<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
APRIL 3, 1998
- --------------------------------------------------------------------------------
(DATE OF REPORT)
PLD TELEKOM INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-20444 13-3950002
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (COMMISSION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) FILE NUMBER) ID NO.)
680 FIFTH AVENUE, 24TH FLOOR
NEW YORK, NEW YORK 10019
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 262-6060
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Pursuant to a request dated as of the date of this Current Report,
the Registrant has requested relief from the Division of Corporation Finance of
the Securities and Exchange Commission (the "Commission") relating to certain of
its subsidiaries which are guarantors of the Registrant's outstanding 14% Senior
Discount Notes due 2004 and 9% Convertible Subordinated Notes due 2006.
Specifically, the Registrant has requested relief from the requirements of
providing separate financial information in the Registrant's financial
statements in filings made under the Securities Act of 1933, as amended, and
from the reporting and informational requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, as amended, with respect to those subsidiaries.
In connection with this request for relief, and to comply with one of
the conditions which the Commission has stated in the past is a condition to
such relief, the Registrant's audited Consolidated Financial Statements (as
filed on March 31, 1997 as part of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997) (the "Financial Statements") have been
supplemented to include, as Note 17, condensed consolidating financial
information for the Registrant, the guarantor subsidiaries and the non-guarantor
subsidiaries.
The Financial Statements, as supplemented only by the addition of
Note 17, are attached to this Current Report as Exhibit 99.1 and made a part
hereof.
No other changes to the Financial Statements, as filed as part of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, or
any other part of such Annual Report on Form 10-K have been made.
In addition, the Company is filing herewith the consolidated
financial statements of certain of its wholly owned subsidiaries which are
pledgees under the terms of the Company's outstanding 14% Senior Discount Notes
due 2004 and 9% Convertible Subordinated Notes due 2006, namely NWE Capital
(Cyprus) Limited, Technocom Limited and Wireless Technology Corporations
Limited. These financial statements are being filed as Exhibits to this Report
in order to facilitate the filing of certain registration statements of the
Company being filed as of the date hereof and the incorporation by reference of
those financial statements into future registration statements of the Company.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired: None
(b) Pro Forma Financial Information: None
(c) Exhibits:
99.1 Consolidated Financial Statements of PLD Telekom Inc.
99.2 Consolidated Financial Statements of NWE Capital (Cyprus)
Limited.
99.3 Consolidated Financial Statements of Technocom Limited.
99.4 Consolidated Financial Statements of Wireless Technology
Corporations Limited.
2
<PAGE> 3
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 TELEKOM INC.
Date: April 3, 1998 By: /s/ Simon Edwards
---------------------------------
Simon Edwards
Chief Financial Officer and
Treasurer
3
<PAGE> 4
EXHIBIT INDEX
Exhibit
99.1 Consolidated Financial Statements of PLD Telekom Inc.
99.2 Consolidated Financial Statements of NWE Capital (Cyprus)
Limited
99.3 Consolidated Financial Statements of Technocom Limited
99.4 Consolidated Financial Statements of Wireless Technology
Corporations Limited
4
<PAGE> 1
PLD TELEKOM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated balance sheets as of December 31, 1997 and
1996...................................................... F-4
Consolidated statements of operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-5
Consolidated statements of shareholders' equity for the
years ended December 31, 1997, 1996 and 1995.............. F-6
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-7
Notes to consolidated financial statements.................. F-8
</TABLE>
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
PLD Telekom Inc.:
We have audited the accompanying consolidated balance sheet of PLD Telekom
Inc. as of December 31, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997, and the results of its operations and the changes in
its financial position for the year then ended in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, NY
March 23, 1998
F-2
<PAGE> 3
AUDITORS' REPORT
Shareholders and Board of Directors
PLD Telekom Inc.:
We have audited the accompanying consolidated balance sheet of PLD Telekom
Inc. as of December 31, 1996 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and the results of its operations and the changes in its
financial position for each of the years in the two-year period ended December
31, 1996 in accordance with United States generally accepted accounting
principles.
KPMG
Chartered Accountants
Toronto, Canada
March 21, 1997
F-3
<PAGE> 4
PLD TELEKOM INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 7)........................ $ 17,256 $ 40,674
Trade receivables, net of allowance of $3,226 and $1,986,
respectively........................................... 17,078 10,528
Other receivables and prepaids............................ 8,615 3,522
Inventory................................................. 2,802 1,840
Due from related parties (note 13(c))..................... 6,320 4,408
-------- --------
Total current assets.............................. 52,071 60,972
Escrow funds (note 9)....................................... 33,868 40,984
Property and equipment, net (note 4)........................ 134,998 93,039
Telecommunications licenses (note 3), net of amortization of
$26,294 and $18,640, respectively......................... 78,837 72,310
Due from related parties (note 13(c))....................... 3,011 --
Other investments (note 5).................................. 7,036 24,094
Other assets (note 6)....................................... 25,765 14,958
-------- --------
Total assets...................................... $335,586 $306,357
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank indebtedness (note 7)................................ -- 15,829
Short-term borrowings (note 8)............................ 20,320 --
Accounts payable.......................................... 13,597 17,781
Accrued liabilities....................................... 5,750 3,126
Due to related parties (note 13(d))....................... 5,336 4,039
Deferred revenues......................................... 3,128 1,078
Customer deposits......................................... 3,070 1,644
Other current liabilities................................. 2,256 3,241
-------- --------
Total current liabilities......................... 53,457 46,738
-------- --------
Long-term debt (note 9)..................................... 133,516 107,954
Minority interest........................................... 21,382 13,711
Commitments and contingencies (note 14)
Shareholders' equity (notes 9 and 10):
Preferred stock, par value $.01 per share in 1997 and no
par value in 1996. Authorized 100,000,000 shares in
1997 and unlimited number of shares in 1996; issued and
outstanding 446,884 shares............................. 4 31
Common stock, par value $.01 per share in 1997 and no par
value in 1996. Authorized 100,000,000 shares in 1997
and unlimited number of shares in 1996; issued and
outstanding 33,324,290 shares in 1997 and 31,696,034
shares in 1996......................................... 333 180,878
Additional paid-in capital................................ 204,007 13,592
Accumulated deficit....................................... (77,113) (56,547)
-------- --------
Total shareholders' equity........................ 127,231 137,954
-------- --------
Total liabilities and shareholders' equity........ $335,586 $306,357
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 5
PLD TELEKOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Telecommunications (note 13(a))................... $ 112,468 $ 60,562 $ 27,686
Finance lease income.............................. 1,956 1,404 1,434
----------- ----------- -----------
114,424 61,966 29,120
Direct costs........................................ 39,186 21,709 10,382
----------- ----------- -----------
Gross profit.............................. 75,238 40,257 18,738
----------- ----------- -----------
Operating expenses:
General and administrative........................ 38,716 24,791 18,168
Depreciation...................................... 10,433 5,226 3,837
Amortization...................................... 7,867 4,883 4,659
Taxes other than income taxes..................... 6,204 2,490 1,220
----------- ----------- -----------
Total operating expenses.................. 63,220 37,390 27,884
----------- ----------- -----------
Operating income/(loss)................... 12,018 2,867 (9,146)
Other income/(expense):
Share of loss from equity investments, after
amortization of licenses of $2,477 and $1,528
in 1996 and 1995, respectively................. (537) (2,692) (1,555)
Interest and other income......................... 3,614 4,859 2,066
Interest expense.................................. (17,846) (9,973) (957)
Amortization of deferred financing costs.......... (1,152) (684) --
Foreign exchange loss............................. (274) (648) (443)
Gain/(loss) on disposal of investments and
property and equipment......................... 749 -- (915)
Provision for amounts due from a shareholder of
PeterStar (note 13(e))......................... -- -- (2,490)
----------- ----------- -----------
Loss before income taxes and minority
interest................................ (3,428) (6,271) (13,440)
Income taxes (note 11).............................. 7,739 3,669 1,490
----------- ----------- -----------
Loss before minority interest............. (11,167) (9,940) (14,930)
Minority interest................................... 9,399 2,521 551
----------- ----------- -----------
Net loss.................................. $ (20,566) $ (12,461) (15,481)
=========== =========== ===========
Net loss per common share:
Basic............................................. $ (0.64) $ (0.39) $ (0.49)
=========== =========== ===========
Diluted........................................... $ (0.64) $ (0.39) $ (0.49)
=========== =========== ===========
Weighted average common shares outstanding.......... 32,061,070 31,579,201 31,314,662
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 6
PLD TELEKOM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ----------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995.............. 446,884 $ 31 30,012,214 $ 173,034 -- (28,605) 144,460
Conversion of Series VIII preferred
shares................................ -- -- 1,110,000 4,886 -- -- 4,886
Issuance of shares for CPY Yellow Pages
Limited (note 3(f))................... -- -- 368,820 1,900 -- -- 1,900
Exercise of warrants and options........ -- -- 16,000 67 -- -- 67
Net loss for the year................... -- -- -- -- -- (15,481) (15,481)
------- ---- ---------- --------- ------- ------- -------
Balance at December 31, 1995............ 446,884 31 31,507,034 179,887 -- (44,086) 135,832
Exercise of options..................... -- -- 189,000 991 -- -- 991
Issuance of warrants (note 9)........... -- -- -- -- 13,592 -- 13,592
Net loss for the year................... -- -- -- -- -- (12,461) (12,461)
------- ---- ---------- --------- ------- ------- -------
Balance at December 31, 1996............ 446,884 31 31,696,034 180,878 13,592 (56,547) 137,954
Increase in par value from none to $.01
(note 10)............................. -- -- -- (180,561) 180,561 -- --
Change in par value of preferred stock
(note 10)............................. -- (27) -- -- 27 -- --
Common stock cancellations.............. -- -- (150) -- -- -- --
Exercise of options and warrants........ -- -- 312,166 3 1,736 -- 1,739
Issuance of shares (note 3(c)).......... -- -- 1,316,240 13 7,668 -- 7,681
Issuance of warrants (note 8(a))........ -- -- -- -- 423 -- 423
Net loss for the year................... -- -- -- -- -- (20,566) (20,566)
------- ---- ---------- --------- ------- ------- -------
Balance at December 31, 1997............ 446,884 $ 4 33,324,290 $ 333 204,007 (77,113) 127,231
======= ==== ========== ========= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 7
PLD TELEKOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(20,566) (12,461) (15,481)
Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:
Depreciation and amortization........................... 19,452 10,793 8,496
Accrued interest on senior discount notes............... 14,260 7,349 --
Minority interest....................................... 9,399 2,521 551
Gain on sale of SPMMTS.................................. (1,001) -- --
Deferred revenue........................................ 2,050 (898) 1,958
Share of loss of equity investments..................... 537 2,692 1,555
Other................................................... -- 300 1,543
Changes in operating assets and liabilities, net of
effects of acquisitions:
Increase in trade receivables......................... (6,550) (2,478) (1,681)
(Increase)/decrease in other receivables and
prepaids........................................... (5,093) 1,827 (1,909)
Increase in inventory................................. (962) (392) (608)
Change in amounts due from or to related parties...... 386 (4,743) (2,499)
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, and other current
liabilities........................................ (1,119) 11,108 1,351
-------- ------- -------
Net cash provided by/(used in) operating
activities....................................... 10,793 15,618 (6,724)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (38,990) (43,201) (31,538)
Proceeds from sale of SPMMTS.............................. 17,180 -- --
Escrow funds.............................................. 7,116 (40,984) --
Purchase of 30% investment in Technocom................... (25,608) -- --
Teleport-TP finance lease and advances.................... -- 3,916 (7,733)
Investments in Baltic Communications Limited, J.V.
Technopark Limited and Teleport-TP, net of cash
acquired................................................ -- (7,515) --
Other investments......................................... 181 (140) (3,000)
Other assets.............................................. (747) (267) (6,822)
-------- ------- -------
Net cash used in investing activities.............. (40,868) (88,191) (49,093)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt borrowings/(repayments)................... (10,929) (6,550) 22,379
Proceeds from issuance of 12% Revolving Credit Notes...... 15,420 -- --
Proceeds from issuance of 14% Senior Discount Notes....... -- 87,697 --
Proceeds from issuance of 9% Convertible Subordinated
Notes................................................... -- 26,500 --
Deferred financing costs.................................. -- (9,224) --
Proceeds from issuance of common stock.................... 1,739 991 67
Cash dividends paid to minority shareholders.............. (1,000) -- --
Loans from shareholders................................... -- (1,843) 405
Related company advances.................................. -- -- (815)
Due to equipment supplier................................. -- -- (4,384)
Recapitalization of PeterStar............................. 1,427 -- --
Other financing........................................... -- -- (2,869)
-------- ------- -------
Net cash provided by financing activities.......... 6,657 97,571 14,783
-------- ------- -------
(Decrease)/increase in cash and cash equivalents... (23,418) 24,998 (41,034)
Cash and cash equivalents at beginning of year.............. 40,674 15,676 56,710
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 17,256 40,674 15,676
======== ======= =======
Supplementary disclosures:
Noncash investing and financing activities:
Supplier financing...................................... $ 11,302 -- --
======== ======= =======
Issuance of common stock for a portion of purchase price
of Technocom.......................................... $ 7,681 -- --
======== ======= =======
Interest paid............................................. $ 3,381 2,425 380
======== ======= =======
Income taxes paid......................................... $ 7,424 3,678 809
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 8
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
The Company was previously incorporated under the laws of Ontario, Canada
and on August 1, 1996 changed its name from Petersburg Long Distance Inc. to PLD
Telekom Inc. (PLD). Effective February 28, 1997, PLD was incorporated in the
United States as a Delaware corporation. Through its majority-owned and
controlled subsidiaries, the Company is a provider of local, long distance and
international telecommunications services in the former Soviet Union.
The Company's telecommunications businesses are at various stages of
development and are growing rapidly in an emerging economy which, by its nature,
has an uncertain economic, political and regulatory environment. The general
risks of operating businesses in the former Soviet Union include the possibility
for rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations.
Ultimate recoverability of the Company's investments is dependent upon its
ability to achieve and maintain profitability, which is dependent to a certain
extent on the stabilization of the economies of the former Soviet Union, the
ability to maintain the necessary telecommunications licenses and the ability to
obtain adequate financing to meet capital commitments.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
(a) Basis of Presentation
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP).
The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Investment in
affiliates in which the Company has significant influence, but does exercise
control, are accounted for under the equity method. Investments of the Company
over which significant influence is not exercised are carried under the cost
method.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1997
and 1996, the Company's cash equivalents consist of term deposits of
approximately $7.2 million and $4.2 million, respectively.
(c) Investments
Management determines the appropriate classification of its investments at
the time of purchase and classifies them as trading, available-for-sale or
held-to-maturity in accordance with the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 1997 and 1996, the Company's
investments which are held in escrow consist of U.S. Treasury Bonds with a
carrying value of $33.9 million and $41.0 million, respectively, have been
classified as available-for-sale. In accordance with SFAS 115, the Company
carries their available-for-sale investments at fair value, with unrealized
gains and losses reported as a separate line item in shareholders' equity. Due
to the short maturity period (1997 -- maturing on January 7, 1998 and 1996 --
maturing on January 5, 1997), the carrying value of these investments
approximates its fair market value at December 31, 1997 and 1996.
(d) Revenue Recognition
The Company records telecommunication revenues as earned, at the time
services are provided.
(e) Inventory
Inventory is stated at the lower of average cost or net realizable value
and is composed of telephony products held for resale to customers.
F-8
<PAGE> 9
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Telecommunications equipment............................. 10 years
Buildings................................................ 28.5 years
Leasehold improvements................................... 10 years
Office furniture and equipment (including computer 3 - 5
equipment)............................................. years
</TABLE>
Interest cost incurred during the period of construction of property and
equipment is capitalized. The interest cost capitalized in 1997 amounted to
$927,791.
(g) Intangible Assets
Telecommunications licenses are being amortized on a straight-line basis
over the terms of the licenses.
Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired and is being amortized on a straight-line basis over
periods ranging from ten to twenty years.
Deferred financing costs represent costs incurred to issue debt. Deferred
financing costs are capitalized and amortized over the term of the related debt.
(h) Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, escrow funds, trade and other receivables, amounts due
from or to related parties, bank indebtedness and accounts payable approximate
fair value due to their short maturities. The fair value of long-term debt is
based on discounted cash flow analysis.
(i) Reporting Currency and Foreign Currency Translation
The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.
Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
(k) Net Loss Per Common Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," on December 31, 1997. SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS") and supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share." SFAS No. 128 also requires dual presentation of basic and
diluted EPS for
F-9
<PAGE> 10
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
complex capital structures on the face of the consolidated statements of
operations. Basic EPS is computed by dividing income or loss by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from the exercise or conversion of securities into common
stock, such as stock options, at the beginning of the period being reported on.
Per share amounts for 1996 and 1995 have been retroactively restated to give
effect to SFAS 128 and were not different from EPS measured under APB No. 15.
Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1995, 1996 and 1997.
The Company had potentially dilutive common stock equivalents of 1,293,000,
135,000 and 150,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, which were not included in the computation of diluted net loss per
common share because they were antidilutive for the periods presented.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
(m) Equity Compensation
Prior to January 1, 1996, the Company accounted for its equity compensation
plan in accordance with the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense was recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method, as defined in SFAS 123, had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure required by SFAS 123.
(n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(o) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
(3) BUSINESSES AND ACQUISITIONS
The Company's key interests at December 31, 1997 include a 60% equity
interest in PeterStar Company Limited ("PeterStar"); a 50% equity interest in
BECET International ("BECET"); and an approximate 80% equity interest in
Technocom Limited ("Technocom"), which holds an approximate 49% equity interest
in
F-10
<PAGE> 11
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Teleport-TP ("Teleport-TP"). The Company also owns 100% of Baltic Communications
Limited ("BCL") and 100% of CPY Yellow Pages Limited ("Yellow Pages").
(a) PeterStar
PeterStar is a joint stock company registered in 1992 under the laws of the
Russian Federation to provide international and domestic telecommunications
services for St. Petersburg. In November 1994, PeterStar was granted a new
license to provide these services for a further ten years. The license was
reissued in June 1996 and sets the maximum number of lines which PeterStar may
have at 106,000 and requires that 74,200 lines be introduced by June 1999. At
December 31, 1997, PeterStar had 114,774 lines in place.
