67% controlled
indirectly by the Government of the Russian Federation, and 50% owned by
Sovinet, a US general partnership, owned by a wholly-owned Global TeleSystems
Group, Inc. ("GTS") subsidiary.
In the opinion of management, the accompanying unaudited condensed
financial statements of EDN Sovintel LLC contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the Company's
financial position as of December 31, 1998 and June 30, 1999, and the results of
operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded. It is
suggested that these financial statements be read in conjunction with the
Company's 1998 audited financial statements and the notes related thereto. The
results of operations for the six months ended June 30, 1999 may not be
indicative of the operating results for the full year.
The Company maintains its records and prepares its financial statements in
Russian rubles in accordance with the requirements of Russian accounting and tax
legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's statutory books, which are
appropriate to present the financial position, results of operations and cash
flows in accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). The principal adjustments are related to certain
accrued revenue and expenses, foreign currency translation, deferred taxation,
and depreciation and valuation of property and equipment. The preparation of
financial statements, in conformity with US GAAP, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Business Environment
There is currently a high level of political and economic instability and
uncertainty in the Russian Federation. As a result of the financial crisis in
August 1998, financial markets were subject to significant downward adjustments.
The national currency was severely devalued during the crisis and continued to
deteriorate through the end of the year. The Russian banking system suffered
significant liquidity problems, and several large Russian banking institutions
stopped operations and/or experienced significant losses. The Russian government
defaulted on, and announced a restructuring of, its internal debt due to a lack
of funds and is negotiating forgiveness and/or restructuring of its external
debt. Difficulties with the
F-53
<PAGE> 160
EDN SOVINTEL LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
collection of budgeted tax revenues and fulfilling the significant pension and
wages arrears to individuals in many regions and constituencies of the Russian
Federation have continued. The financial crisis was further exacerbated by
continuing political uncertainties over the development, and application, of
existing and future legislation, tax regulations, and economic programs
supported by the majority of political institutions and international funding
agencies. These matters had a direct negative impact on the financial position
and results of operations of the Company.
Under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company is required to review whether the carrying amount
of an asset may be recoverable when an event indicates that the carrying amount
of an asset may not be recoverable. The financial crisis in Russia was an event
that was considered an indicator of impairment that caused the Company to
evaluate and assess whether or not it had any impairment of assets. Upon the
conclusion of an analysis, the Company determined that there was no impairment
that would result in a write-off of assets or investments.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from nonowner sources. For the six months
ended June 30, 1998 and 1999, comprehensive income for the Company is equal to
net income.
3. CONTINGENCIES
The tax, legal and banking regulatory system continues to evolve in the
Russian Federation as the Russian government manages the transformation from a
command to a market-oriented economy. There were many new tax and foreign
currency laws and related regulations introduced during 1998 and 1999 which were
not always clearly written and were, at times, conflicting. In addition, their
interpretation is subject to the opinions of a variety of local, regional and
federal tax inspectors, the Central Bank of Russia officials and the Ministry of
Finance. Instances of inconsistent opinions among and between these authorities
are not unusual.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amounts paid to date and accrued as of December
31, 1998 and June 30, 1999. Management believes, based upon its best estimates,
that the Company has paid or accrued all taxes that are applicable for the
current and prior years, and complied with all essential provisions of laws and
regulations of the Russian Federation.
The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation and tax regulations which significantly impact the
Russian economy. The likelihood of such occurrences and their effect on the
Company could have a significant impact on the Company's current activity and
its overall ability to continue operations. The Company does not believe that
these contingencies, as related to its operations, are any more significant than
those of similar enterprises in Russia.
F-54
<PAGE> 161
AUDITED FINANCIAL STATEMENTS
GTS-VOX LIMITED
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
F-55
<PAGE> 162
REPORT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
The Board of Directors
GTS-Vox Limited
We have audited the accompanying consolidated balance sheets of GTS-Vox
Limited as of December 31, 1997 and 1998, and the related consolidated
statements of income and retained earnings, and cash flows for each of the three
years in the period ended December 31, 1998. 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 of America. 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 consolidated financial position of GTS-Vox Limited
at December 31, 1997 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America.
/s/ ERNST & YOUNG (CIS) LIMITED
Moscow, Russia
February 12, 1999
F-56
<PAGE> 163
GTS-VOX LIMITED
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
---------- ----------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,542 $ 7,349
Short-term investments.................................... 1,704 --
Accounts receivable, net.................................. 1,920 4,368
Due from affiliates....................................... 2,146 7,217
Prepaid expenses and other assets......................... 297 1,160
------- -------
Total current assets........................................ 9,609 20,094
Property and equipment, net................................. 6,324 8,267
------- -------
Goodwill and intangible assets, net of accumulated
amortization of $2,190 and $9,713 at December 31, 1997 and
1998, respectively........................................ 5,317 47,433
------- -------
Total assets................................................ $21,250 $75,794
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 194 $ 230
Accrued liabilities and other payables.................... 500 1,783
Taxes accrued or payable.................................. 1,583 517
Amounts due to shareholder and affiliates................. 44 35
------- -------
Total current liabilities................................... 2,321 2,565
Commitments and contingencies
Minority interest........................................... 678 949
Shareholders' Equity:
Common stock, L0.01 par value, (10,000 shares authorized,
issued and outstanding at December 31, 1997 and
1998).................................................. -- --
Additional paid-in capital................................ 7,431 57,278
Retained earnings......................................... 10,820 15,002
------- -------
Total shareholders' equity.................................. 18,251 72,280
------- -------
Total liabilities and shareholders' equity.................. $21,250 $75,794
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 164
GTS-VOX LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Revenues:
Telecommunication services................................ $ 9,990 $20,704 $32,803
Port sales and other revenues............................. 6,517 8,604 9,437
------- ------- -------
16,507 29,308 42,240
Operating Costs and Expenses:
Cost of revenues:
Service costs.......................................... 2,083 4,948 8,936
Cost of sales.......................................... 1,155 1,722 1,567
Selling, general and administrative....................... 1,853 3,128 4,875
Depreciation and amortization............................. 438 2,469 8,468
------- ------- -------
Income from operations...................................... 10,978 17,041 18,394
Other income/(expense): Interest income..................... 475 476 1,006
Foreign currency losses................................... (242) (349) (4,613)
------- ------- -------
Net income before income taxes and minority interest........ 11,211 17,168 14,787
Income taxes................................................ 2,685 6,467 9,738
------- ------- -------
Net income before minority interest......................... 8,526 10,701 5,049
Minority interest........................................... 444 651 672
------- ------- -------
Net income.................................................. 8,082 10,050 4,377
Dividends paid.............................................. (1,848) (5,437) (195)
(Accumulated deficit) Retained earnings, beginning of
year...................................................... (27) 6,207 10,820
------- ------- -------
Retained earnings, end of year.............................. $ 6,207 $10,820 $15,002
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 165
GTS-VOX LIMITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 8,082 $10,050 $ 4,377
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 438 2,469 8,468
Minority interest, net of dividends....................... 338 340 271
Foreign exchange loss..................................... 242 349 4,613
Changes in operating assets and liabilities:
Accounts receivable....................................... (933) (1,347) (3,902)
Due from affiliates....................................... (1,212) (934) (5,071)
Prepaid expenses and other assets......................... (1,138) 736 (1,818)
Trade payables and accrued liabilities.................... 1,675 (1,050) 1,318
Taxes accrued or payable.................................. 17 1,587 (817)
Amounts due to shareholder and affiliates................. 297 (456) (9)
------- ------- -------
Net cash provided by operating activities................... 7,806 11,744 7,430
INVESTING ACTIVITIES
Purchases of property and equipment....................... (5,140) (1,859) (2,888)
(Purchase) disposal of short-term investments............. -- (1,704) 1,704
------- ------- -------
Net cash used in investing activities....................... (5,140) (3,563) (1,184)
FINANCING ACTIVITIES
Proceeds from shareholder................................. -- -- 208
Dividends paid............................................ (1,848) (5,437) (195)
------- ------- -------
Net cash (used in) provided by financing activities......... (1,848) (5,437) 13
Effect of exchange rate changes on cash and cash
equivalents............................................... (17) (23) (2,452)
------- ------- -------
Net increase in cash and cash equivalents................... 801 2,721 3,807
Cash and cash equivalents at beginning of year.............. 20 821 3,542
------- ------- -------
Cash and cash equivalents at end of year.................... $ 821 $ 3,542 $ 7,349
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 166
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ENVIRONMENT
GTS-Vox Limited, a private limited company organized pursuant to the
Companies Act of 1985 of England and Wales (the "Company" or "Vox") is a holding
company with its principal asset being its 95% ownership interest in
Telecommunications of Moscow LLC ("TCM"). Global TeleSystems Group, Inc. ("GTS")
owned 52.6% of Vox through June 1998 and effective July 1, 1998, became a
wholly-owned subsidiary of GTS (see Note 4). The remaining 5% ownership interest
in TCM is owned by MTU-Inform.
TCM is an integral part of GTS' competitive local exchange carrier services
in Moscow. TCM provides carriers with telephone numbers, ports and
interconnectivity to the Moscow city telephone network through its local
gateway. TCM has constructed 100,000 ports, each corresponding to a unique
telephone number. TCM's infrastructure is integrated into the Moscow city
incumbent telephone network at 64 transit and local exchanges allowing it to
deliver traffic within the local public network.
There is currently a high level of political and economic instability and
uncertainty in the Russian Federation. As a result of the financial crisis in
August 1998 all financial markets were subject to significant downward
adjustments. The national currency was severely devalued during the crisis and
continued to deteriorate through the end of the year. The Russian banking system
suffered significant liquidity problems, and several large Russian banking
institutions stopped operations and/or experienced significant losses. The
Russian government defaulted on, and announced a restructuring of, its internal
debt due to a lack of funds and is likely to seek forgiveness and/or
restructuring of its external debt. Difficulties with the collection of budgeted
tax revenues and fulfilling the significant pension and wages arrears to
individuals in many regions and constituencies of the Russian Federation have
continued. The economic crisis was further exacerbated by continuing political
uncertainties over the development, and application, of existing and future
legislation, tax regulations, and economic programs supported by the majority of
political institutions and international funding agencies. These matters had a
direct negative impact on the financial position and results of operations of
the Company.
Under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company is required to review whether the carrying amount
of an asset may be recoverable when an event indicates that the carrying amount
of an asset may not be recoverable. The financial crisis in Russia was an event
that was considered an indicator of impairment that caused the Company to
evaluate and assess whether or not it had any impairment of assets. Upon the
conclusion of an analysis, the Company determined that there was no impairment
that would result in a write-off of assets.
2. BASIS OF PRESENTATION
The Company's operating unit, TCM, maintains its records and prepares its
financial statements in Russian rubles in accordance with the requirements of
Russian accounting and tax legislation. The accompanying financial statements
differ from the financial statements used for statutory purposes in Russia in
that they reflect certain adjustments, not recorded on the Company's books,
which are appropriate to present the financial position, results of operations
and cash flows in accordance with generally accepted accounting principles in
the United States of America ("US GAAP"). The principal adjustments are related
to certain accrued revenue and expenses, foreign currency translation,
"push-down" accounting and depreciation and valuation of property and equipment.
F-60
<PAGE> 167
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements, in conformity with US GAAP,
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Foreign Currency Translation
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. TCM is domiciled in Russia and maintains its records and prepares its
financial statements in Russian rubles in accordance with the requirements of
accounting and tax legislation. The accompanying financial statements differ
from the financial statements used for statutory purposes in Russia in that they
reflect certain adjustments, recorded on the Company's legal books, which are
appropriate to present the financial position, results of operations and cash
flows in accordance with accounting principles generally accepted in the United
States of America ("US GAAP"). The principal adjustments are related to foreign
currency translation, deferred taxation, consolidation, and depreciation and
valuation of property and equipment.
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation" (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). The temporal method for translating assets and
liabilities is used for translation of TCM. Accordingly, monetary assets and
liabilities are translated at current exchange rates while non-monetary assets
and liabilities are translated at their historical rates. Income and expense
accounts are translated at average monthly rates of exchange. The resultant
translation adjustments are included in the income statement.
The ruble is not a convertible currency outside the territory of Russia.
Official exchange rates are determined daily by the Central Bank of Russia
("CBR") and were considered to be a reasonable approximation of market rates
until mid-August 1998. Since that date, liquidity in the CBR currency trading
and interbank trading has varied as have bid and offer exchange rates. As a
result, the market rates have fluctuated significantly and have diverged from
the CBR rate. Nonetheless, the various market-related rates are based on the CBR
rate. Accordingly, CBR rates have been used for translation purposes in these
financial statements. The translation of ruble denominated assets and
liabilities into US dollars for the purpose of these financial statements does
not indicate that the Company could realize or settle in US dollars the reported
values of the assets and liabilities. Likewise, it does not indicate that the
Company could return or distribute the reported US dollar values of capital and
retained earnings to its shareholders.
