<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1999
REGISTRATION NO. 333-_____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
Form S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
---------
GOLDEN TELECOM, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
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,
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.
1751 Pinnacle Drive
North Tower - 12th Floor
McLean, Virginia 22012
(703) 918-4500
(Name, address and telephone number of agent for service)
Copies to:
David J. Beveridge, Esq. James J. Clark, Esq.
Shearman & Sterling Cahill Gordon & Reindel
199 Bishopsgate 80 Pine Street
London, EC2M 3TY, England New York, New York 10005
011-44-171-920-9000 (212) 701-3000
---------
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE ON OR AFTER THE EFFECTIVE DATE OF THIS
REGISTRATION STATEMENT.
---------
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. [ ]
---------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
PROPOSED MAXIMUM PROPOSED 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
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK, NOMINAL VALUE $ $40,000,000 $11,120
$0.01 PER SHARE
================================================================================================================================
</TABLE>
(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.
---------
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.
================================================================================
<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.
SUBJECT TO COMPLETION, DATED JULY 14, 1999
[LOGO]
Shares
GOLDEN TELECOM, INC.
Common Stock
-----------------
We are offering all shares. Prior to this offering, there has been no
public market for our common stock. The initial public offering price is
expected to be between $ and $ per share.
We will make application to list the common stock on The Nasdaq
National Market under the symbol " ".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS GOLDEN TELECOM, INC.
<S> <C> <C> <C>
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.
We have granted the underwriters the right to purchase up to
additional shares at the public offering price to cover any over-allotments.
DEUTSCHE BANK
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY .............................. 1
RISK FACTORS .................................... 8
USE OF PROCEEDS ................................. 23
DIVIDEND POLICY ................................. 23
DILUTION ........................................ 23
CAPITALIZATION .................................. 24
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA ................. 25
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................... 30
BUSINESS ........................................ 49
THE POLITICAL, LEGAL AND ECONOMIC
ENVIRONMENTS IN RUSSIA AND UKRAINE ........... 70
REGULATION ...................................... 74
MANAGEMENT ...................................... 76
BENEFICIAL OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDER ........................ 82
RELATIONSHIP WITH GTS AND CERTAIN
RELATED PARTY TRANSACTIONS ................... 83
DESCRIPTION OF CERTAIN FINANCING
ARRANGEMENTS AND INDEBTEDNESS ................ 86
DESCRIPTION OF CAPITAL STOCK .................... 87
SHARES ELIGIBLE FOR FUTURE SALE ................. 89
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-US HOLDERS OF COMMON STOCK ............ 90
UNDERWRITING .................................... 93
NOTICE TO CANADIAN RESIDENTS .................... 96
LEGAL MATTERS ................................... 97
WHERE YOU CAN FIND MORE INFORMATION ............. 97
EXPERTS ......................................... 97
FORWARD-LOOKING STATEMENTS ...................... 98
INDEX TO FINANCIAL STATEMENTS ................... F-1
GLOSSARY OF TELECOMMUNICATIONS INDUSTRY TERMS ... G-1
</TABLE>
----------------------
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 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.
----------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of this prospectus. This summary is not
complete and may not contain all the information you should consider before
investing in our common stock. The terms "we" and "us" refer to Golden Telecom,
Inc. The term "GTS" refers to our parent company, Global TeleSystems Group,
Inc. This prospectus presents certain pro forma financial information regarding
our results of operations.
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 (CIS). We offer our services through three business groups:
o Competitive Local Exchange Carrier (CLEC) Services using our
overlay networks in Moscow, Kiev and St. Petersburg;
o 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 CIS;
and
o Mobile Services using cellular networks in Kiev, Vladivostok
and thirteen other population centers throughout Russia.
CLEC Services. In Moscow, Kiev and St. Petersburg, we operate
facilities-based CLECs, which include our international gateways. We provide a
range of services including local exchange and access services, international
and domestic long distance services, managed bandwidth services, Internet
access and the design and installation of corporate networks. We offer these
services through our metropolitan area 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 CLEC
services primarily through our operating companies, Sovintel, TCM and Golden
Telecom BTS.
Data and Long Distance Services. In major population centers
throughout Russia and other countries of the CIS, we offer traditional and
high-speed data services, using X.25, frame relay and asynchronous transfer
mode (ATM) technologies, and dedicated and dial-up Internet 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 also offer international
and long distance voice services. We offer these services primarily through our
satellite-based long distance network, which is also used for the growing data
services business. We provide our long distance voice services primarily
through the TeleRoss operating company and 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. We offer these services through our GSM-1800
network in Kiev, NMT-450 network in Vladivostok and AMPS-800 network in
thirteen other metropolitan areas of Russia. Our mobile services are provided
through our operating companies Golden Telecom GSM and the Vostok Mobile
ventures, including PrimTelefone.
<PAGE> 5
The following table provides you with certain information, as of March
31, 1999, about the three business groups through which we conduct our
business:
<TABLE>
<CAPTION>
REGION OWNERSHIP AS OF
BUSINESS VENTURE OF OPERATIONS MARCH 31, 1999 PARTNER(S)
---------------- ------------- --------------- ----------
<S> <C> <C> <C>
CLEC SERVICES:
Sovintel....................... Moscow and St. Petersburg 50% Rostelecom
TCM............................ Moscow 95% MTU-Inform
Golden Telecom BTS............. Kiev 56.75% Private investors
DATA AND LONG DISTANCE SERVICES:
Sovam Teleport................. Russia and CIS 100%
Sovam Teleport Ukraine......... Ukraine 49% Private investors
TeleRoss operating company..... Russia 100%
TeleRoss ventures.............. 14 cities in Russia 50-100% Regional telephone
operators
MOBILE SERVICES:
Golden Telecom GSM............. Kiev 56.75% Private investors
Vostok Mobile ventures......... 14 cities in Russia 50-100% Regional telephone
operators and
private investors
</TABLE>
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 THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
OPERATING DATA 1996 1997 1998 1998 1999
-------------- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Points of Presence(1) ............................ 37 49 78 59 84
Total Voice Minutes (millions)
Local ......................................... 133.0 269.1 340.4 92.3 71.2
Domestic Long Distance ........................ 15.8 57.1 101.6 22.4 21.0
International Outgoing ........................ 20.5 46.0 60.0 14.8 11.3
Incoming ...................................... 33.2 69.9 86.5 17.6 22.4
Dial-up Internet Access Subscribers(2) ........... 1,854 3,159 4,261 3,666 5,074
Total Active Cellular Subscribers (thousands) .... 9.8 20.4 25.5 22.9 28.0
Total Employees .................................. 856 1,116 1,439 1,321 1,409
</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 approximately 10,000 subscribers at
March 31, 1999.
2
<PAGE> 6
OUR 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 CIS. 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 Corporate customers increasingly
Bundled Data and Voice Services demand integrated telecommunications
Over an Integrated Network 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 We plan to build on our position as a
Growth Data and Internet Markets leading provider of data
communication services in Russia and
other countries of the CIS by
increasing the number of points of
presence in our data network to
facilitate the growing demand for
our managed bandwidth services,
using X.25, frame relay and ATM
technologies. 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 Our network strategy has been to
Capacity Needs through Network build and own our local exchange and
Planning and Build Out customer access networks. We have
typically leased digital terrestrial
channels to supply our regional
connectivity, 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.
3
<PAGE> 7
Focus Operating Activities and We plan to deploy our capital
Capital Investments in Major investments primarily in Moscow, Kiev
Metropolitan Areas 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.
OUR FORMATION AS A PUBLIC COMPANY
Our business is currently wholly owned by GTS, a provider of
telecommunications services throughout Europe. GTS has created a separate
holding company, Golden Telecom, Inc., that will issue the shares offered in
this public offering. Immediately before the consummation of this offering, GTS
will contribute to Golden Telecom, Inc. all the business units through which we
conduct our operations. After the completion of the offering, GTS will own
approximately % of the outstanding shares of common stock of our company ( % if
the underwriters' over-allotment option is exercised in full).
In connection with this offering, we intend to enter into several
agreements that will govern the continuing relationships between us and GTS.
For example, GTS will continue to provide some administrative services for us,
guarantee some of our obligations and transfer the trademarks used exclusively
in our operations in the CIS.
OUR ADDRESS
Our principal executive offices are located at 12, Krasnokazarmennaya,
Moscow, Russia 111250. Our telephone number is (011-7-501) 797-9300.
4
<PAGE> 8
THE OFFERING
Shares offered by us (a)...................... shares
Price to public............................... $ per share
Shares outstanding immediately after the shares
offering (b)..............................
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 the net
proceeds from the offering
primarily for the following
purposes:
o potential acquisitions and
business development;
o network expansion;
o working capital; and
o general corporate
purposes.
Proposed Nasdaq National Market symbol........ We intend to apply to list
our shares on the Nasdaq
National Market under the
symbol " ".
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
officers have entered into
similar agreements for a
period of 180 days after the
date of this prospectus.
- ---------
(a) 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 shares.
(b) 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).
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following selected historical and pro forma consolidated financial
and other financial data have been derived from our historical financial
statements and our operating results. Historical 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. 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.
<TABLE>
<CAPTION>
FOR THE YEAR PRO FORMA FOR THE
ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------- -----------------------
1996 1997 1998 1997 1998
--------- --------- --------- --------- ----------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ 13,140 $ 27,198 $ 86,086 $ 79,706 $ 117,367
Gross margin ................................ 3,057 6,778 42,512 40,626 65,493
Equity in (earnings) losses of ventures .... (3,783) (12,428) (2,559) (8,704) 863
Operating loss .............................. (13,599) (6,406) (16,965) (1,910) (10,879)
Other (expense) income ...................... (1,586) (830) (10,455) 583 (10,364)
Net loss .................................... (15,471) (7,883) (33,644) (9,530) (32,832)
Net loss per share(1) ....................... $ $ $ $ $
EBITDA(2) ................................... $ 17,219 $ 21,283 $ 31,250 $ 21,765 $ 38,135
Net cash (used in) provided by operating
activities ............................ (17,077) (20,591) 1,290 2,341 6,683
Net cash used in investing activities ....... (12,274) (22,203) (62,413) (69,411) (41,019)
Net cash provided by financing activities ... 32,390 43,538 74,151 71,922 37,113
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT MARCH 31, 1999
--------------------- -------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents .................. $ 14,164 $ 15,330
Property and equipment, net ................ 52,186 54,714
Investments in and advances to ventures .... 46,519 45,087
Total assets ............................... 235,849 232,324
Total debt ................................. 24,459 25,459
Minority interest .......................... 7,993 8,452
Shareholders' equity ....................... 168,783 166,536
</TABLE>
(1) These amounts were calculated based on an assumption of shares of
common stock outstanding for the respective periods.
(2) EBITDA is earnings (loss) from operations before foreign currency
gains (losses), interest, taxes, depreciation and amortization. In
computing EBITDA, we have included our portion, based on our
accounting policy for equity investees, of the earnings (loss) of our
operations that we account for using the equity method of accounting.
These equity method results exclude foreign currency gains (losses),
interest, taxes and depreciation and amortization, which we include
within our equity in (earnings) losses of ventures line item in our
consolidated statements of operations. EBITDA is a measure of a
company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income
(loss) determined in accordance with US generally accepted accounting
principles (US GAAP) as an indicator of operating performance or as an
alternative to cash from operating activities determined in accordance
with US GAAP as a measure of liquidity.
6
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED QUARTERLY FINANCIAL DATA
We present below certain historical and pro forma consolidated information
regarding our quarterly results since the start of 1998 in order to show our
results before and since the August 1998 Russian financial crisis.
<TABLE>
<CAPTION>
PRO FORMA(1) FOR THE THREE MONTHS ENDED ACTUAL
-------------------------------------------------------------- --------------
FOR THE THREE
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MONTHS ENDED
1998 1998 1998 1998 MARCH 31, 1999
--------- -------- ------------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ 27,306 $ 32,680 $ 31,966 $ 25,415 $ 24,185
Cost of Revenues ............................ 12,567 14,550 12,709 12,048 9,326
Gross Margin ................................ 14,739 18,130 19,257 13,367 14,859
Selling, general and administrative ......... 11,049 11,624 17,124 11,299 8,638
Net loss ........................... (1,939) (395) (17,121) (13,377) (7,776)
EBITDA(2) ................................... 11,203 13,552 6,913 6,467 7,560
Net cash (used in) provided by
operating activities ........................ 6,964 530 1,618 (2,429) (629)
Net cash used in investing activities ....... (6,680) (12,850) (9,635) (11,854) (4,453)
Net cash provided by financing activities ... 1,423 9,922 10,504 15,264 6,526
</TABLE>
- ---------
(1) 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.
(2) EBITDA is earnings (loss) from operations before foreign currency
gains (losses), interest, taxes, depreciation and amortization. In
computing EBITDA, we have included our portion, based on our
accounting policy for equity investees, of the earnings (loss) of our
operations that we account for using the equity method of accounting.
These equity method results exclude foreign currency gains (losses),
interest, taxes and depreciation and amortization, which we include
within our equity in (earnings) losses of ventures line item in our
consolidated statements of operations. EBITDA is a measure of a
company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income
(loss) determined in accordance with US GAAP as an indicator of
operating performance or as an alternative to cash from operating
activities determined in accordance with US GAAP as a measure of
liquidity.
7
<PAGE> 11
RISK FACTORS
Investing in our common stock will provide you with an equity
ownership interest in Golden Telecom, Inc. As a shareholder, you may be subject
to risks inherent in our business. The value of your investment may increase or
decline and could result in a loss. You should carefully consider the following
factors relating to us as well as other information contained in this
prospectus before deciding to invest in shares of our common stock.
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 COULD MATERIALLY ADVERSELY AFFECT OUR
OPERATIONS
RUSSIA
Since the dissolution of the Soviet Union in December 1991, Russia has
been undergoing significant political and economic transformation, the result
of which is a generally unstable political climate characterized by frequent
changes in governments at the federal level, gridlock in the lower house of the
Russian parliament, the Duma, significant dislocations of authority, widespread
corruption among government officials and a significant rise in organized crime
and other criminal activity. In view of these developments and President
Yeltsin's lack of popular support, deteriorating health and erratic stewardship
of the country, Russia's political situation is expected to remain very
unsettled. Continuing political and economic instability could disrupt the
direction, scope and pace of political and economic reforms, discourage foreign
and local investment and spending, and could have a material adverse effect on
our operations and the market price of our stock.
In addition, elections for the Duma are scheduled for December 1999
and Presidential elections are scheduled for June 2000. In the event that an
increased number of ultra nationalistic, anti-Western or Communist lawmakers
are elected, the political and economic reforms initiated during the last eight
years could be reversed. A dramatic change in government policies concerning
foreign investment or the telecommunications industry could have a material
adverse effect on our operations and the market price of our common stock.
UKRAINE
As in Russia, Ukraine has experienced significant political and
economic change since its declaration of independence from the Soviet Union in
1991. New presidential elections are scheduled for October 1999. A change in
the balance of power could lead to increased political and economic instability
and could result in a change in government policies concerning foreign
investment or the telecommunications industry, which in turn could have a
material adverse effect on our operation and the market price of our common
stock.
THE EFFECT OF ECONOMIC INSTABILITY ON OUR BUSINESS IS UNCERTAIN
RUSSIA
In August 1998, the Russian government imposed a 90-day moratorium on
certain foreign exchange payments, which resulted in delayed transfers of
funds. Although the moratorium expired in November 1998 and certain foreign
exchange payments are again allowed, another moratorium could be imposed if the
Russian government and Central Bank anticipate further liquidity crises. Any
difficulties in converting rubles into foreign currency and transferring such
foreign currency could have a material adverse effect on our financial
condition and results of operations.
8
<PAGE> 12
Although markets may have stabilized since August 1998, the Russian
economy remains in a depression, exacerbated by continuing political
instability that may precipitate further economic volatility. If the Russian
political situation does not stabilize and the economy does not improve, the
demand for our services in Russia will remain depressed.
The August 1998 Russian financial crisis has led to a decline in the
Russian stock market and has precipitated the failure of banks and other
businesses. Reforms intended to create a more market-oriented economy are at
risk in this environment. The effects of the financial crisis on our customers
have also made it more difficult for us to collect our invoices.
The August 1998 Russian financial crisis caused a substantial decline
in the demand for our services. For example:
o 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.
o 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.
o TCM 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.
o 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.
UKRAINE
We did not experience the same decline in revenues in Ukraine as in
Russia in part because the Ukrainian economy is less developed than that of
Russia. However, Ukraine is susceptible to many of the same macroeconomic risks
as Russia such as sovereign debt defaults and/or restructurings, foreign
exchange volatility and political instability. Deterioration in the Ukrainian
economic or political situation could adversely impact our results of
operations.
Economic conditions in Ukraine remain fragile. The country's hard
currency reserves are very low ($1.3 billion at June 9, 1999), and the nation's
sovereign debt problems persist, with $2.5 billion maturing in 2000. Although
the Ukrainian banking system did not experience the same level of disruption as
the Russian banking system, the Ukrainian financial sector remains fragile and
many banks, while still in operation, are technically insolvent. The
relationship between Ukraine and the International Monetary Fund and World
Bank, on which Ukraine continues to rely for funding, has already been strained
by the slow pace of reform and the failure of Ukrainian leaders to implement
programs and policies advocated by these institutions. Consequently, the risk
of further devaluation of Ukraine's currency, the hryvna, is very high. Any
such devaluation may adversely affect the financial condition and results of
operation of our Ukrainian operations and, consequently, our consolidated
group.