In October 1992, the Company acquired a 50% interest in PeterStar for
consideration of $19.8 million. An additional 9% interest was acquired in March
1994 for consideration of $8.2 million and an additional 1% interest was
acquired in April 1996 for $1.8 million. All of the considerations have been
allocated to telecommunications licenses. The Company's interest in PeterStar is
owned by its wholly owned subsidiary, NWE Capital (Cyprus) Limited ("NWE
Cyprus"), a company incorporated in Cyprus.
(b) BECET
BECET provides cellular services pursuant to a 15-year license to operate a
cellular telephony system in Kazakhstan until February 2009. The Company's 50%
interest in BECET is owned by its wholly owned subsidiary, Wireless Technology
Corporations Limited ("WTC"), a company incorporated in the territory of the
British Virgin Islands, which in turn is owned by NWE Cyprus.
In connection with the acquisition of BECET, the Company was committed to
provide financing of up to $3.0 million to fund a number of special
telecommunications projects undertaken by the Ministry of Communications in
Kazakhstan. In 1995, the Company provided such financing in the form of a
convertible note (see note 5(b)).
(c) Technocom
The Company subscribed for preferred shares of Technocom, a company
incorporated in the Republic of Ireland, in the amount of $40.0 million, of
which $20.0 million was subscribed for on acquisition in 1994 and the remaining
$20.0 million was subscribed for in June 1996 from the proceeds of the financing
described in note 9. The preferred shares entitle the Company to the first $20.0
million of Technocom's dividend distributions. After receipt of such preference
dividends, all the preferred shares will be converted into a single ordinary
share of Technocom. The carrying value of the Company's investment in
Teleport-TP and minority interest were each increased by a total of $10.0
million in 1995/1996 to reflect the minority interest's ultimate share in the
preferred equity.
On November 26, 1997, PLD acquired an additional 59 ordinary shares of
Technocom increasing its ownership from 50.1% to 80.4%. The total consideration
for the acquisition was $32.5 million, plus acquisition costs of approximately
$840,000 and was allocated to telecommunications licenses, goodwill, and
purchase of minority interest in the amounts of $16.0 million, $11.1 million,
and $6.0 million, respectively. Approximately $24.8 million was paid in cash and
the remainder in shares of PLD common stock (1,316,240 shares of common stock
with a fair market value of $5.85 per share, which cannot be sold until the year
2000). The cash element of the transaction was funded with escrowed funds and
with the proceeds from the Company's 12% Revolving Credit Notes (see note 8).
In addition, the Company restructured certain "put and call" arrangements
with the other two shareholders of Technocom. Under these arrangements, as
originally structured, the remaining ordinary shares of Technocom held by these
shareholders (29 shares, or approximately 14.6% of the total ordinary shares
outstanding, and 10 shares, or approximately 5% of the total ordinary shares
outstanding) were to have been independently valued in 1999 and the Company had
the right to call, and the other two shareholders had the right to put, their
respective interests at the per share value established by the valuation.
F-11
<PAGE> 12
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
These arrangements were restructured as follows. In the case of the holder
of the 29 shares, while the date on which the put or call could be exercised did
not change, the valuation procedure was eliminated and the "put and call" price
for its interest was set at a fixed $17.5 million. In the case of the holder of
the 10 shares, 2 of its remaining 10 ordinary shares were made subject to a new
put and call arrangement which would come into effect in 1998, with the "put and
call" price to be $1 million or, at the holder's option, that number of shares
of common stock which results from dividing $1 million by the lower of $5.85 and
the average closing price of such shares over the preceding 10 trading days. The
remaining 8 ordinary shares continue to be subject to the existing put and call
arrangements in 1999, except that the valuation will be made by the Company and
the amount paid pursuant to the exercise of either the put or the call cannot
exceed $9.6 million or be less than $6.7 million.
On December 20, 1996, Technocom acquired 55.5% of the outstanding shares of
J.V. Technopark Limited ("Technopark") from the minority shareholders of
Technocom for $3.0 million. Technopark is incorporated in Russia and owns a 7.5%
equity interest in Teleport-TP and commercial property in Moscow. The
acquisition of Technopark has been accounted for using the purchase method.
(d) Teleport-TP
The Company currently controls 56% of the voting interests in Teleport-TP
through its ownership of Technocom (see note 3(c)), which has a 49.3% equity
interest in Teleport-TP. The Company originally acquired a 41.8% equity
investment in Teleport-TP through its acquisition of 50.8% of the outstanding
common stock of Technocom. In May 1996, Technocom acquired an additional 3.3%
indirect equity interest in Teleport-TP for cash consideration of $2.0 million,
substantially all of which was allocated to Teleport-TP's telecommunications
licenses. The additional interest was acquired through a company controlled by a
minority shareholder of Technocom.
Teleport-TP is a Russian joint stock company which holds four operating
licenses. The first license expires in November 2004 and authorizes Teleport-TP
to provide long distance and international telecommunications services to
private networks within Moscow and, to a limited extent, elsewhere in the
Russian Federation. Teleport-TP is required by the terms of the license to have
at least 10,500 subscribers (which is 70% of the maximum number of subscribers
permitted under the license) in place by October 1999. Under the terms of the
license agreement, there are no penalties should Teleport-TP not attain the
required number of lines.
The second license expires in October 2004 and permits the operation of
1,000 international leased circuits for the transmission of television and
telecommunications services. The third license, which expires in January 2002,
permits the provision of data services with interconnection to the public
network and requires capacity for 70,000 subscribers by December 2000. The
fourth license, which expires in May 2001, is an overlay license which permits
Teleport-TP to offer local, long distance and international voice and data
services which are interconnected to the public telephone network in 40 regions
across Russia.
F-12
<PAGE> 13
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
As a result of the acquisition of Technopark, the Company consolidated
Teleport-TP's balance sheet at December 31, 1996. The results of operations of
Teleport-TP have been included in the consolidated statements of operations from
January 1, 1997. The consolidation of Teleport-TP's balance sheet at December
31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash................................................. $ 70
Other current assets................................. 4,386
Current liabilities.................................. (1,526)
Equipment under capital lease, net................... 7,415
Other property, plant and equipment, net............. 622
Other assets......................................... 655
Capital lease obligation to Technocom................ (4,153)
Due to Technocom..................................... (3,468)
Due to related parties............................... (3,405)
Minority interest.................................... (411)
Telecommunications licenses, net of accumulated
amortization of $4,005............................. 25,595
-------
Carrying value of investment in Teleport-TP
prior to consolidation................... $25,780
=======
</TABLE>
Condensed financial information of Teleport-TP for the years ended December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications revenues.............................. $11,104 $ 7,070
Cost of sales............................................ 6,534 2,083
------- -------
Gross profit................................... 4,570 4,987
------- -------
Operating expenses:
General and administrative............................. 2,617 1,606
Other taxes............................................ 592 --
Depreciation of assets under capital lease............. 1,016 570
Other depreciation and amortization.................... 200 762
------- -------
4,425 2,938
------- -------
Operating income............................... 145 2,049
Interest on capital lease................................ (531) (1,434)
Other interest and financing charges, net................ 251 (343)
------- -------
Earnings/(loss) before income taxes............ (135) 272
Income taxes............................................. -- (335)
------- -------
Net loss....................................... $ (135) $ (63)
Technocom's interest therein............................. (75) (27)
Amortization of excess purchase price.................... (2,477) (1,528)
------- -------
Share of Teleport-TP loss...................... $(2,552) $(1,555)
======= =======
</TABLE>
Teleport-TP's revenues for the years ended December 31, 1996 and 1995,
include sales to its minority shareholder of $4.6 million and $5.0 million,
respectively, making Teleport-TP to some extent economically dependent on its
minority shareholder.
Teleport-TP's cost of sales for the year ended December 31, 1996 includes
costs of $2.9 million charged by a company controlled by one of the minority
shareholders of Technocom.
F-13
<PAGE> 14
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
General and administrative expenses for the year ended December 31, 1996
include costs of $576,000 related to marketing services provided by a company
controlled by one of the minority shareholders of Technocom.
(e) BCL
Effective April 1, 1996, the Company acquired all of the outstanding shares
of BCL from Cable & Wireless and its Russian partners for cash consideration of
$3.0 million, plus acquisition costs of $253,000. BCL is a Russian joint stock
company which provides international direct dial, international pay phone and
private line services to a corporate customer base in St. Petersburg. BCL's
results of operations are included in the consolidated financial statements from
the date of acquisition.
The acquisition has been accounted for using the purchase method.
(f) Yellow Pages
On April 26, 1995 the Company, through NWE Cyprus, acquired all the
outstanding shares of Yellow Pages, a company incorporated in the Republic of
Cyprus, for consideration of 368,820 common shares of the Company valued at $1.9
million, plus acquisition costs of $244,000. Yellow Pages publishes a Yellow
Pages directory and owns a database of Russian and foreign businesses in St.
Petersburg. Yellow Pages' results of operations are included in the consolidated
financial statements from the date of acquisition.
The acquisition has been accounted for by the purchase method and
substantially all of the consideration was allocated to goodwill.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications equipment:
Installed............................................ $123,902 $ 80,291
Uninstalled.......................................... 10,396 3,677
Buildings.............................................. 5,434 3,194
Office furniture and equipment (including computer
equipment)........................................... 8,054 6,538
Leasehold improvements................................. 6,082 4,443
Advances to equipment suppliers........................ 4,252 7,999
-------- --------
Total property and equipment................. 158,120 106,142
Less: accumulated depreciation......................... (23,122) (13,103)
-------- --------
Property and equipment, net.................. $134,998 $ 93,039
======== ========
</TABLE>
Property and equipment includes telecommunications equipment with a cost of
$16.5 million which has been pledged under the terms of the long-term
installment agreements (see note 9).
F-14
<PAGE> 15
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(5) OTHER INVESTMENTS
Other investments at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Investment in St. Petersburg Intercity & International
Telephone, at cost...................................... $ -- $16,179
Investment in Monogram Finance Group Limited.............. 3,000 3,000
Equity investment in MTR-Sviaz............................ 3,128 4,588
Equity investment in Rosh Telecom......................... 542 327
Investment in Gorizont-RT, at cost........................ 224 --
Other investments, at cost................................ 142 --
------ -------
Total........................................... $7,036 $24,094
====== =======
</TABLE>
(a) Investment in St. Petersburg Intercity & International Telephone (SPMMTS)
The Company held a 10.4% equity interest (13.9% voting interest) in SPMMTS,
a privatized Russian company which operates the long distance and international
gateway in St. Petersburg.
In June 1997, the Company sold its investment in SPMMTS for proceeds of
$17.2 million. The gain of $1.0 million is included in gain on disposal of
investments and property and equipment on the consolidated statement of
operations.
(b) Investment in Monogram Finance Group Limited
During the year ended December 31, 1995, the Company advanced $3.0 million
to Monogram Finance Group Limited ("Monogram") in exchange for a convertible
promissory note due on February 20, 2000. The note is convertible into common
shares of Monogram at any time prior to February 20, 2000 at the then current
fair market price of the shares.
(c) Equity Investment in MTR-Sviaz
Technocom has a 49% equity interest in a Russian joint stock company,
MTR-Sviaz, which is a joint venture with Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. MTR-Sviaz holds two operating licenses and commenced
operations in late 1996. The first license authorizes MTR-Sviaz to provide local
and long distance leased line services within the city and region of Moscow.
Under the second license, MTR-Sviaz is authorized to provide local telephone
services through interconnection (via the Mosenergo network) with the public
switched telephone network within the city and region of Moscow. During 1997 and
1996, Technocom leased telecommunications equipment and access rights with a net
book value of $4.7 million and $5.2 million, respectively, to MTR-Sviaz under
finance leases. For the years ended December 31, 1997 and 1996, the Company
recorded finance lease income of $2.0 million and $872,000, respectively,
related to these leases. At December 31, 1997 and 1996, the investment in
MTR-Sviaz is composed of a finance lease receivable of $4.5 million and $5.0
million, offset by the Company's share of losses of MTR-Sviaz of $1.4 million
and $427,000, respectively.
F-15
<PAGE> 16
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Future minimum lease payments receivable from MTR-Sviaz, by year and in the
aggregate, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $2,530
1999........................................................ 2,530
2000........................................................ 1,704
2001........................................................ 547
2002........................................................ 547
Thereafter.................................................. 1,958
------
Total minimum lease payments...................... 9,816
Amounts representing interest............................... 5,324
------
Present value of minimum lease payments........... $4,492
======
</TABLE>
(6) OTHER ASSETS
Other assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Goodwill, net of accumulated amortization of $574 and
$359................................................... $12,709 1,796
Deferred financing costs, net of accumulated amortization
of $1,836 and $684..................................... 7,811 8,540
Deferred charges......................................... 861 700
Other.................................................... 4,384 3,922
------- -------
$25,765 $14,958
======= =======
</TABLE>
(7) CASH AND CASH EQUIVALENTS AND BANK INDEBTEDNESS
The Company's cash and cash equivalents at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents on deposit:
In Russia and Kazakhstan............................... $ 7,611 $ 5,210
Outside Russia and Kazakhstan.......................... 9,645 10,935
Term deposit (interest bearing), restricted to secure
bank loan of Technocom................................. -- 9,000
Term deposits (interest bearing), restricted to secure
overdraft balances and accounts payable of Technocom... -- 15,529
------- -------
$17,256 $40,674
======= =======
</TABLE>
As at December 31, 1997 and 1996, Technocom has overdraft balances of $-0-
and $6.8 million and demand bank loans of $-0- and $9.0 million (bearing
interest at 5.8125%). The demand bank loans were secured by term deposits in the
same amount held at the same bank.
Technocom has entered into bank guarantees in connection with certain of
its telecommunications equipment supplier financing agreements. The amount of
the guarantees reduces automatically in accordance with installments paid. The
amounts outstanding as of December 31, 1997 under these supplier financing
agreements secured by bank guarantees are approximately $3.6 million (see note
9).
F-16
<PAGE> 17
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) SHORT-TERM BORROWINGS
The Company's short-term borrowings at December 31, 1997 and 1996 consist
of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
12% Revolving Credit Notes............................... $15,420 --
Note payable............................................. 4,000 --
Bank loan facility....................................... 900 --
------- -------
$20,320 --
======= =======
</TABLE>
(a) 12% Revolving Credit Notes
In November 1997, the Company issued $12.4 million in Series A secured
revolving credit notes (the "Series A Notes"), and $3.1 million in Series B
revolving credit notes (the "Series B Notes"), to The Travelers Insurance
Company and The Travelers Indemnity Company (collectively, the "Travelers
Parties"). Both the Series A Notes and the Series B Notes are secured by the
Company's inventory and accounts receivable. In addition, the Series B Notes are
secured by 28 of the 59 Technocom ordinary shares acquired (see note 3(c)).
Both the Series A and B Notes bear interest at an annual rate of 12%,
payable monthly in cash. This interest rate increases to 15% if the Company has
not raised $20 million in additional equity by May 31, 1998. The Series A and
Series B Notes are required to be amortized starting in July 1998. The Series B
Notes, whose original principal amount is $3.1 million, are due in full on
September 30, 1998, and the Series A Notes, in the original principal amount of
$12.3 million, are due in full on December 31, 1998. In addition to issuing the
Series A and Series B Notes, the Company also issued to the Travelers Parties a
total of 423,000 warrants to purchase Common Stock at $8.625 at any time up to
December 31, 2008 (the "Travelers Warrants"). These warrants have been valued at
$423,000 and will be amortized over the term of the revolving credit notes.
The Company may become obligated to issue additional warrants to the
holders in the event that certain amortization payments are not made in
accordance with the agreement or if the Notes are not paid in full at maturity.
Additionally, in the event that the Notes are not paid in full at maturity, all
warrants issued and issuable carry an exercise price of $.01 per share.
(b) Note Payable
Note payable at December 31, 1997 consists of a promissory note issued to
Scientific Atlantic, Inc. ("Scientific Atlantic") on June 10, 1997. The
promissory note, in settlement of equipment and services, is due on June 10,
1998. This note was discounted to West Merchant Bank at a rate of approximately
7.84%. The Company's weighted average interest rate for the note payable is
approximately 8.45%.
(c) Bank Loan Facility
In December 1997, PeterStar entered into a $2.0 million, one-year loan
facility with BNP Dresdner Bank for the purchase of telecommunications
equipment. Interest is charged on borrowed amounts at three-month LIBOR plus
2.5% per annum.
The amount borrowed on the loan facility at December 31, 1997 was $900,000.
F-17
<PAGE> 18
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(9) LONG-TERM DEBT
The Company's long-term debt at December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
14% Senior Discount Notes.............................. $ 95,714 $ 81,454
9% Convertible Subordinated Notes...................... 26,500 26,500
Supplier financing..................................... 11,302 --
-------- --------
Total............................................. $133,516 $107,954
======== ========
</TABLE>
(a) 14% Senior Discount Notes and 9% Convertible Subordinated Notes.
On June 12, 1996, the Company completed a $149.5 million private placement
consisting of (i) 123,000 Units consisting of $123.0 million 14% Senior Discount
Notes ("Senior Notes") due 2004 and ten-year Warrants to purchase a total of
4,182,000 shares of common stock at a price of $6.60 per share; and (ii) $26.5
million 9% Convertible Subordinated Notes ("Convertible Notes") due 2006,
convertible into common stock of the Company at a price of $6.90 per share.
The 123,000 Units were issued at a discount for gross proceeds of $87.7
million, of which $13.6 million was allocated to the Warrants and $74.1 million
was allocated to the Senior Notes for accounting purposes. The Senior Notes have
a zero coupon until December 1, 1998. After such date, the notes require
semi-annual cash interest payments on June 1 and December 1. The difference
between the carrying value and the principal amount of $123.0 million is being
charged to earnings on an effective yield basis which, together with cash
interest payments, results in an effective yield of 16.8%.
The Convertible Notes require semi-annual cash interest payments on June 1
and December 1.
The terms of the Senior Notes require the Company to raise additional
equity of at least $20.0 million by May 31, 1998. Failure to raise additional
equity will cause the interest rate on the Senior Notes to increase to 14.5%.
The Company is party to a Registration Rights Agreement pursuant to which
the Senior Notes were to have been exchanged for registered securities and the
Convertible Notes registered for the shelf by October 1996. Failure to cause the
registration to become effective results in additional interest payable at a
rate of $0.01 per week per $1,000 of accreted value of the Senior Notes and
principal amount of the Convertible Notes, increasing by $0.01 per week for each
90-day period that the securities are not registered. Additional interest ceases
to accrue when the required registration statements become effective.
All, or a portion, of the Senior Notes are redeemable at the option of the
Company after June 13, 2001 at 108% of the principal amount plus accrued and
unpaid interest, reducing to 104% for the year commencing June 1, 2002 and 100%
on or after June 1, 2003.
