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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 333-5396-06
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PLD CAPITAL ASSET (U.S.) INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3996647
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
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505 PARK AVENUE, 21ST FLOOR, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(212) 527-3800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE -- 1,000 SHARES (AUGUST 9, 1999)
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PLD CAPITAL ASSET (U.S.) INC.
INDEX
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PAGE
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Recent Developments......................................... 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PLD Capital Asset (U.S.) Inc.
Condensed Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998................... 6
Condensed Statements of Operations (Unaudited) for
the three and six months ended June 30, 1999 and
1998................................................ 7
Condensed Statements of Cash Flows (Unaudited) for
the six months ended June 30, 1999 and 1998......... 8
Notes to Condensed Financial Statements (Unaudited)
for the three and six months ended June 30, 1999.... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 16
Item 6. Exhibits and Reports on Form 8-K.................. 16
</TABLE>
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PLD Capital Asset (U.S.) Inc. (the "Company") is a wholly owned subsidiary
of PLD Telekom Inc. ("PLD"). The Company was formed to purchase and resell or
lease telecommunications equipment to other subsidiaries of PLD.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), solely because
of the guarantees it has issued in respect of PLD's outstanding 14% Senior
Discount Notes due 2004 (the "Senior Notes") and 9% Convertible Subordinated
Notes due 2006 (the "Convertible Notes"). Upon the completion of PLD's merger
with Metromedia International Group, Inc. described below under "Recent
Developments", the Company's guarantees will be terminated and it will cease to
be subject to the periodic reporting requirements of the Exchange Act.
RECENT DEVELOPMENTS
Merger with Metromedia International Group, Inc.
On May 18, 1999 PLD entered into an agreement (the "Merger Agreement") with
Metromedia International Group, Inc. ("MMG") pursuant to which PLD would merge
with Moscow Communications, Inc., a newly formed, wholly owned subsidiary of
MMG.
MMG is a global communications company engaged in the development and
operation of a variety of communications businesses, including cellular
telecommunications, fixed telephony, international and long distance telephony,
cable television, paging and radio broadcasting, in Eastern Europe, the former
Soviet Union, China and other selected emerging markets. Its common stock is
listed on the American and Pacific Stock Exchanges, under the symbol MMG.
Upon consummation of the merger (the "Merger"), PLD will become a wholly
owned subsidiary of MMG, and the holders of shares of common stock (the "Common
Stock") of PLD will receive shares of MMG on the basis of an exchange ratio
determined in the manner set forth below:
(a) if the Average MMG Stock Price (as defined below) is less than $6.25
and equal to or greater than $5.25, the exchange ratio will be equal to
$3.50 divided by the Average MMG Stock Price;
(b) if the Average MMG Stock Price is equal to or greater than $6.25 and
less than or equal to $8.00, the exchange ratio will be 0.56;
(c) if the Average MMG Stock Price is greater than $8.00, the exchange
ratio will be equal to $4.48 divided by the Average MMG Stock Price;
and
(d) if the Average MMG Stock Price is less than $5.25, then the exchange
ratio will be 0.6667. However, PLD has the right to terminate the
Merger Agreement if the Average MMG Stock Price is less than $5.25 if
MMG does not agree to increase (or "top up") the exchange ratio to an
amount equal to $3.50 divided by the Average MMG Stock Price, and the
further right to terminate the Merger Agreement in all events (without
MMG having any "top up" right) if the Average MMG Stock Price is less
than $4.00.
The "Average MMG Stock Price" is to be determined by taking the average of
the daily closing prices of the common stock of MMG on the American Stock
Exchange Composite Transactions Tape for the twenty consecutive trading days
ending on the third business day immediately prior to the meeting of the
shareholders of PLD which will be called to approve the Merger.
PLD's Series II and Series III Preferred Shares will be redeemed for cash
for a redemption price of Cdn. $1.00 per share. Outstanding options and warrants
to acquire PLD's Common Stock will be converted into options and warrants of MMG
on the basis of the exchange ratio, and any of the Convertible Notes which are
not exchanged under the terms of the exchange offer described below and are
still outstanding, will be assumed by MMG and may be convertible into common
stock of MMG also on the basis of the exchange ratio.