If the Ukrainian economy does not improve and does not attract further
investment, demand for our services may decrease and our revenue may suffer.
THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT OUR ABILITY TO CONVERT RUBLES
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. The instability of the ruble and the institution of further
restrictions on certain foreign exchange
9
<PAGE> 13
payments could negatively affect our ability to convert rubles into foreign
currency and to transfer foreign exchange payments out of Russia. Although the
International Monetary Fund negotiated revised terms for Russia's IMF
financing, it has tied the rollover of IMF debt and any additional loans to the
implementation of economic and legislative reforms. The enactment of these
reforms is not certain. In June 1999, Russia defaulted on approximately $900
million of interest payments on Soviet-era debt, and its hard currency reserves
remain in short supply.
As a result of the August 1998 Russian financial crisis, the value of
the ruble against the US dollar fell significantly, and this decline has
negatively affected 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 to foreign currency exchange
losses, unrecoverable bad debts and unrecoverable cash deposits. A further
decline in the value of the ruble could negatively affect our financial
performance and 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. Although these
restrictions may have temporarily increased the Russian Central Bank's hard
currency reserves, these reserves and Russia's tax revenues may not be
sufficient for the Russian government to meet its debt payment obligations.
Another default on Russia's sovereign debt could adversely affect its ability
to convert rubles to foreign currency, its credibility and its continuing
access to capital markets. A default may also 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 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.
THE REORGANIZATION 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:
o 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;
o Our business relationships with our joint venture partners,
which make up a major component of our business strategy in
Russia, may suffer; and
o The effective consolidation of Rostelecom with our joint
venture partners would create greater competition for
Sovintel and our regional TeleRoss ventures.
10
<PAGE> 14
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:
o 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;
o The new company is likely to become a stronger competitor;
o Our ability to negotiate reasonable interconnection rates may
suffer; and
o Any subsequent privatization of Ukrtelekom may bring in
strong management and resources from a major Western
telecommunications operator, increasing its competitive
strengths.
MORE RESTRICTIVE RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS POLICIES COULD
CONSTRAIN OUR OPERATIONS
Russian legislation does not currently restrict foreign investment in
the telecommunications industry. However, pending legislation could restrict
foreign ownership of telecommunications operators in order to protect the
social order and national security. The Duma and the Federation Council, the
Russian parliament's upper house, has approved this legislation, but it has not
yet been signed into law. 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 and the rest of the CIS.
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 Federal Security Service, a
government agency that is responsible, among other things, for electronic
surveillance. Regulations applicable to SORM require telecommunications
networks to enable state monitoring of electronic traffic. However, the Federal
Security Service has not finalized its technical specifications, and the
applications thereof, governing compliance with SORM, and there is
industry-wide disagreement with regulatory authorities over the appropriate
level of technical compliance with SORM and the costs of implementing SORM
facilities to monitor voice and data traffic.
Ukrainian legislation prohibits the establishment and operation of
telecommunications ventures that are more than 49% owned by foreign investors.
Based on some current interpretations, 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 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%. 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, such 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, we would be in violation of this legislation. The
11
<PAGE> 15
consequences of this violation are unpredictable and may include license
suspension or revocation, or an order to divest a portion of our holdings.
In addition, 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 this resolution is
reintroduced, it could have a material adverse effect on our financial
condition and results of operation, and it could negatively influence any
decision regarding the expansion of our cellular network in Ukraine. We also
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, proposed legislation to introduce a 6%
"excise tax" on cellular calls is currently in parliament. The enactment of
this legislation or other similar industry-specific legislation may have a
material adverse effect on our operations.
CORRUPTION IN RUSSIA AND UKRAINE MAY ADVERSELY AFFECT OUR OPERATIONS
Russia and Ukraine are both plagued with widespread corruption and
criminal activity. 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 have a material adverse
effect on our operations and the market price of our common stock.
RUSSIA AND UKRAINE'S CURRENT LEGAL SYSTEMS MAY NOT ADEQUATELY PROTECT OUR
INVESTMENTS
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
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 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.
DISPERSED POWERS AND BROAD DISCRETION OF RUSSIAN AND UKRAINIAN REGULATORS MAY
ADVERSELY AFFECT OUR OPERATIONS
Pursuant to the 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 containing provisions inconsistent with the Communications Law that
recognizes and defines the roles of other regulatory organs. A similar
situation exists in Ukraine. The dispersion of regulatory powers among a number
of government agencies in Russia and Ukraine may result in inconsistent or
contradictory regulations and capricious enforcement of the regulatory regime,
which could have a material adverse effect on our operations and the market
price of our stock.
Pursuant to Article 15 of the Russian Communications Law, any entity
that offers any communications service must obtain the appropriate license
issued by Goskomsvyaz 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
and Ukraine provide clear guidelines or base standards 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 and capricious decision making and may also give rise
to opportunities for corruption. Recently, the Ukrainian regulatory agency
introduced a regulation requiring holders of international
12
<PAGE> 16
licenses to invest unspecified annual amounts into local network development.
We cannot ensure that the required amount of investment will not be excessive
nor can we predict whether failure to perform this new obligation will lead to
the revocation of our license or otherwise have a material adverse effect on
our results of operations.
These factors render the licensing regime in the regions where we
operate unpredictable, and our failure to obtain and retain licenses could have
a material adverse effect on our operations.
LEGISLATIVE CONFUSION IN THE REGIONS IN WHICH WE OPERATE MAKES IT DIFFICULT TO
COMPLY WITH LEGISLATION AND TO ENFORCE OUR LEGAL RIGHTS
Inconsistent laws and the lack of an independent judiciary make it
difficult to be certain whether we are in compliance with all applicable laws,
rules and regulations, or that we would be able to enforce our rights in a
dispute with our joint venture partners or other parties. The Russian and other
CIS governments have introduced laws and regulations and have changed their
legal structures during the last nine years. This legislation has resulted in
considerable legal confusion, especially in areas of the law that directly
affect our operations. There can be no assurance that local laws and
regulations will stabilize in the future or that they will be consistently
applied by the Russian courts. Our ability to provide services in Russia and
the other independent countries of the CIS could be adversely affected by
difficulties in protecting and enforcing our rights and by future changes to
local laws and regulations.
OUR RUSSIAN AND UKRAINIAN TAX BURDENS MAY BE SIGNIFICANTLY GREATER THAN
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 capricious tax inspectors who demand higher
taxes than applicable law appears to provide. The amount and timing of
unfavorable resolution of tax liability could have a material adverse effect on
our future results of operations or cash flows in a particular period.
Russian laws calculate tax liability in ruble terms. However, some of
our billing is effectively dollar-linked, and we report our results of
operations in dollars. Because we are taxed on foreign exchange gains on a
statutory basis, devaluation of the ruble effectively results in a higher
effective tax rate and greater tax liability.
In addition, the Russian government or regional authorities may enact
sudden changes in tax rates or other tax laws. Although the recent enactment of
a 4% municipal tax in Moscow and in St. Petersburg on goods and services is not
likely to have a material adverse effect on our business, other tax legislation
may have such an effect.
UKRAINE
Ukrainian tax law is similarly unpredictable. The constitution
prohibits retroactive legislation and the tax code requires new tax laws to be
published six months in advance. However, sudden shifts in tax law and policy
and retroactive legislation are common. We are currently allowed to deduct
hryvna losses on hard currency borrowings, which 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.
13
<PAGE> 17
WE MAY BE AT A COMPETITIVE DISADVANTAGE BECAUSE OF RESTRICTIONS IN THE FOREIGN
CORRUPT PRACTICES ACT
The Foreign Corrupt Practices Act makes it illegal for us to give
anything of value to foreign officials in order to obtain or retain any
business or other advantage. Many of our current and potential competitors are
not subject to these anti-bribery restrictions of the Foreign Corrupt Practices
Act. 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 such payments. We believe that such commercial
practices are commonplace in Russia and the other CIS republics 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
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, attitudes towards Western foreign direct investment or business usage of
Western suppliers such as ourselves.
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
CIS. Our competitors may have substantially greater resources, closer ties to
governmental authorities and longer operating histories, any of which may give
them a competitive advantage over alternative providers like us.
Our competitors include 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 Combellga 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.
WE MAY BE OVERLY DEPENDENT ON OUR JOINT VENTURE PARTNERS
We depend to a significant degree on our 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, so
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.
Ukrainian legislation restricts the level of direct foreign ownership
in the telecommunications industry. These regulations may restrict our ability
to increase our holdings in ventures and increases 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 interest.
Under the terms of certain of our joint venture agreements we have the
right to nominate key employees, direct the operations and determine the
strategies for these joint ventures. However, our partners in some ventures,
14
<PAGE> 18
particularly in our wireless operations, have the ability to frustrate the
exercise of such 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 are unable to
control unilaterally the operations of our joint ventures.
OUR PARTNERS ARE OFTEN ALSO OUR COMPETITORS
Notwithstanding our agreements with our joint venture partners, they
sometimes compete directly with our joint ventures, which may result in loss of
customers. In addition, competition with our joint venture partners in the same
markets may create conflicts of interest. For example, our partner Rostelecom
is the dominant international and domestic long distance carrier in Russia.
Similarly, most of our regional telephone company 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 certain 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
(the so-called "last mile") and it is possible that this competitor would
attempt to create adverse operating conditions for our business.
WE MAY FACE DISCRIMINATION BECAUSE WE ARE A FOREIGN CONTROLLED ENTITY
Prior to 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 Central Bank, may refuse to select a service provider that is
controlled by foreign investors. Because we are controlled by foreign
investors, we may in some instances be unable to reach our targeted customers.
WE RELY ON A SMALL NUMBER OF MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES
Pro forma revenues from our five largest customers represented
approximately 41% of our total pro forma revenues in 1998. Accordingly, the
loss of one or more of our key customers, or even a partial loss of our
business from that customer, could have a material adverse effect on our
financial condition and results of operations. Although we are currently
unaware of any such plans on the part of our key customers, we cannot assure
you that they will not reduce their reliance on us by developing relationships
with other service providers.
WE EXPERIENCE LOWER MARGINS AS PRICES FOR OUR SERVICES DECLINE
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.
15
<PAGE> 19
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, network
coverage, results of operations and financial condition could be adversely
affected.
We currently rely on Rostelecom, the exclusive supplier of
international switched voice channels, 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, and 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 CIS relies on a satellite to receive and transmit caller
signals from the point of origin to the intended destination. 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. In fact, 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, depending on the duration of the disruption, have a material
adverse effect on our domestic long distance operations.
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS
We rely greatly on computer systems and other technological devices.
However, 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 implemented a Year 2000
compliance program, the goal of which is to ensure that the functionality and
performance of our operations are not adversely affected by Year 2000 problems.
We are communicating with third parties significant to our business to find out
more about their Year 2000 compliance programs. 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 cost 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
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
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 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.
In the event that our own systems are not Year 2000 compliant, we may
suffer disruption to our operations and our billing systems that could
materially adversely affect our financial condition and results of operations.
We believe that billing and information systems used by our ventures outside
Moscow, Kiev and St. Petersburg may not
16
<PAGE> 20
be fully Year 2000 compliant, and we are reviewing these and our other computer
systems to prepare for the Year 2000 date change.
We have spent approximately $300,000 for our Year 2000 compliance
through March 31, 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.
OUR FAILURE TO INTEGRATE, MANAGE AND OPERATE NEW TECHNOLOGY COULD RESULT IN
SYSTEM FAILURES
The seamless 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 enlarge our network to increase both its capacity and its reach,
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.
Like many other telecommunications providers, we depend on other
providers to be able to supply certain services. For example, our international
network interconnects with the networks of other providers, and we depend on
other Russian operators to provide long distance services to our customers. The
operation of these networks is beyond our control, and a malfunction in one of
these networks could have a material adverse effect on our financial condition
and results of operations.
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 successfully integrate new and emerging technologies and equipment.
WE MAY FACE DIFFICULTIES IN MAINTAINING OUR NETWORK
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 to be able to provide our services, and the Russian
network's underdevelopment may hinder our ability to obtain sufficient capacity
for our traffic volumes. Moreover, there are areas of Moscow into which we
cannot expand 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 financial condition and our results of operations.
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.
WE MAY ENCOUNTER DELAYS AND INCREASED COSTS IF WE CANNOT ACQUIRE KEY EQUIPMENT
FROM OUR 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. Our main suppliers include Nortel, Cisco and
Nokia. While 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 reduction in revenues and may therefore be unable
to repay amounts due under certain vendor financings. If any
17
<PAGE> 21
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. We do not
currently encounter difficulties importing, or spending hard currency on
equipment. However, any change in existing laws that creates such difficulties
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 and uneconomical 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 as
the economies and the governments in Russia and the rest of the CIS recover
from their current difficulties. Significant elements of our business strategy
that may require substantial capital expenditures include the following:
o the construction or the acquisition of fiber optic links
between heavy traffic routes;
o expanding our existing network infrastructure to other parts
of Russia, Ukraine and other countries of the CIS;
o developing additional Internet capability and acquiring other
Internet service providers; and
o expanding our wireless capabilities, including investments in
upgraded technology.
In addition, we will need to maintain our existing infrastructure. If
we fail to generate sufficient funds from a combination of operating cash flow
and additional debt or equity financing, 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 and on the market
price of our common stock.
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 operations, we may
not be able to record accurate call details or bill our customers promptly and
accurately.
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 CIS 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 CIS companies and individuals are
usually not available. We expect that the credit risk of our customer base may
increase as the share of our revenue derived from small- to medium-sized
enterprises and service provider/reseller customers increases.
18
<PAGE> 22
ORGANIZED CRIME MAY POSE A THREAT TO OUR BUSINESS AND EMPLOYEES
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 made. We believe that certain such 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 and 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. We cannot assure you that such issues will not
resurface in the future.
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 CIS countries 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 occasionally had 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 CIS, including senior management and technical personnel. We
cannot assure you that we will be able to hire and retain qualified personnel.
The competition for qualified technical personnel in the telecommunications
industry in the CIS is intense, particularly outside the major urban centers.
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 risk
associated with the use of mobile communications devices could have a material
adverse effect on our financial
19
<PAGE> 23
condition, results of operations and cash flows by reducing our mobile
telephony customer base, our customer growth rate and the average usage of our
subscribers.
RISKS ASSOCIATED WITH THE OFFERING
WE ARE NOW, AND AFTER THIS OFFERING WILL REMAIN, CONTROLLED BY GTS
Before this offering, GTS has controlled our business, and after this
offering, GTS will continue to own approximately % of our outstanding shares
of common stock ( % if the underwriters exercise their over-allotment option in
full).
Moreover, members of our Board 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.
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 shareholders 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, by our stockholders. 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 a 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 may enter into material transactions and agreements with GTS in the
future in addition to those described above. Our Board of Directors will
evaluate the terms and provisions of any material transactions between us and
GTS as it may deem appropriate in light of its fiduciary duties under Delaware
law. In any such evaluation, our Board of Directors may rely on management's
statements and opinions and may or may not use outside experts or consultants
or obtain independent appraisals or opinions.
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 HAVE NO HISTORY OF OPERATING AS A SEPARATE STAND-ALONE COMPANY
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 them regarding the
provision of certain services. These agreements are described elsewhere in this
prospectus.
20
<PAGE> 24
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 satisfy our working capital, capital expenditure and debt
service requirements for the foreseeable future. However, we may need to obtain
alternative sources of financing, 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.
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 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.
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 the 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 approximately % 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 AND THEIR MARKET PRICE MAY
FLUCTUATE
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. A number of factors may adversely affect the
market price of our common stock after this offering or cause the market price
to fluctuate. These factors include:
o our historical and anticipated operating results;
o quarterly fluctuations in our financial and operating
results;
21
<PAGE> 25
o the political, economic and financial conditions of Russia
and Ukraine;
o changes in applicable regulation and the competitive
environment in the Russian and Ukrainian telecommunications
industries; and
o fluctuations in financial markets generally.
ANY US 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 courts, including those with respect to federal
securities law claims, may not be enforceable. Therefore, any US court judgment
obtained against us or any of our operating companies may not be enforceable in
Russia or Ukraine.
22
<PAGE> 26
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:
o potential acquisitions and business development;
o network expansion;
o working capital; and
o general corporate purposes.
DIVIDEND POLICY
We have not paid any dividend on our common stock and do not intend to
pay dividends in the foreseeable future.
DILUTION
At March 31, 1999, the net tangible book value of our common stock was
$ million in the aggregate, or $ 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 March 31, 1999 ................................... $
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>
SHARES OF COMMON STOCK TOTAL CONSIDERATION AVERAGE PRICE
---------------------- ------------------- PER SHARE OF
NUMBER PERCENT AMOUNT PERCENT COMMON STOCK
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholder................
New investors......................
Total..............................