The Convertible Notes are redeemable at the option of the Company on or
after June 1, 2000 under certain conditions at a redemption price equal to the
principal amount plus accrued and unpaid interest.
The Senior Notes and the Convertible Notes were issued under the terms of
Indentures dated May 31, 1996. Pursuant to the Indentures, the Company has
pledged its investments in NWE Cyprus (which holds the Company's interests in
PeterStar, WTC, and Yellow Pages), WTC (which holds the Company's interest in
BECET), BCL, a wholly-owned special purpose leasing subsidiary incorporated in
Cyprus, and the Company's investment in preferred stock of Technocom. In
addition, each of these subsidiaries (except Technocom) have guaranteed the
Senior Notes and the Convertible Notes.
A portion of the net proceeds of $105.0 million (after agent's commission
and expenses) was used to meet the Company's $20.0 million commitment to
Technocom (see note 3(c)) and to repay a revolving credit facility in the amount
of $22.5 million. Under the terms of the Indentures, $46.0 million was deposited
into an escrow account which is invested in eligible cash equivalents, as
defined by the Indentures. The escrow funds
F-18
<PAGE> 19
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
are also pledged as security for the Company's obligations under the Indentures.
Escrow funds may be disbursed for purposes of making qualifying investments of
up to $9.0 million in telecommunications companies operating in Russia or
Kazakhstan, or for purposes of investing in telecommunications equipment through
the Company's special purpose leasing subsidiary, which then leases that
equipment to the Company's operating subsidiaries. Investments in leases are
also pledged as security under the Indentures and all payments received under
the terms of the leases are required to be deposited into a separate escrow
account, to be used to purchase additional telecommunications equipment for
lease. On or after November 30, 1998, the Company must also maintain sufficient
funds in the escrow accounts to meet the next interest payment due on both the
Senior Notes and Convertible Notes.
In 1997, the Company made the determination to solicit the holders of the
Senior Notes and the Convertible Notes with a view to making certain amendments
to the Indentures governing such Notes, intended to give the Company more
flexibility in conducting its business and also to clarify certain provisions of
those Indentures, in both cases based upon the Company's experience in operating
under the terms of the Indentures since they were first executed in June 1996.
Under each of the Indentures, the consents of holders of not less than a
majority in principal amount at stated maturity of each of the Senior Notes and
the Convertible Notes are required to authorize their amendment.
On March 4, 1998, the Company mailed to the holders of record on March 3,
1998 of the Senior Notes and the Convertible Notes a consent solicitation
statement (the "Consent Solicitation"). Pursuant to the Consent Solicitation,
the Company offered to each holder of the Senior Notes who consented to the
amendment of the Senior Note Indenture, a five-year warrant to purchase 1.8
shares of Common Stock at a price of $6.90 per share for each $1,000 in unpaid
principal amount at stated maturity of the Senior Notes held by such holder, and
to each holder of the Convertible Notes who consented to the amendment of the
Convertible Note Indenture a five-year warrant to purchase 2 shares of Common
Stock at a price of $6.90 per share for each $1,000 in unpaid principal amount
of the Convertible Notes held by such holder.
As of close of business on March 18, 1998, when the solicitation period
ended, parties holding 100% in principal amount at stated maturity of the Senior
Notes and 85.7% in principal amount at stated maturity of the Convertible Notes
had consented to the amendments. Pursuant to such consents, The Bank of New
York, as trustee under the Indentures, the Company and certain other parties
executed a supplemental indenture bringing the amendments to the Indentures and
certain related documents into effect.
At December 31, 1997 and 1996, the fair value of the Convertible Notes and
Senior Notes approximates their carrying value.
(b) Supplier Financing
Amounts payable under the terms of the long-term installment purchase
agreements are as follows (see notes 4 and 7):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1999........................... $ 4,616
2000........................... 3,864
2001........................... 2,795
2002........................... 2,361
Thereafter..................... --
-------
$13,636
Less: amounts representing
interest..................... 2,334
-------
$11,302
=======
</TABLE>
The above amounts have been calculated using interest rates of 8.0% to
8.5%.
F-19
<PAGE> 20
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(10) SHAREHOLDERS' EQUITY
(a) Common Stock
On February 28, 1997, as a result of the Company's continuance as a
Delaware corporation, the authorized capital stock was changed from an unlimited
number of common shares without nominal or par value to 100,000,000 common
shares with a par value of $.01 per share. As a result of the change in the par
value, the Common Stock was decreased by $180.6 million and additional paid-in
capital was increased by the same amount.
(b) Preferred Stock
The Company had the following preferred shares issued and outstanding at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
NUMBER OF
SHARES 1997 1996
--------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Series II......................................... 405,217 $ 4 $--
Series III........................................ 41,667 -- 31
--- ---
$ 4 $31
=== ===
</TABLE>
In addition, the capital stock was also changed from an unlimited number of
preferred shares issuable in series to 100,000,000 preferred shares with par
value of $.01 per share issuable in series. As a result of the change in par
value, the preferred stock has been reflected at its par value in the 1997
consolidated financial statements.
The Series II and III preferred shares, issued at a price of Cdn.$1 (US
$0.74) per share, are redeemable at the option of the Company at Cdn.$1 per
share. The shares do not pay dividends and holders thereof do not have voting
rights.
(c) Shares Reserved
In addition to stock options outstanding (see note 12), the Company has
reserved 4,182,000 common shares for issuance on exercise of outstanding
Warrants and 3,840,580 common shares on conversion of outstanding Convertible
Notes (see note 9). In addition, at December 31, 1997, the Company has 500,000
Warrants outstanding to purchase common shares of the Company at a
weighted-average exercise price of $8.11, of which 250,000 Warrants at an
exercise price of Cdn.$11.31 were granted to Cable & Wireless in 1994 and
100,000 Warrants at an exercise price of US$4.70 were granted in 1996 to the
agent in relation to the debt financing described in note 9. Warrants expire
five years after the date of grant.
In connection with the issuance of the Series A and Series B Notes (see
note 8(a)), the Company issued to the Travelers Parties a total of 423,000
warrants to purchase Common Stock at $8.625 at any time up to December 31, 2008
and may become obligated to issue additional warrants to the Travelers Parties
in the event that certain amortization payments are not made, or if the Series A
or Series B Notes are not paid in full at their maturity.
At the end of March of 1998, in connection with the Consent Solicitation
(see note 9(a)), the Company will issue a total of 123,000 five-year warrants to
purchase 1.8 shares of Common Stock at $6.90 per share to the holders of the
Senior Notes, and a total of 22,700 five-year warrants to purchase 2 shares of
Common Stock at a price of $6.90 per share to the holders of the Convertible
Notes.
F-20
<PAGE> 21
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) INCOME TAXES
The geographic components of loss before income taxes and minority interest
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States.............................. $(35,163) $ -- $ --
Canada..................................... -- (20,829) (16,747)
Russia and Kazakhstan...................... 31,735 14,558 3,307
-------- -------- --------
$ (3,428) $ (6,271) $(13,440)
======== ======== ========
</TABLE>
The provision for income taxes, which relates substantially to current
income taxes in the Company's Russian and Kazak businesses, differs from the
United States (34% -- February 28, 1997 onwards) and Canadian (44% -- January 1,
1995 to February 27, 1997) Federal and state/provincial statutory tax rates as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory
rates....................................... $(1,166) $(2,760) $(5,913)
Add/(deduct) the tax effect of:
Non-deductible amortization of licenses and
goodwill................................. 2,561 3,238 2,720
Other non-deductible expenses............... 2,273 1,753 1,010
Concessions on capital expenditures......... (3,854) (1,000) --
Differences in Russian and Kazak statutory
tax rates................................ (210) (1,696) (350)
Change in valuation allowance related to
deferred tax assets...................... 8,135 4,134 4,023
------- ------- -------
Provision for income tax............ $ 7,739 $ 3,669 $ 1,490
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Share issue costs.................................... $ -- $ 2,150
Operating loss carryforwards......................... 8,929 16,200
Capital loss carryforwards........................... -- 8,400
Expenses not yet deducted for Russian and
Kazak tax purposes................................ 18,646 3,760
-------- --------
27,575 30,510
Less: valuation allowance.............................. (8,246) (29,350)
-------- --------
Net deferred tax assets...................... 19,329 1,160
Deferred tax liabilities:
Debt issue costs............................. (1,160) (1,160)
Expenses not currently deducted for book
purposes................................... (705) --
Tax on revenues not yet realized for Russian
tax purposes............................... (17,464) --
-------- --------
Deferred tax liabilities............................... (19,329) (1,160)
-------- --------
$ -- $ --
======== ========
</TABLE>
At December 31, 1997, the Company had operating loss carryforwards for
United States (U.S.) federal income tax purposes of approximately $26.3 million.
In assessing the realizability of the deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will
F-21
<PAGE> 22
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments.
At December 31, 1996, the Company had operating loss carryforwards for
Canadian income tax purposes of approximately $36.0 million and allowable
capital loss carryforwards of approximately $19.0 million. Upon the Company's
emigration to the United States in February 1997, the Company was deemed to
dispose of all its assets at fair value. As a result, a substantial portion of
the operating and capital loss carryforwards were utilized. Remaining losses do
not carry over for U.S. tax purposes.
(12) EQUITY COMPENSATION PLAN
The Company has an Equity Compensation Plan (the "Plan"), which was
approved by the shareholders at the Annual Meeting in June of 1997. The Plan
amends and supersedes in its entirety the PLD Telekom Inc. Stock Option Plan
(the "Prior Plan"). No further grants will be made under the Prior Plan
following the adoption of the Plan and grantees under the Prior Plan have the
option of continuing to have existing grants covered by the terms of the Prior
Plan, or having these grants instead covered by the terms of the Plan.
Pursuant to the Plan, the Company's Board of Directors may grant stock
options, stock appreciation rights, restricted stock and performance units to
directors, officers and key employees of, and certain consultants and advisors
to, the Company and its subsidiaries. The Plan is administered by a committee of
the Board of Directors of the Company consisting solely of "outside directors"
and to date awards under the Plan have been limited to stock options.
The exercise price of each option is generally equal to the fair market
value of the shares of PLD's common stock on the date of grant. The maximum term
for which options are exercisable is ten years. Options shall become exercisable
in accordance with such terms and conditions, consistent with the Plan, as may
be determined by the committee. However, stock options granted to Non-Employee
Directors are immediately exercisable.
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $2.51, $2.11 and $2.31, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 -- risk-free interest rate of 6.5%, expected
life of six years and expected volatility of 40%; 1996 -- risk-free interest
rate of 6.5%, expected life of five years and expected volatility of 30%;
1995 -- risk-free interest rate of 6.3%, expected life of five years and
expected volatility of 30%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the date of grant for its stock options under SFAS 123, the
Company's loss would have been increased to $22.9 million ($0.71 per share),
$13.6 million ($0.43 per share) and $16.0 million ($0.51 per share) for the
years ended December 31, 1997, 1996 and 1995, respectively. The pro forma loss
for the year reflects only options granted in 1997, 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
123 is not reflected in the pro forma loss for the year because compensation
cost is reflected over the options' vesting period and compensation cost for
options granted prior to January 1, 1995 is not considered.
F-22
<PAGE> 23
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
Changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICES
---------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994............. 774,500 $7.83
Granted...................................... 610,000 $5.96
Exercised.................................... (16,000) $4.07
Canceled..................................... (387,000) $8.57
--------- -----
Outstanding at December 31, 1995............. 981,500 $6.61
Granted...................................... 1,010,000 $7.38
Exercised.................................... (189,000) $5.25
Canceled..................................... (120,000) $5.93
--------- -----
Outstanding at December 31, 1996............. 1,682,500 $7.25
Granted...................................... 1,405,000 $5.27
Exercised.................................... (302,166) $5.68
Canceled..................................... (15,000) $5.25
--------- -----
Outstanding at December 31, 1997............. 2,770,334 $6.41
========= =====
</TABLE>
At December 31, 1996 and 1995, the number of options exercisable was
382,500 and 371,500 and the weighted-average exercise price of those options was
$7.92 and $7.55, respectively.
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICES 12/31/97 LIFE PRICE 12/31/97 PRICE
-------- ----------- ----------- --------- ----------- ---------
<C> <C> <S> <C> <C> <C>
$ 5.06 - 6.00 1,453,334 8.4 years $ 5.30 688,332 $ 5.45
6.10 - 6.69 526,500 3.3 6.28 308,499 6.27
7.77 - 8.02 643,000 3.3 7.99 251,000 7.99
10.12 - 11.38 147,500 1.0 10.92 147,500 10.92
--------- ---------
2,770,334 1,395,331
========= =========
</TABLE>
(13) RELATED PARTY TRANSACTIONS
(a) PeterStar has entered into a barter agreement with an indirect minority
shareholder under which the two parties have exchanged services valued at $3.4
million and $3.0 million during 1997 and 1996, respectively. The amounts are
recorded in the consolidated statements of operations as telecommunications
revenues and direct costs.
(b) Direct costs for the years ended December 31, 1997, 1996 and 1995
include $4.2 million, $3.3 million and $1.8 million, respectively, paid to the
other shareholder of BECET in relation to the carriage of traffic over the
public telephone network.
(c) Amounts due from related parties at December 31, 1997 include $2.5
million principal and interest due from MTR-Sviaz in relation to a finance lease
(see note 5(c)), $1.6 million and $3.0 million due from a minority shareholder
of PeterStar under short-term and long-term loans, respectively, and $2.2
million due from a company controlled by a minority shareholder of Technocom for
telecommunications services.
Amounts due from related parties at December 31, 1996 include $1.1 million
principal and interest due from MTR-Sviaz in relation to a finance lease (see
note 5(c)), $600,000 due from a minority shareholder of PeterStar under a
short-term loan and $2.5 million due from a company controlled by a minority
shareholder of Technocom for telecommunications services.
F-23
<PAGE> 24
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(d) Amounts due to related parties at December 31, 1997 include a loan due
to the minority shareholder of Teleport-TP in the amount of $477,000, trade
payables of Teleport-TP in the amount of $3.2 million due to a company
controlled by one of the minority shareholders of Technocom, carrier charges of
$817,000 due to the other shareholder of BECET, a loan due to a company
controlled by a minority shareholder of Technocom in the amount of $336,000, due
to MTR-Sviaz for telephone services and connection charges in the amount of
$292,000, and an amount due to a company controlled by one of the minority
shareholders of Technocom for equipment received from them in the amount of
$204,000.
Amounts due to related parties at December 31, 1996 include a loan due to
the minority shareholder of Teleport-TP in the amount of $477,000, trade
payables of Teleport-TP in the amount of $2.9 million due to a company
controlled by one of the minority shareholders of Technocom, carrier charges of
$234,000 due to the other shareholder of BECET and a loan due to a company
controlled by a minority shareholder of Technocom in the amount of $336,000.
(e) The Company has guaranteed telephone billing system lease payments of a
shareholder of PeterStar totaling $2.5 million. Lease payments of $124,000 are
due quarterly until July 1998. At December 31, 1995, full provision was made for
all amounts paid to date under the guarantee and for all future amounts. The
balances of $373,000 and $871,000 remaining under the lease as of December 31,
1997 and 1996 are included in other current liabilities.
(f) General and administrative expenses for the years ended December 31,
1997 and 1996 include consulting fees of $1.7 million and $300,000,
respectively, charged by a minority shareholder of PeterStar.
(g) See also notes 3(c), (d), (e) and 5(c).
(14) COMMITMENTS AND CONTINGENCIES
(a) Intercompany
The Company paid certain costs on behalf of, and made certain loans to,
PeterStar, resulting in an intercompany balance of approximately $27.0 million
at December 31, 1996. During 1997, an agreement was reached with the minority
shareholders to recapitalize PeterStar. The recapitalization of PeterStar in an
amount of $13.8 million was completed during September 1997, with such funds
being used to repay an equal amount of these advances. Negotiations with the
minority shareholders of PeterStar as to the repayment of the remaining
intercompany balance due to the Company were concluded in March 1998 and
resulted in a further reduction of approximately $5.3 million in PeterStar's
liability. The effect of this settlement was to increase minority interest
expense by approximately $2.1 million in 1997.
(b) Currency Licenses
Under applicable Russian currency control regulations, the Company's
Russian subsidiaries are required to have certain licenses from the Central Bank
of Russia to enable them to make payments of and accept receipts of hard
currency. While PeterStar and BCL have or have applied for all the necessary
licenses, failure to receive the remaining licenses could result in fines and
penalties, which the Company does not believe will be material.
(c) Russian Taxation
Certain of the Company's Russian subsidiaries have accrued profits and
other taxes based on interpretations of the law which may ultimately be disputed
by the Russian taxation authorities. The exposure to additional profits and
other taxes, fines and penalties is not determinable. However, the Company does
not believe this would have a material adverse effect on the financial position
or results of operations of the Company.
F-24
<PAGE> 25
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(d) Purchase Commitments
At December 31, 1997, Technocom and PeterStar have commitments of
approximately $943,000 and $11.4 million, respectively, related to the
acquisition of telecommunications equipment. The PeterStar supply contract
provides for financing of the entire amount over approximately five years.
(e) Line Rental
While it has not had to do so historically, PeterStar anticipates that it
will have to begin paying local line rental charges to the Petersburg Telephone
System in 1998. The exact fee, and the date from which charges will be levied,
have yet to be determined, but the Company does not believe that such payments
will have a material adverse effect on the Company's financial position or
results of operations.
(f) Transponder Capacity
Teleport-TP currently utilizes capacity on three Intelsat satellites for
the provision of its international and domestic long distance services, pursuant
to a fifteen year contract signed with Intelsat in January 1993. The agreement
requires quarterly payments of $616,500 for the remainder of its term.
(15) CANADIAN ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with U.S. GAAP which, in the case of the Company, conform with Canadian GAAP,
except as follows:
(a) Net loss for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss for the year, as reported......... $(20,566) $(12,461) $(15,481)
Noncash interest on Convertible Notes...... (508) (252) --
-------- -------- --------
Net loss for the year under Canadian
GAAP..................................... $(21,074) $(12,713) $(15,481)
======== ======== ========
</TABLE>
Under Canadian GAAP, the Convertible Notes are a compound financial
instrument and the debt and equity elements of the instrument are separately
accounted for. For Canadian GAAP purposes, $13.9 million of the Convertible
Notes were classified as equity and $12.6 million were classified as debt on
issuance. Additional interest expense is charged to the consolidated statements
of operations to accrete the debt portion to the principal amount of $26.5
million at maturity which, together with cash interest payments, results in an
effective yield of 22.3%. Accordingly, long-term debt at December 31, 1997 and
1996 would amount to $120.3 million and $94.3 million, respectively, and
shareholders' equity would amount to $140.4 million and $151.6 million,
respectively, under Canadian GAAP.