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Salomon Smith Barney Inc., who have acted as financial advisors to PLD,
have opined to the Board of Directors of PLD that the exchange ratio is fair
from a financial point of view to PLD, and Donaldson, Lufkin & Jenrette
Securities Corporation, who have acted as financial advisors to MMG, have opined
to the Board of Directors of MMG that the exchange ratio is fair from a
financial point of view to MMG.
In connection with the Merger Agreement, News America Incorporated ("News
America") which, through an affiliate, owns approximately 38% of PLD's Common
Stock, has entered into an agreement (the "Voting Agreement") with MMG pursuant
to which News America has agreed to vote its Common Stock in favor of the Merger
Agreement and not to vote for, solicit, discuss or support any other transaction
involving PLD which could have the effect of interfering with, preventing or
materially delaying the Merger.
In addition, MMG has entered into a bridge loan agreement with PLD pursuant
to which MMG has agreed to lend PLD up to $7.0 million, secured by an
approximately 58% interest in PLD's subsidiary Technocom Limited ("Technocom"),
at an annual interest rate of 10% to fund its ongoing operations during the
period from the execution of the Merger Agreement to the date that the Merger is
consummated (or the Merger Agreement is terminated). As of July 31, 1999, PLD
had borrowed $4.0 million under such bridge loan agreement.
The consummation of the Merger Agreement is subject to a number of
conditions, including the approval of the Merger by the shareholders of PLD and
of MMG, the receipt of various governmental clearances and consents, the absence
of any material adverse change in PLD's or MMG's respective businesses and
operations and other customary closing conditions. In addition, it is subject to
a number of other conditions, as follows:
(a) Exchange Offer. At least 95% in aggregate principal amount of each of
the Senior Notes and of the Convertible Notes (and, together with the
Senior Notes, the "Outstanding PLD Notes") shall have agreed to the
amendment of the indentures governing the Outstanding PLD Notes (the
"Existing Indentures") and exchanged such Notes for new 10 1/2% Senior
Notes due 2007 of MMG (the "New MMG Notes"). In this connection
substantially all of the holders of the Outstanding PLD Notes have
entered into an agreement with MMG, subject to the consummation of the
Merger and certain other conditions, to: (i) defer to the date the
Merger is consummated all interest payable on the Outstanding PLD Notes
during the period from the execution of the Merger Agreement to the
date the Merger is consummated; (ii) amend the Existing Indentures, and
(iii) tender all Outstanding PLD Notes held by them for New MMG Notes.
(b) Modification of Travelers Revolving Credit Agreement. The Travelers
Insurance Company and The Travelers Indemnity Company (collectively,
the "Travelers Parties") shall have consummated the transactions
contemplated by a note and warrant modification agreement (the
"Travelers Note Modification Agreement") entered into simultaneous with
the execution of the Merger Agreement. Under the Travelers Note
Modification Agreement the Travelers Parties have agreed not to
exercise any warrants held by them, or certain other rights which they
have under the Revolving Credit and Warrant Agreement dated November
26, 1997 with PLD, as amended (the "Travelers Revolving Credit
Agreement"), until the Merger is consummated (or the Merger Agreement
is terminated). In addition, MMG and the Travelers Parties have agreed
that, in the event that the Merger is consummated: (i) the guarantees
given by News America with respect to $3.1 million of the amounts due
to the Travelers Parties will be released; (ii) the amount due to the
Travelers Parties will be paid, as to $8.5 million on the date the
Merger is consummated, and as to the remaining $4.92 million in August
2000, together with interest at an annual rate of 10.5%; (iii) in lieu
of their rights under the Travelers Revolving Credit Agreement to
receive warrants to purchase Common Stock of PLD, the Travelers Parties
will receive at closing 100,000 shares of PLD's Common Stock (which
will be converted at closing into shares of MMG at the applicable
exchange ratio) and 10-year warrants to purchase 700,000 shares of
common stock of MMG at a price based upon 125% of the average closing
price of such common stock during December 2000, but not to be less
than $10 per share or more than $15 per share; and (iv) the Travelers
Revolving Credit Agreement will be
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amended and restated to reflect the foregoing matters and to provide
certain additional guarantees of the amounts due to the Travelers
Parties.