====== ======= ====== ======= =============
</TABLE>
The above outstanding computations assume no exercise of any
outstanding options or warrants. Immediately before this offering, there will
be no outstanding options to purchase shares. 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.
23
<PAGE> 27
CAPITALIZATION
The following table sets forth our consolidated capitalization:
o at March 31, 1999 ("Actual"); and
o to give effect to this offering ("As Adjusted").
You should read this table in conjunction with our consolidated
financial statement, including the notes to the financial statements included
in this prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------------------
ACTUAL AS ADJUSTED
--------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Cash and Cash equivalents ..................... $ 15,330
Restricted Cash ............................... 26,765
--------------- ----------------
Total Cash ............................... $ 42,095
=============== ================
Debt maturing within one year ................. $ 4,063
--------------- ----------------
Current debt ............................. 4,063
Long-term obligations (net of current portion)
Long term debt ........................... 21,396
--------------- ----------------
Total debt ............................... 25,459
--------------- ----------------
Minority interest ............................. 8,452
Shareholders' equity(1):
Common stock, $0.01 par value (shares
authorized; shares issued and outstanding,
actual; shares issued and outstanding,
as adjusted)
Additional paid-in capital .................... 247,410
Accumulated deficit ........................... (80,874)
--------------- ----------------
Total shareholders' equity ............... 166,536
--------------- ----------------
Total capitalization .......................... $ 200,447
=============== ================
</TABLE>
- --------------------
(1) As of March 31, 1999, there were no outstanding options to purchase
shares. 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.
24
<PAGE> 28
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical and pro forma 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 and pro forma data are unaudited.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
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 $ 13,757 $ 24,185
Cost of revenues ....................... -- 4,653 10,083 20,420 43,574 8,933 9,326
Gross margin ........................... -- (816) 3,057 6,778 42,512 4,824 14,859
Selling, general and administrative .... $ 1,802 13,225 17,686 21,249 45,327 8,791 8,638
Depreciation and amortization .......... -- 804 2,753 4,363 16,709 1,809 5,962
Equity in (earnings) losses of
ventures................................ (781) 409 (3,783) (12,428) (2,559) (4,405) 4,413
Operating loss ......................... (1,021) (15,254) (13,599) (6,406) (16,965) (1,371) (4,154)
Interest, net .......................... 98 (144) (1,140) (431) (3,003) (704) 179
Foreign currency loss .................. (16) (79) (446) (399) (7,452) (38) (742)
Provision for income taxes ............. -- -- 286 647 5,184 193 2,600
Net loss ............................... (939) (15,477) (15,471) (7,883) (33,644) (2,306) (7,776)
Net loss per share(1) .................. $ $ $ $ $ $ $
EBITDA(2) .............................. N/M N/M $ 17,219 $ 21,283 $ 31,250 $ 8,026 $ 7,560
Net cash (used in) provided by
operating activities ................... N/M N/M (17,077) (20,591) 1,290 (924) (629)
Net cash used in investing activities .. N/M N/M (12,274) (22,203) (62,413) (6,620) (4,453)
Net cash provided by financing
activities ............................. N/M N/M 32,390 43,538 74,151 8,087 6,526
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, AT MARCH 31,
---------------------------------------------------------- ----------------------
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 $ 4,459 $ 15,330
Property and equipment, net ............ 2,858 18,409 21,665 16,812 52,186 22,652 54,714
Investments in and advances to ......... 4,202 43,226 50,188 74,332 46,519 88,887 45,087
ventures
Total assets ........................... 15,423 75,328 92,549 129,620 235,849 164,297 232,324
Total debt ............................. 3,147 12,866 9,322 1,625 24,459 9,237 25,459
Minority interest ...................... -- 1,913 1,913 -- 7,993 -- 8,452
Shareholders' equity ................... 11,502 49,839 70,302 115,568 168,783 135,087 166,536
</TABLE>
- ------------------------
(1) These amounts were calculated based on the assumption of common
stock outstanding for the respective periods.
(2) EBITDA is earnings (loss) from operations before foreign currency
gains (losses), interest, taxes, depreciation and amortization. In
computing EBITDA we have included our portion, based on our accounting
policy for equity investees, of the earnings (loss) of our operations
that we account for using the equity method of accounting. These
equity method results exclude foreign currency gains (losses),
interest, taxes, depreciation and amortization, which we include
within our equity in losses of ventures line item in our consolidated
statements of operations. EBITDA is a measure of a company's
performance commonly used in the telecommunications industry, but
should not be construed as an alternative to net income (loss)
determined in accordance with US GAAP as an indicator of operating
performance or as an alternative to cash from operating activities
determined in accordance with US GAAP as a measure of liquidity.
N/M -- Not meaningful
25
<PAGE> 29
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
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. 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 FOR THE
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---- ----
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues ...................................... $ 79,706 $ 117,367
Cost of revenues .............................. 39,080 51,874
Gross margin .................................. 40,626 65,493
Selling, general and administrative ........... 33,662 51,096
Depreciation and amortization ................. 17,578 24,413
Equity in (earnings) losses of ventures ....... (8,704) 863
Operating loss ................................ (1,910) (10,879)
Interest, net ................................. 1,271 (2,455)
Foreign currency loss ......................... (688) (7,909)
Provision for income taxes .................... 7,552 10,084
Net loss ...................................... (9,530) (32,832)
Net loss per share(1) ......................... $ $
EBITDA(2) ..................................... $ 21,765 $ 38,135
Net cash provided by operating activities ..... 2,341 6,683
Net cash used in investing activities ......... (69,411) (41,019)
Net cash provided by financing activities ..... 71,922 37,113
</TABLE>
- ----------------------------
(1) These amounts were calculated based on an assumption of common
shares outstanding for the respective periods.
(2) EBITDA is earnings (loss) from operations before foreign currency
gains (losses), interest, taxes, depreciation and amortization. In
computing EBITDA, we have included our portion, based on our
accounting policy for equity investees, of the earnings (loss) of our
operations that we account for using the equity method of accounting.
These equity method results exclude foreign currency gains (losses),
interest, taxes and depreciation and amortization, which we include
within our equity in (earnings) losses of ventures line item in our
consolidated statements of operations. EBITDA is a measure of a
company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income
(loss) determined in accordance with US GAAP as an indicator of
operating performance or as an alternative to cash from operating
activities determined in accordance with US GAAP as a measure of
liquidity.
26
<PAGE> 30
We provide below certain pro forma 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 FOR THE THREE MONTHS ENDED ACTUAL
------------------------------------------------------------- ---------------
FOR THE THREE
MARCH 31, JUNE 30, SEPTEMBER 30 DECEMBER 31, MONTHS ENDED
1998 1998 1998 1998 MARCH 31, 1999
---------- ---------- ---------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ 27,306 $ 32,680 $ 31,966 $ 25,415 $ 24,185
Cost of Revenues ....................... 12,567 14,550 12,709 12,048 9,326
Gross Margin ........................... 14,739 18,130 19,257 13,367 14,859
Selling, general and administrative .... 11,049 11,624 17,124 11,299 8,638
Net loss ............................... (1,939) (395) (17,121) (13,377) (7,776)
EBITDA(1) .............................. 11,203 13,552 6,913 6,467 7,560
Net cash (used in) provided by
operating activities ............ 6,964 530 1,618 (2,429) (629)
Net cash used in investing activities .. (6,680) (12,850) (9,635) (11,854) (4,453)
Net cash provided by financing
activities ............................. 1,423 9,922 10,504 15,264 6,526
</TABLE>
---------------------
(1) EBITDA is earnings (loss) from operations before foreign currency
gains (losses), interest, taxes, depreciation and amortization. In
computing EBITDA, we have included our portion, based on our
accounting policy for equity investees, of the earnings (loss) of our
operations that we account for using the equity method of accounting.
These equity method results exclude foreign currency gains (losses),
interest, taxes and depreciation and amortization, which we include
within our equity in (earnings) losses of ventures line item in our
consolidated statements of operations. EBITDA is a measure of a
company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income
(loss) determined in accordance with US GAAP as an indicator of
operating performance or as an alternative to cash from operating
activities determined in accordance with US GAAP as a measure of
liquidity.
27
<PAGE> 31
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. Figures in italics relate to part of the period only.
<TABLE>
<CAPTION>
SELLING,
GENERAL, DEPRECIATION
OWNERSHIP COST OF ADMINISTRATIVE & NET
INTEREST(1) REVENUES REVENUES & OTHER(2) 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%(3) 16,507 3,238 1,360 108 8,874
TeleRoss ventures .................. 50.0% 2,413 637 1,830 659 (841)
Sovam .............................. 66.7%(4) 11,671 7,745 5,078 764 (2,138)
GTS Mobile Services ................ 50.0%(5) 25,195 7,804 10,468 4,288 (669)
Golden Telecom (Ukraine) ........... 24.5%(6) 583 502 1,752 816 (2,737)
---------- ---------- ---------- ---------- ----------
Total ...................... $ 131,409 $ 60,600 $ 30,497 $ 10,273 $ 17,251
ADJUSTMENTS FOR INTER-AFFILIATE
TRANSACTIONS(7) .................... -- $ (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%(3) 29,308 6,670 2,762 633 13,023
TeleRoss ventures .................. 50.0% 6,794 1,581 3,202 963 71
Sovam .............................. 66.7%(4) 17,808 10,046 5,381 1,006 780
GTS Mobile Services ................ 50.0%(5) 37,055 12,762 11,733 5,091 2,908
Golden Telecom (Ukraine) ........... 24.5%(6) 7,220 3,343 4,695 2,500 (3,814)
---------- ---------- ---------- ---------- ----------
Total ...................... $ 212,147 $ 102,783 $ 43,672 $ 15,505 $ 31,432
ADJUSTMENTS FOR INTER-AFFILIATE
TRANSACTIONS(7) .................... $ (23,927) $ (8,695) $ (15,699) -- --
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%(3) 21,586 5,341 1,732 472 8,843
TeleRoss ventures .................. 50.0% 9,018 1,925 3,687 1,087 (223)
GTS Mobile Services ................ 50.0%(5) 35,236 11,842 10,117 7,261 387
Golden Telecom (Ukraine) (through
June 30, 1998) ..................... 24.5%(6) 9,927 3,192 4,144 1,743 209
---------- ---------- ---------- ---------- ----------
Total ...................... $ 199,935 $ 98,537 $ 43,452 $ 16,904 $ 13,476
ADJUSTMENTS FOR INTER-AFFILIATE
TRANSACTIONS(7)..................... $ (25,223) $ (24,881) $ (1,584) -- --
THREE MONTHS ENDED MARCH 31, 1998
Sovintel ........................... 50.0% $ 32,404 $ 20,629 $ 4,473 $ 1,501 $ 4,345
TCM ................................ 50.0%(3) 9,456 2,405 758 267 4,050
TeleRoss ventures .................. 50.0% 2,392 563 876 255 325
GTS Mobile Services ................ 50.0%(5) 10,685 3,569 2,474 1,647 1,266
Golden Telecom (Ukraine) ........... 24.5%(6) 4,220 1,360 1,587 935 149
---------- ---------- ---------- ---------- ----------
Total ...................... $ 59,157 $ 28,526 $ 10,168 $ 4,605 $ 10,135
ADJUSTMENTS FOR INTER-AFFILIATE
TRANSACTIONS(7) .................... $ (8,126) $ (7,524) $ (1,126) -- --
THREE MONTHS ENDED MARCH 31, 1999
Sovintel ........................... 50.0% $ 22,484 $ 13,538 $ 4,193 $ 1,859 $ 988
TeleRoss ventures .................. 50.0% 592 146 365 253 (378)
GTS Mobile Services ................ 50.0%(5) 4,223 1,455 2,176 2,084 (2,590)
---------- ---------- ---------- ---------- ----------
Total ...................... $ 27,299 $ 15,139 $ 6,734 $ 4,196 $ (1,980)
ADJUSTMENTS FOR INTER-AFFILIATE
TRANSACTIONS(7) .................... $ (3,759) $ (3,573) $ 425 -- --
</TABLE>
28
<PAGE> 32
- ----------------------
(1) The ownership interest column indicates our legal ownership percentage
for the respective equity investments. The information is being
provided to assist an investor or analyst in determining our legal
rights associated with the presented financial data. See Note 4 in our
audited Consolidated Financial Statements for additional disclosures
related to our equity investees.
(2) Includes non-income taxes.
(3) Our ownership of TCM increased to 95% from July 1, 1998.
(4) Our ownership of Sovam increased to 100% from February 1998.
(5) 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.
(6) Our effective ownership of Golden Telecom (Ukraine) increased to
56.75% from June 30, 1998. (7) The adjustment amounts 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".
29
<PAGE> 33
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 three month periods ended
March 31, 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 CIS. 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.
CLEC Services. In Moscow, Kiev and St. Petersburg, we operate
facilities-based CLECs, which include our international gateways. We provide a
range of services including local exchange and access services, international
and domestic long distance services, managed bandwidth services, Internet
access and the design and installation of corporate networks. We provide CLEC
services primarily through our operating companies Sovintel, TCM and Golden
Telecom BTS.
Data and Long Distance Services. In major population centers
throughout Russia and other countries of the CIS, we offer traditional and
high-speed data services and dedicated and dial-up Internet access. We provide
data services primarily through our Sovam operating companies. In Russia, we
also offer international and long distance voice services. We provide long
distance voice services primarily through the TeleRoss operating company and
ventures.
Mobile Services. In Kiev, Vladivostok and thirteen other metropolitan
areas of Russia, we offer mobile telephony services on a subscription and
prepaid basis. We provide mobile services through our operating companies
Golden Telecom GSM and the Vostok Mobile ventures, including PrimTelefone in
Vladivostok.
Our financial condition and our results of operations have been, and
continue to be, adversely affected by ongoing economic and political
instability in Russia and the other countries of the CIS. 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 markets may have stabilized since August 1998, the Russian
economy remains in a depression, exacerbated by continuing political
instability that may precipitate further economic volatility. See "--Special
Note Regarding the Russian Financial Crisis".
Our business is currently wholly owned by GTS. GTS has created a
separate holding company, Golden Telecom, Inc., that will issue the shares
offered in this public offering. Immediately before the consummation of this
offering, GTS will contribute to Golden Telecom, Inc. all the business units
through which we conduct our operations. After the completion of the offering,
GTS will own approximately % of the outstanding shares of common stock
of our company ( % if the underwriters' over-allotment option is exercised
in full).
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 method
30
<PAGE> 34
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%.
(5) We own a 95% interest in TCM through our wholly owned subsidiary
GTS-Vox Limited. In July 1998, we purchased our remaining
approximately 47.4% interest in GTS-Vox Limited from our minority
partners and as a result, TCM is now accounted for by the
consolidation method as opposed to the equity method.
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; 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 March 31, 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 $4.8 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. These 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.
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.
31
<PAGE> 35
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 CIS. 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 operation, 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 is 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:
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
o Consolidated Results. Results of Operations for the Three
Months Ended March 31, 1999 compared to the Results of
Operations for the Three Months Ended March 31, 1998
o Pro Forma Consolidated Results. Results of Operations for the
Three Months Ended March 31, 1999 compared to the Pro Forma
Results of Operations for the Three Months Ended March 31,
1998
o Non-consolidated Results. Results of Non-Consolidated
Operations for the Three Months Ended March 31, 1999 compared
to the Results of Non-Consolidated Operations for the Three
Months Ended March 31, 1998
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
o Consolidated Results. Results of Operations for the Year
Ended December 31, 1998 compared to the Results of Operations
for the Year Ended December 31, 1997
o Pro Forma Consolidated Results. Pro Forma Results of
Operations for the Year Ended December 31, 1998 compared to
Pro Forma Results of Operations for the Year Ended December
31, 1997
o 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
32
<PAGE> 36
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
o Consolidated Results. Results of Operations for the Year
Ended December 31, 1997 compared to the Results of Operations
for the Year Ended December 31, 1996
o 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 THREE MONTHS
ENDED MARCH 31, 1999 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1998
For the three months ended March 31, 1998, we only consolidated two
significant ventures: TeleRoss operating company and Sovam (from February 1,
1998). Golden Telecom (Ukraine) and TCM were both consolidated in our results of
operations from July 1, 1998 and, therefore, their results are included only for
the three months ended March 31, 1999. The comparison of revenue, gross margins,
selling, general and administrative expenses and depreciation and amortization
is distorted by these acquisitions. As a result, it is not meaningful to compare
operating results between the two periods. We believe a more meaningful
comparison of these items is discussed below under "--Pro Forma Consolidated
Results-- Consolidated Results of Operations for the Three Months Ended March
31, 1999 compared to the Pro Forma Consolidated Results of Operations for the
Three Months Ended March 31, 1998".
EQUITY IN EARNINGS/LOSSES OF VENTURES
The losses after interest and tax charges from our investments in
non-consolidated ventures were $4.4 million for the three months ended March
31, 1999, and our earnings from investments in non-consolidated ventures were
$4.4 million for the three months ended March 31, 1998. These amounts include
excess losses of $1.4 million for the first three months of 1999. In the first
three months of 1998, we recovered $0.2 million of excess losses relating to
previous periods. See "--Accounting Methodology--Profit and Loss Accounting".