Effective December 31, 1996, the Company changed its Canadian GAAP policy
with respect to pre-operating costs. Such costs may not be capitalized under
U.S. GAAP and, therefore, all such costs have been retroactively expensed for
Canadian GAAP purposes. The change in accounting policy decreased the Canadian
GAAP loss in 1995 by $636,000. The deficit at December 31, 1995 was increased by
$2.2 million.
F-25
<PAGE> 26
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(b) The following non-cash investing and financing activities would be
included in the consolidated statements of cash flows under Canadian GAAP.
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Investing:
Investment in Yellow Pages.................... $ -- -- (1,900)
Investment in BECET........................... -- -- --
Capital expenditures.......................... (11,302) -- --
Investments in Technocom...................... (7,681) -- --
Financing:
Issue of common shares........................ 7,681 -- 6,786
Conversion of preferred shares................ -- -- (4,886)
Supplier financing............................ 11,302 -- --
Recapitalization of PeterStar................. 4,012 -- --
Due from related party........................ (4,012) -- --
</TABLE>
(16) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues............................ $23,891 $26,389 $29,534 $34,610
Operating income.............................. 2,481 2,634 2,872 4,031
Interest and other income..................... 1,394 1,260 625 335
Interest expense.............................. (4,269) (4,120) (4,457) (5,000)
Income taxes.................................. 1,074 2,366 2,048 2,251
Minority interest............................. 1,766 1,457 1,391 4,785
Net loss for the period....................... (4,342) (3,725) (5,377) (7,122)
======= ======= ======= =======
Net loss per common share..................... $ (0.14) $ (0.12) $ (0.17) $ (0.22)
======= ======= ======= =======
</TABLE>
Minority interest for the fourth quarter of 1997 includes $2.1 million in
connection with the settlement reached with the minority shareholders of
PeterStar (see note 14(a)).
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues............................ $10,184 $13,478 $17,011 $21,293
Operating income (loss)....................... (987) 1,897 1,782 175
Interest and other income..................... 855 1,075 1,263 1,666
Interest expense.............................. (296) (1,683) (3,861) (4,133)
Income taxes.................................. 828 526 1,764 551
Minority interest............................. 97 434 1,118 872
Net loss for the period....................... (1,623) (808) (4,758) (5,272)
======= ======= ======= =======
Net loss per common share..................... $ (0.05) $ (0.03) $ (0.15) $ (0.16)
======= ======= ======= =======
</TABLE>
Operating revenues and direct costs in the fourth quarter of 1996 include
$3.0 million in connection with a barter agreement with an indirect minority
shareholder of PeterStar (see note 13(a)).
(17) CONSOLIDATING FINANCIAL INFORMATION
NWE Cyprus, WTC, BCL, PLD Asset Leasing Limited ("PLD Asset Leasing")
and PLD Capital Limited ("PLD Capital") (collectively, the "Subsidiary
Guarantors") have guaranteed the Senior Notes and the Convertible Notes
described in note 9. The following consolidating balance sheets as of December
31, 1997 and 1996 and consolidating statements of operations and cash flows for
each of the years in the three-year period ended December 31, 1997, depict the
financial position and results of operations and cash flows for the Company,
presented using the equity method of accounting for its subsidiaries, the
combined Subsidiary Guarantors, presented using the equity method of
accounting, and the combined non-guarantor subsidiaries together with
consolidating eliminations to arrive at the consolidated balance sheets,
statements of operations and cash flows of the Company and its subsidiaries.
Each of the Subsidiary Guarantors are wholly owned and their guarantees are
full, unconditional and joint and several. Ownership of all other significant
subsidiaries and their holdings are more fully described in note 3.
NWE Cyprus and WTC are holding companies and have no operations
independent of their subsidiaries. PLD Asset Leasing and PLD Capital are special
purpose holding companies incorporated in Cyprus which lease equipment to
non-guarantor subsidiaries. Separate financial statements for the Subsidiary
Guarantors are not presented because they are not material to investors.
There can be no assurance that guarantees by the Subsidiary Guarantors
can be enforced easily, if at all. Each of such companies are incorporated in
jurisdictions which are outside the United States. Persons seeking to enforce
those guarantees may therefore need to do so outside the United States. The need
to bring enforcement actions in such other jurisdictions, and to comply with the
laws of those jurisdictions in relation thereto, may significantly complicate,
delay or limit enforcement of such guarantees.
In addition, the ability to enforce an "upstream" guarantee (or
guarantee by a subsidiary of a parent's obligations) is subject to some
uncertainty not only in the United States but also other applicable
jurisdictions such as Cyprus and Russia, and may well be subject to similar
uncertainty in other jurisdictions where such guarantee may be sought to be
enforced against any Subsidiary Guarantor. Efforts have been made to minimize
the effect of any possible invalidity of the guarantees by limiting the extent
to which they may be enforced against a Subsidiary Guarantor to such amounts
which will not render the guarantees void, voidable or unenforceable, and, in
the case of PLD Asset Leasing and PLD Capital Limited, by limiting the
activities of each such subsidiary to its leasing, selling or investing
operations and in the case of PLD Asset Leasing, PLD Capital and NWE Cyprus by
limiting the activities of each such subsidiary to incur indebtedness. However,
there can be no assurance that such efforts have been successful.
Payments under the guarantee given by BCL may require a license from
the Russian Central Bank and may also (to the extent such payments are
considered to be interest) be subject to Russian withholding tax. While under
current law payments under the guarantees by PLD Asset Leasing, PLD Capital, WTC
and NWE Cyprus currently in existence may be made without the need for licenses
or withholding of tax, there can be no assurance that PLD Asset Leasing, PLD
Capital, WTC or NWE Cyprus will not encounter such problems hereafter.
Finally, the ability of a foreign claimant to enforce a judgment or
arbitral award obtained in respect of a guarantee outside those jurisdictions in
which the Subsidiary Guarantors are incorporated may be limited. For example,
some jurisdictions (i.e., Russia) generally only recognize foreign judgments or
arbitral awards pursuant to bilateral or multilateral treaty arrangements. In
addition, the local courts may have limited experience in the enforcement of
foreign judgments. The possible need to re-litigate in the jurisdiction in which
a Subsidiary Guarantor is located a judgment or arbitral award obtained
elsewhere in respect of its guarantee may significantly delay the enforcement of
such judgment or award.
There are no restrictions in the charter or other foundation documents
of the Subsidiary Guarantors which restrict their ability to pay dividends, and
each of such companies is a wholly owned, direct or indirect, subsidiary of the
Company. However, each such company's ability to pay dividends may be affected,
from time to time, by (i) their own ability to generate sufficient cash from
their operations; (ii) the level of taxation, particularly corporate profits and
withholding taxes, in the jurisdictions in which they operate and (iii) exchange
controls and currency repatriation restrictions in effect in the jurisdictions
in which they operate.
F-26
<PAGE> 27
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
CONSOLIDATING SCHEDULES
Consolidating Balance Sheet
As of December 31, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Guarantors Subsidiaries
Parent (Combined) (Combined)
------ ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 7,271 331 33,072
Trade receivables, net of allowance -- 880 9,648
Other receivables and prepaids 126 155 3,241
Inventory -- 70 1,770
Due from related parties 600 -- 3,808
-------------------------------------------------
Total current assets 7,997 1,436 51,539
Escrow funds 40,984 -- --
Intercompany investments and advances 170,813 116,606 82
Property and equipment, net 334 6,494 87,976
Telecommunications licenses, net of amortization 4,964
Other investments 19,179 3,910 4,915
Other assets 8,561 1,814 895
-------------------------------------------------
Total Assets 247,868 130,260 150,371
-------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness -- -- 15,829
Short-term borrowings -- --
Accounts payable 322 1,929 15,530
Accrued liabilities 523 7 2,596
Due to related parties -- -- 4,039
Deferred revenue -- -- 1,078
Customer deposits -- -- 1,644
Intercompany and other current liabilities 1,115 12,658 2,183
-------------------------------------------------
Total current liabilities 1,960 14,594 (42,899)
Long-term debt 107,954 -- --
Other liabilities -- -- --
Intercompany payables -- 10,745 39,953
Minority interest -- -- 638
Commitments and contingencies
Shareholders' Equity
Preferred stock 31 -- 40,000
Common stock 180,878 125,640 20,392
Additional paid-in capital 13,592 -- --
Accumulated deficit (56,547) (20,719) 6,489
-------------------------------------------------
Total shareholders' equity 137,954 104,921 66,881
-------------------------------------------------
Total liabilities and shareholders' equity 247,868 130,260 150,371
=================================================
<CAPTION>
Eliminations Consolidated
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents -- 40,674
Trade receivables, net of allowance -- 10,528
Other receivables and prepaids -- 3,522
Inventory -- 1,840
Due from related parties -- 4,408
-------------------------------
Total current assets -- 60,972
Escrow funds -- 40,984
Intercompany investments and advances (287,501) --
Property and equipment, net (1,765) 93,039
Telecommunications licenses, net of amortization 67,346 72,310
Other investments (3,910) 24,094
Other assets 3,688 14,958
-------------------------------
Total Assets (222,142) 306,357
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness 15,829
Short-term borrowings --
Accounts payable (51) 17,781
Accrued liabilities (7) 3,126
Due to related parties 4,039
Deferred revenue 1,000 1,078
Customer deposits 28,000 1,644
Other current liabilities (12,686) 3,241
-------------------------------
Total current liabilities (12,715) 46,738
Long-term debt -- 107,954
Other liabilities -- --
Intercompany payables (50,968) --
Minority interest 13,073 13,711
Commitments and contingencies
Shareholders' Equity
Preferred stock 40,000 31
Common stock (146,032) 180,878
Additional paid-in capital 13,592
Accumulated deficit 14,230 (56,547)
-------------------------------
Total shareholders' equity (171,802) 137,954
-------------------------------
Total liabilities and shareholders' equity (222,142) 306,357
===============================
</TABLE>
<PAGE> 28
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
CONSOLIDATING SCHEDULES
Consolidating Balance Sheet
As of December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Guarantors Subsidiaries
Parent (Combined) (Combined)
------ ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 5,513 241 11,502
Trade receivables, net of allowance -- 1,239 15,839
Other receivables and prepaids 1,220 168 7,225
Inventory -- 214 2,587
Due from related parties 1,600 -- 4,719
-------------------------------------------------
Total current assets 8,333 3,081 41,872
-------------------------------------------------
Escrow funds 33,868 -- --
Intercompany investments and advances 210,844 148,295 2,615
Property and equipment, net 191 6,181 129,780
Telecommunications licenses, net of amortization -- -- 622
Due from related parties 3,011 -- --
Other investments 3,000 7,384 4,036
Other assets 11,971 1,627 807
-------------------------------------------------
Total Assets 271,218 166,568 179,732
-------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness -- -- --
Short-term borrowings 19,420 -- 900
Accounts payable 1,224 1,861 10,512
Accrued liabilities 371 34 5,495
Due to related parties -- -- 6,394
Deferred revenue -- -- 3,128
Customer deposits -- -- 3,070
Other current liabilities 758 283 1,258
-------------------------------------------------
Total current liabilities 21,773 2,178 30,757
-------------------------------------------------
Long-term debt 122,214 5,783 11,302
Other liabilities -- 12,209 --
Intercompany payables -- 27,957 36,250
Minority interest -- -- --
Commitments and contingencies
Shareholders' Equity
Preferred stock, 4 -- (40,000)
Common stock, 333 125,640 --
Additional paid-in capital 204,007 -- --
Accumulated deficit (77,113) (7,199) 27,515
-------------------------------------------------
Total shareholders' equity 127,231 118,441 101,423
-------------------------------------------------
Total liabilities and shareholders' equity 271,218 166,568 179,732
=================================================
<CAPTION>
Eliminations Consolidated
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents -- 17,256
Trade receivables, net of allowance -- 17,078
Other receivables and prepaids -- 8,615
Inventory -- 2,802
Due from related parties -- 6,320
-------------------------------
Total current assets -- 52,071
-------------------------------
Escrow funds -- 33,868
Intercompany investments and advances 361,754 --
Property and equipment, net (1,154) 134,998
Telecommunications licenses, net of amortization 78,215 78,837
Due from related parties -- 3,011
Other investments (7,384) 7,036
Other assets 10,145 25,765
-------------------------------
Total Assets (281,932) 335,586
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness --
Short-term borrowings -- 20,320
Accounts payable -- 13,597
Accrued liabilities (150) 5,750
Due to related parties (1,058) 5,336
Deferred revenue -- 3,128
Customer deposits -- 3,070
Other current liabilities (43) 2,256
-------------------------------
Total current liabilities (1,251) 53,457
-------------------------------
Long-term debt (5,783) 133,516
Other liabilities (12,209) --
Intercompany payables (64,207) --
Minority interest 21,382 21,382,000
Commitments and contingencies
Shareholders' Equity
Preferred stock, (40,000) 4
Common stock, (159,548) 333
Additional paid-in capital -- 203,584,000
Warrants -- 423,000
Accumulated deficit 20,316 77,113
-------------------------------
Total shareholders' equity 219,864 (127,231)
-------------------------------
Total liabilities and shareholders' equity 281,932 (335,586)
===============================
</TABLE>
<PAGE> 29
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Consolidating Statement of Operations
Year Ended December 31, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Guarantors Subsidiaries
Parent (combined) (combined)
------ ---------- ----------
<S> <C> <C> <C>
Revenue:
Telecommunications $ - 7,648 104,820
Finance lease income - 783 1,956
Management fees 3,155 - 3,507
--------- ------ -------
3,155 8,431 110,283
Direct costs - 2,623 36,563
--------- ------ -------
Gross Profit 3,155 5,808 73,720
Operating expenses:
General and administrative 7,401 5,679 29,186
Depreciation (246) 812 9,867
Amortization 2,973 4,914 334
Management Fees 8,845 (3,155) (5,690)
Taxes other than income taxes 618 602 4,984
--------- ------ -------
Total operating expenses 19,591 8,852 38,681
Operating income (loss) (16,436) (3,044) 35,039
Other income (expense):
Share of income (loss) from equity investments,
after amortization of licenses 9,283 18,222 (537)
Interest and other income 2,639 48 939
Interest Expense (16,142) (5) (1,704)
Amortization of deferred financing costs (1,152) - -
Other 1,242 (276) (491)
Provision for amounts due from a shareholder of
PeterStar - - -
--------- ------ -------
Loss before income taxes and minority interest (20,566) 14,945 33,246
Income taxes - 426 7,356
--------- ------ -------
Loss before minority interest (20,566) 14,519 25,890
Minority Interest - - (639)
--------- ------ -------
Net loss $ (20,566) 14,519 26,529
========= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Eliminations Consolidated
------------ ------------
<S> <C> <C>
Revenue:
Telecommunications - 112,468
Finance lease income (783) 1,956
Management fees (6,662) -
------- -------
(7,445) 114,424
Direct costs - 39,186
------- -------
Gross Profit (7,445) 75,238
Operating expenses:
General and administrative (3,550) 38,716
Depreciation - 10,433
Amortization (354) 7,867
Management Fees - -
Taxes other than income taxes - 6,204
------- -------
Total operating expenses (3,904) 63,220
Operating income (loss) (3,541) 12,018
Other income (expense):
Share of income (loss) from equity investments,
after amortization of licenses (27,505) (537)
Interest and other income (12) 3,614
Interest Expense 5 (17,846)
Amortization of deferred financing costs - (1,152)
Other - 475
Provision for amounts due from a shareholder of
PeterStar - -
------- -------
Loss before income taxes and minority interest (31,053) (3,428)
Income taxes (43) 7,739
------- -------
Loss before minority interest (31,010) (11,167)
Minority Interest 10,038 9,399
------- -------
Net loss (41,048) (20,566)
======= =======
</TABLE>
<PAGE> 30
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Consolidating Statement of Operations
Year Ended December 31, 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Guarantors Subsidiaries
Parent (combined) (combined) Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Telecommunications $ -- 5,101 55,461 -- 60,562
Finance lease income -- -- 1,404 -- 1,404
Management fees 2,085 -- 4,230 (6,315) --
-------- ------- ------- ------- -------
2,085 5,101 61,095 (6,315) 61,966
Direct costs -- 2,103 19,606 -- 21,709
-------- ------- ------- ------- -------
Gross Profit 2,085 2,998 41,489 (6,315) 40,257
Operating expenses:
General and administrative 3,575 1,588 18,756 872 24,791
Depreciation -- 502 4,925 (201) 5,226
Amortization -- 4,832 59 (8) 4,883
Management Fees 4,230 -- 2,085 (6,315) --
Taxes other than income taxes 11 323 2,156 -- 2,490
-------- ------- ------- ------- -------
Total operating expenses 7,816 7,245 27,981 (5,652) 37,390
Operating income (loss) (5,731) (4,247) 13,508 (663) 2,867
Other income (expense):
Share of income (loss) from equity investments,
after amortization of licenses 861 8,443 (215) (11,781) (2,692)
Interest and other income 2810 173 1910 (34) 4,859
Interest Expense (9,463) -- (510) -- (9,973)
Amortization of deferred financing costs (684) -- -- -- (684)
Other (254) 45 (429) (10) (648)
-------- ------- ------- ------- -------
Loss before income taxes and minority interest (12,461) 4,414 14,264 (12,488) (6,271)
Income taxes -- 194 3,475 -- 3,669
-------- ------- ------- ------- -------
Loss before minority interest (12,461) 4,220 10,789 (12,488) (9,940)
Minority Interest -- -- 19 2,502 2,521
-------- ------- ------- ------- -------
Net loss $(12,461) 4,220 10,770 (14,990) (12,461)
======== ======= ======= ======= =======
Net loss per common share $
======== ======= ======= ======= =======
Weighted average number of common
shares outstanding
======== ======= ======= ======= =======
</TABLE>
<PAGE> 31
PLD TELEKOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Consolidating Statement of Operations
Year Ended December 31, 1995
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Guarantors Subsidiaries
Parent (combined) (combined) Eliminations Consolidated
------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Telecommunications $ -- -- 27,686 -- 27,686
Finance lease income -- -- 1,434 -- 1,434
Management fees 1,200 -- 1,233 (2,433) --
-------- ------- ------- ------- -------
1,200 -- 30,353 (2,433) 29,120
Direct costs -- -- 10,382 -- 10,382
-------- ------- ------- ------- -------
Gross Profit 1,200 -- 19,971 (2,433) 18,738
Operating expenses:
General and administrative 5,300 67 14,865 (2,064) 18,168
Depreciation -- -- 3,837 -- 3,837
Amortization -- 4,606 53 4,659
Management Fees 3,003 -- (1,370) 1,633 --
Taxes other than income taxes -- -- 1,120 100 1,220
-------- ------- ------- ------- -------
Total operating expenses 8,303 4,673 18,505 (3,597) 27,884
Operating income (loss) (7,103) (4,673) 1,466 1,164 (9,146)
Other income (expense):
Share of income (loss) from equity investments,
after amortization of licenses (4,563) (1,691) (27) 4,726 (1,555)
Interest and other income 435 -- 1,631 -- 2,066
Interest Expense (526) -- (431) -- (957)
Amortization of deferred financing costs -- -- -- -- --
Other (1,197) -- (393) 232 (1,358)
Provision for amounts due from a shareholder of
PeterStar (2,490) -- -- -- (2,490)
-------- ------- ------- ------- -------
Loss before income taxes and minority interest (15,444) (6,364) 2,246 6,122 (13,440)
Income taxes 37 -- 1,453 -- 1,490
-------- ------- ------- ------- -------
Loss before minority interest (15,481) (6,364) 793 6,122 (14,930)
Minority Interest -- -- 58 493 551
-------- ------- ------- ------- -------
Net loss $(15,481) (6,364) 735 5,629 (15,481)
======== ======= ======= ======= =======
</TABLE>
<PAGE> 32
PLD TELEKOM INC.
