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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 2000.
REGISTRATION NO.
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UNITED STATES 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 (Primary Industrial (I.R.S. Employer
of Classification Code Number) Identification Nos.)
Incorporation of
Organization)
</TABLE>
REPRESENTATION OFFICE GOLDEN TELESERVICES, INC.
12 TRUBNAYA ULISTA
MOSCOW, RUSSIA 103045
(Address of principal executive offices)
(011-7-501) 797-9300
(Registrant's telephone number)
GRIER C. RACLIN
GLOBAL TELESYSTEMS, INC.
4121 WILSON BOULEVARD
ARLINGTON, VA 22203
(703) 236-3710
(Name, address, and telephone number of agent for service)
Copies to:
DAVID J. BEVERIDGE, ESQ.
SHEARMAN & STERLING
BROADGATE WEST
9 APPOLD STREET
LONDON EC2A 2AP, ENGLAND
(44) 207-655-5000
JEFFREY A. RIDDELL
12 TRUBNAYA ULISTA
MOSCOW, RUSSIA 103045
(011-7-501) 797-9315
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
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 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 post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective 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
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, Par Value $0.01 Per
Share............................. 2,145,633 $34.03 $73,015,891 $19,276
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act on the basis of the average of
the bid and ask prices of the common stock of Golden Telecom, Inc. reported
on the Nasdaq National Market on June 12, 2000.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a)
may determine.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR HAS THERE BEEN ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 14, 2000
PROSPECTUS
[GOLDEN TELECOM(TM)]
---------------------
2,145,633 SHARES COMMON STOCK
---------------------
This prospectus relates to 2,145,633 shares of common stock of Golden
Telecom, Inc., which certain of our stockholders (whom we call the Selling
Stockholders in this prospectus) own and may offer and sell from time to time.
Our shares currently trade on the Nasdaq National Market under the symbol
"GLDN". The last reported sale price of our common stock on the Nasdaq National
Market on June 13, 2000 was $34.50 per share.
The Selling Stockholders may offer the shares for sale from time to time on
the over-the-counter market, in the Nasdaq National Market, in privately
negotiated transactions or otherwise at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices.
The Selling Stockholders will receive all of the net proceeds from the sale
of shares and will pay any selling commissions.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS, WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June 14, 2000
<PAGE> 3
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF THE SHARES OF
COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Dividend Policy............................................. 21
Use of Proceeds............................................. 21
Price Range of the Common Stock............................. 21
Selected Historical Consolidated Financial Data............. 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 43
Management.................................................. 65
Security Ownership and Certain Beneficial Owners and
Management................................................ 75
Relationship with GTS and Certain Related Party
Transactions.............................................. 76
Selling Stockholders........................................ 79
Description of Certain Financing Arrangements and
Indebtedness.............................................. 80
Description of Capital Stock................................ 82
Shares Eligible for Future Sale............................. 83
Certain United States Tax Consequences to Non-US Holders of
Common Stock..............................................
Plan of Distribution........................................ 84
Legal Matters............................................... 85
Where You Can Find More Information......................... 85
Experts..................................................... 85
Forward-Looking Statements.................................. 85
Index To Financial Statements............................... F-1
Glossary of Telecommunications Industry Terms............... G-1
Information Not Required in Prospectus...................... II-1
Exhibit Index
</TABLE>
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PROSPECTUS SUMMARY
The following is a summary of this prospectus. Please do not rely on any
part of this summary without referring to the more detailed information
contained in the other sections of this prospectus.
OUR COMPANY
We are a leading facilities-based provider of integrated telecommunications
services to businesses and other high-usage customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the Commonwealth of Independent States.
We organize our operations into two business divisions, Business Services (Items
(1), (2) and (3) below) and Mobile Services (Item (4) below):
- (1) Competitive Local Exchange Carrier (CLEC) Services using our local
access overlay networks in Moscow, Kiev and St. Petersburg;
- (2) Long Distance Services using a fiber optic and satellite-based
network.
- (3) Data and Internet Services using our fiber optic and satellite-based
networks, including more than 100 combined points of presence in Russia
and other countries of the Commonwealth of Independent States. Our data
and Internet services product portfolio is currently comprised of: (a)
Business to Business services, such as dedicated Internet access, web
design and web hosting: and (b) Business to Consumer services, such as
dial-up Internet access; and
- (4) Mobile Services using cellular networks in Kiev, Vladivostok and six
other population centers throughout Russia. We hold an ownership interest
in ventures in an additional seven regions in Russia; however, we
abandoned those ventures effective August 31, 1999 as part of our revised
strategic plan.
We are approximately 63% owned by Global TeleSystems, Inc. (GTS).
BUSINESS SERVICES
Competitive Local Exchange Carrier (CLEC) Services. In Moscow, Kiev and St.
Petersburg, we provide a range of services including local exchange and access
services, international and domestic long distance services, data
communications, Internet access and the design and installation of corporate
networks. We offer these services through our local access networks comprising
over 1,000 kilometers of fiber optic rings that are integrated with our long
distance network facilities and the incumbent networks in these cities. We
provide local exchange services primarily through our operating companies EDN
Sovintel LLC, the CLEC Services division (formerly TCM) of TeleRoss and Golden
Telecom BTS.
Long Distance Services. In Russia, we offer international and domestic,
satellite based, long distance voice services, primarily through the Long
Distance Services division of TeleRoss and TeleRoss ventures.
Data and Internet Services. In major population centers throughout Russia
and other countries of the Commonwealth of Independent States, we offer
traditional and high-speed data services, using X.25, frame relay and
asynchronous transfer mode, technologies that offer varying degrees of speed and
capacity for data transmission, primarily through the Data Services division of
TeleRoss (formerly Sovam). We also offer Internet services, which include Web
design, Web hosting, and Internet Protocol (IP) based Virtual Private Networks
(VPN), through dedicated lines and dial-up access, with transmission through a
fiber optic network leased from Rostelecom, Sonera and our satellite-based long
distance network.
MOBILE SERVICES
Mobile Services. In Kiev, Vladivostok and six 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, through our operating companies Golden Telecom
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GSM in Kiev and the Vostok Mobile ventures in Russia, including PrimTelefone in
Vladivostok. In accordance with our current business strategy, we have ceased to
provide further financial support to certain of the ventures in less-developed
urban areas. We abandoned those ventures effective August 31, 1999 and, as a
result, took a charge to earnings of $18.5 million in the third quarter of 1999.
As a result of our strategy to operationally merge our significant Russia
based consolidated entities, the formal merger of TCM and Sovam Teleport into
TeleRoss operating company was completed on November 1, 1999. The following
table summarizes the three business groups through which we currently conduct
our operations:
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BUSINESS GROUP REGION OF OPERATIONS
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<S> <C>
CLEC SERVICES:
Sovintel............................... Moscow and St. Petersburg
CLEC Services division (formerly TCM)
of TeleRoss......................... Moscow
CLEC Services division of Golden
Telecom BTS......................... Kiev
LONG DISTANCE SERVICES:
Long Distance Services division
(formerly TeleRoss operating
company) of TeleRoss................ Russia
TeleRoss ventures...................... 14 cities in Russia
DATA AND INTERNET SERVICES:
Data and Internet Services division
(formerly Sovam) of TeleRoss........ Russia and the Commonwealth
of Independent States
Data and Internet Services division
(formerly Sovam Teleport Ukraine) of
Golden Telecom BTS.................. Ukraine
Commercial Information Networks
(KIS)............................... Nizhny Novgorod
MOBILE SERVICES:
Golden Telecom GSM..................... Kiev
Vostok Mobile ventures................. 7 cities in Russia
</TABLE>
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 Commonwealth of
Independent States. To achieve this objective, we intend to:
- Pursue Consolidation Opportunities
The August 1998 Russian financial crisis and its aftermath have
created significant consolidation opportunities. We intend to pursue those
opportunities through acquisitions that allow us to improve and expand our
service offerings and maintain operational control. We will target
complementary opportunities that will enable us to achieve synergies and
economies of scale.
- Increase Market Share by Offering Bundled Data and Voice Services Over an
Integrated Network
Corporate customers increasingly demand integrated telecommunications
solutions from one-stop providers that are able to deliver a full service
offering in the areas in which the corporate customers 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.
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- Extend Leading Position in High Growth Data and Internet Markets
We plan to build on our position as a leading provider of data
communication services in Russia and other countries of the Commonwealth of
Independent States by increasing the number of network access points in our
network to facilitate the growing demand for data communications. In
addition, we plan to expand our Business to Business and Business to
Consumer services through dedicated and dial-up Internet access and
connectivity, web hosting, web design and other Internet service offerings
by increasing our direct marketing efforts and through acquisitions.
- Reduce Operating Costs and Satisfy Capacity Needs through Network
Planning and Optimization
Our network strategy is to build and own our local exchange and
customer access networks. We typically lease digital terrestrial channels
to supply our regional connectivity, supplementing these channels with
satellite circuits for redundancy and remote connectivity. We intend to
incrementally expand the fiber optic capacity along our heavy traffic and
high cost routes, from Moscow to Stockholm in accordance with an agreement
executed with Sonera and its subsidiaries, to reduce our unit transmission
costs and ensure sufficient capacity to meet the growing demand for
Internet and data services.
- Focus Operating Activities and Capital Investments in Major Metropolitan
Areas
We plan to deploy our capital investments primarily in Moscow, Kiev,
St. Petersburg and other major population centers in the countries of the
CIS, 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.
You should consider all the information contained in this prospectus before
making an investment in the common stock. In particular, you should consider the
factors described under "Risk Factors", beginning on page 6.
OUR ADDRESS
Our principal executive offices are the Representation Offices of Golden
TeleServices, Inc. 12 Trubnaya Ulista, Moscow, Russia 103045. Our telephone
number is (011-7-501) 797-9300.
THE OFFERING
Shares offered by the
Selling Stockholders....... 2,145,633 shares
Shares outstanding
immediately after the Shelf
Offering................. 24,080,125 shares. This number of shares does not
include shares of common stock that will be
issuable upon the exercise of employee stock
options or of warrants to purchase our common
stock, none of which are currently exercisable.
Trading.................... Our common stock is traded on the Nasdaq National
Market under the symbol "GLDN".
Use of proceeds............ We will not receive any proceeds from the shares
sold by the selling stockholders.
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RISK FACTORS
You should carefully consider the following risks relating to us as well as
other information contained in this prospectus before deciding to invest in
shares of our common stock. Our business, financial condition or results of
operations have been, and could be, materially adversely affected by the
following risks. The value of your investment may decrease and could result in a
loss.
RISKS ASSOCIATED WITH DOING BUSINESS IN RUSSIA, UKRAINE AND
OTHER COUNTRIES OF THE COMMONWEALTH OF INDEPENDENT STATES
We generate substantially 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 described below.
CONTINUING POLITICAL INSTABILITY IN THE COUNTRIES WHERE WE OPERATE COULD DEPRESS
FOREIGN AND LOCAL INVESTMENT AND SPENDING, WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
Since the dissolution of the Soviet Union in December 1991, Russia and
Ukraine have been undergoing significant political and economic transformation,
the result of which is a generally unstable political climate characterized by
frequent changes in governments, political gridlock in the legislative process,
widespread corruption among government officials and a significant rise in
organized crime and other criminal activity.
This political and economic instability in Russia, Ukraine and the other
countries where we operate could disrupt the direction and the pace of political
and economic reforms. Such a disruption could discourage foreign and local
investment and spending, in which case demand for our services could decrease
and our results of operations could deteriorate. If this were to occur, then the
market price of our stock could decrease.
In addition, a dramatic change in government policies permitting foreign
investment or the privatization of the telecommunications industry could also
have a material adverse effect on our operations.
ECONOMIC INSTABILITY IN RUSSIA AND UKRAINE COULD ADVERSELY AFFECT THE DEMAND FOR
OUR SERVICES AND OUR ABILITY TO COLLECT ON OUR INVOICES
After August 1998, the Russian and Ukrainian economies entered into a
depression that was exacerbated by political instability. Although the political
situation in Russia may have recently stabilized somewhat as demonstrated by the
December 1999 Duma elections and the resignation of former President Yeltsin, if
the political situations in the countries in which we operate do not stabilize
and if their economies do not strengthen, we expect that demand for our services
will remain depressed. The failure and subsequent stagnation of the Russian and
Ukrainian economies has also weakened the financial condition and the results of
operations of many of our customers. As a result, some of these customers were
unable to pay our invoices or maintain their telecommunication services, and our
revenues have suffered accordingly.
The August 1998 Russian financial crisis caused a substantial decline in
the demand for our services. For example:
- Sovintel's revenues in July 1998 were $11.8 million. In September 1998,
they decreased to $10.2 million. In December 1998, revenues were $7.3
million and for December 1999 revenues were $7.5 million.
- Sovintel logged 5.2 million outgoing international minutes in July 1998.
In September 1998, outgoing international minutes decreased to 4.4
million. In December 1998, outgoing international minutes were 3.3
million and in December 1999 they were 4.8 million.
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- 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. TCM's connections for the whole of 1999 were only
854.
- 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. Revenues for December 1999
were $1.5 million.
Demand for our services may remain depressed if the Russian and Ukrainian
political and economic situations do not improve.
THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT OUR ABILITY TO CONVERT RUBLES
TO HARD CURRENCY AND MANAGE CASH FLOWS
The Russian government's default on its obligations to make payments on its
internal debt in August 1998 triggered a substantial decline in the value of the
ruble and the bankruptcy of a number of prominent Russian banks and businesses.
As a result, the value of the ruble against the US dollar fell significantly,
and this decline has negatively affected, and continues to affect, our financial
performance. Our consolidated and non-consolidated entities recorded an
aggregate $13.1 million pre-tax charge in the third quarter of 1998 and $5.3
million in fiscal year 1999. These charges related primarily to foreign currency
exchange losses for ruble-denominated net monetary assets with the remainder
associated with estimates for uncollectible accounts receivable and
unrecoverable cash deposits. A further decline in the value of the ruble would
negatively affect our results of operations and could require us to record
another significant pre-tax charge.
The ruble is generally non-convertible outside Russia, so our ability to
hedge against further devaluation by converting to other currencies is
significantly limited. Within Russia, our ability to convert rubles into other
currencies is subject to rules that increasingly restrict the purposes for which
conversion and payment in foreign currencies are allowed. Another default on
Russia's sovereign debt could lead to greater protectionism and stricter
controls on currency conversion.
Many banks in Moscow suffer liquidity problems, and some are insolvent or
in the process of liquidation. At the same time, banks outside Moscow are
generally becoming more autonomous and less dependent on support from
Moscow-based banks, the Russian government and the Central Bank. As a result, it
has become increasingly more difficult to transfer money between local banks and
Moscow banks. This difficulty has imposed additional strains on our local
operations.
We manage intercompany liquidity through a cash-collateralized debt
facility offered through a Western bank operating under a Russian banking
license. If we lose access to this facility or a similar hard currency facility,
our ability to manage our liquidity position and foreign exchange risk may
suffer.
REORGANIZATIONS OF THE RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS INDUSTRIES MAY
INCREASE COMPETITION
Russia
The Russian government has structured the telecommunications industry so
that one entity, Svyazinvest, controls Rostelecom, our partner in Sovintel, and
most of our other principal joint venture partners. During the last several
quarters the Russian business press has reported that, Rostelecom may be merged
with Svyazinvest. This reorganization could make it more difficult for us to
attract and retain customers because:
- Rostelecom may exercise its influence in Svyazinvest to cause regional
telephone companies to route domestic and international traffic
originating in the regions through Rostelecom rather than through us;
- Our business relationships with our joint venture partners, which make up
a major component of our business strategy in Russia, may suffer; and
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- The effective consolidation of Rostelecom with our joint venture partners
would create greater competition for Sovintel and our regional TeleRoss
ventures.
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 expected that if the foreign partners are bought out, Utel
would then merge with Ukrtelekom.
The emergence of a single powerful Ukrainian telecommunications provider
could make it more difficult for us to attract and retain customers because:
- A single Ukrainian operator with political connections would be more able
to influence the Ukrainian government to create favorable market
conditions for itself and cause unfavorable conditions for us;
- The new company is likely to become a stronger competitor;
- Our ability to negotiate reasonable interconnection rates may suffer; and
- Any subsequent privatization of Ukrtelekom may bring in strong management
and resources from a major Western telecommunications operator,
increasing its competitive strengths.
RUSSIAN AND UKRAINIAN TELECOMMUNICATIONS POLICIES COULD RESTRICT OUR OPERATIONS
Russian and Ukrainian telecommunications regulations govern the procurement
and continuing validity of our licenses and the terms and conditions under which
we provide services. Changes to these regulations may make it prohibitively
expensive for us to provide services and could have a material adverse effect on
our results of operations.
Russia's parliament recently adopted legislation, which, if implemented,
could restrict foreign ownership of telecommunications operators if necessary to
protect the social order and national security. In addition, the recently
appointed Minister of Communications has publicly stated that he will review the
efficacy of wholly owned foreign subsidiaries operating in the
telecommunications industry. Any change to current government regulations or
policies that negatively affects our ownership structure or our licenses or our
ability to obtain licenses in the future would restrict our operations in
Russia.
It may be difficult and prohibitively expensive for us to comply with
applicable Russian telecommunications regulations related to state surveillance
of communications traffic. For example, the Russian Communications Law provides
that telecommunications in Russia are confidential and may only be intercepted
by a court order. Nevertheless, we are subject to SORM, the Russian acronym for
the surveillance system operated partly by the government agency responsible for
electronic surveillance. Regulations applicable to SORM require
telecommunications networks to enable state monitoring of electronic traffic.
However, the government has not finalized its technical specifications for
compliance with SORM. We and other telecommunications operators have disagreed
with regulatory authorities over the appropriate level of technical compliance
with SORM and over who should pay for this compliance. Full compliance with SORM
to monitor voice and data traffic may be extremely burdensome and expensive.
Ukrainian regulatory authorities have established mandatory tariff
guidelines for fixed operator services. The national carrier, Ukrtelekom and its
joint venture, Utel, charge settlement fees in excess of the mandatory
guidelines. In addition, the mandatory guidelines set tariffs in local currency
units and the guidelines do not adjust to reflect the creeping devaluation of
the local currency. Consequently, our pricing structure in Golden Telecom BTS is
in excess of the limits established in the mandatory guidelines. Any
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enforcement action undertaken in regard to the pricing guidelines by Ukrainian
authority could result in fines or in the suspension or revocation of our
Ukrainian licenses.
Ukrainian legislation prohibits the establishment and operation of
telecommunications ventures in which foreign investors own more than 49%. 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 69%. Golden Telecom (Ukraine), in
turn, recently acquired 99% of Sovam Teleport Ukraine. If Ukrainian authorities
determine that the prohibition against foreign participation extends to indirect
holdings, then we would be in violation of this legislation. The consequences of
this violation are unpredictable and may include fines, license suspension or
revocation, or an order to divest a portion of our holdings.
SPECIAL FEES AND TAXES LEVIED AGAINST TELECOMMUNICATIONS OPERATORS COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
In May 1999, the Cabinet of Ministers of Ukraine passed a resolution which
would, if enforced, effectively increase our monthly frequency use fees from
$25,000 per month to $250,000 per month for the period July-December 1999.
However, this resolution was suspended prior to implementation. Further, in
November 1999 the Arbitration Court of Ukraine found the implementation of the
frequency use fee, under which we have been paying $25,000 per month, to be
non-compliant with Ukrainian legislation. As a result of this finding we have
not paid the fee since December 1999 and initiated litigation to recover
frequency fees previously paid. We were successful in the litigation, but
regulatory authorities have enacted new legislation that provides for the
payment of frequency fees. The amount payable under the new legislation has yet
to be determined, but the results of our operations could deteriorate if the
fees are substantially in excess of the amounts previously budgeted for
frequency fees
A number of industry-specific taxes have been directed at the cellular
industry in Ukraine. For example, the Ukrainian parliament passed legislation
introducing a 6% "pension tax" on cellular calls. The enforcement of this law,
which became effective on August 19, 1999, or the enactment of other similar
industry-specific legislation may have a material adverse effect on demand for
our services and on our results of operations.
CORRUPTION AND ORGANIZED CRIME MAY ADVERSELY AFFECT OUR OPERATIONS
Russia, Ukraine, and the other markets where we operate are plagued with
widespread corruption and criminal activity. High levels of corruption exist
among governmental officials and among quasi-commercial enterprises in which the
state has a controlling ownership interest.
When customers fail to make full payment for services rendered after
several requests for payment, it is our policy to terminate their services until
full payment is received. We believe that some of these customers, particularly
those with links to organized crime, may physically endanger our employees or
damage our properties, especially those in remote regions of Russia where police
protection may be limited. So long as organized crime in Russia and Ukraine
remains pervasive, we believe that our employees may be subjected to threats of
violence, our property may be damaged, or both.
In addition, our cellular businesses tend to have a high profile in the
regions in which they operate and are perceived to be cash-intensive. We have
encountered situations where local criminal elements have attempted to exert
pressure on our management and to siphon money out of the ventures through
unauthorized activities. Any of these activities could have a material adverse
effect on our ability to provide services and on our financial results.
RUSSIAN AND UKRAINIAN LEGISLATION MAY NOT ADEQUATELY PROTECT AGAINST
EXPROPRIATION AND NATIONALIZATION
The governments of Russia and Ukraine have enacted legislation to protect
foreign investment and other property against expropriation and nationalization.
In the event that such property is expropriated or
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nationalized, legislation provides for fair compensation. However, we cannot
assure you that such protections would be enforced. This uncertainty is due to
several factors, including:
- the lack of state budgetary resources;
- the apparent lack of political will to enforce legislation to protect
property against expropriation and nationalization;
- the lack of an independent judiciary and sufficient mechanisms to enforce
judgments; and
- widespread corruption among government officials.
Expropriation or nationalization of our business would obviously be detrimental
to our operations.
BROAD DISCRETION OF RUSSIAN AND UKRAINIAN REGULATORS RESULTS IN INCONSISTENT
LEGISLATION AND UNPREDICTABLE ENFORCEMENT
The dispersion of regulatory powers among a number of government agencies
in Russia and Ukraine has resulted in inconsistent or contradictory regulations
and unpredictable enforcement. This situation has made it difficult for us to
comply with all laws and regulations that appear to apply to us and has resulted
in unpredictable regulatory enforcement. For example, pursuant to the Russian
Communications Law, Minsvyaz, the Ministry of Communications, has authority to
regulate and control the development of the communications industry in Russia.
However, there is additional legislation that recognizes and defines the roles
of other regulatory organs and jurisdictional boundaries are unclear.
The Russian Communications Law requires any entity that offers any
communications service to obtain the appropriate license in accordance with the
Communications Law and other applicable licensing regulations. A similar
licensing regime exists in Ukraine. However, neither the Communications Law nor
applicable regulations in Russia or Ukraine provide clear guidelines for the
issuance or extension of a license, and state agencies exercise broad discretion
when determining whether to approve a license application, as well as the terms
and conditions of any license. Such broad discretion in the issuance of licenses
may result in arbitrary decision making and may also give rise to opportunities
for corruption.
The Ukrainian regulatory agency requires that the terms of international
licenses include provisions requiring licensees to pay unspecified annual
amounts into local network development. The required amount of investment has
yet to be defined but may be substantial, and we cannot predict whether failure
to comply will lead to the revocation of our license.
WE MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO CONFUSION IN THE LAWS AND LEGAL
STRUCTURES OF THE COUNTRIES WHERE WE OPERATE
The current confusion with the Russian and CIS legal structure makes it
difficult to know if we would be able to enforce our rights in disputes with our
joint venture partners or other parties, or if we are in compliance with all
applicable laws, rules and regulations. Furthermore, the dispersion of
regulatory power among a number of government agencies in Russia and the other
independent countries of the CIS has resulted in inconsistent or contradictory
regulations and unpredictable enforcement. The Russian and other CIS governments
have rapidly introduced laws and regulations and have changed their legal
structures in an effort to make their economies more market-oriented, resulting
in considerable legal confusion, especially in areas of the law that directly
affect our operations. We cannot assure you that local laws and regulations will
become stable in the future. 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.
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OUR RUSSIAN AND UKRAINIAN TAX BURDENS MAY BE SIGNIFICANTLY GREATER THAN
CURRENTLY ANTICIPATED
Russia
It is possible that our Russian taxes may be greater than the estimated
amount that we have expensed to date and paid or accrued on our balance sheets.
Because of the need for additional sources of budgetary finance, Russian tax
authorities have become increasingly aggressive in their interpretation of the
tax law and its many ambiguities, as well as in their enforcement and collection
activities. Foreign companies are often forced to negotiate their tax bills with
tax inspectors who demand higher taxes than applicable law appears to provide.
Any additional tax liability, as well as any unforeseen changes in the tax law,
could have a material adverse effect on our future results of operations or cash
flows in a particular period.
Russian tax authorities are conducting an examination of potential tax
liabilities in connection with some of our cellular operations. We cannot assure
you that this examination will not result in a fine or a revocation or
suspension of our cellular licenses.
Ukraine
Ukrainian tax law is similarly unpredictable. The constitution prohibits
retroactive legislation, and the tax code requires new tax laws to be adopted no
later than six months prior to the beginning of the next fiscal year.
Nevertheless, sudden shifts in tax law and policy and retroactive legislation
are common. For example, we are currently allowed to deduct losses in hryvna,
the Ukrainian currency, on hard currency borrowings. This allowance resulted in
a significant tax benefit in 1998. Recent decisions by the tax authorities,
however, make it unclear as to whether this tax benefit will continue to be
available. If this tax benefit is removed, we will be subject to significantly
higher tax liability from hryvna exchange gains.
WE MAY BE AT A COMPETITIVE DISADVANTAGE BECAUSE OF RESTRICTIONS IN THE FOREIGN
CORRUPT PRACTICES ACT
The anti-bribery restrictions of the US Foreign Corrupt Practices Act make
it illegal for us to give anything of value to foreign officials in order to
obtain or retain any business or other advantage. Some of our current and
potential competitors are not subject to these anti-bribery restrictions. As a
result, we may be subject to competitive disadvantages to the extent that our
competitors are able to secure business, licenses or other preferential
treatment by making these payments. We believe that bribery is commonplace in
Russia and the other countries of the Commonwealth of Independent States where
we operate, and we cannot ensure that we will be able to compete effectively
with companies that are free from such limitations.
THE MILITARY EVENTS IN CHECHNYA MAY AFFECT THE RUSSIAN POLITICAL AND ECONOMIC
SITUATION AND THE DEMAND FOR OUR SERVICES
In November 1999, Russian military forces advanced into Chechnya in a
revival of the civil war that raged between 1994 and 1996. An escalation of
military activities in Chechnya or the spread of such activities to other areas
of the northern Caucasus could discourage foreign investment in the markets
where we operate, thereby decreasing demands for our services. These events and
western reaction to such events may give rise to increased Russian nationalism,
Russian attitudes towards Western foreign direct investment and business
relationships with Western suppliers such as ourselves. These factors could lead
to decreased demand for our services.
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RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND OUR COMPETITORS MAY BE MORE
SUCCESSFUL IN ATTRACTING AND RETAINING CUSTOMERS
The market for Internet products and services is highly competitive and we
expect that competition, especially in underdeveloped markets, will continue to
intensify. Negative competitive developments could have a material adverse
effect on our business and the trading price of our stock. As we expand the
scope of our Internet offerings, we will compete directly with a greater number
of Internet sites, media companies, and companies providing business services
across a wide range of different online services.
A large number of these websites and online services as well as
high-traffic e-commerce merchants offer or are expected to offer informational
and community features that may be competitive with the services that we offer.
In order to effectively compete, we may need to expend significant internal
resources or acquire other technologies and companies to provide or enhance such
capabilities. Any of these efforts could have a material adverse effect on our
business, operating results and financial condition and be dilutive to our
stockholders.
MARKET CHANGE MAY IMPACT OUR ABILITY TO SUSTAIN GROWTH LEVELS
Because of the uncertain nature of the rapidly changing market we serve,
period-to-period comparisons of operating results are not likely to be
meaningful. In particular, although we experienced strong subscriber growth
during 1999 and the first quarter of 2000, we are not certain that this level of
subscriber growth on a percentage basis will be sustained in future periods. In
addition, we currently expect that our operating expenses will continue to
increase significantly as we expand our sales and marketing operations, continue
to develop and extend the Russia-On-Line brand, fund greater levels of product
development, develop and commercialize additional media properties, and acquire
complementary businesses and technologies. If long-term revenue growth levels do
not meet our expectations, our financial results will be adversely affected.
WE MAY HAVE DIFFICULTY SCALING AND ADAPTING OUR EXISTING ARCHITECTURE TO
ACCOMMODATE INCREASED TRAFFIC AND TECHNOLOGY ADVANCES
Much of the architecture that we employ was not originally designed to
accommodate levels or types of use that we hope to experience on our online
properties and it is unclear whether current or future anticipated levels of
traffic will result in delays or interruptions in our service. In the future, we
may be required to make significant changes to our architecture, including
moving to a completely new architecture. If we are required to switch
architectures, we may incur substantial costs and experience delays or
interruptions in our service. If we experience delays or interruptions in our
service due to inadequacies in our current architecture or as a result of a
change in architectures, users may become dissatisfied with our service and move
to competing providers of online services. Also, as we acquire users who rely
upon us for a wide variety of services, it becomes more technologically complex
and costly to retrieve, store and integrate data that will enable us to track
each users' preferences. Any loss of traffic, increased costs, inefficiencies or
failures to adapt to new technologies and the associated adjustments to our
architecture would have a material adverse effect on our business.
WE ARE BUILDING VALUE INTO THE RUSSIA-ON-LINE BRAND AND THE COSTS OF MAINTAINING
AND ENHANCING OUR BRAND AWARENESS ARE INCREASING.
We believe that maintaining and expanding the Russia-On-Line brand is an
important aspect of our efforts to attract and expand our user and advertiser
base. We also believe that the importance of brand recognition will increase due
to the growing number of Internet sites and the relatively low barriers to
entry. We expect to spend considerable money and resources to date on the
establishment and maintenance of the Russia-On-Line brand. However, because the
number of Internet navigation, commerce, community and service companies
continues to grow dramatically, we expect that it will
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become increasingly difficult and, due to increased competition, expensive, to
obtain quality television, radio, magazine, Internet and other advertising
space. We may not be able to successfully maintain or enhance consumer awareness
of our brand and, even if we are successful in our branding efforts, such
efforts may not be cost-effective. If we are unable to maintain or enhance
consumer awareness of the Russia-On-Line brand in a cost-effective manner, our
business, operating results and financial condition would be materially and
adversely affected.
OUR DEPENDENCE ON THIRD PARTY CONTENT PROVIDERS SUBJECTS US TO RISKS
Our future success depends upon our ability to aggregate compelling content
and deliver that content through its online properties. Much of the content that
attracts users to the Russia-On-Line properties is licensed from third parties.
Our ability to maintain and build relationships with third-party content
providers will be critical to our success. We may be unable to enter into or
preserve relationships with the third parties whose content we seek to obtain.
Many of our current licenses for third-party content extend for a limited period
and there can be no guarantee that they will be renewed upon their expiration.
In addition, as competition for compelling content increases, content providers
may increase the prices at which they offer their content. An increase in the
prices charged to us by third-party content providers could have a material
adverse effect on our business, operating results and financial condition. If we
are unable to license or acquire compelling content for our online properties
from third parties, either through the termination of existing relationships or
the inability to continue to establish relationships with third party content
providers, or if other companies are able to broadcast content that is similar
to or the same as that provided by us, the number of users on our online
properties may not grow at all or at a slower rate than anticipated, which would
decrease our revenue.
WE MUST MANAGE OUR GROWTH, INCLUDING THE INTEGRATION OF RECENTLY ACQUIRED
COMPANIES, SUCCESSFULLY IN ORDER TO ACHIEVE OUR DESIRED RESULTS
We expect to experience significant growth in personnel in the short and
medium term. As the number of our employees grows, it will become increasingly
difficult and more costly to manage our personnel. As part of our business
strategy, we have completed several acquisitions, including our recent
acquisitions of Glasnet, Nevalink, Fintek, KIS, Referat.ru, and Absolute Games
and expect to enter into additional business combinations and acquisitions.
Acquisition transactions are accompanied by a number of risks, including:
- the difficulty of assimilating the operations and personnel of the
acquired companies;
- the potential disruption of our ongoing business and distraction of
management;
- the difficulty of incorporating acquired technology or content and rights
into our products and media properties and unanticipated expenses related
to such integration;
- the potential negative impact on reported earnings;
- the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
- the contingent liabilities associated with acquired businesses,
especially in the markets where we operate.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
OUR INTELLECTUAL PROPERTY RIGHTS ARE COSTLY AND DIFFICULT TO PROTECT
We regard our copyrights, trademarks, trade dress, trade secrets, and
similar intellectual property, including our rights to certain domain names, as
essential to our success. We rely upon trademark and copyright law, trade secret
protection and confidentiality or license agreements with our employees,
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customers, partners and others to protect our proprietary rights. Still,
intellectual property rights are especially difficult to protect in the markets
where we operate. In these markets the regulatory agencies charged to protect
intellectual property rights are inadequately funded, legislation is
underdeveloped, and piracy is commonplace. We cannot guarantee that the steps we
have taken to protect our proprietary rights will be adequate.
WE COMPETE WITH ESTABLISHED COMPETITORS WHO MAY HAVE GREATER RESOURCES THAN WE
DO
Our competitors include incumbent Russian and Ukrainian operators and other
large international telecommunications providers doing business in the
Commonwealth of Independent States. Our competitors may have substantially
greater resources, closer ties to governmental authorities and longer operating
histories. These advantages may give them a competitive edge over alternative
providers like us. This competition may result in a loss of customers, falling
prices and a decline in revenues.
We compete with large established national carriers, some of which are
powerful companies with political connections, as well as joint ventures of
large international operators doing business in Russia and Ukraine. Such
ventures include Global One and Combelga in Russia and Utel in Ukraine. Other
competitors are alliances among telecommunications companies, companies that own
equipment and networks, companies that purchase and resell the services of other
carriers, Internet service providers and other providers of bundled services. We
may also face increasing competition from wireless telephone companies and
satellite companies. Many of these competitors, including the Russian incumbent
operators, have established customer bases and extensive brand name recognition
and possess greater financial, management and other resources. Our results of
operation would suffer if we are unable to keep up with the increasing levels of
competition in the countries where we operate.
OUR RELATIONSHIPS WITH OUR JOINT VENTURE PARTNERS LIMIT OUR INDEPENDENCE AND OUR
FLEXIBILITY
We depend to a significant degree on local partners in our joint ventures
to provide us with interconnection with local networks, regulatory and marketing
expertise, and familiarity with the local business environment. They also help
to facilitate the acquisition of necessary licenses and permits. As a result,
any significant disruption in our relationship with these parties could make it
more difficult for us to expand our operations and to maintain our existing
services.
Under the terms of some of our joint venture agreements, we have the right
to nominate key employees, direct operations and determine strategies for these
joint ventures. However, our partners in some ventures, particularly in our
wireless operations, have the ability to frustrate our exercise of these rights.
Significant corporate decisions by most ventures, such as approving budgets and
business plans, declaring and paying dividends, and entering into substantial
transactions, effectively require the consent of our local partners. Moreover,
we would prefer not to take significant actions without the consent and support
of our partners. Accordingly, we do not have unilateral control over the
operations of our joint ventures.
In addition, Ukrainian legislation restricts the level of foreign ownership
in the telecommunications industry. These regulations may restrict our ability
to increase our holdings in ventures and increase our reliance on local partners
who may lack significant financial resources and may be unable to meet capital
calls at the level of their ownership interests.
GOVERNMENT INTERACTION WITH OUR PARTNERS COULD HAVE ADVERSE SPILLOVER EFFECTS ON
US
The interactions between government authorities and our past or current
partners may create problems for us. For example, we are aware that Russian
authorities are reviewing the activities of our former partners in GTS-Vox, the
holding company which owned our interest in TCM, prior to TCM's merger into our
wholly owned subsidiary, TeleRoss. Certain of our employees have been requested
by Russian governmental authorities to provide information as part of those
inquiries. The authorities' inquiries have raised issues about the formation of
TCM and the sale of our partners' interest in GTS-Vox to us, including issues
concerning Russian antimonopoly and securities filings and the commercial
relationship
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between TCM and the local telephone network in Moscow. Global TeleSystems Inc.,
our approximately 63% shareholder, has also received inquiries apparently
regarding these matters from U.S. authorities in connection with a U.S. grand
jury investigation.
Our involvement in the authorities' review of our former partners'
activities could result in a diversion of our management's time and resources or
the deterioration in our relationship with our partners. The review could lead
to the imposition of administrative fines or other penalties and forfeitures of
assets, including the loss of our ownership interest in the assets that
constituted TCM prior to its merger into TeleRoss. If we were to lose our
ownership interest in the assets that constituted TCM, it would have a material
adverse impact on our operations.
OUR PARTNERS ARE OFTEN ALSO OUR COMPETITORS
Notwithstanding our agreements with our joint venture partners, they
sometimes compete directly with our joint ventures. Competition with our joint
venture partners in the same markets may create conflicts of interest and may
result in a loss of customers. For example, our partner in Sovintel, Rostelecom,
is the dominant international and domestic long distance carrier in Russia.
Similarly, most of our regional partners across Russia offer local and long
distance services in competition with our local joint ventures and TeleRoss, and
some of these partners also offer mobile services in direct competition with
some of our mobile operations. Our partners in our mobile ventures also
sometimes offer independent mobile services in direct competition with our joint
ventures.
We may consider acquiring some of our partners' interests in certain joint
ventures if we are able to do so within regulatory guidelines and on
commercially attractive terms. If we were to make such acquisitions, we expect
that we would continue to employ local personnel in order to retain the benefit
of their local expertise. After an acquisition, however, we would be directly
competing with a powerful, formerly state-owned enterprise that had been our
partner before we acquired its interest. We would have to rely on this
partner-turned-competitor to gain access from our networks to customer sites
along the so-called "last mile". It is possible that this competitor would
attempt to create adverse operating conditions for our business.