We recognized earnings at Sovintel of $0.5 million for the three months ended
March 31, 1999 partially offset our recognized losses at other ventures. In the
three months ended March 31, 1998, our recognized earnings at Sovintel and TCM
together was $4.2 million.
FOREIGN CURRENCY LOSS
Our foreign currency loss was $0.7 million for the three months ended
March 31, 1999, compared to an insignificant loss for the three months ended
March 31, 1998. This increased loss reflects the devaluation of the ruble that
resulted from the August 1998 Russian financial crisis.
PRO FORMA CONSOLIDATED RESULTS -- CONSOLIDATED RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE PRO FORMA CONSOLIDATED
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
REVENUE
Our revenue decreased by 11% to $24.2 million for the three months
ended March 31, 1999 from $27.3 million, on a pro forma basis, for the three
months ended March 31, 1998. The breakdown of revenue by business group was as
follows:
33
<PAGE> 37
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 ENDED MARCH 31, 1999
------------------------- -----------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services........................ $ 11.6 $ 11.7
Data and Long Distance Services...... 13 9.1
Mobile Services...................... 3.1 3.9
Eliminations......................... (0.4) (0.5)
------------------------ -----------------------
TOTAL REVENUE........................ $ 27.3 $ 24.2
</TABLE>
CLEC SERVICES. Revenue from CLEC Services increased slightly to $11.7
million for the three months ended March 31, 1999 from $11.6 million, on a pro
forma basis, for the three months ended March 31, 1998. Substantial decreases
in revenue from installation fees, connection fees and equipment sales were
offset by increased traffic revenue and monthly recurring revenue. The
increases in traffic revenue and monthly recurring revenue were primarily
attributable to increased traffic at Golden Telecom BTS and to the higher
number of ports in use at TCM.
DATA AND LONG DISTANCE SERVICES. Revenue from Data and Long Distance
Services decreased by 30% to $9.1 million for the three months ended March 31,
1999 from $13.0 million, on a pro forma basis, for the three months ended March
31, 1998. Data revenue increased by 5% to $6.2 million from $5.9 million,
primarily as a result of the increase in Internet revenue caused by an increase
in the number of Internet subscribers, which was offset by a small decrease in
private line revenue. Long distance revenue decreased 59% to $2.9 million from
$7.1 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.
MOBILE SERVICES. Revenue from Mobile Services increased by 26% to $3.9
million for the three months ended March 31, 1999 from $3.1 million, on a pro
forma basis, for the three months ended March 31, 1998. This increase was
primarily attributable to the 137% growth in Golden Telecom GSM's active
subscribers from March 31, 1998 to March 31, 1999.
EXPENSES
The following table shows our principal expenses in the three months
ended March 31, 1999 and the three months ended March 31, 1999:
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 ENDED MARCH 31, 1999
----------------------- ----------------------
(IN MILLIONS)
<S> <C> <C>
COST OF REVENUE
CLEC Services......................... $ 3.3 $ 3.4
Data and Long Distance Services....... 8.6 5.5
Mobile Services....................... 1.1 0.9
Eliminations.......................... (0.4) (0.5)
---------------------- ----------------------
TOTAL COST OF REVENUE.................... $ 12.6 $ 9.3
SELLING, GENERAL AND ADMINISTRATIVE...... $ 11.0 $ 8.6
DEPRECIATION AND AMORTIZATION............ $ 5.6 $ 6.0
EQUITY IN (EARNINGS) LOSSES OF VENTURES.. $ (2.9) $ 4.4
</TABLE>
34
<PAGE> 38
COST OF REVENUE
Our cost of revenue decreased by 26% to $9.3 million for the three
months ended March 31, 1999 from $12.6 million, on a pro forma basis, for the
three months ended March 31, 1998.
CLEC SERVICES. Pro forma cost of revenue from CLEC Services increased
by 3% to $3.4 million, or 29% of revenue, for the three months ended March 31,
1999 from $3.3 million, or 28% of revenue, on a pro forma basis, for the three
months ended March 31, 1998. The small increase as a result of increased
settlement and interconnection costs 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 36% to $5.5 million, or 60% of revenue,
for the three months ended March 31, 1999 from $8.6 million, or 66% of revenue,
on a pro forma basis, for the three months ended March 31, 1998. The
significant decrease reflected a substantial reduction in long distance
settlement rates.
MOBILE SERVICES. Pro forma cost of revenue from Mobile Services
decreased by 18% to $0.9 million, or 23% of revenue, for the three months ended
March 31, 1999 from $1.1 million, or 35% of revenue, on a pro forma basis, for
the three months ended March 31, 1998. The increased gross margin was due to
the lower proportion of revenue from sales of handsets, which produce low
margins.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses decreased by 22% to
$8.6 million, or 36% of revenue, for the three months ended March 31, 1999 from
$11.0 million, or 40% of revenue, on a pro forma basis, for the three months
ended March 31, 1998. The decrease in these expenses was attributable primarily
to lower personnel costs and lower provisions for bad debts.
DEPRECIATION AND AMORTIZATION
Our depreciation and amortization expense increased by 7% to $6.0
million for the three months ended March 31, 1999 from $5.6 million, on a pro
forma basis, for the three months ended March 31, 1998.
EQUITY IN EARNINGS/LOSSES OF VENTURES
The losses from our investments in non-consolidated ventures were $4.4
million for three months ended March 31, 1999, compared to earnings of $2.9
million, on a pro forma basis, for the three months ended March 31, 1998. This
$7.3 million decrease in earnings was attributable primarily to a reduction in
earnings at our non-consolidated Long Distance, Mobile Services and CLEC
operating companies. See "-Non-consolidated Results-Results of Non-Consolidated
Operations for the Three Months Ended March 31, 1999 compared to the Results of
Non-Consolidated Operations for the Three Months Ended March 31, 1998".
NON-CONSOLIDATED RESULTS -- RESULTS OF NON-CONSOLIDATED OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE RESULTS OF NON-CONSOLIDATED
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
This section includes a discussion of Sovintel's results of operations
in the quarters ended March 31, 1998 and 1999. Sovintel was our principal
non-consolidated operating company during these periods.
SOVINTEL
REVENUE
Sovintel's revenue decreased by 31% to $22.5 million for the three
months ended March 31, 1999 from $32.4 million, for the three months ended
March 31, 1998. Revenue from local, long distance and international call
35
<PAGE> 39
traffic decreased as a result of the August 1998 Russian financial crisis which
affected both volumes and tariffs. In particular, traffic from cellular
operators decreased 70% compared to the three months ended March 31, 1998.
Revenue from incoming international traffic also fell sharply, largely because
of a 35% reduction in the average settlement rates paid to Sovintel by other
operators.
COST OF REVENUE
Sovintel's cost of revenue decreased by 34% to $13.5 million for the
three months ended March 31, 1999 from $20.6 million for the three months ended
March 31, 1998. The decrease to 60% from 64% 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 7% to $4.2 million, or 19% of revenue, for the three months ended
March 31, 1999 from $4.5 million, or 14% of revenue for the three months ended
March 31, 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. The comparison of revenue, gross
margins, selling, general and administrative expenses and depreciation and
amortization is distorted by these accounting changes. As a result it is not
meaningful to compare operating results between the two periods. We believe a
more meaningful comparison of these items is discussed below in "--Pro Forma
Consolidated Results -- Pro Forma Consolidated Results of Operations for the
Year Ended December 31, 1998 compared to Pro Forma Consolidated Results of
Operations for the Year Ended December 31, 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 $2.2 million for 1998 and $2.0 million for 1997. See
"--Accounting Methodology--Profit and Loss Accounting ". Sovintel and TCM
generated combined earnings of $6.6 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.
FOREIGN CURRENCY LOSS
Our foreign currency loss increased to $7.5 million for the years ended
December 31, 1998 from $0.4 million for the year ended December 31, 1997. Our
foreign currency loss in 1998 was primarily due to the devaluation of the
ruble, as described in "-- Special Note Regarding the Russian Financial Crisis".
PROVISION FOR INCOME TAXES
Our tax provision increased to $5.2 million for the year ended
December 31, 1998 from $0.6 million for the year ended December 31, 1997. TCM's
total tax provision for the year ended December 31, 1998 was $9.7 million. Of
this amount, $4.8 million corresponded to the period from July 1 through
December 31, 1998 and was included in our consolidated results of operations.
TCM's tax provision for 1997 was $6.5 million, which was not consolidated.
36
<PAGE> 40
PRO FORMA CONSOLIDATED RESULTS -- PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO PRO FORMA CONSOLIDATED RESULTS
OF OPERATIONS 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 RESULTS CONSOLIDATED RESULTS
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 209% to $10.2 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 increases in 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.
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.
EXPENSES
The following table shows our principal expenses in the three months
ended March 31, 1999 and the three months ended March 31, 1999:
37
<PAGE> 41
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA CONSOLIDATED
CONSOLIDATED RESULTS 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 ................................. $ 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
SELLING, GENERAL AND ADMINISTRATIVE .............. $ 33.7 $ 51.1
DEPRECIATION AND AMORTIZATION .................... $ 17.6 $ 24.4
EQUITY IN (EARNINGS) LOSSES OF VENTURES .......... $ (8.7) $ 0.9
INTEREST EXPENSE, NET ............................ $ 1.3 $ 2.5
FOREIGN CURRENCY LOSS ............................ $ 0.7 $ 7.9
PROVISION FOR INCOME TAXES ....................... $ 7.6 $ 10.1
</TABLE>
COST OF REVENUE
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.
SELLING, GENERAL AND ADMINISTRATIVE
Our pro forma selling, general and administrative expenses increased
by 52% to $51.1 million, or 44% of revenue, for the year ended December 31,
1998 from $33.7 million, or 42% of revenue, for the year ended December 31,
1997. The increase was due primarily to the growths in our data and mobile
services. The pro forma provision for bad debt increased by $1.9 million to
$4.6 million in 1998 from $2.7 million in 1997 primarily as a result of the
August 1998 Russian financial crisis.
38
<PAGE> 42
DEPRECIATION AND AMORTIZATION
Our pro forma depreciation and amortization expenses increased by 39%
to $24.4 million for the year ended December 31, 1998 from $17.6 million for the
year ended December 31, 1997. Pro forma depreciation expense increased by 48% to
$9.2 million in 1998 from $6.2 million in 1997 because of increased investment
in our network. Pro forma amortization expense increased by 33% to $15.2 million
in 1998 from $11.4 million in 1997, due primarily to the additional goodwill
recognized associated with the current provisions of the 1995 TCM Purchase
Agreement.
EQUITY IN EARNINGS/LOSSES OF VENTURES
The pro forma losses from our investments in non-consolidated ventures
were $0.9 million for the year ended December 31, 1998 compared to pro forma
earnings of $8.7 million for the year ended December 31, 1997. This decrease
was primarily due to lower earnings at Sovintel. See "-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".
INTEREST EXPENSE, NET
Our pro forma interest expense, net, was $2.5 million for the year
ended December 31, 1998 because of costs associated with certain debt financing
that we incurred that year. We earned net interest of $1.3 million for the year
ended December 31, 1997.
FOREIGN CURRENCY LOSS
Our pro forma foreign currency loss was $7.9 million for the year ended
December 31, 1998 and $0.7 million for the years ended December 31, 1997. The
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 pro forma tax provision increased to $10.1 million for the year
ended December 31, 1998 from $7.6 million for the year ended December 31, 1997.
The increase in provision for income taxes was primarily due to higher taxable
profits at TCM.
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 financial crisis adversely affected revenue from local
calls, international incoming calls, and new connections during the third and
fourth quarters of 1998.
39
<PAGE> 43
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. See "--Accounting Methodology--Profit and Loss Accounting
". 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 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".
40
<PAGE> 44
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 $15.3 million and $4.5 million as
of March 31, 1999 and 1998, respectively. Our restricted cash was $26.8 million
and $13.0 million as of March 31, 1999 and 1998, respectively. The restricted
cash is maintained in connection with certain of our debt obligations as
described below.
Our total equity of $166.5 million as of March 31, 1999 included an
accumulated deficit of $80.9 million. Included in the $80.9 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. 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 three months ended March 31, 1999 and 1998, we used cash of
$0.6 million and $0.9 million, respectively, for our operating activities. We
also used cash of $4.5 million and $6.6 million for investing activities, that
was principally attributable to building our telecommunications networks, for
the three months ended March 31, 1999 and 1998, respectively.
We had working capital of $6.2 million as of March 31, 1999 and $9.8
million as of March 31, 1998. At March 31, 1999, we had total debt of
approximately $25.5 million, of which $4.1 million were current maturities. At
December 31, 1998, we had total debt of approximately $24.5 million, of which
$3.0 million 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 a bank providing for up to $30.7 million of financing. The
41
<PAGE> 45
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 March 31, 1999, $16.5 million in loans were
outstanding under the facility. Because of the financial condition of certain
Vostok Mobile ventures, GTS has made most of the principal and interest
payments on behalf of the ventures. As a result, we and GTS are currently
exploring various alternatives for restructuring these loans.
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 March 31, 1999, approximately $2.9
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 March 31,
1999, approximately $8.4 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 March 31, 1999, approximately $1.4 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.
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.
In addition to the external financing discussed above, we have funded
our 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 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 network
expansion plans. 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
42
<PAGE> 46
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, either of 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 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. See "Risk Factors--Risks Associated with Doing Business in
Russia, Ukraine and Other Countries of the Commonwealth of Independent States".
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.
43
<PAGE> 47
<TABLE>
<CAPTION>
FAIR
----
VALUE
-----
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
Long-term debt, including current portion
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 mark
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 1998.
This charge related to foreign currency exchange losses, unrecoverable bad
debts and unrecoverable cash deposits. See "Risk Factors --Risks Associated
with Doing Business in Russia, Ukraine and Other Countries of the CIS".
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 implemented by the Russian
government were the immediate and primary cause of this monetary and financial
crisis:
o 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;
o 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
o 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. Deposits held at Russian
banks, other than Sberbank, are not insured.
44
<PAGE> 48
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.
<TABLE>
<CAPTION>
QUARTER ENDED PERIOD END AVERAGE (1) 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 (2) ........... 6.11 6.15 6.11 5.96
June 30, 1998 ................ 6.20 6.27 6.20 6.11
September 30, 1998 (3) ....... 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 31, 1999 ................ 24.22 24.90 25.12 23.99
September 30, 1999(4)
</TABLE>
- --------------------
(1) The average of the exchange rates each business day during the
relevant period.
(2) 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 such redenomination.
(3) The last official exchange rate prior to the suspension of trading on
August 17, 1998 was 6.27 rubles per US dollar.
(4) Through July 12, 1999.
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:
<TABLE>
<CAPTION>
ACTUAL FOR THE
THREE MONTHS
PRO FORMA(1) FOR THE THREE MONTHS ENDED ENDED
---------------------------------------------------------- --------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1998 1999
-------- -------- ------------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.................................... $ 27,306 $ 32,680 $ 31,966 $ 25,415 $ 24,185
Cost of Revenue............................ 12,567 14,550 12,709 12,048 9,326
Gross Margin............................... 14,739 18,130 19,257 13,367 14,859
Selling, general and administrative........ 11,049 11,624 17,124 11,299 8,638
Net loss................................... (1,939) (395) (17,121) (13,377) (7,776)
EBITDA(2).................................. 11,203 13,552 6,913 6,467 7,560
Net cash (used in) provided by
operating activities....................... 6,964 530 1,618 (2,429) (629)
Net cash used in investing activities...... (6,680) (12,850) (9,635) (11,854) (4,453)
Net cash provided by financing activities.. 1,423 9,922 10,504 15,264 6,526
</TABLE>
- -------------------
(1) 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.
(2) EBITDA is earnings (loss) from operations before foreign currency
gains (losses), interest, taxes, depreciation and amortization. In
computing EBITDA, we have included our portion, based on our
accounting policy for equity investees, of the earnings (loss) of our
operations that we account for using the equity method of accounting.
These equity method results exclude foreign currency gains (losses),
interest, taxes and depreciation and amortization, which we include
within our equity in (earnings) losses of ventures line item in our
consolidated statements of operations. EBITDA is a measure of a
company's performance commonly used in the telecommunications
industry, but should not be construed as an alternative to net income
(loss) determined in accordance with US GAAP as an indicator of
operating performance or as an alternative to cash from operating
activities determined in accordance with US GAAP as a measure of
liquidity.
45
<PAGE> 49
Revenue declined sharply in the fourth quarter of 1998, beginning
immediately after the August financial crisis. The areas principally affected
include:
o 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;
o New installations and connections, which have significantly
decreased across all our businesses groups; and
o 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 $9.3 million in the first quarter of 1999 was 23% lower than cost
of revenue in the fourth quarter of 1998, resulting in an improvement of the
gross margin to 61% 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 (among other things, this includes 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.
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
46
<PAGE> 50
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:
o the failure of our telecommunications equipment, power
providers and/or interfaces with other telecommunication
vendors;
o a loss of interconnect capacity from one or more major
suppliers of transmission capacity; and
o our inability to record, track or invoice billable minutes
which could ultimately cause us to temporarily stop carrying
traffic.
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 operation.