(c) News Letter Agreement. News America and MMG shall have consummated the
arrangements contemplated by a letter agreement (the "News Letter
Agreement") entered into between them simultaneous with the execution
of the Merger Agreement. Under the News Letter Agreement News America
has agreed not to exercise any rights under its Revolving Credit
Agreement dated as of September 30, 1998 with PLD, as amended (the
"News Revolving Credit Agreement") until the Merger is consummated (or
the Merger Agreement is terminated), and MMG has agreed that, on the
date that the Merger is consummated, it will cause: (i) the amount
advanced by News America under the News Revolving Credit Agreement,
namely, $6.45 million, to be repaid in full, together with interest at
an annual rate of 10% (in lieu of the 20% rate specified in the News
Revolving Credit Agreement); and (ii) the guarantees given by News
America to the Travelers Parties to be cancelled.
(d) Technocom Put/Call Agreement. PLD shall have completed the purchase of
the shares of Technocom from Plicom Limited ("Plicom") and Elite
International Limited ("Elite") in accordance with option modification
agreements with each of them (the "Option Modification Agreements")
entered into simultaneously with the execution of the Merger Agreement.
Under the Option Modification Agreements, Plicom and Elite have agreed
not to exercise their rights under their current put and call
agreements with PLD to require PLD to purchase their interests in
Technocom (currently exercisable after June 30, 1999) until the Merger
is consummated (or the Merger Agreement is terminated), and PLD has
agreed that, on the date that the Merger is consummated, it will
purchase Plicom's remaining 14.57% interest in Technocom for $8.75
million, and Elite's remaining 5.03% interest in Technocom for $3.85
million, such sums representing 50% of the amounts to which such
parties would have otherwise been entitled had they exercised their
rights under their current put and call agreements. In addition, PLD
has agreed to pay various other amounts due to Plicom and to cause its
release from any guarantees of obligations undertaken at the request of
PLD, and various other agreements with Plicom and Elite will be
terminated.
The Merger Agreement and the Merger have been unanimously approved by the
Boards of Directors of both MMG and PLD, and each Board is recommending their
approval by their respective stockholders.
The Merger Agreement may be terminated in its entirety by either MMG or PLD
in the event that the other is in material breach of the Merger Agreement, or in
the event that the stockholders of both companies do not approve the Merger or
that the Merger is not otherwise consummated by October 31, 1999. MMG also has
the right to terminate the Merger Agreement in the event that the Board of
Directors of PLD withdraws or modifies its approval of the Merger or recommends
(or fails to recommend against) a different transaction to the stockholders of
PLD.
In the event that MMG terminates the Merger Agreement as a result of PLD's
Board of Directors withdrawing or modifying its approval of the Merger or
recommending (or failing to recommend against) another transaction, or as a
result of a material breach by PLD of the Merger Agreement, or as a result of
the stockholders of PLD not approving the Merger at a time when a different
transaction had been announced, PLD will pay MMG a termination fee of $6.25
million plus its expenses (up to a maximum of $1.0 million).
Russian Economic and Political Turmoil
During 1998 there was considerable turmoil and uncertainty in the Russian
financial markets, prompted in large part by a drop in commodity prices and
economic problems in Russia, together with the crisis in the Asian financial
markets which began in late 1997. These developments were accompanied by a
substantial decline in the Russian stock market. These developments led the
Russian government to raise interest rates significantly and to seek special
assistance from the International Monetary Fund. In August 1998, the Russian
government announced a substantial widening of the trading band in which the
Russian Rouble would be permitted to float, together with a moratorium on
certain foreign debt payments. Thereafter the Rouble
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dropped substantially in value and traded outside of the high end of the band,
and the Russian government did not intervene to stop this trading, thereby
effectively acquiescing to a major devaluation of the Rouble. The latter part of
1998 and the first half of 1999 saw further declines in the value of the Rouble
and this process is expected to continue.
Also in August 1998 the Russian government announced a 90-day moratorium on
debt repayments. This moratorium caused considerable difficulties for Russian
banks and businesses with hard currency obligations, as well as significantly
impairing the ability of such banks and businesses, as well as the Russian
government itself, to access the Western capital markets. The difficulties
experienced by the Russian banks in turn caused difficulties for their
customers, as bank transfers and deposits were frozen in many cases. The Russian
government itself has effectively defaulted on substantial amounts of its debt,
and is engaged in negotiations with Western banks and institutions (which reach
back several months) to restructure this indebtedness. Continuation of these
conditions for any significant period of time could have serious long-term
effects on the Russian economy. At the present time, it is impossible to predict
whether or when any resolution of these problems is likely.