OUR TARGETED CUSTOMERS MAY NOT SELECT A PRIVATELY OWNED, FOREIGN CONTROLLED
ENTITY FOR THEIR COMMUNICATIONS NEEDS
Before 1991, the telecommunications industry in the countries where we
operate was wholly owned and controlled by the state. After 1991, private
companies, including foreign controlled companies, entered these markets as
telecommunications service providers. Many potential customers may be unwilling
to entrust their communications systems to non-state-controlled companies, and,
in particular, to private companies controlled by foreign investors.
Furthermore, state entities that require the types of services that we offer,
such as the Russian Central Bank, may refuse to select a service provider that
is controlled by foreign investors. Because we are controlled by foreign
investors, we may occasionally be unable to reach our targeted customers.
WE RELY ON A SMALL NUMBER OF MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES
Revenues from our five largest customers represented approximately 37% of
our consolidated revenues for the year ended December 31, 1999. Accordingly, the
loss of business from any of our key customers, or a reduction in tariffs
charged to these customers could have a material adverse effect on our financial
condition and results of operations.
Vimpelcom, a Moscow cellular provider and our largest customer, has
recently requested a reduction in the fees paid to the CLEC Services division of
TeleRoss. Revenues from Vimpelcom and its affiliates represented approximately
21% of our consolidated revenues for the year ended December 31, 1999 and
approximately 20% of our consolidated revenues for the year ended December 31,
1998. We agreed to a reduction in Vimpelcom's fees through the end of 1999, and
we have agreed to further reductions thereafter. Further negotiations may lead
to a significant additional reduction in payments by Vimpelcom
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and may have a material adverse effect on our consolidated revenues. In
addition, although we are currently unaware of any plans on the part of our key
customers to move their business to other carriers, we cannot assure you that
they will not reduce their reliance on us by developing relationships with other
service providers.
FALLING PRICES FOR OUR SERVICES MAY LEAD TO A DECLINE IN REVENUES
Prices for international and domestic long distance calls, as well as
Internet access and wireless services, have fallen substantially over the last
few years in most of our current and potential markets. We expect that the
prices for our services will continue to decrease for the foreseeable future as
competitive pressures increase. This is attributable, in part, to the frequent
devaluation of the ruble. Unlike us, most local Russian carriers do not link
their prices to the dollar/ruble exchange rate, so as the ruble devalues, their
prices become relatively cheaper than our prices. In order to compete with these
local operators, we expect that we will continue to lower our tariffs, which may
result in declining margins. As reduced tariffs impact our operating margins, we
may be unable to meet certain foreign currency debt obligations.
FAILURE TO LEASE SUFFICIENT AND RELIABLE TRANSMISSION CAPACITY COULD CAUSE US TO
INCUR LOSSES
Historically, we have leased a substantial portion of our network
transmission capacity under agreements, which generally have twelve- to
thirty-six-month fixed terms. In addition to this capacity, we recently leased
significant additional international capacity which we intend to utilize for
data transmission under long-term lease agreements which may be extended up to
fifteen years. If our lease arrangements deteriorate or terminate and we are
unable to enter into new arrangements or if the entities from whom we lease such
capacity are unable to perform their obligations under such arrangements, our
cost structure, service quality and network coverage could be adversely
affected.
We currently rely on Rostelecom, the exclusive supplier of international
switched voice channels in Russia, to lease transmission capacity to us, and we
rely on local operators for last-mile access to end-users. These companies may
be subject to political and economic pressures not to lease capacity to foreign
operators or competitors. Any changes in regulation or policies that restrict us
from leasing adequate capacity could have an adverse effect on our business.
Local telecommunications operators may, for business reasons or otherwise,
resist giving us access to the last mile.
THE SATELLITES WE USE TO TRANSMIT LONG DISTANCE SIGNALS MAY MALFUNCTION
Our domestic long distance business throughout Russia and other countries
of the Commonwealth of Independent States relies on a satellite to receive and
transmit caller signals. Satellites are subject to significant risks that may
prevent or impair proper commercial operation, including satellite defects, loss
of power, loss of orbit or damage from passing objects. One of our Russian
satellites has not remained stationary in its orbit, and consequently, we have
switched our signal transmission to an Intelsat satellite. The operation of the
satellite that we use to transmit caller signals is beyond our control, and,
although we have backup capacity on other satellites, a disruption of
transmission on these satellites could adversely affect our domestic long
distance operations.
OUR NETWORK MAY NOT BE ABLE TO SUPPORT THE GROWING DEMANDS OF OUR CUSTOMERS
The uninterrupted operation of our network is vital to our success. The
stability of our systems depends on our ability to provide sufficient capacity
to meet the needs of our customers, and that, in turn, depends on the
integration of suitable technology into our networks. As we continue to increase
both the capacity and the reach of our network, and as traffic volume continues
to increase, we will face increasing demands and challenges in managing our
circuit capacity and traffic management systems. Any prolonged failure of our
communications network or other systems or hardware that causes significant
interruptions to our operations could seriously damage our reputation and result
in customer attrition and financial losses.
It is possible that the current economic difficulties and historical
circumstances in Russia may create difficulties in maintaining our network. We
rely to a significant degree on the Russian network being able
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to deliver our services, and the Russian network's underdevelopment may hinder
our ability to obtain sufficient capacity for our traffic volumes, especially as
we expand our Internet access business. Moreover, it is increasingly difficult
to expand within Moscow because the existing Russian network does not have
sufficient capacity, and we may be unable to procure enough telephone numbers
for our customers. These factors are beyond our control, yet they may have a
material adverse effect on our expansion plans and our ability to provide
services to new customers.
In addition, the telecommunications industry is subject to rapid and
significant changes in technology. We cannot predict the effect of technological
changes on our business, even though our operations depend on our ability to
integrate new and emerging technologies successfully.
WE MAY ENCOUNTER DELAYS AND INCREASED COSTS IF WE CANNOT ACQUIRE KEY EQUIPMENT
FROM SUPPLIERS
We depend on technology and equipment that we acquire from various
manufacturers. These manufacturers also provide vendor financing and help us to
maintain this equipment. Without it, we could face delays, operational
disruption and higher expenses. Although we could obtain equipment of comparable
quality from several other suppliers, we may be unable to acquire compatible
equipment from alternative sources on a timely, cost-efficient basis.
Because of the economic difficulties in Russia, some of our ventures have
experienced significant reductions in revenues and may therefore be unable to
repay amounts due under certain vendor financings. If any such default were to
occur, we may not be able to obtain vendor financing from the affected suppliers
for future equipment purchases.
In addition, almost all our telecommunications equipment is imported into
Russia, and we pay for it with dollars or other hard currency. Any change in
existing laws that creates difficulties importing equipment or that restricts us
from spending hard currency may have a material adverse effect on our ability to
obtain adequate supplies to sustain our network. Any increase in customs duties
may render it impractical to continue to import such equipment.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NECESSARY TO IMPLEMENT OUR BUSINESS
STRATEGY
We will need additional capital to maintain and expand our networks. Our
ability to raise funding to pursue our strategies depends on our access to
capital markets or private financing. We believe that the proceeds from our IPO
and our cash flows from operations should be sufficient to finance our capital
requirements for the next 12 to 24 months. However, market conditions and other
factors, especially large or numerous acquisitions, may cause us to seek
additional financing sooner. Significant elements of our business strategy that
may require substantial capital expenditures include the following:
- the construction or the acquisition of fiber optic links between heavy
traffic routes;
- expanding our existing network infrastructure to other parts of Russia,
Ukraine and other countries of the Commonwealth of Independent States;
- developing additional Internet capability and acquiring other Internet
service providers; and
- expanding our wireless capabilities, including investments in upgraded
technology.
- pursuing consolidation opportunities through acquisitions.
In addition, we will need to maintain our existing infrastructure. The
costs for expanding and maintaining our infrastructure may exceed projected
costs and result in unforeseen deficits.
If we fail to generate sufficient funds from a combination of operating
cash flow and additional debt or equity financing, 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.
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OUR BILLING AND MANAGEMENT INFORMATION SYSTEMS MAY NOT BE ABLE TO MEET OUR NEEDS
We encounter difficulties in using and enhancing our billing and management
information systems and in integrating new technology into such systems. We have
historically operated through distinct companies, but we are in the process of
integrating our billing and management information systems so that we will be
able to bill our customers and to manage other administrative tasks through a
single system. If we are unable to integrate and upgrade our billing and
management information systems to support our integrated operations, we may not
be able to record accurate call details or bill our customers promptly and
accurately.
Additionally, any damage to our network management center or our major
switching centers could harm our ability to monitor and manage network
operations and generate accurate call detail reports from which we derive our
billing information.
In our operations outside Moscow, Kiev and St. Petersburg, we rely on our
ventures' switches for billing. We cannot ensure that their systems will meet
our needs or the needs of our customers.
WE ARE EXPOSED TO RISKS OF BAD DEBT AND FRAUD
We have experienced problems relating to the failure of some customers to
make full payment for services rendered and to the fraudulent use of our access
codes to Internet and cellular services. These risks are particularly high in
our markets because of the poor health of the economies in the 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 Commonwealth of Independent States
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 from service provider/reseller customers'
increases.
OUR INTERNAL CONTROLS MAY BE INSUFFICIENT TO ENSURE THAT WE COMPLY WITH
APPLICABLE LAWS
Our reporting and control standards may be insufficient to ensure that
certain practices comply with all applicable laws. If we or any of our ventures
are found to be involved in unlawful practices, then we may be exposed, among
other things, to significant fines, the risk of prosecution or the loss of our
licenses. Russia and the other countries of the Commonwealth of Independent
States have inadequate corporate management and financial reporting legal
requirements, and have underdeveloped banking, computer and other internal
control systems. These countries often have commercial practices and legal and
regulatory frameworks that differ significantly from practices in the United
States and other Western countries. The application of the laws of any
particular country is not always clear or consistent. As a result, it is often
difficult to hire qualified management and accounting staff who can ensure
compliance with changing legal requirements. Thus, we have had and may again
have, difficulty establishing internal management, legal and financial controls,
preparing financial statements and corporate records, and instituting business
practices that meet Western standards.
In light of these circumstances, in the second half of 1996, we increased
our efforts to improve our management and financial controls and business
practices. In early 1997, we retained special outside counsel to conduct a
thorough review of our business practices in the emerging markets in which we
operate. In addition, in June 1999, our special counsel completed an update of
the 1997 review in Russia and Ukraine. Neither the review nor the update
identified any violations of law that we believe would have a material adverse
effect on our financial condition. However, we cannot ensure that all potential
deficiencies have been properly identified or that governmental authorities will
not disagree with our assessment. If our control procedures and compliance
programs are not effective or the government authorities determine that we have
violated any law, depending on the penalties assessed and the timing of any
unfavorable resolution, our future results of operations and cash flows could be
materially adversely affected.
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LOSS OF KEY PERSONNEL COULD AFFECT OUR GROWTH AND FUTURE SUCCESS
We believe that our growth and our future success will depend in large part
upon a small number of key executive officers, as well as on our ability to
attract and retain highly skilled personnel to work in Russia and other parts of
the Commonwealth of Independent States, including senior management and
technical personnel. The competition for qualified technical personnel who are
familiar with the telecommunications industry in the Commonwealth of Independent
States is intense, particularly outside the major urban centers. We cannot
assure you that we will be able to hire and retain qualified personnel.
THERE MAY BE HEALTH RISKS TO USING MOBILE HANDSETS
In recent years, some people have expressed concerns about the potentially
harmful effects of electromagnetic emissions from handsets on the health of
mobile telephone users. Any actual or perceived health risks associated with the
use of mobile communications devices could have a material adverse effect on our
results of operations by reducing our mobile telephony customer base, our
customer growth rate and the average usage of our subscribers.
RISKS ASSOCIATED WITH OUR POSITION AS A NEWLY ESTABLISHED COMPANY
THE INTERESTS OF GLOBAL TELESYSTEMS, INC., OUR CONTROLLING STOCKHOLDER, MAY NOT
COINCIDE WITH OURS, AND COULD HAMPER OUR DEVELOPMENT
Global TeleSystems, Inc. (GTS) owns approximately 63% of our outstanding
shares of common stock. Moreover, H. Brian Thompson, the Chairman of our Board
of Directors, is also the Chairman of GTS's Board of Directors, and three other
GTS officers are members of our Board of Directors. These relationships create
the potential for conflicts of interest in circumstances where our interests and
GTS's interests are not aligned. We can not assure you that any conflicts will
be resolved in our favor.
As our majority shareholder, GTS will have the power to determine matters
submitted to a vote of our stockholders without the consent of the other
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 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 shares of our common stock and the
exercise by GTS of its ability to control our management and affairs.
We entered into a number of agreements with GTS concerning our
relationships as part of the IPO, which closed on October 5, 1999. Because we
remain a subsidiary of GTS, these agreements are a result of negotiations
between affiliated parties, which may not have been at arm's length. Therefore,
the terms offered to us under these agreements may be worse than the terms we
may have reached with an unaffiliated third party.
WE WILL NOT BE ABLE TO RELY ON GTS TO PROVIDE CAPITAL AT HISTORICAL COSTS
We have a limited operating history as a stand-alone company. We continue
to be a subsidiary of GTS, but GTS has no obligation to provide assistance to
us, except in accordance with the agreements that we have made with it regarding
the provision of certain administrative services.
Prior to the IPO, our working capital requirements were satisfied pursuant
to GTS's corporate-wide cash management policies. After the IPO, GTS has not and
will not provide cash injections to finance our
19
<PAGE> 21
operations. We believe that the proceeds from the IPO and our cash flows from
operations will be sufficient to finance our capital requirements for the next
12 to 24 months. However, market conditions and other factors, especially large
or numerous acquisitions, may cause us to seek additional financing sooner and
we cannot ensure that we will be able to obtain financing on terms as favorable
as could be obtained from or by GTS. In this case, our cost of capital would be
higher than that reflected in our historical financial statements.
WE HAVE INCURRED NET LOSSES AND EXPECT FUTURE LOSSES
If considered as a stand-alone entity, we have incurred net losses for the
past five years. We expect to continue to incur net losses as we spend
substantial resources on expanding our network, maintaining our existing
network, participating in the consolidation of the communications industry in
Russia and the other countries of the Commonwealth of Independent States and
marketing. We cannot assure you that we will achieve or sustain profitability.
THE RELEVANCE OF OUR FINANCIAL INFORMATION MAY BE LIMITED
The financial information we have herein 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 herein does not necessarily reflect the many
significant changes that have and will occur in our business and the funding of
our operations as a result of our separation from GTS and our recent IPO.
WE HAVE NOT IDENTIFIED SPECIFIC USES OF THE IPO'S PROCEEDS
We intend to use the funds we have now for potential acquisitions and
business development, network expansion, working capital and general corporate
purposes. Our management will have significant flexibility in applying these
funds. We may, when an appropriate opportunity arises, use a portion, or all, of
the funds to acquire or invest in businesses, products or new technologies. Our
management's failure to apply these funds effectively could cause our business
to suffer.
RISKS ASSOCIATED WITH OUR SHARES OF COMMON STOCK
OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK MAY BE LIMITED
We do not expect to pay any cash dividends in the foreseeable future. If we
raise any capital in the future, we may be restricted from paying dividends
under the terms of such financings. In addition, the governments in the
countries where we operate may further devalue their currencies and take other
actions that may restrict the ability of our holding or operating companies to
declare and pay dividends.
THE PRICE OF THE SHARES MAY DECLINE IF SUBSTANTIAL AMOUNTS OF SHARES ARE SOLD IN
THE PUBLIC MARKET
A total of 2,145,633 shares of our common shares are being registered for
sale from time to time under this Prospectus. Because only 6,878,164 shares of
our common stock are currently freely tradable, the sales of shares under this
Prospectus may result in declines in the price of our common shares. In
addition, GTS owns approximately 63% of ours outstanding 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 the IPO, which occurred on September 30, 1999. 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 their ownership of our shares of
common stock, and we have agreed that they may require us to register their
shares of our common stock with the Securities and Exchange Commission for sale
to the public in certain circumstances.
20
<PAGE> 22
OUR SHARE PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE
The price of our shares has been subject to significant volatility since
our IPO. In addition, a number of particular factors may adversely affect the
market price of our shares or cause the market price to fluctuate and decline
materially. These factors include:
- actual or anticipated fluctuations in quarterly and annual results;
- the limited number of our shares available for trading in public markets;
- introduction of new services;
- mergers and strategic alliances in the telecommunications industry; and
- changes in applicable government regulation in the Russian and Ukrainian
telecommunications industries.
In recent years, the market for stock in technology, telecommunications and
computer companies has been highly volatile. This is particularly true for
companies with relatively small capitalization, such as ours.
ANY US AND OTHER WESTERN JUDGMENTS YOU MAY OBTAIN AGAINST US MAY NOT BE
ENFORCEABLE IN OTHER COUNTRIES
Substantially all of our assets are located in Russia and Ukraine. Although
arbitration awards are generally enforceable in Russia and Ukraine, judgments
obtained in the US or other Western courts, including those with respect to
federal securities law claims, may not be enforceable. Therefore, any US or
other Western court judgment obtained against us or any of our operating
companies may not be enforceable in Russia or Ukraine.
DIVIDEND POLICY
We have not paid any dividends on our common stock and do not intend to pay
dividends in the foreseeable future.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
stockholders in this offering. All proceeds from the sale of the common stock
offered hereby will be for the account of the selling stockholders.
PRICE RANGE OF THE COMMON STOCK
Our common stock has traded on the Nasdaq National Market since September
30, 1999 under the symbol "GLDN". The following table sets forth, for the
periods indicated, the high and low closing prices per share for our common
stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999:
Fourth quarter............................................ 32.00 9.06
2000:
First quarter............................................. 48.00 18.13
Second quarter (through June 13).......................... 44.50 22.88
</TABLE>
As of June 13, 2000, there were approximately 10 holders of record of our
common stock.
21
<PAGE> 23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data at and for
the years ended December 31, 1997, 1998 and 1999 and for the year ended December
31, 1996 are derived from consolidated financial statements of Golden Telecom,
Inc. which have been audited by Ernst & Young (CIS) Limited, independent
auditors. The selected historical consolidated financial data at December 31,
1995 and 1996 and for the year ended December 31, 1995 are derived from
unaudited financial statements. The selected historical financial data for the
three month periods ended March 31, 1999 and 2000 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which Golden Telecom, Inc.
considers necessary for a fair presentation of the financial position and
results of operations for these periods.
Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2000. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included in this Prospectus.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- --------- ---------
(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 $ 97,931 $ 24,185 $ 24,309
Cost of revenues........... 4,653 10,083 20,420 43,574 40,516 9,326 10,294
Gross margin............... (816) 3,057 6,778 42,512 57,415 14,859 14,015
Selling, general and
administrative........... 13,225 17,686 21,249 45,327 41,011 8,638 10,254
Depreciation and
amortization............. 804 2,753 4,363 16,709 28,143 6,805 7,228
Abandonment and
restructuring charge..... -- -- -- -- 19,813 -- --
Operating loss............. (14,845) (17,382) (18,834) (19,524) (31,552) (584) (3,467)
Equity in earnings (losses)
of ventures.............. (409) 3,783 12,428 2,559 (6,677) (3,570) (911)
Interest income (expense),
net...................... (144) (1,140) (431) (3,003) 2,814 179 1,548
Foreign currency loss...... (79) (446) (399) (7,452) (2,739) (742) (343)
Minority interest.......... -- -- -- (1,040) (1,477) (459) --
Other non-operating
expense.................. -- -- -- -- -- -- (148)
Provision for income
taxes.................... -- 286 647 5,184 6,823 2,600 13
Net loss................... (15,477) (15,471) (7,883) (33,644) (46,454) (7,776) (3,334)
Net loss per share(1)...... $ (1.46) $ (1.46) $ (0.74) $ (3.17) $ (3.38) $ (0.73) $ (0.14)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 457 $ 3,420 $ 3,934 $ 14,164 $162,722 $ 15,330 $158,098
Property and equipment,
net...................... 18,409 21,665 16,812 52,186 62,176 54,714 68,663
Investments in and advances
to ventures.............. 43,226 50,188 74,332 46,519 45,196 45,087 43,853
Total assets............... 75,328 92,549 129,620 235,849 366,624 232,324 363,197
Total debt................. 12,866 9,322 1,625 24,459 28,029 25,459 23,692
Minority interest.......... 1,913 1,913 -- 7,993 2,816 8,452 2,816
Shareholders' equity....... 49,839 70,302 115,568 168,783 288,552 166,536 285,674
</TABLE>
---------------
(1) Per share amounts in this table were calculated based upon the assumption
that the 10,600,000 common shares issued in connection with the formation of
the Company are outstanding for all periods prior to September 30, 1999.
22
<PAGE> 24
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,
2000 and 1999, and for each of the years ended December 31, 1999, 1998 and 1997.
This discussion should be read in conjunction with the "Selected Historical
Consolidated Financial Data" and the Consolidated Financial Statements and the
notes related thereto that appear elsewhere in this Prospectus.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other parts of this document,
including, without limitation, those concerning (i) projected traffic volume;
(ii) future revenues and costs; (iii) changes in the Company's competitive
environment; (iv) the performance of future consolidated and equity method
investments; and (v) the political and financial situation in the markets in
which we operate, contain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Among the
key factors that have a direct bearing on the Company's results of operations,
economic performance and financial condition are the commercial and execution
risks associated with implementing the Company's business plan, the political,
economic and legal environment in the markets in which the Company operates,
increasing competitiveness in the telecommunications and Internet-related
businesses that may limit growth opportunities, and increased and intense
downward price pressures on some of the services that we offer. These and other
factors are discussed herein under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Report.
Additional information concerning factors that could cause results to
differ materially from those in the forward looking statements are contained in
the Company's filings with the U.S. Securities and Exchange Commission,
including, but not limited to, the Company's reports on Form 10-K for the year
ended December 31, 1999, the Company's report on Form 10-Q for the quarter ended
March 31, 2000 and September 30, 1999, and the Company's prospectus dated
September 30, 1999 included in the Registration Statement No. 333-82791 on Form
S-1. Additional information may also be contained in the filings with the U.S.
Securities and Exchange Commission submitted by Global TeleSystems Group, Inc.,
("GTS") the majority shareholder in the Company, including, but not limited to,
GTS' report on Form 10-K for the year ended December 31, 1999 and GTS' report on
Form 10-Q for the quarter ended March 31, 2000.
In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report.
The factors described in this report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements of
the Company made by or on behalf of the Company, and investors, therefore,
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors may emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the
23
<PAGE> 25
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.
OVERVIEW
We are a leading facilities-based provider of integrated telecommunications
services and Internet services in major population centers throughout Russia and
other countries of the Commonwealth of Independent States (CIS). We organize our
operations into two business divisions: Business Services and Mobile Services.
Our Business Services Division comprises: CLEC Services, using local access
overlay networks in Moscow, Kiev and St. Petersburg; Data and Internet Services,
using a fiber optic network with more than 100 points of presence in Russia and
the CIS; and Long Distance Services using a fiber optic and satellite-based
network. Our Mobile Services Division operates cellular networks in Kiev,
Vladivostok and six other cities throughout Russia. GTS owns approximately 63%
of our outstanding shares.
Our financial condition and results of operations have been, and continue
to be, adversely affected by ongoing economic instability in Russia and the
other countries of the Commonwealth of Independent States. The Russian economy
collapsed in August 1998 after the Russian government defaulted on its
obligation to make payments on its internal debt and allowed the ruble to
devalue substantially. Although financial markets may have stabilized since
August 1998 and the political climate is less unstable, the Russian economy
remains in depression, exacerbated by continuing political instability that may
precipitate further economic volatility.
Most of our revenue is derived from high-volume business customers and
carriers. Our business customers include large multinational companies, local
enterprises, financial institutions, hotels and government agencies. We believe
that the carriers, including mobile operators, which contribute a substantial
portion of our revenues, in turn derive much of their business from high-volume
business customers. Thus, we believe that most of our ultimate end-users are
businesses that require access to highly reliable and advanced
telecommunications facilities to sustain their operations.
In the aftermath of the August 1998 Russian financial crisis, a significant
number of our business customers scaled back or closed their operations in
Russia, and many local companies have closed down operations in Russia because
of an inability to satisfy their payment obligations to creditors. Terminations
of service and reduction in services offered have reduced our recurring
revenues. Additionally, sales of equipment have declined significantly as new
customers prefer to lease rather than buy equipment under current market
conditions. We are also experiencing significant price pressure on our recurring
revenue, particularly by Moscow cellular operators, which include some of our
largest customers.
We have traditionally competed for customers on the basis of network
quality, customer service and range of service offered. In the past several
years, other telecommunications operators have also introduced high-quality
services to the segments of the business market in which we operate. Competition
with these operators has intensified in the last several quarters, resulting in
declining prices, which has also adversely affected our revenues. In addition,
some of our competitors do not link their prices to the dollar/ruble exchange
rate, so as the ruble devalues, their prices effectively become lower than our
prices. In order to compete with these carriers in the regions outside Moscow
and St. Petersburg, we have been forced to lower our tariffs, which has resulted
in reduced revenues and declining margins.
In recent months, although we have seen what appears to be a slight
recovery in the Russian market, downward price pressures persist, both because
of competitive pressures in Russia and because of a global trend toward lower
telecommunications tariffs. Although we experienced an increase in traffic
volume over recent months, the volume increase has not kept pace with the
reduction in prices.
Although we expect competition to continue to force the general level of
tariffs downward, we expect to mitigate partially the effects of this pressure
by seeking further reductions in the settlement and interconnection rates that
we pay to other telecommunications operators. Our ability to reduce our cost of
revenue by reducing these payments has enabled us generally to maintain, or even
improve, our margins. We expect settlement and interconnection rates to continue
to decline in line with tariffs.
24
<PAGE> 26
In addition to the traditional voice and data service provision, we are
actively pursuing a strategy of developing non-traditional telecom service
offerings including those related to the Internet, such as web hosting, web
design, and vertical and horizontal portal development.
OWNERSHIP AND INITIAL PUBLIC OFFERING
Golden Telecom, Inc., commenced trading on NASDAQ on September 30, 1999,
using the ticker symbol "GLDN". Our Initial Public Offering ("IPO") closed on
October 5, 1999. From our IPO, together with additional investments from
strategic investors, including Global TeleSystems, Inc., we raised $128.0
million in net proceeds. On December 24, 1999 the company issued privately to
Capital International Global Emerging Markets Private Equity Fund, L.P.
1,250,000 of our common shares at the IPO price.
In accordance with the subscription agreement filed with the SEC at the
time of our IPO, a further 30,000 shares of our common stock, in addition to the
420,000 shares issued on September 30, 1999 were issued on March 1, 2000 to an
affiliate of ING Barings in full and final payment for its ownership interest in
Golden Telecom (Ukraine). Following such issuance, Global TeleSystems, Inc. owns
approximately 63% of the outstanding shares of our common stock.
ABANDONMENT AND RESTRUCTURING CHARGE
In the third quarter of 1999, the GTS Board approved a formal plan of
restructuring whereby it determined that the allocation of sufficient resources
to support certain of our cellular ventures, which are not material to our
financial condition or results of operations, was inconsistent with our
strategic plans. We, therefore, no longer intend to provide any further
financial assistance to certain specified cellular ventures, other than the
assumption of certain debt obligations, and we are seeking to sell our ownership
interests in or otherwise dispose of these assets in furtherance of our plan of
abandonment. We are targeting to complete the disposition of these properties by
early 2001. We have taken a charge to earnings of $18.5 million in the third
quarter of 1999, of which approximately $8.3 million was recorded as a
liability. Additionally, in the third quarter of 1999, we recorded a charge and
liability of $1.3 million relating to the cancellation of certain network
capacity. There were no amounts charged against these liabilities in the year
ended December 31, 1999. There was $2.1 million recorded against these
liabilities during the first quarter of 2000. $1.9 million was recorded against
this liability when a Western-owned financial institution attached the
collateral held in regard to a debt-facility between the institution and the
venture. The remaining $0.2 million was due to disposition costs and
cancellation of certain network capacity.
In the quarter ended March 31, 1999, equity in losses recognized for the
abandoned cellular ventures was $0.8 million.
We will continue to support those cellular ventures where the allocation of
financial, operational and management resources is consistent with our strategic
plans.
CHANGES IN OWNERSHIP
Before July 1998, we owned 52.64% of the holding company, GTS-Vox Limited,
which controlled 95% of TCM. In July 1998, we acquired the remaining outstanding
interests in GTS-Vox Limited and increased our ownership in TCM to 95%. As a
result of this acquisition, TCM was thereafter accounted for by the
consolidation method as opposed to the equity method. We acquired the remaining
5% of TCM on August 16, 1999.
On November 1, 1999 we completed the legal merger of Sovam Teleport and TCM
into TeleRoss. Operationally, we currently intend to continue to report segment
information using lines of business within the TeleRoss Operating Company.
An affiliate of ING Barings which indirectly owned 12.25% of Golden Telecom
(Ukraine), contributed its indirect interest in Golden Telecom (Ukraine) to a
wholly owned subsidiary of Golden
25
<PAGE> 27
Telecom, Inc., upon the consummation of the IPO, in exchange for a total of
450,000 newly issued shares of Golden Telecom, Inc. Our beneficial interest in
Golden Telecom (Ukraine) increased from 56.75% to 69% as the result of this
transaction.
In February 2000, Golden Telecom Ukraine acquired 99% of Sovam Teleport
Ukraine, including a 51% interest previously held by third parties. Sovam
Teleport Ukraine is a provider of data and Internet services to Ukraine-based
businesses.
SEGMENT INFORMATION
The Company operates in four segments in the telecommunications industry.
Previously, the Company reported three segments, but commencing from the
beginning of 2000, the Company has operationally and financially separated its
Data and Internet business from the Long Distance business. This separation is
in line with the Company's strategy to develop the Data and Internet segments of
its business. The four segments are: Competitive Local Exchange Carrier (CLEC)
Services using our local access overlay networks in Moscow, Kiev, and St.
Petersburg; Long Distance Services using our fiber optic and satellite-based
network throughout the Commonwealth of Independent States; Data and Internet
Services using our fiber optic network and satellite-based network; and Mobile
Services consisting of cellular networks in Russia and Ukraine on a subscription
and prepaid basis.
PRESENTATION OF FINANCIAL STATEMENTS
Golden Telecom, Inc. was formed in June 1999 to be the holding company for
all of GTS's businesses in the Commonwealth of Independent States. The
consolidated financial statements included in this prospectus have been prepared
as if Golden Telecom, Inc. had been in existence throughout all relevant
periods.
In addition, we have included a discussion of EDN Sovintel LLC, our primary
non-consolidated operation, which entity is material to our business. We believe
that this discussion is helpful to develop 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, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
- Consolidated Results. Results of Operations for the Three Months Ended
March 31, 2000 compared to the Results of Operations for the Three Months
Ended March 31, 1999
- Non-Consolidated Results. Results of Non-Consolidated Operations of EDN
Sovintel LLC for the Three Months Ended March 31, 2000 compared to the
Results of Non-Consolidated Operations of EDN Sovintel LLC for the Three
Months Ended March 31, 1999
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
- Consolidated Results. Consolidated Results of Operations for the Year
Ended December 31, 1999 compared to the Consolidated Results of
Operations for the Year Ended December 31, 1998
- Non-consolidated Results. Results of Non-Consolidated Operations of EDN
Sovintel LLC for the Year Ended December 31, 1999 compared to the Results
of Non-Consolidated Operations of EDN Sovintel LLC for the Year Ended
December 31, 1998
26
<PAGE> 28
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
- Consolidated Results. Consolidated Results of Operations for the Year
Ended December 31, 1998 compared to the Consolidated Results of
Operations for the Year Ended December 31, 1997
- Non-consolidated Results. Results of Non-Consolidated Operations of EDN
Sovintel LLC for the Year Ended December 31, 1998 compared to the Results
of Non-Consolidated Operations of EDN Sovintel LLC for the Year Ended
December 31, 1997
CONSOLIDATED RESULTS -- CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999
Revenue
Our revenue increased to $24.3 million for the three months ended March 31,
2000 from $24.2 million for the three months ended March 31, 1999. The breakdown
of revenue by business group was as follows:
<TABLE>
<CAPTION>
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 ENDED MARCH 31, 2000
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
REVENUE
CLEC services................................ $11.7 $ 9.5
Long distance services....................... 2.9 2.8
Data and Internet services................... 6.3 8.1
Mobile services.............................. 4.0 4.2
Eliminations................................. (0.7) (0.3)
----- -----
TOTAL REVENUE........................ $24.2 $24.3
</TABLE>
CLEC Services. Revenue from CLEC Services decreased by 19% to $9.5 million
for the three months ended March 31, 2000 from $11.7 million for the three
months ended March 31, 1999.
The CLEC Services division of TeleRoss revenue decreased by 25% to $6.2
million for the three months ended March 31, 2000 from $8.3 million for the
three months ended March 31, 1999. This is mainly due to a reduction in monthly
recurring revenue partly offset by increased traffic revenue, largely as a
result of pricing concessions made to its largest customer.
The CLEC Services division of Golden Telecom BTS revenue decreased by 3% to
$3.3 million for the three months ended March 31, 2000 from $3.4 million for the
three months ended March 31, 1999. The decrease in revenue was due to lower
monthly recurring revenue despite an increase in the customer base.
Long Distance Services. Revenue from Long Distance Services decreased by 3%
to $2.8 million for the three months ended March 31, 2000 from $2.9 million for
the three months ended March 31, 1999. Increases in long distance traffic were
more than offset by the decreases in tariffs.
Data and Internet Services. Revenue from Data and Internet Services
increased by 29% to $8.1 million for the three months ended March 31, 2000 from
$6.3 million for the three months ended March 31, 1999. The increase is largely
the result of increases in Internet revenue from both dial-up and dedicated
subscribers. The increase in dial-up Internet subscribers has been achieved
through the acquisition of Glasnet and Nevalink and also from organic growth.
Mobile Services. Revenue from Mobile Services increased by 5% to $4.2
million for the three months ended March 31, 2000 from $4.0 million for the
three months ended March 31, 1999. Although there has been a significant
increase, approximately 127%, in the number of active subscribers at Golden
Telecom GSM pricing competition has limited revenue growth.
27
<PAGE> 29
Expenses
The following table shows our principal expenses for the three months ended
March 31, 2000 and March 31, 1999:
<TABLE>
<CAPTION>
CONSOLIDATED EXPENSES CONSOLIDATED EXPENSES
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 ENDED MARCH 31, 2000
--------------------- ---------------------
(IN MILLIONS)
<S> <C> <C>
COST OF REVENUE
CLEC services................................ $ 3.4 $ 3.1
Long distance services....................... 1.7 2.4
Data and Internet services................... 3.7 4.0
Mobile services.............................. 1.0 1.1
Eliminations................................. (0.5) (0.3)
----- -----
TOTAL COST OF REVENUE.......................... 9.3 10.3
Selling, general and administrative.......... 8.6 10.2
Depreciation and amortization................ 6.8 7.2
Equity in losses of ventures................. 3.6 0.9
Interest income.............................. (0.8) (2.3)
Interest expense............................. 0.6 0.7
Foreign currency loss........................ 0.7 0.4
Other non-operating expense.................. 0.0 0.1
Provision for income taxes................... $ 2.6 $ 0.0
</TABLE>
Cost of Revenue
Our cost of revenue increased by 11% to $10.3 million for the three months
ended March 31, 2000 from $9.3 million for the three months ended March 31,
1999.
CLEC Services. Cost of revenue from CLEC Services decreased by 9% to $3.1
million, or 33% of revenue, for the three months ended March 31, 2000 from $3.4
million, or 29% of revenue, for the three months ended March 31, 1999.
The CLEC Services division of TeleRoss' cost of revenue decreased by 16% to
$1.6 million, or 26% of revenue, for the three months ended March 31, 2000 from
$1.9 million, or 23% of revenue, for the three months ended March 31, 1999. The
increase as a percentage of revenue resulted from settlements to other operators
not decreasing in line with the pricing concessions to customers.
The CLEC Services division of Golden Telecom BTS cost of revenue was $1.5
million, or 45% of revenue, for the three months ended March 31, 2000 and was
$1.5 million, or 44% of revenue, for the three months ended March 31, 1999. Cost
of revenue as a percentage of revenue remained broadly the same because the
reduction in tariffs in response to competitive pressures matched the decrease
in settlement costs paid to other operators.
Long Distance Services. Cost of revenue from Long Distance Services
increased by 41% to $2.4 million, or 86% of revenue, for the three months ended
March 31, 2000 from $1.7 million, or 59% of revenue, for the three months ended
March 31, 1999. The cost of revenue as a percentage of revenue increased as
settlement rates paid to the other carriers did not reduce as quickly as our
long-distance tariffs and additionally, as revenue reduced, fixed network
provisioning costs increased as a percentage of revenue.
Data and Internet Services. Cost of revenue from Data and Internet Services
increased by 8% to $4.0 million, or 49% of revenue, for the three months ended
March 31, 2000 from $3.7 million, or 59% of revenue, for the three months ended
March 31, 1999. The decrease as a percentage of revenue was due to the
operational synergies achieved from the Glasnet and Nevalink acquisitions,
together with other operating efficiencies.
28
<PAGE> 30
Mobile Services. Cost of revenue from Mobile Services increased by 10% to
$1.1 million, or 26% of revenue, for the three months ended March 31, 2000 from
$1.0 million, or 25% of revenue, for the three months ended March 31, 1999. The
cost of revenue increased as a percentage of revenue due to increased
competition, which has in turn led to lower traffic and equipment margins.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 19% to $10.2
million, or 42% of revenue, for the three months ended March 31, 2000 from $8.6
million, or 36% of revenue, for the three months ended March 31, 1999. The
increase is mainly due to a one-time adjustment in non-profits taxes recorded in
the first quarter of 1999.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 6% to $7.2 million
for the three months ended March 31, 2000 from $6.8 million for the three months
ended March 31, 1999. This increase is due to the continuing capital
expenditures of the consolidated entities and increased goodwill amortization
due to acquisitions.
Equity in Earnings/Losses of Ventures
The losses after interest and tax charges from our investments in
non-consolidated ventures were $0.9 million for the three months ended March 31,
2000, and $3.6 million for the three months ended March 31, 1999. We recognized
earnings at Sovintel of $1.0 million for the three months ended March 31, 2000,
which partially offset our recognized losses at other ventures. In the three
months ended March 31, 1999, our recognized earnings at Sovintel were $0.5
million. There were significant losses at our non-consolidated ventures in the
three months ended March 31, 1999 due to the effects of the August 1998 Russian
financial crisis. The losses attributable to the abandoned ventures for the
three months ended March 31, 1999 were $0.8 million.