The exchange rates at December 31, 1996, 1997 and 1998 for one US dollar
were RUR 5.56, RUR 5.96 and RUR 20.65, respectively. At February 12, 1999, the
CBR rate had changed to RUR 22.79. The effect of this devaluation of the ruble
on monetary assets and liabilities has not been determined.
On January 1, 1998, the CBR introduced a new ruble to replace existing
rubles. The new ruble has been redenominated so that one new ruble is equivalent
to one thousand old rubles. The old ruble continued in circulation until
December 31, 1998 and will be accepted as legal tender until December 31, 2002.
All amounts herein are presented in new rubles.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in the bank.
F-61
<PAGE> 168
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable
Accounts receivable are shown at their net realizable value which
approximates fair value. No allowance for uncollectible accounts was deemed
necessary at December 31, 1997 nor 1998.
Property and Equipment
Property and equipment are recorded at their historical cost. Depreciation
is provided on the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Network equipment........................................... 10 years
Other property and equipment................................ 3-5 years
</TABLE>
There is no depreciation charge for construction-in-progress. Depreciation
commences upon completion of the related project.
The Company recognizes impairment of property and equipment in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. During the years ended December 31, 1996, 1997 and
1998, the Company's analyses indicated that there was not an impairment of its
property and equipment.
Goodwill and Intangible Assets
Goodwill represents the excess of amounts paid by GTS over the fair market
value of the net assets of GTS-VOX at the acquisition date, and is being
amortized on a straight-line basis over generally five to ten years. Such
goodwill has been "pushed-down" from GTS and is included in the accompanying
consolidated financial statements. Intangible assets, principally
telecommunications licenses, are amortized on a straight-line basis over the
lesser of their estimated useful lives, generally three to five years, or their
contractual term. In accordance with Accounting Principles Board ("APB") Opinion
No. 17, "Intangible Assets," the Company continues to evaluate the amortization
period to determine whether events or circumstances warrant revised amortization
periods. Additionally, the Company considers whether the carrying value of such
assets should be reduced based on the future benefits of its intangible assets.
Revenue Recognition and Taxes on Revenue
Revenues from telecommunication traffic are recognized in the period in
which the traffic occurs. Revenues from port sales and other services are
recognized in the period in which the sales are made and services rendered.
Taxes on certain revenues were charged at rates ranging from 3.0% to 4.0% over
the three years ended December 31, 1996, 1997 and 1998 and amounted to $600,000,
$1,119,000 and $1,071,000, respectively, and are charged to selling general and
administrative expenses.
Income Taxes
The Company computes and records income taxes in accordance with FAS No.
109, "Accounting for Income Taxes".
Investment Incentive Deductions
Russian legislation allows for certain additional tax deductions related to
new asset investments. These deductions are accounted for as a reduction to
current income taxes in the year in which they arise.
F-62
<PAGE> 169
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOVERNMENT PENSION FUNDS
The Company contributes to the Russian Federation state pension fund,
social fund, medical insurance fund, unemployment fund and transport fund on
behalf of all its Russian employees. Contributions were 40.5%, 40.5% and 39.5%
from base payroll for 1996, 1997 and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments included in current assets and
liabilities is considered to be the carrying value.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income" ("FAS No. 130"). FAS No. 130 establishes standards for the
display of comprehensive income and its components in a full set of financial
statements. Comprehensive income includes all changes in equity during a period
except those resulting from the issuance of shares of stock and distributions to
shareholders. There were no differences between net income and comprehensive
income.
BUSINESS SEGMENTS
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("FAS No. 131"). FAS
No. 131 changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial reports to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management believes the Company's
operations comprise only one segment and as such adoption of FAS No. 131 did not
impact the disclosures made in the Company's financial statements.
4. GOODWILL
On September 6, 1995, GTS purchased its original 52.64% interest in the
Company. The purchase agreement required additional consideration through 1998,
either in cash or shares of GTS common stock, based on the actual earnings of
the Company. During the first quarter of 1997, the original purchase agreement
was modified such that the remaining consideration would only be in the form of
the issuance of GTS common stock. The maximum obligation pursuant to the
agreement was to issue 2,243,280 shares of GTS common stock.
In accordance with this agreement, GTS recorded $26,251,000 of goodwill
from 1995 through 1998. The goodwill resulted from the issuance of 1,009,200
shares of GTS common stock valued at $6.67 per share during 1997, and 673,260
shares of GTS common stock valued at $20.13 per share and 253,718 shares of
common stock valued at $23.55 per share during 1998.
Also during 1998, GTS acquired the remaining outstanding shares of the
Company from its minority shareholder for the cash purchase price of $40
million. In accordance with this purchase, goodwill of $30,183,000 was recorded.
F-63
<PAGE> 170
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The goodwill and related amortization expense related to these transactions
have been pushed down to the Company and are reflected in the accompanying
financial statements at the following amounts:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Goodwill
Beginning balance......................................... $ 5,200 $ 6,728
Purchases................................................. 1,528 49,706
------- -------
Ending balance.............................................. $ 6,728 $56,434
======= =======
Amortization Accumulated
Beginning balance......................................... $ (234) $(1,975)
Charge for the year....................................... (1,741) (7,427)
------- -------
Ending balance.............................................. $(1,975) $(9,402)
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Network equipment........................................... $6,165 $ 8,537
Other property and equipment................................ 281 508
------ -------
6,446 9,045
Accumulated depreciation.................................... (741) (1,686)
Construction-in-progress.................................... 619 908
------ -------
Net book value.............................................. $6,324 $ 8,267
====== =======
</TABLE>
Total depreciation expense on property and equipment for 1996, 1997 and
1998 was $108,000, $633,000, and $945,000, respectively.
6. INCOME TAXES
The Company has not recorded a provision for income taxes in the United
Kingdom as such activity has not generated taxable income. The Russian
Federation was the only tax jurisdiction in which the Company's income was
taxed. The income tax expense reported in the accompanying statements of income
and retained earnings for the years ended December 31, 1996, 1997 and 1998
represents the provision for current and deferred taxes.
Significant components of the provision for income taxes for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense........................................ $2,685 $6,467 $9,738
Deferred tax expense....................................... -- -- --
------ ------ ------
Provision for income taxes................................. $2,685 $6,467 $9,738
====== ====== ======
</TABLE>
F-64
<PAGE> 171
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at the Russian statutory tax rate of
35%.................................................... $ 4,046 $6,822 $ 8,109
Tax effect of permanent differences:
Investment incentive deductions..................... (220) (449) (1,167)
Depreciation differences due to revaluation of fixed
assets............................................ 40 120 390
Taxes on local currency exchange gains.............. -- -- 1,017
Other permanent differences......................... (1,219) (11) 1,400
Increase (decrease) in the valuation allowance for
deferred tax assets.................................... 38 (15) (11)
------- ------ -------
Income tax expense reported in the financial
statements............................................. $ 2,685 $6,467 $ 9,738
======= ====== =======
</TABLE>
The deferred tax balances are calculated by applying the statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying financial statements, and consist of the following
at December 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Depreciation.............................................. $ 23 $ 12
Accrual of expenses....................................... 163 141
Accrual of revenue........................................ (230) (169)
Other deferred tax assets................................. 67 28
----- -----
Deferred tax assets......................................... 23 12
Valuation allowance for deferred tax assets................. (23) (12)
----- -----
Net deferred tax liabilities................................ $ -- $ --
===== =====
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized
to reflect management's estimate of the deferred tax assets that are less likely
than not to be realized.
The Company paid Russian profits tax of $3,320,000, $4,725,000 and
$9,546,000, in 1996, 1997 and 1998, respectively.
7. SHAREHOLDERS' EQUITY
As of December 31, 1998 and 1997, the Company had 10,000 shares, L0.01 par
value per share, issued and outstanding. At December 31, 1997, GTS owned 5,264
shares and a group of entrepreneurs held the remaining 4,736 shares. On July 1,
1998, GTS acquired the shares held by the minority partners and became the sole
shareholder of the Company.
Dividends per share of $20, $544 and $185 were paid to holders of the
Company's common shares during the years ended December 31, 1998, 1997 and 1996,
respectively. Total cash paid for dividends was $195,000, $5,437,000 and
$1,848,000 during the years ended 1998, 1997 and 1996, respectively.
F-65
<PAGE> 172
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
Transactions and balances with GTS and its affiliates were as follows, as
of and for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales...................................................... $4,290 $6,420 $7,902..
Telecommunication lease expense and traffic costs.......... -- 152 284
Amounts due from affiliates................................ 1,211 2,146 2,218
Amounts due to shareholder and affiliates.................. 211 44 36
</TABLE>
Transactions and balances with MTU Inform (one of TCM's shareholders) were
as follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Telecommunication settlement and rent expense............... $911 $2,775 $3,259
Balances in accrued liabilities............................. -- 117 204
Balances in accounts receivable............................. -- 126 35
</TABLE>
Pursuant to a 1995 purchase agreement, GTS received its interest in the
Company, the intermediate holding company of TCM, in exchange for a note in the
principal amount of $0.7 million issued to the sellers and certain additional
consideration to its partners payable in the form of either cash or Common Stock
of GTS based upon its financial performance. GTS paid the note in 1996. On
January 17, 1997, the agreement was amended such that the consideration would
only be in the form of the issuance of Common Stock of GTS. In the first quarter
of 1997, pursuant to this agreement GTS issued 1,009,200 common shares at the
then current fair market value of $6.67 per share. In addition, in April 1998
and July 1998, pursuant to this agreement GTS issued 673,260 and 253,718 shares
of its common stock at the then current fair market values of $20.13 per share
and $23.55 per share, respectively. Further, in July 1998, GTS purchased the
remaining 47.36% interest in GTS-Vox Limited for $40.5 million from its former
partners. Such amounts have been pushed down to the Company and are reflected in
the accompanying financial statements.
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash deposits and trade accounts
receivable. The Company deposits the majority of its available cash with a
foreign-owned financial institution in Russia and maintains certain balances
with a Russian financial institution. In addition, the Company maintains certain
cash balances with a financial institution in the United Kingdom. The Company's
sales and accounts receivable are made to and due from a variety of
international and Russian business customers. As of December 31, 1996, one
customer accounted for 54% of revenues and 100% of accounts receivable. As of
December 31, 1997, this same customer accounted for 41% of revenues and 90% of
accounts receivable. As of December 31, 1998, this same customer accounted for
46% of revenues and 78% of accounts receivable, respectively. The Company has no
other significant concentrations of credit risk except for transactions with
related parties as discussed in Note 8.
10. COMMITMENTS
The Company has several cancelable operating leases for office and
warehouse space and telecommunications lines with terms ranging from one to five
years.
F-66
<PAGE> 173
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense for 1996, 1997 and 1998 was $75,000, $188,000, and
$195,000, respectively.
11. CONTINGENCIES
The tax, legal and banking regulatory system continues to evolve in the
Russian Federation as the Russian government manages the transformation from a
command to a market-oriented economy. There were many new tax and foreign
currency laws and related regulations introduced during 1997 and 1998 which were
not always clearly written and were, at times, conflicting. In addition, their
interpretation is subject to the opinions of a variety of local, regional and
federal tax inspectors, the Central Bank of Russia officials and the Ministry of
Finance. Instances of inconsistent opinions among and between these authorities
are not unusual.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amounts paid to date and accrued as of December
31, 1998. Management believes, based upon its best estimates, that the Company
has paid or accrued all taxes that are applicable for the current and prior
years, and complied with all essential provisions of laws and regulations of the
Russian Federation. In management's opinion, the ultimate determination of the
Company's overall tax liability and potential loss contingencies, to the extent
not previously provided for, will not have a material effect on the financial
position of the Company.
The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation and tax regulations which significantly impact Russian
economy. The likelihood of such occurrences and their effect on the Company
could have a significant impact on the Company's current activity and its
overall ability to continue operations. The Company does not believe that these
contingencies, as related to its operations, are any more significant than those
of similar enterprises in Russia.
12. IMPACT OF THE YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software which is not "Year 2000
Compliant" may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure of miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
The Company has completed an assessment and has modified portions of its
software so that its computer systems will function properly with respect to
dates in year 2000 and thereafter. The total cost of modification or replacement
is included in the maintenance agreements with the respective software
companies. To date, the Company has taken actions, primarily for assessment of
the Year 2000 Issue, and appropriately modified and upgraded its software.