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, which is discussed under "Risk Factors--Risks Associated With Doing
Business in Russia and Other Countries of the Commonwealth of Independent
States".
47
<PAGE> 51
Costs Related to the Year 2000 Issue. We have spent approximately
$300,000 for our Year 2000 compliance through March 31, 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. See
"Risk Factors--Risks Associated with Our Business--The Year 2000 could disrupt
our business and operations".
48
<PAGE> 52
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 CIS. We offer
our services through three business groups:
o CLEC Services using our overlay networks in Moscow, Kiev and
St. Petersburg;
o 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 CIS;
and
o Mobile Services using cellular networks in Kiev, Vladivostok
and thirteen other population centers throughout Russia.
CLEC Services. In Moscow, Kiev and St. Petersburg, we operate
facilities-based CLECs, which include our international gateways. We provide a
range of services including local exchange and access services, international
and domestic long distance services, managed bandwidth services, Internet
access and the design and installation of corporate networks. We offer these
services through our metropolitan area 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 CLEC
services primarily through our operating companies Sovintel, TCM and Golden
Telecom BTS.
Data and Long Distance Services. In major population centers
throughout Russia and other countries of the CIS, we offer traditional and
high-speed data services, using X.25, frame relay and ATM technologies, and
dedicated and dial-up Internet 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 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 the 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 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. We offer these services through our GSM-1800
network in Kiev, NMT-450 network in Vladivostok and AMPS-800 network in
thirteen other population centers throughout Russia. Our mobile services are
provided through our operating companies Golden Telecom GSM and the Vostok
Mobile ventures, including PrimTelefone.
49
<PAGE> 53
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 THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------------------
OPERATING DATA 1996 1997 1998 1998 1999
- ---------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Points of Presence(1) ............................ 37 49 78 59 84
Total Voice Minutes (millions)
Local ......................................... 133.0 269.1 340.4 92.3 71.2
Domestic Long Distance ........................ 15.8 57.1 101.6 22.4 21.0
International Outgoing ........................ 20.5 46.0 60.0 14.8 11.3
Incoming ...................................... 33.2 69.9 86.5 17.6 22.4
Dial-up Internet Access Subscribers(2) ........... 1,854 3,159 4,261 3,666 5,074
Total Active Cellular Subscribers (thousands) .... 9.8 20.4 25.5 22.9 28.0
Total Employees .................................. 856 1,116 1,439 1,321 1,409
</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 has approximately 10,000 subscribers at
March 31, 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. Svyazinvest
currently owns controlling voting interests in 84 local telcos, substantial
equity interests in four other local telcos, including Moscow City Telephone
Network (MGTS), 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 of 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.
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
50
<PAGE> 54
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 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 as illustrated in
the hierarchical diagram below.
[Diagram showing layered hierarchy]
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 operates at the local and tandem exchange level,
providing access to the public local access network through interconnection
with the local and tandem exchanges and via transmission along its alternative
overlay network interconnected with public exchanges. TeleRoss operates at the
toll exchange level and offers domestic long distance services. Sovam's data
services are not defined by the circuit switched voice hierarchy depicted
above.
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.
51
<PAGE> 55
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 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 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:
o our early market entry;
o our focus on service, quality and reliability;
o our strong infrastructure position in Moscow;
o the local market experience of our partners;
o the extent and quality of our existing customer base; and
o 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 CIS. To
achieve this objective, we intend to:
o 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.
o 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.
o 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 CIS by
increasing the number of points of presence in our data network to
facilitate the growing demand for our managed bandwidth services,
using X.25, frame relay and ATM technologies. In
52
<PAGE> 56
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.
o 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, 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.
o 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 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 CIS 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.
Immediately before this offering, GTS intends to transfer its
interests in its Russian and other CIS 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 closing 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 consist of Golden Telecom GSM and the regional
ventures owned by Vostok Mobile, including PrimTelefone.
[Insert organizational 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
53
<PAGE> 57
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 and profits of Sovintel are allocated to the
partners in accordance with their ownership percentages, in consideration of
funds at risk.
TCM. Before July 1998, we owned 52.6% of the holding company, GTS-Vox,
that controls 95% of TCM. In July 1998, we acquired the remaining outstanding
interests in GTS-Vox and now own 95% of TCM. The remaining 5% of TCM is owned
by MTU-Inform, an affiliate of MGTS in Moscow. Losses and profits are allocated
to the partners in accordance with their ownership percentages, in
consideration of funds at risk. We have reached an agreement with MTU-Inform
that provides for our acquisition of MTU-Inform's minority interest in TCM. We
expect the acquisition to be completed during the third quarter of 1999.
Sovam. Sovam Teleport is the subsidiary through which we conduct our
data activities in Russia and other CIS 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 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 board of directors is 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 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. 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. See "Risk Factors -- Risks Associated with Doing
Business in Russia, Ukraine and Other Countries of the Commonwealth of
Independent States -- More restrictive Russian and Ukrainian telecommunications
policies could constrain our operations".
54
<PAGE> 58
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 41% of our total pro forma revenues in 1998. Our
largest customer, Vimpelcom, together with its affiliate KB Impulse, accounted
for approximately 28% of our total pro forma revenues in 1998. No other
customer, except for Sovintel, which accounted for approximately 9% of our
total pro forma revenues, accounted for over 5% of our total pro forma revenues
in 1998. 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
CIS. 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 win 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.
55
<PAGE> 59
REVIEW OF OPERATING COMPANIES
This section provides a more detailed review of our business on a
company-by-company basis.
SOVINTEL
Sovintel is a CLEC 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 March
31, 1999, Sovintel had 311 employees.
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 THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
International Outgoing Number of Minutes(1) ...... 20,839 43,664 54,075 14,080 9,696
Average Rate Per Minute ........................ $ 1.55 $ 1.12 $ 0.96 $ 0.96 $ 0.89
Incoming Number of Minutes(1) .................... 24,306 43,626 25,925 7,321 5,153
Average Rate Per Minute ........................ $ 0.28 $ 0.30 $ 0.28 $ 0.34 $ 0.22
Domestic Long Distance Outgoing Number of
Minutes(1) ....................................... 10,098 26,606 45,152 10,992 8,697
Average Rate Per Minute .......................... $ 0.65 $ 0.52 $ 0.44 $ 0.46 $ 0.38
Moscow (Local) Cellular Number of Minutes(1) ..... 83,673 118,447 88,058 33,611 10,010
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 46,800 55,376
Number of Private Line Channels (cumulative)
International .................................. 22 39 50 44 53
Inter- and Intra-City .......................... 177 405 577 463 615
Equipment Sales (in thousands, approximate) ...... $ 2,200 $ 3,400 $ 4,400 $ 1,000 $ 500
</TABLE>
- -------------
(1) Minutes in thousands. Amounts include minutes among affiliates.
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 CLECs 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 service primarily through the TeleRoss long distance
network as a preferred carrier, or through Rostelecom's network. Sovintel
provides international service 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
56
<PAGE> 60
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 ISDN connection, frame relay and ATM 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.
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 20 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:
o Rostelecom, the Russian national international and domestic
long distance carrier;
o Comstar, a joint venture between GPT Plessey and MGTS;
o Combellga, a joint venture among Alcatel, Belgacom, Comincom
and MGTS;
o Global One, a joint venture between Central Telegraph and
Global One;
o TelMos, a joint venture among MGTS, Rostelecom and AT&T;
o MTU-Inform, a company formed by several individual
entrepreneurs in partnership with MGTS;
o Petersburg Telephone Network, the incumbent local operator in
St. Petersburg; and
o Peterstar, an affiliate of PLD Telekom.
57
<PAGE> 61
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 Internet service providers compete for the corporate end-user market.
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 CLEC services in Moscow. Its
infrastructure is integrated into MGTS's network at over 80 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 to be completed in the third quarter of 1999. As of
March 31, 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
connection fee, 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, an MGTS affiliate that has 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 60 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 CIS-based network. As of
March 31, 1999, Sovam had 151 employees.
58
<PAGE> 62
The following table sets forth certain operating data related to
Sovam's operations:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED AT AND FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DATA SERVICE
Percentage of Total Sovam
Revenue ................................ 79% 81% 84% 79% 85%
Number of Customers ....................... 1,726 1,571 1,460 1,541 1,399
Average Revenue Per Month Per
Customer ............................... $ 446 $ 728 $ 1,095 $ 940 $ 1,223
Number of Cities in Service ............... 25 30 54 34 58
EQUIPMENT AND HARDWARE SALES
Percentage of Total Sovam
Revenue ................................... 14% 8% 5% 10% 5%
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 3,666 5,074
Average Revenue Per Month Per
Subscriber ............................. $ 52 $ 64 $ 63 $ 63 $ 45
</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 approximately 200
trial subscribers. These figures do not reflect the acquisition,
completed in June 1999, of the Glasnet business which has
approximately 10,000 subscribers as of March 31, 1999.
Services and Customers
Data Transmission Services. Sovam offers traditional and high-speed
data communications services, using X.25, frame relay and ATM 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 backbone. 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 March 31, 1999,
Sovam had 5,074 Russia-On-Line customers, while Glasnet had approximately
10,000 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. Packet switching offers greater
cost
59
<PAGE> 63
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 20 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 very small aperture terminals, or
VSATs, supporting our long distances activities. Joint venture partners provide
local access in the cities where TeleRoss operates. As of March 31, 1999,
TeleRoss had 199 employees.
60
<PAGE> 64
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 THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Domestic Minutes(1) .................... 4,035 23,233 40,332 9,599 9,132
Average Rate Per Domestic Minute ....... $ 0.99 $ 0.63 $ 0.46 $ 0.53 $ 0.18
International Minutes(1) ............... 272 744 982 242 182
Average Rate Per International
Minute .............................. $ 2.76 $ 2.47 $ 1.87 $ 2.22 $ 0.86
Number of Cities Served(2) ............. 13 14 15 15 15
Private Lines
Number of Dedicated Channels ......... 33 60 112 70 117
Average Price Per Channel ............ $ 4,553 $ 4,140 $ 2,599 $ 3,428 $ 1,349
VSAT Services
Number of VSATs ...................... 12 24 18 25 19
Average Revenue Per VSAT Per Month ... -- $ 8,324 $ 13,393 $ 14,210 $ 7,965
</TABLE>
- ---------
(1) Minutes in thousands.
(2) Includes connection to Moscow.
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's regional ventures typically employ a direct sales force to
market to corporate end-users. This sales force consists of approximately 45
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.
61
<PAGE> 65
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 March 31, 1999, Golden Telecom (Ukraine) had 172
employees.
GOLDEN TELECOM BTS
Golden Telecom BTS, our Kiev-based CLEC, 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 March 31,
1999, Golden Telecom BTS serviced over 1,800 telephone numbers for business
customers.
The following table shows certain operating data with respect to
Golden Telecom BTS, which commenced service during 1997:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED AT AND FOR THE THREE
DECEMBER 31, MONTHS ENDED MARCH 31,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
International
Number of Minutes(1) ........... -- 927 2,710 518 766
Average Rate Per Minute ........ -- $ 1.63 $ 1.50 $ 1.59 $ 1.24
Domestic Long Distance
Number of Minutes(1) ........... -- 648 3,280 458 1,140
Average Rate Per Minute ....... -- $ 0.12 $ 0.11 $ 0.13 $ 0.12
Local Service
Number of Minutes(1) ........... -- 3,333 14,323 2,324 5,055
Average Rate Per Minute ........ -- $ 0.02 $ 0.01 $ 0.01 $ 0.01
Number of Ports in Use ................. -- 751 1,703 1,092 1,867
</TABLE>
- --------------
(1) Minutes in thousands.
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.
62
<PAGE> 66
Data Services. Golden Telecom BTS provides a private line service, an
integrated voice and data ISDN connection, frame relay and ATM 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 PSTN operators.
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 to over 40
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 markets 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
63
<PAGE> 67
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 (UMC), Kyivstar GSM (Kyivstar) and URS operate GSM-900 networks
in Kiev. UMC and Kyivstar offer roaming services in major cities within
Ukraine, including Kiev. UMC 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 our interest in
PrimTelefone, a venture that has deployed a cellular network based on NMT-450
technology in Vladivostok and the Primorski region. As of March 31, 1999,
Vostok Mobile had 509 employees.
Services and Customers
Vostok Mobile ventures offer basic mobile telephony services and value
added enhanced services such as voice mail 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 has the potential for at least five
licensed operators, including one operator for each of the AMPS, NMT and GSM
cellular standards and two operators in the 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
64
<PAGE> 68
the federal NMT standard, Vimpelcom which operates networks of various
standards in numerous regions and Russian Telephone Development Company (RTDC)
which owns interests in cellular ventures throughout Russia.
Mobile Services Operating Data
The following table sets forth operating data for our Mobile Services
business group (Golden Telecom GSM and Vostok Mobile):
<TABLE>
<CAPTION>
NUMBER OF AVERAGE REVENUE PER
ECONOMIC, ACTIVE ACTIVE SUBSCRIBER FOR
BENEFICIAL SUBSCRIBERS AT THE QUARTER ENDED
OPERATING COMPANY INTEREST(1) CITY MARCH 31, 1999 MARCH 31, 1999
----------------- ----------- ---- -------------- --------------
<S> <C> <C> <C> <C>
RUSSIA
Arkhangelsk Mobile Network....... 50.0% Arkhangelsk 845 $150
Astrakhan Mobile................. 50.0% Astrakhan 1,224 167
Altaisvyaz(2).................... 50.0% Barnaul 492 288
Chuvashia Mobile................. 70.0% Cheboksary 626 147
Lipetsk Mobile................... 70.0% Lipetsk 699 146
Murmansk Mobile Network.......... 50.0% Murmansk 1,021 212
Penza Mobile..................... 60.0% Penza 479 150
Saratov Mobile................... 50.0% Saratov 1,400 186
Parma Mobile..................... 50.0% Syktyvkar 441 206
Volgograd Mobile................. 50.0% Volgograd 1,633 280
Votec Mobile..................... 50.0% Voronezh 2,002 169
Mar Mobile....................... 50.0% Yoshkar-ola 388 159
Novotel(3)....................... 100.0% Novgorod 258 147
PrimTelefone..................... 50.0% Vladivostok(4) 3,711 399
UKRAINE
Golden Telecom GSM............... 56.75% Kiev 12,810 341
------ -----
Total Average............ 28,029 274
====== =====
</TABLE>
- --------------
(1) Represents our indirect economic beneficial interest in each entity.
(2) Joint venture acquired in October 1997; cellular operations commenced
in February 1998.
(3) Acquired in March 1998 and started basic commercial service in April
1998.
(4) Includes Vladivostok and other cities in the Primorsky region.
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.
METROPOLITAN AREA NETWORKS
In Moscow, Kiev and St. Petersburg, we own and operate our
metropolitan area networks (MANs). In Moscow, we own a MAN consisting of
several different elements including local access lines and 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
include the following facilities:
o Access lines supporting approximately 55,000 local access
numbers connecting approximately 2,500 buildings to more than
400 private branch exchanges (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
65
<PAGE> 69
telephones on the premises 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;
o 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;
o Fiber optic Synchronous Digital Hierarchy (SDH) 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 MGTS, 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;
o 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
o A fiber optic backbone network based on SDH technology,
consisting of approximately 142 kilometers of fiber optic
cable in service with approximately 450 kilometers under
construction, which interfaces with the 64 local/tandem
switches of the Moscow public telephone network to provide
interconnectivity between the Nokia DX200 tandem switch and
the Moscow public telephone network.
We provide local access for our data service offering in Moscow 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
MGTS, Combellga, 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.
The St. Petersburg network consists of two hub PBXs interconnected to
the St. Petersburg public telephone network through PTS, 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, we provide 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
PSTN in 14 different major metropolitan areas in Russia. Depending on the
region, we have between 100 to 500 local lines in service, for a total combined
capacity of approximately 4,000 lines. Last mile access to the customers is
usually provided through leased copper or fiber optic lines.
We employ 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 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.
66
<PAGE> 70
INTERNATIONAL NETWORKS
We provide international switched voice services in Russia using
leased transmission capacity we obtain from Rostelecom within Russia, and
international carriers beyond the Russian borders. Similarly, in Ukraine, we
lease 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.
We use Nortel ATM Passport technology for our core data network to
provide certain international private line circuits (IPLC) and international
data transmission services, such as X.25, ATM and frame relay and Cisco routers
for Internet access. We lease 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 co-operation
with international operators such as Cable & Wireless, AT&T and Unisource. In
Ukraine, international outgoing and incoming traffic is similarly routed via
fiber optic cable to GTS Wholesale Services, Cable & Wireless, Sovintel in
Moscow and several other international operators. In addition to our
terrestrial network, we also use our satellite network to offer the same
services between Moscow and other major CIS cities such as Almaty, Tashkent,
Tbilisi and Baku.
DOMESTIC LONG DISTANCE NETWORKS
We have developed a land-based regional network to provide domestic
long distance and data services in Russia. Our 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 CIS cities. We may
further develop our land-based network to meet the demands of our customers,
especially data users.
We also lease 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 CIS. Using this leased
satellite transponder, we serve fourteen Regional Earth Stations 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. Our central hub in Moscow interconnects with our Moscow-based
international, domestic long distance and local facilities.