Interest Income
Our interest income was $2.3 million for the three months ended March 31,
2000 up from $0.8 million for the three months ended March 31, 1999. The
increase in interest income reflects the interest received on the balance of the
cash from our IPO.
Interest Expense
Our interest expense was $0.7 million for the three months ended March 31,
2000 up from $0.6 million for the three months ended March 31, 1999. The
increase is due to reductions in operating company debt which have been more
than offset by the increase in interest expense attributable to debt owed to GTS
and Lucent Technologies.
Foreign Currency Loss
Our foreign currency loss was $0.4 million for the three months ended March
31, 2000, compared to a $0.7 million loss for the three months ended March 31,
1999. This decreased loss reflects the reduced level of devaluation of the
ruble.
Other Non-operating Expense
Our other non-operating expense was $0.1 million for the three months ended
March 31, 2000 due to losses on certain fixed assets disposals by our operating
companies. No other non-operating expense was recorded in the three months ended
March 31, 1999.
29
<PAGE> 31
Provision for Income Taxes
We had a negligible provision for income taxes for the three months ended
March 31, 2000 compared to $2.6 million for three months ended March 31, 1999.
The decrease was due to the merger of TCM into the TeleRoss operating company
with effect from the beginning of November 1999. The net income of TCM is now
offset against losses in the other operating divisions with the merged TeleRoss.
NON-CONSOLIDATED RESULTS -- NON-CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2000 COMPARED TO THE NON-CONSOLIDATED RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
We use equity method accounting to account for those material ventures
where we exercise significant influence, but do not exercise unilateral
operating and financial control. This section includes a limited discussion of
the results of operations of our principal non-consolidated entity, Sovintel, in
which we own a 50% interest.
SOVINTEL
Revenue
Sovintel's revenue decreased by 1% to $22.2 million for the three months
ended March 31, 2000 from $22.5 million, for the three months ended March 31,
1999. Increases in traffic volumes offset reductions in tariffs.
Cost of Revenue
Sovintel's cost of revenue decreased by 13% to $11.7 million for the three
months ended March 31, 2000 from $13.5 million for the three months ended March
31, 1999. The decrease to 53% from 60% 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 and administrative expenses and non-income
taxes decreased by 2% to $4.1 million, or 18% of revenue, for the three months
ended March 31, 2000 from $4.2 million, or 19% of revenue for the three months
ended March 31, 1999. The decrease was largely due to lower employee related
expenses partially offset by increases in other taxes.
CONSOLIDATED RESULTS -- CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1999 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1998
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.
REVENUE
Our revenue increased by 14% to $97.9 million for the year ended December
31, 1999 from $86.1 million for the year ended December 31, 1998. The increase
was due primarily to our consolidation of Sovam from February 1, 1998, Golden
Telecom (Ukraine) from June 30, 1998 and TCM from July 1,
30
<PAGE> 32
1998, offset by decreased revenues caused by the August 1998 Russian financial
crisis. The breakdown of revenue by business group was as follows:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services..................................... $26.5 $44.7
Data and Long Distance Services................... 51.6 38.6
Mobile Services................................... 9.8 17.6
Eliminations...................................... (1.8) (3.0)
----- -----
Total Revenue........................... $86.1 $97.9
</TABLE>
CLEC Services. Revenue from CLEC Services increased by 69% to $44.7 million
for the year ended December 31, 1999 from $26.5 million for the year ended
December 31, 1998.
Of the CLEC Services increase in revenue of $18.2 million for the year
ended December 31, 1999, TCM accounted for a net increase of $10.4 million. The
balance of the increase in revenue of $7.8 million was from Golden Telecom BTS.
The consolidation of TCM only from July 1, 1998 accounted for $15.5 million of
the increase, offset by a decline in second half revenue of $5.1 million. The
consolidation of Golden Telecom BTS only from June 30, 1998 accounted for $6.3
million of the increase, plus an increase in second half revenue $1.5 million.
TCM's revenue decreased by 26% to $31.1 million for the year ended December
31, 1999 down from $42.3 million for the year ended December 31, 1998. The
decrease was due to the continuing effects of the August 1998 Russian financial
crisis. Port sales declined as significantly fewer ports have been sold since
August 1998. In addition, a reduction in traffic revenue was partially offset by
a slight increase in monthly recurring revenue. TCM was consolidated only from
July 1, 1998 in the year ended December 31, 1998.
Golden Telecom BTS revenue increased by 32% to $13.6 million for the year
ended December 31, 1999 from $10.3 million for the year ended December 31, 1998.
The August 1998 financial crisis and its aftermath affected Ukraine less
strongly than Russia. Decreases in Golden Telecom BTS revenue from installation
fees, connection fees and equipment sales were more than offset by increased
traffic revenue and recurring revenue attributable to an increased customer
base. Golden Telecom BTS was only consolidated from June 30, 1998 in the year
ended December 31, 1998.
Data and Long Distance Services. Revenue from Data and Long Distance
Services decreased by 25% to $38.6 million for the year ended December 31, 1999
down from $51.6 million for the year ended December 31, 1998.
Revenue from data services increased by 9% to $27.2 million for the year
ended December 31, 1999 from $24.9 million for the year ended December 31, 1998.
Revenue from Internet access services increased by 19% to $7.5 million in 1999
from $6.1 million in 1998, partly due to the acquisition of the assets of
Glasnet, a Moscow based Internet service provider. Reductions in average
subscriber fees were more than offset by the increases in subscribers. Revenues
from our private line services also increased by 8% to $18.3 million in the year
ended December 1999 from $17.0 million in the year ended December 31, 1998.
Revenue from long distance services decreased by 57% to $11.4 million in
the year ended December 31, 1999 down from $26.7 million in the year ended
December 31, 1998. The decrease was primarily the result of reduced tariffs on
long distance calls in response to competition from Rostelecom and other
carriers and partially as a result of reduced traffic. Rostelecom quotes its
tariffs in rubles, therefore, its tariffs declined in dollar terms as the ruble
devalued after August 1998. As a result, our average tariff in the year ended
December 31, 1999 was 67% lower than our average tariff in the year ended
December 31, 1998.
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<PAGE> 33
Mobile Services. Revenue from Mobile Services increased by 80% to $17.6
million for the year ended December 31, 1999 from $9.8 million for the year
ended December 31, 1998.
The increase in revenue of $7.8 million in the year ended December 31, 1999
represented a net increase of $9.1 million due to the consolidation of Golden
Telecom GSM from June 30, 1998, offset by a reduction of $1.3 million in the
business group's revenue. The consolidation of Golden Telecom GSM only from June
30, 1998 accounted for $8.4 million of the increase, plus an increase in second
half revenue of $0.7 million.
Golden Telecom GSM revenue increased by 19% to $17.1 million for the year
ended December 31, 1999 from $13.8 million for the year ended December 31, 1998.
A significant increase in active subscribers was partially offset by lower
average revenue per active subscriber.
EXPENSES
The following table shows our principal expenses for the years ended
December 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
COST OF REVENUE
CLEC Services................................... $ 7.3 $12.8
Data and Long Distance Services................. 34.6 25.1
Mobile Services................................. 3.6 4.6
Eliminations.................................... (1.9) (2.0)
----- -----
TOTAL COST OF REVENUE............................. 43.6 40.5
Selling, General and Administrative............. 45.3 41.0
Depreciation and Amortization................... 16.7 28.2
Equity in (Earnings) Losses of Ventures......... (2.6) 6.7
Interest (Income) Expense, Net.................. 3.0 (2.8)
Foreign Currency Loss........................... 7.5 2.7
Provision for Income Taxes...................... 5.2 6.8
</TABLE>
Cost of Revenue
Our cost of revenue decreased by 7% to $40.5 million for the year ended
December 31, 1999 down from $43.6 million for the year ended December 31, 1998.
The increase in cost of revenue due to Golden Telecom (Ukraine) and TCM being
included in our consolidated results of operations only from June 30, 1998 and
July 1, 1998, respectively was more than offset by reductions in cost of revenue
at our other operating companies.
CLEC Services. CLEC Services cost of revenue increased by 75% to $12.8
million, or 29% of revenue, for the year ended December 31, 1999 up from $7.3
million, or 28%, of revenue for the year ended December 31, 1998.
Of the CLEC Services increase in cost of revenue of $5.5 million, TCM
accounted for a net increase of $2.0 million. The balance of the increase in
cost of revenue of $3.5 million was from Golden Telecom BTS. The consolidation
of TCM only from July 1, 1998 accounted for $3.5 million of the increase, offset
by a decline in second half cost of revenue of $1.5 million. The consolidation
of Golden Telecom BTS only from June 30, 1998 accounted for $2.8 million of the
increase, plus an increase in second half cost of revenue of $0.7 million.
TCM's cost of revenue decreased by 33% to $7.0 million, or 23% of revenue,
for the year ended December 31, 1999 from $10.4 million, or 25% of revenue, for
the year ended December 31, 1998. The
32
<PAGE> 34
decrease as a percentage of revenue resulted from improved efficiency in TCM's
network operations. TCM was only consolidated from July 1, 1998 in the year
ended December 31, 1998.
Golden Telecom BTS cost of revenue increased by 38% to $5.8 million, or 43%
of revenue, for the year ended December 31, 1999 from $4.2 million, or 41% of
revenue, for the year ended December 31, 1998. Golden Telecom BTS was only
consolidated from June 30, 1998 in the year ended December 31, 1998.
Data and Long Distance Services. Cost of revenue from Data and Long
Distance Services decreased by 27% to $25.1 million, or 65% of revenue, for the
year ended December 31, 1999 down from $34.6 million, or 67% of revenue, for the
year ended December 31, 1998.
Data Services cost of revenue increased by 25% to $15.8 million, or 58% of
revenue, for the year ended December 31, 1999 from $12.6 million, or 51% of
revenue, for the year ended December 31, 1998. The increase as a percentage of
revenue largely reflects competitive pricing reducing the margin on our data
services. Following the acquisition of Glasnet we are continuing to implement
improvements in the provisioning of our fiber routes, which are expected to
improve our network costs.
Long Distance Services cost of revenue decreased by 58% to $9.3 million, or
82% of revenue, in 1999 from $22.0 million, or 82% of revenue, in 1998. The
decrease reflected a reduction in long distance settlements paid to other
carriers, similar to our own reduction in revenue caused by decreased tariffs.
Mobile Services. Cost of revenue from Mobile Services increased by 22% to
$4.6 million, or 26% of revenue, for the year ended December 31, 1999 from $3.6
million, or 37% of revenue, for the year ended December 31, 1998.
Of the Mobile Services increase in cost of revenue of $1.0 million in the
year ended December 31, 1999, $2.5 million was due to an increase in Golden
Telecom GSM, offset by a $1.5 million decline in the business group's cost of
revenue. The consolidation of Golden Telecom GSM only from June 30, 1998,
accounted for $1.8 million of the increase, plus an increase in the second half
cost of revenue of $0.7 million.
Golden Telecom GSM cost of revenue increased by 27% to $4.2 million, or 25%
of revenue, for the year ended December 31, 1999 from $3.3 million, or 24% of
revenue, for the year ended December 31, 1998. The cost of revenue increased
slightly as a percentage of revenue as we reduced our tariffs in response to
competitive tariff pressures. Golden Telecom GSM was only consolidated from June
30, 1998 in the year ended December 31, 1998.
Selling, General and Administrative
Our selling, general and administrative expenses decreased by 9% to $41.0
million, or 42% of revenue, for the year ended December 31, 1999 down from $45.3
million, or 53% of revenue, for the year ended December 31, 1998. Increases due
to the consolidation of Golden Telecom (Ukraine) and TCM were offset by
reductions at our other consolidated entities. Reductions in costs included
employee remuneration as a result of our efforts to enhance operating
efficiency, as well as a reduction in bad debt expense of $3.0 million.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 69% to $28.2
million for the year ended December 31, 1999 from $16.7 million for the year
ended December 31, 1998. This increase was largely the result of the
transactions that enabled us to consolidate Golden Telecom (Ukraine) from June
30, 1998 and TCM from July 1, 1998, which increased goodwill by $31.6 million,
and the consolidation of the two entities.
33
<PAGE> 35
Equity in (Earnings)/Losses of Ventures
Our (earnings)/losses after interest and tax charges from investments in
non-consolidated ventures decreased to a loss of ($6.7) million for the year
ended December 31, 1999 down from earnings of $2.6 million for the year ended
December 31, 1998. We recognized earnings at Sovintel of $2.8 million for the
year ended December 31, 1999, which partially offset the losses we recognized at
other ventures. In the year ended December 31, 1998 our recognized earnings at
Sovintel and TCM together were $6.8 million.
Interest (Income) Expense, Net
Our interest (income), net, was ($2.8) million for the year ended December
31, 1999 up from an expense of $3.0 million for the year ended December 31,
1998. The improvement was mainly due to the interest income received on the IPO
proceeds in the fourth quarter of 1999.
Foreign Currency Loss
Our foreign currency loss decreased to $2.7 million for the year ended
December 31, 1999 from $7.5 million for the year ended December 31, 1998. This
decrease was due to the reduced devaluation of the ruble in 1999, following on
from the substantial foreign currency loss in 1998 as a result of the
significant devaluation of the ruble.
Provision for Income Taxes
Our provision for income taxes increased by 24% to $6.8 million for the
year ended December 31, 1999 from $5.2 million for year ended December 31, 1998.
The increase was almost entirely due to the consolidation of TCM from July 1,
1998. TCM's provision for income taxes following consolidation was $4.8 million.
TCM was only consolidated from July 1, 1998 in the year ended December 31, 1998.
NON-CONSOLIDATED RESULTS -- RESULTS OF NON-CONSOLIDATED OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1999 COMPARED TO THE RESULTS OF NON-CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
This section includes a discussion of Sovintel's results of operations in
the years ended December 31, 1999 and 1998. Sovintel was our principal
non-consolidated operating company during these periods.
SOVINTEL
Revenue
Sovintel's revenue decreased by 26% to $91.7 million for the year ended
December 31, 1999 down from $124.2 million for the year ended December 31, 1998.
Revenue from local, long distance and international call traffic decreased as a
result of the August 1998 Russian financial crisis adversely affected both
traffic volumes and tariffs charged. In particular, traffic from cellular
operators decreased 55% compared to the year ended December 31, 1998. Revenue
from incoming international traffic also fell sharply, largely because of a 23%
reduction in the average settlement rates paid to Sovintel by other operators.
Cost of Revenue
Sovintel's cost of revenue decreased by 33% to $51.1 million, or 56% of
revenue, for the year ended December 31, 1999, down from $76.2 million, or 61%
of revenue, for the year ended December 31, 1998. The decrease as percentage 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. Sovintel's
cost of revenue for the year ended December 31, 1999 included $8.7 million to
TCM and the TeleRoss Operating Company and $0.5 million paid to other group
companies.
34
<PAGE> 36
Selling, General and Administrative
Sovintel's selling, general and administrative expenses and non-income
taxes decreased by 26% to $17.6 million, or 19% of revenue, for the year ended
December 31, 1999 down from $23.8 million, or 19% of revenue, for the year ended
December 31, 1998. The largest portion of the decrease was attributable to the
provision for bad debt and to turnover and other taxes. This decrease was
primarily due to lower turnover taxes as a result of decreased revenue together
with a reduction in the bad debt expense.
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.
REVENUE
Our revenue increased by 217% to $86.1 million for the year ended December
31, 1998 from $27.2 million for the year ended December 31, 1997. The increase
was due primarily to our consolidation of Sovam from February 1, 1998, Golden
Telecom (Ukraine) from June 30, 1998 and TCM from July 1, 1998, offset by
decreased revenues caused by the August 1998 Russian financial crisis. The
breakdown of revenue by business group was as follows:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
CLEC Services..................................... $ 0.0 $26.5
Data and Long Distance Services................... 24.7 51.6
Mobile Services................................... 2.3 9.8
Eliminations...................................... 0.2 (1.8)
----- -----
Total Revenue........................... $27.2 $86.1
</TABLE>
CLEC Services. Revenue from CLEC Services was $26.5 million for the year
ended December 31, 1998. There was no CLEC Services revenue for the year ended
December 31, 1997 because TCM and Golden Telecom BTS were not consolidated
during that period.
Of the CLEC Services increase in revenue of $26.5 million for the year
ended December 31, 1998, $20.7 million was due to the consolidation of TCM from
July 1, 1998. The balance of the CLEC Services revenue increase of $5.8 million
was due to the consolidation of Golden Telecom BTS from June 30, 1998.
TCM's revenue increased by 44% to $42.2 million for the year ended December
31, 1998 from $29.3 million for the year ended December 31, 1997. Of these
amounts, traffic and monthly recurring revenue at TCM increased by 58% to $32.8
million in 1998 from $20.7 million in 1997, primarily due to the increased
number of ports sold and to increased cellular traffic from Vimpelcom and KB
Impulse. Port sales at TCM increased by 10% to $9.5 million in 1998 from $8.6
million in 1997, primarily as a result of increased port sales before the August
1998 Russian financial crisis. TCM was not consolidated in the year ended
December 31, 1997.
Golden Telecom BTS revenue increased by 212% to $10.3 million for the year
ended December 31, 1998 from $3.3 million for the year ended December 31, 1997.
Of these amounts, traffic and monthly recurring revenue at Golden Telecom BTS
increased by 300% to $8.8 million in 1998 from $2.2 million in 1997, primarily
due to the increased customer base and to increased international incoming and
outgoing traffic. Non-recurring revenues such as equipment sales, installation
and connection revenue increased by 27% to $1.4 million in 1998 from $1.1
million for the year ended December 31, 1997. Golden Telecom BTS was not
consolidated in the year ended December 31, 1997.
35
<PAGE> 37
Data and Long Distance Services. Revenue from Data and Long Distance
Services increased by 109% to $51.6 million for the year ended December 31, 1998
from $24.7 million for the year ended December 31, 1997.
The Data and Long Distance Services increase in revenue of $26.9 million in
the year ended December 31, 1998 was principally due to the consolidation of
Sovam from February 1, 1998. The balance of the Data and Long Distance Services
revenue increase was due to an increase in revenue of TeleRoss operating
company.
Sovam's revenue increased by 41% to $24.9 million for the year ended
December 31, 1998 from $17.8 million for the year ended December 31, 1997,
primarily due to increased revenue from leasing private line facilities. Revenue
from Internet access services increased by 65% to $6.1 million in 1998 from $3.7
million in 1997 because of increased usage, of which $3.3 million related to
dedicated leased lines and $2.8 million to dial-up access facilities in 1998.
Sovam was not consolidated in the year ended December 31, 1997.
Revenue from long distance services increased by 8% to $26.7 million in
1998 from $24.7 million in 1997 as a result of increased long distance traffic
volumes during the first six months of 1998. After the August 1998 Russian
financial crisis, traffic levels decreased, and TeleRoss reduced its tariffs to
remain competitive with Rostelecom. These decreased tariffs resulted in
decreased revenue in the third and fourth quarters of 1998.
Mobile Services. Revenue from Mobile Services increased by 326% to $9.8
million for the year ended December 31, 1998 from $2.3 million for the year
ended December 31, 1997.
Of the Mobile Services revenue increase of $7.5 million in the year ended
December 31, 1998, $8.0 million was due to the consolidation of Golden Telecom
(Ukraine) from June 30, 1998. The balance, a reduction of $0.5 million, was due
to a decrease in revenue largely generated by equipment sales, including
handsets.
As its network became fully operational during 1998, Golden Telecom GSM
revenue increased by 254% to $13.8 million for the year ended December 31, 1998
from $3.9 million for the year ended December 31, 1997. Golden Telecom GSM was
not consolidated in the year ended December 31, 1997.
EXPENSES
The following table shows our principal expenses for the years ended
December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS CONSOLIDATED RESULTS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
(IN MILLIONS)
<S> <C> <C>
COST OF REVENUE
CLEC Services................................... $ 0.0 $ 7.3
Data and Long Distance Services................. 18.5 34.6
Mobile Services................................. 1.9 3.6
Eliminations.................................... 0.0 (1.9)
------ -----
TOTAL COST OF REVENUE............................. 20.4 43.6
Selling, General and Administrative............. 21.2 45.3
Depreciation and Amortization................... 4.4 16.7
Equity in (Earnings) Losses of Ventures......... (12.4) (2.6)
Interest, Net................................... 0.4 3.0
Foreign Currency Loss........................... 0.4 7.5
Provision for Income Taxes...................... 0.6 5.2
</TABLE>
36
<PAGE> 38
Cost of Revenue
Our cost of revenue increased by 114% to $43.6 million for the year ended
December 31, 1998 from $20.4 million for the year ended December 31, 1997. The
increase was caused primarily by our acquisitions of minority interests, and the
resulting consolidations, of Sovam, Golden Telecom (Ukraine) and TCM during
1998.
CLEC Services. Cost of revenue from CLEC Services was $7.3 million, or 28%
of revenue, for the year ended December 31, 1998. There was no CLEC Services
cost of revenue for the year ended December 31, 1997.
Of the CLEC Services increase in cost of revenue of $7.3 million in the
year ended December 31, 1998, $5.0 million was due to the consolidation of TCM
from July 1, 1998. The balance of the CLEC Services cost of revenue increase of
$2.3 million was due to the consolidation of Golden Telecom BTS from June 30,
1998.
TCM's cost of revenue increased by 55% to $10.4 million, or 25% of revenue,
for the year ended December 31, 1998 from $6.7 million, or 23% of revenue, for
the year ended December 31, 1997. This slight increase as a percentage of
revenue was due to traffic revenue increasing as a percentage of TCM's revenue
mix. TCM was not consolidated in the year ended December 31, 1997.
Golden Telecom BTS cost of revenue increased by 200% to $4.2 million, or
41% of revenue, for the year ended December 31, 1998 from $1.4 million, or 42%
of revenue, for the year ended December 31, 1997. Golden Telecom BTS was not
consolidated in the year ended December 31, 1997.
Data and Long Distance Services. Cost of revenue from Data and Long
Distance Services increased by 87% to $34.6 million, or 67% of revenue, for the
year ended December 31, 1998 from $18.5 million, or 75% of revenue, for the year
ended December 31, 1997.
Of the Data and Long Distance Services increase in cost of revenue of $16.1
million for the year ended December 31, 1998, $12.6 million was due to the
consolidation of Sovam from February 1, 1998. The balance of the Data and Long
Distance Services cost of revenue increase of $3.5 million was due to an
increase in cost of revenue of TeleRoss operating company.
Sovam's cost of revenue increased by 24% to $12.6 million, or 51% of
revenue, for the year ended December 31, 1998 from $10.2 million, or 57% of
revenue, for the year ended December 31, 1997. The reduction as a percentage of
revenue was due to increased usage of our fixed network. Sovam was not
consolidated in the year ended December 31, 1997.
Cost of revenue from long distance services increased by 22% to $22.0
million, or 82% of revenue, in 1998 from $18.0 million, or 73% of revenue, in
1997. The decreased gross margin in 1998 was primarily due to tariff reductions
following the August 1998 Russian financial crisis.
Mobile Services. Cost of revenue from Mobile Services increased by 89% to
$3.6 million, or 37% of revenue, for the year ended December 31, 1998 from $1.9
million, or 83% of revenue, for the year ended December 31, 1997.
The Mobile Services cost of revenue increase of $1.7 million in the year
ended December 31, 1998, was entirely due to the consolidation of Golden Telecom
(Ukraine) from June 30, 1998.
Golden Telecom GSM cost of revenue increased by 43% to $3.3 million, or 24%
of revenue, for the year ended December 31, 1998 from $2.3 million, or 59% of
revenue, for the year ended December 31, 1997. The cost of revenue decreased
because a lower proportion of revenue was derived from sales of handsets, which
have higher costs in relation to their selling price than revenues derived from
traffic. Golden Telecom GSM was not consolidated in the year ended December 31,
1997.
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<PAGE> 39
Selling, General and Administrative
Our selling, general and administrative expenses increased by 114% to $45.3
million, or 53% of revenue, for the year ended December 31, 1998 from $21.2
million, or 78% of revenue, for the year ended December 31, 1997. This increase
was attributable primarily to the fact that such expenses of Sovam, Golden
Telecom (Ukraine) and TCM were included in our consolidated results of
operations for part of 1998 and not during 1997.
Of the increase in selling, general and administrative expenses of $24.1
million, $10.9 was due to the consolidation of Sovam, $2.2 million was due to
the consolidation of TCM and $4.6 million was due to the consolidation of Golden
Telecom (Ukraine). The remainder of the increase, $6.4 million, was largely due
to increased costs in our Mobile Services business group.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 280% to $16.7
million for the year ended December 31, 1998 from $4.4 million for the year
ended December 31, 1997. This increase was a result of the transactions that
enabled us to consolidate Sovam, Golden Telecom (Ukraine) and TCM beginning in
the second half of 1998 and not during 1997.
Equity in Earnings/Losses of Ventures
Our earnings after interest and tax charges from investments in
non-consolidated ventures decreased to $2.6 million for the year ended December
31, 1998 from $12.4 million for the year ended December 31, 1997. These results
included excess losses of $2.3 million for 1998 and $2.0 million for 1997.
Sovintel and TCM generated combined earnings of $6.8 million for 1998 and $15.7
million for 1997, which offset losses generated by our other ventures. We began
to consolidate TCM effective as of July 1, 1998.
Interest, Net
Our interest expense, net, increased by 650% to $3.0 million for the year
ended December 31, 1998 from $0.4 million for the year ended December 31, 1997.
The increase was partly due to the consolidation of Golden Telecom (Ukraine) and
partly due to certain debt financing costs that we incurred in 1998 associated
with our mobile ventures.
Foreign Currency Loss
Our foreign currency loss increased to $7.5 million for the year ended
December 31, 1998 from $0.4 million for the year ended December 31, 1997. This
substantial increase in foreign currency loss in 1998 was due to the devaluation
of the ruble.
Provision for Income Taxes
Our provision for income taxes increased by 767% to $5.2 million for the
year ended December 31, 1998 from $0.6 million for year ended December 31, 1997.
The increase was almost entirely due to the consolidation of TCM from July 1,
1998. TCM's provision for income taxes following consolidation was $4.8 million.
TCM was not consolidated in the year ended December 31, 1997.
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<PAGE> 40
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.
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 decreased 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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $158.1 million and $162.7 million as of
March 31, 2000 and December 31, 1999, respectively. Our restricted cash was
$15.0 million and $20.3 million as of March 31, 2000 and December 31, 1999,
respectively. The restricted cash is maintained in connection with certain of
our debt obligations as described below.
During the three months ended March 31, 2000, we had cash inflows of $3.0
million from our operating activities. During the three months ended March 31,
1999, we had cash outflows of $0.6 million from our operating activities. We
used cash of $(3.2) million and $(4.5) million for investing activities, which
were principally attributable to building our telecommunications networks and
acquisitions, for the three months ended March 31, 2000 and 1999, respectively.
We had working capital of $125.8 million as of March 31, 2000 and $132.5
million as of December 31, 1999. At March 31, 2000, we had total debt of
approximately $23.7 million, of which $4.0 million were current maturities. At
December 31, 1999, we had total debt of approximately $28.0 million, of which
$4.1 million were current maturities. Total debt includes amounts that are fully
collateralized by restricted cash. At March 31, 2000 and December 31, 1999,
$11.0 million of our long-term debt, including the current portion, was at fixed
rates.
In connection with the purchase of equipment and services for certain
Vostok Mobile ventures in Russia, those ventures entered into a credit agreement
with The Chase Manhattan Bank, New York, providing for up to $30.7 million of
financing. The facility was guaranteed by the vendor of such equipment and
services, and was insured against certain political risks by the Overseas
Private Investment
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<PAGE> 41
Corporation. To the extent that the guarantor was required to make any payments
pursuant to such guarantee, GTS was required to reimburse 50% of such payments.
Because of the financial condition of certain Vostok Mobile ventures, prior to
the IPO, GTS made certain of the principal and interest payments on behalf of
the ventures.
On September 10, 1999, the Company, GTS and the vendor executed a
Settlement Agreement in regard to the Chase Manhattan credit facility. Under the
terms of the Settlement Agreement, on the date of the closing of the Company's
IPO, GTS and the vendor settled the amounts outstanding under the credit
facility totaling $14.4 million. In addition, GTS paid $2.5 million in
compromise of $3.0 million of accounts payable to the vendor from the cellular
investees. The Company received the rights to collect from the cellular
investees the amounts owed by such investees in regard to the credit facility
and the accounts payable and issued promissory notes to GTS in a total amount of
$6.25 million and to the vendor in a total amount of $4.75 million. In addition,
the Company issued warrants to the vendor to purchase 126,050 share of common
stock for $0.10 per share.
In order for us to compete successfully, we will require substantial
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 capital for our acquisition and business development initiatives. The
net proceeds from our IPO and our private placement will be applied to these
funding requirements. We also expect to fund these requirements through our cash
flow from operations, proceeds from additional equity and debt offerings that we
may conduct, and debt financing facilities. There is no guarantee that we will
be successful in accessing additional sources of funding. If we are unable to
obtain the substantial capital necessary to fund our ongoing operations and
business development activities, our operating results and financial condition
could deteriorate, resulting in a decrease in the market price of our common
stock.
In addition to the external financing discussed above, we have funded our
consolidated subsidiaries and affiliates through two methods of financing.
Certain of our operating companies have received direct debt financing through
loans from affiliated companies. In addition, since September 1997, certain of
our operating companies have borrowed funds under a $30.0 million back-to-back,
three-year, revolving credit facility from a Western-owned bank licensed to
operate in Russia. Under this facility, we provide full cash collateral,
recorded on our balance sheet as restricted cash, for onshore loans made by the
bank to our Russian-registered ventures. We are in the process of refinancing
this facility with the same bank. The structure of the new facility will be
substantially the same as the current, with repayment of seven years. The
funding level as at March 31, 2000 totaled $14.2 million, of which $3.2 million
was funded to our consolidated subsidiaries, $8.2 million was funded to our
affiliates and $2.8 million assumed from our non-consolidated abandoned cellular
properties.
We entered into a lease for fiber capacity, including facilities and
maintenance, from Moscow to Stockholm. The lease has an initial term of ten
years with an option to renew for an additional five years. An advance of $5.6
million was made to the lessor in April 2000.
We expect our current sources of funding, including the net proceeds from
our IPO and the related investments, to finance our capital requirements for the
next 12 to 24 months, except in the cases where we make especially large or
numerous acquisitions. The actual amount and timing of our future capital
requirements may differ materially from our current estimates because of changes
and fluctuations in our anticipated acquisitions, investments, revenue,
operating costs and network expansion plans and access to alternative sources of
financing on favorable terms. However, we may not be able to obtain additional
financing on favorable terms. As a result, we may be subject to additional or
more restrictive financial covenants, our interest obligations may increase
significantly and our shareholders may be adversely diluted. Our failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require us to delay or abandon some or
all of our anticipated expenditures, to sell assets, or both, which could have a
material adverse effect on our operations.
We cannot assure you that our operations will achieve or sustain
profitability or positive cash flow in the future. If we cannot achieve and
sustain operating profitability or positive cash flow from operations,
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<PAGE> 42
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 investment
operations are conducted within guidelines that have been established and
authorized by our audit committee. 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 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.
Our cash and cash equivalents are held largely in interest bearing
accounts, in US Dollars, however we do have bank accounts denominated in Russian
rubles and Ukrainian hryvna. Fair value as at December 31, 1999 and 1998
approximates total value.
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. Fair value at
December 31, 1999 and 1998, approximates total value.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
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<PAGE> 43
The following table provides information about our cash equivalents and
debt obligations that are sensitive to changes in interest rates.
<TABLE>
<CAPTION>
1999 1998
2000 2001 2002 2003 2004 THEREAFTER TOTAL TOTAL
-------- ------ ------ ------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Variable rate............ $145,783 $ -- $ -- $ -- $ -- $ -- $145,783 $ --
Average interest rate.... 4.9% -- -- -- -- -- -- --
Long-term debt, including
current portion
Fixed rate............... $ -- $ -- $ -- $1,216 $2,832 $6,952 $ 11,000 $ --
Average interest rate.... -- -- -- 14.0% 14.0% 14.0% -- --
Variable rate............ $ 4,148 $9,518 $1,833 $1,122 $ 408 $ -- $ 17,029 $24,459
Average interest rate.... 8.3% 10.4% 8.6% 8.5% 8.4% -- -- --
</TABLE>
The following table provides information about our financial instruments by
local 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>
1999 1998
2000 2001 2002 2003 2004 THEREAFTER TOTAL TOTAL
------ ------ ------ ------ ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current portion
US dollars
Variable rate................ $2,730 $9,112 $1,833 $1,122 $ 408 $ -- $15,205 $20,988
Average interest rate........ 8.7% 10.5% 8.6% 8.5% 8.4% -- -- --
Fixed rate................... $ -- $ -- $ -- $1,216 $2,832 $6,952 $11,000 $ --
Average interest rate........ -- -- -- 14.0% 14.0% 14.0% -- --
German marks
Variable rate................ $1,373 $ 395 $ -- $ -- $ -- $ -- $ 1,768 $ 3,357
Average interest rate........ 7.6% 7.6% -- -- -- -- -- --
Ukrainian hryvna
Variable rate................ $ 45 $ 11 $ -- $ -- $ -- $ -- $ 56 $ 114
Average interest rate........ 7.6% 7.6% -- -- -- -- -- --
</TABLE>
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<PAGE> 44
BUSINESS
INTRODUCTION
We are a leading facilities-based provider of integrated telecommunications
services to businesses and other high-usage customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the Commonwealth of Independent States.
We organize our operations into two business divisions, Business Services (Items
(1), (2) and (3) below) and Mobile Services (Item (4) below):
- (1) Competitive Local Exchange Carrier (CLEC) Services using our local
access overlay networks in Moscow, Kiev and St. Petersburg;
- (2) Long Distance Services using a fiber optic and satellite-based
network.
- (3) Data and Internet Services using our fiber optic and satellite-based
networks, including more than 100 combined points of presence in Russia
and other countries of the Commonwealth of Independent States. Our data
and Internet services product portfolio is currently comprised of: (a)
Business to Business services, such as dedicated Internet access, web
design and web hosting: and (b) Business to Consumer services, such as
dial-up Internet access; and
- (4) Mobile Services using cellular networks in Kiev, Vladivostok and six
other population centers throughout Russia. We hold an ownership interest
in ventures in an additional seven regions in Russia, however we
abandoned those ventures effective August 31, 1999 as part of our revised
strategic plan.
We are approximately 63% owned by Global TeleSystems, Inc. (GTS).
BUSINESS SERVICES
Competitive Local Exchange Carrier (CLEC) Services. In Moscow, Kiev and St.
Petersburg, we provide a range of services including local exchange and access
services, international and domestic long distance services, data
communications, Internet access and the design and installation of corporate
networks. We offer these services through our local access networks comprising
over 1,000 kilometers of fiber optic rings that are integrated with our long
distance network facilities and the incumbent networks in these cities. We
provide local exchange services primarily through our operating companies EDN
Sovintel LLC, the CLEC Services division (formerly TCM) of TeleRoss and Golden
Telecom BTS.
Long Distance Services. In Russia, we offer international and domestic,
satellite based, long distance voice services, primarily through the Long
Distance Services division of TeleRoss and TeleRoss ventures.
Data and Internet Services. In major population centers throughout Russia
and other countries of the Commonwealth of Independent States, we offer
traditional and high-speed data services, using X.25, frame relay and
asynchronous transfer mode, technologies that offer varying degrees of speed and
capacity for data transmission, primarily through the Data Services division of
TeleRoss (formerly Sovam). We also offer Internet services, which include Web
design, Web hosting, and Internet Protocol (IP) based Virtual Private Networks
(VPN), through dedicated lines and dial-up access, with transmission through a
fiber optic network leased from Rostelecom, Sonera and our satellite-based long
distance network.
MOBILE SERVICES
Mobile Services. In Kiev, Vladivostok and six 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, through our operating companies Golden Telecom
GSM in Kiev and the Vostok Mobile ventures in Russia, including PrimTelefone in
Vladivostok. In accordance with our current business strategy, we have ceased to
provide further financial support to
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<PAGE> 45
certain of the ventures in less-developed urban areas. We abandoned those
ventures effective August 31, 1999 and, as a result, took a charge to earnings
of $18.5 million in the third quarter of 1999.
As a result of our strategy to operationally merge our significant Russia
based consolidated entities, the formal merger of TCM and Sovam Teleport into
TeleRoss operating company was completed on November 1, 1999. The following
table summarizes the three business groups through which we currently conduct
our operations:
<TABLE>
<CAPTION>
BUSINESS GROUP REGION OF OPERATIONS
-------------- --------------------
<S> <C>
CLEC SERVICES:
Sovintel................................. Moscow and St. Petersburg
CLEC Services division (formerly TCM) of
TeleRoss.............................. Moscow
CLEC Services division of Golden
Telecom BTS........................... Kiev
LONG DISTANCE SERVICES:
Long Distance Services division (formerly
TeleRoss operating company) of
TeleRoss.............................. Russia
TeleRoss ventures........................ 14 cities in Russia
DATA AND INTERNET SERVICES:
Data and Internet Services division
(formerly Sovam) of TeleRoss.......... Russia and the Commonwealth
of Independent States
Data and Internet Services division
(formerly Sovam Teleport Ukraine) of
Golden Telecom BTS.................... Ukraine
Commercial Information Networks (KIS).... Nizhny Novgorod
MOBILE SERVICES:
Golden Telecom GSM....................... Kiev
Vostok Mobile ventures................... 7 cities in Russia
</TABLE>
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 has said that it intends to sell a further 25% minus two
shares, but it has not yet scheduled a new tender date. Svyazinvest currently
owns controlling voting interests in 84 local telcos and Rostelecom and
substantial equity interests in four other local telcos, including Moscow City
Telephone Network.
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<PAGE> 46
Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia has occurred.