The project has been completed which is prior to any anticipated impact on
the Company's operating systems. The Company believes that such modifications to
existing software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. If, however, such modifications have been
made incorrectly, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. In particular, it is unclear as to the extent that the Russian
government and other organizations who provide significant infrastructure
services within the Russian
F-67
<PAGE> 174
GTS-VOX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Federation have addressed the Year 2000 Issue. Furthermore, the current crisis
discussed in Notes 1 and 11 could adversely affect the ability of the government
and such organizations to fund adequate Year 2000 compliance programs. There is
no guarantee that the systems of the government or of other organizations on
which the Company relies will be timely converted and would not have an adverse
effect on the Company and its systems.
The costs of the project and the fact that the Company has completed its
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. There can be no guarantee,
however, that these estimates will be achieved and actual results could differ
materially from those anticipated. The Company's financial statements as of
December 31, 1998 and for the year then ended do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts or classifications of liabilities that may result from the
outcome of this uncertainty.
F-68
<PAGE> 175
GTS-VOX LIMITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER OF 1999
(UNAUDITED)
F-69
<PAGE> 176
GTS-VOX LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 7,349 $ 7,493
Accounts receivable, net.................................. 4,368 2,899
Due from affiliated companies............................. 7,217 11,301
Prepaid expenses and other assets......................... 1,160 851
------- -------
Total current assets.............................. 20,094 22,544
Property and equipment, net of accumulated depreciation of
$1,686 and $2,210 at December 31, 1998 and June 30, 1999,
respectively.............................................. 8,267 9,190
Goodwill and intangible assets, net of accumulated
amortization of $9,713 and $15,244 at December 31, 1998
and June 30,1999, respectively............................ 47,433 41,543
------- -------
TOTAL ASSETS...................................... $75,794 $73,277
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 230 $ 188
Accrued expenses.......................................... 1,783 255
Due to affiliated companies............................... 35 125
Taxes accrued or payable.................................. 517 70
------- -------
TOTAL LIABILITIES................................. 2,565 638
COMMITMENT AND CONTINGENCIES
Minority interest......................................... 949 1,206
SHAREHOLDERS' EQUITY
Common stock, L0.01 par value (10,000 shares authorized,
issued and outstanding at December 31, 1998 and June
30, 1999).............................................. -- --
Additional paid-in capital.................................. 57,278 57,088
Retained earnings........................................... 15,002 14,345
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 72,280 71,433
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $75,794 $73,277
======= =======
</TABLE>
F-70
<PAGE> 177
GTS-VOX LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1998 1999 1998 1999
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES, NET........................................ $12,130 $7,180 $21,586 $15,471
COST OF REVENUES..................................... 2,936 1,599 5,341 3,474
------- ------ ------- -------
GROSS MARGIN......................................... 9,194 5,581 16,245 11,997
OPERATING EXPENSES:
Selling, general and administrative................ 1,007 1,289 1,766 2,344
Depreciation and amortization...................... 1,209 3,052 2,479 6,066
------- ------ ------- -------
Total operating expenses................... 2,216 4,341 4,245 8,410
------- ------ ------- -------
Income from operations............................. 6,978 1,240 12,000 3,587
OTHER INCOME/(EXPENSE):
Interest income.................................... 174 362 412 633
Foreign currency (losses) gains.................... (174) 54 (324) (406)
------- ------ ------- -------
Net income before income taxes and minority
interest........................................ 6,978 1,656 12,088 3,814
Income taxes....................................... 2,842 1,616 4,899 4,215
------- ------ ------- -------
Net income (loss) before minority interest......... 4,136 40 7,189 (401)
======= ====== ======= =======
Minority interest.................................. 263 145 465 257
------- ------ ------- -------
Net income (loss).................................. $ 3,873 $ (105) $ 6,724 $ (658)
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-71
<PAGE> 178
GTS-VOX LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1999 1998 1999
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ 3,873 $ (105) $ 6,724 $ (658)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 1,209 3,052 2,479 6,066
Minority interest, net of dividends.................. 174 112 324 258
Foreign currency (gains) losses...................... (136) (54) 67 406
Changes in assets and liabilities:
Accounts receivable.................................. (1,137) 2,619 (1,801) 883
Due from affiliates, net............................. (3,616) (2,190) (5,460) (4,084)
Prepaid expenses and other assets.................... (1,157) 598 (1,553) 266
Trade payables and accrued liabilities............... (140) (2,663) 2,060 (1,634)
------- ------- ------- -------
Net cash provided by operating activities.............. (930) 1,369 2,840 1,503
INVESTING ACTIVITIES
Purchases of property and equipment.................... (50) (1,192) (680) (1,458)
Disposal of short-term investments..................... -- -- 1,704 --
------- ------- ------- -------
Net cash (used in) provided by investing activities.... (50) (1,192) 1,024 (1,458)
------- ------- ------- -------
FINANCING ACTIVITIES -- Proceeds from shareholders..... -- 137 -- 170
Effect of exchange rate changes on cash and cash
equivalents.......................................... (51) -- (133) (71)
Net (decrease) increase in cash and cash equivalents... (1,031) 314 3,731 144
Cash and cash equivalents at beginning of period....... 8,304 7,179 3,542 7,349
------- ------- ------- -------
Cash and cash equivalents at end of period............. $ 7,273 $ 7,493 $ 7,273 $ 7,493
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-72
<PAGE> 179
GTS-VOX LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
GTS-Vox Limited, a private limited company organized pursuant to the
Companies Act of 1985 of England and Wales (the "Company" or "Vox"), is a
holding company with its principal asset being its 95% ownership interest in
TeleCommunications of Moscow LLC ("TCM"). Global TeleSystems Group, Inc. ("GTS")
owned 52.6% of Vox through June 1998. Effective July 1, 1998, Vox became a
wholly owned subsidiary of GTS. Vox acquired the remaining 5% ownership interest
in TCM on August 16, 1999.
TCM is an integral part of GTS's competitive local exchange carrier
services in Moscow. TCM provides carriers with telephone numbers, ports and
interconnectivity to the Moscow city telephone network through its local
gateway. TCM has constructed 100,000 ports, each corresponding to a unique
telephone number. TCM's infrastructure is integrated into the Moscow city
incumbent telephone network at 64 transit and local exchanges allowing it to
deliver traffic within the local public network.
In the opinion of management, the accompanying unaudited condensed
financial statements of the Company contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the Company's financial
position as of December 31, 1998 and June 30, 1999, and the results of
operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded. It is
suggested that these financial statements be read in conjunction with the
Company's 1998 audited financial statements and the notes related thereto. The
results of operations for the six months ended June 30, 1999 may not be
indicative of the operating results for the full year.
The Company maintains its records and prepares its financial statements in
Russian rubles in accordance with the requirements of Russian accounting and tax
legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's statutory books, which are
appropriate to present the financial position, results of operations and cash
flows in accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). The principal adjustments are related to certain
accrued revenue and expenses, foreign currency translation, deferred taxation,
and depreciation and valuation of property and equipment. The preparation of
financial statements, in conformity with US GAAP, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Business Environment
There is currently a high level of political and economic instability and
uncertainty in the Russian Federation. As a result of the financial crisis in
August 1998, financial markets were subject to significant downward adjustments.
The national currency was severely devalued during the crisis and continued to
deteriorate through the end of the year. The Russian banking system suffered
significant liquidity problems, and several large Russian banking institutions
stopped operations and/or experienced significant losses. The Russian government
defaulted on, and announced a restructuring of, its internal debt due to a lack
of funds and is negotiating forgiveness and/or restructuring of its external
debt. Difficulties with the collection of budgeted tax revenues and fulfilling
the significant pension and wages arrears to individuals in many regions and
constituencies of the Russian Federation have continued. The economic crisis was
further exacerbated by continuing political uncertainties over the development,
and application, of existing and future legislation, tax regulations, and
economic programs supported by the majority of political institutions and
international funding agencies. These matters had a direct negative impact on
the financial position and results of operations of the Company.
F-73
<PAGE> 180
GTS-VOX LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company is required to review whether the carrying amount
of an asset may be recoverable when an event indicates that the carrying amount
of an asset may not be recoverable. The financial crisis in Russia was an event
that was considered an indicator of impairment that caused the Company to
evaluate and assess whether or not it had any impairment of assets. Upon the
conclusion of an analysis, the Company determined that there was no impairment
that would result in a write-off of assets.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from nonowner sources. For the six months
ended June 30, 1998 and 1999, comprehensive income for the Company is equal to
net income.
3. CONTINGENCIES
The tax, legal and banking regulatory system continues to evolve in the
Russian Federation as the Russian government manages the transformation from a
command to a market-oriented economy. There were many new tax and foreign
currency laws and related regulations introduced during 1998 and 1999 which were
not always clearly written and were, at times, conflicting. In addition, their
interpretation is subject to the opinions of a variety of local, regional and
federal tax inspectors, the Central Bank of Russia officials and the Ministry of
Finance. Instances of inconsistent opinions among and between these authorities
are not unusual.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amounts paid to date and accrued as of December
31, 1998 and June 30, 1999. Management believes, based upon its best estimates,
that the Company has paid or accrued all taxes that are applicable for the
current and prior years, and complied with all essential provisions of laws and
regulations of the Russian Federation.
The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation and tax regulations which significantly impact the
Russian economy. The likelihood of such occurrences and their effect on the
Company could have a significant impact on the Company's current activity and
its overall ability to continue operations. The Company does not believe that
these contingencies, as related to its operations, are any more significant than
those of similar enterprises in Russia.
F-74
<PAGE> 181
GLOSSARY OF TELECOMMUNICATIONS INDUSTRY TERMS
AMPS (Advanced Mobile Phone System) -- The cellular mobile telephone system
based on analog technology that is now used in US systems. Each AMPS cell can
handle 832 simultaneous conversations.
Asynchronous Transfer Mode (ATM) -- A switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a switching and
transmission of mixed voice, data, and video at varying rates. The asynchronous
transfer mode format can be used by many different information systems,
including LANs.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The information-carrying capability of a transmission medium
is measured by its bandwidth, which is the relative range of frequencies that
can be passed without distortion by such medium. Bandwidth is measured in Hertz,
but may also be expressed as the number of bits that can be transmitted per
second.
Capacity -- The information carrying ability of a telecommunications
facility.
Carrier -- A provider of communications transmission services by fiber,
wire, or radio.
Competitive Local Exchange Carrier (CLEC) -- A competitive local exchange
carrier is an alternative local carrier that competes with incumbent operators
by offering a similar range of services, typically on the competitive local
exchange carrier's overlay network. Competitive local exchange carriers compete
on a selective basis for local exchange services, as well as long distance,
international, Internet access and entertainment.
Dedicated -- Refers to telecommunications lines dedicated to or reserved
for use by particular customers along predetermined routes (in contrast to
telecommunications lines within the local telephone company's public switched
network).
Digital -- Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission/switching technologies
employ a sequence of discrete, distinct pulses to represent information, as
opposed to the continuously variable analog signal.
Earth Station -- A terrestrial antenna and the supporting equipment used to
receive and/or transmit telecommunications signals via satellite.
Electrosvyaz -- Regional telephone company in Russia and other countries of
the Commonwealth of Independent States.
Enhanced Network Services -- Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, asynchronous
transfer mode, or digital interexchange private line facilities. Enhanced
network services also include applications on such networks, including Internet
access and other Internet services.
Frame Relay -- A wide area transport technology that organizes data into
units called frames instead of providing fixed bandwidth as with private lines.
A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access speeds
ranging from 56 kilobits per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not presently well-suited
for voice and video applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on modern fiber optic
networks.
Gateway -- A network element interconnecting two otherwise incompatible
networks, network nodes, subnetworks or devices; performs a protocol conversion
operation across a wide spectrum of communications functions.
G-1
<PAGE> 182
GSM (Global System for Mobile Communications) -- Formerly known as Groupe
Speciale Mobile. GSM began as a pan-European standard for digital cellular
systems. The name was changed to reflect the fact that the standard has been
adopted by several countries in Asia.
Interconnection -- Connection of a piece of telephone equipment to the
telephone network, or a data terminal to a data communications network. Also
refers to the connection of one communications network to another so that users
of one network can communicate with users of another network.
IPLC (International Private Leased Circuits) -- A direct channel leased
from a carrier which is dedicated to a customer's use between specified points
across national boundaries.
ISDN (Integrated Services Digital Network) -- ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, for example, and also
supports a multitude of value-added switched service applications. ISDN's
combined voice and data networking capabilities reduce costs for end users and
result in more efficient use of available facilities. ISDN combines standards
for highly flexible customer to network signaling with both voice and data
within a common facility.