We have developed the land-based technology in parallel with the
satellite network for a number of reasons, including the following:
o Fiber transmission is more suitable for data applications
than satellite transmission because of fewer transmission
delays;
o High entry cost for VSAT technology for customers with
limited capacity requirements; and
o Because there is no "public data network", we need to
establish land-based points of presence in each location
where data services are required.
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 ATM) have become available and
allow for such network integration. This integration may benefit us in
different ways:
67
<PAGE> 71
o 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;
o 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;
o Improves network resilience both for voice and data networks
through the optimal combination of land-based fiber and
satellite transport capacity; and
o 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 an MSC 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 operates a NMT-450 network in Vladivostok and six 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.
The following map shows the location of our networks throughout Russia
and Ukraine:
[Network map]
EMPLOYEES
On March 31, 1999, we, our consolidated subsidiaries and our joint
ventures employed a total of 1,409 full-time employees. This included 356
employees dedicated to customer relations, sales and marketing, 431 employees
dedicated to technical services, and 280 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 CIS that we use for our
four offices. Besides this office space, our principal facilities consist of
telecommunications installations, including switches of various sizes, cables
and VSAT and other transmission devices located throughout the CIS. We believe
that our facilities are adequate for our present needs.
68
<PAGE> 72
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.
69
<PAGE> 73
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 (Federation
Council) and a lower assembly (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 Stepashin was appointed by President Yeltsin and
confirmed by the Duma in May 1999. Prior to 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 has stated that he intends to follow
his predecessors' policies, but with a renewed effort 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. For a description of the political risks that our operations in
Russia and other countries of the CIS face, see "Risk Factors -- Risks
Associated with Doing Business in Russia, Ukraine and Other Countries of the
Commonwealth of Independent States".
With the frequent changes of government in Russia and other countries
of the CIS, 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.
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.
70
<PAGE> 74
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 fair
and full compensation. 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. GKRCh 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.
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.
71
<PAGE> 75
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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Special Note Regarding the Russian Financial Crisis".
Since the August 1998 financial crisis, the International Monetary
Fund has refused to rollover Russia's sovereign debt, as well as lend any
additional funds, until the Russian legislature passes a package of economic
reform legislation submitted by the Primakov government. 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 CIS 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 CIS businesses have a limited operating history in
market-oriented conditions. Many Russian banks are under capitalized 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.
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
72
<PAGE> 76
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 (NBU), the nation's central bank, is independent from the Rada and
has steadfastly refused to permit wholesale printing of the currency despite
much pressure from Parliament. On numerous occasions, Parliament has also
attempted to bring the NBU under its control although, with the President's
backing, the NBU has so far maintained its independence.
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.
73
<PAGE> 77
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 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
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.
74
<PAGE> 78
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.
Regulations also currently prohibit foreign entities from directly
owning more than 49% of any Ukrainian telecommunications operating company.
Thus, it became necessary for us to establish 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. A similar licence is
issued for Golden Telecom (Ukraine) to 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 MGTS 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.
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.
75
<PAGE> 79
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>
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
William H. Seippel 42 Executive Vice President of Finance and Chief Financial
Officer of GTS
</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.
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.
WILLIAM H. SEIPPEL joined GTS as Executive Vice President of Finance
and Chief Financial Officer in October 1996. From July 1992 to October 1996,
Mr. Seippel was Vice President -- Finance and Chief Financial Officer of
Landmark Graphics Corporation.
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
Ukranian company which provides international and domestic services in
Ukraine).
76
<PAGE> 80
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 CIS, from June 1997 through July
1998. Mr. Riddell worked at the Pacific Law Center in Vladivostok from May 1994
through September 1994 and directed the Khabarovsk office of the Pacific Law
Center from October 1994 through June 1996.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
Each non-employee member of our Board of Directors shall receive an
annual retainer fee of $ . In addition, each non-employee member of the Board
of Directors shall receive a fee of $ for each Board meeting attended and a fee
of $ for each Board committee meeting attended.
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.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------------------- --------------------------
NUMBER OF
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS(1) COMPENSATION AWARD(S) OPTIONS/SAR(2) COMPENSATION(3)
------------------ ---- -------- ------- ------------ ---------- -------------- ---------------
<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(4) 0 150,000 $ 5,197
Stan Abbeloos
General Director of Sovam
and Deputy General Director
of TeleRoss................... 1998 $173,837 $66,700 $ 93,600(5) 0 30,000 $ 0
Gerard Essing
President of GTS Mobile
Services(6)................... 1998 $177,500 $47,500 $150,500(7) 0 75,000 $ 0
Jean Pierre VanDromme
Chief Operating Officer of
GTS-CIS(8).................... 1998 $191,000 $84,400 $107,766(9) 0 30,000 $ 0
Kevin Koski
Deputy General Director of
Sovintel...................... 1998 $163,500 $30,900 $213,112(10) 0 24,000 $ 4,181
</TABLE>
- ---------
(1) Represents cash bonus paid in the year indicated for services rendered
in the immediately preceding year.
77
<PAGE> 81
(2) These amounts reflect shares of GTS common stock underlying stock
options awarded under the GTS Stock Option Plan.
(3) Amounts disclosed hereunder 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, as defined below, 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.
(4) 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.
(5) For 1998, the amount disclosed includes an overseas living allowance
of $42,000 and rent on a residence in Moscow of $51,600.
(6) Mr. Essing commenced his employment with the Company in 1995 and left
the Company in May 1999.
(7) For 1998, the amount disclosed includes an overseas living allowance
of $56,000 and rent on a residence in Moscow of $94,500.
(8) Mr. VanDromme commenced his employment with the Company in 1995 and
transferred to another GTS company in April 1999.
(9) For 1998, the amount disclosed includes an overseas living allowance
of $42,000 and rent on a residence in Moscow of $60,000.
(10) 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.
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.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES TO GTS
UNDERLYING EMPLOYEES IN EXERCISE OR BASE GRANT DATE PRESENT
NAME OPTIONS GRANTED FISCAL YEAR PRICE (PER SHARE) EXPIRATION DATE VALUE(2)
---- --------------- ----------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Stewart P. Reich............ 150,000(1) 4.0 $25.75 10/14/08 $ 2,476,905
Stan Abbeloos............... 30,000(1) 0.8 $25.75 10/14/08 $ 495,381
Gerard Essing............... 75,000(1) 2.0 $25.75 10/14/08 $ 1,238,453
Jean Pierre VanDromme....... 30,000(1) 0.8 $25.75 10/14/08 $ 495,381
Kevin Koski................. 24,000(1) 0.6 $25.75 10/14/08 $ 396,305
</TABLE>
- ---------
(1) All these options would vest in February 2005, when 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 financial results for 2001 are expected to be
publicly announced.
(2) 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.
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.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT FY-END AT FY-END(1)
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stewart P. Reich........ -- -- 28,125/234,375 $1,127,250/$7,881,750
Stan Abbeloos............ -- -- 9,000/57,000 $373,005/$2,019,015
Gerard Essing............ -- -- 15,000/120,000 $609,975/$4,079,925
Jean Pierre VanDromme.... -- -- 65,530/68,720 $3,045,497/$2,567,833
Kevin Koski.............. 6125 $ 261,844 35,625/42,250 $1,588,086/$1,473,105
</TABLE>
- ---------
(1) Based on the closing price of $55.75 on the Nasdaq Stock Market of the
Common Stock of GTS on December 31, 1998.
78
<PAGE> 82
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 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, 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 will administer the Equity Plan
with respect to options granted to independent directors.
Notwithstanding the foregoing, the full Board 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) 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.
ELIGIBILITY
Options and restricted stock under the Equity Plan may be granted to
individuals who are our employees 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.
79
<PAGE> 83
INDEPENDENT DIRECTORS
The Equity Plan provides for automatic grants of non-qualified stock
options to independent directors. Each person who is an independent director as
of the date of consummation of the initial public offering of common stock will
receive, as of the date of such consummation, an option to purchase shares
of common stock, and will receive, upon each re-election as an independent
director, an additional option to purchase shares of common stock. In
addition, each person who is elected to serve as an independent director after
the consummation of the initial public offering of common stock will receive, as
of the date of such election, an option to purchase shares of common
stock, and will additionally receive, upon each re-election as an independent
director, an additional option to purchase shares of common stock. Each
such option will have a per share exercise price equal to the fair market value
per share at 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 after the tenth anniversary of 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 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.
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
80
<PAGE> 84
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 % of each participant's
pre-tax contribution to the 401(k) Plan, up to % of the 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 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.
81
<PAGE> 85
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.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK TO BE
BENEFICIALLY OWNED IMMEDIATELY BENEFICIALLY OWNED IMMEDIATELY
BEFORE THE COMPLETION OF THIS OFFERING AFTER THE COMPLETION OF THIS OFFERING
-------------------------------------- -------------------------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE(1) SHARES PERCENTAGE(1)
- ------------------------ ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Global TeleSystems Group, Inc................. 100
Stewart P. Reich.............................. -- 0
Grier C. Raclin............................... -- 0
William H. Seippel............................ -- 0
David J. Wisher............................... -- 0
Stan M. Abbeloos.............................. -- 0
Jeffrey A. Riddell............................ -- 0
All directors and executive officers as a
group (6 persons)............................. -- 0
</TABLE>
- ---------
(1) Based on shares of common stock outstanding immediately before the
offering, and shares of common stock outstanding immediately
after the offering.
The following table sets forth certain information regarding ownership
of GTS common stock and rights to acquire common stock by each of our directors
and executive officers, and all our directors and executive officers as a
group. As in the table above, 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.
<TABLE>
<CAPTION>
SHARES OF GTS COMMON STOCK
BENEFICIALLY OWNED
---------------------------------
NUMBER
NAME OF BENEFICIAL OWNER OF SHARES PERCENTAGE(1)
- ------------------------ --------- -------------
<S> <C> <C>
Stewart P. Reich......................................
Grier C. Raclin.......................................
William H. Seippel....................................
David J. Wisher.......................................
Stan M. Abbeloos......................................
Jeffrey A. Riddell....................................
All directors and executive officers as a group
(6 persons)......................................
</TABLE>
- ---------
(1) The percentage of ownership for each beneficial owner is based upon
shares of GTS common stock issued and outstanding at , 1999
and the number of warrants and stock options in common stock held by
such beneficial owner. Excluded from the calculation are: shares
of common stock issued under GTS's option plans.
82
<PAGE> 86
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 the 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.
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 board of directors. 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 the 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:
o 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
o 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, GTS will continue to provide certain employee
benefits, including medical benefits, life and long-term disability insurance,
participation in the GTS 401 (k) plan and personal property insurance. We will
pay GTS a maximum fee equal to
83
<PAGE> 87
25% of each employee's aggregate base annual salary for providing such
benefits, adjusted in accordance with the types and quantities of the services
provided.
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, defend and hold harmless us and each of our directors, officers,
employees and agents from and 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, defend 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:
o 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;
o any liabilities attributable to Golden Telecom in connection
with any United States federal or state tax audit of GTS;
o any material breach by us of any of the separation
agreements; and
o 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 of which it forms a
part.
The Indemnification Agreement will also provide that we will indemnify
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:
o the assets, businesses or liabilities transferred or assumed
as part of the separation,
o any consent or liability transferred or assumed as part of
the separation of us and GTS,
o any consent or approval required in connection therewith,
o the value or freedom from any security interests of any of
the assets transferred,
o the absence of any defense or freedom from counterclaim with
respect to any claim of any part, or
o 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 conveyance is insufficient
to vest in the transferee good and marketable title, free and clear of any
encumbrances.
84
<PAGE> 88
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
depending, among other things, on our ongoing corporate and financing
activities. 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, exercisable immediately prior to the issuance of any equity securities
by us, to purchase our equity securities so that GTS can maintain its
percentage ownership in us. These pre-emptive rights will terminate when GTS no
longer owns more 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, Russia-On-Line, Golden Telecom and PrimTelefone. If GTS's
ownership of our company falls below 50%, then GTS will have the right to
require us to cease using certain other trademarks and service marks.
85
<PAGE> 89
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 a bank 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 March 31, 1999, $16.5 million in loans were
outstanding under the facility. Because of the financial condition of certain
Vostok Mobile ventures, GTS has made most of the principal and interest
payments on behalf of the ventures. As a result, we and GTS are currently
exploring various alternatives for restructuring these loans.
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 March 31, 1999, approximately $2.9
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 March 31,
1999, approximately $8.4 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 March 31, 1999, approximately $1.4 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.
86
<PAGE> 90
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of shares of common stock,
par value $0.01 per share, of which shares will be issued and outstanding
immediately after this offering.
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. See "Dividend Policy". 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:
o expenses, including attorneys' fees;
o judgments;
o fines; and
o 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
87
<PAGE> 91
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 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.
88
<PAGE> 92
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 and excluding shares covered by vested options
outstanding at March 31, 1999. Of the outstanding shares, the shares
registered in the offering and additional shares 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. Beginning 90 days after the date of
this prospectus, an additional shares will be eligible for sale in the public
market, subject to 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.
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.
89
<PAGE> 93
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 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
90
<PAGE> 94
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:
o 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.
o 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.
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
91
<PAGE> 95
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:
o is a United States person;
o 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;
o is a "controlled foreign corporation" as defined in the Code;
or
o 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.
92
<PAGE> 96
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement, the underwriters named below, through their representative, Deutsche
Bank AG London, 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..................
--------------------
Total...........................
====================
</TABLE>
- -----------------------
* These underwriters or their affiliates intend to sell shares in the
United States and Canada.
+ These underwriters or their affiliates intend to sell shares outside
the United States and Canada.
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 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 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, 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
93
<PAGE> 97
the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995:
(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.
We will make application to list the shares of common stock on The
Nasdaq National Market under the symbol " ".
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:
o the information set forth in this prospectus and otherwise
available to the representatives;
o the history of, and the prospects for, us and the industry in
which we compete;
o an assessment of our management;
o the prospects for, and the timing of, our future earnings;
o the present state of our development and its current
financial condition;
o the political, economic and financial conditions of Russia
and Ukraine;
o the general condition of the securities markets at the time
of the offering;
o the recent market prices of, and the demand for,
publicly-traded common stock of companies in businesses
similar to us;
o market conditions for initial public offerings; and
o other relevant factors.
The underwriters have reserved for sale, at the initial public
offering price, up to shares of the common stock for employees, directors
and certain other persons associated with us 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.
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
94
<PAGE> 98
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 form 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 or its affiliates has
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 receive compensation.
95
<PAGE> 99
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (3) such purchaser has reviewed the text above under "--Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or recission or rights of action under
the civil liability provisions of the United States federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts
named herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any common stock acquired by such purchaser pursuant to the offering. Such a
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one
such report must be filed in respect of common stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
96
<PAGE> 100
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 will apply to list our shares of common stock on The Nasdaq Stock
Market's National Market. If our application is accepted and the shares are
listed on The Nasdaq Stock Market's 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's National 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 document 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 herein 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 TeleCommunications of Moscow 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 herein and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
97
<PAGE> 101
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:
o statements regarding our results of operations and financial
condition;
o statements of our plans, objectives or goals, including those
related to products or services;
o statements regarding our investment program;
o statements regarding our services and anticipated customer
demand for these services;
o statements of future economic performance; and
o 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:
o political, economic and legal changes in the markets where we
operate;
o the effect of, and changes in, regulation and government
policy;
o the effects of competition;
o our need for additional financing;
o possible failure to complete acquisitions and integrate
acquired businesses; and
o 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.
98
<PAGE> 102
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-3
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-4
Consolidated Statements of Operations for the three years ended F-5
December 31, 1998
Consolidated Statements of Cash Flows for the three years ended December
31, 1998 F-6
Consolidated Statements of Shareholder's Equity for the three years ended
December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8
FIRST QUARTER FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 1998 and March
31, 1999 F-25
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1998 and March 31, 1999 F-26
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and March 31, 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-33
Balance Sheets as of December 31, 1997 and 1998 F-34
Statements of Income and Retained Earnings for the three years ended
December 31, 1998 F-35
Statements of Cash Flows for the three years ended December 31, 1998 F-36
Notes to Financial Statements F-37
FIRST QUARTER FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1998 and March 31, 1999 F-50
Condensed Statements of Income for the three months ended March 31, 1998
and March 31, 1999 F-51
Condensed Statements of Cash Flows for the three months ended March 31,
1998 and March 31, 1999 F-52
Notes to Condensed Financial Statements F-53
TELECOMMUNICATIONS OF MOSCOW LLC
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent Auditors F-57
Balance Sheets as of December 31, 1997 and 1998 F-58
Statements of Income and Retained Earnings for the three years ended
December 31, 1998 F-59
Statements of Cash Flows for the three years ended December 31, 1998 F-60
Notes to Financial Statements F-61
</TABLE>
F-1
<PAGE> 103
<TABLE>
<S> <C>
FIRST QUARTER FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1998 and March 31, 1999 F-71
Condensed Statements of Income for the three months ended March 31, 1998
and March 31, 1999 F-72
Condensed Statements of Cash Flows for the three months ended March 31,
1998 and March 31, 1999 F-73
Notes to Condensed Financial Statements F-74
</TABLE>
F-2
<PAGE> 104
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 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
July 12, 1999
F-3
<PAGE> 105
GOLDEN TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
ASSETS 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 (1,000 shares authorized;
1,000 shares issued and outstanding, at
December 31, 1997 and 1998 respectively) ........................ -- --
Additional paid-in capital ......................................... 155,022 241,881
Accumulated deficit ................................................ (73,098)
(39,454)
--------- ---------
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-4
<PAGE> 106
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 .......................... $ $ $
======== ======== ========
Weighted average common shares outstanding ............