Under Russian law, state-owned enterprises within the telecommunications sector
were subject to privatization but only pursuant to a decision of the Russian
government in each individual case and with the state retaining a certain
percentage of the stock of the privatized entity for three years, subject to
extension for national security reasons. At present, virtually all the former
state telecommunications enterprises have been privatized and, subject to the
above restrictions, shares of the newly formed joint stock companies have been
sold to the public. Also, a significant number of private operators provide a
wide variety of telecommunications services pursuant to licenses issued by 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 Russian
telecommunications industry since the early 1990s has been principally driven by
businesses in Moscow requiring international and domestic long distance voice
and data services and by mobile telephony users. The growth in Moscow has
accelerated as multinational corporations have established a presence in the
capital and Russian businesses have begun to expand. The formerly state-owned
local telcos, however, which generally employed an outdated, dilapidated
infrastructure, could not support the requirements of high-volume consumers of
sophisticated telecommunications services. As a result, the inadequacies of the
existing legacy networks constructed during the Soviet era gradually became more
apparent. Further, the proceeds received by the Russian government from the
privatization of state telecommunications assets were not used for the
infrastructure improvements required to meet increased demand. As a result, the
Ministry of Communications began to issue licenses to domestic and foreign
funded companies to encourage investment in the telecommunications
infrastructure.
The licensing structure adopted by the Ministry of Communications directly
reflected the areas of the legacy networks in most urgent need of investment.
Generally, voice and telephony licenses were issued to provide local access,
local exchange, international and domestic long distance services. We are
licensed through various companies to operate at each level of this hierarchy,
and, as a consequence, we are able to offer an integrated service offering.
Sovintel invests in and operates local access networks and an international
gateway. The CLEC Services division of TeleRoss provides access in Moscow to the
public local exchanges and via transmission along its alternative overlay
network interconnected with public exchanges. The Long Distance Services
division of TeleRoss operates at the toll exchange level to provide domestic
long distance services.
The August 1998 Russian financial crisis severely restricted the
profitability of the local telcos and their 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. Since the August 1998 Russian financial crisis, we have seen continued
reductions in per minute tariffs, in US Dollar terms, due to ruble devaluation,
competitive pressures and also following the world-wide trend of reduced
tariffs. This has led to reduced revenues, however, this has also led to reduced
costs as per minute settlements to be paid to other operators have also
declined.
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,
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<PAGE> 47
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 access development.
Ukrtelecom, the Ukrainian incumbent public operator, is the main provider
of telecommunications services in the country, followed by Utel and several
other smaller providers. Ukrtelecom was formed in 1993 as a holding company for
the state's telecommunications interests, including 24 regional local telcos,
two municipal telecommunications operators, and the national transmission
networks, along with broadcasting, research and satellite assets. Ukrtelecom
currently provides local and domestic long distance services.
Utel was formed in 1992 as a joint venture between AT&T, Deutsche Telekom,
PTT Netherlands and Ukrtelekom. Utel became the country's sole international
carrier with an effective monopoly over Ukraine's international traffic. In
return for this concession, Utel was required to make infrastructure
investments, primarily in digital switches, throughout Ukraine. Utel today
provides domestic long distance and international services. In preparation for
the privatization of Ukrtelekom, the government has stated its intention to buy
out its foreign partners in Utel to further enhance the value of any future
privatization offering. Although price negotiations are ongoing, the foreign
partners have agreed in principle to sell their interests.
Public switched voice telephony in Kiev is delivered through a layered
hierarchy similar to that used in Moscow. We use our 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.
The Ukrainian Mobile telecoms market is currently served by five operating
companies. Ukrainian Mobile Communications was the first operator to be licensed
in Ukraine using NMT-450 technology, later it was also awarded a GSM-900
license. Other GSM-900 operators are Kyivstar and Ukrainian Radio Systems, also
known as Wellcome. Golden Telecom Ukraine commenced operations in accordance
with its GSM-1800 license in late 1996. A second GSM-1800 license was issued to
Astelit in 1998 but it has yet to launch a commercial service. There is one
licensed DAMPS operator in Ukraine, Digital Cellular Communications.
OUR POSITION IN THE RUSSIAN AND UKRAINIAN MARKETS
Despite the difficult business environment in the countries where we
operate, we believe that we are well positioned to maintain and consolidate our
strong presence in the business segment of the Russian and Ukrainian
telecommunications markets for the following reasons:
- our early market entry;
- our focus on service, quality and reliability;
- our strong infrastructure position in Moscow;
- the extent and quality of our existing customer base;
- our extensive range of international, domestic and data
telecommunications services;
- our access to capital; and
- the local market experience of our partners.
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BUSINESS STRATEGY
Our objective is to be the leading alternative telecommunications service
provider to the business market in Moscow, Kiev, St. Petersburg and select
population centers throughout Russia and other countries of the Commonwealth of
Independent States. To achieve this objective, we intend to:
- Pursue Consolidation Opportunities
The August 1998 Russian financial crisis and its aftermath have
created significant consolidation opportunities. We intend to pursue those
opportunities through acquisitions that allow us to improve and expand our
service offerings and maintain operational control. We will target
complementary opportunities that will enable us to achieve synergies and
economies of scale.
- Increase Market Share by Offering Bundled Data and Voice Services Over an
Integrated Network
Corporate customers increasingly demand integrated telecommunications
solutions from one-stop providers that are able to deliver a full service
offering in the areas in which the corporate customers operate. As a
result, we plan to continue to develop and combine our businesses to create
a unified service platform for local access, local exchange, domestic and
international long distance, data and systems integration services.
- Extend Leading Position in High Growth Data and Internet Markets
We plan to build on our position as a leading provider of data
communication services in Russia and other countries of the Commonwealth of
Independent States by increasing the number of network access points in our
network to facilitate the growing demand for data communications. In
addition, we plan to expand our Business to Business and Business to
Consumer services through dedicated and dial-up Internet access and
connectivity, web hosting, web design and other Internet service offerings
by increasing our direct marketing efforts and through acquisitions.
- Reduce Operating Costs and Satisfy Capacity Needs through Network
Planning and Optimization
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 incrementally expand the fiber optic capacity along our heavy traffic
and high cost routes, from Moscow to Stockholm in accordance with an
agreement executed with Sonera and its subsidiaries, to reduce our unit
transmission costs and ensure sufficient capacity to meet the growing
demand for Internet and data services.
- Focus Operating Activities and Capital Investments in Major Metropolitan
Areas
We plan to deploy our capital investments primarily in Moscow, Kiev, St.
Petersburg and other major population centers in the countries of the CIS, 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.
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CORPORATE HISTORY AND ORGANIZATION
History
Golden Telecom, Inc., a majority owned subsidiary of Global TeleSystems,
Inc. (GTS), was incorporated in Delaware in June 1999 in preparation for our
Initial Public Offering (IPO) which took place on September 30, 1999 and closed
on October 5, 1999. 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 a for-profit Delaware
corporation 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 other Commonwealth of Independent States businesses have been
built through the establishment of joint ventures with local and foreign
partners, with GTS progressively increasing its ownership. In 1995, GTS began to
expand its telecommunications operations into Western and Central Europe.
Organization
TCM and Sovam Teleport were distinct legal entities prior to their merger
into TeleRoss on November 1, 1999. TCM was integrated into the CLEC Services
division of TeleRoss and Sovam Teleport was integrated into the Data and
Internet Services division of TeleRoss. The Data and Internet Services division
of TeleRoss also absorbed the recently acquired Internet Service Providers in
Moscow and St. Petersburg, Glasnet and Nevalink, respectively, the web design
firm, Fintek, and two vertical portals, Referat.ru and Absolute Games.
Similarly, Sovam Teleport Ukraine had existed as a distinct legal entity until
Golden Telecom Ukraine acquired the business on February 8, 2000. Sovam Teleport
Ukraine is currently being integrated into the Data and Internet Services
division of Golden Telecom BTS. On April 6, 2000, we acquired 51% of KIS, an ISP
in Nizhny Novgorod which will form part of our Data and Internet Services
division.
As the result of these recent mergers and acquisitions, we currently
organize our operations into two groups: our Business Services Group and our
Mobile Services Group. The Business Services Group is composed of three distinct
service units: CLEC Services, Data and Internet Services and Long Distance
Services. Our joint venture, Sovintel, and two business divisions, the CLEC
Services division of TeleRoss and the CLEC Services division of Golden Telecom
BTS, constitute our CLEC Service offering. Our Data and Internet Services are
offered by the Data and Internet Services division of TeleRoss and the Data and
Internet Services division of Golden Telecom BTS. Our Long Distance Services are
offered by the Long Distance division of TeleRoss and TeleRoss ventures. Our
Mobile Services Group consists of Golden Telecom GSM and the seven regional
Russian ventures owned by Vostok Mobile, including PrimTelefone.
The Business Services operations in Russia and other countries of the CIS,
excepting Ukraine, are undertaken primarily through Sovintel and TeleRoss. Our
Business Services operations in Ukraine are conducted through Golden Telecom
Ukraine. Mobile Services in Russia are offered through joint ventures partially
and indirectly owned by GTS Mobile Services. Mobile Services in Ukraine are
offered through Golden Telecom Ukraine.
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The following chart shows the organization and ownership of our operations:
[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 partner has the right to appoint three of the six
members of its Board of Directors. Rostelecom has the right to propose a
candidate for the position of the General Director, and we have the right to
propose a candidate for the position of the First Deputy General Director, who
together constitute the Executive Directorate. In addition, we have the right to
propose a candidate for the position of Finance Director.
The Board of Directors develops the annual budget and strategic business
plans and recommends acquisitions and other significant corporate actions.
Certain functions of the Board of Directors, including oversight of related
party transactions are delegated to the Executive Committee, comprised of one
representative from each partner. Major business decisions require joint
approval of both members of the Executive Directorate. The Executive Directorate
oversees the daily operations of the company and leads strategic planning
initiatives to be presented to the Sovintel Board of Directors. Neither we, nor
Rostelecom, are obligated to fund Sovintel's operations or capital expenditures.
Losses (up to the amount of their respective charter capital contributions or
commitments) and profits of Sovintel are allocated to the partners in accordance
with their ownership percentages, in consideration of funds at risk.
TeleRoss. Effective November 1, 1999, we completed the legal merger of our
wholly owned CLEC Services business in Moscow, TCM, and our wholly owned Data
and Internet Services business, Sovam Teleport, into our wholly owned Long
Distance Services business, TeleRoss. This merger allows to us to
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further achieve operational and financial synergies and savings particularly
with regard to taxation. The history of the individual entities prior to the
legal merger are as follows:
CLEC Services division (formerly TCM) of TeleRoss. Prior to July 1998,
we owned 52.64% of the holding company, GTS-Vox, that controlled 95% of
TCM, our CLEC Services business in Moscow. In July 1998, we acquired the
remaining outstanding interests in GTS-Vox and as a result owned 95% of
TCM. We acquired the remaining 5% of TCM on August 16, 1999;
Data and Internet Services division (formerly Sovam) of
TeleRoss. Sovam Teleport was the subsidiary through which we conducted our
Data and Internet activities in Russia and other Commonwealth of
Independent States countries, except Ukraine. In February 1998, we acquired
the ownership interest of our former partner, thereby making Sovam a wholly
owned subsidiary. Prior to February 8, 2000, we operated our Ukrainian data
services business through our 49% owned affiliate, Sovam Teleport Ukraine.
Effective February 8, 2000, Golden Telecom Ukraine acquired 99% of Sovam
Teleport Ukraine, including a 51% interest previously held by third parties
and the remaining 1% is owned by our wholly owned subsidiary, SFMT-Rusnet,
Inc.
Long Distance Services division (formerly TeleRoss operating company)
of TeleRoss. Our TeleRoss business consists of the wholly owned TeleRoss
operating company, thirteen regional joint ventures in which we hold 50%
ownership interests, and one wholly owned regional venture. TeleRoss
operating company holds the applicable operating licenses to offer
pan-Russian domestic long distance services and thereby controls rates and
tariffs, billing and collections for all fourteen regional ventures. In
addition, TeleRoss directly controls the activities related to remotely
located very small aperture terminal (VSAT) customers. TeleRoss
participates in the management of the TeleRoss ventures under the terms of
their applicable foundation agreements and charters. Under most of these
charters, each partner has the right to appoint an equal number of members
to each venture's board of directors. The boards of directors are
authorized to approve the annual operating budget, strategic business
plans, and to declare dividends. The foundation agreements and charters do
not have expiration dates. While we have significant influence within these
ventures, decisions, including the decision to declare and pay dividends,
are generally subject to our partners' approvals.
Neither we nor our respective joint venture partners are obligated to
fund operations or capital expenditures of the TeleRoss ventures. Losses
and profits are allocated to the partners in accordance with their
ownership percentages, in consideration of funds at risk.
Golden Telecom (Ukraine). Our total economic interest in Golden Telecom
(Ukraine), consisting of two business divisions, Golden Telecom BTS and Golden
Telecom GSM, held directly and indirectly, is 69%. Prior to our IPO, we owned
75% of GTS Ukrainian TeleSystems LLC which in turn owns 49% of Golden Telecom
(Ukraine), and we own an additional 20% interest in Golden Telecom (Ukraine)
through two wholly owned subsidiaries. As part of the IPO, an affiliate of ING
Barings contributed its 25% interest in GTS Ukrainian TeleSystems LLC to a
wholly owned subsidiary of Golden Telecom, Inc. upon the consummation of the IPO
and received as partial consideration 420,000 newly issued shares of our common
stock. An additional 30,000 shares of our common stock were issued as final
settlement to the affiliate of ING Barings on March 1, 2000. Golden Telecom
(Ukraine) is co-managed by us and our Ukrainian partners. We control the Board
of Directors and appoint the Chief Financial Officer and a general manager for
each of the business divisions. The partners appoint the General Director. On
February 8, 2000, Golden Telecom Ukraine acquired 99% of Sovam Teleport Ukraine,
which will be integrated into the Data and Internet Services division within
Golden Telecom BTS. The remaining 1% is owned by SFMT-Rusnet, Inc., a wholly
owned subsidiary of Golden Telecom, Inc. On April 6, 2000, SFMT-Rusnet, Inc.
acquired a 51% ownership interest KIS, an ISP in Nizhny Novgorod which will be
integrated into the Data and Internet Services division.
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. We currently have ownership in fourteen Russian
regional cellular operators, however, seven of these ventures were abandoned
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effective August 31, 1999. 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 37% of our consolidated revenues for year ended December 31, 1999.
Our largest customer, Vimpelcom, together with its affiliate KB Impulse,
accounted for approximately 21% of our consolidated revenues for the year ended
December 31, 1999. No other customer, except for Sovintel, which accounted for
approximately 9% of our consolidated revenues, accounted for over 5% of our
consolidated revenues for the year ended December 31, 1999. We provide services
to our largest customers, including Vimpelcom and Sovintel, pursuant to
agreements which specify the services we must maintain for these customers, and
the tariffs that we charge for these services. Our principal customer segments
are:
Corporate Network Customers. Corporate network customers are typically
large multinational or Russian companies which require the full range of
voice and data services in several cities across Russia and other countries
of the Commonwealth of Independent States. While pricing is always a
factor, this segment places more value on network coverage, reliability as
defined by service level agreements, and ability to design, install and
maintain local area and wide area networks. These customers are willing to
make longer term commitments to integrated one-stop providers in exchange
for increased levels of service.
Corporate End-Users. Corporate end-users are foreign and Russian
enterprises with centralized operations, either in Moscow or in the
regions. These corporate end-users also require a full range of voice and
data services, but are more likely to purchase distinct services from
separate suppliers based on price. We attempt to acquire business from
corporate customers by providing superior technology, service levels and
pricing.
Fixed-Line Operators. Fixed-line operators are other
telecommunications providers, including the Moscow overlay operators,
alternative regional fixed-line operators and the local telcos. Price is
the primary factor in their purchase decision, and although long-term
contracts are rare, traffic volumes are large. Voice telephony is a
commodity for the customers in this segment.
Cellular Operators. Cellular operators are heavy consumers of our
local exchange capacity in Moscow because each cellular customer requires a
unique telephone number, which has made cellular operators important
contributors to our revenue. In contrast, our corporate customers may
require only one port, which can serve multiple end-users.
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, 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.
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REVIEW OF OPERATING COMPANIES
This section provides a more detailed review of our business on a
company-by-company basis.
Sovintel
Sovintel is a competitive local exchange carrier that has constructed and
operates a fully-digital overlay network in and around Moscow. Sovintel has a
limited network in St. Petersburg that is interconnected to Sovintel's Moscow
network to support new business customers and Sovintel's Moscow clients.
Sovintel services approximately 50,000 telephone numbers for business customers
and cellular providers. As of March 31, 2000, Sovintel had 339 employees.
Services and Customers
Local Access Services. Local telephone services are provided through the
interconnection of Sovintel's fiber optic ring with the switches of the CLEC
Services division of TeleRoss, MTU-Inform and other competitive local exchange
carriers that operate in Moscow. These switches provide access to local
telephone services through interconnections with the local public telephone
network and with the principal Moscow cellular providers.
International and Domestic Long Distance Services. Sovintel provides
domestic long distance services primarily through Rostelecom's network or
through the TeleRoss long distance network. Sovintel provides international
services primarily through its international gateway, which transmits
international traffic through dedicated channels leased from Rostelecom.
When an international call is placed to one of Sovintel's customers which
uses a number acquired from and serviced by the alternative local exchange
providers, TCM or MTU-Inform, the calling party has the option of dialing
through either the public city code (095) or Sovintel's exclusive city code
(501). When a caller chooses to dial through the 501 code, the call is connected
directly to Sovintel's dedicated network and can thereby avoid the frequently
congested public international and domestic long distance networks. Sovintel
receives a settlement from international carriers for calls routed through its
501 city code. International outbound switched voice traffic is routed by
destination based on either anticipated return traffic from the foreign operator
through Sovintel's 501 city code, or through least-cost routing. Sovintel
attempts to direct international traffic through particular foreign operators so
as to balance the settlements paid to and received from foreign operators.
Thereafter, Sovintel directs all international outbound switched voice traffic
in excess of that required to achieve the balance of the bilateral relationships
to the lowest cost route.
Data Services. Sovintel provides high-speed data services through
interconnection with the Data Services division of TeleRoss network and through
its own Moscow city data network. These services include a private line service,
an integrated voice and data integrated services digital network (ISDN)
connection, Internet, frame relay and asynchronous transfer mode service.
Private line channels, which are provided over dedicated leased lines, are
principally used by customers with high-volume data traffic needs, such as large
data providers.
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.
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Marketing and Pricing
Sales to customers are made through a direct sales force consisting of 27
account managers in Moscow and St. Petersburg, supervised by an expatriate
commercial director. Each of these account managers targets specific customer
groups and industry segments, and is supported by specialists in technical sales
support, marketing, customer service and user training. Sovintel's sales and
marketing personnel receive various financial incentives through a combination
of salary, commissions, bonuses and benefits. Sovintel offers one of the
broadest range of products among alternative providers, and frequently releases
new products and enhancements to existing products in order to strengthen its
market position. In addition, Sovintel trains its employees to provide customer
service at a level which is comparable to that provided by Western
telecommunications companies. As a result, we believe Sovintel has earned a
reputation for providing high-quality telecommunications services through an
experienced and professional customer service staff.
Sovintel prices its services at a premium to those offered by the national
monopoly operator and competitively with other alternative service providers
within the market. Sovintel offers customers volume discounts for exceeding
certain defined revenue thresholds. Although Sovintel publishes standard
tariffs, it does not require regulatory approval to change its tariffs.
Competition
Sovintel competes principally on the basis of price, network quality,
customer service and range of services offered. While Sovintel has a leading
position in the corporate market, it faces significant competition from other
service providers, including:
- Rostelecom, the Russian national international and domestic long distance
carrier;
- Comstar, a joint venture between GPT Plessey and Moscow City Telephone
Network;
- Combellga, a joint venture among Alcatel, Belgacom and Comincom;
- Global One, a subsidiary of the international venture Global One;
- TelMos, a joint venture among Moscow City Telephone Network, Rostelecom
and AT&T;
- MTU-Inform, a company currently controlled by Sistema;
- Petersburg Telephone Network, the incumbent local operator in St.
Petersburg; and
- Peterstar, an affiliate of PLD Telekom, which was acquired by the
Metromedia International Group, Inc. on September 30, 1999.
All the companies listed above provide Internet solutions, and some also
offer limited data transmission. Of Sovintel's competitors, Global One is a
market leader in Moscow in the data services market. Numerous small and
medium-sized Internet service providers compete for the corporate end-user
market.
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.
CLEC SERVICES DIVISION (FORMERLY TCM) OF TELEROSS
TeleRoss operates an integral part of our competitive local exchange
carrier services in Moscow through its division that absorbed TCM in the recent
merger of TCM into TeleRoss. Its infrastructure is integrated into the Moscow
city incumbent telephone network at 64 transit and local exchanges allowing it
to deliver traffic within the local public network. Our network also
interconnects directly with other fixed-line and cellular operators in Moscow
and with Rostelecom. We have invested in the infrastructure necessary to
construct 100,000 ports, each corresponding to a unique telephone number. We are
currently
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constructing an additional 50,000 ports of which 5,000 are complete with the
balance expected to be completed by the end of the third quarter of 2000.
Services and Customers
Local Access and Operating Services. Through this division of TeleRoss we
provide 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.
The divisions' customers primarily consist of cellular operators and
fixed-line operators.
Pricing
For each port customers have, in the past, paid a one-time port fee, a flat
monthly fee and per minute charges based on usage. However, recent pricing
trends are reflected in an increased emphasis on 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.
Competition
The division's main competitor is MTU-Inform, a Moscow City Telephone
Network affiliate that, until August 16, 1999, had been a 5% shareholder in TCM.
DATA AND INTERNET SERVICES DIVISION (FORMERLY SOVAM) OF TELEROSS
The Data and Internet Services division of TeleRoss provides data
transmission services, dedicated and dial-up Internet access, Internet on-line
services and information services. We use leased capacity on satellite and
land-based networks to provide these data services in 71 cities in Russia, 19
cities in Ukraine and 10 cities in Kazakhstan, Azerbaijan, Georgia, Uzbekistan
and Belorussia to create wide area networks. Through reciprocal cooperation
agreements with other international operators, the division provides
connectivity and delivery through its Commonwealth of Independent States-based
network.
Services and Customers
Data Transmission Services. The Data Services division of TeleRoss offers
traditional and high-speed data communications services, using X.25, frame relay
and asynchronous transfer mode technologies, to business customers who require
wide area networks to link computer networks in geographically dispersed
offices. Its major customers are large multinational corporations, financial
institutions and professional organizations. These customers require an
integrated product offering, including network access and hardware and software
solutions featuring installation, configuration and maintenance.
Private Line Services. This division 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. We offer 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 and MICEX (Moscow Interbank Currency Exchange).
Internet Services. We serve the professional Internet market with dedicated
access to our Internet transmission network. This division also offers dial-up
services, which consist of Russia-On-Line, a business we developed internally
that targets the higher end of the market, Glasnet, acquired June 30, 1999 a
business that targets mass market consumers and Nevalink, a small service
provider in St. Petersburg, which we acquired on December 1, 1999.
Russia-On-Line is the first Russian-English language, online service for
accessing the Internet through either dedicated private lines or dial-up
servers.
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In addition, the company has added vertical portals in the education and
computer gaming categories of the Russian Internet. These services are
distributed through our 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, 2000, the Data and Internet Services division of TeleRoss had 31,930
dial-up Internet subscribers.
In addition to Internet access services we offer web design, web hosting
and Internet Protocol (IP) based Virtual Private Networks (VPN) and intend to
increase our market position in these services to other Internet related
products and services with a focus on two potential customer bases:
Business to Business Services (B2B): In conjunction with our goal of
increasing our web design capabilities, we plan to reinforce our market
leadership position in web hosting through the construction of a Managed
Data Center. The Managed Data Center will also facilitate our entry into
the Application Service Provisioning (ASP) market. ASP refers to the
technique whereby application software and the related data files are
maintained by us on one of our servers on behalf of a client. Access to the
application and data is achieved through the Internet. We are currently
undertaking ASP trials and are in discussion with a number of potential
customers and partners for this type of application. The ASP market, which
addresses B2B customer needs, is expected to grow rapidly across Western
and Eastern Europe and we aim to be the market leader in this new segment
of the communications industry.
We are well positioned to build upon our existing large base of
corporate networking clients and dedicated Internet access customers to
increase our value added Internet services.
Business to Consumer Services (B2C): We will augment our dial-up
Internet access service with a strong focus on the Internet advertising
market. Portal development is a key element of our strategy and we intend
to devote significant resources to attracting and retaining visitors to our
portals and content sites.
Voice over Data Services. Our 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 efficiencies over circuit switching, and
offers this division 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, this
division distributes, installs, configures and maintains the equipment and
software necessary to support the data requirements of its customers.
This divisions' data customers primarily consist of corporate network and
corporate end-user customers. We also provide dial-up access to mass-market
consumers (B2C) and dedicated access to corporate end-users.
Marketing and Pricing
The Data and Internet Services division of TeleRoss, combined with the Long
Distance Services division of TeleRoss, share a dedicated sales force in Moscow,
Kiev and St. Petersburg, consisting of approximately 46 sales and account
managers who have financial incentives comparable to the sales account managers
of Sovintel. In addition to direct sales, our Internet access packages are
distributed in Moscow through large retailers. In the regions, TeleRoss and its
venture partners market the Data Services division's 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 both the Data and Internet and Long Distance Services
divisions of TeleRoss.
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We price 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. We have recently introduced a series of prepaid cards, which
entitle the holder to utilize a certain amount of hours of dial-up Internet
access.
Competition
Global One and Rostelecom are our primary competitors in the data services
market. Cityline and MTU-Inform are the divisions' primary competitors in the
Internet service provider market.
LONG DISTANCE SERVICES DIVISION OF TELEROSS (FORMERLY TELEROSS OPERATING
COMPANY)
The Long Distance Services division of TeleRoss operates a pan-Russian,
satellite-based, domestic long distance network and, in cooperation with
fourteen regional joint ventures, is a provider of local access, international
and domestic long distance services in the cities where the joint ventures are
located. The satellite-based network is comprised of regional earth stations and
VSATs supporting our long distance activities. Joint venture partners provide
local access in the cities where TeleRoss operates.
Services and Customers
Public Switched Voice Telephony Services. The division 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 our 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. We offer 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.
Our customers primarily consist of corporate network customers, corporate
end-users, fixed-line operators and cellular operators.
Marketing and Pricing
The Long Distance Services division of TeleRoss and its regional ventures
typically employ a direct sales force to market to corporate end-users. This
sales force is combined with the data services division and consists of
approximately 46 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 our regional partners. We have 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 we can adjust our prices to reflect the
integrated services that we provide.
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Competition
Rostelecom and Global One are the principal competitors to the Long
Distance Services division of TeleRoss. Rostelecom provides similar services in
all regions where we operate. Global One provides integrated voice and data
services in a limited number of regions.
GOLDEN TELECOM (UKRAINE)
Golden Telecom (Ukraine) has two operating divisions: Business Services
(CLEC and Data and Internet), 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, 2000, Golden Telecom (Ukraine) had 266
employees.
GOLDEN TELECOM BTS
Golden Telecom BTS, our Kiev-based competitive local exchange carrier, has
constructed a 123 kilometer fiber optic network that is interconnected to the
local public telephone network in Kiev and to our international gateway. As of
March 31, 2000, Golden Telecom BTS serviced over 2,400 telephone lines for
business customers. Golden Telecom BTS is integrating the network of Sovam
Ukraine into the existing Golden Telecom BTS network.
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 either through national carriers or local carriers.
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 acquired an intercity
operator's license allowing it to offer domestic long distance services directly
and is developing local interconnect in major Ukrainian centers. Domestic long
distances services from Kiev to Odessa are currently provided through
infrastructure leased from the national long distance carrier, Ukrtelecom, and
the Odessa local telco.
Data and Internet Services. Golden Telecom BTS provides a private line
service, an integrated voice and data ISDN connection, frame relay, x.25,
dial-up and dedicated internet and asynchronous transfer mode services. Private
line channels, which are provided over dedicated leased lines, are principally
used by customers with high-volume data traffic needs. The services and
customers of Sovam Ukraine are being integrated into Golden Telecom BTS.
Information Services. We offer a variety of information services addressing
the needs of professional markets. The Data and Internet Services division of
Golden Telecom BTS carries airline reservations systems, financial and banking
services, such as SWIFT and Reuters.
Golden Telecom BTS's customers primarily consist of corporate network
customers, corporate end-users, fixed-line operators and cellular operators.
Marketing and Pricing
While emphasizing the quality and reliability of its services, Golden
Telecom BTS positions itself as a piece competitive service provider to
businesses. Sales to our customers are made through a direct sales
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force consisting of eleven account managers in Kiev. Our direct sales force
employees are incentivized through salary, commission and bonuses.
Golden Telecom BTS has recently adopted a more aggressive pricing policy
for corporate end users in order to stimulate higher growth. As a carrier for
other telecommunications operators Golden Telecom BTS also offers a more
attractive pricing structure than the incumbent operators in order to attract
cellular and smaller public switched telecommunications network (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, and by providing integrated voice and
data services.
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 plans to commence operations in
Odessa in the third quarter of 2000 and is exploring the possibility of
expanding its operations in other major cities in Ukraine in accordance with the
terms of this license.
Services and Customers
Mobile Services. Golden Telecom GSM provides two types of mobile services
to its clients: a basic service for clients who utilize prepaid calling cards
and an expanded service for subscription clients, including international access
and value-added services such as voicemail, call forwarding, and conferencing.
International roaming services with 53 operators in 39 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 primarily the high-end mass market and business
customer segments.
Marketing and Pricing
Golden Telecom GSM's network uses the widest frequency bandwidth of all
cellular operators in Kiev, allowing it to deploy a high quality network
throughout the city and thus market itself as a quality service provider. Due to
the highly competitive nature of the cellular market in Kiev, Golden Telecom GSM
focuses on providing a flexible and competitive tariff structure at a slight
premium to other operators reflecting the high quality of its service. Golden
Telecom GSM targets two markets for its services. The subscription service is
marketed as a high-quality service to private and business users providing
clients with flexible tariff plans and a variety of value-added services. The
prepaid package is targeted at younger, entry-level users, offering them mobile
services without fixed contracts or monthly fees and with control over their
expenditures. Golden Telecom GSM makes wide use of advertising and brand
promotions in order to maintain its core customer base.
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Competition
The Ukrainian cellular market is very competitive. Ukrainian Mobile
Communications, Kyivstar GSM (Kyivstar) and URS operate GSM-900 networks in
Kiev. Ukrainian Mobile Communications and Kyivstar offer roaming services in
major cities within Ukraine, including Kiev. Ukrainian Mobile Communications
also operates a NMT-450 network throughout Ukraine. DCC operates an AMPS-800
network in Kiev and other regions in Ukraine.
VOSTOK MOBILE
Vostok Mobile is a holding company through which we operate six 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 of Russia. PrimTelefone also holds a license to operate
a cellular network based on the GSM-1800 technology in the Russian Far East. We
are currently reviewing plans for the deployment of this technology.
Restructuring of Certain Cellular Ventures
In the third quarter of 1999 we determined that the allocation of
sufficient resources to support seven of our cellular ventures, which are not
material to our financial condition or results of operations, was inconsistent
with our strategic plans. We therefore do not intend to provide any further
financial assistance to certain cellular ventures, other than the assumption of
certain debt obligations, and we are seeking to sell or otherwise dispose of our
ownership interests in these assets in furtherance of our plan of abandonment.
We have taken a charge to earnings of $18.5 million in the third quarter of
1999. We will continue to support only those cellular ventures where the
allocation of financial, operational and management resources is consistent with
our strategic plans.
Services and Customers
Vostok Mobile ventures offer basic mobile telephony services and value
added enhanced services such as voicemail and call forwarding.
Customers of the Vostok Mobile ventures consist of high-income individuals
and corporate end users.
Marketing and Pricing
In the regions operating in the AMPS-800 standard, Vostok Mobile's
marketing efforts have focused on the branding of its trade name, Unicel, which
is marketed and promoted at the local level by the joint ventures. By promoting
the Unicel trade name, local ventures can emphasize their relationship with the
other Unicel joint ventures, allowing customers to view these ventures as
integrated parts of a larger cellular organization. Each venture employs a
commercial director who is responsible for sales and marketing and oversees a
sales force of between two and four individuals.
The AMPS-800 ventures generally offer at least two tariff plans, a standard
tariff plan and a premium tariff plan. The standard tariff plan typically
provides for a monthly fixed fee, a small amount of a free airtime and a
per-minute fee. The premium tariff plan typically provides for a monthly fixed
fee, a larger amount of free airtime and a discounted per-minute fee. Most plans
price late night and weekend calls at off-peak rates.
PrimTelefone markets itself under its company name as the leading operator
in Vladivostok and the Primorski region of Russia. 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.
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Competition
Vostok Mobile is experiencing increased competition in the regional
cellular market and expects this competition to intensify. Each region in which
the cellular joint ventures operate is permitted to have at least five licensed
operators, including one operator for each of the Advanced Mobile Phone System
(AMPS), Nordic Mobile Telephone System (NMT) and Global System for Mobile
Communications (GSM) cellular standards and two operators in the Digital
Cellular System (DCS) cellular standard. Although not all the licensed entities
have started operations, each of our mobile ventures face competition from at
least one active operator, including Sotel, a loosely affiliated group of
operators in the federal NMT standard, Vimpelcom which operates networks of
various standards in numerous regions and Russian Telephone Development Company,
a subsidiary of MCT, which owns interests in cellular ventures throughout
Russia.
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 operate metropolitan area networks
(MANs) through Sovintel, the CLEC Services Division of TeleRoss (TCM) and Golden
Telecom (Ukraine). In each of these locations, we own or lease local access
lines and private branch exchanges (PBXs), local exchange switches, local
numbering capacity, fiber optic transmission rings and a fiber optic backbone.
Our facilities in Moscow are fully integrated with our domestic and
international networks, as well as with the networks of Rostelecom and the
Moscow city public telephone network. The elements of this Moscow MAN operated
by Sovintel and TCM include the following facilities:
- Access lines supporting approximately 55,000 local access numbers
connecting approximately 2,500 buildings to more than 400 PBXs. These
PBXs are often located on customer premises, to distribute advanced
telephony services in those premises to the end-users. These PBXs
function as switches that permit users to receive incoming calls, to dial
any other telephones on the premises that are connected to the PBX, to
access a line leading to another PBX or to access an outside line to the
public switched telephone network;
- A network of 16 hub PBXs connected to the fiber optic network,
complemented by a Nortel DMS 100E local switch with advanced
functionality. These hub PBXs act as traffic aggregators for our 400
PBXs;
- Fiber optic Synchronous Digital Hierarchy rings of over 750 kilometers
that carry our traffic between our network elements. This network
connects us to major office buildings, hotels, business centers, and
factories and is co-located with 22 central offices of Moscow City
Telephone Network, where we have access to copper wire facilities. The
copper wire facilities are used in circumstances where a customer's
requirements do not justify the immediate investment in fiber optic
facilities;
- A Nokia DX200 local and tandem switch, with 100,000 operational local
numbers and an additional 50,000 local numbers under construction, is
interconnected to the local public switched telephone network via the
backbone fiber optic network and leased channels; and
- A fiber optic backbone network based on Synchronous Digital Hierarchy
technology, consisting of approximately 450 kilometers of fiber optic
cable in service. Our network interfaces with over 70 local/tandem
switches of the Moscow public telephone network and Rostelecom's long
distance and international network to provide full interconnectivity
between the Nokia DX200 tandem switch and the public switched telephone
network.
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Sovintel provides local access for our data service offering in Moscow
generally using the same intracity transport and customer access network as
described above. This network is complemented by access lines leased from other
Moscow-based operators that possess their own local access networks in cases
where our data customers are not otherwise on our network. In these
circumstances, involving approximately half of our Moscow data customers, we
lease local access from Moscow City Telephone Network, Combelga, Macomnet,
Golden Line and other competitors. Thus, our customers for data services may use
the same local access as provided by their voice service providers.
Sovintel's St. Petersburg network consists of two hub PBXs interconnected
to the St. Petersburg public telephone network through St. Petersburg City
Telephone Network, with capacity for 2,000 local numbers, and twenty PBXs that
are installed on customer premises and within business centers. We have
constructed approximately 122 kilometers of fiber optic cable in and around St.
Petersburg, which is used to connect office buildings and business centers to
our network.
In Ukraine, Golden Telecom (Ukraine) provides local exchange carrier
services through our MAN in Kiev. Golden Telecom BTS provides last mile
connections (both copper and fiber optic) from three large PBX switches acting
as central offices in the city and a large quantity of smaller PBXs. In Kiev, we
have constructed a 123-kilometer fiber optic ring consisting of a main loop and
two sub-rings. We plan to extend the total fiber optic network to serve
additional customers. We have also constructed a data network consisting of
seven data switches.
We offer combined voice and data services with access to the local public
switched telecommunications network (PSTN) in 16 different major metropolitan
areas in Russia through our Data and Internet and Long Distance Services
divisions of TeleRoss. 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.
The Data Services division of TeleRoss (Sovam) also employs dial-up
Internet access servers using approximately 850 dial-up lines in 38 cities in
Russia Ukraine, Kazakhstan and Uzbekistan, 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.
INTERNATIONAL NETWORKS
Sovintel and the Long Distance Services division of TeleRoss provide
international switched voice services in Russia using leased transmission
capacity that they obtain from Rostelecom within Russia, and international
carriers beyond the Russian borders. Similarly, in Ukraine, Golden Telecom
(Ukraine) leases capacity from Ukrtelekom for domestic segments and
international operators for international segments. We operate two international
gateway switches. One switch, Sovintel's Nortel DMS 300, is located in Moscow,
and the other international gateway switch, Golden Telecom (Ukraine)'s Siemens
EWSD, is in Kiev. These international gateway switches carry our international
switched voice traffic to international operators with which we have
interconnect and settlement agreements.