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Non-
Consolidating Statement of Cash Flows Subsidiary Guarantor
for the year ended December 31, 1997 Guarantors Subsidiaries
(in thousands) Parent (Combined) (Combined) Eliminations Consolidated
------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities (11,731) (11,468) 40,519 (6,527) 10,793
Cash flows from investing activities
Escrow funds 7,116 -- -- -- 7,116
Capital Expenditures -- (750) (40,896) 2,656 (38,990)
Proceeds on disposal of SPMMTS 17,180 -- -- -- 17,180
Investments in subsidiaries (33,211) (7,111) -- 14,714 (25,608)
Other 302 -- (246) (622) (566)
------------------------------------------------------------------------------
Net cash used in investing activities (8,613) (7,861) (41,142) 16,748 (40,868)
------------------------------------------------------------------------------
Financing
Short term debt borrowings/(repayments) (14,929) 4,000 (10,929)
Proceeds from notes 15,420 -- -- -- 15,420
Issuance of stock 1,739 -- -- -- 1,739
Recapitalization of Peterstar 1,427 -- -- -- 1,427
Related party advances and other -- 19,239 (6,018) (14,221) (1,000)
------------------------------------------------------------------------------
Net cash provided by financing activities 18,586 19,239 (21,947) (10,221) 6,657
------------------------------------------------------------------------------
(Decrease)/Increase in cash and cash
equivalents (1,758) (90) (21,570) (23,418)
Cash and cash equivalents at beginning of year 7,271 331 33,072 40,674
------------------------------------------------------------------------------
Cash and cash equivalents at end of year 5,513 241 11,502 -- 17,256
==============================================================================
</TABLE>
<PAGE> 33
PLD TELEKOM INC.
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Non-
Consolidating Statement of Cash Flows Subsidiary Guarantor
for the year ended December 31, 1996 Guarantors Subsidiaries
(in thousands) Parent (Combined) (Combined) Eliminations Consolidated
---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash provided by/(used in) operating
activities................................. (9,906) 13,322 29,802 (17,600) 15,618
Cash flows from investing activities
Escrow funds............................... (40,964) -- -- -- (40,984)
Capital Expenditures....................... (1,214) (1,835) (40,152) -- (43,201)
Investments in subsidiaries................ (25,536) (11,901) (4,999) 34,921 (7,515)
Other...................................... (4,457) -- 455 7,511 3,509
---------- ---------- ---------- ------------ -------------
Net cash used in investing activities... (72,191) (13,736) (44,696) (42,432) (86,191)
---------- ---------- ---------- ------------ -------------
Financing
Short term debt borrowings/(repayments) ... (14,500) -- 7,950 -- (6,550)
Debt issuance, net of offering costs....... 104,973 -- -- -- 104,973
Issuance of stock ......................... 991 -- 20,000 (20,000) 991
Loans from shareholders.................... (1,604) -- -- (239) (1,843)
Related party advances and other .......... -- 745 4,001 4,746 --
---------- ---------- ---------- ------------ -------------
Net cash provided by financing
activities............................ (89,860) 745 31,951 (24,965) (97,571)
---------- ---------- ---------- ------------ -------------
Increase in cash and cash
equivalents........................... 7,763 331 16,904 24,998
Cash and cash equivalents at beginning
of year.................................... (492) -- 16,168 15,676
---------- ---------- ---------- ------------ -------------
Cash and cash equivalents at end of year.... 7,271 331 33,072 -- 40,674
========== ========== ========== ============ ==============
</TABLE>
<PAGE> 34
PLD TELEKOM INC.
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Non-
Subsidiary Guarantor
Consolidating Statement of Cash Flows for the year Guarantors Subsidiaries
ended December 31, 1995 Parent (Combined) (Combined) Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash provided by/(used in) operating activities (33,422) (90) (10,671) 37,459 (6,724)
Cash flows from investing activities
Capital Expenditures (13,496) -- (18,042) -- (31,538)
Teleport finance leases -- -- -- (7,733) (7,733)
Proceeds on disposal of assets/investments -- -- 2,403 (2,403) --
Investments in subsidiaries -- (13,881) (2,403) 16,284 --
Other (8,905) -- (17) (900) (9,822)
------- ------- ------- ------- -------
Net cash used in investing activities (22,401) (13,881) (18,059) 5,248 (49,093)
------- ------- ------- ------- -------
Financing
Short term debt borrowings/(repayments) 14,170 -- 7,879 330 22,379
Issuance of stock 67 -- -- -- 67
Loans from shareholders 502 -- -- (97) 405
Related party advances and other 4,819 13,971 16,081 42,939 (8,068)
------- ------- ------- ------- -------
Net cash provided by financing activities 19,558 13,971 23,960 (42,706) 14,783
------- ------- ------- ------- -------
Decrease in cash and cash equivalents (36,265) -- (4,769) (41,034)
Cash and cash equivalents at beginning of year 35,773 -- 20,937 56,710
------- ------- ------- ------- -------
Cash and cash equivalents at end of year (492) -- 16,168 -- 15,676
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
NWE CAPITAL (CYPRUS) LTD.
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 2
INDEX TO FINANCIAL STATEMENTS PAGE
------
Independent Auditors' Report...................................... 1
Consolidated balance sheets
as of December 31, 1997 and 1996.................................. 2
Consolidated statements of operations
for the years ended December 31, 1997, 1996 and 1995.............. 3
Consolidated statements of shareholders' equity for the
years ended December 31, 1997, 1996 and 1995...................... 4
Consolidated statements of cash flows for the
years ended December 31, 1997, 1996 and 1995...................... 5
Notes to consolidated financial statementS........................ 6
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
Shareholder and Board of Directors
NWE Capital (Cyprus) Ltd.:
We have audited the accompanying consolidated balance sheets of NWE Capital
(Cyprus) Ltd. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the years in the three year period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and the changes in their financial position for each of the years in
the three year period then ended in conformity with generally accepted
accounting principles.
KPMG
St. Petersburg, Russia
March 3, 1998
<PAGE> 4
NWE CAPITAL (CYPRUS) LTD.
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 7) $ 7,849 5,185
Trade receivables, net of allowance of $3,002 and $1,913,
respectively 12,725 5,893
Other receivables and prepaids 3,266 1,178
VAT receivable 2,154 626
Due from related parties 468 96
Inventory 2,566 1,698
--------- ---------
Total current assets 29,028 14,676
Property and equipment, net (note 6) 79,002 56,613
Telecommunications licenses (note 3), net of amortization
of $19,356 and $14,635, respectively 42,286 46,715
Other receivables (note 4) 3,012 --
Goodwill (note 5), net of amortization of $574 and $359,
respectively 1,580 1,795
Other assets 280 369
--------- ---------
Total assets $ 155,188 120,168
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank indebtedness (note 8) 900 --
Accounts payable 3,064 4,502
Accrued liabilities 3,044 1,545
Advances from other group companies (note 10) 32,810 41,304
Due to related parties 818 233
Customer deposits and advances 5,978 2,694
Current portion of long term debt 3,988 1,021
--------- ---------
Total current liabilities 50,602 51,299
--------- ---------
Long term debt (note 9) 12,458 5,226
Due to Related parties 2,144 2,144
Minority interest 19,391 2,615
Commitments and contingencies (note 16)
Shareholder's equity (note 12):
Common stock, par value CY (pound)1 per share. Authorized
3,246,174 shares in 1997 and 1996; issued and outstanding
1,000 shares in 1997 and 1996 7,082 7,082
Contributed surplus 63,723 63,723
Accumulated deficit (212) (11,921)
--------- ---------
Total shareholder's equity 70,593 58,884
--------- ---------
Total liabilities and shareholder's equity $ 155,188 120,168
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NWE CAPITAL (CYPRUS) LTD.
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Telecommunications revenue $ 85,588 52,651 24,747
Direct costs 23,120 17,527 8,636
-------- -------- --------
Gross profit 62,468 35,124 16,111
Operating expenses:
General and administrative 15,742 12,396 10,378
Management fees 4,817 2,085 1,730
Depreciation 7,194 4,758 3,798
Amortization 4,936 4,884 4,659
Taxes other than income taxes 3,257 1,667 657
-------- -------- --------
Total operating expenses 35,946 25,790 21,222
Operating income (loss) 26,522 9,334 (5,111)
Other income (expense):
Interest and other income 337 370 684
Interest on long term debt (584) -- --
Foreign exchange loss (676) (740) (233)
Loss on disposal of property and equipment -- (9) (123)
Settlement With minority shareholders (note 11) 5,339 -- 1,711
-------- -------- --------
Income (loss) before income taxes
and minority interest 30,938 8,955 (3,072)
Income taxes (note 13) 6,893 3,356 1,038
-------- -------- --------
Income (loss) before minority interest 24,045 5,599 (4,110)
Minority interest 12,336 2,615 --
-------- -------- --------
Net income (loss) $ 11,709 2,984 (4,110)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NWE CAPITAL (CYPRUS) LTD.
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars, except number of shares)
<TABLE>
<CAPTION>
Common stock
Number
of Contributed Accumulated
shares Amount surplus deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,000 $ 2 $ -- $ (10,795) $ (10,793)
Net loss for the year -- -- -- (4,110) (4,110)
--------- --------- --------- --------- ---------
Balance at December 31, 1995 1,000 2 -- (14,905) (14,903)
Conversion of promissory note
from PLD Telekom Inc. 928,591 2,000 18,000 -- 20,000
Acquisition of WTC from
PLD Telekom Inc. 2,316,583 5,080 45,723 -- 50,803
Net income for the year -- -- -- 2,984 2,984
--------- --------- --------- --------- ---------
Balance at December 31, 1996 3,246,174 7,082 63,723 $ (11,921) $ 58,884
Net income for the year -- -- -- 11,709 11,709
--------- --------- --------- --------- ---------
Balance at December 31, 1997 3,246,174 $ 7,082 $ 63,723 $ (212) $ 70,593
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
NWE CAPITAL (CYPRUS) LTD.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,709 2,984 (4,110)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,130 9,642 8,457
Minority interest 12,336 2,615 --
Settlement with minority shareholders (note 11) (5,339) -- (1,711)
Other 133 9 --
Customer deposits and advances 3,284 103 2,585
Changes in working capital (note 14) (10,047) (331) (9,167)
-------- -------- --------
Net cash provided by (used in)
operating activities 24,206 15,022 (3,946)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (19,367) (20,652) (12,339)
Other assets 89 (58) 110
-------- -------- --------
Net cash used in investing activities (19,278) (20,710) (12,229)
-------- -------- --------
Cash flows from financing activities:
Bank indebtedness 900 -- --
Long term debt -- 6,247 (4,384)
Advances from other group companies (3,591) 1,729 8,891
Recapitalisation of PeterStar 1,427 -- --
Capital contributions by PLD -- -- 13,881
Dividends paid (1,000) -- --
-------- -------- --------
Net cash provided by financing activities (2,264) 7,976 18,388
-------- -------- --------
Increase in cash and cash equivalents 2,664 2,288 2,213
Cash and cash equivalents at beginning of year 5,185 2,897 684
-------- -------- --------
Cash and cash equivalents at end of year $ 7,849 5,185 2,897
======== ======== ========
Supplementary disclosures:
Non-cash investing and financing activities:
Purchase of equipment with PLD advances and
under long term contracts $ 10,641 1,597 9,532
======== ======== ========
Recapitalisation of PeterStar (note 4) $ 4,012 -- --
======== ======== ========
Interest paid $ 728 -- --
======== ======== ========
Income taxes paid $ 6,924 3,999 1,688
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) BUSINESS AND OPERATIONS
The Company is incorporated under the laws of Cyprus. The Company is a
wholly-owned subsidiary of PLD Telekom Inc. ("PLD"). PLD was previously
incorporated under the laws of Ontario, Canada. Effective February 28,
1997, PLD was incorporated in the United States as a Delaware
corporation. Through its majority-owned and controlled subsidiaries, the
Company is a provider of local, long distance and international
telecommunications services in the former Soviet Union.
The Company's telecommunications businesses are at various stages of
development and are growing rapidly in an emerging economy which, by its
nature, has an uncertain economic, political and regulatory environment.
The general risks of operating businesses in the former Soviet Union
include the possibility for rapid change in government policies, economic
conditions, the tax regime and foreign currency regulations.
Ultimate recoverability of the Company's investments is dependent upon
its ability to achieve and maintain profitability, which is dependent to
a certain extent on the stabilization of the economies of the former
Soviet Union, the ability to maintain the necessary telecommunications
licenses and the ability to obtain adequate financing to meet capital
commitments.
The Company is in a net current liability position and will require the
continued support of PLD in order to meet it's obligations as they fall
due.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United
States (U.S.GAAP).
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
<PAGE> 9
2
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. At December 31, 1997 and 1996, the Company's cash
equivalents consist of term deposits, of $4.6 million and $1.4
million, respectively.
(d) REVENUE RECOGNITION
The Company records telecommunication revenues as earned, at the
time services are provided with the exception of terminal sales.
Terminal sales are recognised when the equipment is delivered and
the supporting contract is signed.
(e) INVENTORY
Inventory is stated at the lower of average cost or net realizable
value and is composed of telephony products held for resale to
customers.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Telecommunications equipment 10 years
Buildings 10 years
Office furniture and equipment 3-5 years
Leasehold improvements 15 years
</TABLE>
Interest costs incurred during the period of installment of
telecommunications equipment is capitalised. The interest cost
capitalised in 1997 amounted to $927,791.
<PAGE> 10
3
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
(g) TELECOMMUNICATIONS LICENSES
Telecommunications licenses are amortized on a straight-line basis
over the terms of the licenses.
(h) GOODWILL
Goodwill represents the excess of the purchase price over the fair
values of the net assets acquired of C.P.Y. Yellow Pages Limited,
and is being amortized on a straight-line basis over ten years.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, trade and other receivables,
amounts due from or to related parties, bank indebtedness and
accounts payable approximate fair value due to their short
maturities. The fair value of long term debt is based on
discounted cash flow analysis.
(j) REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION
The statutory accounts of the Company's consolidated subsidiaries
are maintained in accordance with local accounting regulations and
are stated in local currencies.
Local statements are adjusted to U.S. GAAP and then translated
into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS 52), "Foreign Currency
Translation."
Under SFAS 52, the financial statements of foreign entities in
highly inflationary economies are measured in all cases using the
U.S. dollar as the functional currency. U.S. dollar transactions
are shown at their historical value. Monetary assets and
liabilities denominated in local currencies are translated into
U.S. dollars at the prevailing period-end exchange rate. All other
assets and liabilities are translated at historical exchange
rates. Results of operations have been translated using the
monthly average exchange rates. Translation differences resulting
from the use of these different rates are included in the
accompanying consolidated statements of operations.
<PAGE> 11
4
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
(k) INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income or
expense in the period it occurs.
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," on January 1, 1996. SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
<PAGE> 12
5
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(2), CONTINUED
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the year. Actual results could differ
from those estimates.
(3) BUSINESSES AND ACQUISITIONS
The Company's key interests at December 31, 1997 include a 60%
equity interest in PeterStar Company Limited ("PeterStar") and a
50% indirect equity interest in BECET International ("BECET").
(a) PETERSTAR
PeterStar is a joint stock company registered in 1992 under the
laws of the Russian Federation to provide international and
domestic telecommunications services to St. Petersburg, Russia. In
November 1994, PeterStar was granted a license to provide these
services for a further ten years. The license was reissued in June
1996 and sets the maximum number of lines which PeterStar may have
and requires that 74,200 lines be introduced by June 1999. At
December 31, 1997, PeterStar had 114,774 lines in place.
In October 1992, PLD acquired a 50% interest in PeterStar for
consideration of $20.0 million. All of the consideration was
allocated to telecommunications licenses. This interest was
subsequently transferred to the Company in exchange for a
promissory note in the amount of $20.0 million. During 1996 the
promissory note was exchanged for 928,591 shares of the Company.
<PAGE> 13
6
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
(a) PETERSTAR, CONTINUED
In March 1994, PLD acquired 90% of the outstanding shares of PMT
Ltd., a Russian company whose sole asset was a 10% interest in
PeterStar, for consideration of $8.2 million. PLD acquired the
remaining 10% of PMT Ltd. in April 1996 for consideration of $1.8
million. All of the consideration was allocated to
telecommunications licenses. In April 1996, PLD transferred its
10% interest in PeterStar to the Company in exchange for a $10.0
million non-interest bearing promissory note payable on demand and
convertible to common shares at the option of either PLD or the
Company. This acquisition has been accounted for using the
continuity of interests method. Accordingly, PLD's historical cost
of the PeterStar telecommunications licenses is recorded in these
financial statements and comparative figures have been restated to
reflect the historical net book value of the PeterStar licenses
and the related amortization expense.