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 107
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-6
<PAGE> 108
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 ...... 1 $ -- $ 65,939 $ (16,100) $ 49,839
Proceeds from GTS ............... -- -- 35,934 -- 35,934
Net loss ........................ -- -- -- (15,471) (15,471)
------- -------- --------- --------- ---------
Balance at December 31, 1996 ...... 1 -- 101,873 (31,571) 70,302
Proceeds from GTS ............... -- -- 53,149 -- 53,149
Net loss ........................ -- -- -- (7,883) (7,883)
------- -------- --------- --------- ---------
Balance at December 31, 1997 ...... 1 -- 155,022 (39,454) 115,568
Proceeds from GTS ............... -- -- 86,859 -- 86,859
Net loss ........................ -- -- -- (33,644) (33,644)
------- -------- --------- --------- ---------
Balance at December 31, 1998 ...... 1 $ -- $ 241,881 $ (73,098) $ 168,783
======= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 109
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 Russia 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. Accordingly, management has begun evaluating and assessing
these conditions as they exist in the regional cellular businesses to determine
the nature and scope of any actions it may consequently take. This may include
curtailing or abandoning certain businesses or other actions. As part of the
reorganization and transfer of ownership rights of CIS entities to the Company,
GTS and the Company will complete a full evaluation of all such properties.
However, this evaluation and assessment is not completed or near completion and,
accordingly, no decisions have been taken by management. When completed, the
Company may incur additional liabilities or adjust the carrying value of certain
assets or both and such amounts may be material to the financial statements.
The issues discussed above also raise uncertainties over the future
operations of other parts of the Company's business. The Company's financial
statements as of December 31, 1998 and for the year then ended do not include
F-8
<PAGE> 110
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 these uncertainties.
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
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 US
Statement of Financial Accounting Standards ("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
F-9
<PAGE> 111
currency trading and interbank trading has varied. As a result, the market rates
have 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.
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.
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
F-10
<PAGE> 112
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 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.
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.
F-11
<PAGE> 113
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.
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 56.7% from 24.5% 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:
F-12
<PAGE> 114
<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 .............. $ $
</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
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.
F-13
<PAGE> 115
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-14
<PAGE> 116
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
----------------------------------------------------
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
VENTURES OWNED VENTURES METHOD VENTURES
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue............................................ $52,496 $159,651 $212,147
Gross margin....................................... 19,792 82,990 102,782
Net income......................................... 10,161 20,110 30,271
Equity in net losses............................... 7,233 8,477 15,710
Current assets..................................... 16,640 52,972 69,612
Total assets....................................... 33,635 160,362 193,997
Current liabilities................................ 16,945 57,512 74,457
Total liabilities.................................. 20,263 84,743 105,006
Net assets......................................... 13,372 75,619 88,991
Ownership interest in equity in net assets......... 9,528 47,342 56,870
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------
MAJORITY OWNED 50% OR LESS TOTAL EQUITY
VENTURES OWNED VENTURES METHOD VENTURES
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue $ 4,306 $168,422 $172,728
Gross margin....................................... 1,889 75,549 77,438
Net (loss) income.................................. (187) 4,611 4,424
Equity in net (losses) earnings.................... (51) 122 71
Current assets..................................... 953 41,806 42,759
Total assets....................................... 7,837 136,658 144,495
Current liabilities................................ 3,431 50,880 54,311
Total liabilities.................................. 6,975 68,175 75,150
Net assets......................................... 862 68,481 69,343
Ownership interest in equity in net assets......... 548 122 670
</TABLE>
F-15
<PAGE> 117
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
======= =======
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>
F-16
<PAGE> 118
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") rate 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 ($3.4 million) at
December 31, 1998. The agreement carries interest at a rate equal to the 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.
F-17
<PAGE> 119
In 1996, certain non-consolidated joint ventures of the Company entered
into a 4.0 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 these shares were outstanding for all periods
presented.
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.
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.
F-18
<PAGE> 120
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.
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:
F-19
<PAGE> 121
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carry-forwards ........................... $ 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 los 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).
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.
F-20
<PAGE> 122
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.
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 504,600 common shares at the then current fair market value of $13.33 per
share.
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.
F-21
<PAGE> 123
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.
NOTE 13: SEGMENT INFORMATION
The Company operates in two segments within the telecommunications
industry. The industry consists of a wide range of telecommunications services
to international business customers, including long distance voice and data
services and electronic messaging services. As a result of the planned initial
public offering of the Company's stock and a change in management's focus, there
may be three segments in the future as opposed to two. The Company has adopted
the SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The following table presents consolidated financial information
segmented by the Company's lines of businesses for 1996, 1997 and 1998.
Transfers between lines of businesses were not considered material for
disclosure purposes.
F-22
<PAGE> 124
LINE OF BUSINESS DATA:
CONSOLIDATED:
<TABLE>
<CAPTION>
BUSINESS MOBILE CORPORATE,
SERVICES SERVICES OTHER &
CIS CIS ELIMINATIONS TOTAL
--------- --------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Total revenue .......................... $ 9,211 $ 3,485 $ 444 $ 13,140
Gross margin ........................... 817 1,809 431 3,057
Selling general and administrative ..... 8,278 5,992 3,416 17,686
Net loss ............................... (3,084) (9,777) (2,610) (15,471)
Identifiable assets .................... 71,138 25,126 (3,715) 92,549
Liabilities ............................ 69,530 41,297 (90,493) 20,334
Net (liabilities)/assets ............... 1,608 (16,171) 86,778 72,215
Year Ended December 31, 1997
Total revenue .......................... $ 24,732 $ 2,313 $ 153 $ 27,198
Gross margin ........................... 6,233 351 194 6,778
Selling general and administrative ..... 11,458 3,290 6,501 21,249
Net income (loss) ...................... 1,085 (5,953) (3,015) (7,883)
Identifiable assets .................... 69,388 26,719 33,513 129,620
Liabilities ............................ 38,022 19,143 (43,113) 14,052
Net assets ............................. 31,366 7,576 76,626 115,568
Year Ended December 31, 1998
Total revenue .......................... $ 75,394 $ 9,818 $ 874 $ 86,086
Gross margin ........................... 36,119 6,234 159 42,512
Selling general and administrative ..... 26,075 11,357 7,895 45,327
Net loss ............................... (13,839) (17,595) (2,210) (33,644)
Identifiable assets .................... 169,998 51,659 14,192 235,849
Liabilities ............................ 89,721 47,571 (78,219) 59,073
Net assets ............................. 80,277 4,088 92,411 176,776
</TABLE>
F-23
<PAGE> 125
GOLDEN TELECOM, INC.
Condensed Consolidated Financial Statements
For the First Quarter of 1999
(Unaudited)
F-24
<PAGE> 126
GOLDEN TELECOM, INC.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- ---------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 14,164 $ 15,330
Accounts receivable, less allowance for doubtful accounts of $4,208 and
$4,377 at December 31, 1998 and March 31, 1999, respectively 13,404 15,572
Prepaid expenses 4,643 4,374
Other assets 5,289 4,199
--------- ---------
Total current assets 37,500 39,475
Property and equipment, net of accumulated depreciation of $19,181 and
$22,196 at December 31, 1998 and March 31, 1999, respectively 52,186 54,714
Investments in and advances to ventures 46,519 45,087
Goodwill and intangible assets, net of accumulated amortization of $23,510
and $27,723 at December 31, 1998 and March 31, 1999, respectively 71,924 66,078
Restricted cash and other non-current assets 27,720 26,970
--------- ---------
TOTAL ASSETS $ 235,849 $ 232,324
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued expenses $ 25,770 $ 23,571
Debt maturing within one year 3,018 4,063
Other current liabilities 5,674 5,674
--------- ---------
Total current liabilities 34,462 33,308
Long-term debt, less current portion 21,441 21,396
Taxes and other non-current liabilities 3,170 2,632
--------- ---------
TOTAL LIABILITIES 59,073 57,336
COMMITMENTS AND CONTINGENCIES
Minority interest 7,993 8,452
SHAREHOLDER'S EQUITY
Common stock, $0.01 par value (1,000 shares authorized;
1,000 and shares issued and outstanding
at December 31, 1998 and March 31, 1999)
Additional paid-in capital 241,881 247,410
Accumulated deficit (73,098) (80,874)
--------- ---------
TOTAL SHAREHOLDER'S EQUITY 168,783 166,536
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 235,849 $ 232,324
========= =========
</TABLE>
F-25
<PAGE> 127
GOLDEN TELECOM, INC.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1998 1999
-------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
REVENUES, NET:
Telecommunication services $ 12,255 $ 23,426
Equipment sales 1,502 759
-------- --------
13,757 24,185
OPERATING COSTS AND EXPENSES:
Cost of revenues:
Telecommunication services 7,413 8,640
Equipment sales 1,520 686
Selling, general and administrative 8,791 8,638
Depreciation and amortization 1,809 5,962
Equity in (earnings) losses of ventures (4,405) 4,413
-------- --------
LOSS FROM OPERATIONS (1,371) (4,154)
OTHER INCOME/(EXPENSE):
Interest income -- 759
Interest expense (704) (580)
Foreign currency losses (38) (742)
-------- --------
(742) (563)
-------- --------
Net loss before income taxes and minority interest (2,113) (4,717)
Income taxes 193 2,600
-------- --------
Net loss before minority interest (2,306) (7,317)
Minority interest -- (459)
-------- --------
NET LOSS $ (2,306) $ (7,776)
======== ========
Pro forma net loss per share $ $
======== ========
Weighted average common shares outstanding
======== ========
</TABLE>
F-26
<PAGE> 128
GOLDEN TELECOM, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1998 1999
-------------- --------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,306) $ (7,776)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 1,809 5,962
Equity in (earnings) losses of ventures, net of dividends received (4,405) 4,413
Minority interest -- 459
Foreign currency losses 38 742
Other 226 (421)
Changes in assets and liabilities, excluding effects of
acquisitions and ventures:
Accounts receivable (1,376) (2,672)
Accounts payable and accrued expenses 4,833 (2,662)
Other changes in assets and liabilities 257 1,326
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (924) (629)
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (3,787) --
Investments in and advances to ventures, net of repayments 2,815 (2,137)
Purchases of property and equipment (1,087) (3,066)
Restricted cash (4,561) 750
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,620) (4,453)
FINANCING ACTIVITIES
Proceeds from debt 3,512 1,229
Repayments of debt -- (230)
Net proceeds from GTS 4,575 5,527
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,087 6,526
Effect of exchange rate changes on cash and cash equivalents (18) (278)
-------- --------
Net increase in cash and cash equivalents 525 1,166
Cash and cash equivalents at beginning of period 3,934 14,164
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,459 $ 15,330
======== ========
</TABLE>
F-27
<PAGE> 129
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; however, other adjustments may have been required had an audit been
performed. 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 months ended March 31,
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
F-28
<PAGE> 130
GOLDEN TELECOM, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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. Accordingly, management has begun evaluating and assessing
these conditions as they exist in the regional cellular businesses to determine
the nature and scope of any actions it may consequently take. As part of the
reorganization and transfer of ownership rights of CIS entities to the Company,
GTS and the Company will complete a full evaluation of all such properties. This
may include curtailing or abandoning certain businesses or other actions.
However, this evaluation and assessment is not completed or near completion and,
accordingly, no decisions have been taken by management. When completed, the
Company may incur additional liabilities or adjust the carrying value of certain
assets or both and such amounts may be material to the financial statements.
The issues discussed above also raise significant uncertainties over
the future operations of other parts of the Company's business. The Company's
financial statements as of March 31, 1999 and for the three-month period 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 these
uncertainties.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("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 months ended March 31, 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.
F-29
<PAGE> 131
GOLDEN TELECOM, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 these shares were outstanding for all periods
presented.
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 THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
-------- --------
(in thousands, except per share data)
<S> <C> <C>
Revenues ............................... $ 27,306 $ 24,185
Net loss ............................... (1,939) (7,776)
Net loss per common share .............. $ $
</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 a 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
F-30
<PAGE> 132
GOLDEN TELECOM, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
at March 31, 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.
6. SEGMENT INFORMATION
The Company operates in two segments within the telecommunications
industry. The industry consists of a wide range of telecommunications services
to international business customers, including long distance voice and data
services and electronic messaging services. As a result of the planned initial
public offering of the Company's stock and a change in management's focus, there
may be three segments in the future as opposed to two. The Company has adopted
the SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The following table presents consolidated financial information
segmented by the Company's lines of businesses for the quarters ended March 31,
1999 and 1998. Transfers between lines of businesses were not considered
material for disclosure purposes.
LINE OF BUSINESS DATA:
CONSOLIDATED:
<TABLE>
<CAPTION>
BUSINESS MOBILE CORPORATE,
SERVICES SERVICES OTHER &
CIS CIS ELIMINATIONS TOTAL
--------- --------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Quarter Ended March 31, 1998
Total revenue ............................. $ 12,934 $ 823 $ -- $ 13,757
Gross margin .............................. 4,303 388 133 4,824
Selling, general and administrative ....... 4,948 961 2,882 8,791
Net income (loss) ......................... 461 (1,218) (1,549) (2,306)
Identifiable assets ....................... 76,608 29,298 41,687 147,593
Liabilities ............................... 52,274 19,247 (32,571) 38,950
Net (liabilities)/assets .................. 24,334 10,051 74,258 108,643
Quarter Ended March 31, 1999
Total revenue ............................. $ 20,135 $ 4,050 $ -- $ 24,185
Gross margin .............................. 11,845 3,014 -- 14,859
Selling, general and administrative ....... 7,029 2,037 (428) 8,638
Net income (loss) ......................... (4,633) (5,037) 1,894 (7,776)
Identifiable assets ....................... 163,501 52,666 16,157 232,324
Liabilities ............................... 92,955 51,402 (87,021) 57,336
Net (liabilities)/assets .................. 70,546 1,264 103,178 174,988
</TABLE>
F-31
<PAGE> 133
AUDITED FINANCIAL STATEMENTS
EDN SOVINTEL LLC
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
F-32
<PAGE> 134
EDN SOVINTEL LLC
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-33
<PAGE> 135
EDN SOVINTEL LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- -------
(In Thousands of US Dollars)
<S> <C> <C>
ASSETS
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>
See accompanying notes.
F-34
<PAGE> 136
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
Installation revenues 9,312 5,241 3,926
Equipment sales 2,240 3,433 4,419
--------- --------- ---------
75,040 113,962 124,168
Operating Costs and Expenses:
Cost of revenues:
Service costs 34,648 62,926 71,010
Cost of installation 4,656 2,621 1,963
Equipment sales 1,370 2,834 3,264
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>
See accompanying notes.
F-35
<PAGE> 137
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 and advances for
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>
See accompanying notes.
F-36
<PAGE> 138
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.
The issues discussed in the preceding paragraph raise significant
uncertainties over the future operations of the Company. 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 these uncertainties.
F-37
<PAGE> 139
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 US Financial Accounting Standard
("FAS") 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.
F-38
<PAGE> 140
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION (CONTINUED)
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.
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.
F-39
<PAGE> 141
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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.
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.
F-40
<PAGE> 142
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 on 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.
F-41
<PAGE> 143
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-42
<PAGE> 144
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (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
------- ------- -------
<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>
F-43
<PAGE> 145
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
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.
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).