In August 1998, the Russian government experienced a significant upheaval,
with the dismissal of the reformist government led by Sergei Kiriyenko and its
replacement by one led by Yevgeny Primakov. The Primakov government did not
propose a plan to address Russia's economic and financial difficulties, one
result of which was to cause the International Monetary Fund to delay further
assistance to the Russian government. In 1999, further political upheavals
occurred, as President Boris Yeltsin first dismissed the Primakov government in
May 1999 and selected Sergei Stepashin as the new Prime Minister, and then in
turn replaced him with Vladimir Putin in August 1999. It is too soon to predict
what policies will be adopted by the new Putin government. These frequent
governmental reshufflings create increased uncertainty about the future
political situation in Russia, which in turn creates additional concern about
the ability of the government to deal with the many problems currently
afflicting the Russian economic system.
At the present time, it is not possible to predict the complete effect of
the continuing economic, financial and political difficulties in Russia,
although they have made for a difficult business environment in Russia. The
Company is not yet able to predict the effects of the ongoing difficulties on
its results for 1999, but the continuing economic difficulties in Russia may
have an adverse effect on the Company in current and future reporting periods,
and there can be no assurance that such adverse effects will not be material.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
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JUNE 30, DECEMBER 31,
1999 1998
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Assets:
Current:
Cash and cash equivalents.............................. $ 10 $ 10
Other receivables and prepaids......................... 390 228
Assets held for resale................................. 4,994 3,949
Due from related parties -- installment sales
contracts............................................. 5,111 6,408
------- -------
Total current assets.............................. 10,505 10,595
Escrow funds.............................................. 2,218 528
Due from related parties -- installment sales contracts... 3,513 3,806
------- -------
Total assets...................................... $16,236 $14,929
======= =======
Liabilities and Shareholder's Equity:
Current liabilities:
Accounts payable and accrued liabilities............... 917 1,977
Due to related parties................................. 6,015 5,035
Current portion of long-term debt...................... 355 --
------- -------
Total current liabilities......................... 7,287 7,012
Long-term debt............................................ 741 --
Shareholder's equity:
Capital stock:
Additional paid-in capital................................ 6,641 6,641
Retained earnings......................................... 1,567 1,276
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Total shareholder's equity........................ 8,208 7,917
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Total liabilities and shareholder's equity........ $16,236 $14,929
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</TABLE>
See accompanying notes to condensed financial statements.
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PLD CAPITAL ASSET (U.S.) INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1999 1998 1999 1998
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Revenues:
Interest income........................................... $193 $132 $416 $342
Operating expenses:
General and administrative................................ -- -- -- --
---- ---- ---- ----
Operating income............................................ 193 132 416 342
Interest expense............................................ (41) -- (41) --
Foreign exchange gain....................................... 73 -- 73 --
---- ---- ---- ----
Income before taxes......................................... 225 132 448 342
Income taxes................................................ 79 5 157 14
---- ---- ---- ----
Net income.................................................. $146 $127 $291 $328
==== ==== ==== ====
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See accompanying notes to condensed financial statements.
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PLD CAPITAL ASSET (U.S.) INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
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1999 1998
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Cash flows from operating activities:
Net income............................................. $ 291 $ 328
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Increase in supplier prepayments.................. (89) --
Increase in assets held for resale................ (149) --
Change in due from or due to related parties,
net.............................................. 1,736 (328)
Increase in accounts payable and accrued
liabilities...................................... (99) --
------- -----
Net cash provided by operating activities....... 1,690 --
Cash flows from investing activities:
Escrow............................................... (1,690) --
------- -----
Net cash used in investing activities........... (1,690) --
------- -----
Increase /(decrease) in cash and cash equivalents........... -- --
Cash and cash equivalents, beginning of period.............. 10 10
------- -----
Cash and cash equivalents, end of period.................... $ 10 $ 10
======= =====
Supplemental disclosures:
Non-cash investing and financing activities:
Purchase of equipment with advances from PLD Telekom Inc.
and suppliers.......................................... $ 895 $ --
======= =====
</TABLE>
See accompanying notes to condensed financial statements.