The Data Services division of TeleRoss uses Nortel asynchronous transfer
mode Passport technology for its core data network to provide certain
international private line circuits and international data transmission
services, such as X.25, asynchronous transfer mode and frame relay and Cisco
routers for Internet access. The Data Services Division of TeleRoss leases the
domestic fiber optic capacity necessary to implement these service offerings
from Rostelecom, Ukrtelekom, Rascom and Sonera. International segments of these
offerings are provided in cooperation with international operators such as Cable
& Wireless, AT&T and Unisource. In Ukraine, international outgoing and incoming
traffic is similarly routed by Golden Telecom (Ukraine) via fiber optic cable to
GTS Wholesale Services, Cable & Wireless, Sovintel in Moscow and several other
international operators. In addition to their terrestrial network, the Data and
Long Distance Services divisions of TeleRoss also use satellite transmission to
offer the same
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services between Moscow and other major Commonwealth of Independent States
cities such as Almaty, Tashkent, Tbilisi and Baku.
Additionally we have acquired STM-16 capacity (2.4 Gbps) from Moscow to
Stockholm from Sonera Corporation. In Stockholm this capacity will connect
directly to the Global TeleSystems (GTS) network, providing access to
complementary broadband Internet and data networks in Europe and the United
States of America. The capacity, on the Sonera fiber optic network, was acquired
on February 7, 2000, through a 10 year lease agreement with an option to renew
for 5 years. Initially the equivalent of an STM-1 (155 Mbps) will be activated
and the capacity will be incrementally upgraded to STM-4 (622 Mbps) and finally
STM-16 as required.
DOMESTIC LONG DISTANCE NETWORKS
TeleRoss has developed a land-based regional network to provide domestic
long distance and data services in Russia. Its land-based domestic long distance
network consists primarily of fiber optic capacity leased from Rostelecom. We
use this land-based network primarily to serve our regional Data and Internet
businesses. This network together with our satellite-based network currently
accesses more than 100 different points of presence across Russia and in certain
other large Commonwealth of Independent States cities. We may further develop
our land-based network to meet the demands of our customers, especially data
users.
TeleRoss also leases capacity on a satellite transponder (72 MHZ) from
Intelsat. We recently signed a five-year lease for this capacity, which expires
in March 2004. The coverage area of this satellite, or "footprint", includes the
full territory of Russia and other countries of the Commonwealth of Independent
States. Using this leased satellite transponder, TeleRoss serves fourteen
Regional Earth Stations (RESs) and 26 VSAT stations across the country. A VSAT
is a relatively small satellite antenna, typically 1.5 to 5 meters in diameter,
used primarily for satellite-based point-to-point applications. These RESs and
VSATs interconnect with our central hub in Moscow and with local facilities in
the areas where the RESs and VSATs are located. TeleRoss's central hub in Moscow
interconnects with Sovintel's and the CLEC Services division of TeleRoss'
Moscow-based international, domestic long distance and local facilities.
The Long Distance and Data and Internet Services divisions of TeleRoss have
developed their land-based technology in parallel with its satellite network for
a number of reasons, including the following:
- Fiber transmission is more suitable for data applications than satellite
transmission because of fewer transmission delays;
- High entry cost for VSAT technology for customers with limited capacity
requirements; and
- Because there is no "public data network", we need to establish
land-based points of presence in each location where data services are
required.
We are implementing a strategy to integrate the land-based and satellite
networks and to integrate the different technologies integral to each, thereby
developing a single, multi-purpose network. The technologies required to carry
voice over packet networks, such as voice over frame relay, voice over Internet
Protocol and voice over asynchronous transfer mode, have become available and
allow for such network integration. This integration may benefit us in different
ways:
- Creates a possibility to carry voice "on net" between multiple locations.
This application was not possible with a satellite-only network, because
the time delays in consecutive satellite "hops" are impractical for
efficient communications;
- Creates a possibility to terminate traffic in significantly more points
of presence. Points of presence established originally for data services
may be extended to carry voice over an interface to a local voice
operator, allowing us to extend our carrier's carrier services;
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- Improves network resilience both for voice and data networks through the
optimal combination of land-based fiber and satellite transport capacity;
and
- Enables us to operate an integrated network over which we could offer
voice, data and Internet services.
We have already upgraded 18 points of presence to carry packet switched
voice, and we intend to upgrade other points of presence.
CELLULAR NETWORK
Our cellular operations are each comprised of a mobile switching center and
a network of radio base stations providing coverage to each licensed region. In
most cases, base stations are interconnected via microwave transmission
facilities although some are connected to their associated mobile switching
centers with fiber optic or copper facilities. Our most extensive cellular
networks have been deployed in Kiev and the Primorski region of the Russian Far
East.
Golden Telecom (Ukraine) operates a GSM-1800 network in Kiev and the
immediately surrounding areas with a mobile switching center and 58 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 the international airport,
Borispol.
PrimTelefone, one of our Vostok Mobile ventures, operates a NMT-450 network
in Vladivostok and nine other cities in the Primorski region, including the road
between Vladivostok and Ussuriisk and Valdivostok and Nakhodka. Eight base
stations are deployed in the Vladivostok metropolitan area and fifteen base
stations cover other cities in the Primorski region. PrimTelefone also holds a
license to operate a GSM-1800 network in the Russian Far East.
EMPLOYEES
On March 31, 2000, we and our consolidated subsidiaries employed a total of
680 full-time employees and our joint ventures employed 729 full-time employees.
On March 31, 1999, we and our consolidated subsidiaries employed a total of 523
employees and our joint ventures employed 886 full-time employees. Included in
the number of full-time employees were 24 and 29 expatriates as at March 31,
2000 and March 31, 1999, respectively.
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 TeleRoss (and former TCM
and Sovam). The right to occupy and utilize the space is through a fifty-five
year lease, which expires in 2050.
Golden Telecom Ukraine occupy office and technical premises located in Kiev
under long-term leases which expire in 2006, additionally they have leases on a
dealer-center and a shop premise.
Sovintel leases its offices, which occupy approximately two floors of a
building in central Moscow under a cancelable lease, which expires in 2004,
additionally they have leases on a number of technical premises.
Three of our cellular joint ventures own small premises, which serve as
their main offices. We lease various buildings and space in buildings throughout
the Commonwealth of Independent States that we use for our offices. Beside 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 Commonwealth of Independent States.
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We possess the right occupy and utilize two floors, 1886 square meters, of
a building in Moscow which serve as the principal sales office for TeleRoss and
which houses our representative office. The right to occupy and utilize the
space is through a three year lease. We believe that our facilities are adequate
for our current needs.
LEGAL PROCEEDINGS
Certain of our employees have been requested by Russian governmental
authorities to provide information in connection with inquiries into the
activities of our former partners in GTS-Vox, which company owned our interests
in TCM prior to TCM's merger into TeleRoss. The authorities' inquiries have
raised issues about the formation of TCM and the sale of our partners' interest
in GTS-Vox to us, including issues concerning Russian antimonopoly and
securities filings and the commercial relationship between TCM and the local
telephone network in Moscow. We have cooperated and intend to continue to
cooperate with any legitimate governmental inquiries.
We are occasionally involved in routine litigation concerning various
matters. However, we do not currently consider any of this litigation to be
material in the aggregate.
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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. Each
director will serve until the next annual meeting of the stockholders or until
he or she is succeeded by another qualified director who has been elected.
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>
Ashley Dunster....................... 37 Vice President of Global Private Equity for Capital
International Research, Inc.
Izzet Guney.......................... 41 Director of the EBRD Telecoms, Informatics, Media
Sector
Alexandr M. Knaster.................. 41 Chief Executive of Alfa Bank, Moscow
Stewart J. Paperin................... 52 Chief Financial Officer of the Soros Foundation
Grier C. Raclin...................... 48 Senior Vice President -- External Affairs, General
Counsel and Corporate Secretary of GTS
Stewart P. Reich..................... 56 President and Chief Executive Officer of Golden
Telecom, Inc.
Robert A. Schriesheim................ 40 Executive Vice President -- Corporate Development and
Chief Financial Officer of GTS
H. Brian Thompson.................... 61 Chairman of the Board and Chief Executive Officer of
GTS
Jeffrey H. Von Deylen................ 36 Senior Vice President of Finance of GTS
</TABLE>
Ashley Dunster was elected to our Board of Directors in January 2000. Mr.
Dunster has served as a member of the Board's Audit Committee and as Chair of
the Compensation Committee since being elected a Director. Mr. Dunster is Vice
President of Global Private Equity for Capital International Research, Inc., a
subsidiary of The Capital Group Companies, Inc. Mr. Dunster is responsible for
private equity investments in Eastern Europe and Africa. Prior to joining
Capital International Research in 1997, Mr. Dunster spent four years at the
European Bank for Reconstruction and Development (EBRD) where he was a principal
banker in the Early Stage Equity Team, with private equity responsibilities
covering Russia, Kazakhstan, Hungary and Slovenia.
Izzet Guney was elected to our Board of Directors in January 2000. Mr.
Guney has served as Chair of the Board's Audit Committee since being elected a
Director. Mr. Guney is the director of the EBRD Telecoms, Informatics, Media
(TIM) Sector and has worked for the ERBD since 1997. Mr. Guney is responsible
for the overall supervision of origination, structuring and execution of deals
in EBRD's Region for the TIM sector. Prior to joining EBRD, Mr. Guney served as
Vice President of Corporate Development of Paging Network (PageNet)
International and Executive Director of SBC Communications from 1995 to 1996, as
Director from 1994 to 1995, and Associate Director and Manager of SBC's Mergers
and Acquisitions from 1991 to 1994.
Alexandr M. Knaster was elected to our Board of Directors in September 1999
and has served on the Board's Executive Committee since November 1999 and on the
Compensation Committee since January 2000. Mr. Knaster has been Chief Executive
of Alfa Bank, a commercial bank headquartered in Moscow, since October 1998.
Prior to joining Alfa Bank, from 1995-1998, Mr. Knaster was President and Chief
Executive Officer of Credit Suisse First Boston (Moscow) and was responsible for
that investment banking firm's operations in Russia and other countries of the
Commonwealth of Independent States. Before his tenure with Credit Suisse First
Boston (Moscow), Mr. Knaster spent ten years in the investment banking industry
as director with Deutsche Morgan Grenfell in Moscow, as managing director with
Bankers Trust in New York and London, and as managing director and partner with
Simmons & Company International in Houston.
Stewart J. Paperin was elected to our Board of Directors in January 2000.
Mr. Paperin has also served as a director of GTS from March 1997. Mr. Paperin
serves as Chief Financial Officer of the Soros
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Foundations. In addition, he has served as the President of Capital Resource
East since October 1993. Prior to that, Mr. Paperin was President of Brooke
Group International from 1990 to 1993 where he was responsible for investments
in the former Soviet Union. Mr. Paperin also served as Chief Financial Officer
of Western Union Corporation from 1989 to 1990. Mr. Paperin serves as a director
of Global TeleSystems, Inc., Penn Octane Corporation and Svyazinvest as well as
several emerging Internet and telecommunication companies.
Grier C. Raclin was elected to our Board of Directors in June 1999. Mr.
Raclin has served as Global TeleSystems, Inc. Senior Vice President -- External
Affairs and General Counsel since September 1997, and was elected Corporate
Secretary of Global TeleSystems, Inc. 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. Mr. Raclin received his undergraduate and law
degrees from Northwestern University and attended the University of Chicago
School of Business Executive Programs.
Stewart P. Reich was elected to our Board of Directors in June 1999 and
became President and Chief Executive Officer of Golden Telecom, Inc. in June
1999. Mr. Reich has served on the Board's Executive Committee since January
2000. Prior to joining the Company as President and Chief Executive Officer, Mr.
Reich was with GTS as President/GTS-CIS from September 1997 until September
1999. Prior to joining GTS, Mr. Reich completed 34 years of service with AT&T.
His last assignment was from September 1992 to August 1997 as President of Utel,
a joint venture of AT&T, Deutsche Telekom, PTT Telecom (Netherlands) and
Urktelekom, a Ukrainian company which provides international and domestic
services in Ukraine.
Robert A. Schriesheim was elected to our Board of Directors in September
1999. Mr. Schriesheim has been Executive Vice President and Chief Corporate
Development Officer of GTS in February 1999. In September 1999, Mr. Schriesheim
was appointed Executive Vice President, Corporate Development and Chief
Financial Officer of GTS. Prior to GTS, from 1997, he was President, Chief
Executive Officer and Director of SBC Equity Partners, Inc., a private equity
firm affiliated with Sanwa Business Credit Corporation that invests in
technology-based service and manufacturing companies. From 1996-1997, Mr.
Schriesheim was Vice President -- Corporate Business Development for Ameritech
Corp., the regional Bell operating company, and Managing Director -- Ameritech
Development Corporation. From 1993-1996, he was Vice President -- Acquisitions
and New Business Development (1993-1994) and Vice President -- Global Corporate
Development (1995-1996) of A.C. Nielsen Company, a consumer marketing research,
information and decision-support service company.
H. Brian Thompson was elected Chairman of our Board of Directors in
September 1999 and has served as Chair of the Board's Executive Committee since
November 1999. In March 1999, Mr. Thompson was elected Chairman of the Board and
Chief Executive Officer of GTS. From January to March 1999, he served as
non-executive chairman of Telecom Eireann. From 1991 until June 1998, Mr.
Thompson was Chairman and Chief Executive Officer of LCI International, Inc., a
provider of telecommunications services in the United States and to more than
230 international locations. In June 1998, LCI was acquired by Qwest
Communications International, Inc. and Mr. Thompson became Vice Chairman of
Qwest. He resigned from the Board of Directors of Qwest in December 1998. He
serves as a member of the boards of directors of Bell Canada International,
Inc., PageNet do Brazil, DynCorp and Williams Communications Group, Inc. He also
serves as Co-Chairman of the Global Information Infrastructure Commission and
served as Chairman of the Advisory Committee for Telecommunications for Ireland
Department of Public Enterprise. Mr. Thompson is chairman of the Executive
Committee of the Board of Directors for GTS.
Jeffrey H. Von Deylen was elected to our Board of Directors in January 2000
and has served as a member of the Board's Audit Committee since being elected a
Director. Mr. Von Deylen joined GTS as Senior Vice President, Finance in October
1999. Prior to his appointment, Mr. Von Deylen was Vice President, Corporate
Controller at Qwest Communications International, Inc. He was with Qwest and LCI
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<PAGE> 68
International, which Qwest acquired in 1998, for six years. Before his tenure at
Qwest and LCI, Mr. Von Deylen was with Arthur Andersen, the auditing firm.
EXECUTIVE OFFICERS
The following are our executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart P. Reich...................... 56 President and Chief Executive Officer
Stan M. Abbeloos...................... 48 Chief Operating Officer
David J. Wisher....................... 44 Chief Financial Officer and Treasurer
Jeffrey A. Riddell.................... 39 General Counsel and Secretary
Jeffrey L. Howley..................... 40 Chief Operating Officer of Golden
Telecom Ukraine
Kevin J. Cuffe........................ 40 Commercial Director of Sovintel
</TABLE>
Stewart P. Reich joined Golden Telecom, Inc. as President and Chief
Executive Officer in June 1999. Mr. Reich has served on the Board's Executive
Committee since January 2000. Prior to joining the Company as President and
Chief Executive Officer, Mr. Reich was with GTS as President/GTS-CIS from
September 1997 until September 1999. Prior to joining GTS, Mr. Reich completed
34 years of service with AT&T. His last assignment was from September 1992 to
August 1997 as President of Utel, a joint venture of AT&T, Deutsche Telekom, PTT
Telecom (Netherlands) and Urktelekom, a Ukrainian company which provides
international and domestic services in Ukraine.
Stan M. Abbeloos joined Golden Telecom, Inc. as Chief Operating Officer in
June 1999. Prior to that, Mr. Abbeloos was appointed General Director of Sovam
Teleport (GTS-CIS) from October 1997 and also Deputy General Director of
TeleRoss from October 1998. Prior to that, Mr. Abbeloos was Commercial Director
of Sovintel from July 1996 until October 1997. 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.
David J. Wisher joined Golden Telecom, Inc. as Chief Financial Officer in
June 1999. Prior to that, Mr. Wisher was with GTS as Vice
President-Finance -- GTS-CIS in January 1997 through June 1999. From 1992
through 1996, Mr. Wisher was the Assistant Controller for Andrew Corporation, a
telecommunications equipment manufacturer that has made extensive investments in
Russia.
Jeffrey A. Riddell joined Golden Telecom, Inc. as General Counsel and
Secretary in June 1999. Prior to that, Mr. Riddell was with GTS as Legal
Director -- GTS-CIS from August 1998 until June 1999, and Deputy Director of the
Legal Department -- GTS-CIS in July 1997 and was appointed as Legal
Director -- GTS-CIS in August 1998. Prior to joining GTS, Mr. Riddell was in
private practice from May 1996 until July 1997 with Salans, Hertzfeld &
Heilbronn. Prior to that, he worked at the Pacific Law Center in Vladivostok and
Khabarovsk from May 1994 through June 1996.
Jeffrey L. Howley joined Golden Telecom, Inc. as Chief Operating Officer of
Golden Telecom Ukraine GSM division in September 1999. Prior to that, Mr. Howley
served in the same capacity within GTS-CIS, since May 1999. Mr. Howley joined
GTS in May 1995, initially as Director of Operations and Venture Support based
in Moscow. From July 1997 he served as Cellular Business Director based in Kiev
and from January 1998 served as Chief Operating Officer of Golden Telecom
Ukraine. Prior to May 1995, Mr. Howley served as Executive Vice President of
Russian Telecom, Inc. based in Houston, Texas.
Kevin J. Cuffe joined Golden Telecom, Inc. as Commercial Director for
Sovintel in September 1999. Prior to that, Mr. Cuffe had served in the same
capacity within GTS-CIS, since joining in April 1998. From December 1996 until
April 1998, Mr. Cuffe was the AT&T Business Market Division's Area Director for
Southern Europe, Middle East and Africa. Prior to that, he served with AT&T
Russia as Projects Director -- New Ventures, based in Moscow from April 1995
until October 1996.
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<PAGE> 69
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each non-employee member of our board of directors will receive an annual
retainer fee of $15,000. In addition, each non-employee member of the board of
directors will receive a fee of $1,000 for each board meeting attended in person
and a fee of $500 for each board meeting attended by telephone. Non-employee
members will also receive a fee of $750 for each board committee meeting
attended in person and a fee of $500 for each board committee attended by
telephone. However, board committee fees will not be paid if the meeting is held
on the same day as a board meeting.
Directors who are also GTS employees have waived their rights to all forms
of Director compensation, including rights to stock options, which is in line
with GTS company policy. Mr. Dunster has also waived his rights to all forms of
Director compensation, including rights to stock options, which is in line with
Capital International Research, Inc. policy.
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
1997, 1998, and 1999. Each bonus listed below represents a cash bonus paid in
the year indicated for services rendered in the immediately preceding year
except for bonuses paid in 1999, which is for services rendered in 1998 and the
first three quarters of 1999. The number of securities underlying stock options
refers to shares of GTS and GTI common stock underlying stock options awarded
under the GTS and GTI Stock Option Plan.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION NUMBER OF
----------------------------------------- RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SAR COMPENSATION(1)
------------------ ---- -------- -------- ------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart P. Reich............ 1999 $268,750 $213,006 $1,349,915(3) 56,746 500,000(9) $5,451
President and Chief 1998 243,750 98,300 187,008(3) 0 300,000(10) 5,197
Executive Officer(2) 1997 78,333 75,000 59,772(3) 0 225,000(10) 384
Stan Abbeloos............... 1999 $182,000 $102,450 $ 794,340(4) 19,673 300,000(9) $ 0
Senior Vice President and 1998 173,837 66,700 93,600(4) 0 60,000(10) 0
Chief Operating Officer 1997 160,000 64,000 93,600(4) 0 72,000(10) 0
David Wisher................ 1999 $158,500 $ 55,658 $ 455,294(5) 14,509 300,000(9) $4,332
Senior Vice President,
Chief 1998 152,999 35,000 225,373(5) 0 60,000(10) 4,418
Financial Officer and 1997 145,000 15,000 170,472(5) 0 54,000(10) 4,000
Treasurer
Jeff Howley................. 1999 $140,000 $ 73,339 $ 257,637(6) 6,784 110,000(9) $4,245
Chief Operating Officer of 1998 140,000 32,942 599,276(6) 0 36,000(10) 4,269
Golden Telecom (Ukraine) 1997 121,233 39,600 94,807(6) 0 27,000(10) 4,000
Kevin Cuffe................. 1999 $137,500 $ 62,233 $ 134,726(8) 3,337 60,000(9) $4,134
Commercial Director -- 1998 101,250 50,000 88,332(8) 0 28,000(10) 2,205
Sovintel(7) 1997 0 0 0 0 0 0
</TABLE>
---------------
(1) Amounts disclosed represent the sum of premiums paid by the company for $1
million in term life insurance for each named executive officer and
contributions by the company under the 401(k) Plan to each named
executive's account, except, Mr. Abbeloos who does not participate in the
401(k) Plan because of his non-US citizenship. In each case in which the
company paid 401(k) Plan contributions, $4,000 was paid in 1999, 1998, and
1997 to the named executive officers, except for Mr. Reich in 1997 and Mr.
Cuffe in 1998, as they had not completed an entire year of service with the
company.
(2) Mr. Reich commenced his employment with the company in 1997.
(3) For 1999, the amount disclosed includes an overseas living allowance of
$72,000, rent on a residence in Moscow of $87,000, and stock option income
of $1,208,500.
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<PAGE> 70
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.
For 1997, the amount disclosed includes an overseas living allowance of
$24,000 and rent on a residence in Moscow of $30,300.
(4) For 1999, the amount disclosed includes an overseas living allowance of
$42,000, rent on a residence in Moscow of $48,900 and stock option income
of $699,440.
For 1998, the amount disclosed includes an overseas living allowance of
$42,000 and rent on a residence in Moscow of $51,600.
For 1997, the amount disclosed includes an overseas living allowance of
$42,000 and rent on a residence in Moscow of $51,600.
(5) For 1999, the amount disclosed includes an overseas living allowance of
$53,400, rent on a residence in Moscow of $57,072, dependent tuition of
$30,400, and stock option income of $283,400.
For 1998, the amount disclosed includes an overseas living allowance of
$53,400, rent on a residence in Moscow of $90,000, a tax equalization
payment of $42,271 that compensated Mr. Wisher for the higher taxes he pays
because he resides in Moscow instead of the United States, and dependent
tuition of $22,500.
For 1997, the amount disclosed includes an overseas living allowance of
$53,400, rent on a residence in Moscow of $90,000 and dependent tuition of
$25,300.
(6) For 1999, the amount disclosed includes an overseas living allowance of
$53,400, rent on a residence in Moscow of $50,400, and stock option income
of $144,233.
For 1998, the amount disclosed includes an overseas living allowance of
$43,429, rent on a residence in Moscow of $49,800, and stock option income
of $423,486.
For 1997, the amount disclosed includes an overseas living allowance of
$42,000 and rent on a residence in Moscow of $40,000.
(7) Mr. Cuffe commenced his employment with the Company in 1998.
(8) For 1999, the amount disclosed includes an overseas living allowance of
$42,000 and rent on a residence in Moscow of $60,000.
For 1998, the amount disclosed includes an overseas living allowance of
$31,500 and rent on a residence in Moscow of $45,000
(9) Shares of common stock underlying stock options awarded under the Equity
Participation Plan.
(10) Nonvested options at December 31, 1999 were surrendered for a mixture of
restricted shares and options to purchase shares of Golden Telecom, Inc.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock option grants of GTI
common stock to the five most highly compensated officers in 1999 under the GTS
stock option plan. The exercise price for all of the GTI stock options awarded
approximated the fair market value of GTI common stock on the date of grant.
One-third of the options noted in the second column will vest on September 30,
2000. Thereafter, the options will vest in equal monthly installments for a
period of 24 months. The present value of each grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
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<PAGE> 71
weighted-average assumptions: dividend yield 0%, expected volatility of 1,
risk-free interest rate of 5.90% and expected life of five years.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES TO GTI
UNDERLYING EMPLOYEES IN EXERCISE OR BASE EXPIRATION GRANT DATE
OPTIONS GRANTED FISCAL YEAR PRICE (PER SHARE) DATE PRESENT VALUE
--------------- --------------- ----------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Stewart P. Reich......... 500,000 18.28 $12.00 10/1/09 $4,025,000
Stan Abbeloos............ 300,000 10.97 12.00 10/1/09 2,415,000
David Wisher............. 300,000 10.97 12.00 10/1/09 2,415,000
Jeff Howley.............. 110,000 4.02 12.00 10/1/09 885,500
Kevin Cuffe.............. 60,000 2.19 12.00 10/1/09 483,000
</TABLE>
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 and
GTI stock options exercised by the five most highly compensated officers during
1999, the number of options under the GTS and GTI Stock Option Plan held by such
persons at December 31, 1999, and the value of all unexercised options held by
such persons as of that date. The value of the options stated in the last column
is based on the closing price of $34.75 for GTS on the New York Stock Exchange
and the closing price of $32.00 for GTI on the Nasdaq National Stock Market on
December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END AT FY-END
ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Stewart P. Reich........ 50,000 $1,208,500 162,500/500,000 $3,870,500/$10,000,000
Stan Abbeloos........... 28,000 699,440 28,000/300,000 652,960/ 6,000,000
David Wisher............ 10,000 283,400 37,000/300,000 902,845/ 6,000,000
Jeff Howley............. 6,200 144,233 19,300/110,000 462,586/ 2,200,000
Kevin Cuffe............. -- -- 7,000/ 60,000 147,700/ 1,200,000
</TABLE>
Exercisable options in the above table represent options granted by GTS and
unexercisable options represent options granted by Golden Telecom, Inc.
STOCK-RELATED COMPENSATION
Before our initial public offering, our executive officers and some of our
employees participated in GTS stock option plans, pursuant to which they were
granted options to purchase GTS common stock. At the time of the consummation of
the initial public offering on September 30, 1999, such persons surrendered all
their GTS options that did not vest by the end of 1999, and received restricted
shares and options to purchase shares of Golden Telecom. These restricted shares
and the shares underlying these options represent 12% of our fully diluted share
capital immediately after the initial public offering. These restricted shares
and options are intended as long-term compensation and to align the interests of
the grantees with our stockholders.
The restricted shares of Golden Telecom vest on September 30, 2001. Each of
the Golden Telecom options have an exercise price equal to the public offering
price in the IPO, or $12.00 per share. One-third of these options will vest on
September 30, 2000. Thereafter, the options will vest in equal monthly
installments for a period of 24 months.
GOLDEN TELECOM, INC. EQUITY PARTICIPATION PLAN
Prior to the effective date of our initial public offering, the independent
directors on the compensation committee of our parent company and, at the time,
our sole shareholder and our board of directors approved the 1999 Equity
Participation Plan of Golden Telecom, Inc., which we also refer to as the Equity
70
<PAGE> 72
Plan. A total of 4,023,551 shares of common stock are reserved for issuance
under the Equity Plan. The principal purposes of the Equity Plan is to align the
interests of our directors, officers, and employees with the interest of our
shareholders. The Equity Plan provides incentives for our officers and employees
through granting of options and restricted stock, and induces officers and
employees to remain with the 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 and may be categorized as independent in
accordance with NASD rules and sundry securities and tax legislation), by
providing for the automatic grant of options to independent directors.
Under the Equity Plan, not more than 4,023,551 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 4,023,551 shares, not more than 402,355 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 750,000 (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 was
filed as an exhibit to the registration statement dated September 30, 1999.
Administration
The compensation committee of the board of directors or another committee
or subcommittee appointed under the terms of the Equity Plan (which we refer to
as the Committee) which other committee or subcommittee consists solely of two
or more members of the board of directors, each of whom is both a "non-employee
director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (which we refer to as the Exchange Act) and an "outside director" for
the purposes of Section 162(m) of the Internal Revenue Code (which we refer to
as the Code), will administer the Equity Plan with respect to grants to our
employees or consultants and the full board of directors will administer the
Equity Plan with respect to options granted to independent directors.
Notwithstanding the foregoing, the full board of directors may administer
the Equity Plan with respect to grants to our employees or consultants, except
with respect to matters which under Rule 16b-3 of the Exchange Act or Section
162(m) of the Code are required to be determined by the Committee.
Subject to the terms and conditions of the Equity Plan, the Committee has
the authority to select the employees and consultants, if any, to whom awards
are to be made, to determine the number of shares to be subject thereto and the
terms and conditions thereof, to interpret the provisions of the Equity Plan,
and to make all other determinations and to take all other actions necessary or
advisable for the administration of the Equity Plan with respect to grants or
awards made to employees or consultants. The Committee (and the board of
directors) is also authorized to adopt, amend and rescind rules relating to the
administration of the Equity Plan. Notwithstanding the foregoing, the Board
shall conduct the general administration of the Equity Plan with respect to
options granted to independent directors.
Eligibility
Options and restricted stock under the Equity Plan may be granted to
individuals who are our employees, directors or consultants (or employees or
consultants of any of our current or future subsidiaries) selected by the
Committee for participation in the Equity Plan. In addition, the Equity Plan
provides for certain automatic grants of non-qualified stock options to
independent directors.
Independent Directors
The Equity Plan provides for automatic grants of non-qualified stock
options to independent directors. Each person who is elected to serve as an
independent director will receive, as of the date of such election,
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<PAGE> 73
an option to purchase 10,000 shares of common stock, and will receive, an option
to purchase 2,500 shares of common stock on a date which occurs during the first
quarter of each calendar year after such initial election. Each such option will
have a per-share exercise price equal to the fair market value per share at the
close of the trading day previous to the day that the option is granted. Each
such option will become exercisable in accordance with the terms of the Equity
Plan. No portion of an option granted to any independent director shall be
exercisable ten years from the date of grant or, except under certain
circumstances, after the termination of the independent director's services as
our director.
Awards Under the Equity Plan
The Equity Plan provides that the Committee may grant or issue stock
options and restricted stock, or a combination thereof, to any eligible
employee, director or consultant. Each such award will be set forth in a
separate agreement with the person receiving the award and will indicate the
type, terms and conditions of the award.
Nonqualified Stock Options, which we also refer to as NQSOs, will provide
for the right to purchase common stock at a specified price which, except with
respect to NQSOs intended to qualify as performance-based compensation under
Section 162(m) of the Code, may be less than fair market value on the date of
grant, and usually will become exercisable (in the discretion of the Committee)
in one or more installments after the grant date, subject to the participant's
continued employment with us and/or subject to the satisfaction of individual
performance targets established by the Committee. NQSOs may be granted for any
term specified by the Committee. Notwithstanding the foregoing, NQSOs granted to
independent directors shall be subject to the terms described above.
Incentive Stock Options, which we also refer to as ISOs, will be designed
to comply with certain restrictions contained in the Internal Revenue Code.
Among such restrictions, ISOs: (1) must have an exercise price not less than the
fair market value of a share of common stock on the date of grant, (2) may only
be granted to employees, (3) must expire within a specified period of time
following the optionee's termination of employment, and (4) must be exercised
within ten years after the date of grant; but may be subsequently modified to
disqualify them for treatment as ISOs. In the case of an ISO granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all of our classes of stock, the Equity Plan provides that the
exercise price must be at least 110% of the fair market value of a share of
common stock on the date of grant and the ISO must expire upon the fifth
anniversary of the date of its grant.
Restricted Stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Committee. Restricted stock, typically, may be repurchased by us at the
original purchase price if the conditions or restrictions are not met. In
general, restricted stock may not be sold, or otherwise transferred, until
restrictions are removed or expire. Purchasers of restricted stock, unlike
recipients of options, will have voting rights and will receive dividends in
escrow prior to the time when the restrictions lapse.
Securities Laws and Federal Income Taxes
Securities Laws. The Equity Plan is intended to conform to the extent
necessary with all provisions of the Securities Act and the Exchange Act and any
and all regulations and rules promulgated by the SEC thereunder, including,
without limitation, Rule 16b-3. To the extent permitted by applicable law, the
Equity Plan and options or restricted stock granted thereunder shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.
General Federal Tax Consequences. Under current federal laws, in general,
recipients of awards and grants of nonqualified stock options and restricted
stock under the Equity Plan are generally not taxable at the time of grant but
are taxable under Section 83 of the Code upon their receipt of Class A common
stock or cash with respect to the exercise or vesting of such awards or grants
and, subject to Section 162(m) of the Code, we will be entitled to an income tax
deduction with respect to the amounts taxable to these recipients. Under
Sections 421 and 422 of the Code, recipients of ISOs are generally not
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<PAGE> 74
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 has approved a 401(k) retirement savings plan (which
we refer to as the 401(k) Plan), which will be a defined contribution retirement
benefit plan that we intend to have qualified for favorable tax treatment under
Section 401 of the Code. All employees of Golden Telecom, Inc., subject to
certain regulatory qualifications, who are US citizens and at least 21 years of
age and have completed the minimum service requirement will be eligible to
participate in our 401(k) Plan. The 401(k) Plan participants will be able to
defer pre-tax income by contributing to the plan up to the maximum amount
permitted by law. After-tax contributions will also permitted under the 401(k)
Plan. We intend to match 50% of each participant's pre-tax contribution to the
401(k) Plan, up to 5% of the participant's total compensation. In addition, we
may, in our sole discretion and in a nondiscriminatory manner, contribute
additional amounts as profit sharing to each participant's account. The amounts
deposited into each participant's account will be invested among various
investment options according to the direction of the participant. Each
participant's pre-tax and after-tax contributions will be immediately vested and
nonforfeitable. Our matching contribution and profit sharing allocations to each
participant's account will not vest until the participant has completed three
years of service either with us or with GTS before this offering, at which time
the matching contribution and profit sharing allocations become 100% vested.
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<PAGE> 75
PERFORMANCE GRAPH
The following performance graph compares the changes in the Company's total
shareholder return on our common stock from September 30, 1999 (the date on
which the common stock began trading on the Nasdaq National Market) and ending
on December 31, 1999 with the cumulative total return, assuming reinvestment of
dividends of the Nasdaq Stock Market (U.S. and Foreign) Index and the Nasdaq
Telecommunications Index.
[GRAPH]
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
9/99 10/99 11/99 12/99
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Golden Telecom, Inc. 100.00 106.57 132.85 373.72
NASDAQ Stock Market (U.S. & Foreign) 100.00 107.53 119.87 146.44
NASDAQ Telecommunications 100.00 118.40 123.46 142.21
</TABLE>
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<PAGE> 76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 purposes of this table, a person or a
group of persons is deemed to have "beneficial ownership" of any shares as of a
date when such person or group has the right to acquire such shares within 60
days after such date, but such shares are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Percentages
of shares owned are based on 24,080,125 shares of common stock issued and
outstanding at March 31, 2000.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
------------------------ ------------ ------------
<S> <C> <C>
Global TeleSystems, Inc..................................... 15,056,328 62.53
4121 Wilson Boulevard, 8th Floor
Arlington, VA 22203
European Bank of Reconstruction and Development............. 3,032,531 12.59
One Exchange Square
London EC2A 2JN
Capital International Global Emerging Markets Private Equity
Fund, L.P................................................. 1,678,600 6.97
135 South State College Blvd.
Brea, CA 92821
Ashley Dunster.............................................. -- --
Izzet Guney................................................. -- --
Alexandr M. Knaster......................................... 26,500 *
Stewart J. Paperin.......................................... -- --
Grier C. Raclin............................................. 1,000 *
Robert A. Schriesheim....................................... -- --
H. Brian Thompson........................................... -- --
Jeffrey H. Von Deylen....................................... -- --
Stewart P. Reich............................................ 56,746 *
Stan M. Abbeloos............................................ 19,673 *
David J. Wisher............................................. 14,509 *
Jeffrey L. Howley........................................... 6,784 *
Kevin J. Cuffe.............................................. 3,337 *
All Directors and Executive Officers as a group (14
persons).................................................. 128,737 *
</TABLE>
---------------
* Less than 1%
75
<PAGE> 77
RELATIONSHIP WITH GTS AND CERTAIN RELATED PARTY TRANSACTIONS
GTS owns 15,056,328 shares of our outstanding common stock, which
represents approximately 63% of the combined voting power of all of our
outstanding common stock. 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.
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 initial
public offering underwriting agreement relating to the initial public 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 September 30, 1999, the date of our initial public
offering.
Our relationship with GTS is governed by agreements that we to entered into
after the completion of our initial public 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 this
registration statement. Immediately before the initial public offering, GTS
transferred to us all the properties that currently constitute our business,
including the shares of our operating and holding companies that were currently
owned, directly or indirectly, by GTS. Except as discussed in this document,
because all our agreements with third parties are made through these operating
and holding companies, GTS did not transfer to us any additional rights or
obligations that were made through companies retained by GTS.
ADMINISTRATIVE SERVICES AGREEMENT
We entered into an administrative services agreement with GTS. Pursuant to
this agreement, GTS provides 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 provides these administrative services subject to the oversight, supervision
and approval of our executive officers. We 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 agreement to
provide accounting, financial management and budgeting services was mutually
terminated effective March 1, 2000.
The administrative services agreement became effective upon the
consummation of the initial public offering, and may be terminated by either
party upon at least 90 days' written notice and, in the case of a termination by
us, with the consent of GTS, which consent may not be unreasonably withheld. In
addition, the administrative services agreement will be terminated if we
experience a change of control. A change of control shall be deemed to have
occurred if:
- a majority of the seats on our board of directors shall be occupied by
persons who are neither nominated by GTS or by its board of directors,
nor appointed by our directors nominated by GTS; or
- 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.
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<PAGE> 78
EMPLOYEE BENEFITS AGREEMENT
We entered into an employee benefits agreement with GTS. Pursuant to this
agreement, our employees participate in the employee benefit plans (including
all retirement plans and welfare benefit plans) which, immediately prior to the
consummation of the initial public offering, covered these employees. We pay GTS
a management fee equal to 25% of the aggregate amount of all employees' base
salaries, as in effect from time to time.
INDEMNIFICATION AGREEMENT
We entered into an indemnification agreement with GTS. This agreement
provides 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 agreed to indemnify and hold
harmless us and each of our directors, officers, employees and agents against
all liabilities relating to, arising out of or resulting from any material
breach by GTS under any of the separation agreements.