LAN (Local Area Network) -- The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
Local Loop -- The local loop is that portion of the local telephone network
that connects the customer's premises to the local exchange provider's central
office or switching center. This includes all the facilities starting from the
customer premise interface which connects to the inside wiring and equipment at
the customer premise to a terminating point within the switching wire center.
MAN (Metropolitan Area Network) -- A high-speed data intra-city network
that links multiple locations within a city. Typically extends as far as 50
kilometers, operates at speeds from 1 megabits per second to 200 megabits per
second and provides an integrated set of services for real-time data, voice and
image transmission.
NMT (Nordic Mobile Telephone System) -- A cellular standard widely used in
Northern Europe.
Overlay Network -- An overlay network is a separate, independent
telecommunications network offering a particular service, or group of services,
in a geographical area similar to the area serviced by an incumbent operator. An
overlay network is typically deployed to address performance issues in a local
public telephone network that has not been sufficiently upgraded or maintained
or which does not have adequate capacity to service the needs of large volume
users.
PBX/PABX (private branch exchange/private automatic branch exchange) -- A
customer operated switch on customer premises, typically used by large
businesses with multiple telephone lines.
POP (Point of Presence) -- A physical place where a carrier has placed
equipment, typically a router or a switch, to allow network access.
Port -- A port is any point of entry or exit into a network.
Private Line -- A direct channel specifically dedicated to a customer's use
between specified points. Private lines offer highly available connectivity, as
they are dedicated to the use of a single organization. As private lines are
priced solely based on distance, with no usage-sensitive cost element, they can
be used constantly and at maximum capacity. Therefore, they offer a highly
cost-effective alternative to usage-sensitive, switched services. Private
networks comprise numbers of private lines.
PSTN (Public switched telecommunications network) -- Refers to the local,
long distance and international phone system typically used by the public at
large.
G-2
<PAGE> 183
Redundant Electronics -- Describes a telecommunications facility using two
separate electronic devices to transmit the telecommunications signal so that if
one device malfunctions, the signal may continue without interruption.
Route Kilometers -- The number of kilometers along which fiber optic cables
are installed.
SDH (Synchronous Digital Hierarchy) -- the international standard for
ultra-high-speed broadband fiber-optic, digital transmission networks that use
equipment from many different manufacturers and carry a variety of services. The
basic communications channel of SDH is a 155.52 megabits per second transmission
channel that is multiplexed upward.
Switch -- A mechanical or electronic device that opens or closes circuits
or selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users.
TCP/IP (Transmission Control Protocol/Internet Protocol) -- an "open"
standard operating and interface protocol for federal government local area
networks that use devices from multiple vendors. TCP/IP, first developed by the
US Defense Department, has been adopted by some academic and business
institutions who deal regularly with the federal government.
Trunk -- A telephone circuit with a switch at both ends. A trunk may
connect two central office switches, or two PBXs, or a PBX and a central office
switch.
VSAT (Very Small Aperture Terminal) -- A relatively small satellite
antenna, typically 1.5 to 3.0 meters in diameter used for satellite-based
point-to-multipoint data communications applications.
X.25 -- A standard governing the interface between data terminals and data
circuit termination equipment for terminals on packet-switched data networks.
G-3
<PAGE> 184
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF THE SHARES OF
COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 7
Use of Proceeds............................ 20
Dividend Policy............................ 20
Dilution................................... 21
Capitalization............................. 22
Selected Historical Consolidated Financial
Data..................................... 23
Selected Pro Forma Consolidated Financial
Data..................................... 24
Ventures Accounted for Under the Equity
Method of Accounting..................... 25
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................ 27
Business................................... 52
The Political, Legal and Economic
Environments in Russia and Ukraine....... 74
Regulation................................. 78
Management................................. 81
Beneficial Ownership of Management and
Principal Stockholder.................... 89
Relationship with GTS and Certain
Related Party Transactions............... 90
Description of Certain Financing
Arrangements and Indebtedness............ 93
Description of Capital Stock............... 95
Shares Eligible for Future Sale............ 96
Certain United States Tax Consequences
to Non-US Holders of Common Stock........ 97
Underwriting............................... 100
Legal Matters.............................. 103
Where You Can Find More Information........ 103
Experts.................................... 103
Forward-Looking Statements................. 104
Index To Financial Statements.............. F-1
Glossary of Telecommunications Industry
Terms.................................... G-1
</TABLE>
---------------------
DEALER PROSPECTUS DELIVERY OBLIGATION:
Until , 1999, (25 days after the date of this prospectus) all dealers
that buy, sell or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. Dealers
are also obligated to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
[GOLDEN TELECOM LOGO]
4,650,000 SHARES
COMMON STOCK
DEUTSCHE BANK
BEAR, STEARNS & CO. INC.
ING BARINGS
Prospectus
, 1999
<PAGE> 185
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 56,213
NASD filing fee............................................. 20,720
Nasdaq listing fee.......................................... 95,000
Blue Sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 1,600,000
Attorneys' fees and expenses................................ 730,000
Accountants' fees and expenses.............................. 600,000
Transfer agent's and registrar's fees and expenses.......... 3,000
Miscellaneous............................................... 385,067
----------
Total............................................. $3,500,000
==========
</TABLE>
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Golden Telecom Inc.'s Certificate of Incorporation and By-laws provide for
indemnification of its directors and officers to the fullest extent permitted by
the Delaware General Corporate Law, as such law may be amended from time to
time.
Article 8 of the Underwriting Agreement (Exhibit 1.1 hereto) contains
provisions for certain indemnification rights to the directors and officers of
Golden Telecom, Inc.
In addition, Golden Telecom, Inc. maintains liability insurance for its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of
Golden Telecom, Inc.
3.2 -- Amended and Restated By-laws of Golden Telecom, Inc.
4.1* -- Specimen certificate representing shares of Common Stock.
4.2* -- Form of Registration Rights Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
4.3* -- Form of Warrant Agreement.
4.4 -- Form of Registration Rights Agreement among Baring Vostok
Private Equity Fund LP, Guernsey, First NIS Regional Fund
SICAF and Golden Telecom, Inc.
5.1 -- Amended Opinion of Shearman & Sterling as to the legality
of the shares of common stock of Golden Telecom, Inc.
10.1* -- Form of Contribution Agreement between Global TeleSystems
Group, Inc. and Golden Telecom, Inc.
</TABLE>
II-1
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.2* -- Form of Shareholders' Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.3* -- Form of Administrative Services Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.4* -- Form of Trademark Transfer Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.5* -- Form of Indemnification Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.6* -- Form of Employee Benefits Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.7* -- Form of Golden Telecom, Inc. 1999 Equity Participation
Plan.
10.8* -- Agreement No. 26-12/97, dated December 26, 1997, among
TCM, MTU-Inform and VimpelCom.
10.9* -- Agreement No. 08-04/98, dated April 8, 1998, among TCM,
MTU-Inform and VimpelCom.
10.10* -- Agreement No. 01-08/98, dated August 1, 1998, among TCM,
MTU-Inform and KB-Impulse.
21.1* -- List of subsidiaries of Golden Telecom, Inc.
23.1 -- Consent of Ernst & Young (CIS) Limited, Independent
Auditors (Golden Telecom, Inc.)
23.2 -- Consent of Ernst & Young (CIS) Limited, Independent
Auditors (EDN Sovintel LLC).
23.3 -- Consent of Ernst & Young (CIS) Limited, Independent
Auditors (GTS-Vox Limited).
23.4 -- Consent of Shearman & Sterling (included in its opinion
in Exhibit 5.1).
24.1* -- Powers of Attorney.
24.2* -- Power of Attorney.
24.3 -- Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
(b) Consolidated Financial Statement Schedules.
We have furnished Schedule II -- Valuation and Qualifying Accounts on page
II-5 for Golden Telecom, Inc.
All other schedules are omitted because they are not applicable or not
required, or because the required information is either incorporated herein by
reference or included in the financial statements or notes thereto included in
this report.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the
II-2
<PAGE> 187
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
Moscow, Russia on September 29, 1999.
GOLDEN TELECOM, INC.
By: /s/ STEWART P. REICH
----------------------------------
Name: Stewart P. Reich
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEWART P. REICH President and Chief September 29, 1999
- ----------------------------------------------------- Executive Officer,
Stewart P. Reich Director (Principal
Executive Officer)
/s/ DAVID J. WISHER Chief Financial Officer September 29, 1999
- ----------------------------------------------------- (Principal Financial and
David J. Wisher Accounting Officer)
* Director September 29, 1999
- -----------------------------------------------------
Alexander M. Knaster
* Director September 29, 1999
- -----------------------------------------------------
Grier C. Raclin
* Director September 29, 1999
- -----------------------------------------------------
Robert A. Schriesheim
* Director September 29, 1999
- -----------------------------------------------------
H. Brian Thompson
*By /s/ DAVID J. WISHER
-------------------------------------------------
David J. Wisher
Attorney in Fact
</TABLE>
II-4
<PAGE> 189
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
GOLDEN TELECOM, INC.
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- ----- ---------- ------------------------- ---------- ---------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO RESERVES BALANCE
BEGINNING COSTS AND FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES ACQUISITIONS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts at
12/31/98................................ 3,947 4,418 589 (4,746) 4,208
Allowance for doubtful accounts at
12/31/97................................ 766 3,290 -- (109) 3,947
Allowance for doubtful accounts at
12/31/96................................ -- 766 -- -- 766
</TABLE>
<PAGE> 190
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of
Golden Telecom, Inc.
3.2 -- Amended and Restated By-laws of Golden Telecom, Inc.
4.1* -- Specimen certificate representing shares of Common Stock.
4.2* -- Form of Registration Rights Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
4.3* -- Form of Warrant Agreement.
4.4 -- Form of Registration Rights Agreement among Baring Vostok
Private Equity Fund LP, Guernsey, First NIS Regional Fund
SICAF and Golden Telecom, Inc.
5.1 -- Amended Opinion of Shearman & Sterling as to the legality
of the shares of common stock of Golden Telecom, Inc.
10.1* -- Form of Contribution Agreement between Global TeleSystems
Group, Inc. and Golden Telecom, Inc.
10.2* -- Form of Shareholders' Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.3* -- Form of Administrative Services Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.4* -- Form of Trademark Transfer Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.5* -- Form of Indemnification Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.6* -- Form of Employee Benefits Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.7* -- Form of Golden Telecom, Inc. 1999 Equity Participation
Plan.
10.8* -- Agreement No. 26-12/97, dated December 26, 1997, among
TCM, MTU-Inform and VimpelCom.
10.9* -- Agreement No. 08-04/98, dated April 8, 1998, among TCM,
MTU-Inform and VimpelCom.
10.10* -- Agreement No. 01-08/98, dated August 1, 1998, among TCM,
MTU-Inform and KB-Impulse.
21.1* -- List of subsidiaries of Golden Telecom, Inc.
23.1 -- Consent of Ernst & Young (CIS) Limited, Independent
Auditors (Golden Telecom, Inc.)
23.2 -- Consent of Ernst & Young (CIS) Limited, Independent
Auditors (EDN Sovintel LLC).
23.3 -- Consent of Ernst & Young (CIS) Limited, Independent
Auditors (GTS-Vox Limited).
23.4 -- Consent of Shearman & Sterling (included in its opinion
in Exhibit 5.1).
24.1* -- Powers of Attorney.
24.2* -- Power of Attorney.
24.3 -- Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
OF
GOLDEN TELECOM, INC.
ARTICLE I
OFFICES
SECTION 1.01. Registered Office. The registered office of
Golden Telecom, Inc. (the "Corporation") in the State of Delaware shall be at
the principal office of National Corporate Research, Ltd. in the City of Dover,
County of Kent, and the registered agent in charge thereof shall be National
Corporate Research, Ltd.
SECTION 1.02. Other Offices. The Corporation may also have
an office or offices at any other place or places within or without the State
of Delaware as the Board of Directors of the Corporation (the "Board") may from
time to time determine or the business of the Corporation may from time to time
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. Annual Meetings. The annual meeting of
stockholders of the Corporation for the election of directors of the
Corporation ("Directors"), and for the transaction of such other business as
may properly come before such meeting, shall be held at such place, date and
time as shall be fixed by the Board and designated in the notice or waiver of
notice of such annual meeting; provided, however, that no annual meeting of
stockholders need be held if all actions, including the election of Directors,
required by the General Corporation Law of the State of Delaware (the "General
Corporation Law") to be taken at such annual meeting are taken by written
consent in lieu of meeting pursuant to Section 2.09 hereof.