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PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by PLD Capital Asset (U.S.) Inc. ("PLDCA" or the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the condensed financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. Certain information and footnote disclosures generally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for interim periods are not necessarily indicative of the
results for a full year. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto for the fiscal year
ended December 31, 1998.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
PLDCA was incorporated on March 24, 1998 under the laws of the State of
Delaware and is a wholly-owned subsidiary of PLD Telekom Inc. ("PLD" or the
"Parent"). The Company was formed as a special purpose subsidiary to enter into
installment sales agreements in respect of certain telecommunications equipment
required by PLD's operating subsidiaries located in Russia and Kazakhstan. On
June 30, 1998, PLDCA assumed the assets, liabilities and business of PLD Asset
Leasing Limited ("PLDAL"). PLDCA recorded such assets and liabilities at the
historical cost of PLDAL, since the entities were under common control. Amounts
presented for the three and six months ended June 30, 1998 reflect the results
of operations and cash flows of PLDAL. PLDAL is a Cypriot company wholly owned
by the Parent, which existed to enter into lease agreements with related
companies. PLDAL is presently inactive and PLD is in the process of liquidating
PLDAL.
Ultimate recoverability of the Company's investments is dependent upon each
of PLD's subsidiaries and affiliates with which it has entered into installment
sales contracts, achieving and maintaining profitability, which is dependent to
a certain extent on a stabilization of the economies of the former Soviet Union,
the ability of these companies to maintain their telecommunications licenses and
their ability to obtain adequate financing to meet capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Guarantees
In June 1996, PLD issued senior discount notes (the "Senior Notes") and
convertible subordinated notes (the "Convertible Notes") with an aggregate
principal amount of $149.5 million (together, the "Notes"). The Company is a
guarantor of this debt under the terms of the related indentures.
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. PLD's failure to
make payment in full of its current debt obligations could result in a
cross-default under and acceleration of the Senior Notes and Convertible Notes.
In addition, any failure by PLD to make interest payments on the Senior Notes
and Convertible Notes could result in a default under and acceleration of those
Notes. Any such events could result in a claim being made against the Company
under its guarantee, which would have a material adverse effect on the Company
and raise substantial doubt about the Company's ability to continue as a going
concern.
On May 18, 1999, PLD entered into a Merger Agreement with Metromedia
International Group, Inc. ("MMG") pursuant to which PLD will become a wholly
owned subsidiary of MMG, upon the terms and conditions set forth therein (the
"Merger"). In connection with the Merger Agreement and the transactions
contemplated thereunder, substantially all of the holders of the Senior Notes
and Convertible Notes have agreed, subject to completion of the Merger and the
other transactions contemplated by the Merger
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PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Agreement, to defer to the date the Merger is consummated all of the interest
payable on the Notes during the period from the execution of the Merger
Agreement to the date of consummation of the Merger and to exchange their
outstanding Notes for new notes issued by MMG which will not be guaranteed by
the Company.
While agreements have been reached with substantially all of the holders of
the Senior Notes and Convertible Notes and with other parties involving PLD's
obligations to such parties, those agreements are conditioned upon the closing
of the Merger. If the Merger did not close, PLD would remain obligated to pay
interest on the Senior Notes and Convertible Notes and there can be no assurance
that the other parties would not demand payment in full of PLD's current debt
obligations to them.
(b) Purchase Commitments
As of June 30, 1999, the Company had entered into purchase commitments with
unaffiliated companies relating to telecommunications equipment amounting to
$704,000.
(c) Deferral of Payments to Supplier
Pursuant to an amendment to a supply contract with Siemens, which was
originally entered into in August 1997, the Company has restructured the amount
outstanding as of June 30, 1999 of $1.1 million, whereby $0.7 million has been
deferred for payment during the period June 30, 2000 to December 31, 2003.
(4) RESTRICTED CASH
Pursuant to the terms of PLD's $149.5 million private placement completed
on June 12, 1996, $2.2 million was in the Company's escrow account on June 30,
1999. These funds may only be used for certain specified purposes, principally
for the purchase of telecommunications equipment and the payment of interest on
PLD's Senior Notes.
(5) COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, comprehensive
income was equal to net income reported on the condensed statement of
operations.
(6) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's condensed financial statements for
the six months ended June 30, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the operations of the Company and its affiliates, the impact of Year 2000 issues
on the Company's operations and interpretations and actions of certain
regulatory authorities, including in Russia, as well as information contained
elsewhere in this report where statements are preceded by, followed by, or
include the words "believes," "expects," "anticipates," and similar expressions.