(b) BECET
BECET provides cellular services pursuant to a 15 year license to
operate a cellular and mobile telephone system in Kazakstan until
February 2009. The Company's 50% interest in BECET is held by its
wholly-owned subsidiary, Wireless Technology Corporations Limited
("WTC"), a company incorporated in the territory of the British
Virgin Islands.
In March 1994, PLD acquired all the outstanding shares of WTC for
consideration of $30.0 million. The acquisition was accounted for
by the purchase method. As of the date of acquisition, BECET had
not commenced operations and did not have any tangible assets or
liabilities. Therefore, the entire purchase price, including
acquisition costs of $0.8 million was allocated to
telecommunications licenses. BECET commenced commercial operations
in September 1994. During 1994 and 1995, PLD contributed
additional equity of $20.0 million to WTC which in turn
contributed $20.0 million of working capital and equipment to
BECET in exchange for its 50% equity interest.
On January 5, 1996, PLD transferred its shares in WTC to the
Company for consideration of 2,316,583 shares of the Company. This
acquisition has been accounted for using the continuity of
interests method. Accordingly, PLD's historical cost of the BECET
license is recorded in these financial statements and comparative
figures have been restated to reflect the historical net book
value of the licenses and the related amortization expense.
<PAGE> 14
7
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(4) OTHER RECEIVABLES
During 1997, a $13.6 million receivable by PLD from PeterStar was
assigned to the Company. This amount was subsequently repaid by PeterStar
with the proceeds from a share issue. $4.0 million was advanced to a
minority shareholder of PeterStar so that it could participate in the
share issue. $4.0 million of the assigned amount is outstanding at year
end. $1.0 million is considered current and the remainder is classified
as long term although payment terms have not been finalised.
(5) GOODWILL
Effective April 26, 1995, PLD acquired all the outstanding shares of
C.P.Y. Yellow Pages Limited ("Yellow Pages"), a company incorporated in
the Republic of Cyprus, for consideration of $2.1 million. Yellow Pages
publishes a Yellow Pages directory and owns a database of Russian and
foreign businesses in St. Petersburg. The acquisition was accounted for
by the purchase method and substantially all of the consideration was
allocated to goodwill.
On March 1, 1996, PLD transferred the shares of Yellow Pages to the
Company in exchange for a non-interest bearing promissory note in the
amount of $2.1 million. The note is payable in ten years and may be
converted to common shares at the option of either PLD or the Company.
This transaction has been accounted for using the continuity of interests
method.
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands
of U.S. dollars)
<S> <C> <C>
Telecommunications equipment:
Installed $ 68,492 49,934
Uninstalled 11,473 3,343
Buildings 2,333 335
Office furniture and equipment 4,156 4,795
Leasehold improvements 5,277 5,705
Advances to equipment suppliers 3,917 2,117
-------- --------
Total property and equipment 95,648 66,229
Less accumulated depreciation (16,646) (9,616)
-------- --------
Net book value $ 79,002 56,613
======== ======
</TABLE>
<PAGE> 15
8
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(6), CONTINUED
Property and equipment includes telecommunications equipment with a cost
of $16.5 million which has been pledged under the terms of the long term
installment agreements and $6.6 million which has been acquired under
capital lease (note 9).
(7) CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands
of U.S. dollars)
<S> <C> <C>
Cash on deposit:
In Russia and Kazakstan $6,621 5,032
Outside Russia and Kazakstan 1,228 153
------ -----
$7,849 5,185
====== =====
</TABLE>
(8) BANK INDEBTEDNESS
In December 1997, PeterStar entered into a $2.0 million, one-year loan
facility with BNP Dresdner Bank for the purchase of telecommunications
equipment. Interest is charged on borrowed amounts at three-month LIBOR
plus 2.5% per annum. The amount borrowed on the loan facility at
December 31, 1997 was $900,000. The bank indebtedness is guaranteed
by PLD.
(9) LONG TERM DEBT
The Company's long term debt at December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands
of U.S. dollars)
<S> <C> <C>
Obligations under capital lease $ 4,483 5,226
Supplier financing 7,975 -
------- -----
$12,458 5,226
======= =====
</TABLE>
<PAGE> 16
9
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
OBLIGATIONS UNDER CAPITAL LEASE
In September 1996, PeterStar entered into a five year capital lease for
switching equipment. The lessor of the equipment, PLD Asset Leasing
Limited, is a wholly-owned subsidiary of PLD.
Future minimum payments are as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $3,520
1999 1,760
2000 1,760
2001 1,760
------
Total minimum lease payments 8,800
Amounts representing interest 2,199
------
Present value of net minimum payments 6,601
Interest accrued to December 31, 1997 783
------
7,384
Current portion 2,901
------
Non-current portion $4,483
======
</TABLE>
The net book value of the related assets at December 31, 1997 and 1996
was $6.2 million.
<PAGE> 17
10
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
SUPPLIER FINANCING
Amounts payable under the terms of long term installment purchase
agreements are as follows (in thousands of U.S. dollars):
<TABLE>
<S> <C>
1999 $3,214
2000 2,595
2001 1,927
2002 1,792
------
9,528
Amounts representing interest (1,553)
------
$7,975
======
</TABLE>
The above amounts have been calculated using an interest rate of 8.0%.
(10) ADVANCES FROM OTHER GROUP COMPANIES
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands
of U.S. dollars)
<S> Current: <C> <C>
PLD Telekom Inc. $32,221 39,580
PLD Management Services Limited 589 1,724
------- -------
$32,810 41,304
Non-Current: ------- --------
</TABLE> PLD Telekom Inc. $ 2,144 2,144
======= ========
$12.1 million in advances from PLD Telekom Inc. arose on the acquisition
of a 10% interest in PeterStar and on the acquisition of Yellow Pages
(notes 3(a) and 5).
(11) SETTLEMENT WITH MINORITY SHAREHOLDERS
During 1997 and 1995, PLD and the minority shareholders of PeterStar
reached settlements regarding management fees and other costs previously
charged by PLD and expensed by PeterStar. As a result of the settlements,
charges to PeterStar of $5.3 million and $1.7 million for 1997 and 1995,
respectively, were disallowed. Such amounts were reflected by PeterStar
as a reduction of expense in these periods.
(12) COMMON STOCK
At December 31, 1997 and 1996 the authorized capital stock of the Company
consists of 3,246,174 common shares with par value of CY(pound)1 per
share. 1,000 shares are issued at December 31, 1997 and 1996. The balance
of the unissued shares have been fully subscribed for by PLD, are in the
process of being issued and are reflected as outstanding in the
accompanying financial statements.
<PAGE> 18
11
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(13) INCOME TAXES
BECET and PeterStar are subject to income tax at statutory rates of 30%
and 33%, respectively. The provision for income taxes, which relates
substantially to current income taxes in BECET and PeterStar, differs
from the U.S. federal and state statutory tax rates as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands of U.S. dollars)
<S> <C> <C> <C>
Provision for income taxes at statutory rates $ 10,886 3,826 (85)
Add (deduct) the tax effect of:
Non-deductible amortization of
licenses and goodwill 633 626 616
Other nondeductible expenses 1,045 1,348 1,906
Concessions on capital expenditures (3,775) (2,292) (1,399)
Change in valuation allowance
related to deferred tax assets (1,896) (152) --
-------- -------- --------
Provision for income tax $ 6,893 3,356 1,038
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands of U.S. dollars)
<S> <C> <C> <C>
Deferred tax assets:
Expenses not yet deducted for Russian and
Kazak tax purposes $ 2,190 4,086
Less valuation allowance (2,190) (4,086)
-------- -------
$ - -
======= ======
</TABLE>
As a result of the rapid change in the regulatory environment and
uncertainty surrounding the Russian tax regime, the Company has provided
a valuation allowance against deferred tax assets.
<PAGE> 19
12
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(14) CHANGES IN WORKING CAPITAL
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands of U.S. dollars)
<S> <C> <C> <C>
Increase in trade receivables $ (6,832) (2,465) (521)
(Increase) decrease in VAT receivable (1,528) 281 (427)
(Increase) decrease in other receivables
and prepaid (1,088) 1,592 (3,126)
Increase in inventory (868) (409) (608)
Change in amounts due from or to
related parties 213 -- --
Increase (decrease) in amounts payable
and accrued liabilities 56 670 (4,485)
-------- -------- --------
Changes in working capital $(10,047) (331) (9,167)
======== ======== ========
</TABLE>
(15) RELATED PARTY TRANSACTIONS
(a) PeterStar has entered into a barter agreement with an indirect
minority shareholder under which the two parties have exchanged
services valued at $3.4 million and $3.0 million during 1997 and
1996, respectively. The amounts are recorded in the consolidated
statements of operations as telecommunications revenue and direct
costs.
(b) Direct costs for the years ended December 31, 1997, 1996 and 1995
include $4.2 million, $3.3 million and $1.8 million, respectively,
paid to the other shareholder of BECET in relation to carriage of
traffic over the public telephone network. Balances outstanding of
$0.8 million and $0.2 million as of December 31, 1997 and 1996,
respectively, in relation to these charges, are included in due to
related parties.
(c) PLD charged management fees of $2.0 million related to PeterStar
and $1.2 million related to BECET during the year ended December
31, 1997 (1996 - $1.2 million and $0.9 million, respectively; 1995
- $1.2 million and $0.5 million, respectively). These amounts are
recorded in the consolidated statements of operations as
management fee expense.
<PAGE> 20
13
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
(d) Additional charges, related to management services of $0.2
million, $26,000 and $0.8 million for the years ended December 31,
1997, 1996 and 1995 respectively, were charged to BECET by PLD and
another PLD subsidiary. These amounts are recorded in the
consolidated statements of operations as general and
administrative expenses.
(e) PeterStar was charged $3.6 million in service fees by PLD relating
to recharged expenses and capital equipment in 1997 (1996: $2.1
million, 1995: $3.9 million). These amounts have been recorded in
general and administrative expenses in the consolidated statements
of operations or property and equipment in the consolidated
balance sheets as appropriate.
(f) PeterStar entered into a capital lease with a wholly-owned
subsidiary of PLD (see note 9).
(g) During 1996 PeterStar entered into a five year installment
purchase agreement with Petersburg Telephone Network, an indirect
minority shareholder, for telecommunications equipment. Total
contract value was $13.7 million (note 9).
(h) PeterStar was charged management fees of $1.7 million during 1997
(1996 and 1995: nil) by OAO Telecominvest, a minority shareholder.
This amount is included in management fees in the consolidated
statement of operations.
(i) During 1997 PeterStar entered into five year installment purchase
agreements with PLD Telekom Inc. for telecommunication equipment.
Total contract value was $2.3 million.
<PAGE> 21
14
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(16) COMMITMENTS AND CONTINGENCIES
(a) RUSSIAN TAXATION
PeterStar and BECET subsidiaries have accrued profits and other
taxes based on interpretations of the law which may ultimately be
disputed by the local taxation authorities. Management believes
that the exposure to additional profits and other taxes, fines and
penalties will not have a material adverse effect on the financial
position or results of operations of the Company.
(b) PURCHASE COMMITMENTS
At December 31, 1997, PeterStar has commitments of approximately
$11.4 million related to the acquisition of telecommunications
equipment. The PeterStar supply contract provides for financing of
the entire amount over approximately five years.
(c) MANAGEMENT SERVICES
On January 1, 1995, WTC entered into a two year agreement with
PLD, under which PLD would provide certain consulting,
informational services, management support services and personnel
expertise. The agreement was automatically renewed for 1998 and
the minimum commitment for the Company in 1998 is $25,000 per
month plus 3% of monthly gross revenues.
On January 1, 1995, BECET entered into a two year agreement with
its other shareholder, by which the shareholder would provide
certain consulting services, management support services and
personnel expertise. Payments under this agreement were 300,000
tenge per month ($3,975 at the December 31, 1997 exchange rate)
plus 0.15% of monthly gross revenues. This agreement was
terminated as of December 31, 1997 and BECET is currently
negotiating a new contract. This is anticipated to provide for
fees of 300,000 tenge per month plus 1.0% of monthly gross
revenues, and to be effective as of January 1, 1998, with a one
year term automatically renewable for successive one year periods
unless terminated by either party.
(d) GUARANTEE
In June 1996, PLD issued senior discount notes and convertible
subordinated notes with an aggregate principal amount of $149.5
million. The Company is a guarantor of the debt under the terms of
the related indentures.
<PAGE> 22
15
NWE CAPITAL (CYPRUS) LTD.
Notes to Consolidated Financial Statements, Continued
(e) LINE RENTAL
While it has not had to do so historically, PeterStar anticipates
that it will have to begin paying local line rental charges to the
Petersburg Telephone System in 1998. The exact fee, and the date
from which charges will be levied, have yet to be determined, but
the Company does not believe that such payments will have a
material adverse effect on the Company's financial position or
results of operations.
<PAGE> 1
Technocom Limited and subsidiaries
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 2
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.......................................... 1
Consolidated balance sheets as of December 31, 1997 and 1996.......... 2
Consolidated statements of operations for the years ended
December 31, 1997, 1996 and 1995.................................... 4
Consolidated statements of shareholders' equity for the years
ended December 31, 1997, 1996 and 1995.............................. 5
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995.................................... 6
Notes to consolidated financial statements............................ 7
<PAGE> 3
Report of Independent Chartered Accountants
The Board of Directors and Shareholders
Technocom Limited:
We have audited the accompanying consolidated balance sheets of Technocom
Limited and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Technocom Limited
and subsidiaries as at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Dublin, Ireland KPMG
April 2, 1998 Chartered Accountants
1
<PAGE> 4
Technocom Limited and subsidiaries
Consolidated Balance Sheets
As at December 31
(Thousands of United States Dollars)
<TABLE>
<CAPTION>
1997 1996
US$ US$
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and term deposits (note 4) 4,671 27,997
Trade receivables, net of allowance of $220
(1996 - $40) 2,942 3,961
Other receivables 2,806 1,479
Due from related parties (note 10) 5,591 4,347
------ ------
TOTAL CURRENT ASSETS 16,010 37,784
Property and equipment, net (note 5) 50,656 33,322
Telecommunications licenses, net (note 3) 2,005 2,286
Due from related parties (note 10) 2,253 4,005
Other investments and assets, net (note 6) 1,307 772
------ ------
TOTAL ASSETS 72,231 78,169
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank indebtedness (note 4) -- 15,829
Accounts payable (note 10) 11,410 8,306
Accrued liabilities 1,590 3,575
Due to related parties (note 10) 18,693 8,754
Deferred taxes (note 9) 549 276
------ ------
TOTAL CURRENT LIABILITIES 32,242 36,740
Other liabilities 337 --
Due to related parties (note 10) 336 336
Supplier financing (note 7) 3,327 --
Commitments and contingencies (note 11)
Minority interest -- 638
SHAREHOLDERS' EQUITY (note 8)
Share capital 1 1
</TABLE>
2
<PAGE> 5
<TABLE>
<S> <C> <C>
Share premium 40,390 40,390
Retained (deficit)/earnings (4,402) 64
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 72,231 78,169
====== ======
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE> 6
Technocom Limited and subsidiaries
Consolidated Statements of Operations
Years ended December 31
(Thousands of United States Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
US$ US$ US$
<S> <C> <C> <C>
REVENUES:
Telecommunications 19,024 3,302 4,372
Finance lease income 1,956 1,404 --
------ ----- -----
TOTAL REVENUES 20,980 4,706 4,372
DIRECT COSTS 13,034 2,487 1,745
------ ----- -----
GROSS PROFIT 7,946 2,219 2,627
OPERATING EXPENSES:
General and administrative 8,739 2,383 916
Depreciation 2,561 138 30
Amortization 281 10 --
Other expenses and taxes -- 125 622
------ ----- -----
TOTAL OPERATING EXPENSES 11,581 2,656 1,568
OPERATING (LOSS)/INCOME FROM CONTINUING OPERATIONS (3,635) (437) 1,059
OTHER INCOME/(EXPENSES):
Share of losses of equity investments (note 3) (677) (359) (27)
Interest income 607 1,233 511
Interest expenses (1,126) (589) --
Other expenses -- -- (300)
------ ----- -----
OPERATING (LOSS)/INCOME BEFORE TAXATION AND
MINORITY INTEREST (4,831) (152) 1,243
Income taxes (note 9) (273) (104) (410)
------ ----- -----
Income (loss) before minority interest (5,104) (256) 833
Minority interest 638 (19) (58)
------ ----- -----
NET (LOSS)/INCOME (4,466) (275) 775
====== ===== =====
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE> 7
Technocom Limited and subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 31
(Thousands of United States Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
US$ US$ US$
<S> <C> <C> <C>
BALANCE BEGINNING OF YEAR 40,455 20,730 20,159
Premium on shares issued -- 20,000 --
Share issue cost -- -- (204)
Net (loss)/profit (4,466) (275) 775
------ ------ ------
BALANCE END OF YEAR 35,989 40,455 20,730
====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements
5
<PAGE> 8
Technocom Limited and subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31
(Thousands of United States Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
US$ US$ US$
<S> <C> <C> <C>
CASH PROVIDED BY CONTINUING OPERATIONS
Net (loss)/income (4,466) (275) 775
Adjustments to reconcile net (loss)/income
to net cash provided by operating activities:
Depreciation and amortization 2,842 148 30
Share of loss of equity investments 677 359 27
Minority interest (638) 19 58
Other 337 -- --
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables 1,019 (270) (25)
(Increase)/decrease in other receivables (2,263) 2,455 (1,813)
Changes in due from/to related parties 10,446 6,809 10,881
Increase/(decrease) in accounts payable 3,104 (29) 1,450
(Decrease)/increase in accrued liabilities (1,713) 3,440 (1,098)
------ ------ ------
CASH PROVIDED BY CONTINUING OPERATIONS 9,345 12,656 10,285
CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
(Decrease)/increase in bank indebtedness (15,829) 7,951 7,879
Share issuance costs -- -- (204)
Issue of preferred shares -- 20,000 --
------ ------ ------
CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (15,829) 27,951 7,675
CASH USED IN INVESTMENT ACTIVITIES
Property and equipment (16,567) (20,766) (3,146)
Telecommunication licenses -- -- (2,403)
Investment in Technopark, net of cash acquired -- (2,866) --
Investment in Teleport, net of cash acquired -- (2,133) --
Other investments and assets (275) 491 --
------ ------ ------
CASH USED IN INVESTMENT ACTIVITIES (16,842) (25,274) (5,549)
(Decrease)/increase in cash (23,326) 15,333 12,411
Cash, beginning of year 27,997 12,664 253
------ ------ ------
Cash, end of year 4,671 27,997 12,664
====== ====== ======
SUPPLEMENTAL DISCLOSURE
Non-cash financing activities:
Supplier financing 3,327 -- --
====== ====== ======
Cash paid for taxes -- 238 --
====== ====== ======
Cash paid for interest 1,126 589 --
====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements
6
<PAGE> 9
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
(Tabular amounts in Thousands of United States Dollars)
1 BUSINESS OPERATIONS AND FUTURE ACTIVITIES
Technocom Limited and subsidiaries ("the Company") was incorporated under
the laws of the Republic of Ireland in January 1992. The Company's
principal activity is the provision of telecommunications services in
Russia. The Company conducts its business activities directly and through
a number of subsidiaries and other affiliates, most of which are
incorporated in Russia. The Company established a registered foreign
representative office in Russia in October 1995. The Company's parent is
PLD Telekom Inc. ("PLD"), a publicly listed company. The parent company
has agreed to provide continued financial support to finance the
operations of the Company. The Company is dependent on this support for
continued operations.