SECTION 2.02. Special Meetings. Special meetings of
stockholders for any purpose or purposes may be called by the Board or the
Chairman of the Board, the President or the Secretary of the Corporation (the
"Secretary") or by the recordholders of at least a majority of
<PAGE> 2
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the shares of common stock of the Corporation issued and outstanding ("Shares")
and entitled to vote thereat, to be held at such place, date and time as shall
be designated in the notice or waiver of notice thereof.
SECTION 2.03. Notice of Meetings. (a) Except as otherwise
provided by law, written notice of each annual or special meeting of
stockholders stating the place, date and time of such meeting and, in the case
of a special meeting, the purpose or purposes for which such meeting is to be
held, shall be given personally or by first-class mail (airmail in the case of
international communications) to each recordholder of Shares (a "Stockholder")
entitled to vote thereat, not less than 10 nor more than 60 days before the
date of such meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, postage prepaid, directed to the
Stockholder at such Stockholder's address as it appears on the records of the
Corporation. If, prior to the time of mailing, the Secretary shall have
received from any Stockholder a written request that notices intended for such
Stockholder are to be mailed to some address other than the address that
appears on the records of the Corporation, notices intended for such
Stockholder shall be mailed to the address designated in such request.
(b) Notice of a special meeting of Stockholders may be
given by the person or persons calling the meeting, or, upon the written
request of such person or persons, such notice shall be given by the Secretary
on behalf of such person or persons. If the person or persons calling a
special meeting of Stockholders give notice thereof, such person or persons
shall deliver a copy of such notice to the Secretary. Each request to the
Secretary for the giving of notice of a special meeting of Stockholders shall
state the purpose or purposes of such meeting.
SECTION 2.04. Waiver of Notice. Notice of any annual or
special meeting of Stockholders need not be given to any Stockholder who files
a written waiver of notice with the Secretary, signed by the person entitled to
notice, whether before or after such meeting. Neither the business to be
transacted at, nor the purpose of, any meeting of Stockholders need be
specified in any written waiver of notice thereof. Attendance of a Stockholder
at a meeting, in person or by proxy, shall constitute a waiver of notice of
such meeting, except when such Stockholder attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business on the grounds that the notice of such meeting was inadequate or
improperly given.
SECTION 2.05. Adjournments. Whenever a meeting of
Stockholders, annual or special, is adjourned to another date, time or place,
notice need not be given of the adjourned meeting if the date, time and place
thereof are announced at the meeting at which the adjournment is taken. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each Stockholder entitled to vote thereat. At the adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.
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SECTION 2.06. Quorum. Except as otherwise provided by law or
the Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), the recordholders of a majority of the Shares entitled to vote
thereat, present in person or by proxy, shall constitute a quorum for the
transaction of business at all meetings of Stockholders, whether annual or
special. If, however, such quorum shall not be present in person or by proxy
at any meeting of Stockholders, the Stockholders entitled to vote thereat may
adjourn the meeting from time to time in accordance with Section 2.05 hereof
until a quorum shall be present in person or by proxy.
SECTION 2.07. Voting. Each Stockholder shall be entitled to
one vote for each Share held of record by such Stockholder. Except as
otherwise provided by law or the Certificate of Incorporation, when a quorum is
present at any meeting of Stockholders, the vote of the recordholders of a
majority of the Shares constituting such quorum shall decide any question
brought before such meeting.
SECTION 2.08. Proxies. Each Stockholder entitled to vote at
a meeting of Stockholders or to express, in writing, consent to or dissent from
any action of Stockholders without a meeting may authorize another person or
persons to act for such Stockholder by proxy. Such proxy shall be filed with
the Secretary before such meeting of Stockholders or such action of
Stockholders without a meeting, at such time as the Board may require. No
proxy shall be voted or acted upon more than three years from its date, unless
the proxy provides for a longer period.
SECTION 2.09. Stockholders' Consent in Lieu of Meeting. Any
action required by the General Corporation Law to be taken at any annual or
special meeting of Stockholders, and any action which may be taken at any
annual or special meeting of Stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the recordholders of Shares having not
less than the minimum number of votes necessary to authorize or take such
action at a meeting at which the recordholders of all Shares entitled to vote
thereon were present and voted.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of
the Corporation shall be managed by the Board, which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law, the Certificate of Incorporation or these By-laws directed or required to
be exercised or done by Stockholders.
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SECTION 3.02. Number and Term of Office. The number of
Directors shall be three or such other number as shall be fixed from time to
time by the Board. Directors need not be Stockholders. Directors shall be
elected at the annual meeting of Stockholders or, if, in accordance with
Section 2.01 hereof, no such annual meeting is held, by written consent in lieu
of meeting pursuant to Section 2.09 hereof, and each Director shall hold office
until his successor is elected and qualified, or until his earlier death or
resignation or removal in the manner hereinafter provided.
SECTION 3.03. Resignation. Any Director may resign at any
time by giving written notice to the Board, the Chairman of the Board of the
Corporation (the "Chairman") or the Secretary. Such resignation shall take
effect at the time specified in such notice or, if the time be not specified,
upon receipt thereof by the Board, the Chairman or the Secretary, as the case
may be. Unless otherwise specified therein, acceptance of such resignation
shall not be necessary to make it effective.
SECTION 3.04. Removal. Any or all of the Directors may be
removed, with or without cause, at any time by vote of the recordholders of a
majority of the Shares then entitled to vote at an election of Directors, or by
written consent of the recordholders of Shares pursuant to Section 2.09 hereof.
SECTION 3.05. Vacancies. Vacancies occurring on the Board as
a result of the removal of Directors without cause may be filled only by vote
of the recordholders of a majority of the Shares then entitled to vote at an
election of Directors, or by written consent of such recordholders pursuant to
Section 2.09 hereof. Vacancies occurring on the Board for any other reason,
including, without limitation, vacancies occurring as a result of the creation
of new directorships that increase the number of Directors, may be filled by
such vote or written consent or by vote of the Board or by written consent of
the Directors pursuant to Section 3.08 hereof. If the number of Directors then
in office is less than a quorum, such other vacancies may be filled by vote of
a majority of the Directors then in office or by written consent of all such
Directors pursuant to Section 3.08 hereof. Unless earlier removed pursuant to
Section 3.04 hereof, each Director chosen in accordance with this Section 3.05
shall hold office until the next annual election of Directors by the
Stockholders and until his successor shall be elected and qualified.
SECTION 3.06. Meetings. (a) Annual Meetings. As soon as
practicable after each annual election of Directors by the Stockholders, the
Board shall meet for the purpose of organization and the transaction of other
business, unless it shall have transacted all such business by written consent
pursuant to Section 3.08 hereof.
(b) Other Meetings. Other meetings of the Board shall be
held at such times as the Chairman, the President of the Corporation (the
"President"), the Secretary or a majority of the Board shall from time to time
determine.
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(c) Notice of Meetings. The Secretary shall give written
notice to each Director of each meeting of the Board, which notice shall state
the place, date, time and purpose of such meeting. Notice of each such meeting
shall be given to each Director, if by mail, addressed to him at his residence
or usual place of business, at least two days before the day on which such
meeting is to be held, or shall be sent to him at such place by telecopy,
telegraph, cable, or other form of recorded communication, or be delivered
personally or by telephone not later than the day before the day on which such
meeting is to be held. A written waiver of notice, signed by the Director
entitled to notice, whether before or after the time of the meeting referred to
in such waiver, shall be deemed equivalent to notice. Neither the business to
be transacted at, nor the purpose of any meeting of the Board need be specified
in any written waiver of notice thereof. Attendance of a Director at a meeting
of the Board shall constitute a waiver of notice of such meeting, except as
provided by law.
(d) Place of Meetings. The Board may hold its meetings
at such place or places within or without the State of Delaware as the Board or
the Chairman may from time to time determine, or as shall be designated in the
respective notices or waivers of notice of such meetings.
(e) Quorum and Manner of Acting. One-third of the total
number of Directors then in office (but in no event less than two if the total
number of directorships, including vacancies, is greater than one and in no
event a number less than one-third of the total number of directorships,
including vacancies) shall be present in person at any meeting of the Board in
order to constitute a quorum for the transaction of business at such meeting,
and the vote of a majority of those Directors present at any such meeting at
which a quorum is present shall be necessary for the passage of any resolution
or act of the Board, except as otherwise expressly required by law, the
Certificate of Incorporation or these By-laws. In the absence of a quorum for
any such meeting, a majority of the Directors present thereat may adjourn such
meeting from time to time until a quorum shall be present.
(f) Organization. At each meeting of the Board, one of
the following shall act as chairman of the meeting and preside, in the
following order of precedence:
(i) the Chairman;
(ii) the President;
(iii) any Director chosen by a majority of the
Directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
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SECTION 3.07. Committees of the Board. The Board may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more Directors. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of such committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
Director to act at the meeting in the place of any such absent or disqualified
member. Any committee of the Board, to the extent provided in the resolution
of the Board designating such committee, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; provided, however, that no such committee
shall have such power or authority in reference to amending the Certificate of
Incorporation (except that such a committee may, to the extent authorized in
the resolution or resolutions providing for the issuance of shares of stock
adopted by the Board as provided in Section 151(a) of the General Corporation
Law, fix the designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes of stock of the Corporation or fix the
number of shares of any series of stock or authorize the increase or decrease
of the shares of any series), adopting an agreement of merger or consolidation
under Section 251 or 252 of the General Corporation Law, recommending to the
Stockholders the sale, lease or exchange of all or substantially all the
Corporation's property and assets, recommending to the Stockholders a
dissolution of the Corporation or the revocation of a dissolution, or amending
these By-laws; provided further, however, that, unless expressly so provided in
the resolution of the Board designating such committee, no such committee shall
have the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section
253 of the General Corporation Law. Each committee of the Board shall keep
regular minutes of its proceedings and report the same to the Board when so
requested by the Board.
SECTION 3.08. Directors' Consent in Lieu of Meeting. Any
action required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by all the members of the Board or such committee and such
consent is filed with the minutes of the proceedings of the Board or such
committee.
SECTION 3.09. Action by Means of Telephone or Similar
Communications Equipment. Any one or more members of the Board, or of any
committee thereof, may participate in a meeting of the Board or such committee
by means of conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute presence in person at
such meeting.
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SECTION 3.10. Compensation. Unless otherwise restricted by
the Certificate of Incorporation, the Board may determine the compensation of
Directors. In addition, as determined by the Board, Directors may be
reimbursed by the Corporation for their expenses, if any, in the performance of
their duties as Directors. No such compensation or reimbursement shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV
OFFICERS
SECTION 4.01. Officers. The officers of the Corporation
shall be the Chairman, the President, the Secretary and a Treasurer and may
include one or more Vice Presidents and one or more Assistant Secretaries and
one or more Assistant Treasurers and any other officers that the Board shall
appoint. Any two or more offices may be held by the same person.
SECTION 4.02. Authority and Duties. All officers shall have
such authority and perform such duties in the management of the Corporation as
may be provided in these By-laws or, to the extent not so provided, by
resolution of the Board.
SECTION 4.03. Term of Office, Resignation and Removal. (a)
Each officer shall be appointed by the Board and shall hold office for such
term as may be determined by the Board. Each officer shall hold office until
his successor has been appointed and qualified or his earlier death or
resignation or removal in the manner hereinafter provided. The Board may
require any officer to give security for the faithful performance of his
duties.
(b) Any officer may resign at any time by giving written
notice to the Board, the Chairman, the President or the Secretary. Such
resignation shall take effect at the time specified in such notice or, if the
time be not specified, upon receipt thereof by the Board, the Chairman, the
President or the Secretary, as the case may be. Unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective.
(c) All officers and agents appointed by the Board shall
be subject to removal, with or without cause, at any time by the Board or by
the action of the recordholders of a majority of the Shares entitled to vote
thereon.
SECTION 4.04. Vacancies. Any vacancy occurring in any office
of the Corporation, for any reason, shall be filled by action of the Board.
Unless earlier removed pursuant to Section 4.03 hereof, any officer appointed
by the Board to fill any such vacancy shall serve only until such time as the
unexpired term of his predecessor expires unless reappointed by the Board.
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SECTION 4.05. The Chairman. The Chairman shall have the
power to call special meetings of Stockholders, to call special meetings of the
Board and, if present, to preside at all meetings of Stockholders and all
meetings of the Board. The Chairman shall perform all duties incident to the
office of Chairman of the Board and all such other duties as may from time to
time be assigned to him by the Board or these By-laws.
SECTION 4.06. The President. The President shall be the
chief executive officer of the Corporation and shall have general and active
management and control of the business and affairs of the Corporation, subject
to the control of the Board, and shall see that all orders and resolutions of
the Board are carried into effect. The President shall perform all duties
incident to the office of President and all such other duties as may from time
to time be assigned to him by the Board or these By-laws.