Except as set forth in the indemnification agreement, we agreed to
indemnify and hold harmless each of GTS and its directors, officers, employees
and agents from and against all liabilities relating to, arising out of or
resulting from:
- our failure to pay, perform or otherwise promptly discharge any of our
liabilities arising out of our business, operations or assets on or after
the closing date, whether or not expressly assumed by us;
- any liabilities attributable to Golden Telecom in connection with any
United States federal or state tax audit of GTS;
- any material breach by us of any of the separation agreements; and
- any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact required to be
stated in this prospectus or necessary to make the statements in this
prospectus not misleading, with respect to all information contained in
this prospectus or the registration statement, as amended or
supplemented, of which it forms a part.
The indemnification agreement also provides that we will indemnify and hold
harmless GTS for any liabilities incurred by GTS under any of its guarantees of
our obligations or liabilities and that we will pay GTS for its direct costs, if
any, of maintaining such guarantees.
Neither we nor GTS intends to make any representation or warranty to one
another or to any other person or party as to:
- the assets, businesses or liabilities transferred or assumed as part of
the separation,
- any consent or liability transferred or assumed as part of the separation
of us and GTS,
- any consent or approval required in connection therewith,
- the value or freedom from any security interests of any of the assets
transferred,
- the absence of any defense or freedom from counterclaim with respect to
any claim or any part thereof, or
- the legal sufficiency of any assignment, document or instrument delivered
to convey title to any asset transferred.
Except as expressly set forth in any separation agreements, all assets were
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.
77
<PAGE> 79
REGISTRATION RIGHTS AGREEMENT
We entered into a registration rights agreement with GTS. This agreement
provides that, on up to three occasions, following the 360-day lock-up on sales
of our shares of common stock held by GTS and on GTS's written request, we will
use our reasonable best efforts to register under the applicable federal and
state securities laws the resale of any of GTS's shares of our common stock. GTS
will also have the right, following the 360-day lock-up on sales of our shares
of common stock held by GTS, to include its shares of our common stock in future
registrations initiated by us on our own behalf or on behalf of other
shareholders. This right is subject to certain limitations as to whether and to
what extent GTS may request registration. GTS will pay the out-of-pocket costs
for registrations which it initiates. We have agreed to pay all of our
out-of-pocket costs and expenses, other than underwriting discounts and
commissions pertaining to shares resold by GTS, in connection with registrations
in which GTS participates but does not initiate. In addition to the above
rights, when GTS owns less than 25% of our outstanding shares of capital stock,
it may request that we register such remaining shares in a shelf registration
statement, at GTS's expense. Subject to certain limitations, such registration
rights may be assigned by GTS. The registration rights agreement contains
customary indemnification and contribution provisions between us and GTS.
SHAREHOLDERS' AGREEMENT
We entered into a shareholders' agreement with GTS. This agreement provides
GTS with pre-emptive rights for any subsequent equity that we issue.
Specifically, among other things, we will grant to GTS the right to purchase any
new equity securities that we issue so that GTS can maintain its percentage
ownership in our company immediately prior to the issuance of such new equity
securities. These pre-emptive rights will terminate when GTS owns less than 25%
of our shares of common stock.
The shareholders' agreement also provides for certain corporate governance
matters. The shareholders' agreement provides 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 entered into a trademark transfer agreement with GTS, pursuant to which
GTS transferred all rights and interests in all trademarks used by Golden
Telecom, including, without limitation, Sovintel, Sovam Teleport, TeleRoss, TCM,
Russia-On-Line, Golden Telecom, GlasNet and PrimTelefone. If GTS's ownership of
our company falls below 50% or a majority of our Board of Directors is not
appointed by GTS, then GTS will have the right to require us to cease using
certain other trademarks and service marks.
78
<PAGE> 80
SELLING STOCKHOLDERS
The following table sets forth certain information regarding ownership of
Golden Telecom, Inc. common stock and rights to acquire common stock by each of
the selling stockholders under this prospectus. For the purposes of this table,
a person or group of persons is deemed to have "beneficial ownership" of any
shares which such has the right to acquire 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.
The percentage of ownership for each beneficial owner is based upon
24,080,125 shares of common stock issued and outstanding as of March 31, 2000.
The Selling Stockholders may sell their shares in the over-the-counter
market, in the Nasdaq National Market, in privately negotiated transactions or
otherwise. Shares will be sold at market prices prevailing at the time of sale,
at prices related to such prevailing market price or at negotiated prices.
Transferees of these stockholders or other persons acquiring shares, including
brokers who borrow the shares to settle short sales of the common stock, may
also use this Prospectus.
The Selling Stockholders will receive all of the net proceeds from the
sales of shares and will pay any underwriting discounts and selling commissions,
if any.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO SHELF OFFERING AFTER THE SHELF OFFERING
----------------------- NUMBER OF -------------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT
------------------------ ---------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Capital International Global Emerging
Markets Private Equity Fund, L.P...... 1,678,600 6.97 1,250,000 0 0
135 South State College Blvd.
Brea, CA 92821
First NIS Regional Fund SICAV........... 628,253 2.61 628,253 0 0
13, rue Goethe
B.P. 413
L-2014 Luxembourg
Barings Vostok Private Equity Fund
L.P. ................................. 267,380 1.11 267,380 0 0
P.O. Box 431
13-15 Victoria Road
St. Peterport
Guernsey, Channel Islands, GY13ZD
</TABLE>
79
<PAGE> 81
DESCRIPTION OF CERTAIN FINANCING ARRANGEMENTS AND INDEBTEDNESS
In connection with the purchase of equipment and services for certain
Vostok Mobile ventures in Russia, those ventures entered into a credit agreement
with The Chase Manhattan Bank, New York, providing for up to $30.7 million of
financing. The facility was guaranteed by the vendor of such equipment and
services, and was insured against certain political risks by the Overseas
Private Investment Corporation. To the extent that the guarantor was required to
make any payments pursuant to such guarantee, GTS was required to reimburse 50%
of such payments. Because of the financial condition of certain Vostok Mobile
ventures, prior to the IPO, GTS made certain of the principal and interest
payments on behalf of the ventures.
On September 10, 1999, the Company, GTS and the vendor executed a
Settlement Agreement in regard to the Chase Manhattan credit facility. Under the
terms of the Settlement Agreement, on the date of the closing of the Company's
IPO, GTS and the vendor settled the amounts outstanding under the credit
facility totaling $14.4 million. In addition, GTS paid $2.5 million in
compromise of $3.0 million of accounts payable to the vendor from the cellular
investees. The company received the rights to collect from the cellular
investees the amounts owed by such investees in regard to the credit facility
and the accounts payable. In consideration of such payments, the agreement in
principle also provides for the following, all of which occurred upon the
consummation of our initial public offering.
- We issued a promissory note to the vendor for $4.75 million, which bears
interest at 14% per annum. The note is subordinated to accounts payable
and senior loans and has a maturity of seven years. However, we are not
required to make any payments under the note for the two-year period
ending on the second anniversary of its issuance. At its election, during
the one-year period ending on the first anniversary of the note's
issuance, the vendor has the option of selling the note to GTS at 60% of
its face value, or $2.85 million.
- We issued two promissory notes to GTS for $4.75 million and $1.5 million.
These notes have the same ranking, maturity, interest rate and payment
terms as the $4.75 million promissory note that we issued to the vendor,
as described above.
- We issued warrants to the vendor to purchase 126,050 shares of our common
stock for $0.10 per share. The warrants are exercisable for five years,
but are not exercisable during the two-year period ending on the second
anniversary of the issuance of the warrants. During this two-year period,
we are required to transfer one-half of the warrants to GTS if GTS or its
subsidiaries place orders in Western and Central Europe with the vendor
in an amount equal to or exceeding $50 million, as invoiced by the
vendor. If GTS or its subsidiaries place such orders in an amount equal
to or exceeding $75 million, we are required to transfer all of the
warrants to GTS.
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 2.3 million DM ($1.3 million) at March
31, 2000. The agreement carries interest at a rate equal to the DM LIBOR rate
plus 4.5 percent per annum (equivalent to 7.5% at March 31, 2000).
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, 1999, the Company had purchased $13.7 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
$6.6 million at March 31, 2000. The
80
<PAGE> 82
agreement carries interest at a rate equal to the LIBOR rate plus 3.0 percent
per annum (equivalent to 9.0% at March 31, 2000).
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.
GTS has guaranteed the payments under the Motorola and Ericsson agreements.
To the extent that GTS makes any payments under such guarantees, we will be
required to indemnify GTS for such payments.
In 1996, certain non-consolidated joint ventures of the Company entered
into a 5.0 million Netherlands Guilders ("NLG") credit facility which is
guaranteed by Vostok Mobile B.V., a subsidiary of the Company. Borrowings
outstanding by the regional joint ventures totaled NLG 1.3 million ($0.5
million) at March 31, 2000.
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 $12.0 million and $3.2 million at
March 31, 1999 and 2000, respectively. Total borrowings outstanding by all
entities under the Citibank General Credit Agreement totaled $27.7 million and
$14.2 million at March 31, 1999 and 2000, respectively. All amounts outstanding
under this agreement are due September 30, 2000 and are fully collateralized by
the Company's restricted cash. The Company is in the process of refinancing this
facility with the same bank. The structure of the new facility will be
substantially the same as the current, with repayment terms of seven years. 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
March 31, 2000. The loan carries interest at a rate equal to the three-month
London Inter-Bank Offering Rate ("LIBOR") plus 5.0 percent per annum (equivalent
to 11.70% at March 31, 2000).
81
<PAGE> 83
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share, of which 24,080,125 shares are issued and outstanding
as of March 31, 2000. Our Board of Directors and stockholders have approved an
amendment to a provision of the Company's Certificate of Incorporation to
increase the number of shares of Common Stock to 100,000,000 and to authorize
the issuance of 10,000,000 shares of Preferred Stock.
The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares we issue does not purport to be
complete and is subject to the detailed provisions of, and qualified in its
entirety by reference to, our Certificate of Incorporation and By-laws, and to
the applicable provisions of the General Corporation Law of the State of
Delaware, which we refer to as the DGCL.
OUR COMMON STOCK
You are entitled to one vote for one share held of record on all matters
upon which shareholders have the right to vote. There are no cumulative voting
rights. All issued and outstanding shares of common stock are, and the offered
shares, when issued and paid for, will be, validly issued, fully paid and non-
assessable. You are entitled to such dividends as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
Upon dissolution, you are entitled to share pro rata in our assets remaining
after payment in full of all of our liabilities and obligations, including
payment of the liquidation preference, if any, of any preferred stock then
outstanding. The Board of Directions unanimously approved an amendment to a
provision of the Company's Certificate of Incorporation to increase the number
of shares of Common Stock to 100,000,000. This amendment was approved by the
stockholders at the annual stockholders meeting held on May 17, 2000. The
amendment to the Company's Certificate of Incorporation will become effective
upon the filing of one or more Certificates of Amendment with the Secretary of
the State of the State of Delaware.
OUR PREFERRED STOCK
The Company's Board of Directors has unanimously approved an amendment to a
provision of the Company's Certificate of Incorporation to authorize to issue
10,000,000 shares of $0.01 par value Preferred Stock. There are no issued and
outstanding shares of Preferred Stock and no Preferred Stock is being offered by
this prospectus. The amendment was approved by the stockholders at the annual
stockholders meeting held on May 17, 2000. The amendment to the Company's
Certificate of Incorporation will become effective upon the filing of one or
more Certificates of Amendment with the Secretary of the State of the State of
Delaware.
The board of directors may authorize the issuance of one or more series of
preferred stock having rights, including voting, conversion and redemption
rights, and preferences, including dividend and liquidation preferences, which
our board of directors may determine, without further action by our
stockholders.
The issuance of preferred stock by the board of directors could adversely
affect the rights of the holders of common stock. For example, the issuance of
preferred stock could result in a series of securities outstanding that would
have preferences over the common stock with respect to dividends and in
liquidation and that could, upon conversion or otherwise, have all the rights
appurtenant to the common stock.
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
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<PAGE> 84
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Such person
may recover the following from the corporation:
- expenses, including attorneys' fees;
- judgments;
- fines; and
- amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor. Such person
may recover expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. However, no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (1) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (2) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or (4)
for any transaction from which the director derived an improper personal
benefit.
Our Certificate of Incorporation provides that our directors shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that such exculpation from liabilities is
not permitted with respect to liability arising from items described in clauses
(1) through (4) in the preceding paragraph. The Certificate and our By-laws
further provide that we shall indemnify our directors and officers to the
fullest extent permitted by the DGCL.
Our directors and officers are covered under directors' and officers'
liability insurance policies that we maintain.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the initial public offering, there were 22,800,125
shares of common stock outstanding. As of March 31, 2000, 24,080,125 shares of
common stock were outstanding. Of the outstanding shares, 6,878,164 shares are
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. Upon the effective
date of this registration statement, 9,023,797 shares will be freely tradable
without restriction under the Securities Act. Upon completion of this offering,
there will be 24,080,125 shares of common stock outstanding.
GTS has 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
83
<PAGE> 85
Bank AG London, which consent may not be unreasonably withheld, for a period of
360 days after the date of the IPO. GTS owns 15,056,328 shares of our Common
Stock.
Before the initial public offering, there was 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.
PLAN OF DISTRIBUTION
The shares may be sold from time to time to purchasers directly by the
selling stockholders. Alternatively, the selling stockholders may from time to
time offer the shares to or through underwriters, broker/dealers or agents, who
may receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom the may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of the shares may
be deemed to be "underwriters" within the meaning of the Securities Act and any
profit on the sale of such securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker/dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
The shares may be sold from time to time in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. Such prices will be
determined by the selling stockholders or by agreement between such selling
stockholders and underwriters or dealers who receive fees or commissions in
connection therewith. The sale of the shares may be effected in transactions
(which may involve crosses, block transactions and borrowings, returns and
reborrowings of the shares pursuant to stock loan agreements to settle short
sales of the common stock) (1) on any national securities exchange or quotation
service on which the shares may be listed or quoted at the time of sale, (2) in
the over-the-counter markets, (3) in transactions otherwise than on such
exchange or in the over-the-counter market or (4) through the writing of
options. Shares also may be delivered in connection with the issuance of
securities by issuers other than Golden Telecom, Inc. that are exchangeable for
(whether optional or mandatory) or payable in, such shares or pursuant to which
such shares may be distributed. At the time a particular offering of the shares
is made, a Prospectus Supplement, if required, will be distributed which will
set forth the aggregate amount and type of the shares being offered and the
terms of the offering, including the name or names of any underwriter,
broker/dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to broker/dealers. This
prospectus also may be used by pledges, donees and transferees of the selling
stockholders or by other persons acquiring shares, including brokers who borrow
the shares to settle short sales of shares of the common stock. In addition, the
shares which qualify for sale under an applicable exemption form registration
under the Securities Act may be sold pursuant to such exemption rather than this
prospectus.
To comply with the securities laws of certain jurisdictions, if applicable,
the shares will be offered or sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain jurisdictions the shares
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or any exemption from registration or qualification
is available and is complied with.
The selling stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provision may limit
the timing of purchases and sales of any of the shares by the selling
stockholders. The foregoing may affect the marketability of such securities.
The selling stockholders will pay all underwriting discounts and selling
commissions, if any. We will indemnify the underwriters in an underwritten
offering against certain civil liabilities, including certain
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<PAGE> 86
liabilities under the Securities Act, or we will contribute to payments the
underwriters may have to make in respect thereof.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Golden Telecom, Inc. by Jeffrey A. Riddell, General Counsel and Secretary of
Golden Telecom, Inc.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements, and other information with the
Securities and Exchange Commission (SEC). In addition, we have filed a
registration statement on Form S-1 of which this Prospectus is a part. 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.
We are subject to the reporting requirement of the Securities Exchange Act
of 1934, and therefore, we 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.
EXPERTS
The consolidated financial statements of Golden Telecom, Inc. at December
31, 1998 and 1999, and for each of the three years in the period ended December
31, 1999 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 EDN Sovintel LLC at December 31, 1998 and 1999,
and for each of the three years in the period ended December 31, 1999, 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.
FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral forward-looking statements,
including in this prospectus, in other filings with the Securities and Exchange
Commission, in reports to shareholders and in other communications. These
statements relate to analyses and other information which are based on forecasts
of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies. Examples of such forward-looking statements include, but are not
limited to:
- statements regarding our results of operations and financial condition;
- statements of our plans, objectives or goals, including those related to
products or services;
- statements regarding our investment program;
85
<PAGE> 87
- statements regarding our services and anticipated customer demand for
these services;
- statements of future economic performance; and
- statements of assumptions underlying such statements.
Words such as "believe", "anticipate", "expect", "intend", "seek", "will",
"plan", "could", "may", "project" and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements.
By their very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, and there are risks that the
predictions, forecasts, projections and other forward-looking statements will
not be achieved. Our risks are more specifically described in the "Risk Factors"
section. If one or more of these materialize, or should underlying assumptions
prove incorrect, actual results may be very different from those anticipated in
this prospectus. You should understand that a number of important factors could
cause actual results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements. These factors include:
- political, economic and legal changes in the markets where we operate;
- the effect of, and changes in, regulation and government policy;
- the effects of competition;
- our need for additional financing;
- possible failure to complete acquisitions and integrate acquired
businesses; and
- our success at managing the risks of the foregoing.
The foregoing list of important factors is not exhaustive; when relying on
forward-looking statements to make investment decisions you should carefully
consider the foregoing factors and other uncertainties and events. Such
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update or revise any of them, whether as a
result of new information, future events or otherwise.
86
<PAGE> 88
INDEX TO FINANCIAL STATEMENTS
GOLDEN TELECOM, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999................................ F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999................................ F-5
Consolidated Statements of Shareholder's Equity for the
three years ended December 31, 1999.................... F-6
Notes to Consolidated Financial Statements................ F-7
FIRST QUARTER FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 2000......................................... F-30
Consolidated Statements of Operations for the three months
ended March 31, 1999 and March 31, 2000................ F-31
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 2000................ F-32
Notes to Consolidated Financial Statements................ F-33
EDN SOVINTEL LLC
YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young (CIS) Limited, Independent
Auditors............................................... F-39
Balance Sheets as of December 31, 1998 and 1999........... F-40
Statements of Income for the three years ended December
31, 1999............................................... F-41
Statements of Cash Flows for the three years ended
December 31, 1999...................................... F-42
Statements of Members' Equity for the three years ended
December 31, 1999...................................... F-43
Notes to Financial Statements............................. F-44
FIRST QUARTER FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1999 and March 31,
2000................................................... F-53
Statements of Income for the three months ended March 31,
1999 and March 31, 2000................................ F-54
Statements of Cash Flows for the three months ended March
31, 1999 and March 31, 2000............................ F-55
Notes to Financial Statements............................. F-56
</TABLE>
F-1
<PAGE> 89
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, 1998 and 1999, and the related consolidated
statements of operations, cash flows, and shareholders' equity for each of the
three years in the period ended December 31, 1999. 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, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, 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.
/s/ ERNST & YOUNG (CIS) LIMITED
Moscow, Russia
February 8, 2000
F-2
<PAGE> 90
GOLDEN TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 14,164 $162,722
Accounts receivable, net.................................. 13,404 10,961
Prepaid expenses.......................................... 4,643 2,666
Other assets.............................................. 5,289 5,252
-------- --------
TOTAL CURRENT ASSETS.............................. 37,500 181,601
Property and equipment, net of accumulated depreciation of
$19,181 and $29,289 at December 31, 1998 and 1999,
respectively.............................................. 52,186 62,176
Investments in and advances to ventures..................... 46,519 45,196
Goodwill and intangible assets, net of accumulated
amortization of $23,510 and $33,737 at December 31, 1998
and 1999, respectively.................................... 71,924 53,467
Restricted cash and other non-current assets................ 27,720 24,184
-------- --------
TOTAL ASSETS...................................... $235,849 $366,624
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 25,770 $ 35,022
Debt maturing within one year............................. 3,018 4,148
Other current liabilities................................. 5,674 3,392
Due to affiliates......................................... -- 6,563
-------- --------
TOTAL CURRENT LIABILITIES......................... 34,462 49,125
Long-term debt, less current portion........................ 21,441 17,631
Related party long-term debt................................ -- 6,250
Taxes and other non-current liabilities..................... 3,170 2,250
-------- --------
TOTAL LIABILITIES................................. 59,073 75,256
COMMITMENTS AND CONTINGENCIES
Minority interest........................................... 7,993 2,816
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value (50,000,000 shares
authorized; 10,600,000 and 24,050,125 shares issued and
outstanding at December 31, 1998 and 1999
respectively).......................................... 106 241
Additional paid-in capital................................ 241,775 407,863
Accumulated deficit....................................... (73,098) (119,552)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 168,783 288,552
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $235,849 $366,624
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 91
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
REVENUE:
Telecommunication services................................ $17,414 $ 69,659 $ 83,505
Equipment sales........................................... 5,471 8,955 3,302
Revenue from affiliates................................... 4,313 7,472 11,124
------- -------- --------
TOTAL REVENUE..................................... 27,198 86,086 97,931
OPERATING COSTS AND EXPENSES:
Costs of revenue:
Access and network services............................ 15,158 37,779 38,067
Equipment sales........................................ 5,262 5,795 2,449
Selling, general and administrative....................... 21,249 45,327 41,011
Depreciation and amortization............................. 4,363 16,709 28,143
Abandonment and restructuring charge...................... -- -- 19,813
------- -------- --------
TOTAL OPERATING EXPENSES.......................... 46,032 105,610 129,483
LOSS FROM OPERATIONS........................................ (18,834) (19,524) (31,552)
OTHER INCOME (EXPENSE):
Equity in earnings (losses) of ventures................... 12,428 2,559 (6,677)
Interest income........................................... 146 1,649 5,208
Interest expense.......................................... (577) (4,652) (2,394)
Foreign currency losses................................... (399) (7,452) (2,739)
Minority interest......................................... -- (1,040) (1,477)
------- -------- --------
TOTAL OTHER INCOME (EXPENSES)..................... 11,598 (8,936) (8,079)
------- -------- --------
Net loss before income taxes................................ (7,236) (28,460) (39,631)
Income taxes................................................ 647 5,184 6,823
------- -------- --------
NET LOSS.......................................... $(7,883) $(33,644) $(46,454)
======= ======== ========
Net loss per share................................ $ (0.74) $ (3.17) $ (3.38)
======= ======== ========
Weighted average common shares outstanding........ 10,600 10,600 13,736
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 92
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(7,883) $(33,644) $(46,454)
Adjustments to Reconcile Net Loss to Net Cash (Used in)
Provided by Operating Activities:
Depreciation.............................................. 3,282 6,941 11,863
Amortization.............................................. 1,081 9,768 16,280
Equity in (earnings) losses of ventures, net of dividends
received............................................... (12,428) (2,559) 6,677
Abandonment and restructuring charge...................... -- -- 19,813
Minority interest......................................... -- 1,040 1,477
Foreign currency losses................................... 399 7,452 2,739
Other..................................................... 605 5,488 1,387
Changes in assets and liabilities:
Accounts receivable.................................... (3,228) (1,145) 495
Accounts payable and accrued expenses.................. 3,040 4,570 1,337
Due to affiliates, net................................. -- -- 6,510
Other changes in assets and liabilities................ (5,459) 3,379 (5,752)
------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES...................................... (20,591) 1,290 16,372
INVESTING ACTIVITIES
Purchases of property and equipment....................... (9,011) (18,704) (22,110)
Acquisitions, net of cash acquired........................ -- (40,017) (6,397)
Restricted cash........................................... (5,000) (19,096) 7,251
Investments in and advances to ventures, net of
repayments............................................. (8,192) 15,404 3,073
------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (22,203) (62,413) (18,183)
FINANCING ACTIVITIES
Proceeds from debt........................................ -- 13,885 6,857
Repayments of debt........................................ (7,697) (7,104) (13,983)
Net proceeds from issuance of common stock................ -- -- 142,453
Net proceeds from shareholder............................. 51,235 67,370 16,071
------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 43,538 74,151 151,398
Effect of exchange rate changes on cash..................... (230) (2,798) (1,029)
------- -------- --------
Net increase (decrease) in cash............................. 514 10,230 148,558
Cash at beginning of period................................. 3,420 3,934 14,164
------- -------- --------
CASH AT END OF PERIOD............................. $ 3,934 $ 14,164 $162,722
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 93
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(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, 1996............... 10,600 $106 $101,767 $ (31,571) $ 70,302
Contributions by GTS..................... -- -- 53,149 -- 53,149
Net loss................................. -- -- -- (7,883) (7,883)
------ ---- -------- --------- --------
BALANCE AT DECEMBER 31, 1997............... 10,600 106 154,916 (39,454) 115,568
Contributions by GTS..................... -- -- 86,859 -- 86,859
Net loss................................. -- -- -- (33,644) (33,644)
------ ---- -------- --------- --------
BALANCE AT DECEMBER 31, 1998............... 10,600 $106 $241,775 $ (73,098) $168,783
Proceeds from the sale of common stock,
net of expenses of $8,348............. 13,030 131 142,322 -- 142,453
Issuance of warrants..................... -- -- 1,500 -- 1,500
Compensatory restricted stock grants..... -- -- 213 -- 213
Acquisition of Ukrainian TeleSystems,
LLC................................... 420 4 5,032 -- 5,036
Contributions by GTS..................... -- -- 17,021 -- 17,021
Net loss................................. -- -- -- (46,454) (46,454)
------ ---- -------- --------- --------
BALANCE AT DECEMBER 31, 1999............... 24,050 $241 $407,863 $(119,552) $288,552
====== ==== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 94
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 for
Global TeleSystems Group, Inc. ("GTS") operating entities within the
Commonwealth of Independent States ("CIS") (the "CIS entities") and supporting
non-CIS holding companies. On September 29, 1999, GTS transferred its ownership
rights of the CIS entities to the Company. Golden Telecom, a majority-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 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
were 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, 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 negotiating
forgiveness and/or restructuring of its external debt. Difficulties with the
collection of budgeted tax revenues and fulfilling the significant pension and
wages arrearages 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.
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
F-7
<PAGE> 95
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
previously recognized have been recovered. The results of operations from the
abandoned cellular ventures are excluded from our results of operations as from
August 31, 1999, the date of abandonment.
Results of subsidiaries acquired and accounted for by the purchase method
have been included in operations from the relevant date of acquisition.
Foreign Currency Translation
The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Each of the legal entities domiciled in the CIS maintains its records
and prepares its financial statements in the local currency (either Russian
rubles or Ukrainian hryvna) in accordance with the requirements of accounting
and tax legislation. The accompanying financial statements differ from the
financial statements used for statutory purposes in the CIS in that they reflect
certain adjustments, recorded on the Company's CIS legal entities' books, which
are appropriate to present the financial position, results of operations and
cash flows in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The principal adjustments are related to
foreign currency translation, deferred taxation, consolidation, and depreciation
and valuation of property and equipment.
The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). The temporal method for translating assets and
liabilities is used for translation of the Company's legal entities domiciled in
the CIS. Accordingly, monetary assets and liabilities are translated at current
exchange rates while non-monetary assets and liabilities are translated at their
historical rates. Income and expense accounts are translated at average monthly
rates of exchange. The resultant translation adjustments are included in the
operations of the subsidiaries and ventures.
All foreign currency gains and losses recognized in the operations of
consolidated subsidiaries are included in the Company's statement of operations
as "foreign currency losses." The Company's proportionate share of all foreign
currency gains and losses recognized in the operations of ventures accounted for
by the equity method of accounting are recognized in the Company's statement of
operations as "equity in earnings of ventures".
The local currencies of the countries located within the CIS are not
convertible outside the territory of the respective countries. Official exchange
rates are determined daily by the respective Central Banks and were considered
to be reasonable approximations of market rates until mid-August 1998. Since
that date, liquidity in the currency trading and interbank trading has varied.
As a result, the market rates have 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 value of capital 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 $27.5 million and $21.0
million of restricted cash at December 31, 1998 and 1999, respectively. The
restricted cash is
F-8
<PAGE> 96
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily related to cash held in escrow at a financial institution for the
collateralization of debt obligations that certain of the Company's consolidated
subsidiaries and equity ventures have borrowed from such financial institution.
Accounts Receivable, Net
Accounts receivable are shown at their net realizable value which
approximates their fair value.
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 its estimated useful life, five 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 fair
value of the asset. The fair value of the asset is measured using discounted
cash flow analysis or other valuation techniques. No impairment expenses was
recognized in 1997, 1998 or 1999.
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
F-9
<PAGE> 97
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated financial statements. The Company does not provide for deferred
taxes on the undistributed earnings of its foreign companies, as such earnings
are intended to be reinvested in those operations permanently. Prior to its
formation, the Company was functioning as operating units of GTS and was
included in the consolidated tax return of GTS.
Revenue Recognition
The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that are partial minutes and test traffic
which will be neither billed nor collected. Revenue from service contracts is
accounted for when the services are provided. Billings received in advance of
service being performed are deferred and recognized as revenue as the service is
performed. Revenues are stated net of any value-added taxes ("VAT") charged to
customers. Certain other taxes that are based on revenues earned were incurred
at rates ranging from 1.5% to 4.0% during 1997, 1998 and 1999, and have been
included in operating expenses since these taxes are incidental to the revenue
cycle.
Advertising
The Company expenses the cost of advertising as incurred. Advertising
expenses for the year ended December 31, 1999 were $2.8 million. Advertising
expenses were not material in the years ended December 31, 1998 and 1997.
Net Loss Per Share
The Company's net loss per share calculation (basic and diluted) is based
upon the weighted average common shares outstanding of the Company. The
10,600,000 common shares issued in connection with the formation of the Company
are considered to be outstanding for all periods prior to 1999. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Warrants, stock options and restricted stock grants have been
excluded from the net loss per share calculation because their effect would be
antidilutive.
Fair Value of Financial Instruments
The carrying amounts for cash, accounts receivable, accounts payable, and
accrued liabilities approximate their fair value. The fair values of the long
and short-term debt approximate carrying values.
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, 1997, 1998 and 1999, comprehensive income for the Company is
equal to net loss.
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. Of the $162.7
million of cash and cash equivalents held as at December 31, 1999, $145.8
million was held in cash equivalents in US financial instruments. The balance
being maintained in US-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
F-10
<PAGE> 98
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
specific customers that it determines to have significant credit risk. The
company generally does not require collateral to extend credit to its customers.
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
December 31, 1999 was 20.65 rubles and 27.00 per US dollar, respectively. The
official exchange rate as of February 8, 2000 was 28.76. The Company has taken
and intends to continue to take actions that may minimize the unfavorable effect
of continued ruble devaluation.
Stock-Based Compensation
Prior to its formation, certain employees of the Company participated in
one or more of the stock option plans of GTS. The Company has now established
its own stock-based compensation plans as detailed in Note 8.
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," for its plans. 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 has elected
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and present pro forma disclosures of results of operations 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: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS
During 1998, the Company increased its ownership interest in several of its
previously existing ventures by either buying all or part of the minority
shareholders' interest in these ventures. These transactions have enabled the
Company to consolidate certain ventures that were previously accounted for
following the equity method of accounting. The Company has executed these
transactions by paying cash and has accounted for these transactions under the
purchase method of accounting, and as such, any purchase price paid over net
tangible assets acquired has been reflected as goodwill, which is being
amortized on a straight-line basis for a period of five years. No adjustments
have been made to the assets and liabilities acquired, since their carrying
values approximated their fair market values on the date of the transactions.
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
F-11
<PAGE> 99
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocation of the purchase price, and as such, the Company recorded
approximately $30.2 million in goodwill.
In June 1998, the Company increased its beneficial interest in Golden
Telecom LLC ("Golden Telecom (Ukraine)") to 56.75% for cash consideration of
approximately $9.8 million. The Company's 1998 financial statements reflect the
allocation of the purchase price, and as such, the Company recorded
approximately $1.4 million in goodwill.
The following unaudited pro forma combined results of operations for the
Company gives effect to the Sovam, TCM and Golden Telecom (Ukraine) business
combinations as if they had occurred at the beginning of each period presented
(in thousands, except per share data). These pro forma amounts are provided for
informational purposes only and do not purport to present the results of
operations of the Company had the transactions assumed therein occurred on or as
of the date indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $79,706 $117,367
Net loss.................................................... (9,530) (32,832)
Net loss per common share................................... $ (0.90) $ (3.10)
</TABLE>
In August 1999, the Company increased its beneficial ownership in TCM to
100%. Goodwill in the amount of $3.2 million has been recorded by the Company,
which is being amortized over the five-year life of the goodwill.
In addition, an affiliate of ING Barings which indirectly owned 12.25% of
Golden Telecom (Ukraine), contributed its indirect interest in Golden Telecom
(Ukraine) to a wholly owned subsidiary of Golden Telecom, Inc., upon the
consummation of the offering on September 30, 1999 in exchange for 420,000 newly
issued shares of common stock of the Company. In accordance with the
subscription agreement filed with the SEC at the time of the Initial Public
Offering, an additional 30,000 shares of common stock in the Company will be
issued in full and final settlement to the affiliate of ING Barings. Our
beneficial interest in Golden Telecom (Ukraine) increased from 56.75% to 69% as
the result of this transaction.
In June 1999, the Company acquired the assets of Glasnet, a Moscow based
Internet Services Provider (ISP). In July 1999, the Company acquired a 75%
interest in SA Telcom LLP, a telecommunications and data services provider in
Kazakhstan. In December 1999, the company acquired the assets of Nevalink, an
Internet Services Provider (ISP), and the acquisition of full-equity ownership
of NevaTelecom. Both Nevalink and NevaTelecom provide telecom and Internet
services to the St. Petersburg market. These acquisitions were purchased for
approximately $2.5 million, with further conditional payments to a maximum of
approximately $1.0 million, payable if certain performance targets are achieved.
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, in the periods shown, range from 50% to 70%.
F-12
<PAGE> 100
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's investments in and advances to ventures are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Equity in net assets acquired............................... $10,006 $ 8,186
Excess of investment cost over equity in net assets acquired
net of amortization of $3,752 and $4,730 at December 31,
1998 and 1999, respectively............................... 1,512 390
Accumulated earnings recognized............................. 20,737 21,338
Dividends................................................... (706) (1,442)
Cash advances and other..................................... 14,970 16,724
------- -------
Total investments in and advances to ventures..... $46,519 $45,196
======= =======
</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> 101
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-------------------
1998 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
BALANCE, AT BEGINNING OF PERIOD............................. $ 74,332 $46,519
Equity in net assets acquired............................. 10,372 159
Excess of investment cost over equity in net assets
acquired............................................... 48,125 120
Dividends................................................. (706) (1,011)
Cash advances (repayments) and other...................... 1,542 6,878
Effect of consolidating equity method companies........... (89,705) --
-------- -------
(30,372) 6,146
Equity ownership in (losses)/earnings..................... 6,914 (1,635)
Excess losses recognized over amount attributable to
ownership interest..................................... (2,253) (4,125)
Interest income on advances............................... 932 141
Amortization of excess of investment cost over equity in
net assets acquired.................................... (3,034) (1,058)
-------- -------
2,559 (6,677)
-------- -------
Loss in value that is other than temporary................ -- (792)
-------- -------
BALANCE, AT END OF PERIOD................................... $ 46,519 $45,196
======== =======
</TABLE>
For all periods presented through December 31, 1999, the significant
investments accounted for under the equity method and the percentage interest
owned consist of the following:
<TABLE>
<CAPTION>
EQUITY METHOD ENTITIES PERIOD
---------------------------------
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> 102
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1998 and 1999. The December 31, 1999 information excludes the
results of the abandoned mobile ventures.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999
------------------------------ ------------------------------
50% OR TOTAL 50% OR TOTAL
MAJORITY LESS EQUITY MAJORITY LESS EQUITY
OWNED OWNED METHOD OWNED OWNED METHOD
VENTURES VENTURES VENTURES VENTURES VENTURES VENTURES
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $4,306 $164,116 $168,422 $ 1,758 $108,384 $110,142
Gross margin.................... 2,869 75,549 78,418 1,128 52,724 53,852
Net income...................... (187) 4,611 4,424 (1,205) 327 (878)
Current assets.................. 953 41,806 42,759 188 29,341 29,529
Total assets.................... 7,837 136,658 144,495 4,285 109,373 113,658
Current liabilities............. 3,431 50,880 54,311 2,428 28,559 30,987
Total liabilities............... 6,975 68,175 75,150 3,352 43,024 46,376
Net assets...................... 862 68,481 69,343 933 66,349 67,282
</TABLE>
F-15
<PAGE> 103
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
<S> <C> <C>
Accounts receivable consists of:
Trade accounts receivable................................. $15,420 $13,209
Value added taxes receivable.............................. 1,276 1,089
Other receivables......................................... 916 673
------- -------
17,612 14,971
Less: allowance for doubtful accounts..................... 4,208 4,010
------- -------
Total accounts receivable, net.................... $13,404 $10,961
======= =======
Other assets consists of:
Inventories............................................... $ 4,216 $ 1,879
Other assets.............................................. 1,073 3,373
------- -------
Total other assets................................ $ 5,289 $ 5,252
======= =======
Property and equipment consists of:
Telecommunications equipment.............................. $55,219 $71,077
Furniture, fixtures and equipment......................... 7,224 7,408
Other property............................................ 3,880 4,058
Construction in process................................... 5,044 8,922
------- -------
71,367 91,465
Less: accumulated depreciation............................ 19,181 29,289
------- -------
Total property and equipment, net................. $52,186 $62,176
======= =======
Goodwill and intangible assets consists of:
Goodwill.................................................. $78,761 $72,785
Other intangibles......................................... 16,673 14,149
------- -------
95,434 87,204
Less: accumulated amortization............................ 23,510 33,737
------- -------
Total goodwill and intangible assets, net......... $71,924 $53,467
======= =======
Accounts payable and accrued expenses consists of:
Accounts payable.......................................... $10,570 $ 6,010
Interest payable.......................................... 964 962
Income taxes.............................................. 245 --
Accrued compensation...................................... 1,764 2,330
Accrued other taxes....................................... 5,873 2,763
Restructuring charge accrual.............................. -- 9,461
Other accrued expenses.................................... 6,354 13,496
------- -------
Total accounts payable and accrued expenses....... $25,770 $35,022
======= =======
</TABLE>
F-16
<PAGE> 104
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: DEBT OBLIGATIONS
Company debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Citibank General Credit Agreement........................... $12,665 $ 6,765
Siemens Equipment Agreement................................. 3,440 1,824
Motorola Equipment Agreement................................ 8,354 6,910
Vendor Settlement Agreement................................. -- 4,750
Note payable to GTS......................................... -- 6,250
Other indebtedness.......................................... -- 1,530
------- -------
24,459 28,029
Less: debt maturing within one year......................... 3,018 4,148
------- -------
Total long-term debt.............................. $21,441 $23,881
======= =======
</TABLE>
Aggregate maturities of long-term debt, as of December 31, 1999, are as
follows: 2000 -- $4.1 million, 2001 -- $9.5 million, 2002 -- $1.8 million,
2003 -- $2.3 million, 2004 -- $3.3 million and thereafter -- $7.0 million.