The Company operates in an emerging economy which, by its nature, has an
uncertain economic, political, and regulatory environment. The general
risks of operating businesses in the former Soviet Union include the
possibilities of rapid change in government policies, economic conditions,
the tax regime and foreign currency regulations. In addition, the
satellite-based long distance network is at an early stage of its
development and operation.
Ultimate recoverability of the Company's investments is dependent upon
each of the subsidiaries achieving and maintaining profitability, which is
dependent to a certain extent on a stabilization of the economies of the
former Soviet Union, the ability to maintain the necessary
telecommunications licenses and the ability to obtain adequate financing
to meet capital commitments.
It is the intention of the directors of the Company to continue to develop
the current activities of the Company. The financial statements have been
prepared on a going concern basis as the directors do not believe, at the
current time, that any of the risk factors set out above will have a
material adverse impact on the Company in the foreseeable future.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
(a) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States (US GAAP).
7
<PAGE> 10
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned and controlled subsidiaries. All
significant intercompany transactions and balances have been
eliminated on consolidation. Investments in affiliates in which
the Company has significant influence, but does not exercise
control, are accounted for under the equity method. Investments of
the Company over which significant influence is not exercised are
carried under the cost method.
(c) CASH AND TERM DEPOSITS
The Company's term deposits consist of term deposits with an
initial term of less than three months, and accordingly, they are
considered cash equivalents for purposes of the consolidated
statements of cash flows.
8
<PAGE> 11
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of United States Dollars)
(d) REVENUE RECOGNITION
All the Company's revenues are earned in Russia and consist of the
supply of telecommunications services and leasing of
telecommunications equipment.
All revenues are recorded as earned at the time services are
provided.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Costs directly related to the installation of
telecommunications equipment are included in the cost of the
equipment. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets as follows:
Telecommunications equipment 10 years
Buildings 28.5 years
Leasehold improvements 10 years
Office furniture and equipment 3-5 years
(f) TELECOMMUNICATIONS LICENSES
Telecommunications licenses are amortized on a straight-line basis
over the terms of the licenses.
(g) EQUITY INVESTMENTS
Equity investments are those investments in which the group has a
participating interest in the equity capital and over which it is
able to exercise significant influence.
The Company's share of the profits and losses of equity
investments is included in the consolidated profit and loss
account. The Company's interest in their net assets is included as
an investment in the consolidated balance sheets at its share of
the net assets at acquisition plus its share of retained profits
or losses subsequent to that date. The amounts included in the
financial statements in respect of equity investments are taken
from their latest financial statements made up to the balance
sheet date.
(h) NET INVESTMENT IN FINANCE LEASES
The total net investment in finance leases included in the balance
sheet represents total lease payments receivable, net of finance
charges relating to future accounting periods. Finance charges are
allocated to accounting periods so as to give a constant rate of
return on the net cash investment in the lease.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets
for cash and term deposits, trade and other receivables, amounts
due from/to related parties, bank indebtedness and accounts
payable approximate fair value due to their short maturities.
9
<PAGE> 12
Technocom Limited and subsidiaries
Notes to Consolidated Financial Statements (CONTINUED)
(Tabular amounts in Thousands of United States Dollars)
(j) REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION
The statutory accounts of the Company's consolidated subsidiaries
are maintained in accordance with local accounting regulations and
are stated in local currencies.
Local statements are adjusted to U.S. GAAP and then translated
into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS 52), "Foreign Currency
Translation."
Under SFAS 52, the financial statements of foreign entities in
highly inflationary economies are measured in all cases using the
U.S. dollar as the functional currency. U.S. dollar transactions
are shown at their historical value. Monetary assets and
liabilities denominated in local currencies are translated into
U.S. dollars at the prevailing period-end exchange rate. All other
assets and liabilities are translated at historical exchange
rates. Results of operations have been translated using the
monthly average exchange rates. Translation differences resulting
from the use of these different rates are included in the
accompanying consolidated statements of operations.
(k) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income or expense in the period it occurs.
(l) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the year. Actual results could differ
from those estimates.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of Statement of Financial
Accounting Standards No.121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," on January 1, 1996. SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
10
<PAGE> 13
(n) RECLASSIFICATION
Certain reclassifications have made been made to the financial
statements for conformity purposes.
11
<PAGE> 14
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of United States Dollars)
3 TELECOMMUNICATIONS LICENSES AND SIGNIFICANT INVESTMENTS
The Company's key interests at December 31, 1997 include approximately
49% equity interests in: (a) Teleport-TP ("Teleport") (56% voting
interest), and (b) MTR-Sviaz; and (c) an approximate 56% interest in J.V.
Technopark Limited ("Technopark").
(a) TELEPORT
Teleport is a Russian joint stock company which holds four
operating licenses. The first license expires in November 2004 and
authorizes Teleport to provide long distance and international
telecommunications services to private networks within Moscow and,
to a limited extent, elsewhere in the Russian Federation. Teleport
is required by the terms of the license to have at least 10,500
subscribers (which is 70% of the maximum number of subscribers
permitted under the license) in place by October 1999. Under the
terms of the license agreement, there are no penalties should
Teleport not attain the required number of lines. The second
license expires in October 2004 and permits the operation of 1,000
international leased circuits for the transmission of television
and telecommunications services. The third license permits the
provision of data services with interconnection to the public
network. This expires in January 2002 and requires capacity for
70,000 subscribers by December 2000.
The fourth license is an overlay license which permits Teleport to
offer local, long distance and international voice and data
services which are interconnected to the public telephone network
in 40 regions across Russia. The overlay license expires in May
2001.
The Company initially held a 42% equity interest in Teleport. In
May 1996, the Company acquired an additional 3.3% indirect equity
interest in Teleport for cash consideration of $2 million,
substantially all of which has been allocated to Teleport's
telecommunication licenses. The additional interest was acquired
through a company controlled by a minority shareholder of
Technocom. The acquisition of Technopark, a company incorporated
in Russia, on December 20, 1996 increased Technocom's equity
interest in Teleport to 49.3% and its voting interest to 56%.
As a result of this acquisition, the Company consolidated
Teleport's balance sheet at December 31, 1996. The results of
operations of Teleport have been included in the consolidated
statements of operations from January 1, 1997. The consolidation
of Teleport's balance sheet at December 31, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash........................................................ $ 70
Other current assets........................................ 4,386
Current liabilities......................................... (1,526)
Equipment under capital lease, net.......................... 7,415
Other property, plant and equipment, net.................... 622
Other assets................................................ 655
Capital lease obligation to Technocom....................... (4,153)
Due to Technocom............................................ (3,468)
Due to related parties...................................... (3,405)
Minority interest........................................... (411)
Telecommunications licenses, net of accumulated
amortization of $4,005.................................... 25,595
-------
Carrying value of investment in Teleport
prior to consolidation.............................. $25,780
=======
</TABLE>
Condensed financial information of Teleport for the years
ended December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
(In thousands)
<S> <C> <C>
Telecommunications revenues.......... $11,104 $ 7,070
Cost of sales........................ 6,534 2,083
------- -------
Gross profit.................... 4,570 4.987
------- -------
Operating expenses:
General and administrative.......... 2,617 1,606
Other taxes.......................... 592 --
Depreciation of assets under capital
lease.............................. 1,016 570
Other depreciation and amortization.. 200 762
------ -------
4,425 2,938
------- -------
Operating income............. 145 2,049
Interest on capital lease........... (531) (1,434)
Other interest and financing
charges, net...................... 251 (343)
------- -------
Earnings/(loss) before income
taxes...................... (135) 272
Income taxes........................ -- (335)
------- -------
Net loss..................... $ (135) $ (63)
Technocom's interest therein........... (75) (27)
Amortization of excess purchase price.. (2,477) (1,528)
------- -------
Share of Teleport-TP loss.......$(2,552) $(1,555)
======= =======
</TABLE>
Teleport's revenues for the years ended December 31, 1996 and
1995, include sales to its minority shareholder of $4.6 million
and $5.0 million, respectively, making Teleport to some extent
economically dependent on its minority shareholder.
Teleport's cost of sales for the year ended December 31, 1996
includes costs of $2.9 million charged by a company controlled by
one of the minority shareholders of Technocom.
TELECOMMUNICATIONS LICENSES
Telecommunications licenses are amortized over a period of 7 to 9
years. The balances were as follows for December 31, 1997 and
1996:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
<S> <C> <C> <C>
As of December 31, 1997 2,296 (291) 2,005
As of December 31, 1996 2,296 (10) 2,286
</TABLE>
12
<PAGE> 15
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of United States Dollars)
(b) MTR-SVIAZ
The Company has a 49% equity interest in a Russian joint stock
company, MTR-Sviaz, which is a joint venture with Mosenergo, the
Moscow city power utility, to modernize and commercialize a
portion of Mosenergo's internal telecommunications network.
MTR-Sviaz holds two operating licenses and commenced operations in
late 1996. The first license authorizes MTR-Sviaz to provide local
and long distance leased line services within the city and region
of Moscow. Under the second license, MTR-Sviaz is authorized to
provide local telephone services through interconnection (via the
Mosenergo network) with the public switched telephone network
within the city and region of Moscow. During 1997 and 1996,
Technocom leased telecommunications equipment and access rights
with a net book value of $4,700,000 and $5,205,000, respectively,
to MTR-Sviaz under finance leases. The Company recorded finance
lease income of $1,956,000 and $872,000 for the years ended
December 31, 1997 and 1996. As of those dates, the investment in
MTR-Sviaz comprises a finance lease receivable of $4,492,000 and
$5,015,000, offset by the Company's share of losses of MTR-Sviaz
of $1,364,000 and $427,000, respectively.
Future minimum lease payments receivable from MTR-Sviaz, by year
and in the aggregate, are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1998 ................................................. $2,530
1999 ................................................. 2,530
2000 ................................................. 1,704
2001 ................................................. 547
2002 ................................................. 547
Thereafter ........................................... 1,958
------
Total minimum lease payments ............... 9,816
Amounts representing interest ........................ 5,324
------
Present value of minimum lease payments .... $4,492
======
</TABLE>
(c) TECHNOPARK
On December 20, 1996 the Company acquired 55.51% of the
outstanding shares of Technopark, a company incorporated in Russia
which holds a 7.5% equity interest in Teleport and owns office
space in Moscow, for cash consideration of $3 million. The sellers
were the minority shareholders of Technocom. The acquisition of
Technopark has been accounted for using the purchase method and
therefore its operations have been included since January 1, 1997.
The aggregate purchase price equaled fair market value as of
the date of the acquisition, therefore no goodwill was
recognized.
4 CASH AND TERM DEPOSITS, BANK INDEBTEDNESS
At December 31, 1996, Technocom had an overdraft balance of $6.8 million
and demand bank loans of $9.0 million bearing interest at 5.8125%. The
demand bank loans were secured by term deposits in the same amount held at
the same bank. The Company had no overdraft or demand bank loans at
December 31, 1997.
15
<PAGE> 16
5 PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
<S> <C> <C> <C>
1997
Telecommunications equipment 51,886 (5,005) 46,881
Buildings 3,100 (109) 2,991
Office furniture and equipment 1,149 (539) 610
Leasehold improvements 228 (54) 174
------ ------ ------
TOTAL 56,363 (5,707) 50,656
====== ====== ======
</TABLE>
14
<PAGE> 17
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of Unites States Dollars)
5. PROPERTY AND EQUIPMENT (continued)
<TABLE>
<CAPTION>
1996
<S> <C> <C> <C>
Telecommunications equipment 32,512 (2,917) 29,595
Buildings 3,100 - 3,100
Office furniture and equipment 630 (199) 431
Leasehold improvements 227 (31) 196
------ ------ ------
TOTAL 36,469 (3,147) 33,322
====== ====== ======
</TABLE>
6 OTHER INVESTMENTS AND ASSETS
Other investments and assets consist of debt and equity instruments
which are not accounted for as equity investments. These investments,
which do not have a readily determinable market value, are stated at
cost less provisions for permanent diminutions in value.
7 SUPPLIER FINANCING
Payments to be made under supplier financing arrangements outstanding as
of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1999 1,402
2000 1,269
2001 868
2002 569
------
4,108
Amounts representing interest 781
------
3,327
======
</TABLE>
The terms of the agreements generally require installment payments over
the next 3-5 years at interest rates of either 8.5% or LIBOR plus 250
points. Amounts are calculated based on an 8.5% discount rate.
The Company has entered into bank guarantees under the terms of the
agreements. The guaranteed amount reduces as installments are paid. The
amounts outstanding under the agreements secured by bank guarantees
amounted to $3,759,000 at December 31, 1997.
15
<PAGE> 18
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of Unites States Dollars)
8 SHAREHOLDERS' EQUITY
The authorized capital stock of the Company consists of 1,000,000 ordinary
shares with a par value of one Irish pound and 1,000 preferred shares with
a par value of US$1. Issued shares consist of 199 ordinary shares and
1,000 preferred shares. The par value of ordinary shares is translated at
the historical rate of IR(pound)1=US$1.60.
During 1996, the Company allotted 500 preferred shares with a nominal
value of US$1 and a premium of US$39,999 per share in accordance with the
terms of a subscription and shareholder agreement dated 28 December 1994,
PLD, the parent, committed to subscribe for preferred shares in the
Company in the amount of $40,000,000, of which $20,000,000 was subscribed
for on 28 December 1994 and the remaining $20,000,000 was subscribed for
in June 1996. The preferred shares entitle the parent to the first
$20,000,000 of the Company's dividend distributions. After receipt of such
preference dividends, all the preferred shares will be converted into a
single ordinary share in the Company.
9 INCOME TAXES
Income tax expense of $273,000, $104,000 and $410,000 for the years ended
December 31, 1997, 1996 and 1995, respectively differs from the amounts
computed by applying the U.S. federal income tax rate of 35% to pretax
income from continuing operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
US$ US$ US$
<S> <C> <C> <C>
Provision for income tax at statutory rates (1,468) (47) 435
Increase/(reduction) in income taxes
resulting from:
Non-deductible expenses 489 205 --
Non-taxable credits (115) (56) (25)
Valuation allowance 882 -- --
Other 485 2 --
------ ---- ----
273 104 410
====== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portion of the deferred tax assets and liabilities as of December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS:
Tax on expenses not yet deducted for Russian tax purposes 16,998 8,282
Less: valuation allowance 82 454
------ -----
NET DEFERRED TAX ASSETS 16,916 7,828
DEFERRED TAX LIABILITIES:
Tax on revenues not yet realized for Russian tax purposes 17,465 8,103
------ -----
NET DEFERRED TAX LIABILITIES 549 275
====== ====
</TABLE>
16
<PAGE> 19
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of Unites States Dollars)
9 INCOME TAXES (continued)
The valuation allowance for deferred tax assets as of January 1, 1997 and
1996 was $454,000 and $Nil, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 and 1996 was an
increase of $454,000 and a decrease of $372,000, respectively. In
assessing the realizability of deferred tax assets, management determined
that it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
10 RELATED PARTIES
During the year, the Company paid a total of $220,833 (1996: $208,333)
pursuant to two management contracts with two shareholders for provision
of the services of two directors of the Company. In addition, a
significant proportion of the Company's general and administrative
expenses were incurred by its three shareholders on behalf of the Company.
Included in accounts payable for 1997 is approximately $3,891,000 of
amounts due to companies which are not directly related to Technocom
Limited and subsidiaries, but which share common directors.
Significant amounts owed to/from related parties consisted of the
following:
17
<PAGE> 20
<TABLE>
<CAPTION>
1997 1996
US$ US$
<S> <C> <C>
AMOUNTS OWED TO:
Current:
PLD Telekom Inc. 17,918 5,032
PLD Management Services Limited 482 252
Other current 293 3,470
------ -----
Total current 18,693 8,754
====== =====
Non-current:
Other non-current 336 336
====== =====
</TABLE>
<TABLE>
<CAPTION>
1997 1996
US$ US$
<S> <C> <C>
AMOUNTS OWED FROM:
Current:
Lanstone Enterprises Limited 2,240 2,477
MTR-Sviaz 2,459 1,096
Finance lease receivable 872 616
Others 20 158
----- -----
Total current 5,591 4,347
====== =====
Non-current:
Finance lease receivable 2,253 4,005
===== =====
</TABLE>
The finance lease receivable consists of a single agreement with
MTR-Sviaz. The lease was entered into in August of 1996 for $5,197,000 and
requires payments until July 2006.
18
<PAGE> 21
Technocom Limited and subsidiaries
Notes to the Consolidated Financial Statements (continued)
(Tabular amounts in Thousands of Unites States Dollars)
11 COMMITMENTS AND CONTINGENCIES
Teleport currently utilizes capacity on three Intelsat satellites for the
provision of its international and domestic long distance services,
pursuant to a fifteen year contract signed with Intelsat in January 1993.
The agreement requires quarterly payments of $616,500 for the remainder of
its term.
As of December 31, 1997, the Company has commitments of approximately $0.9
million (1996: $11.3 million) related to the acquisition of
telecommunications equipment.
During 1996, the Company provided guarantees to telecommunications
suppliers in the form of letters of credit totalling $3,483,000 as of
December 31, 1996. No similar guarantees were outstanding as of December
31, 1997.
The Company and certain of its Russian subsidiaries have accrued profits
and other taxes based on interpretations of the law which may ultimately
be disputed by the Russian taxation authorities. The exposure to
additional profits and other taxes, fines and penalties, in the opinion
of the Company's directors will not have a material adverse effect on
the financial position or results of operations of the Company.