SECTION 4.07. Vice Presidents. Vice Presidents, if any, in
order of their seniority or in any other order determined by the Board, shall
generally assist the President and perform such other duties as the Board or
the President shall prescribe, and in the absence or disability of the
President, shall perform the duties and exercise the powers of the President.
SECTION 4.08. The Secretary. The Secretary shall, to the
extent practicable, attend all meetings of the Board and all meetings of
Stockholders and shall record all votes and the minutes of all proceedings in a
book to be kept for that purpose, and shall perform the same duties for any
committee of the Board when so requested by such committee. He shall give or
cause to be given notice of all meetings of Stockholders and of the Board,
shall perform such other duties as may be prescribed by the Board, the Chairman
or the President and shall act under the supervision of the Chairman. He shall
keep in safe custody the seal of the Corporation and affix the same to any
instrument that requires that the seal be affixed to it and which shall have
been duly authorized for signature in the name of the Corporation and, when so
affixed, the seal shall be attested by his signature or by the signature of the
Treasurer of the Corporation (the "Treasurer") or an Assistant Secretary or
Assistant Treasurer of the Corporation. He shall keep in safe custody the
certificate books and stockholder records and such other books and records of
the Corporation as the Board, the Chairman or the President may direct and
shall perform all other duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him by the Board, the
Chairman or the President.
SECTION 4.09. Assistant Secretaries. Assistant Secretaries
of the Corporation ("Assistant Secretaries"), if any, in order of their
seniority or in any other order determined by the Board, shall generally assist
the Secretary and perform such other duties as the Board or the Secretary shall
prescribe, and, in the absence or disability of the Secretary, shall perform
the duties and exercise the powers of the Secretary.
SECTION 4.10. The Treasurer. The Treasurer shall have the
care and custody of all the funds of the Corporation and shall deposit such
funds in such banks or other depositories
<PAGE> 9
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as the Board, or any officer or officers, or any officer and agent jointly,
duly authorized by the Board, shall, from time to time, direct or approve. He
shall disburse the funds of the Corporation under the direction of the Board
and the President. He shall keep a full and accurate account of all moneys
received and paid on account of the Corporation and shall render a statement of
his accounts whenever the Board, the Chairman or the President shall so
request. He shall perform all other necessary actions and duties in connection
with the administration of the financial affairs of the Corporation and shall
generally perform all the duties usually appertaining to the office of
treasurer of a corporation. When required by the Board, he shall give bonds
for the faithful discharge of his duties in such sums and with such sureties as
the Board shall approve.
SECTION 4.11. Assistant Treasurers. Assistant Treasurers of
the Corporation ("Assistant Treasurers"), if any, in order of their seniority
or in any other order determined by the Board, shall generally assist the
Treasurer and perform such other duties as the Board or the Treasurer shall
prescribe, and, in the absence or disability of the Treasurer, shall perform
the duties and exercise the powers of the Treasurer.
ARTICLE V
CHECKS, DRAFTS, NOTES, AND PROXIES
SECTION 5.01. Checks, Drafts and Notes. All checks, drafts
and other orders for the payment of money, notes and other evidences of
indebtedness issued in the name of the Corporation shall be signed by such
officer or officers, agent or agents of the Corporation and in such manner as
shall be determined, from time to time, by resolution of the Board.
SECTION 5.02. Execution of Proxies. The Chairman or the
President, or, in the absence or disability of both of them, any Vice
President, may authorize, from time to time, the execution and issuance of
proxies to vote shares of stock or other securities of other corporations held
of record by the Corporation and the execution of consents to action taken or
to be taken by any such corporation. All such proxies and consents, unless
otherwise authorized by the Board, shall be signed in the name of the
Corporation by the Chairman, the President or any Vice President.
ARTICLE VI
SHARES AND TRANSFERS OF SHARES
SECTION 6.01. Certificates Evidencing Shares. Shares shall
be evidenced by certificates in such form or forms as shall be approved by the
Board. Certificates shall be issued in consecutive order and shall be numbered
in the order of their issue, and shall be signed by the
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Chairman, the President or any Vice President and by the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer. The signatures
of the officers of the Corporation upon a certificate may be facsimiles if the
certificate is countersigned by a transfer agent or registered by a registrar
other than the Corporation itself or an employee of the Corporation. In case
any officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer at the date of issue.
SECTION 6.02. Stock Ledger. A stock ledger in one or more
counterparts shall be kept by the transfer agent, in which shall be recorded
the name and address of each person, firm or corporation owning the Shares
evidenced by each certificate evidencing Shares issued by the Corporation, the
number of Shares evidenced by each such certificate, the date of issuance
thereof and, in the case of cancellation, the date of cancellation. Except as
otherwise expressly required by law, the person in whose name Shares stand on
the stock ledger of the Corporation shall be deemed the owner and recordholder
thereof for all purposes.
SECTION 6.03. Transfers of Shares. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate
representing shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, a new certificate shall be
issued to the person entitled thereto, and the old certificate canceled and the
transaction recorded upon the books of the Corporation.
SECTION 6.04. Addresses of Stockholders. Each Stockholder
shall designate to the transfer agent an address at which notices of meetings
and all other corporate notices may be served or mailed to such Stockholder,
and, if any Stockholder shall fail to so designate such an address, corporate
notices may be served upon such Stockholder by mail directed to the mailing
address, if any, as the same appears in the stock ledger of the Corporation or
at the last known mailing address of such Stockholder.
SECTION 6.05. Lost, Destroyed and Mutilated Certificates.
Each recordholder of Shares shall promptly notify the Corporation of any loss,
destruction or mutilation of any certificate or certificates evidencing any
Share or Shares of which he is the recordholder. The Board may, in its
discretion, cause the Corporation to issue a new certificate in place of any
certificate theretofore issued by it and alleged to have been mutilated, lost,
stolen or destroyed, upon the surrender of the mutilated certificate or, in the
case of loss, theft or destruction of the certificate, upon satisfactory proof
of such loss, theft or destruction, and the Board may, in its discretion,
require the recordholder of the Shares evidenced by the lost, stolen or
destroyed certificate or his legal representative to give the Corporation a
bond sufficient to indemnify the Corporation against any claim made against it
on account of the alleged loss, theft or destruction of any such certificate or
the issuance of such new certificate.
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SECTION 6.06. Regulations. The Board may make such other
rules and regulations as it may deem expedient, not inconsistent with these
By-laws, concerning the issue, transfer and registration of certificates
evidencing Shares.
SECTION 6.07. Fixing Date for Determination of Stockholders
of Record. In order that the Corporation may determine the Stockholders
entitled to notice of or to vote at any meeting of Stockholders or any
adjournment thereof, or to express consent to, or to dissent from, corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board may fix, in advance, a
record date, which shall not be more than 60 nor less than 10 days before the
date of such meeting, nor more than 60 days prior to any other such action. A
determination of the Stockholders entitled to notice of or to vote at a meeting
of Stockholders shall apply to any adjournment of such meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.
ARTICLE VII
SEAL
SECTION 7.01. Seal. The Board may approve and adopt a
corporate seal, which shall be in the form of a circle and shall bear the full
name of the Corporation, the year of its incorporation and the words "Corporate
Seal Delaware".
ARTICLE VIII
FISCAL YEAR
SECTION 8.01. Fiscal Year. The fiscal year of the
Corporation shall end on the thirty-first day of December of each year unless
changed by resolution of the Board.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
SECTION 9.01. Indemnification. Any and every person made a
party to any action, suit or proceeding by reason of the fact that such person,
his or her testator or intestate, is or was a director, officer, employee or
agent of this Corporation, or of any corporation, partnership, joint venture,
trust or other enterprise which he or she served as such at the request
<PAGE> 12
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of this Corporation, shall be indemnified by the Corporation, to the fullest
extent permissible under the laws of the state of Delaware, against any and all
reasonable expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and necessarily incurred by such person connection
with the defense of any such action, suit or proceedings. Such right of
indemnification shall not be deemed exclusive of any other rights to which such
person may be entitled apart from this provision. The Board of Directors is
authorized to provide for the discharge of the Corporation's responsibilities
under this Article by way of insurance or any other feasible and proper means.
ARTICLE X
AMENDMENTS
SECTION 10.01. Amendments. Any By-law (including these
By-laws) may be adopted, amended or repealed by the vote of the recordholders
of a majority of the Shares then entitled to vote at an election of Directors
or by written consent of Stockholders pursuant to Section 2.09 hereof, or by
vote of the Board or by a written consent of Directors pursuant to Section 3.08
hereof.
<PAGE> 1
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made
and entered into as of __________, 1999, by and between Golden Telecom, Inc., a
Delaware corporation (the "Company"), and ____________ ("Investor").
RECITALS
A. In connection with the initial public offering of shares of
common stock by the Company (the "Initial Public Offering"), the Company desires
to grant to Investor certain registration rights with respect to an aggregate of
___________ shares of common stock of the Company.
B. The parties hereto desire to set forth the terms and
conditions of the Company's covenants and agreements in respect of the
registration of such shares with the Securities and Exchange Commission and all
applicable state securities agencies.
D. In consideration of the premises and the mutual agreements
contained herein, the parties hereby agree as follows:
AGREEMENT
1. Definitions
As used in this Agreement, the following capitalized terms
shall have the following meanings:
"Advice" has the meaning set forth in the last paragraph of
Section 6 hereof.
"Agents" means any Person authorized to act and who acts on
behalf of Investor with respect to the transactions contemplated by
this Agreement.
"Common Stock" means shares of the Company's common stock, par
value $.01 per share, as the same may be constituted from time to time.
"Demand Registration" has the meaning set forth in Section
3(a) hereof.
<PAGE> 2
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"Exchange Act" means The Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder as in effect from
time to time.
"Person" means an individual, partnership, corporation trust
or unincorporated organization, or a government or agency or political
subdivision thereof.
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement and all other
amendments and supplements to the Prospectus, including post-effective
amendments and all material incorporated by reference in such
Prospectus.
"Registrable Securities" means (i) the __________ shares of
Common Stock currently beneficially owned by Investor and (ii) any
securities issued or issuable with respect to such shares of Common
Stock by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, until such shares of Common Stock or other securities
are not Restricted Securities as defined in Section 2, provided,
however, that Registrable Securities shall not include such securities
as may be transferred pursuant to an exemption from the registration
requirements of the Securities Act provided by Rule 144 under the
Securities Act.
"Registration Expenses" has the meaning set forth in Section 7
hereof.
"Registration Statement" means any registration statement of
the Company which covers Registrable Securities pursuant to the
provisions of this Agreement, including (i) the Prospectus, (ii)
amendments and supplements to such Registration Statement, (iii)
post-effective amendments, (iv) all exhibits and all material
incorporated by reference in such Registration Statement and (v) any
registration statement pursuant to a Demand Registration.
"Restricted Securities" means the Registrable Securities upon
original issuance thereof, subject to the provisions of Section 2
hereof.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"SEC" means The Securities and Exchange Commission.
"Underwritten Offering" means the offering and sale of
securities of the Company covered by any Registration Statement
pursuant to a firm commitment
<PAGE> 3
3
underwriting to an underwriter at a fixed price for reoffering or
pursuant to agency or best efforts arrangements with an underwriter.
Unless the context otherwise requires: (i) "or" is not exclusive; and (ii) words
in the singular include the plural and in the plural include the singular.
2. Securities Subject to this Agreement
Registrable Securities. The securities entitled to the
benefits of this Agreement are the Registrable Securities but, with respect to
any particular Registrable Security, only so long as such security continues to
be a Restricted Security. A Registrable Security ceases to be a Restricted
Security when (i) it has been effectively registered under the Securities Act
and disposed of in accordance with the Registration Statement covering it, (ii)
it has been distributed pursuant to Rules 144 or 144A under the Securities Act
(or any similar provision then in force) or (iii) it has otherwise been
transferred and a new certificate or other evidence of ownership for it not
bearing a legend restricting transfer under the Securities Act and not subject
to any stop transfer order has been delivered by or on behalf of the Company and
no other restriction on transfer exists.
3. Demand Registration
(a) Requests for Registration. At any time after March 25,
2000 (the "Six-Month Lock-Up"), Investor may make written requests for
registration with the SEC under and in accordance with the provisions of the
Securities Act of all or part of its Registrable Securities (a "Demand
Registration"). All requests made pursuant to this Section 3(a) shall specify
the number of Registrable Securities to be registered and the intended methods
of disposition thereof. All such requests shall be delivered to the Company in
accordance with the provisions of Section 9(d) of this Agreement.