For such statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in the Report. Furthermore, this document
constitutes a Year 2000 Readiness Statement, and the statements herein are
subject to the Year 2000 Information and Readiness Disclosure Act, and the
Company hereby claims the protection of such Act for this document and all
information contained herein.
BASIS OF PRESENTATION
EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 VERSUS THREE AND SIX MONTHS ENDED JUNE
30, 1998
Overview. The definition of EBITDA is given in the previous section. It is
commonly used as an indicator of the ability of a business to generate cash
flows from its operating activities. Management therefore considers it to be a
relevant and useful measure for investors. The Company reported EBITDA of $0.27
million and net income of $0.15 million on revenues of $0.19 million for the
three months ended June 30, 1999, compared to EBITDA and net income of $0.13
million on revenues of $0.13 million reported in the second quarter of 1998. For
the six months ended June 30, 1999, the Company reported EBITDA of $0.49 million
and net income of $0.29 million on operating revenues of $0.42 million compared
to EBITDA of $0.34 million and net income of $0.33 million on operating revenues
of $0.34 million a year earlier. In the six months ended June 30, 1999, cash
generated from operations totaled $1.69 million and cash used in investing
activities totaled $1.69 million, compared to the first half of 1998 when no
funds were generated from operations or used in investing activities.
Revenues. Revenues increased from $0.13 million in the second quarter of
1998 to $0.19 million in the second quarter of 1999. For the six months ended
June 30, 1999, revenues increased to $0.42 million from $0.34 million reported
in the first half of 1998.
General and administrative expenses. No general and administrative
expenses were incurred in the six months ended June 30, 1999 and 1998.
Income taxes. The income tax charge for the three months ended June 30,
1999 was $0.08 million compared with $0.01 million in 1998. In the six months
ended June 30, 1999, the income tax provision of $0.16 million compared to $0.01
million a year earlier. The provision for income taxes in the first half of 1999
represents U.S. federal, state and local taxes. In the first half of 1998 the
provision for income taxes represented Cypriot income taxes payable by PLDAL.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, a total of $1.69 million in cash
was generated from operations (1998 - nil) and $1.69 million was used in net
investing activities (1998 - nil).
Cash generated from operations and funds used in investing activities
related primarily to payments received from PeterStar pursuant to five
outstanding installment sales contracts and deposited into escrow. Funds held in
the Company's escrow account at June 30, 1999 increased to $2.22 million from
$0.53 million at the end of 1998.
As of June 30, 1999, the Company reported working capital of $3.22 million
compared to working capital of $3.58 million at the end of 1998. At June 30,
1999, the Company had consolidated total assets of $16.24 million ($14.93
million as of December 31, 1998) consisting of current assets of $10.51 million,
escrow funds of $2.22 million and long-term installment sales contracts due from
related parties of $3.51 million.
Shareholder's equity of $8.21 million, as of June 30, 1999, compared with
$7.92 million as of December 31, 1998, and consisted of $6.64 million in common
stock and additional paid-in capital plus retained earnings of $1.57 million.
The Company has financed all of its equipment purchases by drawing the
funds required from the PLD escrow account established pursuant to the
Indentures. Inasmuch as it is not permitted to obtain funds from elsewhere, its
business as a provider of equipment to the PLD operating subsidiaries is
entirely governed by the availability and amount of funds in the PLD escrow
account and the Company's escrow account which was also established pursuant to
the Indentures. The Company does not commit to any equipment purchase unless
there are sufficient funds in the escrow accounts to pay for such purchase
(including costs of delivery to the PLD operating subsidiary which would use the
equipment, and customs duties, VAT and other costs of importation). In the event
that there were insufficient funds in the escrow accounts, the Company would not
make the purchase, and the equipment would have to be financed by PLD or the
applicable operating subsidiary by other means, or the purchase would have to be
postponed.
As of December 31, 1998 there was approximately $14.4 million in the PLD
escrow account and a further $0.5 million in the Company's escrow account. The
escrow accounts are replenished from time to time by payments made by the PLD
operating subsidiaries under leases and installment sales contracts entered into
with the Company, as well as interest earned on the funds in escrow. They may
also be replenished by the proceeds of certain asset sales as well as returns on
certain limited investments which may be made using escrow funds. The escrow
funds are available, if required, to provide funds to PLD to pay interest on the
Senior Notes.