There are no material pending legal proceedings to which the Company or
any of its property is subject.
19
<PAGE> 1
WIRELESS TECHNOLOGY CORPORATION LIMITED
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE> 2
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report..................................................................... 1
Consolidated balance sheets as of December 31, 1997 and 1996..................................... 2
Consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995....... 3
Consolidated statements of accumulated deficit for the years ended December 31, 1997, 1996 and
1995............................................................................................. 4
Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995....... 5
Notes to consolidated financial statements....................................................... 6
</TABLE>
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Wireless Technology Corporations Limited:
We have audited the accompanying consolidated balance sheets of Wireless
Technology Corporations Limited and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, accumulated deficit, and
cash flows for each of the years in the three year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiary as of December 31, 1997 and 1996 and the results of their operations
and the changes in their financial position for each of the years in the three
year period ended December 31, 1997 in conformity with generally accepted
accounting principles in the United States.
KPMG
Moscow, Russia
February 18, 1998
1
<PAGE> 4
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Consolidated Balance Sheets
December 31, 1997 and 1996
(thousands of United States dollars)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,294 2,733
Trade receivables, net of allowance of $1,139
and $850, respectively 3,462 2,582
Due from related parties (note 6) -- 78
Inventory 1,640 913
Prepaid expenses and other current assets 798 336
-------- -------
Total current assets 11,194 6,642
Property and equipment, net (note 3) 23,362 22,342
Telecommunications license, net (note 4) 23,693 25,800
-------- -------
Total assets $ 58,249 54,784
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,197 2,624
Due to related parties (note 6) 1,875 1,289
Customer deposits and advances 3,070 1,795
Income tax payable 58 165
-------- -------
Total current liabilities 6,200 5,873
-------- -------
Commitments and contingencies (note 8)
Minority interest 4,489 1,878
Shareholders' equity:
Share capital (note 5) 20,000 20,000
Contributed capital 30,803 30,803
Accumulated deficit (3,243) (3,770)
-------- -------
Total shareholders' equity 47,560 47,033
-------- -------
Total liabilities and shareholders' equity $ 58,249 54,784
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
(thousands of United States dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Telecommunications revenues $ 30,012 19,305 9,340
Direct costs (note 6) 6,873 5,376 3,176
-------- ------ ------
Gross profit 23,139 13,929 6,164
Operating expenses:
General and administrative (note 6) 7,501 4,387 4,918
Management fees (note 6) 1,155 885 530
Depreciation and amortization 5,325 4,133 3,188
Taxes other than income tax 379 354 150
-------- ------ ------
Total operating expenses 14,360 9,759 8,786
-------- ------ ------
Operating income (loss) 8,779 4,170 (2,622)
Other income (expense):
Interest and other income 249 203 621
Foreign exchange loss (242) (341) (6)
-------- ------ ------
Net income (loss) before income
tax and minority interest 8,786 4,032 (2,007)
Income tax (note 7) 3,648 1,547 247
-------- ------ ------
Net income (loss) before minority
interest 5,138 2,485 (2,254)
Minority interest 3,611 1,878 --
-------- ------ ------
Net income (loss) $ 1,527 607 (2,254)
======== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Consolidated Statements of Accumulated Deficit
Years ended December 31, 1997, 1996, and 1995
(thousands of United States dollars)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Accumulated deficit at beginning of year $(3,770) (4,377) (2,123)
Net income (loss) 1,527 607 (2,254)
Dividends (1,000) -- --
------- ----- -----
Accumulated deficit at end of year $(3,243) (3,770) (4,377)
======= ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
(thousands of United States dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,527 607 (2,254)
Adjustments to reconcile net income to net cash
provided (used in) operating activities:
Depreciation and amortization 5,325 4,133 3,188
Bad debt expense 449 415 435
Minority interest 3,611 1,878 --
Changes in operating assets and liabilities:
Increase in trade receivables (1,329) (1,801) (1,365)
Increase in inventory (727) (255) (651)
(Increase) decrease in prepaid expenses
and other current assets (462) 1,071 (1,389)
(Increase) decrease in prepaid income taxes -- 300 (300)
Increase (decrease) in accrued interest -- 316 (316)
(Decrease) increase in accounts payable
and accrued liabilities (1,427) 957 1,475
Increase (decrease) in due to/due from
related parties, net 664 958 (42)
Increase in customer deposits and advances 1,275 1,034 544
(Decrease) increase in income taxes payable (107) 165 --
------- ----- ------
Net cash provided by (used in)
operating activities 8,799 9,778 (675)
------- ----- ------
Cash flows from investing activities:
Prepaid equipment purchases -- -- (9,000)
Purchases of property and equipment (4,238) (8,175) (3,329)
------- ----- ------
Net cash used in investing activities (4,238) (8,175) (12,329)
------- ----- ------
</TABLE>
Continued on next page.
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1997, 1996, and 1995
(thousands of United States dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Shareholder contributions $ -- -- 13,880
Dividends paid (2,000) -- --
------- ----- ------
Net cash (used in) provided by
financing activities (2,000) -- 13,880
------- ----- ------
Increase in cash and cash equivalents 2,561 1,603 876
Cash and cash equivalents at beginning of year 2,733 1,130 254
------- ----- ------
Cash and cash equivalents at end of year $ 5,294 2,733 1,130
======= ===== ======
Supplementary disclosures:
Interest paid $ -- -- --
======= ===== ======
Income taxes paid $ 3,755 1,082 546
======= ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 9
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
Wireless Technology Corporations Limited (the "Company") was incorporated
in the British Virgin Islands as an international business company on
October 27, 1993. The Company is a wholly-owned indirect subsidiary of
PLD Telekom Inc. ("PLD"), a company incorporated in Canada as of December
31, 1996 and incorporated in the United States as of December 31, 1997.
The Company's only significant asset is a 50% controlling interest in
BECET International JSC ("BECET"), which was formed on January 14, 1994
as a joint stock company under the laws of Kazakhstan.
BECET conducts business under the name "ALTEL" and was formed for the
purpose of planning, developing, operating and servicing a cellular
telecommunications system throughout Kazakhstan, and for the sale of
related equipment to subscribers. BECET commenced operations in September
1994 and continues to develop its service network throughout Kazakhstan.
The BECET joint venture agreement required the Company to subscribe for
1,000 Class B shares in exchange for the contribution of working capital
and tangible equipment with a cost of $20.0 million. The Class B shares
were fully subscribed and paid as of December 31, 1995. Funding for the
contribution was provided by PLD. The Company is entitled to a priority
return of its $20.0 million contribution upon dissolution, liquidation or
wind-up of BECET before the other shareholder receives any proceeds.
Kazaktelecom ("KT"), the other shareholder of BECET, subscribed for 1,000
Class A shares in exchange for the contribution to BECET of a fifteen
year license for the use of certain cellular frequencies and the
procurement of access to the public telephone network. For accounting
purposes, no value was assigned to KT's contribution.
The Company's results are dependent upon BECET's ability to retain
existing subscribers, to attract new subscribers, and to control
operating expenses. The ability to retain and attract subscribers is
dependent upon the general economic conditions of the marketplace, the
demographic characteristics of its subscribers, the activities of
competitors, if any, and other factors which may be outside the control
of the Company.
7
<PAGE> 10
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES, CONTINUED
The Company's operations are also subject to the unique economic,
political, and social risks inherent in doing business in Kazakhstan.
These include the policies of the Kazakh government, economic conditions,
imposition of or changes to taxes or other similar charges by regulatory
bodies, foreign exchange fluctuations and controls, controlling of prices
by the Anti-Monopoly Commission, the potential for civil disturbance,
deprivation or unenforceability of contractual rights, and the
appropriation of property without fair compensation.
The Kazakh government has exercised and continues to exercise substantial
influence over many aspects of the private sector. Confronted with the
collapse of the planned economy, the government has been attempting to
implement economic reform policies and encourage substantial private
economic activity. However, these reforms have been only partially
successful to date. The economy in Kazakhstan is still characterized by
growing unemployment, high inflation, increasing foreign debt, a weak
currency, and the possibility of widespread bankruptcies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the
United States ("U.S. GAAP") and are presented in United States'
dollars ("U.S. dollars"). The consolidated financial statements
include the accounts of the Company and its subsidiary, BECET,
which the Company effectively controls. Significant intercompany
transactions and balances have been eliminated.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. As of December 31, 1997 and 1996, the Company's cash
equivalents consist of cash on deposit and term deposits. As of
December 31, 1997 and 1996, the Company had $4,625,000 and
$1,421,000, respectively, in cash equivalents.
8
<PAGE> 11
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) REVENUE RECOGNITION
Telecommunications revenues include airtime revenues, terminal
sales, subscription fees, connection fees and other revenues. The
Company records airtime revenues, subscription fees, connection
fees and other revenues as earned, at the time the services are
provided. Terminal sales are recognized when the equipment is
delivered and the supporting contract is signed.
(d) INVENTORY
Inventory includes cellular telephones and accessories held for
sale and is stated at the lower of average cost or net realizable
value.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Base station equipment 10
Leasehold improvements and renovations 15
Office equipment, computers, and software 3-5
Other telecommunication equipment 3
Vehicles 3-5
Residential apartments 5
</TABLE>
(f) TELECOMMUNICATIONS LICENSE
The telecommunications license is amortized on a straight-line
basis over 15 years, the term of the license.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," on January 1, 1996. SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
9
<PAGE> 12
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(h) REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION
The statutory accounts of BECET are maintained in accordance with
Kazakh accounting rules and regulations and are stated in Kazakh
tenge. The Kazakh statements are translated into U.S. dollars and
then adjusted to U.S. GAAP in accordance with Statement of
Financial Accounting Standards No. 52, "Accounting for Foreign
Currency Translation" ("SFAS 52"). BECET's functional currency is
the U.S. dollar as virtually all equipment expenditures are made
in U.S. dollars and revenues are collected in U.S. dollar
equivalents.
In accordance with SFAS 52, BECET has re-measured its financial
statements since the functional currency is also the reporting
currency and because BECET is subject to highly inflationary
accounting. Accordingly, U.S. dollar transactions are re-measured
at their historical value. Monetary assets and liabilities
denominated in local currencies are translated into U.S. dollars
at the prevailing period-end exchange rate. All other assets and
liabilities are translated at historical exchange rates. Results
of operations have been translated using the monthly average
exchange rates. Translation differences resulting from the use of
these different rates are included in the accompanying statements
of operations. The tenge to U.S. dollar exchange rates used as of
December 31, 1997 and 1996 were 75.5 tenge to 1 U.S. dollar and
73.3 tenge to 1 U.S. dollar, respectively.
(i) INCOME TAX
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income or
expense in the period it occurs.
10
<PAGE> 13
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date
of the consolidated financial statements and the reported amounts
of revenues and expenses during the year. Actual results could
differ from those estimates.
(k) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's
consolidated financial statements to conform to the current year's
presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Base station equipment $ 16,998 14,040
Leasehold improvements and renovations 5,277 3,847
Office equipment, computers, and software 3,193 2,652
Other telecommunications equipment 1,092 932
Vehicles 456 398
Residential apartments 335 335
----------- ------
Total property and equipment 27,351 22,204
Less accumulated depreciation (6,423) (3,205)
----------- ------
Net book value of assets subject to depreciation 20,928 18,999
Uninstalled equipment 2,434 3,343
----------- ------
Property and equipment, net $ 23,362 22,342
=========== ======
</TABLE>
11
<PAGE> 14
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(4) TELECOMMUNICATIONS LICENSE
The telecommunications license as of December 31, 1997 and 1996 consists
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Costs $ 31,595 31,595
Less accumulated amortization (7,902) (5,795)
----------- ------
Telecommunications licenses net $ 23,693 25,800
=========== ======
</TABLE>
In March 1994, PLD acquired all of the outstanding shares of the Company
for consideration of $30.0 million plus costs of acquisition of $0.8
million and $0.8 million of BECET's organization costs. The acquisition
was accounted for by the purchase method of accounting. As of the date of
acquisition, BECET had not commenced operations and did not have any
tangible assets or liabilities. Therefore, the entire purchase price was
allocated to BECET's cellular license. This purchase accounting has been
"pushed down" into the Company's financial statements.
(5) SHARE CAPITAL
The authorized share capital of the Company as of December 31, 1997 and
1996 was 20,001,000 ordinary shares of $1 par value each. The shares may
be divided into such number of classes and series as determined by the
directors. The issued and outstanding share capital of the Company as of
December 31, 1997 and 1996 consisted of 20,000,002 shares with aggregate
par value of $20,000,002. Two shares were issued on incorporation on
October 27, 1993 and an additional 20,000,000 shares were issued on
December 20, 1995 to PLD for the contribution to purchase the Class B
shares of BECET (see note 1). Total dividends declared and paid were
$1,000,000, $0, and $0 for the years ended December 31, 1997, 1996, and
1995, respectively.
(6) RELATED PARTY TRANSACTIONS
(a) Management fees of $1,155,000, $885,000, and $530,000 for the years
ended December 31, 1997, 1996, and 1995, respectively, were charged
by PLD for management services (see note 8). Balances outstanding of
$129,000 and $265,000 as of December 31, 1997 and 1996, respectively,
in relation to these charges, are included in due to related parties.
12
<PAGE> 15
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(6) RELATED PARTY TRANSACTIONS, CONTINUED
(b) Additional charges, related to management services, of $191,000,
$26,000, and $841,000 for the years ended December 31, 1997, 1996,
and 1995, respectively, were charged to BECET by PLD and another PLD
subsidiary. These amounts are included in general and administrative
expenses. Balances outstanding of $929,000 and $791,000 as of
December 31, 1997 and 1996, respectively, in relation to these
charges, are included in due to related parties.
(c) Direct costs included costs of $4,163,000, $3,291,000, and $1,788,000
for the years ended December 31, 1997, 1996, and 1995, respectively,
were charged by KT to BECET. Balances outstanding of $817,000 and
$233,000 as of December 31, 1997 and 1996, respectively, in relation
to these charges, are included in due to related parties.
(d) Consulting fees of $88,000 $81,000 and $107,000 for the years ended
December 31, 1997, 1996, and 1995, respectively, were paid to KT by
BECET (see note 8). These amounts are included in general and
administrative expenses. There was no balance outstanding as of
December 31, 1997 and 1996 in relation to these charges.
(e) The unpaid balance of a non-interest bearing advance from BECET to KT
in the amount of $78,000, as of December 31, 1996 is included in due
from related parties.
(f) Lease payments for the office premises in Almaty and other premises
of $91,000 for each of the years ended December 31, 1997, 1996, and
1995 were paid by BECET to KT. There was no balance outstanding in
relation to these leases as of December 31, 1997 and 1996.
(7) INCOME TAX
The provision for income tax expense for the years ended December 31,
1997, 1996, and 1995 consists solely of current tax due to the government
of Kazakhstan. The statutory Kazakh income tax rate for the years ended
December 31, 1997, 1996, and 1995 was 30%. The effective tax rates on
income as calculated under U.S. GAAP differ from the statutory rates due
to differences between taxable income under the tax laws of Kazakhstan
and net income before income tax and minority interest for U.S. GAAP
purposes. These differences are as follows:
13
<PAGE> 16
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(7) INCOME TAX, CONTINUED
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) for income taxes at
statutory rate $ 2,636 1,200 (603)
Add (deduct) the tax effect of:
Non-deductible amortization of license 633 626 617
Depreciation expense from Kazakh
revaluation of property and equipment (149) (45) (24)
Amortization of intangible asset not recorded in
U.S. GAAP financial statements (46) (48) (49)
Foreign currency loss 73 102 2
Other 501 (288) 304
------- ----- ---
Provision for income tax $ 3,648 1,547 247
======= ==== ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 342 255
Accumulated depreciation and amortization 267 205
Accounts payable and accrued liabilities 45 2
Due to related parties 278 260
Other 8 --
---------- ---
940 722
Less valuation allowance (235) (286)
---------- ---
Net deferred tax asset 705 436
Deferred tax liabilities:
Inventory - (225)
Other (705) (211)
---------- ---
$ -- --
========== ===
</TABLE>
As a result of the rapid change in regulatory environment and uncertainty
surrounding the Kazakh tax regime, the Company has provided a valuation
allowance against deferred tax assets.
The net change in the valuation allowance for the years ended December
31, 1997 and 1996, was a decrease of $51,000 and $692,000, respectively.
14
<PAGE> 17
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(8) COMMITMENTS AND CONTINGENCIES
(a) LEASES
As of December 31, 1997, BECET had long-term operating
leases primarily involving business facilities and equipment. The
leases have varying terms and contain renewal options. Future
minimum lease payments under non-cancelable operating leases
consist of the following as of December 31, 1997:
<TABLE>
<S> <C>
1998 $ 414
1999 383
2000 275
2001 60
2002 20
Thereafter 63
-------
Total future minimum lease payments $ 1,215
======
</TABLE>
Rent expense for the years ending December 31, 1997, 1996, and
1995 was $541,000, $422,000, and $375,000, respectively.
(b) PLD
On January 1, 1995, the Company entered into a 2 year agreement
with PLD, under which PLD would provide certain consulting,
informational services, management support services, and personnel
expertise. The agreement can be automatically renewed for
successive 12 month periods unless terminated by either party with
at least 3 months written notice. Payments under this agreement
are $25,000 per month plus 3% of monthly gross revenues. The
agreement was automatically renewed for 1998 and the minimum
commitment for the Company in 1998 is $300,000 plus 3% of gross
revenues.
15
<PAGE> 18
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
Notes to Consolidated Financial Statements (continued)
December 31, 1997 and 1996
(tabular amounts in thousands of United States dollars)
(8) COMMITMENTS AND CONTINGENCIES, CONTINUED
(c) KT
On January 1, 1995, BECET entered into a 2 year agreement with KT,
under which KT would provide certain consulting services,
management support services, and personnel expertise. Payments
under this agreement were 300,000 tenge per month ($3,975 at the
December 31, 1997 exchange rate) plus 0.15% of monthly gross
revenues. This agreement was terminated as of December 31, 1997
and BECET is currently negotiating a new consulting agreement with
KT. The new agreement is anticipated to provide for fees of
300,000 tenge per month plus 1.0% of monthly gross revenues, and
to be effective as of January 1, 1998, with a one year term
automatically renewable for successive one year periods unless
terminated by either party.
(d) GUARANTEE
In June 1996, PLD issued senior discount notes and convertible
subordinated notes with an aggregate principal amount of $149.5
million. The Company, along with other PLD subsidiaries, is a
guarantor of the debt under the terms of the related indentures.
16