(b) Number of, and Limitations on, Registrations. Investor
will be entitled to request one Demand Registration. The Company will not be
obligated to register any Registrable Securities pursuant to such a Demand
Registration unless there is requested to be included in such registration at
least 250,000 shares of Common Stock (subject to such adjustments as may be
necessary by reason of the occurrence of an event contemplated by clause (ii) of
the definition of Registrable Securities) (unless, at the time of such request,
Investor holds less than 250,000 shares of Common Stock, in which case such
request must be for such entire lesser amount).
(c) Expenses. In any registration initiated as a Demand
Registration, the Company will pay all Registration Expenses, whether or not the
Registration Statement has become effective, provided, however, that Investor
will pay all Registration Expenses, whether
<PAGE> 4
4
or not the Registration Statement has become effective, in the event that
_________ has exercised its demand registration rights pursuant to Section 3(a)
of its registration rights agreement with the Company, dated the date hereof.
(d) Selection of Underwriters. If any of the Registrable
Securities covered by a Demand Registration are to be sold in an underwritten
offering, or in a best efforts underwritten offering, the investment banker or
investment bankers and manager or managers that will administer the offering
will be selected by Investor. If Investor disapproves of the terms and
conditions of the underwriting, Investor may elect to withdraw all its
Registrable Securities by written notice to the Company and the managing
underwriter.
4. Incidental Registration.
(a) Request for Registration. After the Six-Month Lock-Up, if
the Company at any time proposes to register any of its authorized but unissued
shares of Common Stock on its own behalf or any of its unregistered and issued
shares of Common Stock on behalf of other stockholders, under the Securities Act
on a form and in a manner that would permit registration of Registrable
Securities under the Securities Act for sale to the public under the Securities
Act, it will each such time give prompt notice in accordance with the provisions
of Section 9(d) of this Agreement to Investor of its intention to do so,
specifying the form and manner and the other relevant facts involved in such
proposed registration (including, without limitation, the identity of the
managing underwriter, if any). Upon the written request of Investor delivered to
the Company within 30 days after such notice shall have been given to Investor
(which request shall specify the Registrable Securities intended to be disposed
of by such holder and the intended method of disposition thereof), the Company
will use its reasonable best efforts to effect the registration under the
Securities Act, as expeditiously as is reasonable, of all Registrable Securities
that the Company has been so requested to register by Investor, to the extent
requisite to permit the sale of the Registrable Securities to be so registered;
provided, however, that:
(i) if, at any time after giving such written notice of its
intention to register any Common Stock proposed to be registered by the
Company and prior to the effective date of the registration statement
filed in connection with such registration, the Company shall determine
for any reason not to register such Common Stock, the Company shall, at
its election, give written notice of such determination to Investor,
and thereupon the Company shall be relieved of its obligation to
register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration
Expenses in connection therewith to the extent provided in Section
4(b));
<PAGE> 5
5
(ii) if the managing underwriter of such offering shall advise
the Company that, in its judgment, the number of Common Stock proposed
to be included in such offering should be limited because the inclusion
of Registrable Securities is likely to adversely impact the purchase
price obtained for the Common Stock proposed to be included in such
offering, then the Company will promptly advise Investor thereof and
may require, by written notice to Investor accompanying such advice,
that, to the extent necessary to meet such limitation, all holders of
Registrable Securities and of other shares of Common Stock proposing to
sell Common Stock in such offering shall share pro rata in the number
of Common Stock to be excluded from such offering, such sharing to be
based on the respective numbers of Registrable Securities and other
shares of Common Stock as to which registration has been requested by
such holders, and that the distribution of such Registrable Securities
and other shares of Common Stock as are so excluded be deferred (in
case of a deferral as to a portion of such Registrable Securities and
other shares of Common Stock, such portion to be allocated among such
holders in proportion to the respective numbers of Common Stock so
requested to be registered by such holders) until the completion of the
distribution of such Common Stock and any other securities by such
underwriters; and
(b) Expenses. In any registration initiated pursuant to this
Section 4, the Company will pay all Registration Expenses, whether or not the
Registration Statement has become effective.
5. Registration Procedures
Whenever Investor has requested that any Registrable
Securities be registered pursuant to this Agreement, the Company will promptly
take all such actions as may be necessary or desirable to permit the sale of
such Registrable Securities in accordance with the intended method or methods of
disposition thereof, and pursuant thereto the Company will as expeditiously as
possible:
(a) with respect to a request to file a Registration Statement
covering Registrable Securities made pursuant to Section 3, use its
reasonable best efforts to prepare and file with the SEC not later than
60 days after receipt of such request (which 60-day period may be
extended by the Company for up to an additional 60 days if at the time
of such request the Company is engaged in negotiations in anticipation
of its participation in a material merger, acquisition or other form of
business combination or, if by reason of such transaction, the Company
is not in a position to timely prepare and file the Registration
Statement and the Company furnishes to Investor a certificate signed by
the president or a vice president of the Company stating that in the
good faith opinion of the board of directors of the Company such
registration would interfere with such transaction then being pursued
by the Company) a Registration Statement on a
<PAGE> 6
6
form for which the Company then qualifies which is satisfactory to the
Company and Investor (unless the offering is made on an underwritten
basis, including on a best efforts underwriting basis, in which event
the managing underwriter or underwriters may determine the form to be
used) and which form shall be available for the sale of the Registrable
Securities in accordance with the intended method or methods of
distribution thereof, and use its reasonable best efforts to cause such
Registration Statement to become effective; the Company shall not file
any Registration Statement pursuant to Section 3 or any amendment
thereto or any Prospectus or any supplement thereto (including such
documents incorporated by reference) to which Investor or the
underwriters, if any, shall reasonably object in light of the
requirements of the Securities Act or any other applicable laws or
regulations;
(b) before filing a Registration Statement or Prospectus or
any amendments or supplements thereto (excluding documents to be
incorporated by reference therein, except in the case of the
preparation of the initial Registration Statement), the Company shall,
within five days of filing, furnish to Investor and the underwriters,
if any, copies of all such documents in substantially the form proposed
to be filed (including documents incorporated therein by reference), to
enable Investor and the underwriters, if any, to review such documents
prior to the filing thereof, and the Company shall make such reasonable
changes thereto (including changes to, or the filing of amendments
reflecting such changes to, documents incorporated by reference) as may
be reasonably requested by Investor and the managing underwriter or
underwriters, if any;
(c) subject to paragraph (b) above, prepare and file with the
SEC such amendments and post-effective amendments to the Registration
Statement as may be necessary to keep the Registration Statement
continuously effective for a period of not less than 18 months, or such
shorter period which will terminate when all Registrable Securities
covered by such Registration Statement have been sold or withdrawn;
cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such Registration Statement during the applicable period in
accordance with the intended methods of disposition by Investor thereof
set forth in such Registration Statement or supplement to the
Prospectus;
(d) notify Investor and the managing underwriters, if any,
promptly, and (if requested by any such Person) confirm such advice in
writing, (1) when the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective, (2) of any request by the SEC for amendments or
supplements to
<PAGE> 7
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the Registration Statement or the Prospectus or for additional
information, (3) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (4) if at any time the
representations and warranties of the Company contemplated by paragraph
(o) below cease to be true and correct, (5) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose, and (6) of the happening of any event which makes any
statement made in the Registration Statement, the Prospectus or any
document incorporated therein by reference untrue or which requires the
making of any changes in the Registration Statement, the Prospectus or
any document incorporated therein by reference in order to make the
statements therein not misleading;
(e) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement at
the earliest possible moment;
(f) as promptly as practicable after filing with the SEC of
any document which is incorporated by reference into the Registration
Statement or the Prospectus (after initial filing of the Registration
Statement) provide copies of such document to counsel to Investor and
to the managing underwriters;
(g) provide to Investor and each managing underwriter, without
charge, at least one signed copy of the Registration Statement and any
post-effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference and all
exhibits (including those incorporated by reference) and a reasonable
number of conformed copies of all such documents;
(h) deliver to Investor and the underwriters, if any, as many
copies of the Prospectus (including each preliminary prospectus) and
any amendment or supplement thereto as such Persons may reasonably
request; the Company consents to the use of the Prospectus or any
amendment or supplement thereto by Investor and the underwriters, if
any, in connection with the offering and sale of the Registrable
Securities covered by the Prospectus or any amendment or supplement
thereto;
(i) prior to the date on which the Registration Statement is
declared effective, use its reasonable best efforts to register or
qualify, or cooperate with Investor and the underwriters, if any, and
their respective counsel in connection with the registration or
qualification of, such Registrable Securities for offer and sale under
the securities or blue sky laws of such jurisdictions as any seller or
underwriter reasonably requests in writing and do any and all other
acts or things necessary or
<PAGE> 8
8
advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the Registration Statement; provided
that the Company will not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to
take any action which would subject it to general service of process in
any such jurisdiction where it is not then so subject; provided,
further, that the Company will not be required to qualify such
Registrable Securities in any jurisdiction in which the securities
regulatory authority requires that Investor submit any shares of its
Registrable Securities to the terms, provisions and restrictions of any
escrow, lock-up or similar agreement(s) for consent to sell Registrable
Securities in such jurisdiction unless Investor agrees to do so;
(j) cooperate with Investor and the managing underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any
restrictive legends; and enable such Registrable Securities to be in
such denominations and registered in such names as the managing
underwriters may request at least two business days prior to any sale
of Registrable Securities to the underwriters;
(k) use its reasonable best efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with
or approved by such other governmental agencies or authorities within
the United States as may be necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition of
such Registrable Securities;
(1) upon the occurrence of any event contemplated by paragraph
(d)(6) above, prepare a supplement or post-effective Amendment to the
Registration Statement or the Prospectus or any document incorporated
therein by reference or file any other required document so that, as
thereafter delivered to the purchasers of the Registrable Securities,
the Prospectus will not contain an untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading;
(m) use its reasonable best efforts to cause all Registrable
Securities covered by the Registration Statement to be listed on each
securities exchange or the Nasdaq National Market on which similar
securities issued by the Company are then listed if requested by
Investor or the managing underwriters, if any;
(n) provide a transfer agent and registrar for all Registrable
Securities;
(o) enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith as
Investor or the managing underwriters, if any, reasonably request in
order to expedite or facilitate the disposition
<PAGE> 9
9
of such Registrable Securities and in such connection, whether or not
an underwriting agreement is entered into and whether or not the
registration is an underwritten registration (1) make such
representations and warranties to Investor and the underwriters, if
any, in form, substance and scope as are customarily made by issuers to
underwriters in primary underwritten offerings (including, without
limitation, an agreement to not sell equity securities during a
customary lock-up period) and confirm the accuracy of the same if and
when requested, and matters relating to the compliance of the
Registration Statement and the Prospectus with the Securities Act; (2)
obtain opinions of counsel to the Company, and updates thereof (which
counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters) addressed to Investor and
the underwriters, if any, covering the matters customary in
underwritten primary offerings and such other matters as may be
reasonably requested by Investor and underwriters, if any; (3) obtain
"comfort" letters and updates thereof from the Company's independent
certified public accountants addressed to Investor and the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "comfort" letters by
underwriters in connection with primary underwritten offerings; (4) if
an underwriting agreement is entered into, the same shall set forth in
full the indemnification provisions and procedures of Section 8 hereof
with respect to all parties to be indemnified pursuant to said Section;
and (5) the Company shall deliver such documents and certificates as
may be requested by Investor and the managing underwriters, if any, to
evidence compliance with clause (1) above and with any customary
conditions contained in the underwriting agreement or other agreement
entered into by the Company. The above shall be done at each closing
under such underwriting or similar agreement or as and to the extent
required thereunder;
(p) make available for inspection during normal business hours
by Investor, any underwriter participating in any disposition pursuant
to such registration statement, and any attorney, accountant or other
agent retained by Investor or any such underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to
supply all information reasonably requested by Investor or any such
underwriter, attorney, accountant or agent in connection with such
registration statement; provided that any records, information or
documents that are designated by the Company in writing as confidential
shall be kept confidential by such Persons;
(q) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the SEC, and make generally
available to its security holders, earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than 45
days after the end of any 12-month period (1) commencing at the end of
any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm or
<PAGE> 10
10
best efforts underwriting offering, and (2) beginning with the first
month of the Company's first fiscal quarter commencing after the
effective date of the Registration Statement, which statements shall
cover said 12-month periods; and
(r) take such other reasonable steps that are necessary or
advisable to permit the sale of such Registrable Securities.
The Company may require Investor to furnish to the Company
such information and documents regarding Investor and the distribution of the
Registrable Securities as the Company may from time to time reasonably request
in writing.