The Company paid interest of $0.3 million, $1.9 million and $2.4 million in
1997, 1998, and 1999, 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 $12.7 million and $6.8 million at
December 31, 1998 and 1999, respectively. Total borrowings outstanding by all
entities under the Citibank General Credit Agreement totaled $27.4 million and
$19.7 million at December 31, 1998 and 1999, respectively. All amounts
outstanding under this agreement are due September 30, 2000 and are fully
collateralized by the Company's restricted cash. The Company intends to either
refinance this debt on a long-term basis, with negotiations to this end being
substantially complete, or to repay the debt out of restricted cash balances.
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, 1999. The loan carries interest at a rate equal to the three-month
London Inter-Bank Offering Rate ("LIBOR") plus 5.0 percent per annum (equivalent
to 11.11% at December 31, 1999).
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 3.4 million DM ($1.8 million) at
December 31, 1999. The agreement carries interest at a rate equal to the DM
LIBOR rate plus 4.5 percent per annum (equivalent to 7.58% at December 31,
1999).
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, 1999, the Company had purchased $13.7 million of equipment
under this agreement. Golden Telecom (Ukraine) is required to make
F-17
<PAGE> 105
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
semiannual payments plus accrued interest beginning six months after completion
of installation of such equipment. Amounts outstanding under this agreement
totaled $6.9 million at December 31, 1999. 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, 1999).
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).
In 1996, certain non-consolidated joint ventures of the Company entered
into a 5.0 million Netherlands Guilders ("NLG") credit facility which is
guaranteed by Vostok Mobile B.V., a subsidiary of the Company. Borrowings
outstanding by the regional joint ventures totaled NLG 2.6 million ($1.3
million) at December 31, 1999.
Debt Restructuring
On September 10 1999, the Company, GTS and a vendor of telecommunications
equipment executed a Settlement Agreement in regard to a credit facility under
which, certain equity method cellular investees had outstanding loans. Under the
terms of the Settlement Agreement, on the date of the closing of the Company's
initial public offering, GTS and the vendor prepaid the amounts outstanding
under the credit facility totaling $14.4 million plus $0.3 million of accounts
payable to the vendor, and GTS paid directly or funded the settlement of certain
outstanding accounts receivable from the cellular investees to the vendor for
$2.5 million. The Company received the rights to collect from the cellular
investees the amounts owed by such investees in regard to the credit facility
and the accounts receivable and issued promissory notes to GTS in a total amount
of $6.25 million and the vendor in a total amount of $4.75 million. In addition,
the Company issued certain warrants to the vendor described below.
The promissory note issued to the vendor bears interest at 14% per annum.
The note is subordinated to accounts payable and senior loans and has a maturity
of seven years. The Company is not required to make any payments under the note
for the first thirty-months. At its election, the vendor will have the option of
selling the note to GTS at 60% of its face value, $2.85 million, during the
first year after which such option expires.
The two promissory notes issued to GTS, for $4.75 million and $1.5 million,
have the same ranking, maturity, interest rate and payment terms as the $4.75
million promissory note issued to the vendor, as described above.
The terms of the warrants allow the vendor to purchase 126,050 shares of
our common stock at an exercise price of $0.10 per share. The warrants are
exercisable for five years, but will not be exercisable during the first
two-years. During this period, the Vendor will be required to transfer one-half
of the warrants to GTS if GTS or its subsidiaries place orders in Western and
Central Europe with the vendor in an amount equal to or exceeding $50 million,
as invoiced by the vendor. If GTS or its subsidiaries place such orders in an
amount equal to or exceeding $75 million, the Vendor will be required to
transfer all of the warrants to GTS.
F-18
<PAGE> 106
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: SHAREHOLDERS' EQUITY
Common Stock
On June 10, 1999, the Company issued one hundred shares of $0.01 par common
stock to GTS. In anticipation of the Initial Public Offering of our stock and in
consideration of the contribution of the assets that constitute Golden Telecom,
Inc., on September 29, 1999, the Company issued an additional 10,599,900 shares
of common stock to GTS. The accompanying financial statements have been prepared
with the assumption that 10,600,000 shares of common stock have been issued and
outstanding for all of the prior periods presented. On September 30, 1999, the
Company issued 4,456,328 shares of $0.01 par common stock to GTS and 2,673,797
shares of $0.01 par common stock to a group of strategic investors. Additionally
the Company issued 420,000 shares of $0.01 par common stock to an affiliate of
ING Barings as partial consideration for its ownership interest in GTS-Ukrainian
TeleSystems LLC. Also, on September 30, 1999, the Company signed an Underwriting
Agreement with Deutsche Bank AG London to issue 4,650,000 shares of $0.01 par
common stock as part of an initial public offering.
In December 1999, the Company issued privately 1,250,000 shares of $0.01
par common stock to Capital International Global Emerging Markets Private Equity
Fund, L.P. This investment is conditioned on certain customary conditions and is
subject to a 180-day lock-up. Capital International has received certain
registration rights from the company, and in accordance with a shareholders
agreement with GTS, GTS has agreed, subject to certain terms and conditions to
appoint one individual nominated by Capital International to its Board of
Directors. For purposes of this private placement, the company has received a
waiver of its lock-up on selling shares of its common until March 25, 2000.
These shares have not been, and will not be, registered with the SEC and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
The Company's sole shareholder and the board of directors approved the 1999
Equity Participation Plan of Golden Telecom, Inc. on September 30, 1999. Under
this plan not more than 4,023,551 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.
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, 1998 or 1999.
At the time of the IPO certain employees that had been granted GTS options
that would vest during the year 2000, surrendered those options and received
restricted shares in Golden Telecom, Inc., which will vest on the second
anniversary of the IPO. The maximum number of restricted shares to be issued
under this arrangement will be 142,096. The restricted shares were priced at
$0.01 per share and the maximum total cost of this restricted share program to
the company will be $1.7 million (grant date fair value) of which $0.2 million
was recorded in the year ended December 31, 1999.
The Company has established the Golden Telecom Equity Participation Plan, a
stock option plan similar to the principal option plan of GTS. The Company has
granted and intends 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. The plan is subject to ratification by the
shareholders. Under the equity plan not more than 4,023,551 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. On October 1, 1999 2,735,000 shares at $12.00 per share were
granted to key employees under the Company's Equity Participation Plan. The
options vest over a three-year period from
F-19
<PAGE> 107
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the date of grant and expire ten years from the date of grant. In the period no
further grants were made, no grants were exercised and no grants were canceled
or expired. Accordingly options for 2,735,000 shares at $12.00 per share were
outstanding at December 31, 1999, none of which were exercisable.
The Company applies the provisions of APB No. 25 in accounting for its
stock options incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss in
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the year ended December 31, 1999 would have been approximately $48.3
million, $3.52 net loss per common share.
The fair value of options granted under the GTI plan in 1999 are estimated
to be $8.05 per share on the date of grant using the Black Scholes option
pricing model for grants in 1999 with the following assumptions: dividend yield
0%, risk free interest rate of 5.90%, an expected life of five years, and an
expected volatility of 1.
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 provided 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
$32,000, $40,000 and $37,000 for the years ended December 31, 1997, 1998 and
1999, respectively. Neither GTS nor the company made any discretionary
(non-matching) contributions for the years ended December 31, 1997, 1998 or
1999.
Certain employees continue to participate through the GTS 401(k) retirement
savings plan, however the Company intends to establish a 401(k) Retirement
Savings Plan similar to the GTS Savings Plan.
NOTE 10: INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax loss:
Domestic............................................ $(4,976) $ (8,210) $(24,926)
Foreign............................................. (2,260) (19,210) (14,705)
------- -------- --------
$(7,236) $(27,420) $(39,631)
======= ======== ========
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, the Company recorded
$0.6 million, $5.2 million, and $6.8 million respectively, in income tax expense
that related exclusively to its current provision for foreign taxes.
The Company paid foreign income taxes of $0.1 million, $5.4 million and
$7.1 million in 1997, 1998 and 1999, 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
F-20
<PAGE> 108
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 $2.9 million, and $2.9 million for years ended December
31, 1997 and 1998, and $0.0 million for the nine months ended September 30,
1999. 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, $23.6 million, 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,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Taxes at US statutory rates................................. 35.0% 35.0% 35.0%
Foreign income taxes........................................ (8.9) (18.2) (17.2)
Foreign and domestic operating losses with no related tax
benefit................................................... (35.0) (35.0) (35.0)
----- ----- -----
(8.9)% (18.2)% (17.2)%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities are recorded based on temporary
differences between earnings as reported in the financial statements and
earnings for income tax purposes. The following table summarizes major
components of the Company's deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.......................... $ 6,300 $ 8,037
Other deferred tax assets................................. 700 743
------- -------
Total deferred tax asset.................................... 7,000 8,780
Less: valuation allowance................................. (7,000) (8,780)
------- -------
Total............................................. $ -- $ --
======= =======
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards
for US federal income tax purposes of approximately $23.0 million expiring in
fiscal years 2010 through 2019. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carryforwards are limited to a maximum of $7.5 million per year.
Certain of the Company's consolidated foreign ventures have foreign tax
loss carryforwards in excess of $17.9 million. These tax loss carryforwards are
typically denominated in the local currency, subject to annual limitations and
expire in fiscal years 2000 through 2004. The Company's financial statements do
not reflect any provision for benefits that might be associated with such loss
carryforwards.
F-21
<PAGE> 109
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
its 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 $1.0 million, $2.5
million, and $0.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
Future minimum lease payments under non-cancelable operating leases with
terms of one year or more, as of December 31, 1999, are as follows: 2000 -- $0.4
million, 2001 -- $0.4 million, 2002 -- $0.4 million, and 2003 -- $0.3 million.
Other Commitments and Contingencies
The Company's non-consolidated ventures have future purchase commitments
amounting to $1.2 million and $0.1 million as of December 31, 1998 and 1999,
respectively.
In the ordinary course of business, the Company has issued financial
guarantees on debt for the benefit of certain of its non-consolidated ventures,
which is all collateralized by cash as described in Note 6. The total amounts
guaranteed at December 31, 1998 and 1999 were approximately $9.5 million and
$8.5 million, respectively. The Company expects that all the collateralized debt
will be repaid by the ventures, except those ventures that have been abandoned.
Major Customers
There were no major customers in 1997. The Company had one major customer
in the CLEC reporting segment, representing $17.4 million, or 20%, of total
revenues in 1998 and $21.0 million, or 21%, of total revenues in 1999.
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
F-22
<PAGE> 110
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, 1998,
and 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.
Other Matters
In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matter other than
what is discussed above, will not have a material effect upon the financial
condition, results of operations or liquidity of the Company.
NOTE 12: RELATED PARTY TRANSACTIONS
Pursuant to a 1995 purchase agreement, the Company received its interest in
GTS-Vox Limited, the intermediate holding company of TCM, in exchange for a note
in the principal amount of $0.7 million issued to the sellers and certain
additional consideration to its partners payable in the form of either cash or
Common Stock of GTS based upon its financial performance. The Company paid the
note in 1996. On January 17, 1997, the agreement was amended such that the
consideration would only be in the form of the issuance of Common Stock of GTS.
In the first quarter of 1997, pursuant to this agreement GTS issued 1,009,200
common shares at the then current fair market value of $6.67 per share. In
addition, in April 1998 and July 1998, pursuant to this agreement, GTS issued
673,260 and 253,718 shares of its common stock at the then current fair market
values of $20.13 per share and $23.55 per share, respectively. Further, in July
1998, the Company purchased the remaining 47.36% interest in GTS-Vox Limited for
$40.5 million from its former partners.
In April 1996, the Company entered into an agreement with First NIS
Regional Fund SICAF, an affiliate of Baring International Investment Management
Limited ("Barings"), to acquire a 29% effective interest in Golden Telecom
(Ukraine), a Ukrainian limited liability company. Such acquisition closed in May
1996. Barings funded $4.5 million to be applied towards the purchase of the
interest in Golden Telecom (Ukraine). Barings could exercise an option to
convert its initial investment into 438,311 shares of GTS Common Stock at an
exercise price of $10.27. In June 1997 the agreement was amended, such that
Barings funded an additional $4.1 million to be applied to Golden Telecom
(Ukraine). In connection with a restructuring of Golden Telecom (Ukraine), the
agreement was further amended in June 1998 to restructure the capital and
ownership of Golden Telecom (Ukraine). Pursuant to such amendment Barings
exercised and received 713,311 shares of GTS Common Stock and made an additional
investment of $5.75 million to be applied toward Golden Telecom (Ukraine)'s
capital expenditure and operating capital requirements. As a result of the June
1998 amendment, the Company increased its effective ownership interest in Golden
Telecom (Ukraine) to approximately 57%. Affiliates of Barings, which consist
primarily of investment funds and trusts, are shareholders of GTS.
F-23
<PAGE> 111
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, an affiliate of ING Barings which indirectly owned 12.25% of
Golden Telecom (Ukraine), contributed its indirect interest in Golden Telecom
(Ukraine) to a wholly owned subsidiary of Golden Telecom, Inc., upon the
consummation of the IPO on September 30, 1999 in exchange for 420,000 newly
issued shares of common stock of the Company. In accordance with the
subscription agreement filed with the SEC at the time of the IPO, an additional
30,000 shares of common stock of the Company will be issued to the affiliate of
ING Barings. The Company's beneficial interest in Golden Telecom (Ukraine)
increased from 56.75% to 69% as the result of this transaction.
In September 1997, the Company acquired from its minority partner, Tricor
B.V., its 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 entered into an administrative services agreement with GTS.
Pursuant to this agreement, GTS will provide the Company with certain
accounting, tax and financial management and budgeting services, legal and
regulatory services and human resources services. The amount payable under this
agreement is $0.2 million per annum.
Included in revenues for the twelve months ended December 31, 1997, 1998
and 1999, respectively is $4.3 million, $7.4 million, and $10.5 million, of
intercompany transactions from the Company's equity investees.
Included in revenues for the twelve months ended December 31, 1997, 1998
and 1999, respectively is $0.0 million, $0.1 million and $0.6 million of
intercompany transactions from other GTS affiliates.
F-24
<PAGE> 112
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: SEGMENT INFORMATION
LINE OF BUSINESS DATA
The Company operates in three segments within the telecommunications
industry. These three segments are: Competitive Local Exchange Carrier (CLEC)
Services using our local access overlay networks in Moscow, Kiev, and St.
Petersburg; Data and Long Distance Services using a fiber optic and
satellite-based network; and Mobile Services consisting of cellular networks
throughout the Russia and Ukraine on a subscription and prepaid basis. The
Company has adopted the SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The following table presents financial
information for both consolidated ventures and equity investee ventures,
segmented by the Company's lines of businesses for 1997, 1998 and 1999.
Transfers between lines of businesses are included in the adjustments to
reconcile segment to consolidated results. The Company evaluates performance
based on the operating margin of each strategic business unit.
<TABLE>
<CAPTION>
ADJUSTMENTS TO
RECONCILE BUSINESS
SEGMENT TO
CONSOLIDATED RESULTS
-----------------------
BUSINESS EQUITY
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
-------- ------------- -------- ------------ -------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1997
Revenue.............. $139,996 $38,019 $40,219 $ (5,237) $212,997 $ 27,198 $(212,147) $ 26,348
Depreciation &
amortization....... 6,290 5,441 8,368 (231) 19,868 4,363 (15,505) --
Operating income
(loss)............. 43,072 (5,765) 551 (6,745) 31,113 (18,834) (50,187) 240
Equity in (earnings)
of ventures........ -- -- -- -- -- (12,428) -- (12,428)
Identifiable
assets............. 97,280 65,231 90,095 54,191 306,797 129,620 (177,177) --
Capital
expenditures....... 24,507 2,052 17,020 (810) 42,769 1,846 (44,572) 3,649
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENTS TO
RECONCILE BUSINESS
SEGMENT TO
CONSOLIDATED RESULTS
-----------------------
BUSINESS EQUITY
DATA AND MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CLEC LONG DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
-------- ------------- -------- ------------ -------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1998
Revenue.............. $168,573 $49,237 $50,019 $ (9,357) $258,472 $ 86,086 $(199,935) $ 27,549
Depreciation &
amortization....... 8,004 5,006 13,246 7,357 33,613 16,709 (16,904) --
Operating income
(loss)............. 47,336 (6,126) (3,584) (16,390) 21,236 (19,524) (41,040) 280
Equity in (earnings)
of ventures........ -- -- -- -- -- (2,559) -- (2,559)
Identifiable
assets............. 129,071 44,709 95,776 113,319 382,875 235,849 (147,026) --
Capital
expenditures....... 27,679 6,438 24,172 415 58,704 20,738 (37,966) --
</TABLE>
F-25
<PAGE> 113
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ADJUSTMENTS TO
RECONCILE BUSINESS
SEGMENT TO
CONSOLIDATED RESULTS
DATA -----------------------
AND BUSINESS EQUITY
LONG MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CLEC DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
-------- -------- -------- ------------ -------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenue................... $128,086 $36,685 $35,108 $ (7,955) $191,924 $ 97,931 $(112,912) $18,919
Depreciation &
amortization............ 10,318 7,389 16,607 12,397 46,711 28,143 (18,568) --
Operating income
(loss).................. 37,901 (8,215) (5,769) (43,388) (19,471) (31,552) (12,078) (3)
Equity in losses of
ventures................ -- -- -- -- -- 6,677 -- 6,677
Identifiable assets....... 121,461 49,127 62,213 247,481 480,282 366,624 (113,658) --
Capital expenditures...... 13,246 10,619 10,080 1,038 34,983 22,110 (12,873) --
</TABLE>
GEOGRAPHIC DATA
Revenues from external customers are based on the location of the operating
company providing the service.
Prior to June 30, 1998, all operations were located within Russia. Since
that time, the Company has operated within two main geographic regions of the
CIS-Russia and Ukraine. Geographic information as of December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenue................................ $ 72,242 $13,906 $ (62) $ 86,086
Long-lived assets...................... 130,412 33,612 6,651 170,675
YEAR ENDED DECEMBER 31, 1999
Revenue................................ $ 67,923 $30,228 $ (220) $ 97,931
Long-lived assets...................... 128,533 33,266 2,959 164,758
</TABLE>
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes non-cash investing and financing activities
for the Company:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31, 1999
-----------------
(IN THOUSANDS)
<S> <C>
Issuance of warrants........................................ $1,500
Acquisition of shares of GTS Ukrainian TeleSystems, Inc. ... 5,036
Issuance of notes and assumption of debt related to certain
cellular ventures......................................... 7,047
Issuance of notes and assumption of debt related to
abandoned ventures........................................ 3,953
Write off of certain equity investments, goodwill and fixed
assets related to abandonment............................. 6,274
Other liabilities assumed related to abandonment and
restructuring............................................. 9,586
</TABLE>
F-26
<PAGE> 114
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: OTHER TRANSACTIONS
Abandonment
In September 1999, the Board of Directors of GTS approved a formal plan of
restructuring that resulted in the Company abandoning certain cellular business
operations in Russia. As part of this plan of restructuring, the Company is
currently seeking a buyer for its ownership interests in these operations and
does not intend to provide any further financial assistance to such businesses,
other than debts assumed as described above. The Company is targeting to
complete the disposition of these properties by early 2001.
In reaching its decision the Company had determined that the financial,
operational and management support required for these ventures does not meet its
current strategic plan; however, it will continue to support the remaining
Russian cellular businesses. In connection with this decision, a charge to
earnings in the third quarter of 1999 of $18.5 million was incurred as a result
of the plan of abandonment, of which approximately $8.3 million was recorded as
a liability. This charge was calculated based on the write-down of the carrying
value of these business operations to their estimated realizable value. The
charge was based upon the financial statements as at August 31, 1999 and the
results of the abandoned ventures were no longer included in the Company's
results commencing September 1, 1999. Additionally, the Company has recorded a
restructuring charge of $1.3 million relating to the cancellation of certain
network capacity. There were no amounts recorded against the liabilities of $9.6
million in the year ended December 31, 1999.
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summary historical consolidated quarterly financial data
since the start of 1998 show our results before and since the August 1998
Russian financial crisis.
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
ACTUAL
FOR THE THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................ $13,756 $14,949 $ 31,966 $ 25,415
Cost of Revenues........................ 8,934 9,883 12,709 12,048
Gross Margin............................ 4,822 5,066 19,257 13,367
Selling, general and administrative..... 8,791 8,113 17,124 11,299
Net loss................................ (2,306) (840) (17,121) (13,377)
Net loss per share(1)................... $ (0.22) $ (0.08) $ (1.62) $ (1.26)
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
FOR THE THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................ $24,185 $23,170 $ 25,111 $ 25,465
Cost of Revenues........................ 9,326 9,376 11,118 10,696
Gross Margin............................ 14,859 13,794 13,993 14,769
Selling, general and administrative..... 8,638 10,432 10,928 11,013
Abandonment and restructuring charge.... -- -- 19,813 --
Net loss................................ (7,776) (8,194) (26,424) (4,060)
Net loss per share(1)................... $ (0.73) $ (0.77) $ (2.44) $ (0.18)
</TABLE>
F-27
<PAGE> 115
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
---------------
(1) Per share amounts in this table were calculated based upon an assumption of
10,600,000 shares of common stock outstanding for each period prior to the
quarter ended September 30, 1999. The sum of the earnings per share for the
four quarters will not equal earnings per share for the total year due to
changes in the average number of common shares outstanding.
NOTE 17: SUBSEQUENT EVENTS (UNAUDITED)
In February 2000, the Company acquired the outstanding interest in Sovam
Teleport Ukraine, increasing its ownership position from 49 percent to 100
percent. Sovam Teleport Ukraine is a provider of data and internet services to
Ukraine-based businesses.
In accordance with the subscription agreement filed with the SEC at the
time of the IPO, a further 30,000 shares of common stock, in addition to the
420,000 shares of common stock issued on September 30, 1999 in Golden Telecom,
Inc., will be issued to the affiliate of ING Barings in full and final
settlement for its ownership interest in Golden Telecom Ukraine.
F-28
<PAGE> 116
GOLDEN TELECOM, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER OF 2000
(UNAUDITED)
F-29
<PAGE> 117
GOLDEN TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 162,722 $ 158,098
Accounts receivable, net.................................. 10,961 12,904
Prepaid expenses.......................................... 2,666 2,830
Other assets.............................................. 5,252 4,974
--------- ---------
TOTAL CURRENT ASSETS.............................. 181,601 178,806
Property and equipment, net of accumulated depreciation of
$29,289 and $31,809 at December 31, 1999 and March 31,
2000, respectively........................................ 62,176 68,663
Investments in and advances to ventures..................... 45,196 43,853
Goodwill and intangible assets, net of accumulated
amortization of $33,737 and $38,255 at December 31, 1999
and March 31, 2000, respectively.......................... 53,467 52,986
Restricted cash and other non-current assets................ 24,184 18,889
--------- ---------
TOTAL ASSETS...................................... $ 366,624 $ 363,197
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 35,022 $ 32,967
Debt maturing within one year............................. 4,148 4,021
Current portion capital lease obligation.................. -- 5,561
Due to affiliates......................................... 6,563 7,088
Other current liabilities................................. 3,392 3,399
--------- ---------
TOTAL CURRENT LIABILITIES......................... 49,125 53,036
Long-term debt, less current portion........................ 17,631 13,421
Related party long-term debt................................ 6,250 6,250
Taxes and other non-current liabilities..................... 2,250 2,000
--------- ---------
TOTAL LIABILITIES................................. 75,256 74,707
Minority interest........................................... 2,816 2,816
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value (50,000,000 shares
authorized; 24,050,125 and 24,080,125 shares issued and
outstanding at December 31, 1999 and March 31, 2000
respectively).......................................... 241 241
Additional paid-in capital................................ 407,863 408,319
Accumulated deficit....................................... (119,552) (122,886)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................ 288,552 285,674
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $ 366,624 $ 363,197
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 118
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUE
Telecommunication services................................ $20,219 $21,161
Revenue from affiliates................................... 3,207 2,256
Equipment sales........................................... 759 892
------- -------
TOTAL REVENUE..................................... 24,185 24,309
OPERATING COSTS AND EXPENSES
Cost of revenue
Access and network services............................ 8,640 9,604
Equipment sales........................................ 686 690
Selling, general and administrative....................... 8,638 10,254
Depreciation and amortization............................. 6,805 7,228
------- -------
TOTAL OPERATING EXPENSES.......................... 24,769 27,776
LOSS FROM OPERATIONS........................................ (584) (3,467)
OTHER INCOME (EXPENSE)
Equity in losses of ventures.............................. (3,570) (911)
Interest income........................................... 759 2,286
Interest expense.......................................... (580) (738)
Foreign currency losses................................... (742) (343)
Minority interest......................................... (459) --
Other non-operating expense............................... -- (148)
------- -------
TOTAL OTHER INCOME (EXPENSES)..................... (4,592) 146
Net loss before income taxes................................ (5,176) (3,321)
Income taxes................................................ 2,600 13
------- -------
NET LOSS.......................................... $(7,776) $(3,334)
======= =======
Net loss per share................................ $ (0.73) $ (0.14)
======= =======
Weighted average common shares outstanding........ 10,600 24,060
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 119
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 2000
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(7,776) $ (3,334)
Adjustments to Reconcile Net Loss to Net Cash (Used in)
Provided by Operating Activities:
Depreciation.............................................. 2,802 3,300
Amortization.............................................. 4,003 3,928
Equity in losses of ventures, net of dividends received... 3,570 911
Minority interest......................................... 459 --
Foreign currency losses................................... 742 343
Other..................................................... (421) 566
Changes in assets and liabilities:
Accounts receivable.................................... (2,672) (2,227)
Accounts payable and accrued expenses.................. (2,662) 1,488
Other changes in assets and liabilities................ 1,326 (2,009)
------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES....................................... (629) 2,966
INVESTING ACTIVITIES
Purchases of property and equipment and intangible
assets................................................. (3,066) (6,377)
Acquisitions, net of cash acquired........................ -- (1,226)
Restricted cash........................................... 750 3,650
Other investing........................................... (2,137) 746
------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (4,453) (3,207)
FINANCING ACTIVITIES
Proceeds from debt........................................ 1,229 23
Repayments of debt........................................ (230) (4,280)
Net proceeds from shareholder............................. 5,527 32
------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 6,526 (4,225)
Effect of exchange rate changes on cash and cash
equivalents............................................... (278) (158)
------- --------
Net increase (decrease) in cash and cash equivalents........ 1,166 (4,624)
Cash and cash equivalents at beginning of period............ 14,164 162,722
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $15,330 $158,098
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 120
GOLDEN TELECOM, INC.
NOTES TO 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 for
Global TeleSystems Group, Inc. ("GTS") operating entities within the
Commonwealth of Independent States ("CIS") (the "CIS entities") and supporting
non-CIS holding companies. On September 29, 1999, GTS transferred its ownership
rights in the CIS entities to the Company. Golden Telecom, a majority-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, Internet 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 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
interests 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 were created and recorded as a result of this
reorganization.
The financial statements 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. 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 1999 audited
consolidated financial statements and the notes related thereto. The results of
operations for the three months ended March 31, 2000 may not be indicative of
the operating results for the full year.
The Company maintains, where appropriate, its records and prepares its
financial statements in Russian rubles or Ukrainian hryvna in accordance with
the requirements of Russian or Ukrainian accounting and tax legislation. The
accompanying financial statements differ from the financial statements used for
statutory purposes in Russia and Ukraine in that they reflect certain
adjustments, not recorded on the Company's statutory books, which are
appropriate to present the financial position, results of operations and cash
flows in accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). The principal adjustments are related to certain
accrued revenue and expenses, foreign currency translation, deferred taxation,
and depreciation and valuation of property and equipment. The preparation of
financial statements, in conformity with US GAAP, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Business Environment
All of the Company's operating entities operate within the CIS. A high
level of political, financial and economic instability exists within the CIS. As
a result of the financial crisis in Russia that began in August 1998, financial
markets throughout the CIS were subject to significant downward adjustments. The
Russian national currency was severely devalued during the crisis and has only
recently entered into a phase of relatively controlled and graduated
devaluation. The Russian banking system suffered significant liquidity problems,
and several large Russian banking institutions ceased 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
continues to negotiate forgiveness and/or restructuring of its external debt.
Difficulties with the collection of budgeted tax revenues and fulfillment of the
significant pension and
F-33
<PAGE> 121
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wages arrearages to individuals in many regions and constituencies of the
Russian Federation continued throughout 1999 and may have only recently abated,
owing primarily to increases in world energy prices. Any dramatic decline in
world energy prices is likely to cause a reoccurrence of the social and economic
problems associated with budgetary shortfalls in Russia. 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 international
political institutions and funding agencies. Although these matters continue to
have a lingering negative impact on the financial position and results of
operations of the Company, several positive developments have recently occurred.
These developments include the election of a Duma, the lower house of the
Russian parliament, decidedly more progressive than its predecessor in December
1999, the resignation of former President Boris Yeltsin on December 31, 1999,
and the election in March 2000 of former Prime Minister Vladimir Putin to the
presidency. These political events are evidence of the continued development of
democratic and constitutional procedures in Russia and have led to increased and
relative political stability. In addition, the massive technical breakdowns and
disruptions predicted by many upon the occurrence of the year 2000 failed to
materialize throughout the CIS.
2. POLICIES AND PROCEDURES
For the three months ended March 31, 1999 and 2000, comprehensive income
for the Company is equal to net income.
The Company's net loss per share calculation (basic and diluted) is based
upon the weighted average common shares outstanding of the Company. The
10,600,000 common shares issued in connection with the formation of the Company
are considered to be outstanding for all periods prior to 1999. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Warrants, stock options and restricted stock grants have been
excluded from the net loss per share calculation because their effect would be
antidilutive.
3. SHAREHOLDERS' EQUITY
Common Stock
In accordance with the subscription agreement filed with the SEC at the
time of our Initial Public Offering ("IPO"), an additional 30,000 shares of the
Company's common stock were issued on March 1, 2000 to an affiliate of ING
Barings in full and final settlement for its ownership interest in Golden
Telecom Ukraine. On September 30, 1999, the Company issued 420,000 shares of
common stock to this affiliate as partial consideration for their ownership
interest in Golden Telecom Ukraine.
4. OTHER TRANSACTIONS
Investment Transactions
In February 2000, Golden Telecom Ukraine acquired 99% of Sovam Teleport
Ukraine, including a 51% interest previously held by third parties. Sovam
Teleport Ukraine is a provider of data and Internet services to Ukraine-based
businesses.
In March 2000, the Company acquired the assets of Referat.ru and Absolute
Games, two leading vertical portals in the education and computer gaming
categories of the Russian Internet.
Abandonment and Restructuring Charge
In September 1999, the Board of Directors of GTS approved a formal plan of
restructuring that resulted in the Company abandoning certain cellular business
operations in Russia. As part of this plan of restructuring, the Company is
currently seeking disposition of its ownership interests in these operations
F-34
<PAGE> 122
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and does not intend to provide any additional financial assistance to such
businesses, other than debts assumed. The Company is targeting to complete the
disposition of these properties by early 2001.
In reaching its decision the Company determined that the financial,
operational and management support required for these ventures does not meet its
current strategic plan; however, the Company will continue to support the
remaining Russian cellular businesses. In connection with this decision, a
charge to earnings in the third quarter of 1999 of $18.5 million was incurred as
a result of the plan of abandonment, of which approximately $8.3 million was
recorded as a liability. This charge was calculated based on the write-down of
the carrying value of these business operations to their estimated realizable
value. The charge was based upon the financial statements as of August 31, 1999
and the results of the abandoned ventures were no longer included in the
Company's results after September 1, 1999. Additionally, in the third quarter of
1999 the Company recorded a restructuring charge and a liability of $1.3 million
relating to the cancellation of certain network capacity. As of March 31, 2000
and December 31, 1999, the company had $7.5 million and $9.6 million,
respectively, for the accrual of costs not yet incurred.
5. CONTINGENCIES
Tax Matters
The taxation system within the various countries of the CIS ("CIS Taxes")
is evolving as the respective governments transform from command to market
oriented economies. The various CIS governments have introduced and continue to
introduce new tax 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, officials in Ministry of Finance and other
governmental bodies. Instances of inconsistent opinions between local, regional
and federal tax authorities and between the Ministry of Finance 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 March 31, 2000. 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 any contingencies associated with CIS taxes, it
is possible that the Company's future results of operations or cash flows could
be materially affected in a particular period.
In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.
F-35
<PAGE> 123
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT INFORMATION
LINE OF BUSINESS DATA
The Company operates in four segments within the telecommunications
industry. Previously, the Company reported three segments, but commencing from
the beginning of 2000, the Company has operationally and financially separated
its Data and Internet business from the Long Distance business. This separation
is in line with the Company's strategy to develop the Data and Internet segment
of its business. The four segments are: Competitive Local Exchange Carrier
(CLEC) Services using our local access overlay networks in Moscow, Kiev, and St.
Petersburg; Long Distance Services using our fiber optic and satellite-based
network throughout the Commonwealth of Independent States; Data and Internet
Services using our fiber optic network, and Mobile Services consisting of
cellular networks in Russia and Ukraine on a subscription and prepaid basis. The
following table presents financial information for both consolidated ventures
and equity investee ventures, segmented by the Company's lines of businesses for
the three-month periods ended March 31, 1999 and 2000. Transfers between lines
of businesses are included in the adjustments to reconcile segment to
consolidated results. The Company evaluates performance based on the operating
income (loss) of each strategic business unit.
<TABLE>
<CAPTION>
DATA & BUSINESS
LONG INTERNET MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC DISTANCE SERVICES SERVICES ELIMINATIONS TOTAL RESULTS
-------- -------- --------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH
31, 1999
Revenue................ $ 32,254 $ 2,941 $ 6,338 $ 8,222 $ (2,381) $ 47,374 $ 24,185
Operating income
(loss)............... 8,640 (1,374) (61) (2,935) (3,741) 529 (584)
Identifiable assets.... 125,030 28,232 14,988 80,259 112,489 360,998 232,324
Capital expenditures... 3,226 960 625 4,372 862 10,045 5,398
<CAPTION>
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
-------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
THREE MONTHS ENDED MARCH
31, 1999
Revenue................ $ (27,299) $4,110
Operating income
(loss)............... (1,230) 117
Identifiable assets.... (128,674) --
Capital expenditures... (4,647) --
</TABLE>
<TABLE>
<CAPTION>
DATA & BUSINESS
LONG INTERNET MOBILE CORPORATE & SEGMENT CONSOLIDATED
CLEC DISTANCE SERVICES SERVICES ELIMINATIONS TOTAL RESULTS
-------- -------- --------- -------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH
31, 2000
Revenue................ $ 29,601 $ 2,890 $ 8,502 $ 7,816 $ (1,492) $ 47,317 $ 24,309
Operating income
(loss)............... 8,834 (1,600) 226 (1,489) (6,607) (636) (3,467)
Identifiable assets.... 113,535 21,828 28,608 53,753 258,384 476,108 363,197
Capital expenditures... 4,689 1,111 6,309 1,812 374 14,295 11,710
<CAPTION>
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
-------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
THREE MONTHS ENDED MARCH
31, 2000
Revenue................ $ (27,030) $4,022
Operating income
(loss)............... (3,178) 347
Identifiable assets.... (112,911) --
Capital expenditures... (2,585) --
</TABLE>
GEOGRAPHIC DATA
Revenues are based on the location of the operating company providing the
service.
The following tables present financial information segmented by the
Company's geographic regions for the three-month periods ended March 31, 1999
and 2000.
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenue........................................ $ 17,041 $ 7,144 $ -- $ 24,185
Long-lived assets.............................. 127,044 33,815 5,066 165,925
</TABLE>
F-36
<PAGE> 124
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Revenue........................................ $ 16,803 $ 7,628 $ (122) $ 24,309
Long-lived assets.............................. 130,035 36,799 2,821 169,655
</TABLE>
7. SIGNIFICANT EQUITY METHOD SUBSIDIARY INFORMATION
The following table presents summarized income statement information from
the Company's significant equity investee, EDN Sovintel LLC, as of March 31,
1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 1999 MARCH 31, 2000
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Revenue.................................................. $22,484 $22,226
Gross margin............................................. 8,946 10,505
Income from operations................................... 2,894 4,410
Net income............................................... 988 2,101
</TABLE>
8. DEBT AND CAPITAL LEASE OBLIGATIONS
Since September 1997, certain of the Company's 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, the Company provides full cash collateral, recorded on the Company's
balance sheet as restricted cash, for onshore loans made by the bank to our
Russian-registered ventures. The Company is in the process of refinancing this
facility with the same bank. The structure of the new facility will be
substantially the same as the existing facility, with repayment over seven
years.
In the first quarter of 2000, the Company entered into a lease for fiber
capacity, including facilities and maintenance, from Moscow to Stockholm. The
lease has a term of ten years with an option to renew for an additional five
years. An advance of $5.6 million was made to the lessor in April 2000.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes significant non-cash investing and financing
activities for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 1999 MARCH 31, 2000
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Capitalization of leases................................. $ -- $5,561
Issuance of common stock to affiliate of ING Barings..... -- 360
Business acquisitions.................................... -- 500
</TABLE>
10. SUBSEQUENT EVENTS
In April 2000, the Company acquired Fintek, a prominent Moscow-based Web
design studio, which provides a full range of Web design services, including
e-commerce consulting, database development, and bulletin design using the
industry's most advanced technologies such as Flash 4 animation.
In April 2000, the Company acquired 51% of Commercial Information Networks
(KIS), the largest Internet service provider in Nizhny Novgorod.