The Company's operating costs are minimal and are funded as required by
advances from PLD. The Company is not permitted under the terms of Indentures to
incur, and has not in fact incurred, any other indebtedness or obligations other
than payments to equipment manufacturers which are funded out of the escrow
account. Accordingly, the Company's operations are essentially self-sufficient.
As it has disclosed in its Annual Report on Form 10-K, PLD has significant
debt service requirements, including the payment of interest on the Senior Notes
and the Convertible Notes and amounts owing to the Travelers Parties, and PLD
does not presently have sufficient funds on hand to meet its current debt
obligations. The Company is a guarantor of the Senior Notes and the Convertible
Notes under the terms of the related indentures.
While agreements have been reached with substantially all of the holders of
the Senior Notes and the Convertible Notes and with the Travelers Parties on a
restructuring of PLD's indebtedness to such parties, those agreements are
conditioned upon the closing of the Merger. If the Merger did not close, PLD
would remain obligated to pay interest on the Senior Notes and Convertible Notes
and there can be no assurance that the Travelers Parties would not demand
payment in full of PLD's obligations to them. PLD's failure to make payment in
full to the Travelers Parties could result in a cross-default under and
acceleration of the Senior Notes and Convertible Notes. In addition, any failure
by PLD to make interest payments on the Senior Notes and Convertible Notes could
result in a default under and acceleration of those Notes. Any such events
12
<PAGE> 14
could result in a claim being made against the Company under its guarantee,
which would have a material adverse effect on the Company and raise substantial
doubt about the Company's ability to continue as a going concern.
In connection with the Merger Agreement with MMG and the transactions
contemplated thereunder, the holders of the Senior and Convertible Notes have
agreed, subject to completion of the merger and other transactions contemplated
by the Merger Agreement, to exchange their outstanding notes for new notes
issued by MMG which will not be guaranteed by the Company.
EFFECTS OF NEWLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS 133 cannot be applied
retroactively to financial statements of prior periods. At the current time the
Company has not evaluated the impact SFAS 133 will have, if any.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result of the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19--). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process transactions,
incorrect data being generated and critical deadlines being overlooked. The
impact of these disruptions could be significant.
PLD has conducted, and has caused each of its operating subsidiaries to
conduct a survey of the equipment and software used by them.
The PLD operating businesses supply telecommunications services. To the
very limited extent that they maintain actual inventory for sale (e.g., cellular
telephone equipment sold to subscribers for its cellular telephony services),
they do not manufacture such inventory themselves but resell goods supplied by
recognized manufacturers of such goods.
PLD's survey has involved testing of equipment as well as contacting the
manufacturers of equipment and producers of software (or review of materials
published by such parties, including websites) to assess such parties' Year 2000
readiness. Such survey has indicated that, except in a few instances, the
equipment and software which the operating subsidiaries use are Year 2000
compliant. PLD is taking steps to upgrade or replace those items which are not
compliant. In many cases the items required to be upgraded or replaced were due
to be upgraded or replaced in any event, so that PLD's exposure has been the
acceleration of already planned expenditures, rather than new or unanticipated
expenditures. PLD expects that essentially all of its upgrading and replacement
work, and any remaining testing required, will be complete by the end of the
third quarter of 1999.
As of June 30, 1999, PLD has expended approximately $1.9 million for
remediation efforts and expects that its total remediation costs, including
scheduled upgrades and replacements of approximately $3.1 million, will be
approximately $4.0 million.
Starting in January 1998, all operating businesses were required to use
their best efforts to obtain specific warranties of Year 2000 compliance from
parties with which they contract for products or services thereafter. While
almost all new contracts for products or services entered into since that date
have contained some form of warranty, these have generally been limited to
recovering of direct losses, and not indirect or consequential
13
<PAGE> 15
losses, such as loss of revenues or profits. In consequence, the actual efficacy
of such warranties may be somewhat limited.
Additionally, all operating businesses have been required to review the
terms under which they have heretofore supplied products and/or services to
third parties. No case has been identified in which any operating business has
specifically guaranteed Year 2000 compliance, and PLD has instituted a policy
regarding the giving of such guarantees in the future in order to control and
limit possible exposure thereunder. Further, since none of the operating
businesses manufacture equipment or produce proprietary software for customers
other than in exceptional cases, virtually all such transactions involve the
re-sale or assignment of products and services supplied by others. Accordingly,
PLD believes that, to the extent that such products and services are either
warranted or shown to be Year 2000 compliant, its own exposure is commensurately
reduced.