Investor agrees by acquisition of such Registrable Securities
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 6(d)(6) hereof, Investor will forthwith
discontinue disposition of Registrable Securities until Investor's receipt of
the copies of the supplemented or amended Prospectus contemplated by Section
6(l) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings which are incorporated by reference in the
Prospectus, and, if so directed by the Company, Investor will, or will request
the underwriters to, deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in Investor's possession, of the
Prospectus covering such Registrable Securities current at the time of receipt
of such notice. If the Company shall give such notice, the time periods
mentioned in Section 6(c) hereof shall be extended by the number of days during
the period from and including the date of the giving of such notice pursuant to
Section 6(d)(6) to and including the date when Investor shall have received the
copies of the supplemented or amended prospectus contemplated by Section 6(l)
hereof or the Advice.
6. Expenses
Except as otherwise provided herein, all expenses incident to
the Company's performance of or compliance with this Agreement including without
limitation all registration and filing fees, including with respect to filings
required to be made with the National Association of Securities Dealers, fees
and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel for the underwriters in connection
with blue sky qualifications of the Registrable Securities and determination of
their eligibility for investment under the laws of such jurisdictions as the
managing underwriters or holders of a majority of the Registrable Securities
being sold may designate), printing expenses, messenger, telephone and delivery
expenses, and fees and disbursements of counsel for the Company, Investor and of
all independent certified public accountants (including the expenses of any
special audit and "comfort" letters required by or incident to such
performance), the fees and expenses incurred in connection with the listing of
the securities to
<PAGE> 11
11
be registered on each securities exchange on which similar securities issued by
the Company are then listed, rating agency fees, securities acts liability
insurance if Investor so requires, the reasonable fees and expenses of any
special experts retained by Investor or by the Company at the request of the
managing underwriters in connection with such registration and fees and expenses
of other Persons retained by Investor (all such expenses being herein called
"Registration Expenses") will be borne by the Company. The Company shall, in any
event, pay its internal expenses (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties) and the expense of any annual audit which are not "Registration
Expenses" for purposes of this Agreement. In no event shall the Company be
liable for the payment of any discounts, commissions or fees of underwriters,
selling brokers, dealer managers or similar industry professionals relating to
the distribution of the Registrable Securities. Investor shall be liable for the
cost and expense of the time spent by its officers, employees and Agents
incurred in connection with the registration of Registrable Securities owned by
it.
7. Indemnification
(a) Indemnification by Company. The Company will indemnify and
hold harmless, to the full extent permitted by law, Investor, its officers and
directors, their Agents and each Person who controls Investor (within the
meaning of the Securities Act) against all losses, claims, damages, liabilities
(or actions in respect thereto) and expenses to which any such Person may be
subject, under the Securities Act or otherwise, and reimburse all such Persons
for any legal or other expenses incurred with investigating or defending against
any such losses, claims, damages or liabilities, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue or alleged
untrue statement of a material fact contained in a Registration Statement,
Prospectus or preliminary prospectus or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as the same arise out of
or are based upon an untrue statement of a material fact or omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, which statement or omission is made therein in reliance
upon and in conformity with information furnished in writing to the Company by
Investor, expressly for use therein. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of Investor,
Investor's directors and officers, their Agents or a controlling Person, and
shall survive the transfer of such securities by Investor. The Company will also
indemnify underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, their officers and
directors and each Person who controls such Persons (with the meaning of the
Securities Act) to the same extent as provided above with respect to the
indemnification of Investor of Registrable Securities.
<PAGE> 12
12
(b) Indemnification by Investor. Investor will indemnify and
hold harmless, to the full extent permitted by law, the Company, its directors
and officers and each Person who controls the Company (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities (or actions in
respect thereto) and expenses to which any such Person may be subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue or alleged untrue
statement of a material fact contained in a Registration Statement or Prospectus
or preliminary prospectus or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, to the extent, but only if and to the extent, that such untrue or
alleged untrue statement or omission or alleged omission is made therein in
reliance upon and in conformity with the information furnished in writing by
Investor specifically for inclusion therein. In no event shall the liability of
Investor hereunder be greater in amount than the dollar amount of the proceeds
received by Investor upon the sale of the Registrable Securities giving rise to
such indemnification obligation. The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same
extent as provided above with respect to information so furnished in writing by
such Persons.
(c) Conduct of Indemnification Proceedings. Any Person
entitled to indemnification hereunder will (i) give prompt notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (ii) unless in such indemnified party's reasonable judgment a conflict of
interest may exist between such indemnified and indemnifying parties with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party and in
that case the indemnified party shall have the right to participate in the
conduct of such defense provided that it will pay for the fees of its own
counsel. Whether or not such defense is assumed by the indemnifying party, the
indemnifying party will not be subject to any liability for any settlement made
without its consent (but such consent will not be unreasonably withheld). No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving of
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. An indemnifying party who is
not entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels. The failure
to notify an indemnifying party promptly of the commencement of any such action,
if and to the extent prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this
<PAGE> 13
13
Section, but the omission so to notify the indemnifying party will not relieve
it of any liability that it may have to any indemnified party otherwise than
under this Section.
(d) Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims, damages
or liabilities in such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified party in connection with the
actions which resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of material fact or omission or alleged omission to
state a material fact, has been made, or relates to information supplied by,
such indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses, claims,
damages or liabilities referred to above shall be deemed to include any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
8. Transfer of Registration Rights
The registration rights of Investor under this Agreement with
respect to any Registrable Securities may be transferred to any transferee of
such Registrable Securities, including any affiliate of Investor; provided,
however, that (i) Investor shall give the Company written notice at or prior to
the time of such transfer stating the name and address of the transferee and
identifying the securities with respect to which the rights under this Agreement
are being transferred and (ii) such transferee shall agree in writing, in form
and substance reasonably satisfactory to the Company, to be bound by the
provisions of this Agreement.
9. Miscellaneous
(a) Remedies. Investor shall be entitled to exercise all
rights provided herein or granted by law, including recovery of damages, and
each will be entitled to specific performance of their rights under this
Agreement. The Company agrees that monetary
<PAGE> 14
14
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Agreement and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
(b) No Inconsistent Agreements. The Company will not on or
after the date of this Agreement enter into any agreement with respect to its
securities which is inconsistent with the rights granted to Investor in this
Agreement or otherwise conflicts with the provisions hereof. The Company has not
previously entered into any agreement with respect to its securities granting
any registration rights to any Person.
(c) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of
Investor.
(d) Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be in writing (including
telecopier or similar writing) and shall be deemed to have been given at the
time when mailed in any general or branch office of the United States Postal
Service, enclosed in a registered or certified postpaid envelope, or sent by
Federal Express or other similar overnight courier service, addressed to the
address of the parties stated below or to such changed address as such party may
have fixed by notice or, if given by telecopier, when such telecopy is
transmitted and the appropriate answerback is received.
(i) If to Investor:
(ii) If to the Company:
Golden Telecom, Inc.
12 Krasnokazarmennaya Str., 6th Floor
111250 Moscow, Russia
Facsimile: +7-095-797-9331
Attn: General Counsel
(e) Assignment. Neither party shall assign or transfer any of
its rights under this Agreement without the prior written consent of the other
party. If any transferee of a
<PAGE> 15
15
holder of Registrable Securities shall acquire Registrable Securities, in any
manner, whether by operation of law or otherwise, such Registrable Securities
shall be held subject to all of the terms of this Agreement, and by taking and
holding such Registrable Securities such transferee shall be conclusively deemed
to have agreed to be bound by and to perform all of the terms and provisions of
this Agreement and such transferee shall be entitled to receive the benefits
hereof.
(f) Governing Law. This Agreement shall be governed by the
laws of the State of New York.
(g) Entire Agreement. This Agreement, together with any other
agreements between the parties, constitutes the entire understanding between the
parties and supersedes all proposals, commitments, writings, negotiations and
understandings, oral and written, and all other communications between the
parties relating to the subject matter of this Agreement.
(h) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
(i) Severability. Should any part, term or condition hereof be
declared illegal or unenforceable or in conflict with any other law, the
validity of the remaining portions or provisions of this Agreement shall not be
affected thereby, and the illegal or unenforceable portions of this Agreement
shall be and hereby are redrafted to conform with applicable law, while leaving
the remaining portions of this Agreement intact.
(j) Force Majeure. No party shall be deemed to have breached
this Agreement or be held liable for any failure or delay in the performance of
all or any portion of its obligations under this Agreement if prevented from
doing so by a cause or causes beyond its control. Without limiting the
generality of the foregoing, such causes include acts of God or the public
enemy, fires, floods, storms, earthquakes, riots, strikes, lock-outs, wars and
war-operations, restraints of government power or communication line failure or
other circumstances beyond such party's control, or by reason of the judgment,
ruling or order of any court or agency of competent jurisdiction or change of
law or regulation subsequent to the execution of this Agreement.
(k) Successors and Assigns. Subject to the provisions of
Section 9(e), this Agreement is solely for the benefit of the parties and their
respective successors and assigns. Nothing herein shall be construed to provide
any rights to any other entity or individual.
(l) Headings. Section headings are for convenience only and do
not control or affect the meaning or interpretation of any terms or provisions
of this Agreement.
<PAGE> 16
16
(m) Attorneys' Fees. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof or
thereof is validly asserted as a defense, the successful party shall be entitled
to recover reasonable attorneys, fees in addition to any other available remedy.
<PAGE> 17
17
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
INVESTOR
By:
--------------------------------------------
Name:
Title:
GOLDEN TELECOM, INC.
By:
--------------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 5.1
[Shearman & Sterling Letterhead]
September 24, 1999
The Board of Directors
Golden Telecom, Inc.
12, Krasnokazarmennaya Street
Moscow, Russia 111250
Ladies and Gentlemen:
We are acting as counsel for Golden Telecom, Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-1 (the "Registration Statement") that has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the proposed offering and sale by the Company of
its shares of common stock, par value $0.01 per share (the "Common Stock").
We are familiar with the corporate proceedings of the Company
to date with respect to the proposed offering and sale of its shares of Common
Stock, including the resolutions of the Board of Directors of the Company
authorizing the issuance, offering and sale of such shares of Common Stock, and
we have examined such corporate records of the Company and such other documents
and certificates as we have deemed necessary as a basis for the opinion
hereinafter expressed.
Based upon the foregoing, and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that the
shares of Common Stock to which the Registration Statement relates, when issued
as described in the Registration Statement, will be legally issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name under the heading
"Legal Matters" in the prospectus contained therein. In giving such consent,
we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
Very truly yours,
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 18, 1999, except for Note 14, as to which the
date is September 10, 1999 and Note 1, as to which the date is September ,
1999, (Golden Telecom, Inc.), with respect to the consolidated financial
statements included in Pre-Effective Amendment No. 4 to the Registration
Statement (Form S-1 No. 333-82791) and related Prospectus of Golden Telecom,
Inc. dated on or about September 29, 1999.
/s/ Ernst & Young (CIS) Limited
Moscow, Russia
The foregoing consent is in the form that will be signed upon the
completion of the reorganization described in Note 1 to the consolidated
financial statements.
/s/ Ernst & Young (CIS) Limited
Moscow, Russia
September 28, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 12, 1999 (EDN Sovintel LLC), with respect
to the financial statements included in Pre-Effective Amendment No. 4 to the
Registration Statement (Form S-1 No. 333-82791) and related Prospectus of Golden
Telecom, Inc. dated on or about September 29, 1999.
/s/ Ernst & Young (CIS) Limited
Moscow, Russia
September 28, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 12, 1999 GTS-Vox Limited with respect to
the financial statements included in Pre-Effective Amendment No. 4 to the
Registration Statement (Form S-1 No. 333-82791) and related Prospectus of Golden
Telecom, Inc. dated on or about September 29, 1999.
/s/ Ernst & Young (CIS) Limited
Moscow, Russia
September 28, 1999
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned members of the Board of Directors of Golden Telecom, Inc.
hereby constitute and appoint David J. Wisher and Jeffrey A. Riddell and each of
them acting singly, as true and lawful attorneys-in-fact for the undersigned,
with full power of substitution and resubstitution, for and in the name, place
and stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933 any and all amendments (including
post-effective amendments) and exhibits to the registration statement on Form
S-1 of Golden Telecom, Inc. (File No. 333-82791), any related registration
statement and its amendments and exhibits filed pursuant to Rule 462(b) under
the Securities Act and any and all applications and other documents to be filed
with the Securities and Exchange Commission pertaining to the registration of
the securities covered thereby or under any related registration statement or
any amendment thereto, with full power and authority to do and perform each and
every act and thing requisite and necessary or desirable, hereby ratifying and
confirming all that each of such attorneys-in-fact or its substitute shall
lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Alexander M. Knaster Director September 28, 1999
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