F-37
<PAGE> 125
AUDITED FINANCIAL STATEMENTS
EDN SOVINTEL LLC
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
WITH REPORT OF INDEPENDENT AUDITORS
F-38
<PAGE> 126
REPORT OF ERNST & YOUNG (CIS) LIMITED, INDEPENDENT AUDITORS
The Board of Directors and Members
EDN Sovintel LLC
We have audited the accompanying balance sheets of EDN Sovintel LLC as of
December 31, 1998 and 1999, and the related statements of income, members'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 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, 1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, 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.
We have also audited the financial statements of the Company at December
31, 1998 and 1999 and for each of the three years ended December 31, 1999, 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 1999 audited
financial statements and have reported separately for the 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 8, 2000
F-39
<PAGE> 127
EDN SOVINTEL LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS OF
US DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 5,116 $ 2,644
Accounts receivable, net of allowance for doubtful
accounts of $3,364 and $2,427, respectively............ 16,726 16,868
Due from affiliated companies............................. 1,329 645
Inventories............................................... 1,487 1,095
Prepaid taxes............................................. 2,836 --
VAT receivable, net....................................... 4,904 2,547
Prepaid expenses and other current assets................. 3,716 1,764
------- -------
TOTAL CURRENT ASSETS.............................. 36,114 25,563
Property and equipment, net................................. 51,057 50,477
Deferred expenses........................................... 810 675
Other noncurrent assets..................................... -- 909
------- -------
TOTAL ASSETS...................................... $87,981 $77,624
======= =======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Trade payables............................................ $10,897 $ 8,963
Accrued expenses.......................................... 3,779 3,237
Due to affiliated companies............................... 12,736 3,692
Amount due to partner in commercial arrangement........... 1,350 929
Short-term loan........................................... 3,500 3,052
Deferred income taxes..................................... 2,190 686
------- -------
TOTAL LIABILITIES................................. 34,452 20,559
MEMBERS' EQUITY................................... 53,529 57,065
------- -------
TOTAL LIABILITIES AND MEMBERS' EQUITY............. $87,981 $77,624
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 128
EDN SOVINTEL LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
-------- -------- -------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
REVENUES:
Telecommunication services................................ $105,288 $115,823 $87,456
Equipment sales and other revenue......................... 8,674 8,345 4,224
-------- -------- -------
113,962 124,168 91,680
OPERATING COSTS AND EXPENSES:
Cost of revenue:
Service costs.......................................... 62,926 71,010 47,722
Equipment costs and other cost of revenue.............. 5,455 5,227 3,369
Selling, general and administrative....................... 15,899 23,772 17,537
Depreciation and amortization............................. 5,312 6,341 7,736
-------- -------- -------
TOTAL OPERATING COSTS AND EXPENSES................ 89,592 106,350 76,364
-------- -------- -------
INCOME FROM OPERATIONS...................................... 24,370 17,818 15,316
OTHER INCOME (EXPENSE):
Interest income........................................... 392 199 125
Interest expense.......................................... (503) -- (423)
Foreign currency losses................................... (131) (7,628) (1,853)
-------- -------- -------
TOTAL OTHER INCOME (EXPENSE)...................... (242) (7,429) (2,151)
-------- -------- -------
Net income before taxes..................................... 24,128 10,389 13,165
Income taxes................................................ 5,664 6,129 7,607
-------- -------- -------
NET INCOME........................................ $ 18,464 $ 4,260 $ 5,558
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 129
EDN SOVINTEL LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1997 1998 1999
-------- -------- -------
(IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 18,464 $ 4,260 $ 5,558
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 5,312 6,341 7,736
Deferred income taxes.................................. (186) 2,376 (1,504)
Provision for doubtful accounts........................ 602 2,684 1,900
Foreign exchange loss.................................. 131 7,628 1,853
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,496) (17,302) (2,458)
Inventories............................................ 52 210 392
Prepaid expenses and other assets...................... (538) (2,086) 3,850
VAT receivable, net.................................... (2,609) (6,011) 2,269
Trade payables......................................... (2,491) 16,891 (1,644)
Accrued liabilities and other payables................. 1,533 3,451 (2,233)
Taxes accrued or payable............................... 570 (1,609) --
Increase (decrease) amounts due affiliated companies,
net.................................................. 4,694 2,889 (9,382)
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 24,038 19,722 6,337
INVESTING ACTIVITIES -- Purchases of property and
equipment................................................. (16,177) (18,554) (7,021)
FINANCING ACTIVITIES
Proceeds from affiliate................................... 10,760 -- --
Payment to affiliate...................................... (16,421) (39) --
Proceeds from debt........................................ -- 3,500 1,560
Payment of debt........................................... -- -- (2,008)
Payment of dividends...................................... -- -- (1,011)
Cash withdrawn (deposited) with related party............. (41) 121 --
-------- -------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... (5,702) 3,582 (1,459)
Effect of exchange rate changes on cash..................... (145) (5,254) (329)
-------- -------- -------
Net (decrease) increase in cash............................. 2,014 (504) (2,472)
Cash at beginning of period................................. 3,606 5,620 5,116
-------- -------- -------
CASH AT END OF PERIOD............................. $ 5,620 $ 5,116 $ 2,644
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 130
EDN SOVINTEL LLC
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
GOLDEN OJSC MEMBERS'
TELECOM ROSTELECOM EQUITY
------- ---------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................................ $15,403 $15,402 $30,805
Net income................................................ 9,232 9,232 18,464
------- ------- -------
BALANCE AT DECEMBER 31, 1997................................ 24,635 24,634 49,269
Net income................................................ 2,130 2,130 4,260
------- ------- -------
BALANCE AT DECEMBER 31, 1998................................ 26,765 26,764 53,529
Dividends................................................. (1,011) (1,011) (2,022)
Net income................................................ 2,779 2,779 5,558
------- ------- -------
BALANCE AT DECEMBER 31, 1999................................ $28,533 $28,532 $57,065
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 131
EDN SOVINTEL LLC
NOTES TO FINANCIAL STATEMENTS
(US DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
NOTE 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 and later expand
its operations to other regions of Russia, including St. Petersburg, Pskov and
Kaliningrad. 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 till September 20, 2001.
The Company began operating in December 1991, providing services under contracts
generally denominated 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 corporation, which is a wholly owned subsidiary of Golden Telecom,
Inc. ("GTI").
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.
NOTE 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.
NOTE 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-44
<PAGE> 132
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 re-measured into US dollars in
accordance with the relevant provisions of SFAS No. 52, "Foreign Currency
Translation".
Under SFAS 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 re-measurement 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, 1997, 1998 and 1999 for one US dollar
were RUR 5.96, RUR 20.65 and RUR 27.00, respectively. At February 8, 2000, the
CBR rate had changed to RUR 28.76; 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 estimated net realizable value which
approximates fair value. The Company generally does not require collateral to
extend credits to its customers.
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.
F-45
<PAGE> 133
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, 1997, 1998 and
1999, the Company's analyses indicated that there was no impairment of its
property and equipment.
Deferred Expenses
Deferred expenses represent the Company's investment 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 and
installation fees, and other services are recognized in the period in which the
equipment is sold, connections and installations made, and services rendered.
The revenues earned from connection and installation fees partially offset the
direct costs that the Company incurs to connect its customers. Taxes on certain
revenues were charged at rates ranging from 3.0% to 4.0% over the three years
ended December 31, 1997, 1998 and 1999 and amounted to $4,458, $4,953 and
$3,666, 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, 1997, 1998 and 1999 were $671, $555
and $1,067, 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%, 39.5% and 38.5%
from base payroll for 1997, 1998 and 1999, respectively.
F-46
<PAGE> 134
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The fair value of financial instruments included in current assets and
liabilities approximates the carrying value.
Comprehensive Income
Effective January 1, 1998, the Company adopted FAS No. 130, "Reporting of
Comprehensive Income". FAS No. 130 establishes standards for the display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from the issuance of shares of stock and distributions to
shareholders. There were no differences between net income and comprehensive
income.
Business Segments
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". FAS No. 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes the Company's operations comprise only
one segment and as such adoption of FAS No. 131 did not impact the disclosures
made in the Company's financial statements.
Comparative Figures
Certain of the 1997 and 1998 amounts have been reclassified to conform to
the presentation adopted in the current year.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Network equipment........................................... $ 59,805 $ 67,361
Other property and equipment................................ 5,567 7,517
-------- --------
65,372 74,878
Accumulated depreciation.................................... (20,763) (27,561)
Construction-in-progress.................................... 6,448 3,160
-------- --------
Net book value.............................................. $ 51,057 $ 50,477
======== ========
</TABLE>
Total depreciation and amortization expense on property and equipment for
1997, 1998 and 1999 was $5,177, $6,206 and $7,736, respectively, including $135
yearly amortization expense related to deferred expenses.
NOTE 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, for the years ended December 31, 1997, 1998 and 1999 represents the
provision for current and deferred taxes.
F-47
<PAGE> 135
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current tax expense..................................... $ 5,850 $ 3,753 $ 9,111
Deferred tax expense (benefit).......................... (186) 2,376 (1,504)
------- ------- -------
Provision for income taxes.............................. $ 5,664 $ 6,129 $ 7,607
======= ======= =======
</TABLE>
A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Income tax expense at statutory tax rate of 35%; 30%
from April 1, 1999.................................... $ 8,445 $ 3,636 $ 3,950
Tax effect of permanent differences:
Effect of change in tax rate.......................... -- -- 91
Investment incentive deductions....................... (4,318) (3,753) (879)
Tax loss carryforwards utilized....................... (34) -- --
Depreciation differences due to revaluation of fixed
assets............................................. 735 1,625 997
Taxes on local currency exchange gains................ -- 3,241 1,204
Other permanent differences........................... 1,266 890 2,526
Increase (decrease) in the valuation allowance for
deferred tax assets................................... (430) 490 (282)
------- ------- -------
Income tax expense reported in the financial
statements............................................ $ 5,664 $ 6,129 $ 7,607
======= ======= =======
</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 1999
------ ------- -------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Depreciation........................................... $ 398 $ 393 $ 492
Inventory write-downs and allowances................... 235 257 150
Accrual of expenses.................................... 1,132 965 749
Reserve for bad debt................................... -- -- 186
------ ------- -------
Gross tax assets......................................... 1,765 1,615 1,577
Accrual of revenue..................................... (946) (1,134) (515)
Taxes on unrealized local currency exchange gains...... -- (1,561) (920)
Other deferred tax liabilities......................... (13) -- --
------ ------- -------
Gross tax liabilities.................................... (959) (2,695) (1,435)
------ ------- -------
Net deferred tax (liabilities)/assets.................... 806 (1,080) 142
Valuation allowance for deferred tax assets.............. (620) (1,110) (828)
------ ------- -------
Net deferred tax (liabilities)/assets.................... $ 186 $(2,190) $ (686)
====== ======= =======
</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.
F-48
<PAGE> 136
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid in cash Russian profits tax of $4,302, $7,309 and $7,889,
in 1997, 1998 and 1999, respectively.
NOTE 6. NOTE DUE TO AFFILIATE
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.
NOTE 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 $3,052 at December 31, 1999. Collective maximum borrowings that
are allowed under this agreement are $30,000. Total borrowings outstanding by
all entities under the General Credit Agreement totaled $19,741 at December 31,
1999. 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, 1999. The loan carries interest at a rate equal to the three-month
LIBOR rate plus 5.0 percent per annum (11.11% at December 31, 1999).
The Company paid in cash interest relating to notes due to affiliates and
short-term loans of $697, $0, and $388, in 1997, 1998 and 1999, respectively.
NOTE 8. MEMBERS' EQUITY
The Company's capital structure as specified in the charter capital
document is as follows as of December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Registered capital in Russian rubles:
Rostelecom................................................ 600 600
Golden Telecom, Inc. ..................................... 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, 1999 amounted
to 338 million rubles or approximately $12,500 at applicable year-end exchange
rates.
F-49
<PAGE> 137
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS
Transactions and balances with Rostelecom (one of the Company's members)
and its affiliates were as follows, as of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ------
<S> <C> <C> <C>
Sales.................................................... $ 2,310 $ 900 $ 412
Telecommunication lease and traffic costs................ 11,183 15,962 7,932
Amounts due to member and affiliates..................... 4,184 4,860 1,092
Cash deposit with related party.......................... 485 -- --
</TABLE>
At the request of Rostelecom, the Company placed a deposit of 2.65 million
rubles in August 1996 with a Russian bank related to this shareholder. The bank
deposit agreement stated a deposit term of one year, which was rolled over for
an additional year during 1997. The deposit earned interest quarterly at a rate
of 15% per annum plus any devaluation losses against the US dollar up to a
maximum of 4.8% per quarter. This amount was withdrawn in October and November
1998 for a total value of $121.
Transactions and balances with GTI and its affiliates were as follows, as
of and for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- ------
<S> <C> <C> <C>
Sales..................................................... $4,974 $ 5,097 $3,334
Telecommunication services................................ 7,433 10,498 9,246
Management service fees and reimbursements of expenses of
expatriate staff........................................ 1,318 1,265 976
Balances due under credit facility........................ 39 -- --
Interest expense.......................................... 503 -- --
Amounts due from affiliates............................... 1,586 1,329 646
Amounts due to member and affiliates...................... 5,919 7,876 2,600
</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>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Telecommunication settlement and rent expense........... $19,003 $15,001 $11,549
Balances in trade payables.............................. -- 39 1,542
Balances in accounts receivable......................... 487 266 95
Amount due to partner in commercial arrangement......... 1,350 1,350 929
Balances in prepaid expenses and other assets........... 800 -- --
</TABLE>
The Company also has an investment 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.
NOTE 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 within Russia. As of December 31, 1997, one customer
accounted for 11% of revenues and 11% of accounts receivable, respectively. As
of
F-50
<PAGE> 138
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, one customer accounted for 13% of revenues and 5% of accounts
receivable. As of December 31, 1999, another customer accounted for 10% 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.
NOTE 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 1997, 1998 and 1999 was $2,794, $2,261 and $4,019,
respectively.
NOTE 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 1999 and previous years
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, 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. 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 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.
In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of the management, the Company's liability, if
any, in all pending litigation, other legal proceeding or other matter other
than what is discussed above, will not have a material effect upon the financial
condition, results of operations or liquidity of the Company.
F-51
<PAGE> 139
EDN SOVINTEL LLC
FINANCIAL STATEMENTS
FOR THE FIRST QUARTER OF 2000
(UNAUDITED)
F-52
<PAGE> 140
EDN SOVINTEL LLC
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 2,644 $ 4,149
Accounts receivable, net of allowance for doubtful
accounts of $3,364 and $3,133, respectively............ 16,868 16,589
Due from affiliated companies............................. 645 751
Inventories............................................... 1,095 1,151
VAT receivable, net....................................... 2,547 1,811
Prepaid expenses and other current assets................. 1,764 2,411
------- -------
TOTAL CURRENT ASSETS.............................. 25,563 26,862
Property and equipment, net of accumulated depreciation of
$27,561 and $29,528 at December 31, 1999 and March 31,
2000...................................................... 50,477 50,503
Deferred expenses........................................... 675 641
Other noncurrent assets..................................... 909 --
------- -------
TOTAL ASSETS...................................... $77,624 $78,006
======= =======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Trade payables............................................ $ 8,963 $ 7,252
Accrued expenses.......................................... 3,237 3,373
Due to affiliated companies............................... 3,692 3,617
Amount due to partner in commercial arrangement........... 929 862
Short-term loan........................................... 3,052 3,052
Deferred income taxes..................................... 686 686
------- -------
TOTAL LIABILITIES................................. 20,559 18,841
MEMBERS' EQUITY................................... 57,065 59,165
------- -------
TOTAL LIABILITIES AND MEMBERS' EQUITY............. $77,624 $78,006
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 141
EDN SOVINTEL LLC
STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUES
Telecommunication services................................ $22,022 $21,974
Equipment sales and other revenue......................... 462 252
------- -------
22,484 22,226
OPERATING COSTS AND EXPENSES
Cost of revenue
Service costs.......................................... 13,238 11,507
Equipment costs and other cost of revenue.............. 300 214
Selling, general and administrative....................... 4,193 4,081
Depreciation and amortization............................. 1,859 2,014
------- -------
TOTAL OPERATING COSTS AND EXPENSES................ 19,590 17,816
------- -------
INCOME FROM OPERATIONS...................................... 2,894 4,410
OTHER INCOME (EXPENSE)
Interest income........................................... 25 34
Interest expense.......................................... (87) (90)
Foreign currency losses................................... (899) (157)
------- -------
TOTAL OTHER INCOME (EXPENSE)...................... (242) (213)
------- -------
Net income before taxes..................................... 1,933 4,197
Income taxes................................................ 945 2,096
------- -------
NET INCOME........................................ $ 988 $ 2,101
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 142
EDN SOVINTEL LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 988 $ 2,101
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,859 2,014
Provision for doubtful accounts........................ 335 423
Foreign exchange loss.................................. 899 157
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,125) (190)
Inventories............................................ 422 (56)
Prepaid expenses and other assets...................... 411 277
VAT receivable, net.................................... (2,304) 458
Trade payables......................................... 1,027 (2,019)
Accrued liabilities and other payables................. 59 586
Taxes accrued or payable............................... 386 348
Decrease in amounts due to affiliated companies, net... (3,256) (396)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES....................................... (299) 3,703
INVESTING ACTIVITIES
Purchases of property and equipment....................... (1,951) (2,006)
------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (1,951) (2,006)
FINANCING ACTIVITIES
Payment to partner in commercial arrangement.............. -- (67)
------- -------
NET CASH USED IN FINANCING ACTIVITIES............. -- (67)
Effect of exchange rate changes on cash................... (747) (125)
------- -------
Net (decrease) increase in cash........................... (2,997) 1,505
Cash at beginning of period............................... 5,116 2,644
------- -------
CASH AT END OF PERIOD............................. $ 2,119 $ 4,149
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 143
EDN SOVINTEL LLC
NOTES TO 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 and later expand
its operations to other regions of Russia, including St. Petersburg, Pskov and
Kaliningrad. 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 operates under a license issued by the Ministry of Communication,
including a license authorizing the Company to provide local, interzonal,
intercity and international telephone services, which license expires March 17,
2008. The Company received a license for leased lines on January 15, 1999 valid
till September 20, 2001. The Company began operating in December 1991, providing
services under contracts generally denominated 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 controlled by a joint
stock holding company, Svyazinvest, which is, in turn, majority owned by the
Russian government, and 50% owned by Sovinet, a Delaware corporation, which is a
wholly owned subsidiary of Golden Telecom, Inc. ("GTI").
A high level of political, financial and economic instability exists within
the CIS. As a result of the financial crisis in Russia that began in August
1998, financial markets throughout the CIS were subject to significant downward
adjustments. The Russian national currency was severely devalued during the
crisis and has only recently entered into a phase of relatively controlled and
graduated devaluation. The Russian banking system suffered significant liquidity
problems, and several large Russian banking institutions ceased 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
continues to negotiate forgiveness and/or restructuring of its external debt.
Difficulties with the collection of budgeted tax revenues and fulfillment of the
significant pension and wages arrearages to individuals in many regions and
constituencies of the Russian Federation continued throughout 1999 and may have
only recently abated, owing primarily to increases in world energy prices. Any
dramatic decline in world energy prices is likely to cause a reoccurrence of the
social and economic problems associated with budgetary shortfalls in Russia. 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 international
political institutions and funding agencies. Although these matters continue to
have a lingering negative impact on the financial position and results of
operations of the Company, several positive developments have recently occurred.
These developments include the election of a Duma, the lower house of the
Russian parliament, decidedly more progressive than its predecessor in December
1999, the resignation of former president Boris Yeltsin on December 31, 1999,
and the election in March 2000 of former Prime Minister Vladimir Putin to the
presidency. These political events are evidence of the continued development of
democratic and constitutional procedures in Russia and have led to increased and
relative political stability. In addition, the massive technical breakdowns and
disruptions predicted by many upon the occurrence of the year 2000 failed to
materialize throughout the CIS.
The financial statements 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. In the opinion of
management, the financial statements
F-56
<PAGE> 144
EDN SOVINTEL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1999 audited consolidated financial statements
and the notes related thereto. The results of operations for the three months
ended March 31, 2000 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.
2. POLICIES AND PROCEDURES
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from nonowner sources. For the three
months ended March 31, 1999 and 2000, 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, and official in 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 final 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, 1999 and March 31, 2000. Management believes, based upon its best estimates,
that the Company has paid or accrued all taxes that are applicable for the
current and prior years, and complied with all essential provisions of laws and
regulations of the Russian Federation.
The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation and tax regulations, which significantly impact the
Russian economy. The likelihood of such occurrences and their effect on the
Company could have a significant impact on the Company's current activity and
its overall ability to continue operations. The Company does not believe that
these contingencies, as related to its operations, are any more significant than
those of similar enterprises in Russia.
F-57
<PAGE> 145
GLOSSARY OF TELECOMMUNICATIONS INDUSTRY TERMS
AMPS (Advanced Mobile Phone System) -- The cellular mobile telephone system
based on analog technology that is now used in US systems. Each AMPS cell can
handle 832 simultaneous conversations.
Asynchronous Transfer Mode (ATM) -- A switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a switching and
transmission of mixed voice, data, and video at varying rates. The asynchronous
transfer mode format can be used by many different information systems,
including LANs.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The information-carrying capability of a transmission medium
is measured by its bandwidth, which is the relative range of frequencies that
can be passed without distortion by such medium. Bandwidth is measured in Hertz,
but may also be expressed as the number of bits that can be transmitted per
second.
Capacity -- The information carrying ability of a telecommunications
facility.
Carrier -- A provider of communications transmission services by fiber,
wire, or radio.
Competitive Local Exchange Carrier (CLEC) -- A competitive local exchange
carrier is an alternative local carrier that competes with incumbent operators
by offering a similar range of services, typically on the competitive local
exchange carrier's overlay network. Competitive local exchange carriers compete
on a selective basis for local exchange services, as well as long distance,
international, Internet access and entertainment.
Dedicated -- Refers to telecommunications lines dedicated to or reserved
for use by particular customers along predetermined routes (in contrast to
telecommunications lines within the local telephone company's public switched
network).
Digital -- Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission/switching technologies
employ a sequence of discrete, distinct pulses to represent information, as
opposed to the continuously variable analog signal.
Earth Station -- A terrestrial antenna and the supporting equipment used to
receive and/or transmit telecommunications signals via satellite.
Electrosvyaz -- Regional telephone company in Russia and other countries of
the Commonwealth of Independent States.
Enhanced Network Services -- Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, asynchronous
transfer mode, or digital interexchange private line facilities. Enhanced
network services also include applications on such networks, including Internet
access and other Internet services.
Frame Relay -- A wide area transport technology that organizes data into
units called frames instead of providing fixed bandwidth as with private lines.
A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access speeds
ranging from 56 kilobits per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not presently well-suited
for voice and video applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on modern fiber optic
networks.
Gateway -- A network element interconnecting two otherwise incompatible
networks, network nodes, subnetworks or devices; performs a protocol conversion
operation across a wide spectrum of communications functions.
G-1
<PAGE> 146
GSM (Global System for Mobile Communications) -- Formerly known as Groupe
Speciale Mobile. GSM began as a pan-European standard for digital cellular
systems. The name was changed to reflect the fact that the standard has been
adopted by several countries in Asia.
Interconnection -- Connection of a piece of telephone equipment to the
telephone network, or a data terminal to a data communications network. Also
refers to the connection of one communications network to another so that users
of one network can communicate with users of another network.
IPLC (International Private Leased Circuits) -- A direct channel leased
from a carrier which is dedicated to a customer's use between specified points
across national boundaries.
ISDN (Integrated Services Digital Network) -- ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, for example, and also
supports a multitude of value-added switched service applications. ISDN's
combined voice and data networking capabilities reduce costs for end users and
result in more efficient use of available facilities. ISDN combines standards
for highly flexible customer to network signaling with both voice and data
within a common facility.
LAN (Local Area Network) -- The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
Local Loop -- The local loop is that portion of the local telephone network
that connects the customer's premises to the local exchange provider's central
office or switching center. This includes all the facilities starting from the
customer premise interface which connects to the inside wiring and equipment at
the customer premise to a terminating point within the switching wire center.
MAN (Metropolitan Area Network) -- A high-speed data intra-city network
that links multiple locations within a city. Typically extends as far as 50
kilometers, operates at speeds from 1 megabits per second to 200 megabits per
second and provides an integrated set of services for real-time data, voice and
image transmission.
NMT (Nordic Mobile Telephone System) -- A cellular standard widely used in
Northern Europe.
Overlay Network -- An overlay network is a separate, independent
telecommunications network offering a particular service, or group of services,
in a geographical area similar to the area serviced by an incumbent operator. An
overlay network is typically deployed to address performance issues in a local
public telephone network that has not been sufficiently upgraded or maintained
or which does not have adequate capacity to service the needs of large volume
users.
PBX/PABX (private branch exchange/private automatic branch exchange) -- A
customer operated switch on customer premises, typically used by large
businesses with multiple telephone lines.
POP (Point of Presence) -- A physical place where a carrier has placed
equipment, typically a router or a switch, to allow network access.
Port -- A port is any point of entry or exit into a network.
Private Line -- A direct channel specifically dedicated to a customer's use
between specified points. Private lines offer highly available connectivity, as
they are dedicated to the use of a single organization. As private lines are
priced solely based on distance, with no usage-sensitive cost element, they can
be used constantly and at maximum capacity. Therefore, they offer a highly
cost-effective alternative to usage-sensitive, switched services. Private
networks comprise numbers of private lines.
PSTN (Public switched telecommunications network) -- Refers to the local,
long distance and international phone system typically used by the public at
large.
G-2
<PAGE> 147
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> 148
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
SEC Registration Fee...................................... $ 19,276
Accounting Fees and Expenses.............................. $ 10,000
Legal Fees and Expenses................................... $ 25,000
Printing Expenses......................................... $ 5,000
Miscellaneous............................................. $ 724
--------
Total........................................... $ 60,000
========
</TABLE>
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. In addition, Golden Telecom, Inc. maintains liability insurance for its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 10, 1999, the Company issued 100 shares of common stock, par value
$0.01, at a purchase price of $0.01 per share, for an aggregate offering price
of $1.00 to Global TeleSystems, Inc. No underwriter or underwriting discount was
involved in the offering. Exemption from registration was claimed under the
Securities Act of 1922, as amended (the "Securities Act") afforded by Section
4(2) thereof.
On September 29, 1999, the Company issued 10,599,900 shares of common
stock, par value $0.01, to Global TeleSystems, Inc., in exchange for the
contribution, transfer and assignment of the capital stock and ownership
interest in certain contributed subsidiaries. No underwriter or underwriting
discount was involved in the offering. Exemption from registration was claimed
under the Securities Act, pursuant to Section 4(2) thereof.
On September 30, 1999, the Company issued 420,000 shares of common stock,
par value $0.01 to First NIS Regional Fund SICAV in exchange for its ownership
interest in Golden Telecom (Ukraine). In accordance with the subscription
agreement filed with the SEC at the time of our IPO, a further 30,000 shares of
our common stock were issued on March 1, 2000 to First NIS Regional Fund SICAV
in full and final payment for its ownership interest in Golden Telecom
(Ukraine). No underwriter or underwriting discount was involved in the offering.
Exemption from registration was claimed under the Securities Act pursuant to
Rule 144.
On September 30, 1999, the Company issued 178,253 shares of common stock,
par value $0.01, at a purchase price of $11.22 per share, for an aggregate
offering of $2.0 million to First NIS Regional Fund SICAV. No underwriter or
underwriting discount was involved in the offering. Exemption from registration
was claimed under the Securities Act pursuant to Rule 144.
On September 30, 1999, the Company issued 267,380 shares of common stock,
par value $0.01, at a purchase price of $11.22 per share, for an aggregate
offering of $3.0 million to Barings Vostok Private Equity Fund L.P. No
underwriter or underwriting discount was involved in the offering. Exemption
from registration was claimed under the Securities Act pursuant to Rule 144.
On December 24, 1999 the Company issued privately 1,250,000 shares of
common stock, par value $0.01, at a purchase price of $12.00 per share, for an
aggregate offering of $15.0 million, to Capital International Global Emerging
Markets Private Equity Fund, L.P. Deutsche Bank AG London acted as
II-1
<PAGE> 149
underwriters in the offering and the aggregate discount was $0.3 million.
Exemption from registration was claimed under the Securities Act pursuant to
Rule 144.
We intend to use our net proceeds from the unregistered sales of securities
together with the proceeds from GTS and other strategic investors and our IPO
for the following purposes:
- potential acquisitions and business development;
- network expansion;
- working capital; and
- general corporate purposes.
Until we use the net proceeds, we are investing them in short-term
interest-bearing US government securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Amended and Restated Certificate of Incorporation of
Golden Telecom, Inc.
3.2** -- Amended and Restated By-laws of Golden Telecom, Inc.
4.1** -- Specimen certificate representing shares of Common Stock
4.2** -- Form of Registration Rights Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
4.3** -- Form of warrant Agreement
4.4** -- Form of Registration Rights Agreement among Baring Vostok
Private Equity Fund LP, Guernsey, First NIS Regional Fund
SICAV and Golden Telecom, Inc.
5.1* -- Opinion of Golden Telecom, Inc. General Counsel
10.1** -- Form of Contribution Agreement between Global TeleSystems
Group, Inc. and Golden Telecom, Inc.
10.2** -- Form of Shareholders' Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.3** -- Form of Administrative Services Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.4** -- Form of Trademark Transfer Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.5** -- Form of Indemnification Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.6** -- Form of Employee Benefits Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.7** -- Form of Golden Telecom, Inc. 1999 Equity Participation
Plan
10.8** -- Agreement No. 26-12/97, dated December 26, 1997, among
TCM, MTU-Inform and VimpelCom.
10.9** -- Agreement No. 08-04/98, dated April 8, 1998, among TCM,
MTU-Inform and VimpelCom.
10.10** -- Agreement No. 01-08/98, dated August 1, 1998, among TCM,
MTU-Inform and KB-Impulse.
</TABLE>
II-2
<PAGE> 150
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION
----------- -----------
<C> <S>
10.11**** -- Agreement No. 311299-TP, dated December 31, 1999, among
TeleRoss, KB-Impulse and VimpelCom.
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).
24.* -- Powers of Attorney (included on signature page).
99.1*** -- Subscription Agreement between Capital International
Global Emerging Markets Private Equity Fund L.P., and
Golden Telecom, Inc.
99.2*** -- Form of Shareholders and Registration Rights Agreement
between Capital International Global Emerging Markets
Private Equity Fund L.P., Global TeleSystems Group, Inc.,
and Golden Telecom, Inc.
</TABLE>
---------------
* Filed herewith.
** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's registration statement on Form S-1 dated July 14, 1999 and
amendments (Commission File No. 333-82791).
*** Incorporated by reference to the correspondingly numbered Exhibits to
Schedule 13D of Capital International Global Emerging Markets Private
Equity Fund L.P., dated December 27, 1999 (Commission File No. 005-56995).
**** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's annual report on Form 10-K dated March 21, 2000 (Commission File
No. 0-27423).
(b) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of the Company are included
as part of this document:
- Report of Ernst & Young (CIS) Limited, Independent Auditors
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Operations for each of the Three Years Ended
December 31, 1999
- Consolidated Statements of Cash Flows for each of the Three Years Ended
December 31, 1999
- Consolidated Statements of Changes in Shareholders' Equity for each of
the Three Years Ended December 31, 1999
- Notes to Consolidated Financial Statements for the Year Ended December
31, 1999
- Consolidated Balance Sheet as of March 31, 2000 and December 31, 1999
- Consolidated Statements of Operations for each of the Quarter Ended March
31, 2000 and 1999
- Consolidated Statements of Cash Flows for each of the Quarter Ended March
31, 2000 and 1999
- Notes to Consolidated Financial Statements for the quarter ended March
31, 2000
II-3
<PAGE> 151
The following financial statements of our significant equity investee,
Sovintel LLC, are included as part of this document:
- Report of Ernst & Young (CIS) Limited, Independent Auditors
- Balance Sheets as of December 31, 1999 and 1998
- Statements of Income for each of the Three Years Ended December 31, 1999
- Statements of Cash Flow for each of the Three Years Ended December 31,
1999
- Statements of Members' Equity for the Year Ended December 31, 1999
- Notes to Financial Statements for the Year Ended December 31, 1999
- Balance Sheet as of March 31, 2000 and December 31, 1999
- Statements of Income for each of the Quarter Ended March 31, 2000 and
1999
- Statements of Cash Flows for each of the Quarter Ended March 31, 2000 and
1999
- Notes to Financial Statements for the quarter ended March 31, 2000
2. Consolidated Financial Statement Schedules
We have furnished Schedule II -- Valuation and Qualifying Accounts on Page
II-8.
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
persons of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling persons in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by the 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) To file, during any period in which offers or sales are being
made, a post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregates, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
II-4
<PAGE> 152
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 153
SIGNATURES
Pursuant to the requirements of the Securities Act 1933, as amended, the
registrant certifies that is has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Moscow, Russian Federation, on this 14th day of June, 2000.
GOLDEN TELECOM, INC.
By: /s/ DAVID J. WISHER
----------------------------------
Name: David J. Wisher
Title: Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
We, the undersigned officers and directors of Golden Telecom, Inc. hereby
severally constitute and appoint, Stewart P. Reich, Jeffrey A. Riddell, and
David J. Wisher and each of them singly, as his true and lawful attorney-in-fact
and agents with full power of substitution and resubstitution, for him, and in
his name, place and stead, in any and all capacities to sign any and all
amendments and supplements to the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and, in connection with any registration of additional
securities pursuant to Rule 462 (b) under the Securities Act of 1933, as
amended, to sign any abbreviated registration statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, in each case, with our names and on our
behalf in our capacities as officers and directors to enable Golden Telecom,
Inc. to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorney to said
Registration Statement and any and all amendments thereto.
II-6
<PAGE> 154
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 14th day of June, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEWART P. REICH President, Chief Executive Officer June 14, 2000
----------------------------------------------------- and Director (Principal
Stewart P. Reich Executive Officer)
/s/ DAVID J. WISHER Chief Financial Officer and June 14, 2000
----------------------------------------------------- Treasurer
David J. Wisher
/s/ ASHLEY DUNSTER Director June 14, 2000
-----------------------------------------------------
Ashley Dunster
/s/ IZZET GUNEY Director June 14, 2000
-----------------------------------------------------
Izzet Guney
/s/ ALEXANDR M. KNASTER Director June 14, 2000
-----------------------------------------------------
Alexandr M. Knaster
/s/ STEWART J. PAPERIN Director June 14, 2000
-----------------------------------------------------
Stewart J. Paperin
/s/ GRIER C. RACLIN Director June 14, 2000
-----------------------------------------------------
Grier C. Raclin
/s/ ROBERT A. SCHRIESHEIM Director June 14, 2000
-----------------------------------------------------
Robert A. Schriesheim
/s/ JEFFREY VON DEYLEN Director June 14, 2000
-----------------------------------------------------
Jeffrey Von Deylen
/s/ H. BRIAN THOMPSON Chairman of the Board of Directors June 14, 2000
-----------------------------------------------------
H. Brian Thompson
</TABLE>
II-7
<PAGE> 155
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 AT
BEGINNING COSTS AND FROM END
DESCRIPTION OF PERIOD EXPENSES ACQUISITIONS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts at
12/31/99................................. 4,208 1,288 -- (1,486) 4,010
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
</TABLE>
EDN SOVINTEL LLC
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO RESERVES BALANCE AT
BEGINNING COSTS AND FROM END
DESCRIPTION OF PERIOD EXPENSES ACQUISITIONS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts at
12/31/99................................. 2,427 1,900 -- (963) 3,364
Allowance for doubtful accounts at
12/31/98................................. 643 2,650 -- (866) 2,427
Allowance for doubtful accounts at
12/31/97................................. 900 345 -- (602) 643
</TABLE>
II-8
<PAGE> 156
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1** -- Amended and Restated Certificate of Incorporation of
Golden Telecom, Inc.
3.2** -- Amended and Restated By-laws of Golden Telecom, Inc.
4.1** -- Specimen certificate representing shares of Common Stock
4.2** -- Form of Registration Rights Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
4.3** -- Form of warrant Agreement
4.4** -- Form of Registration Rights Agreement among Baring Vostok
Private Equity Fund LP, Guernsey, First NIS Regional Fund
SICAV and Golden Telecom, Inc.
5.1* -- Opinion of Golden Telecom, Inc. General Counsel
10.1** -- Form of Contribution Agreement between Global TeleSystems
Group, Inc. and Golden Telecom, Inc.
10.2** -- Form of Shareholders' Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.3** -- Form of Administrative Services Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.4** -- Form of Trademark Transfer Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.5** -- Form of Indemnification Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.6** -- Form of Employee Benefits Agreement between Global
TeleSystems Group, Inc. and Golden Telecom, Inc.
10.7** -- Form of Golden Telecom, Inc. 1999 Equity Participation
Plan
10.8** -- Agreement No. 26-12/97, dated December 26, 1997, among
TCM, MTU-Inform and VimpelCom.
10.9** -- Agreement No. 08-04/98, dated April 8, 1998, among TCM,
MTU-Inform and VimpelCom.
10.10** -- Agreement No. 01-08/98, dated August 1, 1998, among TCM,
MTU-Inform and KB-Impulse.
10.11**** -- Agreement No. 311299-TP, dated December 31, 1999, among
TeleRoss, KB-Impulse and VimpelCom.
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).
24.* -- Powers of Attorney (included on signature page).
99.1*** -- Subscription Agreement between Capital International
Global Emerging Markets Private Equity Fund L.P., and
Golden Telecom, Inc.
99.2*** -- Form of Shareholders and Registration Rights Agreement
between Capital International Global Emerging Markets
Private Equity Fund L.P., Global TeleSystems Group, Inc.,
and Golden Telecom, Inc.
</TABLE>
---------------
* Filed herewith.
<PAGE> 157
** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's registration statement on Form S-1 dated July 14, 1999 and
amendments (Commission File No. 333-82791).
*** Incorporated by reference to the correspondingly numbered Exhibits to
Schedule 13D of Capital International Global Emerging Markets Private
Equity Fund L.P., dated December 27, 1999 (Commission File No. 005-56995).
**** Incorporated by reference to the correspondingly numbered Exhibit to the
Company's annual report on Form 10-K dated March 21, 2000 (Commission File
No. 0-27423).