While there can be no assurances that equipment failures will not occur,
the effect of such failures may be ameliorated by the fact that such equipment
is usually part of a network of facilities and equipment maintained by PLD's
operating businesses. This means that a failure in an individual component will
not necessarily cause a substantial disruption to the network as a whole,
because no individual item is critical to the operation of the network as a
whole, and the network also provides opportunities to by-pass the failure.
The foregoing indicates that, to the extent that its business depends upon
equipment, software, facilities and networks under its control, PLD believes
that, by the year 2000, it will have taken all steps reasonably required to
ensure that those items are Year 2000 compliant, and that it has reasonable
contingency arrangements to deal with failures.
PLD's operating businesses' principal Year 2000 risks arise from the fact
that they are dependent for the completion of their calls upon a variety of
other traffic carriers who provide interconnection and termination services.
Since in many cases there are a variety of routes over which traffic can be
carried, it is simply not possible for the operating businesses to verify that
each entity which could be involved in providing telecommunications services to
them will be Year 2000 compliant. To a large extent, the operating businesses
are reliant in these circumstances on the actions of the other
telecommunications operators and service providers to ensure that their
counterparts are Year 2000 compliant. While the operating businesses believe
that the parties providing these services which are based in the United States
and other Western countries are expected to be substantially Year 2000
compliant, the Year 2000 compliance and readiness of the Russian and other
C.I.S. parties with which the operating businesses interact appears to be
substantially behind that of Western parties. PLD has been unable to determine
with any degree of certainty the extent to which its interconnect partners in
the C.I.S. are non-compliant because those parties have generally been reluctant
to share this information. Nevertheless the Company believes, based on such
reluctance and anecdotal and other evidence, that many of those partners,
particularly in those in the less developed regions of the Russian Federation or
the C.I.S., are substantially non-compliant.
Furthermore, the likelihood that those parties will be able to become Year
2000 compliant seems problematical, given the limited amount of time left for
this, the severe funding constraints faced by those parties, principally as a
result of poor economic conditions in their home countries, and the possible
lack of governmental pressure on those parties.
Accordingly, there is a significant risk that the operating businesses may
experience disruptions in their operations as a result of their C.I.S.
interconnect partners not being able to complete calls or pass traffic to them.
While the operating businesses are unable to predict the extent or duration of
such disruptions, the possibility exists that they could be extensive, and also
take considerable time, perhaps even months, to correct.
An additional risk is the likelihood that the billing systems of those
interconnect partners may also be disrupted, resulting in those partners being
unable to collect from their customers or to make timely settlements with the
operating businesses.
Accordingly, the operating businesses believe that there is a considerable
risk that they will experience disruptions in providing telecommunications
services to and from the countries of the C.I.S. which they serve,
14
<PAGE> 16
and that those disruptions may be substantial. Given their inability to obtain
an accurate assessment of the extent to which their C.I.S. partners may be
non-compliant, it is impossible for the Company to predict either the extent or
the magnitude of those disruptions. Nevertheless, they have the potential to
adversely impact the operations of its operating subsidiaries, and such adverse
impact may be material.
PLD has investigated the possibility of obtaining insurance against
liability arising out of claims that products or services supplied are not Year
2000 compliant, but has determined that such insurance is not obtainable upon
terms which are sufficiently comprehensive and/or is only obtainable upon terms
which are uneconomical given the level of perceived risk, and accordingly has
elected not to pursue such insurance.
15
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLD CAPITAL ASSET (U.S.) INC.
Date: August 30, 1999 By: /s/ CLAYTON A. WAITE
--------------------------------------
Clayton A. Waite
Director and Principal
Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD CAPITAL
ASSET (U.S.) INC.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE FINANCIAL
STATEMENTS FOR PLD CAPITAL ASSET (U.S.) INC. AT AND FOR THE SIX MONTHS ENDED
MARCH 31, 1999 CONTAINED THEREIN.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
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<PERIOD-END> JUN-30-1999
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<COMMON> 0
<OTHER-SE> 8,208
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