F-44
<PAGE> 146
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-45
<PAGE> 147
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
F-46
<PAGE> 148
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-47
<PAGE> 149
12. CONTINGENCIES (CONTINUED)
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 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> 150
EDN SOVINTEL LLC
CONDENSED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER OF 1999
(UNAUDITED)
F-49
<PAGE> 151
EDN SOVINTEL LLC
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,116 $ 2,119
Accounts receivable, less allowance for doubtful accounts of $2,427 and
$2,082 at December 31, 1998 and March 31, 1999, respectively 16,726 17,364
Due from affiliated companies 1,329 573
Inventory 1,487 1,065
VAT receivable, net 4,904 6,110
Prepaid taxes 2,836 3,934
Prepaid expenses and other assets 3,716 3,305
------- -------
Total current assets 36,114 34,470
Property and equipment, net of accumulated depreciation of $20,763 and
$22,736 at December 31, 1998 and March 31, 1999, respectively 51,057 51,183
Deferred expenses 810 776
------- -------
TOTAL ASSETS $87,981 $86,429
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $10,897 $11,924
Accrued expenses 3,779 3,838
Due to affiliated companies 12,736 8,724
Other liabilities 1,350 1,350
Short-term loan 3,500 3,500
Deferred income taxes 2,190 2,576
------- -------
TOTAL LIABILITIES 34,452 31,912
Commitments and contingencies
SHAREHOLDERS' EQUITY
Contributed capital 2,000 2,000
Retained earnings 51,529 52,517
------- -------
TOTAL SHAREHOLDERS' EQUITY 53,529 54,517
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $87,981 $86,429
======= =======
</TABLE>
F-50
<PAGE> 152
EDN SOVINTEL LLC
Condensed Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
REVENUES, NET: $ 32,404 $ 22,484
COST OF REVENUES: 20,629 13,538
-------- --------
Gross margin 11,775 8,946
OPERATING EXPENSES:
Selling, general and administrative 3,031 3,106
Depreciation and amortization 1,501 1,859
Non-income taxes 1,442 1,087
-------- --------
Total operating expenses 5,974 6,052
-------- --------
Income from operations 5,801 2,894
OTHER INCOME/(EXPENSE):
Interest income 37 25
Interest expense -- (87)
Foreign currency losses (220) (899)
-------- --------
Net income before taxes 5,618 1,933
Income taxes 1,273 945
-------- --------
Net income $ 4,345 $ 988
======== ========
</TABLE>
F-51
<PAGE> 153
EDN SOVINTEL LLC
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,345 $ 988
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,501 1,859
Provision for doubtful accounts 157 335
Foreign currency loss 220 899
Changes in assets and liabilities:
Accounts receivable (3,861) (1,125)
Prepaid expenses and other assets (1,974) (1,471)
Accounts payable and accrued expenses 2,853 1,472
------- -------
Net cash provided by operating activities 3,241 2,957
INVESTING ACTIVITIES -- Purchases of property and equipment (3,500) (1,951)
FINANCING ACTIVITIES -- Due to affiliated companies, net 1,654 (3,256)
Effect of exchange rate changes
on cash and cash equivalents (59) (747)
------- -------
Net increase (decrease) in cash and cash equivalents 1,336 (2,997)
Cash and cash equivalents at beginning of period 5,620 5,116
------- -------
Cash and cash equivalents at end of period $ 6,956 $ 2,119
======= =======
</TABLE>
F-52
<PAGE> 154
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 March 31, 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;
however, other adjustments may have been required had an audit been performed.
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 three months ended March 31, 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.
F-53
<PAGE> 155
EDN SOVINTEL LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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
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.
The issues discussed in the preceding paragraph raise significant
uncertainties over the future operations of the Company. The Company's financial
statements as of March 31, 1999 and for the period 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 these uncertainties.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (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 months ended March 31, 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 March 31, 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.
F-54
<PAGE> 156
EDN SOVINTEL LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
3. CONTINGENCIES (CONTINUED)
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-55
<PAGE> 157
AUDITED FINANCIAL STATEMENTS
TELECOMMUNICATIONS OF MOSCOW LLC
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
F-56
<PAGE> 158
REPORT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
TeleCommunications of Moscow LLC
We have audited the accompanying balance sheets of TeleCommunications
of Moscow 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 TeleCommunications
of Moscow 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 and have reported separately for the 1996, 1997 and 1998
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-57
<PAGE> 159
TELECOMMUNICATIONS OF MOSCOW LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1998
------- -------
(In Thousands of US Dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,447 $ 483
Short-term investments 1,704 --
Accounts receivable, net 1,920 4,367
Due from affiliates 2,146 7,218
VAT receivable, net 134 309
Prepaid expenses and other assets 164 851
Total current assets 9,515 13,228
Property and equipment, net 6,324 8,267
------- -------
Total assets $15,839 $21,495
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 194 $ 165
Accrued liabilities and other payables 454 1,781
Taxes accrued or payable 998 349
Amounts due to shareholder and affiliates 44 36
Other taxes payable 584 169
------- -------
Total current liabilities 2,274 2,500
Commitments and contingencies
Shareholders' equity:
Capital contributions -- 4
Retained earnings 13,565 18,991
------- -------
Total shareholders' equity 13,565 18,995
------- -------
Total liabilities and shareholders' equity $15,839 $21,495
======= =======
</TABLE>
See accompanying notes.
F-58
<PAGE> 160
TELECOMMUNICATIONS OF MOSCOW 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 $ 9,990 $ 20,704 $ 32,803
Connection Fees 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
Connection costs 1,155 1,722 1,567
Selling, general and administrative 1,838 2,762 3,951
Depreciation 108 633 945
-------- -------- --------
Income from operations 11,323 19,243 26,841
Other Income/(expense)
Interest income (478) (467) (851)
Foreign currency losses 242 220 4,524
-------- -------- --------
Income before taxes 11,559 19,490 23,168
Income taxes 2,685 6,467 9,738
-------- -------- --------
Net income 8,874 13,023 13,430
Dividends paid (2,106) (6,218) (8,004)
(Accumulated deficit) Retained earnings, beginning of year (8) 6,760 13,565
-------- -------- --------
Retained earnings, end of year $ 6,760 $ 13,565 $ 18,991
======== ======== ========
</TABLE>
See accompanying notes.
F-59
<PAGE> 161
TELECOMMUNICATIONS OF MOSCOW 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 $ 8,874 $ 13,023 $ 13,430
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 108 633 945
Foreign exchange loss 242 220 4,524
Changes in operating assets and liabilities:
Accounts receivable (933) (1,218) (3,812)
Due from affiliates (1,211) (935) (5,072)
Prepaid expenses and other assets (838) 661 (1,547)
VAT receivable, net (399) 73 (270)
Trade payables 1,252 (1,060) (29)
Accrued liabilities and other payables 236 735 912
Taxes accrued or payable 71 941 (401)
Amounts due to shareholder and affiliates 211 (167) (8)
-------- -------- --------
Net cash provided by operating activities 7,613 12,906 8,672
INVESTING ACTIVITIES
Purchases of and advances for property and equipment (5,165) (1,859) (2,888)
(Purchase) disposal of short-term investments -- (1,704) 1,704
-------- -------- --------
Net cash used in investing activities (5,165) (3,563) (1,184)
FINANCING ACTIVITIES
Proceeds from shareholder -- -- 4
Dividends paid (2,106) (6,218) (8,004)
-------- -------- --------
Net cash used in financing activities (2,106) (6,218) (8,000)
Effect of exchange rate changes on cash and cash equivalents (17) (23) (2,452)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 325 3,102 (2,964)
Cash and cash equivalents at beginning of year 20 345 3,447
-------- -------- --------
Cash and cash equivalents at end of year $ 345 $ 3,447 $ 483
======== ======== ========
</TABLE>
See accompanying notes.
F-60
<PAGE> 162
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND ENVIRONMENT
AOZT Invest-Project was established in May 1994, and reregistered as
TeleCommunications of Moscow LLC ("TCM" or the "Company") in November 1995.
GTS-Vox Limited ("Vox") purchased 95% of TCM in July 1995. Global TeleSystems
Group, Inc. ("GTS") owned 52% of Vox through June 1998. Effective July 1, 1998,
Vox became a wholly-owned subsidiary of GTS (see Note 4). The remaining 5% of
TCM is owned by MTU-Inform.
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.
The issues discussed in the preceding paragraph raise significant
uncertainties over the future operations of the Company. 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 these uncertainties.
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 and depreciation and
valuation of property and equipment.
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.
F-61
<PAGE> 163
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 US Financial Accounting Standard
("FAS") 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 June 18, 1999,
the CBR rate had changed to RUR 24.23. 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.
ACCOUNTS RECEIVABLE
Accounts receivable are shown at their net realizable value which
approximates fair value. No allowance for uncollectable accounts was deemed
necessary at December 31, 1997 nor 1998.
F-62
<PAGE> 164
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
REVENUE RECOGNITION AND TAXES ON REVENUE
Revenues from telecommunication traffic are recognized in the period in
which the traffic occurs. Revenues from connection fees and other services are
recognized in the period in which the connections 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-63
<PAGE> 165
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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"). 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 on 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. GTS-VOX TRANSACTIONS
During 1996 through 1998, GTS-Vox Limited ("Vox") recorded $26,251,000
of goodwill. This goodwill resulted from a series of issuances of GTS' shares
for the initial purchase of GTS' 52.6% interest in Vox.
Also during 1998, GTS acquired the remaining outstanding shares of Vox
from its minority shareholder. As part of this transaction, Vox recorded
$30,183,000 of goodwill.
F-64
<PAGE> 166
\
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The goodwill and related amortization expense related to these
transactions have not been pushed down to the Company and is instead reflected
in the Vox 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 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>
A reconciliation between the statutory rate and the effective income
tax rate is as follows for the years ended December 31:
F-65
<PAGE> 167
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at 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 (liabilities) 67 28
----- -----
Deferred tax (liabilities)/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.
F-66
<PAGE> 168
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. 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:
MTU Inform 1 3,750
GTS-Vox Limited 19 71,250
------- -------
20 75,000
======= =======
Historical value of the Company's capital in US dollars $ 6 $ 3,593
======= =======
</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 233 million rubles or approximately $11.3 million at applicable
year-end exchange rates.
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 and traffic costs -- 152 284
Amounts due from affiliates 1,211 2,146 7,218
Amounts due to shareholder and affiliates 211 44 36
</TABLE>
Transactions and balances with MTU Inform (one of the Company'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>
F-67
<PAGE> 169
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. 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.
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.
F-68
<PAGE> 170
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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-69
<PAGE> 171
TELECOMMUNICATIONS OF MOSCOW LLC
CONDENSED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER OF 1999
(UNAUDITED)
F-70
<PAGE> 172
TELECOMMUNICATIONS OF MOSCOW LLC
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 483 $ 279
Accounts receivable, net 4,367 5,431
Due from affiliated companies 7,218 9,111
VAT receivable, net 309 165
Prepaid expenses and other assets 851 1,284
------- -------
Total current assets 13,228 16,270
Property and equipment, net of accumulated depreciation of $1,687
and $1,953 at December 31, 1998 and March 31, 1999, respectively 8,267 8,267
------- -------
TOTAL ASSETS $21,495 $24,537
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 165 $ 157
Accrued expenses 1,781 2,278
Due to affiliated companies 36 45
Taxes accrued or payable 349 822
Other taxes payable 169 --
------- -------
TOTAL LIABILITIES 2,500 3,302
Commitment and contingencies
SHAREHOLDERS' EQUITY
Contributed capital 4 4
Retained earnings 18,991 21,231
------- -------
TOTAL SHAREHOLDERS' EQUITY 18,995 21,235
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,495 $24,537
======= =======
</TABLE>
F-71
<PAGE> 173
TELECOMMUNICATIONS OF MOSCOW LLC
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
REVENUES, NET $ 9,456 $ 8,291
COST OF REVENUES 2,405 1,875
------- -------
GROSS MARGIN 7,051 6,416
OPERATING EXPENSES:
Selling, general and administrative 375 433
Depreciation 267 267
Non-income taxes 383 621
------- -------
Total operating expenses 1,025 1,321
------- -------
Income from operations 6,026 5,095
OTHER INCOME/(EXPENSE):
Interest income 232 205
Foreign currency losses (150) (460)
------- -------
Net income before taxes 6,108 4,840
Income taxes 2,058 2,600
------- -------
Net income $ 4,050 $ 2,240
======= =======
</TABLE>
F-72
<PAGE> 174
TELECOMMUNICATIONS OF MOSCOW LLC
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,050 $ 2,240
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 267 267
Foreign currency losses 150 460
Changes in assets and liabilities:
Accounts receivable (570) (1,702)
Due from affiliates, net (1,849) (1,884)
Prepaid expenses and other assets (461) (334)
Accounts payable and accrued expenses 2,225 1,087
------- -------
Net cash provided by operating activities 3,812 134
INVESTING ACTIVITIES
Purchases of property and equipment (629) (267)
Disposal of short-term investments 1,704 --
------- -------
Net cash provided by (used in) investing activities 1,075 (267)
Effect of exchange rate changes
on cash and cash equivalents (82) (71)
------- -------
Net increase (decrease) in cash and cash equivalents 4,805 (204)
Cash and cash equivalents at beginning of period 3,447 483
------- -------
Cash and cash equivalents at end of period $ 8,252 $ 279
======= =======
</TABLE>
F-73
<PAGE> 175
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL PRESENTATION AND DISCLOSURES
AOZT Invest-Project was established in May 1994, and reregistered as
TeleCommunications of Moscow LLC ("TCM" or the "Company") in November 1995.
GTS-Vox Limited ("Vox") purchased 95% of TCM in July 1995. Global TeleSystems
Group, Inc. ("GTS") owned 52% of Vox through June 1998. Effective July 1, 1998,
Vox became a wholly-owned subsidiary of GTS. The remaining 5% of TCM is owned by
MTU-Inform.
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 March 31, 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;
however, other adjustments may have been required had an audit been performed.
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 three months ended March 31, 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.
F-74
<PAGE> 176
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
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.
The issues discussed in the preceding paragraph raise significant
uncertainties over the future operations of the Company. The Company's financial
statements as of March 31, 1999 and for the period 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 these uncertainties.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (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 months ended March 31, 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 March 31, 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.
F-75
<PAGE> 177
TELECOMMUNICATIONS OF MOSCOW LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
3. CONTINGENCIES (CONTINUED)
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-76
<PAGE> 178
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.
ATM (Asynchronous Transfer Mode) -- 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 ATM 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.
CLEC (Competitive Local Exchange Carrier) -- A CLEC is an alternative
local carrier that competes with incumbent operators by offering a similar
range of services, typically on the CLEC's overlay network. The CLECs 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 CIS.
Enhanced Network Services -- Telecommunications services providing
digital connectivity, primarily for data applications, via frame relay, ATM, 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> 179
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.
G-2
<PAGE> 180
PSTN (Public switched telecommunications network) -- Refers to the
local, long distance and international phone system typically used by the
public at large.
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> 181
Shares
[LOGO]
Common Stock
-------------
PROSPECTUS
-------------
Deutsche Bank
, 1999
<PAGE> 182
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.................................................... $
NASD filing fee.........................................................
Nasdaq listing fee......................................................
Blue Sky fees and expenses..............................................
Printing and engraving expenses.........................................
Attorneys' fees and expenses............................................
Accountants' fees and expenses..........................................
Transfer agent's and registrar's fees and expenses......................
Miscellaneous...........................................................
-------------
Total..........................................................
=============
</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.
Section 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
------ ----------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation of Golden Telecom, Inc.
3.2* By-laws of the Golden Telecom, Inc.
4.1* Specimen Certificate representing shares of Common Stock
5.1* Opinion of Shearman & Sterling as to the legality of the common shares of Golden
Telecom, Inc.
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 (TeleCommunications
of Moscow LLC)
23.4* Consent of Shearman & Sterling (included in its opinion in Exhibit 5.1)
24.1 Powers of Attorney (included on the signature page hereof)
</TABLE>
II-1
<PAGE> 183
- -------------------
* To be filed by amendment.
+ Exhibits for which Golden Telecom, Inc. is seeking confidential treatment
for certain portions.
(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 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-2
<PAGE> 184
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 July 14, 1999.
GOLDEN TELECOM, INC.
By: /s/ Stewart P. Reich
--------------------------------
Name: Stewart P. Reich
Title: President and Chief
Executive Officer
II-3
<PAGE> 185
POWER OF ATTORNEY
The undersigned Directors and Officers 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 this Registration Statement, 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 hereby or under any related
registration statement or any amendment hereto or 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.
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
--------- ----- ----
<S> <C> <C>
/s/ Stewart P. Reich President and July 13, 1999
--------------------------- Chief Executive Officer,
Stewart P. Reich Director
(Principal Executive
Officer)
/s/ David J. Wisher Chief Financial Officer July 13, 1999
--------------------------- (Principal Financial and
David J. Wisher Accounting Officer)
Director July 13, 1999
/s/ Grier C. Raclin
---------------------------
Grier C. Raclin
Director July 13, 1999
/s/ William H. Seippel
---------------------------
William H. Seippel
</TABLE>
II-4
<PAGE> 186
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>
II-5
<PAGE> 187
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation of Golden Telecom, Inc.
3.2* By-laws of the Golden Telecom, Inc.
4.1* Specimen Certificate representing shares of Common Stock
5.1* Opinion of Shearman & Sterling as to the legality of the common shares of Golden
Telecom, Inc.
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 (TeleCommunications
of Moscow LLC)
23.4* Consent of Shearman & Sterling (included in its opinion in Exhibit 5.1)
24.1 Powers of Attorney (included on the signature page hereof)
</TABLE>
- -------------------
* To be filed by amendment.
+ Exhibits for which Golden Telecom, Inc. is seeking confidential
treatment for certain portions.
<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 1, as to which the
date is September , 1999, (Golden Telecom, Inc.), in the Registration
Statement on Form S-1 and related Prospectus of Golden Telecom, Inc. dated on or
about July 13, 1999.
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
July 12, 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), in the
Registration Statement on Form S-1 and related Prospectus of Golden Telecom,
Inc. dated on or about July 13, 1999.
/s/ Ernst & Young (CIS) Limited
Moscow, Russia
July 12, 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 (TeleCommunications of Moscow
LLC), in the Registration Statement on Form S-1 and related Prospectus of Golden
Telecom, Inc. dated on or about July 13, 1999.
/s/ Ernst & Young (CIS) Limited
Moscow, Russia
July 12, 1999
